Qurate Retail, Inc. (QRTEA) Q1 2023 Earnings Conference Call Transcript

Qurate Retail, Inc. (NASDAQ:QRTEA) Q1 2023 Earnings Conference Call May 5, 2023 8:00 AM ET

Company Participants

Shane Kleinstein - Vice President, Investor Relations

David Rawlinson II - President and Chief Executive Officer

Bill Wafford - Chief Financial Officer

Gregory B. Maffei - Executive Chairman

Ben Oren - Executive Vice President and Treasurer

Conference Call Participants

Carla Casella - JPMorgan

Jason Haas - Bank of America

William Reuter - Bank of America

Hale Holden - Barclays

Karru Martinson - Jefferies

Operator

Greetings, and welcome to the Qurate Retail Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Shane Kleinstein. You may begin.

Shane Kleinstein

Thank you, and good morning. Before we begin, we'd like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in the most recent forms 10-K and 10-Q filed by our company and QVC with the SEC.

These forward-looking statements speak only as of the date of this call and Qurate Retail expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Qurate Retail's expectations with regard thereto, or any change in events, conditions or circumstances on which any such statement is based. Please note that we have published slides to accompany the earnings release.

On today's call we will address certain non-GAAP financial measures, including adjusted OIBDA, adjusted OIBDA margin, free cash flow and constant currency. Information regarding the comparable GAAP metrics along with required definitions and reconciliations including preliminary note and schedules one through four can be found in the earnings press release issued today or our earnings presentation, which are available on our website.

Today, speaking on the earnings call we have Qurate Retail, President and CEO, David Rawlinson; Qurate Retail Group's new CFO, Bill Wafford; and Qurate Retail Executive Chairman, Greg Maffei.

I will turn the call over to, David Rawlinson.

David Rawlinson II

Thank you, Shane, and good morning to everyone. Thank you for joining us today and for your interest in Qurate Retail. We saw meaningful improvement in revenue trends in the first quarter at our largest businesses QVC U.S. And QVC International, both of which declined only low-single-digits even against the challenged retail backdrop. Performance was soft at our smaller businesses, HSN, Cornerstone and Zulily. Volume remains pressured due to our customer file, which I will discuss in more detail shortly.

While we have multiple efforts underway to reactivate customer groups, we expect the impact of these initiatives to take several quarters. Against this backdrop, we are intensely focused on near-term factors within our control, most notably cost management and driving increased sales price. We believe we are on track to deliver our objectives for Project Athens, our three year plan to establish revenue stability, margin expansion and incremental free cash flow generation. Our turnaround is well underway, and we are encouraged by early signs of stabilization particularly at QVC U.S.

HSN is slightly behind QVC U.S. and to implement similar pricing strategies and their performance was also impacted by promotional shipping offers tested in the quarter that did not drive the expected volume gains and have since been discontinued. They were also impacted by reduced marketing spend.

Focusing on QxH, our adjusted OIBDA in the quarter included $35 million of headwind from two specific items. Nearly 60% was transformation costs related to Project Athens that impacted our SG&A, and the remainder was primarily an adjustment related to processing returns in the wake of the December 2021 fire at our Rocky Mount fulfillment center. Rocky Mount was our primary return center for QVC U.S. This represented a true-up related to a backlog and processing returns following the buyer.

Despite these headwinds, I'm pleased with the significant progress we made and initial margins from our pricing and merchandising efforts. We expect to see material improvement and our profitability in the back half of this year. Free cash flow improved $174 million year-over-year mainly due to increased cash from operations that reflected working capital improvements. We continue to have strong liquidity and we believe our capital structure has the runway to get us through this transition.

Bill, will discuss each of our businesses and free cash flow in more detail momentarily. Looking at trends in the retail industry, the environment continues to be very promotional as most retailers did not reduce inventory to the extent we did in 2022. Inflation remains elevated, interest rates are rising and consumer sentiment is low by historic standards. Against this backdrop, we are focusing on the actions within our control including meaningful cost cutting initiatives.

As we said on our last call, QVC U.S. and HSN eliminated approximately 400 positions in late February that is expected to generate $60 million in all-in run-rate savings, with $50 million benefiting 2023. We have not experienced any meaningful disruption from the workforce reductions and their operating efficiently.

In March, Zulily eliminated 85 positions that are expected to create annual savings of approximately $14 million with $11 million benefiting 2023.We actively renegotiated import freight contracts during the past six months to take advantage of lower market rates. As a result, our rates for import rate declined 30% year-over-year and more than 60% from their peak in August 2021. It will take time for these savings to flow through our P&L, as freight costs are included in product costs and the impact of P&L once the item is sold.

We have additional cost saving initiatives in process throughout our business. As a reminder, as part of Project Athens, we expect the OIBDA improvement in 2023 will be mostly cost and margin driven and weighted towards the back half of the year, reaching run-rate in 2024.

Turning to our customer file. I want to acknowledge that this is a key focus as we execute our transformation. I've talked previously about the roll-off of less sticky customers that came in during the pandemic, who made purchases online but often didn't interact with our poor video commerce offering. In addition, the Rocky Mount Fire had a material impact on our customer count. Significantly impacting our merchandise assortment, order to delivery times and overall customer satisfaction. Our customers are accustomed to a higher level of service from our brands.

As we show on slide seven in our earnings presentation, our existing customers generated nearly 90% of sales in the trailing 12 months. New and reactivated customers have a significant influence on our customer count as they represent 46% of total customers, yet make up only 10% of our sales. Therefore, as we undergo our transformation, we have heightened our focus on existing customers through merchandise, pricing and programming strategies. We are seeing encouraging results.

Existing customers purchased on average 30 items and their spend grew to $1,500 dollars per customer and the 12 months ended March 31. They increased their spend. This increase in their spend was important to the moderation in QxH's revenue decline relative to 2022 and we are actively focused on driving this continued growth.

We have several initiatives already underway to retain and reactivate customers. Many of these efforts come from enhancing fundamental execution through Project Athens's workstreams. Starting with our merchandise strategy, we meaningfully improved the freshness of our merchandise, enhanced programing, brought back day of urgency in our TSV offerings and focused on driving higher average sales price.

As previously communicated, QxH reduced inventory 25% in FY 2022. As a result, we were able to bring in fresh merchandise in Q1. At QVC, we experienced success with new brands including Canyon Retreat, our own private label apparel offering. The jewelry brand, Effy, as we embark on an enhanced jewelry strategy and OMI WellBeauty supplements in our wellness category.

Managing towards higher average sales price and driving incremental spend among our customers is important and driving topline improvement while our customer funnel is replenished. We are driving average sales price through tailored price increases as well as managing our product assortment into higher priced subcategories, especially within apparel and accessories for our best customers over index.

For example, throughout the pandemic, our customers naturally rotated into purchasing more loungewear. Our customers saturated now in category, and after cleaning out this inventory, our merchandising team is seeing strength in higher priced apparel subcategory such as dresses and denim. We also leaned in the higher price point accessories, including leather handbags. We saw good traction in Q1 and will continue to be a focus.

Electronics remains a challenging category across the industry, reflecting a lack of innovation, which especially impacts our HSN business, where the category is more highly penetrated. While still an important component of the overall mix, we did emphasize reliance on this category in Q1. The pricing efforts are materializing in our results with QxH average sales price up 2%. Average spend per customer increased 11% in the first quarter because of Project Athens initiatives.

Going forward, we are better leveraging the insights of our pricing strategies and data analysts to enhance our merchandise planning strategy and augment our pricing capabilities. We will track all pricing decisions rigorously, so the team can better analyze, measure and recommend pricing actions to drive sales and margin.

We also improved our service promise to customers. At QxH, 84% of packages were shipped within 48 hours in Q1, up from 69% in Q1 2022, and our order to delivery time decreased by half a day. We still have work to do here and aim to further reduce our order to delivery times.

There are several other efforts underway tailored to serving our best customers. We are inviting customers to exclusive live shows and live stream events to meet with hosts and get early access to brand launches. We're offering targeted special promotions on product. We're making outbound calls from customer service to show appreciation for our best customers and address any concerns. Key hosts are making outbound calls and sending thank you notes and videos, leveraging the trust and relationships they uniquely share with our customers. We look forward to learning from these efforts, adapting from those that do not work well and leaning into those that do.

QVC and HSN are leveraging celebrities just as we've done throughout our history. Our platforms continue to be a relevant home for these personalities to launch and promote their brands, telling their stories, and demonstrating their product's life. In Q1, QVC teamed up with Carla Hall to launch our new product line Sweet Heritage, a collection of kitchen and food items. Carla is a trained chef, popular TV personality from Top Chef and culinary author with nearly $0.5 million Instagram followers.

Additionally, HSN collaborated with Christian Siriano to launch C. Wonder, a collection of ready-to-wear apparel style exclusive to HSN. Christian is an award fashion designer with more than $2 million Instagram followers.

In March, we named actor, best-selling author and disability advocate Selma Blair as QVC U.S. Brand Ambassador for Accessibility. We launched a dedicated, accessible and adaptive merchandise category with hundreds of products spanning fashion, home, electronics and beauty. This makes QVC one of the first U.S. retailers to Qurate a full lifestyle of accessible products into a single multi-category offering.

From a programming perspective, we conducted our first live audience shows in two years with “In the Kitchen with David” and a cooking show to launch the Carla Hall new culinary product line. We invited our most loyal customers to join us in the studio and held a meet-and-greet prior to the shows. Both shows are strong ways to further enhance our customer relationship.

For six weeks, from February and the March, QVC U.S. aired a pilot program called "Over 50 & Fabulous", connecting with our four demographics, Mally Roncal hosted the show, which featured a different topic each week, including empty nesting, menopause, life advice and treating yourself. The pilot's objectives were to drive viewership, increase digital traffic, create social engagement, bring in new customers and of course generate sales.

On average, 595,000 households tune-in to the on air program. 12 shows on QVC.com, Facebook, QVC+ and YouTube had more than 8.7 million video views and reached more than 16 million people. Three quarters of the digital visitors were new to QVC.com and 60% of sales were consistently from our most loyal customers. And overwhelmingly, we receive positive customer feedback on social platforms. We plan to continue the pilot monthly, testing, learning and adapting. Then we plan to resume the weekly cadence in Q3 for another six to eight weeks.

In early April, QVC International launched the key initiative, the Integrated Experience, which aims to turn QVC International into the ultimate shopping destination for specific categories. Initially, we are focused on two categories. We launched gardening in the UK in early April and expect to start food in Germany in Q2. It incorporates TV, web and app content into one simplified experience, offering customers differentiated product assortment, innovative programming and live experiences across platforms. It allows like-minded people to share their knowledge and learn from each other. These capabilities are being brought to life in a portable and scalable way, which will allow us to deploy them across multiple markets and additional focus categories.

Shifting now to our streaming business and our actions to create new revenue streams. We continue to grow engagement on our streaming platforms. The total minutes viewed on our app-based streaming services increased 13% year-over-year. We reduced marketing spend in the quarter, but are planning to support streaming more aggressively in the second half of the year.

In mid-March, we launched a beta of our next-generation video and live stream shopping platform and app called Sune, spelled S-U-N-E. The format is mobile-first, short-form and summable. The shopping content and brands featured are unique entertaining and engaging. We are targeting different customers than our traditional audience, Gen Z and young millennials, who are digitally native and actively shopping via video content on other platforms, and seeks to develop personal between these customers, influencers and new up and coming brands and founders. During the public beta phase, we will look to scale, add more functionality, expand brand and product assortment and further personalize the shopping experience.

Now turning to our non-video commerce businesses, starting with Cornerstone. Performance softened in Q1, this is partly due to comping its all-time best first quarter in 2022, but also reflects saturation in the home and home furniture market. Zulily's performance was disappointing. National brands are performing well, but we are seeing pressure in unbranded vendors. We took additional cost actions in March that will benefit future quarters. Bill, will discuss more momentarily.

In closing, we're seeing improved revenue stabilization at our largest video commerce businesses, good initial innovation in our customer experiences and continued opportunities to reduce costs. Our results are still far from where we want, and we recognize we have a lot of work to do to get the business to where it needs to be. We are intensely focused on delivering our Project Athens revenue, OIBDA and free cash flow outcomes.

I would like to thank Jim Hathaway for serving as Interim CFO of QRG. We would greatly appreciate his hard work during this transition, and I look forward to continuing to work with him as CFO of QVC.

I would also like to welcome Bill Wafford, Qurate Retail Group's new CFO. We are excited to have him on board, to leverage his 25 years of experience in corporate finance, management consulting and executive leadership across retail, consumer goods and digital businesses.

I'll turn the call to Bill, to discuss the details of each of our businesses.

Bill Wafford

Thank you, David, and good morning, everyone. I'm very pleased to join David and the entire team. I look forward to speaking with many of you over the coming quarters. Unless otherwise noted, my comments compare financial performance for the three months ended March 31, 2023 to the same period in 2022.

Starting with QxH. Revenue declined 5% primarily on lower unit volume, reflecting fewer customers and reduced shipping and handling revenue primarily at HSN. These pressures were partially offset by 2% growth in average selling price from a mix of elevated product assortment and price increases.

From a category perspective, QxH experienced declines mainly in electronics, beauty and home. We did, however, experienced a moderation in the rate of year-over-year decline for most categories versus Q1 ‘22. This improvement reflects our elevated merchandise strategy and focus to lean into higher price and margin categories and products at QVC and HSN, and our reduced focus on electronics.

QVC U.S. is further along in these efforts and topline performance meaningfully approved in the first quarter. HSN is focusing on similar pricing and merchandise strategies there was a higher penetration of electronics, which impacted its relative performance.

Home revenue declined 2% which was a material improvement from the mid-teens decline in Q1 2022. In Q1 2023, we experienced lower demand largely for kitchen, electrics and cleaning partially offset by strong growth in food. Apparel was essentially flat on top of low-single-digit growth in Q1 2022. This year's performance was primarily due to strength in denim, dresses and swimwear, partially offset by contemporary apparel.

We are rotating airtime into these areas of strength and emphasizing higher price point subcategories in our mix. Beauty declined 6% mainly due to weakness in beauty devices and hair care. Electronics revenue declined 25%, in part due to category softness in the market. We are strategically pulling back on electronics airtime as we focus on higher margin fashion categories were our best customers over index.

Adjusted OIBDA declined $86 million or 38% with adjusted OIBDA margin decreasing 470 basis points. We are incurring certain cost associated with our transformation, some of which are included in adjusted OIBDA and some such as severance or below the line. The expected Project Athens $300 million to $600 million run-rate OIBDA opportunity we articulated to the market is net of associated costs.

There will be some timing impact as we incur costs while the transformation initiatives are put in-place, but before benefits run rate. In particular, in the first quarter, our adjusted OIBDA was pressured by $21 million of costs associated with Project Athens' transformation that were included in SG&A. These costs are non-recurring in nature or non-operating in nature, sorry, and we expect to incur additional expense associated with the transformation through 2023, after which these costs should dissipate.

Now, looking at the rest of our QxH adjusted OIBDA performance. Gross profit declined 160 basis points, mainly due to fulfillment and product margin pressure, partially offset by favorable inventory obsolescence. While product margins decreased, initial product margins improved 180 basis points driven by price increases and a favorable mix into higher margin products. These gains were offset by reduced shipping and handling revenue due to lower volume and the shipping promotions at HSN.

Also, as David mentioned, we incurred a $14 million true-up in the first quarter to catch up in processing returns following the Rocky Mount Fire. As a reminder, Rocky Mount was our primary returns facility and due to the complexities of processing returns in multiple locations, and the lack of a common IT system, we revised our estimate for our return provision in the first quarter.

Fulfillment expenses reflect higher outbound freight rates and wages largely due to inflation. Fulfillment center rent from the sale leaseback transactions completed in ‘22 of approximately $8 million. Higher return processing costs and increased drop-ship penetration, these pressures were partially offset by less detention and demurrage costs.

Inventory obsolescence favourability was a result of the 33% year-over-year inventory reduction at QxH. Operating expenses were unfavourable approximately 60 basis points, primarily due to increased commissions from our mix of scripted sales and expanded linear distribution.

SG&A was unfavourable approximately 240 basis points. $21 million of the SG&A pressure is from the aforementioned transformation related costs associated with Project Athens. We had approximately 55 basis points of sales deleverage and modest expense associated with building our live stream business soon which launched in beta in March. Marketing expenses decreased year-over-year primarily due to less spending on core media.

Moving to QVC International. My comments will focus on constant currency results. Revenue declined 3% primarily on lower unit volume and reduced shipping and handling revenue. QVC Japan was essentially flat, experiencing high inflation as well as reduced viewership in March due to the country's strong interest in the world baseball classic.

Our largest European businesses, Germany and the UK, declined in the mid-single digit and experienced soft consumer sentiment in part attributed to historic inflation. PVC International increased average selling price 5% due to price increases and favourable product shift into higher price point home products in Germany and health fitness and apparel in Japan. From a category perspective, QVC International experienced declines in electronics, jewelry and home, which were partially offset by gains in apparel accessories and beauty.

Adjusted OIBDA decreased 23% and adjusted OIBDA margin declined 330 basis points, primarily driven by higher administrative and fulfilment costs. Gross margin declined mainly due to fulfilment expenses, which reflect higher warehouse labour costs in Germany and the UK and $4 million in rent following the sale leaseback transaction in January of this year. SG&A was unfavourable mostly due to higher fixed costs from wages, benefits and outside services.

Moving to Cornerstone. Revenue declined 13% in the first quarter. Cornerstone was comping its all-time best first quarter in the prior year and on a two year basis, revenue grew 4%. While our business managed its inventory balances very effectively heading into the first quarter, the broader home industry remained highly promotional in the first quarter, requiring Cornerstone to increase promotions to stay competitive. We experienced softness in home accessories, outdoor furniture and kitchen as well as an apparel at Garnet Hill.

Adjusted OIBDA decreased $27 million mainly due to volume decreases, increased promotional activity, higher marketing and warehouse expense as well as higher fixed cost overhead due to opening new stores in Austin, Texas and Charleston, South Carolina in the first quarter as well as in West Palm, Florida in September of 2022. These headwinds were partially offset by lowering down logistics costs.

Looking at Zulily. Revenue declined 17% mostly due to lower unit volume and reduced shipping and handling revenue. These pressures were partially offset by 9% increase in average selling price due to a favourable product mix within national brands and footwear.

Adjusted OIBDA loss increased $13 million largely due to lower product margins, reflecting shipping, handling and site promotions, as well as increased marketing expense and higher inventory obsolescence. These headwinds were partially offset by lower fulfilment and fixed cost.

Now turning at the balance sheet and cash flow. Total capital expenditures were $54 million in Q1 and we spent $38 million on renewals of our TV distribution contract, an increase of $36 million over prior year.

As a reminder, TV distribution contracts are generally renewed on a two year cycle. Total free cash flow for the first three months of 2023 was a use of $70 million versus a use of $244 million last year.

The year-over-year improvement was primarily attributable to increased cash flow from operations, partially offset by higher TV distribution payments. The operating cash flow increase was largely driven by working capital improvements from inventory receivables and payables. QxH inventory was down 33% year-over-year.

Looking at our debt profile. On March 31, we had $1.3 billion drawn on the QVC revolver with $1.9 billion in available capacity. Looking at our cash balances, as of March 31, Qurate Retail had total cash of $1.3 billion of which $421 million is at QVC Inc. Our leverage ratio as defined by the QVC revolving credit facility was 2.5 times. Note that covenant OIBDA includes the adjusted OIBDA of QVC, Cornerstone and Zulily, as well as gains on sale leaseback transactions for the four quarters following such transactions and as of the beginning of this year also includes a portion of expected cost savings. Our covenant OIBDA for purposes of our leverage ratio as of March 31st, includes approximately $225 million of such savings.

Finally, on an administrative note, on May 1st, we received notice from NASDAQ that QRTEA's closing bid price had fallen below $1 per share for 30 consecutive business days. This notice begins a period of 180 calendar days to regain compliance, which means the stock needs to have a closing bid of $1 or more for 10 consecutive business trading days for continued listing on NASDAQ. Additionally, we may be able to take advantage of an additional 180 day compliance period, which means we could have up to 360 days.

Importantly for our management, we are focused on executing our transformation and driving improved financial performance. We took significant action throughout 2022 to create liquidity and position ourselves to execute Project Athens. We have sufficient cushion relative to our 4.5 times maximum net leverage covenant threshold in our credit facility. Our suppliers and partners have been very supportive of Qurate businesses as we manage through our transformation and we continue to look forward to continuing these long standing relationships.

With that, I'll turn the call over to Greg.

Gregory B. Maffei

Thank you, David and Bill. We were pleased to see the performance improvement at our two largest businesses, QVC U.S. and QVC International with revenue only down single-digit in a very choppy retail market. This is a significant improvement. I'd also know we took actions to right size costs during the quarter, but will mostly benefit future periods.

We were disappointed by the augmented pressure during the quarter, but it's worth reiterating that the improvement in underlying operations at QxH was masked by $14 million related to the revised returns provision and $21 million of transformation related costs incurred during the period.

As was noted before, we believe the capital structure we have has runway to get us through our transition, and we have a covenant of 2.5 times currently leverage relative to the 4.5 covenant in the revolver.

We do expect upcoming free cash flow will be applied to debt repayment and will manage towards our stated leverage target of 2.5 times. We did repay $214 million of the 2023 maturity in March this year this quarter. And we also settled $153 million of exchanges on the 1.75% charter bonds during the quarter plus $94 million that settled after quarter end. These bonds have an October 23 put call date which was pulled forward in timing with these recent exchanges. I would also note there is no DTL associated with these 1.75% charter bond retirements. We will continue to assess other opportunities to improve our balance sheet.

And with that, operator, I'd like to open up the line for Q&A.

Question-and-Answer Session

Operator

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

Carla Casella

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

David Rawlinson II

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

Carla Casella

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

David Rawlinson II

Ben Oren, maybe you should take this.

Ben Oren

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

Carla Casella

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

Ben Oren

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

Carla Casella

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

Operator

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

Jason Haas

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

David Rawlinson II

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

Jason Haas

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

David Rawlinson II

Yes. So we still feel good about our expectations about Project Athens. I think as Bill pointed out, there are some one-time transformation costs that could be above and below the line. That we're experiencing as we go through. I think after that, we feel very good about hitting the double-digit OIBDA. We feel good about stable revenue and we certainly feel good about our free cash flow expectations and we would reiterate those.

And a lot of the margin and profitability improvements in the second half, and we've done a lot already to lay the groundwork for some of that. We've talked about the reductions in force. We've talked about the benefits we're already starting to see in pricing and elevating assortment and how that drove higher average sale prices. We continue to expect some favourable product margin in the second half including product margin that's not pricing related. And then we expect fulfilment to turn favourable due to less detention and demurrage some lower import freight rates and then lapping the increase in fulfilment centre rents from the sale and leaseback that we did last year.

Jason Haas

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

David Rawlinson II

Yes.

Jason Haas

Okay. Great. Thank you.

Operator

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

William Reuter

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

Bill Wafford

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

William Reuter

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

David Rawlinson II

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

William Reuter

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

Bill Wafford

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

William Reuter

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

Operator

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

Hale Holden

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

David Rawlinson II

Yes, it's a great question. I'd say a couple of things. First, we didn't -- we weren't in a position to take much price last year when a lot of our competitors took price because we were being relatively aggressive on inventory and so we didn't have some of the freshness and uniqueness that you really need to be able to drive excitement and value and so some of the prices just being able to get clean and having new freshness. But I would also say we've been more deliberate in terms of which subcategories we're emphasizing and so some of it is a mix shift of going towards higher category items.

You might think about cloth handbags versus leather handbags and other changes like that. So it's been partially a mix, partially taking some actual price and then partially a lower reliance on promotions and clearance. And we think that continues to be achievable. We have not seen any negative response from customers. We're being very deliberate to do it with a scaffold and not a sledgehammer. We're also being very deliberate to do it in ways that remain very competitive whenever we're doing especially in today's special value relative to the market pricing.

One of the things we've worked on this product part of Project Athens is having better market intelligence, having a better sense of where the market competitive price is and what an actual value to that price is. And so we're remaining focused on making sure we're continuing to deliver extraordinary value for our customers even as we think there continue to be opportunities to get more price and to continue to drive up the average spend for existing customers.

Hale Holden

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

David Rawlinson II

Yes. I think you're talking about our -- it’s sort Easy Pay usually, those are three to five payments, usually three to four payments. We've seen similar penetration to as a percentage of total sales to sort of historical levels, we're also continuing to see very strong performance. I will say our performance relative to things like bad debt levels and those instruments or class leading always have been and we're continuing to see class leading performance. Some slight increases in sort of defaults and that sort of thing, but mostly in the noise. And so we continue to build. So good about that offer and what it offers to consumers.

We're continuing to see relatively high take rates. I will say as we continue to have a focus on cash, we are looking at ways to be surgical on how we use that tool to make sure we're not overusing it, but the performance of Easy Pay and FlexPay its equivalents at HSN. It's continued to be strong.

Hale Holden

Great. Thank you so much. I appreciate it.

Operator

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

Karru Martinson

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

David Rawlinson II

Yes. Appreciate the question. I'd say a number of things. I think a number of things are going on with the customer file. I think you correctly identified one of them, which is these pandemic cohorts and we're now at, I think, the tail end of cycling through some of those. I've talked in my prepared remarks a bit about the Rocky Mount fire. We have more data and analysis now that just shows that that had a big impact on our customer file. We simply disappointed a lot of customers through that period and we're starting to see some stability now that our performance is improving.

We have seen real moderation. So if you look at QSH actually, and if you were to look at it on an average daily customer count basis, we're at -- in Q1, we were essentially flat to where we were in Q3. So that takes out a bit of the holiday Q4 noise but in Q1, we're about where we were in Q3.

So we have seen very substantial stabilization and then with our -- as I mentioned, the vast majority of our sales are actually with our existing customers even though our customer count tends to move more with new and reactive customers. And so we think we can drive a lot of value with that 90% of sales even as we continue to work on the things that are going to be most attractive to rebuilding and then growing our customer valve from where we have been.

The average spend numbers $1500 highest we've seen in a while number of items and frequency highest we've seen in a while, the ability to do that while getting price that makes us very encouraged. And then on the new and reactive, I think a lot of the things I talked about Carla Hall, Christian Siriano, Selma Blair, those all help. Those are all names with people or people that are known, but may not to people who may not know us. The law shows reengaging the TSVs. We've had much better TSV strategies that's helped bring in some new customers. And then of course, I talked about on the streaming side and live streaming side, some of the early efforts we have underway.

So we have a very broad pull attack on the customer file issue. We think we'll continue to see improvement as we go throughout the year. But we also think there are pretty large opportunities with our relatively stable existing customer file.

Karru Martinson

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

David Rawlinson II

Ben, maybe you could take a cut of that.

Ben Oren

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

Karru Martinson

Thank you very much, guys. Appreciate it.

Operator

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

Carla Casella

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

Bill Wafford

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

Carla Casella

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

Bill Wafford

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

Carla Casella

Yes.

Bill Wafford

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

Carla Casella

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

Bill Wafford

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

Carla Casella

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

David Rawlinson II

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

Carla Casella

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

David Rawlinson II

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

Carla Casella

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

Bill Wafford

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

Carla Casella

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

Bill Wafford

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

Carla Casella

Okay, great. Okay. Thank you.

David Rawlinson II

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

Bill Wafford

Thank you.

Operator

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