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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Spencer Wang Good afternoon, and welcome to the Netflix Q1 2024 earnings interview. I'm Spencer Wang, VP of finance, IR, and corporate development. Joining me today are co-CEOs, Ted Sarandos and Greg Peters; and CFO, Spence Neumann. As a reminder, we will be making forward-looking statements, and actual results may vary. With that, we will now take questions that have been submitted by the analyst community. And we'll begin first with some questions about paid membership reporting and our results and forecast. So, for our first question, it comes from Justin Patterson of KeyBanc. And, I'll direct this at Greg initially. Greg, could you please talk about the decision to stop reporting quarterly membership in ARM data in 2025? Why eliminate this? And since you said success stems -- starts with engagement, how are you thinking of expanding these disclosures? Greg Peters -- Co-Chief Executive Officer Yeah. As we noted in the letter, we've evolved and we're going to continue to evolve, developing our revenue model and adding things like advertising and our extra member feature, things that aren't directly connected to number of members. We've also evolved our pricing and plans with multiple tiers, different price points across different countries. I think those price points are going to become increasingly different. So, each incremental member has a different business impact, and all of that means that that historical simple math that we all did, number of members times the monthly price, is increasingly less accurate in capturing the state of the business. So, this change is really motivated by wanting to focus on what we see are the key metrics that we think matter most to the business. So, we're going to report and guide on revenue, on OI, OI margin, net income, EPS, free cash flow. We'll add a new annual guidance on our revenue range to give you a little bit more of a long-term view. We'll also -- we're not going to be silent on members as well. We'll periodically update when we grow and we hit certain major milestones, we'll announce those. It's just not going to be part of our regular reporting. We want to do all of this thoughtfully and give everyone time to adjust this transition. So, we're going to continue to report subscribers until Q1 of next year, which links into our next annual revenue guidance for 2025. So, we think that provides long-range continuity, and we expect that will provide an effective bridge and transition. But ultimately, we think this is a better approach that reflects the evolution of the business, and it more matches and is consistent with how we manage internally to engagement, revenue, and profit. Ted Sarandos -- Co-Chief Executive Officer Yeah. And on engagement, Greg, as a reminder, we currently report our engagement on our biannual engagement report, leading the industry and viewing transparency and granularity. And we're going to look into building on that both in granularity, which would be kind of tough. Our current report covers about 99% of the viewing on Netflix, but we'll look at the regularity in different ways that we can make it even easier to track our progress on engagement. But importantly, why we focus on engagement is because we believe it's the single best indicator of member satisfaction with our offering, and it is a leading indicator for retention and acquisition over time. So, happy members watch more. They stick around longer. They tell friends, which all grows engagement, revenue, and profit, our North Stars. And we believe that those are the measurements of success in streaming. Spencer Wang Great. Thank you, Ted and Greg. I'll move us along to the next question from Ben Swinburne of Morgan Stanley, who asked two years ago, Netflix stopped adding members. What changes inside Netflix and/or the broader industry explain the significant improvement in member growth we're seeing today, excluding the paid sharing initiative? In other words, what are you doing better today as a company than in the first half of 2022? Ted Sarandos -- Co-Chief Executive Officer That's a great question. I would say the thing we're doing is we're thrilling our members. That's the thing we set out, and it's why we all bounce out of bed in the morning. I look at this last quarter. Eight of the first 11 weeks of the year, we've had the No. 1 film on streaming. Nine of the first 11 weeks, we've had the No. 1 original series, and I'm talking about hits like Avatar: The Last Airbender, Griselda, Damsel, Love Is Blind, 3 Body Problem, all of that just in the last few months. So, this consistent and dependable and expected drumbeat of hit shows, films, and games, that's the business that we're in. And that's what we have to do every day, and we have to do it all over the world. So, if you think about that and how we're doing about kind of quality and scale in multiple cultures, in multiple regions, I look at this last quarter, you see Fool Me Once, One Day, Gentlemen, Scoop, The Super Buzzy, Baby Reindeer, all that from the U.K. all in the last few months. Berlin, Society of the Snow, Alpha Males, all from Spain and all just in the last few months. So, that's been one of those things that we just keep building and building and building on and local unscripted, which is a fairly new initiative for us, and we're finding huge success with things like our second season of Physical 100 in Korea recently and Love is Blind Sweden. These are all kind of hard-to-replicate things that we keep getting better and better at every day that we're really proud of the teams for doing that. And remember, engagement captures all of this, and none of that's possible without great tech and product. We need to do both. Greg Peters -- Co-Chief Executive Officer Yeah, I think that's right. I mean, the fundamental is all those amazing series, film, games, live events. But a key component of our success and something that we're seeking to get constantly better at is that ability to find audiences for all those great titles. Part of making that happen is just the number of people who look to us for entertainment. We mentioned over 0.5 billion people in this letter. But part of that is that product we do to effectively connect those folks with titles that they will love, which then enables us to find the largest audiences for those titles that we think that they could get anywhere. And I think, as you mentioned, Ted, this applies globally to titles from all over the world, which is super exciting. And then, of course, we seek to maximize the fandom and the impact on the conversation and the cultural zeitgeist that all those titles have. And when we do that well, that just feeds positively into that cycle as we launch new titles. So, in terms of what are we doing better, what do we do better, we seek to get better at all of those things. And if we can make that whole flywheel spin a little bit faster, then that's great for our members. It's great for our titles, and it's great for our creators. Spencer Wang Thank you, Ted and Greg. Moving us along, we have Barton Crockett from Rosenblatt, who has a question about our revenue guidance, so I will direct this question to Spence. Spence, can you please explain what drives the revenue deceleration for the full year, so 13% to 15% revenue growth through the full year compared with the 15% to 16% growth in the first and second quarters of this year? Secondly, he also has a question about second-quarter subscriber growth. Will that be higher or lower than Q2 of 2023? Spence Neumann -- Chief Financial Officer All right. Sure. Well, thanks for the question. So, first, regarding revenue growth overall, full-year outlook, I feel really good about where we are in our growth outlook. So, I just want to be clear about that. We've done a lot of hard work over the past 18 months or so to reaccelerate the business and reaccelerate revenue through combination of improving our core service, which Greg and Ted just talked about, and rolling out paid sharing, launching our ads business. And that reacceleration really started in the back half of '23, and it built through the year. So, our growth in the back half of '24 is really kind of comping off of those hard comps. And at the high end of our revenue forecast, our growth in the second half is consistent with our growth in the first half, even with those tougher comps. And it's still early in the year. We still got a lot to execute against. We also -- as you see in our letter, there's been some FX that -- with the strengthening dollar. That's a bit of a headwind, so we'll see where that goes throughout the year. But we're guiding a healthy double-digit revenue growth for the full year, which is what we set out to deliver, and that's what's reflected in the range. And I guess maybe it's -- in the question, I guess, seated in this is a little bit of like what's really kind of the outlook for our growth of the business, not just the back half of this year but into '25. And it's too early to provide real -- specific guidance, but we're going to work hard to sustain healthy double-digit revenue growth for our business. And we really like the kind of the opportunity ahead of us. And we're so small in every aspect. We're only 6% roughly of our revenue opportunity. We're less than 10% of TV share in every country in which we operate. There's still hundreds of millions of homes that are not Netflix members, and we're just getting started on advertising. So, the key is to, as you just heard from Greg and Ted, continually improve our service, drive more engagement, more member value. As we do that, we'll have more members. We'll be able to occasionally price and add value and also have a big, highly engaged audience for advertisers. So, more to come on '25 guidance, but that's -- we feel good about the outlook. And then I guess the second part of the question, I'm trying to remember, Spencer, I'm sorry. Spencer Wang I'll be the bad guy on this one, Spence. So, the second question was, do you expect Q2 subscriber growth to be higher or lower than Q2 of the prior year? So, Barton, as you know, we don't give formal subscriber guidance. We did give an indication in the letter for you that we expect fairly typical seasonality. So, paid net adds in Q2 of this year will be lower than Q1 of this year, and that's the limit of the color we'll provide there. Spence Neumann -- Chief Financial Officer Thanks, Spencer. Spencer Wang No problem, Spence. So, to follow up on the revenue guidance question, we have Jason Helfstein from Oppenheimer, who's asking for some more color on the drivers of the full-year revenue guidance with respect to subscriber growth versus ARM growth and how that -- those two dynamics will play into the revenue forecast, Spence. Spence Neumann -- Chief Financial Officer Yeah. I -- do you want me to take this one as well? Spencer Wang Yeah. Spence Neumann -- Chief Financial Officer OK. I'll jump in. Others can chime in as well. But when we think about the outlook for the year, it's -- in terms of the mix of revenue growth, it's kind of pretty similar to -- we expect it will be pretty similar to what you see in Q1, where it's primarily driven by member growth because of the kind of the full year impact of paid sharing rolling through the year and continued strong acquisition and retention trends. But you are -- we are seeing some ARM growth as well. We saw it in Q1, about 1% on a reported basis, 4% FX neutral. And what's -- I just want to be clear. What's happening is that -- with ARM is price changes are going well. And that's why we're seeing those strong acquisition retention trends because it's testament to the strength of our slate, the overall improvement in the value of our service. But we've only really changed prices in a few big markets, and that was U.S., U.K., France late last year and only on some of the plan tiers in those markets, not even all the plan tiers. And since then, it's been mostly pretty small countries other than Argentina. In Argentina, as you can see, we're sort of pricing into the local currency devaluation, and you see that in the difference between FX neutral and reported growth in Q1. So, mostly, what you're seeing in our growth profile this year is the fact that we haven't taken pricing in most countries for the past two years, really. And we also have some ARM kind of headwinds in the near term that you see in Q1. You'll probably see throughout most of this year, which is that, one, we have some -- this plan mix shift as we roll out paid sharing. So, it's -- while it's highly revenue accretive, as you can see in our numbers, in our reported growth -- strong reported growth in Q1 and outlook for the year, that -- as we spin off into new paid memberships, they tend to spin off into a mix of plan tiers that's a little bit of a lower price SKU than what we see in our tenured members. And we're also growing our ads tier at a nice clip as you've seen and I'm sure we'll talk about. And monetization is lagging growth there. I'm sure we'll talk about that a bit as well. We also have some country mix shifts. So, that whole combination of factors results in pretty modest ARM growth -- still some ARM growth but pretty modest in Q1 and probably throughout the year. But again, the key there is that this is all -- we're kind of managing this business transition in a way that's really healthy for overall revenue growth as you see with 15% reported revenue growth in the quarter, strong outlook for the year. And we're building into a much more kind of durable and healthy foundation for revenue growth going forward across a larger base of paid members and a really kind of strong and scaled, highly engaged audience for it to build into our advertising over time and a strong paid sharing solution also to kind of penetrate into those households. So, we'll increasingly kind of see that mix in our revenue growth, and we start to see some of it this year. Spencer Wang Great, Spence. The next question comes from Kannan Venkateshwar from Barclays, and it's for you, which is, do you expect margin growth trajectory to continue being on the present path for a few years? Can you attain margins that are comparable to legacy media margins? Spence Neumann -- Chief Financial Officer Well, thanks, Kannan. Our focus is on sustaining healthy revenue growth and growing margins each year. That's what we talk about a lot. We also talked about it in the letter. And we feel good about what we've been delivering. 21% margins last year, that's up from 18% in the year before. And now we're targeting 25% this year, which is up a tick from the start of the year when we were guiding to 24%. So, I'd say just like we have in the past, we'll take a disciplined approach to balancing margin improvement with investing into our growth. We've managed that balance historically pretty well, growing content investment, growing profit, growing profit margin, and growing cash flow. You should expect we'll continue to do that. But the amount of annual margin expansion in any given year could bounce around a bit with FX and other investment opportunities. But again, we're committed to grow margin each year, and we see a lot of runway to continue to grow profit and profit margin over the long term. Spencer Wang Thank you, Spence. Our next question comes from Alan Gould of Loop Capital. Which inning are we in with respect to enforcing paid sharing? Two years ago, you said 100 million subscribers were sharing passwords with 30 million in UCAN. How many do you estimate still borrow passwords? And I'll turn the floor over to Greg to answer that question. Greg Peters -- Co-Chief Executive Officer Yeah. As we mentioned last quarter, we're at the point where we've operationalized the paid sharing work. So, this is just now part of that standard mechanism that we've been building and iterating on over time to translate more entertainment value and great film, series, games, live events into revenue. And like we do with all of the significant parts of our product experience, we're iterating on that, testing it, improving it continually. So, rather than thinking beyond sort of specific cohorts or specific numbers, we really think about this more as developing more mechanisms, more effective ways to convert folks who are interacting with us, whether they be borrowers or folks that were members before that are coming back, we call them rejoiners or folks that have never been a Netflix member. So, we want to find the right call to action, the right offer, or the right nudge at the right time to get them to convert. And just to be clear, we still see opportunities to improve this process. We've got line of sight on several improvements, this value translation mechanism that we expect will deliver and contribute to business growth for the next several quarters to come. But I also very much believe that just like for the last 15 years, we're going to -- we've always found something to improve in this process. And even beyond those, for years and decades to come, we'll be working on this and making it better and better and better. So, all of those improvements could allow us to effectively get more of that 500 million-plus smart TV households to sign up and become members. Spence mentioned the hundreds of millions yet to come. This is a way to effectively get at more of those folks and make them part of our membership base. And as we mentioned earlier on the call, too, I think worth noting that while we're fully anticipating continuing to grow subs, the overall business growth now has extra levers and extra drivers like plan optimization, including things like extra members, ads revenue, pricing into more value, which is important. So, those levers are also an increasingly important part of our growth model as well. Spencer Wang Great. I'll move this on now to a series of questions around advertising. The first of which comes from Doug Anmuth of JPMorgan. What are the most important drivers of scaling your ad tier when you think about adjustments you could make to pricing and plans, partner bundles, and marketing? How do you get people over the hump for -- that a few minutes of ads an hour can still be a very good experience at the right price? Greg, why don't you take that one? Greg Peters -- Co-Chief Executive Officer Yeah. All the things you mentioned in the question matter. And I would say we're generally taking our entire playbook, everything that we've learned about how do you grow members, and we're applying it to our ads tier now. So, clearly, that means partner channels. It means device integrations, bundles, integrated payments. Those are all important tools for growth just as they are and will continue to be in our non-ads offering; increasing awareness of the quality of our ads experience, especially relative to the linear TV ads experience, which, in many countries, is really quite poor. That's an important iterative tool when we talk about sort of marketing and awareness building. That's going to be part of our growth mechanism. Low price, that's important to consumers. $6.99 is an example in the United States for multiple streams, full HD downloads. We think that's a great entertainment value, especially at the industry-leading low ad load that we've got. So, that's critical as well. So, I think you can see the results of leveraging all of these mechanisms and more and how our ads tier has been scaling over the last couple of quarters. So, we're 65% up quarter to quarter this last quarter. That's after two quarters of about 70% quarter-over-quarter growth. For me, it's exciting to see that growth rate stay high even as we've grown the base so much because, obviously, the numbers indicate that that means that there's more absolute additions each quarter. So, we're making good progress there. But look, we've got much, much more to do in terms of scaling. We've got more to do in terms of effective go-to-market, more technical features, more ads products. There's plenty of work ahead for us on ads. Spencer Wang Great, Greg. Our next question on advertising comes from Rich Greenfield of LightShed. He has a three-part question. Part one, can you update us on your thinking around the optimal spread between the ad tier and the ad-free tier? Secondly, is your advertising ARPU, excluding the subscription fee, up meaningfully versus your original comments that it was in the $8 to $9 range last year? And then lastly, can you give us a sense of what ARPU would look like if supply was not outstripping demand? Greg Peters -- Co-Chief Executive Officer Yeah. I'll take the first one and then maybe hand the ARPU/ARM points to Spence. We don't have a fixed operator position on sort of the optimal pricing spread. And much like we've done with price changes in general, we really use signals from our customers, things like plan take rate, conversion rates, churn to guide us along an iterative path to get to that right pricing. And I think it's also probably worth noting that sort of right pricing is not really a static position. As we continue to evolve and improve our offering, that's going to change as well. But I think a good general guideline for us in the long term is that it would be healthy for us to land overall monetization between our ads and non-ad offerings in roughly an equivalent position. So, that really comes down to what works best for any given member, and it's really a member choice about which plan they think serves them the best. And then I'll hand it over to Spence on ARM questions. Spence Neumann -- Chief Financial Officer Sure. Thanks, Greg. So, in terms of ARM and your question, Rich, in terms of how we're doing now relative to what we discussed when we first launched business, as Greg said, we've been growing our inventory at quite a fast clip. And so, monetization hasn't fully kept up with that growth in scale and inventory as we're still early in building out our sales capabilities and our ad products. But that is an opportunity for us because this -- we're still a very premium content environment, very highly engaged audience that's at an increasing scale. So, our CPMs remain strong. And we're building out our capabilities, as Greg talked about. So, the revenue is going to follow engagement over time, and it's already kind of growing nicely, which is great just off a small base. So, then really, as Greg said, what that means for ARM is right now, it is a bit of a drag on our ARM because we're kind of under-monetizing relative to supply. But over time, we expect to be similar in revenue on our ads tier, a combination of subscription as well as ads revenue with those kind of non-ads offerings. So, that's how to think about it, but we're building to it over time. Spencer Wang Great. Last question on advertising comes from John Hodulik at UBS. How are you approaching this year's upfronts? And do you believe the base of ad support users is now of the scale that upfront commitments can drive a meaningful change in advertising revenue and be a contributor to ARM growth in 2025? So perhaps, Ted, maybe you could start, and then, Greg, follow after that. Ted Sarandos -- Co-Chief Executive Officer Yeah, of course. Look, first and foremost, this is our second upfronts. We're really excited to go and share with advertisers this incredible slate that we're very, very proud of. So, they're going to get a look at some of the shows that are upcoming right away, like brand-new seasons of Bridgerton and Sweet Tooth and That '90s Show; some of our big unscripted events upcoming, like our Tom Brady roast, by way of example; and brand-new shows like Dead Boy Detectives and Shane Gillis' new show, Tires; Eric, a great new limited series out of the U.K. with Benedict Cumberbatch that we're super excited about. And then they'll even get a longer look at what's coming up in the second half of the year, which is, again, returning seasons of Cobra Kai, Emily in Paris, The Night Agent, Outer Banks; and Squid Game, our big one; and a brand-new season of Monsters from Ryan Murphy, which is the Lyle and Erik Menendez story this year, which is going to be really an incredible thing to share with our advertisers; brand-new original series and limited series like American Primeval from Pete Berg; Heartburn with an all-star cast, Nicole Kidman and Liev Schreiber; Senna, which is this great limited series on the great Brazilian Formula 1 driver that we're really excited about. And also, I look at our early -- at our movies coming up that we'll end the year with, with like Eddie Murphy and his most iconic role, Axel Foley, in Beverly Hills Cop: Axel Foley; Carry-On; a big new animated feature, Spellbound. So, we've got a lot of entertainment in store for the audience at the upfronts. Greg Peters -- Co-Chief Executive Officer Yeah. I think this is an opportunity to reengage with advertisers and look at the fundamentals of what our offering is. I mean, first and foremost, it's an incredible list of titles that brands want to be connected with. It's just super exciting to hear that roster. We've got great engagement from our members on our ads tier. We've got an opportunity to grow that even further. We think that's connected again to the power of those titles. We're rapidly growing scale as we mentioned. That's the No. 1 request we've had from advertisers. So, that's exciting. We're making progress on technical features like measurement on ads products. So, we're excited to get that out there. And really, this is just an opportunity to bring all of that progress in a package to advertisers and then -- and of course, to get input from them because we know that they're going to have comments and they're going to have things that they're going to want us to continue to work on, and then really then just to continue that journey because we know there's plenty more to go do to realize the potential we have in the space. And so, I would say we're continuing to grow here. We're growing off of a relatively small base in terms of the impact against already big and substantial business. So, even though it's growing quite quickly, it takes a while to grow that into the point where it's material. So, we look forward to that increasing in '25 and then increasing further in '26 and beyond. Spencer Wang Great. I'll now transition us to several questions around content. And this first one, I'll direct to Ted. It's a rare question around why don't we spend more. Given what seems like a very favorable current backdrop for Netflix to acquire and license content, why not lean in even more aggressively? Could it make sense to spend more than $17 billion in cash content this year? Ted Sarandos -- Co-Chief Executive Officer Yeah. Independent of the availability of licensed content, you should look at it -- I think we're -- we've always been very disciplined about the way we invest in the business and how we grow it. And we can get a lot of bang for our buck by spending our money well and producing our shows really well and also by acquiring the right content. And the floodgates have opened a little more on licensing for sure. But again, we're very focused on the ones that we think will drive the business. So, I think we're -- at our current level of spending and our current rate of growth that we're pretty comfortable spending just behind that anticipated rate of growth. Spencer Wang And Ted, Jason Helfstein's follow-up is also about license content or second-run content. And his question is, how would a second -- more second-run licensing impact your margins and free cash flow? Ted Sarandos -- Co-Chief Executive Officer Well, the budget is the budget, so it's all part of how we're spending against the content. And the free cash flow economics, we've gotten pretty close in our cash flow against P&L on our content spend generally. So, I don't think it would have much -- very much impact on that, unless you want to add some color to that, Spence. Spence Neumann -- Chief Financial Officer I just love you talking about the discipline on our content budgets, Ted. It makes me happy. No, I agree with all of it. I mean, yes, we spend with the opportunity but with, I think, prudent constraints and discipline. And to be clear, like we -- as you say, there has been more licensed content opportunity, but the vast majority of our content spend is still into original programming. It's -- and it is and is likely to continue to be. So, we'll always complement it with great licensed content for that variety and quality for our members, but the originals -- original content is still our future, too. Yeah. Spencer Wang Great. Next question is from Michael Morris of Guggenheim. Specific about the Jake Paul-Mike Tyson fight for Ted. What are the characteristics of the upcoming Jake Paul-Mike Tyson fight that make this the type of sports programming you're interested in investing in? How does that content benefit your member base and advertising growth goals? Ted Sarandos -- Co-Chief Executive Officer Yeah. So, we're in the very early days of developing our live programming. And it's -- I would look at this as an expansion of the types of content we offer, the way we expanded to film and unscripted and animation and most recently, games. On-demand and streaming have been unbelievable for consumer choice and control, and it's really put the controls of television back in the hands of consumers, which has been really phenomenal. But there's also something incredibly magic about folks gathering around the TV together in the living room to watch something all at the same time. We believe that these kind of eventized cultural moments like the Jake Paul and Mike Tyson fight are just that kind of television that we want to be part of winning over those moments with our members as well. So, that, for me, is the excitement part of this. We have -- beyond the fight itself, we have several nights of live comedy coming from the Netflix Is A Joke Festival next month. And starting in January, we've got 52 weeks of live sports with WWE Raw that's going to be coming to our members every week on Netflix. And we think it's going to be a real value add to watch those things in real time. And we're going to continue to try a lot of new things. But the core of it is, do our members love it? And judging from the early excitement around the Jake Paul-Mike Tyson fight, there's going to be a lot of people waking up in the middle of the night all over the world to watch this fight in real time. Greg Peters -- Co-Chief Executive Officer I think worth noting that just as what's relevant to members in terms of these large cultural events that Ted talks about, that's what has relevance to advertisers as well. So, it's an opportunity for us to expand our advertising offering and give those brands access to these kind of culture-defining moments. Spencer Wang Thanks, Ted and Greg. And I'm personally looking forward to that event, and my money is on Iron Mike Tyson. But as a follow-up on the sports -- Greg Peters -- Co-Chief Executive Officer Bold. Bold. Spencer Wang Yes, he's still got it, I think. But as a follow-up to the sports question for Ted, as you continue to scale Netflix and become bigger and bigger and potentially gain more leverage, how could your sports strategy change beyond what you're doing today around primarily sports entertainment? Ted Sarandos -- Co-Chief Executive Officer Yeah. You know, we said this many times, but not anti-sports but pro-profitable growth. And I think that's the core of everything we do in all kinds of programming, including sports. So, our North Star is to grow engagement, revenue, and profit. And if we find opportunities, we could drive all three of those, we will do that across an increasingly wide variety of quality entertainment. So, when and if those opportunities arrive that we can come in and do that, which we feel like we did in our deal with WWE, if we can repeat those dynamics in other things, including sports, we'll look at it for sure. So, I think it's -- we've had the benefit of building an enormous business without a loss leader, and we continue to believe that we can grow on that path just as you've seen. So, I think the core of it is, is that we're going to look at those opportunities with the same discipline that we do when we talk to movie producers and television networks about putting our content on the air. Spencer Wang Great. The next question comes from Rich Greenfield from LightShed about our film strategy. So, for Ted, a recent New York Times article cited internal communications from new Netflix film chief Dan Lin stating, "The aim is to make Netflix's movies better, cheaper, and less frequent. Lynn wants his team to become more aggressive producers developing their own material rather than waiting for projects from producers and agents that come to them." Everyone wants to make better, cheaper films, but we find it hard to believe -- we, being rich, find it hard to believe that there is a magic formula. Help us understand the strategy shift under Dan Lin versus Scott Stuber. Ted Sarandos -- Co-Chief Executive Officer Well, thanks for that question, Rich. I would send you back to that New York Times article because that was not a quote from Dan. And I would say that -- nor did we participate in that article. I would say, just to be clear, there is no appetite to make fewer films, but there is an unlimited appetite to make better films always. Even though we have made and we are making great films, we want to make them better, of course. We're super excited to have Dan join the company. He just joined a couple of weeks ago, and he's joined us running 100 miles an hour. Bela has said this publicly, that our strategy remains variety and quality, and she's doing an amazing job of bringing new fresh thinking to our content and our content organization. Bringing Dan on board is a great example of that. We want to have a lot of movies. We want them to thrill our audiences, and they all have different tastes, and we want them all to be great. So, we take a very audience-centric view of what quality is, and Dan knows that from having produced for us. As the CEO of Rideback, he produced the Oscar-nominated film, The Two Popes, for us. He did Avatar: The Last Airbender for us recently. So, he understands Netflix and the audience really, really well. And his success in live action and animation is very hard to define in the business. So, we're thrilled he's doing it here. Spencer Wang Great. Thank you, Ted. The next question comes from Kannan Venkateshwar from Barclays. Could you please provide an update on engagement trends now that paid sharing is mostly behind you? So I'll kick it over to Ted first, and Greg, you can feel free to add on. Ted Sarandos -- Co-Chief Executive Officer Well, look, it's important to note that we compete for every hour of viewing all the time, every day, everywhere we operate. And we think that that engagement report is very important and that metric is important because, again, it's the best indicator of customer satisfaction. I know I just said this 10 minutes ago, but I'm going to repeat it. Eight of the first 11 weeks of this year, we've had the No. 1 movie; and nine of the last 11 weeks of this year, we've had the No. 1 series. And that's according to the Nielsen streaming data. And for us, that is what we're singularly focused on. And we've actually seen in that Nielsen data our share tick up a little bit even in this incredibly competitive space, where you've got a lot of folks competing for attention, for time, and for money. Greg Peters -- Co-Chief Executive Officer Yeah, Ted, I think you can repeat that eight out of 11, nine, 11 as many times as you want, as far as I'm concerned. Spence Neumann -- Chief Financial Officer I'm going to close with that, too. Greg Peters -- Co-Chief Executive Officer So, you know, as we have said, due to the work that we've been doing on password sharing, we're essentially cutting off some viewers who are not payers, and therefore, we're going to lose some viewing associated with that. So, when you see our next engagement report, you are going to see some impact to our overall absolute view hours as a result of that. But despite that impact and despite the general pressure from strong competition that Ted noted, we think our engagement remains healthy. You can see it in the stat that Ted indicated in terms of the Nielsen ratings and our modest growth in TV time in the United States. But we also wanted to do an apples-to-apples view of engagement. So, we looked at the population not impacted by paid sharing, what we called owner households. And in Q1 of '24, the hours viewed per account were steady with the year-ago quarter. So, that's a pretty good sign that our engagement's holding up, and it sort of cuts through the noise around paid sharing. And again, I just want to reiterate, we think we have plenty of room to grow engagement, right? We're still less than 10% of TV hours even in our most mature markets. So, there's tons of room of growth ahead of us. Spencer Wang Thank you, Ted and Greg. I'm going to move us along now to a series of questions around plans and pricing and pricing strategy. So, from Steve Cahall from Wells Fargo. Greg, as you continue to expand, do you think there is a ceiling for pricing? If so, how close are we to that ceiling in mature markets? And do you envision Netflix having content here so that you can continue to expand your content genres and further segment your customer base? Greg Peters -- Co-Chief Executive Officer Yeah. We don't have a set position on a ceiling. I mean, sure, you can look at paid TV as potential markers for where people have spent before. But we really actually don't think of it so much is defined by that. We see it as an opportunity to continue the process that we've been working on, which is let's continue to try and invest wisely, add more entertainment value. And as we add more entertainment value, then, of course, we can go back to our subscribers and ask them to pay a little bit more to keep that virtuous cycle moving. And really, the markers for us in terms of the upside potential more around the hours on TV that we are winning, how many moments of truth, we call it, that we are winning, again, less than 10% in our even most mature markets. There's tons of room there. You can use total consumer spend on entertainment in the markets and categories that we compete in. That's between 5% and 6%. So, there's just a lot of runway still ahead of us to go do a good job at making that investment happen, deliver more value, and then ask folks to pay a little bit more. Spencer Wang Great. Next question on pricing comes from Mark Shmulik of Bernstein. Can you please share progress on how the retirement of the basic plan is going in the U.K. and Canada? And is there any color you can share on if when we could expect a similar rollout in the U.S.? Greg, why don't you take that one? Greg Peters -- Co-Chief Executive Officer Yep. As we shared in the Q4 '23 letter, we were planning on retiring our basic plan in some of our ads countries. We've now started that process in Canada and the U.K. And very similar to what you see -- what you saw us do with paid sharing, we're going to work hard to make this a smooth transition. Part of that is listening to our members before we make any further moves, so we've got nothing more to announce, and we really want to see how this goes. Yeah. And we know that this is a change for our basic members, but we think we've got a strong offering for them. They're going to get more for less, two streams versus one. We've got higher definition, we've got downloads, all at a lower price. And of course, it goes without saying, hopefully, that members can always choose our ads-free plans as well if they prefer. Spencer Wang Great. Thank you, Greg. A couple of questions on overall capital allocation. So, these would be for Spence primarily from John Blackledge of TD Cowen. You mentioned evolving capital allocation strategy in your investor letter with the -- with your new investment-grade status. Can you please talk about the changes in how investors will see that change? Spence Neumann -- Chief Financial Officer Yeah, sure. Thanks for the question. It's really quite a modest evolution of our capital allocation strategy to better reflect our investment-grade status. And that's really what it is. We're still going to have the same financial policies and principles in terms of prioritizing profitable growth by reinvesting in our core business, maintaining a healthy balance sheet with ample liquidity, and returning excess cash beyond several billion dollars on the balance sheet of minimum cash and anything that we use for selective M&A to return to shareholders through share repurchase. So, really, the only change is that now that we're solidly investment grade, we're going to -- while we will hold still several billion dollars of cash on the balance sheet, we won't have the same marker of two months of revenue. The equivalent of two months of revenue on the balance sheet allows us to be a bit more efficient there. We also upsized our revolver, which was announced today, up to $3 billion from $1 billion, which also gives us more access to capital and better cash efficiency. And then, again, any cash beyond that, we'll return to shareholders. We've historically been mostly a build-versus-buy company with select strategic kind of acceleration through M&A. And there's nothing right now planned, but that still is kind of our philosophy, is to build predominantly. And we're also going to kind of refinance our existing kind of debt as those maturities approach. But we don't plan to kind of lever up through stock buyback. We want to -- we really do value that balance sheet flexibility. Spencer Wang Great. Thank you, Spence. Last question on capital allocation for you. This comes from Vikram of Baird. What are your latest thoughts on the appropriate level of content spend for the business beyond 2024? Specifically in the past, you have referenced a 1.1 cash content spend-to-amortization ratio. Is that still the case? And what would you need to see in an opportunity to meaningfully exceed that framework? Spence Neumann -- Chief Financial Officer Yes. It still holds. It still holds. So, we're still basic -- the short of it is we're really kind of managing to that. So, as we said, we've been focused on driving that acceleration of our revenue growth, continuing to grow our business, grow our profitability. As we do that, we would expect to continue to grow our content investment as we have historically into the highest-impact areas but also be quite disciplined there. So, we want to grow our free cash flow. So, we believe we can manage to that roughly 1.1x of cash content spend relative to expense on the P&L. And that leads to overall revenue growth, increased profit, profit margins, growing free cash flow. And that still gives us a lot of opportunity to spend into the -- all those kind of content and entertainment categories that Greg and Ted have been talking about. Spencer Wang Thanks, Spence. We have a few more minutes left, so we'll wrap up with a few higher-level questions. The next one comes from Eric Sheridan of Goldman Sachs. And I think both Ted and Greg can tackle this one. The question is what are your thoughts on the competitive impact from short-form video consumption? Ted Sarandos -- Co-Chief Executive Officer So, I look at how -- what people watch and when they watch it, have a lot to do with one another. What are the choices and how much time do they have? So our version of short form is more like giving our members the ability to watch 10 minutes of an episode of a series that they're binging right now if they only have 10 minutes. But some -- and also, when I look at the short-form viewing on YouTube and TikTok, some of it is adjacent and quite complementary to our viewing. So, our trailers or creators expressing their fandom for our shows like doing posting a Wednesday dance or ugly crying watching One Day, all those kind of things that become viral sensations and actually increase the fandom of our shows. Now, that being said, some of that viewing is directly competitive with us, the same as it is with other media companies who provide content to YouTube, by way of example. The art of this has always been finding the right balance of both. And I also would point out that these platforms have been a way to have new voices emerge, and we've got our eye on them as well to try to develop them into the next generation of great storytellers on Netflix. Spencer Wang Great. And I think for our final question, we'll take that from Dan Salmon of New Street Research. What is the opportunity for Netflix to leverage generative AI technology in the near and long term? What do you think great storytellers should be focused on as this technology continues to emerge quickly? I'll turn that over to Greg, please. Greg Peters -- Co-Chief Executive Officer Yeah. Worth noting, I think, that we've been leveraging advanced technologies like ML for almost two decades. These technologies are the foundation for our recommendation systems that help us find these largest audiences for our titles and deliver the most satisfaction for our members. So, we're excited to continue to involve and improve those systems as new technologies emerge and are developed. And we also think we're well positioned to be in the vanguard of adoption and application of those new approaches from our just general capabilities that we've developed and how we've already developed systems that do all these things. We also think that we have the opportunity to develop and deliver new tools to creators to allow them to tell their stories in even more compelling ways. That's great for them. It's great for the stories, and it's great for our members. And what should storytellers be focused on? I think storytellers should be focused on great storytelling. It is incredibly hard and incredibly complex to deliver thrilling stories through film, through series, through games. And storytellers have a unique and critical role in making that happen, and we don't see that changing. Spencer Wang Great. Thank you very much, Greg. And we are now out of time. So, I want to thank you all for taking the time to listen into our earnings call. And we look forward to speaking with you all next quarter. Thank you. Answer:

the Netflix Q1 2024 earnings interview

Spencer Wang Good afternoon, and welcome to the Netflix Q1 2024 earnings interview. I'm Spencer Wang, VP of finance, IR, and corporate development. Joining me today are co-CEOs, Ted Sarandos and Greg Peters; and CFO, Spence Neumann. As a reminder, we will be making forward-looking statements, and actual results may vary. With that, we will now take questions that have been submitted by the analyst community. And we'll begin first with some questions about paid membership reporting and our results and forecast. So, for our first question, it comes from Justin Patterson of KeyBanc. And, I'll direct this at Greg initially. Greg, could you please talk about the decision to stop reporting quarterly membership in ARM data in 2025? Why eliminate this? And since you said success stems -- starts with engagement, how are you thinking of expanding these disclosures? Greg Peters -- Co-Chief Executive Officer Yeah. As we noted in the letter, we've evolved and we're going to continue to evolve, developing our revenue model and adding things like advertising and our extra member feature, things that aren't directly connected to number of members. We've also evolved our pricing and plans with multiple tiers, different price points across different countries. I think those price points are going to become increasingly different. So, each incremental member has a different business impact, and all of that means that that historical simple math that we all did, number of members times the monthly price, is increasingly less accurate in capturing the state of the business. So, this change is really motivated by wanting to focus on what we see are the key metrics that we think matter most to the business. So, we're going to report and guide on revenue, on OI, OI margin, net income, EPS, free cash flow. We'll add a new annual guidance on our revenue range to give you a little bit more of a long-term view. We'll also -- we're not going to be silent on members as well. We'll periodically update when we grow and we hit certain major milestones, we'll announce those. It's just not going to be part of our regular reporting. We want to do all of this thoughtfully and give everyone time to adjust this transition. So, we're going to continue to report subscribers until Q1 of next year, which links into our next annual revenue guidance for 2025. So, we think that provides long-range continuity, and we expect that will provide an effective bridge and transition. But ultimately, we think this is a better approach that reflects the evolution of the business, and it more matches and is consistent with how we manage internally to engagement, revenue, and profit. Ted Sarandos -- Co-Chief Executive Officer Yeah. And on engagement, Greg, as a reminder, we currently report our engagement on our biannual engagement report, leading the industry and viewing transparency and granularity. And we're going to look into building on that both in granularity, which would be kind of tough. Our current report covers about 99% of the viewing on Netflix, but we'll look at the regularity in different ways that we can make it even easier to track our progress on engagement. But importantly, why we focus on engagement is because we believe it's the single best indicator of member satisfaction with our offering, and it is a leading indicator for retention and acquisition over time. So, happy members watch more. They stick around longer. They tell friends, which all grows engagement, revenue, and profit, our North Stars. And we believe that those are the measurements of success in streaming. Spencer Wang Great. Thank you, Ted and Greg. I'll move us along to the next question from Ben Swinburne of Morgan Stanley, who asked two years ago, Netflix stopped adding members. What changes inside Netflix and/or the broader industry explain the significant improvement in member growth we're seeing today, excluding the paid sharing initiative? In other words, what are you doing better today as a company than in the first half of 2022? Ted Sarandos -- Co-Chief Executive Officer That's a great question. I would say the thing we're doing is we're thrilling our members. That's the thing we set out, and it's why we all bounce out of bed in the morning. I look at this last quarter. Eight of the first 11 weeks of the year, we've had the No. 1 film on streaming. Nine of the first 11 weeks, we've had the No. 1 original series, and I'm talking about hits like Avatar: The Last Airbender, Griselda, Damsel, Love Is Blind, 3 Body Problem, all of that just in the last few months. So, this consistent and dependable and expected drumbeat of hit shows, films, and games, that's the business that we're in. And that's what we have to do every day, and we have to do it all over the world. So, if you think about that and how we're doing about kind of quality and scale in multiple cultures, in multiple regions, I look at this last quarter, you see Fool Me Once, One Day, Gentlemen, Scoop, The Super Buzzy, Baby Reindeer, all that from the U.K. all in the last few months. Berlin, Society of the Snow, Alpha Males, all from Spain and all just in the last few months. So, that's been one of those things that we just keep building and building and building on and local unscripted, which is a fairly new initiative for us, and we're finding huge success with things like our second season of Physical 100 in Korea recently and Love is Blind Sweden. These are all kind of hard-to-replicate things that we keep getting better and better at every day that we're really proud of the teams for doing that. And remember, engagement captures all of this, and none of that's possible without great tech and product. We need to do both. Greg Peters -- Co-Chief Executive Officer Yeah, I think that's right. I mean, the fundamental is all those amazing series, film, games, live events. But a key component of our success and something that we're seeking to get constantly better at is that ability to find audiences for all those great titles. Part of making that happen is just the number of people who look to us for entertainment. We mentioned over 0.5 billion people in this letter. But part of that is that product we do to effectively connect those folks with titles that they will love, which then enables us to find the largest audiences for those titles that we think that they could get anywhere. And I think, as you mentioned, Ted, this applies globally to titles from all over the world, which is super exciting. And then, of course, we seek to maximize the fandom and the impact on the conversation and the cultural zeitgeist that all those titles have. And when we do that well, that just feeds positively into that cycle as we launch new titles. So, in terms of what are we doing better, what do we do better, we seek to get better at all of those things. And if we can make that whole flywheel spin a little bit faster, then that's great for our members. It's great for our titles, and it's great for our creators. Spencer Wang Thank you, Ted and Greg. Moving us along, we have Barton Crockett from Rosenblatt, who has a question about our revenue guidance, so I will direct this question to Spence. Spence, can you please explain what drives the revenue deceleration for the full year, so 13% to 15% revenue growth through the full year compared with the 15% to 16% growth in the first and second quarters of this year? Secondly, he also has a question about second-quarter subscriber growth. Will that be higher or lower than Q2 of 2023? Spence Neumann -- Chief Financial Officer All right. Sure. Well, thanks for the question. So, first, regarding revenue growth overall, full-year outlook, I feel really good about where we are in our growth outlook. So, I just want to be clear about that. We've done a lot of hard work over the past 18 months or so to reaccelerate the business and reaccelerate revenue through combination of improving our core service, which Greg and Ted just talked about, and rolling out paid sharing, launching our ads business. And that reacceleration really started in the back half of '23, and it built through the year. So, our growth in the back half of '24 is really kind of comping off of those hard comps. And at the high end of our revenue forecast, our growth in the second half is consistent with our growth in the first half, even with those tougher comps. And it's still early in the year. We still got a lot to execute against. We also -- as you see in our letter, there's been some FX that -- with the strengthening dollar. That's a bit of a headwind, so we'll see where that goes throughout the year. But we're guiding a healthy double-digit revenue growth for the full year, which is what we set out to deliver, and that's what's reflected in the range. And I guess maybe it's -- in the question, I guess, seated in this is a little bit of like what's really kind of the outlook for our growth of the business, not just the back half of this year but into '25. And it's too early to provide real -- specific guidance, but we're going to work hard to sustain healthy double-digit revenue growth for our business. And we really like the kind of the opportunity ahead of us. And we're so small in every aspect. We're only 6% roughly of our revenue opportunity. We're less than 10% of TV share in every country in which we operate. There's still hundreds of millions of homes that are not Netflix members, and we're just getting started on advertising. So, the key is to, as you just heard from Greg and Ted, continually improve our service, drive more engagement, more member value. As we do that, we'll have more members. We'll be able to occasionally price and add value and also have a big, highly engaged audience for advertisers. So, more to come on '25 guidance, but that's -- we feel good about the outlook. And then I guess the second part of the question, I'm trying to remember, Spencer, I'm sorry. Spencer Wang I'll be the bad guy on this one, Spence. So, the second question was, do you expect Q2 subscriber growth to be higher or lower than Q2 of the prior year? So, Barton, as you know, we don't give formal subscriber guidance. We did give an indication in the letter for you that we expect fairly typical seasonality. So, paid net adds in Q2 of this year will be lower than Q1 of this year, and that's the limit of the color we'll provide there. Spence Neumann -- Chief Financial Officer Thanks, Spencer. Spencer Wang No problem, Spence. So, to follow up on the revenue guidance question, we have Jason Helfstein from Oppenheimer, who's asking for some more color on the drivers of the full-year revenue guidance with respect to subscriber growth versus ARM growth and how that -- those two dynamics will play into the revenue forecast, Spence. Spence Neumann -- Chief Financial Officer Yeah. I -- do you want me to take this one as well? Spencer Wang Yeah. Spence Neumann -- Chief Financial Officer OK. I'll jump in. Others can chime in as well. But when we think about the outlook for the year, it's -- in terms of the mix of revenue growth, it's kind of pretty similar to -- we expect it will be pretty similar to what you see in Q1, where it's primarily driven by member growth because of the kind of the full year impact of paid sharing rolling through the year and continued strong acquisition and retention trends. But you are -- we are seeing some ARM growth as well. We saw it in Q1, about 1% on a reported basis, 4% FX neutral. And what's -- I just want to be clear. What's happening is that -- with ARM is price changes are going well. And that's why we're seeing those strong acquisition retention trends because it's testament to the strength of our slate, the overall improvement in the value of our service. But we've only really changed prices in a few big markets, and that was U.S., U.K., France late last year and only on some of the plan tiers in those markets, not even all the plan tiers. And since then, it's been mostly pretty small countries other than Argentina. In Argentina, as you can see, we're sort of pricing into the local currency devaluation, and you see that in the difference between FX neutral and reported growth in Q1. So, mostly, what you're seeing in our growth profile this year is the fact that we haven't taken pricing in most countries for the past two years, really. And we also have some ARM kind of headwinds in the near term that you see in Q1. You'll probably see throughout most of this year, which is that, one, we have some -- this plan mix shift as we roll out paid sharing. So, it's -- while it's highly revenue accretive, as you can see in our numbers, in our reported growth -- strong reported growth in Q1 and outlook for the year, that -- as we spin off into new paid memberships, they tend to spin off into a mix of plan tiers that's a little bit of a lower price SKU than what we see in our tenured members. And we're also growing our ads tier at a nice clip as you've seen and I'm sure we'll talk about. And monetization is lagging growth there. I'm sure we'll talk about that a bit as well. We also have some country mix shifts. So, that whole combination of factors results in pretty modest ARM growth -- still some ARM growth but pretty modest in Q1 and probably throughout the year. But again, the key there is that this is all -- we're kind of managing this business transition in a way that's really healthy for overall revenue growth as you see with 15% reported revenue growth in the quarter, strong outlook for the year. And we're building into a much more kind of durable and healthy foundation for revenue growth going forward across a larger base of paid members and a really kind of strong and scaled, highly engaged audience for it to build into our advertising over time and a strong paid sharing solution also to kind of penetrate into those households. So, we'll increasingly kind of see that mix in our revenue growth, and we start to see some of it this year. Spencer Wang Great, Spence. The next question comes from Kannan Venkateshwar from Barclays, and it's for you, which is, do you expect margin growth trajectory to continue being on the present path for a few years? Can you attain margins that are comparable to legacy media margins? Spence Neumann -- Chief Financial Officer Well, thanks, Kannan. Our focus is on sustaining healthy revenue growth and growing margins each year. That's what we talk about a lot. We also talked about it in the letter. And we feel good about what we've been delivering. 21% margins last year, that's up from 18% in the year before. And now we're targeting 25% this year, which is up a tick from the start of the year when we were guiding to 24%. So, I'd say just like we have in the past, we'll take a disciplined approach to balancing margin improvement with investing into our growth. We've managed that balance historically pretty well, growing content investment, growing profit, growing profit margin, and growing cash flow. You should expect we'll continue to do that. But the amount of annual margin expansion in any given year could bounce around a bit with FX and other investment opportunities. But again, we're committed to grow margin each year, and we see a lot of runway to continue to grow profit and profit margin over the long term. Spencer Wang Thank you, Spence. Our next question comes from Alan Gould of Loop Capital. Which inning are we in with respect to enforcing paid sharing? Two years ago, you said 100 million subscribers were sharing passwords with 30 million in UCAN. How many do you estimate still borrow passwords? And I'll turn the floor over to Greg to answer that question. Greg Peters -- Co-Chief Executive Officer Yeah. As we mentioned last quarter, we're at the point where we've operationalized the paid sharing work. So, this is just now part of that standard mechanism that we've been building and iterating on over time to translate more entertainment value and great film, series, games, live events into revenue. And like we do with all of the significant parts of our product experience, we're iterating on that, testing it, improving it continually. So, rather than thinking beyond sort of specific cohorts or specific numbers, we really think about this more as developing more mechanisms, more effective ways to convert folks who are interacting with us, whether they be borrowers or folks that were members before that are coming back, we call them rejoiners or folks that have never been a Netflix member. So, we want to find the right call to action, the right offer, or the right nudge at the right time to get them to convert. And just to be clear, we still see opportunities to improve this process. We've got line of sight on several improvements, this value translation mechanism that we expect will deliver and contribute to business growth for the next several quarters to come. But I also very much believe that just like for the last 15 years, we're going to -- we've always found something to improve in this process. And even beyond those, for years and decades to come, we'll be working on this and making it better and better and better. So, all of those improvements could allow us to effectively get more of that 500 million-plus smart TV households to sign up and become members. Spence mentioned the hundreds of millions yet to come. This is a way to effectively get at more of those folks and make them part of our membership base. And as we mentioned earlier on the call, too, I think worth noting that while we're fully anticipating continuing to grow subs, the overall business growth now has extra levers and extra drivers like plan optimization, including things like extra members, ads revenue, pricing into more value, which is important. So, those levers are also an increasingly important part of our growth model as well. Spencer Wang Great. I'll move this on now to a series of questions around advertising. The first of which comes from Doug Anmuth of JPMorgan. What are the most important drivers of scaling your ad tier when you think about adjustments you could make to pricing and plans, partner bundles, and marketing? How do you get people over the hump for -- that a few minutes of ads an hour can still be a very good experience at the right price? Greg, why don't you take that one? Greg Peters -- Co-Chief Executive Officer Yeah. All the things you mentioned in the question matter. And I would say we're generally taking our entire playbook, everything that we've learned about how do you grow members, and we're applying it to our ads tier now. So, clearly, that means partner channels. It means device integrations, bundles, integrated payments. Those are all important tools for growth just as they are and will continue to be in our non-ads offering; increasing awareness of the quality of our ads experience, especially relative to the linear TV ads experience, which, in many countries, is really quite poor. That's an important iterative tool when we talk about sort of marketing and awareness building. That's going to be part of our growth mechanism. Low price, that's important to consumers. $6.99 is an example in the United States for multiple streams, full HD downloads. We think that's a great entertainment value, especially at the industry-leading low ad load that we've got. So, that's critical as well. So, I think you can see the results of leveraging all of these mechanisms and more and how our ads tier has been scaling over the last couple of quarters. So, we're 65% up quarter to quarter this last quarter. That's after two quarters of about 70% quarter-over-quarter growth. For me, it's exciting to see that growth rate stay high even as we've grown the base so much because, obviously, the numbers indicate that that means that there's more absolute additions each quarter. So, we're making good progress there. But look, we've got much, much more to do in terms of scaling. We've got more to do in terms of effective go-to-market, more technical features, more ads products. There's plenty of work ahead for us on ads. Spencer Wang Great, Greg. Our next question on advertising comes from Rich Greenfield of LightShed. He has a three-part question. Part one, can you update us on your thinking around the optimal spread between the ad tier and the ad-free tier? Secondly, is your advertising ARPU, excluding the subscription fee, up meaningfully versus your original comments that it was in the $8 to $9 range last year? And then lastly, can you give us a sense of what ARPU would look like if supply was not outstripping demand? Greg Peters -- Co-Chief Executive Officer Yeah. I'll take the first one and then maybe hand the ARPU/ARM points to Spence. We don't have a fixed operator position on sort of the optimal pricing spread. And much like we've done with price changes in general, we really use signals from our customers, things like plan take rate, conversion rates, churn to guide us along an iterative path to get to that right pricing. And I think it's also probably worth noting that sort of right pricing is not really a static position. As we continue to evolve and improve our offering, that's going to change as well. But I think a good general guideline for us in the long term is that it would be healthy for us to land overall monetization between our ads and non-ad offerings in roughly an equivalent position. So, that really comes down to what works best for any given member, and it's really a member choice about which plan they think serves them the best. And then I'll hand it over to Spence on ARM questions. Spence Neumann -- Chief Financial Officer Sure. Thanks, Greg. So, in terms of ARM and your question, Rich, in terms of how we're doing now relative to what we discussed when we first launched business, as Greg said, we've been growing our inventory at quite a fast clip. And so, monetization hasn't fully kept up with that growth in scale and inventory as we're still early in building out our sales capabilities and our ad products. But that is an opportunity for us because this -- we're still a very premium content environment, very highly engaged audience that's at an increasing scale. So, our CPMs remain strong. And we're building out our capabilities, as Greg talked about. So, the revenue is going to follow engagement over time, and it's already kind of growing nicely, which is great just off a small base. So, then really, as Greg said, what that means for ARM is right now, it is a bit of a drag on our ARM because we're kind of under-monetizing relative to supply. But over time, we expect to be similar in revenue on our ads tier, a combination of subscription as well as ads revenue with those kind of non-ads offerings. So, that's how to think about it, but we're building to it over time. Spencer Wang Great. Last question on advertising comes from John Hodulik at UBS. How are you approaching this year's upfronts? And do you believe the base of ad support users is now of the scale that upfront commitments can drive a meaningful change in advertising revenue and be a contributor to ARM growth in 2025? So perhaps, Ted, maybe you could start, and then, Greg, follow after that. Ted Sarandos -- Co-Chief Executive Officer Yeah, of course. Look, first and foremost, this is our second upfronts. We're really excited to go and share with advertisers this incredible slate that we're very, very proud of. So, they're going to get a look at some of the shows that are upcoming right away, like brand-new seasons of Bridgerton and Sweet Tooth and That '90s Show; some of our big unscripted events upcoming, like our Tom Brady roast, by way of example; and brand-new shows like Dead Boy Detectives and Shane Gillis' new show, Tires; Eric, a great new limited series out of the U.K. with Benedict Cumberbatch that we're super excited about. And then they'll even get a longer look at what's coming up in the second half of the year, which is, again, returning seasons of Cobra Kai, Emily in Paris, The Night Agent, Outer Banks; and Squid Game, our big one; and a brand-new season of Monsters from Ryan Murphy, which is the Lyle and Erik Menendez story this year, which is going to be really an incredible thing to share with our advertisers; brand-new original series and limited series like American Primeval from Pete Berg; Heartburn with an all-star cast, Nicole Kidman and Liev Schreiber; Senna, which is this great limited series on the great Brazilian Formula 1 driver that we're really excited about. And also, I look at our early -- at our movies coming up that we'll end the year with, with like Eddie Murphy and his most iconic role, Axel Foley, in Beverly Hills Cop: Axel Foley; Carry-On; a big new animated feature, Spellbound. So, we've got a lot of entertainment in store for the audience at the upfronts. Greg Peters -- Co-Chief Executive Officer Yeah. I think this is an opportunity to reengage with advertisers and look at the fundamentals of what our offering is. I mean, first and foremost, it's an incredible list of titles that brands want to be connected with. It's just super exciting to hear that roster. We've got great engagement from our members on our ads tier. We've got an opportunity to grow that even further. We think that's connected again to the power of those titles. We're rapidly growing scale as we mentioned. That's the No. 1 request we've had from advertisers. So, that's exciting. We're making progress on technical features like measurement on ads products. So, we're excited to get that out there. And really, this is just an opportunity to bring all of that progress in a package to advertisers and then -- and of course, to get input from them because we know that they're going to have comments and they're going to have things that they're going to want us to continue to work on, and then really then just to continue that journey because we know there's plenty more to go do to realize the potential we have in the space. And so, I would say we're continuing to grow here. We're growing off of a relatively small base in terms of the impact against already big and substantial business. So, even though it's growing quite quickly, it takes a while to grow that into the point where it's material. So, we look forward to that increasing in '25 and then increasing further in '26 and beyond. Spencer Wang Great. I'll now transition us to several questions around content. And this first one, I'll direct to Ted. It's a rare question around why don't we spend more. Given what seems like a very favorable current backdrop for Netflix to acquire and license content, why not lean in even more aggressively? Could it make sense to spend more than $17 billion in cash content this year? Ted Sarandos -- Co-Chief Executive Officer Yeah. Independent of the availability of licensed content, you should look at it -- I think we're -- we've always been very disciplined about the way we invest in the business and how we grow it. And we can get a lot of bang for our buck by spending our money well and producing our shows really well and also by acquiring the right content. And the floodgates have opened a little more on licensing for sure. But again, we're very focused on the ones that we think will drive the business. So, I think we're -- at our current level of spending and our current rate of growth that we're pretty comfortable spending just behind that anticipated rate of growth. Spencer Wang And Ted, Jason Helfstein's follow-up is also about license content or second-run content. And his question is, how would a second -- more second-run licensing impact your margins and free cash flow? Ted Sarandos -- Co-Chief Executive Officer Well, the budget is the budget, so it's all part of how we're spending against the content. And the free cash flow economics, we've gotten pretty close in our cash flow against P&L on our content spend generally. So, I don't think it would have much -- very much impact on that, unless you want to add some color to that, Spence. Spence Neumann -- Chief Financial Officer I just love you talking about the discipline on our content budgets, Ted. It makes me happy. No, I agree with all of it. I mean, yes, we spend with the opportunity but with, I think, prudent constraints and discipline. And to be clear, like we -- as you say, there has been more licensed content opportunity, but the vast majority of our content spend is still into original programming. It's -- and it is and is likely to continue to be. So, we'll always complement it with great licensed content for that variety and quality for our members, but the originals -- original content is still our future, too. Yeah. Spencer Wang Great. Next question is from Michael Morris of Guggenheim. Specific about the Jake Paul-Mike Tyson fight for Ted. What are the characteristics of the upcoming Jake Paul-Mike Tyson fight that make this the type of sports programming you're interested in investing in? How does that content benefit your member base and advertising growth goals? Ted Sarandos -- Co-Chief Executive Officer Yeah. So, we're in the very early days of developing our live programming. And it's -- I would look at this as an expansion of the types of content we offer, the way we expanded to film and unscripted and animation and most recently, games. On-demand and streaming have been unbelievable for consumer choice and control, and it's really put the controls of television back in the hands of consumers, which has been really phenomenal. But there's also something incredibly magic about folks gathering around the TV together in the living room to watch something all at the same time. We believe that these kind of eventized cultural moments like the Jake Paul and Mike Tyson fight are just that kind of television that we want to be part of winning over those moments with our members as well. So, that, for me, is the excitement part of this. We have -- beyond the fight itself, we have several nights of live comedy coming from the Netflix Is A Joke Festival next month. And starting in January, we've got 52 weeks of live sports with WWE Raw that's going to be coming to our members every week on Netflix. And we think it's going to be a real value add to watch those things in real time. And we're going to continue to try a lot of new things. But the core of it is, do our members love it? And judging from the early excitement around the Jake Paul-Mike Tyson fight, there's going to be a lot of people waking up in the middle of the night all over the world to watch this fight in real time. Greg Peters -- Co-Chief Executive Officer I think worth noting that just as what's relevant to members in terms of these large cultural events that Ted talks about, that's what has relevance to advertisers as well. So, it's an opportunity for us to expand our advertising offering and give those brands access to these kind of culture-defining moments. Spencer Wang Thanks, Ted and Greg. And I'm personally looking forward to that event, and my money is on Iron Mike Tyson. But as a follow-up on the sports -- Greg Peters -- Co-Chief Executive Officer Bold. Bold. Spencer Wang Yes, he's still got it, I think. But as a follow-up to the sports question for Ted, as you continue to scale Netflix and become bigger and bigger and potentially gain more leverage, how could your sports strategy change beyond what you're doing today around primarily sports entertainment? Ted Sarandos -- Co-Chief Executive Officer Yeah. You know, we said this many times, but not anti-sports but pro-profitable growth. And I think that's the core of everything we do in all kinds of programming, including sports. So, our North Star is to grow engagement, revenue, and profit. And if we find opportunities, we could drive all three of those, we will do that across an increasingly wide variety of quality entertainment. So, when and if those opportunities arrive that we can come in and do that, which we feel like we did in our deal with WWE, if we can repeat those dynamics in other things, including sports, we'll look at it for sure. So, I think it's -- we've had the benefit of building an enormous business without a loss leader, and we continue to believe that we can grow on that path just as you've seen. So, I think the core of it is, is that we're going to look at those opportunities with the same discipline that we do when we talk to movie producers and television networks about putting our content on the air. Spencer Wang Great. The next question comes from Rich Greenfield from LightShed about our film strategy. So, for Ted, a recent New York Times article cited internal communications from new Netflix film chief Dan Lin stating, "The aim is to make Netflix's movies better, cheaper, and less frequent. Lynn wants his team to become more aggressive producers developing their own material rather than waiting for projects from producers and agents that come to them." Everyone wants to make better, cheaper films, but we find it hard to believe -- we, being rich, find it hard to believe that there is a magic formula. Help us understand the strategy shift under Dan Lin versus Scott Stuber. Ted Sarandos -- Co-Chief Executive Officer Well, thanks for that question, Rich. I would send you back to that New York Times article because that was not a quote from Dan. And I would say that -- nor did we participate in that article. I would say, just to be clear, there is no appetite to make fewer films, but there is an unlimited appetite to make better films always. Even though we have made and we are making great films, we want to make them better, of course. We're super excited to have Dan join the company. He just joined a couple of weeks ago, and he's joined us running 100 miles an hour. Bela has said this publicly, that our strategy remains variety and quality, and she's doing an amazing job of bringing new fresh thinking to our content and our content organization. Bringing Dan on board is a great example of that. We want to have a lot of movies. We want them to thrill our audiences, and they all have different tastes, and we want them all to be great. So, we take a very audience-centric view of what quality is, and Dan knows that from having produced for us. As the CEO of Rideback, he produced the Oscar-nominated film, The Two Popes, for us. He did Avatar: The Last Airbender for us recently. So, he understands Netflix and the audience really, really well. And his success in live action and animation is very hard to define in the business. So, we're thrilled he's doing it here. Spencer Wang Great. Thank you, Ted. The next question comes from Kannan Venkateshwar from Barclays. Could you please provide an update on engagement trends now that paid sharing is mostly behind you? So I'll kick it over to Ted first, and Greg, you can feel free to add on. Ted Sarandos -- Co-Chief Executive Officer Well, look, it's important to note that we compete for every hour of viewing all the time, every day, everywhere we operate. And we think that that engagement report is very important and that metric is important because, again, it's the best indicator of customer satisfaction. I know I just said this 10 minutes ago, but I'm going to repeat it. Eight of the first 11 weeks of this year, we've had the No. 1 movie; and nine of the last 11 weeks of this year, we've had the No. 1 series. And that's according to the Nielsen streaming data. And for us, that is what we're singularly focused on. And we've actually seen in that Nielsen data our share tick up a little bit even in this incredibly competitive space, where you've got a lot of folks competing for attention, for time, and for money. Greg Peters -- Co-Chief Executive Officer Yeah, Ted, I think you can repeat that eight out of 11, nine, 11 as many times as you want, as far as I'm concerned. Spence Neumann -- Chief Financial Officer I'm going to close with that, too. Greg Peters -- Co-Chief Executive Officer So, you know, as we have said, due to the work that we've been doing on password sharing, we're essentially cutting off some viewers who are not payers, and therefore, we're going to lose some viewing associated with that. So, when you see our next engagement report, you are going to see some impact to our overall absolute view hours as a result of that. But despite that impact and despite the general pressure from strong competition that Ted noted, we think our engagement remains healthy. You can see it in the stat that Ted indicated in terms of the Nielsen ratings and our modest growth in TV time in the United States. But we also wanted to do an apples-to-apples view of engagement. So, we looked at the population not impacted by paid sharing, what we called owner households. And in Q1 of '24, the hours viewed per account were steady with the year-ago quarter. So, that's a pretty good sign that our engagement's holding up, and it sort of cuts through the noise around paid sharing. And again, I just want to reiterate, we think we have plenty of room to grow engagement, right? We're still less than 10% of TV hours even in our most mature markets. So, there's tons of room of growth ahead of us. Spencer Wang Thank you, Ted and Greg. I'm going to move us along now to a series of questions around plans and pricing and pricing strategy. So, from Steve Cahall from Wells Fargo. Greg, as you continue to expand, do you think there is a ceiling for pricing? If so, how close are we to that ceiling in mature markets? And do you envision Netflix having content here so that you can continue to expand your content genres and further segment your customer base? Greg Peters -- Co-Chief Executive Officer Yeah. We don't have a set position on a ceiling. I mean, sure, you can look at paid TV as potential markers for where people have spent before. But we really actually don't think of it so much is defined by that. We see it as an opportunity to continue the process that we've been working on, which is let's continue to try and invest wisely, add more entertainment value. And as we add more entertainment value, then, of course, we can go back to our subscribers and ask them to pay a little bit more to keep that virtuous cycle moving. And really, the markers for us in terms of the upside potential more around the hours on TV that we are winning, how many moments of truth, we call it, that we are winning, again, less than 10% in our even most mature markets. There's tons of room there. You can use total consumer spend on entertainment in the markets and categories that we compete in. That's between 5% and 6%. So, there's just a lot of runway still ahead of us to go do a good job at making that investment happen, deliver more value, and then ask folks to pay a little bit more. Spencer Wang Great. Next question on pricing comes from Mark Shmulik of Bernstein. Can you please share progress on how the retirement of the basic plan is going in the U.K. and Canada? And is there any color you can share on if when we could expect a similar rollout in the U.S.? Greg, why don't you take that one? Greg Peters -- Co-Chief Executive Officer Yep. As we shared in the Q4 '23 letter, we were planning on retiring our basic plan in some of our ads countries. We've now started that process in Canada and the U.K. And very similar to what you see -- what you saw us do with paid sharing, we're going to work hard to make this a smooth transition. Part of that is listening to our members before we make any further moves, so we've got nothing more to announce, and we really want to see how this goes. Yeah. And we know that this is a change for our basic members, but we think we've got a strong offering for them. They're going to get more for less, two streams versus one. We've got higher definition, we've got downloads, all at a lower price. And of course, it goes without saying, hopefully, that members can always choose our ads-free plans as well if they prefer. Spencer Wang Great. Thank you, Greg. A couple of questions on overall capital allocation. So, these would be for Spence primarily from John Blackledge of TD Cowen. You mentioned evolving capital allocation strategy in your investor letter with the -- with your new investment-grade status. Can you please talk about the changes in how investors will see that change? Spence Neumann -- Chief Financial Officer Yeah, sure. Thanks for the question. It's really quite a modest evolution of our capital allocation strategy to better reflect our investment-grade status. And that's really what it is. We're still going to have the same financial policies and principles in terms of prioritizing profitable growth by reinvesting in our core business, maintaining a healthy balance sheet with ample liquidity, and returning excess cash beyond several billion dollars on the balance sheet of minimum cash and anything that we use for selective M&A to return to shareholders through share repurchase. So, really, the only change is that now that we're solidly investment grade, we're going to -- while we will hold still several billion dollars of cash on the balance sheet, we won't have the same marker of two months of revenue. The equivalent of two months of revenue on the balance sheet allows us to be a bit more efficient there. We also upsized our revolver, which was announced today, up to $3 billion from $1 billion, which also gives us more access to capital and better cash efficiency. And then, again, any cash beyond that, we'll return to shareholders. We've historically been mostly a build-versus-buy company with select strategic kind of acceleration through M&A. And there's nothing right now planned, but that still is kind of our philosophy, is to build predominantly. And we're also going to kind of refinance our existing kind of debt as those maturities approach. But we don't plan to kind of lever up through stock buyback. We want to -- we really do value that balance sheet flexibility. Spencer Wang Great. Thank you, Spence. Last question on capital allocation for you. This comes from Vikram of Baird. What are your latest thoughts on the appropriate level of content spend for the business beyond 2024? Specifically in the past, you have referenced a 1.1 cash content spend-to-amortization ratio. Is that still the case? And what would you need to see in an opportunity to meaningfully exceed that framework? Spence Neumann -- Chief Financial Officer Yes. It still holds. It still holds. So, we're still basic -- the short of it is we're really kind of managing to that. So, as we said, we've been focused on driving that acceleration of our revenue growth, continuing to grow our business, grow our profitability. As we do that, we would expect to continue to grow our content investment as we have historically into the highest-impact areas but also be quite disciplined there. So, we want to grow our free cash flow. So, we believe we can manage to that roughly 1.1x of cash content spend relative to expense on the P&L. And that leads to overall revenue growth, increased profit, profit margins, growing free cash flow. And that still gives us a lot of opportunity to spend into the -- all those kind of content and entertainment categories that Greg and Ted have been talking about. Spencer Wang Thanks, Spence. We have a few more minutes left, so we'll wrap up with a few higher-level questions. The next one comes from Eric Sheridan of Goldman Sachs. And I think both Ted and Greg can tackle this one. The question is what are your thoughts on the competitive impact from short-form video consumption? Ted Sarandos -- Co-Chief Executive Officer So, I look at how -- what people watch and when they watch it, have a lot to do with one another. What are the choices and how much time do they have? So our version of short form is more like giving our members the ability to watch 10 minutes of an episode of a series that they're binging right now if they only have 10 minutes. But some -- and also, when I look at the short-form viewing on YouTube and TikTok, some of it is adjacent and quite complementary to our viewing. So, our trailers or creators expressing their fandom for our shows like doing posting a Wednesday dance or ugly crying watching One Day, all those kind of things that become viral sensations and actually increase the fandom of our shows. Now, that being said, some of that viewing is directly competitive with us, the same as it is with other media companies who provide content to YouTube, by way of example. The art of this has always been finding the right balance of both. And I also would point out that these platforms have been a way to have new voices emerge, and we've got our eye on them as well to try to develop them into the next generation of great storytellers on Netflix. Spencer Wang Great. And I think for our final question, we'll take that from Dan Salmon of New Street Research. What is the opportunity for Netflix to leverage generative AI technology in the near and long term? What do you think great storytellers should be focused on as this technology continues to emerge quickly? I'll turn that over to Greg, please. Greg Peters -- Co-Chief Executive Officer Yeah. Worth noting, I think, that we've been leveraging advanced technologies like ML for almost two decades. These technologies are the foundation for our recommendation systems that help us find these largest audiences for our titles and deliver the most satisfaction for our members. So, we're excited to continue to involve and improve those systems as new technologies emerge and are developed. And we also think we're well positioned to be in the vanguard of adoption and application of those new approaches from our just general capabilities that we've developed and how we've already developed systems that do all these things. We also think that we have the opportunity to develop and deliver new tools to creators to allow them to tell their stories in even more compelling ways. That's great for them. It's great for the stories, and it's great for our members. And what should storytellers be focused on? I think storytellers should be focused on great storytelling. It is incredibly hard and incredibly complex to deliver thrilling stories through film, through series, through games. And storytellers have a unique and critical role in making that happen, and we don't see that changing. Spencer Wang Great. Thank you very much, Greg. And we are now out of time. So, I want to thank you all for taking the time to listen into our earnings call. And we look forward to speaking with you all next quarter. Thank you.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning. And welcome to the first-quarter 2024 Annaly Capital Management earnings conference. [Operator instructions] Please note that today's event is being recorded. I would now like to turn the conference over to Sean Kensil, director, investor relations. Please go ahead, sir. Sean Kensil -- Director, Investor Relations Good morning, and welcome to the first-quarter 2024 earnings call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our first-quarter 2024 Investor Presentation and first-quarter 2024 Supplemental Information, both found under the Presentations section of our website. Please also note this event is being recorded. Participants on this morning's call include David Finkelstein, chief executive officer and chief investment officer; Serena Wolfe, chief financial officer; Mike Fania, deputy chief investment officer and head of residential credit; V.S. Srinivasan, head of agency; and Ken Adler, head of mortgage servicing rights. And with that, I'll turn the call over to David. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Thank you, Sean. Good morning and thank you all for joining us on our first quarter earnings call. Today, I'll briefly review the macro and market environment along with our first quarter performance, then I'll provide an update on each of our three businesses and conclude with our outlook. Serena will then discuss her financials, after which we'll open the call up to Q&A. Now, beginning with the macro landscape. First quarter of 2024 was characterized by surprisingly resilient economic data, a healthy labor market, and an uptick in inflation. Consequently, interest rates sold off modestly on the quarter as the market priced out roughly half of the rate cuts that were expected at the beginning of the year. Now despite rising rates, risk assets performed well over the quarter as volatility declined and money flowed into both equity and fixed-income markets. Banks also reemerged as modest buyers of Treasuries and Agency MBS in the first quarter, a welcome development given their absence over the past couple of years. In addition, the Federal Reserve made it clear that it considers policy rates and balance sheet management to be separate tools as they have begun discussing slowing the pace the Fed's Treasury securities run off. We are encouraged by this development as this approach allows for more gradual decline in bank reserves, thereby stabilizing liquidity, potentially reducing treasury supply to the private sector, and strengthening banks' deposit growth, all positive for fixed income and Agency MBS. Now, against this supportive backdrop, all three of our housing finance strategies perform well in the quarter, with production coupon Agency MBS spreads roughly five basis points tighter, credit spreads 25 to 100 basis points tighter, and the MSR market experiencing modest multiple expansion. As a result, we delivered a 4.8% economic return for the quarter with EAD of $0.64 and leverage a quarter end of 5.6 turns. Now, as the second quarter has unfolded, continued strong economic data coupled with stalled progress on disinflation has driven a further repricing of forward rate expectations, as well as an increase in volatility. This current risk-off tone has led to marginal spread widening across Agency and Credit, and justifies our leverage profile, which is at its lowest level of the cycle. Now, notwithstanding lower leverage, prevailing return environment gives us confidence in the durability of the portfolio earnings profile, and we believe that our current dividend is appropriately set for 2024, given our expectations for earnings this year. Now shifting to the businesses, and beginning with Agency, the portfolio ended the quarter modestly lower to accommodate growth in the Residential Credit and MSR businesses. We continue to gravitate up in coupon, with our weighted average coupon increasing 20 basis points to 4.76%, reducing our holdings of 4% coupons and lower by over $5 billion, in favor of, predominantly, 5.5% and higher. We continue to favor production coupons, as they provide the widest nominal spreads, and as evidenced by their performance this past quarter, the best returns in a range-bound rate environment. They also stand to benefit from potential spread tightening, should option costs decline due to a steeper yield curve or lower implied volatility. Our Agency CMBS portfolio was largely unchanged over the quarter, spreads in the sector tightened 10 to 15 basis points on continued broad-based demand, outperforming Agency MBS and providing incremental excess returns while improving our overall convexity profile. As it relates to interest rate management, the notional value of our hedge portfolio declined slightly as we moved hedges out the curve, leading to a modest decline in our hedge ratio. As our existing front-end swap position has been rolling off, we have replaced that risk with hedges in the intermediate and long-end part of the yield curve, closely aligning our hedges with the interest rate risk of our assets. In addition, our increased allocation of swaps relative to Treasuries that we discussed last quarter benefited our overall return, given the widening of swap spreads during the quarter. The short-term outlook for Agency CMBS has become somewhat more challenging. As recent inflation reports have delayed the start of the cutting cycle and led to a pickup in volatility. However, we remain constructive on the sector, given the potential of sustained bank demand and the expected upcoming reduction in Fed Treasury runoff, factors that should be supportive of Agency CMBS and were absent in the prior widening episodes. Meanwhile, hedge carry remains attractive with historically wide nominal spreads. Now turning to Residential Credit, the portfolio ended the quarter at $6.2 billion in market value and $2.4 billion of equity, with a rise in 21% of the firm's capital at quarter end. Residential Credit spreads tighten meaningfully to start the year, given the support the fundamental backdrop with AAA non-QM spreads 35 basis points tighter than below IG CRT M2 70 basis points tighter. The credit curve continued to flatten as the issuance and supply of subordinate assets remained limited. Now, the growth in our portfolio was driven by our organic Onslow Bay strategy through increased whole loan purchases and retention of OBX securities. Given tightening spreads, we opportunistically reduced our CRT portfolio and other segments of our third-party securities holdings into strong demand. In Onslow Bay correspondent channel had another record quarter as we registered $3.7 billion of expanded credit locks in Q1, up 40% quarter over quarter. We settled $2.4 billion in loans, the vast majority of which were sourced directly via our correspondent channel. And our pipeline remains robust with $2 billion of locks at quarter end and continued momentum into the spring selling season. Most importantly, our credit discipline remains strong as our current pipeline is characterized by a 68 LTV and a 753 FICO with only 3% of our locks greater than 80 LTV. We were able to take advantage of the supportive capital markets by pricing seven securitizations, totaling $3.3 billion in Q1, generating $328 million in assets for Annaly's balance sheet and low to mid double-digit returns. And subsequent to quarter end, we priced an additional non-QM transaction with retained assets exhibiting similar expected returns. Now looking forward, the further expansion of the Onslow Bay channel is positioned Annaly as a market leader in the Residential Credit market, allowing us to manufacture our own credit risk while retaining control over all aspects of the process. Now Shifting to our MSR business, our portfolio ended the first quarter at $2.7 billion in market value, representing $2.3 billion in the firm's capital. MSR transaction volumes continue to be elevated in the first quarter given challenging originator profitability while demand and pricing remain firm. And despite elevated supply, we were disciplined, finding better opportunity and relative value post-quarter end and in early April, we committed to purchase just over $100 million in market value for bulk package, which we expect to close in the second quarter. We're confident we've constructed one of the highest quality conventional MSR portfolios in the market, characterized by our industry-lower 3.07% note rate and exceptional credit quality. Fundamental performance of our MSR portfolio has continued to outpace our initial expectations with our holdings realizing a three-month CPR of 3%, rising float income given increased escrow balances, and minimal borrower delinquencies and all of these factors have contributed to our MSR portfolio exhibiting highly stable cash flows at double-digit returns. Now given Annaly's diversified strategy and ample liquidity position, we currently do not utilize a significant amount of recourse leverage on the MSR portfolio as it is advantageous to supplement leverage with lower-cost agency repo. However, with $1.25 billion of committed warehouse facilities, we are positioned for additional MSR growth should pricing be favorable. Now looking ahead, we are optimistic about the outlook for our three businesses and we continue to see attractive risk-adjusted returns across each of our investment strategies. However, bouts of volatility remain a key risk as we have been reminded in recent weeks and we remain vigilant. We continue to be well prepared given our conservative leverage position and capital structure, our ample liquidity, and a diversified capital allocation strategy that can outperform across different interest rate and macro landscapes. And while we continue to make progress in allocating incremental capital toward our Residential Credit and MSR strategies, we like our current capital allocation and are disciplined in pricing and selected in the sourcing of assets. And overall, we are proud of the unique platform we built with three established and fully skilled businesses on our balance sheet and we believe this model can continue to deliver superior returns relative to sector just as we have over the past couple of years. Now with that, I will hand it over to Serena to discuss our financials. Serena Wolfe -- Chief Financial Officer Thank you, David. Today, I will provide brief financial highlights for the first quarter ending March 31st, 2024. Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics which exclude the PAA. Our book value per share as of March 31st, 2024 increased from the prior quarter to $19.73, based largely on asset spread appreciation with minimal interest rate exposure. And with our first quarter dividend of $0.65, as David mentioned earlier, we generated an economic return of 4.8%. Rising rates and spread timing for credit assets resulted in gains on our hedging portfolios of $2.19 and gains on our ready MSR investments of $0.17. Outpacing losses on our Agency investment portfolios of $2.04 as implied volatility declines in asset spread times. Earnings available for distribution decreased by $0.04 per share to $0.64 in the first quarter compared to Q4, 2023. EAD declined on lower swap benefits and some of our positions matured. Gross interest expense increased as average repo and securitized debt balances increased by approximately $3.6 billion. The net financing impact on the EAD was mitigated by continued improvement in asset yields and the average asset yields ex-PAAs further rose quarter over quarter, 23 basis points higher than in the fourth quarter at 4.87%. Asset yields benefited from the Agency MBS portfolio continuing its up and keep on strategy and the Onslow Bay correspondent channel experiencing record growth and hold on purchases as attracted yields. Net interest margin reflected the changes to EAD in the first quarter with the portfolio generating 143 basis points of NIM ex-PAA, and 15 basis points decreased from Q4. Similarly, net interest spread decreased 13 basis points quarter over quarter to 109 basis points. Total cost of funds increased quarter over quarter rising 36 basis points to 3.78%. As I previously highlighted, swap benefit continues to normalize as positions expire reducing net interest on swaps by $49 million and increasing cost of funds by 33 basis points accounting for much of the quarter-over-quarter impact. On the other hand, average repo rates were stable through the quarter declining nominally by one basis point. Turning to details on financing, we continue to see strong demand for funding for our Agency and non-agency security portfolios. Our repo strategy is consistent with prior quarters with a book positioned around Fed meeting dates as we look to take advantage of any future rate cuts. As a result, our Q1 reported weighted average repo days were 43 days down just one day compared to Q4. During Q1, we continued to obtain additional funding capacity for our credit businesses. To increase financing optionality for our Onslow Bay platform, we closed additional warehouse facilities approaching $1 billion in size, which included expanded product offerings and non-market features at two-year terms. As of March 31st, 2024, we had $3.9 billion of MSR and hold on warehouse capacity at a 34% of utilization rate, leaving substantial availability. Annaly's unencumbered assets increased to $5.3 billion in the first quarter, compared to $5.2 billion in the fourth quarter, including cash and unencumbered Agency MBS of $3.5 billion. In addition, we have approximately $900 million in fair value of MSR that has been placed to committed warehouse facilities. They remain undrawn and can be quickly converted to cash, subject to market advance rates. We have approximately $6.2 billion in assets available for financing unchanged compared to last quarter. We believe that our disciplined approach to liquidity and credit leverage leaves us well-prepared to confront market risk, such as the volatility of the previous few weeks. Lastly, we have continued to efficiently manage our expenses, resulting in a decline in our opex-to-equity ratio to 1.35% of the first quarter, compared to 1.41% for the fourth quarter of 2023. That concludes our prepared remarks, and we will now open the line for questions. Thank you, operator. Questions & Answers: Operator Thank you. [Operator instructions] Today's first question comes from Bose George with KBW. Please proceed. Bose George -- KBW -- Analyst Hey, everyone, good morning. Could I get an update for book value quarter to date? David Finkelstein -- Chief Executive Officer and Chief Investment Officer Sure, Bose. Good morning. So, as of our last flash, which was Tuesday's close, net of our dividend accrual, we were off just inside of 3% inclusive of that dividend just inside of 2% off. Bose George -- KBW -- Analyst OK. Perfect. Thank you. And then I noticed the targeted return on your MSR increased to 12 to 14 from 10 to 12. Is that sort of just better yields in the market or is there like a different leverage assumption or just curious what drove that? David Finkelstein -- Chief Executive Officer and Chief Investment Officer It's predominantly the increase in float income associated with higher short rates projected, but Ken, you want to elaborate? Ken Adler -- Head of Mortgage Servicing Rights Yes, as you may know, ownership of the MSR asset involves the MSR owner and the benefit of the float income maintaining those extra accounts. So the higher for longer change in rates just translates to a much higher yield at the exact same multiple. So it's really just the math on that. Bose George -- KBW -- Analyst OK. Great. Thank you. Operator The next question comes from Doug Harder with UBS. Please proceed. Doug Harter -- UBS -- Analyst Thanks. Can you talk about how MSRs are performing kind of in this, as rates continue to increase and their effectiveness of hedging the MBS portfolio? Ken Adler -- Head of Mortgage Servicing Rights Yes, absolutely. This is Ken. Thanks for the question. In terms of spot performance, I mean, the speeds you can see in the presentation, extremely stable, delinquency is extremely stable. And as the prior question alluded to, we have an increase in cash flow. Expected cash flow over time as the earnings on the flow are not expected to decline, given the Fed rate cuts coming out of the market in terms of the expected pricing. In terms of hedging the MBS portfolio, slower speeds are good for the MSR. And the mortgage universe trading in discounts, slower speeds are not a good outcome for mortgage backed security. So we do have that hedging property. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Yes, Doug, I'll just add to Ken's point. Look, when we buy MSR, standard speaking, it's often a hedge for the duration of the portfolio. When it's deep out of the money, there's two other hedge benefits we get as Ken discussed. First are the higher float income hedges, the higher for longer and short rates in financing associated with the Agency MBS. And secondly, the turnover, which is lower in a higher rate environment, is better for MSR. So those two factors have led to a shift in the benefits associated with MSR for our portfolio. Doug Harter -- UBS -- Analyst Thanks. And then the increase in the Onslow Bay correspondent activity is how much -- is that kind of adding new customers? Is that getting deeper with existing customers kind of if you could give a little more color behind the increased activity there? Mike Fania -- Deputy Chief Investment Officer and Head of Residential Credit Hey, Doug. Thank you. This is Mike. Thanks for the question I think a lot of it is that the correspondent channel is not yet mature. We still believe that there's over a 100 correspondence that are originating non-QM and VSCR loans that are not currently our captive customers so we've been very aggressive in trying to build it the correspondence so some of that volume is just through the maturation of the correspondent channel, some of it is spring seasonals right so we've certainly benefited from that it's one relative to Q4 and I think a lot of it is also the growth in the actual market itself , larger non-banks have rolled out these programs and they have been very active participants and not only potentially taking market share from some of the smaller niche specialty finance players but they're building market share as well and the borrower in the non-QM VSCR market is also a little bit less sensitive than an Agency or jumbo market two rates about a quarter of the volume that we're doing right now is cash outs that numbers 7% to 8% within the Agency market. So I think there's a number of factors that are leading to the increase in volumes but I'll say one of the largest drivers is just the actual build of the correspondent adding new originators to the platform. Doug Harter -- UBS -- Analyst Great. Thank you. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Thank you, Doug. Operator Our next question comes from Rick Shane with J.P. Morgan. Please proceed. Rick Shane -- J.P. Morgan -- Analyst Thanks, everybody, and good morning. Look, I'm looking at slide 6 and I know Bose had ask a question here as well. There's convergence between the returns on the three strategies and I'd love to explore in the current environment, sort of the base case, higher for longer, what you think the right tactical approach is. And then if you could sort of lay out if we saw the tail scenarios, one tail scenario being additional hikes, the other being cut sooner than we thought, how you would position yourself in the context of these three choices. Basically, I want to understand how you're thinking about things now and what the risks are or what the opportunities are if you make a strategic call. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Sure, thanks, Rick. So just in terms of overall capital allocation, as I mentioned in our prepared remarks, so we do very much like where we are at today. We think the three sectors are all fully scaled, obviously, and the portfolio is in a good balance right now. And I think it shows up in our economic returns over the past many quarters. So we're happy with where we're at. In terms of relative value, Agency looks perfectly fair here. We're certainly sensitive to higher volatility that could materialize, albeit we don't expect to see anything like we saw last fall. But nonetheless, some we're sensitive to. So we're a little bit under levered on the Agency side. But our allocation is nearly 60%. And that's the core of the portfolio, and that's where our liquidity is. So we like it there. In terms of the other two sectors, both are adding accretive returns, both in terms of book value, and they're supporting the dividend. So we like where we're at. And then when we look at, from a relative value and a capital allocation percentage in terms of expected returns under various scenarios, this allocation here today gives us the best bang for a buck when we stress the portfolio with shock rates up or down. Now, in terms of how we would position in the scenario you mentioned, whether it's higher for longer versus or even hike potentially versus the potential for cuts. Look, the way we look at it is we are carrying a very small amount of interest rate risk, but you're not getting paid for it. The rates market is, we think, to be relatively fairly priced. We have sold off over 80 basis points on the long end this year, and it's been warranted, given the much stronger data that we've seen and the surprise uptick in inflation. But when we look out the horizon and think about longer-term rates, five-year rates, five years forward in treasuries is at $465, which we think looks perfectly reasonable. 10-year real rates are roughly 2.25%. And then globally, rates are quite competitive with the nominal 10 years, 150 basis points over the rest of the G7. So the rates market looks to have priced in the stronger growth and the higher inflation that we've recently seen. And another point to note with respect to rates markets relative to the Fed, for example, is the market is priced in a much higher neutral rate than the Fed's long-run average. We're over 4% now when we look out the curve on very short rates. And so the market is reasonably well priced for uncertainty associated with the potential for longer or even hikes. And the way we would position ourselves if we did anticipate hikes is we maintain a conservative approach with respect to interest rate risk. We're already at the lowest leverage we've been at since 2014, and so we feel good about that and we're prepared for it. And the positive aspect of it, as I mentioned in our prepared remarks, is that we're able to earn returns that support a 13% yield on book. And so we feel really good about it and we're prepared for that type of uncertainty. Now, on the other hand, if all of a sudden higher rate and the trajectory of policy does create unintended consequences in interest rate sensitive sectors, for example, whether it's regional banks or CRE and housing, the Fed does have to react in a way that's much more accommodated much quicker. We're going to have plenty of opportunity to position the portfolio in a more aggressive fashion as that materializes. So we're not worried about missing anything. Right now, our leverage is at where it's at because candidly, the range of outcomes has increased to the intent of your question. And we need to get through this bout of volatility. And so we're going to remain relatively conservative, but we're prepared for downside and we can easily react if the policy becomes much more accommodative and all of sudden rates are improved quite a bit. Does that help? Rick Shane -- J.P. Morgan -- Analyst It does and I apologize for asking such an open-ended question but I really, I have to say enjoyed the answer it's very helpful, and thank you. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Anytime, Rick. Operator The next question is from Jason Weaver with JonesTrading. Please proceed. Jason Weaver -- JonesTrading -- Analyst Hey. Good morning. I was wondering can you give us a ballpark on the incremental NIM you're targeting for the whole loans going into the Onflow Bay securitizations? And what you think your capacity is there in what might be a weaker origination environment? Mike Fania -- Deputy Chief Investment Officer and Head of Residential Credit Hey, Jason, this is Mike. When you say NIM you're talking about some form of projected gain on sale in terms of where we are at -- Jason Weaver -- JonesTrading -- Analyst If you had any internal target for that, yes. Mike Fania -- Deputy Chief Investment Officer and Head of Residential Credit Yes, that's not a metric that we've given out historically, but I will say in terms of when we're actually pricing our loans, when we're putting out our rate sheet, we are targeting close to mid-teens ROEs based upon retaining, call it 10% market value, and then maybe a small amount of recourse leverage. So you're looking at 6% to 7% dedicated deployed capital on those whole loans at mid-teens ROEs in terms of where we're setting the risk and the rate sheet. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Yes, Jason, just to add, as I talked about in my prepared comments, as we added OBX securities to the balance sheet, we reduced our third-party securities. The way Mike is able to organically create assets, it's much cheaper than we think than third-party securities, and credit has done quite well, as I'm sure you're aware. And so we've reduced that component, the third-party component of balance sheet to make room for what is candidly much more attractive with priced OBX securities, and we'll continue to do that. Jason Weaver -- JonesTrading -- Analyst All right. Thank you. That's helpful. And then David, maybe expanding on your earlier prepared remarks a little bit, what do you think about the impact of QT curtailment on your agency portfolio strategy? Does it change the approach at all? David Finkelstein -- Chief Executive Officer and Chief Investment Officer It gives us more confidence in the near-term horizon, and it's very incremental what the Fed would do, and I think everybody's aware they're likely to begin the taper either in May or in June, and they'll reduce the runoff of their treasury portfolio by roughly 50%. And what that will do is it will help provide comfort to private market participants that there's less treasury supply coming to the market. It'll help banks in so far as deposit growth we will be able to be deployed into fixed income in terms of their liquidity, and ultimately that'll help Agency MBS. Banks did reemerge as buyers, both Treasuries and Agency MBS in the first quarter, and we're hopeful that will continue, and reduced Treasury supply from the Fed will help fixed income markets overall and indirectly the Agency MBS market. But we don't expect them to reduce their runoff in Agency MBS. We don't expect them to buy Agency MBS in any event other than a crisis type period for the foreseeable future, but the reduced Treasury supply would be helpful for all fixed-income markets. Jason Weaver -- JonesTrading -- Analyst All right. Thanks again for taking my questions. David Finkelstein -- Chief Executive Officer and Chief Investment Officer You bet, Jason. Operator Our next question is from Trevor Cranston with JMP Securities. Please proceed. Trevor Cranston -- JMP Securities -- Analyst Hi. Thanks. On the MSR business, as that continues to grow and gain scale, can you talk about how you would think about potentially bringing the servicing function in-house and kind of generally how you think about the trade-offs between using sub-services and having an in-house servicing function, right? David Finkelstein -- Chief Executive Officer and Chief Investment Officer Yes, sure. So we've looked at servicers in the past and have seen a number of them come to market, and what we've learned is that it's much more efficient for us to outsource servicing. In the absence of significant scale, it's very low-margin business, and we have a considerable amount of flexibility by using multiple high-quality sub-services. They are competitively priced. We have good recapture relationships. And we also have better access to assets as a consequence. We're not a competitive threat to the mortgage origination community, and so by outsourcing services, it's better for overall business. Now, that could change at some point, but right now, we really like the relationships we have on the sub-servicing side, and we're going to maintain that posture for the time being. Trevor Cranston -- JMP Securities -- Analyst Got it. OK. That makes sense. And then in light of the significant move we've had in rates here in April, can you comment on any changes you made within the portfolio, particularly in Agency MBS or with the hedges? David Finkelstein -- Chief Executive Officer and Chief Investment Officer Sure. So we did actually sell early in the quarter a couple billion Agency MBS, and some of that was outright. So part of that was anticipatory and we were certainly glad we did. We will manage our rate exposure here as the market evolves. We're currently running at about a half-year duration, which we're comfortable with, but we're certainly cautious. agency MBS. We think in this sell-off they've been better behaved, certainly in the fall, primarily because fall has been a little bit better this time around, and there's more fundamentally positive factors in the market today than there were last year. The bar for the Fed to hike is higher today than it was last year. As we just talked about, the QT taper is likely to be underway. The composition of treasury issuance is in a better place than it was last fall, and money is actually flowing into fixed income. So we feel a little bit better about the market in this rate sell-off than we did last year. When we were in October, it was sort of the million insight mentality, and that doesn't exist today, and that should be supportive of the Agency market, but we're going to stay conservative to the extent there's more cheapening in the basis, we're going to cover those mortgages that we bought, and we anticipate doing so, and it's advantageous to sell early, and we trade it around. So that's pretty much the story, Trevor. Trevor Cranston -- JMP Securities -- Analyst OK. Appreciate the comments. Thank you. David Finkelstein -- Chief Executive Officer and Chief Investment Officer You bet, Trevor. Operator The next question is from Eric Hagan with BTIG. Please proceed. Eric Hagen -- BTIG -- Analyst Hey. Good morning. How you guys doing? Hey. It looks like the preferred stock is going to go fully floating rate by the end of June. Right now, the prep served in around 15% of the equity capital structure. How does your outlook for leverage in a position of the portfolio maybe respond to the cost of that preferred? And even at your current valuation and when you look at the environment, do you think it actually makes sense to maybe scale up with more preferred right now? David Finkelstein -- Chief Executive Officer and Chief Investment Officer Yes. So in terms of our capital structure, you're right, it's probably 13.5% of our capital is in preferred, and our Series Is do go floating here in June, and how we look at it is our cost of preferred capital would be a little over 10% at that time, which is relatively high, but it's also important to note that we're at the highs of the rate cycle. And so when we look at our cost of prep, we look at it over a longer horizon compared to the forwards, and it does come down with ultimate Fed cuts, so to around 9% or thereabouts. And then we compare that level to the asset yield on the portfolio. And when you look at the relationship, even at the spreads today versus asset yields, that spread is actually higher today than the long-run average. So we're comfortable with the elevated cost of preferred capital in this floating rate environment, even with the Is going floating, which is -- will have a relatively immaterial cost burden, less than a $1.00 a quarter, it'll add to our prep costs, so not that material. And then with respect to potentially issuing more prep, we like our capital structure where it's at. The prep market hasn't really opened up. There's been a couple of very recent bank transactions, but generally speaking, it's still relatively quiet to the extent it does, and we get some firmness and pricing in mid to upper single digits call it, to be able to issue and potentially even refile. We would certainly look at it, but we like the low leverage in our capital structure as it stands, and we'll keep an eye on that market. Eric Hagen -- BTIG -- Analyst Yes, I mean, along the same lines, I mean, as you guys scale up with the MSR, is there room for unsecured debt just as a kind of more effective duration match maybe versus using secured? David Finkelstein -- Chief Executive Officer and Chief Investment Officer Well, look, we have $3.5 billion of essentially cash and Agency MBS on the balance sheet, so we don't need the debt. And right now, as I mentioned in my prepared remarks, a lot of that capital funding MSR is coming from excess liquidity and we do have ample warehouse capacity and we compare that warehouse capacity and the cost of warehouse financing through debt markets and the fact of the matter is that issuing unsecured debt would be funding that MSR at a cost that's much higher than term committed warehouse financing and so it wouldn't make sense for us and particularly given the fact that we don't need the liquidity if we go to the debt markets so certainly it's not something we're actively considering. Eric Hagen -- BTIG -- Analyst Yep. Thank you, guys. Appreciate it. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Thanks, Eric. Operator The next question comes from Kenneth Lee with RBC Capital Markets. Ken Lee -- RBC Capital Markets -- Analyst Hey. Thanks for taking my question. Good morning. Just one for me. You mentioned in the prepared remarks that dividends are set appropriately for 2024. Wondering if you could just further flush this out. Is this dependent upon rate volatility to potentially decline, or does it depend on a certain Agency MBS spread range? Thanks. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Well, it's a function of where the asset yields on the portfolio are and looking at the forwards and trying to give some guidance to a little bit further out the rise and given the fact that we're lower levered, just an attempt to provide a little comfort that we can operate at lower leverage and still generate a yield that is certainly competitive. And it's the durability, the earnings power of the portfolio that I just wanted to highlight there. And now look, quarter-over-quarter EAD is going to ebb and flow. But when it comes to the economic earnings of the portfolio, we do feel quite good about covering it. The second quarter, our NIM will go up very modestly, we anticipate. And in the absence of a shock to the market, we feel reasonably good about where the earnings picture is for 2024. Ken Lee -- RBC Capital Markets -- Analyst Great. Very helpful there. Thanks again. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Thanks. Operator The next question comes from Merrill Ross with Compass Point. Please proceed. Merrill Ross -- Compass Point Research -- Analyst Thank you. I wanted to ask about the lower swap benefit and I expect that would continue the hedge ratio job to 97%. Maybe you could give us a ballpark for where it would be as the positions expire throughout the year. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Yes, Meryl, it was a little difficult to hear you on that, but what I think you asked is about the roll down on the hedge portfolio and where the hedge ratio would go. So just real quickly, when you look at our swap book currently, we did have roughly $5 billion roll off in the first quarter, the second quarter is very light, it's actually just $1.25 billion, and when we look at that front-end swap position, zero to three years, it's roughly $18 billion notional, and it has an average life of average maturity of 1.46 years, so if you think about it, over the next three years, we're going to tap that on average in a year and a half, and so it's pretty evenly distributed. Now, the way to think about it is, as those swaps run off, also what's happening is Agency MBS are running off, and when you look at the asset yield on our portfolio, which is in the 480s on a book yield basis, and you look at reinvesting those, that run off into new Agency MBS and production coupon MBS or yield somewhere in the 6.25 range, right, Srini, they are about so what you'll see over the next number of years is a pretty orderly runoff of the hedge portfolio, which will replace out the curve and make sure that we're hedged for the environment, but also you're going to replenish yield by reinvesting Agency runoff and increasing the asset yield over time, so we like the hedge portfolio where it's at, we'll manage for the environment, and we're going to stay reasonably well hedge amount. Merrill Ross -- Compass Point Research -- Analyst Thank you. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Thank you. Operator At this time, there are no further questioners in the queue. And this does conclude our question-and-answer session. I would now like to turn the conference back over to David Finkelstein for any closing remarks. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Thank you, and thanks everybody for joining us today. Have a good rest of the spring, and we'll talk to you next quarter. Answer:

the first-quarter 2024 Annaly Capital Management earnings conference

Operator Good morning. And welcome to the first-quarter 2024 Annaly Capital Management earnings conference. [Operator instructions] Please note that today's event is being recorded. I would now like to turn the conference over to Sean Kensil, director, investor relations. Please go ahead, sir. Sean Kensil -- Director, Investor Relations Good morning, and welcome to the first-quarter 2024 earnings call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our first-quarter 2024 Investor Presentation and first-quarter 2024 Supplemental Information, both found under the Presentations section of our website. Please also note this event is being recorded. Participants on this morning's call include David Finkelstein, chief executive officer and chief investment officer; Serena Wolfe, chief financial officer; Mike Fania, deputy chief investment officer and head of residential credit; V.S. Srinivasan, head of agency; and Ken Adler, head of mortgage servicing rights. And with that, I'll turn the call over to David. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Thank you, Sean. Good morning and thank you all for joining us on our first quarter earnings call. Today, I'll briefly review the macro and market environment along with our first quarter performance, then I'll provide an update on each of our three businesses and conclude with our outlook. Serena will then discuss her financials, after which we'll open the call up to Q&A. Now, beginning with the macro landscape. First quarter of 2024 was characterized by surprisingly resilient economic data, a healthy labor market, and an uptick in inflation. Consequently, interest rates sold off modestly on the quarter as the market priced out roughly half of the rate cuts that were expected at the beginning of the year. Now despite rising rates, risk assets performed well over the quarter as volatility declined and money flowed into both equity and fixed-income markets. Banks also reemerged as modest buyers of Treasuries and Agency MBS in the first quarter, a welcome development given their absence over the past couple of years. In addition, the Federal Reserve made it clear that it considers policy rates and balance sheet management to be separate tools as they have begun discussing slowing the pace the Fed's Treasury securities run off. We are encouraged by this development as this approach allows for more gradual decline in bank reserves, thereby stabilizing liquidity, potentially reducing treasury supply to the private sector, and strengthening banks' deposit growth, all positive for fixed income and Agency MBS. Now, against this supportive backdrop, all three of our housing finance strategies perform well in the quarter, with production coupon Agency MBS spreads roughly five basis points tighter, credit spreads 25 to 100 basis points tighter, and the MSR market experiencing modest multiple expansion. As a result, we delivered a 4.8% economic return for the quarter with EAD of $0.64 and leverage a quarter end of 5.6 turns. Now, as the second quarter has unfolded, continued strong economic data coupled with stalled progress on disinflation has driven a further repricing of forward rate expectations, as well as an increase in volatility. This current risk-off tone has led to marginal spread widening across Agency and Credit, and justifies our leverage profile, which is at its lowest level of the cycle. Now, notwithstanding lower leverage, prevailing return environment gives us confidence in the durability of the portfolio earnings profile, and we believe that our current dividend is appropriately set for 2024, given our expectations for earnings this year. Now shifting to the businesses, and beginning with Agency, the portfolio ended the quarter modestly lower to accommodate growth in the Residential Credit and MSR businesses. We continue to gravitate up in coupon, with our weighted average coupon increasing 20 basis points to 4.76%, reducing our holdings of 4% coupons and lower by over $5 billion, in favor of, predominantly, 5.5% and higher. We continue to favor production coupons, as they provide the widest nominal spreads, and as evidenced by their performance this past quarter, the best returns in a range-bound rate environment. They also stand to benefit from potential spread tightening, should option costs decline due to a steeper yield curve or lower implied volatility. Our Agency CMBS portfolio was largely unchanged over the quarter, spreads in the sector tightened 10 to 15 basis points on continued broad-based demand, outperforming Agency MBS and providing incremental excess returns while improving our overall convexity profile. As it relates to interest rate management, the notional value of our hedge portfolio declined slightly as we moved hedges out the curve, leading to a modest decline in our hedge ratio. As our existing front-end swap position has been rolling off, we have replaced that risk with hedges in the intermediate and long-end part of the yield curve, closely aligning our hedges with the interest rate risk of our assets. In addition, our increased allocation of swaps relative to Treasuries that we discussed last quarter benefited our overall return, given the widening of swap spreads during the quarter. The short-term outlook for Agency CMBS has become somewhat more challenging. As recent inflation reports have delayed the start of the cutting cycle and led to a pickup in volatility. However, we remain constructive on the sector, given the potential of sustained bank demand and the expected upcoming reduction in Fed Treasury runoff, factors that should be supportive of Agency CMBS and were absent in the prior widening episodes. Meanwhile, hedge carry remains attractive with historically wide nominal spreads. Now turning to Residential Credit, the portfolio ended the quarter at $6.2 billion in market value and $2.4 billion of equity, with a rise in 21% of the firm's capital at quarter end. Residential Credit spreads tighten meaningfully to start the year, given the support the fundamental backdrop with AAA non-QM spreads 35 basis points tighter than below IG CRT M2 70 basis points tighter. The credit curve continued to flatten as the issuance and supply of subordinate assets remained limited. Now, the growth in our portfolio was driven by our organic Onslow Bay strategy through increased whole loan purchases and retention of OBX securities. Given tightening spreads, we opportunistically reduced our CRT portfolio and other segments of our third-party securities holdings into strong demand. In Onslow Bay correspondent channel had another record quarter as we registered $3.7 billion of expanded credit locks in Q1, up 40% quarter over quarter. We settled $2.4 billion in loans, the vast majority of which were sourced directly via our correspondent channel. And our pipeline remains robust with $2 billion of locks at quarter end and continued momentum into the spring selling season. Most importantly, our credit discipline remains strong as our current pipeline is characterized by a 68 LTV and a 753 FICO with only 3% of our locks greater than 80 LTV. We were able to take advantage of the supportive capital markets by pricing seven securitizations, totaling $3.3 billion in Q1, generating $328 million in assets for Annaly's balance sheet and low to mid double-digit returns. And subsequent to quarter end, we priced an additional non-QM transaction with retained assets exhibiting similar expected returns. Now looking forward, the further expansion of the Onslow Bay channel is positioned Annaly as a market leader in the Residential Credit market, allowing us to manufacture our own credit risk while retaining control over all aspects of the process. Now Shifting to our MSR business, our portfolio ended the first quarter at $2.7 billion in market value, representing $2.3 billion in the firm's capital. MSR transaction volumes continue to be elevated in the first quarter given challenging originator profitability while demand and pricing remain firm. And despite elevated supply, we were disciplined, finding better opportunity and relative value post-quarter end and in early April, we committed to purchase just over $100 million in market value for bulk package, which we expect to close in the second quarter. We're confident we've constructed one of the highest quality conventional MSR portfolios in the market, characterized by our industry-lower 3.07% note rate and exceptional credit quality. Fundamental performance of our MSR portfolio has continued to outpace our initial expectations with our holdings realizing a three-month CPR of 3%, rising float income given increased escrow balances, and minimal borrower delinquencies and all of these factors have contributed to our MSR portfolio exhibiting highly stable cash flows at double-digit returns. Now given Annaly's diversified strategy and ample liquidity position, we currently do not utilize a significant amount of recourse leverage on the MSR portfolio as it is advantageous to supplement leverage with lower-cost agency repo. However, with $1.25 billion of committed warehouse facilities, we are positioned for additional MSR growth should pricing be favorable. Now looking ahead, we are optimistic about the outlook for our three businesses and we continue to see attractive risk-adjusted returns across each of our investment strategies. However, bouts of volatility remain a key risk as we have been reminded in recent weeks and we remain vigilant. We continue to be well prepared given our conservative leverage position and capital structure, our ample liquidity, and a diversified capital allocation strategy that can outperform across different interest rate and macro landscapes. And while we continue to make progress in allocating incremental capital toward our Residential Credit and MSR strategies, we like our current capital allocation and are disciplined in pricing and selected in the sourcing of assets. And overall, we are proud of the unique platform we built with three established and fully skilled businesses on our balance sheet and we believe this model can continue to deliver superior returns relative to sector just as we have over the past couple of years. Now with that, I will hand it over to Serena to discuss our financials. Serena Wolfe -- Chief Financial Officer Thank you, David. Today, I will provide brief financial highlights for the first quarter ending March 31st, 2024. Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics which exclude the PAA. Our book value per share as of March 31st, 2024 increased from the prior quarter to $19.73, based largely on asset spread appreciation with minimal interest rate exposure. And with our first quarter dividend of $0.65, as David mentioned earlier, we generated an economic return of 4.8%. Rising rates and spread timing for credit assets resulted in gains on our hedging portfolios of $2.19 and gains on our ready MSR investments of $0.17. Outpacing losses on our Agency investment portfolios of $2.04 as implied volatility declines in asset spread times. Earnings available for distribution decreased by $0.04 per share to $0.64 in the first quarter compared to Q4, 2023. EAD declined on lower swap benefits and some of our positions matured. Gross interest expense increased as average repo and securitized debt balances increased by approximately $3.6 billion. The net financing impact on the EAD was mitigated by continued improvement in asset yields and the average asset yields ex-PAAs further rose quarter over quarter, 23 basis points higher than in the fourth quarter at 4.87%. Asset yields benefited from the Agency MBS portfolio continuing its up and keep on strategy and the Onslow Bay correspondent channel experiencing record growth and hold on purchases as attracted yields. Net interest margin reflected the changes to EAD in the first quarter with the portfolio generating 143 basis points of NIM ex-PAA, and 15 basis points decreased from Q4. Similarly, net interest spread decreased 13 basis points quarter over quarter to 109 basis points. Total cost of funds increased quarter over quarter rising 36 basis points to 3.78%. As I previously highlighted, swap benefit continues to normalize as positions expire reducing net interest on swaps by $49 million and increasing cost of funds by 33 basis points accounting for much of the quarter-over-quarter impact. On the other hand, average repo rates were stable through the quarter declining nominally by one basis point. Turning to details on financing, we continue to see strong demand for funding for our Agency and non-agency security portfolios. Our repo strategy is consistent with prior quarters with a book positioned around Fed meeting dates as we look to take advantage of any future rate cuts. As a result, our Q1 reported weighted average repo days were 43 days down just one day compared to Q4. During Q1, we continued to obtain additional funding capacity for our credit businesses. To increase financing optionality for our Onslow Bay platform, we closed additional warehouse facilities approaching $1 billion in size, which included expanded product offerings and non-market features at two-year terms. As of March 31st, 2024, we had $3.9 billion of MSR and hold on warehouse capacity at a 34% of utilization rate, leaving substantial availability. Annaly's unencumbered assets increased to $5.3 billion in the first quarter, compared to $5.2 billion in the fourth quarter, including cash and unencumbered Agency MBS of $3.5 billion. In addition, we have approximately $900 million in fair value of MSR that has been placed to committed warehouse facilities. They remain undrawn and can be quickly converted to cash, subject to market advance rates. We have approximately $6.2 billion in assets available for financing unchanged compared to last quarter. We believe that our disciplined approach to liquidity and credit leverage leaves us well-prepared to confront market risk, such as the volatility of the previous few weeks. Lastly, we have continued to efficiently manage our expenses, resulting in a decline in our opex-to-equity ratio to 1.35% of the first quarter, compared to 1.41% for the fourth quarter of 2023. That concludes our prepared remarks, and we will now open the line for questions. Thank you, operator. Questions & Answers: Operator Thank you. [Operator instructions] Today's first question comes from Bose George with KBW. Please proceed. Bose George -- KBW -- Analyst Hey, everyone, good morning. Could I get an update for book value quarter to date? David Finkelstein -- Chief Executive Officer and Chief Investment Officer Sure, Bose. Good morning. So, as of our last flash, which was Tuesday's close, net of our dividend accrual, we were off just inside of 3% inclusive of that dividend just inside of 2% off. Bose George -- KBW -- Analyst OK. Perfect. Thank you. And then I noticed the targeted return on your MSR increased to 12 to 14 from 10 to 12. Is that sort of just better yields in the market or is there like a different leverage assumption or just curious what drove that? David Finkelstein -- Chief Executive Officer and Chief Investment Officer It's predominantly the increase in float income associated with higher short rates projected, but Ken, you want to elaborate? Ken Adler -- Head of Mortgage Servicing Rights Yes, as you may know, ownership of the MSR asset involves the MSR owner and the benefit of the float income maintaining those extra accounts. So the higher for longer change in rates just translates to a much higher yield at the exact same multiple. So it's really just the math on that. Bose George -- KBW -- Analyst OK. Great. Thank you. Operator The next question comes from Doug Harder with UBS. Please proceed. Doug Harter -- UBS -- Analyst Thanks. Can you talk about how MSRs are performing kind of in this, as rates continue to increase and their effectiveness of hedging the MBS portfolio? Ken Adler -- Head of Mortgage Servicing Rights Yes, absolutely. This is Ken. Thanks for the question. In terms of spot performance, I mean, the speeds you can see in the presentation, extremely stable, delinquency is extremely stable. And as the prior question alluded to, we have an increase in cash flow. Expected cash flow over time as the earnings on the flow are not expected to decline, given the Fed rate cuts coming out of the market in terms of the expected pricing. In terms of hedging the MBS portfolio, slower speeds are good for the MSR. And the mortgage universe trading in discounts, slower speeds are not a good outcome for mortgage backed security. So we do have that hedging property. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Yes, Doug, I'll just add to Ken's point. Look, when we buy MSR, standard speaking, it's often a hedge for the duration of the portfolio. When it's deep out of the money, there's two other hedge benefits we get as Ken discussed. First are the higher float income hedges, the higher for longer and short rates in financing associated with the Agency MBS. And secondly, the turnover, which is lower in a higher rate environment, is better for MSR. So those two factors have led to a shift in the benefits associated with MSR for our portfolio. Doug Harter -- UBS -- Analyst Thanks. And then the increase in the Onslow Bay correspondent activity is how much -- is that kind of adding new customers? Is that getting deeper with existing customers kind of if you could give a little more color behind the increased activity there? Mike Fania -- Deputy Chief Investment Officer and Head of Residential Credit Hey, Doug. Thank you. This is Mike. Thanks for the question I think a lot of it is that the correspondent channel is not yet mature. We still believe that there's over a 100 correspondence that are originating non-QM and VSCR loans that are not currently our captive customers so we've been very aggressive in trying to build it the correspondence so some of that volume is just through the maturation of the correspondent channel, some of it is spring seasonals right so we've certainly benefited from that it's one relative to Q4 and I think a lot of it is also the growth in the actual market itself , larger non-banks have rolled out these programs and they have been very active participants and not only potentially taking market share from some of the smaller niche specialty finance players but they're building market share as well and the borrower in the non-QM VSCR market is also a little bit less sensitive than an Agency or jumbo market two rates about a quarter of the volume that we're doing right now is cash outs that numbers 7% to 8% within the Agency market. So I think there's a number of factors that are leading to the increase in volumes but I'll say one of the largest drivers is just the actual build of the correspondent adding new originators to the platform. Doug Harter -- UBS -- Analyst Great. Thank you. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Thank you, Doug. Operator Our next question comes from Rick Shane with J.P. Morgan. Please proceed. Rick Shane -- J.P. Morgan -- Analyst Thanks, everybody, and good morning. Look, I'm looking at slide 6 and I know Bose had ask a question here as well. There's convergence between the returns on the three strategies and I'd love to explore in the current environment, sort of the base case, higher for longer, what you think the right tactical approach is. And then if you could sort of lay out if we saw the tail scenarios, one tail scenario being additional hikes, the other being cut sooner than we thought, how you would position yourself in the context of these three choices. Basically, I want to understand how you're thinking about things now and what the risks are or what the opportunities are if you make a strategic call. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Sure, thanks, Rick. So just in terms of overall capital allocation, as I mentioned in our prepared remarks, so we do very much like where we are at today. We think the three sectors are all fully scaled, obviously, and the portfolio is in a good balance right now. And I think it shows up in our economic returns over the past many quarters. So we're happy with where we're at. In terms of relative value, Agency looks perfectly fair here. We're certainly sensitive to higher volatility that could materialize, albeit we don't expect to see anything like we saw last fall. But nonetheless, some we're sensitive to. So we're a little bit under levered on the Agency side. But our allocation is nearly 60%. And that's the core of the portfolio, and that's where our liquidity is. So we like it there. In terms of the other two sectors, both are adding accretive returns, both in terms of book value, and they're supporting the dividend. So we like where we're at. And then when we look at, from a relative value and a capital allocation percentage in terms of expected returns under various scenarios, this allocation here today gives us the best bang for a buck when we stress the portfolio with shock rates up or down. Now, in terms of how we would position in the scenario you mentioned, whether it's higher for longer versus or even hike potentially versus the potential for cuts. Look, the way we look at it is we are carrying a very small amount of interest rate risk, but you're not getting paid for it. The rates market is, we think, to be relatively fairly priced. We have sold off over 80 basis points on the long end this year, and it's been warranted, given the much stronger data that we've seen and the surprise uptick in inflation. But when we look out the horizon and think about longer-term rates, five-year rates, five years forward in treasuries is at $465, which we think looks perfectly reasonable. 10-year real rates are roughly 2.25%. And then globally, rates are quite competitive with the nominal 10 years, 150 basis points over the rest of the G7. So the rates market looks to have priced in the stronger growth and the higher inflation that we've recently seen. And another point to note with respect to rates markets relative to the Fed, for example, is the market is priced in a much higher neutral rate than the Fed's long-run average. We're over 4% now when we look out the curve on very short rates. And so the market is reasonably well priced for uncertainty associated with the potential for longer or even hikes. And the way we would position ourselves if we did anticipate hikes is we maintain a conservative approach with respect to interest rate risk. We're already at the lowest leverage we've been at since 2014, and so we feel good about that and we're prepared for it. And the positive aspect of it, as I mentioned in our prepared remarks, is that we're able to earn returns that support a 13% yield on book. And so we feel really good about it and we're prepared for that type of uncertainty. Now, on the other hand, if all of a sudden higher rate and the trajectory of policy does create unintended consequences in interest rate sensitive sectors, for example, whether it's regional banks or CRE and housing, the Fed does have to react in a way that's much more accommodated much quicker. We're going to have plenty of opportunity to position the portfolio in a more aggressive fashion as that materializes. So we're not worried about missing anything. Right now, our leverage is at where it's at because candidly, the range of outcomes has increased to the intent of your question. And we need to get through this bout of volatility. And so we're going to remain relatively conservative, but we're prepared for downside and we can easily react if the policy becomes much more accommodative and all of sudden rates are improved quite a bit. Does that help? Rick Shane -- J.P. Morgan -- Analyst It does and I apologize for asking such an open-ended question but I really, I have to say enjoyed the answer it's very helpful, and thank you. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Anytime, Rick. Operator The next question is from Jason Weaver with JonesTrading. Please proceed. Jason Weaver -- JonesTrading -- Analyst Hey. Good morning. I was wondering can you give us a ballpark on the incremental NIM you're targeting for the whole loans going into the Onflow Bay securitizations? And what you think your capacity is there in what might be a weaker origination environment? Mike Fania -- Deputy Chief Investment Officer and Head of Residential Credit Hey, Jason, this is Mike. When you say NIM you're talking about some form of projected gain on sale in terms of where we are at -- Jason Weaver -- JonesTrading -- Analyst If you had any internal target for that, yes. Mike Fania -- Deputy Chief Investment Officer and Head of Residential Credit Yes, that's not a metric that we've given out historically, but I will say in terms of when we're actually pricing our loans, when we're putting out our rate sheet, we are targeting close to mid-teens ROEs based upon retaining, call it 10% market value, and then maybe a small amount of recourse leverage. So you're looking at 6% to 7% dedicated deployed capital on those whole loans at mid-teens ROEs in terms of where we're setting the risk and the rate sheet. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Yes, Jason, just to add, as I talked about in my prepared comments, as we added OBX securities to the balance sheet, we reduced our third-party securities. The way Mike is able to organically create assets, it's much cheaper than we think than third-party securities, and credit has done quite well, as I'm sure you're aware. And so we've reduced that component, the third-party component of balance sheet to make room for what is candidly much more attractive with priced OBX securities, and we'll continue to do that. Jason Weaver -- JonesTrading -- Analyst All right. Thank you. That's helpful. And then David, maybe expanding on your earlier prepared remarks a little bit, what do you think about the impact of QT curtailment on your agency portfolio strategy? Does it change the approach at all? David Finkelstein -- Chief Executive Officer and Chief Investment Officer It gives us more confidence in the near-term horizon, and it's very incremental what the Fed would do, and I think everybody's aware they're likely to begin the taper either in May or in June, and they'll reduce the runoff of their treasury portfolio by roughly 50%. And what that will do is it will help provide comfort to private market participants that there's less treasury supply coming to the market. It'll help banks in so far as deposit growth we will be able to be deployed into fixed income in terms of their liquidity, and ultimately that'll help Agency MBS. Banks did reemerge as buyers, both Treasuries and Agency MBS in the first quarter, and we're hopeful that will continue, and reduced Treasury supply from the Fed will help fixed income markets overall and indirectly the Agency MBS market. But we don't expect them to reduce their runoff in Agency MBS. We don't expect them to buy Agency MBS in any event other than a crisis type period for the foreseeable future, but the reduced Treasury supply would be helpful for all fixed-income markets. Jason Weaver -- JonesTrading -- Analyst All right. Thanks again for taking my questions. David Finkelstein -- Chief Executive Officer and Chief Investment Officer You bet, Jason. Operator Our next question is from Trevor Cranston with JMP Securities. Please proceed. Trevor Cranston -- JMP Securities -- Analyst Hi. Thanks. On the MSR business, as that continues to grow and gain scale, can you talk about how you would think about potentially bringing the servicing function in-house and kind of generally how you think about the trade-offs between using sub-services and having an in-house servicing function, right? David Finkelstein -- Chief Executive Officer and Chief Investment Officer Yes, sure. So we've looked at servicers in the past and have seen a number of them come to market, and what we've learned is that it's much more efficient for us to outsource servicing. In the absence of significant scale, it's very low-margin business, and we have a considerable amount of flexibility by using multiple high-quality sub-services. They are competitively priced. We have good recapture relationships. And we also have better access to assets as a consequence. We're not a competitive threat to the mortgage origination community, and so by outsourcing services, it's better for overall business. Now, that could change at some point, but right now, we really like the relationships we have on the sub-servicing side, and we're going to maintain that posture for the time being. Trevor Cranston -- JMP Securities -- Analyst Got it. OK. That makes sense. And then in light of the significant move we've had in rates here in April, can you comment on any changes you made within the portfolio, particularly in Agency MBS or with the hedges? David Finkelstein -- Chief Executive Officer and Chief Investment Officer Sure. So we did actually sell early in the quarter a couple billion Agency MBS, and some of that was outright. So part of that was anticipatory and we were certainly glad we did. We will manage our rate exposure here as the market evolves. We're currently running at about a half-year duration, which we're comfortable with, but we're certainly cautious. agency MBS. We think in this sell-off they've been better behaved, certainly in the fall, primarily because fall has been a little bit better this time around, and there's more fundamentally positive factors in the market today than there were last year. The bar for the Fed to hike is higher today than it was last year. As we just talked about, the QT taper is likely to be underway. The composition of treasury issuance is in a better place than it was last fall, and money is actually flowing into fixed income. So we feel a little bit better about the market in this rate sell-off than we did last year. When we were in October, it was sort of the million insight mentality, and that doesn't exist today, and that should be supportive of the Agency market, but we're going to stay conservative to the extent there's more cheapening in the basis, we're going to cover those mortgages that we bought, and we anticipate doing so, and it's advantageous to sell early, and we trade it around. So that's pretty much the story, Trevor. Trevor Cranston -- JMP Securities -- Analyst OK. Appreciate the comments. Thank you. David Finkelstein -- Chief Executive Officer and Chief Investment Officer You bet, Trevor. Operator The next question is from Eric Hagan with BTIG. Please proceed. Eric Hagen -- BTIG -- Analyst Hey. Good morning. How you guys doing? Hey. It looks like the preferred stock is going to go fully floating rate by the end of June. Right now, the prep served in around 15% of the equity capital structure. How does your outlook for leverage in a position of the portfolio maybe respond to the cost of that preferred? And even at your current valuation and when you look at the environment, do you think it actually makes sense to maybe scale up with more preferred right now? David Finkelstein -- Chief Executive Officer and Chief Investment Officer Yes. So in terms of our capital structure, you're right, it's probably 13.5% of our capital is in preferred, and our Series Is do go floating here in June, and how we look at it is our cost of preferred capital would be a little over 10% at that time, which is relatively high, but it's also important to note that we're at the highs of the rate cycle. And so when we look at our cost of prep, we look at it over a longer horizon compared to the forwards, and it does come down with ultimate Fed cuts, so to around 9% or thereabouts. And then we compare that level to the asset yield on the portfolio. And when you look at the relationship, even at the spreads today versus asset yields, that spread is actually higher today than the long-run average. So we're comfortable with the elevated cost of preferred capital in this floating rate environment, even with the Is going floating, which is -- will have a relatively immaterial cost burden, less than a $1.00 a quarter, it'll add to our prep costs, so not that material. And then with respect to potentially issuing more prep, we like our capital structure where it's at. The prep market hasn't really opened up. There's been a couple of very recent bank transactions, but generally speaking, it's still relatively quiet to the extent it does, and we get some firmness and pricing in mid to upper single digits call it, to be able to issue and potentially even refile. We would certainly look at it, but we like the low leverage in our capital structure as it stands, and we'll keep an eye on that market. Eric Hagen -- BTIG -- Analyst Yes, I mean, along the same lines, I mean, as you guys scale up with the MSR, is there room for unsecured debt just as a kind of more effective duration match maybe versus using secured? David Finkelstein -- Chief Executive Officer and Chief Investment Officer Well, look, we have $3.5 billion of essentially cash and Agency MBS on the balance sheet, so we don't need the debt. And right now, as I mentioned in my prepared remarks, a lot of that capital funding MSR is coming from excess liquidity and we do have ample warehouse capacity and we compare that warehouse capacity and the cost of warehouse financing through debt markets and the fact of the matter is that issuing unsecured debt would be funding that MSR at a cost that's much higher than term committed warehouse financing and so it wouldn't make sense for us and particularly given the fact that we don't need the liquidity if we go to the debt markets so certainly it's not something we're actively considering. Eric Hagen -- BTIG -- Analyst Yep. Thank you, guys. Appreciate it. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Thanks, Eric. Operator The next question comes from Kenneth Lee with RBC Capital Markets. Ken Lee -- RBC Capital Markets -- Analyst Hey. Thanks for taking my question. Good morning. Just one for me. You mentioned in the prepared remarks that dividends are set appropriately for 2024. Wondering if you could just further flush this out. Is this dependent upon rate volatility to potentially decline, or does it depend on a certain Agency MBS spread range? Thanks. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Well, it's a function of where the asset yields on the portfolio are and looking at the forwards and trying to give some guidance to a little bit further out the rise and given the fact that we're lower levered, just an attempt to provide a little comfort that we can operate at lower leverage and still generate a yield that is certainly competitive. And it's the durability, the earnings power of the portfolio that I just wanted to highlight there. And now look, quarter-over-quarter EAD is going to ebb and flow. But when it comes to the economic earnings of the portfolio, we do feel quite good about covering it. The second quarter, our NIM will go up very modestly, we anticipate. And in the absence of a shock to the market, we feel reasonably good about where the earnings picture is for 2024. Ken Lee -- RBC Capital Markets -- Analyst Great. Very helpful there. Thanks again. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Thanks. Operator The next question comes from Merrill Ross with Compass Point. Please proceed. Merrill Ross -- Compass Point Research -- Analyst Thank you. I wanted to ask about the lower swap benefit and I expect that would continue the hedge ratio job to 97%. Maybe you could give us a ballpark for where it would be as the positions expire throughout the year. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Yes, Meryl, it was a little difficult to hear you on that, but what I think you asked is about the roll down on the hedge portfolio and where the hedge ratio would go. So just real quickly, when you look at our swap book currently, we did have roughly $5 billion roll off in the first quarter, the second quarter is very light, it's actually just $1.25 billion, and when we look at that front-end swap position, zero to three years, it's roughly $18 billion notional, and it has an average life of average maturity of 1.46 years, so if you think about it, over the next three years, we're going to tap that on average in a year and a half, and so it's pretty evenly distributed. Now, the way to think about it is, as those swaps run off, also what's happening is Agency MBS are running off, and when you look at the asset yield on our portfolio, which is in the 480s on a book yield basis, and you look at reinvesting those, that run off into new Agency MBS and production coupon MBS or yield somewhere in the 6.25 range, right, Srini, they are about so what you'll see over the next number of years is a pretty orderly runoff of the hedge portfolio, which will replace out the curve and make sure that we're hedged for the environment, but also you're going to replenish yield by reinvesting Agency runoff and increasing the asset yield over time, so we like the hedge portfolio where it's at, we'll manage for the environment, and we're going to stay reasonably well hedge amount. Merrill Ross -- Compass Point Research -- Analyst Thank you. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Thank you. Operator At this time, there are no further questioners in the queue. And this does conclude our question-and-answer session. I would now like to turn the conference back over to David Finkelstein for any closing remarks. David Finkelstein -- Chief Executive Officer and Chief Investment Officer Thank you, and thanks everybody for joining us today. Have a good rest of the spring, and we'll talk to you next quarter.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, and welcome to Tradeweb's first quarter 2024 earnings conference call. As a reminder, today's call is being recorded and will be available for playback. To begin, I'll turn the call over to Head of Treasury, FP&A, and Investor Relations Ashley Serrao. Please go ahead. Ashley Serrao -- Head of Treasury, FP&A, and Investor Relations Thank you, and good morning. Joining me today for the call are our CEO, Billy Hult, who will review the highlights for the quarter and provide a brief business update; our president, Tom Pluta, who will dive a little deeper into some growth initiatives; and our CFO, Sara Furber, who will review our financial results. We intend to use the website as a means of disclosing material, non-public information, and complying with our disclosure obligations under Regulation FD. I'd like to remind you that certain statements in this presentation and during the Q&A may relate to future events and expectations, and as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements related to, among other things, our guidance are forward-looking statements. Actual results may differ materially from these forward-looking statements. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our earnings release, presentation, and periodic reports filed with the SEC. In addition, on today's call, we will reference certain non-GAAP measures, as well as certain market and industry data. Information regarding these non-GAAP measures, including reconciliations to GAAP measures, is in our earnings release and presentation. Information regarding market and industry data, including sources, is in our earnings presentation. Now let me turn the call over to Billy. Billy Hult -- Chief Executive Officer Thanks, Ashley. Good morning, everyone, and thank you for joining our first quarter earnings call. This was another record quarter as our strategy and focus on building deeper relationships with our clients through our one-stop shop offering continues to pay off. I believe it's a great time to be in the fixed-income trading business, macro debate is flourishing and electronification continues to take hold leaving me optimistic about our future. Even as there is consensus around rate cuts in the U.S., questions remain on the number of cuts this year, ultimate level of rates, and shape of the yield curve. In fact, Jamie Dimon, in his most recent annual letter, highlighted the potential for U.S. rates to range from as low as 2% to as high as 8%. Traders can make a lot of money with that sort of spread. While capitalizing on the array of organic growth opportunities in front of us remains our focus, we also continue to selectively use M&A to complement our offerings with the goal to create better outcomes for our clients. This year, we have deepened our penetration into the U.S. Treasury market and added new futures and algorithmic functionality with r8fin, and are adding corporates as a fourth client channel with our pending ICD acquisition. Diving into the first quarter, the momentum we saw in January persisted into February and March as we eclipsed $400 million in quarterly revenues for the first time. Specifically, strong client activity, share gains, and improved risk-appetite drove 24.1% year-over-year revenue growth on a reported basis. We continue to balance investing for growth and profitability as adjusted EBITDA margins expanded by 141 basis points relative to the first quarter of 2023. Turning to Slide 5. Rates and credit led the way, accounting for 55% and 34% of our revenue growth, respectively. Record revenues across rates were primarily driven by organic growth across global government bonds and swaps and were also supplemented by the addition of r8fin and Yieldbroker. Similarly, record revenues across credit were led by strong U.S. and European corporate credit, with record quarterly market share in electronic U.S. investment grade being a highlight. Money markets also hit a record fueled by continued growth in institutional repos. Equities also hit a record despite challenging industry volumes in our core ETF business. Finally, market data revenues were driven by growth in our LSEG market data contract and proprietary data products. Turning to Slide 6. I will provide a brief update on two of our focus areas, U.S. Treasuries and ETFs, and then turn it over to Tom who will dig deeper into U.S. credit and global interest rate swaps. Starting with U.S. Treasuries, record first quarter revenues increased by 22% year over year led by records across our institutional and wholesale businesses. Our institutional business saw growing adoption of our streaming and RFQ+ offering. The leading indicators of the institutional business remains strong. We gained share and achieved record quarterly market share of U.S. Treasuries versus Bloomberg. Client engagement was healthy with institutional average daily trades up 40% year over year. Automation continues to be an important theme with institutional U.S. Treasury AiEX average daily trades increasing by more than 80% year over year and over 50% of our institutional tickets utilizing our AiEX functionality. Our wholesale business featured record volumes across our streaming and session protocols. Our recent acquisition of r8fin is off to a strong start, contributing approximately 1.5% to our overall U.S. Treasury market share complementing our CLOB and streaming protocols. While the central limit order book continued to face tougher market conditions, the team remains focused on onboarding more liquidity providers over the coming quarters as they deliver on a holistic strategy across our wholesale protocols. Within equities, our ETF business saw its second-highest quarterly revenues which were up 1% year over year despite challenging industry volumes. Other initiatives to expand our equity brand beyond our flagship ETF franchise continue to bear fruit. First quarter equity derivatives revenues were up 10% year over year, driven by strong equity futures growth. Looking ahead, the client pipeline remains strong as the benefits of our electronic solutions continue to resonate. We believe we are well-positioned to capitalize on the long-term secular ETF growth story, not just in equities, but across our fixed-income business. With that, I will turn it over to Tom. Tom Pluta -- President Thanks Billy. Turning to Slide 7 for a closer look at another record-breaking quarter for credit. Strong double-digit revenue growth was driven by 37% and 46% year-over-year revenue growth across U.S. and European Credit, respectively. Munis produced mid-single-digit growth, while credit derivatives revenues were more muted given softer industry volumes. Automation continued to surge with global credit AiEX average daily trades increasing by about 70% year over year. We set another fully electronic quarterly market share record in U.S. IG helped by record IG block market share. Our institutional business continues to scale to new highs as clients engage with our diverse set of protocols to optimize execution across a variety of market environments. Our primary focus on growing institutional RFQ continues to pay off with ADV growing 29% year over year, with strong double-digit growth across both IG and high yield. Moreover, Portfolio trading ADV rose over 70% year over year with IG portfolio trading reaching record levels. Our clients continue to get more sophisticated in their usage of PT, with 65% of our PT volume done in-comp. These in-comp volumes grew 85% year over year. Retail credit revenues were up almost 40% year over year as financial advisors have started to turn their focus toward credit in recent months to complement their buying of U.S. Treasuries. AllTrade produced a record quarter with over $200 billion in volume. Specifically, our all-to-all volumes grew over 15% year over year and our dealer-RFQ offering grew almost 40% year over year. The team continues to be focused on broadening out our network and increasing the number of responses on the AllTrade platform. In the first quarter, the average number of responses per all-to-all inquiry rose by over 45% year over year. We also continue to increase our engagement and wallet share with ETF market makers. Finally, our sessions ADV grew over 65% year over year and saw another record revenue quarter. Looking ahead, U.S. credit remains our biggest focus area and we like the way we are positioned across our three client channels. We believe we have a long runway for growth with ample opportunity to innovate alongside our clients. Our strategy is focused on expanding our network, increasing our wallet share, enhancing our pre and post-trade analytics, and continuously improving our protocols and client experience. In the first quarter, we continued to strategically expand our sales force to broaden our coverage and attract clients we have historically not had a presence with. With respect to high yield, we continue to chip away and believe we should be able to replicate the success we have seen in IG as we leverage our Aladdin collaboration to grow our all-to-all network later this year, enhance functionality, and increase our presence with ETF market makers. Beyond U.S. credit, our EM expansion efforts continue to progress with the opening of new offices in Miami and Dubai and a steady increase in engagement with local clients. On the product side, we are focused on enhancing our integration with FXall and continuing to build out functionality for multi-asset package trading. Moving to Slide 8, global swaps produced record revenues, driven by a combination of strong client engagement in response to the macro environment and continued market share gains. Strength here was partially offset by an 8% reduction in duration and elevated quarterly compression activity. All in, global swaps revenues grew 35% year over year and market share rose to 22% with record share across other G-11 and EM-denominated currencies. Finally, we continue to make progress across emerging markets swaps and our rapidly growing RFM protocol. Our first quarter EM swaps revenues more than doubled year over year and we believe there is still significant room to grow given the low levels of electronification. Our RFM protocol saw average daily volume rise over 130% year over year with adoption picking up, especially across our European swaps business. Looking ahead, we believe the long-term swaps revenue growth potential is meaningful. With the market still about 30% electronified, we believe there remains a lot we can do to help digitize our clients' manual workflows while the global fixed-income markets and broader swaps market grow. And with that, let me turn it over to Sara to discuss our financials in more detail. Sara Furber -- Chief Financial Officer Thanks, Tom, and good morning. As I go through the numbers, all comparisons will be to the prior-year period, unless otherwise noted. Slide 9 provides a summary of our quarterly earnings performance. As Billy recapped earlier, this quarter we saw record revenues of $409 million that were up 24.1% year over year on a reported basis and 23.8% on a constant-currency basis. Stepping back, looking at revenue this quarter, we generated similar average daily revenue growth with March being the strongest across all three months. We derived approximately 38% of our first quarter revenues from international customers, and recall that approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in euros. Our variable revenues increased by 30% and total trading revenues increased by 24%. Total fixed revenues related to our four major asset classes were up 7.3% on a reported and 6.9% on a constant-currency basis. The fixed subscription fee increase was primarily driven by the addition of new dealers and customers to the rates platform, as well as pricing increases on some of our rates subscription services. Credit fixed revenue growth was driven by the previously disclosed dealer fee increases, which we instituted at the start of the third quarter of 2023. And other trading revenues were down 5%. As a reminder, this line fluctuates as it reflects revenues tied to periodic technology enhancements performed for our retail clients. This quarter's adjusted EBITDA margin of 53.7% increased by 128 basis points on a reported basis when compared to the 2023 full-year margins. Moving on to fees per million on Slide 10 and a highlight of the key trends for the quarter. You can see Slide 16 of the earnings presentation for additional detail regarding our fee per million performance this quarter. For cash rates products, fees per million were up 1%, primarily due to an increase in the European government bond fees per million. For long-tenor swaps, fees per million were down 18%, primarily due to an increase in compression, as well as an 8% decline in duration. For cash credit, average fees per million decreased 4% due to a mix shift away from high yield and munis. For cash equities, average fees per million decreased by 15% due to a reduction in U.S. ETF fee per million given an increase in notional per share traded. Recall in the U.S., we charge per share and not for notional value traded. Finally, within money markets, average fees per million decreased 6%, driven by a mix shift away from higher fee per million U.S. CDs and toward our growing institutional repo business. Slide 11 details our adjusted expenses. At a high level, the scalability and variable nature of our expense base allows us to continue to invest for growth and grow margins. We have maintained a consistent philosophy here. Adjusted expenses for the first quarter increased 19.5% on a reported basis and 18.3% on a constant-currency basis. Compensation costs increased 24.7% due to increases in performance-related compensation and headcount. Technology and communication costs increased 21.3%, primarily due to our previously communicated investments in data strategy and infrastructure. Professional fees decreased 17.6% mainly due to a decrease in periodic regulatory and compliance requests relative to the first quarter of 2023. We expect professional fees to rebound over the course of the year and grow over time as we spend more on technology consulting to support our organic growth. General and administrative costs increased due to a pickup in marketing and well as a decline in FX gains year-on-year. Movements in FX resulted in a $900,000 gain in the first quarter of 2024 versus a $1.3 million gain in first quarter of 2023. Slide 12 details capital management and our guidance. On our cash position and capital return policy. We ended the first quarter in a strong position with $1.54 billion in cash and cash equivalents and free cash flow reached approximately $651 million for the trailing 12 months. Recall we recently entered into a definitive agreement to acquire ICD for $785 million, subject to customary adjustments, pending customary closing conditions and regulatory reviews. Our net interest income of $19.3 million increased due to a combination of higher cash balances and interest yields. This was primarily driven by the higher interest rate environment and more efficient management of our cash. With this quarter's earnings, the board declared a quarterly dividend of $0.10 per Class A and Class B shares. Turning to guidance for 2024. Given the strong start to the year, we now expect adjusted expenses to trend close to the top end of our previously communicated $755 million to $805 million range for 2024. We continue to believe we can drive margin expansion compared to 2023, although it will be more modest compared to last year since we expect to capitalize on the anticipated healthy revenue environment by accelerating investments to support our current and future organic growth. We expect our capex spend to increase as the year progresses into our previously communicated range. Now I'll turn it back to Billy for concluding remarks. Billy Hult -- Chief Executive Officer Thanks, Sara. We have always recognized that we occupy a very important piece of desktop real estate connecting liquidity providers to their most important clients. The markets we live and breathe in remain dynamic, and we continue to work very hard alongside our clients to innovate and push the boundaries of what can be traded electronically. Our sales and tech teams remain busy, and strategically, I feel good about the road ahead and durability of our one-stop-shop value proposition. With a couple of important month-end trading days left in April, which tend to be our strongest revenue days, overall revenue growth is trending in excess of 40% relative to April 2023, driven, in part, by a favorable year-over-year comparison due to a temporary risk-off environment fueled by the regional banking crisis in the prior-year period. Revenue growth this month is also being helped by a few more trading days. Focusing on average daily revenue, we are trending close to the first quarter as momentum in the business continues. The diversity of our growth remains a theme. We are seeing strong volume growth across global government bonds, mortgages, interest rate swaps, corporate credit and repos. Our IG and high yield share are both higher than March levels with IG currently at record levels. As we focus on our future, we recently expanded our executive leadership team, adding Ashley Serrao who you all know well; and Michael Cohen, our global head of marketing and communications. Both these leaders have made a significant impact on our company, and we look forward to their future contributions. I would also like to welcome Lisa Opoku to our board of directors, who joined our board as of March 7th. Lisa brings nearly 30 years of finance and legal experience to the board while also increasing our board's independence and diversity. We look forward to benefiting from her valuable insight and industry experience. Finally, I would like to conclude my remarks by thanking our clients for their business and partnership in the quarter, and I want to thank my colleagues for their efforts that contributed to our record quarterly revenues at Tradeweb. With that, I will turn it back to Ashley for your questions. Ashley Serrao -- Head of Treasury, FP&A, and Investor Relations Thanks, Billy. As a reminder, please limit yourself to one question only. Feel free to hop back in the queue and ask additional questions at the end. Q&A will end at 10:30 a.m. Eastern Time. Operator, you can now take our first question. Questions & Answers: Operator Thank you. One moment for our first question, please. Our first question comes from the line of Alexander Blostein with Goldman Sachs. Your line is now open. Alex Blostein -- Goldman Sachs -- Analyst Hey, good morning, Billy. Good morning, everybody. Great to see diversity in the business and the growth, but I wanted to zone in on the interest rate swap business, which continues to be obviously quite active here. And I guess the growth is not all sort of coming from compression trading, as maybe we've seen over the last couple of quarters. So help us maybe unpack a little bit the key drivers of recent growth and how you're thinking about this business for the rest of the year from here. Billy Hult -- Chief Executive Officer Sure. Alex, how are you? Happy spring, and thanks for the question. Alex, if we were going to – I like to always start with a little bit of a half a step back as, you know. If we were going to sort of paint a picture on from our perspective, not just on how to really build a business, but really grow it and become the leader in a business. From our perspective, I really feel like the swap business would paint a pretty good picture for us. It would be plant the flag early in a large, opaque, non-transparent market. When regulation starts moving in that direction, don't be a bystander, really work with the regulators and shape that regulation in a way that works for the most important clients and then leverage the network. And I kind of say that very strongly leverage the network. And so the advantage for us, as you know, in swaps has always been this giant network of mortgage customers who are huge consumers of swaps that we have, very strong network of U.S. government and European government clients, particularly on the hedge fund side. We're very active in the swaps market. So leverage that network and then continue to invest and innovate. Invest in regions. So a lot of the investments that we have put into place around EM has paid off for us, Alex. And then work with clients and innovate on what we describe as micro-trading protocols. So from our perspective, the protocol request for market has been a market share driver and a big driver of revenue. So those two factors alone are responsible for 50% of our revenue growth over the past two years. We've gone from basically making $220 million in our global swaps business in 2021 to $300 million in 2023, and feeling really good where the trajectory of that business is going in 2024. So a lot of enthusiasm for us, we see a lot of potential. We quote the big stat that 70% of the swaps business is still done via voice markets. We see that as large-size trades, we see that as partly the wholesale market where we still have a big area of focus there and we're still early in the penetration of electronic solutions across EM, I think inflation swaps, swaptions and then how we describe multi-asset packages. So we're going to keep our focus. It's been a big business for us over the past few years and it's a story that we're going to continue to tell very strongly because I think it paints a very strong picture about how we've arrived in a leadership position in that space. And thanks for the question, Alex. Operator Thank you. Our next question comes from the line of Patrick Moley with Piper Sandler. Your line is now open. Patrick Moley -- Piper Sandler -- Analyst Good morning. Thanks for taking the question. So you've made a number of value-add bolt-on acquisitions in recent years. ICD may be a little larger than the others, but we're just hoping to get your updated thoughts on how we should think about the M&A strategy going forward. And then if I could just add a second piece to that, ICD obviously adds an entirely new client segment in corporates. So could you just talk about how that might impact your approach to evaluating potential targets in the future? Thanks. Billy Hult -- Chief Executive Officer Sure. Hey, Patrick, how are you? Thanks for the question. I don't want to say we have our hands full right now. It's maybe not quite the perfect way to describe it, but we're focused with a capital F focused really on two things. It's maximizing our organic growth potential, first and foremost, and then the value of our recent acquisitions. And I think you framed it really well, we announced three deals in the past year. The good news from our perspective is our growth is really kind of firing on all cylinders. And both r8fin and Yieldbroker are from our perspective, progressing very, very well. And I say this in a strong way very much looking forward to ICD being part of the Tradeweb family, feeling very, very good about the strategy there and our ability to integrate going forward. Longer-term view, it's always important for the company to continue to place these bets on the table, improving the client experience, increasing our earnings power. These are kind of blueprints for us. And so with respect to future deals, we're going to continue to evaluate expansion areas for growth across geographies, clients, and products. And that's become our playbook. I'm going to kick it to Sara for some important details. And we lead always with the concept of how important it is for the culture to fit us. And that is one of the reasons why we feel good about the acquisitions over the past year, and particularly around our recent one. We feel there's a very, very strong cultural fit there, which matters to us a lot. Sara Furber -- Chief Financial Officer Great. I mean, I think you covered it really well. I would say just emphasizing what Billy said, the framework doesn't change, obviously, looking at strategic fit and discipline, financial fit discipline, and then also going to be measured in terms of operationally making sure that we have the bandwidth and are digesting. That said, ICD, once it closes, does open a new client channel for us. And obviously, we're focused on that integration. But we think we're going to use all our tools in the toolkit to ultimately grow our overall platform, and that will be organic and inorganic. And we do think overall corporate treasurer is an underserved market. So we like the long-term ability to layer on different pieces of the puzzle there. I would say just one other thing, we've talked a lot about acquisitions. I would say when we think about inorganic, we do think about the range of tools in the toolkit. And so we do look at partnerships, we do look at smaller investments. And one area that doesn't actually conflict in terms of integration and operational bandwidth, we are spending more time just researching emerging technologies, much smaller financial commitments in that space that we want to look at to make sure that we're building out a platform across the full suite of things in terms of where the market goes. So thanks for the question and good to hear from you. Operator Thank you. One moment for our next question, please. Our next question comes from the line of Andrew Bond with Rosenblatt Securities. Your line is now open. Andrew Bond -- Rosenblatt Securities -- Analyst Hey, thanks. Good morning. So on the last call, you talked a bit about the pace of margin expansion moderating from here. Sara, you talked a little bit about that in your prepared remarks today. So can you frame what kind of margin expansion opportunity you still see for the company over time, given your current growth rates? And maybe what do you see as Tradeweb's steady state for EBITDA margin? Sara Furber -- Chief Financial Officer Great. Hi, Andrew. Nice to hear from you. Obviously like -- and I've talked about this, we feel like our business is still growing and our platform is still growing, and we are confident we can grow margins from here. Given that many of our businesses are still scaling where we are on that spectrum, I think it's too early to really quote or determine what the steady-state margin opportunity is. Our focus right now, particularly in the environment that we're in, is around entering new markets, expanding the platform, and investing in new opportunities. And I think the great news is we see a lot of interesting opportunities to accelerate our investment, which we talked about and really drive durable, profitable revenue growth over the long term. So, you've seen us and we've talked about investing in areas like EM more on credit sales as we have momentum there. Automation and algo there is a lot of organic opportunities, but you've also seen us deploy capital for acquisitions, and we're going to continue to put investment dollars behind those, whether it be Yieldbroker, ultimately ICD or r8fin which we think we can leverage that technology in other markets. So I think, I know everybody wants like a very specific number, but I just think it's – the good news is it's too early. I think our business really is on that growth horizon for several years to come. What I can be clear about and I think you've seen us do have a good track record here is while we're focused on all these areas of investment, we care about profitability. And so you should expect us to grow our margins slowly and steadily and have them trend higher, particularly as we look around making decisions. These are decisions that we all think add to the margin expectation over time. And then lastly, I've talked about this. Even in environments that can be more volatile, we have a lot of control over our expense base and so a fair bit of discretion and variable expenses. So that allows us to kind of have that extra bit of confidence around delivering for our shareholders. Operator Thank you. One moment for our next question. Our next question comes from the line of Chris Allen with Citi. Your line is now open. Chris Allen -- Citi -- Analyst Hey, good morning, everyone, and thanks for taking my question. I wanted to circle back on interest rate swaps and compression activity specifically. Maybe if you could just provide some color on what kind of customers are coming in for compression trading, customers that are just coming in for compression trading. Are you making any progress in broadening out the wallet of those customers to capture risk trades? And kind of where are you with that progress? Tom Pluta -- President Hi, Chris. Good morning. Good to hear from you. It's Tom. So, yes, compression trading ebbs and flows during the normal course of business, clients put risk on and then they manage out old risk through compressions. And both clients and dealers find it a very efficient tool to reduce derivative notional balances. The biggest players are the macro hedge funds and they can drive large amounts of the volume, so they continue to be big drivers. We have been broadening out and increasing the number of participants in the compression protocols, so it's all been a very positive story. Now to your question about how that relates to risk trading, what we've learned is that our most active compression clients become very sticky to the platform and they've also been significantly growing their volumes of risk traits with us, which are, as you know, more profitable. Last quarter, we did have some charts in the investor presentation that highlighted this powerful correlation as well. And the key takeaways from that are in the charts last time, our top five to 10 compression clients have not only had very significant growth in compression volumes but also very large growth in their risk trading volumes as well. So those clients moved up very significantly in the rankings with us in risk trading. So we think that compression continues to be a very useful tool and very complementary and additive protocol to our overall swaps business. Thanks for the question. Operator Thank you. One moment for our next question. Our next question comes from the line of Kyle Voigt with KBW. Your line is now open. Kyle Voigt -- Keefe, Bruyette and Woods -- Analyst Hi. Good morning. So you called out adoption of RFQ trading as being a key driver of credit volume growth in the quarter and in March specifically. And I think in the prepared remarks, you noted success on both the institutional RFQ and dealer RFQ side. Just more broadly speaking, just wondering if you could talk about why you're having success with that RFQ protocol right now. What is resonating with these end clients across both the institutional and dealer segments? Is it price, capabilities or something else driving the outsized growth on the platform? Billy Hult -- Chief Executive Officer Yes. Hey, Kyle. It's Billy. It's a good question because as you know really well, it sometimes feels like when you talk about credit, it's like the world gets divided between portfolio trading and alt to all trading, and those kind of pick up the kind of big headlines, but those are kind of headlines sometimes. And we feel like RFQ trading is really in a pretty straightforward way our biggest tangible opportunity in credit right now. It's a foundational protocol that you have to get really right to be in the flow of things. So that's like a huge, huge area of focus for us. And so when we think about that RFQ world, we think about first and foremost the institutional side, where we've been kind of growing our volumes there really now for years as our network expands and our efforts to kind of cross-sell pay off. I say this in a pretty simple way. We're building deeper and stronger relationships with our clients. And part of that has been, from our perspective, getting things right, adding value around portfolio trading, adding value around the alt to all network. And then sometimes what happens in a very straightforward way is then you wind up getting that RFQ volume. It's like you've kind of earned that type of business. And that's been a big kind of area of growth for us. Dealer RFQ, which is a sort of change in market structure, is a more recent initiative for us. So still in early stages of building that protocol, but we feel given the relationships we have with the dealers, with the banks that the momentum there is quite promising. So answer your questions for a second on some numbers. RFQ activity increased almost 30% for us, dealer RFQ almost 40% in the first quarter. So we're getting really into some big numbers. And a little bit technically on the RFQ side, we continue to sort of make the investments and the enhancements that you would expect us to make some of those quite bespoke for specific clients. It continues to kind of resonate with the broader market. It's a big area of investment for us, huge growth potential. And I kind of emphasize this point to you. You start to get some of that after you've added some of these efficiencies that we've talked a lot about in terms of portfolio trading and rounding out our liquidity and alt to all trading. Then all of a sudden you start to get some real kind of momentum in terms of the client activity. So thanks very much, Kyle, for your question. Appreciate it. Operator Thank you. Our next question comes from the line of Benjamin Budish with Barclays. Your line is now open. Ben Budish -- Barclays -- Analyst Hi. Good morning, and thanks for taking the question. Maybe, I think, circling back, I think it was Patrick's question on M&A, just can you maybe give an update on r8fin? You've owned the asset for about a quarter now. Any updated thoughts on what Tradeweb can do to sort of accelerate that business? What's sort of the potential upside from now having access to that futures trading workflow, having had a little bit more time owning the asset? Thank you. Tom Pluta -- President Hi, Ben. Good morning. Yes, so as Billy and Sara mentioned, we remain very excited about this asset and the opportunity for growth, which nicely complements our existing businesses. As mentioned in the prepared remarks, the acquisition is off to a very strong start and already contributing about 1.5 percentage points to our U.S. treasury market share. So that's very significant volumes starting day one. Over the last quarter, we spent a lot of time engaging with the r8fin client base, working on full integration into the Tradeweb infrastructure. And our focus ahead will be on onboarding more Tradeweb clients to r8fin, which will add to an already very rapid pace of client growth that existed before we got involved. So there's a lot of momentum on the client side and the feedback that we're getting from existing clients and prospective clients is extremely positive. We now have a market-leading technology offering that's allowing us to capitalize on growing demand for intelligent execution of multi-legged orders across cash treasuries and treasury futures. This access to U.S. bond futures is a nice compliment to the rest of our rate products. I think you heard us talking about finding ways to get involved in that space. And now we are. As far as what's ahead to your question there, looking forward, there is a lot of excitement outside of the U.S. on this acquisition as well, and our plans include expanding into new markets with European cash and futures and potentially swaps likely next on the agenda. So we see growth in the U.S. with the existing products and international expansion coming in the relatively near future. Thanks for the question. Operator Thank you. Our next question comes from the line of Michael Cyprys with Morgan Stanley. Your line is now open. Michael Cyprys -- Morgan Stanley -- Analyst Hey, good morning. Thanks for taking the question. Just wanted to circle back on the Aladdin integration for the credit business. I was hoping you can update us on the progress there. Maybe just remind us what exactly is going to be changing in terms of what customers will have access to, that they didn't have access to previously. And how do you think about the opportunity set? And if there's any sort of lessons learned from the integration on the rate side that occurred years ago if I'm not mistaken. Billy Hult -- Chief Executive Officer Sure, I'll take that one as well. So the Aladdin partnership remains an important component of our growth strategy and credit and a significant part of our plan of expanding our network, particularly in high yield. We've made great progress and have been working through the three phases of this integration. So in Phase 1, we completed that in the second half of last year, and that was focused on getting dealer access and inventory data into Aladdin. Phase 2, we recently completed, and that allows Aladdin clients to respond to auto inquiries right from their Aladdin dashboard. And in Phase 3, clients will be able to initiate an RFQ on Tradeweb from within Aladdin and then also use our automation tools. So we expect, we're progressing – we expect all phase of this to be completed over the next 12 months. And as far as the results for us on volumes, revenue, and market share, we expect this to be a steady progression as we move forward with more clients within Aladdin using Tradeweb functionality. So your question on lessons learned, yes, we integrated with Aladdin in rates a number of years ago. And the main lesson there is really that Aladdin is a very important tool for many asset managers and being partnered with them and providing easier access for those clients to Tradeweb is beneficial to us and growing our volumes. We learned that in rates. That's what we're expecting and learning and seeing in credit as well. Thanks for the question. Operator Thank you. Our next question comes from the line of Dan Fannon with Jefferies. Your line is now open. Dan Fannon -- Jefferies -- Analyst Thanks. Good morning. I guess sticking with you, Tom, you had mentioned in your prepared remarks about looking to replicate the success and invest in high grade and high yield. And I think Aladdin to your previous response as part of that, but maybe you can elaborate on what you expect on other things you're doing and really kind of a time period you think to gauge the success of the potential share gains? Tom Pluta -- President Sure. So in high yield, the goal is to continue to build out the client network, and we have been doing that. Billy mentioned we're hiring salespeople to help build out that client footprint and we have been making notable progress. We're also building out the dealer network, and you can see in the stats on the increase in the number of responses, clients will come on the system, but ultimately, they want liquidity, and they want a lot of responses and they're getting that. As Aladdin functionality rolls out, as I mentioned, over the course of the year, this will continue to boost high-yield volume. So there's no time frame as far as when we're there and when we're done, but it's more a continuum, and we do expect to continue to grow our share over time. And this is a very sustained effort. It's blocking and tackling. It's getting clients to come over to Tradeweb for the first time and we are getting there. So that's what we're going to continue to do. Thanks for the question. Operator Thank you. One moment for our next question. And our next question comes from the line of Craig Siegenthaler with Bank of America. Your line is now open. Craig Siegenthaler -- Bank of America Merrill Lynch -- Analyst Good morning, everyone. Our question is on pricing and credit. So as competition here in credit continues to intensify, how are you thinking about pricing over the long term? And in your discussions with buy-side clients, is this becoming a more relevant topic? Thank you. Billy Hult -- Chief Executive Officer Hey, Craig. It's Billy. Thanks very much. We'd be crazy to say that pricing isn't part of the conversation with our clients. And if I didn't say that the right way, it would be when this call was over, right. It's a big part of the reality. That being said, we say this in a very kind of blunt way. It's not the main focus, right? Clients are focused on being able to do their job more efficiently and more intelligently. And it's important for us to always appreciate that when clients think about value, that we provide, it goes just a lot past that sort of execution fee. It starts with liquidity and functionality, but it stretches to pre-trade analytics, and really how we describe this like flow of information and Tom was talking about Aladdin but this flow of information to OMSs. And so the convenience of trading multiple products from a single platform, that's a big deal, that one-stop shop sort of emphasis that we continue to kind of make. I say this again in my – in sort of a little bit of my own language. If pricing was the main focus, our largest competitor in institutional rates market would have all that business. And if it was the main focus, we'd be the full leader in the credit market, right? So these are kind of complex dynamics, sometimes with a complex dynamic, you simplify, right? Simple strategy, continue to provide our clients with more innovation or bang for the buck, and pricing conversations always take care of themselves. And I don't say that flippantly. I say that with a lot of rigor in terms of the analysis. So we're going to continue to innovate with protocols, connecting our markets. We believe we provide a lot of value to our clients, and we have that loyalty and support, and we feel quite good about where our pricing model is today. It's a good question, Craig, thank you. Operator Thank you. Our next question comes from the line of Ken Worthington with J.P. Morgan. Your line is now open. Ken Worthington -- JPMorgan Chase and Company -- Analyst Hi. Good morning, everybody. Congrats, Ashley. On high yield, connection with ETF managers seems like a no-brainer to me for Tradeweb and high yield. How big a part of the high-yield trading ecosystem are ETFs? How is rebalancing and high-yield ETFs done currently? And what needs to happen for Tradeweb to win more business in that part of the market? Tom Pluta -- President Hey, Ken, good morning. Yes, high yields, I should say, ETF market makers and ETF volumes coming into the cash markets continue to be a significant part of what we're seeing and a significant part of our growth strategy. We've also seen ETF market makers using portfolio trading to replicate some of those baskets. So I think us having the full range of protocols, a thorough ETF market offering, strengthen portfolio trading, RFQ, and the cash bonds, all complement one another. So as far as what has to continue to happen, we continue to work on all of these protocols, building out the network, building out the responses, building out the volume and what we've seen increasingly is these players interacting across the various protocols, and we're working on ways to try to make it easier for clients to access those protocols within Tradeweb in terms of doing more than one trade or doing a package of trades at one time. So we're focused on all those things. The results have been quite promising, and it's a big part of the focus going forward. Thanks for the question. Operator Thank you. One moment for our next question, please. Our next question will come from the line of Brian Bedell with Deutsche Bank. Your line is now open. Brian Bedell -- Deutsche Bank -- Analyst Great. Thanks. Good morning. Thanks for taking my question. Most have been asked and answered, but maybe just one on your views on the potential clearing of treasuries, new regulations coming around and I realize it's still potentially a couple of years out, but how do you see that changing the landscape for Tradeweb in any major way and are there opportunities for you to expand your business with that new paradigm. Tom Pluta -- President Sure, Brian. So just to recap, the SEC did announce the final clearing rules in December and set the deadlines for the end of 2025 for cash treasuries and mid-2026 for treasury repo. In cash treasury, essentially the rule will scope in more dealers, essentially the PTFs to clear their trades. But this rule fell short of scoping an even wider variety of market participants that some had expected. So it's not as dramatic in cash treasuries. In treasury repo that is the bigger change. So substantially all of the market will be required to clear repo going forward or essentially clear repo going forward. There's a few exclusions out there, but it is most of the market. I guess what I would highlight is that there's still a number of open questions that the industry is wrestling with such as, will there be other clearing houses other than FICC entering the space as competitors and one or more have suggested that they will enter. And then what are the specifics of the protocols that are introduced by clearing houses with respect to cross margining and netting and things that. And then is there enough capacity for bank dealers who are sponsoring a large number of clients into the clearing houses and how those margin costs we shared? So these are the types of things that are being discussed in the market, being discussed in the panels. And then how might that impact liquidity? So these details are still being worked out. But ultimately, your question is what's the impact to Tradeweb? Generally speaking, more central clearing is positive for our business. It does go hand-in-hand with electronification. And as we are a large player in critical infrastructure provider in the treasury and repo markets, we're already fully connected to FICC. We already manage clear treasury business today through Dealerweb. We're very familiar with how all that works. And as these deadlines approach, we're going to work closely with our clients and help them navigate the rule changes as we've done in interest rate swaps. So mild positive, not a dramatic change, but this direction of travel in the regulation continues to be supportive for Tradeweb. Billy Hult -- Chief Executive Officer And our ability to have a voice around how this regulation ultimately gets implemented in the market. From my perspective, there's some pretty good feelings about that because it mimics a little bit the way that we were able to kind of get in there around, as you guys all know very well, the derivatives regulation and how SEFs reform and very important decisions that were made around really how clearing would work and the market structure of that market that gives us now, again, a bunch of years later, confidence, but also the credibility to be in there with the right people and really shape how that regulation winds up really affecting the markets that we live and breathe in. So that's a big part of this and Tom answered that perfectly. Operator Thank you. One moment for our next question. Our next question comes from the line of Alex Kramm with UBS. Your line is now open. Alex Kramm -- UBS -- Analyst Hey, hello, everyone. Just wanted to come back on the discussion we had earlier about RFQ. Sounds like you're being successful there. But I know there's limited disclosures. But when I look at some of the foundational RFQ numbers that you give every quarter, I think over the last 10 quarters, you're kind of stuck in the low to high 4% market share of trade. Now that's combined high yield in IG. So I don't know if that's a fair way to look at it. But doesn't seem like you've been really able to break out, and I think 1Q was actually down a little bit over the – from the last few quarters. So just wondering if we're looking at this right, is there's still a lot to do, and what there is to do because it seems like you've been stuck a little bit. So just maybe rectify that a little bit. Thanks. Billy Hult -- Chief Executive Officer Yes. How are you? I made the sort of analogy about the painting to the first question that Alex from Goldman asked me, I'm not saying you're going to like smudge our Picasso, but I kind of hear where you're coming from. I think at the end of the day, as we talk about sort of where we're headed with RFQ trading and the real significant progress that we've made around that and the emphasis around that. At the end of the day, the success around that has been, I think, higher around kind of IG. And we're pretty blunt here. I think we do a lot of things very, very well. We still have more work to do on high yield. And some of that work is around the penetration of RFQ trading into high yield. But from our perspective, also it's about the adoption of portfolio trading into the less liquid areas of the market. And it's also about, and Tom described, this work that we're doing with Aladdin in terms of increasing the responder network in high yield, that's going to be a big piece of it as well. So if you felt like just everything we do in RFQ trading would perfectly apply from IG to high yield, not so fast. It's again, the collaborative effect of really impacting the clients' workflow. And the focus in high yield have to be three-pronged. It has to be around, yes, RFQ, but also the continued confidence around portfolio trading plus rounding up this network of responders through integrations like Aladdin. So it's always a sort of pure focus that we have. It's a good question. Thanks a lot. Operator Thank you. One moment for the next question. Our next question comes from Craig Siegenthaler with Bank of America. Your line is now open. Elias Abboud -- Bank of America Merrill Lynch -- Analyst Hi, good morning. It's Elias Abboud from Craig's team. Thanks for taking the question. You mentioned earlier that you've completed Phase 2 of the Aladdin integration, which was for all-to-all trading. I was wondering if you could quantify the inflection you've seen in institutional all-to-all volume since that integration was completed. So maybe we can get a peek into what the results from Phase 3 could look like down the road. Thanks. Tom Pluta -- President Yes. So we've definitely made significant progress there. We don't actually break out and disclose that, but I think it's safe to say that we are making progress. We see more. It's a little bit too soon, I'd say, to see the full effect because these are still coming online. And I think we'll see more of the impact later this year and into next year, but it has been a steady growth and what's been contributing to the overall market share gains that you have – that we have been experiencing over the last year or a year and a half. Thanks for the question. Operator Thank you. And this concludes our Q&A portion. I'll now turn the call back over to Mr. Billy Hult for closing remarks. Billy Hult -- Chief Executive Officer Thank you all very much for joining us this morning. Any follow-up questions, obviously, always feel free to reach out to Ashley and the team. We also want to end with a little congratulations to one of our teammates, Sameer, who had a baby boy who we know is listening at home. Congratulations to Sameer. And, everyone, have a great day. Thank you. Sara Furber -- Chief Financial Officer Thank you. Answer:

Tradeweb's first quarter 2024 earnings conference call

Operator Good morning, and welcome to Tradeweb's first quarter 2024 earnings conference call. As a reminder, today's call is being recorded and will be available for playback. To begin, I'll turn the call over to Head of Treasury, FP&A, and Investor Relations Ashley Serrao. Please go ahead. Ashley Serrao -- Head of Treasury, FP&A, and Investor Relations Thank you, and good morning. Joining me today for the call are our CEO, Billy Hult, who will review the highlights for the quarter and provide a brief business update; our president, Tom Pluta, who will dive a little deeper into some growth initiatives; and our CFO, Sara Furber, who will review our financial results. We intend to use the website as a means of disclosing material, non-public information, and complying with our disclosure obligations under Regulation FD. I'd like to remind you that certain statements in this presentation and during the Q&A may relate to future events and expectations, and as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements related to, among other things, our guidance are forward-looking statements. Actual results may differ materially from these forward-looking statements. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our earnings release, presentation, and periodic reports filed with the SEC. In addition, on today's call, we will reference certain non-GAAP measures, as well as certain market and industry data. Information regarding these non-GAAP measures, including reconciliations to GAAP measures, is in our earnings release and presentation. Information regarding market and industry data, including sources, is in our earnings presentation. Now let me turn the call over to Billy. Billy Hult -- Chief Executive Officer Thanks, Ashley. Good morning, everyone, and thank you for joining our first quarter earnings call. This was another record quarter as our strategy and focus on building deeper relationships with our clients through our one-stop shop offering continues to pay off. I believe it's a great time to be in the fixed-income trading business, macro debate is flourishing and electronification continues to take hold leaving me optimistic about our future. Even as there is consensus around rate cuts in the U.S., questions remain on the number of cuts this year, ultimate level of rates, and shape of the yield curve. In fact, Jamie Dimon, in his most recent annual letter, highlighted the potential for U.S. rates to range from as low as 2% to as high as 8%. Traders can make a lot of money with that sort of spread. While capitalizing on the array of organic growth opportunities in front of us remains our focus, we also continue to selectively use M&A to complement our offerings with the goal to create better outcomes for our clients. This year, we have deepened our penetration into the U.S. Treasury market and added new futures and algorithmic functionality with r8fin, and are adding corporates as a fourth client channel with our pending ICD acquisition. Diving into the first quarter, the momentum we saw in January persisted into February and March as we eclipsed $400 million in quarterly revenues for the first time. Specifically, strong client activity, share gains, and improved risk-appetite drove 24.1% year-over-year revenue growth on a reported basis. We continue to balance investing for growth and profitability as adjusted EBITDA margins expanded by 141 basis points relative to the first quarter of 2023. Turning to Slide 5. Rates and credit led the way, accounting for 55% and 34% of our revenue growth, respectively. Record revenues across rates were primarily driven by organic growth across global government bonds and swaps and were also supplemented by the addition of r8fin and Yieldbroker. Similarly, record revenues across credit were led by strong U.S. and European corporate credit, with record quarterly market share in electronic U.S. investment grade being a highlight. Money markets also hit a record fueled by continued growth in institutional repos. Equities also hit a record despite challenging industry volumes in our core ETF business. Finally, market data revenues were driven by growth in our LSEG market data contract and proprietary data products. Turning to Slide 6. I will provide a brief update on two of our focus areas, U.S. Treasuries and ETFs, and then turn it over to Tom who will dig deeper into U.S. credit and global interest rate swaps. Starting with U.S. Treasuries, record first quarter revenues increased by 22% year over year led by records across our institutional and wholesale businesses. Our institutional business saw growing adoption of our streaming and RFQ+ offering. The leading indicators of the institutional business remains strong. We gained share and achieved record quarterly market share of U.S. Treasuries versus Bloomberg. Client engagement was healthy with institutional average daily trades up 40% year over year. Automation continues to be an important theme with institutional U.S. Treasury AiEX average daily trades increasing by more than 80% year over year and over 50% of our institutional tickets utilizing our AiEX functionality. Our wholesale business featured record volumes across our streaming and session protocols. Our recent acquisition of r8fin is off to a strong start, contributing approximately 1.5% to our overall U.S. Treasury market share complementing our CLOB and streaming protocols. While the central limit order book continued to face tougher market conditions, the team remains focused on onboarding more liquidity providers over the coming quarters as they deliver on a holistic strategy across our wholesale protocols. Within equities, our ETF business saw its second-highest quarterly revenues which were up 1% year over year despite challenging industry volumes. Other initiatives to expand our equity brand beyond our flagship ETF franchise continue to bear fruit. First quarter equity derivatives revenues were up 10% year over year, driven by strong equity futures growth. Looking ahead, the client pipeline remains strong as the benefits of our electronic solutions continue to resonate. We believe we are well-positioned to capitalize on the long-term secular ETF growth story, not just in equities, but across our fixed-income business. With that, I will turn it over to Tom. Tom Pluta -- President Thanks Billy. Turning to Slide 7 for a closer look at another record-breaking quarter for credit. Strong double-digit revenue growth was driven by 37% and 46% year-over-year revenue growth across U.S. and European Credit, respectively. Munis produced mid-single-digit growth, while credit derivatives revenues were more muted given softer industry volumes. Automation continued to surge with global credit AiEX average daily trades increasing by about 70% year over year. We set another fully electronic quarterly market share record in U.S. IG helped by record IG block market share. Our institutional business continues to scale to new highs as clients engage with our diverse set of protocols to optimize execution across a variety of market environments. Our primary focus on growing institutional RFQ continues to pay off with ADV growing 29% year over year, with strong double-digit growth across both IG and high yield. Moreover, Portfolio trading ADV rose over 70% year over year with IG portfolio trading reaching record levels. Our clients continue to get more sophisticated in their usage of PT, with 65% of our PT volume done in-comp. These in-comp volumes grew 85% year over year. Retail credit revenues were up almost 40% year over year as financial advisors have started to turn their focus toward credit in recent months to complement their buying of U.S. Treasuries. AllTrade produced a record quarter with over $200 billion in volume. Specifically, our all-to-all volumes grew over 15% year over year and our dealer-RFQ offering grew almost 40% year over year. The team continues to be focused on broadening out our network and increasing the number of responses on the AllTrade platform. In the first quarter, the average number of responses per all-to-all inquiry rose by over 45% year over year. We also continue to increase our engagement and wallet share with ETF market makers. Finally, our sessions ADV grew over 65% year over year and saw another record revenue quarter. Looking ahead, U.S. credit remains our biggest focus area and we like the way we are positioned across our three client channels. We believe we have a long runway for growth with ample opportunity to innovate alongside our clients. Our strategy is focused on expanding our network, increasing our wallet share, enhancing our pre and post-trade analytics, and continuously improving our protocols and client experience. In the first quarter, we continued to strategically expand our sales force to broaden our coverage and attract clients we have historically not had a presence with. With respect to high yield, we continue to chip away and believe we should be able to replicate the success we have seen in IG as we leverage our Aladdin collaboration to grow our all-to-all network later this year, enhance functionality, and increase our presence with ETF market makers. Beyond U.S. credit, our EM expansion efforts continue to progress with the opening of new offices in Miami and Dubai and a steady increase in engagement with local clients. On the product side, we are focused on enhancing our integration with FXall and continuing to build out functionality for multi-asset package trading. Moving to Slide 8, global swaps produced record revenues, driven by a combination of strong client engagement in response to the macro environment and continued market share gains. Strength here was partially offset by an 8% reduction in duration and elevated quarterly compression activity. All in, global swaps revenues grew 35% year over year and market share rose to 22% with record share across other G-11 and EM-denominated currencies. Finally, we continue to make progress across emerging markets swaps and our rapidly growing RFM protocol. Our first quarter EM swaps revenues more than doubled year over year and we believe there is still significant room to grow given the low levels of electronification. Our RFM protocol saw average daily volume rise over 130% year over year with adoption picking up, especially across our European swaps business. Looking ahead, we believe the long-term swaps revenue growth potential is meaningful. With the market still about 30% electronified, we believe there remains a lot we can do to help digitize our clients' manual workflows while the global fixed-income markets and broader swaps market grow. And with that, let me turn it over to Sara to discuss our financials in more detail. Sara Furber -- Chief Financial Officer Thanks, Tom, and good morning. As I go through the numbers, all comparisons will be to the prior-year period, unless otherwise noted. Slide 9 provides a summary of our quarterly earnings performance. As Billy recapped earlier, this quarter we saw record revenues of $409 million that were up 24.1% year over year on a reported basis and 23.8% on a constant-currency basis. Stepping back, looking at revenue this quarter, we generated similar average daily revenue growth with March being the strongest across all three months. We derived approximately 38% of our first quarter revenues from international customers, and recall that approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in euros. Our variable revenues increased by 30% and total trading revenues increased by 24%. Total fixed revenues related to our four major asset classes were up 7.3% on a reported and 6.9% on a constant-currency basis. The fixed subscription fee increase was primarily driven by the addition of new dealers and customers to the rates platform, as well as pricing increases on some of our rates subscription services. Credit fixed revenue growth was driven by the previously disclosed dealer fee increases, which we instituted at the start of the third quarter of 2023. And other trading revenues were down 5%. As a reminder, this line fluctuates as it reflects revenues tied to periodic technology enhancements performed for our retail clients. This quarter's adjusted EBITDA margin of 53.7% increased by 128 basis points on a reported basis when compared to the 2023 full-year margins. Moving on to fees per million on Slide 10 and a highlight of the key trends for the quarter. You can see Slide 16 of the earnings presentation for additional detail regarding our fee per million performance this quarter. For cash rates products, fees per million were up 1%, primarily due to an increase in the European government bond fees per million. For long-tenor swaps, fees per million were down 18%, primarily due to an increase in compression, as well as an 8% decline in duration. For cash credit, average fees per million decreased 4% due to a mix shift away from high yield and munis. For cash equities, average fees per million decreased by 15% due to a reduction in U.S. ETF fee per million given an increase in notional per share traded. Recall in the U.S., we charge per share and not for notional value traded. Finally, within money markets, average fees per million decreased 6%, driven by a mix shift away from higher fee per million U.S. CDs and toward our growing institutional repo business. Slide 11 details our adjusted expenses. At a high level, the scalability and variable nature of our expense base allows us to continue to invest for growth and grow margins. We have maintained a consistent philosophy here. Adjusted expenses for the first quarter increased 19.5% on a reported basis and 18.3% on a constant-currency basis. Compensation costs increased 24.7% due to increases in performance-related compensation and headcount. Technology and communication costs increased 21.3%, primarily due to our previously communicated investments in data strategy and infrastructure. Professional fees decreased 17.6% mainly due to a decrease in periodic regulatory and compliance requests relative to the first quarter of 2023. We expect professional fees to rebound over the course of the year and grow over time as we spend more on technology consulting to support our organic growth. General and administrative costs increased due to a pickup in marketing and well as a decline in FX gains year-on-year. Movements in FX resulted in a $900,000 gain in the first quarter of 2024 versus a $1.3 million gain in first quarter of 2023. Slide 12 details capital management and our guidance. On our cash position and capital return policy. We ended the first quarter in a strong position with $1.54 billion in cash and cash equivalents and free cash flow reached approximately $651 million for the trailing 12 months. Recall we recently entered into a definitive agreement to acquire ICD for $785 million, subject to customary adjustments, pending customary closing conditions and regulatory reviews. Our net interest income of $19.3 million increased due to a combination of higher cash balances and interest yields. This was primarily driven by the higher interest rate environment and more efficient management of our cash. With this quarter's earnings, the board declared a quarterly dividend of $0.10 per Class A and Class B shares. Turning to guidance for 2024. Given the strong start to the year, we now expect adjusted expenses to trend close to the top end of our previously communicated $755 million to $805 million range for 2024. We continue to believe we can drive margin expansion compared to 2023, although it will be more modest compared to last year since we expect to capitalize on the anticipated healthy revenue environment by accelerating investments to support our current and future organic growth. We expect our capex spend to increase as the year progresses into our previously communicated range. Now I'll turn it back to Billy for concluding remarks. Billy Hult -- Chief Executive Officer Thanks, Sara. We have always recognized that we occupy a very important piece of desktop real estate connecting liquidity providers to their most important clients. The markets we live and breathe in remain dynamic, and we continue to work very hard alongside our clients to innovate and push the boundaries of what can be traded electronically. Our sales and tech teams remain busy, and strategically, I feel good about the road ahead and durability of our one-stop-shop value proposition. With a couple of important month-end trading days left in April, which tend to be our strongest revenue days, overall revenue growth is trending in excess of 40% relative to April 2023, driven, in part, by a favorable year-over-year comparison due to a temporary risk-off environment fueled by the regional banking crisis in the prior-year period. Revenue growth this month is also being helped by a few more trading days. Focusing on average daily revenue, we are trending close to the first quarter as momentum in the business continues. The diversity of our growth remains a theme. We are seeing strong volume growth across global government bonds, mortgages, interest rate swaps, corporate credit and repos. Our IG and high yield share are both higher than March levels with IG currently at record levels. As we focus on our future, we recently expanded our executive leadership team, adding Ashley Serrao who you all know well; and Michael Cohen, our global head of marketing and communications. Both these leaders have made a significant impact on our company, and we look forward to their future contributions. I would also like to welcome Lisa Opoku to our board of directors, who joined our board as of March 7th. Lisa brings nearly 30 years of finance and legal experience to the board while also increasing our board's independence and diversity. We look forward to benefiting from her valuable insight and industry experience. Finally, I would like to conclude my remarks by thanking our clients for their business and partnership in the quarter, and I want to thank my colleagues for their efforts that contributed to our record quarterly revenues at Tradeweb. With that, I will turn it back to Ashley for your questions. Ashley Serrao -- Head of Treasury, FP&A, and Investor Relations Thanks, Billy. As a reminder, please limit yourself to one question only. Feel free to hop back in the queue and ask additional questions at the end. Q&A will end at 10:30 a.m. Eastern Time. Operator, you can now take our first question. Questions & Answers: Operator Thank you. One moment for our first question, please. Our first question comes from the line of Alexander Blostein with Goldman Sachs. Your line is now open. Alex Blostein -- Goldman Sachs -- Analyst Hey, good morning, Billy. Good morning, everybody. Great to see diversity in the business and the growth, but I wanted to zone in on the interest rate swap business, which continues to be obviously quite active here. And I guess the growth is not all sort of coming from compression trading, as maybe we've seen over the last couple of quarters. So help us maybe unpack a little bit the key drivers of recent growth and how you're thinking about this business for the rest of the year from here. Billy Hult -- Chief Executive Officer Sure. Alex, how are you? Happy spring, and thanks for the question. Alex, if we were going to – I like to always start with a little bit of a half a step back as, you know. If we were going to sort of paint a picture on from our perspective, not just on how to really build a business, but really grow it and become the leader in a business. From our perspective, I really feel like the swap business would paint a pretty good picture for us. It would be plant the flag early in a large, opaque, non-transparent market. When regulation starts moving in that direction, don't be a bystander, really work with the regulators and shape that regulation in a way that works for the most important clients and then leverage the network. And I kind of say that very strongly leverage the network. And so the advantage for us, as you know, in swaps has always been this giant network of mortgage customers who are huge consumers of swaps that we have, very strong network of U.S. government and European government clients, particularly on the hedge fund side. We're very active in the swaps market. So leverage that network and then continue to invest and innovate. Invest in regions. So a lot of the investments that we have put into place around EM has paid off for us, Alex. And then work with clients and innovate on what we describe as micro-trading protocols. So from our perspective, the protocol request for market has been a market share driver and a big driver of revenue. So those two factors alone are responsible for 50% of our revenue growth over the past two years. We've gone from basically making $220 million in our global swaps business in 2021 to $300 million in 2023, and feeling really good where the trajectory of that business is going in 2024. So a lot of enthusiasm for us, we see a lot of potential. We quote the big stat that 70% of the swaps business is still done via voice markets. We see that as large-size trades, we see that as partly the wholesale market where we still have a big area of focus there and we're still early in the penetration of electronic solutions across EM, I think inflation swaps, swaptions and then how we describe multi-asset packages. So we're going to keep our focus. It's been a big business for us over the past few years and it's a story that we're going to continue to tell very strongly because I think it paints a very strong picture about how we've arrived in a leadership position in that space. And thanks for the question, Alex. Operator Thank you. Our next question comes from the line of Patrick Moley with Piper Sandler. Your line is now open. Patrick Moley -- Piper Sandler -- Analyst Good morning. Thanks for taking the question. So you've made a number of value-add bolt-on acquisitions in recent years. ICD may be a little larger than the others, but we're just hoping to get your updated thoughts on how we should think about the M&A strategy going forward. And then if I could just add a second piece to that, ICD obviously adds an entirely new client segment in corporates. So could you just talk about how that might impact your approach to evaluating potential targets in the future? Thanks. Billy Hult -- Chief Executive Officer Sure. Hey, Patrick, how are you? Thanks for the question. I don't want to say we have our hands full right now. It's maybe not quite the perfect way to describe it, but we're focused with a capital F focused really on two things. It's maximizing our organic growth potential, first and foremost, and then the value of our recent acquisitions. And I think you framed it really well, we announced three deals in the past year. The good news from our perspective is our growth is really kind of firing on all cylinders. And both r8fin and Yieldbroker are from our perspective, progressing very, very well. And I say this in a strong way very much looking forward to ICD being part of the Tradeweb family, feeling very, very good about the strategy there and our ability to integrate going forward. Longer-term view, it's always important for the company to continue to place these bets on the table, improving the client experience, increasing our earnings power. These are kind of blueprints for us. And so with respect to future deals, we're going to continue to evaluate expansion areas for growth across geographies, clients, and products. And that's become our playbook. I'm going to kick it to Sara for some important details. And we lead always with the concept of how important it is for the culture to fit us. And that is one of the reasons why we feel good about the acquisitions over the past year, and particularly around our recent one. We feel there's a very, very strong cultural fit there, which matters to us a lot. Sara Furber -- Chief Financial Officer Great. I mean, I think you covered it really well. I would say just emphasizing what Billy said, the framework doesn't change, obviously, looking at strategic fit and discipline, financial fit discipline, and then also going to be measured in terms of operationally making sure that we have the bandwidth and are digesting. That said, ICD, once it closes, does open a new client channel for us. And obviously, we're focused on that integration. But we think we're going to use all our tools in the toolkit to ultimately grow our overall platform, and that will be organic and inorganic. And we do think overall corporate treasurer is an underserved market. So we like the long-term ability to layer on different pieces of the puzzle there. I would say just one other thing, we've talked a lot about acquisitions. I would say when we think about inorganic, we do think about the range of tools in the toolkit. And so we do look at partnerships, we do look at smaller investments. And one area that doesn't actually conflict in terms of integration and operational bandwidth, we are spending more time just researching emerging technologies, much smaller financial commitments in that space that we want to look at to make sure that we're building out a platform across the full suite of things in terms of where the market goes. So thanks for the question and good to hear from you. Operator Thank you. One moment for our next question, please. Our next question comes from the line of Andrew Bond with Rosenblatt Securities. Your line is now open. Andrew Bond -- Rosenblatt Securities -- Analyst Hey, thanks. Good morning. So on the last call, you talked a bit about the pace of margin expansion moderating from here. Sara, you talked a little bit about that in your prepared remarks today. So can you frame what kind of margin expansion opportunity you still see for the company over time, given your current growth rates? And maybe what do you see as Tradeweb's steady state for EBITDA margin? Sara Furber -- Chief Financial Officer Great. Hi, Andrew. Nice to hear from you. Obviously like -- and I've talked about this, we feel like our business is still growing and our platform is still growing, and we are confident we can grow margins from here. Given that many of our businesses are still scaling where we are on that spectrum, I think it's too early to really quote or determine what the steady-state margin opportunity is. Our focus right now, particularly in the environment that we're in, is around entering new markets, expanding the platform, and investing in new opportunities. And I think the great news is we see a lot of interesting opportunities to accelerate our investment, which we talked about and really drive durable, profitable revenue growth over the long term. So, you've seen us and we've talked about investing in areas like EM more on credit sales as we have momentum there. Automation and algo there is a lot of organic opportunities, but you've also seen us deploy capital for acquisitions, and we're going to continue to put investment dollars behind those, whether it be Yieldbroker, ultimately ICD or r8fin which we think we can leverage that technology in other markets. So I think, I know everybody wants like a very specific number, but I just think it's – the good news is it's too early. I think our business really is on that growth horizon for several years to come. What I can be clear about and I think you've seen us do have a good track record here is while we're focused on all these areas of investment, we care about profitability. And so you should expect us to grow our margins slowly and steadily and have them trend higher, particularly as we look around making decisions. These are decisions that we all think add to the margin expectation over time. And then lastly, I've talked about this. Even in environments that can be more volatile, we have a lot of control over our expense base and so a fair bit of discretion and variable expenses. So that allows us to kind of have that extra bit of confidence around delivering for our shareholders. Operator Thank you. One moment for our next question. Our next question comes from the line of Chris Allen with Citi. Your line is now open. Chris Allen -- Citi -- Analyst Hey, good morning, everyone, and thanks for taking my question. I wanted to circle back on interest rate swaps and compression activity specifically. Maybe if you could just provide some color on what kind of customers are coming in for compression trading, customers that are just coming in for compression trading. Are you making any progress in broadening out the wallet of those customers to capture risk trades? And kind of where are you with that progress? Tom Pluta -- President Hi, Chris. Good morning. Good to hear from you. It's Tom. So, yes, compression trading ebbs and flows during the normal course of business, clients put risk on and then they manage out old risk through compressions. And both clients and dealers find it a very efficient tool to reduce derivative notional balances. The biggest players are the macro hedge funds and they can drive large amounts of the volume, so they continue to be big drivers. We have been broadening out and increasing the number of participants in the compression protocols, so it's all been a very positive story. Now to your question about how that relates to risk trading, what we've learned is that our most active compression clients become very sticky to the platform and they've also been significantly growing their volumes of risk traits with us, which are, as you know, more profitable. Last quarter, we did have some charts in the investor presentation that highlighted this powerful correlation as well. And the key takeaways from that are in the charts last time, our top five to 10 compression clients have not only had very significant growth in compression volumes but also very large growth in their risk trading volumes as well. So those clients moved up very significantly in the rankings with us in risk trading. So we think that compression continues to be a very useful tool and very complementary and additive protocol to our overall swaps business. Thanks for the question. Operator Thank you. One moment for our next question. Our next question comes from the line of Kyle Voigt with KBW. Your line is now open. Kyle Voigt -- Keefe, Bruyette and Woods -- Analyst Hi. Good morning. So you called out adoption of RFQ trading as being a key driver of credit volume growth in the quarter and in March specifically. And I think in the prepared remarks, you noted success on both the institutional RFQ and dealer RFQ side. Just more broadly speaking, just wondering if you could talk about why you're having success with that RFQ protocol right now. What is resonating with these end clients across both the institutional and dealer segments? Is it price, capabilities or something else driving the outsized growth on the platform? Billy Hult -- Chief Executive Officer Yes. Hey, Kyle. It's Billy. It's a good question because as you know really well, it sometimes feels like when you talk about credit, it's like the world gets divided between portfolio trading and alt to all trading, and those kind of pick up the kind of big headlines, but those are kind of headlines sometimes. And we feel like RFQ trading is really in a pretty straightforward way our biggest tangible opportunity in credit right now. It's a foundational protocol that you have to get really right to be in the flow of things. So that's like a huge, huge area of focus for us. And so when we think about that RFQ world, we think about first and foremost the institutional side, where we've been kind of growing our volumes there really now for years as our network expands and our efforts to kind of cross-sell pay off. I say this in a pretty simple way. We're building deeper and stronger relationships with our clients. And part of that has been, from our perspective, getting things right, adding value around portfolio trading, adding value around the alt to all network. And then sometimes what happens in a very straightforward way is then you wind up getting that RFQ volume. It's like you've kind of earned that type of business. And that's been a big kind of area of growth for us. Dealer RFQ, which is a sort of change in market structure, is a more recent initiative for us. So still in early stages of building that protocol, but we feel given the relationships we have with the dealers, with the banks that the momentum there is quite promising. So answer your questions for a second on some numbers. RFQ activity increased almost 30% for us, dealer RFQ almost 40% in the first quarter. So we're getting really into some big numbers. And a little bit technically on the RFQ side, we continue to sort of make the investments and the enhancements that you would expect us to make some of those quite bespoke for specific clients. It continues to kind of resonate with the broader market. It's a big area of investment for us, huge growth potential. And I kind of emphasize this point to you. You start to get some of that after you've added some of these efficiencies that we've talked a lot about in terms of portfolio trading and rounding out our liquidity and alt to all trading. Then all of a sudden you start to get some real kind of momentum in terms of the client activity. So thanks very much, Kyle, for your question. Appreciate it. Operator Thank you. Our next question comes from the line of Benjamin Budish with Barclays. Your line is now open. Ben Budish -- Barclays -- Analyst Hi. Good morning, and thanks for taking the question. Maybe, I think, circling back, I think it was Patrick's question on M&A, just can you maybe give an update on r8fin? You've owned the asset for about a quarter now. Any updated thoughts on what Tradeweb can do to sort of accelerate that business? What's sort of the potential upside from now having access to that futures trading workflow, having had a little bit more time owning the asset? Thank you. Tom Pluta -- President Hi, Ben. Good morning. Yes, so as Billy and Sara mentioned, we remain very excited about this asset and the opportunity for growth, which nicely complements our existing businesses. As mentioned in the prepared remarks, the acquisition is off to a very strong start and already contributing about 1.5 percentage points to our U.S. treasury market share. So that's very significant volumes starting day one. Over the last quarter, we spent a lot of time engaging with the r8fin client base, working on full integration into the Tradeweb infrastructure. And our focus ahead will be on onboarding more Tradeweb clients to r8fin, which will add to an already very rapid pace of client growth that existed before we got involved. So there's a lot of momentum on the client side and the feedback that we're getting from existing clients and prospective clients is extremely positive. We now have a market-leading technology offering that's allowing us to capitalize on growing demand for intelligent execution of multi-legged orders across cash treasuries and treasury futures. This access to U.S. bond futures is a nice compliment to the rest of our rate products. I think you heard us talking about finding ways to get involved in that space. And now we are. As far as what's ahead to your question there, looking forward, there is a lot of excitement outside of the U.S. on this acquisition as well, and our plans include expanding into new markets with European cash and futures and potentially swaps likely next on the agenda. So we see growth in the U.S. with the existing products and international expansion coming in the relatively near future. Thanks for the question. Operator Thank you. Our next question comes from the line of Michael Cyprys with Morgan Stanley. Your line is now open. Michael Cyprys -- Morgan Stanley -- Analyst Hey, good morning. Thanks for taking the question. Just wanted to circle back on the Aladdin integration for the credit business. I was hoping you can update us on the progress there. Maybe just remind us what exactly is going to be changing in terms of what customers will have access to, that they didn't have access to previously. And how do you think about the opportunity set? And if there's any sort of lessons learned from the integration on the rate side that occurred years ago if I'm not mistaken. Billy Hult -- Chief Executive Officer Sure, I'll take that one as well. So the Aladdin partnership remains an important component of our growth strategy and credit and a significant part of our plan of expanding our network, particularly in high yield. We've made great progress and have been working through the three phases of this integration. So in Phase 1, we completed that in the second half of last year, and that was focused on getting dealer access and inventory data into Aladdin. Phase 2, we recently completed, and that allows Aladdin clients to respond to auto inquiries right from their Aladdin dashboard. And in Phase 3, clients will be able to initiate an RFQ on Tradeweb from within Aladdin and then also use our automation tools. So we expect, we're progressing – we expect all phase of this to be completed over the next 12 months. And as far as the results for us on volumes, revenue, and market share, we expect this to be a steady progression as we move forward with more clients within Aladdin using Tradeweb functionality. So your question on lessons learned, yes, we integrated with Aladdin in rates a number of years ago. And the main lesson there is really that Aladdin is a very important tool for many asset managers and being partnered with them and providing easier access for those clients to Tradeweb is beneficial to us and growing our volumes. We learned that in rates. That's what we're expecting and learning and seeing in credit as well. Thanks for the question. Operator Thank you. Our next question comes from the line of Dan Fannon with Jefferies. Your line is now open. Dan Fannon -- Jefferies -- Analyst Thanks. Good morning. I guess sticking with you, Tom, you had mentioned in your prepared remarks about looking to replicate the success and invest in high grade and high yield. And I think Aladdin to your previous response as part of that, but maybe you can elaborate on what you expect on other things you're doing and really kind of a time period you think to gauge the success of the potential share gains? Tom Pluta -- President Sure. So in high yield, the goal is to continue to build out the client network, and we have been doing that. Billy mentioned we're hiring salespeople to help build out that client footprint and we have been making notable progress. We're also building out the dealer network, and you can see in the stats on the increase in the number of responses, clients will come on the system, but ultimately, they want liquidity, and they want a lot of responses and they're getting that. As Aladdin functionality rolls out, as I mentioned, over the course of the year, this will continue to boost high-yield volume. So there's no time frame as far as when we're there and when we're done, but it's more a continuum, and we do expect to continue to grow our share over time. And this is a very sustained effort. It's blocking and tackling. It's getting clients to come over to Tradeweb for the first time and we are getting there. So that's what we're going to continue to do. Thanks for the question. Operator Thank you. One moment for our next question. And our next question comes from the line of Craig Siegenthaler with Bank of America. Your line is now open. Craig Siegenthaler -- Bank of America Merrill Lynch -- Analyst Good morning, everyone. Our question is on pricing and credit. So as competition here in credit continues to intensify, how are you thinking about pricing over the long term? And in your discussions with buy-side clients, is this becoming a more relevant topic? Thank you. Billy Hult -- Chief Executive Officer Hey, Craig. It's Billy. Thanks very much. We'd be crazy to say that pricing isn't part of the conversation with our clients. And if I didn't say that the right way, it would be when this call was over, right. It's a big part of the reality. That being said, we say this in a very kind of blunt way. It's not the main focus, right? Clients are focused on being able to do their job more efficiently and more intelligently. And it's important for us to always appreciate that when clients think about value, that we provide, it goes just a lot past that sort of execution fee. It starts with liquidity and functionality, but it stretches to pre-trade analytics, and really how we describe this like flow of information and Tom was talking about Aladdin but this flow of information to OMSs. And so the convenience of trading multiple products from a single platform, that's a big deal, that one-stop shop sort of emphasis that we continue to kind of make. I say this again in my – in sort of a little bit of my own language. If pricing was the main focus, our largest competitor in institutional rates market would have all that business. And if it was the main focus, we'd be the full leader in the credit market, right? So these are kind of complex dynamics, sometimes with a complex dynamic, you simplify, right? Simple strategy, continue to provide our clients with more innovation or bang for the buck, and pricing conversations always take care of themselves. And I don't say that flippantly. I say that with a lot of rigor in terms of the analysis. So we're going to continue to innovate with protocols, connecting our markets. We believe we provide a lot of value to our clients, and we have that loyalty and support, and we feel quite good about where our pricing model is today. It's a good question, Craig, thank you. Operator Thank you. Our next question comes from the line of Ken Worthington with J.P. Morgan. Your line is now open. Ken Worthington -- JPMorgan Chase and Company -- Analyst Hi. Good morning, everybody. Congrats, Ashley. On high yield, connection with ETF managers seems like a no-brainer to me for Tradeweb and high yield. How big a part of the high-yield trading ecosystem are ETFs? How is rebalancing and high-yield ETFs done currently? And what needs to happen for Tradeweb to win more business in that part of the market? Tom Pluta -- President Hey, Ken, good morning. Yes, high yields, I should say, ETF market makers and ETF volumes coming into the cash markets continue to be a significant part of what we're seeing and a significant part of our growth strategy. We've also seen ETF market makers using portfolio trading to replicate some of those baskets. So I think us having the full range of protocols, a thorough ETF market offering, strengthen portfolio trading, RFQ, and the cash bonds, all complement one another. So as far as what has to continue to happen, we continue to work on all of these protocols, building out the network, building out the responses, building out the volume and what we've seen increasingly is these players interacting across the various protocols, and we're working on ways to try to make it easier for clients to access those protocols within Tradeweb in terms of doing more than one trade or doing a package of trades at one time. So we're focused on all those things. The results have been quite promising, and it's a big part of the focus going forward. Thanks for the question. Operator Thank you. One moment for our next question, please. Our next question will come from the line of Brian Bedell with Deutsche Bank. Your line is now open. Brian Bedell -- Deutsche Bank -- Analyst Great. Thanks. Good morning. Thanks for taking my question. Most have been asked and answered, but maybe just one on your views on the potential clearing of treasuries, new regulations coming around and I realize it's still potentially a couple of years out, but how do you see that changing the landscape for Tradeweb in any major way and are there opportunities for you to expand your business with that new paradigm. Tom Pluta -- President Sure, Brian. So just to recap, the SEC did announce the final clearing rules in December and set the deadlines for the end of 2025 for cash treasuries and mid-2026 for treasury repo. In cash treasury, essentially the rule will scope in more dealers, essentially the PTFs to clear their trades. But this rule fell short of scoping an even wider variety of market participants that some had expected. So it's not as dramatic in cash treasuries. In treasury repo that is the bigger change. So substantially all of the market will be required to clear repo going forward or essentially clear repo going forward. There's a few exclusions out there, but it is most of the market. I guess what I would highlight is that there's still a number of open questions that the industry is wrestling with such as, will there be other clearing houses other than FICC entering the space as competitors and one or more have suggested that they will enter. And then what are the specifics of the protocols that are introduced by clearing houses with respect to cross margining and netting and things that. And then is there enough capacity for bank dealers who are sponsoring a large number of clients into the clearing houses and how those margin costs we shared? So these are the types of things that are being discussed in the market, being discussed in the panels. And then how might that impact liquidity? So these details are still being worked out. But ultimately, your question is what's the impact to Tradeweb? Generally speaking, more central clearing is positive for our business. It does go hand-in-hand with electronification. And as we are a large player in critical infrastructure provider in the treasury and repo markets, we're already fully connected to FICC. We already manage clear treasury business today through Dealerweb. We're very familiar with how all that works. And as these deadlines approach, we're going to work closely with our clients and help them navigate the rule changes as we've done in interest rate swaps. So mild positive, not a dramatic change, but this direction of travel in the regulation continues to be supportive for Tradeweb. Billy Hult -- Chief Executive Officer And our ability to have a voice around how this regulation ultimately gets implemented in the market. From my perspective, there's some pretty good feelings about that because it mimics a little bit the way that we were able to kind of get in there around, as you guys all know very well, the derivatives regulation and how SEFs reform and very important decisions that were made around really how clearing would work and the market structure of that market that gives us now, again, a bunch of years later, confidence, but also the credibility to be in there with the right people and really shape how that regulation winds up really affecting the markets that we live and breathe in. So that's a big part of this and Tom answered that perfectly. Operator Thank you. One moment for our next question. Our next question comes from the line of Alex Kramm with UBS. Your line is now open. Alex Kramm -- UBS -- Analyst Hey, hello, everyone. Just wanted to come back on the discussion we had earlier about RFQ. Sounds like you're being successful there. But I know there's limited disclosures. But when I look at some of the foundational RFQ numbers that you give every quarter, I think over the last 10 quarters, you're kind of stuck in the low to high 4% market share of trade. Now that's combined high yield in IG. So I don't know if that's a fair way to look at it. But doesn't seem like you've been really able to break out, and I think 1Q was actually down a little bit over the – from the last few quarters. So just wondering if we're looking at this right, is there's still a lot to do, and what there is to do because it seems like you've been stuck a little bit. So just maybe rectify that a little bit. Thanks. Billy Hult -- Chief Executive Officer Yes. How are you? I made the sort of analogy about the painting to the first question that Alex from Goldman asked me, I'm not saying you're going to like smudge our Picasso, but I kind of hear where you're coming from. I think at the end of the day, as we talk about sort of where we're headed with RFQ trading and the real significant progress that we've made around that and the emphasis around that. At the end of the day, the success around that has been, I think, higher around kind of IG. And we're pretty blunt here. I think we do a lot of things very, very well. We still have more work to do on high yield. And some of that work is around the penetration of RFQ trading into high yield. But from our perspective, also it's about the adoption of portfolio trading into the less liquid areas of the market. And it's also about, and Tom described, this work that we're doing with Aladdin in terms of increasing the responder network in high yield, that's going to be a big piece of it as well. So if you felt like just everything we do in RFQ trading would perfectly apply from IG to high yield, not so fast. It's again, the collaborative effect of really impacting the clients' workflow. And the focus in high yield have to be three-pronged. It has to be around, yes, RFQ, but also the continued confidence around portfolio trading plus rounding up this network of responders through integrations like Aladdin. So it's always a sort of pure focus that we have. It's a good question. Thanks a lot. Operator Thank you. One moment for the next question. Our next question comes from Craig Siegenthaler with Bank of America. Your line is now open. Elias Abboud -- Bank of America Merrill Lynch -- Analyst Hi, good morning. It's Elias Abboud from Craig's team. Thanks for taking the question. You mentioned earlier that you've completed Phase 2 of the Aladdin integration, which was for all-to-all trading. I was wondering if you could quantify the inflection you've seen in institutional all-to-all volume since that integration was completed. So maybe we can get a peek into what the results from Phase 3 could look like down the road. Thanks. Tom Pluta -- President Yes. So we've definitely made significant progress there. We don't actually break out and disclose that, but I think it's safe to say that we are making progress. We see more. It's a little bit too soon, I'd say, to see the full effect because these are still coming online. And I think we'll see more of the impact later this year and into next year, but it has been a steady growth and what's been contributing to the overall market share gains that you have – that we have been experiencing over the last year or a year and a half. Thanks for the question. Operator Thank you. And this concludes our Q&A portion. I'll now turn the call back over to Mr. Billy Hult for closing remarks. Billy Hult -- Chief Executive Officer Thank you all very much for joining us this morning. Any follow-up questions, obviously, always feel free to reach out to Ashley and the team. We also want to end with a little congratulations to one of our teammates, Sameer, who had a baby boy who we know is listening at home. Congratulations to Sameer. And, everyone, have a great day. Thank you. Sara Furber -- Chief Financial Officer Thank you.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, and welcome to the UnitedHealth Group first quarter 2024 earnings conference call. A question-and-answer session will follow UnitedHealth Group's prepared remarks. As a reminder, this call is being recorded. Here is some important introductory information. This call contains forward-looking statements under U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. This call will also reference non-GAAP amounts. A reconciliation of the non-GAAP to GAAP amounts is available on the Financial and Earnings Reports section of the company's investor relations page at www.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated April 16, 2024, which may be accessed from the Investor Relations page of the company's website. I will now turn the conference over to the chief executive officer of UnitedHealth Group, Andrew Witty. Andrew Witty -- Chief Executive Officer Good morning, and thank you for joining us today. We have a lot to cover. First, we'll discuss the status and impact of the Change Healthcare cyberattack, then we'll turn to the performance of our businesses which continue to grow and perform well. It's important to underscore at the outset that even as we have devoted significant attention to addressing the Change Healthcare attack, the vast majority of the 400,000 people of this enterprise have remained as usual, intensely focused on delivering for all those we serve. That dedication is reflected in our overall performance this quarter. Directly as a result of their hard and -- hard work and the broad performance of our diversified businesses, we're able to reconfirm our full-year adjusted earnings outlook, even as we absorb $0.30 to $0.40 per share in business disruption impacts related to Change Healthcare. Now turning to Change Healthcare. This was an unprecedented attack by a malicious actor on the U.S. health system. We promptly disconnected the affected services and turned our focus to two main areas: restoration and support. The attack disrupted the ability of care providers to file claims and be paid for their work. We moved quickly to fill this gap. Fortunately, we were able to bring to bear the substantial resources of UnitedHealth Group to drive the recovery and begin to mitigate the impact. Resources, which are stand-alone to Change Healthcare, would not have had access to on its own. These are the resources and the philosophy that underpinned our remediation of healthcare.gov back in 2013 and our distribution of CMS COVID emergency relief funds to care providers in 2020. Here, we assisted care providers in financial need, providing over $6 billion in funding, all at no cost to them. We rapidly deployed resources to develop alternative solutions and move promptly to restore claims and payment services. We've made substantial progress, and we will not rest until care providers' connectivity needs are met. And to help care providers mitigate workflow disruptions and help ensure the uninterrupted delivery of care, for a period of time, we suspended some care management activities. I'm immensely grateful for our colleagues who continue to work tirelessly day and night to restore services, free up funds for providers, and protect the broader health system. Let me touch on two more items we know are of interest to you. First is care activity. The central point is that overall care patterns are consistent with what we anticipated last year heading into 2024 and within the outlook we shared with you in November. The second item is the essential value of Medicare Advantage to seniors. Here are what we see, some of the core facts regarding Medicare Advantage. It drives better health outcomes; provides a higher value, significantly more comprehensive benefit for people, all at a lower cost to beneficiaries and taxpayers; and is more popular with and valuable to seniors than traditional Medicare. Medicare Advantage consumers spend, on average, 45% less on premiums and out-of-pocket costs than those in traditional Medicare. That translates into nearly $2,400 in savings annually and several times more for the country's most underserved and medically challenged populations. That's one of the many reasons why more than half of seniors choose Medicare Advantage today versus 30% 10 years ago and why we believe these offerings will continue to grow strongly for years to come. 2025 is the second year of the significant three-year phase funding reductions to Medicare Advantage introduced by CMS last year. Here, in early 2024, we're at the beginning of our thoughtful, responsible, three-year plan we developed last year to adapt to those changes. Our strategy continues to focus on providing as much stability as possible in the reduced funding environment, improving outcomes and experiences for the consumers we're privileged to serve, and delivering the performance you expect from us. We believe our long-term perspective and the deliberate multiyear approach we began last year is serving us well, putting us into a position of sustainable, competitive strength. Among a handful of notable business developments to share, UnitedHealthcare was honored to secure major Medicaid wins in Virginia, Texas, and Michigan. While we were disappointed in the outcome in Florida, we'll be seeking to better understand the process and considerations there. There's a substantial pipeline in Medicaid RFPs, and we're confident that our offerings will resonate in other states as well. UnitedHealthcare's commercial benefits continued their momentum from last year, growing to serve 2 million more people in the first quarter, the largest increase in years. This growth was across UHC's commercial customer segments from individuals up through the largest of employers. This is further evidenced of our innovative and consumer-centric products have established the footing for sustained growth. We also see continued momentum at Optum Rx, coming off last year's record-selling season with a recent win in Hawaii and the renewal of our contract with the Department of Veterans Affairs. We're grateful for the opportunity to support them. And Optum Health is tracking well to achieve its objective of growing to serve another 750,000 patients in value-based arrangements this year in partnership with many payers. Before I turn it over to John Rex, our president and chief financial officer, I want to acknowledge Dirk McMahon recently retired after more than 20 years of service. I'd like to thank him for his leadership and partnership. Dirk has left an indelible mark on this company through the example he set and the many of our leaders he has mentored. John? John Rex -- Executive Vice President, Chief Financial Officer Thank you, Andrew. This morning I'll first provide color on some of the unique items in the quarter directly related to the Change Healthcare cyberattack followed by care activity trends, business updates, and finally, thoughts on the remainder of '24. But first, let me start at the most fundamental level. The UnitedHealth Group businesses continue to grow and perform well during the quarter, and we are encouraged by the momentum and the many opportunities to serve we're seeing across the enterprise. On the Change Healthcare cyberattack. As Andrew noted, our guiding focus throughout has been to make sure patient care is delivered and care providers' access to funding is secured as we work to bring back services fully. The cyber impacts in the quarter totaled about $870 million or $0.74 per share. At this distance, we estimate the full-year impact will be $1.15 to $1.35 per share. Let me break that down into its key components. Of the $870 million, about $595 million were direct costs due to the clearinghouse platform restoration and other response efforts, including medical expenses directly relating to the temporary suspension of some care management activities. For the full year, we estimate these direct costs at $1 billion to $1.15 billion or $0.85 to $0.95 per share. It's important to note these direct costs are included in net earnings but are excluded from adjusted earnings per share. The other component affecting our results relates to the disruption of ongoing Change Healthcare business. This is driven by the loss of revenues associated with the affected services, all while incurring the support and costs to keep these capabilities fully ready to return to service. Notably, these effects are not excluded from adjusted earnings. In the first quarter, this impact was about $280 million or $0.25 per share. At this distance, we currently estimate the business disruption at $350 million to $450 million or $0.30 to $0.40 per share for the year. This, of course, will depend on the ultimate timing of service and transaction volume restoration. These elements are broken out for you in the supplemental tables provided with our press release this morning. Of course, we will provide regular updates on our progress and outlook throughout the course of the year. While much of Change Healthcare's functionality and services have been restored, we are working hard to restore more, and the objective we all share is for an even stronger Change Healthcare to be fully returned to expected performance levels next year. I'll come back to some of these elements in more detail in just a moment. Turning to underlying care patterns. The headline is that these continue within our expectations. Outpatient care activity among seniors remains consistent with the elevated levels we began seeing in the first half of '23 and for which we planned, so we continue to be comfortable with the outlook we established last June when we filed our 2024 Medicare Advantage benefit offerings. The winter seasonal activity we discussed with you in January, particularly related to strong vaccine uptake, higher respiratory illness incidence, and related physician office visits, has subsided. Overall inpatient care activity also remains within our expectations. The first quarter medical care ratio at 84.3% included roughly 40 basis points or about $340 million related to the temporary suspension of some care management activities. These have been recently reinstated. The majority of the remaining $325 million of full-year medical expense impact included in our outlook will land in the second quarter. Notably, we did not reflect any favorable earnings impacting medical reserve development in the quarter. Out of prudence, due to the potential for the cyberattack to affect claims receipt timing, we reflected an additional $800 million of claims reserves. We'll continue with a judicious view as we progress over the next several quarters. Turning to the performance of our businesses, the most important takeaway is they are growing and performing at a level which allows us to maintain the adjusted earnings per share objectives we established last November, even while taking on the business disruption impacts of the Change Healthcare attack. At UnitedHealthcare, revenues of $75.4 billion grew nearly $5 billion. Within our domestic commercial membership, we're off to a strong start, powered by disciplined growth, serving 2.1 million new consumers in the first quarter. We are encouraged by the momentum and positive customer response to our differentiated offerings and look forward to building further upon that momentum heading into '25. For Medicare Advantage. As you would anticipate, we are deeply into our '25 planning activities. As we finalize our '25 benefit designs over the next several weeks, we will build competitive offerings that once again appropriately reflect the funding and cost environment. We approached this last year with a deliberate three-year plan, which continues firmly on track and positions us well going into '25. Our Medicaid business ended the first quarter with 7.7 million members. As Andrew noted, key wins in Texas, Virginia, and Michigan demonstrate the value state customers see in our offerings. In Virginia, UHC was the highest-scoring plan with particular strength in member-centric care, benefits and service delivery, quality and value-based payments. In Texas, UHC was awarded the maximum number of possible service areas, expanding the number of people we will have the opportunity to serve. And in Michigan, UHC achieved perfect scores in such critical consumer-centric areas as social determinants of health and health equity, further solidifying our value proposition. Optum Health's revenues grew by 16% to $26.7 billion as we increase the number of patients served and are on track to approach 5 million patients in value-based care by year end. For the most complex patients that Optum Health serves, we have engaged 75% through the first quarter of this year, a significant increase in the number of patients engaged over last year. This reflects progressively earlier connectivity with patients and the ability to improve their health outcomes and experiences more rapidly. Optum Rx revenues grew 12% to $30.8 billion, driven by new client starts, continued expansion within existing partnerships, and growth within pharmacy services. Optum Insight, as you know, is where the Change Healthcare business resides. In the quarter, about $500 million of the $870 million total impact is within Optum Insight. Just under half of this are direct response costs, think clearinghouse restoration activities, which we have excluded from adjusted earnings. And slightly over half are the business disruption effects which are not excluded from adjusted earnings. For many of the impacted Change Healthcare services, transaction volume drives revenues, so the effect of the attack in the period is one of keeping all the lights brightly burning at full readiness to resume services while revenue production was essentially suspended. To be clear, the Optum Insight team did the critical and right thing, promptly shutting off services and finding any method possible to keep the care system working, including helping clients find alternative solutions. Coming out of this incident, the team will be working tirelessly with customers to recover transaction volumes and demonstrate that Change Healthcare is ready to serve and is more valuable than ever. Beyond Change Healthcare, the Optum Insight revenue backlog increased to nearly $33 billion, growth of over $2 billion from a year ago, driven by health system partnerships to provide business process and information technology services. A couple of other items of note that were affected by the cyberattack. Days claims payable in the first quarter were 47.1, compared to the 47.9 in the fourth quarter, 23, and 47.8 a year ago. The accelerated payments to care providers and the Brazil sale reduced what would have been our reported measure for the quarter by about three days. The medical costs payable balance increased $1.6 billion from year-end '23 to $34 billion. The change reflects a $3 billion increase in the incurred but not yet reported component for IBNR. This is the result of the prudent ongoing claims receipt assessment, offset by a $1.6 billion reduction in the fully processed claims component due to care provider payments acceleration. Cash flows from operations in the quarter were $1.1 billion, impacted by about $3 billion due to the funding acceleration to care providers and collection extensions to affected customers and were additionally impacted by the timing of some public sector receipts. To summarize, a continued focus on better serving patients and the health system underpins our mission and growth drivers which remain strong. And as we move further into this year, the broadly strong performance across our enterprise allows us to continue to expect full-year adjusted earnings per share in the range of $27.50 to $28, even as we incorporate the $0.30 to $0.40 per share of business disruption impacts. Now I'll turn it back to Andrew. Andrew Witty -- Chief Executive Officer Thank you, John. As we look out over the next several years, we, like many others, see a healthcare environment in need of improvements in quality, value simplification, and consumer responsiveness. While we're a comparatively small part of the $5 trillion U.S. health system, UnitedHealth Group strategy is focused on helping to meet those very needs, and we're well-positioned to do so. Our focus on understanding opportunities to align incentives, notably led via our value-based care offerings, demonstrates what can be achieved through partnership and realignment of ways of working. Our commitment to improving all we do for consumers stimulates our drive to help bring care to patients where they need and want it at prices and with an experience worthy of the 2020s. We have a proven commitment to making available our insights and innovations widely and quickly throughout the market, alongside our relentless multiplayer orientation at Optum. We remain committed to partnering with others throughout healthcare to help make the health system more modern and responsive. Our success depends on enabling partners and customers outside our company to succeed. The combination of this strategic design, strengths, and behaviors underpins our high confidence in our ability to navigate the inevitable environmental change and challenge, and it reinforces our confidence in our ability to perform and grow strongly as you have come to expect from us. With that, operator, we'll turn to questions. Questions & Answers: Operator Thank you. The floor is now open for questions. [Operator instructions] And we'll go first to Lisa Gill with J.P. Morgan. Lisa Gill -- JPMorgan Chase and Company -- Analyst Thanks very much, and thanks for all the comments. I just want to go back to your comment around your three-year plan as it pertains to V28. Does the 2025 final bid change anything around that plan? And how do I think about the impact in the quarter of V28 in both Optum Health as well as on the UnitedHealth side? Andrew Witty -- Chief Executive Officer Yeah, Lisa. Thanks so much for the question. Yeah, as we've said a few times and certainly repeated this morning, we've looked at the changes that CMS finalized last year really thoughtfully, and we see this as a three-year strategy in response. Obviously, it's phased in over three years. We want to make sure we don't do anything that chases short-term growth, for example, but puts a lot -- puts at risk long-term sustainability. What you're also not going to see from us is a kind of knee-jerk reaction between growth and margin. We want to be very focused on ensuring that year in, year out, we're a super reliable performer in this environment. As you look at the most recent final rate, I don't think it really changes the story. Obviously, it's a little disappointing that we don't think CMS really reflected what was -- what we've seen over the last year in terms of actual in-market medical trend. But in reality, it's just a little extra pressure for '25 on top of what we'd already seen previously. We're well-positioned for that in terms of all the work we've been doing really from the get-go last year. Really, from February last year, we've been getting ourselves lined up for this. You're seeing that reflected in Q1 in a few really key features, right? So you're seeing really strong cost control inside the company, as you'd absolutely expect us to do, making sure that we're not incurring any expense that we don't need to to support our members and patients on the outside of the organization. You saw us take a very thoughtful bid strategy last year. And of course, we continue to focus on how to make sure that we manage medical cost as effectively as possible, ensuring quality of care delivered and avoiding waste. All of that plays through. I'm very, very pleased with how this first quarter has played out in that respect. If you look at the performance of Optum Health and our MA business within UnitedHealthcare, both very strong performance during this quarter despite the pressure that's been incurred on them from the rate notice last year, and I think that bodes super well for the rest of this year and the strategy that we've laid out for the next three. Thanks, Lisa. Next question. Operator We'll go next to Josh Raskin with Nephron Research. Josh Raskin -- Nephron Research -- Analyst Hi. Thanks. Good morning. Can you just explain what medical cost you categorized as accommodations to support care providers? I think the UM management that you guys were talking about, what a certain medical -- what's a certain medical expense in that bucket? And then when you look at your actual claims received or claims processed inventories, what percentage of a normal or expected quarter did you actually see in the quarter versus how much did you just sort of put into IBNR? Andrew Witty -- Chief Executive Officer Josh, thanks so much. I'm going to ask Brian Thompson in a second, just to give you a little bit more color on the first part of your question. Listen, I think by the time we got to the end of the quarter, we had the overwhelming majority of what we'd anticipate in receipt in terms of claims received into the organization because it's always a little bit tricky to be absolute about that because you're kind of comparing against what you would have expected. And as you obviously know, every quarter, you see corrections, both up and down, in terms of actual claims submissions catching up with what you may have estimated, and that's been obviously a feature of this marketplace. But overall, I would say UHC claims receipt was very, very close to normal by the time we closed the quarter. But maybe, Brian, you could give a little more color commentary on how you would characterize some of that relief we gave. Brian Thompson -- Chief Executive Officer, UnitedHealthcare Sure. Appreciate the question. Yeah, Josh, I believe we started March 8th. And what we did, I call it foregone utilization management protocols, and those are really in two categories. The first is we suspended our inpatient level of care reviews where we assess for appropriateness of inpatient versus outpatient, and that was the lion's share of our adjustment. And we've got a long history of understanding those elements. It's just a unit cost adjustment, so pretty simple and easy to estimate and adjust for. The second element inside those practices was some outpatient prior authorizations that we also suspended. Those were a smaller element inside this quarter. Those will play out a little bit more in next quarter as you think about that lag between notice and actual incurral date. But again, pretty easy for us to estimate. These are practices we've had in place for a very long time and feel comfortable about the adjustments that we made. Andrew Witty -- Chief Executive Officer Brian, thanks so much. And just again, to confirm, as you heard from John, we've brought those processes back into play in the last few days. Next question. Operator We'll go next to A.J. Rice with UBS. A.J. Rice -- UBS -- Analyst Thanks. Hi, everybody. Congratulations on working through all this. Maybe just make sure I understand a little more. The $800 million reserve that you're holding out, you did comment shouldn't take any prior-period development to the bottom line. I guess it sounds like you've used the word prudent several times in describing that. How much -- yeah, just maybe to follow up on the last question. How much of that is things that either from what you get inside from Optum Health or from your own ability to look at prior-year claims versus what you've seen so far is what you really think is going to happen? And how much of that is sort of add on, just because of the moving parts out there? And then it sounds like you're basically saying that the care dynamics are similar. Is there anything you call out outpatient, inpatient, uh, that suggests any variance relative to your MLR assumptions for the year when you started out? Andrew Witty -- Chief Executive Officer So I'm going to ask John just to comment on the $800 million more specifically. I mean, I think as we said a couple of times, A.J., really not seeing anything stand out in terms of care pattern differentiation from what we really expected. I mean, as we mentioned earlier, that kind of pressure we saw at the end of Q4 and rolling into the very beginning of the year around some kind of winter syndrome, vaccination dynamics we talked about a lot last time, as expected, that did subside. Beyond that, I would -- which was what we were anticipating. Beyond that, I wouldn't say there's anything really to call out within all of that. John, could you maybe go a little deeper on the $800 million? John Rex -- Executive Vice President, Chief Financial Officer Yeah. Good morning, A.J. Yeah, so picking up on comment Andrew had made earlier, so what you're really doing there is estimating what you didn't see, so claims receipts that you may have not received in the quarter and trying to make an accommodation for that, as you said, a prudent accommodation for that, just to acknowledge that there clearly had to be some disruption in the quarter and claims patterns. And so you're trying to make some estimation in that zone to anticipate that. So you put it somewhere in the zone, it's not zero, and it's not $800 million, somewhere in between, probably as you'd think about those elements and where you might land. And so as we look out -- and you should expect that we'll probably continue with a judicious view over this over the next several quarters actually also. We'll want to make sure that we've got full visibility into this, that the claims are flowing. And as we sit here on April 16th, that does -- we see at UHC, we see a fairly normal claims receipts and payments flows going on at this point, but we'll really want to be careful on that because we know there are certain care providers out there that maybe have been left out a bit. And so we'll continue to be very judicious next quarter also in terms of assessing that. Andrew Witty -- Chief Executive Officer Thanks, John. Thank you, A.J. Next question. Operator We'll go next to Justin Lake with Wolfe Research. Justin Lake -- Wolfe Research -- Analyst Thanks. First, I just wanted to quickly follow up on A.J.'s question here around the $800 million. Can you just be specific around -- is that conservatism related to 2023, meaning you would have had up $800 million of development that would have benefited the quarter? Or are you saying that you just took extra reserves that actually impacted Q1 because we're looking at an MLR that's 50 basis points above where you kind of expected it? And yet, you're saying trend is in line. So we're trying to figure out was there a 50-basis-point miss or are you saying that really that's just the conservatism here? And then any -- my question was really around the relative visibility on cost trend, right? Last year, it was somewhat opaque. You kind of told us that there was some uncertainty, and then that uncertainty turned to certainty around, hey, trend is higher in Q2. How do you feel about your visibility this year? Do we have to wait till 2Q to kind of be able to declare that, hey, we're kind of through this, and you're not seeing with the rest of the industry seeing? Or do you think we probably have to get that update again in second quarter? And lastly, any commentary on Q2 MLR and where you think you end up in the full-year range for MLR would certainly be helpful if you could provide. Thanks. Andrew Witty -- Chief Executive Officer OK, Justin, thanks for those questions. Let me -- I'm going to ask John in a second just to go back and again just give you a little bit more definition around the $800 million, as you asked. Just in terms of cost trend and let me make a couple of comments and ask Brian maybe to go a little deeper as well and then come back to John. As I look at the cost trend this year versus last year, some big differences. So last year, really I think the core of the story of what led to that sort of step shift, if I can put it that way, in early Q2 -- Q2 of last year. I think that was really -- and the hindsight tells us that was really around a kind of post-COVID or end of COVID story playing out in terms of capacity coming on stream most importantly and to some degree of pent-up demand. I actually think the capacity coming on stream was as much an issue driver of that as anything else. So I think to some degree a one-off. We don't see anything like that. We've seen much more stabilization. We haven't seen a step down from that trend. We'd be super clear about that. We haven't seen it kind of go back down again, but we've certainly seen that kind of sustained activity without aggressive acceleration. And then the other thing, I would say to you is, as you would expect, given that shift we saw last year in the intervening year, we've put in a lot of sensing mechanisms across our organization, both in UAC and Optum, to look for early warning signals of changes, quite a low granularity in terms of trying to figure out how this pattern plays out. Now as all our actuaries and any actual will tell you that the gold standard of knowledge on trend is a paid claim, but nonetheless, we've tried to put in place a lot more prospective sensing capability. And again, that's kind of consistent with what we're sharing with you. So we're not really anticipating a big change there. I mean, obviously, the future is the future, but as we sit today, everything looks pretty much as expected. Brian, you may want to give a bit more from a UHG perspective. Brian Thompson -- Chief Executive Officer, UnitedHealthcare Yeah. Thanks, Andrew. And I think you summarized it well. I'll reiterate what you heard from John, which is what we're seeing in these underlying service types, inpatient, outpatient, et cetera, are in line with what we had planned for, so I'll reiterate that. Just to add to that level of improved visibility this year over last, certainly COVID being the biggest driver, but also redeterminations. Last year, we were at the beginning of that. This year, we're nearing the end of that. So two key unknowns a year ago I think that contributed to perhaps a little less visibility, both of which I think we've really got a better view to this year. And the last thing I'll just point out is, as we've paced through one-one, I also feel good about our business mix. Again, early in the stages of evaluation of that, but how our growth has changed and what we've seen in those profiles from the growth that you're seeing in our commercial business to the growth in our Medicare business as well, really feel good about all those elements. So, yes, optimistic about the rest of the year and how it's playing out against what we had planned for. Andrew Witty -- Chief Executive Officer Great. Thanks, Brian. And John? John Rex -- Executive Vice President, Chief Financial Officer Yeah, Justin, good morning. So I think the way you look at it, so overall the net view being, so we didn't let any earnings or medical care ratio impacting development flow-through into the quarter. And when you look at it, so you can come at it, as to the normative course of assessments would have indicated some potential for favorable development in the quarter. We would -- we took a position also that there was likelihood that there were claims we didn't receive. And so in terms of the claims completion factors and such and so how that may have impacted and so you're really netting that all off in the course of the quarter to try to just normalize that out, not having any impact from any of those -- from those elements, and taking a pretty prudent view of where you might be in terms of the claims you received. In terms of your question here on the Q2 MCR, at this distance, I put it in a similar zip code to 1Q, including similar impact from the cyber effects that we had also. And as I noted in response to A.J.'s question, we'll be continued to be very judicious as we look at those patterns also on claims receipts. So we'll continue with the judicious view of how we think about -- how we think about development and those impacts as we step out here in the next couple of quarters to make sure we're getting our claims receipt timings fully incurred here. Andrew Witty -- Chief Executive Officer Great. John, thanks so much. Next question. Operator We'll go next to Stephen Baxter with Wells Fargo. Stephen Baxter -- Wells Fargo Securities -- Analyst Yeah, hi, thanks. The business disruption costs you've projected beyond the first quarter are, I think, smaller maybe than most had expected despite the fact we've heard commentary from stakeholders reducing their dependence on Change Healthcare during the quarter. I guess, what are you seeing from customers on that front? I guess, how much of that recovery do you have on the revenue line? Do you have line-of-sight to versus you have to drive throughout the balance of the year to get to that no impact to 2025 that you seem to expect? Thank you. Andrew Witty -- Chief Executive Officer Yeah, Stephen, thanks so much. So I'm going to ask Roger Connor, who runs Optum Insight to give you a little detail on this. First off, so I just want to -- I just want to take a moment to pay credit to the teams for the speed in which they brought back the overwhelming majority, the functionality of Optum -- of Change Healthcare after the attack. It's been extraordinary example of really the resources of UHG, and frankly, the support of many of the biggest companies across America in the tech environment coming in to help recover from this particular attack, which was straight out an attack on the US Health System, and designed to create maximum damage I think. We've got through that very well in terms of the remediation and the build back to functionality, and Roger, maybe you could share a little bit of what you're seeing and expect in terms of customer dynamics over the next few months. Roger Connor -- Chief Executive Officer, OptumInsight Yeah, we'll do. Stephen, thanks very much for the question. So the way that we're thinking about the whole cyberattack response is two key areas of focus. First of all, as Andrew mentioned, good progress on system restoration. If you look at the biggest areas where we have the largest number of customers, that's pharmacy, claim, and payment, we're up to 80% functionality and that's continuing to improve day by day. Now we've still got work to do. We've got another set of products coming online in the number in the coming weeks, but pleased with that progress. I think your question is really about our next focus, which is recovering the business and this is about bringing those products back, but actually bringing them back stronger where we can. We're adding functionality where we can too. But then also bringing back customers, who because of the outage have to go elsewhere to get things like their clearance house support. Now we are confident in our ability to do that. Why? Well, first of all, the portfolio and the differentiation we have, which is good. But also, as you can imagine, we're talking to those customers all the time and they want their functionality back. They like what they've got or they had with Change and they want to get that back. So we're working with them to ensure that we can actually do that. Also, we provided financial support to a number of our clients and they appreciate that. They have said to us that they appreciate it. That's a signal that we are committed both to them, but then also to this marketplace as well. So when you add those elements up, Stephen, that's where we're confident. We've got more work to do. This has been a heavy lift and we're going to continue that work. But that's why we're confident in getting back to that baseline performance in 2025. Andrew Witty -- Chief Executive Officer Roger, thanks so much. And I think, Stephen, what you heard in Roger's response there is a couple of really important features of the character of UnitedHealth Group, super high resilience and we will always stand by our customers and clients, and when an attack like this happens, which puts our customers and clients at risk, we will do whatever it takes to make sure they get through that, whether it's technical fixes or financial support, we are going to stand by our clients, who in this case are the providers and the systems across America who look after American patients and we will do that. And I think that means a lot to a lot of people and it's an important capability to have running through the backbone of American healthcare. With that, Stephen, thanks for the question. Next question. Operator We'll go next to Kevin Fischbeck with Bank of America. Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst Great. Thanks. Just want to go more -- a little bit more into the visibility that you guys think that you have into claims today. It sounds like you feel like you're largely back, but I guess, where would you say today that you are from a percent visibility into claims versus the same time last year? And I know that there's forecasted improvement, but I think there's a lot of focus on the ability to price 2025 correctly. So by the time you're submitting your MA bids, how much back to normal? What percentage back to normal do you think you'll be from a claims perspective at that point? And then finally, I'm used to hearing you guys reiterate 13% to 16% long-term EPS growth, but I didn't hear that in the prepared remarks. I just wasn't sure if that was due to time or whether there was anything that you were trying to say there. Thanks. Andrew Witty -- Chief Executive Officer All right. So I'm going to ask John to comment on your substantive question, Kevin, and I'm going to ask you just to stay on the line for my last paragraph for closing comments for the second part of your question. John? John Rex -- Executive Vice President, Chief Financial Officer Good morning, Kevin. So as we sit here today on April 16th, I would say, UHC is pretty much back to normal levels in terms of claim submission activity. We view it as normalized now. That we're seeing claims slowing like they -- we'd expect them to be flowing and moving along. So that's all progressing quite well, which assists a lot with the piece that you were just describing here in terms of where we think that is and as we move forward and look over the next month plus to finalize our bid submissions and such. So feel good about that in terms of our visibility and insights. Andrew Witty -- Chief Executive Officer Yeah. Thanks so much, John, and thanks so much, Kevin. Next question. Operator We'll go next to Nathan Rich with Goldman Sachs. Nathan Rich -- Goldman Sachs -- Analyst Hi. Good morning. Thanks for the question. I wanted to ask on the reported DOJ investigation. I'd be curious, has the company had kind of dialogue with the DOJ and do you have a sense of timeline for what the next steps might be as we look about what -- for what the possible outcome of this process could be? Andrew Witty -- Chief Executive Officer Hey, Nathan, thanks so much for the question. Listen, I think you'd probably expect we don't comment on these sorts of matters and I don't think it would be appropriate to do so today, and certainly, we never have done in the past. So it's not something we're going to get into in the call, but I appreciate the interest. Thanks. Next question. Operator We'll go next to Andrew Mok with Barclays. Andrew Mok -- Barclays -- Analyst Hi. Good morning. Commercial risk and ASO membership both came in above the high end of your initial guidance, can you help us understand what drove the membership -- a better membership results for each segment? Thanks. Andrew Witty -- Chief Executive Officer Thanks so much for the question. I'll ask Dan Kueter, who runs our E&I business from UHC to respond to that. Dan? Dan Kueter -- Chief Executive Officer, UnitedHealthcare Employer and Individual Yeah. Hi, Andrew, and thanks for the question. Certainly encouraged with the broad-based growth, share gaining growth, I would say, in our Individual segment, our Local Market segment, and our National Accounts business. Some of the key drivers underlying that, about a third of our Group growth gains were attached to our most innovative products and the expansion of those into 37 states now, on a fully insured basis, to be -- and also fully available nationally on an ASO fee-based business. Specifically inside the risk business, our individual and family exchange-based plans were a significant driver of the growth. We've seen some latency. From membership, we expected that would have come in from redeterminations into the final portions of 2023, now begin to emerge into 2024. That's been a significant contributor to that risk-based growth in the first quarter. As a punchline, I like our growth, I like the pricing, very much like the profile of both the groups and the consumers that we're attracting. And finally, I'm really pleased with the consumer experience that our teams are delivering to those that we serve. Thanks for the question. Andrew Witty -- Chief Executive Officer Great. Thanks so much. And as you saw, Dan's organization delivered an extraordinary two million member growth in the first quarter, one of the highest growth rates we've seen for many, many years. And I think that really comes down to relentless focus on modernization of service offer and then delivery of that service offer, and I'm very proud of the whole team in the UHC commercial businesses domestically for what they've done. Next question. Operator We'll go next to Lance Wilkes with Bernstein. Lance Wilkes -- AllianceBernstein -- Analyst Thanks. Question on Optum Health. As we're looking at outlook there, we've been really focused on capacity growth in the systems, do you guys have any insights for your capacity growth in Optum Health? Obviously, you've been taking some cost actions there, so interested in hiring trends. And then second, have you been renegotiating risk deals? I know that there was likely some of that for '24. What's the outlook for that and the impact of that in '24 and the outlook of that for '25? Thanks a lot. Andrew Witty -- Chief Executive Officer Yeah, Lance, thanks so much. And I'm glad you've asked about Optum Health. I'm going to ask Dr. Desai to respond to that. Amar runs our Optum Health business. He has been doing a great job of continuing to mature that business for us, which for me, I think is one of the great headlines of Optum Health. Its continuous maturation as a sophisticated value-based care delivery organization, and Amar, maybe you could respond to Lance's question. Amar Desai -- Chief Executive Officer, OptumHealth Yeah, thanks for the question, Lance. I'll take the first one in terms of hiring trends. We continue to work with more providers in a deeper way continuing to grow across a range of arrangements. As you know, physicians across the country work with us in contracted affiliated arrangements, as well as employed arrangements, and we continue to have strong partnership and growth, both organically and also through some of our inorganic M&A activity. We don't see a capacity constraint there. In fact, we've continued to see incredible growth with our payer partners to the second part of your question. The risk partner growth continues to increase across multiple payers. It's being driven by some of the funding and benefit dynamics that are out there. Folks are looking for a real stable partner to be able to grow with. We have worked with them continuously in terms of our contracts, both looking at the benefit and funding changes and ensuring that the funding level is appropriate for the risk that we're taking on, and to be able to provide very high-quality care across our membership. So we're very proud of the growth we've had and we'll continue to do so. Thanks. Andrew Witty -- Chief Executive Officer Great. Amar, thanks so much. Next question. Operator We'll go next to Sarah James with Cantor Fitzgerald. Sarah James -- Cantor Fitzgerald -- Analyst Thank you. We wanted to understand a little bit better the $3 billion in IBNR. So just our back-of-the-envelope math suggests if 15% to 20% of claims from UHC run-through change, post-event that would be like assuming a third of the change-related claims are delayed, is that in the ballpark of where your change completion factor assumptions were? And keeping that conservative assumption of a claims like throughout the year, what does that imply for the seasonality of the remaining $0.41 to $0.61 GAAP impact from change? Andrew Witty -- Chief Executive Officer Sarah James, thanks so much. John? John Rex -- Executive Vice President, Chief Financial Officer Yeah. So I don't know if I'd kind of go right with some of those stats that you pulled out in terms of where those fell, but here's some insights I can offer on that. So, one of the elements we wanted to break out on the IBNR component is, so, as you know, what we report on the balance sheet you received this morning, medical costs payable is a combination of IBNR and medical claims payable. And so we're hoping to provide some more transparency for you as you looked at the quarter and such, and a $3 billion increase in IBNR is significant. And then offsetting that on the -- on that line item would have been the -- really the funding advances. The component where we just made sure that as soon as the claim was in-house processed, we were speeding it out the door to get it to providers. That was one of the components in addition to the interest-free loans we made that we were helping the provider community -- the provider community with. As you talked -- as you discussed kind of where we were, let's say, today, we feel that UnitedHealthcare is essentially at normalized levels in terms of -- in terms of claims receipts. As we sit here, we're going to be super prudent in how we look at that because we know there are providers out there that could still be having trouble submitting claims, and still having troubles with payment flows and such, and so we're going to be very appropriately constrained in how we think about that dynamic playing out here over the next -- over the next couple of quarters. But really, those are the kind of mechanics of what's going on between the IBNR component that you spotlighted and the full line of medical costs payable. Andrew Witty -- Chief Executive Officer Right. Thanks, John. Next question. Operator We'll go next to Gary Taylor with Cowen. Gary Taylor -- TD Cowen -- Analyst Hi. Good morning. Just wanted to follow up on that point, John. My understanding is, on the IBNR that you report in your Qs and Ks includes unprocessed claims, inventories, so the $3 billion, is that just going to tie to the number we see when the Q comes out? Are you saying the $3 billion really is true unreported claims at this point? Andrew Witty -- Chief Executive Officer Thanks so much, Gary. John? John Rex -- Executive Vice President, Chief Financial Officer $3 billion is IBNR directly, that is to your point. That is the IBNR component of it, Gary. Andrew Witty -- Chief Executive Officer OK. Thanks, John. Next question. Operator We'll go next to Erin Wright with Morgan Stanley. Erin Wright -- Morgan Stanley -- Analyst OK, thanks. On capital deployment, you didn't change your expectations for share repurchases, but how should we think about the priorities more broadly, whether it's M&A or otherwise in your ability to be opportunistic on that front? Thanks. Andrew Witty -- Chief Executive Officer Erin, thanks so much. I'll ask John to comment on it. John Rex -- Executive Vice President, Chief Financial Officer Yeah, Erin. Yeah, we didn't update any of those components here. We continue to take a very balanced view in terms of how we think about our opportunities. You saw, certainly, that we had activity in the quarter from -- in terms of both share repurchase and dividends. Also, we continue with robust opportunities in the marketplace in terms of other capabilities that we are looking at. So that all continues strong. So you'll see us continue to balance those out nicely in terms of -- in terms of the opportunities that are out there and with capacities really to approach all those elements strongly. Andrew Witty -- Chief Executive Officer Yeah, and I continue to see very interesting diverse pipeline of M&A opportunity across the marketplace in terms of business areas that we have interest in. As I think you see some of the funding changes play out across the -- across the next few years, I suspect that may also create new opportunities for us as different companies assess their positions. I think how we look at this situation is we have a good strong strategy for how we navigate through this dynamic. You're seeing that play out super well in the first quarter performance of Optum Health and UHC and I think it gives us a sense of real confidence as we look not just in terms of our performance, but potentially how we might think about M&A opportunity. And as you rightly said, be somewhat opportunistic if those moments arrive. Next question. Operator We'll go next to Whit Mayo with Leerink Partners. Whit Mayo -- Leerink Partners -- Analyst Thanks. Good morning. Just back on the 2025 rate notice, I think you're -- if I'm hearing you correctly, it sounds like you're framing this as modestly disappointing, but perhaps manageable. Just any more color on growth expectations for next year? And then if you could elaborate on the broker agent changes, what this could potentially mean for your strategy seems like a meaningful change. Don't know, if you think about investing more into captive broker strategies, just any color would be helpful. Thanks. Andrew Witty -- Chief Executive Officer Thanks so much for the question. I mean, obviously, we're not going to get into give kind of '25 numbers or expectation just yet, but Tim Noel, who runs our M&R business, certainly give you some good perspective on the rest of your question. Tim? Tim Noel -- Chief Executive Officer, Medicare and Retirement Yeah, good morning, Whit. Thanks for the question. So on the final notice and some of the distribution elements of that, we continue to believe that there's opportunities to improve the distribution environment in Medicare Advantage and have been in a dialog with CMS for several years on how to do that. Some of the elements of the final notice that were published recently are directly in line with some of our recommendations and some of them are relatively consistent, but not totally as we had conceived them. I would also say right now, it's a little bit early to comment on how this might rebalance some of the channel mix, as still some questions on how some of the key elements of that will be rolled out. So we're still waiting for a little bit more detail before we can get more specific on how it impacts go-to-market in '25. Whit Mayo -- Leerink Partners -- Analyst Great. Thanks so much, Tim. Next question. Operator We'll go next to Ann Hynes with Mizuho Securities. Ann Hynes -- Mizuho Securities -- Analyst Hi. Good morning. So, I would say your commentary on care patterns is definitely more positive than what investors feared. And you referenced several times that trend came in line with your expectations, can you actually tell us what growth rates you're assuming like the major trend categories in guidance, whether that's inpatient and outpatient, and maybe some year-over-year growth versus historical averages? And within that, can you specifically talk about what you're assuming for MA? That'd be great. Thank you. Andrew Witty -- Chief Executive Officer John, would you like to start that? John Rex -- Executive Vice President, Chief Financial Officer Yeah. Ann, good morning. So the components that I would call outliers are the similar components that we've talked about for a while here in terms of trend outlooks. So in particular, still go back to outpatient care for senior, what we've seen in orthopedic, cardiac, those kind of categories primarily have been the big factors. I think you brought up a really important point though. So the percentage growth in those was much bigger last year. You're coming off an environment where both the supply side had been constrained and the willingness of seniors, in particular, consumers to access that environment had been constrained for a couple of years. So those percentage factors were quite significant. You heard us talk about very significant levels on those double-digit levels of last year as we looked at those. The way we look at those really though is because you would expect that to start normalizing in terms of the percentage change. So you really look at that in terms of the number of units consumed per patient served. And so you look at those levels, that's what we're talking about and we're seeing those kind of continuing at those levels. They're continuing at those levels in terms of the number of units consumed, delivered, and -- but those percentage levels, of course, would start normalizing out a little bit in terms of what you'd seen. So that continues to be the area. It's outpatient care for seniors. It's those categories that we'd call real outlier areas versus our historical levels of trend factors. The other -- the other historical levels of trend factors remain much closer to kind of our traditional views that we've always had as a company. In the quarter, other things you look at just to get indications, and by the way, we kind of vastly expanded all those areas. First fills, you've heard us talk about that a lot. Also, first fills in the quarter, an indication of outpatient care, physician visit activity, it's kind of normalized in there also in terms of stabilizing for us and many -- the many other factors of the company historically looked at. Thank you. Andrew Witty -- Chief Executive Officer Thanks, John. And maybe ask Brian maybe to give you a little bit more from a UHC perspective, and then maybe Heather also from a Optum perspective in a second, just maybe reflect a little bit on the work you're doing in terms of how we -- obviously, medical trend is one thing, then there's a question of how well we're able to engage with folks to actually help them manage their cost and maybe come to you in a second, Heather, on some of the word that you're leading at Optum. So Brian, first? Brian Thompson -- Chief Executive Officer, UnitedHealthcare Sure. I think John said it well. The first headline is what we're seeing is what we plan for. But as he alluded to, some of those elements, we plan for them to be elevated year over year. And I don't want to lose sight of unit costs. We've talked for some time that multi-year provider group and hospital contracts renew a little later than perhaps the inflation we've seen and that is up year over year. The biggest driver was the outpatient. We're really pleased to see that in line with as John explained. But also, we've been able to see increases in Specialty Rx. We've planned for those. Those are in our pricing appropriately, et cetera. And we've certainly worked hard to create more access in the behavioral space. So all of those elements are modestly up, but up as we had planned for and they'll hopefully sound familiar to you because we spoke to all of these at our investor conference as we ended the year. So I think that's what I would summarize or add to John's commentary. Heather? Heather Cianfrocco -- President, Optum So, I would say, incredibly consistent on the Optum side. So maybe just focusing on the medical first. So I mean, I think you've heard us say this, when you look, when we came out of last year, looking into this year, our focus was on the behavioral health, those outpatient sides consistent with UnitedHealthcare. And what was very important for Optum Health was using that capacity that Amar explained in our physicians, as well as those wrap-around services and our investments, to ensure that we were looking at those care patterns. So, we feel really good about coming into this year. That work we've done, John referenced engagement with particularly those most complex numbers, 75% already engaged. And that PCP engagement, that member engagement is incredibly important, whether it's with their PCP directly or it's with some of our care -- our own care management wrap-around services. Because it identifies affordability opportunities incredibly quickly. It also identifies chronic disease that needs to be managed and it gets them connected to primary care quickly. So that's our focus for the year and that's why we feel good about that our ability to control utilization on the medical side particularly. And again, what we'll remind you is a reduced funding environment as we go into this year. So that's what brings us -- that's what brings that value-based care proposition, incredible value to all of our payers. On the pharmacy side, I call it, same things. For our clients, that specialty trend is a focus and we bring those products and solutions and that's why we've seen growth on the PBM side and our pharmacies around our clinical model and the continued innovative products that we're bringing to bear. So you're seeing that pull-through in the diversified growth and strength of the performance on the Optum Rx side as well. Andrew Witty -- Chief Executive Officer Great. Thanks so much, Heather. Just one number Heather just shared with you there, which I'm very pleased of and it's a significant improvement year over year is that 75% engagement of the most complex members in Optum Health. And just for that, that means three out of every four most complex, most disadvantaged folks in the country have had a direct engagement with us in the first three months of the year. That's a great rate of touch. Opens the door then for us really getting to know those folks, helping the system, helping bring the system to support that many of these people, particularly those who are trapped in their homes have just not had access to that kind of care opportunity. That engagement is the first step of doing that. We have -- we really believe that is a key to how we not only deliver an effective care delivery from a cost point of view but also make sure they get the very best quality that they deserve. So really pleased to see that step up year over year. I think we have time for one last question. If we could take that question, please, Jennifer. Operator Yes, we'll go to our last question from Jessica Tassan with Piper Sandler. Jessica Tassan -- Piper Sandler -- Analyst [Technical difficulty] A few more details maybe on the -- Andrew Witty -- Chief Executive Officer Sorry, we missed the beginning of your question. Jessica Tassan -- Piper Sandler -- Analyst Hi. Sorry about that. I'm interested in a few more details maybe around the launch of Change 2.0. If you could talk a little about what payer receptivity to reconnection has been? Whether Change retains its legacy data rights post breach? And then just any change or updated thoughts on kind of the long-term thesis on Change for something like real-time transparent payments and decision support network? Thanks so much. Andrew Witty -- Chief Executive Officer Thanks very much for the question. Let me ask Roger to kick that one off. Roger Connor -- Chief Executive Officer, OptumInsight Yeah, Jessica, thanks very much for the question. First of all, on your first part about Change 2.0. Again, we're just confident in terms of our ability to reconnect. I mentioned the level of functional restoration that we have. You can imagine now the next stage of this is working with payer and provider to reconnect them in a safe way and an appropriate way and all of the conversations that we're having with them are positive as we work through it. As I mentioned, there's still work to do and that's going to take us a little bit of time, but we're continuing to work through that functionality. I think it's important also to recognize, where Change sits in the overall Optum Insight portfolio. Change Healthcare was about 15% of our projected revenue for this year and when you look at -- that means I've got thousands of people who are continuing to work on other products outside of Change, not impacted by this and their underlying performance this quarter has been strong. If you adjust for the Change out, that business' earnings actually grew by around 10%. But what we haven't slowed either, as you mentioned, is our innovation agenda. The excitement of the Change portfolio across the Optum Insight portfolio is what we can bring to this market to transform it from an innovation point-of-view. And the real-time settlement work that we're doing, plus work that we've been doing with Optum Health on value-based care and provider risk enablement, that's all still going ahead. So in terms of our innovation agenda and the performance of the underlying business within Optum Insight, we're very positive. Andrew Witty -- Chief Executive Officer Roger, thanks so much. And yeah, absolutely, Change Healthcare, the important acquisition for the group and I think important for the country that we own Change Healthcare. Without UnitedHealth Group owning Change Healthcare, this attack would likely still have happened and it would have -- it would have left Change Healthcare, I think, extremely challenged to come back because it was a part of UnitedHealth Group, we've been able to bring it back. We're going to bring it back much stronger than it was before. And secondarily, all of the reasons that we were interested in bringing the Change Healthcare capabilities and customer connectivity closer to UnitedHealth Group still absolutely holds fast in terms of the potential innovation around things like real-time settlement, clinical decision support capabilities, all of those products are the future services of the future, which ought to be characteristics of a modern healthcare environment. Those are all the reasons why we believe Change and Health -- and UHG were better together. This cyberattack has unfortunately created another true validation of why that was the right thing to do because it meant UHG was in position to resolve this much more quickly than I think would ever have been imaginable in a stand-alone situation. Thanks, everybody, for all of your questions this morning. It's been a bit more of a complex quarter for sure this time around but one that's also showed the depth and breadth of our company's capabilities. We're recovering quickly from the Change Healthcare attack and are a stronger, more capable company as a result. We're continuing to build our business based on the five strategic growth pillars that we're relentlessly focused on, and we're steadfastly confident in our ability to achieve our 13% to 16% long-term growth objective as we look to the years ahead. We very much appreciate all of your time and attention this morning. Thank you. Answer:

the UnitedHealth Group first quarter 2024 earnings conference call

Operator Good morning, and welcome to the UnitedHealth Group first quarter 2024 earnings conference call. A question-and-answer session will follow UnitedHealth Group's prepared remarks. As a reminder, this call is being recorded. Here is some important introductory information. This call contains forward-looking statements under U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. This call will also reference non-GAAP amounts. A reconciliation of the non-GAAP to GAAP amounts is available on the Financial and Earnings Reports section of the company's investor relations page at www.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated April 16, 2024, which may be accessed from the Investor Relations page of the company's website. I will now turn the conference over to the chief executive officer of UnitedHealth Group, Andrew Witty. Andrew Witty -- Chief Executive Officer Good morning, and thank you for joining us today. We have a lot to cover. First, we'll discuss the status and impact of the Change Healthcare cyberattack, then we'll turn to the performance of our businesses which continue to grow and perform well. It's important to underscore at the outset that even as we have devoted significant attention to addressing the Change Healthcare attack, the vast majority of the 400,000 people of this enterprise have remained as usual, intensely focused on delivering for all those we serve. That dedication is reflected in our overall performance this quarter. Directly as a result of their hard and -- hard work and the broad performance of our diversified businesses, we're able to reconfirm our full-year adjusted earnings outlook, even as we absorb $0.30 to $0.40 per share in business disruption impacts related to Change Healthcare. Now turning to Change Healthcare. This was an unprecedented attack by a malicious actor on the U.S. health system. We promptly disconnected the affected services and turned our focus to two main areas: restoration and support. The attack disrupted the ability of care providers to file claims and be paid for their work. We moved quickly to fill this gap. Fortunately, we were able to bring to bear the substantial resources of UnitedHealth Group to drive the recovery and begin to mitigate the impact. Resources, which are stand-alone to Change Healthcare, would not have had access to on its own. These are the resources and the philosophy that underpinned our remediation of healthcare.gov back in 2013 and our distribution of CMS COVID emergency relief funds to care providers in 2020. Here, we assisted care providers in financial need, providing over $6 billion in funding, all at no cost to them. We rapidly deployed resources to develop alternative solutions and move promptly to restore claims and payment services. We've made substantial progress, and we will not rest until care providers' connectivity needs are met. And to help care providers mitigate workflow disruptions and help ensure the uninterrupted delivery of care, for a period of time, we suspended some care management activities. I'm immensely grateful for our colleagues who continue to work tirelessly day and night to restore services, free up funds for providers, and protect the broader health system. Let me touch on two more items we know are of interest to you. First is care activity. The central point is that overall care patterns are consistent with what we anticipated last year heading into 2024 and within the outlook we shared with you in November. The second item is the essential value of Medicare Advantage to seniors. Here are what we see, some of the core facts regarding Medicare Advantage. It drives better health outcomes; provides a higher value, significantly more comprehensive benefit for people, all at a lower cost to beneficiaries and taxpayers; and is more popular with and valuable to seniors than traditional Medicare. Medicare Advantage consumers spend, on average, 45% less on premiums and out-of-pocket costs than those in traditional Medicare. That translates into nearly $2,400 in savings annually and several times more for the country's most underserved and medically challenged populations. That's one of the many reasons why more than half of seniors choose Medicare Advantage today versus 30% 10 years ago and why we believe these offerings will continue to grow strongly for years to come. 2025 is the second year of the significant three-year phase funding reductions to Medicare Advantage introduced by CMS last year. Here, in early 2024, we're at the beginning of our thoughtful, responsible, three-year plan we developed last year to adapt to those changes. Our strategy continues to focus on providing as much stability as possible in the reduced funding environment, improving outcomes and experiences for the consumers we're privileged to serve, and delivering the performance you expect from us. We believe our long-term perspective and the deliberate multiyear approach we began last year is serving us well, putting us into a position of sustainable, competitive strength. Among a handful of notable business developments to share, UnitedHealthcare was honored to secure major Medicaid wins in Virginia, Texas, and Michigan. While we were disappointed in the outcome in Florida, we'll be seeking to better understand the process and considerations there. There's a substantial pipeline in Medicaid RFPs, and we're confident that our offerings will resonate in other states as well. UnitedHealthcare's commercial benefits continued their momentum from last year, growing to serve 2 million more people in the first quarter, the largest increase in years. This growth was across UHC's commercial customer segments from individuals up through the largest of employers. This is further evidenced of our innovative and consumer-centric products have established the footing for sustained growth. We also see continued momentum at Optum Rx, coming off last year's record-selling season with a recent win in Hawaii and the renewal of our contract with the Department of Veterans Affairs. We're grateful for the opportunity to support them. And Optum Health is tracking well to achieve its objective of growing to serve another 750,000 patients in value-based arrangements this year in partnership with many payers. Before I turn it over to John Rex, our president and chief financial officer, I want to acknowledge Dirk McMahon recently retired after more than 20 years of service. I'd like to thank him for his leadership and partnership. Dirk has left an indelible mark on this company through the example he set and the many of our leaders he has mentored. John? John Rex -- Executive Vice President, Chief Financial Officer Thank you, Andrew. This morning I'll first provide color on some of the unique items in the quarter directly related to the Change Healthcare cyberattack followed by care activity trends, business updates, and finally, thoughts on the remainder of '24. But first, let me start at the most fundamental level. The UnitedHealth Group businesses continue to grow and perform well during the quarter, and we are encouraged by the momentum and the many opportunities to serve we're seeing across the enterprise. On the Change Healthcare cyberattack. As Andrew noted, our guiding focus throughout has been to make sure patient care is delivered and care providers' access to funding is secured as we work to bring back services fully. The cyber impacts in the quarter totaled about $870 million or $0.74 per share. At this distance, we estimate the full-year impact will be $1.15 to $1.35 per share. Let me break that down into its key components. Of the $870 million, about $595 million were direct costs due to the clearinghouse platform restoration and other response efforts, including medical expenses directly relating to the temporary suspension of some care management activities. For the full year, we estimate these direct costs at $1 billion to $1.15 billion or $0.85 to $0.95 per share. It's important to note these direct costs are included in net earnings but are excluded from adjusted earnings per share. The other component affecting our results relates to the disruption of ongoing Change Healthcare business. This is driven by the loss of revenues associated with the affected services, all while incurring the support and costs to keep these capabilities fully ready to return to service. Notably, these effects are not excluded from adjusted earnings. In the first quarter, this impact was about $280 million or $0.25 per share. At this distance, we currently estimate the business disruption at $350 million to $450 million or $0.30 to $0.40 per share for the year. This, of course, will depend on the ultimate timing of service and transaction volume restoration. These elements are broken out for you in the supplemental tables provided with our press release this morning. Of course, we will provide regular updates on our progress and outlook throughout the course of the year. While much of Change Healthcare's functionality and services have been restored, we are working hard to restore more, and the objective we all share is for an even stronger Change Healthcare to be fully returned to expected performance levels next year. I'll come back to some of these elements in more detail in just a moment. Turning to underlying care patterns. The headline is that these continue within our expectations. Outpatient care activity among seniors remains consistent with the elevated levels we began seeing in the first half of '23 and for which we planned, so we continue to be comfortable with the outlook we established last June when we filed our 2024 Medicare Advantage benefit offerings. The winter seasonal activity we discussed with you in January, particularly related to strong vaccine uptake, higher respiratory illness incidence, and related physician office visits, has subsided. Overall inpatient care activity also remains within our expectations. The first quarter medical care ratio at 84.3% included roughly 40 basis points or about $340 million related to the temporary suspension of some care management activities. These have been recently reinstated. The majority of the remaining $325 million of full-year medical expense impact included in our outlook will land in the second quarter. Notably, we did not reflect any favorable earnings impacting medical reserve development in the quarter. Out of prudence, due to the potential for the cyberattack to affect claims receipt timing, we reflected an additional $800 million of claims reserves. We'll continue with a judicious view as we progress over the next several quarters. Turning to the performance of our businesses, the most important takeaway is they are growing and performing at a level which allows us to maintain the adjusted earnings per share objectives we established last November, even while taking on the business disruption impacts of the Change Healthcare attack. At UnitedHealthcare, revenues of $75.4 billion grew nearly $5 billion. Within our domestic commercial membership, we're off to a strong start, powered by disciplined growth, serving 2.1 million new consumers in the first quarter. We are encouraged by the momentum and positive customer response to our differentiated offerings and look forward to building further upon that momentum heading into '25. For Medicare Advantage. As you would anticipate, we are deeply into our '25 planning activities. As we finalize our '25 benefit designs over the next several weeks, we will build competitive offerings that once again appropriately reflect the funding and cost environment. We approached this last year with a deliberate three-year plan, which continues firmly on track and positions us well going into '25. Our Medicaid business ended the first quarter with 7.7 million members. As Andrew noted, key wins in Texas, Virginia, and Michigan demonstrate the value state customers see in our offerings. In Virginia, UHC was the highest-scoring plan with particular strength in member-centric care, benefits and service delivery, quality and value-based payments. In Texas, UHC was awarded the maximum number of possible service areas, expanding the number of people we will have the opportunity to serve. And in Michigan, UHC achieved perfect scores in such critical consumer-centric areas as social determinants of health and health equity, further solidifying our value proposition. Optum Health's revenues grew by 16% to $26.7 billion as we increase the number of patients served and are on track to approach 5 million patients in value-based care by year end. For the most complex patients that Optum Health serves, we have engaged 75% through the first quarter of this year, a significant increase in the number of patients engaged over last year. This reflects progressively earlier connectivity with patients and the ability to improve their health outcomes and experiences more rapidly. Optum Rx revenues grew 12% to $30.8 billion, driven by new client starts, continued expansion within existing partnerships, and growth within pharmacy services. Optum Insight, as you know, is where the Change Healthcare business resides. In the quarter, about $500 million of the $870 million total impact is within Optum Insight. Just under half of this are direct response costs, think clearinghouse restoration activities, which we have excluded from adjusted earnings. And slightly over half are the business disruption effects which are not excluded from adjusted earnings. For many of the impacted Change Healthcare services, transaction volume drives revenues, so the effect of the attack in the period is one of keeping all the lights brightly burning at full readiness to resume services while revenue production was essentially suspended. To be clear, the Optum Insight team did the critical and right thing, promptly shutting off services and finding any method possible to keep the care system working, including helping clients find alternative solutions. Coming out of this incident, the team will be working tirelessly with customers to recover transaction volumes and demonstrate that Change Healthcare is ready to serve and is more valuable than ever. Beyond Change Healthcare, the Optum Insight revenue backlog increased to nearly $33 billion, growth of over $2 billion from a year ago, driven by health system partnerships to provide business process and information technology services. A couple of other items of note that were affected by the cyberattack. Days claims payable in the first quarter were 47.1, compared to the 47.9 in the fourth quarter, 23, and 47.8 a year ago. The accelerated payments to care providers and the Brazil sale reduced what would have been our reported measure for the quarter by about three days. The medical costs payable balance increased $1.6 billion from year-end '23 to $34 billion. The change reflects a $3 billion increase in the incurred but not yet reported component for IBNR. This is the result of the prudent ongoing claims receipt assessment, offset by a $1.6 billion reduction in the fully processed claims component due to care provider payments acceleration. Cash flows from operations in the quarter were $1.1 billion, impacted by about $3 billion due to the funding acceleration to care providers and collection extensions to affected customers and were additionally impacted by the timing of some public sector receipts. To summarize, a continued focus on better serving patients and the health system underpins our mission and growth drivers which remain strong. And as we move further into this year, the broadly strong performance across our enterprise allows us to continue to expect full-year adjusted earnings per share in the range of $27.50 to $28, even as we incorporate the $0.30 to $0.40 per share of business disruption impacts. Now I'll turn it back to Andrew. Andrew Witty -- Chief Executive Officer Thank you, John. As we look out over the next several years, we, like many others, see a healthcare environment in need of improvements in quality, value simplification, and consumer responsiveness. While we're a comparatively small part of the $5 trillion U.S. health system, UnitedHealth Group strategy is focused on helping to meet those very needs, and we're well-positioned to do so. Our focus on understanding opportunities to align incentives, notably led via our value-based care offerings, demonstrates what can be achieved through partnership and realignment of ways of working. Our commitment to improving all we do for consumers stimulates our drive to help bring care to patients where they need and want it at prices and with an experience worthy of the 2020s. We have a proven commitment to making available our insights and innovations widely and quickly throughout the market, alongside our relentless multiplayer orientation at Optum. We remain committed to partnering with others throughout healthcare to help make the health system more modern and responsive. Our success depends on enabling partners and customers outside our company to succeed. The combination of this strategic design, strengths, and behaviors underpins our high confidence in our ability to navigate the inevitable environmental change and challenge, and it reinforces our confidence in our ability to perform and grow strongly as you have come to expect from us. With that, operator, we'll turn to questions. Questions & Answers: Operator Thank you. The floor is now open for questions. [Operator instructions] And we'll go first to Lisa Gill with J.P. Morgan. Lisa Gill -- JPMorgan Chase and Company -- Analyst Thanks very much, and thanks for all the comments. I just want to go back to your comment around your three-year plan as it pertains to V28. Does the 2025 final bid change anything around that plan? And how do I think about the impact in the quarter of V28 in both Optum Health as well as on the UnitedHealth side? Andrew Witty -- Chief Executive Officer Yeah, Lisa. Thanks so much for the question. Yeah, as we've said a few times and certainly repeated this morning, we've looked at the changes that CMS finalized last year really thoughtfully, and we see this as a three-year strategy in response. Obviously, it's phased in over three years. We want to make sure we don't do anything that chases short-term growth, for example, but puts a lot -- puts at risk long-term sustainability. What you're also not going to see from us is a kind of knee-jerk reaction between growth and margin. We want to be very focused on ensuring that year in, year out, we're a super reliable performer in this environment. As you look at the most recent final rate, I don't think it really changes the story. Obviously, it's a little disappointing that we don't think CMS really reflected what was -- what we've seen over the last year in terms of actual in-market medical trend. But in reality, it's just a little extra pressure for '25 on top of what we'd already seen previously. We're well-positioned for that in terms of all the work we've been doing really from the get-go last year. Really, from February last year, we've been getting ourselves lined up for this. You're seeing that reflected in Q1 in a few really key features, right? So you're seeing really strong cost control inside the company, as you'd absolutely expect us to do, making sure that we're not incurring any expense that we don't need to to support our members and patients on the outside of the organization. You saw us take a very thoughtful bid strategy last year. And of course, we continue to focus on how to make sure that we manage medical cost as effectively as possible, ensuring quality of care delivered and avoiding waste. All of that plays through. I'm very, very pleased with how this first quarter has played out in that respect. If you look at the performance of Optum Health and our MA business within UnitedHealthcare, both very strong performance during this quarter despite the pressure that's been incurred on them from the rate notice last year, and I think that bodes super well for the rest of this year and the strategy that we've laid out for the next three. Thanks, Lisa. Next question. Operator We'll go next to Josh Raskin with Nephron Research. Josh Raskin -- Nephron Research -- Analyst Hi. Thanks. Good morning. Can you just explain what medical cost you categorized as accommodations to support care providers? I think the UM management that you guys were talking about, what a certain medical -- what's a certain medical expense in that bucket? And then when you look at your actual claims received or claims processed inventories, what percentage of a normal or expected quarter did you actually see in the quarter versus how much did you just sort of put into IBNR? Andrew Witty -- Chief Executive Officer Josh, thanks so much. I'm going to ask Brian Thompson in a second, just to give you a little bit more color on the first part of your question. Listen, I think by the time we got to the end of the quarter, we had the overwhelming majority of what we'd anticipate in receipt in terms of claims received into the organization because it's always a little bit tricky to be absolute about that because you're kind of comparing against what you would have expected. And as you obviously know, every quarter, you see corrections, both up and down, in terms of actual claims submissions catching up with what you may have estimated, and that's been obviously a feature of this marketplace. But overall, I would say UHC claims receipt was very, very close to normal by the time we closed the quarter. But maybe, Brian, you could give a little more color commentary on how you would characterize some of that relief we gave. Brian Thompson -- Chief Executive Officer, UnitedHealthcare Sure. Appreciate the question. Yeah, Josh, I believe we started March 8th. And what we did, I call it foregone utilization management protocols, and those are really in two categories. The first is we suspended our inpatient level of care reviews where we assess for appropriateness of inpatient versus outpatient, and that was the lion's share of our adjustment. And we've got a long history of understanding those elements. It's just a unit cost adjustment, so pretty simple and easy to estimate and adjust for. The second element inside those practices was some outpatient prior authorizations that we also suspended. Those were a smaller element inside this quarter. Those will play out a little bit more in next quarter as you think about that lag between notice and actual incurral date. But again, pretty easy for us to estimate. These are practices we've had in place for a very long time and feel comfortable about the adjustments that we made. Andrew Witty -- Chief Executive Officer Brian, thanks so much. And just again, to confirm, as you heard from John, we've brought those processes back into play in the last few days. Next question. Operator We'll go next to A.J. Rice with UBS. A.J. Rice -- UBS -- Analyst Thanks. Hi, everybody. Congratulations on working through all this. Maybe just make sure I understand a little more. The $800 million reserve that you're holding out, you did comment shouldn't take any prior-period development to the bottom line. I guess it sounds like you've used the word prudent several times in describing that. How much -- yeah, just maybe to follow up on the last question. How much of that is things that either from what you get inside from Optum Health or from your own ability to look at prior-year claims versus what you've seen so far is what you really think is going to happen? And how much of that is sort of add on, just because of the moving parts out there? And then it sounds like you're basically saying that the care dynamics are similar. Is there anything you call out outpatient, inpatient, uh, that suggests any variance relative to your MLR assumptions for the year when you started out? Andrew Witty -- Chief Executive Officer So I'm going to ask John just to comment on the $800 million more specifically. I mean, I think as we said a couple of times, A.J., really not seeing anything stand out in terms of care pattern differentiation from what we really expected. I mean, as we mentioned earlier, that kind of pressure we saw at the end of Q4 and rolling into the very beginning of the year around some kind of winter syndrome, vaccination dynamics we talked about a lot last time, as expected, that did subside. Beyond that, I would -- which was what we were anticipating. Beyond that, I wouldn't say there's anything really to call out within all of that. John, could you maybe go a little deeper on the $800 million? John Rex -- Executive Vice President, Chief Financial Officer Yeah. Good morning, A.J. Yeah, so picking up on comment Andrew had made earlier, so what you're really doing there is estimating what you didn't see, so claims receipts that you may have not received in the quarter and trying to make an accommodation for that, as you said, a prudent accommodation for that, just to acknowledge that there clearly had to be some disruption in the quarter and claims patterns. And so you're trying to make some estimation in that zone to anticipate that. So you put it somewhere in the zone, it's not zero, and it's not $800 million, somewhere in between, probably as you'd think about those elements and where you might land. And so as we look out -- and you should expect that we'll probably continue with a judicious view over this over the next several quarters actually also. We'll want to make sure that we've got full visibility into this, that the claims are flowing. And as we sit here on April 16th, that does -- we see at UHC, we see a fairly normal claims receipts and payments flows going on at this point, but we'll really want to be careful on that because we know there are certain care providers out there that maybe have been left out a bit. And so we'll continue to be very judicious next quarter also in terms of assessing that. Andrew Witty -- Chief Executive Officer Thanks, John. Thank you, A.J. Next question. Operator We'll go next to Justin Lake with Wolfe Research. Justin Lake -- Wolfe Research -- Analyst Thanks. First, I just wanted to quickly follow up on A.J.'s question here around the $800 million. Can you just be specific around -- is that conservatism related to 2023, meaning you would have had up $800 million of development that would have benefited the quarter? Or are you saying that you just took extra reserves that actually impacted Q1 because we're looking at an MLR that's 50 basis points above where you kind of expected it? And yet, you're saying trend is in line. So we're trying to figure out was there a 50-basis-point miss or are you saying that really that's just the conservatism here? And then any -- my question was really around the relative visibility on cost trend, right? Last year, it was somewhat opaque. You kind of told us that there was some uncertainty, and then that uncertainty turned to certainty around, hey, trend is higher in Q2. How do you feel about your visibility this year? Do we have to wait till 2Q to kind of be able to declare that, hey, we're kind of through this, and you're not seeing with the rest of the industry seeing? Or do you think we probably have to get that update again in second quarter? And lastly, any commentary on Q2 MLR and where you think you end up in the full-year range for MLR would certainly be helpful if you could provide. Thanks. Andrew Witty -- Chief Executive Officer OK, Justin, thanks for those questions. Let me -- I'm going to ask John in a second just to go back and again just give you a little bit more definition around the $800 million, as you asked. Just in terms of cost trend and let me make a couple of comments and ask Brian maybe to go a little deeper as well and then come back to John. As I look at the cost trend this year versus last year, some big differences. So last year, really I think the core of the story of what led to that sort of step shift, if I can put it that way, in early Q2 -- Q2 of last year. I think that was really -- and the hindsight tells us that was really around a kind of post-COVID or end of COVID story playing out in terms of capacity coming on stream most importantly and to some degree of pent-up demand. I actually think the capacity coming on stream was as much an issue driver of that as anything else. So I think to some degree a one-off. We don't see anything like that. We've seen much more stabilization. We haven't seen a step down from that trend. We'd be super clear about that. We haven't seen it kind of go back down again, but we've certainly seen that kind of sustained activity without aggressive acceleration. And then the other thing, I would say to you is, as you would expect, given that shift we saw last year in the intervening year, we've put in a lot of sensing mechanisms across our organization, both in UAC and Optum, to look for early warning signals of changes, quite a low granularity in terms of trying to figure out how this pattern plays out. Now as all our actuaries and any actual will tell you that the gold standard of knowledge on trend is a paid claim, but nonetheless, we've tried to put in place a lot more prospective sensing capability. And again, that's kind of consistent with what we're sharing with you. So we're not really anticipating a big change there. I mean, obviously, the future is the future, but as we sit today, everything looks pretty much as expected. Brian, you may want to give a bit more from a UHG perspective. Brian Thompson -- Chief Executive Officer, UnitedHealthcare Yeah. Thanks, Andrew. And I think you summarized it well. I'll reiterate what you heard from John, which is what we're seeing in these underlying service types, inpatient, outpatient, et cetera, are in line with what we had planned for, so I'll reiterate that. Just to add to that level of improved visibility this year over last, certainly COVID being the biggest driver, but also redeterminations. Last year, we were at the beginning of that. This year, we're nearing the end of that. So two key unknowns a year ago I think that contributed to perhaps a little less visibility, both of which I think we've really got a better view to this year. And the last thing I'll just point out is, as we've paced through one-one, I also feel good about our business mix. Again, early in the stages of evaluation of that, but how our growth has changed and what we've seen in those profiles from the growth that you're seeing in our commercial business to the growth in our Medicare business as well, really feel good about all those elements. So, yes, optimistic about the rest of the year and how it's playing out against what we had planned for. Andrew Witty -- Chief Executive Officer Great. Thanks, Brian. And John? John Rex -- Executive Vice President, Chief Financial Officer Yeah, Justin, good morning. So I think the way you look at it, so overall the net view being, so we didn't let any earnings or medical care ratio impacting development flow-through into the quarter. And when you look at it, so you can come at it, as to the normative course of assessments would have indicated some potential for favorable development in the quarter. We would -- we took a position also that there was likelihood that there were claims we didn't receive. And so in terms of the claims completion factors and such and so how that may have impacted and so you're really netting that all off in the course of the quarter to try to just normalize that out, not having any impact from any of those -- from those elements, and taking a pretty prudent view of where you might be in terms of the claims you received. In terms of your question here on the Q2 MCR, at this distance, I put it in a similar zip code to 1Q, including similar impact from the cyber effects that we had also. And as I noted in response to A.J.'s question, we'll be continued to be very judicious as we look at those patterns also on claims receipts. So we'll continue with the judicious view of how we think about -- how we think about development and those impacts as we step out here in the next couple of quarters to make sure we're getting our claims receipt timings fully incurred here. Andrew Witty -- Chief Executive Officer Great. John, thanks so much. Next question. Operator We'll go next to Stephen Baxter with Wells Fargo. Stephen Baxter -- Wells Fargo Securities -- Analyst Yeah, hi, thanks. The business disruption costs you've projected beyond the first quarter are, I think, smaller maybe than most had expected despite the fact we've heard commentary from stakeholders reducing their dependence on Change Healthcare during the quarter. I guess, what are you seeing from customers on that front? I guess, how much of that recovery do you have on the revenue line? Do you have line-of-sight to versus you have to drive throughout the balance of the year to get to that no impact to 2025 that you seem to expect? Thank you. Andrew Witty -- Chief Executive Officer Yeah, Stephen, thanks so much. So I'm going to ask Roger Connor, who runs Optum Insight to give you a little detail on this. First off, so I just want to -- I just want to take a moment to pay credit to the teams for the speed in which they brought back the overwhelming majority, the functionality of Optum -- of Change Healthcare after the attack. It's been extraordinary example of really the resources of UHG, and frankly, the support of many of the biggest companies across America in the tech environment coming in to help recover from this particular attack, which was straight out an attack on the US Health System, and designed to create maximum damage I think. We've got through that very well in terms of the remediation and the build back to functionality, and Roger, maybe you could share a little bit of what you're seeing and expect in terms of customer dynamics over the next few months. Roger Connor -- Chief Executive Officer, OptumInsight Yeah, we'll do. Stephen, thanks very much for the question. So the way that we're thinking about the whole cyberattack response is two key areas of focus. First of all, as Andrew mentioned, good progress on system restoration. If you look at the biggest areas where we have the largest number of customers, that's pharmacy, claim, and payment, we're up to 80% functionality and that's continuing to improve day by day. Now we've still got work to do. We've got another set of products coming online in the number in the coming weeks, but pleased with that progress. I think your question is really about our next focus, which is recovering the business and this is about bringing those products back, but actually bringing them back stronger where we can. We're adding functionality where we can too. But then also bringing back customers, who because of the outage have to go elsewhere to get things like their clearance house support. Now we are confident in our ability to do that. Why? Well, first of all, the portfolio and the differentiation we have, which is good. But also, as you can imagine, we're talking to those customers all the time and they want their functionality back. They like what they've got or they had with Change and they want to get that back. So we're working with them to ensure that we can actually do that. Also, we provided financial support to a number of our clients and they appreciate that. They have said to us that they appreciate it. That's a signal that we are committed both to them, but then also to this marketplace as well. So when you add those elements up, Stephen, that's where we're confident. We've got more work to do. This has been a heavy lift and we're going to continue that work. But that's why we're confident in getting back to that baseline performance in 2025. Andrew Witty -- Chief Executive Officer Roger, thanks so much. And I think, Stephen, what you heard in Roger's response there is a couple of really important features of the character of UnitedHealth Group, super high resilience and we will always stand by our customers and clients, and when an attack like this happens, which puts our customers and clients at risk, we will do whatever it takes to make sure they get through that, whether it's technical fixes or financial support, we are going to stand by our clients, who in this case are the providers and the systems across America who look after American patients and we will do that. And I think that means a lot to a lot of people and it's an important capability to have running through the backbone of American healthcare. With that, Stephen, thanks for the question. Next question. Operator We'll go next to Kevin Fischbeck with Bank of America. Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst Great. Thanks. Just want to go more -- a little bit more into the visibility that you guys think that you have into claims today. It sounds like you feel like you're largely back, but I guess, where would you say today that you are from a percent visibility into claims versus the same time last year? And I know that there's forecasted improvement, but I think there's a lot of focus on the ability to price 2025 correctly. So by the time you're submitting your MA bids, how much back to normal? What percentage back to normal do you think you'll be from a claims perspective at that point? And then finally, I'm used to hearing you guys reiterate 13% to 16% long-term EPS growth, but I didn't hear that in the prepared remarks. I just wasn't sure if that was due to time or whether there was anything that you were trying to say there. Thanks. Andrew Witty -- Chief Executive Officer All right. So I'm going to ask John to comment on your substantive question, Kevin, and I'm going to ask you just to stay on the line for my last paragraph for closing comments for the second part of your question. John? John Rex -- Executive Vice President, Chief Financial Officer Good morning, Kevin. So as we sit here today on April 16th, I would say, UHC is pretty much back to normal levels in terms of claim submission activity. We view it as normalized now. That we're seeing claims slowing like they -- we'd expect them to be flowing and moving along. So that's all progressing quite well, which assists a lot with the piece that you were just describing here in terms of where we think that is and as we move forward and look over the next month plus to finalize our bid submissions and such. So feel good about that in terms of our visibility and insights. Andrew Witty -- Chief Executive Officer Yeah. Thanks so much, John, and thanks so much, Kevin. Next question. Operator We'll go next to Nathan Rich with Goldman Sachs. Nathan Rich -- Goldman Sachs -- Analyst Hi. Good morning. Thanks for the question. I wanted to ask on the reported DOJ investigation. I'd be curious, has the company had kind of dialogue with the DOJ and do you have a sense of timeline for what the next steps might be as we look about what -- for what the possible outcome of this process could be? Andrew Witty -- Chief Executive Officer Hey, Nathan, thanks so much for the question. Listen, I think you'd probably expect we don't comment on these sorts of matters and I don't think it would be appropriate to do so today, and certainly, we never have done in the past. So it's not something we're going to get into in the call, but I appreciate the interest. Thanks. Next question. Operator We'll go next to Andrew Mok with Barclays. Andrew Mok -- Barclays -- Analyst Hi. Good morning. Commercial risk and ASO membership both came in above the high end of your initial guidance, can you help us understand what drove the membership -- a better membership results for each segment? Thanks. Andrew Witty -- Chief Executive Officer Thanks so much for the question. I'll ask Dan Kueter, who runs our E&I business from UHC to respond to that. Dan? Dan Kueter -- Chief Executive Officer, UnitedHealthcare Employer and Individual Yeah. Hi, Andrew, and thanks for the question. Certainly encouraged with the broad-based growth, share gaining growth, I would say, in our Individual segment, our Local Market segment, and our National Accounts business. Some of the key drivers underlying that, about a third of our Group growth gains were attached to our most innovative products and the expansion of those into 37 states now, on a fully insured basis, to be -- and also fully available nationally on an ASO fee-based business. Specifically inside the risk business, our individual and family exchange-based plans were a significant driver of the growth. We've seen some latency. From membership, we expected that would have come in from redeterminations into the final portions of 2023, now begin to emerge into 2024. That's been a significant contributor to that risk-based growth in the first quarter. As a punchline, I like our growth, I like the pricing, very much like the profile of both the groups and the consumers that we're attracting. And finally, I'm really pleased with the consumer experience that our teams are delivering to those that we serve. Thanks for the question. Andrew Witty -- Chief Executive Officer Great. Thanks so much. And as you saw, Dan's organization delivered an extraordinary two million member growth in the first quarter, one of the highest growth rates we've seen for many, many years. And I think that really comes down to relentless focus on modernization of service offer and then delivery of that service offer, and I'm very proud of the whole team in the UHC commercial businesses domestically for what they've done. Next question. Operator We'll go next to Lance Wilkes with Bernstein. Lance Wilkes -- AllianceBernstein -- Analyst Thanks. Question on Optum Health. As we're looking at outlook there, we've been really focused on capacity growth in the systems, do you guys have any insights for your capacity growth in Optum Health? Obviously, you've been taking some cost actions there, so interested in hiring trends. And then second, have you been renegotiating risk deals? I know that there was likely some of that for '24. What's the outlook for that and the impact of that in '24 and the outlook of that for '25? Thanks a lot. Andrew Witty -- Chief Executive Officer Yeah, Lance, thanks so much. And I'm glad you've asked about Optum Health. I'm going to ask Dr. Desai to respond to that. Amar runs our Optum Health business. He has been doing a great job of continuing to mature that business for us, which for me, I think is one of the great headlines of Optum Health. Its continuous maturation as a sophisticated value-based care delivery organization, and Amar, maybe you could respond to Lance's question. Amar Desai -- Chief Executive Officer, OptumHealth Yeah, thanks for the question, Lance. I'll take the first one in terms of hiring trends. We continue to work with more providers in a deeper way continuing to grow across a range of arrangements. As you know, physicians across the country work with us in contracted affiliated arrangements, as well as employed arrangements, and we continue to have strong partnership and growth, both organically and also through some of our inorganic M&A activity. We don't see a capacity constraint there. In fact, we've continued to see incredible growth with our payer partners to the second part of your question. The risk partner growth continues to increase across multiple payers. It's being driven by some of the funding and benefit dynamics that are out there. Folks are looking for a real stable partner to be able to grow with. We have worked with them continuously in terms of our contracts, both looking at the benefit and funding changes and ensuring that the funding level is appropriate for the risk that we're taking on, and to be able to provide very high-quality care across our membership. So we're very proud of the growth we've had and we'll continue to do so. Thanks. Andrew Witty -- Chief Executive Officer Great. Amar, thanks so much. Next question. Operator We'll go next to Sarah James with Cantor Fitzgerald. Sarah James -- Cantor Fitzgerald -- Analyst Thank you. We wanted to understand a little bit better the $3 billion in IBNR. So just our back-of-the-envelope math suggests if 15% to 20% of claims from UHC run-through change, post-event that would be like assuming a third of the change-related claims are delayed, is that in the ballpark of where your change completion factor assumptions were? And keeping that conservative assumption of a claims like throughout the year, what does that imply for the seasonality of the remaining $0.41 to $0.61 GAAP impact from change? Andrew Witty -- Chief Executive Officer Sarah James, thanks so much. John? John Rex -- Executive Vice President, Chief Financial Officer Yeah. So I don't know if I'd kind of go right with some of those stats that you pulled out in terms of where those fell, but here's some insights I can offer on that. So, one of the elements we wanted to break out on the IBNR component is, so, as you know, what we report on the balance sheet you received this morning, medical costs payable is a combination of IBNR and medical claims payable. And so we're hoping to provide some more transparency for you as you looked at the quarter and such, and a $3 billion increase in IBNR is significant. And then offsetting that on the -- on that line item would have been the -- really the funding advances. The component where we just made sure that as soon as the claim was in-house processed, we were speeding it out the door to get it to providers. That was one of the components in addition to the interest-free loans we made that we were helping the provider community -- the provider community with. As you talked -- as you discussed kind of where we were, let's say, today, we feel that UnitedHealthcare is essentially at normalized levels in terms of -- in terms of claims receipts. As we sit here, we're going to be super prudent in how we look at that because we know there are providers out there that could still be having trouble submitting claims, and still having troubles with payment flows and such, and so we're going to be very appropriately constrained in how we think about that dynamic playing out here over the next -- over the next couple of quarters. But really, those are the kind of mechanics of what's going on between the IBNR component that you spotlighted and the full line of medical costs payable. Andrew Witty -- Chief Executive Officer Right. Thanks, John. Next question. Operator We'll go next to Gary Taylor with Cowen. Gary Taylor -- TD Cowen -- Analyst Hi. Good morning. Just wanted to follow up on that point, John. My understanding is, on the IBNR that you report in your Qs and Ks includes unprocessed claims, inventories, so the $3 billion, is that just going to tie to the number we see when the Q comes out? Are you saying the $3 billion really is true unreported claims at this point? Andrew Witty -- Chief Executive Officer Thanks so much, Gary. John? John Rex -- Executive Vice President, Chief Financial Officer $3 billion is IBNR directly, that is to your point. That is the IBNR component of it, Gary. Andrew Witty -- Chief Executive Officer OK. Thanks, John. Next question. Operator We'll go next to Erin Wright with Morgan Stanley. Erin Wright -- Morgan Stanley -- Analyst OK, thanks. On capital deployment, you didn't change your expectations for share repurchases, but how should we think about the priorities more broadly, whether it's M&A or otherwise in your ability to be opportunistic on that front? Thanks. Andrew Witty -- Chief Executive Officer Erin, thanks so much. I'll ask John to comment on it. John Rex -- Executive Vice President, Chief Financial Officer Yeah, Erin. Yeah, we didn't update any of those components here. We continue to take a very balanced view in terms of how we think about our opportunities. You saw, certainly, that we had activity in the quarter from -- in terms of both share repurchase and dividends. Also, we continue with robust opportunities in the marketplace in terms of other capabilities that we are looking at. So that all continues strong. So you'll see us continue to balance those out nicely in terms of -- in terms of the opportunities that are out there and with capacities really to approach all those elements strongly. Andrew Witty -- Chief Executive Officer Yeah, and I continue to see very interesting diverse pipeline of M&A opportunity across the marketplace in terms of business areas that we have interest in. As I think you see some of the funding changes play out across the -- across the next few years, I suspect that may also create new opportunities for us as different companies assess their positions. I think how we look at this situation is we have a good strong strategy for how we navigate through this dynamic. You're seeing that play out super well in the first quarter performance of Optum Health and UHC and I think it gives us a sense of real confidence as we look not just in terms of our performance, but potentially how we might think about M&A opportunity. And as you rightly said, be somewhat opportunistic if those moments arrive. Next question. Operator We'll go next to Whit Mayo with Leerink Partners. Whit Mayo -- Leerink Partners -- Analyst Thanks. Good morning. Just back on the 2025 rate notice, I think you're -- if I'm hearing you correctly, it sounds like you're framing this as modestly disappointing, but perhaps manageable. Just any more color on growth expectations for next year? And then if you could elaborate on the broker agent changes, what this could potentially mean for your strategy seems like a meaningful change. Don't know, if you think about investing more into captive broker strategies, just any color would be helpful. Thanks. Andrew Witty -- Chief Executive Officer Thanks so much for the question. I mean, obviously, we're not going to get into give kind of '25 numbers or expectation just yet, but Tim Noel, who runs our M&R business, certainly give you some good perspective on the rest of your question. Tim? Tim Noel -- Chief Executive Officer, Medicare and Retirement Yeah, good morning, Whit. Thanks for the question. So on the final notice and some of the distribution elements of that, we continue to believe that there's opportunities to improve the distribution environment in Medicare Advantage and have been in a dialog with CMS for several years on how to do that. Some of the elements of the final notice that were published recently are directly in line with some of our recommendations and some of them are relatively consistent, but not totally as we had conceived them. I would also say right now, it's a little bit early to comment on how this might rebalance some of the channel mix, as still some questions on how some of the key elements of that will be rolled out. So we're still waiting for a little bit more detail before we can get more specific on how it impacts go-to-market in '25. Whit Mayo -- Leerink Partners -- Analyst Great. Thanks so much, Tim. Next question. Operator We'll go next to Ann Hynes with Mizuho Securities. Ann Hynes -- Mizuho Securities -- Analyst Hi. Good morning. So, I would say your commentary on care patterns is definitely more positive than what investors feared. And you referenced several times that trend came in line with your expectations, can you actually tell us what growth rates you're assuming like the major trend categories in guidance, whether that's inpatient and outpatient, and maybe some year-over-year growth versus historical averages? And within that, can you specifically talk about what you're assuming for MA? That'd be great. Thank you. Andrew Witty -- Chief Executive Officer John, would you like to start that? John Rex -- Executive Vice President, Chief Financial Officer Yeah. Ann, good morning. So the components that I would call outliers are the similar components that we've talked about for a while here in terms of trend outlooks. So in particular, still go back to outpatient care for senior, what we've seen in orthopedic, cardiac, those kind of categories primarily have been the big factors. I think you brought up a really important point though. So the percentage growth in those was much bigger last year. You're coming off an environment where both the supply side had been constrained and the willingness of seniors, in particular, consumers to access that environment had been constrained for a couple of years. So those percentage factors were quite significant. You heard us talk about very significant levels on those double-digit levels of last year as we looked at those. The way we look at those really though is because you would expect that to start normalizing in terms of the percentage change. So you really look at that in terms of the number of units consumed per patient served. And so you look at those levels, that's what we're talking about and we're seeing those kind of continuing at those levels. They're continuing at those levels in terms of the number of units consumed, delivered, and -- but those percentage levels, of course, would start normalizing out a little bit in terms of what you'd seen. So that continues to be the area. It's outpatient care for seniors. It's those categories that we'd call real outlier areas versus our historical levels of trend factors. The other -- the other historical levels of trend factors remain much closer to kind of our traditional views that we've always had as a company. In the quarter, other things you look at just to get indications, and by the way, we kind of vastly expanded all those areas. First fills, you've heard us talk about that a lot. Also, first fills in the quarter, an indication of outpatient care, physician visit activity, it's kind of normalized in there also in terms of stabilizing for us and many -- the many other factors of the company historically looked at. Thank you. Andrew Witty -- Chief Executive Officer Thanks, John. And maybe ask Brian maybe to give you a little bit more from a UHC perspective, and then maybe Heather also from a Optum perspective in a second, just maybe reflect a little bit on the work you're doing in terms of how we -- obviously, medical trend is one thing, then there's a question of how well we're able to engage with folks to actually help them manage their cost and maybe come to you in a second, Heather, on some of the word that you're leading at Optum. So Brian, first? Brian Thompson -- Chief Executive Officer, UnitedHealthcare Sure. I think John said it well. The first headline is what we're seeing is what we plan for. But as he alluded to, some of those elements, we plan for them to be elevated year over year. And I don't want to lose sight of unit costs. We've talked for some time that multi-year provider group and hospital contracts renew a little later than perhaps the inflation we've seen and that is up year over year. The biggest driver was the outpatient. We're really pleased to see that in line with as John explained. But also, we've been able to see increases in Specialty Rx. We've planned for those. Those are in our pricing appropriately, et cetera. And we've certainly worked hard to create more access in the behavioral space. So all of those elements are modestly up, but up as we had planned for and they'll hopefully sound familiar to you because we spoke to all of these at our investor conference as we ended the year. So I think that's what I would summarize or add to John's commentary. Heather? Heather Cianfrocco -- President, Optum So, I would say, incredibly consistent on the Optum side. So maybe just focusing on the medical first. So I mean, I think you've heard us say this, when you look, when we came out of last year, looking into this year, our focus was on the behavioral health, those outpatient sides consistent with UnitedHealthcare. And what was very important for Optum Health was using that capacity that Amar explained in our physicians, as well as those wrap-around services and our investments, to ensure that we were looking at those care patterns. So, we feel really good about coming into this year. That work we've done, John referenced engagement with particularly those most complex numbers, 75% already engaged. And that PCP engagement, that member engagement is incredibly important, whether it's with their PCP directly or it's with some of our care -- our own care management wrap-around services. Because it identifies affordability opportunities incredibly quickly. It also identifies chronic disease that needs to be managed and it gets them connected to primary care quickly. So that's our focus for the year and that's why we feel good about that our ability to control utilization on the medical side particularly. And again, what we'll remind you is a reduced funding environment as we go into this year. So that's what brings us -- that's what brings that value-based care proposition, incredible value to all of our payers. On the pharmacy side, I call it, same things. For our clients, that specialty trend is a focus and we bring those products and solutions and that's why we've seen growth on the PBM side and our pharmacies around our clinical model and the continued innovative products that we're bringing to bear. So you're seeing that pull-through in the diversified growth and strength of the performance on the Optum Rx side as well. Andrew Witty -- Chief Executive Officer Great. Thanks so much, Heather. Just one number Heather just shared with you there, which I'm very pleased of and it's a significant improvement year over year is that 75% engagement of the most complex members in Optum Health. And just for that, that means three out of every four most complex, most disadvantaged folks in the country have had a direct engagement with us in the first three months of the year. That's a great rate of touch. Opens the door then for us really getting to know those folks, helping the system, helping bring the system to support that many of these people, particularly those who are trapped in their homes have just not had access to that kind of care opportunity. That engagement is the first step of doing that. We have -- we really believe that is a key to how we not only deliver an effective care delivery from a cost point of view but also make sure they get the very best quality that they deserve. So really pleased to see that step up year over year. I think we have time for one last question. If we could take that question, please, Jennifer. Operator Yes, we'll go to our last question from Jessica Tassan with Piper Sandler. Jessica Tassan -- Piper Sandler -- Analyst [Technical difficulty] A few more details maybe on the -- Andrew Witty -- Chief Executive Officer Sorry, we missed the beginning of your question. Jessica Tassan -- Piper Sandler -- Analyst Hi. Sorry about that. I'm interested in a few more details maybe around the launch of Change 2.0. If you could talk a little about what payer receptivity to reconnection has been? Whether Change retains its legacy data rights post breach? And then just any change or updated thoughts on kind of the long-term thesis on Change for something like real-time transparent payments and decision support network? Thanks so much. Andrew Witty -- Chief Executive Officer Thanks very much for the question. Let me ask Roger to kick that one off. Roger Connor -- Chief Executive Officer, OptumInsight Yeah, Jessica, thanks very much for the question. First of all, on your first part about Change 2.0. Again, we're just confident in terms of our ability to reconnect. I mentioned the level of functional restoration that we have. You can imagine now the next stage of this is working with payer and provider to reconnect them in a safe way and an appropriate way and all of the conversations that we're having with them are positive as we work through it. As I mentioned, there's still work to do and that's going to take us a little bit of time, but we're continuing to work through that functionality. I think it's important also to recognize, where Change sits in the overall Optum Insight portfolio. Change Healthcare was about 15% of our projected revenue for this year and when you look at -- that means I've got thousands of people who are continuing to work on other products outside of Change, not impacted by this and their underlying performance this quarter has been strong. If you adjust for the Change out, that business' earnings actually grew by around 10%. But what we haven't slowed either, as you mentioned, is our innovation agenda. The excitement of the Change portfolio across the Optum Insight portfolio is what we can bring to this market to transform it from an innovation point-of-view. And the real-time settlement work that we're doing, plus work that we've been doing with Optum Health on value-based care and provider risk enablement, that's all still going ahead. So in terms of our innovation agenda and the performance of the underlying business within Optum Insight, we're very positive. Andrew Witty -- Chief Executive Officer Roger, thanks so much. And yeah, absolutely, Change Healthcare, the important acquisition for the group and I think important for the country that we own Change Healthcare. Without UnitedHealth Group owning Change Healthcare, this attack would likely still have happened and it would have -- it would have left Change Healthcare, I think, extremely challenged to come back because it was a part of UnitedHealth Group, we've been able to bring it back. We're going to bring it back much stronger than it was before. And secondarily, all of the reasons that we were interested in bringing the Change Healthcare capabilities and customer connectivity closer to UnitedHealth Group still absolutely holds fast in terms of the potential innovation around things like real-time settlement, clinical decision support capabilities, all of those products are the future services of the future, which ought to be characteristics of a modern healthcare environment. Those are all the reasons why we believe Change and Health -- and UHG were better together. This cyberattack has unfortunately created another true validation of why that was the right thing to do because it meant UHG was in position to resolve this much more quickly than I think would ever have been imaginable in a stand-alone situation. Thanks, everybody, for all of your questions this morning. It's been a bit more of a complex quarter for sure this time around but one that's also showed the depth and breadth of our company's capabilities. We're recovering quickly from the Change Healthcare attack and are a stronger, more capable company as a result. We're continuing to build our business based on the five strategic growth pillars that we're relentlessly focused on, and we're steadfastly confident in our ability to achieve our 13% to 16% long-term growth objective as we look to the years ahead. We very much appreciate all of your time and attention this morning. Thank you.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, ladies and gentlemen. Welcome to Vale's first quarter 2024 earnings call. This conference is being recorded, and a replay will be available on our website at vale.com. [Operator instructions] Further instructions will be provided before we begin the question-and-answer section of our call. We would like to advise that forward-looking statements may be provided in this presentation including Vale's expectations about future events or results, encompassing those matters listed in their respective presentation. We caution you that forward-looking statements are not guarantees of future performance and involve risks and uncertainties. To obtain information on factors that may lead to results different from those forecast by Vale, please consult the reports body files with the U.S. Securities and Exchange Commission, the Brazilian Comissao Valores Mobiliarios. And in particular, the factors discussed under forward-looking statements and risk factors in Vale's annual report on Form 20-F. With us today are Mr. Eduardo de Salles Bartolomeo, CEO; and Mr. Gustavo Pimenta, executive vice president of finance and investor relations; Mr. Marcello Spinelli, executive vice president, Iron Ore Solutions; Mr. Carlos Medeiros, executive vice president of operations; and Mr. Mark Cutifani, chairman of Vale Base Metals. Now I will turn the conference over to Mr. Eduardo Bartolomeo. Sir, you may now begin. Eduardo Bartolomeo -- Chief Executive Officer Thank you, and good morning, everyone. I'm very excited that we got off to a good start in 2024. Starting with our safety journey. Technological enhancements and innovation toward safety improvements is showing encouraging results with 77% reduction in accidents in some critical activities. On the safety, the [Inaudible] located in the Vargem Grande complex was removed from the emergency level by international mining agency and is now certified as safe and stable. On our second level, the stabilization of our iron ore operations, we are taking Vale to an even higher level of performance. Iron ore production had the highest output for our first quarter since 2019, and sales were up 15% year-over-year. On our total level, one of Vale's major competitive advantage is our potential to grow a high-quality portfolio with low capital intensity. Our three key projects will add 50 million tons capacity by 2026. Vargem Grande, Capanema, and S11D plus 20. The first project to come online will be Vargem Grande, which is almost 90% completed and on track to start up in the fourth quarter of 2024. On our path to transform the energy transition metal business. Copper production grew 22% in the first quarter. Nickel production decreased by 4% year-on-year, in line with plan, mainly reflecting maintenance overhaul at the on Onca Puma furnace. Outside Brazil, we saw a stronger performance in the Canadian and Indonesian operations. On the energy transition metals partnership last week, the committee on further investment in the United States granted the final regulatory approval, and we expect to close the transaction in the upcoming weeks. And in our pursuit toward the SG leadership in mining, we reached a remarkable target, 100% renewable energy consumption in Brazil, two years ahead of schedule. Reaching the target means that Vale has zeroed its indirect CO2 emissions in Brazil, which corresponds to scope 2 emissions. To support our decarbonization pathway, Vale has announced an agreement to acquire the remaining 45% stake in Alianca Energia, which is a first step toward creating an asset-light energy platform. Lastly, our discipline in capital allocation remains untouched. We are walking the talk and returning value to shareholders. In March, we paid $2.3 billion in dividends while completing 17% of the fourth buyback program launched since 2020. Now let's go over more details of our quarter performance. Next slide, please. We are gradually becoming a safer company. Technology and innovation have been key pillars to our quest to deliver a sustainable safety performance. We want to turn Vale into a safe benchmark starting with zeroing our end to injuries, those that usually precede life-changing or fatal events. By the end of 2025. We are on the right track to fulfill these commitments. Our safety transformation program targets the critical activities with the highest end to records. Later, developing preventive controls. Some of them technology based like collision alerts and driver drowsiness detection. As a result, we had a 77% reduction in any two events since 2019. Another key element of our safety strategy is our dam safety management. Since 2020, we increased safety conditions up to adequate levels for 16 dams. All our structures are continuously checked by our 24/7 geotechnical monitory centers. In a conservative approach, we removed 100% of the people from risk areas and back-up dams were constructed to reduce potential consequences in those areas. At the same time, Vale continues to progress on the dam decraterization program with 43% of the structures eliminated to date. We are already seeing a safer Vale, built with operational discipline and a strong management model. OK. Next slide, please. We delivered a robust operating performance on iron ore in Q1. Production was the highest for a first quarter since 2019, underpinned by increased assets and process reliability, especially S11D. We have talked about our strong actions toward operational excellence, and we are now consistently bearing the fruits of that strategy. Our operational plan for the quarter was successful in dealing with a higher average rainfall. We delivered a 6% increase in total production and 15% higher sales year-on-year. Moreover, we continue to debottleneck our operations at S11D, increased geological knowledge enables more accurate mining plans, while the truckless system combined with a mobile mining fleet provides further operating flexibility. Our long-term ability to deal with [Inaudible] relies on the installation of the new crushers. As you know, but these surgical measures have allowed us to operate S11D with more efficiency with the highest production for our first quarter since 2020. The solid production performance in Q1 give us further confidence that we will deliver our guidance as planned. Next slide, please. We are committed to accelerating solutions to support the steel industry decarbonization. Our briquette plant is ramping up in our Tubarao complex, aiming to deliver around 1.5 million tons of briquettes in 2024. We continue to progress on agreements for the construction of mega hubs. We are also studying the feasibility of developing green industrial hubs in Spain together with Hydnum Steel. Finally, we are very proud to be selected under the inflation Reduction Act funding to enter in negotiations to develop a briquette plant in the U.S. The selection by the U.S. Government Department of Energy represents a critical path for the validation of our proprietary technology and its potential to deliver a transformative solution to the carbonized steel sector. Iron ore briquettes will contribute to achieving Vale's commitment to reduce 15% of its Scope 3 net emissions by 2025. Next slide, please. In the energy transition metals business, we delivered remarkable output in copper, an outstanding 22% increase quarter-on-quarter, driven by the successful ramp-up of Salobo and a stronger performance at Salobo I and II plants. On nickel, we are on track to deliver the production guidance for 2024. As part of the asset review initiatives, Sudbury mines had improved performance and the Carrabelle mill throughput was up 7% year-on-year. The improved mine performance resulted in reduced consumption of third-party feed and lower costs. We are confident that we are taking the right steps to transform the energy transition metals business. Next slide. On ESG, we continue to march toward becoming a more transparent and open company. We just released our 2023 integrated report where we announced that we reached the target of 100% renewable energy consumption in Brazil, two years ahead of schedule. Reaching the target means that Vale has zero Scope 2 emissions in Brazil. To support our decarbonization pathway, Vale signed an agreement to acquire the remaining 45% stake in Alianca Energia. This is an important step toward creating an asset-light energy platform. Upon the transaction conclusion, value search for potential partners to better advance in our commitments to decarbonize our operations using renewable sources at competitive costs. Our big focus on becoming an ESG leader in mining is bearing fruit. Our improvement in carbon emissions and safety practice led to renewal perception by Sustainalytics for instance, with an important upgrade in our ESG risk rating in April. With that said, now I'll pass the floor to Gustavo for our financial results. and I'll get back to you in the Q&A. Thank you. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations Thanks, Eduardo, and good morning, everyone. Let me start with our EBITDA performance in the quarter. As you can see, we delivered a pro forma EBITDA of $3.5 billion in Q1. Before going to the main drivers, I would like to first explain a couple of reporting changes we implemented this quarter with the reorganization of our assets between iron ore solutions and energy transition models, some items previously classified as others will now be allocated to their respective business segments. This change includes items such as SG&A and energy generation assets, and we will allow for more precise evaluation of each business segment's performance. In addition, for better alignment with market peers, we are now including the proportional EBITDA of our associates and joint ventures into our EBITDA. We note that before 2024, our EBITDA included the dividends coming from those entities. Which were naturally more volatile during the year. Now returning to the main drivers behind our EBITDA performance in the quarter. We are pleased to see a continued strong operational performance across the board, which helped us offset a large portion of the impact from provisional prices given the decrease in the iron ore benchmark prices during the quarter. On volumes, iron ore sales increased almost 15% or 8.2 million tons year-on-year, driven by better operational performance in all of our systems, highlighting S11D, which achieved the highest output for our first quarter since 2020. Sales were also quite strong in Q1 this year, reflecting the initiatives undertaken in 2023, to improve operational performance and flexibility of our Ponta da Madeira port. Corporate sales were another highlight in the quarter, increasing by 22% or 14,000 tons year-on-year, driven by the ramp-up of Salobo III and better operational performance in the Salobo I and II operations. On costs and expenses, I'd like to highlight the ongoing effort that our teams have been making internally to improve productivity and efficiency. Excluding the external effects, of higher freight costs in the iron ore business and the one-off effects in base metals, like the Onca Puma furnace rebuild, our cost and expenses were roughly flat year-on-year. Again, this is being accomplished through a series of initiatives across the business, and we are quite excited about the cost efficiency opportunities we still see ahead of us. Now moving on to price realization. Iron ore finance realized price was $100.7 per ton in Q1. 7% lower year-on-year and 15% lower quarter-on-quarter. Pricing mechanisms had a negative impact of $10 per ton on our realized price in the quarter. largely explained by the negative effect of provisional prices. At the end of Q1, 24% of our iron ore fine sales were booked at $102 per ton on average. Which compares to an average price of $124 per ton in the quarter. Also, about 30 million tons of sales from Q4 '23, were booked at an average price of $139 per ton and were later realized at lower prices in Q1. Our average iron ore fines premium came in negative at $1.6 per ton as we increased the share of high silica products in our sales mix given the lower discounts observed for these products during the quarter. This has allowed us to maintain an adequate balance of high-quality products through our supply chain for later value maximization. For Q2, we continue to see similar market conditions and, therefore, expected to maintain a slightly higher share of high silica products in our mix compared to historical lens. Now let me turn to our cost performance. In iron ore, our C1 cash cost ex third-party purchases was $23.5 per ton, slightly lower versus last year. despite the negative impact of the BRL appreciation. Excluding this effect, C1 would have been $22.8 per ton, almost $8 per ton lower year-on-year. This was driven by lower demurrage costs due to improved shipping and port loading during the rainy season, higher fixed cost dilution as a result of higher production volumes in gains from our cost efficiency programs. Additionally, I'd like to take a moment to comment on our strategy behind third-party purchases. We acquired iron ore from the smaller producers that operate near our operations. This product is sold directly to our customers where it is blended within our own production, generating a positive contribution margin. This helps dilute fixed costs, particularly as we have excess logistics capacity while capital intensity is very low, which implies a very healthy return on invested capital. In 2023, our third-party volume was 24 million tons, and it is expected to increase slightly in 2024. We are also evaluating to accelerate the development of some of our smaller deposits through leasing agreements with regional partners, transactions that can offer attractive returns for both sides. Moving on to our energy transition metals business. We are pleased to deliver significant year-on-year reductions in all-in cost in both copper and nickel. Our copper all-in costs decreased by 26% year-on-year, driven by continued successful ramp-up of Salobo III and the improved operational performance at Salobo I and II. The higher proportion of Salobo III volumes in the product mix has also contributed to an increase in unit by product revenues with higher gold sales. Nickel all-in costs were down 14% year-on-year, supported by higher unit byproduct revenues. The unit COGS increase was expected and largely related to the furnace rebuild at Onca Puma. I would like to also mention that Mark Cutifani and the VBM team continued to make significant progress on the asset review. The value opportunities are being assessed and designed for implementation over the next two to three years with some benefits already being captured in the shorter term. As we pointed out last quarter, we will present the key findings and action plan of the asset review in our webinar to be scheduled for June this year. Now moving on to cash generation. Our EBITDA to cash conversion was 57% in Q1. with free cash flow reaching $2 billion, roughly $0.5 billion lower than Q4 2023. Despite the $3.4 billion sequential drop in EBITDA, driven mostly by seasonally lower shipments quarter-on-quarter and lower iron ore prices. This was achieved primarily due to the positive impact of a strong cash collection from Q4 sales as we had anticipated last quarter and seasonally lower capex disbursement. Most of the free cash flow generation was used to pay dividends and execute our buyback program for a total shareholder remuneration of $2.6 billion in Q1. So before we move on to the Q&A session, I would like to reinforce the key messages from today's call. Safety continues to be our key priority, and we remain highly focused on creating the conditions for an accident-free workplace environment. Our continued strong operational performance across all commodities only reinforces we are in the right direction to consistently deliver on our short- and long-term commitments. On ESG, we are making significant progress on several fronts as demonstrated by our recent achievement of 100% renewable sourcing in Brazil for Scope 2 and the continued investments to deliver a sustainable future for our businesses. On the medium-term strategic objectives we laid out at Vale Day, we are quite pleased to see the development of our key projects such as Vargem Grande. Which we expected to reach start-up later this year. These investments will position Vale as the leader in high-quality offerings, which are critical for steel-making decarbonization. Last, we remain highly committed to a disciplined capital allocation process as evidenced by our $2.6 billion cash return to shareholders year-to-date through dividends and share buybacks. Now I would like to open the call for questions. Thank you. Questions & Answers: Operator [Operator instructions]. Our first question comes from Rafael Barcellos with Bradesco BBI. Rafael Barcellos -- Bradesco BBI -- Analyst Good morning, and thanks for taking my questions. So firstly, I would say that the main news in the sector was the potential merger between BHP and Anglo American. So maybe if you could discuss a bit on how this movement could change Vale's strategy going forward. It could be interesting for us? Or even how could it change your recently announced a partnership at Anglo Minas Rio assets. And my second question here is maybe to just understand better your views on iron ore markets and price premiums in the coming quarters. And of course, how do you see the possibility of further extraordinary dividends now with iron ore prices back to the $120 per ton level? Thanks. Eduardo Bartolomeo -- Chief Executive Officer Thanks, Rafael. It's Eduardo here. As you've noticed, it's truly unfolding. So we are still digesting what is going on. Specifically answering your question, we don't see any impacts on our Minas-Rio deal. It's being undertaken with Anglo, it's going to be respected by whoever comes later if it comes later. So that's the first reaction. Second is, we've been speaking with you since we've decided to do the carve out, right? We believe that Vale has a unique position in the industry, right? We do have a growth platform in iron ore, as Gustavo mentioned during his presentation, we are going to add 50 million tons of high quality with low cost. So there is no other asset in the world that could be attractive to us on that sense. And when you look at base metals, we still have the -- as well the best endowment in Canada, in Brazil, in Carajas province, and Indonesia. We obviously, we're always looking at opportunities eventually, but it doesn't change our strategic focus on executing the asset review, the transformation in base metals. There is a tremendous amount of value to be extracted there. And iron ore, we are the only iron ore growth with quality in the sector. So we will follow up closely this development of this deal, but it doesn't impact our strategy or change anything in our mindset. And I'll pass the second question to Spinelli. Marcello Spinelli -- Executive Vice President, Iron Ore Solutions Thank you, Rafael. Regarding the market, so we see China, as you mentioned, we remain the same view about China. That's the main market. We are calling this moment as the China resiliency. Despite the the problem and the proper markets that all of us track we see since '21, a very strong market in the manufacturing growing really constantly with the energy transition industry or shipbuilding. So we have an offset for that. And we may consider the exports as something that is sometimes bothering the markets. But by the end of the day, is a trade-off between protection in the market and inflation. So all the micron conditions in China are going well. So steel inventory now is lower than last year and the margins are getting better. So as a whole, we see the market really similar compared to last year. And you asked us about the premiums. Premiums by product, we see a stable moment and we've been stable for some months. So some quarters actually. So we see the Carajas and also the BRBF and a stable gap. And we can have a small upside risk if we have some spike in the coke and coal market that can increase the necessity for efficiency. Operator Next question from Caio Ribeiro with Bank of America. Caio Ribeiro -- Bank of America Merrill Lynch -- Analyst Yes. Thank you very much. Good morning. Thanks for the opportunity. So first of all, I just wanted to see if you could share some updates with us on the latest, involving the Onca Puma and Sossego operations? And any color that you can share on expected operational financial impacts there would be helpful. And then my second question is related to the renegotiation of the railroad concessions, right? Can you give us some color there as well on your latest expectations around those negotiations and on timing as well to conclude them? Thank you. Eduardo Bartolomeo -- Chief Executive Officer I think Mark is on the call, right, Mark, could you answer the first one? Mark Cutifani -- Executive Vice President, Base Metals Yes. Thanks, Eduardo. Can you hear me OK? Eduardo Bartolomeo -- Chief Executive Officer Yes. Mark Cutifani -- Executive Vice President, Base Metals Well, thanks for the question. On both operations, we're working through with the authorities as we speak. In the case of Sossego, what has been outlined to us is that there were some complaints on noise and dust and complaints around reduced social programs through COVID. We have already submitted our reports for those issues, which was subject to the first complaint. And now that it's clear that we've input the report. We're now working through detail that's contained in those reports both with the authorities and with the local political leadership as well. And we've got about three to four weeks ore on the ground to process. So we're in good shape in terms of our ore stocks because it's the mines that are actually impacted. So processes are still going forward. On Onca Puma, a fairly similar story in terms of complaints, a little bit different in terms of some of the mining with more environmental related but also connected to social programs and a similar story. We're working through with the authorities. We're also talking to other leaders in the community, very sensitive to making sure that people aren't impacted. And I think everybody is keen to make sure we get things up and running very quickly. In the on Onca Puma case, we're going to have four months of ore because we've now finished the furnace rebuild, and we're on heat up at the moment, still going through those processes. But again, at this stage, we're not anticipating problems over the course of the year, we should be able to make up the production through the course of the year. May might be impacted on the furnace issue, but that's more an operating ramp up to full capacity issue than anything connected to the current mining shutdown because we've got lots of ore. So that's where we are. I would expect during the course of next week we'll have both issues pretty well in view and we'll let everybody know where we're up to. Marcello Spinelli -- Executive Vice President, Iron Ore Solutions Caio, thank you for your question. So first of all, we have a very solid contract. We spent more than four years to steer off the renewal with all the approvals on all the levels -- federal levels. And it's important to say we are complying with our obligations. But nevertheless, we've been talking to the transportation ministry. We see it room to optimize some specific parts of the contract and also adjust some obligations that can bring value for the company. And we see that we can balance this value with new obligations to pay. So you may expect a balanced negotiation. We are finalizing the discussion. And we expect the final terms soon. Operator Next question from Carlos De Alba with Morgan Stanley. Carlos De Alba -- Morgan Stanley -- Analyst Thanks very much, and good morning, everyone. So my question may be similar to the last one, but focusing a little on Mariana. Clearly, you took a provision in the fourth quarter and now you provided us with an updated disbursement path. And there were news overnight about the potential restart or the reportedly restart of the negotiations this week. So I don't know if you can provide an update there. Clearly, a key concern by the market something that everyone would like to get resolved. I think the company, the authorities and certainly the people that were impacted. So I hope they will be greater. And my second question is, in light of the increase in capex at Serra Sul 120 as well as the Voisey Bay expansion and then the revision of capex of the briquette projects. How can we think about? How should we think about the 2025, maybe 2026 capex for the company? Thank you. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations Carlos, this is Gustavo. So on Mariana, yes, your question is spot on. We are highly engaged with the counterparties, the mediation process, as you probably know, has been ongoing, and we engage it more actively recently in order to find a resolution that works for everybody. We continue to be hopeful that by by mid this year, we can reach a negotiated outcome, which we all think it's the ideal path in this case. So stay tuned. We'll keep you updated, but we are certainly engaged looking forward to find an agreeable solution here for all parties. On the capex, we've updated. The main one is S11D. It's over a period of years as we get to commissioning in 2026. So no impact in our guidance for -- in our expectations as we had before for the following years. This year, we are still within the $6.5 billion, no impact. And we should be able to accommodate those increases in the following years as well. Operator Next question from Jon Brandt with HSBC. Jon Brandt -- HSBC -- Analyst Good morning. Thanks for taking my question. I just wanted to clarify an earlier answer Eduardo. Just given the Anglo BHP news today, are you sort of unequivocally saying that Vale have no interest in the Anglo assets and that you're more watching to see what the impact is from from a potential deal, but Vale have no interest in those assets. Is that correct? And then I guess my question is really around -- we sort of discussed some of the rail concessions, some of the permits, the Samarco liabilities, etc. I'm just wondering, I think that's sort of a big part of the reason for Vale's underperformance relative to peers. And I'm just wondering, how would you categorize your relationship with the government, right? I mean, you've talked a lot about stability and wanting sort of a stable environment. This seems to be anything bought. So I'm wondering what you can do or what Vale can do to sort of improve the relationship that you have with the government? So that the market doesn't have to deal with these sorts of issues. And then my second question, just really quickly, is, it looks like on the breakeven cost for copper, they came in well below guidance for 2024. I'm just wondering how much upside risk there is to that guidance number? Is this a seasonal issue? Or has some of the things Mark that you've put into place, is that really starting to bear fruit? Thank you. Eduardo Bartolomeo -- Chief Executive Officer Thanks, Jon. Well, it's a question that, obviously, when you look at Anglo assets, obviously, would be interested. What we try to explain in my answer at the beginning is that we have better options inside house to look at and more cheap options because otherwise, you would go to a bid and doesn't make any sense for us. So that's why I said we are watching with attention. That the asset that has interference with our our strategy is the Minas-Rio that we just closed with Anglo and this one is protected. The others, as mentioned, we are wait and see to see what's going to happen. But meanwhile, we are much more interested in accelerating, executing our own endowment. Specifically about the railway concessions. That's a good question because it's not a Vale's issue, right? It has been done through [Inaudible] been run to MRIS. It has been with all the other concessions. So it's not a Vale specific problem. Obviously, as Spinelli said, we are truly sure that we have a very robust contract what will take the opportunity to adjust some specifics and make a win-win situation with the government that we believe will help on this problem or on this matter that you mentioned better and a more stable relationship with the government. That is always good. By the way, we always had. And the second question is to you, right? Sorry, a couple of questions to Mark. Sorry, Mark. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations I can -- we probably lost Mark. I can take it, Jon. So yes, it was a good first quarter, especially given the strong ramp-up of Salobo. Salobo III, plus also a strong operational performance in Salobo I and II. So we are not resetting expectations, but what I can say, it's looking pretty good within the guidance that we had laid out. So hopefully, three and we -- with the remaining part of the year, we can provide more details around it. Operator Next question from Leonardo Correa with BTG Pactual. Leonardo Correa -- BTG Pactual -- Analyst Good morning, everyone. I have a couple of questions on my side. Yes. So the first one, I'm not sure if Mark is back. So feel free -- Mark Cutifani -- Executive Vice President, Base Metals Still here. Leonardo Correa -- BTG Pactual -- Analyst You are here. OK. Perfect. Welcome back, Mark. On the -- just on the base metal story still, right? I mean they're very mixed results are pressured, right, by in fairness by pressured nickel prices, but you're having a dual speed situation, right, where basically copper is performing very well, perhaps above expectations and nickel is performing well below expectations. And the overall results have been pressured, if you take a year of expectations for EBITDA in base metals are way above what you guys are currently delivering. And I get the point that there's a lot under review, so I don't want to be unfair, but -- and I know that Gustavo and I think in the opening remarks, you said that by June, we're going to have more details. I mean just thinking of you, I mean, do you see an opportunity to adjust capacities and to perhaps put some of Vale's nickel assets under care and maintenance at this point just given market conditions are unfavorable, and and the asset is not generating any EBITDA? So my first question is specifically to nickel, how you see the evolution and how viable certain assets are to Vale are in this scenario? The second question I think there was a question on this, Gustavo, but I think it wasn't addressed yet. But if I may, just moving back to the dividend situation and the extraordinary dividend potential for the latter part of this year. With all these questions on additional provisions and outflows, how are you viewing this, right? We're getting some help from iron ore prices lately. So we're back to $120. How are you viewing this extraordinary dividend story with your leverage, which is now at the upper side of your tolerance, let's say? Those are the two questions. Eduardo Bartolomeo -- Chief Executive Officer OK. Go ahead, Mark. Mark, you're on mute. Mark Cutifani -- Executive Vice President, Base Metals Try again, how's that? Eduardo Bartolomeo -- Chief Executive Officer OK. I copy you. Mark Cutifani -- Executive Vice President, Base Metals OK. Gustavo made the observation on copper around Salobo's improvement, and that was very encouraging, flowing into the first quarter coming off a strong last quarter as well. And that pointed to a few changes that were made over the last six or nine months. And we've had similar albeit lagging performance at Sudbury because we did the asset review in Sudbury about three months after Salobo. And Eduardo pointed to the 7% improvement at [Inaudible]. On a run rate basis, it's closer to 15%, and that reflects both copper and nickel. So I think we've got good trends at two of the most important operations, Indonesia remains fairly solid. Onca Puma is coming through the furnace rebuild and is heating up. And what we are flagging is a likely intention to push some of that feed north to try and improve the premiums on products we received. And so it's not simply about operations. It's also -- and that's a long way to go and a lot of improvement to come, but it's also about price realizations. And with the price volatility and what we think will be a premium related to the products that we produce from Canada. We think there's still a lot of potential on both the cost side and on the pricing side that we're looking at. And with the volatility we're seeing in the nickel market, what we don't want to do is start cutting production, where we're already seeing material reductions in operating costs, and we think there's a real premium. So we want to give it another two or three months, and that's what we want to reflect and show you in June. So we still think there is two stories playing out. The operating improvement plus premiums that we can get by using our flow sheets better, filling [Inaudible], doing more work at clinic and making sure we've got the molecules heading in the right in the right direction. So it will be a story in two parts. And I think we'll be able to show that in June that we're looking at both operating costs and margin improvements as well on the pricing side. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations Thanks, Mark. And I'll take the second one, apologies also to Rafael that we haven't responded for the first question on the extraordinary dividend potential. Look, as you know, it depends on several elements. Certainly, market conditions have improved lately, which give us some good expectations of potential cash generation through year-end but we also compare those vis-a-vis where we are on the leverage ratio, minimum cash provisions and outflows. So I think it's early, and we think it's early to point out to potential incremental dividends, but we will certainly assess that through year-end. And if there's any opportunity, we will certainly consider with our board as we always do, right, and we've been doing this consistently over the last several years. Operator Next question from Myles Allsop with UBS. Myles Allsop -- UBS -- Analyst A couple of questions. First of all, on iron ore. Obviously, a very strong first quarter. The guidance for 2024 either looks conservative or you have some concerns about potential operating challenges later this year. I mean, should we look at the guidance as conservative? Or are there other things we should bear in mind for later in the year? And then maybe, secondly, on the nickel side, a question for Mark, I mean, the challenges in the nickel market are driven by Indonesia and obviously, Vale's contributing to those incremental tonnes. And what's the latest with the Indonesian projects? And are there any -- is there any desire to slow those back to try and rebalance the market? Thank you. Carlos Medeiros -- Executive Vice President, Operations Hi, Myles. Yes, this is Carlos Medeiros. It's too early days to review our 2024 guidance. We had a quite good Q1. But still, there are challenges as we see ahead. And we had also a very strong second half of the year last year. So this is why we prefer to maintain our guidance and if we decide to revisit it, it will be done later in the year. Meanwhile, we're still working on the usual levels to increase production. Taking initiatives such as our seasonality plan that has proved to be robust, the reliability initiatives to continue to improve the overall equipment availability or mining plans to review the mine geometries, whatever necessary to free up more ore and also in the hydrogeology initiatives to make sure that our -- the balance in our minds offers additional opportunities to access the bottom of the pit during the year. So all in all, we will keep it for now and we might get back to you later. Thank you. Mark Cutifani -- Executive Vice President, Base Metals Yes, as on the nickel side. On the question on Indonesia. I think the first thing to recognize is the divestment announcements and milestones that were achieved were very positive. And certainly, we move through that filing quickly with the Indonesian government a credit to everybody involved. Second point, funds on Puma have been committed as per the requirements, and we're still working through the early phases of that. In terms of the commitment on new projects, again, we're very mindful of our obligations with our partners. But at the same time, we're also making the point that we need to be prudent and consider the individual investment propositions very carefully. There is a little bit of uncertainty in the marketplace regarding our different products will be priced in the market. Great news for us in Canada is that it's likely we will do better than most because of the nature of the material and the late carbon footprint. Indonesia will probably be in a very different conversation, and we're working with our partners just to make sure we understand that and what that means for each of the investments. And again, we're also mindful of the fact that we need to pace those additions with the market as well. But again, it's an open conversation with our partners. It still early in that process, I have to say. So we've got a bit more work to do. Operator Vale team, ready for your next question? Next question is from Timna Tanners with Wolfe Research. Timna Tanners -- Wolfe Research -- Analyst Hi. Good morning. Just dive on a little more cost, we could see that we reset volatility and are price have been great to hear that to manage the cost side this quarter, saw a little bit uptick on the [Inaudible] costs despite the progress [Inaudible] an actual cost there. Can you give us an update on the [Inaudible] purchase side? That's my first question. Eduardo Bartolomeo -- Chief Executive Officer Timna, sorry. It's getting crunched, could you ask it again? Timna Tanners -- Wolfe Research -- Analyst Sure, is that any better? Eduardo Bartolomeo -- Chief Executive Officer A little bit. Timna Tanners -- Wolfe Research -- Analyst Sorry. Just asking for any outlook on costs, given the -- there's some price volatility and any guidelines for third-party purchase costs, anything thing you can [Inaudible] retain costs overall on the iron ore side. Eduardo Bartolomeo -- Chief Executive Officer OK. We got this one. Timna Tanners -- Wolfe Research -- Analyst [Inaudible] outlook. Thanks. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations Yes, I can -- Eduardo Bartolomeo -- Chief Executive Officer I'll ask the first one -- answer the first one, then Timna, you ask the second one. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations Timna, Gustavo here. On the cost outlook, we came at a C1 at 23.5%, slightly lower than last year. You have to be mindful that Q1 is usually our toughest quarter in terms given the lower volumes that are produced to the effect of dilution is limited as we saw last year. But when we look at the forecast for the year, we are feeling super confident with the numbers that we laid out, the 21.5 million to 23 million. A lot of the cost efficiency initiatives that we've started 18 months ago are bearing fruit and sales are coming strong. Production is coming strong. So we are feeling good about it. The challenges which have been managed on the all-in, I think Leonardo made that reference in terms of the breakeven cost has been mostly associated with the freight rates which Vale is mostly hedged, which is one of our competitive advantage, it's not 100% hedged. So you saw an uptick this quarter. But we -- this is one of the headwinds that we've been able to manage. We are now probably 90% hedged in terms of our demands for the year. Also hedged on the brand costs. And the other element here are the premiums, which came a little tighter and has given market conditions. But all in all, we are feeling very good with the numbers that we had laid out in terms of forecast for the year for both and all-in cost across all businesses, by the way. Operator Next question from Ricardo Monegaglia with Safra. Ricardo Monegaglia -- Safra -- Analyst Hello. Good morning, everyone. I have a couple of questions, actually follow-ups from previous questions. First, on the base metals business. Are there any changes to commodity price hedge policies given the recent rally in metals prices? And the second question still on base metals is, are there any updates that you could share with us on regards to the conclusion of Vale based metals transaction. It continues to be expected to occur in the second quarter, what are the final steps to conclude this acquisition would be interesting to understand. And my second question is on iron ore quality. Based on the target for the year and 1Q '24 levels. It implies that quality will come above the level of 62.5% in the coming quarters? Should we expect this trend already in the second quarter? Or high silica sales could continue high or at the same level as in the first Q? Those are my questions Thank you, guys. Eduardo Bartolomeo -- Chief Executive Officer Gustavo. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations Sure. Thanks, Ricardo. So I'll do the first one and then Spinelli will cover the premium. So on the hedging, we usually don't do it. That's the nature of the business, we like to run the exposure unless there is some very unique conditions where we may want to consider. So that's part of the nature of our business. And we like to run with exposure in those commodities. On the VBM we've got, I think Eduardo mentioned in his prep remarks, we've got all the regulatory approvals, and we are now working with partners to move to the closing, which we expected to happen in the next, call it, a couple of weeks to keep the market updated about it. So I'll turn back to Spinelli. Marcello Spinelli -- Executive Vice President, Iron Ore Solutions OK. Thank you, Carlos. So regarding the quality average, depends on the first -- firstly on the production mix. And you saw that we had a good performance in the north system. And as we have a pattern of higher production in the second half that will naturally increase the average grade. And regarding sales, you're right, we had took an advantage to sell directly the high silicon in the first part of the year, actually in the end of last year. So the discount was there. So we can take this choice every -- actually every day we assess this. So as we move forward during the year, we have the possibility to blend this product or to concentrate this product or sell them directly. But in the second half, we have -- we don't have a lot of high silica as we increase the production in the North system and we prioritize the blend. And after that, we can choose the remaining high silica if you want to sell directly or not. It's difficult to precise in advance, it depends on the market conditions. Operator Next question from Gabriel Simoes with Goldman Sachs. Gabriel Simoes -- Goldman Sachs -- Analyst Hi. Can you hear me? OK. Thanks for taking my questions. I actually have one quick follow-up. On one of the questions that were asked before. Actually, I just wanted to understand on the development of your iron ore projects. So if you could comment a bit on how the development is going or the capacity increasing projects, so Vargem Grande, Capanema, and S11D that would be great because we just wanted to understand how the projects are doing so far and how confident you are with the time line you provided earlier? I know you mentioned that the sales should remain the same time line? Just wanted to have a better sense on the other ones. Thank you. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations So Gabriel, Gustavo here. Yes, we are feeling pretty good about it. We gave you some stats during Eduardo's presentation of where each one of those projects. We have a series of projects, but the three main ones we've been pointing out is Vargem Grande, Capanema, and plus 20. And they are moving along the time line we had established. So we're feeling pretty good about it. And Vargem Grande, for example, the expectations that we start -- have this start-up by the end of the year. So that's one of the key projects that we've promised to deliver through 2026 to have that increase and take value to a potential range of $3.40 to $3.60. So we are moving along the plan, and we are feeling pretty good about those deliverables. Operator This concludes today's question-and-answer session. We would like to hand the floor back to Mr. Eduardo Bartolomeo for the company's final remarks. Eduardo Bartolomeo -- Chief Executive Officer OK. Well, just to conclude, I think we -- as we say here in Brazil, we start with the right foot. We started the year in a very good shape. We always like to say that we win the game in the first quarter. We're not that arrogant. We know we still have nine months to go. Rainy season isn't over yet on the north. But the thesis of safety versus production is being proved is being proved that we can be safer and reliable and that, I think, is a very important message. We are seeing a positive market in iron ore and on copper as well, while nickel has it's challenges. As lastly, answered by Gustavo, our projects are on time, on budget. So we will deliver on it. On June, we're going to have more color on the asset review. And in the end, every -- about the noises that are around us. We see some overhangs starting to getting off of the radar as Marianas is expected to be over by the -- will try our best to do it by the first half. The renewal is going to be over, it's not going to be material. So with that said, if we see through the noise, we remain extremely disciplined, extremely focused on what we have to do. And we still see an extremely huge opportunity to invest in value. So again, thanks a lot for your attention, and hope to see you in the next call. OK. Thank you, and have a safe day. Answer:

Vale's first quarter 2024 earnings call

Operator Good morning, ladies and gentlemen. Welcome to Vale's first quarter 2024 earnings call. This conference is being recorded, and a replay will be available on our website at vale.com. [Operator instructions] Further instructions will be provided before we begin the question-and-answer section of our call. We would like to advise that forward-looking statements may be provided in this presentation including Vale's expectations about future events or results, encompassing those matters listed in their respective presentation. We caution you that forward-looking statements are not guarantees of future performance and involve risks and uncertainties. To obtain information on factors that may lead to results different from those forecast by Vale, please consult the reports body files with the U.S. Securities and Exchange Commission, the Brazilian Comissao Valores Mobiliarios. And in particular, the factors discussed under forward-looking statements and risk factors in Vale's annual report on Form 20-F. With us today are Mr. Eduardo de Salles Bartolomeo, CEO; and Mr. Gustavo Pimenta, executive vice president of finance and investor relations; Mr. Marcello Spinelli, executive vice president, Iron Ore Solutions; Mr. Carlos Medeiros, executive vice president of operations; and Mr. Mark Cutifani, chairman of Vale Base Metals. Now I will turn the conference over to Mr. Eduardo Bartolomeo. Sir, you may now begin. Eduardo Bartolomeo -- Chief Executive Officer Thank you, and good morning, everyone. I'm very excited that we got off to a good start in 2024. Starting with our safety journey. Technological enhancements and innovation toward safety improvements is showing encouraging results with 77% reduction in accidents in some critical activities. On the safety, the [Inaudible] located in the Vargem Grande complex was removed from the emergency level by international mining agency and is now certified as safe and stable. On our second level, the stabilization of our iron ore operations, we are taking Vale to an even higher level of performance. Iron ore production had the highest output for our first quarter since 2019, and sales were up 15% year-over-year. On our total level, one of Vale's major competitive advantage is our potential to grow a high-quality portfolio with low capital intensity. Our three key projects will add 50 million tons capacity by 2026. Vargem Grande, Capanema, and S11D plus 20. The first project to come online will be Vargem Grande, which is almost 90% completed and on track to start up in the fourth quarter of 2024. On our path to transform the energy transition metal business. Copper production grew 22% in the first quarter. Nickel production decreased by 4% year-on-year, in line with plan, mainly reflecting maintenance overhaul at the on Onca Puma furnace. Outside Brazil, we saw a stronger performance in the Canadian and Indonesian operations. On the energy transition metals partnership last week, the committee on further investment in the United States granted the final regulatory approval, and we expect to close the transaction in the upcoming weeks. And in our pursuit toward the SG leadership in mining, we reached a remarkable target, 100% renewable energy consumption in Brazil, two years ahead of schedule. Reaching the target means that Vale has zeroed its indirect CO2 emissions in Brazil, which corresponds to scope 2 emissions. To support our decarbonization pathway, Vale has announced an agreement to acquire the remaining 45% stake in Alianca Energia, which is a first step toward creating an asset-light energy platform. Lastly, our discipline in capital allocation remains untouched. We are walking the talk and returning value to shareholders. In March, we paid $2.3 billion in dividends while completing 17% of the fourth buyback program launched since 2020. Now let's go over more details of our quarter performance. Next slide, please. We are gradually becoming a safer company. Technology and innovation have been key pillars to our quest to deliver a sustainable safety performance. We want to turn Vale into a safe benchmark starting with zeroing our end to injuries, those that usually precede life-changing or fatal events. By the end of 2025. We are on the right track to fulfill these commitments. Our safety transformation program targets the critical activities with the highest end to records. Later, developing preventive controls. Some of them technology based like collision alerts and driver drowsiness detection. As a result, we had a 77% reduction in any two events since 2019. Another key element of our safety strategy is our dam safety management. Since 2020, we increased safety conditions up to adequate levels for 16 dams. All our structures are continuously checked by our 24/7 geotechnical monitory centers. In a conservative approach, we removed 100% of the people from risk areas and back-up dams were constructed to reduce potential consequences in those areas. At the same time, Vale continues to progress on the dam decraterization program with 43% of the structures eliminated to date. We are already seeing a safer Vale, built with operational discipline and a strong management model. OK. Next slide, please. We delivered a robust operating performance on iron ore in Q1. Production was the highest for a first quarter since 2019, underpinned by increased assets and process reliability, especially S11D. We have talked about our strong actions toward operational excellence, and we are now consistently bearing the fruits of that strategy. Our operational plan for the quarter was successful in dealing with a higher average rainfall. We delivered a 6% increase in total production and 15% higher sales year-on-year. Moreover, we continue to debottleneck our operations at S11D, increased geological knowledge enables more accurate mining plans, while the truckless system combined with a mobile mining fleet provides further operating flexibility. Our long-term ability to deal with [Inaudible] relies on the installation of the new crushers. As you know, but these surgical measures have allowed us to operate S11D with more efficiency with the highest production for our first quarter since 2020. The solid production performance in Q1 give us further confidence that we will deliver our guidance as planned. Next slide, please. We are committed to accelerating solutions to support the steel industry decarbonization. Our briquette plant is ramping up in our Tubarao complex, aiming to deliver around 1.5 million tons of briquettes in 2024. We continue to progress on agreements for the construction of mega hubs. We are also studying the feasibility of developing green industrial hubs in Spain together with Hydnum Steel. Finally, we are very proud to be selected under the inflation Reduction Act funding to enter in negotiations to develop a briquette plant in the U.S. The selection by the U.S. Government Department of Energy represents a critical path for the validation of our proprietary technology and its potential to deliver a transformative solution to the carbonized steel sector. Iron ore briquettes will contribute to achieving Vale's commitment to reduce 15% of its Scope 3 net emissions by 2025. Next slide, please. In the energy transition metals business, we delivered remarkable output in copper, an outstanding 22% increase quarter-on-quarter, driven by the successful ramp-up of Salobo and a stronger performance at Salobo I and II plants. On nickel, we are on track to deliver the production guidance for 2024. As part of the asset review initiatives, Sudbury mines had improved performance and the Carrabelle mill throughput was up 7% year-on-year. The improved mine performance resulted in reduced consumption of third-party feed and lower costs. We are confident that we are taking the right steps to transform the energy transition metals business. Next slide. On ESG, we continue to march toward becoming a more transparent and open company. We just released our 2023 integrated report where we announced that we reached the target of 100% renewable energy consumption in Brazil, two years ahead of schedule. Reaching the target means that Vale has zero Scope 2 emissions in Brazil. To support our decarbonization pathway, Vale signed an agreement to acquire the remaining 45% stake in Alianca Energia. This is an important step toward creating an asset-light energy platform. Upon the transaction conclusion, value search for potential partners to better advance in our commitments to decarbonize our operations using renewable sources at competitive costs. Our big focus on becoming an ESG leader in mining is bearing fruit. Our improvement in carbon emissions and safety practice led to renewal perception by Sustainalytics for instance, with an important upgrade in our ESG risk rating in April. With that said, now I'll pass the floor to Gustavo for our financial results. and I'll get back to you in the Q&A. Thank you. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations Thanks, Eduardo, and good morning, everyone. Let me start with our EBITDA performance in the quarter. As you can see, we delivered a pro forma EBITDA of $3.5 billion in Q1. Before going to the main drivers, I would like to first explain a couple of reporting changes we implemented this quarter with the reorganization of our assets between iron ore solutions and energy transition models, some items previously classified as others will now be allocated to their respective business segments. This change includes items such as SG&A and energy generation assets, and we will allow for more precise evaluation of each business segment's performance. In addition, for better alignment with market peers, we are now including the proportional EBITDA of our associates and joint ventures into our EBITDA. We note that before 2024, our EBITDA included the dividends coming from those entities. Which were naturally more volatile during the year. Now returning to the main drivers behind our EBITDA performance in the quarter. We are pleased to see a continued strong operational performance across the board, which helped us offset a large portion of the impact from provisional prices given the decrease in the iron ore benchmark prices during the quarter. On volumes, iron ore sales increased almost 15% or 8.2 million tons year-on-year, driven by better operational performance in all of our systems, highlighting S11D, which achieved the highest output for our first quarter since 2020. Sales were also quite strong in Q1 this year, reflecting the initiatives undertaken in 2023, to improve operational performance and flexibility of our Ponta da Madeira port. Corporate sales were another highlight in the quarter, increasing by 22% or 14,000 tons year-on-year, driven by the ramp-up of Salobo III and better operational performance in the Salobo I and II operations. On costs and expenses, I'd like to highlight the ongoing effort that our teams have been making internally to improve productivity and efficiency. Excluding the external effects, of higher freight costs in the iron ore business and the one-off effects in base metals, like the Onca Puma furnace rebuild, our cost and expenses were roughly flat year-on-year. Again, this is being accomplished through a series of initiatives across the business, and we are quite excited about the cost efficiency opportunities we still see ahead of us. Now moving on to price realization. Iron ore finance realized price was $100.7 per ton in Q1. 7% lower year-on-year and 15% lower quarter-on-quarter. Pricing mechanisms had a negative impact of $10 per ton on our realized price in the quarter. largely explained by the negative effect of provisional prices. At the end of Q1, 24% of our iron ore fine sales were booked at $102 per ton on average. Which compares to an average price of $124 per ton in the quarter. Also, about 30 million tons of sales from Q4 '23, were booked at an average price of $139 per ton and were later realized at lower prices in Q1. Our average iron ore fines premium came in negative at $1.6 per ton as we increased the share of high silica products in our sales mix given the lower discounts observed for these products during the quarter. This has allowed us to maintain an adequate balance of high-quality products through our supply chain for later value maximization. For Q2, we continue to see similar market conditions and, therefore, expected to maintain a slightly higher share of high silica products in our mix compared to historical lens. Now let me turn to our cost performance. In iron ore, our C1 cash cost ex third-party purchases was $23.5 per ton, slightly lower versus last year. despite the negative impact of the BRL appreciation. Excluding this effect, C1 would have been $22.8 per ton, almost $8 per ton lower year-on-year. This was driven by lower demurrage costs due to improved shipping and port loading during the rainy season, higher fixed cost dilution as a result of higher production volumes in gains from our cost efficiency programs. Additionally, I'd like to take a moment to comment on our strategy behind third-party purchases. We acquired iron ore from the smaller producers that operate near our operations. This product is sold directly to our customers where it is blended within our own production, generating a positive contribution margin. This helps dilute fixed costs, particularly as we have excess logistics capacity while capital intensity is very low, which implies a very healthy return on invested capital. In 2023, our third-party volume was 24 million tons, and it is expected to increase slightly in 2024. We are also evaluating to accelerate the development of some of our smaller deposits through leasing agreements with regional partners, transactions that can offer attractive returns for both sides. Moving on to our energy transition metals business. We are pleased to deliver significant year-on-year reductions in all-in cost in both copper and nickel. Our copper all-in costs decreased by 26% year-on-year, driven by continued successful ramp-up of Salobo III and the improved operational performance at Salobo I and II. The higher proportion of Salobo III volumes in the product mix has also contributed to an increase in unit by product revenues with higher gold sales. Nickel all-in costs were down 14% year-on-year, supported by higher unit byproduct revenues. The unit COGS increase was expected and largely related to the furnace rebuild at Onca Puma. I would like to also mention that Mark Cutifani and the VBM team continued to make significant progress on the asset review. The value opportunities are being assessed and designed for implementation over the next two to three years with some benefits already being captured in the shorter term. As we pointed out last quarter, we will present the key findings and action plan of the asset review in our webinar to be scheduled for June this year. Now moving on to cash generation. Our EBITDA to cash conversion was 57% in Q1. with free cash flow reaching $2 billion, roughly $0.5 billion lower than Q4 2023. Despite the $3.4 billion sequential drop in EBITDA, driven mostly by seasonally lower shipments quarter-on-quarter and lower iron ore prices. This was achieved primarily due to the positive impact of a strong cash collection from Q4 sales as we had anticipated last quarter and seasonally lower capex disbursement. Most of the free cash flow generation was used to pay dividends and execute our buyback program for a total shareholder remuneration of $2.6 billion in Q1. So before we move on to the Q&A session, I would like to reinforce the key messages from today's call. Safety continues to be our key priority, and we remain highly focused on creating the conditions for an accident-free workplace environment. Our continued strong operational performance across all commodities only reinforces we are in the right direction to consistently deliver on our short- and long-term commitments. On ESG, we are making significant progress on several fronts as demonstrated by our recent achievement of 100% renewable sourcing in Brazil for Scope 2 and the continued investments to deliver a sustainable future for our businesses. On the medium-term strategic objectives we laid out at Vale Day, we are quite pleased to see the development of our key projects such as Vargem Grande. Which we expected to reach start-up later this year. These investments will position Vale as the leader in high-quality offerings, which are critical for steel-making decarbonization. Last, we remain highly committed to a disciplined capital allocation process as evidenced by our $2.6 billion cash return to shareholders year-to-date through dividends and share buybacks. Now I would like to open the call for questions. Thank you. Questions & Answers: Operator [Operator instructions]. Our first question comes from Rafael Barcellos with Bradesco BBI. Rafael Barcellos -- Bradesco BBI -- Analyst Good morning, and thanks for taking my questions. So firstly, I would say that the main news in the sector was the potential merger between BHP and Anglo American. So maybe if you could discuss a bit on how this movement could change Vale's strategy going forward. It could be interesting for us? Or even how could it change your recently announced a partnership at Anglo Minas Rio assets. And my second question here is maybe to just understand better your views on iron ore markets and price premiums in the coming quarters. And of course, how do you see the possibility of further extraordinary dividends now with iron ore prices back to the $120 per ton level? Thanks. Eduardo Bartolomeo -- Chief Executive Officer Thanks, Rafael. It's Eduardo here. As you've noticed, it's truly unfolding. So we are still digesting what is going on. Specifically answering your question, we don't see any impacts on our Minas-Rio deal. It's being undertaken with Anglo, it's going to be respected by whoever comes later if it comes later. So that's the first reaction. Second is, we've been speaking with you since we've decided to do the carve out, right? We believe that Vale has a unique position in the industry, right? We do have a growth platform in iron ore, as Gustavo mentioned during his presentation, we are going to add 50 million tons of high quality with low cost. So there is no other asset in the world that could be attractive to us on that sense. And when you look at base metals, we still have the -- as well the best endowment in Canada, in Brazil, in Carajas province, and Indonesia. We obviously, we're always looking at opportunities eventually, but it doesn't change our strategic focus on executing the asset review, the transformation in base metals. There is a tremendous amount of value to be extracted there. And iron ore, we are the only iron ore growth with quality in the sector. So we will follow up closely this development of this deal, but it doesn't impact our strategy or change anything in our mindset. And I'll pass the second question to Spinelli. Marcello Spinelli -- Executive Vice President, Iron Ore Solutions Thank you, Rafael. Regarding the market, so we see China, as you mentioned, we remain the same view about China. That's the main market. We are calling this moment as the China resiliency. Despite the the problem and the proper markets that all of us track we see since '21, a very strong market in the manufacturing growing really constantly with the energy transition industry or shipbuilding. So we have an offset for that. And we may consider the exports as something that is sometimes bothering the markets. But by the end of the day, is a trade-off between protection in the market and inflation. So all the micron conditions in China are going well. So steel inventory now is lower than last year and the margins are getting better. So as a whole, we see the market really similar compared to last year. And you asked us about the premiums. Premiums by product, we see a stable moment and we've been stable for some months. So some quarters actually. So we see the Carajas and also the BRBF and a stable gap. And we can have a small upside risk if we have some spike in the coke and coal market that can increase the necessity for efficiency. Operator Next question from Caio Ribeiro with Bank of America. Caio Ribeiro -- Bank of America Merrill Lynch -- Analyst Yes. Thank you very much. Good morning. Thanks for the opportunity. So first of all, I just wanted to see if you could share some updates with us on the latest, involving the Onca Puma and Sossego operations? And any color that you can share on expected operational financial impacts there would be helpful. And then my second question is related to the renegotiation of the railroad concessions, right? Can you give us some color there as well on your latest expectations around those negotiations and on timing as well to conclude them? Thank you. Eduardo Bartolomeo -- Chief Executive Officer I think Mark is on the call, right, Mark, could you answer the first one? Mark Cutifani -- Executive Vice President, Base Metals Yes. Thanks, Eduardo. Can you hear me OK? Eduardo Bartolomeo -- Chief Executive Officer Yes. Mark Cutifani -- Executive Vice President, Base Metals Well, thanks for the question. On both operations, we're working through with the authorities as we speak. In the case of Sossego, what has been outlined to us is that there were some complaints on noise and dust and complaints around reduced social programs through COVID. We have already submitted our reports for those issues, which was subject to the first complaint. And now that it's clear that we've input the report. We're now working through detail that's contained in those reports both with the authorities and with the local political leadership as well. And we've got about three to four weeks ore on the ground to process. So we're in good shape in terms of our ore stocks because it's the mines that are actually impacted. So processes are still going forward. On Onca Puma, a fairly similar story in terms of complaints, a little bit different in terms of some of the mining with more environmental related but also connected to social programs and a similar story. We're working through with the authorities. We're also talking to other leaders in the community, very sensitive to making sure that people aren't impacted. And I think everybody is keen to make sure we get things up and running very quickly. In the on Onca Puma case, we're going to have four months of ore because we've now finished the furnace rebuild, and we're on heat up at the moment, still going through those processes. But again, at this stage, we're not anticipating problems over the course of the year, we should be able to make up the production through the course of the year. May might be impacted on the furnace issue, but that's more an operating ramp up to full capacity issue than anything connected to the current mining shutdown because we've got lots of ore. So that's where we are. I would expect during the course of next week we'll have both issues pretty well in view and we'll let everybody know where we're up to. Marcello Spinelli -- Executive Vice President, Iron Ore Solutions Caio, thank you for your question. So first of all, we have a very solid contract. We spent more than four years to steer off the renewal with all the approvals on all the levels -- federal levels. And it's important to say we are complying with our obligations. But nevertheless, we've been talking to the transportation ministry. We see it room to optimize some specific parts of the contract and also adjust some obligations that can bring value for the company. And we see that we can balance this value with new obligations to pay. So you may expect a balanced negotiation. We are finalizing the discussion. And we expect the final terms soon. Operator Next question from Carlos De Alba with Morgan Stanley. Carlos De Alba -- Morgan Stanley -- Analyst Thanks very much, and good morning, everyone. So my question may be similar to the last one, but focusing a little on Mariana. Clearly, you took a provision in the fourth quarter and now you provided us with an updated disbursement path. And there were news overnight about the potential restart or the reportedly restart of the negotiations this week. So I don't know if you can provide an update there. Clearly, a key concern by the market something that everyone would like to get resolved. I think the company, the authorities and certainly the people that were impacted. So I hope they will be greater. And my second question is, in light of the increase in capex at Serra Sul 120 as well as the Voisey Bay expansion and then the revision of capex of the briquette projects. How can we think about? How should we think about the 2025, maybe 2026 capex for the company? Thank you. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations Carlos, this is Gustavo. So on Mariana, yes, your question is spot on. We are highly engaged with the counterparties, the mediation process, as you probably know, has been ongoing, and we engage it more actively recently in order to find a resolution that works for everybody. We continue to be hopeful that by by mid this year, we can reach a negotiated outcome, which we all think it's the ideal path in this case. So stay tuned. We'll keep you updated, but we are certainly engaged looking forward to find an agreeable solution here for all parties. On the capex, we've updated. The main one is S11D. It's over a period of years as we get to commissioning in 2026. So no impact in our guidance for -- in our expectations as we had before for the following years. This year, we are still within the $6.5 billion, no impact. And we should be able to accommodate those increases in the following years as well. Operator Next question from Jon Brandt with HSBC. Jon Brandt -- HSBC -- Analyst Good morning. Thanks for taking my question. I just wanted to clarify an earlier answer Eduardo. Just given the Anglo BHP news today, are you sort of unequivocally saying that Vale have no interest in the Anglo assets and that you're more watching to see what the impact is from from a potential deal, but Vale have no interest in those assets. Is that correct? And then I guess my question is really around -- we sort of discussed some of the rail concessions, some of the permits, the Samarco liabilities, etc. I'm just wondering, I think that's sort of a big part of the reason for Vale's underperformance relative to peers. And I'm just wondering, how would you categorize your relationship with the government, right? I mean, you've talked a lot about stability and wanting sort of a stable environment. This seems to be anything bought. So I'm wondering what you can do or what Vale can do to sort of improve the relationship that you have with the government? So that the market doesn't have to deal with these sorts of issues. And then my second question, just really quickly, is, it looks like on the breakeven cost for copper, they came in well below guidance for 2024. I'm just wondering how much upside risk there is to that guidance number? Is this a seasonal issue? Or has some of the things Mark that you've put into place, is that really starting to bear fruit? Thank you. Eduardo Bartolomeo -- Chief Executive Officer Thanks, Jon. Well, it's a question that, obviously, when you look at Anglo assets, obviously, would be interested. What we try to explain in my answer at the beginning is that we have better options inside house to look at and more cheap options because otherwise, you would go to a bid and doesn't make any sense for us. So that's why I said we are watching with attention. That the asset that has interference with our our strategy is the Minas-Rio that we just closed with Anglo and this one is protected. The others, as mentioned, we are wait and see to see what's going to happen. But meanwhile, we are much more interested in accelerating, executing our own endowment. Specifically about the railway concessions. That's a good question because it's not a Vale's issue, right? It has been done through [Inaudible] been run to MRIS. It has been with all the other concessions. So it's not a Vale specific problem. Obviously, as Spinelli said, we are truly sure that we have a very robust contract what will take the opportunity to adjust some specifics and make a win-win situation with the government that we believe will help on this problem or on this matter that you mentioned better and a more stable relationship with the government. That is always good. By the way, we always had. And the second question is to you, right? Sorry, a couple of questions to Mark. Sorry, Mark. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations I can -- we probably lost Mark. I can take it, Jon. So yes, it was a good first quarter, especially given the strong ramp-up of Salobo. Salobo III, plus also a strong operational performance in Salobo I and II. So we are not resetting expectations, but what I can say, it's looking pretty good within the guidance that we had laid out. So hopefully, three and we -- with the remaining part of the year, we can provide more details around it. Operator Next question from Leonardo Correa with BTG Pactual. Leonardo Correa -- BTG Pactual -- Analyst Good morning, everyone. I have a couple of questions on my side. Yes. So the first one, I'm not sure if Mark is back. So feel free -- Mark Cutifani -- Executive Vice President, Base Metals Still here. Leonardo Correa -- BTG Pactual -- Analyst You are here. OK. Perfect. Welcome back, Mark. On the -- just on the base metal story still, right? I mean they're very mixed results are pressured, right, by in fairness by pressured nickel prices, but you're having a dual speed situation, right, where basically copper is performing very well, perhaps above expectations and nickel is performing well below expectations. And the overall results have been pressured, if you take a year of expectations for EBITDA in base metals are way above what you guys are currently delivering. And I get the point that there's a lot under review, so I don't want to be unfair, but -- and I know that Gustavo and I think in the opening remarks, you said that by June, we're going to have more details. I mean just thinking of you, I mean, do you see an opportunity to adjust capacities and to perhaps put some of Vale's nickel assets under care and maintenance at this point just given market conditions are unfavorable, and and the asset is not generating any EBITDA? So my first question is specifically to nickel, how you see the evolution and how viable certain assets are to Vale are in this scenario? The second question I think there was a question on this, Gustavo, but I think it wasn't addressed yet. But if I may, just moving back to the dividend situation and the extraordinary dividend potential for the latter part of this year. With all these questions on additional provisions and outflows, how are you viewing this, right? We're getting some help from iron ore prices lately. So we're back to $120. How are you viewing this extraordinary dividend story with your leverage, which is now at the upper side of your tolerance, let's say? Those are the two questions. Eduardo Bartolomeo -- Chief Executive Officer OK. Go ahead, Mark. Mark, you're on mute. Mark Cutifani -- Executive Vice President, Base Metals Try again, how's that? Eduardo Bartolomeo -- Chief Executive Officer OK. I copy you. Mark Cutifani -- Executive Vice President, Base Metals OK. Gustavo made the observation on copper around Salobo's improvement, and that was very encouraging, flowing into the first quarter coming off a strong last quarter as well. And that pointed to a few changes that were made over the last six or nine months. And we've had similar albeit lagging performance at Sudbury because we did the asset review in Sudbury about three months after Salobo. And Eduardo pointed to the 7% improvement at [Inaudible]. On a run rate basis, it's closer to 15%, and that reflects both copper and nickel. So I think we've got good trends at two of the most important operations, Indonesia remains fairly solid. Onca Puma is coming through the furnace rebuild and is heating up. And what we are flagging is a likely intention to push some of that feed north to try and improve the premiums on products we received. And so it's not simply about operations. It's also -- and that's a long way to go and a lot of improvement to come, but it's also about price realizations. And with the price volatility and what we think will be a premium related to the products that we produce from Canada. We think there's still a lot of potential on both the cost side and on the pricing side that we're looking at. And with the volatility we're seeing in the nickel market, what we don't want to do is start cutting production, where we're already seeing material reductions in operating costs, and we think there's a real premium. So we want to give it another two or three months, and that's what we want to reflect and show you in June. So we still think there is two stories playing out. The operating improvement plus premiums that we can get by using our flow sheets better, filling [Inaudible], doing more work at clinic and making sure we've got the molecules heading in the right in the right direction. So it will be a story in two parts. And I think we'll be able to show that in June that we're looking at both operating costs and margin improvements as well on the pricing side. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations Thanks, Mark. And I'll take the second one, apologies also to Rafael that we haven't responded for the first question on the extraordinary dividend potential. Look, as you know, it depends on several elements. Certainly, market conditions have improved lately, which give us some good expectations of potential cash generation through year-end but we also compare those vis-a-vis where we are on the leverage ratio, minimum cash provisions and outflows. So I think it's early, and we think it's early to point out to potential incremental dividends, but we will certainly assess that through year-end. And if there's any opportunity, we will certainly consider with our board as we always do, right, and we've been doing this consistently over the last several years. Operator Next question from Myles Allsop with UBS. Myles Allsop -- UBS -- Analyst A couple of questions. First of all, on iron ore. Obviously, a very strong first quarter. The guidance for 2024 either looks conservative or you have some concerns about potential operating challenges later this year. I mean, should we look at the guidance as conservative? Or are there other things we should bear in mind for later in the year? And then maybe, secondly, on the nickel side, a question for Mark, I mean, the challenges in the nickel market are driven by Indonesia and obviously, Vale's contributing to those incremental tonnes. And what's the latest with the Indonesian projects? And are there any -- is there any desire to slow those back to try and rebalance the market? Thank you. Carlos Medeiros -- Executive Vice President, Operations Hi, Myles. Yes, this is Carlos Medeiros. It's too early days to review our 2024 guidance. We had a quite good Q1. But still, there are challenges as we see ahead. And we had also a very strong second half of the year last year. So this is why we prefer to maintain our guidance and if we decide to revisit it, it will be done later in the year. Meanwhile, we're still working on the usual levels to increase production. Taking initiatives such as our seasonality plan that has proved to be robust, the reliability initiatives to continue to improve the overall equipment availability or mining plans to review the mine geometries, whatever necessary to free up more ore and also in the hydrogeology initiatives to make sure that our -- the balance in our minds offers additional opportunities to access the bottom of the pit during the year. So all in all, we will keep it for now and we might get back to you later. Thank you. Mark Cutifani -- Executive Vice President, Base Metals Yes, as on the nickel side. On the question on Indonesia. I think the first thing to recognize is the divestment announcements and milestones that were achieved were very positive. And certainly, we move through that filing quickly with the Indonesian government a credit to everybody involved. Second point, funds on Puma have been committed as per the requirements, and we're still working through the early phases of that. In terms of the commitment on new projects, again, we're very mindful of our obligations with our partners. But at the same time, we're also making the point that we need to be prudent and consider the individual investment propositions very carefully. There is a little bit of uncertainty in the marketplace regarding our different products will be priced in the market. Great news for us in Canada is that it's likely we will do better than most because of the nature of the material and the late carbon footprint. Indonesia will probably be in a very different conversation, and we're working with our partners just to make sure we understand that and what that means for each of the investments. And again, we're also mindful of the fact that we need to pace those additions with the market as well. But again, it's an open conversation with our partners. It still early in that process, I have to say. So we've got a bit more work to do. Operator Vale team, ready for your next question? Next question is from Timna Tanners with Wolfe Research. Timna Tanners -- Wolfe Research -- Analyst Hi. Good morning. Just dive on a little more cost, we could see that we reset volatility and are price have been great to hear that to manage the cost side this quarter, saw a little bit uptick on the [Inaudible] costs despite the progress [Inaudible] an actual cost there. Can you give us an update on the [Inaudible] purchase side? That's my first question. Eduardo Bartolomeo -- Chief Executive Officer Timna, sorry. It's getting crunched, could you ask it again? Timna Tanners -- Wolfe Research -- Analyst Sure, is that any better? Eduardo Bartolomeo -- Chief Executive Officer A little bit. Timna Tanners -- Wolfe Research -- Analyst Sorry. Just asking for any outlook on costs, given the -- there's some price volatility and any guidelines for third-party purchase costs, anything thing you can [Inaudible] retain costs overall on the iron ore side. Eduardo Bartolomeo -- Chief Executive Officer OK. We got this one. Timna Tanners -- Wolfe Research -- Analyst [Inaudible] outlook. Thanks. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations Yes, I can -- Eduardo Bartolomeo -- Chief Executive Officer I'll ask the first one -- answer the first one, then Timna, you ask the second one. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations Timna, Gustavo here. On the cost outlook, we came at a C1 at 23.5%, slightly lower than last year. You have to be mindful that Q1 is usually our toughest quarter in terms given the lower volumes that are produced to the effect of dilution is limited as we saw last year. But when we look at the forecast for the year, we are feeling super confident with the numbers that we laid out, the 21.5 million to 23 million. A lot of the cost efficiency initiatives that we've started 18 months ago are bearing fruit and sales are coming strong. Production is coming strong. So we are feeling good about it. The challenges which have been managed on the all-in, I think Leonardo made that reference in terms of the breakeven cost has been mostly associated with the freight rates which Vale is mostly hedged, which is one of our competitive advantage, it's not 100% hedged. So you saw an uptick this quarter. But we -- this is one of the headwinds that we've been able to manage. We are now probably 90% hedged in terms of our demands for the year. Also hedged on the brand costs. And the other element here are the premiums, which came a little tighter and has given market conditions. But all in all, we are feeling very good with the numbers that we had laid out in terms of forecast for the year for both and all-in cost across all businesses, by the way. Operator Next question from Ricardo Monegaglia with Safra. Ricardo Monegaglia -- Safra -- Analyst Hello. Good morning, everyone. I have a couple of questions, actually follow-ups from previous questions. First, on the base metals business. Are there any changes to commodity price hedge policies given the recent rally in metals prices? And the second question still on base metals is, are there any updates that you could share with us on regards to the conclusion of Vale based metals transaction. It continues to be expected to occur in the second quarter, what are the final steps to conclude this acquisition would be interesting to understand. And my second question is on iron ore quality. Based on the target for the year and 1Q '24 levels. It implies that quality will come above the level of 62.5% in the coming quarters? Should we expect this trend already in the second quarter? Or high silica sales could continue high or at the same level as in the first Q? Those are my questions Thank you, guys. Eduardo Bartolomeo -- Chief Executive Officer Gustavo. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations Sure. Thanks, Ricardo. So I'll do the first one and then Spinelli will cover the premium. So on the hedging, we usually don't do it. That's the nature of the business, we like to run the exposure unless there is some very unique conditions where we may want to consider. So that's part of the nature of our business. And we like to run with exposure in those commodities. On the VBM we've got, I think Eduardo mentioned in his prep remarks, we've got all the regulatory approvals, and we are now working with partners to move to the closing, which we expected to happen in the next, call it, a couple of weeks to keep the market updated about it. So I'll turn back to Spinelli. Marcello Spinelli -- Executive Vice President, Iron Ore Solutions OK. Thank you, Carlos. So regarding the quality average, depends on the first -- firstly on the production mix. And you saw that we had a good performance in the north system. And as we have a pattern of higher production in the second half that will naturally increase the average grade. And regarding sales, you're right, we had took an advantage to sell directly the high silicon in the first part of the year, actually in the end of last year. So the discount was there. So we can take this choice every -- actually every day we assess this. So as we move forward during the year, we have the possibility to blend this product or to concentrate this product or sell them directly. But in the second half, we have -- we don't have a lot of high silica as we increase the production in the North system and we prioritize the blend. And after that, we can choose the remaining high silica if you want to sell directly or not. It's difficult to precise in advance, it depends on the market conditions. Operator Next question from Gabriel Simoes with Goldman Sachs. Gabriel Simoes -- Goldman Sachs -- Analyst Hi. Can you hear me? OK. Thanks for taking my questions. I actually have one quick follow-up. On one of the questions that were asked before. Actually, I just wanted to understand on the development of your iron ore projects. So if you could comment a bit on how the development is going or the capacity increasing projects, so Vargem Grande, Capanema, and S11D that would be great because we just wanted to understand how the projects are doing so far and how confident you are with the time line you provided earlier? I know you mentioned that the sales should remain the same time line? Just wanted to have a better sense on the other ones. Thank you. Gustavo Pimenta -- Executive Vice President, Finance and Investor Relations So Gabriel, Gustavo here. Yes, we are feeling pretty good about it. We gave you some stats during Eduardo's presentation of where each one of those projects. We have a series of projects, but the three main ones we've been pointing out is Vargem Grande, Capanema, and plus 20. And they are moving along the time line we had established. So we're feeling pretty good about it. And Vargem Grande, for example, the expectations that we start -- have this start-up by the end of the year. So that's one of the key projects that we've promised to deliver through 2026 to have that increase and take value to a potential range of $3.40 to $3.60. So we are moving along the plan, and we are feeling pretty good about those deliverables. Operator This concludes today's question-and-answer session. We would like to hand the floor back to Mr. Eduardo Bartolomeo for the company's final remarks. Eduardo Bartolomeo -- Chief Executive Officer OK. Well, just to conclude, I think we -- as we say here in Brazil, we start with the right foot. We started the year in a very good shape. We always like to say that we win the game in the first quarter. We're not that arrogant. We know we still have nine months to go. Rainy season isn't over yet on the north. But the thesis of safety versus production is being proved is being proved that we can be safer and reliable and that, I think, is a very important message. We are seeing a positive market in iron ore and on copper as well, while nickel has it's challenges. As lastly, answered by Gustavo, our projects are on time, on budget. So we will deliver on it. On June, we're going to have more color on the asset review. And in the end, every -- about the noises that are around us. We see some overhangs starting to getting off of the radar as Marianas is expected to be over by the -- will try our best to do it by the first half. The renewal is going to be over, it's not going to be material. So with that said, if we see through the noise, we remain extremely disciplined, extremely focused on what we have to do. And we still see an extremely huge opportunity to invest in value. So again, thanks a lot for your attention, and hope to see you in the next call. OK. Thank you, and have a safe day.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Welcome to VISA's fiscal second quarter 2024 earnings conference call. All participant lines are in a listen-only mode until the question-and-answer session. Today's conference is being recorded. If you object, you may disconnect at this time. I would now like to turn the call over to your host, Ms. Jennifer Como, senior vice president and global head of investor relations. Ms. Como, you may begin. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Thanks, Holly. Good afternoon, everyone, and welcome to Visa's fiscal second quarter 2024 earnings call. Joining us today are Ryan McInerney, Visa's chief executive officer; and Chris Suh, Visa's chief financial officer. This call is being webcast on the investor relations section of our website at investor.visa.com. A replay will be archived on our site for 30 days. A slide deck containing financial and statistical highlights has been posted on our IR website. Let me also remind you that this presentation includes forward-looking statements. These statements are not guarantees of future performance, and our actual results could differ materially as a result of many factors. Additional information concerning those factors is available in our most recent annual report on Form 10-K and any subsequent reports on Forms 10-Q and 8-K, which you can find on the SEC's website and the investor relations section of our website. For non-GAAP financial information disclosed on this call, the related GAAP measures and reconciliation are available in today's earnings release and the related materials available on our IR website. And with that, let me turn the call over to Ryan. Ryan McInerney -- Chief Executive Officer Good afternoon, everyone. Thank you for joining us. We delivered strong second quarter results with $8.8 billion in net revenue, up 10%, GAAP EPS up 12%, and non-GAAP EPS up 20%. For our key business drivers, we saw relative stability. Overall payments grew 8% year over year in constant dollars, U.S. payment volume grew 6% year over year, and international payments volume grew 11%. Cross-border volume, excluding intra-Europe, rose 16% year over year, and process transactions grew 11%. Visa's business performance demonstrates our strategy at work in consumer payments, new flows, and value-added services. Furthermore, across all of these growth levers, tremendous opportunity remains. I'll spend a few moments on each growth lever. Let's start with consumer payments. The opportunity in consumer payments is enormous. Based on the latest public data from calendar year 2022 and our analysis, we estimate that the total global purchase personal consumption expenditure, or PPCE, excluding Russia and China, was approximately $40 trillion. Within that $40 trillion, our addressable opportunity is more than $20 trillion. This includes three components. One, cash and check, which is about half of the addressable opportunity. Tap-to-pay is a great example of how we are converting small ticket cash transactions to Visa credentials. Two, ACH and other electronic transactions. We have many examples in this space, including the work we are doing to extend Visa as a bill pay method in acceptance categories like rent, education, and loan repayments. And three, cards that run primarily on domestic networks. We have been focused on converting these domestic-based cards to visa credentials in countries around the world, and I'll share a good example from Europe in a moment. There is a very long runway ahead, and I remain excited about Visa's future growth opportunity in consumer payments. We continue to capture that growth by delivering innovative and secure payment solutions for buyers and sellers, including new credentials and issuance, tap-to-pay, and e-commerce. I'll briefly talk about each. First, we're making great progress in expanding the number of Visa credentials. We have added over 100 million credentials from September to December for a year-over-year growth rate of 6%. One area of focus is in Europe, with the U.K. growing credentials at its fastest rate since 2016, driven in part by strong growth from fin tech clients. In addition, from 2018 to 2023, we converted more than 20 million credentials in Europe that primarily ran on domestic networks to Visa debit credentials, with millions more in the process of being migrated. This is a great example of the opportunity I mentioned a moment ago. We're particularly excited as we prepare for the Paris Olympics, which are less than a hundred days away. We have close to 300 clients across 85 countries globally working with Visa to activate our Olympic sponsorship for marketing campaigns and cardholder engagements, such as credential issuance and on-site cardholder events. And in Europe alone, we expect our clients to be able to participate in the event, who have issued over 5 million Olympic and Paralympic branded visa credentials before the start of the games. Also, this quarter in Europe, we renewed our relationship with Caixa Geral de Depositos in Portugal across consumer credit, debit, and prepaid; and commercial credit and debit, as well as a suite of value-added services including risk solutions and analytics. Another area of strength is our co-brand issuance. Visa is the primary network partner for eight of the top 10 co-brand partnerships in the U.S. today. And we are pleased that Visa has finalized a multiyear extension of our successful credit co-branded partnership with Alaska Airlines, a portfolio that benefits from a loyal customer base and high cross-border usage. We have also had significant co-brand momentum in SAMEA. First, we launched a new co-brand card in partnership with Qatar Airways, British Airways, and National Bank of Kuwait. Second, we expanded our strong global Marriott relationship to launch Qatar's first hospitality co-branded card with Qatar Islamic Bank. Across the United Arab Emirates, we now have exclusive agreements with all the leading airlines marked by a recent agreement with Emirates Skywards. And we also signed an inaugural airline co-brand agreement in Morocco with Royal Air Maroc. Now, newer digital issuers are equally important to our future growth and consumer payments. And in Saudi Arabia, fin tech stc pay, which has over 12 million customers, is transitioning from a digital wallet to a full digital bank and expanding its Visa prepaid business into Visa debit and credit. Digital bank, Maya, in the Philippines has chosen Visa to offer its millions of mobile wallet users and bank depositors access to consumer credit cards with new issuance of affluent products. In the U.S., we signed a newly expanded credit deal with brokerage platform, Robinhood, including the launch of a new Robinhood Gold card, which offers 3% cash-back for all purchases. In Europe, broker and savings platform, Trade Republic, has launched a new Visa card that combines spending and savings for their 4 million customers across 17 markets. Over 1 million people joined the wait list for the card in just a few weeks. As I've mentioned in the past, we feel great about our products, our value-added services, our new flows capabilities, our brand and our people, all coming together to deepen and expand our partnerships with our clients around the world. As we think about Visa's growth, tap-to-pay and e-commerce are key drivers in the digitization of payments. This quarter, tap-to-pay grew 5 percentage points from last year to 79% of face-to-face transactions globally, excluding the U.S. Of note, Japan nearly doubled its penetration since last year to almost 30%. In the U.S., in the second quarter, we're nearing 50% penetration with New York City at over 75%, the first U.S. city to reach this milestone, up from 50% two years ago, demonstrating the impact that transit and our focused issuance and acceptance have on accelerating growth. On the e-commerce front, we continued to see Visa's U.S. e-commerce payments volume grow several points faster year over year than face-to-face spend, and the same is true in many key countries around the world, including Canada, Brazil, Australia, and India. And this matters to Visa's growth because in the e-commerce space, cash is not usually an option. And although e-commerce payments are a highly competitive environment, we believe our capabilities and our focus on safety, security, reliability, and user experience position us very well. Adding to the potential for growth is tokenization, which brings several benefits to the ecosystem, especially in e-commerce, including reducing fraud, improving authorization rates, and, therefore, making it easier for a customer to purchase a good or service. As of the second quarter, we have over 9.5 billion tokens globally and have surpassed a milestone of 1 billion tokens in Asia-Pacific, joining the ranks of the U.S. and Europe. We continue to be focused across all of these efforts in addition to seeking new areas of acceptance and spending. Now, moving to new flows. We mentioned last quarter that we see $200 trillion of opportunity, excluding Russia and China. And we are delivering visas commercial and money movement solutions to help digitize these flows. This quarter, new flows revenue growth improved to 14% year over year on a constant dollar basis with Visa Direct overall transactions growing 31% for the quarter to $2.3 billion, and commercial volumes up 8% year over year in constant dollars. Throughout the quarter, we remained focused on our Visa Direct strategy across several areas of growth, including through new use cases, expansion to new geographies, and enablers. One recent example is our extended agreement with TUNES, which increased the number of countries in which Visa Direct can enable push-to-wallet from 78 to 108. In addition, TUNES is implementing Visa Direct's push-to-card capability to enable payouts made to eligible Visa cards and accounts. We have also expanded earned wage access in Canada through an agreement with Payfare and have brought our first Visa Direct cross-border capability into Taiwan with Taishin Bank. On the enabler front, we are pleased that our longtime partner, JPMorgan Payments, will be seamlessly integrating Visa Direct into their acquiring operations to offer their business clients faster push payments capabilities. In addition, we continued to deepen our relationship with Chase in the small business market with investment and enhancements in products and services. And in accounts receivable and payable, we renewed and expanded our multiyear agreement with Bill on their accounts payable, spend and expense management platforms. We have also reached a global partnership with Taulia, an SAP company and a leading provider of working capital management solutions. The collaboration will incorporate Visa's digital payments technology into Taulia's virtual cards, a solution that integrates with SAP ERP solutions and business applications to make embedded finance accessible for businesses through a seamless and streamlined payments experience for buyers and suppliers. One vertical in new flows that has immense potential is government payments, representing over $15 trillion in annual payments volume opportunity, where we are in a strong position to combine many of our new flows offerings. A recent example is in Kenya, where we signed an agreement with Pesaflow, a technology partner for the government of Kenya, to expand card payments on eCitizen, the government's electronic platform with over 12 million users. We achieved this by bringing together Visa virtual credentials and Visa Direct into the platform. Now, let me move on to value-added services, where revenue was up 23% in the second quarter in constant dollars. The growth and opportunity in value-added services continue to be significant and broad-based. In acceptance solutions, we signed an agreement with Millicom International Cellular in Latin America for cybersource gateway, decision manager, and token management solutions. As it relates to open banking, just about two years ago, we acquired Tink as we saw the opportunity in open banking to enable the movement of data and money and to provide consumers with control over their financial data. Over those two years, we have been expanding our presence in Europe, winning deals with such as Audion and Revolut. We're now expanding open banking solutions through Tink into the United States, having signed several data access agreements, including with Capital One, Fiserv, and Jack Henry, so that their customers may share data with Tink. We've also signed partnerships on the fin tech and merchant side, including Dwolla and MaxRewards. And across our risk offerings, we continue to bolster them through our technology, innovation, and AI expertise, and are expanding their utility beyond the Visa network. Recently, we announced three such capabilities in our Visa Protect offerings. The first is the expansion of our signature solutions, Visa Advanced Authorization and Visa Risk Manager for non-Visa card payments, making them network agnostic. This allows issuers to simplify their fraud operations into a single fraud detection solution. The second is the release of Visa Protect for account-to-account payments. fraud prevention solution built specifically for real-time payments, including P2P digital wallets, account-to-account transactions, and central banks' instant payment systems. Powered by AI-based fraud detection models, this new service provides a real-time risk score that can be used to identify fraud on account-to-account payments. We've been piloting both of these in a number of countries. And our strong results thus far have informed our decision to roll these out globally. The third solution is Visa Deep Authorization. It is a new transaction risk scoring solution tailored specifically to the U.S. market to better manage e-commerce payments, powered by a world-class deep learning recurrent neural network model and petabytes of contextual data. We also continue to make our offerings available through third-party platforms. We mentioned ServiceNow last quarter, and we are excited to have recently joined the AWS Partner Network to help seamlessly provide our clients running systems in the cloud access to Visa's solutions, initially starting with Currency Cloud, now known as Visa cross-border solutions and Pismo. We also signed an agreement with Stripe for them to distribute verify solutions through a self-service dispute management platform for their merchants. All of these efforts are part of our strategy to build and offer our solutions for both Visa and our network of networks. Before I hand it to Chris, I wanted to note that we have commenced the exchange offer for Visa's class B1 common stock that is set to expire at the end of next week. I also wanted to highlight that this quarter, after nearly 20 years of litigation, we have agreed to a landmark settlement with U.S. merchants, more than 90% of which are small businesses, lowering credit interchange rates, and capping those rates into 2030 once approved by the court. The injunctive relief class settlement also provides updates to several key network rules giving merchants more choice in how they accept digital payments. Last, let me share a few closing thoughts on the quarter and beyond. First, our second quarter was marked by stable results and strengthened relationships with clients across the globe. Second, as we head into the back half of our fiscal year and beyond, new flows and value-added services remain key areas of focus. We also see significant opportunity in consumer payments by digitizing cash and check, enhancing our capabilities in e-commerce, and building new solutions for our network of networks. I could not be more excited for what lies ahead. Finally, all of this is possible because of the 30,000 Visa employees who come to work every day in service of our clients and partners, I am grateful for everything that you do, thank you. And now over to Chris. Chris Suh -- Chief Financial Officer Thanks, Ryan. Good afternoon, everyone. As Ryan said, Q2 was a strong quarter with relatively stable growth across payments volume, process transactions, and cross-border volume. Looking at our drivers, in constant dollars, global payments volume was up 8% year over year and process transactions grew 11% year over year. Cross-border volume growth excluding Intra-Europe was up 16% year over year in constant dollars. Fiscal second quarter net revenue was up 10% in nominal and constant dollars, which was slightly above our expectations, primarily due to lower-than-expected incentives and better-than-expected value-added services revenue that collectively more than offset lower-than-expected currency volatility. GAAP EPS was up 12% and non-GAAP EPS was up 20% in nominal and 21% in constant dollars. So, let's go into the details, starting with total payments volume. Global payments volume growth in Q2 was 8%, consistent with Q1 growth. There are a couple of things I'd like to highlight when comparing Q2 to Q1. First, the extra day for the leap year was a benefit to the quarter. This was offset primarily by slowing payments volume growth in Asia-Pacific mostly due to macroeconomic weakness in Mainland China. When we adjust for Asia and some other smaller factors, we see second quarter global payments volume growth generally in line with the first quarter. Now on to the U.S. U.S payments volume grew 6% year over year, credit grew 6% and debit grew 6%. Card present spend grew 4% and card not present volume grew 8%. Reg II had a similar modest impact in Q2 as we saw in Q1. When we normalize for leap year, we see relatively stable U.S payments volume growth. Consumer spend across all segments from low to high spend has remained relatively stable. Our data does not indicate any meaningful behavior change across consumer segments. Moving to international markets, where total payments volume growth was up 11% in constant dollars. Payments volume growth rates were strong for the quarter in most major regions with Latin America, CEMEA, and Europe, ex-UK, each growing more than 19% in constant dollars. Normalized for leap year and weakness in Mainland China, total international payments volume growth was relatively stable to the first quarter. As a reminder, domestic volumes in Mainland China drive a very small amount of revenue and therefore the impact to our financial statements is not significant. Now to cross-border, which I'll speak to in constant dollars and excluding Intra-Europe transactions. Total cross-border volumes were up a healthy 16% in Q2 generally in line with our expectations. Cross-border card not present volume growth, excluding travel and adjusted for cryptocurrency purchases was in the mid-teens, stronger than expected. Cross-border travel volume was up 17% or 152% indexed to 2019. Consistent with our expectations for the year, we continue to see strong travel volume growth in and out of LAC, Europe, and CEMEA and out of the U.S. ranging from 158% to 192% of 2019 levels. The U.S. inbound travel volume has continued to recover within our expectations up several points from Q1 versus 2019 levels. Asia-Pacific travel volume continues to recover, but the pace has been slower than we anticipated. Travel volume into Asia indexed at 142% of 2019 levels for the quarter, up eight points from Q1, while travel volume out of Asia was up two points to 124% of 2019. Service revenue grew 7% year over year versus the 8% growth in Q1 constant dollar payments volume. Data processing revenue grew 12% versus the 11% process transaction growth. International transaction revenue was up 9% versus the 16% increase in constant dollar cross-border volume, excluding intra-Europe, impacted by lapping strong currency volatility from last year. As volatility reached lows that we haven't seen in about four years, the revenue growth was lower than we expected. Other revenue grew 37%, primarily driven by strong consulting and marketing services revenue growth and, to a lesser extent, pricing. Client incentives grew 12%, lower than we expected due to client performance and deal timing. Across our three growth engines, consumer payments growth was driven by relatively stable payments volume, process transactions, and cross-border volume. New flows revenue improved, as expected, to 14% year-over-year growth in constant dollars. Visa Direct transactions improved to 31% year-over-year growth helped by growth in Latin America for interoperability among P2P apps. Commercial volumes rose 8% year over year in constant dollars. In Q2, value-added services revenue grew 23% in constant dollars to $2.1 billion, primarily driven by issuing and acceptance solutions and advisory services. GAAP operating expenses increased 29% driven by increases in the litigation provision and G&A expenses. Non-GAAP operating expenses grew 11% primarily due to increases in G&A and personnel expenses. FX and Pismo each represented an approximately half point headwind. Excluding net losses from our equity investments of $30 million, non-GAAP non-operating income was $189 million. Our GAAP tax rate was 15.4%, and our non-GAAP tax rate was 16% due to the resolution of some non-U.S. tax matters. GAAP EPS was $2.29 and non-GAAP EPS was $2.51, up 20% over last year, inclusive of an almost 1 point drag from exchange rates and an approximately half point drag from Pismo. In Q2, we bought back approximately 2.7 billion in stock and distributed over 1 billion in dividends to our stockholders. At the end of March, we had 23.6 billion remaining in our buyback authorization. Now, let's move to what we've seen so far in April through the 21st. U.S. payments volume was up 4% with debit up 4% and credit up 5% year over year, down from March, primarily due to Easter timing. Process transactions grew 9% year over year. Constant dollar cross-border volume, excluding transactions within Europe grew 15% year over year. Travel-related cross-border volume, excluding Intra-Europe grew 15% year over year in constant dollars or 151% indexed to 2019. And cross-border card not present ex-travel grew 15% in constant dollars. Now, on to our expectations. Remember that adjusted basis is defined as non-GAAP results in constant dollars and excluding acquisition impacts. You can review these disclosures in our earnings presentations for more detail. Let's start with the full year. We are reaffirming our prior-year guidance for the full year for adjusted net revenue and operating expense growth in the low double digits and EPS growth in the low teens. As for drivers, things are progressing generally as we expected, except for the trends in Asia that we discussed. Accordingly, we are making a small adjustment to our outlook for total payments volume growth to the high single digits from the low double digits. Total cross-border volume, excluding Intra-Europe, is expected to continue to grow strongly in the mid-teens with the strength in e-commerce generally offsetting weakness in Asia travel. Remember that our drivers assume no recession or no further increase in Reg II impacts. Currency volatility remains low and we are assuming volatility in the third quarter continues at a similar rate to the second quarter and adjusts up slightly in the fourth quarter. Now, on to the third quarter expectations. We expect adjusted net revenue growth in the low-double-digits, generally in line to the adjusted second quarter growth rate. Adjusted operating expenses in the third quarter are expected to grow in the low teens, driven primarily by Olympic-related marketing expense due to the strong client engagement that Ryan referenced. Non-operating income is expected to be between $50 million and $60 million and the tax rate is expected to be between 19% and 19.5% in Q3 with the full year unchanged. This puts third quarter adjusted EPS growth in the high end of low-double-digits. For the third quarter, Pismo is expected to have minimal benefit to net revenue growth and an approximately 1 point headwind to non-GAAP operating expense and an approximately half point drag to non-GAAP EPS growth. FX for the third quarter is expected to have an approximately 1 point drag to net revenue growth and approximately 1.5 point benefit to non-GAAP operating expense growth, and an approximately half point drag to non-GAAP EPS growth. In summary, we had another solid quarter in Q2 with relatively stable underlying drivers and strong financial results. We feel good about the momentum in our business as we head into the second half across consumer payments, new flows, and value-added services. We remain thoughtful with our spending plans as we continue to balance between short and long-term considerations in the context of a changing environment. So, now, Jennifer, let's do some Q&A. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Thanks, Chris. And with that, we're ready to take questions, Holly. Questions & Answers: Operator [Operator instructions] Our first caller is Sanjay Sakhrani with KBW. You may go ahead. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thank you. Chris, a clarification question. You mentioned Easter was mainly affecting the quarter-to-date trends. Is it fair to assume that the growth rate would be commensurate with the last quarter if you adjust it for that? And then just on a related matter, did the tax refund timings have any impact later in the quarter, or in the quarter, or into the quarter-to-date trends? Thanks. Chris Suh -- Chief Financial Officer Yeah. Thanks for the question. So, April volumes, as I said on the call, through the first three weeks were lower than March -- the month of March. This was due to the timing of Easter, which again was in March this year and April of last year. And so, once you factor that into March and April growth rates, the change between the months are -- the change in growth rate is not meaningful. As far as tax payments at this point, I don't really have an update. Largely they've been consistent at this point year to date. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, Holly. Operator Our next caller is Timothy Chiodo with UBS. You may go ahead. Timothy Chiodo -- UBS -- Analyst Great. Thank you for taking the question. There were some helpful comments around the e-commerce strength within cross-border offsetting some of the travel weakness. When we think about the components of overall cross-border, clearly, there's the traditional travel, so card present and card not present. And then, there's the traditional e-commerce, right, so retail e-commerce. But there are other faster growing but smaller portions, whether it be the remittances or marketplace payouts or you gave the Thunes example earlier. I was wondering if you could maybe size the, in aggregate, how large some of those other maybe faster growing portions of cross-border have become as a part of the overall mix? Chris Suh -- Chief Financial Officer Yeah, sure. Why don't I start? Yeah, we don't have specifics to break out. As we talked about, the e-commerce business has been strong. It continues to grow above what we expected. The yields across our entire cross-border business are positive and accretive to Visa overall. And so we're happy with all flavors of cross-border, but I don't have a further breakout for you in terms of the pieces that you were asking about. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, Holly. Operator Our next caller is Craig Maurer with FT Partners. You may go ahead . Craig Maurer -- Financial Technology Partners -- Analyst Yeah, thanks for taking the question. I wanted to ask a question on U.S. debit trends. April continued the trend of weakening that we've seen -- that we saw also in March and basically since February. I wanted to know to what degree your guidance for both third quarter and the year embeds continued weakening in U.S. debit. You know, it seems if we look at the restaurant data released by the likes of Darden that the lower-income portion of the U.S. is significantly reducing spend in certain areas. So, curious about commentary there. Thanks. Chris Suh -- Chief Financial Officer Yeah. As we talked about on the call, we see quite stable -- relatively stable volumes in the U.S. across credit and debit, normalizing for the things that I talked about. And so, you know, in addition, as I talked about Reg II, the impact remains stable as well. And so from our perspective, our data indicates stable volume growth in the U.S. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, Holly. Operator Our next caller is Bryan Bergin with TD Cowen. You may go ahead. Bryan Bergin -- TD Cowen -- Analyst Hi. Good afternoon. Thank you. I wanted to ask on new flows, so a nice recovery there in growth. Can you give a comment on what areas were most pronounced in the underlying growth recovery relative to what you saw last quarter? Chris Suh -- Chief Financial Officer Yeah. Let me talk about Q2 growth. The two pieces of information that we gave you in terms of Q2 growth. We saw commercial volume growth globally 8%, stable to Q1 and in fact, stable over the last several quarters. And we saw very strong growth in Visa Direct transactions, growing 31% for the quarter. New flows revenue in total growing 14%, which was in line with our expectations that we shared with you at the start of the year. I think the recovery that you're referencing to was because Q1 growth was lower, and that was really due to some lapping issues that were one-time and nonrecurring, which we passed at this point. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, Holly. Operator Our next caller is Will Nance with Goldman Sachs. You may go ahead. Will Nance -- Goldman Sachs -- Analyst Hey, guys. I appreciate you taking the question. A bit of a dual-part question on just some of the prior guidance commentary you made around first half versus second half dynamics and some of the drivers of acceleration over the course of the year. And I guess, specifically, I guess, incentives, you talked about a step-down in the growth rate from first half to second half. Is that still your expectation, you know, despite that coming in a lot lower in the most recent quarter? And then, for the similar question on the volume growth trends, I guess, I hear you on the Asia trends, but I guess, overall, you had some kind of upbeat commentary on ticket sizes over the course of the year and kind of easing inflation in comps. It seems like gas prices might help that as well. So, just any commentary on ticket sizes and specifically the negative ticket sizes you've seen in the U.S.? Any commentary on kind of what's structural versus, you know, kind of more environmental there? Thanks. Chris Suh -- Chief Financial Officer Yeah. OK. Let me start first with incentives, the first part of your question. So, as you all have seen from quarter to quarter, incentive growth can vary based on a number of factors, client performance, deal timing, which is what caused half one to come in lower than anticipated. For our outlook for the second half of the year, our expectations remain largely unchanged. We still expect year-over-year growth to be lower in the second half than in the first half as we lap the higher incentives that we saw starting in the second half of last year. And we do expect the Q4 incentive growth rate will be the lowest growth quarter of the year. So, expectations for half two are unchanged. To your second question on ATS, let me -- there's a lot of moving parts in here. And so maybe I'm just going to kind of go through it in detail and unpack bit by bit. Globally, Q2 ATS year-over-year growth was down slightly, which is consistent with the growth that we saw in Q1. Breaking that apart between the U.S. and international, in the U.S., ticket size growth actually continued to improve from Q1 to Q2. Still slightly negative, but the trend improved from Q1 to Q2. And looking ahead in the U.S., this is something that we've spoken to previously, we do continue to expect ATS will turn positive in the second half of this year as we lap the lower ticket sizes in the second half of last year. Internationally, outside of Asia-Pacific, let's set that aside for a second, we saw improvement in several regions, including the impact from higher inflation in several markets. And so, overall, excluding Asia, we still expect ATS to turn positive in the second half based on the expected improvements in the U.S. with the impact of Asia factored in, global ATS will be slightly negative. And that was factored into the revised payment volume outlook that I gave for the full year. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, Holly. Operator Our next caller is Moshe Katri with Wedbush Securities. You may go ahead. Moshe Katri -- Wedbush Securities -- Analyst Hey, thanks for taking my question. It seems that there was a pretty significant uptick sequentially in growth for value-added services. Is there anything to call out there? Thanks. Ryan McInerney -- Chief Executive Officer I mean, I'll talk about the business just for a minute, Moshe. Thanks for the question and then, Chris, you can add any specific callouts. As I think I said in my prepared remarks, the business is really hitting its strides in a lot of different areas in terms of the product we're bringing to market, the success our sales teams are having around the world. You know, we're really focused on three big areas of trying to drive growth. One is just deepening the penetration of products we have with existing clients. That, if you think about it, is the most near-term opportunity that we have. And we've got metrics, client-by-client all around the world, what are they using, what are they not using. We're arming our sales teams with that. We're building case studies on how we can help them and we're driving progress in terms of deepening the relationship we have with our existing clients. And then we're building new products that we're bringing to market. I mentioned a few of those in my prepared remarks today, both in the risk and fraud space, as well as in the open banking space and then driving geographic expansion. I mentioned I think just one cybersource deal in my prepared remarks, but cybersource has been a great example of, you know, a platform where we've been having success growing in markets where we hadn't traditionally been as deep. AP is actually a positive example of that in the cybersource space. So, those are a couple of call-outs, Moshe, in terms of kind of how we're just seeing the broader business. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question. Operator Our next caller is Cris Kennedy with William Blair. You may go ahead. Cris Kennedy -- William Blair and Company -- Analyst Good afternoon. Thanks for taking the question. You talked about bringing Tink into the U.S. Can you talk about the open banking opportunity in the U.S. relative to Europe? Thank you. Chris Suh -- Chief Financial Officer Yeah. Thanks, Chris. I think Europe is the most developed open banking market in the world. We bought Tink two years ago believing that it was the best platform in Europe, and I think that's proven true over the couple of years that we've had a chance to own it. On the client side, in Europe, we've been making great progress. I think I mentioned a couple in my prepared remarks, we've been -- we've been winning business and winning share with both fin techs as well as more traditional banks, merchants, and others, both in the payment side of things and in the account information side of things. I would describe the U.S. market as less developed as Europe. And so I think it's an opportunity for us to take the learnings that we've had in the much more developed Europe market, as well as the success we've had with our clients, the products, the services, the wins and the losses and bring all of that to the U.S. market. So, we're excited to do that. And as I mentioned, I think the U.S. market is still at the very early stages of its development. So, I think it's a good time for us to be a competitor in the market. And, you know, we're hopeful that over the coming quarters and years, we'll have a chance to share with you a lot of the success that we have in the U.S. market. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next caller is Dan Perlin with RBC Capital Markets. You may go ahead. Dan Perlin -- RBC Capital Markets -- Analyst Thanks. Ryan, I just wanted to ask a question on the Visa Deep Authorization commentary and kind of that market there. I just want to make sure I understand, are you doing this as a means with which to like equalize kind of e-commerce across the market for authorization rates, so that like acquirers need to be partnered with you more specifically and therefore, they're not competing maybe shows individually on kind of author rates within e-commerce? Or is there something different within this platform? Thank you. Ryan McInerney -- Chief Executive Officer Hey, Dan. Let me backup. I think this is a little different than what you were describing. What we found in the U.S. e-commerce market is that it's the most -- on the one hand, it's the most developed e-commerce market on the planet. On the other hand, it's become the place of the most sophisticated fraud and attack vectors that we see anywhere in the world. And so what we were bringing -- we are bringing to market with Visa Deep Authorization is an e-commerce transaction risk scoring platform and capability that is specifically tailored and built for the unique sets of attack vectors that we're seeing in the U.S. So, it's -- as I was mentioning in my prepared remarks, it's built on deep learning technology that's specifically tuned to some of the sequential and contextual view of accounts that we've had in the U.S. market. And the whole goal is what we do with a lot of our fraud and authorization products. We want to -- we want to make it a better buyer and seller experience. We want to reduce fraud rates, increase authorization rates, increase shopping conversion for our merchant partners. And we think Visa Deep Authorization is going to be yet another tool that will help do that. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next caller is Tien-Tsin Huang with JPMorgan. You may go ahead. Tien-Tsin Huang -- JPMorgan Chase and Company -- Analyst Thanks so much. It sounded like the Middle East deal activity is in a good place here. I believe Emirates is a takeaway for you. I'm just curious if there's something new going on there from a pipeline perspective. It sounds like maybe some investing. Is this the growth market we should be paying more attention to maybe? Thanks. Chris Suh -- Chief Financial Officer Thanks, Tien-Tsin. I think what you're seeing is good execution from our sales team, doing what we do when we do it best, which is in with our clients, listening, learning, obsessing about what's important to them, and then bringing them products and value propositions that are helping meet their needs and drive their strategies. And really, just kudos to our team on the ground there and the great work that they're doing. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next caller is Trevor Williams with Jefferies. You may go ahead. Trevor Williams -- Jefferies -- Analyst Great. Thanks a lot. This one is for Ryan. Just wanted to go back to the merchant settlement in the U.S., clearly you guys aren't directly impacted by lower interchange, but I'm just curious kind of what you're expecting the downstream impact to be on Visa, the relationships between you and your issuing banks. And if you think it in any way kind of changes the competitive dynamics at all within the U.S. credit market? Thanks. Ryan McInerney -- Chief Executive Officer Thanks, Trevor. I think the good news on this front is it brings clarity and stability to the market. You know, this is litigation that's been out there for the better part of 20 years or so. I think there's been a lot of great work that's been done to bring this to a resolution. Just to remind everyone what the main planks of the resolution are. It really is two different sets of things. One is it will reduce interchange for U.S. -- for credit cards in the U.S. market for both Visa and Mastercard and it will have no increases in interchange for the five years of the agreement. And then, the second set of things are tools that give merchants more flexibility to how they manage payments significant, specifically as it relates to surcharging and things like that. I think, overall, it's what I said, Trevor, which is clarity and stability that lets everybody who operates in the U.S. market move on and move on continuing to grow the digitization of this great payments ecosystem that we've all collectively built in the United States. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next question is from Harshita Rawat with Bernstein. You may go ahead. Harshita Rawat -- AllianceBernstein -- Analyst Good afternoon. So, Ryan, I want to follow up on value-added services, such an important part of your growth story. I know you've talked about the five types of services you offer and how your top 250 clients use almost 2x the number of services versus the rest of your client base. Can you give us some sense on how these penetration numbers have evolved over time? And finally, as you kind of think about pricing for these services, to what extent it's a bundle pricing along with core versus kind of a separately priced service? Thank you. Ryan McInerney -- Chief Executive Officer OK. You have a great memory. As we've said, our top 265 clients or so use on average about 22 of our value-added services. We don't talk about like how that's moved quarter to quarter, but the opportunity is enormous just when you think about the number of clients we have around the planet. And so, as I was mentioning earlier kind of what we've done is we've armed our frontline teams with kind of client-by-client, what are they using, what are they not using, what are the opportunities to create value for the client by putting value-added services A, B, C or D to work for them. And we're having great success and you. see that in the numbers. In terms of the pricing, it's -- it's different pricing models for different products and different suites of solutions in different places around the world. You know, we're always trying to come up with the right product pricing mix that's going to work best for our products in the market. And we have a portfolio of value-added services that span from issuing to acceptance to risk and identity to advisory into open banking and the competitive sets are deep and different in all of those markets. So, we're bringing different pricing approaches to each and every market around the world to help, you know, meet the best that we can for our clients. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next caller is Ramsey El-Assal with Barclays. You may go ahead. Ramsey El-Assal -- Barclays -- Analyst Hi. Thanks for taking my question. I wanted to ask about one of the consumer payment opportunities that Ryan called out, namely taking share from domestic card networks. How do you drive that? Is it just a question of getting banks to issue more of your cards or is it more on the acceptance or consumer side? What are the levers that you have to basically speed that up? Chris Suh -- Chief Financial Officer Yeah. Thanks for the question. On the -- it's really the first of the things that you mentioned. Now, of course, we need to have, you know, great acceptance. We need to have great capabilities and all those types of things, which we do in every market we operate around the planet. So, then it becomes sitting down with clients, helping them understand the value of, for example, a Visa debit card versus a card that runs primarily on domestic schemes. And then you get into e-commerce capabilities that Visa Debit is able to provide their clients that maybe they don't get the same type of capabilities from the domestic scheme. You get to cross-border travel opportunities that, you know, their customers would have if they were using a Visa card versus, you know, one of those domestic schemes that I mentioned. You also get into the risk and fraud prevention capabilities that I mentioned earlier and the ability to have more transactions approved and lower fraud rates, tokenization, I mean, all these kind of benefit you've heard us talk about over and over again, those are what our teams can sit down with the clients and explain to them. Often the clients will do some pilots and some tests, they'll see the results, they'll see higher spend, they'll see higher client satisfaction. And then, ultimately the decision to issue Visa cards to their clients becomes a very clear decision for them. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next caller is Jamie Friedman with Susquehanna. You may go ahead. Jamie Friedman -- Susquehanna International Group -- Analyst Hi. I was wondering if you could share some color on how Prosa is doing so far and how you view the opportunity in Mexico as you start to press and productize into the Mexican market. Thank you. Ryan McInerney -- Chief Executive Officer Yeah. Thanks, Jamie. We view the Mexican opportunity as a very significant one. And coincidentally, I was just down there a couple of weeks ago meeting with clients and meeting with the Prosa team as well. So, as I think I explained on one of these calls, today, because we don't process transactions domestically in Mexico, we're not able to deliver a lot of the value-added services that I've mentioned over the course of this call to our clients. And so, first and foremost, our clients are very excited about us having the opportunity to have a majority ownership stake in Prosa and then bring these world class capabilities that we've built to the Mexican market, the things I mentioned earlier, tokenization, you know, the risk scoring algorithms that I mentioned, or the e-commerce capabilities that I mentioned, those types of things. Now, Prosa itself is a great asset. It's been operating for 50 years in Mexico has deep processing experience, it has scale. They do more than 10 billion transactions annually. They have a great base of clients. So, it's really the combination of both Prosa's experience and deep footprint in the Mexican market combined with our experience, our technology, our track record in bringing a lot of these services to market. The combination of those two things gives us a lot of confidence and our clients a lot of confidence that we can digitize the significant amount of cash and check and electronic payments that exist today in Mexico. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next question is from Andrew Schmidt with Citi. You may go ahead. Andrew Schmidt -- Citi -- Analyst Hey, Ryan. Hey, Chris. Thanks for having me on the call here. I wanted to go back to cross-border for a second. Obviously, a part of the back-half growth is the narrowing of the spread between cross-border revs and volumes. Maybe if you could talk a little about how, you know, whether those assumptions have changed at all with FX volumes coming down or if there's other puts and takes we should consider there? Thanks a lot. Chris Suh -- Chief Financial Officer Yeah, sure. Yeah, I spoke at length about volatility. So, we had -- in Q2, we saw volatility -- currency volatility at multiyear lows. This one is hard to predict. In Q3, our assumption, what's embedded in the guidance for Q3 is that the currency volatility levels remain at this low level. We do have, again, embedded in our forecast. We do anticipate that Q4 improves slightly. That's generally in line with market expectations. But, yeah, that is our view of currency volatility. That said, the underlying health of our business as we enter the second half of the year, we feel really good about across consumer payments, across new flows, across value-added services. And so, volatility is sort of the variable, and we'll have to see how it comes in. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next question comes from Jason Kupferberg with Bank of America. You may go ahead. Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst Thank you, guys. Can you talk about your second half expectations for new flows and VAS revenue growth, as well as cross-border travel volume growth? Thanks. Chris Suh -- Chief Financial Officer Sure. Let me unpack that a little bit. From a -- as you heard us, we reaffirmed our prior year guide for the full year, adjusted net revenue growth, opex, EPS. And within that, I spoke about the fact that volatility is going to cause our currency volatility -- treasury revenues in international to be lower than we anticipated in Q3. But again, full year unchanged within that. Our expectations for new flows in that are consistent with the ones that we shared at the beginning of the year, which we anticipated. For the full year, new flows will grow faster than consumer payments with weighted toward faster growth in the second half of the year. We're seeing that with the 14% growth in Q2. We anticipate continuing to see a good growth in the second half of the year. Value-added services has grown over 20% in each of the first two quarters. The momentum there is pretty evident. The second part of your question was, I think, around cross-border travel of volumes in total. So, we did make a little bit of adjustment. You heard me talk about based on half-one trends. And so again, this is one with a couple of parts, so let's just go through it in detail. First of all, we feel really good, feel great about our first half total cross-border performance, 16% growth in Q2, in line with our expectations. And within that, travel was 17% and e-commerce growth mid-teens better than expected. And so, that unpacking travel a bit, we've seen most of our travel volume expectations play out actually as we planned at the beginning of the year, which continues to be strong and healthy in most regions LAC, Europe, CEMEA, and all the ones that I talked about on the call, with Asia being the exception to that, which again continues to improve with the pace of recovery being slower than expected, offset again by strength in the e-commerce cross-border business, which is performing better than we expected. So, we expect these trends to continue into the second half and thus, we've moderated our outlook for travel due to AP and upped our expectations on e-commerce. So, putting that all together, overall, our view is that total cross-border volumes remain strong, growing in the mid-teens in the second half, which is frankly the better measure in relation to our financial performance given the strong yields across both travel and e-commerce. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator And our last question comes from Ken Suchoski with Autonomous Research. You may go ahead. Ken Suchoski -- Autonomous Research -- Analyst Hey, good afternoon. Thanks for taking the question. A lot of my questions have been asked. I just want to ask about the service yields, though, because they came in a little bit lighter than we were expecting. So, can you just talk about what drove that? It looks like the service yield declined year over year. But maybe there's some offset with client incentives also coming a little bit lower in the quarter. So, any detail there would be helpful. Any thoughts on how to think about the year-over-year change in that yield going forward? Thanks. Chris Suh -- Chief Financial Officer As we talked about both service revenue and data processing revenue, grew generally in line with the underlying drivers, service revenue at 7% versus the 8% in constant dollar PV, Q1 constant dollar PV that's impacted by a number of smaller things, none of which I would call out as a single thing. Data processing revenue grew a little bit above processed transactions, 1.12 versus 11. And that was helped aided a little bit by pricing. From a yield perspective, I think the thing that's important is that our second quarter yields remained consistent with Q1 and consistent with the average over the last several quarters. And so, we're seeing very stable yields across the business, and we're pleased to see that. And even more broadly, our net revenue yield across the whole company remained quite stable. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Great. And last question please, Holly. Operator And our last question comes from Paul Golding with Macquarie Capital. You may go ahead. Paul Golding -- Macquarie Group -- Analyst Thanks so much. Ryan, you were talking about the addressable opportunity of $20 trillion of which cash and check was half. I was wondering if you can give any thought to quantifying the ACH versus the domestic network conversion and where you think you are in that opportunity capture for each of those. Thanks. Ryan McInerney -- Chief Executive Officer Yeah, thanks. We're having great success in all three. I gave you examples. Some of our teams are ahead of others in different parts of the world and domestic schemes are more prevalent in some parts of the world than others, like I mentioned Europe as an example. But the opportunity is enormous in all three of these areas and we've been having really good success in all three of the areas. Jennifer Como -- Senior Vice President, Head of Global Investor Relations And with that, we'd like to thank you for joining us today. If you have additional questions, please feel free to call or email our investor relations team. Thanks again, and have a great day. Operator And this concludes today's conference. Thank you for participating. Answer:

VISA's fiscal second quarter 2024 earnings conference call

Operator Welcome to VISA's fiscal second quarter 2024 earnings conference call. All participant lines are in a listen-only mode until the question-and-answer session. Today's conference is being recorded. If you object, you may disconnect at this time. I would now like to turn the call over to your host, Ms. Jennifer Como, senior vice president and global head of investor relations. Ms. Como, you may begin. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Thanks, Holly. Good afternoon, everyone, and welcome to Visa's fiscal second quarter 2024 earnings call. Joining us today are Ryan McInerney, Visa's chief executive officer; and Chris Suh, Visa's chief financial officer. This call is being webcast on the investor relations section of our website at investor.visa.com. A replay will be archived on our site for 30 days. A slide deck containing financial and statistical highlights has been posted on our IR website. Let me also remind you that this presentation includes forward-looking statements. These statements are not guarantees of future performance, and our actual results could differ materially as a result of many factors. Additional information concerning those factors is available in our most recent annual report on Form 10-K and any subsequent reports on Forms 10-Q and 8-K, which you can find on the SEC's website and the investor relations section of our website. For non-GAAP financial information disclosed on this call, the related GAAP measures and reconciliation are available in today's earnings release and the related materials available on our IR website. And with that, let me turn the call over to Ryan. Ryan McInerney -- Chief Executive Officer Good afternoon, everyone. Thank you for joining us. We delivered strong second quarter results with $8.8 billion in net revenue, up 10%, GAAP EPS up 12%, and non-GAAP EPS up 20%. For our key business drivers, we saw relative stability. Overall payments grew 8% year over year in constant dollars, U.S. payment volume grew 6% year over year, and international payments volume grew 11%. Cross-border volume, excluding intra-Europe, rose 16% year over year, and process transactions grew 11%. Visa's business performance demonstrates our strategy at work in consumer payments, new flows, and value-added services. Furthermore, across all of these growth levers, tremendous opportunity remains. I'll spend a few moments on each growth lever. Let's start with consumer payments. The opportunity in consumer payments is enormous. Based on the latest public data from calendar year 2022 and our analysis, we estimate that the total global purchase personal consumption expenditure, or PPCE, excluding Russia and China, was approximately $40 trillion. Within that $40 trillion, our addressable opportunity is more than $20 trillion. This includes three components. One, cash and check, which is about half of the addressable opportunity. Tap-to-pay is a great example of how we are converting small ticket cash transactions to Visa credentials. Two, ACH and other electronic transactions. We have many examples in this space, including the work we are doing to extend Visa as a bill pay method in acceptance categories like rent, education, and loan repayments. And three, cards that run primarily on domestic networks. We have been focused on converting these domestic-based cards to visa credentials in countries around the world, and I'll share a good example from Europe in a moment. There is a very long runway ahead, and I remain excited about Visa's future growth opportunity in consumer payments. We continue to capture that growth by delivering innovative and secure payment solutions for buyers and sellers, including new credentials and issuance, tap-to-pay, and e-commerce. I'll briefly talk about each. First, we're making great progress in expanding the number of Visa credentials. We have added over 100 million credentials from September to December for a year-over-year growth rate of 6%. One area of focus is in Europe, with the U.K. growing credentials at its fastest rate since 2016, driven in part by strong growth from fin tech clients. In addition, from 2018 to 2023, we converted more than 20 million credentials in Europe that primarily ran on domestic networks to Visa debit credentials, with millions more in the process of being migrated. This is a great example of the opportunity I mentioned a moment ago. We're particularly excited as we prepare for the Paris Olympics, which are less than a hundred days away. We have close to 300 clients across 85 countries globally working with Visa to activate our Olympic sponsorship for marketing campaigns and cardholder engagements, such as credential issuance and on-site cardholder events. And in Europe alone, we expect our clients to be able to participate in the event, who have issued over 5 million Olympic and Paralympic branded visa credentials before the start of the games. Also, this quarter in Europe, we renewed our relationship with Caixa Geral de Depositos in Portugal across consumer credit, debit, and prepaid; and commercial credit and debit, as well as a suite of value-added services including risk solutions and analytics. Another area of strength is our co-brand issuance. Visa is the primary network partner for eight of the top 10 co-brand partnerships in the U.S. today. And we are pleased that Visa has finalized a multiyear extension of our successful credit co-branded partnership with Alaska Airlines, a portfolio that benefits from a loyal customer base and high cross-border usage. We have also had significant co-brand momentum in SAMEA. First, we launched a new co-brand card in partnership with Qatar Airways, British Airways, and National Bank of Kuwait. Second, we expanded our strong global Marriott relationship to launch Qatar's first hospitality co-branded card with Qatar Islamic Bank. Across the United Arab Emirates, we now have exclusive agreements with all the leading airlines marked by a recent agreement with Emirates Skywards. And we also signed an inaugural airline co-brand agreement in Morocco with Royal Air Maroc. Now, newer digital issuers are equally important to our future growth and consumer payments. And in Saudi Arabia, fin tech stc pay, which has over 12 million customers, is transitioning from a digital wallet to a full digital bank and expanding its Visa prepaid business into Visa debit and credit. Digital bank, Maya, in the Philippines has chosen Visa to offer its millions of mobile wallet users and bank depositors access to consumer credit cards with new issuance of affluent products. In the U.S., we signed a newly expanded credit deal with brokerage platform, Robinhood, including the launch of a new Robinhood Gold card, which offers 3% cash-back for all purchases. In Europe, broker and savings platform, Trade Republic, has launched a new Visa card that combines spending and savings for their 4 million customers across 17 markets. Over 1 million people joined the wait list for the card in just a few weeks. As I've mentioned in the past, we feel great about our products, our value-added services, our new flows capabilities, our brand and our people, all coming together to deepen and expand our partnerships with our clients around the world. As we think about Visa's growth, tap-to-pay and e-commerce are key drivers in the digitization of payments. This quarter, tap-to-pay grew 5 percentage points from last year to 79% of face-to-face transactions globally, excluding the U.S. Of note, Japan nearly doubled its penetration since last year to almost 30%. In the U.S., in the second quarter, we're nearing 50% penetration with New York City at over 75%, the first U.S. city to reach this milestone, up from 50% two years ago, demonstrating the impact that transit and our focused issuance and acceptance have on accelerating growth. On the e-commerce front, we continued to see Visa's U.S. e-commerce payments volume grow several points faster year over year than face-to-face spend, and the same is true in many key countries around the world, including Canada, Brazil, Australia, and India. And this matters to Visa's growth because in the e-commerce space, cash is not usually an option. And although e-commerce payments are a highly competitive environment, we believe our capabilities and our focus on safety, security, reliability, and user experience position us very well. Adding to the potential for growth is tokenization, which brings several benefits to the ecosystem, especially in e-commerce, including reducing fraud, improving authorization rates, and, therefore, making it easier for a customer to purchase a good or service. As of the second quarter, we have over 9.5 billion tokens globally and have surpassed a milestone of 1 billion tokens in Asia-Pacific, joining the ranks of the U.S. and Europe. We continue to be focused across all of these efforts in addition to seeking new areas of acceptance and spending. Now, moving to new flows. We mentioned last quarter that we see $200 trillion of opportunity, excluding Russia and China. And we are delivering visas commercial and money movement solutions to help digitize these flows. This quarter, new flows revenue growth improved to 14% year over year on a constant dollar basis with Visa Direct overall transactions growing 31% for the quarter to $2.3 billion, and commercial volumes up 8% year over year in constant dollars. Throughout the quarter, we remained focused on our Visa Direct strategy across several areas of growth, including through new use cases, expansion to new geographies, and enablers. One recent example is our extended agreement with TUNES, which increased the number of countries in which Visa Direct can enable push-to-wallet from 78 to 108. In addition, TUNES is implementing Visa Direct's push-to-card capability to enable payouts made to eligible Visa cards and accounts. We have also expanded earned wage access in Canada through an agreement with Payfare and have brought our first Visa Direct cross-border capability into Taiwan with Taishin Bank. On the enabler front, we are pleased that our longtime partner, JPMorgan Payments, will be seamlessly integrating Visa Direct into their acquiring operations to offer their business clients faster push payments capabilities. In addition, we continued to deepen our relationship with Chase in the small business market with investment and enhancements in products and services. And in accounts receivable and payable, we renewed and expanded our multiyear agreement with Bill on their accounts payable, spend and expense management platforms. We have also reached a global partnership with Taulia, an SAP company and a leading provider of working capital management solutions. The collaboration will incorporate Visa's digital payments technology into Taulia's virtual cards, a solution that integrates with SAP ERP solutions and business applications to make embedded finance accessible for businesses through a seamless and streamlined payments experience for buyers and suppliers. One vertical in new flows that has immense potential is government payments, representing over $15 trillion in annual payments volume opportunity, where we are in a strong position to combine many of our new flows offerings. A recent example is in Kenya, where we signed an agreement with Pesaflow, a technology partner for the government of Kenya, to expand card payments on eCitizen, the government's electronic platform with over 12 million users. We achieved this by bringing together Visa virtual credentials and Visa Direct into the platform. Now, let me move on to value-added services, where revenue was up 23% in the second quarter in constant dollars. The growth and opportunity in value-added services continue to be significant and broad-based. In acceptance solutions, we signed an agreement with Millicom International Cellular in Latin America for cybersource gateway, decision manager, and token management solutions. As it relates to open banking, just about two years ago, we acquired Tink as we saw the opportunity in open banking to enable the movement of data and money and to provide consumers with control over their financial data. Over those two years, we have been expanding our presence in Europe, winning deals with such as Audion and Revolut. We're now expanding open banking solutions through Tink into the United States, having signed several data access agreements, including with Capital One, Fiserv, and Jack Henry, so that their customers may share data with Tink. We've also signed partnerships on the fin tech and merchant side, including Dwolla and MaxRewards. And across our risk offerings, we continue to bolster them through our technology, innovation, and AI expertise, and are expanding their utility beyond the Visa network. Recently, we announced three such capabilities in our Visa Protect offerings. The first is the expansion of our signature solutions, Visa Advanced Authorization and Visa Risk Manager for non-Visa card payments, making them network agnostic. This allows issuers to simplify their fraud operations into a single fraud detection solution. The second is the release of Visa Protect for account-to-account payments. fraud prevention solution built specifically for real-time payments, including P2P digital wallets, account-to-account transactions, and central banks' instant payment systems. Powered by AI-based fraud detection models, this new service provides a real-time risk score that can be used to identify fraud on account-to-account payments. We've been piloting both of these in a number of countries. And our strong results thus far have informed our decision to roll these out globally. The third solution is Visa Deep Authorization. It is a new transaction risk scoring solution tailored specifically to the U.S. market to better manage e-commerce payments, powered by a world-class deep learning recurrent neural network model and petabytes of contextual data. We also continue to make our offerings available through third-party platforms. We mentioned ServiceNow last quarter, and we are excited to have recently joined the AWS Partner Network to help seamlessly provide our clients running systems in the cloud access to Visa's solutions, initially starting with Currency Cloud, now known as Visa cross-border solutions and Pismo. We also signed an agreement with Stripe for them to distribute verify solutions through a self-service dispute management platform for their merchants. All of these efforts are part of our strategy to build and offer our solutions for both Visa and our network of networks. Before I hand it to Chris, I wanted to note that we have commenced the exchange offer for Visa's class B1 common stock that is set to expire at the end of next week. I also wanted to highlight that this quarter, after nearly 20 years of litigation, we have agreed to a landmark settlement with U.S. merchants, more than 90% of which are small businesses, lowering credit interchange rates, and capping those rates into 2030 once approved by the court. The injunctive relief class settlement also provides updates to several key network rules giving merchants more choice in how they accept digital payments. Last, let me share a few closing thoughts on the quarter and beyond. First, our second quarter was marked by stable results and strengthened relationships with clients across the globe. Second, as we head into the back half of our fiscal year and beyond, new flows and value-added services remain key areas of focus. We also see significant opportunity in consumer payments by digitizing cash and check, enhancing our capabilities in e-commerce, and building new solutions for our network of networks. I could not be more excited for what lies ahead. Finally, all of this is possible because of the 30,000 Visa employees who come to work every day in service of our clients and partners, I am grateful for everything that you do, thank you. And now over to Chris. Chris Suh -- Chief Financial Officer Thanks, Ryan. Good afternoon, everyone. As Ryan said, Q2 was a strong quarter with relatively stable growth across payments volume, process transactions, and cross-border volume. Looking at our drivers, in constant dollars, global payments volume was up 8% year over year and process transactions grew 11% year over year. Cross-border volume growth excluding Intra-Europe was up 16% year over year in constant dollars. Fiscal second quarter net revenue was up 10% in nominal and constant dollars, which was slightly above our expectations, primarily due to lower-than-expected incentives and better-than-expected value-added services revenue that collectively more than offset lower-than-expected currency volatility. GAAP EPS was up 12% and non-GAAP EPS was up 20% in nominal and 21% in constant dollars. So, let's go into the details, starting with total payments volume. Global payments volume growth in Q2 was 8%, consistent with Q1 growth. There are a couple of things I'd like to highlight when comparing Q2 to Q1. First, the extra day for the leap year was a benefit to the quarter. This was offset primarily by slowing payments volume growth in Asia-Pacific mostly due to macroeconomic weakness in Mainland China. When we adjust for Asia and some other smaller factors, we see second quarter global payments volume growth generally in line with the first quarter. Now on to the U.S. U.S payments volume grew 6% year over year, credit grew 6% and debit grew 6%. Card present spend grew 4% and card not present volume grew 8%. Reg II had a similar modest impact in Q2 as we saw in Q1. When we normalize for leap year, we see relatively stable U.S payments volume growth. Consumer spend across all segments from low to high spend has remained relatively stable. Our data does not indicate any meaningful behavior change across consumer segments. Moving to international markets, where total payments volume growth was up 11% in constant dollars. Payments volume growth rates were strong for the quarter in most major regions with Latin America, CEMEA, and Europe, ex-UK, each growing more than 19% in constant dollars. Normalized for leap year and weakness in Mainland China, total international payments volume growth was relatively stable to the first quarter. As a reminder, domestic volumes in Mainland China drive a very small amount of revenue and therefore the impact to our financial statements is not significant. Now to cross-border, which I'll speak to in constant dollars and excluding Intra-Europe transactions. Total cross-border volumes were up a healthy 16% in Q2 generally in line with our expectations. Cross-border card not present volume growth, excluding travel and adjusted for cryptocurrency purchases was in the mid-teens, stronger than expected. Cross-border travel volume was up 17% or 152% indexed to 2019. Consistent with our expectations for the year, we continue to see strong travel volume growth in and out of LAC, Europe, and CEMEA and out of the U.S. ranging from 158% to 192% of 2019 levels. The U.S. inbound travel volume has continued to recover within our expectations up several points from Q1 versus 2019 levels. Asia-Pacific travel volume continues to recover, but the pace has been slower than we anticipated. Travel volume into Asia indexed at 142% of 2019 levels for the quarter, up eight points from Q1, while travel volume out of Asia was up two points to 124% of 2019. Service revenue grew 7% year over year versus the 8% growth in Q1 constant dollar payments volume. Data processing revenue grew 12% versus the 11% process transaction growth. International transaction revenue was up 9% versus the 16% increase in constant dollar cross-border volume, excluding intra-Europe, impacted by lapping strong currency volatility from last year. As volatility reached lows that we haven't seen in about four years, the revenue growth was lower than we expected. Other revenue grew 37%, primarily driven by strong consulting and marketing services revenue growth and, to a lesser extent, pricing. Client incentives grew 12%, lower than we expected due to client performance and deal timing. Across our three growth engines, consumer payments growth was driven by relatively stable payments volume, process transactions, and cross-border volume. New flows revenue improved, as expected, to 14% year-over-year growth in constant dollars. Visa Direct transactions improved to 31% year-over-year growth helped by growth in Latin America for interoperability among P2P apps. Commercial volumes rose 8% year over year in constant dollars. In Q2, value-added services revenue grew 23% in constant dollars to $2.1 billion, primarily driven by issuing and acceptance solutions and advisory services. GAAP operating expenses increased 29% driven by increases in the litigation provision and G&A expenses. Non-GAAP operating expenses grew 11% primarily due to increases in G&A and personnel expenses. FX and Pismo each represented an approximately half point headwind. Excluding net losses from our equity investments of $30 million, non-GAAP non-operating income was $189 million. Our GAAP tax rate was 15.4%, and our non-GAAP tax rate was 16% due to the resolution of some non-U.S. tax matters. GAAP EPS was $2.29 and non-GAAP EPS was $2.51, up 20% over last year, inclusive of an almost 1 point drag from exchange rates and an approximately half point drag from Pismo. In Q2, we bought back approximately 2.7 billion in stock and distributed over 1 billion in dividends to our stockholders. At the end of March, we had 23.6 billion remaining in our buyback authorization. Now, let's move to what we've seen so far in April through the 21st. U.S. payments volume was up 4% with debit up 4% and credit up 5% year over year, down from March, primarily due to Easter timing. Process transactions grew 9% year over year. Constant dollar cross-border volume, excluding transactions within Europe grew 15% year over year. Travel-related cross-border volume, excluding Intra-Europe grew 15% year over year in constant dollars or 151% indexed to 2019. And cross-border card not present ex-travel grew 15% in constant dollars. Now, on to our expectations. Remember that adjusted basis is defined as non-GAAP results in constant dollars and excluding acquisition impacts. You can review these disclosures in our earnings presentations for more detail. Let's start with the full year. We are reaffirming our prior-year guidance for the full year for adjusted net revenue and operating expense growth in the low double digits and EPS growth in the low teens. As for drivers, things are progressing generally as we expected, except for the trends in Asia that we discussed. Accordingly, we are making a small adjustment to our outlook for total payments volume growth to the high single digits from the low double digits. Total cross-border volume, excluding Intra-Europe, is expected to continue to grow strongly in the mid-teens with the strength in e-commerce generally offsetting weakness in Asia travel. Remember that our drivers assume no recession or no further increase in Reg II impacts. Currency volatility remains low and we are assuming volatility in the third quarter continues at a similar rate to the second quarter and adjusts up slightly in the fourth quarter. Now, on to the third quarter expectations. We expect adjusted net revenue growth in the low-double-digits, generally in line to the adjusted second quarter growth rate. Adjusted operating expenses in the third quarter are expected to grow in the low teens, driven primarily by Olympic-related marketing expense due to the strong client engagement that Ryan referenced. Non-operating income is expected to be between $50 million and $60 million and the tax rate is expected to be between 19% and 19.5% in Q3 with the full year unchanged. This puts third quarter adjusted EPS growth in the high end of low-double-digits. For the third quarter, Pismo is expected to have minimal benefit to net revenue growth and an approximately 1 point headwind to non-GAAP operating expense and an approximately half point drag to non-GAAP EPS growth. FX for the third quarter is expected to have an approximately 1 point drag to net revenue growth and approximately 1.5 point benefit to non-GAAP operating expense growth, and an approximately half point drag to non-GAAP EPS growth. In summary, we had another solid quarter in Q2 with relatively stable underlying drivers and strong financial results. We feel good about the momentum in our business as we head into the second half across consumer payments, new flows, and value-added services. We remain thoughtful with our spending plans as we continue to balance between short and long-term considerations in the context of a changing environment. So, now, Jennifer, let's do some Q&A. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Thanks, Chris. And with that, we're ready to take questions, Holly. Questions & Answers: Operator [Operator instructions] Our first caller is Sanjay Sakhrani with KBW. You may go ahead. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thank you. Chris, a clarification question. You mentioned Easter was mainly affecting the quarter-to-date trends. Is it fair to assume that the growth rate would be commensurate with the last quarter if you adjust it for that? And then just on a related matter, did the tax refund timings have any impact later in the quarter, or in the quarter, or into the quarter-to-date trends? Thanks. Chris Suh -- Chief Financial Officer Yeah. Thanks for the question. So, April volumes, as I said on the call, through the first three weeks were lower than March -- the month of March. This was due to the timing of Easter, which again was in March this year and April of last year. And so, once you factor that into March and April growth rates, the change between the months are -- the change in growth rate is not meaningful. As far as tax payments at this point, I don't really have an update. Largely they've been consistent at this point year to date. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, Holly. Operator Our next caller is Timothy Chiodo with UBS. You may go ahead. Timothy Chiodo -- UBS -- Analyst Great. Thank you for taking the question. There were some helpful comments around the e-commerce strength within cross-border offsetting some of the travel weakness. When we think about the components of overall cross-border, clearly, there's the traditional travel, so card present and card not present. And then, there's the traditional e-commerce, right, so retail e-commerce. But there are other faster growing but smaller portions, whether it be the remittances or marketplace payouts or you gave the Thunes example earlier. I was wondering if you could maybe size the, in aggregate, how large some of those other maybe faster growing portions of cross-border have become as a part of the overall mix? Chris Suh -- Chief Financial Officer Yeah, sure. Why don't I start? Yeah, we don't have specifics to break out. As we talked about, the e-commerce business has been strong. It continues to grow above what we expected. The yields across our entire cross-border business are positive and accretive to Visa overall. And so we're happy with all flavors of cross-border, but I don't have a further breakout for you in terms of the pieces that you were asking about. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, Holly. Operator Our next caller is Craig Maurer with FT Partners. You may go ahead . Craig Maurer -- Financial Technology Partners -- Analyst Yeah, thanks for taking the question. I wanted to ask a question on U.S. debit trends. April continued the trend of weakening that we've seen -- that we saw also in March and basically since February. I wanted to know to what degree your guidance for both third quarter and the year embeds continued weakening in U.S. debit. You know, it seems if we look at the restaurant data released by the likes of Darden that the lower-income portion of the U.S. is significantly reducing spend in certain areas. So, curious about commentary there. Thanks. Chris Suh -- Chief Financial Officer Yeah. As we talked about on the call, we see quite stable -- relatively stable volumes in the U.S. across credit and debit, normalizing for the things that I talked about. And so, you know, in addition, as I talked about Reg II, the impact remains stable as well. And so from our perspective, our data indicates stable volume growth in the U.S. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, Holly. Operator Our next caller is Bryan Bergin with TD Cowen. You may go ahead. Bryan Bergin -- TD Cowen -- Analyst Hi. Good afternoon. Thank you. I wanted to ask on new flows, so a nice recovery there in growth. Can you give a comment on what areas were most pronounced in the underlying growth recovery relative to what you saw last quarter? Chris Suh -- Chief Financial Officer Yeah. Let me talk about Q2 growth. The two pieces of information that we gave you in terms of Q2 growth. We saw commercial volume growth globally 8%, stable to Q1 and in fact, stable over the last several quarters. And we saw very strong growth in Visa Direct transactions, growing 31% for the quarter. New flows revenue in total growing 14%, which was in line with our expectations that we shared with you at the start of the year. I think the recovery that you're referencing to was because Q1 growth was lower, and that was really due to some lapping issues that were one-time and nonrecurring, which we passed at this point. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, Holly. Operator Our next caller is Will Nance with Goldman Sachs. You may go ahead. Will Nance -- Goldman Sachs -- Analyst Hey, guys. I appreciate you taking the question. A bit of a dual-part question on just some of the prior guidance commentary you made around first half versus second half dynamics and some of the drivers of acceleration over the course of the year. And I guess, specifically, I guess, incentives, you talked about a step-down in the growth rate from first half to second half. Is that still your expectation, you know, despite that coming in a lot lower in the most recent quarter? And then, for the similar question on the volume growth trends, I guess, I hear you on the Asia trends, but I guess, overall, you had some kind of upbeat commentary on ticket sizes over the course of the year and kind of easing inflation in comps. It seems like gas prices might help that as well. So, just any commentary on ticket sizes and specifically the negative ticket sizes you've seen in the U.S.? Any commentary on kind of what's structural versus, you know, kind of more environmental there? Thanks. Chris Suh -- Chief Financial Officer Yeah. OK. Let me start first with incentives, the first part of your question. So, as you all have seen from quarter to quarter, incentive growth can vary based on a number of factors, client performance, deal timing, which is what caused half one to come in lower than anticipated. For our outlook for the second half of the year, our expectations remain largely unchanged. We still expect year-over-year growth to be lower in the second half than in the first half as we lap the higher incentives that we saw starting in the second half of last year. And we do expect the Q4 incentive growth rate will be the lowest growth quarter of the year. So, expectations for half two are unchanged. To your second question on ATS, let me -- there's a lot of moving parts in here. And so maybe I'm just going to kind of go through it in detail and unpack bit by bit. Globally, Q2 ATS year-over-year growth was down slightly, which is consistent with the growth that we saw in Q1. Breaking that apart between the U.S. and international, in the U.S., ticket size growth actually continued to improve from Q1 to Q2. Still slightly negative, but the trend improved from Q1 to Q2. And looking ahead in the U.S., this is something that we've spoken to previously, we do continue to expect ATS will turn positive in the second half of this year as we lap the lower ticket sizes in the second half of last year. Internationally, outside of Asia-Pacific, let's set that aside for a second, we saw improvement in several regions, including the impact from higher inflation in several markets. And so, overall, excluding Asia, we still expect ATS to turn positive in the second half based on the expected improvements in the U.S. with the impact of Asia factored in, global ATS will be slightly negative. And that was factored into the revised payment volume outlook that I gave for the full year. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, Holly. Operator Our next caller is Moshe Katri with Wedbush Securities. You may go ahead. Moshe Katri -- Wedbush Securities -- Analyst Hey, thanks for taking my question. It seems that there was a pretty significant uptick sequentially in growth for value-added services. Is there anything to call out there? Thanks. Ryan McInerney -- Chief Executive Officer I mean, I'll talk about the business just for a minute, Moshe. Thanks for the question and then, Chris, you can add any specific callouts. As I think I said in my prepared remarks, the business is really hitting its strides in a lot of different areas in terms of the product we're bringing to market, the success our sales teams are having around the world. You know, we're really focused on three big areas of trying to drive growth. One is just deepening the penetration of products we have with existing clients. That, if you think about it, is the most near-term opportunity that we have. And we've got metrics, client-by-client all around the world, what are they using, what are they not using. We're arming our sales teams with that. We're building case studies on how we can help them and we're driving progress in terms of deepening the relationship we have with our existing clients. And then we're building new products that we're bringing to market. I mentioned a few of those in my prepared remarks today, both in the risk and fraud space, as well as in the open banking space and then driving geographic expansion. I mentioned I think just one cybersource deal in my prepared remarks, but cybersource has been a great example of, you know, a platform where we've been having success growing in markets where we hadn't traditionally been as deep. AP is actually a positive example of that in the cybersource space. So, those are a couple of call-outs, Moshe, in terms of kind of how we're just seeing the broader business. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question. Operator Our next caller is Cris Kennedy with William Blair. You may go ahead. Cris Kennedy -- William Blair and Company -- Analyst Good afternoon. Thanks for taking the question. You talked about bringing Tink into the U.S. Can you talk about the open banking opportunity in the U.S. relative to Europe? Thank you. Chris Suh -- Chief Financial Officer Yeah. Thanks, Chris. I think Europe is the most developed open banking market in the world. We bought Tink two years ago believing that it was the best platform in Europe, and I think that's proven true over the couple of years that we've had a chance to own it. On the client side, in Europe, we've been making great progress. I think I mentioned a couple in my prepared remarks, we've been -- we've been winning business and winning share with both fin techs as well as more traditional banks, merchants, and others, both in the payment side of things and in the account information side of things. I would describe the U.S. market as less developed as Europe. And so I think it's an opportunity for us to take the learnings that we've had in the much more developed Europe market, as well as the success we've had with our clients, the products, the services, the wins and the losses and bring all of that to the U.S. market. So, we're excited to do that. And as I mentioned, I think the U.S. market is still at the very early stages of its development. So, I think it's a good time for us to be a competitor in the market. And, you know, we're hopeful that over the coming quarters and years, we'll have a chance to share with you a lot of the success that we have in the U.S. market. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next caller is Dan Perlin with RBC Capital Markets. You may go ahead. Dan Perlin -- RBC Capital Markets -- Analyst Thanks. Ryan, I just wanted to ask a question on the Visa Deep Authorization commentary and kind of that market there. I just want to make sure I understand, are you doing this as a means with which to like equalize kind of e-commerce across the market for authorization rates, so that like acquirers need to be partnered with you more specifically and therefore, they're not competing maybe shows individually on kind of author rates within e-commerce? Or is there something different within this platform? Thank you. Ryan McInerney -- Chief Executive Officer Hey, Dan. Let me backup. I think this is a little different than what you were describing. What we found in the U.S. e-commerce market is that it's the most -- on the one hand, it's the most developed e-commerce market on the planet. On the other hand, it's become the place of the most sophisticated fraud and attack vectors that we see anywhere in the world. And so what we were bringing -- we are bringing to market with Visa Deep Authorization is an e-commerce transaction risk scoring platform and capability that is specifically tailored and built for the unique sets of attack vectors that we're seeing in the U.S. So, it's -- as I was mentioning in my prepared remarks, it's built on deep learning technology that's specifically tuned to some of the sequential and contextual view of accounts that we've had in the U.S. market. And the whole goal is what we do with a lot of our fraud and authorization products. We want to -- we want to make it a better buyer and seller experience. We want to reduce fraud rates, increase authorization rates, increase shopping conversion for our merchant partners. And we think Visa Deep Authorization is going to be yet another tool that will help do that. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next caller is Tien-Tsin Huang with JPMorgan. You may go ahead. Tien-Tsin Huang -- JPMorgan Chase and Company -- Analyst Thanks so much. It sounded like the Middle East deal activity is in a good place here. I believe Emirates is a takeaway for you. I'm just curious if there's something new going on there from a pipeline perspective. It sounds like maybe some investing. Is this the growth market we should be paying more attention to maybe? Thanks. Chris Suh -- Chief Financial Officer Thanks, Tien-Tsin. I think what you're seeing is good execution from our sales team, doing what we do when we do it best, which is in with our clients, listening, learning, obsessing about what's important to them, and then bringing them products and value propositions that are helping meet their needs and drive their strategies. And really, just kudos to our team on the ground there and the great work that they're doing. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next caller is Trevor Williams with Jefferies. You may go ahead. Trevor Williams -- Jefferies -- Analyst Great. Thanks a lot. This one is for Ryan. Just wanted to go back to the merchant settlement in the U.S., clearly you guys aren't directly impacted by lower interchange, but I'm just curious kind of what you're expecting the downstream impact to be on Visa, the relationships between you and your issuing banks. And if you think it in any way kind of changes the competitive dynamics at all within the U.S. credit market? Thanks. Ryan McInerney -- Chief Executive Officer Thanks, Trevor. I think the good news on this front is it brings clarity and stability to the market. You know, this is litigation that's been out there for the better part of 20 years or so. I think there's been a lot of great work that's been done to bring this to a resolution. Just to remind everyone what the main planks of the resolution are. It really is two different sets of things. One is it will reduce interchange for U.S. -- for credit cards in the U.S. market for both Visa and Mastercard and it will have no increases in interchange for the five years of the agreement. And then, the second set of things are tools that give merchants more flexibility to how they manage payments significant, specifically as it relates to surcharging and things like that. I think, overall, it's what I said, Trevor, which is clarity and stability that lets everybody who operates in the U.S. market move on and move on continuing to grow the digitization of this great payments ecosystem that we've all collectively built in the United States. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next question is from Harshita Rawat with Bernstein. You may go ahead. Harshita Rawat -- AllianceBernstein -- Analyst Good afternoon. So, Ryan, I want to follow up on value-added services, such an important part of your growth story. I know you've talked about the five types of services you offer and how your top 250 clients use almost 2x the number of services versus the rest of your client base. Can you give us some sense on how these penetration numbers have evolved over time? And finally, as you kind of think about pricing for these services, to what extent it's a bundle pricing along with core versus kind of a separately priced service? Thank you. Ryan McInerney -- Chief Executive Officer OK. You have a great memory. As we've said, our top 265 clients or so use on average about 22 of our value-added services. We don't talk about like how that's moved quarter to quarter, but the opportunity is enormous just when you think about the number of clients we have around the planet. And so, as I was mentioning earlier kind of what we've done is we've armed our frontline teams with kind of client-by-client, what are they using, what are they not using, what are the opportunities to create value for the client by putting value-added services A, B, C or D to work for them. And we're having great success and you. see that in the numbers. In terms of the pricing, it's -- it's different pricing models for different products and different suites of solutions in different places around the world. You know, we're always trying to come up with the right product pricing mix that's going to work best for our products in the market. And we have a portfolio of value-added services that span from issuing to acceptance to risk and identity to advisory into open banking and the competitive sets are deep and different in all of those markets. So, we're bringing different pricing approaches to each and every market around the world to help, you know, meet the best that we can for our clients. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next caller is Ramsey El-Assal with Barclays. You may go ahead. Ramsey El-Assal -- Barclays -- Analyst Hi. Thanks for taking my question. I wanted to ask about one of the consumer payment opportunities that Ryan called out, namely taking share from domestic card networks. How do you drive that? Is it just a question of getting banks to issue more of your cards or is it more on the acceptance or consumer side? What are the levers that you have to basically speed that up? Chris Suh -- Chief Financial Officer Yeah. Thanks for the question. On the -- it's really the first of the things that you mentioned. Now, of course, we need to have, you know, great acceptance. We need to have great capabilities and all those types of things, which we do in every market we operate around the planet. So, then it becomes sitting down with clients, helping them understand the value of, for example, a Visa debit card versus a card that runs primarily on domestic schemes. And then you get into e-commerce capabilities that Visa Debit is able to provide their clients that maybe they don't get the same type of capabilities from the domestic scheme. You get to cross-border travel opportunities that, you know, their customers would have if they were using a Visa card versus, you know, one of those domestic schemes that I mentioned. You also get into the risk and fraud prevention capabilities that I mentioned earlier and the ability to have more transactions approved and lower fraud rates, tokenization, I mean, all these kind of benefit you've heard us talk about over and over again, those are what our teams can sit down with the clients and explain to them. Often the clients will do some pilots and some tests, they'll see the results, they'll see higher spend, they'll see higher client satisfaction. And then, ultimately the decision to issue Visa cards to their clients becomes a very clear decision for them. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next caller is Jamie Friedman with Susquehanna. You may go ahead. Jamie Friedman -- Susquehanna International Group -- Analyst Hi. I was wondering if you could share some color on how Prosa is doing so far and how you view the opportunity in Mexico as you start to press and productize into the Mexican market. Thank you. Ryan McInerney -- Chief Executive Officer Yeah. Thanks, Jamie. We view the Mexican opportunity as a very significant one. And coincidentally, I was just down there a couple of weeks ago meeting with clients and meeting with the Prosa team as well. So, as I think I explained on one of these calls, today, because we don't process transactions domestically in Mexico, we're not able to deliver a lot of the value-added services that I've mentioned over the course of this call to our clients. And so, first and foremost, our clients are very excited about us having the opportunity to have a majority ownership stake in Prosa and then bring these world class capabilities that we've built to the Mexican market, the things I mentioned earlier, tokenization, you know, the risk scoring algorithms that I mentioned, or the e-commerce capabilities that I mentioned, those types of things. Now, Prosa itself is a great asset. It's been operating for 50 years in Mexico has deep processing experience, it has scale. They do more than 10 billion transactions annually. They have a great base of clients. So, it's really the combination of both Prosa's experience and deep footprint in the Mexican market combined with our experience, our technology, our track record in bringing a lot of these services to market. The combination of those two things gives us a lot of confidence and our clients a lot of confidence that we can digitize the significant amount of cash and check and electronic payments that exist today in Mexico. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next question is from Andrew Schmidt with Citi. You may go ahead. Andrew Schmidt -- Citi -- Analyst Hey, Ryan. Hey, Chris. Thanks for having me on the call here. I wanted to go back to cross-border for a second. Obviously, a part of the back-half growth is the narrowing of the spread between cross-border revs and volumes. Maybe if you could talk a little about how, you know, whether those assumptions have changed at all with FX volumes coming down or if there's other puts and takes we should consider there? Thanks a lot. Chris Suh -- Chief Financial Officer Yeah, sure. Yeah, I spoke at length about volatility. So, we had -- in Q2, we saw volatility -- currency volatility at multiyear lows. This one is hard to predict. In Q3, our assumption, what's embedded in the guidance for Q3 is that the currency volatility levels remain at this low level. We do have, again, embedded in our forecast. We do anticipate that Q4 improves slightly. That's generally in line with market expectations. But, yeah, that is our view of currency volatility. That said, the underlying health of our business as we enter the second half of the year, we feel really good about across consumer payments, across new flows, across value-added services. And so, volatility is sort of the variable, and we'll have to see how it comes in. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator Our next question comes from Jason Kupferberg with Bank of America. You may go ahead. Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst Thank you, guys. Can you talk about your second half expectations for new flows and VAS revenue growth, as well as cross-border travel volume growth? Thanks. Chris Suh -- Chief Financial Officer Sure. Let me unpack that a little bit. From a -- as you heard us, we reaffirmed our prior year guide for the full year, adjusted net revenue growth, opex, EPS. And within that, I spoke about the fact that volatility is going to cause our currency volatility -- treasury revenues in international to be lower than we anticipated in Q3. But again, full year unchanged within that. Our expectations for new flows in that are consistent with the ones that we shared at the beginning of the year, which we anticipated. For the full year, new flows will grow faster than consumer payments with weighted toward faster growth in the second half of the year. We're seeing that with the 14% growth in Q2. We anticipate continuing to see a good growth in the second half of the year. Value-added services has grown over 20% in each of the first two quarters. The momentum there is pretty evident. The second part of your question was, I think, around cross-border travel of volumes in total. So, we did make a little bit of adjustment. You heard me talk about based on half-one trends. And so again, this is one with a couple of parts, so let's just go through it in detail. First of all, we feel really good, feel great about our first half total cross-border performance, 16% growth in Q2, in line with our expectations. And within that, travel was 17% and e-commerce growth mid-teens better than expected. And so, that unpacking travel a bit, we've seen most of our travel volume expectations play out actually as we planned at the beginning of the year, which continues to be strong and healthy in most regions LAC, Europe, CEMEA, and all the ones that I talked about on the call, with Asia being the exception to that, which again continues to improve with the pace of recovery being slower than expected, offset again by strength in the e-commerce cross-border business, which is performing better than we expected. So, we expect these trends to continue into the second half and thus, we've moderated our outlook for travel due to AP and upped our expectations on e-commerce. So, putting that all together, overall, our view is that total cross-border volumes remain strong, growing in the mid-teens in the second half, which is frankly the better measure in relation to our financial performance given the strong yields across both travel and e-commerce. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Next question, please. Operator And our last question comes from Ken Suchoski with Autonomous Research. You may go ahead. Ken Suchoski -- Autonomous Research -- Analyst Hey, good afternoon. Thanks for taking the question. A lot of my questions have been asked. I just want to ask about the service yields, though, because they came in a little bit lighter than we were expecting. So, can you just talk about what drove that? It looks like the service yield declined year over year. But maybe there's some offset with client incentives also coming a little bit lower in the quarter. So, any detail there would be helpful. Any thoughts on how to think about the year-over-year change in that yield going forward? Thanks. Chris Suh -- Chief Financial Officer As we talked about both service revenue and data processing revenue, grew generally in line with the underlying drivers, service revenue at 7% versus the 8% in constant dollar PV, Q1 constant dollar PV that's impacted by a number of smaller things, none of which I would call out as a single thing. Data processing revenue grew a little bit above processed transactions, 1.12 versus 11. And that was helped aided a little bit by pricing. From a yield perspective, I think the thing that's important is that our second quarter yields remained consistent with Q1 and consistent with the average over the last several quarters. And so, we're seeing very stable yields across the business, and we're pleased to see that. And even more broadly, our net revenue yield across the whole company remained quite stable. Jennifer Como -- Senior Vice President, Head of Global Investor Relations Great. And last question please, Holly. Operator And our last question comes from Paul Golding with Macquarie Capital. You may go ahead. Paul Golding -- Macquarie Group -- Analyst Thanks so much. Ryan, you were talking about the addressable opportunity of $20 trillion of which cash and check was half. I was wondering if you can give any thought to quantifying the ACH versus the domestic network conversion and where you think you are in that opportunity capture for each of those. Thanks. Ryan McInerney -- Chief Executive Officer Yeah, thanks. We're having great success in all three. I gave you examples. Some of our teams are ahead of others in different parts of the world and domestic schemes are more prevalent in some parts of the world than others, like I mentioned Europe as an example. But the opportunity is enormous in all three of these areas and we've been having really good success in all three of the areas. Jennifer Como -- Senior Vice President, Head of Global Investor Relations And with that, we'd like to thank you for joining us today. If you have additional questions, please feel free to call or email our investor relations team. Thanks again, and have a great day. Operator And this concludes today's conference. Thank you for participating.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Greetings, and welcome to the Vuzix fourth quarter and full year ending December 31st, 2023, financial results and business update conference 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 call is being recorded. Now I would like to turn the call over to Ed McGregor, director of investor relations of -- at Vuzix. Mr. McGregor, you may begin. Please hold. We are experiencing technical difficulty [Technical difficulty] Thank you for standing by. Ed McGregor -- Director, Investor Relations Good afternoon, everyone, and welcome to the Vuzix fourth quarter and 2023 full year ending December 31st financial results and business update conference call. With us today are Vuzix CEO Paul Travers; and our CFO, Grant Russell. Before I turn the call over to Paul, I would like to remind you that on this call, management's prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question-and-answer session. Therefore, the company claims the protection of the safe harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by any forward-looking statements as a result of certain factors, including, but not limited to, general economic and business conditions, competitive factors, change in business strategy or development plans, the ability to attract and retain qualified personnel, as well as changes in legal and regulatory requirements. In addition, any projections as to the company's future performance represent management's estimates as of today, April 15th, 2024. Vuzix assumes no obligation to update these projections in the future as market conditions change. This afternoon, the company issued a press release announcing its final 2023 financial results and filed its 10-K with the SEC, so participants in this call who may not have already done so may wish to look at those documents as the company will provide a summary of the results discussed on today's call. Today's call may include certain non-GAAP financial measures. When required, reconciliation to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in the company's Form 10-K annual filing at sec.gov, which is also available at www.vuzix.com. I will now turn the call over to Vuzix CEO Paul Travers. We'll give an overview of the company's operating results and business outlook. Paul will then turn the call over to Grant Russell, Vuzix CFO, who will provide an overview of the company's fourth quarter and full-year financial results. Paul will then return to make some closing remarks, after which, we will move on to the Q&A session. Paul? Paul Travers -- Chief Executive Officer Thank you, Ed. Hello, everyone, and welcome to the Vuzix Q4 and full-year 2023 conference call. As disclosed in our January 17th press release, Vuzix instituted cost-cutting initiatives across our operations designed to streamline our operations and organizational structure to remove redundancy without sacrificing revenue generation or overall customer support. These measured reductions across sales, marketing, and product development will extend our financial runway, improve our margins, and allow the company to refocus resources aligned with the highest growth opportunities over the short to medium term. Let me now get into a bit more about the state of the industry and the growth areas that Vuzix is positioned to benefit from. Although the augmented reality smart glasses market has developed slower than most expected over the past five years, there are increasing signs that adoption is finally starting to grow. Some of the largest players in the technology, products, and eyewear markets are just now entering the space with first-generation virtual reality and mixed reality and smart glasses products, and continue their investments in this category. Meta and Luxottica have seen a growing positive reception of their second product, and that now includes some audio-only, AI-driven capabilities with their smart glasses carrying the Ray-Ban brand. Industry reports estimate over 300,000 units were sold in the first 12 months, and they don't even have displays in them yet, a key feature that many could argue questions the validity of the reference to even call them smart glasses. Apple also recently launched the Apple Vision Pro and sold out in even larger numbers at a much higher price point. And although our enterprise-based product revenue line has not shown it just yet, our inbound new business pipeline is expanding nicely on many fronts and should result in us achieving that growth very soon. Vuzix has invested significant capital and other resources to create a foundation of key intellectual property that positions the company as one of the global leaders in the wearable computing and augmented reality smart glasses space. We have led much of the industry with the core technology development needed right through to addressing the enterprise markets in general. Our growing focus on offering OEM and ODM solutions of optics and display engine components for the enterprise, defense, and broader consumer markets is readying us for the rapid growth we see coming with much of the investment and costs already realized we are positioning to deliver to our customers and market in short order. The advancement of our core technologies is becoming more evident every day in our products, waveguides, and microdisplay component solutions. Our Z100, which we introduced at CES this January 2024, is an innovative and unique AR smart glasses solution within the industry. It demonstrates the art of the possible with actual displays in small, fashionable form factors, one that others have yet to replicate and deliver today to either enterprise users or the broader consumer markets. Our new waveguide mega factory, which was completed and became operational in late 2023, is a facility focused on high-volume manufacturing and the advancement of our waveguide technology. Again, The Wall Street Journal recently reported that roughly 300,000 Ray-Ban glasses were sold in 2023. Our plant floor could meet that volume demand today if, by way of example, Meta selected Vuzix to provide their waveguide needs for a similar product to their new Meta Ray-Bans and wanted to offer a more premium AI product with actual displays. Vuzix and our partner, Atomistic, from whom we have exclusively licensed microLED technologies and invested are on a good path that should result in achieving what we feel will be state-of-the-art breakthroughs related to microLED solutions. Atomistic's microLEDs have the potential to optimally deliver on the performance, size, and cost required for augmented and mixed reality products that we feel will be able to ultimately achieve substantial success in the mass markets. That demand could be well beyond the potential of the Meta Ray-Bans, which, today, are simply audio-enabled sunglasses with a built-in camera. Many believe they could ultimately match or exceed the number of smartphones used around the globe. Supporting these solutions from Vuzix is a comprehensive patent portfolio of more than 375 patents and patents pending, including a significant collection of fundamental waveguide design patents and applications, as well as extensive trade secrets regarding nano-imprinting, processes, equipment, and materials, like polymers, adhesion promoters, and release agents, that are critical to how we can produce in volume and at low cost to support the broader markets. Lastly, moving into software, which has finally been successfully ported over to the Vuzix smart glasses, is now leveraging artificial intelligence for item scanning and picking and continues to gain traction in the back-end operations of warehouses and large manufacturing plants. According to Pluralsight, a leading technology workforce development company, by 2025, the top three transformative technologies for the global economy are going to be the ubiquitous internet, artificial intelligence, and augmented reality. The stage is set for AI-enabled are smart glasses, and this is why almost every major tech firm has development programs happening in all three areas. The investments we have made in our core technologies and application ecosystems we feel are critical to preparing the company for the next phase of growth, coming from the augmented reality smart glasses industry. The Z100, running 48 hours on a single charge, packs industry-defining heads-up waveguide technology and a custom microLED display engine into a sleek, fashionable form factor that weighs in at just 38 grams, the weight of a standard pair of eyeglasses. For enterprise users, that represents the first attractive, functional bridge between AI platform tools and the user's external world, where situational guidance can streamline workflows for human workers who can reap the benefits of a truly connected workplace. In addition to a lightweight AI interface, the Z100 glasses can augment the data feed from wirelessly connected finger scanners, sensors, controllers, and other equipment with minimal native user interfaces, making that data available in a new and highly accessible format. For the broader market, there is a transferable customer base that needs a better solution. There are 1.6 billion smartphones and 300 million smartwatches sold annually, and the biggest use cases are notifications, social media, and soon, mobile AI connected to the world around you. Products like the Z100 have the potential to provide heads-up, hands-free access to notifications, alerts, and other location-aware information, from language translation to closed captioning, to directions, to health and workout status, to messaging, and much more, and also, to integrate the latest local and cloud-based AI engines coming from several of the larger known brands in the social media and streaming space. The bottom line is the Z100 has enthusiastically been received and will be successful in advancing the industry and opening up new doors for Vuzix OEM and ODM opportunities with our reference designs and integration opportunities with some consumer-centric software companies, and we are planning to continue this theme with the broader markets into the fall of the year. The new Vuzix waveguide factory is a state-of-the art manufacturing plant that accomplishes several specific mass market requirements, including increasing our waveguide build capacity and lowering our manufacturing costs. It is also allowing us to utilize the more advanced processes needed for our latest waveguide designs. Our production capacity can now be quickly ramped to deliver up to 1 million units annually with very little further investment. The new facility also allows Vuzix to focus on the advancement of waveguides utilizing higher index materials, advanced glass substrates, and unique waveguide configurations. Recently, Vuzix introduced INCOGNITO-enabled waveguides, which we believe is the first waveguide-based technology in the world to virtually eliminate forward eye glow when the displays are active. Eliminating eye glow is deemed by most to be a critical requirement for the broader consumer markets to accept smart glasses. We have demonstrated Vuzix INCOGNITO privately in dark rooms with the light out to leading consumer brands and defense contractors, much to their amazement and well done statements and of course how the heck. Vuzix INCOGNITO technology manages internal light reflections and forward light leakage within a waveguide, which, besides the obvious of removing the annoying forward light, results in improved contrast of virtual images in the AR glasses. INCOGNITO has been accomplished with no increase in our manufacturing cost per waveguide and will be targeted for introduction into certain of the company's defense enterprise, and of course, ultimately, broader consumer applications for both Vuzix products and our OEM offerings. So we all know that when it comes to smart glasses, one has to also address the fact that more than 60% of the population wears prescription glasses, and solving the challenges associated with delivering waveguides with integrated prescriptions is no small task. Vuzix is currently in the process of establishing the infrastructure to support the production of prescription-based waveguides with a road map for scaled production thereafter. Multiple patents and patents pending are already in place related to the system processes and prescription integrations. The prescription lens layer needs to be finished, trimmed, and integrated with the smart glasses waveguides, all of which must be conducted in controlled environments and with our approach can utilize most of the existing industry infrastructure for high-volume prescription glasses. We expect our integrated solutions can support the vast majority of prescriptions needed, including bifocals and astigmatism. Our recently announced Ophthalmic Advisory Board is providing strategic input, guidance, and recommendations regarding vision correction issues and have a better-build products and services to meet customer vision requirements. Their efforts and contributions are helping Vuzix successfully do this. Again, these are all industry-leading developments and the waveguides resulting from them in terms of cost, scalability, and features we feel are unmatched in the industry. Waveguides, with all these features mentioned above, represent an essential component needed for widespread adoption of lightweight, AI-enabled smart glasses and other wearables. The other essential component for AI-enabled AR smart glasses is microLEDs. As we've discussed in the past, microLEDs have the potential to be a driving force in providing the performance, size, and costs needed for AR, MR, and smart glasses to achieve success in the mass market. MicroLEDs have the potential to be much more efficient, lower power to drive high brightness levels outdoors in the real world with the resolution and form factor to enable a family of next-generation, small, lightweight, fashion-forward smart glasses. Over the past 24-plus months, Vuzix has invested approximately $30 million in developing advanced microLED display technologies, leveraging extensive Atomistic SAS intellectual properties for which we have the option to continue to own the exclusive license outright and acquire the company. The current AR display device technology approach to microLEDs by others today primarily consists of using gallium nitride and gallium arsenide material systems. It has had ongoing challenges related to higher build costs, complicated manufacturing scalability, less power efficiency, and spectral performance when scaled to the micron sizes needed for smart glasses and other uses. Atomistic, in contrast, continues to make steady progress in the development of their unique microLED materials approach. This includes delivering against a number of pre-established development milestones in our exclusive license agreements, six out of 10 thus far. These milestones are related to the development and production of a singularly unique multi-chamber epitaxy machine used for both red, green, and blue, or RGB, microLEDs atomic-level design and ultimately into production, development of unique doping materials and processes, expanded development and patent-related documentation of multiple material stack approaches to optimize the atomic pixel structure for increased efficiencies for all three primary colors, and work on multiple unique methods of pixel control. We expect this progress to accelerate over the coming months with increased production of test samples and refinement of initial designs. As we are making this progress, the ability to share more with third parties is now starting to crystallize, and we have been able to start engaging with select potential customers, investing partners, and organizations that have a vested interest to see microLED technology finally commercialized, including U.S. and international defense organizations, numerous well-known brands, and multinational commercialization and supply companies. The early feedback has been very positive thus far with nearly all parties intently interested in seeing and potentially supporting a practical solution for high brightness and high efficiency with an approach that is clearly scalable at a competitive cost. These early conversations regarding Atomistic's unique technical and production approach reconfirm the path we are on and the potential high return on our investment. Our current enterprise smart glasses products are now being used around the clock in many warehouses to drive cost savings and efficiencies. In healthcare, Vuzix glasses are being used around the globe to teach and perform surgeries. Vuzix smart glasses are also being used during equipment repairs and remote maintenance service calls. The list of use cases keeps growing as the enterprise industry matures. And as we have expressed in the past, we continue to see much larger deployment opportunities on the horizon. This has not changed. We've entered 2024 with a solid pipeline of smart glasses and OEM sales opportunities. We feel this way because it is not concentrated across only a few customers, but instead, it is becoming more broad-based across industries, geographic regions, and use cases. The Vuzix team is looking forward to executing and delivering on what we feel should be a significant number of growth catalysts throughout the remainder of 2024. One area of broad focus for the entire industry, and of course, for Vuzix is artificial intelligence for many applications, including as a personal assistant for work or life management and entertainment. We have multiple third-party ISVs in the enterprise space and Vuzix's own Moviynt team planning to enable their AI-enabled offerings ultimately through the use of smart glasses to leverage artificial intelligence for augmenting humans for picking, preventive maintenance, education, security, and language processing. We believe artificial intelligence-equipped smart glasses will also have a meaningful impact in defense, and of course, with consumers. According to the survey, Revolutionizing Fulfillment Operations with Workforce Augmentation, created by Incisiv, one of the leading insights firms for digital transformation leaders, 94% of businesses report a commitment to evolving the role of human labor in areas like automated warehouses and last-mile delivery. In this context, there's a growing focus on technology that enhance, rather than replace, human capabilities. Reflecting this sentiment, a strong 69% of those surveyed agreed that wearable AR solutions that broaden the capabilities of their workers with AI optimizations, improved accuracy, and data-rich inputs will be central to warehouse operations in the coming years. Again, our core waveguide and microdisplay projector technology in optics continue to gain traction in these markets, both as products and as well related to potential ODM and OEM reference designs for consumer smart glasses and in the trenches with our defense customers. We remain in ongoing discussions with multiple industry leaders to ideally provide them components, subsystems, and even full white-label designs for their upcoming AR products. We believe our success with many of these firms is just a matter of time. In November of last year, Vuzix also signed an agreement with Quanta, one of the world's largest ODM suppliers on the planet with over $40 billion in annual revenues, to jointly supply these same components and with the goal to enable as many commercial customers as possible with AR-finished goods solutions. This is an exciting new relationship for Vuzix and one that continues to evolve with initial glasses already being shown from Quanta using Vuzix waveguides and software to select key accounts. On the defense side, and I know we have been expressing this for quite some time, we expect at least one of our customers, which, to date, has invested millions of dollars in prior NREs with Vuzix, to be rolling into production this year, and we feel there is a second customer right behind them. At the same time, our specialized waveguide R&D efforts are bearing new fruit and opening up new addressable markets and defense areas related to HUDs for armored vehicles, aircraft, and ultimately, even ground forces. We believe the competitiveness of our products and technologies is opening other accretive opportunities also. Vuzix is now actively working with select U.S. agencies to secure development grants to support their needs to have Vuzix as a strategic U.S. supplier of advanced technologies focused on our waveguides and microLEDs. Concurrently, we have growing relationships with leading industry players that not only are interested in working with Vuzix around our key technologies but are potentially interested in investing to better secure their access to it. Grant will now take you through our numbers, as well as provide some additional color regarding further organizational efficiencies and other matters. Grant? Grant Russell -- Chief Financial Officer Thank you, Paul. As Ed mentioned, the 10-K we filed this afternoon with the SEC offers a detailed explanation of our annual financials, so I'm just going to provide you with a bit of color on some of the full year, as well as quarterly numbers. For the year ended December 31st, 2023, Vuzix reported $12.1 million in total revenues as compared to $11.8 million for the prior year. Product sales increased by 2% year over year, driven by increased smart glasses revenues. Sales of engineering services for the year increased 3% to $1.4 million from $1.3 million. Please note, as disclosed in our 10-K, we have $2.9 million worth of remaining performance obligations. Over the revenues already recognized under our current waveguide development project for the three months ended December 31st, 2023, Vuzix reported $1.1 million in total revenues versus $2.9 million in the prior year's fourth quarter. The revenue decline was primarily due to reduced unit sales of our M400 smart glasses. Please note the Q4 2023 revenue total achieved was below the initially indicated amount in early January, pursuant to our cost-reduction press release update, as one significant customer order had to be moved from when it originally shipped in December 2023 into the 2024 revenue year due to shipment and delivery issues discovered later during formal closing procedures. For the full year ended December 31st, 2023, there was an overall gross loss of $2.6 million as compared to a $1.5 million gross profit for 2022. Included in 2023's cost of sales was a $4.4 million inventory obsolescence reserve, well above the $0.3 million in obsolescence reserves accrued in our 2022 fiscal year. The large additional inventory reserve amount was related to expected surplus component parts and obsolescence in excess of currently planned existing future build product belts in 2024 and in early 2025 and all part of our planned transition to expected new smart glass models in 2025. No finished goods have been included in this reserve as a disposal value of these excess components that will not likely be used in future product models is unknown. A 100% obsolescence provision was accrued. Research and development expenses for 2023 fell 3% to $12.3 million as compared to $12.7 million for the 2022 period. The decrease was largely due to a $0.9 million reduction in external development and consulting expenses, partially offset by an increase in salary and benefits-related expenses and a $0.4 million accrual for severance-related costs for staff reductions which took place in early January 2024. Sales and marketing costs for all of 2023 rose 57% to $12.7 million from $8.1 million in 2022 with the most significant factors being a $2.1 million increase in salary, commissions, and benefits-related expenses, driven by headcount increases at point $4 million provision for staff reductions in this area, which took place in early January 2024, and an increased bad debt reserve allowance of $1.6 million and a $0.6 million increase in advertising and trade show expenses. General and administrative expenses for 2023 decreased 12% to $18.6 million as compared to $21 million for the 2022 period. The decrease was largely due to a $2.5 million decrease in noncash stock-based compensation, primarily related to the company's 2021 long-term incentive plan. For the full year ended December 31st, 2023, the net loss was $50.1 million or $0.79 per share as compared to a loss of $40.8 million or $0.64 per share for the full year of 2022. Now for some balance sheet highlights. Our cash position as of December 31st, 2023, was $26.6 million, and we had a net working capital position of $36.3 million. Net cash flows used in operating activities was $26.3 million for the year ended December 31st, 2023, as compared to $24.5 million for the 2022 year, an increase of $1.8 million. Cash used for investing activities in 2023 was for $19.3 million, down from $21.2 million in 2022. Both these amounts are well above our historical average for investments. The most significant components of this total investment were $10.5 million in cash payments on further technology development payments pursuant to our exclusive microLED technology license agreement with Atomistic and a $2.5 million investment in the preferred shares of Atomistic purchased from its founders, and $5.3 million for purchases of manufacturing equipment and leasehold improvements expenditures, primarily related to our waveguide plant expansion project. We are presently envisioning spending significantly less on investments in 2024 as our new and expanded waveguide manufacturing facility was completed in late 2023. Looking forward to the balance of 2024. We are addressing certain operational challenges highlighted as follows: reducing our operating costs by further operating cost reductions and headcount phrases to better rightsize our costs in relation to our planned revenues, delay or curtail discretionary and non-essential capital expenditures not related to near-term new products and R&D as mentioned in our 10-K filing, the probable implementation of a voluntary cash salary reduction program in exchange for equity instruments offered to all salaried employees and management. We are also actively pursuing licensing and strategic opportunities around waveguide technologies with potential OEMs which include the receipt of upfront licensing fees and ongoing supply agreements, as Paul mentioned, some potential strategic investments. As most of you are aware, we are in the process of going effective with our new S-3 shelf registration statement with the SEC as Vuzix has found it prudent to have one in place over the past many years. The new S-3 includes the provision for an ATM, or at-the-market, offering with an investment banking firm to raise capital on the best terms if favorable market conditions develop. And as pointed out in our recent 10-K, there's a cautionary going concern note to our financial statements that projecting our cash needs out over the next 12 months, there is possible financial uncertainty related to the full alleviation of all our current going concern risks. Vuzix management is confident based on its plan and history of managing its operations and successful capital raises over the past two decades that it can fully alleviate those financial risks over the next 12 months. As a result, our financial statements have been prepared on a going concern basis. This presentation assumes that the company will continue normal business operations into the future. However, as noted in our 10-K, the company's external auditors do not share the opinion that such financial risks are yet fully alleviated and have included a cautionary note in that regard in their audit report. This is an opinion that management does not agree with. And before concluding, we would like to apologize to our stockholders for having to take advantage of the 15-day grace period for the filing of our 10-K for 2023 with the SEC. As it should be evident to most, there were a variety of issues, assumptions, and extra efforts required to properly prepare our financial statements and complete our external audit to the satisfaction of all relevant parties. We expect this delay will not be repeated again in the near future. With that, I would like to turn the call back over to Paul. Paul Travers -- Chief Executive Officer Thank you, Grant. With that, I would like to now turn the call back over to the operator for Q&A. Questions & Answers: Operator Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Thank you. Our first question comes from the line of Christian Schwab with Craig-Hallum Capital. Please proceed with your question. Tyler Burmeister -- Craig-Hallum Capital Group -- Analyst Hey, guys. This is Tyler Burmeister on behalf of Christian. So I guess, first, I guess maybe just to kind of get to it, we're into April now. Q1, it's closed just a couple of weeks ago. I'm sure books aren't finalized, but any color you can give us so far and kind of how Q1 shakes out, maybe directionally, what revenue looks like, as well as a cash balance early view for Q1? Paul Travers -- Chief Executive Officer I don't know if Grant wants to get into cash balances and stuff. I can tell you that it will be an uptick from our Q4 numbers, we believe. Grant Russell -- Chief Financial Officer And on the cash side, it would generally sort of follow the last couple of quarters as far as net changes in cash balances, minus the funds that were flowing out to domestic for the license support. So it's down a little but should not be an unexpected amount. Tyler Burmeister -- Craig-Hallum Capital Group -- Analyst Sorry. No, fair enough. And then I guess maybe another, Grant, could you help maybe just level set us these cost-cutting efforts that you're making? Maybe you called out $8 million on an annual level you're looking to reduce previously. Maybe how far along are you into that? Or what's the baseline level you're thinking that $8 million has come off of, just given some of these more one-time-in-nature expenses to a couple of moving pieces there that would maybe help level set everyone. Grant Russell -- Chief Financial Officer I mean, we still stand by the $8 million sort of annualized target. I mean, I am not saying -- Q1, some of the costs came in a little higher than we'd hoped because it takes time to slow down the tanker, but we're honestly looking at more cuts. And we feel we can get our operating expenses under $20 million on an annual basis, and we'd love to get it closer to 15%. So we're looking at potentially another 30% of cuts to operating expenses. We'd like to try to implement in the next quarter while we wait for our business to accelerate as fast as we're all expecting. Tyler Burmeister -- Craig-Hallum Capital Group -- Analyst OK. That's very helpful. I guess maybe last one here. Paul, you said at least one -- potentially two or another one closely behind are defense firms for their OEM opportunities. They've been working for a while that you expect to ramp this year. Any framework you can give us for what the potential financial terms that might look like or what numbers might look like around that at all would be helpful. Paul Travers -- Chief Executive Officer Yes, I can help you there. There's actually four-plus programs right now that are really active. There are two of them that are literally we're on the front end of delivering their very first production devices. The kinds of unit prices. It's in the -- anywhere from $2,500 to $5,000 system, and the kinds of volumes that we're talking about are somewhere 2,500 to upwards of 10,000 pieces. That won't all be at once, of course, but we should, knock on wood, see one, if not two, of those programs start to roll this year. It's to the point where they're out showing customers and the likes. We're getting very positive feedback. So it's right on the cusp of kicking off. Tyler Burmeister -- Craig-Hallum Capital Group -- Analyst All right. That sounds great. That's all for me, guys. Appreciate it. Operator Thank you. Our next question comes from the line of Aaron Martin with AIGH Investment Partners. Please proceed with your question. Aaron Martin -- AIGH Investment Partners -- Analyst I apologize. The star one was pressed earlier on the call when we had the technical difficulties. But can you guys talk a little more on the waveguide, the big facility in terms of what level does it have -- you talked about being able to produce hundreds of thousands. At what level does it have to get to, to be at scale from a cost perspective? Paul Travers -- Chief Executive Officer Well, let me say, Aaron, that the facility right now is at the hundreds of thousands of level for production, and there's very little new investments that we need to make to graduate that up to 1 million plus units annually. I would also suggest that to get beyond that, it's not a big investment, and we don't need to expand the facility in the process to do it. We could probably add to the facility that we're in right now, run three times those kinds of numbers. So we're set. We're in a good spot to crank up production, and the investments we think were well worth it. Aaron Martin -- AIGH Investment Partners -- Analyst Now we talked about this facility getting the waveguides out at a cost point that's radically lower than anyone else. My question is, at what level of build do you have to be out with your existing capacity to get the cost -- the per-waveguide production cost down to the target levels? Paul Travers -- Chief Executive Officer Yeah. So first of all, let me say that I don't care who's out there trying to produce these right now. If they're making them in the 10,000-piece quantities, the prices are not going to be better than Vuzix. If they're making them out 100,000, and we're making them out 100,000, they're not going to be better than Vuzix. So wherever we are on the scale path that we're on, these other folks, for the most part, are so expensive. But honestly, I don't even know how products are going to be able to go into the marketplace with $200 to $500 kind of price points on waveguides. So even now, when we're only making small unit volumes, we're highly competitive. That said, even making 20,000 pieces, we can be in the really nicely scaled kinds of volume prices. We don't give -- I want to be careful how I say that because we're not sharing with everybody what those numbers are and how that all adds up because, of course, our margins aren't a lot of people's business. But it scales pretty easily, Aaron, to get to good price points. Aaron Martin -- AIGH Investment Partners -- Analyst OK. And then on the cost-cutting measures, you talked about getting the operating expenses down to, say, $20 million. Is there a time frame for that? Grant Russell -- Chief Financial Officer Our goal would be to accomplish an exon of cuts in the next quarter, and I should stress that these are on a cash basis. So we do carry a pretty good burden of non-stock -- noncash stock compensation related to the LTIP. But I mean, on an annual basis, I think by July 1, we'll be there. And the team is going to work hard to make some difficult decisions to do that without sacrificing our future in doing so. Aaron Martin -- AIGH Investment Partners -- Analyst OK, great. Thank you so much. Paul Travers -- Chief Executive Officer Thank you, Aaron. Operator Thank you. There are no further questions at this time. I'd like to turn the floor back over to Paul for closing comments. Paul Travers -- Chief Executive Officer Thank you, operator. I would like to thank everyone for your interest and participation on today's call. We will look forward to speaking with you again in May when we report our Q1 2024 quarterly results. Again, have a nice evening, everybody. Answer:

the Vuzix fourth quarter and full year ending December 31st, 2023, financial results and business update conference call

Operator Greetings, and welcome to the Vuzix fourth quarter and full year ending December 31st, 2023, financial results and business update conference 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 call is being recorded. Now I would like to turn the call over to Ed McGregor, director of investor relations of -- at Vuzix. Mr. McGregor, you may begin. Please hold. We are experiencing technical difficulty [Technical difficulty] Thank you for standing by. Ed McGregor -- Director, Investor Relations Good afternoon, everyone, and welcome to the Vuzix fourth quarter and 2023 full year ending December 31st financial results and business update conference call. With us today are Vuzix CEO Paul Travers; and our CFO, Grant Russell. Before I turn the call over to Paul, I would like to remind you that on this call, management's prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question-and-answer session. Therefore, the company claims the protection of the safe harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by any forward-looking statements as a result of certain factors, including, but not limited to, general economic and business conditions, competitive factors, change in business strategy or development plans, the ability to attract and retain qualified personnel, as well as changes in legal and regulatory requirements. In addition, any projections as to the company's future performance represent management's estimates as of today, April 15th, 2024. Vuzix assumes no obligation to update these projections in the future as market conditions change. This afternoon, the company issued a press release announcing its final 2023 financial results and filed its 10-K with the SEC, so participants in this call who may not have already done so may wish to look at those documents as the company will provide a summary of the results discussed on today's call. Today's call may include certain non-GAAP financial measures. When required, reconciliation to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in the company's Form 10-K annual filing at sec.gov, which is also available at www.vuzix.com. I will now turn the call over to Vuzix CEO Paul Travers. We'll give an overview of the company's operating results and business outlook. Paul will then turn the call over to Grant Russell, Vuzix CFO, who will provide an overview of the company's fourth quarter and full-year financial results. Paul will then return to make some closing remarks, after which, we will move on to the Q&A session. Paul? Paul Travers -- Chief Executive Officer Thank you, Ed. Hello, everyone, and welcome to the Vuzix Q4 and full-year 2023 conference call. As disclosed in our January 17th press release, Vuzix instituted cost-cutting initiatives across our operations designed to streamline our operations and organizational structure to remove redundancy without sacrificing revenue generation or overall customer support. These measured reductions across sales, marketing, and product development will extend our financial runway, improve our margins, and allow the company to refocus resources aligned with the highest growth opportunities over the short to medium term. Let me now get into a bit more about the state of the industry and the growth areas that Vuzix is positioned to benefit from. Although the augmented reality smart glasses market has developed slower than most expected over the past five years, there are increasing signs that adoption is finally starting to grow. Some of the largest players in the technology, products, and eyewear markets are just now entering the space with first-generation virtual reality and mixed reality and smart glasses products, and continue their investments in this category. Meta and Luxottica have seen a growing positive reception of their second product, and that now includes some audio-only, AI-driven capabilities with their smart glasses carrying the Ray-Ban brand. Industry reports estimate over 300,000 units were sold in the first 12 months, and they don't even have displays in them yet, a key feature that many could argue questions the validity of the reference to even call them smart glasses. Apple also recently launched the Apple Vision Pro and sold out in even larger numbers at a much higher price point. And although our enterprise-based product revenue line has not shown it just yet, our inbound new business pipeline is expanding nicely on many fronts and should result in us achieving that growth very soon. Vuzix has invested significant capital and other resources to create a foundation of key intellectual property that positions the company as one of the global leaders in the wearable computing and augmented reality smart glasses space. We have led much of the industry with the core technology development needed right through to addressing the enterprise markets in general. Our growing focus on offering OEM and ODM solutions of optics and display engine components for the enterprise, defense, and broader consumer markets is readying us for the rapid growth we see coming with much of the investment and costs already realized we are positioning to deliver to our customers and market in short order. The advancement of our core technologies is becoming more evident every day in our products, waveguides, and microdisplay component solutions. Our Z100, which we introduced at CES this January 2024, is an innovative and unique AR smart glasses solution within the industry. It demonstrates the art of the possible with actual displays in small, fashionable form factors, one that others have yet to replicate and deliver today to either enterprise users or the broader consumer markets. Our new waveguide mega factory, which was completed and became operational in late 2023, is a facility focused on high-volume manufacturing and the advancement of our waveguide technology. Again, The Wall Street Journal recently reported that roughly 300,000 Ray-Ban glasses were sold in 2023. Our plant floor could meet that volume demand today if, by way of example, Meta selected Vuzix to provide their waveguide needs for a similar product to their new Meta Ray-Bans and wanted to offer a more premium AI product with actual displays. Vuzix and our partner, Atomistic, from whom we have exclusively licensed microLED technologies and invested are on a good path that should result in achieving what we feel will be state-of-the-art breakthroughs related to microLED solutions. Atomistic's microLEDs have the potential to optimally deliver on the performance, size, and cost required for augmented and mixed reality products that we feel will be able to ultimately achieve substantial success in the mass markets. That demand could be well beyond the potential of the Meta Ray-Bans, which, today, are simply audio-enabled sunglasses with a built-in camera. Many believe they could ultimately match or exceed the number of smartphones used around the globe. Supporting these solutions from Vuzix is a comprehensive patent portfolio of more than 375 patents and patents pending, including a significant collection of fundamental waveguide design patents and applications, as well as extensive trade secrets regarding nano-imprinting, processes, equipment, and materials, like polymers, adhesion promoters, and release agents, that are critical to how we can produce in volume and at low cost to support the broader markets. Lastly, moving into software, which has finally been successfully ported over to the Vuzix smart glasses, is now leveraging artificial intelligence for item scanning and picking and continues to gain traction in the back-end operations of warehouses and large manufacturing plants. According to Pluralsight, a leading technology workforce development company, by 2025, the top three transformative technologies for the global economy are going to be the ubiquitous internet, artificial intelligence, and augmented reality. The stage is set for AI-enabled are smart glasses, and this is why almost every major tech firm has development programs happening in all three areas. The investments we have made in our core technologies and application ecosystems we feel are critical to preparing the company for the next phase of growth, coming from the augmented reality smart glasses industry. The Z100, running 48 hours on a single charge, packs industry-defining heads-up waveguide technology and a custom microLED display engine into a sleek, fashionable form factor that weighs in at just 38 grams, the weight of a standard pair of eyeglasses. For enterprise users, that represents the first attractive, functional bridge between AI platform tools and the user's external world, where situational guidance can streamline workflows for human workers who can reap the benefits of a truly connected workplace. In addition to a lightweight AI interface, the Z100 glasses can augment the data feed from wirelessly connected finger scanners, sensors, controllers, and other equipment with minimal native user interfaces, making that data available in a new and highly accessible format. For the broader market, there is a transferable customer base that needs a better solution. There are 1.6 billion smartphones and 300 million smartwatches sold annually, and the biggest use cases are notifications, social media, and soon, mobile AI connected to the world around you. Products like the Z100 have the potential to provide heads-up, hands-free access to notifications, alerts, and other location-aware information, from language translation to closed captioning, to directions, to health and workout status, to messaging, and much more, and also, to integrate the latest local and cloud-based AI engines coming from several of the larger known brands in the social media and streaming space. The bottom line is the Z100 has enthusiastically been received and will be successful in advancing the industry and opening up new doors for Vuzix OEM and ODM opportunities with our reference designs and integration opportunities with some consumer-centric software companies, and we are planning to continue this theme with the broader markets into the fall of the year. The new Vuzix waveguide factory is a state-of-the art manufacturing plant that accomplishes several specific mass market requirements, including increasing our waveguide build capacity and lowering our manufacturing costs. It is also allowing us to utilize the more advanced processes needed for our latest waveguide designs. Our production capacity can now be quickly ramped to deliver up to 1 million units annually with very little further investment. The new facility also allows Vuzix to focus on the advancement of waveguides utilizing higher index materials, advanced glass substrates, and unique waveguide configurations. Recently, Vuzix introduced INCOGNITO-enabled waveguides, which we believe is the first waveguide-based technology in the world to virtually eliminate forward eye glow when the displays are active. Eliminating eye glow is deemed by most to be a critical requirement for the broader consumer markets to accept smart glasses. We have demonstrated Vuzix INCOGNITO privately in dark rooms with the light out to leading consumer brands and defense contractors, much to their amazement and well done statements and of course how the heck. Vuzix INCOGNITO technology manages internal light reflections and forward light leakage within a waveguide, which, besides the obvious of removing the annoying forward light, results in improved contrast of virtual images in the AR glasses. INCOGNITO has been accomplished with no increase in our manufacturing cost per waveguide and will be targeted for introduction into certain of the company's defense enterprise, and of course, ultimately, broader consumer applications for both Vuzix products and our OEM offerings. So we all know that when it comes to smart glasses, one has to also address the fact that more than 60% of the population wears prescription glasses, and solving the challenges associated with delivering waveguides with integrated prescriptions is no small task. Vuzix is currently in the process of establishing the infrastructure to support the production of prescription-based waveguides with a road map for scaled production thereafter. Multiple patents and patents pending are already in place related to the system processes and prescription integrations. The prescription lens layer needs to be finished, trimmed, and integrated with the smart glasses waveguides, all of which must be conducted in controlled environments and with our approach can utilize most of the existing industry infrastructure for high-volume prescription glasses. We expect our integrated solutions can support the vast majority of prescriptions needed, including bifocals and astigmatism. Our recently announced Ophthalmic Advisory Board is providing strategic input, guidance, and recommendations regarding vision correction issues and have a better-build products and services to meet customer vision requirements. Their efforts and contributions are helping Vuzix successfully do this. Again, these are all industry-leading developments and the waveguides resulting from them in terms of cost, scalability, and features we feel are unmatched in the industry. Waveguides, with all these features mentioned above, represent an essential component needed for widespread adoption of lightweight, AI-enabled smart glasses and other wearables. The other essential component for AI-enabled AR smart glasses is microLEDs. As we've discussed in the past, microLEDs have the potential to be a driving force in providing the performance, size, and costs needed for AR, MR, and smart glasses to achieve success in the mass market. MicroLEDs have the potential to be much more efficient, lower power to drive high brightness levels outdoors in the real world with the resolution and form factor to enable a family of next-generation, small, lightweight, fashion-forward smart glasses. Over the past 24-plus months, Vuzix has invested approximately $30 million in developing advanced microLED display technologies, leveraging extensive Atomistic SAS intellectual properties for which we have the option to continue to own the exclusive license outright and acquire the company. The current AR display device technology approach to microLEDs by others today primarily consists of using gallium nitride and gallium arsenide material systems. It has had ongoing challenges related to higher build costs, complicated manufacturing scalability, less power efficiency, and spectral performance when scaled to the micron sizes needed for smart glasses and other uses. Atomistic, in contrast, continues to make steady progress in the development of their unique microLED materials approach. This includes delivering against a number of pre-established development milestones in our exclusive license agreements, six out of 10 thus far. These milestones are related to the development and production of a singularly unique multi-chamber epitaxy machine used for both red, green, and blue, or RGB, microLEDs atomic-level design and ultimately into production, development of unique doping materials and processes, expanded development and patent-related documentation of multiple material stack approaches to optimize the atomic pixel structure for increased efficiencies for all three primary colors, and work on multiple unique methods of pixel control. We expect this progress to accelerate over the coming months with increased production of test samples and refinement of initial designs. As we are making this progress, the ability to share more with third parties is now starting to crystallize, and we have been able to start engaging with select potential customers, investing partners, and organizations that have a vested interest to see microLED technology finally commercialized, including U.S. and international defense organizations, numerous well-known brands, and multinational commercialization and supply companies. The early feedback has been very positive thus far with nearly all parties intently interested in seeing and potentially supporting a practical solution for high brightness and high efficiency with an approach that is clearly scalable at a competitive cost. These early conversations regarding Atomistic's unique technical and production approach reconfirm the path we are on and the potential high return on our investment. Our current enterprise smart glasses products are now being used around the clock in many warehouses to drive cost savings and efficiencies. In healthcare, Vuzix glasses are being used around the globe to teach and perform surgeries. Vuzix smart glasses are also being used during equipment repairs and remote maintenance service calls. The list of use cases keeps growing as the enterprise industry matures. And as we have expressed in the past, we continue to see much larger deployment opportunities on the horizon. This has not changed. We've entered 2024 with a solid pipeline of smart glasses and OEM sales opportunities. We feel this way because it is not concentrated across only a few customers, but instead, it is becoming more broad-based across industries, geographic regions, and use cases. The Vuzix team is looking forward to executing and delivering on what we feel should be a significant number of growth catalysts throughout the remainder of 2024. One area of broad focus for the entire industry, and of course, for Vuzix is artificial intelligence for many applications, including as a personal assistant for work or life management and entertainment. We have multiple third-party ISVs in the enterprise space and Vuzix's own Moviynt team planning to enable their AI-enabled offerings ultimately through the use of smart glasses to leverage artificial intelligence for augmenting humans for picking, preventive maintenance, education, security, and language processing. We believe artificial intelligence-equipped smart glasses will also have a meaningful impact in defense, and of course, with consumers. According to the survey, Revolutionizing Fulfillment Operations with Workforce Augmentation, created by Incisiv, one of the leading insights firms for digital transformation leaders, 94% of businesses report a commitment to evolving the role of human labor in areas like automated warehouses and last-mile delivery. In this context, there's a growing focus on technology that enhance, rather than replace, human capabilities. Reflecting this sentiment, a strong 69% of those surveyed agreed that wearable AR solutions that broaden the capabilities of their workers with AI optimizations, improved accuracy, and data-rich inputs will be central to warehouse operations in the coming years. Again, our core waveguide and microdisplay projector technology in optics continue to gain traction in these markets, both as products and as well related to potential ODM and OEM reference designs for consumer smart glasses and in the trenches with our defense customers. We remain in ongoing discussions with multiple industry leaders to ideally provide them components, subsystems, and even full white-label designs for their upcoming AR products. We believe our success with many of these firms is just a matter of time. In November of last year, Vuzix also signed an agreement with Quanta, one of the world's largest ODM suppliers on the planet with over $40 billion in annual revenues, to jointly supply these same components and with the goal to enable as many commercial customers as possible with AR-finished goods solutions. This is an exciting new relationship for Vuzix and one that continues to evolve with initial glasses already being shown from Quanta using Vuzix waveguides and software to select key accounts. On the defense side, and I know we have been expressing this for quite some time, we expect at least one of our customers, which, to date, has invested millions of dollars in prior NREs with Vuzix, to be rolling into production this year, and we feel there is a second customer right behind them. At the same time, our specialized waveguide R&D efforts are bearing new fruit and opening up new addressable markets and defense areas related to HUDs for armored vehicles, aircraft, and ultimately, even ground forces. We believe the competitiveness of our products and technologies is opening other accretive opportunities also. Vuzix is now actively working with select U.S. agencies to secure development grants to support their needs to have Vuzix as a strategic U.S. supplier of advanced technologies focused on our waveguides and microLEDs. Concurrently, we have growing relationships with leading industry players that not only are interested in working with Vuzix around our key technologies but are potentially interested in investing to better secure their access to it. Grant will now take you through our numbers, as well as provide some additional color regarding further organizational efficiencies and other matters. Grant? Grant Russell -- Chief Financial Officer Thank you, Paul. As Ed mentioned, the 10-K we filed this afternoon with the SEC offers a detailed explanation of our annual financials, so I'm just going to provide you with a bit of color on some of the full year, as well as quarterly numbers. For the year ended December 31st, 2023, Vuzix reported $12.1 million in total revenues as compared to $11.8 million for the prior year. Product sales increased by 2% year over year, driven by increased smart glasses revenues. Sales of engineering services for the year increased 3% to $1.4 million from $1.3 million. Please note, as disclosed in our 10-K, we have $2.9 million worth of remaining performance obligations. Over the revenues already recognized under our current waveguide development project for the three months ended December 31st, 2023, Vuzix reported $1.1 million in total revenues versus $2.9 million in the prior year's fourth quarter. The revenue decline was primarily due to reduced unit sales of our M400 smart glasses. Please note the Q4 2023 revenue total achieved was below the initially indicated amount in early January, pursuant to our cost-reduction press release update, as one significant customer order had to be moved from when it originally shipped in December 2023 into the 2024 revenue year due to shipment and delivery issues discovered later during formal closing procedures. For the full year ended December 31st, 2023, there was an overall gross loss of $2.6 million as compared to a $1.5 million gross profit for 2022. Included in 2023's cost of sales was a $4.4 million inventory obsolescence reserve, well above the $0.3 million in obsolescence reserves accrued in our 2022 fiscal year. The large additional inventory reserve amount was related to expected surplus component parts and obsolescence in excess of currently planned existing future build product belts in 2024 and in early 2025 and all part of our planned transition to expected new smart glass models in 2025. No finished goods have been included in this reserve as a disposal value of these excess components that will not likely be used in future product models is unknown. A 100% obsolescence provision was accrued. Research and development expenses for 2023 fell 3% to $12.3 million as compared to $12.7 million for the 2022 period. The decrease was largely due to a $0.9 million reduction in external development and consulting expenses, partially offset by an increase in salary and benefits-related expenses and a $0.4 million accrual for severance-related costs for staff reductions which took place in early January 2024. Sales and marketing costs for all of 2023 rose 57% to $12.7 million from $8.1 million in 2022 with the most significant factors being a $2.1 million increase in salary, commissions, and benefits-related expenses, driven by headcount increases at point $4 million provision for staff reductions in this area, which took place in early January 2024, and an increased bad debt reserve allowance of $1.6 million and a $0.6 million increase in advertising and trade show expenses. General and administrative expenses for 2023 decreased 12% to $18.6 million as compared to $21 million for the 2022 period. The decrease was largely due to a $2.5 million decrease in noncash stock-based compensation, primarily related to the company's 2021 long-term incentive plan. For the full year ended December 31st, 2023, the net loss was $50.1 million or $0.79 per share as compared to a loss of $40.8 million or $0.64 per share for the full year of 2022. Now for some balance sheet highlights. Our cash position as of December 31st, 2023, was $26.6 million, and we had a net working capital position of $36.3 million. Net cash flows used in operating activities was $26.3 million for the year ended December 31st, 2023, as compared to $24.5 million for the 2022 year, an increase of $1.8 million. Cash used for investing activities in 2023 was for $19.3 million, down from $21.2 million in 2022. Both these amounts are well above our historical average for investments. The most significant components of this total investment were $10.5 million in cash payments on further technology development payments pursuant to our exclusive microLED technology license agreement with Atomistic and a $2.5 million investment in the preferred shares of Atomistic purchased from its founders, and $5.3 million for purchases of manufacturing equipment and leasehold improvements expenditures, primarily related to our waveguide plant expansion project. We are presently envisioning spending significantly less on investments in 2024 as our new and expanded waveguide manufacturing facility was completed in late 2023. Looking forward to the balance of 2024. We are addressing certain operational challenges highlighted as follows: reducing our operating costs by further operating cost reductions and headcount phrases to better rightsize our costs in relation to our planned revenues, delay or curtail discretionary and non-essential capital expenditures not related to near-term new products and R&D as mentioned in our 10-K filing, the probable implementation of a voluntary cash salary reduction program in exchange for equity instruments offered to all salaried employees and management. We are also actively pursuing licensing and strategic opportunities around waveguide technologies with potential OEMs which include the receipt of upfront licensing fees and ongoing supply agreements, as Paul mentioned, some potential strategic investments. As most of you are aware, we are in the process of going effective with our new S-3 shelf registration statement with the SEC as Vuzix has found it prudent to have one in place over the past many years. The new S-3 includes the provision for an ATM, or at-the-market, offering with an investment banking firm to raise capital on the best terms if favorable market conditions develop. And as pointed out in our recent 10-K, there's a cautionary going concern note to our financial statements that projecting our cash needs out over the next 12 months, there is possible financial uncertainty related to the full alleviation of all our current going concern risks. Vuzix management is confident based on its plan and history of managing its operations and successful capital raises over the past two decades that it can fully alleviate those financial risks over the next 12 months. As a result, our financial statements have been prepared on a going concern basis. This presentation assumes that the company will continue normal business operations into the future. However, as noted in our 10-K, the company's external auditors do not share the opinion that such financial risks are yet fully alleviated and have included a cautionary note in that regard in their audit report. This is an opinion that management does not agree with. And before concluding, we would like to apologize to our stockholders for having to take advantage of the 15-day grace period for the filing of our 10-K for 2023 with the SEC. As it should be evident to most, there were a variety of issues, assumptions, and extra efforts required to properly prepare our financial statements and complete our external audit to the satisfaction of all relevant parties. We expect this delay will not be repeated again in the near future. With that, I would like to turn the call back over to Paul. Paul Travers -- Chief Executive Officer Thank you, Grant. With that, I would like to now turn the call back over to the operator for Q&A. Questions & Answers: Operator Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Thank you. Our first question comes from the line of Christian Schwab with Craig-Hallum Capital. Please proceed with your question. Tyler Burmeister -- Craig-Hallum Capital Group -- Analyst Hey, guys. This is Tyler Burmeister on behalf of Christian. So I guess, first, I guess maybe just to kind of get to it, we're into April now. Q1, it's closed just a couple of weeks ago. I'm sure books aren't finalized, but any color you can give us so far and kind of how Q1 shakes out, maybe directionally, what revenue looks like, as well as a cash balance early view for Q1? Paul Travers -- Chief Executive Officer I don't know if Grant wants to get into cash balances and stuff. I can tell you that it will be an uptick from our Q4 numbers, we believe. Grant Russell -- Chief Financial Officer And on the cash side, it would generally sort of follow the last couple of quarters as far as net changes in cash balances, minus the funds that were flowing out to domestic for the license support. So it's down a little but should not be an unexpected amount. Tyler Burmeister -- Craig-Hallum Capital Group -- Analyst Sorry. No, fair enough. And then I guess maybe another, Grant, could you help maybe just level set us these cost-cutting efforts that you're making? Maybe you called out $8 million on an annual level you're looking to reduce previously. Maybe how far along are you into that? Or what's the baseline level you're thinking that $8 million has come off of, just given some of these more one-time-in-nature expenses to a couple of moving pieces there that would maybe help level set everyone. Grant Russell -- Chief Financial Officer I mean, we still stand by the $8 million sort of annualized target. I mean, I am not saying -- Q1, some of the costs came in a little higher than we'd hoped because it takes time to slow down the tanker, but we're honestly looking at more cuts. And we feel we can get our operating expenses under $20 million on an annual basis, and we'd love to get it closer to 15%. So we're looking at potentially another 30% of cuts to operating expenses. We'd like to try to implement in the next quarter while we wait for our business to accelerate as fast as we're all expecting. Tyler Burmeister -- Craig-Hallum Capital Group -- Analyst OK. That's very helpful. I guess maybe last one here. Paul, you said at least one -- potentially two or another one closely behind are defense firms for their OEM opportunities. They've been working for a while that you expect to ramp this year. Any framework you can give us for what the potential financial terms that might look like or what numbers might look like around that at all would be helpful. Paul Travers -- Chief Executive Officer Yes, I can help you there. There's actually four-plus programs right now that are really active. There are two of them that are literally we're on the front end of delivering their very first production devices. The kinds of unit prices. It's in the -- anywhere from $2,500 to $5,000 system, and the kinds of volumes that we're talking about are somewhere 2,500 to upwards of 10,000 pieces. That won't all be at once, of course, but we should, knock on wood, see one, if not two, of those programs start to roll this year. It's to the point where they're out showing customers and the likes. We're getting very positive feedback. So it's right on the cusp of kicking off. Tyler Burmeister -- Craig-Hallum Capital Group -- Analyst All right. That sounds great. That's all for me, guys. Appreciate it. Operator Thank you. Our next question comes from the line of Aaron Martin with AIGH Investment Partners. Please proceed with your question. Aaron Martin -- AIGH Investment Partners -- Analyst I apologize. The star one was pressed earlier on the call when we had the technical difficulties. But can you guys talk a little more on the waveguide, the big facility in terms of what level does it have -- you talked about being able to produce hundreds of thousands. At what level does it have to get to, to be at scale from a cost perspective? Paul Travers -- Chief Executive Officer Well, let me say, Aaron, that the facility right now is at the hundreds of thousands of level for production, and there's very little new investments that we need to make to graduate that up to 1 million plus units annually. I would also suggest that to get beyond that, it's not a big investment, and we don't need to expand the facility in the process to do it. We could probably add to the facility that we're in right now, run three times those kinds of numbers. So we're set. We're in a good spot to crank up production, and the investments we think were well worth it. Aaron Martin -- AIGH Investment Partners -- Analyst Now we talked about this facility getting the waveguides out at a cost point that's radically lower than anyone else. My question is, at what level of build do you have to be out with your existing capacity to get the cost -- the per-waveguide production cost down to the target levels? Paul Travers -- Chief Executive Officer Yeah. So first of all, let me say that I don't care who's out there trying to produce these right now. If they're making them in the 10,000-piece quantities, the prices are not going to be better than Vuzix. If they're making them out 100,000, and we're making them out 100,000, they're not going to be better than Vuzix. So wherever we are on the scale path that we're on, these other folks, for the most part, are so expensive. But honestly, I don't even know how products are going to be able to go into the marketplace with $200 to $500 kind of price points on waveguides. So even now, when we're only making small unit volumes, we're highly competitive. That said, even making 20,000 pieces, we can be in the really nicely scaled kinds of volume prices. We don't give -- I want to be careful how I say that because we're not sharing with everybody what those numbers are and how that all adds up because, of course, our margins aren't a lot of people's business. But it scales pretty easily, Aaron, to get to good price points. Aaron Martin -- AIGH Investment Partners -- Analyst OK. And then on the cost-cutting measures, you talked about getting the operating expenses down to, say, $20 million. Is there a time frame for that? Grant Russell -- Chief Financial Officer Our goal would be to accomplish an exon of cuts in the next quarter, and I should stress that these are on a cash basis. So we do carry a pretty good burden of non-stock -- noncash stock compensation related to the LTIP. But I mean, on an annual basis, I think by July 1, we'll be there. And the team is going to work hard to make some difficult decisions to do that without sacrificing our future in doing so. Aaron Martin -- AIGH Investment Partners -- Analyst OK, great. Thank you so much. Paul Travers -- Chief Executive Officer Thank you, Aaron. Operator Thank you. There are no further questions at this time. I'd like to turn the floor back over to Paul for closing comments. Paul Travers -- Chief Executive Officer Thank you, operator. I would like to thank everyone for your interest and participation on today's call. We will look forward to speaking with you again in May when we report our Q1 2024 quarterly results. Again, have a nice evening, everybody.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good afternoon, everyone, and thank you for standing by. Welcome to Western Digital's third quarter fiscal 2024 conference call. Presently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator instructions] As a reminder, this event is being recorded. Now, I will turn the call over to Mr. Peter Andrew, vice president, financial planning and analysis and investor relations. You may begin. Peter Andrew -- Vice President, Financial Planning and Analysis and Investor Relations Thank you, and good afternoon, everyone. Joining me today are David Goeckeler, chief executive officer; and Wissam Jabre, chief financial officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based upon management's current assumptions and expectations, and as such, does include risks and uncertainties. These forward-looking statements include expectations for our product portfolio, our business plan and performance, the separation of our Flash and HDD businesses, ongoing market trends, and our future financial results. We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. We will also make references to non-GAAP financial measures today. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website. With that, I'll now turn the call over to David. David Goeckeler -- Chief Executive Officer Thank you, Peter. Good afternoon, everyone, and thanks for joining the call to discuss our third quarter of fiscal year 2024 performance. Western Digital delivered excellent results in the quarter with revenue of $3.5 billion non-GAAP gross margin of 29.3% and non-GAAP earnings per share of $0.63, all of which exceeded expectations. Our strategy of developing a diversified portfolio of industry-leading products across a broad range of end markets, coupled with structural changes we have made to both of our businesses is unlocking our true earnings potential and allowing us to continue improving through-cycle profitability and dampening business cycles. This strategy enables us to generate higher earnings per share even in a constrained supply environment. In addition, our commitment to achieving operational efficiency and enhancing our agility has allowed us to run our Flash and HDD businesses more efficiently and further drive innovation to take opportunities. In particular, as the technology landscape continues to evolve, the demand for AI solutions is becoming increasingly apparent across our end markets. The uptick in AI adoption is highlighting the incredible value of data and will drive increased storage demand across both HDD and Flash at the edge and in the core, providing greater long-term growth and margin expansion opportunities for Western Digital. We are in the early innings of unlocking the full potential of this company, and our team remains focused on improving the profitability of our business to drive long-term margin expansion and shareholder value as these new demand opportunities present themselves. Before I dive further into the demand environment, I want to briefly comment on the status of the separation of our Flash and HDD businesses. I am proud of the team's ongoing efforts as we drive toward completion of the separation in the second half of the calendar year. We remain focused on achieving the separation as soon as possible, and we'll continue to provide further updates on our progress as appropriate. Moving on to end market commentary. I am pleased to report that during the quarter, revenue in all of our major end markets returned to year-over-year growth. In cloud, we experienced 29% growth in revenue from a year ago, highlighting the incredible success of our industry-leading HDD product line. In addition, we began to experience an increase in demand for our flash-based solutions, signaling a long-awaited recovery in this end market. In client, 20% revenue growth from a year ago was driven by increased bit demand for our flash-based solutions, coupled with an increase in ASPs. In consumer, we experienced 17% revenue growth from a year ago, highlighting the power of the SanDisk premium brand. Higher flash bit sales, combined with a better pricing environment more than offset the continued decline in consumer HDD demand. I'll now turn to business updates, starting with Flash. Our sequential revenue growth in the quarter reflects the continuing commitment to disciplined capital spending and carefully optimizing bit shipments into our most profitable end markets to take advantage of the improved pricing environment. This approach, combined with the strength of our product portfolio has enabled us to drive significantly higher profitability while strategically managing our inventory. On the technology front, we achieved a significant milestone by initiating mass production of our QLC-based client SSD, leveraging BiCS6 technology. This is yet another significant milestone demonstrating our continued commitment to innovation and market leadership. These advancements pave the way to spearhead the market's transition to QLC-based flash solutions in calendar year 2024. Additionally, our progress with BiCS8 is on track. While this technology is ready to be productized as market conditions warrant, our innovative offerings will remain at the forefront of the market, further strengthening our competitive position and bolstering our growth prospects. As noted earlier, in the third quarter, we began to experience an increase in demand for our enterprise SSD solutions. We are seeing demand returning for NVMe SSDs that we qualified before the downturn. We are also experiencing significant interest in providing these products in dramatically higher capacities for AI-related applications, which we expect to ship in the second half of the year. In addition, we are also sampling our newest high-performance PCI Gen 5, BiCS6-based enterprise SSD. We are preparing for qualification at a hyperscaler and the product is generating significant interest in the enterprise market. We expect to ramp in the second half of the calendar year. Turning to HDD. The sequential revenue increase was driven by improved nearline demand and higher pricing as we focused on optimizing profitability per exabyte sold. In particular, nearline revenue reached a fixed quarter high, reflecting the successful strategy we put in place to bring the most innovative, high-capacity, and high-performance drives to market. We have the right products at the right cost structure, which are reflected in our financial performance. Our cloud customers continue to transition to SMR with our 26-terabyte and 28-terabyte UltraSMR drives, quickly becoming a significant portion of our capacity enterprise exabyte shipments. SMR-based drives represented approximately 50% of nearline exabyte shipments in the quarter. Our portfolio strategy to commercialize ePMR, OptiNAND, and UltraSMR technologies in advance of our transition to HAMR, has proven to be the winning strategy and enables us to deliver to customers the industry's highest capacity and leading TCO drives, all of which can be produced at scale with controlled costs. We are confident that our product strategy, which combines UltraSMR technology with upcoming advancements in nearline drives is enabling Western Digital to deliver best-in-class gross margin in HDDs all at a time when AI is emerging as another growth engine for the industry. As we move toward a new supply and demand environment, characterized by higher demand, supply tightness, and product shortages, we are leveraging our proven technology we've already introduced to the market to meet the demands of our customers with the right portfolio at the right time, while also operating with a lean cost structure for continued profitability improvement in our HDD business. Although the actions we are taking have improved profitability, we remain focused on driving higher margins to appropriately value the incredible amount of innovation and TCO improvements we continue to deliver to our customers. Before I turn it over to Wissam, I wanted to share some perspectives on our outlook. Within Flash, in addition to growth opportunities at the edge, which is Western Digital strength, we are encouraged by the returning demand within the enterprise SSD market and expect growth throughout this calendar year. AI-related workloads are driving increasing demand for enterprise SSDs, and our portfolio is well-positioned to support those use cases. Looking ahead, we anticipate bit shipments to remain flat into the fiscal fourth quarter and look to Flash ASP increases to be the primary revenue growth driver, led by our focus on allocating bits to the most high-value end markets amid the tightening supply environment. While we're pleased to see pricing trends moving in a positive direction, it's crucial to acknowledge the importance of maintaining capital discipline and only reinvesting capital back into the business once profitability improves further, and we see sustained demand. Overall, our continued focus on improving profitability through our innovation road map, disciplined capital spending, and strategic pricing initiatives position us well for continued success in calendar year 2024 and into 2025 by offering the most capital and cost-efficient bits in the industry. In HDD, the success of our portfolio of leading capacity enterprise products, combined with the restructuring efforts we've implemented in recent years are yielding improved unit economics and greater visibility. As cloud demand is recovering, we anticipate continued growth driven by higher nearline demand and better pricing as we are now in a supply constrained environment. We're optimistic about aligning the pricing of our products to better mirror the innovation we are integrating into them, supporting long-term margin expansion in our HDD business. As we reap the rewards of the innovation and operational efficiencies that we've implemented, we will look for opportunities to reinvest in the business when the conditions are ripe for expansion. We will approach every capital allocation decision with a focus on discipline. Let me now turn the call over to Wissam, who will discuss our financial third-quarter results. Wissam Jabre -- Chief Financial Officer Thank you, and good afternoon, everyone. Following on David's comments, Western Digital return to profitability and free cash flow generation and delivered great results in the quarter, which exceeded expectations. Total revenue for the quarter was $3.5 billion, up 14% sequentially and 23% year over year. Non-GAAP earnings per share was $0.63. Looking at end markets, cloud represented 45% of total revenue at $1.6 billion, up 45% sequentially and 29% year over year. The growth was primarily attributed to higher nearline shipments and improved nearline per unit pricing with Flash revenue up both sequentially and year over year. Nearline bit shipments of 108 exabytes were up 60% sequentially. Client represented 34% of total revenue at $1.2 billion, up 5% sequentially and 20% year over year. Sequentially, the increase in Flash ASP more than offset a decline in flash bit shipments, while HDD revenue decreased. Year over year, the increase was driven by growth in both Flash and HDD ASPs and flash bit shipments. Consumer represented 21% of total revenue at $0.7 billion, down 13% sequentially and up 7% year over year. Sequentially, both Flash and HDD were down at approximately similar rates and in line with seasonality. On a year-over-year basis, the increase was driven by growth in flash bit shipments and ASP. Turning now to revenue by business segment for the fiscal third quarter. Flash revenue was $1.7 billion, up 2% sequentially as ASP increased 18% on both blended and like-for-like basis. Bit shipments decreased 15% from last quarter as we proactively focused our flash bit placement to maximize profitability. Flash revenue grew 30% from fiscal third quarter of 2023 on higher bits and ASP. HDD revenue was $1.8 billion, up 28% from last quarter, as exabyte shipments increased 41% and average price per unit increased 19% to $145. Compared to the fiscal third quarter of 2023, HDD revenue grew 17%, while total exabyte shipments and average price per unit were up 25% and 33%, respectively. Moving to gross margin and expenses. Please note, my comments will be related to non-GAAP results unless stated otherwise. Gross margin was 29.3%, well above the guidance range. Gross margin improved 13.8 percentage points sequentially and 18.7 percentage points year on year due to better pricing, our continued focus on cost reduction, and lower underutilization charges. Flash gross margin was higher than expected at 27.4%, up 19.5 percentage points sequentially and 32.4 percentage points year over year. There were no underutilization charges in the quarter. HDD gross margin was 31.1%, up 6.3 percentage points sequentially and 6.8 percentage points year over year. This includes underutilization charges of $17 million or one-percentage-point headwind. HDD gross margin is within our long-term target range, including underutilization charges. This underscores the team's focus on cost reduction and profitability as previously, this level of gross margin was achieved with higher revenue. Operating expenses were $632 million for the quarter, up 13% sequentially and 5% year over year. The sequential increase was mainly driven by higher variable compensation associated with better-than-expected financial results. Operating income was $380 million, which included HDD underutilization charges of $17 million. Tax expenses in the quarter was $51 million, reflecting the improved financial outlook for the fiscal year. Fiscal third-quarter earnings per share was $0.63. Operating cash flow was $58 million and free cash flow was $91 million. Cash capital expenditures, which include the purchase of property, plant, and equipment and activity related to Flash joint ventures on the cash flow statement represented a cash inflow of $33 million. Third-quarter inventory was flat from the prior quarter at $3.2 billion, with days of inventory increasing four days to 119 days. A decline in HDD inventory offset an increase in flash inventory. Gross debt outstanding was $7.8 billion at the end of the fiscal third quarter. Cash and cash equivalents were $1.9 billion, and total liquidity was $4.1 billion, including revolver capacity of $2.2 billion. For the fiscal fourth quarter, our non-GAAP guidance is as follows. We expect revenue to be in the range of $3.6 billion to $3.8 billion and project sequential revenue growth in both HDD and Flash. In HDD, we expect continued momentum with our industry-leading SMR product portfolio aimed at the cloud. In Flash, we anticipate bits will be flat and ASP is up as we continue optimizing our bit placement to maximize profitability. Gross margin is expected to be between 32% and 34%. We expect operating expenses to be between $670 million and $690 million with the increase mainly related to certain project-driven investments, coupled with higher variable compensation as the financial outlook has continued to strengthen. Interest and other expenses are expected to be approximately $105 million. We expect income tax expense to be between $30 million and $40 million for the fiscal fourth quarter and $130 million to $140 million for fiscal year 2024 as the financial outlook improved. We expect earnings per share to be $1.05, plus or minus $0.15, based on approximately 342 million shares outstanding. The financial outlook has strengthened, and we will remain disciplined in executing the business, controlling our capital spending, and improving our profitability. I will now turn the call back over to David. David Goeckeler -- Chief Executive Officer Thanks, Wissam. Let me wrap up, and then we'll open up for questions. I'm pleased with the team's performance in developing a diversified portfolio of industry-leading products across a broad range of end markets. As industry supply and demand dynamics continue to improve, we will remain disciplined around our capital spending and focused on driving innovation and efficiency across our business. Coupled with the structural changes we have made to our businesses, we are confident in our ability to drive greater through-cycle profitability and dampen business cycles. As we move forward, we remain uniquely positioned to capitalize on the promising growth prospects that lie ahead, solidifying our leadership position in the industry, particularly as AI continues to drive new storage solution opportunities and growth. OK. Peter, let's start the Q&A. Questions & Answers: Operator Ladies and gentlemen, at this time we'll begin the question-and-answer session. [Operator instructions] One moment for the first question. Our first question today comes from C.J. Muse from Cantor Fitzgerald. Please go ahead with your question. C.J. Muse -- Cantor Fitzgerald -- Analyst Yeah, good afternoon. Thank you for taking the question. I guess first question on the HDD side, the gross margins are spectacular. And if we take out the underutilization you're north of 32%. So, curious from here as you think about ongoing tightness, ongoing growth in demand led by the cloud, and a pricing strategy where I think you and your main competitor are being extraordinarily rational. How do you think the progression for that part of your business will look through the remainder of calendar '24 and into '25? David Goeckeler -- Chief Executive Officer Hey, C.J., thanks for the question. Yeah, we're -- the HDD business, we're really happy with where the portfolio is at. I think that's where it starts, bringing great products to market that deliver the highest capacity points and the best TCO for our customers. And when we're able to do that, we can share in more of that TCO advantage we're bringing to market. I think that's been the strategy for quite some time, and we're really happy with where the portfolio is and it's really resonating with customers. But the other side of that is making sure we really control the cost side of it. So, we're really focused on making sure we bring the lowest-cost product as well, and that leads to the margin expansion. And then we -- of course, we've got a returning demand environment as we get the cyclical recovery in HDD spending coming off of the lows that we all really understand. But going forward, we talked about a little bit in the prepared remarks. We expect to continue to bring great products to market. We expect to continue to drive better TCO for our customers. And we're in an environment now where we have supply demand balance and significant restructuring of our business during the downturn. We've taken capacity -- we've set our capacity of what we think the market needs as we emerge into this demand environment. We do see better supply demand alignment. We see tightness in the market. that's leading to what you would expect as customers giving us more visibility into what their ordering looks like going forward. So, we're optimistic about being able to continue to drive profitability of this business higher. C.J. Muse -- Cantor Fitzgerald -- Analyst Very helpful. And as a quick follow-up, on the NAND side, I think you guided last kind of high-teens bit growth. And I'm just curious, is that still a number in play? Or given your prioritization of highest profitable areas of NAND, should we be thinking about a different number? And here not talking about production but actual revenue bits. David Goeckeler -- Chief Executive Officer You mean for our -- for what time period? Just to make sure I understand your question. C.J. Muse -- Cantor Fitzgerald -- Analyst My apologies, for calendar '24. David Goeckeler -- Chief Executive Officer Oh, calendar '24. Look, we see -- yes, we still see demand in the mid to -- call it, the mid- to high teens for the market. We see supply like about 8% of bits in production. So, we still see an undersupplied market. For us, we had bits down this quarter. We forecast them down double digits. We were right about that, maybe a little bit more flat going into next quarter as we kind of optimize our supply throughout the year where we can think we can get the best profitability. C.J. Muse -- Cantor Fitzgerald -- Analyst Thank you. David Goeckeler -- Chief Executive Officer Thank you, C.J. Operator Our next question comes from Joe Moore from Morgan Stanley. Please go ahead with your question. Joe Moore -- Morgan Stanley -- Analyst Great. Thank you, and congratulations on the results. In terms of the outlook, looking for four points of gross margin improvement. It seems like the like-for-like pricing, certainly in NAND is a lot better than that. HDD seems pretty good as well. What are the offsets that you only would see sort of four points of gross margin expansion given the improvement that we're seeing in absolute pricing? Wissam Jabre -- Chief Financial Officer Hey, Joe, thanks for the question. Look, our guide comprehends a balanced view of what we have in terms of information today with the outlook. Yes, we see improvement in margins in both of the businesses. So, on the Flash side, we still anticipate improvement in pricing that will help gross margin move a bit higher from here. And on the HDD side, as David mentioned, we continue to focus on, obviously, the great technology that we deliver but also the cost discipline and pricing of the products. So, all of these are comprehended in our guide. Joe Moore -- Morgan Stanley -- Analyst Great. And then as a follow-up, you sort of talked about these higher-density SSDs in the second half of the calendar year for AI purposes. Can you talk about what has to happen to sort of get those drives out? Like is it you need new capacity points that you don't currently serve, and then can you talk generally, it seems like AI is having some positive effects on both sides of your guys' business. Can you talk about that a little bit? David Goeckeler -- Chief Executive Officer Yeah. So, what I would say about the AI demand as it's coming into focus. I don't think it's so much in the results just yet, but we're seeing where it's going to impact both businesses. And clearly, one of them you just outlined, which is we're seeing enterprise SSD demand return, we saw some increase in the last quarter. We expect some increase in this quarter. But really, as we look to the second half. We have customers coming to us wanting the kind of SSDs we built and qualified before the downturn. They just want them in much bigger capacity points, 30- and 60-terabyte capacity points. So, it's the same product just taking it and increasing capacity and going through a qualification on that. So, we're in that process with customers. We also introduced a new SSD that's more compute-focused, which is PCIe Gen 5 product based on BiCS6, very high performance that plays a little bit different role in the AI training stack, and we're getting very good feedback on that product. It's being qualified by our starting qualification. We've sampled -- we're kind of getting rid of the qualification of the hyperscaler, and we're seeing good demand in the enterprise market as well. So, we feel like the portfolio set up well as we go into the second half, and we're seeing a lot of demand show up for people that are very building large amount of infrastructure for model training. Joe Moore -- Morgan Stanley -- Analyst Great. Thank you. David Goeckeler -- Chief Executive Officer Thanks, Joe. Operator Our next question comes from Aaron Rakers from Wells Fargo. Please go ahead with your question. Aaron Rakers -- Wells Fargo Securities -- Analyst Yeah. Thanks for taking the question. I've got two as well. The first question, I just want to go back to kind of like the gross margin dynamics with regard to the [Inaudible] business. David, if you look back a couple of years, right, you peaked at like 150, 155 exabytes of capacity shifts. As we hear about the industry being constrained, where do you -- where would you characterize your capacity footprint today? And is it fair to assume that you have to see gross margin at or even above the high end of the 31% to 34% target model that you've laid out to kind of come back in and add capacity? David Goeckeler -- Chief Executive Officer Yeah. I mean, that's how we're thinking about it. I mean, this is a -- I've talked about this quite a bit. And this is an industry that I think has been oversupplied with this client-to-cloud transition that's been going on for 15 years. I think the downturn was in time when we saw a significant change in demand, to say the least, that we just decided to remove capacity to get supply and demand better balance. So, as we -- we're just emerging into that market, Aaron. I mean, I think as we start to see this market play out and dynamics get to the kind of business model and get more visibility into what the future is. We can have confidence in making investments if that's what we need to do to expand capacity. I think as all of that comes into focus, and it's starting to happen. We're starting to see that. We're getting more visibility. We're getting to participate more in the TCO advantages that we're bringing to the market. We're seeing better dynamics. And as that continues, and we get more confidence, we're not there yet, then we would think about how do we bring more capacity into the market. But we're just at the -- we're kind of getting to the starting line is, I guess, what I would say. Aaron Rakers -- Wells Fargo Securities -- Analyst Yeah. That's helpful. And then as a quick follow-up, just on the enterprise SSD topic. I think prior to the downturn, you had talked about, I want to say it was two or three cloud OEMs that you had designed in with the NVMe drive. Can you just talk about the breadth of what you're expecting? It just sounds like you're kind of getting back into the market, optimizing displacement there. So, how do we think about the breadth of the customer base in that enterprise SSD space? David Goeckeler -- Chief Executive Officer Yeah, you got it. I mean, it's the -- what we're seeing now is when the market is coming back, we're seeing those customers now come back up to a very long digestion period. And this is something we've been waiting for, for quite some time. Like every market from consumer to PC to nearline on the HDD side has gone through this big digestion phase. And I think enterprise SSD was the one we were waiting to see when we're going to come out of that. And that's what we're starting to see. So, we're seeing a couple of dynamics in that market. We're seeing those enterprise SSDs that we had qualified, the very same products now we're getting orders for as that digestion phase ends and they get -- they start to ramp ordering back. And then we're seeing the kind of AI impact on different capacity points use for model training, we're starting to see that demand come in the market. So, we're seeing both of those things happen. We think the portfolio is well-positioned for those markets. We expect that to play out through the rest of the year, and we're excited about it. Aaron Rakers -- Wells Fargo Securities -- Analyst Thank you. David Goeckeler -- Chief Executive Officer Thanks. Operator Our next question comes from Wamsi Mohan from Bank of America. Please go ahead with your question. Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst Thank you so much. On the HDD side, you had a very outsized exabyte quarter-on-quarter growth in the quarter relative to your nearest competitor. How are you thinking about the continued trajectory here in terms of exabyte growth perhaps both quarter-on-quarter basis but also maybe calendar '24 versus calendar '23? David Goeckeler -- Chief Executive Officer Yeah. We're seeing -- I mean, big picture, we're seeing a return in demand. Obviously, I think it was the largest sequential exabyte growth we've seen in a very long time. I hesitate to say ever because this is -- business has been around a very long time. But to go back as far as we could look, it was the biggest sequential increase we had seen. And it's -- as I said earlier, that starts with having products that really resonate with our customers. We really believe very strongly in the technology road map we've built around ePMR and UltraSMR is resonating very strongly with customers. Nearly 50% of exabytes shipped this quarter was SMR, and we're set up well for what we talked about last time where we expect over half of our exabytes in FY '25 to be SMR-based. So, like we said, coming into the fiscal year that we expected sequential growth throughout the fiscal year, last quarter, we extended that to the calendar year, and we still see that. So, we still see sequential exabyte growth going forward throughout this calendar year. Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst OK. Thanks for that. And as a follow-up, on sort of reinvesting on capacity side, right, on the HDD side? I think you said when conditions are ripe for reinvesting, and I know to Aaron's question earlier, you commented on certain gross margin ranges. But this cycle, your gross margin is much higher at lower revenue levels than past cycles. So, clearly, it feels as though, at least the capability to drive peak margins much higher than your established long-term range. So, why should 33% be maybe the level at which you reinvest? Why wouldn't it be 34%, 35%, or higher than that? David Goeckeler -- Chief Executive Officer Well, we haven't really set a bogey for that, right? We want to look at the holistic marketing. Again, that -- I understand this question everybody is looking for when we would reinvest. But that's really not what we're even thinking about right now. We're thinking about getting a market that's balanced on supply and demand, delivering great products to our customers that can meet the needs of the growth of the cloud. And I think that -- to your point, I think the business is emerging what we planned for and a lot of hard work that went in over the last couple of years, which is to come back in a much healthier position with the ability to drive greater profitability. So, we're just getting back to the bottom of the range that we set a couple of years ago. It's not as if we're declaring victory in that at all, to your point, like I said, I feel like we're just getting back to the starting line of where we need to drive the business to, but we feel very good about to be able to drive increased profitability in it. Look, it starts with delivering great products to your customers. Like we have to continue to bring better TCO. And I think we have got a tremendous architecture to do that while controlling our cost to build the product. We have to work stay focused on both sides of this equation. We got to have the lowest cost and then the best TCO that allows us to drive pricing, which drives margin expansion. So, we're working across that whole equation. And I think the strategy is working quite well. And that's why we saw -- when we saw some -- we saw the demand return, we saw the margins pop up. But to your point, we believe we can -- we're just getting started on this. Operator Our next question comes from Karl Ackerman from BNP Paribas. Please go ahead with your question. Karl Ackerman -- Exane BNP Paribas -- Analyst Yes, thank you. I'm curious your thoughts on the decision to prioritize the transition to BiCS6 for the mobile market rather than SSDs because AI demand appears concentrated in high-capacity enterprise SSDs. And I guess as you address that question, could you discuss your opportunity to provide QLC enterprise SSD to address these inference applications that appear to be supporting 30- and 60-terabyte units? Thank you. David Goeckeler -- Chief Executive Officer Yeah. Thanks, Karl. So, haven't really said where BiCS6 is going to go. That's in our future. That's one thing we feel really good about is the technology is there, and we'll bring it to market when we see it's the right time to do that when we got the right profitability, the right supply demand characteristics to invest in productizing that node, the technology is in great shape. But we haven't really outlined exactly which products are going to go there first or second or third. So, that's still in our future. As far as your point on QLC, this is -- we're now starting to transition to BiCS6. And so, we talked about a couple -- a number of products here that are BiCS6 based, which first, the client SSD, you didn't -- I'll talk about enterprise SSD as well, but we -- our client SSD has been extremely well received. The performance of it is outstanding. We have our own internal controller team. They've done an amazing job of building a really, really high-performance QLC client SSD. We expect that to lead the market and lead that transition in that part of the market. And then we're bringing BiCS6 into our enterprise SSDs as well, right? So that will be lever we have to drive BiCS6, which gives us more capacity, better performance. And so, we feel good about that. Transition is now starting, and the products are starting to show up. They're in customers' hands, and they've been very, very well received. Karl Ackerman -- Exane BNP Paribas -- Analyst Thank you. David Goeckeler -- Chief Executive Officer Thanks, Karl. Operator Our next question comes from Amit Daryanani from Evercore. Please go ahead with your question. Amit Daryanani -- Evercore ISI -- Analyst Thanks a lot. Good afternoon. I have two questions as well, I guess. First, on the HDD side, I'm wondering, do you think given some of the challenges on HAMR qualifications that Seagate's having, if you potentially saw a bigger uplift in market on the nearline side, and you think that market share could potentially sustain or does some of that kind of flow back as those qualifications get done. So, I'd love to understand if the share gains you think you're seeing are sustainable or not. And then on the Flash side, I would love to just maybe get your perspective. I know you folks are talking about bit growth being flat in June. But as some of these qualifications ramp up in the back half, how do you think about bit growth ramping up into the back half of this calendar year? Thank you. David Goeckeler -- Chief Executive Officer Yeah. So, on the first question, the business with our customers is planned pretty far in advance. So, there wouldn't be a situation where something would happen intra-quarter and that would drive a big share shift. The reality is we've got great products, and they're very much resonating with our customers, and we can deliver them at scale. And they have bring best-in-class TCO. And clearly, customers are adopting those at a significant rate. Like is it sustainable? We continue to bring great products to market. That's what we plan to do. We're very confident in our road map on HDD, and we'll continue to bring the best TCO solutions to our customers. On bit growth, we do expect flat bit growth into the calendar Q2, but we'll see a pickup in bit growth in the second half of the year. Amit Daryanani -- Evercore ISI -- Analyst Got it. Thank you. David Goeckeler -- Chief Executive Officer Thank you. Operator Our next question comes from Harlan Sur from JPMorgan. Please go ahead with your question. Harlan Sur -- JPMorgan Chase and Company -- Analyst Yeah, good afternoon. Nice job on the quarterly execution. Another question on enterprise SSD. So, you guys have been really smart on how you are allocating flash bits, right, with a strong focus on profitability. So, as you reallocate more bits toward eSSD in the second half, is the profitability profile of enterprise SSD portfolio expected to be accretive to the overall Flash business and your shares peaked previously sort of in that sort of high single-digit percentage range in enterprise? Just given a more competitive portfolio, like what type of share is the team targeting kind of mid- to longer term? David Goeckeler -- Chief Executive Officer OK. Thanks, Harlan. Your questions are very related. So, we saw a pickup in enterprise SSD in the March quarter. It's still -- quite honestly, it's still relatively small numbers, but it's growing quite well. So, it's -- we wouldn't have supplied those bits if it wasn't the right thing to do from a portfolio strategy point of view. We'll see when we get to the second half, what pricing looks like, that versus other options we have, and then we'll decide how much supply we put into those products. And you're really getting into core of our portfolio strategy, which is to have a lot of optionality. We have a lot of optionality across client SSD, across gaming, now across enterprise SSD, across mobile, across consumer, obviously, which is a big business for us. And then based on what we see going into the quarter. And then very importantly, what happens during the quarter? How do we allocate our supply to get the best return? And clearly, we're in an environment right now where things got better throughout the quarter. So, as we go through the quarter, we find more opportunity to mix and get more profitability, and that's what happened in the March quarter, and you saw the results of having that agility into the business. So, I really don't want to call a share number or anything like that because it tends to distort, what we want to do is maximize profitability, not maximize share in any particular market. We want to maximize where we get the most return for our supply. Harlan Sur -- JPMorgan Chase and Company -- Analyst I appreciate that. And then maybe a question on BiCS8. I know you're not calling out any timing yet, but you have had it sort of in preproduction for quite some time. How are the early yields on this technology? And I guess, more importantly, like can the team still drive mid-teens percentage annualized type cost down with the new bonded-to-array technology? David Goeckeler -- Chief Executive Officer Yeah. So, what I'll say about yields is we're very confident in the technology. I mean, we feel very, very good about it. It's a major advancement in the architecture of NAND from an industry perspective to the CBA architecture. And it's -- the development has gone well. We feel very good about it. We can productize it when we need it. Again, this gets into a larger conversation about the dynamics of the market and when is the supply needed, and we're going to be very, very disciplined about going through any transition or putting any capex to the market until we see the profitability that we want to get. So, we feel very good about BiCS8. There was a second part of the question. Harlan Sur -- JPMorgan Chase and Company -- Analyst On the cost downs. David Goeckeler -- Chief Executive Officer Oh, cost-downs. Wissam Jabre -- Chief Financial Officer Yes, maybe I'll take that, Harlan. Yes. On the cost down, we're still anticipating the mid-teens percentage year-on-year cost downs. So, there's no change there. Harlan Sur -- JPMorgan Chase and Company -- Analyst Perfect. Thank you. David Goeckeler -- Chief Executive Officer Thanks, Harlan. Operator Our next question comes from Carlos Colorado from UBS. Please go ahead with your question. Carlos Colorado -- UBS -- Analyst Hi. Thanks for taking my question. So, I have -- the first one is about nearline. You are going outperforming your competition by a lot. So, what are the underlying reasons in your opinion for this? And do we have to expect this to normalize over time? And do you think this can be sustained? And I have a follow-up. Thanks. David Goeckeler -- Chief Executive Officer Yeah. The performance of the HDD business is driven by the product, right? It's pretty straightforward. Products are -- they're great products. This architecture that we built on ePMR, OptiNAND, UltraSMR, customers are really committed to SMR. They deliver the best TCO in the market. We can produce them at scale and that's what leads to the performance. Carlos Colorado -- UBS -- Analyst OK. Thanks. And the follow-up is you mentioned that AI's revenues are of SSD sales. You have a perfect vantage point to see if AI is driving applications that traditionally where HDD is that now being transferred to SSD some of those applications, or is the classic question on cannibalization from one to the other. Is that -- is AI changing that scenario? Thanks. David Goeckeler -- Chief Executive Officer We do not see any cannibalization. Clearly, HDD plays a big role in the AI storage life cycle as well as the whole ingest phase, because all of the big data lakes and all of the raw data sets, those are all going to be stored on HDD. It's just the economics of where you store that data, and how do you access that data. It's all that part of the AI pipeline, if you will, is going to be HDD. Now, you have all of these other new use cases around training and inference, and those are all going to be SSDs. So, it's really about growth as opposed to substitution. And that's what's so exciting about this. And obviously, once you get the models trained, then the models are going to turn out more data, which is going to be stored on HDD. So, you got this virtuous cycle going. So, it's kind of literally rising tide lifts all boats. It's not a substitution game. Clearly, there's a lot of new use cases being developed around AI, like the whole training infrastructures that are being built, that's what's driving these very high-capacity storage-based enterprise SSDs that we're seeing demand for. So, hopefully, that helps. Operator Our next question comes from Krish Sankar from TD Cowen. Please go ahead with your question. Krish Sankar -- TD Cowen -- Analyst Yeah. Hi. Thanks for taking my question. I have two of them. First one on Flash for Dave. You spoke about the BiCS6 hyperscaler qualifying it. My understanding was a BiCS6 was kind of more like a sub-node and BiCS8 is going to be the bigger one. I'm just kind of curious to get to your enterprise SSD market share target. Do you really need BiCS8, or can you achieve it with BiCS6? And then I have a follow-up. David Goeckeler -- Chief Executive Officer You're right. BiCS6 is when we say stub node, it's we're not going to take the whole portfolio to BiCS6. So, we have a big portfolio, and we're choosing which products to take the BiCS6. And clearly, we're taking the products that require QLC and the kind of things you're talking about. So, we feel good about our nodal plan in the Fab being able to supply what we need in these markets. Krish Sankar -- TD Cowen -- Analyst Got it. Got it. And then, Dave, on the hard drive side, I think you said in the past that you can get to 40 terabytes of the ePMR technology. I'm just kind of curious with obviously a competitor like trying to ramp up HAMR, and it took them a while like a few years to even get the three terabytes per disc in R&D to fall. Can you give us an update on your HAMR road map or the status of your HAMR technology, how we think about 30, 40 terabytes-plus? David Goeckeler -- Chief Executive Officer So, we've been working on HAMR for quite some time. We understand HAMR extremely well. We understand all the issues with HAMR, and what it takes to get it qualified. Clearly, we're doing that all behind the scenes, because we have a product portfolio with the best TCO we can offer in the market today, and we can do that all the way up to 40 terabytes. And 40 terabytes is where the economics flip over and you get the four terabyte per platter or 40 per unit, where essentially the capacity increase will cancel out the increase in costs you have to put in the unit to get the economics to work on margin, right? That's kind of a complicated -- a lot to say in one sentence. But our portfolio is very focused on the right product with the right cost at the right time. The right time for HAMR is at 40 terabytes. And we've got a lot of development going on that product. We have for a long time. We, quite frankly, don't need to do it in public because we have another portfolio that's selling extremely well, which we've talked about throughout this process. But have a lot of confidence in our HAMR development. And quite frankly, our customers know exactly what we're doing, and where we're at, and what our plans are, and they're comfortable with that as well. Krish Sankar -- TD Cowen -- Analyst Yeah. Thanks, Dave. Operator And our next question comes from Tom O' Malley from Barclays. Please go ahead with your question. Tom O'Malley -- Barclays -- Analyst Hey, guys, thanks for taking my question. I'm going to do one on the CFO side real quick on opex. So, big step up in the June quarter, and you're talking about some special projects. How should we think about that progressing? Is that investments that are going to stick around for the next couple of quarters? Or should that reset back to kind of the lower base you've been running out? You've just seen opex move from kind of the $550 million to $660 million over the past year, obviously, revenue increasing as well, but any color there on what that investment is for and if you see a step down after that? Wissam Jabre -- Chief Financial Officer Yeah. Sure, Tom. So, let me first start by saying that the way we think of opex is we don't see opex increasing faster than revenue. So, we're still very focused on that cost discipline and opex discipline. When it comes to this quarter, we're expecting some increase. The increase is almost 50-50, driven by variable comp as the financial outlook has improved much faster than anticipated. So, there's a bit of increase there. But also, as you mentioned, there's some project-specific R&D investments that also -- that we have sort of a direct correlation and line of sight to revenue. I would say for the next couple of quarters, the range that we've guided for Q4 is a reasonable range. I know it's too early to talk about fiscal year '25. But for modeling purposes, we can use the same type of numbers for now. Tom O'Malley -- Barclays -- Analyst Helpful. And if I look at your cost guidance for the year, a couple kind of with what you're looking at for June of '24, when I'm looking at gross margins, it seems like you need to have a pretty significant step-up in HDD gross margins. Are you planning for all of that the underutilization to come out of the model in the June quarter? And if any remains, can you let us know how much you're expecting? Wissam Jabre -- Chief Financial Officer So, for this most recent -- for Q3, we had a little bit -- and we disclosed, we talked about those. But as you can see, the numbers are becoming less and less significant. And so, for the June quarter, there's still a little bit, but it's not really very significant for us to talk about on this call. Tom O'Malley -- Barclays -- Analyst Thank you. Wissam Jabre -- Chief Financial Officer Thanks, Tom. Operator Our next question comes from Vijay Rakesh from Mizuho. Please go ahead with your question. Vijay Rakesh -- Mizuho Securities -- Analyst Yeah. Hi, David and Wissam. Just a quick question on the Flash side. Dave, when you look at the profitability, as you mentioned, how does the BiCS6 compare to -- if you look at some of the competitive NAND out there, either in terms of die size or cost per gig versus some of the peers? Wissam Jabre -- Chief Financial Officer So, that's a very complicated question. I mean, we can go into it in detail offline. We obviously do tons of work, and I appreciate your question that it's a multifaceted issue. It's die size. It's memory hole density, it's all kinds of very complicated thing goes into producing a NAND product. Look, we think the product compares extremely favorable. We think it leads the market. Again, for the last -- looking back many years, we have been able to produce bits at a third less capex than the industry average, and we expect BiCS8 to continue that leadership in the market. So, we feel very, very good about the product, about its performance. Again, when you build, this is like kind of one of the magic of wafer bonding. You can build the CMOS separately from the NAND stack and then the CMOS is kind of pristine. So, the interfaces are really, really fast. So, there's lots of good things about that architecture that leads to a really, really market-leading product, and we feel good about it. And we've got that all ready to go when the market conditions will support that level of investment. Operator Our next question comes from Mehdi Hosseini from SIG. Please go ahead with your question. Mehdi Hosseini -- Susquehanna International Group -- Analyst Yes. Most of the good questions have been asked. But David, I just have a longer-term question, and I think it will help many investors. Let's say, prices were to go sideways in '25, and you're just focusing on that 15% cost down and higher mix of higher-value eSSD products. Can you help us understand how your Flash margins would evolve from here? And then I'm not trying to ask you for pricing. But I'm just wondering how we could gauge your execution first on the product mix and be on the cost down and how they both would manifest into higher margins. Wissam Jabre -- Chief Financial Officer Yeah. Let me first start with -- I'll take a stab at the answer, Mehdi. So, look, our target model hasn't changed. We're still targeting through cycle for the Flash business to be 35%, gross margin to be between 35% to 37%. And so, that means, obviously, as -- from where we are today, we still have some ways to go to get to that through cycle margin. And the way we achieve these gross margins is what we've been talking about on this call. We focus on the product portfolio, the bit placement as well as on the cost side, which we still anticipate a similar type of ranges in terms of cost downs. Mehdi Hosseini -- Susquehanna International Group -- Analyst OK. That's reasonable. Let me just move on to the second question. And this is something I always ask, focusing on HDD. Is there any update how you see exabyte shipment evolving like over the next couple of years? Is the target now 25% to 30% or less or more? David Goeckeler -- Chief Executive Officer We're not -- we're still in the 20% to 25% camp, maybe around 25%. That's -- we're clearly in a cyclical recovery here, getting back to that kind of through-cycle number. I think the kind of the question inside your question is, how much does AI add on to that? And I think it's still a little early to tell. We definitely see -- as I talked about earlier, we see the value of data going up, you want to store more data to train more models. Those models are going to turn out more data. So, we think that the bias is higher. I'm not in a position yet to call exactly how much it changes the slope of that line. So, that's something we're going to stay very focused on as we go forward here over the next several quarters, stay close to our customers as these models get deployed and AI gets more broadly deployed and adopted so that we can dial in what we expect that impact to be on HDD storage demand. But we feel good that it's -- and we've got that secular tailwind to the business that will emerge. Operator Our next question comes from Steven Fox from Fox Advisors. Please go ahead with your question. Steven Fox -- Fox Advisors -- Analyst Hi. Two quick ones for me. First of all, on the HDD side, your large competitors talked about having to sort of support the supply chain going forward. I was wondering what -- how you look at that option or need to do that? And then secondly, since cash flows turned positive again, I was wondering if you could sort of give us a little bit of help on how to think cash flow tracks maybe versus net income or EBITDA over the next few quarters? Thanks. David Goeckeler -- Chief Executive Officer I'll just say something about supply chain. Look, we stay -- we've stayed very close to our suppliers throughout the entire downturn and stay very close to them as we're planning the business going forward. So, we think we always support our supply chain, and Irving Tan, who leads operations, is based in Singapore, a lot of our suppliers are there, and he personally can stay very, very close to them. So, we've stayed -- we've been very close and have supported our supply chain throughout this entire downturn. And now as things are getting better, that's a good situation for all of us. You want to talk about the cash flow? Wissam Jabre -- Chief Financial Officer Yeah. Let me take that. So, on the cash flow, yes, thanks. Obviously, we returned to free cash flow positive in Q3. And as the revenue and the business continues to recover, we're completely focused on profitability and cash flow generation. So, we should expect that to improve from here. Operator Our next question comes from Ananda Baruah from Loop Capital. Please go ahead with your question. Ananda Baruah -- Loop Capital Markets -- Analyst Yeah. Thank you, guys, for taking the question. Just one for me. David, really, I think, piggybacking off the part of Mehdi's question. So, just a TAM question on both sides of the business, HDD and Flash, is really the spirit of it that you see some near-term demand from AI coming and TBD on the impact to the TAM over time and also TBD on impact to the normalized growth rate off of whatever the new TAM looks like? And that's really the question. And TBD is the financing, but I just wanted to make sure we get all of your current opinion there. Thanks. David Goeckeler -- Chief Executive Officer I think that's a fair way to say it. I think it's coming into focus as to where it's going to show up on both sides of the business, but it's -- to your point, we're not ready to call what it does to the TAM, besides, we believe, it's a tailwind to both TAMs. So, clearly, on the NAND business, there's very specific use cases on model training that are coming up substantially. I mean, obviously, you're seeing that across the whole technology landscape. And maybe that's a little bit easier to see we're actually seeing demand for those kind of products in the second half. And for HDD, we see it as all the data that's going to feed that process is going to sit on HDDs. And obviously, once those models get trained, they're going to turn out data that's 85% plus of that is going to be stored on HDD. So, we see a very, very good setup, but we're staying close to our customers in these markets. It's still a little bit early to actually put a number on it of what it does to the growth rate or the TAM size. Operator And our next question comes from Tristan Gerra from Baird. Please go ahead with your question. Tristan Gerra -- Robert W. Baird and Company -- Analyst Hi. Good afternoon. A quick follow-up on this, which is how critical is it to have U.S. manufacturing for SSDs in relation to AI? And how do you look at partnership with hyperscalers as opposed to more kind of a general-purpose business? David Goeckeler -- Chief Executive Officer You mean U.S. manufacturing of the NAND itself or the SSD, which -- well, our NAND is manufactured in Japan. So, we don't see that as -- we feel really good about our manufacturing footprint, by the way. So, the JV, we haven't talked at all on this call about the JV, but that puts us in a great position from a scale perspective and gives us -- is the big underlying part of that lowest cost bids, low capital efficiency and great product road map, because we -- all of that is done in tandem with Kioxia, and so we're able to invest as the largest supplier in the market, which is a great position to be in. But we haven't -- the way our footprint is set up for a manufacturing point of view, we haven't seen anything that impairs us ability to serve the entire market. And as far as partnership with hyperscalers, like, look, we stay very close to the hyperscalers. Obviously, they're big customers of ours. We're big suppliers of theirs on both sides of the business. So, we're very, very close to them and staying close to what are different use cases, how do they want the products built especially in the enterprise SSD market, every -- there's not just one enterprise SSD. Everybody uses slightly different interfaces and there's different ways, their architecture of their data centers are built. So, we stay close to them to make sure we build the right product for what we're -- what the markets we want to serve. Operator And at this time, we'll conclude today's question-and-answer session. I'd like to turn the floor back over to David for any closing remarks. David Goeckeler -- Chief Executive Officer All right. Thanks, everyone. We appreciate all of the questions, and we look forward to talking to everybody throughout the quarter. Thanks again. Answer:

Western Digital's third quarter fiscal 2024 conference call

Operator Good afternoon, everyone, and thank you for standing by. Welcome to Western Digital's third quarter fiscal 2024 conference call. Presently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator instructions] As a reminder, this event is being recorded. Now, I will turn the call over to Mr. Peter Andrew, vice president, financial planning and analysis and investor relations. You may begin. Peter Andrew -- Vice President, Financial Planning and Analysis and Investor Relations Thank you, and good afternoon, everyone. Joining me today are David Goeckeler, chief executive officer; and Wissam Jabre, chief financial officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based upon management's current assumptions and expectations, and as such, does include risks and uncertainties. These forward-looking statements include expectations for our product portfolio, our business plan and performance, the separation of our Flash and HDD businesses, ongoing market trends, and our future financial results. We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. We will also make references to non-GAAP financial measures today. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website. With that, I'll now turn the call over to David. David Goeckeler -- Chief Executive Officer Thank you, Peter. Good afternoon, everyone, and thanks for joining the call to discuss our third quarter of fiscal year 2024 performance. Western Digital delivered excellent results in the quarter with revenue of $3.5 billion non-GAAP gross margin of 29.3% and non-GAAP earnings per share of $0.63, all of which exceeded expectations. Our strategy of developing a diversified portfolio of industry-leading products across a broad range of end markets, coupled with structural changes we have made to both of our businesses is unlocking our true earnings potential and allowing us to continue improving through-cycle profitability and dampening business cycles. This strategy enables us to generate higher earnings per share even in a constrained supply environment. In addition, our commitment to achieving operational efficiency and enhancing our agility has allowed us to run our Flash and HDD businesses more efficiently and further drive innovation to take opportunities. In particular, as the technology landscape continues to evolve, the demand for AI solutions is becoming increasingly apparent across our end markets. The uptick in AI adoption is highlighting the incredible value of data and will drive increased storage demand across both HDD and Flash at the edge and in the core, providing greater long-term growth and margin expansion opportunities for Western Digital. We are in the early innings of unlocking the full potential of this company, and our team remains focused on improving the profitability of our business to drive long-term margin expansion and shareholder value as these new demand opportunities present themselves. Before I dive further into the demand environment, I want to briefly comment on the status of the separation of our Flash and HDD businesses. I am proud of the team's ongoing efforts as we drive toward completion of the separation in the second half of the calendar year. We remain focused on achieving the separation as soon as possible, and we'll continue to provide further updates on our progress as appropriate. Moving on to end market commentary. I am pleased to report that during the quarter, revenue in all of our major end markets returned to year-over-year growth. In cloud, we experienced 29% growth in revenue from a year ago, highlighting the incredible success of our industry-leading HDD product line. In addition, we began to experience an increase in demand for our flash-based solutions, signaling a long-awaited recovery in this end market. In client, 20% revenue growth from a year ago was driven by increased bit demand for our flash-based solutions, coupled with an increase in ASPs. In consumer, we experienced 17% revenue growth from a year ago, highlighting the power of the SanDisk premium brand. Higher flash bit sales, combined with a better pricing environment more than offset the continued decline in consumer HDD demand. I'll now turn to business updates, starting with Flash. Our sequential revenue growth in the quarter reflects the continuing commitment to disciplined capital spending and carefully optimizing bit shipments into our most profitable end markets to take advantage of the improved pricing environment. This approach, combined with the strength of our product portfolio has enabled us to drive significantly higher profitability while strategically managing our inventory. On the technology front, we achieved a significant milestone by initiating mass production of our QLC-based client SSD, leveraging BiCS6 technology. This is yet another significant milestone demonstrating our continued commitment to innovation and market leadership. These advancements pave the way to spearhead the market's transition to QLC-based flash solutions in calendar year 2024. Additionally, our progress with BiCS8 is on track. While this technology is ready to be productized as market conditions warrant, our innovative offerings will remain at the forefront of the market, further strengthening our competitive position and bolstering our growth prospects. As noted earlier, in the third quarter, we began to experience an increase in demand for our enterprise SSD solutions. We are seeing demand returning for NVMe SSDs that we qualified before the downturn. We are also experiencing significant interest in providing these products in dramatically higher capacities for AI-related applications, which we expect to ship in the second half of the year. In addition, we are also sampling our newest high-performance PCI Gen 5, BiCS6-based enterprise SSD. We are preparing for qualification at a hyperscaler and the product is generating significant interest in the enterprise market. We expect to ramp in the second half of the calendar year. Turning to HDD. The sequential revenue increase was driven by improved nearline demand and higher pricing as we focused on optimizing profitability per exabyte sold. In particular, nearline revenue reached a fixed quarter high, reflecting the successful strategy we put in place to bring the most innovative, high-capacity, and high-performance drives to market. We have the right products at the right cost structure, which are reflected in our financial performance. Our cloud customers continue to transition to SMR with our 26-terabyte and 28-terabyte UltraSMR drives, quickly becoming a significant portion of our capacity enterprise exabyte shipments. SMR-based drives represented approximately 50% of nearline exabyte shipments in the quarter. Our portfolio strategy to commercialize ePMR, OptiNAND, and UltraSMR technologies in advance of our transition to HAMR, has proven to be the winning strategy and enables us to deliver to customers the industry's highest capacity and leading TCO drives, all of which can be produced at scale with controlled costs. We are confident that our product strategy, which combines UltraSMR technology with upcoming advancements in nearline drives is enabling Western Digital to deliver best-in-class gross margin in HDDs all at a time when AI is emerging as another growth engine for the industry. As we move toward a new supply and demand environment, characterized by higher demand, supply tightness, and product shortages, we are leveraging our proven technology we've already introduced to the market to meet the demands of our customers with the right portfolio at the right time, while also operating with a lean cost structure for continued profitability improvement in our HDD business. Although the actions we are taking have improved profitability, we remain focused on driving higher margins to appropriately value the incredible amount of innovation and TCO improvements we continue to deliver to our customers. Before I turn it over to Wissam, I wanted to share some perspectives on our outlook. Within Flash, in addition to growth opportunities at the edge, which is Western Digital strength, we are encouraged by the returning demand within the enterprise SSD market and expect growth throughout this calendar year. AI-related workloads are driving increasing demand for enterprise SSDs, and our portfolio is well-positioned to support those use cases. Looking ahead, we anticipate bit shipments to remain flat into the fiscal fourth quarter and look to Flash ASP increases to be the primary revenue growth driver, led by our focus on allocating bits to the most high-value end markets amid the tightening supply environment. While we're pleased to see pricing trends moving in a positive direction, it's crucial to acknowledge the importance of maintaining capital discipline and only reinvesting capital back into the business once profitability improves further, and we see sustained demand. Overall, our continued focus on improving profitability through our innovation road map, disciplined capital spending, and strategic pricing initiatives position us well for continued success in calendar year 2024 and into 2025 by offering the most capital and cost-efficient bits in the industry. In HDD, the success of our portfolio of leading capacity enterprise products, combined with the restructuring efforts we've implemented in recent years are yielding improved unit economics and greater visibility. As cloud demand is recovering, we anticipate continued growth driven by higher nearline demand and better pricing as we are now in a supply constrained environment. We're optimistic about aligning the pricing of our products to better mirror the innovation we are integrating into them, supporting long-term margin expansion in our HDD business. As we reap the rewards of the innovation and operational efficiencies that we've implemented, we will look for opportunities to reinvest in the business when the conditions are ripe for expansion. We will approach every capital allocation decision with a focus on discipline. Let me now turn the call over to Wissam, who will discuss our financial third-quarter results. Wissam Jabre -- Chief Financial Officer Thank you, and good afternoon, everyone. Following on David's comments, Western Digital return to profitability and free cash flow generation and delivered great results in the quarter, which exceeded expectations. Total revenue for the quarter was $3.5 billion, up 14% sequentially and 23% year over year. Non-GAAP earnings per share was $0.63. Looking at end markets, cloud represented 45% of total revenue at $1.6 billion, up 45% sequentially and 29% year over year. The growth was primarily attributed to higher nearline shipments and improved nearline per unit pricing with Flash revenue up both sequentially and year over year. Nearline bit shipments of 108 exabytes were up 60% sequentially. Client represented 34% of total revenue at $1.2 billion, up 5% sequentially and 20% year over year. Sequentially, the increase in Flash ASP more than offset a decline in flash bit shipments, while HDD revenue decreased. Year over year, the increase was driven by growth in both Flash and HDD ASPs and flash bit shipments. Consumer represented 21% of total revenue at $0.7 billion, down 13% sequentially and up 7% year over year. Sequentially, both Flash and HDD were down at approximately similar rates and in line with seasonality. On a year-over-year basis, the increase was driven by growth in flash bit shipments and ASP. Turning now to revenue by business segment for the fiscal third quarter. Flash revenue was $1.7 billion, up 2% sequentially as ASP increased 18% on both blended and like-for-like basis. Bit shipments decreased 15% from last quarter as we proactively focused our flash bit placement to maximize profitability. Flash revenue grew 30% from fiscal third quarter of 2023 on higher bits and ASP. HDD revenue was $1.8 billion, up 28% from last quarter, as exabyte shipments increased 41% and average price per unit increased 19% to $145. Compared to the fiscal third quarter of 2023, HDD revenue grew 17%, while total exabyte shipments and average price per unit were up 25% and 33%, respectively. Moving to gross margin and expenses. Please note, my comments will be related to non-GAAP results unless stated otherwise. Gross margin was 29.3%, well above the guidance range. Gross margin improved 13.8 percentage points sequentially and 18.7 percentage points year on year due to better pricing, our continued focus on cost reduction, and lower underutilization charges. Flash gross margin was higher than expected at 27.4%, up 19.5 percentage points sequentially and 32.4 percentage points year over year. There were no underutilization charges in the quarter. HDD gross margin was 31.1%, up 6.3 percentage points sequentially and 6.8 percentage points year over year. This includes underutilization charges of $17 million or one-percentage-point headwind. HDD gross margin is within our long-term target range, including underutilization charges. This underscores the team's focus on cost reduction and profitability as previously, this level of gross margin was achieved with higher revenue. Operating expenses were $632 million for the quarter, up 13% sequentially and 5% year over year. The sequential increase was mainly driven by higher variable compensation associated with better-than-expected financial results. Operating income was $380 million, which included HDD underutilization charges of $17 million. Tax expenses in the quarter was $51 million, reflecting the improved financial outlook for the fiscal year. Fiscal third-quarter earnings per share was $0.63. Operating cash flow was $58 million and free cash flow was $91 million. Cash capital expenditures, which include the purchase of property, plant, and equipment and activity related to Flash joint ventures on the cash flow statement represented a cash inflow of $33 million. Third-quarter inventory was flat from the prior quarter at $3.2 billion, with days of inventory increasing four days to 119 days. A decline in HDD inventory offset an increase in flash inventory. Gross debt outstanding was $7.8 billion at the end of the fiscal third quarter. Cash and cash equivalents were $1.9 billion, and total liquidity was $4.1 billion, including revolver capacity of $2.2 billion. For the fiscal fourth quarter, our non-GAAP guidance is as follows. We expect revenue to be in the range of $3.6 billion to $3.8 billion and project sequential revenue growth in both HDD and Flash. In HDD, we expect continued momentum with our industry-leading SMR product portfolio aimed at the cloud. In Flash, we anticipate bits will be flat and ASP is up as we continue optimizing our bit placement to maximize profitability. Gross margin is expected to be between 32% and 34%. We expect operating expenses to be between $670 million and $690 million with the increase mainly related to certain project-driven investments, coupled with higher variable compensation as the financial outlook has continued to strengthen. Interest and other expenses are expected to be approximately $105 million. We expect income tax expense to be between $30 million and $40 million for the fiscal fourth quarter and $130 million to $140 million for fiscal year 2024 as the financial outlook improved. We expect earnings per share to be $1.05, plus or minus $0.15, based on approximately 342 million shares outstanding. The financial outlook has strengthened, and we will remain disciplined in executing the business, controlling our capital spending, and improving our profitability. I will now turn the call back over to David. David Goeckeler -- Chief Executive Officer Thanks, Wissam. Let me wrap up, and then we'll open up for questions. I'm pleased with the team's performance in developing a diversified portfolio of industry-leading products across a broad range of end markets. As industry supply and demand dynamics continue to improve, we will remain disciplined around our capital spending and focused on driving innovation and efficiency across our business. Coupled with the structural changes we have made to our businesses, we are confident in our ability to drive greater through-cycle profitability and dampen business cycles. As we move forward, we remain uniquely positioned to capitalize on the promising growth prospects that lie ahead, solidifying our leadership position in the industry, particularly as AI continues to drive new storage solution opportunities and growth. OK. Peter, let's start the Q&A. Questions & Answers: Operator Ladies and gentlemen, at this time we'll begin the question-and-answer session. [Operator instructions] One moment for the first question. Our first question today comes from C.J. Muse from Cantor Fitzgerald. Please go ahead with your question. C.J. Muse -- Cantor Fitzgerald -- Analyst Yeah, good afternoon. Thank you for taking the question. I guess first question on the HDD side, the gross margins are spectacular. And if we take out the underutilization you're north of 32%. So, curious from here as you think about ongoing tightness, ongoing growth in demand led by the cloud, and a pricing strategy where I think you and your main competitor are being extraordinarily rational. How do you think the progression for that part of your business will look through the remainder of calendar '24 and into '25? David Goeckeler -- Chief Executive Officer Hey, C.J., thanks for the question. Yeah, we're -- the HDD business, we're really happy with where the portfolio is at. I think that's where it starts, bringing great products to market that deliver the highest capacity points and the best TCO for our customers. And when we're able to do that, we can share in more of that TCO advantage we're bringing to market. I think that's been the strategy for quite some time, and we're really happy with where the portfolio is and it's really resonating with customers. But the other side of that is making sure we really control the cost side of it. So, we're really focused on making sure we bring the lowest-cost product as well, and that leads to the margin expansion. And then we -- of course, we've got a returning demand environment as we get the cyclical recovery in HDD spending coming off of the lows that we all really understand. But going forward, we talked about a little bit in the prepared remarks. We expect to continue to bring great products to market. We expect to continue to drive better TCO for our customers. And we're in an environment now where we have supply demand balance and significant restructuring of our business during the downturn. We've taken capacity -- we've set our capacity of what we think the market needs as we emerge into this demand environment. We do see better supply demand alignment. We see tightness in the market. that's leading to what you would expect as customers giving us more visibility into what their ordering looks like going forward. So, we're optimistic about being able to continue to drive profitability of this business higher. C.J. Muse -- Cantor Fitzgerald -- Analyst Very helpful. And as a quick follow-up, on the NAND side, I think you guided last kind of high-teens bit growth. And I'm just curious, is that still a number in play? Or given your prioritization of highest profitable areas of NAND, should we be thinking about a different number? And here not talking about production but actual revenue bits. David Goeckeler -- Chief Executive Officer You mean for our -- for what time period? Just to make sure I understand your question. C.J. Muse -- Cantor Fitzgerald -- Analyst My apologies, for calendar '24. David Goeckeler -- Chief Executive Officer Oh, calendar '24. Look, we see -- yes, we still see demand in the mid to -- call it, the mid- to high teens for the market. We see supply like about 8% of bits in production. So, we still see an undersupplied market. For us, we had bits down this quarter. We forecast them down double digits. We were right about that, maybe a little bit more flat going into next quarter as we kind of optimize our supply throughout the year where we can think we can get the best profitability. C.J. Muse -- Cantor Fitzgerald -- Analyst Thank you. David Goeckeler -- Chief Executive Officer Thank you, C.J. Operator Our next question comes from Joe Moore from Morgan Stanley. Please go ahead with your question. Joe Moore -- Morgan Stanley -- Analyst Great. Thank you, and congratulations on the results. In terms of the outlook, looking for four points of gross margin improvement. It seems like the like-for-like pricing, certainly in NAND is a lot better than that. HDD seems pretty good as well. What are the offsets that you only would see sort of four points of gross margin expansion given the improvement that we're seeing in absolute pricing? Wissam Jabre -- Chief Financial Officer Hey, Joe, thanks for the question. Look, our guide comprehends a balanced view of what we have in terms of information today with the outlook. Yes, we see improvement in margins in both of the businesses. So, on the Flash side, we still anticipate improvement in pricing that will help gross margin move a bit higher from here. And on the HDD side, as David mentioned, we continue to focus on, obviously, the great technology that we deliver but also the cost discipline and pricing of the products. So, all of these are comprehended in our guide. Joe Moore -- Morgan Stanley -- Analyst Great. And then as a follow-up, you sort of talked about these higher-density SSDs in the second half of the calendar year for AI purposes. Can you talk about what has to happen to sort of get those drives out? Like is it you need new capacity points that you don't currently serve, and then can you talk generally, it seems like AI is having some positive effects on both sides of your guys' business. Can you talk about that a little bit? David Goeckeler -- Chief Executive Officer Yeah. So, what I would say about the AI demand as it's coming into focus. I don't think it's so much in the results just yet, but we're seeing where it's going to impact both businesses. And clearly, one of them you just outlined, which is we're seeing enterprise SSD demand return, we saw some increase in the last quarter. We expect some increase in this quarter. But really, as we look to the second half. We have customers coming to us wanting the kind of SSDs we built and qualified before the downturn. They just want them in much bigger capacity points, 30- and 60-terabyte capacity points. So, it's the same product just taking it and increasing capacity and going through a qualification on that. So, we're in that process with customers. We also introduced a new SSD that's more compute-focused, which is PCIe Gen 5 product based on BiCS6, very high performance that plays a little bit different role in the AI training stack, and we're getting very good feedback on that product. It's being qualified by our starting qualification. We've sampled -- we're kind of getting rid of the qualification of the hyperscaler, and we're seeing good demand in the enterprise market as well. So, we feel like the portfolio set up well as we go into the second half, and we're seeing a lot of demand show up for people that are very building large amount of infrastructure for model training. Joe Moore -- Morgan Stanley -- Analyst Great. Thank you. David Goeckeler -- Chief Executive Officer Thanks, Joe. Operator Our next question comes from Aaron Rakers from Wells Fargo. Please go ahead with your question. Aaron Rakers -- Wells Fargo Securities -- Analyst Yeah. Thanks for taking the question. I've got two as well. The first question, I just want to go back to kind of like the gross margin dynamics with regard to the [Inaudible] business. David, if you look back a couple of years, right, you peaked at like 150, 155 exabytes of capacity shifts. As we hear about the industry being constrained, where do you -- where would you characterize your capacity footprint today? And is it fair to assume that you have to see gross margin at or even above the high end of the 31% to 34% target model that you've laid out to kind of come back in and add capacity? David Goeckeler -- Chief Executive Officer Yeah. I mean, that's how we're thinking about it. I mean, this is a -- I've talked about this quite a bit. And this is an industry that I think has been oversupplied with this client-to-cloud transition that's been going on for 15 years. I think the downturn was in time when we saw a significant change in demand, to say the least, that we just decided to remove capacity to get supply and demand better balance. So, as we -- we're just emerging into that market, Aaron. I mean, I think as we start to see this market play out and dynamics get to the kind of business model and get more visibility into what the future is. We can have confidence in making investments if that's what we need to do to expand capacity. I think as all of that comes into focus, and it's starting to happen. We're starting to see that. We're getting more visibility. We're getting to participate more in the TCO advantages that we're bringing to the market. We're seeing better dynamics. And as that continues, and we get more confidence, we're not there yet, then we would think about how do we bring more capacity into the market. But we're just at the -- we're kind of getting to the starting line is, I guess, what I would say. Aaron Rakers -- Wells Fargo Securities -- Analyst Yeah. That's helpful. And then as a quick follow-up, just on the enterprise SSD topic. I think prior to the downturn, you had talked about, I want to say it was two or three cloud OEMs that you had designed in with the NVMe drive. Can you just talk about the breadth of what you're expecting? It just sounds like you're kind of getting back into the market, optimizing displacement there. So, how do we think about the breadth of the customer base in that enterprise SSD space? David Goeckeler -- Chief Executive Officer Yeah, you got it. I mean, it's the -- what we're seeing now is when the market is coming back, we're seeing those customers now come back up to a very long digestion period. And this is something we've been waiting for, for quite some time. Like every market from consumer to PC to nearline on the HDD side has gone through this big digestion phase. And I think enterprise SSD was the one we were waiting to see when we're going to come out of that. And that's what we're starting to see. So, we're seeing a couple of dynamics in that market. We're seeing those enterprise SSDs that we had qualified, the very same products now we're getting orders for as that digestion phase ends and they get -- they start to ramp ordering back. And then we're seeing the kind of AI impact on different capacity points use for model training, we're starting to see that demand come in the market. So, we're seeing both of those things happen. We think the portfolio is well-positioned for those markets. We expect that to play out through the rest of the year, and we're excited about it. Aaron Rakers -- Wells Fargo Securities -- Analyst Thank you. David Goeckeler -- Chief Executive Officer Thanks. Operator Our next question comes from Wamsi Mohan from Bank of America. Please go ahead with your question. Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst Thank you so much. On the HDD side, you had a very outsized exabyte quarter-on-quarter growth in the quarter relative to your nearest competitor. How are you thinking about the continued trajectory here in terms of exabyte growth perhaps both quarter-on-quarter basis but also maybe calendar '24 versus calendar '23? David Goeckeler -- Chief Executive Officer Yeah. We're seeing -- I mean, big picture, we're seeing a return in demand. Obviously, I think it was the largest sequential exabyte growth we've seen in a very long time. I hesitate to say ever because this is -- business has been around a very long time. But to go back as far as we could look, it was the biggest sequential increase we had seen. And it's -- as I said earlier, that starts with having products that really resonate with our customers. We really believe very strongly in the technology road map we've built around ePMR and UltraSMR is resonating very strongly with customers. Nearly 50% of exabytes shipped this quarter was SMR, and we're set up well for what we talked about last time where we expect over half of our exabytes in FY '25 to be SMR-based. So, like we said, coming into the fiscal year that we expected sequential growth throughout the fiscal year, last quarter, we extended that to the calendar year, and we still see that. So, we still see sequential exabyte growth going forward throughout this calendar year. Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst OK. Thanks for that. And as a follow-up, on sort of reinvesting on capacity side, right, on the HDD side? I think you said when conditions are ripe for reinvesting, and I know to Aaron's question earlier, you commented on certain gross margin ranges. But this cycle, your gross margin is much higher at lower revenue levels than past cycles. So, clearly, it feels as though, at least the capability to drive peak margins much higher than your established long-term range. So, why should 33% be maybe the level at which you reinvest? Why wouldn't it be 34%, 35%, or higher than that? David Goeckeler -- Chief Executive Officer Well, we haven't really set a bogey for that, right? We want to look at the holistic marketing. Again, that -- I understand this question everybody is looking for when we would reinvest. But that's really not what we're even thinking about right now. We're thinking about getting a market that's balanced on supply and demand, delivering great products to our customers that can meet the needs of the growth of the cloud. And I think that -- to your point, I think the business is emerging what we planned for and a lot of hard work that went in over the last couple of years, which is to come back in a much healthier position with the ability to drive greater profitability. So, we're just getting back to the bottom of the range that we set a couple of years ago. It's not as if we're declaring victory in that at all, to your point, like I said, I feel like we're just getting back to the starting line of where we need to drive the business to, but we feel very good about to be able to drive increased profitability in it. Look, it starts with delivering great products to your customers. Like we have to continue to bring better TCO. And I think we have got a tremendous architecture to do that while controlling our cost to build the product. We have to work stay focused on both sides of this equation. We got to have the lowest cost and then the best TCO that allows us to drive pricing, which drives margin expansion. So, we're working across that whole equation. And I think the strategy is working quite well. And that's why we saw -- when we saw some -- we saw the demand return, we saw the margins pop up. But to your point, we believe we can -- we're just getting started on this. Operator Our next question comes from Karl Ackerman from BNP Paribas. Please go ahead with your question. Karl Ackerman -- Exane BNP Paribas -- Analyst Yes, thank you. I'm curious your thoughts on the decision to prioritize the transition to BiCS6 for the mobile market rather than SSDs because AI demand appears concentrated in high-capacity enterprise SSDs. And I guess as you address that question, could you discuss your opportunity to provide QLC enterprise SSD to address these inference applications that appear to be supporting 30- and 60-terabyte units? Thank you. David Goeckeler -- Chief Executive Officer Yeah. Thanks, Karl. So, haven't really said where BiCS6 is going to go. That's in our future. That's one thing we feel really good about is the technology is there, and we'll bring it to market when we see it's the right time to do that when we got the right profitability, the right supply demand characteristics to invest in productizing that node, the technology is in great shape. But we haven't really outlined exactly which products are going to go there first or second or third. So, that's still in our future. As far as your point on QLC, this is -- we're now starting to transition to BiCS6. And so, we talked about a couple -- a number of products here that are BiCS6 based, which first, the client SSD, you didn't -- I'll talk about enterprise SSD as well, but we -- our client SSD has been extremely well received. The performance of it is outstanding. We have our own internal controller team. They've done an amazing job of building a really, really high-performance QLC client SSD. We expect that to lead the market and lead that transition in that part of the market. And then we're bringing BiCS6 into our enterprise SSDs as well, right? So that will be lever we have to drive BiCS6, which gives us more capacity, better performance. And so, we feel good about that. Transition is now starting, and the products are starting to show up. They're in customers' hands, and they've been very, very well received. Karl Ackerman -- Exane BNP Paribas -- Analyst Thank you. David Goeckeler -- Chief Executive Officer Thanks, Karl. Operator Our next question comes from Amit Daryanani from Evercore. Please go ahead with your question. Amit Daryanani -- Evercore ISI -- Analyst Thanks a lot. Good afternoon. I have two questions as well, I guess. First, on the HDD side, I'm wondering, do you think given some of the challenges on HAMR qualifications that Seagate's having, if you potentially saw a bigger uplift in market on the nearline side, and you think that market share could potentially sustain or does some of that kind of flow back as those qualifications get done. So, I'd love to understand if the share gains you think you're seeing are sustainable or not. And then on the Flash side, I would love to just maybe get your perspective. I know you folks are talking about bit growth being flat in June. But as some of these qualifications ramp up in the back half, how do you think about bit growth ramping up into the back half of this calendar year? Thank you. David Goeckeler -- Chief Executive Officer Yeah. So, on the first question, the business with our customers is planned pretty far in advance. So, there wouldn't be a situation where something would happen intra-quarter and that would drive a big share shift. The reality is we've got great products, and they're very much resonating with our customers, and we can deliver them at scale. And they have bring best-in-class TCO. And clearly, customers are adopting those at a significant rate. Like is it sustainable? We continue to bring great products to market. That's what we plan to do. We're very confident in our road map on HDD, and we'll continue to bring the best TCO solutions to our customers. On bit growth, we do expect flat bit growth into the calendar Q2, but we'll see a pickup in bit growth in the second half of the year. Amit Daryanani -- Evercore ISI -- Analyst Got it. Thank you. David Goeckeler -- Chief Executive Officer Thank you. Operator Our next question comes from Harlan Sur from JPMorgan. Please go ahead with your question. Harlan Sur -- JPMorgan Chase and Company -- Analyst Yeah, good afternoon. Nice job on the quarterly execution. Another question on enterprise SSD. So, you guys have been really smart on how you are allocating flash bits, right, with a strong focus on profitability. So, as you reallocate more bits toward eSSD in the second half, is the profitability profile of enterprise SSD portfolio expected to be accretive to the overall Flash business and your shares peaked previously sort of in that sort of high single-digit percentage range in enterprise? Just given a more competitive portfolio, like what type of share is the team targeting kind of mid- to longer term? David Goeckeler -- Chief Executive Officer OK. Thanks, Harlan. Your questions are very related. So, we saw a pickup in enterprise SSD in the March quarter. It's still -- quite honestly, it's still relatively small numbers, but it's growing quite well. So, it's -- we wouldn't have supplied those bits if it wasn't the right thing to do from a portfolio strategy point of view. We'll see when we get to the second half, what pricing looks like, that versus other options we have, and then we'll decide how much supply we put into those products. And you're really getting into core of our portfolio strategy, which is to have a lot of optionality. We have a lot of optionality across client SSD, across gaming, now across enterprise SSD, across mobile, across consumer, obviously, which is a big business for us. And then based on what we see going into the quarter. And then very importantly, what happens during the quarter? How do we allocate our supply to get the best return? And clearly, we're in an environment right now where things got better throughout the quarter. So, as we go through the quarter, we find more opportunity to mix and get more profitability, and that's what happened in the March quarter, and you saw the results of having that agility into the business. So, I really don't want to call a share number or anything like that because it tends to distort, what we want to do is maximize profitability, not maximize share in any particular market. We want to maximize where we get the most return for our supply. Harlan Sur -- JPMorgan Chase and Company -- Analyst I appreciate that. And then maybe a question on BiCS8. I know you're not calling out any timing yet, but you have had it sort of in preproduction for quite some time. How are the early yields on this technology? And I guess, more importantly, like can the team still drive mid-teens percentage annualized type cost down with the new bonded-to-array technology? David Goeckeler -- Chief Executive Officer Yeah. So, what I'll say about yields is we're very confident in the technology. I mean, we feel very, very good about it. It's a major advancement in the architecture of NAND from an industry perspective to the CBA architecture. And it's -- the development has gone well. We feel very good about it. We can productize it when we need it. Again, this gets into a larger conversation about the dynamics of the market and when is the supply needed, and we're going to be very, very disciplined about going through any transition or putting any capex to the market until we see the profitability that we want to get. So, we feel very good about BiCS8. There was a second part of the question. Harlan Sur -- JPMorgan Chase and Company -- Analyst On the cost downs. David Goeckeler -- Chief Executive Officer Oh, cost-downs. Wissam Jabre -- Chief Financial Officer Yes, maybe I'll take that, Harlan. Yes. On the cost down, we're still anticipating the mid-teens percentage year-on-year cost downs. So, there's no change there. Harlan Sur -- JPMorgan Chase and Company -- Analyst Perfect. Thank you. David Goeckeler -- Chief Executive Officer Thanks, Harlan. Operator Our next question comes from Carlos Colorado from UBS. Please go ahead with your question. Carlos Colorado -- UBS -- Analyst Hi. Thanks for taking my question. So, I have -- the first one is about nearline. You are going outperforming your competition by a lot. So, what are the underlying reasons in your opinion for this? And do we have to expect this to normalize over time? And do you think this can be sustained? And I have a follow-up. Thanks. David Goeckeler -- Chief Executive Officer Yeah. The performance of the HDD business is driven by the product, right? It's pretty straightforward. Products are -- they're great products. This architecture that we built on ePMR, OptiNAND, UltraSMR, customers are really committed to SMR. They deliver the best TCO in the market. We can produce them at scale and that's what leads to the performance. Carlos Colorado -- UBS -- Analyst OK. Thanks. And the follow-up is you mentioned that AI's revenues are of SSD sales. You have a perfect vantage point to see if AI is driving applications that traditionally where HDD is that now being transferred to SSD some of those applications, or is the classic question on cannibalization from one to the other. Is that -- is AI changing that scenario? Thanks. David Goeckeler -- Chief Executive Officer We do not see any cannibalization. Clearly, HDD plays a big role in the AI storage life cycle as well as the whole ingest phase, because all of the big data lakes and all of the raw data sets, those are all going to be stored on HDD. It's just the economics of where you store that data, and how do you access that data. It's all that part of the AI pipeline, if you will, is going to be HDD. Now, you have all of these other new use cases around training and inference, and those are all going to be SSDs. So, it's really about growth as opposed to substitution. And that's what's so exciting about this. And obviously, once you get the models trained, then the models are going to turn out more data, which is going to be stored on HDD. So, you got this virtuous cycle going. So, it's kind of literally rising tide lifts all boats. It's not a substitution game. Clearly, there's a lot of new use cases being developed around AI, like the whole training infrastructures that are being built, that's what's driving these very high-capacity storage-based enterprise SSDs that we're seeing demand for. So, hopefully, that helps. Operator Our next question comes from Krish Sankar from TD Cowen. Please go ahead with your question. Krish Sankar -- TD Cowen -- Analyst Yeah. Hi. Thanks for taking my question. I have two of them. First one on Flash for Dave. You spoke about the BiCS6 hyperscaler qualifying it. My understanding was a BiCS6 was kind of more like a sub-node and BiCS8 is going to be the bigger one. I'm just kind of curious to get to your enterprise SSD market share target. Do you really need BiCS8, or can you achieve it with BiCS6? And then I have a follow-up. David Goeckeler -- Chief Executive Officer You're right. BiCS6 is when we say stub node, it's we're not going to take the whole portfolio to BiCS6. So, we have a big portfolio, and we're choosing which products to take the BiCS6. And clearly, we're taking the products that require QLC and the kind of things you're talking about. So, we feel good about our nodal plan in the Fab being able to supply what we need in these markets. Krish Sankar -- TD Cowen -- Analyst Got it. Got it. And then, Dave, on the hard drive side, I think you said in the past that you can get to 40 terabytes of the ePMR technology. I'm just kind of curious with obviously a competitor like trying to ramp up HAMR, and it took them a while like a few years to even get the three terabytes per disc in R&D to fall. Can you give us an update on your HAMR road map or the status of your HAMR technology, how we think about 30, 40 terabytes-plus? David Goeckeler -- Chief Executive Officer So, we've been working on HAMR for quite some time. We understand HAMR extremely well. We understand all the issues with HAMR, and what it takes to get it qualified. Clearly, we're doing that all behind the scenes, because we have a product portfolio with the best TCO we can offer in the market today, and we can do that all the way up to 40 terabytes. And 40 terabytes is where the economics flip over and you get the four terabyte per platter or 40 per unit, where essentially the capacity increase will cancel out the increase in costs you have to put in the unit to get the economics to work on margin, right? That's kind of a complicated -- a lot to say in one sentence. But our portfolio is very focused on the right product with the right cost at the right time. The right time for HAMR is at 40 terabytes. And we've got a lot of development going on that product. We have for a long time. We, quite frankly, don't need to do it in public because we have another portfolio that's selling extremely well, which we've talked about throughout this process. But have a lot of confidence in our HAMR development. And quite frankly, our customers know exactly what we're doing, and where we're at, and what our plans are, and they're comfortable with that as well. Krish Sankar -- TD Cowen -- Analyst Yeah. Thanks, Dave. Operator And our next question comes from Tom O' Malley from Barclays. Please go ahead with your question. Tom O'Malley -- Barclays -- Analyst Hey, guys, thanks for taking my question. I'm going to do one on the CFO side real quick on opex. So, big step up in the June quarter, and you're talking about some special projects. How should we think about that progressing? Is that investments that are going to stick around for the next couple of quarters? Or should that reset back to kind of the lower base you've been running out? You've just seen opex move from kind of the $550 million to $660 million over the past year, obviously, revenue increasing as well, but any color there on what that investment is for and if you see a step down after that? Wissam Jabre -- Chief Financial Officer Yeah. Sure, Tom. So, let me first start by saying that the way we think of opex is we don't see opex increasing faster than revenue. So, we're still very focused on that cost discipline and opex discipline. When it comes to this quarter, we're expecting some increase. The increase is almost 50-50, driven by variable comp as the financial outlook has improved much faster than anticipated. So, there's a bit of increase there. But also, as you mentioned, there's some project-specific R&D investments that also -- that we have sort of a direct correlation and line of sight to revenue. I would say for the next couple of quarters, the range that we've guided for Q4 is a reasonable range. I know it's too early to talk about fiscal year '25. But for modeling purposes, we can use the same type of numbers for now. Tom O'Malley -- Barclays -- Analyst Helpful. And if I look at your cost guidance for the year, a couple kind of with what you're looking at for June of '24, when I'm looking at gross margins, it seems like you need to have a pretty significant step-up in HDD gross margins. Are you planning for all of that the underutilization to come out of the model in the June quarter? And if any remains, can you let us know how much you're expecting? Wissam Jabre -- Chief Financial Officer So, for this most recent -- for Q3, we had a little bit -- and we disclosed, we talked about those. But as you can see, the numbers are becoming less and less significant. And so, for the June quarter, there's still a little bit, but it's not really very significant for us to talk about on this call. Tom O'Malley -- Barclays -- Analyst Thank you. Wissam Jabre -- Chief Financial Officer Thanks, Tom. Operator Our next question comes from Vijay Rakesh from Mizuho. Please go ahead with your question. Vijay Rakesh -- Mizuho Securities -- Analyst Yeah. Hi, David and Wissam. Just a quick question on the Flash side. Dave, when you look at the profitability, as you mentioned, how does the BiCS6 compare to -- if you look at some of the competitive NAND out there, either in terms of die size or cost per gig versus some of the peers? Wissam Jabre -- Chief Financial Officer So, that's a very complicated question. I mean, we can go into it in detail offline. We obviously do tons of work, and I appreciate your question that it's a multifaceted issue. It's die size. It's memory hole density, it's all kinds of very complicated thing goes into producing a NAND product. Look, we think the product compares extremely favorable. We think it leads the market. Again, for the last -- looking back many years, we have been able to produce bits at a third less capex than the industry average, and we expect BiCS8 to continue that leadership in the market. So, we feel very, very good about the product, about its performance. Again, when you build, this is like kind of one of the magic of wafer bonding. You can build the CMOS separately from the NAND stack and then the CMOS is kind of pristine. So, the interfaces are really, really fast. So, there's lots of good things about that architecture that leads to a really, really market-leading product, and we feel good about it. And we've got that all ready to go when the market conditions will support that level of investment. Operator Our next question comes from Mehdi Hosseini from SIG. Please go ahead with your question. Mehdi Hosseini -- Susquehanna International Group -- Analyst Yes. Most of the good questions have been asked. But David, I just have a longer-term question, and I think it will help many investors. Let's say, prices were to go sideways in '25, and you're just focusing on that 15% cost down and higher mix of higher-value eSSD products. Can you help us understand how your Flash margins would evolve from here? And then I'm not trying to ask you for pricing. But I'm just wondering how we could gauge your execution first on the product mix and be on the cost down and how they both would manifest into higher margins. Wissam Jabre -- Chief Financial Officer Yeah. Let me first start with -- I'll take a stab at the answer, Mehdi. So, look, our target model hasn't changed. We're still targeting through cycle for the Flash business to be 35%, gross margin to be between 35% to 37%. And so, that means, obviously, as -- from where we are today, we still have some ways to go to get to that through cycle margin. And the way we achieve these gross margins is what we've been talking about on this call. We focus on the product portfolio, the bit placement as well as on the cost side, which we still anticipate a similar type of ranges in terms of cost downs. Mehdi Hosseini -- Susquehanna International Group -- Analyst OK. That's reasonable. Let me just move on to the second question. And this is something I always ask, focusing on HDD. Is there any update how you see exabyte shipment evolving like over the next couple of years? Is the target now 25% to 30% or less or more? David Goeckeler -- Chief Executive Officer We're not -- we're still in the 20% to 25% camp, maybe around 25%. That's -- we're clearly in a cyclical recovery here, getting back to that kind of through-cycle number. I think the kind of the question inside your question is, how much does AI add on to that? And I think it's still a little early to tell. We definitely see -- as I talked about earlier, we see the value of data going up, you want to store more data to train more models. Those models are going to turn out more data. So, we think that the bias is higher. I'm not in a position yet to call exactly how much it changes the slope of that line. So, that's something we're going to stay very focused on as we go forward here over the next several quarters, stay close to our customers as these models get deployed and AI gets more broadly deployed and adopted so that we can dial in what we expect that impact to be on HDD storage demand. But we feel good that it's -- and we've got that secular tailwind to the business that will emerge. Operator Our next question comes from Steven Fox from Fox Advisors. Please go ahead with your question. Steven Fox -- Fox Advisors -- Analyst Hi. Two quick ones for me. First of all, on the HDD side, your large competitors talked about having to sort of support the supply chain going forward. I was wondering what -- how you look at that option or need to do that? And then secondly, since cash flows turned positive again, I was wondering if you could sort of give us a little bit of help on how to think cash flow tracks maybe versus net income or EBITDA over the next few quarters? Thanks. David Goeckeler -- Chief Executive Officer I'll just say something about supply chain. Look, we stay -- we've stayed very close to our suppliers throughout the entire downturn and stay very close to them as we're planning the business going forward. So, we think we always support our supply chain, and Irving Tan, who leads operations, is based in Singapore, a lot of our suppliers are there, and he personally can stay very, very close to them. So, we've stayed -- we've been very close and have supported our supply chain throughout this entire downturn. And now as things are getting better, that's a good situation for all of us. You want to talk about the cash flow? Wissam Jabre -- Chief Financial Officer Yeah. Let me take that. So, on the cash flow, yes, thanks. Obviously, we returned to free cash flow positive in Q3. And as the revenue and the business continues to recover, we're completely focused on profitability and cash flow generation. So, we should expect that to improve from here. Operator Our next question comes from Ananda Baruah from Loop Capital. Please go ahead with your question. Ananda Baruah -- Loop Capital Markets -- Analyst Yeah. Thank you, guys, for taking the question. Just one for me. David, really, I think, piggybacking off the part of Mehdi's question. So, just a TAM question on both sides of the business, HDD and Flash, is really the spirit of it that you see some near-term demand from AI coming and TBD on the impact to the TAM over time and also TBD on impact to the normalized growth rate off of whatever the new TAM looks like? And that's really the question. And TBD is the financing, but I just wanted to make sure we get all of your current opinion there. Thanks. David Goeckeler -- Chief Executive Officer I think that's a fair way to say it. I think it's coming into focus as to where it's going to show up on both sides of the business, but it's -- to your point, we're not ready to call what it does to the TAM, besides, we believe, it's a tailwind to both TAMs. So, clearly, on the NAND business, there's very specific use cases on model training that are coming up substantially. I mean, obviously, you're seeing that across the whole technology landscape. And maybe that's a little bit easier to see we're actually seeing demand for those kind of products in the second half. And for HDD, we see it as all the data that's going to feed that process is going to sit on HDDs. And obviously, once those models get trained, they're going to turn out data that's 85% plus of that is going to be stored on HDD. So, we see a very, very good setup, but we're staying close to our customers in these markets. It's still a little bit early to actually put a number on it of what it does to the growth rate or the TAM size. Operator And our next question comes from Tristan Gerra from Baird. Please go ahead with your question. Tristan Gerra -- Robert W. Baird and Company -- Analyst Hi. Good afternoon. A quick follow-up on this, which is how critical is it to have U.S. manufacturing for SSDs in relation to AI? And how do you look at partnership with hyperscalers as opposed to more kind of a general-purpose business? David Goeckeler -- Chief Executive Officer You mean U.S. manufacturing of the NAND itself or the SSD, which -- well, our NAND is manufactured in Japan. So, we don't see that as -- we feel really good about our manufacturing footprint, by the way. So, the JV, we haven't talked at all on this call about the JV, but that puts us in a great position from a scale perspective and gives us -- is the big underlying part of that lowest cost bids, low capital efficiency and great product road map, because we -- all of that is done in tandem with Kioxia, and so we're able to invest as the largest supplier in the market, which is a great position to be in. But we haven't -- the way our footprint is set up for a manufacturing point of view, we haven't seen anything that impairs us ability to serve the entire market. And as far as partnership with hyperscalers, like, look, we stay very close to the hyperscalers. Obviously, they're big customers of ours. We're big suppliers of theirs on both sides of the business. So, we're very, very close to them and staying close to what are different use cases, how do they want the products built especially in the enterprise SSD market, every -- there's not just one enterprise SSD. Everybody uses slightly different interfaces and there's different ways, their architecture of their data centers are built. So, we stay close to them to make sure we build the right product for what we're -- what the markets we want to serve. Operator And at this time, we'll conclude today's question-and-answer session. I'd like to turn the floor back over to David for any closing remarks. David Goeckeler -- Chief Executive Officer All right. Thanks, everyone. We appreciate all of the questions, and we look forward to talking to everybody throughout the quarter. Thanks again.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company second-quarter fiscal year 2024 earnings conference call. Today's call is being recorded. [Operator instructions] I would now like to turn the presentation over to the host for today's call, Ross Cooling, communications manager, investor relations, and stakeholder engagement. Please proceed. Ross Cooling -- Vice President of Stakeholder and Investor Engagement Thank you. Good afternoon, and thanks to everyone for joining us today. On our call today are WD-40 Company's president and chief executive officer, Steve Brass; and vice president, finance, and chief financial officer, Sara Hyzer. In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings press release, and Form 10-K for the period ending February 29th, 2024. These documents are available on our Investor Relations website at investor.wd40company.com. A replay and transcript of today's call will also be made available shortly after this call. On today's call, we will discuss certain non-GAAP measures. The descriptions and reconciliations of these non-GAAP measures are available in our SEC filings as well as the earnings documents posted on our Investor Relations website. As a reminder, today's call includes forward-looking statements about our expectations for the company's future performance. Actual results could differ materially. The company's expectations, beliefs, and projections are expressed in good faith, but there can be no assurance they will be achieved or accomplished. Please refer to the risk factors detailed in our SEC filings for further discussion. Finally, for anyone listening to a webcast replay or reviewing a written transcript of this call, please note that all information presented is current only as of today's date, April 9th, 2024. The Company disclaims any duty or obligation to update any forward-looking information as a result of new information, future events, or otherwise. With that, I'd now like to turn the call over to Steve. Steve Brass -- President and Chief Executive Officer Thank you, Ross, and thanks to all of you for joining us this afternoon. Today, I'll begin by discussing several strategic actions we've taken to support our 4x4 strategic framework, followed by an overview of our sales results for the second fiscal quarter of 2024. I will also provide you with an update on our Must-Win Battles and some of our strategic enablers. Sara will provide further details on our second quarter results. an update on our business model and our outlook for the remainder of fiscal year '24, and then we will take your questions. Over the last few moments, I'm proud of the significant progress we have made on our 4x4 strategic framework. In March, we acquired our Brazilian marketing distributor and longtime business partner, Theron Marketing, for approximately $7 million in an all-cash transaction. This transaction directly supports our first Must-Win battle to lead geographic expansion of WD-40 multi-use product. Strategically, this allows us to have a direct market presence in Brazil to drive faster growth versus building up a direct market from the ground up. As you may recall, we successfully shifted from a distributor model to a direct market in Mexico in May 2020, and our revenues in Mexico are virtually tripled since making that shift. Taking Brazil direct through an acquisition presents a similar growth opportunity, and we are well-positioned to capture that growth. Our prior agreement with Theron Marketing was based on a royalty model and moving to a direct market provide us within an immediate benefit to our top line. We expect the Brazil market to drive revenue growth in excess of $10 million over the next year as a result of transitioning to this new business model. This is a substantial increase over the growth expected under the old royalty-based business model, which generated approximately $2 million of annual revenue. We've also made the strategic decision to more actively pursue the sale of our U.S. and U.K. homecare and cleaning product portfolios. For the time being, we intend to strategically maintain the homecare and cleaning product portfolio in Australia as it is a substantial portion of that market's business. Net proceeds from the sale of our U.S. and U.K. homecare and cleaning product portfolios will provide us with an opportunity to reinvest in our core business for long-term growth. While this will have an unfavorable impact on our sales in the short term once we divest the portfolio, it allows us to place even more focus on creating revenue growth through our Must-Win Battles and focus on our higher-margin business centered on our maintenance products over the long term. The immediate accretion from the Brazilian marketing distributor acquisition and the additional investments we will make to accelerate growth in our high-potential markets will offset lost revenue from this sale over time. And finally, during the second quarter, we went live with the first and most significant phase of our enterprise resource planning or ERP system. This is no small task, and we did anticipate there being some level of disruption as can be expected for a project of this nature. These disruptions resulted in a minor unfavorable impact on the quarter's performance, particularly in the U.S. I'm proud to report that due to the ingenuity and resilience of our team members and the long-standing partnerships with our customers we have worked through most of these challenges, and are confident going forward as we continue to improve our processes and leverage the value this system brings across the organization. I want to acknowledge and thank our employees for their ongoing diligence in managing through this implementation. We know projects like these allow us to live one of our core values of making it better than it is today, which will only strengthen us over time. Sara will provide more details on the ERP implementation. Now turning to our sales results. I'm happy to share with you that for the second consecutive quarter, we saw sales growth across all our trade blocks. For the second quarter, we reported net sales of $139 million, an increase of 7% over the prior year. Excluding the favorable impact of currency, revenue grew 5%. On a year-to-date basis, net sales grew 10% on a reported basis and 7% excluding the favorable impact of currency, which is in line with both our FY '24 guidance and our long-term growth targets. We remain encouraged that the improvement in trends we experienced in the second half of fiscal year '23 have carried into the first half of fiscal year '24. We're also pleased to report continued expansion of our gross margin versus prior year, which allows us to invest across other areas of our business, such as advertising and promotion activities in order to continue to drive top-line growth. Now let me discuss second quarter sales results by segment. Unless otherwise noted, I will discuss sales and comparisons to prior year on a reported basis. Sales in the Americas, which includes the United States, Latin America, and Canada of approximately $63.5 million grew 1% over the prior year fiscal quarter. We're pleased to report that strong demand and sales growth throughout the U.S. more than offset the short-term impact of the ERP implementation had on our net sales. WD-40 specialists and other maintenance product sales increased across most regions in the Americas, and we continue to see encouraging signs across the region. The growth in maintenance products was partly offset by a decline in homecare and cleaning products sales, primarily due to lower volume in the U.S. as a result of reduced demand. In total, our Americas segment made up 46% of our global business in the second quarter. Turning to our sales results in EIMEA, which includes Europe, India, and Middle East and Africa. The recovery we experienced in the second half of last year in EIMEA has continued throughout the first half of this year. EIMEA sales of $54.3 million increased 16% over the prior year. Currency fluctuations positively impacted our sales in EIMEA and on a constant currency basis, sales would have increased 11%, marking the fourth consecutive quarter of double-digit sales growth in constant currency. The growth was driven in large part by higher sales of WD-40 Multi-Use product, which increased 17% and WD-40 Specialist, which increased 23%. As a reminder, volumes last year were unfavorably impacted by price increases we had implemented resulting in temporarily reduced demand as customers adjusted to these prices. The combination of recovering volumes and increased selling prices resulted in higher sales across most regions in EIMEA this quarter. In the second quarter, sales of WD-40 Multi-Use Product increased most significantly in France, India and Iberia, which increased $1 million, $0.9 million and $0.6 million, respectively. The growth in maintenance products was partly offset by a decline of 10% in homecare and cleaning product sales, which is a much smaller part of the business for EIMEA. In total, EIMEA segment made up 39% of our global business in the second quarter. Turning to Asia Pacific, which includes Australia, China, and other countries in the Asia region, sales of $21.3 million were up 4% over the prior year. The growth was driven by higher sales of WD-40 Multi-Use product, which were up 3% in homecare and cleaning products, which were up 23% over the prior year. This was partly offset by a 3% decline in WD-40 Specialist product sales. In China, sales of maintenance products were up 3%, primarily due to successful promotional programs and marketing activities that led to increased sales volume. On a constant currency basis, sales for China would have increased by 5%. In our Asia Pacific distributor markets, sales of maintenance products were up 3%, primarily due to price increases in these markets and successful promotional programs in certain regions. In Australia, sales were up 6% over the prior year, primarily due to higher sales of home care and cleaning products. In total, our Asia Pacific segment made up 15% of our global business in the second quarter. Now let me discuss the progress we've made against our Must-Win Battles and provide you with an update on some of our strategic enablers that support our 4x4 strategic framework. We look at these Must-Win Battles as growth drivers over the long term, and therefore, we will focus our discussion on the year-to-date results of these battles. Starting with Must-Win Battler number one, lead geographic expansion. As mentioned earlier, the acquisition of a Brazilian marketing distributor is a strategic decision that aligns with and supports this Must-Win Battle. Through the first half of the year, global sales of WD-40 Multi-Use Product of $215 million grew 10% over the prior year, led by strong growth of 19% in EIMEA followed by growth in the Americas and Asia Pacific of 6.5% and 3%, respectively. We continue to make investments in our flagship brand to build awareness and increase market penetration in identified key markets. As a result, we made excellent progress in seeing volume recovery in many key markets. Next is Must-Win Battler number two, accelerating premiumization, which is a major contributor to our revenue growth and gross margin expansion. Year-to-date sales of WD-40 Smart Straw and EZ Reach when combined, were up 13% over the prior year. Our implementation of WD-40 Smart Straw, next-gen generation in the Americas and at multiple packages in EIMEA is contributing to the sales growth of premiumized products. This growth aligns with our long-term net sales compound annual growth rate target of greater than 10% in reported currency for premiumized products. Our third Must-Win Battle is to drive WD-40 Specialist growth. Through the first half of the year, sales of WD-40 Specialist products were $34 million, up 10% over the prior year, led by strong growth in EIMEA of 17%. In the Americas, sales of WD-40 Specialist grew 4%, while Asia Pacific, which is a much smaller portfolio grew 9% compared to the prior year. We continue to target a net sales compound annual growth rate of greater than 15% and reported currency for WD-40 Specialists. Our fourth and final Must-Win Battle is to accelerate digital commerce. We see this as an accelerator for all our other Must-Win Battles as it improves brand awareness and online engagement leading to an improved customer experience and sales across our channels. Year to date, e-commerce sales were up 24%, with strong growth in both EIMEA and the Americas trade blocks. Turning to the second element of our strategic framework, our strategic enablers, which collectively underpin our Must-Win Battles. I want to take a moment to discuss strategic enabler number one of ensuring a people-first mindset. At WD-40 Company, we pride ourselves in our culture and continuously focus on how to improve it. Our greatest asset cannot be found on a balance sheet, but rather it resides within our talented team. I'm extremely proud that we have been able to maintain an employee engagement score of around 93%, particularly given some of the significant changes we've experienced over the past 18 months. This includes changes within our leadership team as Sara and I have gotten up to speed in our roles and changes across the global organization as we've implemented and updated pricing structure, completed the first and most significant phase of our ERP implementation system and have continued to face uncertain macroeconomic conditions. Once again, I want to thank our strong and resilient team as we continue to evolve our internal processes, a major area of focus will be on implementing cultural pulse checks for real-time feedback for us to be more proactive versus being reactive in this area. And as previously discussed, we are making great progress on our strategic enabler number four, which is to drive productivity by our enhanced systems with our new ERP system. As a lean company with just over 600 employees, we recognize the importance of providing the best systems and have increased our investments in new systems and system enhancements. And we are not done as we will continue to invest to support this important enabler to drive our strategy and support sustainable profitable growth for our organization. With that, I'll now turn the call over to Sara. Sara Hyzer -- Vice President, Chief Financial Officer Thanks, Steve, and good afternoon. As Steve mentioned, we have had a productive few months and continue to make notable progress against our 4x4 strategic framework. I am proud that our team continues to turn in solid results that continue to align with our long-term 55/30/25 business model. As Steve discussed, we went live with the first phase of our ERP system during the second quarter. To add some additional color, the new system is now in place over a substantial portion of our business, including the U.S. business, our Latin America distributor business, and our sales in our Asia regional office, which combined make up just under 50% of our revenues. This was a significant first step for the company as we move toward a more streamlined system footprint globally. Given the scale and scope of this implementation, even with those disruptions that Steve mentioned, we ultimately view the implementation of the success with lessons learned. I look forward to taking the learnings from this first implementation and applying those into the next phase of the project. I'll begin today with a discussion about our second-quarter results, followed by an update on our full-year 2024 guidance before turning it back over to Steve for his final thoughts. Turning to our second-quarter gross margin performance. I am particularly proud that we continue to expand margins from prior year and performed within our target range of 50% to 55%. For the second quarter, gross margin improved 160 basis points over prior year to 52.4%. Gross margin benefited 130 basis points from favorable sales mix and other miscellaneous mix. This quarter, we saw a benefit from sales mix in EIMEA, which had a strong top-line growth. Lower costs associated with Specialty Chemicals also positively impacted gross margin by 100 basis points. To a lesser degree, gross margin was positively impacted by 70 basis points from tactical price increases as we cycle through the anniversary of most of those changes. While we are not planning any significant additional tactical price increases in the near term, we continue to monitor the inflationary environment in various markets. These favorable impacts to gross margin were partially offset by higher costs associated with other input costs, which had an adverse impact of 100 basis points in the quarter. Gross margin improved over prior year across all trade blocks. Within the Americas, gross margin improved 130 basis points over prior year to 49.4%. The EIMEA continues to expand gross margin, improving 140 basis points over prior year to 53.7%. And Asia Pacific, again, turned into strong gross margin performance, improving 320 basis points over the prior year to 58.5%. This progress through the first half of the year has positioned us to raise the bottom end of our full-year 2024 gross margin guidance, which I will discuss shortly. Based on the current trajectory, cost environment and macro environment, we are targeting to achieve gross margin of 55% by the end of fiscal year 2026. Now turning to our cost of doing business, which we define as total operating expenses, less adjustments for certain noncash expenses and is primarily comprised of investments in our employees, investments in our brand and freight expense. As we continue to grow our top line, we also remain focused on operating efficiently and reducing our costs effectively. As we get more operational leverage, we expect the cost of doing business to perform within our targeted range of 30% to 35% over time. For the second quarter, our cost of doing business was 36%, as compared to 33% in the prior year. The increase was primarily driven by increases in our employee-related costs due to higher accrued incentive compensation, annual compensation increases, and higher headcount, partially offset by lower stock-based compensation. We also experienced an increase in professional services, including costs associated with our ERP implementation and the acquisition of our Brazilian distributor. Additionally, travel expense and unfavorable changes in foreign currency exchange rates contributed to higher SG&A expense. Investments in advertising and promotional activities or A&P increase over prior year as we continue to build our brand and make investments to support long-term profitable growth. As a percentage of sales, A&P investment was 4.8%, compared to 4.6% prior year. Our A&P investments are always impacted by phasing between quarters, and we still expect the full year to be within our guidance of 5% to 6%. Turning now to adjusted EBITDA. While adjusted EBITDA margin has been under pressure due to the inflationary environment and the strategic investments we are making we continue to target performing in a range of 20% to 25% longer term. Getting adjusted EBITDA above 20% remains a priority. The sale of our home care and cleaning products portfolio will likely impact the timing of achieving this as we anticipate a potential step back in the short term as we divest this portfolio, but expect a longer-term benefit as we focus our investments on our higher growth and higher-margin maintenance products. For the second quarter, adjusted EBITDA margin was 17%, as compared to 19% in the prior year. The step back this quarter reflects the higher cost of business items that I previously discussed. Now let me discuss some items that fall below the adjusted EBITDA line. Net income of $15.5 million declined approximately $1 million or 6% from prior year. On a constant currency basis, net income would have decreased 9% compared to the prior year. Our net income reflects the provision for income tax rate of 21.6%. Diluted earnings per common share for the quarter were $1.14, compared to $1.21 in the prior year. Diluted EPS reflects 13.6 million weighted average shares outstanding this quarter, which was essentially flat compared to the prior year. Turning to the balance sheet and capital allocation. Our resilient and asset-light business model, coupled with actions we have taken to grow our top line while improving gross margin continued to contribute to our strong balance sheet and liquidity position. Maintaining a disciplined and balanced capital allocation approach remains a priority for us. For the foreseeable future, we expect maintenance capex of between 1% and 2% of sales per fiscal year, which is in line with our asset-light strategy. One of our more significant investments have been around our new ERP system. Through our go-live date in January, we have capitalized approximately $10 million in investments. And this quarter, we began to amortize those costs upon implementing the first phase of the new system. As part of this project, we have incurred and will continue to incur costs that do not qualify for capitalization. We will continue to incur costs that will either be capitalized or expensed, depending on their nature, through the next phases of implementation in the near term. We continue to assess what those phases will be as we consider the needs of the business, supporting any business model changes like Brazil and the risk profile of our existing systems. We also continue to make progress in lowering our inventory levels, which we had invested in to stabilize our U.S. supply chain in prior years. Our inventory levels peaked in the first quarter of fiscal 2023 and since then, we have reduced inventory by $41 million or 34%. In addition, we continue to return capital to our shareholders through regular dividends and buybacks. Annual dividends will continue to be targeted at greater than 50% of earnings. On March 19th, our board of directors approved a quarterly cash dividend of $0.88 per share. During the second quarter, we repurchased approximately 11,500 shares of our stock under our current share repurchase plan at a total cost of approximately $2.9 million. We will continue to be active in the market and expect to repurchase at least enough shares to offset shares issued for equity compensation. Going forward, our objective is to return cash to investors in the most accretive manner. Our cash flow from operations for the first half of fiscal year 2024 was $44.9 million, and we have elected to use $21.6 million of that cash to pay down a portion of our short-term higher interest rate borrowings. Our intent is to continue to pay down higher interest borrowings under the current interest rate environment. That concludes my discussion on our reported results. Let me now provide an update on our guidance. For the first half of fiscal year 2024, we are pleased with our solid performance and progress against our 4x4 strategic framework. It is important to note that results may vary from quarter to quarter and comparisons to the prior year will vary particularly by trade block due to the timing of those prior year price changes and the temporary resulting impact on volumes. We continue to monitor the market and our guidance assumes no major changes to the current macroeconomic environment in the second half of fiscal year 2024. It is also important to note that our full-year guidance as previously communicated, anticipated the acquisition of our Brazilian marketing distributor. Based on these factors and assumptions, we are therefore reiterating annual net sales growth between 6% and 12%, with net sales between $570 million and $600 million in constant currency. We are increasing the bottom end of our gross margin range to 51.5%, resulting in a new annual guidance of 51.5% to 53%, and an increase up from our prior guidance of 51% to 53%. This is based on our current performance, mix trends, and current cost environment. Advertising and promotion investment remains unchanged, and we expect this to be between 5% and 6% of net sales. We are reducing our provision for income tax to be between 23% and 24%, a decrease from our prior guidance of 24% and 25%. Given the updated gross margin guidance and the slightly lower tax rate, we are increasing our net income guidance and now expect it to be between $67.7 million and $71.8 million, up from our prior guidance of $65 million and $70 million. And we are increasing our diluted EPS to be between $5 and $5.30 from our prior guidance of $4.78 and $5.15. Our diluted EPS guidance is based on an estimated 13.6 million weighted average shares outstanding as we had previously communicated. That completes the financial overview. Now I would like to turn the call back to Steve. Steve Brass -- President and Chief Executive Officer Thank you, Sara. In closing, we are proud of the progress we've made this quarter, particularly as it relates to our strategic framework and our longer-term goals. In summary, what did you hear today from us on this call? You heard that we saw top-line growth in all three trade blocks for the second consecutive quarter. You heard that we continue to execute on Must-Win Battles sales of WD-40 Multi-Use product, WD-40 Specialists were both up 10% year to date. Sales of premiumized products were up 13% and digital commerce sales were up 24% year to date. You heard that we're incredibly pleased with how gross margin is holding up, and our first-half performance has positioned us to increase the bottom end of our full-year guidance range. You heard that we're also increasing our annual net income and adjusted EPS guidance for the full fiscal year 2024. You heard that we've made notable progress against our 4x4 strategic framework with the announced acquisition of our Brazilian marketing distributor, our decision to pursue a sale of our U.S. and U.K. homecare and cleaning products portfolio, and the successful go-live with the first phase of our new ERP system. You heard the loss of revenue from the prospective sale of our home care and cleaning products portfolio will be partially offset from the Brazil marketing distributor acquisition in the short term. Over the longer term, we will fully offset this revenue loss by increasing investments to accelerate growth in our identified high-potential markets. And you heard that we've been able to maintain our employee engagement score of around 93%, reflecting our passionate and resilient team, which is a strong competitive advantage for us. Thank you for joining our call today. We'd now be pleased to answer your questions. Questions & Answers: Operator [Operator instructions] We'll take our first question from Daniel Rizzo with Jefferies. Dan Rizzo -- Jefferies -- Analyst Hi, everyone. Thanks for taking my questions. I guess to start with -- and maybe I missed this, but I was just wondering what if the softness in Canada was just due to timing issues or what specifically was going on there because I think it was down 24% year over year in the quarter? Steve Brass -- President and Chief Executive Officer Hey, Daniel. So we're in the middle of a hard conversion of our Smart Straw product in Canada. So what you saw was the withdrawal of the current formats and the moving to Smart Straw. And so that did have a negative impact in the quarter. But looking forward, as we premiumize with quite a hard conversion in the Canadian market, you will see significant revenue growth as a result of that in the back half of the year. Dan Rizzo -- Jefferies -- Analyst So the hard conversion is over as of now? Steve Brass -- President and Chief Executive Officer It is being completed. It is mostly through, and we are executing as we speak. And so in the second half, you should see that uplift from more premium formats within Canada market. Dan Rizzo -- Jefferies -- Analyst OK. And then you mentioned the potential sale of the homecare products. Have you ever said what they contribute to EBITDA on an annual basis, how much? Steve Brass -- President and Chief Executive Officer We haven't Daniel, no. But I mean if you look at it in terms of the revenues, if you take FY '23, revenues from last year it was about $26 million combined between the U.S. and the U.K. It represents about 5% of our overall sales revenue. And obviously, those products are sold at slightly lower gross margins. So we've spoken about those products having a margin of about low 40s, 41%, 42%. And so you should be able to do the math from that. Dan Rizzo -- Jefferies -- Analyst No. That's perfect. So with the distributor acquisition in Brazil to kind of, I guess, kind of boost things in terms of growing through distribution. I was wondering if there's other opportunities like that or this is just a one-off thing because I mean you haven't really done too many deals in the past, but I was wondering if that's a new way you're looking at things? Or this just appeared? Steve Brass -- President and Chief Executive Officer So we're very transparent about where we believe our biggest top growth opportunities are around the world with our geographic expansion. We put on our top 20 growth market opportunities. And so we're very clear where those are. How we execute -- I mean, the question we ask ourselves is how do we grow the quickest in those opportunities. And so each -- the answer to each market is different, as you know, we're heavily invested in China with 60 people in China, and that's growing very nicely for us. And so how we invest to accelerate growth is something that's very much on our mind, particularly as we think now about potentially reinvesting some of the proceeds from the sale to further accelerate growth in those key areas. Dan Rizzo -- Jefferies -- Analyst OK. And then -- and final question, with the amortization cost from the $10 million for the ERP transition, I was wondering if that's -- I assume that's going to linger through the back half of the year, but I was wondering if it's going to last until next year. I think I might have asked this in the past, but I forgot the answer? Sara Hyzer -- Vice President, Chief Financial Officer The amortization costs, in particular, Daniel, this is Sara. Yes. So we did start amortizing -- we had about $10 million, very specifically to the ERP project that started in Q2, middle of Q2, and we are amortizing that over 10 years. So you will -- pretty easy to do the math there, you'll see about $1 million a year, just under $1 million a year with the first phase. And then as we continue roll out new locations, we'll be adding to that bucket. And then every time when we go live, we'll be able to disclose what those amounts are. Dan Rizzo -- Jefferies -- Analyst All right. Thank you very much, guys. Sara Hyzer -- Vice President, Chief Financial Officer You're welcome. Operator We'll take our next question from Linda Bolton-Weiser with D.A. Davidson. Linda Bolton-Weiser -- D.A. Davidson -- Analyst Thank you. Hello. So I think -- well, you did mention that there was some -- a little bit of disruption or something, challenges related to the ERP implementation in the U.S. Is there any way to quantify that impact on the quarter? Sara Hyzer -- Vice President, Chief Financial Officer Sure. I can take that. Linda, we are estimating about a top-line volume reduction of about $2.4 million from the disruption for the quarter. And not really all is in the U.S. We had some disruption in Latin America and ARO, but we were able to make that up before the end of the quarter. So that's the estimate that we have for the ERP disruption. Linda Bolton-Weiser -- D.A. Davidson -- Analyst And so is that like shipments which just couldn't be made and it will kind of be pushed into the next -- into the third quarter? Or is it just kind of lost revenue that will be regained? Sara Hyzer -- Vice President, Chief Financial Officer So at this point, the estimate of the $2.5 million is what we believe is lost revenue, and the team is obviously working hard on trying to make that up, but it really was around disruption of related to processing, fulfilling, and shipping orders. And ultimately, there was some short stock at some of our customers during a few weeks during the go-live. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. And then I was just curious on the Brazilian business. when you mentioned $10 million, I think, Steve, you said a revenue opportunity in the next year. Can you clarify, is that like incremental? Or is that just total versus what it was? And then I mean, some of it is just accounting for removing the distributor margin from the equation. So I'm just kind of wondering how much of a -- kind of real step-up in revenue that represents? Can you explain that a little bit? Steve Brass -- President and Chief Executive Officer Sure. So if you look at the basic model that we had is -- we had a royalty model in Brazil, and so that was a $2 million revenue stream. And that was -- I mean, it's almost -- when you have a royalty model, it's almost all gross margin minus a few costs, right? So it's a different model. I mean you have to say that Brazil is one of our -- in terms of units sold, it's actually even bigger than Mexico was when we took over the Mexico market. And so we're very confident in our ability to be able to -- given the experience we've had in Mexico to be able to transform that and realize the incremental value as a direct market. And so in our first year, as we said, so -- in the back half of this year, that will be $5 million of increment on top of the $1 million we would have done last year. And then for the first 6 months of next year, we'll have a further $5 million plus then whatever we can put on top. And so, in the medium term, we see a $20 million-plus market in Brazil, which is exactly what we achieved in Mexico over a three and a half year period. And opportunities for growth well beyond that in the long term. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. Gotcha. And then I was just wondering -- sorry, switching back for a minute to the Americas, I know it's in your queue, but I was curious if you could give volume and pricing for the whole company and then what it was in the quarter for the Americas? Sara Hyzer -- Vice President, Chief Financial Officer Sure. Linda, I'll start with the whole company. So volume just for the quarter was up 2% and impact of price was an impact of 3%. And for the full year. And then currency had an impact of 2%. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. So the pricing of 3% was for the quarter or for the half? Sara Hyzer -- Vice President, Chief Financial Officer For the quarter. And for the year to date, we're right at 3% as well. So for the halfway through the year, we're at 3% for impact of selling price and then the increase in the sales volume is 4%. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. Gotcha. Sara Hyzer -- Vice President, Chief Financial Officer Yes, that's based on the growth, a growth of 10%. So that's how the 10% has been -- if you look at halfway through the year, we're up 10%. Of the 10%, 3% is related to selling price and 4% is related to volume. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. And I guess -- so the 3% pricing in the quarter, I mean, I just -- it's a little bit more than I would have thought because you're anniversarying -- I don't know, I guess I just thought it would have kind of flattened out sooner. So I don't know, is there any way you can give us some color on how we should expect that cadence to go for the pricing line? Sara Hyzer -- Vice President, Chief Financial Officer Yeah. So we do expect that to come down, not -- run at that rate for the second half of the year. We are continuing to lap price. So we're predominantly through most of the larger price increases now in both the Americas and EIMEA markets. Asia PAC, we are still lapping some more recent price increases related to Australia. The timing of the inflationary environment in Australia was a little bit later. And so there are some price activities that we implemented really the later half of last year and really even into this year in Australia through a couple of different price changes or price increases. So there's still some lapping, but we're through the biggest pieces of it. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. And then finally, just on Asia. I guess that was one region that kind of was a little bit lower growth than I thought. And then I noticed you said Specialists was down. I know that's small in that region. But is there any particular thing that was going on? Steve Brass -- President and Chief Executive Officer So I think we're -- overall in Asia is if you look, it's been masked a little bit by currency -- constant currency rate our growth overall, I believe we're up 5% year to date. China is up in local currency 12% year to date. And so we maintained double-digit growth in China. And all the other regions are up, but perhaps not as high as we thought. So we see a very strong back half against prior year for Asia Pacific. So there's nothing to be worried about. I think by the end of the year, we'll have caught up. And well, all three trading blocks we see operating within our guidance range. The 5% to 8% of the Americas, 10% to 13% for Asia PAC, and 8% to 11% for EIMEA. So we're very optimistic about the second half of the year. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. And then just one final one. I was trying to figure out the math here on your EPS increase for the guidance and -- the tax rate, I don't think it was more than like $0.05 or $0.10, and yet you raised the midpoint of the range by $0.18. So is it fair to say that the rest of that is operational -- moving in the gross margin being better? Sara Hyzer -- Vice President, Chief Financial Officer Yeah. Most of the change is as we're just getting -- we're halfway through the year now. We have more visibility as to how we believe margin will play out for the second half of the year. So that's really the biggest change and the narrowing of the EPS range. There's obviously a little play in there on the income tax line as well, but those are the biggest two drivers for the change in the guidance. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. That's all for me. Thank you very much. Sara Hyzer -- Vice President, Chief Financial Officer Thanks, Linda. Answer:

the WD-40 Company second-quarter fiscal year 2024 earnings conference call

Operator Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company second-quarter fiscal year 2024 earnings conference call. Today's call is being recorded. [Operator instructions] I would now like to turn the presentation over to the host for today's call, Ross Cooling, communications manager, investor relations, and stakeholder engagement. Please proceed. Ross Cooling -- Vice President of Stakeholder and Investor Engagement Thank you. Good afternoon, and thanks to everyone for joining us today. On our call today are WD-40 Company's president and chief executive officer, Steve Brass; and vice president, finance, and chief financial officer, Sara Hyzer. In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings press release, and Form 10-K for the period ending February 29th, 2024. These documents are available on our Investor Relations website at investor.wd40company.com. A replay and transcript of today's call will also be made available shortly after this call. On today's call, we will discuss certain non-GAAP measures. The descriptions and reconciliations of these non-GAAP measures are available in our SEC filings as well as the earnings documents posted on our Investor Relations website. As a reminder, today's call includes forward-looking statements about our expectations for the company's future performance. Actual results could differ materially. The company's expectations, beliefs, and projections are expressed in good faith, but there can be no assurance they will be achieved or accomplished. Please refer to the risk factors detailed in our SEC filings for further discussion. Finally, for anyone listening to a webcast replay or reviewing a written transcript of this call, please note that all information presented is current only as of today's date, April 9th, 2024. The Company disclaims any duty or obligation to update any forward-looking information as a result of new information, future events, or otherwise. With that, I'd now like to turn the call over to Steve. Steve Brass -- President and Chief Executive Officer Thank you, Ross, and thanks to all of you for joining us this afternoon. Today, I'll begin by discussing several strategic actions we've taken to support our 4x4 strategic framework, followed by an overview of our sales results for the second fiscal quarter of 2024. I will also provide you with an update on our Must-Win Battles and some of our strategic enablers. Sara will provide further details on our second quarter results. an update on our business model and our outlook for the remainder of fiscal year '24, and then we will take your questions. Over the last few moments, I'm proud of the significant progress we have made on our 4x4 strategic framework. In March, we acquired our Brazilian marketing distributor and longtime business partner, Theron Marketing, for approximately $7 million in an all-cash transaction. This transaction directly supports our first Must-Win battle to lead geographic expansion of WD-40 multi-use product. Strategically, this allows us to have a direct market presence in Brazil to drive faster growth versus building up a direct market from the ground up. As you may recall, we successfully shifted from a distributor model to a direct market in Mexico in May 2020, and our revenues in Mexico are virtually tripled since making that shift. Taking Brazil direct through an acquisition presents a similar growth opportunity, and we are well-positioned to capture that growth. Our prior agreement with Theron Marketing was based on a royalty model and moving to a direct market provide us within an immediate benefit to our top line. We expect the Brazil market to drive revenue growth in excess of $10 million over the next year as a result of transitioning to this new business model. This is a substantial increase over the growth expected under the old royalty-based business model, which generated approximately $2 million of annual revenue. We've also made the strategic decision to more actively pursue the sale of our U.S. and U.K. homecare and cleaning product portfolios. For the time being, we intend to strategically maintain the homecare and cleaning product portfolio in Australia as it is a substantial portion of that market's business. Net proceeds from the sale of our U.S. and U.K. homecare and cleaning product portfolios will provide us with an opportunity to reinvest in our core business for long-term growth. While this will have an unfavorable impact on our sales in the short term once we divest the portfolio, it allows us to place even more focus on creating revenue growth through our Must-Win Battles and focus on our higher-margin business centered on our maintenance products over the long term. The immediate accretion from the Brazilian marketing distributor acquisition and the additional investments we will make to accelerate growth in our high-potential markets will offset lost revenue from this sale over time. And finally, during the second quarter, we went live with the first and most significant phase of our enterprise resource planning or ERP system. This is no small task, and we did anticipate there being some level of disruption as can be expected for a project of this nature. These disruptions resulted in a minor unfavorable impact on the quarter's performance, particularly in the U.S. I'm proud to report that due to the ingenuity and resilience of our team members and the long-standing partnerships with our customers we have worked through most of these challenges, and are confident going forward as we continue to improve our processes and leverage the value this system brings across the organization. I want to acknowledge and thank our employees for their ongoing diligence in managing through this implementation. We know projects like these allow us to live one of our core values of making it better than it is today, which will only strengthen us over time. Sara will provide more details on the ERP implementation. Now turning to our sales results. I'm happy to share with you that for the second consecutive quarter, we saw sales growth across all our trade blocks. For the second quarter, we reported net sales of $139 million, an increase of 7% over the prior year. Excluding the favorable impact of currency, revenue grew 5%. On a year-to-date basis, net sales grew 10% on a reported basis and 7% excluding the favorable impact of currency, which is in line with both our FY '24 guidance and our long-term growth targets. We remain encouraged that the improvement in trends we experienced in the second half of fiscal year '23 have carried into the first half of fiscal year '24. We're also pleased to report continued expansion of our gross margin versus prior year, which allows us to invest across other areas of our business, such as advertising and promotion activities in order to continue to drive top-line growth. Now let me discuss second quarter sales results by segment. Unless otherwise noted, I will discuss sales and comparisons to prior year on a reported basis. Sales in the Americas, which includes the United States, Latin America, and Canada of approximately $63.5 million grew 1% over the prior year fiscal quarter. We're pleased to report that strong demand and sales growth throughout the U.S. more than offset the short-term impact of the ERP implementation had on our net sales. WD-40 specialists and other maintenance product sales increased across most regions in the Americas, and we continue to see encouraging signs across the region. The growth in maintenance products was partly offset by a decline in homecare and cleaning products sales, primarily due to lower volume in the U.S. as a result of reduced demand. In total, our Americas segment made up 46% of our global business in the second quarter. Turning to our sales results in EIMEA, which includes Europe, India, and Middle East and Africa. The recovery we experienced in the second half of last year in EIMEA has continued throughout the first half of this year. EIMEA sales of $54.3 million increased 16% over the prior year. Currency fluctuations positively impacted our sales in EIMEA and on a constant currency basis, sales would have increased 11%, marking the fourth consecutive quarter of double-digit sales growth in constant currency. The growth was driven in large part by higher sales of WD-40 Multi-Use product, which increased 17% and WD-40 Specialist, which increased 23%. As a reminder, volumes last year were unfavorably impacted by price increases we had implemented resulting in temporarily reduced demand as customers adjusted to these prices. The combination of recovering volumes and increased selling prices resulted in higher sales across most regions in EIMEA this quarter. In the second quarter, sales of WD-40 Multi-Use Product increased most significantly in France, India and Iberia, which increased $1 million, $0.9 million and $0.6 million, respectively. The growth in maintenance products was partly offset by a decline of 10% in homecare and cleaning product sales, which is a much smaller part of the business for EIMEA. In total, EIMEA segment made up 39% of our global business in the second quarter. Turning to Asia Pacific, which includes Australia, China, and other countries in the Asia region, sales of $21.3 million were up 4% over the prior year. The growth was driven by higher sales of WD-40 Multi-Use product, which were up 3% in homecare and cleaning products, which were up 23% over the prior year. This was partly offset by a 3% decline in WD-40 Specialist product sales. In China, sales of maintenance products were up 3%, primarily due to successful promotional programs and marketing activities that led to increased sales volume. On a constant currency basis, sales for China would have increased by 5%. In our Asia Pacific distributor markets, sales of maintenance products were up 3%, primarily due to price increases in these markets and successful promotional programs in certain regions. In Australia, sales were up 6% over the prior year, primarily due to higher sales of home care and cleaning products. In total, our Asia Pacific segment made up 15% of our global business in the second quarter. Now let me discuss the progress we've made against our Must-Win Battles and provide you with an update on some of our strategic enablers that support our 4x4 strategic framework. We look at these Must-Win Battles as growth drivers over the long term, and therefore, we will focus our discussion on the year-to-date results of these battles. Starting with Must-Win Battler number one, lead geographic expansion. As mentioned earlier, the acquisition of a Brazilian marketing distributor is a strategic decision that aligns with and supports this Must-Win Battle. Through the first half of the year, global sales of WD-40 Multi-Use Product of $215 million grew 10% over the prior year, led by strong growth of 19% in EIMEA followed by growth in the Americas and Asia Pacific of 6.5% and 3%, respectively. We continue to make investments in our flagship brand to build awareness and increase market penetration in identified key markets. As a result, we made excellent progress in seeing volume recovery in many key markets. Next is Must-Win Battler number two, accelerating premiumization, which is a major contributor to our revenue growth and gross margin expansion. Year-to-date sales of WD-40 Smart Straw and EZ Reach when combined, were up 13% over the prior year. Our implementation of WD-40 Smart Straw, next-gen generation in the Americas and at multiple packages in EIMEA is contributing to the sales growth of premiumized products. This growth aligns with our long-term net sales compound annual growth rate target of greater than 10% in reported currency for premiumized products. Our third Must-Win Battle is to drive WD-40 Specialist growth. Through the first half of the year, sales of WD-40 Specialist products were $34 million, up 10% over the prior year, led by strong growth in EIMEA of 17%. In the Americas, sales of WD-40 Specialist grew 4%, while Asia Pacific, which is a much smaller portfolio grew 9% compared to the prior year. We continue to target a net sales compound annual growth rate of greater than 15% and reported currency for WD-40 Specialists. Our fourth and final Must-Win Battle is to accelerate digital commerce. We see this as an accelerator for all our other Must-Win Battles as it improves brand awareness and online engagement leading to an improved customer experience and sales across our channels. Year to date, e-commerce sales were up 24%, with strong growth in both EIMEA and the Americas trade blocks. Turning to the second element of our strategic framework, our strategic enablers, which collectively underpin our Must-Win Battles. I want to take a moment to discuss strategic enabler number one of ensuring a people-first mindset. At WD-40 Company, we pride ourselves in our culture and continuously focus on how to improve it. Our greatest asset cannot be found on a balance sheet, but rather it resides within our talented team. I'm extremely proud that we have been able to maintain an employee engagement score of around 93%, particularly given some of the significant changes we've experienced over the past 18 months. This includes changes within our leadership team as Sara and I have gotten up to speed in our roles and changes across the global organization as we've implemented and updated pricing structure, completed the first and most significant phase of our ERP implementation system and have continued to face uncertain macroeconomic conditions. Once again, I want to thank our strong and resilient team as we continue to evolve our internal processes, a major area of focus will be on implementing cultural pulse checks for real-time feedback for us to be more proactive versus being reactive in this area. And as previously discussed, we are making great progress on our strategic enabler number four, which is to drive productivity by our enhanced systems with our new ERP system. As a lean company with just over 600 employees, we recognize the importance of providing the best systems and have increased our investments in new systems and system enhancements. And we are not done as we will continue to invest to support this important enabler to drive our strategy and support sustainable profitable growth for our organization. With that, I'll now turn the call over to Sara. Sara Hyzer -- Vice President, Chief Financial Officer Thanks, Steve, and good afternoon. As Steve mentioned, we have had a productive few months and continue to make notable progress against our 4x4 strategic framework. I am proud that our team continues to turn in solid results that continue to align with our long-term 55/30/25 business model. As Steve discussed, we went live with the first phase of our ERP system during the second quarter. To add some additional color, the new system is now in place over a substantial portion of our business, including the U.S. business, our Latin America distributor business, and our sales in our Asia regional office, which combined make up just under 50% of our revenues. This was a significant first step for the company as we move toward a more streamlined system footprint globally. Given the scale and scope of this implementation, even with those disruptions that Steve mentioned, we ultimately view the implementation of the success with lessons learned. I look forward to taking the learnings from this first implementation and applying those into the next phase of the project. I'll begin today with a discussion about our second-quarter results, followed by an update on our full-year 2024 guidance before turning it back over to Steve for his final thoughts. Turning to our second-quarter gross margin performance. I am particularly proud that we continue to expand margins from prior year and performed within our target range of 50% to 55%. For the second quarter, gross margin improved 160 basis points over prior year to 52.4%. Gross margin benefited 130 basis points from favorable sales mix and other miscellaneous mix. This quarter, we saw a benefit from sales mix in EIMEA, which had a strong top-line growth. Lower costs associated with Specialty Chemicals also positively impacted gross margin by 100 basis points. To a lesser degree, gross margin was positively impacted by 70 basis points from tactical price increases as we cycle through the anniversary of most of those changes. While we are not planning any significant additional tactical price increases in the near term, we continue to monitor the inflationary environment in various markets. These favorable impacts to gross margin were partially offset by higher costs associated with other input costs, which had an adverse impact of 100 basis points in the quarter. Gross margin improved over prior year across all trade blocks. Within the Americas, gross margin improved 130 basis points over prior year to 49.4%. The EIMEA continues to expand gross margin, improving 140 basis points over prior year to 53.7%. And Asia Pacific, again, turned into strong gross margin performance, improving 320 basis points over the prior year to 58.5%. This progress through the first half of the year has positioned us to raise the bottom end of our full-year 2024 gross margin guidance, which I will discuss shortly. Based on the current trajectory, cost environment and macro environment, we are targeting to achieve gross margin of 55% by the end of fiscal year 2026. Now turning to our cost of doing business, which we define as total operating expenses, less adjustments for certain noncash expenses and is primarily comprised of investments in our employees, investments in our brand and freight expense. As we continue to grow our top line, we also remain focused on operating efficiently and reducing our costs effectively. As we get more operational leverage, we expect the cost of doing business to perform within our targeted range of 30% to 35% over time. For the second quarter, our cost of doing business was 36%, as compared to 33% in the prior year. The increase was primarily driven by increases in our employee-related costs due to higher accrued incentive compensation, annual compensation increases, and higher headcount, partially offset by lower stock-based compensation. We also experienced an increase in professional services, including costs associated with our ERP implementation and the acquisition of our Brazilian distributor. Additionally, travel expense and unfavorable changes in foreign currency exchange rates contributed to higher SG&A expense. Investments in advertising and promotional activities or A&P increase over prior year as we continue to build our brand and make investments to support long-term profitable growth. As a percentage of sales, A&P investment was 4.8%, compared to 4.6% prior year. Our A&P investments are always impacted by phasing between quarters, and we still expect the full year to be within our guidance of 5% to 6%. Turning now to adjusted EBITDA. While adjusted EBITDA margin has been under pressure due to the inflationary environment and the strategic investments we are making we continue to target performing in a range of 20% to 25% longer term. Getting adjusted EBITDA above 20% remains a priority. The sale of our home care and cleaning products portfolio will likely impact the timing of achieving this as we anticipate a potential step back in the short term as we divest this portfolio, but expect a longer-term benefit as we focus our investments on our higher growth and higher-margin maintenance products. For the second quarter, adjusted EBITDA margin was 17%, as compared to 19% in the prior year. The step back this quarter reflects the higher cost of business items that I previously discussed. Now let me discuss some items that fall below the adjusted EBITDA line. Net income of $15.5 million declined approximately $1 million or 6% from prior year. On a constant currency basis, net income would have decreased 9% compared to the prior year. Our net income reflects the provision for income tax rate of 21.6%. Diluted earnings per common share for the quarter were $1.14, compared to $1.21 in the prior year. Diluted EPS reflects 13.6 million weighted average shares outstanding this quarter, which was essentially flat compared to the prior year. Turning to the balance sheet and capital allocation. Our resilient and asset-light business model, coupled with actions we have taken to grow our top line while improving gross margin continued to contribute to our strong balance sheet and liquidity position. Maintaining a disciplined and balanced capital allocation approach remains a priority for us. For the foreseeable future, we expect maintenance capex of between 1% and 2% of sales per fiscal year, which is in line with our asset-light strategy. One of our more significant investments have been around our new ERP system. Through our go-live date in January, we have capitalized approximately $10 million in investments. And this quarter, we began to amortize those costs upon implementing the first phase of the new system. As part of this project, we have incurred and will continue to incur costs that do not qualify for capitalization. We will continue to incur costs that will either be capitalized or expensed, depending on their nature, through the next phases of implementation in the near term. We continue to assess what those phases will be as we consider the needs of the business, supporting any business model changes like Brazil and the risk profile of our existing systems. We also continue to make progress in lowering our inventory levels, which we had invested in to stabilize our U.S. supply chain in prior years. Our inventory levels peaked in the first quarter of fiscal 2023 and since then, we have reduced inventory by $41 million or 34%. In addition, we continue to return capital to our shareholders through regular dividends and buybacks. Annual dividends will continue to be targeted at greater than 50% of earnings. On March 19th, our board of directors approved a quarterly cash dividend of $0.88 per share. During the second quarter, we repurchased approximately 11,500 shares of our stock under our current share repurchase plan at a total cost of approximately $2.9 million. We will continue to be active in the market and expect to repurchase at least enough shares to offset shares issued for equity compensation. Going forward, our objective is to return cash to investors in the most accretive manner. Our cash flow from operations for the first half of fiscal year 2024 was $44.9 million, and we have elected to use $21.6 million of that cash to pay down a portion of our short-term higher interest rate borrowings. Our intent is to continue to pay down higher interest borrowings under the current interest rate environment. That concludes my discussion on our reported results. Let me now provide an update on our guidance. For the first half of fiscal year 2024, we are pleased with our solid performance and progress against our 4x4 strategic framework. It is important to note that results may vary from quarter to quarter and comparisons to the prior year will vary particularly by trade block due to the timing of those prior year price changes and the temporary resulting impact on volumes. We continue to monitor the market and our guidance assumes no major changes to the current macroeconomic environment in the second half of fiscal year 2024. It is also important to note that our full-year guidance as previously communicated, anticipated the acquisition of our Brazilian marketing distributor. Based on these factors and assumptions, we are therefore reiterating annual net sales growth between 6% and 12%, with net sales between $570 million and $600 million in constant currency. We are increasing the bottom end of our gross margin range to 51.5%, resulting in a new annual guidance of 51.5% to 53%, and an increase up from our prior guidance of 51% to 53%. This is based on our current performance, mix trends, and current cost environment. Advertising and promotion investment remains unchanged, and we expect this to be between 5% and 6% of net sales. We are reducing our provision for income tax to be between 23% and 24%, a decrease from our prior guidance of 24% and 25%. Given the updated gross margin guidance and the slightly lower tax rate, we are increasing our net income guidance and now expect it to be between $67.7 million and $71.8 million, up from our prior guidance of $65 million and $70 million. And we are increasing our diluted EPS to be between $5 and $5.30 from our prior guidance of $4.78 and $5.15. Our diluted EPS guidance is based on an estimated 13.6 million weighted average shares outstanding as we had previously communicated. That completes the financial overview. Now I would like to turn the call back to Steve. Steve Brass -- President and Chief Executive Officer Thank you, Sara. In closing, we are proud of the progress we've made this quarter, particularly as it relates to our strategic framework and our longer-term goals. In summary, what did you hear today from us on this call? You heard that we saw top-line growth in all three trade blocks for the second consecutive quarter. You heard that we continue to execute on Must-Win Battles sales of WD-40 Multi-Use product, WD-40 Specialists were both up 10% year to date. Sales of premiumized products were up 13% and digital commerce sales were up 24% year to date. You heard that we're incredibly pleased with how gross margin is holding up, and our first-half performance has positioned us to increase the bottom end of our full-year guidance range. You heard that we're also increasing our annual net income and adjusted EPS guidance for the full fiscal year 2024. You heard that we've made notable progress against our 4x4 strategic framework with the announced acquisition of our Brazilian marketing distributor, our decision to pursue a sale of our U.S. and U.K. homecare and cleaning products portfolio, and the successful go-live with the first phase of our new ERP system. You heard the loss of revenue from the prospective sale of our home care and cleaning products portfolio will be partially offset from the Brazil marketing distributor acquisition in the short term. Over the longer term, we will fully offset this revenue loss by increasing investments to accelerate growth in our identified high-potential markets. And you heard that we've been able to maintain our employee engagement score of around 93%, reflecting our passionate and resilient team, which is a strong competitive advantage for us. Thank you for joining our call today. We'd now be pleased to answer your questions. Questions & Answers: Operator [Operator instructions] We'll take our first question from Daniel Rizzo with Jefferies. Dan Rizzo -- Jefferies -- Analyst Hi, everyone. Thanks for taking my questions. I guess to start with -- and maybe I missed this, but I was just wondering what if the softness in Canada was just due to timing issues or what specifically was going on there because I think it was down 24% year over year in the quarter? Steve Brass -- President and Chief Executive Officer Hey, Daniel. So we're in the middle of a hard conversion of our Smart Straw product in Canada. So what you saw was the withdrawal of the current formats and the moving to Smart Straw. And so that did have a negative impact in the quarter. But looking forward, as we premiumize with quite a hard conversion in the Canadian market, you will see significant revenue growth as a result of that in the back half of the year. Dan Rizzo -- Jefferies -- Analyst So the hard conversion is over as of now? Steve Brass -- President and Chief Executive Officer It is being completed. It is mostly through, and we are executing as we speak. And so in the second half, you should see that uplift from more premium formats within Canada market. Dan Rizzo -- Jefferies -- Analyst OK. And then you mentioned the potential sale of the homecare products. Have you ever said what they contribute to EBITDA on an annual basis, how much? Steve Brass -- President and Chief Executive Officer We haven't Daniel, no. But I mean if you look at it in terms of the revenues, if you take FY '23, revenues from last year it was about $26 million combined between the U.S. and the U.K. It represents about 5% of our overall sales revenue. And obviously, those products are sold at slightly lower gross margins. So we've spoken about those products having a margin of about low 40s, 41%, 42%. And so you should be able to do the math from that. Dan Rizzo -- Jefferies -- Analyst No. That's perfect. So with the distributor acquisition in Brazil to kind of, I guess, kind of boost things in terms of growing through distribution. I was wondering if there's other opportunities like that or this is just a one-off thing because I mean you haven't really done too many deals in the past, but I was wondering if that's a new way you're looking at things? Or this just appeared? Steve Brass -- President and Chief Executive Officer So we're very transparent about where we believe our biggest top growth opportunities are around the world with our geographic expansion. We put on our top 20 growth market opportunities. And so we're very clear where those are. How we execute -- I mean, the question we ask ourselves is how do we grow the quickest in those opportunities. And so each -- the answer to each market is different, as you know, we're heavily invested in China with 60 people in China, and that's growing very nicely for us. And so how we invest to accelerate growth is something that's very much on our mind, particularly as we think now about potentially reinvesting some of the proceeds from the sale to further accelerate growth in those key areas. Dan Rizzo -- Jefferies -- Analyst OK. And then -- and final question, with the amortization cost from the $10 million for the ERP transition, I was wondering if that's -- I assume that's going to linger through the back half of the year, but I was wondering if it's going to last until next year. I think I might have asked this in the past, but I forgot the answer? Sara Hyzer -- Vice President, Chief Financial Officer The amortization costs, in particular, Daniel, this is Sara. Yes. So we did start amortizing -- we had about $10 million, very specifically to the ERP project that started in Q2, middle of Q2, and we are amortizing that over 10 years. So you will -- pretty easy to do the math there, you'll see about $1 million a year, just under $1 million a year with the first phase. And then as we continue roll out new locations, we'll be adding to that bucket. And then every time when we go live, we'll be able to disclose what those amounts are. Dan Rizzo -- Jefferies -- Analyst All right. Thank you very much, guys. Sara Hyzer -- Vice President, Chief Financial Officer You're welcome. Operator We'll take our next question from Linda Bolton-Weiser with D.A. Davidson. Linda Bolton-Weiser -- D.A. Davidson -- Analyst Thank you. Hello. So I think -- well, you did mention that there was some -- a little bit of disruption or something, challenges related to the ERP implementation in the U.S. Is there any way to quantify that impact on the quarter? Sara Hyzer -- Vice President, Chief Financial Officer Sure. I can take that. Linda, we are estimating about a top-line volume reduction of about $2.4 million from the disruption for the quarter. And not really all is in the U.S. We had some disruption in Latin America and ARO, but we were able to make that up before the end of the quarter. So that's the estimate that we have for the ERP disruption. Linda Bolton-Weiser -- D.A. Davidson -- Analyst And so is that like shipments which just couldn't be made and it will kind of be pushed into the next -- into the third quarter? Or is it just kind of lost revenue that will be regained? Sara Hyzer -- Vice President, Chief Financial Officer So at this point, the estimate of the $2.5 million is what we believe is lost revenue, and the team is obviously working hard on trying to make that up, but it really was around disruption of related to processing, fulfilling, and shipping orders. And ultimately, there was some short stock at some of our customers during a few weeks during the go-live. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. And then I was just curious on the Brazilian business. when you mentioned $10 million, I think, Steve, you said a revenue opportunity in the next year. Can you clarify, is that like incremental? Or is that just total versus what it was? And then I mean, some of it is just accounting for removing the distributor margin from the equation. So I'm just kind of wondering how much of a -- kind of real step-up in revenue that represents? Can you explain that a little bit? Steve Brass -- President and Chief Executive Officer Sure. So if you look at the basic model that we had is -- we had a royalty model in Brazil, and so that was a $2 million revenue stream. And that was -- I mean, it's almost -- when you have a royalty model, it's almost all gross margin minus a few costs, right? So it's a different model. I mean you have to say that Brazil is one of our -- in terms of units sold, it's actually even bigger than Mexico was when we took over the Mexico market. And so we're very confident in our ability to be able to -- given the experience we've had in Mexico to be able to transform that and realize the incremental value as a direct market. And so in our first year, as we said, so -- in the back half of this year, that will be $5 million of increment on top of the $1 million we would have done last year. And then for the first 6 months of next year, we'll have a further $5 million plus then whatever we can put on top. And so, in the medium term, we see a $20 million-plus market in Brazil, which is exactly what we achieved in Mexico over a three and a half year period. And opportunities for growth well beyond that in the long term. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. Gotcha. And then I was just wondering -- sorry, switching back for a minute to the Americas, I know it's in your queue, but I was curious if you could give volume and pricing for the whole company and then what it was in the quarter for the Americas? Sara Hyzer -- Vice President, Chief Financial Officer Sure. Linda, I'll start with the whole company. So volume just for the quarter was up 2% and impact of price was an impact of 3%. And for the full year. And then currency had an impact of 2%. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. So the pricing of 3% was for the quarter or for the half? Sara Hyzer -- Vice President, Chief Financial Officer For the quarter. And for the year to date, we're right at 3% as well. So for the halfway through the year, we're at 3% for impact of selling price and then the increase in the sales volume is 4%. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. Gotcha. Sara Hyzer -- Vice President, Chief Financial Officer Yes, that's based on the growth, a growth of 10%. So that's how the 10% has been -- if you look at halfway through the year, we're up 10%. Of the 10%, 3% is related to selling price and 4% is related to volume. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. And I guess -- so the 3% pricing in the quarter, I mean, I just -- it's a little bit more than I would have thought because you're anniversarying -- I don't know, I guess I just thought it would have kind of flattened out sooner. So I don't know, is there any way you can give us some color on how we should expect that cadence to go for the pricing line? Sara Hyzer -- Vice President, Chief Financial Officer Yeah. So we do expect that to come down, not -- run at that rate for the second half of the year. We are continuing to lap price. So we're predominantly through most of the larger price increases now in both the Americas and EIMEA markets. Asia PAC, we are still lapping some more recent price increases related to Australia. The timing of the inflationary environment in Australia was a little bit later. And so there are some price activities that we implemented really the later half of last year and really even into this year in Australia through a couple of different price changes or price increases. So there's still some lapping, but we're through the biggest pieces of it. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. And then finally, just on Asia. I guess that was one region that kind of was a little bit lower growth than I thought. And then I noticed you said Specialists was down. I know that's small in that region. But is there any particular thing that was going on? Steve Brass -- President and Chief Executive Officer So I think we're -- overall in Asia is if you look, it's been masked a little bit by currency -- constant currency rate our growth overall, I believe we're up 5% year to date. China is up in local currency 12% year to date. And so we maintained double-digit growth in China. And all the other regions are up, but perhaps not as high as we thought. So we see a very strong back half against prior year for Asia Pacific. So there's nothing to be worried about. I think by the end of the year, we'll have caught up. And well, all three trading blocks we see operating within our guidance range. The 5% to 8% of the Americas, 10% to 13% for Asia PAC, and 8% to 11% for EIMEA. So we're very optimistic about the second half of the year. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. And then just one final one. I was trying to figure out the math here on your EPS increase for the guidance and -- the tax rate, I don't think it was more than like $0.05 or $0.10, and yet you raised the midpoint of the range by $0.18. So is it fair to say that the rest of that is operational -- moving in the gross margin being better? Sara Hyzer -- Vice President, Chief Financial Officer Yeah. Most of the change is as we're just getting -- we're halfway through the year now. We have more visibility as to how we believe margin will play out for the second half of the year. So that's really the biggest change and the narrowing of the EPS range. There's obviously a little play in there on the income tax line as well, but those are the biggest two drivers for the change in the guidance. Linda Bolton-Weiser -- D.A. Davidson -- Analyst OK. That's all for me. Thank you very much. Sara Hyzer -- Vice President, Chief Financial Officer Thanks, Linda.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Thank you for standing by. My name is Alex, and I will be your conference operator today. At this time, I would like to welcome everyone to the WEX Q1 2024 earnings conference call. [Operator instructions] I would now like to turn the call over to Steve Elder, senior vice president of investor relations. Please go ahead. Steve Elder -- Senior Vice President, Global Investor Relations Thank you, operator, and good morning, everyone. With me today is Melissa Smith, our chair and CEO; and Jagtar Narula, our CFO. The press release we issued earlier this morning and a slide deck to walk through our prepared remarks have been posted to the Investor Relations section of our website at wexinc.com. A copy of the release has also been included in an 8-K we filed with the SEC earlier this morning. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income, which we refer to as ANI, adjusted operating income, and related margin as well as adjusted free cash flow during our call. Please see Exhibit 1 of the press release for an explanation and reconciliation of these non-GAAP measures. The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis due to the uncertainty and the indeterminate amount of certain elements that are included in reported GAAP earnings. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our annual report on Form 10-K for the year ended December 31st, 2023, filed with the SEC on February 23rd, 2024, and subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I'll turn the call over to Melissa. Melissa Smith -- Chief Executive Officer Thank you, Steve, and good morning, everyone. We appreciate you joining us today. The first quarter marked a strong start to 2024 for WEX. We delivered another quarter of impressive financial results including record high revenue for the first quarter, which is a testament to the resilience of our diversified business model in any economic environment. Earlier this month, we hosted our Annual Spark Conference where we brought together industry leaders to demonstrate how our cutting-edge solutions can help simplify the business of running a business. At the event, we showcased how our customers and partners can unlock the full potential of WEX's solutions, highlighting the power of our innovative technology across employee benefits, fleet management, and corporate payments. We had record attendance at Spark, which underscores the invaluable role our services played for our customers. Now let's discuss our first-quarter results. During the quarter, we achieved revenue of $653 million, an increase of 7% year over year. Excluding the impact of fluctuations in fuel prices and foreign exchange rates, Q1 revenue grew 10% year over year. Total volume processed across the organization in the first quarter grew 9% year over year to $57 billion, driven by strong performance in corporate payments. Adjusted net income per diluted share in Q1 was $3.46, an increase of 5% compared to the same quarter last year, as a result of strong quarterly revenue and share repurchases. Excluding the impact of fluctuations in fuel prices and foreign exchange rates, adjusted EPS grew 14% year over year. As a reminder, earnings growth was impacted by exiting our interest rate swaps in December, which Jagtar will discuss later on the call. Each of our business segments demonstrated robust performance during the quarter. Our Corporate Payments segment remains very healthy and continues to grow at a strong pace as purchase volumes increased 29% year over year. The travel business continues to grow at a faster pace than the overall market. We have solidified our virtual card offering as a best-in-class solution and build strong long-term relationships with our clients. This approach has positioned us as preferred payment solutions provider to our partners, driving sustained growth and customer loyalty. To that end, we recently signed a new long-term agreement with Booking.com, and this agreement distinguishes WEX as Booking's preferred partner. Booking.com first became a WEX customer in 2013, and we now process payments for Booking.com in more than 20 currencies. We've also renewed our agreement with HBX Group, one of the largest B2B TravelTech ecosystems in the world. HBX Group and it's a combination division known as Hotelbeds, has been a WEX customer for many years. Going forward, we expect to serve a larger share of their total volume as they consolidate relationships. The continuation of these long-standing partnerships demonstrates the strength and reliability of WEX's enterprise-grade technology platform, our broad currency offerings, and our deep payments expertise when delivering world-class travel payment solutions globally. Among our more than 800,000 active customer relationships worldwide, we are proud to work with eight of the top 10 online travel agencies globally. In the Benefits segment, overall SaaS account growth was lower than normal this quarter, primarily due to the previously mentioned loss of a Medicare Advantage customer. Still the core business continues to perform well and we grew accounts excluding the declines in Medicare Advantage account, 8% compared to last year. We are now serving 8 million HSA accounts. According to the 2023 year-end report by Devenir, the overall number of HSA accounts grew 5% last year to 37 million. So we continue to perform well compared to the market growth. Based on the overall number of HSA accounts at year-end, this also means that approximately 20% of all HSAs in the U.S. run on the WEX platform as of the end of Q1. We also continue to integrate the Ascensus Health and Benefits line of business that we acquired last September. This acquisition positions us for accelerated growth and innovation in the rapidly evolving benefits landscape. Finally, in our Mobility segment, we continue to be a market leader in this space across all of our core markets, and are focused on maximizing the value that we provide to our clients. In addition to the many small businesses that signed up with the WEX in the quarter, we also renewed our agreement with Shell to manage its portfolio of commercial fleet cars across North America. This represents a continuation of agreements first established in 2018. In our over-the-road truck business, the market continues to be challenged. But over the Red payment processing gallon volumes increased by 1% in Q1 for the first year-over-year increase in the past five quarters. Our go-to-market engine continues to add vehicles to the platform with an increase of 4% versus Q1 last year. Jagtar will provide you with the details, but we are pleased to see sequential increase in the revenue growth this quarter. Now I'd like to highlight the progress we've made executing against our strategic initiatives, further solidifying our position as market leader. We continue to be focused on supporting our mobility customers as they transition to EV and hybrid solutions and manage their vehicles in a mix fleet world. We have more than 600,000 mobility customers globally. Our expansive reach, coupled with our expertise and our innovative offerings, positions us as a trusted partner for our customers as they evolve their fleet. While we've all read about the slowdown in consumer EV shipments, we continue to invest in this area and roll out our integrated mix fleet solutions because customer interest remains steady. In Q1, we launched the general availability of our at-home reimbursement feature set to complement our public charging access, where we have brought acceptance. We believe that fleet made up of traditional ICE vehicles, hybrids, and EVs will be present for years to come. Our solutions are designed to support these mixed fleets with integrated reporting and data. At our Spark Conference, we pulled together our most innovative customers with our product development teams in more than a dozen early stage energy innovation start-ups. I was left with great confidence that we're helping the industry think critically about how to help customers unlock significant value by integrating EVs properly and how to operate a mixed fleet with WEX as their trusted partner. In Q1, we launched the pilot for an enhanced acceptance offering for our North American Mobility customers that combines the best of WEX's fleet solution with a broad acceptance of the Mastercard network. With this offering, customers can manage all of their vehicle-related purchases, including fuel, parts and services, car washes, parking tools, and roadside assistance, all with the same data, controls, and integrated experience that helps simplify the business of running their business. This helps the small business owner better understand the expenses related to each vehicle, while at the same time, having the controls of a closed loop card to closely manage what is able to be purchased. While it's early days, we have hundreds of customers enrolled in the pilot, and are actively gathering insights to inform future product features as we continue to expand the program and increased mobility spend beyond fuel. Furthermore, we completed our strategic acquisition of Payzer, a leading cloud-native field service management software in November. As we continue to integrate Payzer into the WEX ecosystem, we remain confident that the platform complements and significantly enhances our existing mobility offerings, supporting our efforts to expand our total addressable market and deliver high value to our customers. During the first quarter, we launched our first marketing efforts with Payzer targeted at current WEX customers, and we're testing different sales techniques to drive the best results. We're focused on both targeting Payzer's customer base and marketing the WEX field service management customers. We continue to be very excited about the long-term prospects and are tracking well with our integration efforts. Last quarter, we announced that we achieved $75 million of cost savings on a run-rate basis through the end of 2023. As we start 2024, we remain very confident in our ability to achieve the full $100 million of our run rate cost savings goals this year. As a reminder, roughly half of these savings will be reinvested and have been front-loaded in our year to drive long-term growth in the business in key areas such as digital products, technology, and risk management capabilities and tools, generating sustained cash flows to power our strategic growth investments and maintain our solid balance sheet with low leverage remains a top priority for WEX. We continue to do share repurchases as an important and attractive element of our capital allocation strategy, underscoring our commitment to drive shareholder value. Consequently, during Q1, our board expanded our share repurchase program by authorizing an additional $400 million in repurchases, reflecting our unwavering commitment to delivering long-term value for our shareholders. Advancing technology innovation through the business remains a priority. As our ongoing efforts in this area continue to drive cost savings in our margins, while demonstrating our commitment to drive long-term sustainable profitability. From an AI perspective, our initial use cases that I updated you on last quarter have yielded positive results, and we're taking steps to accelerate our AI capabilities and support additional use cases in the business. A main area of focus is our customer service operations where we're experimenting with new technologies and driving efficiencies for better customer service. We're currently working on reimagining our IVR systems and flows to enable customers to fulfill payments faster and with more accuracy. The advancements we have made with voice-to-text and text-to-speech technology in this area will enable us to apply our learnings and many other areas going forward, particularly as we work to reinvent our call center experience. One area we're particularly excited about is the application of AI in our Benefit business. We've been able to leverage AI to deliver personalized targeted messaging to the HSA account holders. And by using predictive analytics, we've helped our customers optimize their HSAs, enhancing their ability to pay and save for healthcare. In closing, I want to reiterate that WEX is well-positioned to continue driving solid financial performance in any macroeconomic environment as we have proven over the last several quarters. We expect to deliver strong revenue and adjusted earnings growth this year. We remain focused on delivering accretive EPS, driven by high marginal contribution of incremental revenue to our business. Our reengineering efforts that are delivering efficiencies across the enterprise and pricing optimization initiatives that yield strong drop through to our bottom line. Finally, we're in a privileged position to make strategic growth investments in our business, while also buying back shares to deliver the most value to our shareholders. This is supported by a solid balance sheet with low leverage. As we look ahead to the rest of 2024, I remain confident in WEX's ability to drive growth across the business in the near and long term, backed by our strong position in the market and strategic initiatives in place. With that, I'll turn it over to Jagtar to walk you through this quarter's financial performance in more detail. Jagtar? Jagtar Narula -- Chief Financial Officer Thanks, Melissa, and good morning, everyone. We reported a strong first quarter with record-high Q1 revenue. Our adjusted EPS results show continued execution against our strategic initiatives even against a year-over-year decline in fuel prices. Now let's start with the quarter results. For the first quarter, total revenue was $652.7 million, a 7% increase over Q1 2023, with more than 80% of revenue for the quarter recurring in nature. We had strong contributions from both Corporate Payments and Benefits, while lower fuel prices impacted reported growth in the Mobility segment. As a reminder, we define recurring revenue as payment processing and account servicing revenue, revenue from our factoring business, income from custodial HSA cash assets, transaction processing fees, and other smaller items. In total, adjusted operating income margin for the company was 38.5%, which is up from 37.6% last year, driven by margin increases in both Corporate Payments and Benefits segments. From an earnings perspective, on a GAAP basis we had net income of $65.8 million in Q1 or $1.55 per share. Non-GAAP adjusted net income was $146.7 million or $3.46 per diluted share, which is an increase of 5% over last year. Our first-quarter results were solid and set us up well for the remainder of the year, as we continue to navigate a year-over-year decline in fuel prices as well as a significant increase in debt costs due primarily to higher interest rates. Like we have discussed in previous quarters, our HSA custodial cash balances allow us to mitigate the impact of higher rates. As a reminder, we also exited our interest rate hedge positions in December, leading to an increase in interest cost this quarter. Exiting our interest rate swaps in December resulted in an $11 million cash impact to interest expense and a 7% drag on earnings per share. In addition, the foreign exchange rates and lower fuel prices resulted in a negative $20 million impact to revenue this quarter versus last year, or an approximate 9.5% drag to earnings per share. Our ability to continue to grow earnings per share despite the drag from exiting the swaps and lower fuel prices is a testament to our diverse vertical focused businesses, strong recurring revenue, and balanced interest rate exposure, allowing us to sustain durable through the cycle revenue and earnings growth. Now let's move to segment results, starting with Mobility. Mobility revenue for the quarter was $339 million, a 1% decrease from the prior year. Fuel prices are strong, but have retreated compared to last year, with the domestic average fuel price in Q1 of $3.56 versus $3.86 in 2023. The Q1 fuel price was slightly higher than our guidance, but the benefit we received in the U.S. was almost entirely offset by $2 million of negative spreads in Europe versus our expectation. While Mobility revenue declined approximately $3 million year over year, fuel prices had a large impact. The year-over-year 8% fuel price decline and reduced spreads in Europe decreased segment revenue by an estimated $21 million or 6%, while the underlying business continued to perform well. As we expected, excluding the change in fuel prices, revenue growth accelerated from Q4. Similar to last quarter, payment processing transactions remained roughly flat year over year, which was in line with our expectations. Local customers in the U.S. were approximately flat compared to last year, and over the road payment processing transactions were slightly above year-ago levels. As Melissa noted, this is the first quarter in some time that OTR transactions have increased, reflecting stabilization in that business. Note that despite the fact that this was a leap year, we actually had one less business day in Q1 than last year. Overall, we were pleased that both payment processing transactions and total transaction growth rates improved from Q4 2023. Next, let's turn to late fees. The net late fee rate decreased 4 basis points versus the prior year. Finance fee revenue decreased $10 million or 13%, which reduced segment revenue in total by 3%. The previously mentioned decline in fuel prices, a 20% decline in the number of late fee instances, and a 7% slowdown in our factoring revenue caused the decline in finance fee revenue. We believe the decline in late fee instances reflects the tighter credit policies that we have put in place. While these tighter policies reduce our late fee revenue, they have also resulted in significantly lower credit losses and taken holistically our positive earnings impact to the company. I will touch further on credit losses in a moment. The net interchange rate in the Mobility segment was 1.31%, which is up 8 basis points over our 2023 net interchange rate. The increase reflects continued benefits from the interest rate escalated causes contained in various merchant contracts, the rate benefit from lower domestic fuel prices, and higher rates earned from merchant contract renewals at favorable terms. The Mobility segment adjusted operating income margin for the quarter was 38.6%, down from 40.5% in Q1 2023. The decline in fuel price this year is the primary reason for the lower margins. Moving on. Credit losses decreased $24 million in the Mobility segment versus last year, and were in line with our guidance range at 15 basis points of spend volume, which compares to 32 basis points last year. Loss improved significantly compared to last year as expected. The changes that we made to our credit policies a year ago have had the intended impact in terms of reducing losses, especially with over-the-road trucking customers. The year-over-year decline of 17 basis points in credit loss rates more than makes up for the 4 basis point decline in our net late fee rate, and underscores the positive overall impact from the credit changes we made a year ago. Turning now to Corporate Payments. Total segment revenue for the quarter increased 17% to $122.5 million. Purchase volume issued by WEX was $23.9 billion, which is an increase of 29% versus last year. The net interchange rate in the segment was down 9 basis points sequentially, related to the timing of revenue recognition for network incentives earned in Q4 of last year. We continue to see strength in consumer travel demand that drove strong results in Corporate Payments. Travel-related customer revenue grew 30% compared to last year. The interchange rate for travel-related customers is down from Q4 due to the timing of incentive recognition. Outside of travel, our non-travel customer revenue was up 7%, driven by a 26% increase in purchase volume, showing some reacceleration in our partner channel and continued positive growth in our direct channel revenue. Similar to last quarter, over half our non-travel corporate payment revenue growth came from our direct channel. The Corporate Payments segment delivered an adjusted operating income margin of 52.7%, up from 46.9% in Q1 last year, driven by continued acceleration in volume. Finally, let's look at the Benefits segment. We again achieved strong results in this segment with Q1 revenue of $191.2 million, which is an increase of $26.3 million or 16% over the prior year. As we expected, SaaS accounts were flat in Q1 versus the prior year, with the loss of the Medicare Advantage customer that we mentioned last quarter. Core market dynamics of this business continue to be strong as exemplified by the underlying SaaS account growth, excluding the declines in Medicare Advantage accounts, which was 8% year over year. The Benefits segment purchase volume increased 10%, leading to a 6% increase in payment processing revenue. We also realized approximately $51 million in revenue from the custodial HSA cash deposits that were invested by WEX Bank and from funds held at third-party banks compared to $37 million last year. Approximately $8 million of the revenue increase in the Benefits segment is due to the average interest rate earned on these balances, increasing from 4% last year to 4.8% this year. The Benefits segment adjusted operating income margin was 41.5% compared to 39.1% in 2023. The custodial revenue from the invested HSA cash deposits has very high incremental margins. It is the primary driver of this increase. Now I will provide an update on the balance sheet and our liquidity position. We remain in a healthy financial position and ended the quarter with $780 million in cash. We have $463 million of available borrowing capacity and corporate cash of $176 million as defined under the company's credit agreement at quarter end. The total outstanding balance on our revolving line of credit and term loans was $3.2 billion. The leverage ratio, as defined in the credit agreement, stands at 2.6 times, which is near the low end of our long-term target of 2.5 to 3.5 times. Leverage generally increases slightly in the first quarter of each year. Our ability to invest in the business and return capital to shareholders while also maintaining conservative debt levels puts us in an enviable position. Next, I would like to turn to cash flow. WEX generates a significant amount of cash each year. Using our definition, adjusted free cash flow was negative $205 million in Q1. The first quarter of each year is seasonally low for us, and the timing of the end of the quarter falling on a weekend resulted in an estimated $190 million cash flow impact and caused an even larger negative number than normal for the quarter. We expect this will reverse in Q2. Our primary discretionary use of cash so far this year has been to repurchase shares. We repurchased 353,000 shares at a total cost of $74 million during Q1. Since restarting our share repurchase program in 2022, we have repurchased approximately 3.9 million shares at a cost of $662 million, which equates to an average cost of $169 per share. Looking forward, we will continue to manage capital allocation between organic investment, M&A, and returning capital to shareholders. Finally, let's move to revenue and earnings guidance for the second quarter and full year. The first quarter was another good quarter for us and as a result of improvement in some macro factors, I'm pleased to share that we are raising our guidance for 2024 to reflect those factors and trends. Starting with the second quarter, we expect to report revenue in the range of $675 million to $685 million. We expect ANI EPS to be between $3.75 and $3.85 per diluted share. For the full year, we expect to report revenue in the range of $2.73 billion to $2.77 billion. We expect ANI EPS to be between $16.10 and $16.60 per diluted share. For the full year, these updated ranges represent an increase of $30 million in revenue and $0.20 of EPS compared to the midpoint of our previous guidance. The major moving pieces compared to our prior guidance are updated fuel price and interest rate assumptions and the impact of share repurchases completed. Consistent with our prior guidance, we expect Mobility revenue growth to accelerate through the year, as we lap credit changes that caused higher attrition and lower finance fee revenue. As we noted last quarter, we are also implementing a number of pricing changes that will help the second half of the year. We also expect corporate payments revenue growth to slow as we progress through the year. In addition, we expect a greater proportion of our cost savings program to flow through to net income as we have front-loaded the reinvestment we intended to make. In conclusion, we delivered another quarter of growth in our financial results, and I'm especially proud that we were able to do this in the uncertain economic environment that we are operating in. With that, operator, please open the line for questions. Questions & Answers: Operator Thank you. [Operator instructions] And your first question comes from the line of Ramsey El-Assal with Barclays. Please go ahead. Ramsey? All right. Your next question comes from the line of Sheriq Sumar. Please go ahead. Sheriq Sumar -- Evercore ISI -- Analyst Yeah. Hi. This is Sheriq. Thanks for taking my question. So on the benefits side; I believe your guidance still remains around 10% to 15% for 2024. I mean given the potential pipeline of HSAs and even the interest rate dynamics and potential pricing impact, I mean, can you help us understand the evidence for the full year? And how should we think about the drivers for growth in 2025? I mean, do you think that we could be able to maintain these levels? Or would there be some tougher comps in 2025? Thank you. Melissa Smith -- Chief Executive Officer Let me start and give a little bit of context here. This year, one of the things that we've talked about that's going to impact the year is the loss of the Medicare Advantage account. When you exclude the Medicare Advantage accounts loss, we grew our total accounts 8%, so we think that will run through the course of this year and will affect the growth rate for this year. That being said, we feel good about how we're growing accounts, excluding that compared to what's happening overall in the marketplace. So as we transition into next year, we expect to continue to see strong account growth and then have that be compounded by additional custodian revenue as well as some of the other ancillary fees that we are continuing to earn across the portfolio. So we do think -- we've talked about our long-term guidance range of 15% to 20% in that segment and we think this year we're going to have some anomalies that are going to affect that. Jagtar Narula -- Chief Financial Officer Sheriq, I'll just add with regard to your question about 2024. So we came roughly a little ahead of our guidance range for the year. So we just expect Benefits growth to be sort of balanced over the course of the year for precisely the reasons that Melissa said. We saw good benefit from census and HSA accounts in the first quarter going through the rest of the year, we should see an uplift from the normal midyear on-boarding that we see HSA accounts and continued good performance of the HSA assets. Sheriq Sumar -- Evercore ISI -- Analyst Thank you so much. Yes, one follow-up on the EV side. Is there any color that you could provide on the economics or any potential dilution that we could expect or if you see that? And secondly, on the competitive dynamics, I mean, where do you see it from your seat? Where do you see WEX stand at this point of time? Like are you thinking that are you ahead of the curve in terms of investments? Or do you see that there is still some catch-up that you need to do versus other peers out in the market? Melissa Smith -- Chief Executive Officer We continue to be very bullish about the impact of EP disease in our portfolio for a couple of reasons. First of all, we see this as a new revenue opportunity. And so far, that has proved out to be true. So we're earning subscription fees for access to the networks that we've created, both in the United States and Europe. You've talked about the fact that we've rolled out at home reimbursement capability, which we think is market leading, and earnings subscription fees associated with that. And then as we continue to build additional functionality, which we have in our product road map, we think that gives us the ability to continue to add in future subscription fees. So OK, the net of that, we talked about this between $1.5 billion and $2 billion additional TAM. And I'd say from what we've seen so far, we do believe that this is going to be additive. And it's a great way to transition the portfolio into a different source of revenue over time. From a competitive perspective, we feel really good about where we sit competitively, in part because what we're hearing from our customers is they're going through this migration; you've got government fleets that are going through the migration, some of the largest fleets that have sustainability requirements. And then a bunch of other people that are testing in this marketplace and what we know from talking to our customers is that when they are having these mandates, they're not really sure what to do next. And so we're working in much more of a consultative fashion than probably what we had anticipated. And I think that's just indicative of the fact that they're on the commercial side, people are looking for options, and we feel really good about the capability that we've built. Sheriq Sumar -- Evercore ISI -- Analyst Thank you so much. That's helpful. Operator Your next question comes from the line of Ramsey El-Assal. Please go ahead. Ramsey El-Assal -- Barclays -- Analyst Hi. Can you guys hear me now? Hello. Melissa Smith -- Chief Executive Officer We can. Hello. Ramsey El-Assal -- Barclays -- Analyst Yes, you can. Sorry about that. Hi, if you can hear me, I think you can. You mentioned that the net interchange rate in the Corporate segment, I think, fell due to timing of revenue recognition from network incentives from last year. Can you elaborate that on that a little bit? And also just help us think through how interchange rates should trend for the next couple of quarters. Jagtar Narula -- Chief Financial Officer Yes, sure. So Ramsey, what I was referring to was the decrease we saw from Q4 of 2023 to Q1 of 2024. You'll recall from the last earnings call, in Q4 we have revenue recognition related to the volume incentives that we have with the associations, and that caused the interchange rate to increase in Q4 and then back coming down to Q1, it normalized. Going through the balance of the year we expect interchange rates to be flat to slightly tick up from the first quarter. There'll be some dynamics with the booking contract, but we expect flat to slightly tick up as we go through the year. Ramsey El-Assal -- Barclays -- Analyst OK. And then a quick follow-up. It looks like in the Q2 guidance you're expecting credit loss to be a bit higher than it was in Q1 and also for the full year. I'm just curious what the dynamics there are in terms of maybe a bit of an uptick in credit losses in Q2? Jagtar Narula -- Chief Financial Officer Yes. We've built some pretty sophisticated models that help us forecast where we think credit losses are going. And we're just looking at slightly higher charge-offs in the second quarter. Based upon recent trends, nothing too alarming, but we expect as a result of those charge-offs that we'll be raising reserves in the quarter. And then as you can see from the forecast of the guide, we expect that to trend down over the course of the year. We've put into place some new functionality; in Q1 we had a new credit adjudication model. In Q2 we've got a new automated credit line monitoring system that's going into place. So we expect credit losses to be relatively contained as we go through the year, but we do expect an uptick in Q2. Ramsey El-Assal -- Barclays -- Analyst Got it. Thank you so much. Operator Question comes from the line of Sanjay Sakhrani. Please go ahead. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thank you. Good morning. So yes, congratulations on the renewals with Booking and HBX; I guess as we think about, and I think Jagtar, you mentioned it a little bit there's probably going to be some impact as we look at the yields and anything else. Maybe you can just help us think about the P&L impacts in terms of volumes and the take rates and such as we look out this year into next. Melissa Smith -- Chief Executive Officer Yes. Let me start just a little bit around the -- specifically the contracted booking. We're -- there are going to be some short-term headwinds, but also long-term opportunity associated with the new contract. And we couldn't be more pleased to sign this contract, Booking.com and it's the largest online travel agency in the world that's a uniquely sophisticated partner if we're going to continue to be their primary virtual card partner. But going forward, they're going to continue to rely upon WEX's best-in-class payments technology platform, and they're going to be transitioning and performing certain activities in-house related to a portion of the virtual card program. And contemplated this obviously in our guidance and Jagtar will talk more about that in a minute. But I just want to reiterate, it's a great outcome for both companies. The partnership has allowed us to scale together and we're really excited about the opportunities that we have long-term. Jagtar Narula -- Chief Financial Officer Sanjay, I'll talk a little bit about what this means for interchange rate in the Corporate Payments business. So just a reminder, right, we've -- I've said that we've included this in our guide for the year. And I think I previously said in the last earnings call that we expect our Corporate Payments revenue to grow in the high single digits this year, and this new contract has not changed our expectations. So if you look at what we did in the first quarter, we grew 16% year over year in Corporate Payments. And so that -- as I said in my prepared remarks, implies that we expect to trend down over the course of the year. This Booking contract doesn't change that expectation that's embedded in that outlook. So let me start with the accounting impacts to this. So today, Booking volume is recorded as payment processing revenue, and it will continue to be under the existing contract. But as it transitions to the new program, we expect a portion of that volume to transition to this new program. In this new program, it will no longer be recorded as payment processing revenue. And instead it will be recorded as account servicing revenue. So the result of that will be that volume that transitions to the new program will not be included in our purchase volume metric that we report or net interchange rate, although you will still see it included in our total volume metric that we published. So we're obviously in early days of this transition and much remains to be seen on how it flows through in the timing factors. But our current expectation, as I said, earlier to Ramsey is that our total interchange rate for Corporate Payments for the full year will be stable to slightly up from the rates that we saw in the first quarter. And while the timing could still shift, what we're currently expecting is that Corporate Payments purchase volume will grow in the high single digits for the year, inclusive of that reduction in reported volumes related to the Booking transition. So with that rate and volume, that gives you our expectations for Corporate Payments purchase revenue and then the remaining bridge to our full-year guide is really the expected corresponding increase that we expect in the account servicing revenue related to Booking. So just to reiterate what Melissa said, we're really excited about this contract. We've got a great customer, a long-term relationship. This continues that long-term relationship and we see additional revenue opportunities working with them. So we're really excited about this. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst OK. And just to clarify, you guys see this as net accretive to the growth rate on a go for -- I know there's transitory stuff this year. But as we look out 2025 onwards, is this renewal net accretive, stable or dilutive to sort of revenue growth in that segment? And then I have one quick follow-up on just something you said, Jagtar. Melissa Smith -- Chief Executive Officer It's a headwind in the short term. We think it's a benefit over the long term. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst And when you say short-term, you're talking about even into next year or just mainly this year? Melissa Smith -- Chief Executive Officer Well, as they go through the migration, so there's going to be a period of time. And again, this is a piece of the portfolio that they're going to bring in-house. And the timing of that is uncertain. So we're giving you our current expectation. So it's really going to depend on how much transitions when it transitions and so again we're giving you our current thoughts right now. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Got it. Got it. And then just one of the questions I've gotten is just that back-end EPS guide. It seems like the revenues and EPS sort of delinking a little bit. Jagtar, you mentioned you sort of front ended the investment and front-loaded the investments, but the back end you get the cost saves. So that's more you have a decent amount of visibility into that EPS trajectory in the back end, assuming the revenues are correct. Is that right? Jagtar Narula -- Chief Financial Officer That's right, Sanjay. So we've got -- if you look at the back end, it's roughly based upon what we guided in Q2 in the full year, you talked about $75 million increase in revenue in the second half, and that's related to the things we've talked about, pricing, volume, etc. And then you've got the cost reductions that we have talked about repeatedly that we expect to start flowing through in the second half, whereas we front-loaded the cost reductions we've seen with some of the investments that we've talked about before. Melissa Smith -- Chief Executive Officer We also had the step-up in credit loss we were anticipating in the second quarter. Jagtar Narula -- Chief Financial Officer Yes. Correct. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst All right. Great. Thank you, guys. Appreciate it. Operator Your next question comes from the line of James Faucette with Morgan Stanley. Please go ahead. James Faucette -- Morgan Stanley -- Analyst Great. Thank you very much. I wanted to ask, just how we should be thinking about the mix between travel and non-travel revenue and Corporate Payments over near to medium-term, especially with some of these model transitions, etc.? Melissa Smith -- Chief Executive Officer So right now about 55%, 60% of revenue is travel and about 70% of the spend volume, relates to travel, the rest obviously is non-travel. Over time, we are expecting from a spend perspective. And again, in this case, I will talk about total spend just to make it cleaner that you wouldn't see a big deviation. We've seen, obviously, like a big uptick over the last couple of years in travel spend with a rebound from the pandemic. We do think that, that will continue to normalize as you progress through the course of the year. And I think Jagtar talked about the moving parts of how the pieces are going to move through our P&L in a way that you can actually go through the math to give you the current expectation. Jagtar Narula -- Chief Financial Officer Yes. I'd just add. So I gave sort of what we expect for total volume -- purchase volume through the year. I would say that we expect the rates of nontravel purchase volume to be fairly stable over the course of the year. So the real net to that and the total volume number I gave is really the booking transition. James Faucette -- Morgan Stanley -- Analyst Got it. Got it. Got it. And then I just wanted to touch quickly on in the Benefit side and the HSA, just so I can better understand what's happening there. You've seen growth there in cash assets, but that seems to be beginning to normalize. And the growth has still been quite strong, though it came in at 14%, I think, in the quarter. Melissa, you've spoken to Devenir's HSA estimates in the past. But curious how you're thinking about the level of HSA growth we should be expecting for the rest of 2024 and the 2025? And as part of that, I guess, tied into that, what kind of assumptions are you making about rate cuts and impact on yields on those balances for the rest of this year? Melissa Smith -- Chief Executive Officer Why don't I start, and Jagtar hit the rates at the end of the year. Yes. So as we go through the course of this year, we anticipate to continue to outgrow the marketplace in terms of our account growth. So it really focused around continuing to move our sales through our pipeline and making sure that we are delivering that through the course of this year. So our objective is to outgrow what happens from a market perspective. And then as we have added in the custodial rights capability to be able to make sure that we're earning accretive revenue associated with that, as well as added through the Ascensus acquisition, the ability to add in additional products like compliance products, we have our benefit administration products. And so continuing to cross-sell those across the portfolio, including our core growth capability, which has been a really strong cross-sell that we've had since we added that capability. And from a rate perspective, do you want to talk about that? Jagtar Narula -- Chief Financial Officer Yes. So what we've included in our guidance, and I think in our earnings presentation is that we are basically forecasting in line with the market expectations. So at the beginning of the year, we had said five rate cuts is what we expected. We've changed that as, I think market expectations are now down to about two rate cuts this year. So that's what's included in our guide. I would say, with regard to the HSA balances, the majority of our balances are in fixed-rate instruments. So we don't expect any rate cuts to impact those. The part of our portfolio that's in floating. Obviously, that's part of our revenue guide increase for the balance of the year since we're expecting less rate cuts as we go through the year. But as I've talked about in previous calls, we tend to manage the fixed versus floating rate exposure, so that it's effectively P&L neutral once you take it all the way through the P&L and look at corporate debt. So we'll have some revenue impact, it doesn't have a bottom-line EPS impact. James Faucette -- Morgan Stanley -- Analyst Great. Hey, I appreciate all the colors, you guys. Operator Your next question comes from the line of John Davis with Raymond James. Please go ahead. John Davis -- Raymond James -- Analyst Hey, good morning, guys. Melissa, obviously, you called out the x, the account growth and benefits ex the loss of the Medicare Advantage customer being about, let's call it, 1.5 million accounts or so. How should we think about the revenue impact within benefits this year of that customer loss? Melissa Smith -- Chief Executive Officer It's still a couple of percent in the course of the year for the full year. John Davis -- Raymond James -- Analyst OK. So a couple of points to benefits growth, just to be clear. Melissa Smith -- Chief Executive Officer Yes. John Davis -- Raymond James -- Analyst OK. And then just Jagtar on Mobility margins. First time, I think margins have dipped below 40% in a while, and I know you called out lower fuel prices. But maybe just help us think about what the trajectory of margins from here in Mobility and how we should think about the full year? Any color there would be helpful. Jagtar Narula -- Chief Financial Officer Yes, sure. So we should expect margins to improve overall as we go through the year. I think, right, we've got higher fuel prices that we're forecasting over the balance of the year. We're expecting improvements in late fees as we go through the year, some of the drag that we've seen will become less of a drag. And then we're expecting a better interest rate environment as we go through the balance of the year. So all those things should help margins will have a little bit of an impact in Q2 because we are forecasting those higher credit losses, but that should improve as we get into the second half. John Davis -- Raymond James -- Analyst OK. Thanks guys. Operator Next question comes from the line of Nate Svensson with Deutsche Bank. Please go ahead. Nate Svensson -- Deutsche Bank -- Analyst Hey, I just kind of wanted to follow up on that last question there. I was hoping you could remind us some of the underlying assumptions on the revenue growth within Mobility. So I think before you had talked about 8% macro adjusted growth, including about two points or so from Payzer. So I just wanted to make sure that, that was reiterated for this quarter. And then maybe some of the underlying assumptions there. You mentioned late fee increasing that I guess, the headwind getting better in the back half of the year, but maybe some of the other assumptions like gallons of fuel growth, expansion, and payment processing rate. Anyway for -- that'll help us, that would be helpful. Melissa Smith -- Chief Executive Officer Jagtar is going to go into that in detail. But before he starts, one of the things that was really important to us was to see the step up in the first quarter. You talked about the fact that we had an impact of negative spreads in Europe that impacted the quarter, which offset the positivity that we had for steel prices. But in terms of revenue growth, going from our growth in the fourth quarter to the incremental growth that we saw in the first quarter was part of the plan that we had as we were progressing through the course of the year. So we are pleased with the number that we posted this quarter. Jagtar Narula -- Chief Financial Officer Yes. I'll jump in here. And I just want to emphasize what Melissa just said, right? So we've guided to top end of our long-term range, so call it 8% growth. In Mobility, first quarter, we saw 5%, which was a tick up from below 2% that we saw in Q4. So that was -- and sorry, that's ex fuel prices. But that's exactly what we expected to do, and we're quite pleased to see that. So as we think through the rest of the year, high end of our range at 8%, Payzer's expected to contribute to. And the rest of it comes from the things that I talked about in the previous call that we saw come to start to come to fruition in Q1. So part of it is the pricing levers that we've pulled. We saw that coming through in the rate in the first quarter. Part of it is the impact from the credit losses that we saw a couple of years ago and the actions that we took last year, dampened both volume growth because of higher attrition as well as late fees because of improvements in the portfolio. Both those items we expect to lap this year. We didn't quite see it as much as Q1 because it's more of a Q2 and beyond item. So we should start to see that as we go through the year. So those three things that I just mentioned, fuel prices -- sorry, late fees, volume and pricing are all what we're expecting in Q2 through Q4 of the year. Nate Svensson -- Deutsche Bank -- Analyst Super helpful. Appreciate the color. I guess my follow-up, maybe a two-parter on Corporate Payments. I think last quarter, you had talked about a better virtual card attach rate within your travel business. So I guess any update on how that trended this quarter and how you see that going forward? And then I guess the second part, a couple of comments your prepared remarks on this, but more color on your direct sales efforts in Corporate Payments. So any additional information on the benefit you're seeing from the direct sales force or selling your AP product in the midsized businesses would be helpful. Thank you. Melissa Smith -- Chief Executive Officer Yes, we'll take them on this one, too. So we don't continue to see the benefit of the migration to the merchant model, which I think is what you're talking about within our European customers. And so that has been a benefit. Although I will say in the quarter, the oversize of the growth came from outside of Europe in this particular quarter. And most of the increase in spend volume was because of transaction growth. The rates seem to have normalized. It was only about a 4% increase in rate year over year. So again, it feels like we're getting back into more of a normalized environment. In terms of sales, half of the growth came from our direct sales outside of travel in our Corporate Payments business. And so we feel good about how we continue to build the pipeline there and continue to execute and deliver, and that we've got a sustained growth engine at this point in time that's continuing to deliver each quarter. And I would say that's true within travel too as well. We continue to build the pipeline we have there, working with our existing customers, look for opportunities. You talked about some of that during the call, but it's an area that we're going to continue to focus on as well. Jagtar Narula -- Chief Financial Officer Yes, I'll just add to that, that -- we're extremely pleased with the growth of that direct business this quarter. This is the second quarter in a row where over half of our nontravel related payment processing revenue came from the direct business. And overall, if I look at our payment processing revenue trends for nontravel, this is the third quarter of trending upwards. So we were quite pleased to see that continuing trend. Nate Svensson -- Deutsche Bank -- Analyst Thank you. Appreciate it. Operator Your next question comes from the line of Mihir Bhatia with Bank of America. Please go ahead. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Good morning and thank you for taking my questions. I actually wanted to start by going back to following up on Sanjay's question. You mentioned some of the short-term headwinds from the Booking renewal. But can you just talk about the longer-term opportunity there? Is there additional volume you'll be getting for them from them longer term? I'm just trying to understand the benefit for WEX from the renewal, beyond obviously locking up such a large customer. But what is the opportunity side of that contract renewal look like? Melissa Smith -- Chief Executive Officer Yes. Let me talk about a couple of things here. First of all, I think it's important to distinguish Booking because it is a highly sophisticated customer. They have a unique capability set in this marketplace. And so what we're doing with them, we feel like it's a great partnership, we're bridging them to their capability. In terms of the opportunity for us, again, this long-term relationship, we are the primary provider over that long term. We are continuing to work with them on other areas across their portfolio, which we do believe will create opportunities. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst OK. And then maybe like switching to guidance a little bit, right? Just trying to understand big picture, right. What's changed here, right? The fuel price assumption increased like $0.09, which based on the framework you gave last quarter should be about $0.27 of EPS, right? But EPS only going up $0.20. It looks like revenue guide is increasing more than just the fuel price tailwinds from that framework. So it looks like you're maybe getting a little bit better revenue than you expected at the start of the year. But costs are may be coming in higher. Is that the right way to think about it? I'm just trying to understand what's changed really if I remove the macro or the fuel impact? Jagtar Narula -- Chief Financial Officer Yes. So what I would say here two items. So if I start with the revenue, two macro items are impacting revenue. One is fuel prices. The other one is interest rates. And our -- as we said in the last call, right, I assumed originally five rate reductions this year. Now we're assuming less than that. So that has a revenue impact because of merchant contracts and HSA assets. So the fuel-related changes you see flow through to earnings, the interest rate-related changes you see in the revenue line. But as we've talked about before, we manage our business to be interest rate neutral at the EPS level. So you don't see those flow through to changes because they're basically counteracted by interest cost increase we expect in the corporate debt. So largely the fuels flowing through, we had in the first-quarter market movement that impacted our first-quarter number. That was about $2 million. And so that's largely the delta that you see between the $0.27 you'd expect and what you're seeing in the actual EPS increase. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Got it. Thank you. Operator That concludes our Q&A session. I will now turn the conference back over to Steve Elder for the closing remarks. Steve Elder -- Senior Vice President, Global Investor Relations Thank you, operator, and thank you, everyone, for joining us today. We'll look forward to sharing our progress in the second quarter, coming up soon. Thank you. Answer:

the WEX Q1 2024 earnings conference call

Operator Thank you for standing by. My name is Alex, and I will be your conference operator today. At this time, I would like to welcome everyone to the WEX Q1 2024 earnings conference call. [Operator instructions] I would now like to turn the call over to Steve Elder, senior vice president of investor relations. Please go ahead. Steve Elder -- Senior Vice President, Global Investor Relations Thank you, operator, and good morning, everyone. With me today is Melissa Smith, our chair and CEO; and Jagtar Narula, our CFO. The press release we issued earlier this morning and a slide deck to walk through our prepared remarks have been posted to the Investor Relations section of our website at wexinc.com. A copy of the release has also been included in an 8-K we filed with the SEC earlier this morning. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income, which we refer to as ANI, adjusted operating income, and related margin as well as adjusted free cash flow during our call. Please see Exhibit 1 of the press release for an explanation and reconciliation of these non-GAAP measures. The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis due to the uncertainty and the indeterminate amount of certain elements that are included in reported GAAP earnings. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our annual report on Form 10-K for the year ended December 31st, 2023, filed with the SEC on February 23rd, 2024, and subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I'll turn the call over to Melissa. Melissa Smith -- Chief Executive Officer Thank you, Steve, and good morning, everyone. We appreciate you joining us today. The first quarter marked a strong start to 2024 for WEX. We delivered another quarter of impressive financial results including record high revenue for the first quarter, which is a testament to the resilience of our diversified business model in any economic environment. Earlier this month, we hosted our Annual Spark Conference where we brought together industry leaders to demonstrate how our cutting-edge solutions can help simplify the business of running a business. At the event, we showcased how our customers and partners can unlock the full potential of WEX's solutions, highlighting the power of our innovative technology across employee benefits, fleet management, and corporate payments. We had record attendance at Spark, which underscores the invaluable role our services played for our customers. Now let's discuss our first-quarter results. During the quarter, we achieved revenue of $653 million, an increase of 7% year over year. Excluding the impact of fluctuations in fuel prices and foreign exchange rates, Q1 revenue grew 10% year over year. Total volume processed across the organization in the first quarter grew 9% year over year to $57 billion, driven by strong performance in corporate payments. Adjusted net income per diluted share in Q1 was $3.46, an increase of 5% compared to the same quarter last year, as a result of strong quarterly revenue and share repurchases. Excluding the impact of fluctuations in fuel prices and foreign exchange rates, adjusted EPS grew 14% year over year. As a reminder, earnings growth was impacted by exiting our interest rate swaps in December, which Jagtar will discuss later on the call. Each of our business segments demonstrated robust performance during the quarter. Our Corporate Payments segment remains very healthy and continues to grow at a strong pace as purchase volumes increased 29% year over year. The travel business continues to grow at a faster pace than the overall market. We have solidified our virtual card offering as a best-in-class solution and build strong long-term relationships with our clients. This approach has positioned us as preferred payment solutions provider to our partners, driving sustained growth and customer loyalty. To that end, we recently signed a new long-term agreement with Booking.com, and this agreement distinguishes WEX as Booking's preferred partner. Booking.com first became a WEX customer in 2013, and we now process payments for Booking.com in more than 20 currencies. We've also renewed our agreement with HBX Group, one of the largest B2B TravelTech ecosystems in the world. HBX Group and it's a combination division known as Hotelbeds, has been a WEX customer for many years. Going forward, we expect to serve a larger share of their total volume as they consolidate relationships. The continuation of these long-standing partnerships demonstrates the strength and reliability of WEX's enterprise-grade technology platform, our broad currency offerings, and our deep payments expertise when delivering world-class travel payment solutions globally. Among our more than 800,000 active customer relationships worldwide, we are proud to work with eight of the top 10 online travel agencies globally. In the Benefits segment, overall SaaS account growth was lower than normal this quarter, primarily due to the previously mentioned loss of a Medicare Advantage customer. Still the core business continues to perform well and we grew accounts excluding the declines in Medicare Advantage account, 8% compared to last year. We are now serving 8 million HSA accounts. According to the 2023 year-end report by Devenir, the overall number of HSA accounts grew 5% last year to 37 million. So we continue to perform well compared to the market growth. Based on the overall number of HSA accounts at year-end, this also means that approximately 20% of all HSAs in the U.S. run on the WEX platform as of the end of Q1. We also continue to integrate the Ascensus Health and Benefits line of business that we acquired last September. This acquisition positions us for accelerated growth and innovation in the rapidly evolving benefits landscape. Finally, in our Mobility segment, we continue to be a market leader in this space across all of our core markets, and are focused on maximizing the value that we provide to our clients. In addition to the many small businesses that signed up with the WEX in the quarter, we also renewed our agreement with Shell to manage its portfolio of commercial fleet cars across North America. This represents a continuation of agreements first established in 2018. In our over-the-road truck business, the market continues to be challenged. But over the Red payment processing gallon volumes increased by 1% in Q1 for the first year-over-year increase in the past five quarters. Our go-to-market engine continues to add vehicles to the platform with an increase of 4% versus Q1 last year. Jagtar will provide you with the details, but we are pleased to see sequential increase in the revenue growth this quarter. Now I'd like to highlight the progress we've made executing against our strategic initiatives, further solidifying our position as market leader. We continue to be focused on supporting our mobility customers as they transition to EV and hybrid solutions and manage their vehicles in a mix fleet world. We have more than 600,000 mobility customers globally. Our expansive reach, coupled with our expertise and our innovative offerings, positions us as a trusted partner for our customers as they evolve their fleet. While we've all read about the slowdown in consumer EV shipments, we continue to invest in this area and roll out our integrated mix fleet solutions because customer interest remains steady. In Q1, we launched the general availability of our at-home reimbursement feature set to complement our public charging access, where we have brought acceptance. We believe that fleet made up of traditional ICE vehicles, hybrids, and EVs will be present for years to come. Our solutions are designed to support these mixed fleets with integrated reporting and data. At our Spark Conference, we pulled together our most innovative customers with our product development teams in more than a dozen early stage energy innovation start-ups. I was left with great confidence that we're helping the industry think critically about how to help customers unlock significant value by integrating EVs properly and how to operate a mixed fleet with WEX as their trusted partner. In Q1, we launched the pilot for an enhanced acceptance offering for our North American Mobility customers that combines the best of WEX's fleet solution with a broad acceptance of the Mastercard network. With this offering, customers can manage all of their vehicle-related purchases, including fuel, parts and services, car washes, parking tools, and roadside assistance, all with the same data, controls, and integrated experience that helps simplify the business of running their business. This helps the small business owner better understand the expenses related to each vehicle, while at the same time, having the controls of a closed loop card to closely manage what is able to be purchased. While it's early days, we have hundreds of customers enrolled in the pilot, and are actively gathering insights to inform future product features as we continue to expand the program and increased mobility spend beyond fuel. Furthermore, we completed our strategic acquisition of Payzer, a leading cloud-native field service management software in November. As we continue to integrate Payzer into the WEX ecosystem, we remain confident that the platform complements and significantly enhances our existing mobility offerings, supporting our efforts to expand our total addressable market and deliver high value to our customers. During the first quarter, we launched our first marketing efforts with Payzer targeted at current WEX customers, and we're testing different sales techniques to drive the best results. We're focused on both targeting Payzer's customer base and marketing the WEX field service management customers. We continue to be very excited about the long-term prospects and are tracking well with our integration efforts. Last quarter, we announced that we achieved $75 million of cost savings on a run-rate basis through the end of 2023. As we start 2024, we remain very confident in our ability to achieve the full $100 million of our run rate cost savings goals this year. As a reminder, roughly half of these savings will be reinvested and have been front-loaded in our year to drive long-term growth in the business in key areas such as digital products, technology, and risk management capabilities and tools, generating sustained cash flows to power our strategic growth investments and maintain our solid balance sheet with low leverage remains a top priority for WEX. We continue to do share repurchases as an important and attractive element of our capital allocation strategy, underscoring our commitment to drive shareholder value. Consequently, during Q1, our board expanded our share repurchase program by authorizing an additional $400 million in repurchases, reflecting our unwavering commitment to delivering long-term value for our shareholders. Advancing technology innovation through the business remains a priority. As our ongoing efforts in this area continue to drive cost savings in our margins, while demonstrating our commitment to drive long-term sustainable profitability. From an AI perspective, our initial use cases that I updated you on last quarter have yielded positive results, and we're taking steps to accelerate our AI capabilities and support additional use cases in the business. A main area of focus is our customer service operations where we're experimenting with new technologies and driving efficiencies for better customer service. We're currently working on reimagining our IVR systems and flows to enable customers to fulfill payments faster and with more accuracy. The advancements we have made with voice-to-text and text-to-speech technology in this area will enable us to apply our learnings and many other areas going forward, particularly as we work to reinvent our call center experience. One area we're particularly excited about is the application of AI in our Benefit business. We've been able to leverage AI to deliver personalized targeted messaging to the HSA account holders. And by using predictive analytics, we've helped our customers optimize their HSAs, enhancing their ability to pay and save for healthcare. In closing, I want to reiterate that WEX is well-positioned to continue driving solid financial performance in any macroeconomic environment as we have proven over the last several quarters. We expect to deliver strong revenue and adjusted earnings growth this year. We remain focused on delivering accretive EPS, driven by high marginal contribution of incremental revenue to our business. Our reengineering efforts that are delivering efficiencies across the enterprise and pricing optimization initiatives that yield strong drop through to our bottom line. Finally, we're in a privileged position to make strategic growth investments in our business, while also buying back shares to deliver the most value to our shareholders. This is supported by a solid balance sheet with low leverage. As we look ahead to the rest of 2024, I remain confident in WEX's ability to drive growth across the business in the near and long term, backed by our strong position in the market and strategic initiatives in place. With that, I'll turn it over to Jagtar to walk you through this quarter's financial performance in more detail. Jagtar? Jagtar Narula -- Chief Financial Officer Thanks, Melissa, and good morning, everyone. We reported a strong first quarter with record-high Q1 revenue. Our adjusted EPS results show continued execution against our strategic initiatives even against a year-over-year decline in fuel prices. Now let's start with the quarter results. For the first quarter, total revenue was $652.7 million, a 7% increase over Q1 2023, with more than 80% of revenue for the quarter recurring in nature. We had strong contributions from both Corporate Payments and Benefits, while lower fuel prices impacted reported growth in the Mobility segment. As a reminder, we define recurring revenue as payment processing and account servicing revenue, revenue from our factoring business, income from custodial HSA cash assets, transaction processing fees, and other smaller items. In total, adjusted operating income margin for the company was 38.5%, which is up from 37.6% last year, driven by margin increases in both Corporate Payments and Benefits segments. From an earnings perspective, on a GAAP basis we had net income of $65.8 million in Q1 or $1.55 per share. Non-GAAP adjusted net income was $146.7 million or $3.46 per diluted share, which is an increase of 5% over last year. Our first-quarter results were solid and set us up well for the remainder of the year, as we continue to navigate a year-over-year decline in fuel prices as well as a significant increase in debt costs due primarily to higher interest rates. Like we have discussed in previous quarters, our HSA custodial cash balances allow us to mitigate the impact of higher rates. As a reminder, we also exited our interest rate hedge positions in December, leading to an increase in interest cost this quarter. Exiting our interest rate swaps in December resulted in an $11 million cash impact to interest expense and a 7% drag on earnings per share. In addition, the foreign exchange rates and lower fuel prices resulted in a negative $20 million impact to revenue this quarter versus last year, or an approximate 9.5% drag to earnings per share. Our ability to continue to grow earnings per share despite the drag from exiting the swaps and lower fuel prices is a testament to our diverse vertical focused businesses, strong recurring revenue, and balanced interest rate exposure, allowing us to sustain durable through the cycle revenue and earnings growth. Now let's move to segment results, starting with Mobility. Mobility revenue for the quarter was $339 million, a 1% decrease from the prior year. Fuel prices are strong, but have retreated compared to last year, with the domestic average fuel price in Q1 of $3.56 versus $3.86 in 2023. The Q1 fuel price was slightly higher than our guidance, but the benefit we received in the U.S. was almost entirely offset by $2 million of negative spreads in Europe versus our expectation. While Mobility revenue declined approximately $3 million year over year, fuel prices had a large impact. The year-over-year 8% fuel price decline and reduced spreads in Europe decreased segment revenue by an estimated $21 million or 6%, while the underlying business continued to perform well. As we expected, excluding the change in fuel prices, revenue growth accelerated from Q4. Similar to last quarter, payment processing transactions remained roughly flat year over year, which was in line with our expectations. Local customers in the U.S. were approximately flat compared to last year, and over the road payment processing transactions were slightly above year-ago levels. As Melissa noted, this is the first quarter in some time that OTR transactions have increased, reflecting stabilization in that business. Note that despite the fact that this was a leap year, we actually had one less business day in Q1 than last year. Overall, we were pleased that both payment processing transactions and total transaction growth rates improved from Q4 2023. Next, let's turn to late fees. The net late fee rate decreased 4 basis points versus the prior year. Finance fee revenue decreased $10 million or 13%, which reduced segment revenue in total by 3%. The previously mentioned decline in fuel prices, a 20% decline in the number of late fee instances, and a 7% slowdown in our factoring revenue caused the decline in finance fee revenue. We believe the decline in late fee instances reflects the tighter credit policies that we have put in place. While these tighter policies reduce our late fee revenue, they have also resulted in significantly lower credit losses and taken holistically our positive earnings impact to the company. I will touch further on credit losses in a moment. The net interchange rate in the Mobility segment was 1.31%, which is up 8 basis points over our 2023 net interchange rate. The increase reflects continued benefits from the interest rate escalated causes contained in various merchant contracts, the rate benefit from lower domestic fuel prices, and higher rates earned from merchant contract renewals at favorable terms. The Mobility segment adjusted operating income margin for the quarter was 38.6%, down from 40.5% in Q1 2023. The decline in fuel price this year is the primary reason for the lower margins. Moving on. Credit losses decreased $24 million in the Mobility segment versus last year, and were in line with our guidance range at 15 basis points of spend volume, which compares to 32 basis points last year. Loss improved significantly compared to last year as expected. The changes that we made to our credit policies a year ago have had the intended impact in terms of reducing losses, especially with over-the-road trucking customers. The year-over-year decline of 17 basis points in credit loss rates more than makes up for the 4 basis point decline in our net late fee rate, and underscores the positive overall impact from the credit changes we made a year ago. Turning now to Corporate Payments. Total segment revenue for the quarter increased 17% to $122.5 million. Purchase volume issued by WEX was $23.9 billion, which is an increase of 29% versus last year. The net interchange rate in the segment was down 9 basis points sequentially, related to the timing of revenue recognition for network incentives earned in Q4 of last year. We continue to see strength in consumer travel demand that drove strong results in Corporate Payments. Travel-related customer revenue grew 30% compared to last year. The interchange rate for travel-related customers is down from Q4 due to the timing of incentive recognition. Outside of travel, our non-travel customer revenue was up 7%, driven by a 26% increase in purchase volume, showing some reacceleration in our partner channel and continued positive growth in our direct channel revenue. Similar to last quarter, over half our non-travel corporate payment revenue growth came from our direct channel. The Corporate Payments segment delivered an adjusted operating income margin of 52.7%, up from 46.9% in Q1 last year, driven by continued acceleration in volume. Finally, let's look at the Benefits segment. We again achieved strong results in this segment with Q1 revenue of $191.2 million, which is an increase of $26.3 million or 16% over the prior year. As we expected, SaaS accounts were flat in Q1 versus the prior year, with the loss of the Medicare Advantage customer that we mentioned last quarter. Core market dynamics of this business continue to be strong as exemplified by the underlying SaaS account growth, excluding the declines in Medicare Advantage accounts, which was 8% year over year. The Benefits segment purchase volume increased 10%, leading to a 6% increase in payment processing revenue. We also realized approximately $51 million in revenue from the custodial HSA cash deposits that were invested by WEX Bank and from funds held at third-party banks compared to $37 million last year. Approximately $8 million of the revenue increase in the Benefits segment is due to the average interest rate earned on these balances, increasing from 4% last year to 4.8% this year. The Benefits segment adjusted operating income margin was 41.5% compared to 39.1% in 2023. The custodial revenue from the invested HSA cash deposits has very high incremental margins. It is the primary driver of this increase. Now I will provide an update on the balance sheet and our liquidity position. We remain in a healthy financial position and ended the quarter with $780 million in cash. We have $463 million of available borrowing capacity and corporate cash of $176 million as defined under the company's credit agreement at quarter end. The total outstanding balance on our revolving line of credit and term loans was $3.2 billion. The leverage ratio, as defined in the credit agreement, stands at 2.6 times, which is near the low end of our long-term target of 2.5 to 3.5 times. Leverage generally increases slightly in the first quarter of each year. Our ability to invest in the business and return capital to shareholders while also maintaining conservative debt levels puts us in an enviable position. Next, I would like to turn to cash flow. WEX generates a significant amount of cash each year. Using our definition, adjusted free cash flow was negative $205 million in Q1. The first quarter of each year is seasonally low for us, and the timing of the end of the quarter falling on a weekend resulted in an estimated $190 million cash flow impact and caused an even larger negative number than normal for the quarter. We expect this will reverse in Q2. Our primary discretionary use of cash so far this year has been to repurchase shares. We repurchased 353,000 shares at a total cost of $74 million during Q1. Since restarting our share repurchase program in 2022, we have repurchased approximately 3.9 million shares at a cost of $662 million, which equates to an average cost of $169 per share. Looking forward, we will continue to manage capital allocation between organic investment, M&A, and returning capital to shareholders. Finally, let's move to revenue and earnings guidance for the second quarter and full year. The first quarter was another good quarter for us and as a result of improvement in some macro factors, I'm pleased to share that we are raising our guidance for 2024 to reflect those factors and trends. Starting with the second quarter, we expect to report revenue in the range of $675 million to $685 million. We expect ANI EPS to be between $3.75 and $3.85 per diluted share. For the full year, we expect to report revenue in the range of $2.73 billion to $2.77 billion. We expect ANI EPS to be between $16.10 and $16.60 per diluted share. For the full year, these updated ranges represent an increase of $30 million in revenue and $0.20 of EPS compared to the midpoint of our previous guidance. The major moving pieces compared to our prior guidance are updated fuel price and interest rate assumptions and the impact of share repurchases completed. Consistent with our prior guidance, we expect Mobility revenue growth to accelerate through the year, as we lap credit changes that caused higher attrition and lower finance fee revenue. As we noted last quarter, we are also implementing a number of pricing changes that will help the second half of the year. We also expect corporate payments revenue growth to slow as we progress through the year. In addition, we expect a greater proportion of our cost savings program to flow through to net income as we have front-loaded the reinvestment we intended to make. In conclusion, we delivered another quarter of growth in our financial results, and I'm especially proud that we were able to do this in the uncertain economic environment that we are operating in. With that, operator, please open the line for questions. Questions & Answers: Operator Thank you. [Operator instructions] And your first question comes from the line of Ramsey El-Assal with Barclays. Please go ahead. Ramsey? All right. Your next question comes from the line of Sheriq Sumar. Please go ahead. Sheriq Sumar -- Evercore ISI -- Analyst Yeah. Hi. This is Sheriq. Thanks for taking my question. So on the benefits side; I believe your guidance still remains around 10% to 15% for 2024. I mean given the potential pipeline of HSAs and even the interest rate dynamics and potential pricing impact, I mean, can you help us understand the evidence for the full year? And how should we think about the drivers for growth in 2025? I mean, do you think that we could be able to maintain these levels? Or would there be some tougher comps in 2025? Thank you. Melissa Smith -- Chief Executive Officer Let me start and give a little bit of context here. This year, one of the things that we've talked about that's going to impact the year is the loss of the Medicare Advantage account. When you exclude the Medicare Advantage accounts loss, we grew our total accounts 8%, so we think that will run through the course of this year and will affect the growth rate for this year. That being said, we feel good about how we're growing accounts, excluding that compared to what's happening overall in the marketplace. So as we transition into next year, we expect to continue to see strong account growth and then have that be compounded by additional custodian revenue as well as some of the other ancillary fees that we are continuing to earn across the portfolio. So we do think -- we've talked about our long-term guidance range of 15% to 20% in that segment and we think this year we're going to have some anomalies that are going to affect that. Jagtar Narula -- Chief Financial Officer Sheriq, I'll just add with regard to your question about 2024. So we came roughly a little ahead of our guidance range for the year. So we just expect Benefits growth to be sort of balanced over the course of the year for precisely the reasons that Melissa said. We saw good benefit from census and HSA accounts in the first quarter going through the rest of the year, we should see an uplift from the normal midyear on-boarding that we see HSA accounts and continued good performance of the HSA assets. Sheriq Sumar -- Evercore ISI -- Analyst Thank you so much. Yes, one follow-up on the EV side. Is there any color that you could provide on the economics or any potential dilution that we could expect or if you see that? And secondly, on the competitive dynamics, I mean, where do you see it from your seat? Where do you see WEX stand at this point of time? Like are you thinking that are you ahead of the curve in terms of investments? Or do you see that there is still some catch-up that you need to do versus other peers out in the market? Melissa Smith -- Chief Executive Officer We continue to be very bullish about the impact of EP disease in our portfolio for a couple of reasons. First of all, we see this as a new revenue opportunity. And so far, that has proved out to be true. So we're earning subscription fees for access to the networks that we've created, both in the United States and Europe. You've talked about the fact that we've rolled out at home reimbursement capability, which we think is market leading, and earnings subscription fees associated with that. And then as we continue to build additional functionality, which we have in our product road map, we think that gives us the ability to continue to add in future subscription fees. So OK, the net of that, we talked about this between $1.5 billion and $2 billion additional TAM. And I'd say from what we've seen so far, we do believe that this is going to be additive. And it's a great way to transition the portfolio into a different source of revenue over time. From a competitive perspective, we feel really good about where we sit competitively, in part because what we're hearing from our customers is they're going through this migration; you've got government fleets that are going through the migration, some of the largest fleets that have sustainability requirements. And then a bunch of other people that are testing in this marketplace and what we know from talking to our customers is that when they are having these mandates, they're not really sure what to do next. And so we're working in much more of a consultative fashion than probably what we had anticipated. And I think that's just indicative of the fact that they're on the commercial side, people are looking for options, and we feel really good about the capability that we've built. Sheriq Sumar -- Evercore ISI -- Analyst Thank you so much. That's helpful. Operator Your next question comes from the line of Ramsey El-Assal. Please go ahead. Ramsey El-Assal -- Barclays -- Analyst Hi. Can you guys hear me now? Hello. Melissa Smith -- Chief Executive Officer We can. Hello. Ramsey El-Assal -- Barclays -- Analyst Yes, you can. Sorry about that. Hi, if you can hear me, I think you can. You mentioned that the net interchange rate in the Corporate segment, I think, fell due to timing of revenue recognition from network incentives from last year. Can you elaborate that on that a little bit? And also just help us think through how interchange rates should trend for the next couple of quarters. Jagtar Narula -- Chief Financial Officer Yes, sure. So Ramsey, what I was referring to was the decrease we saw from Q4 of 2023 to Q1 of 2024. You'll recall from the last earnings call, in Q4 we have revenue recognition related to the volume incentives that we have with the associations, and that caused the interchange rate to increase in Q4 and then back coming down to Q1, it normalized. Going through the balance of the year we expect interchange rates to be flat to slightly tick up from the first quarter. There'll be some dynamics with the booking contract, but we expect flat to slightly tick up as we go through the year. Ramsey El-Assal -- Barclays -- Analyst OK. And then a quick follow-up. It looks like in the Q2 guidance you're expecting credit loss to be a bit higher than it was in Q1 and also for the full year. I'm just curious what the dynamics there are in terms of maybe a bit of an uptick in credit losses in Q2? Jagtar Narula -- Chief Financial Officer Yes. We've built some pretty sophisticated models that help us forecast where we think credit losses are going. And we're just looking at slightly higher charge-offs in the second quarter. Based upon recent trends, nothing too alarming, but we expect as a result of those charge-offs that we'll be raising reserves in the quarter. And then as you can see from the forecast of the guide, we expect that to trend down over the course of the year. We've put into place some new functionality; in Q1 we had a new credit adjudication model. In Q2 we've got a new automated credit line monitoring system that's going into place. So we expect credit losses to be relatively contained as we go through the year, but we do expect an uptick in Q2. Ramsey El-Assal -- Barclays -- Analyst Got it. Thank you so much. Operator Question comes from the line of Sanjay Sakhrani. Please go ahead. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thank you. Good morning. So yes, congratulations on the renewals with Booking and HBX; I guess as we think about, and I think Jagtar, you mentioned it a little bit there's probably going to be some impact as we look at the yields and anything else. Maybe you can just help us think about the P&L impacts in terms of volumes and the take rates and such as we look out this year into next. Melissa Smith -- Chief Executive Officer Yes. Let me start just a little bit around the -- specifically the contracted booking. We're -- there are going to be some short-term headwinds, but also long-term opportunity associated with the new contract. And we couldn't be more pleased to sign this contract, Booking.com and it's the largest online travel agency in the world that's a uniquely sophisticated partner if we're going to continue to be their primary virtual card partner. But going forward, they're going to continue to rely upon WEX's best-in-class payments technology platform, and they're going to be transitioning and performing certain activities in-house related to a portion of the virtual card program. And contemplated this obviously in our guidance and Jagtar will talk more about that in a minute. But I just want to reiterate, it's a great outcome for both companies. The partnership has allowed us to scale together and we're really excited about the opportunities that we have long-term. Jagtar Narula -- Chief Financial Officer Sanjay, I'll talk a little bit about what this means for interchange rate in the Corporate Payments business. So just a reminder, right, we've -- I've said that we've included this in our guide for the year. And I think I previously said in the last earnings call that we expect our Corporate Payments revenue to grow in the high single digits this year, and this new contract has not changed our expectations. So if you look at what we did in the first quarter, we grew 16% year over year in Corporate Payments. And so that -- as I said in my prepared remarks, implies that we expect to trend down over the course of the year. This Booking contract doesn't change that expectation that's embedded in that outlook. So let me start with the accounting impacts to this. So today, Booking volume is recorded as payment processing revenue, and it will continue to be under the existing contract. But as it transitions to the new program, we expect a portion of that volume to transition to this new program. In this new program, it will no longer be recorded as payment processing revenue. And instead it will be recorded as account servicing revenue. So the result of that will be that volume that transitions to the new program will not be included in our purchase volume metric that we report or net interchange rate, although you will still see it included in our total volume metric that we published. So we're obviously in early days of this transition and much remains to be seen on how it flows through in the timing factors. But our current expectation, as I said, earlier to Ramsey is that our total interchange rate for Corporate Payments for the full year will be stable to slightly up from the rates that we saw in the first quarter. And while the timing could still shift, what we're currently expecting is that Corporate Payments purchase volume will grow in the high single digits for the year, inclusive of that reduction in reported volumes related to the Booking transition. So with that rate and volume, that gives you our expectations for Corporate Payments purchase revenue and then the remaining bridge to our full-year guide is really the expected corresponding increase that we expect in the account servicing revenue related to Booking. So just to reiterate what Melissa said, we're really excited about this contract. We've got a great customer, a long-term relationship. This continues that long-term relationship and we see additional revenue opportunities working with them. So we're really excited about this. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst OK. And just to clarify, you guys see this as net accretive to the growth rate on a go for -- I know there's transitory stuff this year. But as we look out 2025 onwards, is this renewal net accretive, stable or dilutive to sort of revenue growth in that segment? And then I have one quick follow-up on just something you said, Jagtar. Melissa Smith -- Chief Executive Officer It's a headwind in the short term. We think it's a benefit over the long term. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst And when you say short-term, you're talking about even into next year or just mainly this year? Melissa Smith -- Chief Executive Officer Well, as they go through the migration, so there's going to be a period of time. And again, this is a piece of the portfolio that they're going to bring in-house. And the timing of that is uncertain. So we're giving you our current expectation. So it's really going to depend on how much transitions when it transitions and so again we're giving you our current thoughts right now. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Got it. Got it. And then just one of the questions I've gotten is just that back-end EPS guide. It seems like the revenues and EPS sort of delinking a little bit. Jagtar, you mentioned you sort of front ended the investment and front-loaded the investments, but the back end you get the cost saves. So that's more you have a decent amount of visibility into that EPS trajectory in the back end, assuming the revenues are correct. Is that right? Jagtar Narula -- Chief Financial Officer That's right, Sanjay. So we've got -- if you look at the back end, it's roughly based upon what we guided in Q2 in the full year, you talked about $75 million increase in revenue in the second half, and that's related to the things we've talked about, pricing, volume, etc. And then you've got the cost reductions that we have talked about repeatedly that we expect to start flowing through in the second half, whereas we front-loaded the cost reductions we've seen with some of the investments that we've talked about before. Melissa Smith -- Chief Executive Officer We also had the step-up in credit loss we were anticipating in the second quarter. Jagtar Narula -- Chief Financial Officer Yes. Correct. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst All right. Great. Thank you, guys. Appreciate it. Operator Your next question comes from the line of James Faucette with Morgan Stanley. Please go ahead. James Faucette -- Morgan Stanley -- Analyst Great. Thank you very much. I wanted to ask, just how we should be thinking about the mix between travel and non-travel revenue and Corporate Payments over near to medium-term, especially with some of these model transitions, etc.? Melissa Smith -- Chief Executive Officer So right now about 55%, 60% of revenue is travel and about 70% of the spend volume, relates to travel, the rest obviously is non-travel. Over time, we are expecting from a spend perspective. And again, in this case, I will talk about total spend just to make it cleaner that you wouldn't see a big deviation. We've seen, obviously, like a big uptick over the last couple of years in travel spend with a rebound from the pandemic. We do think that, that will continue to normalize as you progress through the course of the year. And I think Jagtar talked about the moving parts of how the pieces are going to move through our P&L in a way that you can actually go through the math to give you the current expectation. Jagtar Narula -- Chief Financial Officer Yes. I'd just add. So I gave sort of what we expect for total volume -- purchase volume through the year. I would say that we expect the rates of nontravel purchase volume to be fairly stable over the course of the year. So the real net to that and the total volume number I gave is really the booking transition. James Faucette -- Morgan Stanley -- Analyst Got it. Got it. Got it. And then I just wanted to touch quickly on in the Benefit side and the HSA, just so I can better understand what's happening there. You've seen growth there in cash assets, but that seems to be beginning to normalize. And the growth has still been quite strong, though it came in at 14%, I think, in the quarter. Melissa, you've spoken to Devenir's HSA estimates in the past. But curious how you're thinking about the level of HSA growth we should be expecting for the rest of 2024 and the 2025? And as part of that, I guess, tied into that, what kind of assumptions are you making about rate cuts and impact on yields on those balances for the rest of this year? Melissa Smith -- Chief Executive Officer Why don't I start, and Jagtar hit the rates at the end of the year. Yes. So as we go through the course of this year, we anticipate to continue to outgrow the marketplace in terms of our account growth. So it really focused around continuing to move our sales through our pipeline and making sure that we are delivering that through the course of this year. So our objective is to outgrow what happens from a market perspective. And then as we have added in the custodial rights capability to be able to make sure that we're earning accretive revenue associated with that, as well as added through the Ascensus acquisition, the ability to add in additional products like compliance products, we have our benefit administration products. And so continuing to cross-sell those across the portfolio, including our core growth capability, which has been a really strong cross-sell that we've had since we added that capability. And from a rate perspective, do you want to talk about that? Jagtar Narula -- Chief Financial Officer Yes. So what we've included in our guidance, and I think in our earnings presentation is that we are basically forecasting in line with the market expectations. So at the beginning of the year, we had said five rate cuts is what we expected. We've changed that as, I think market expectations are now down to about two rate cuts this year. So that's what's included in our guide. I would say, with regard to the HSA balances, the majority of our balances are in fixed-rate instruments. So we don't expect any rate cuts to impact those. The part of our portfolio that's in floating. Obviously, that's part of our revenue guide increase for the balance of the year since we're expecting less rate cuts as we go through the year. But as I've talked about in previous calls, we tend to manage the fixed versus floating rate exposure, so that it's effectively P&L neutral once you take it all the way through the P&L and look at corporate debt. So we'll have some revenue impact, it doesn't have a bottom-line EPS impact. James Faucette -- Morgan Stanley -- Analyst Great. Hey, I appreciate all the colors, you guys. Operator Your next question comes from the line of John Davis with Raymond James. Please go ahead. John Davis -- Raymond James -- Analyst Hey, good morning, guys. Melissa, obviously, you called out the x, the account growth and benefits ex the loss of the Medicare Advantage customer being about, let's call it, 1.5 million accounts or so. How should we think about the revenue impact within benefits this year of that customer loss? Melissa Smith -- Chief Executive Officer It's still a couple of percent in the course of the year for the full year. John Davis -- Raymond James -- Analyst OK. So a couple of points to benefits growth, just to be clear. Melissa Smith -- Chief Executive Officer Yes. John Davis -- Raymond James -- Analyst OK. And then just Jagtar on Mobility margins. First time, I think margins have dipped below 40% in a while, and I know you called out lower fuel prices. But maybe just help us think about what the trajectory of margins from here in Mobility and how we should think about the full year? Any color there would be helpful. Jagtar Narula -- Chief Financial Officer Yes, sure. So we should expect margins to improve overall as we go through the year. I think, right, we've got higher fuel prices that we're forecasting over the balance of the year. We're expecting improvements in late fees as we go through the year, some of the drag that we've seen will become less of a drag. And then we're expecting a better interest rate environment as we go through the balance of the year. So all those things should help margins will have a little bit of an impact in Q2 because we are forecasting those higher credit losses, but that should improve as we get into the second half. John Davis -- Raymond James -- Analyst OK. Thanks guys. Operator Next question comes from the line of Nate Svensson with Deutsche Bank. Please go ahead. Nate Svensson -- Deutsche Bank -- Analyst Hey, I just kind of wanted to follow up on that last question there. I was hoping you could remind us some of the underlying assumptions on the revenue growth within Mobility. So I think before you had talked about 8% macro adjusted growth, including about two points or so from Payzer. So I just wanted to make sure that, that was reiterated for this quarter. And then maybe some of the underlying assumptions there. You mentioned late fee increasing that I guess, the headwind getting better in the back half of the year, but maybe some of the other assumptions like gallons of fuel growth, expansion, and payment processing rate. Anyway for -- that'll help us, that would be helpful. Melissa Smith -- Chief Executive Officer Jagtar is going to go into that in detail. But before he starts, one of the things that was really important to us was to see the step up in the first quarter. You talked about the fact that we had an impact of negative spreads in Europe that impacted the quarter, which offset the positivity that we had for steel prices. But in terms of revenue growth, going from our growth in the fourth quarter to the incremental growth that we saw in the first quarter was part of the plan that we had as we were progressing through the course of the year. So we are pleased with the number that we posted this quarter. Jagtar Narula -- Chief Financial Officer Yes. I'll jump in here. And I just want to emphasize what Melissa just said, right? So we've guided to top end of our long-term range, so call it 8% growth. In Mobility, first quarter, we saw 5%, which was a tick up from below 2% that we saw in Q4. So that was -- and sorry, that's ex fuel prices. But that's exactly what we expected to do, and we're quite pleased to see that. So as we think through the rest of the year, high end of our range at 8%, Payzer's expected to contribute to. And the rest of it comes from the things that I talked about in the previous call that we saw come to start to come to fruition in Q1. So part of it is the pricing levers that we've pulled. We saw that coming through in the rate in the first quarter. Part of it is the impact from the credit losses that we saw a couple of years ago and the actions that we took last year, dampened both volume growth because of higher attrition as well as late fees because of improvements in the portfolio. Both those items we expect to lap this year. We didn't quite see it as much as Q1 because it's more of a Q2 and beyond item. So we should start to see that as we go through the year. So those three things that I just mentioned, fuel prices -- sorry, late fees, volume and pricing are all what we're expecting in Q2 through Q4 of the year. Nate Svensson -- Deutsche Bank -- Analyst Super helpful. Appreciate the color. I guess my follow-up, maybe a two-parter on Corporate Payments. I think last quarter, you had talked about a better virtual card attach rate within your travel business. So I guess any update on how that trended this quarter and how you see that going forward? And then I guess the second part, a couple of comments your prepared remarks on this, but more color on your direct sales efforts in Corporate Payments. So any additional information on the benefit you're seeing from the direct sales force or selling your AP product in the midsized businesses would be helpful. Thank you. Melissa Smith -- Chief Executive Officer Yes, we'll take them on this one, too. So we don't continue to see the benefit of the migration to the merchant model, which I think is what you're talking about within our European customers. And so that has been a benefit. Although I will say in the quarter, the oversize of the growth came from outside of Europe in this particular quarter. And most of the increase in spend volume was because of transaction growth. The rates seem to have normalized. It was only about a 4% increase in rate year over year. So again, it feels like we're getting back into more of a normalized environment. In terms of sales, half of the growth came from our direct sales outside of travel in our Corporate Payments business. And so we feel good about how we continue to build the pipeline there and continue to execute and deliver, and that we've got a sustained growth engine at this point in time that's continuing to deliver each quarter. And I would say that's true within travel too as well. We continue to build the pipeline we have there, working with our existing customers, look for opportunities. You talked about some of that during the call, but it's an area that we're going to continue to focus on as well. Jagtar Narula -- Chief Financial Officer Yes, I'll just add to that, that -- we're extremely pleased with the growth of that direct business this quarter. This is the second quarter in a row where over half of our nontravel related payment processing revenue came from the direct business. And overall, if I look at our payment processing revenue trends for nontravel, this is the third quarter of trending upwards. So we were quite pleased to see that continuing trend. Nate Svensson -- Deutsche Bank -- Analyst Thank you. Appreciate it. Operator Your next question comes from the line of Mihir Bhatia with Bank of America. Please go ahead. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Good morning and thank you for taking my questions. I actually wanted to start by going back to following up on Sanjay's question. You mentioned some of the short-term headwinds from the Booking renewal. But can you just talk about the longer-term opportunity there? Is there additional volume you'll be getting for them from them longer term? I'm just trying to understand the benefit for WEX from the renewal, beyond obviously locking up such a large customer. But what is the opportunity side of that contract renewal look like? Melissa Smith -- Chief Executive Officer Yes. Let me talk about a couple of things here. First of all, I think it's important to distinguish Booking because it is a highly sophisticated customer. They have a unique capability set in this marketplace. And so what we're doing with them, we feel like it's a great partnership, we're bridging them to their capability. In terms of the opportunity for us, again, this long-term relationship, we are the primary provider over that long term. We are continuing to work with them on other areas across their portfolio, which we do believe will create opportunities. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst OK. And then maybe like switching to guidance a little bit, right? Just trying to understand big picture, right. What's changed here, right? The fuel price assumption increased like $0.09, which based on the framework you gave last quarter should be about $0.27 of EPS, right? But EPS only going up $0.20. It looks like revenue guide is increasing more than just the fuel price tailwinds from that framework. So it looks like you're maybe getting a little bit better revenue than you expected at the start of the year. But costs are may be coming in higher. Is that the right way to think about it? I'm just trying to understand what's changed really if I remove the macro or the fuel impact? Jagtar Narula -- Chief Financial Officer Yes. So what I would say here two items. So if I start with the revenue, two macro items are impacting revenue. One is fuel prices. The other one is interest rates. And our -- as we said in the last call, right, I assumed originally five rate reductions this year. Now we're assuming less than that. So that has a revenue impact because of merchant contracts and HSA assets. So the fuel-related changes you see flow through to earnings, the interest rate-related changes you see in the revenue line. But as we've talked about before, we manage our business to be interest rate neutral at the EPS level. So you don't see those flow through to changes because they're basically counteracted by interest cost increase we expect in the corporate debt. So largely the fuels flowing through, we had in the first-quarter market movement that impacted our first-quarter number. That was about $2 million. And so that's largely the delta that you see between the $0.27 you'd expect and what you're seeing in the actual EPS increase. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Got it. Thank you. Operator That concludes our Q&A session. I will now turn the conference back over to Steve Elder for the closing remarks. Steve Elder -- Senior Vice President, Global Investor Relations Thank you, operator, and thank you, everyone, for joining us today. We'll look forward to sharing our progress in the second quarter, coming up soon. Thank you.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Welcome, and thank you for joining the Wells Fargo first-quarter 2024 earnings conference call. [Operator instructions] Please note that today's call is being recorded. I would now like to turn the call over to John Campbell, director of investor relations. Sir, you may begin the conference. John Campbell -- Director, Investor Relations Good morning. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss first-quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our first-quarter earnings materials, including the release, financial supplement, and presentation deck are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financial reference, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I'll now turn the call over to Charlie. Charlie Scharf -- Chief Executive Officer Thanks, John. I'll make some brief comments about our first quarter results and then update you on our priorities. I'll then turn the call over to Mike to review our results in more detail before we take your questions. Let me start with some first-quarter highlights. Our solid results reflect the progress we're making to improve and diversify our financial performance and the continued strength in the U.S. economy. It's gratifying to see the investments we're making across the franchise contributing to higher revenue versus the fourth quarter, as an increase in noninterest income more than offset an expected decline in net interest income. Noninterest income also benefited from higher equity markets, which benefited our Wealth and Investment Management business. Net charge-offs were higher than a year ago as expected and stable from the fourth quarter. Credit trends remain generally consistent. Consumer delinquencies continue to perform as we've forecasted, and year-over-year growth in consumer spend remains consistent with prior quarters. In our commercial portfolios, the weakness we see continues to be in certain commercial office properties, but our expectations have not significantly changed versus what we anticipated last quarter. Mike will discuss the specific items that drove an increase in expenses from a year ago, but we continued to execute on our efficiency initiatives, including reducing headcount, which has declined every quarter since the third quarter of 2020. Average commercial and consumer loans were both down from the fourth quarter as higher rates are impacting demand and we are continuing to reduce our exposure in certain portfolios. Average deposits were relatively stable from the fourth quarter as growth in interest-bearing deposits offset lower noninterest-bearing deposits. Our capital position remains strong and returning excess capital to shareholders remains a priority. As we stated on our last earnings call, we expect to repurchase more common stock this year than we did in 2023. In the first quarter, we repurchased a total of $6.1 billion in common stock, and our average common shares outstanding declined 6% from a year ago. Now let me update you on the progress we're making on our strategic priorities, starting with our risk and control work. Earlier this year, the OCC terminated a consent order issued in 2016 regarding sales practices misconduct. The closure of this order was an important milestone as it is confirmation that we operate much differently today around sales practices. As I repeatedly said, our risk and control work remains our top priority, and closing consent orders is an important sign of progress. This is the sixth consent order that our regulators have terminated since I joined Wells Fargo in 2019. Building our risk and control framework is a continuous ongoing effort, and as we implement changes, we track effectiveness along the way. The numerous internal metrics we track show that the work is clearly improving our control environment, and we see that we are completing interim deliverables, but we will not be satisfied until all of our work is complete. So it will remain our top priority and our approach will not change. As I highlighted in my recent annual letter, we have added approximately 10,000 people across numerous risk and control-related groups, and we're spending over $2.5 billion more per year than in 2018 in these areas, and we are a stronger, better company for our customers, communities, and employees. While we're moving forward with confidence, I will repeat what I've said in the past. Regulatory pressures on banks' long-standing issues such as ours is high. And until we complete our work and until it is validated by our regulators, we remain at risk of further regulatory actions. Additionally, as we implement heightened controls and oversight, new issues could be found and these may result in regulatory actions. At the same time, we're making progress on our risk and control work, we're executing on our strategic priorities to better serve our customers and help drive higher returns over time. We continue to introduce attractive new products as we build our credit card business. Last month, we launched Autograph Journey, designed for frequent travelers who could earn points wherever they book travel. Our new product offerings continue to drive strong credit card spend, up approximately $5 billion or 14% from a year ago. We continue to make investments in talent and technology to strengthen Corporate and Investment Banking. More than 50 new senior hires have joined our CIB since 2019, with many of these in key coverage and product groups within banking. In February, Doug Braunstein, who has more than 35 years of industry experience, joined Wells Fargo as a vice chairman. Doug is a world-class banker, and he's working alongside the great team he's assembled to continue to grow the franchise. In addition, given the breadth of Doug's experience, he's also providing counsel on broader business issues beyond client development. As we look forward, it's always helpful to be grounded in the facts. We continue to see strength in the U.S. economy. Spending patterns of consumers using our debit and credit cards remain generally consistent and continue to grow year over year. Consumer credit is performing as we expect, wholesale credit continues to perform well, and our views around commercial real estate have not significantly changed since last quarter. These are all positives. In addition, we remain committed and confident in our ability to increase efficiencies across the enterprise. And areas we have targeted for investment such as credit card, investment banking, and trading are performing well. We are beginning to see early signs of share and fee growth, which will be important as we diversify our revenues and reduce net interest income as a percentage of revenue. And we remain bullish on opportunities across our other businesses, again, more positives. Having said that, markets and rates will likely remain volatile. And as risk managers, we are prepared if trends were to change. We've historically managed credit through multiple cycles and believe that the actions we've taken over the last several years position us well. We have strong capital and liquidity positions. As we're building many of our businesses, we have done so within a consistent level of risk appetite. And our business model and franchise value differentiates us from most of who we compete with, regardless of the environment. So what does all of this mean for our outlook? Simply said, our views haven't changed from last quarter. While we could look at specific data points on a specific date and alter our guidance, there is not enough of a consistent pattern to change our views, but what we see is helpful. Our focus remains the same. We are transforming Wells Fargo and are investing to build a well-controlled, best-growing and higher-returning company while we work to become more efficient. I'm pleased with the progress we've made, and I'm optimistic about the future opportunities ahead. I will now turn the call over to Mike. Mike Santomassimo -- Chief Financial Officer Thank you, Charlie, and good morning, everyone. Net income for the first quarter was $4.6 billion or $1.20 per diluted common share. Our first quarter results included $284 million or $0.06 per share for the FDIC special assessment as a result of the regional bank failures last year. Recall last quarter, our results included $1.9 billion for the special assessment, and this additional amount reflects recent updates provided by the FDIC, including potential recoveries, which were highlighted in their disclosure. The ultimate amount of our special assessment may continue to change as the FDIC determines the actual losses and recoveries to the deposit insurance fund. Turning to Slide 4. Net interest income declined $1.1 billion or 8% from a year ago due to the impact of higher interest rates on funding costs, including the impact of customers migrating to higher-yielding deposit products as well as lower loan balances, partially offset by higher yields on earning assets. First quarter results were largely as expected with loan balances a little lower and deposit balances in the businesses a little higher than our expectations. Our full-year net interest income guidance has not changed from last quarter, and we still expect 2024 net interest income to be approximately 7% to 9% lower than 2023. We also continue to expect net interest income will trough toward the end of this year. It is still early in the year and, ultimately, the amount of net interest income we earn will depend on a variety of factors, many of which are uncertain, including deposit balances, mix and pricing, the absolute level of interest rates, and the shape of the yield curve and loan demand. On Slide 5, we highlight loans and deposits. Average loans were down from both the fourth quarter and a year ago. Credit card loans continue to grow, almost other categories declined. I'll highlight specific drivers when discussing our operating segment results. Average loan yields increased 69 basis points from a year ago to over 6%, reflecting the higher interest rate environment. Average deposits declined 1% from a year ago, reflecting lower deposits in our consumer businesses, as customers continued spending and reallocating cash into higher-yielding alternatives. While growth in average deposits from the fourth quarter was modest, we have grown deposits in our commercial businesses for two consecutive quarters, which reflected our success in attracting clients' operational deposits. Period-end deposits included in the chart on the bottom of the page were up 2% from the fourth quarter, but some of this growth reflected a temporary increase driven by a quarter end that was on a payday and a holiday. While the pace of growth slowed, our average deposit costs continued to increase as expected, rising 16 basis points from the fourth quarter to 174 basis points with higher deposit costs across most operating segments. Our mix of deposits continue to shift with our percentage of noninterest-bearing deposits declining to 26%. Turning to noninterest income on Slide 6. We were pleased with the growth in noninterest income across all of our business segments. Growth in noninterest income more than offset lower net interest income, reflecting a revenue growth from both the fourth quarter and a year ago. Noninterest income was up 17% from a year ago with strong growth in investment advisory fees and brokerage commissions, deposit and lending-related fees, trading and investment banking fees. As Charlie highlighted, we benefited from market conditions as well as the investments we've been making in our businesses. I will highlight the specific drivers of this growth when discussing the segment results. Turning to expenses on Slide 7. First quarter noninterest expense increased 5% from a year ago, driven by higher operating losses, the FDIC special assessment, an increase in revenue-related compensation predominantly due to higher investment and advisory fees in our Wealth and Investment Management business, and higher technology and equipment expense. These increases were partially offset by the impact of efficiency initiatives, including lower professional and outside services expense, which declined 10% from a year ago. The higher operating losses were driven by customer remediation accruals for a small number of historical matters that we are working hard to get behind us. The increase in personnel expense from the fourth quarter was driven by approximately $650 million of seasonally higher expenses in the first quarter, including payroll taxes, restricted stock expense for retirement-eligible employees, and 401(k) matching contributions. Not including expense for the FDIC special assessment in the first quarter, our full-year 2024 noninterest expense guidance is unchanged and is still expected to be approximately $52.6 billion. However, we continue to watch a couple of items. Our guidance included $1.3 billion of operating losses for the year, which we still believe is a reasonable estimate even with a higher level of operating losses in the first quarter. However, we have outstanding litigation, regulatory, and customer remediation matters that could impact operating losses during the remainder of the year. Also, if market valuations remain at current levels or move higher, that would increase investment in advisory fees and revenue-related compensation could be higher than we assumed in our expense guidance for this year, which would be a good thing. We'll continue to update you as the year progresses. Turning to credit quality on Slide 8. Net loan charge-offs declined 3 basis points from the fourth quarter to 50 basis points of average loans. Credit performance trends were consistent with what we saw last quarter. The decline reflected lower commercial net loan charge-offs, which were down $131 million from the fourth quarter to 25 basis points of average loans. The reduction was driven by lower losses in our commercial real estate office portfolio. We did not see further deterioration in the performance of our CRE office portfolio versus the fourth quarter and, therefore, our expectations have not changed. We continue to expect additional losses in the coming quarters. However, the amounts will likely be uneven and episodic. Consumer net loan charge-offs continue to increase as expected and were up $28 million from the fourth quarter to 84 basis points of average loans. While auto losses continue to decline, benefiting from the tightening actions we implemented starting in late 2021, credit card losses increased in line with our expectations. Nonperforming assets declined 2% from the fourth quarter, driven by the lower CRE office nonaccruals, reflecting the realization of losses and paydowns in the quarter. Moving to Slide 9. Based on the consistent credit trends I noted before, our allowance for credit losses was down modestly, driven by declines for commercial real estate and auto loans, partially offset by a higher allowance for credit card loans. The table on the page shows the allowance for credit losses coverage ratio for commercial real estate, including the breakdown of the office portfolio. We didn't increase our allowance for this portfolio in the first quarter, and the coverage ratio in our CIB commercial real estate office portfolio of 11% was stable compared with the fourth quarter. Turning to capital and liquidity on Slide 10. Our capital position remains strong, and our CET1 ratio of 11.2% continue to be well above our 8.9% regulatory minimum plus buffers. We repurchased $6.1 billion of common stock in the first quarter. While the amount of stock we repurchase each quarter will vary, we continue to expect to repurchase more common stock this year than we did in 2023. Turning to our operating segments, starting with Consumer Banking and Lending on Slide 11. Consumer, Small, and Business Banking revenue declined 4% from a year ago, driven by our lower deposit balances. We continue to invest in talent, technology, and branches to improve the customer experience. Our branches are becoming more advice focused with teller transactions declining while banker visits have increased. We are modernizing and optimizing the branch network. The number of branches declined 6% from a year ago, while at the same time, we are accelerating the refurbishment of our branch network. In addition, the enhancements we are making to our mobile app continue to drive momentum in mobile adoption, and we surpassed 30 million active mobile customers in the first quarter, up 6% from a year ago. Mobile logins also reached a milestone, surpassing 2 billion logins for the first time in the first quarter, up 18% from a year ago. Home lending revenue was stable from a year ago as higher mortgage banking income was offset by lower net interest income, as loan balances continued to decline. Credit card revenue increased 6% from a year ago, driven by the higher loan balances. Payment rates remained relatively stable compared with the fourth quarter and were above pre-pandemic levels. Auto revenue declined 23% from a year ago, driven by continued loans rate compression and lower loan balances. Personal lending revenue was up 7% from a year ago and included the impact of higher loan balances. Turning to some key business drivers on Slide 12. Retail mortgage originations declined 38% from a year ago, reflecting the progress we've made on our strategic objective to simplify the business as well as the decline in the mortgage market. We also made significant progress in reducing the amount of third-party mortgage loans we service, down 21% from a year ago. We also continued to reduce the head count in home lending, which was down 33% from a year ago. Balances in our auto portfolio were down 12% compared to last year. Origination volume declined 18% from a year ago, reflecting credit tightening actions, but increased 24% from a slow fourth quarter. Debit card spend increased 4% from a year ago with growth in most categories, except for fuel and travel. Credit card spending remained strong. It was up 14% from a year ago. All categories grew with stronger growth in nondiscretionary spend. New account growth continued to be strong, up 12% from last year. Turning to Commercial Banking results on Slide 13. Middle Market Banking revenue was down 4% from a year ago, driven by lower net interest income due to higher deposit costs, partially offset by higher deposit-related fees. Asset-Based Lending and Leasing revenue decreased 7% year over year and included lower revenue from equity investments. Average loan balances were stable compared to a year ago as growth in Asset-Based Lending and Leasing was offset by declines in Middle Market Banking. Weaker loan demand reflected the impact of clients being cautious, given the higher rate environment and the anticipation of lower rates this year as well as some potential uncertainty in an election year. Turning to Corporate and Investment Banking on Slide 14. Banking revenue increased 5% from a year ago, driven by higher investment banking revenue due to increased activity across all products. Our results benefited from the areas where we have had strength for some time, such as investment-grade debt capital markets and from the talent we've been attracting into the business. While it is still early, we are encouraged by the green shoots we are seeing. Commercial real estate revenue was down 7% from a year ago and included the impact of lower loan balances. Markets revenue increased 2% from a year ago, driven by continued strong performance in structured products, credit products and foreign exchange. Our trading results continue to benefit from market conditions, and the investments we have made in technology and talent to round out the business have enabled us to produce strong results even as market dynamics have changed. Average loans declined 4% from a year ago. Banking clients have taken advantage of strong capital markets pay off loans. In addition to weak loan demand in commercial real estate given market conditions, balances also declined due to credit tightening actions we implemented last year, along with our efforts to actively reduce certain property types in the portfolio. On Slide 15, Wealth and Investment Management revenue increased 2% compared to a year ago. Lower net interest income driven by lower deposit balances as customers reallocated cash into higher-yielding alternatives was more than offset by higher asset-based fees due to increased market valuations. While cash alternatives as a percentage of total client assets was higher than a year ago, it has declined in the past two quarters as the migration of deposits into cash alternatives has slowed significantly. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so first-quarter results reflected market valuations as of January 1st, which were higher from a year ago. Asset-based fees in the second quarter will reflect market valuations as of April 1st, which were higher from both a year ago and from January 1st. Slide 16 highlights our corporate results. Revenue grew from a year ago due to improved results in our affiliated venture capital business on lower impairments. In summary, our results in the first quarter reflected the progress we're making to improve our financial performance. We grew revenue, driven by strong growth in our fee-based businesses. We continue to make progress on our efficiency initiatives. We increased capital return to shareholders and maintained our strong capital position. We'll now take your questions. Questions & Answers: Operator Thank you. [Operator instructions] And our first question will come from John McDonald of Autonomous Research. Your line is open, sir. John McDonald -- Autonomous Research -- Analyst Hi. Good morning. Guys, I wanted to ask about your profitability targets and kind of how you're seeing the journey to the mid-teens ROTCE goal. Mike, maybe you could talk about that through the lens of 12% return on tangible common equity this quarter. Where do you think you're kind of overearning, underearning? And what does that journey to the mid-teens look like over the next couple of years? Mike Santomassimo -- Chief Financial Officer Hey, John. It's Mike. Thanks for the question. So look, I think not much has changed in our thinking on the topic. And so as you sort of think about it on a long-term basis, there's no reason -- we still -- there's still no reason why our businesses shouldn't have returns like the best of our peers. And as we sort of go through that journey, obviously, we are where we are in terms of the returns today. And as we get toward closer to 15%, it's going to be the same kinds of drivers that we've been talking about now for a while. We've got to continue to optimize sort of capital and balance sheet. You saw us return some via buybacks today. We're making investments on each of our businesses, and so we'll need to start seeing some of the returns there. And this was one quarter of it but a good quarter that shows some of the benefits of those investments we're making across a whole range of the businesses, which is good to see, and Charlie highlighted a bunch of that in his commentary. And then we've got to stay on the efficiency journey, which we continue to believe is not done. And we've got a lot of work to do to continue to drive efficiency across the company, and we're going to stay at that as we look forward. And so I think it's really those drivers that get in. We still have confidence that we're going to get there. Charlie Scharf -- Chief Executive Officer Hey, John. It's Charlie. Let me just add a couple of things. Number one is just as a reminder to everyone, we tried to be clear as NII was rising and we got to certainly either at the peak or near the peaks that we were out-earning, and that we didn't look at those ROEs at those points as sustainable, but that our clear journey was to continue to get there on a sustainable basis. I think second of all, when we look at -- obviously, it's very hard to draw any conclusion from a specific quarter, right? You've got the FDIC. We've got operating losses, which we've talked about where our expectations are for the full year which are different than the quarter. So it's very hard to draw a conclusion on a specific quarter. But when we look at what is going to get us there, we are very consistent on what those things are. Number one is improve business performance, and we tried to highlight where we see that. And those areas that we don't talk about are areas that we are still bullish on, but we'd like to see some more improvement and the ability to increase our returns in those parts of the company, as well as continued capital return as well as the limitations we have because of the asset gap. So again, our thesis hasn't changed, our views haven't changed and our confidence in getting there hasn't changed. John McDonald -- Autonomous Research -- Analyst OK. And then one just quick follow-up there. Do you think this 11% CET1 is probably kind of the ballpark of where you hang out regardless of the minimum just because it feels like you have super regional banks that aren't G-SIBs that are running at 10%, 10.5%, you have bigger banks at 12%, 13%. Does 11% kind of feel like the right ballpark, which means you can return most of what you're generating now? Charlie Scharf -- Chief Executive Officer I would say it's something that we continue to think through. You know our existing needs today with buffers are at 8.9%. At 8.9%, everyone understands that Basel III endgame is coming but likely with significant revisions. So I don't -- I think as the quarters continue, we'll learn more about where that will come out, and we'll be able to be more informed where we'll wind up. We've always tried to be on the more conservative end, but there's a point at which too much is too much, which is why we bought the amount this quarter that we bought back. John McDonald -- Autonomous Research -- Analyst OK. Thank you. Operator The next question will come from Ebrahim Poonawala of Bank of America. Your line is open, sir. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst Hey. Good morning. I guess just following up on that. As we think about Basel, your capital levels, even with 100 basis points buffer, you probably have $12 billion of excess capital. Given what we saw in 1Q and I heard you, Mike, year over year, you're going to be higher but that doesn't give enough color. I'm just wondering, should we expect the pace of buybacks to continue, given that where the stock is trading, which is still fairly attractive valuations? Mike Santomassimo -- Chief Financial Officer Yes, it's Mike. Thanks for the question. As you look at the pacing, we're really not going to provide specific guidance on like what we'll do quarter to quarter. I think obviously, as you pointed out, we've got significant excess capital to where we need to be. We'll be able to handle with whatever comes out of Basel III quite easily with where we are today, gives us the ability to be there and invest as we've got opportunities with clients. And so we've got lots of flexibility. And each quarter, we'll go through the same process we go through every quarter, which is thinking about sort of where the capital requirements are going to go, looking at all the different risks that are out there across the spectrum, whether it's rates or other, and then looking at what we're seeing from client activity. And then we'll make a decision on the pacing of it. But as you say, we're still very confident we'll do more than we did last year, but pacing will kind of leave to -- we'll cover that each quarter after we report. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst Got it. And I guess just separately, I think there's a lot of focus on market share opportunity for Wells beating capital markets, IB, corporate lending, and I think Charlie referenced the hiring of Doug Braunstein. Would appreciate additional color in terms of areas where you see within corporate capital markets where there's market share to be had. And what's the level of investment/infrastructure needed in order for competing in that space and winning market share? Charlie Scharf -- Chief Executive Officer Yes, let me start out. I think first of all, when we talk about the level of investment that's necessary, we're making the investment and it's embedded in what we're spending. And so we are funding that through normal course of business. Some of the folks that we're hiring or replacing other people and others are additions, but that's part of what it is. And so we don't anticipate any kind of step-up in the expense base to fund what we're doing, which we feel great about. We've got the ability to spend along the way and to actually see them paying off for itself. Listen, I said this very consistently, which is we are extremely underpenetrated across almost all segments of the investment banking space. But we've been stronger on the debt side. We have not been as strong on the equity side. And by the way, all for reasons that relate to our own willingness to invest over the last decade and a half, not because of the opportunity or because of our business model, it's just the opposite. It's just not something that the senior management team here was supportive of, and we feel very differently than that. And so when we look across coverage in the equity space by industry, on the strategic side and how that relates to our -- the existing high-quality debt platform that we have, again, we're prioritizing industries based upon where we already have strength and relationship and where there are significant wallets. But we feel really great about our ability to serve a broad set of customers and their desire to do business with us because of both the platform and the talent that we have here. And then when we look at our -- the trading side of our business, a big part of what we do there is to support our efforts within the investment bank. But it also is to leverage the broader institutional relationships that we have where we do a lot with those institutions, but we haven't necessarily leveraged trading flow as part of that. And so to do that, we're making investments not just in people but in technology. We are -- as I alluded to, we're not doing any of this by rethinking the way we think of our risk tolerances. It really is about getting the right products, the right services, the right people, and calling on our customer base with a different degree of credibility and desire that we've had in the past. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst Such a great color. Thank you. Operator The next question comes from Ken Usdin of Jefferies. Your line is open, sir. Ken Usdin -- Jefferies -- Analyst Thank you. Good morning. I'm wondering if we could talk a little bit about just that kind of last mile of deposit repricing. You talked about the mix shift and noninterest down and interest-bearing up. But just wondering just what's happening on the pricing side. And are you still seeing both sides, consumer and wholesale? If you can maybe just kind of give us the dynamics that's happening underneath and how you expect that to continue as we get to this -- as we stay in this rates peak? Mike Santomassimo -- Chief Financial Officer Sure. I'll take that, Ken. As you look at the commercial side, not much has changed. It's pretty competitive. We're not seeing it move one way or the other in a significant way as you sort of look over the last quarter. Good news is we've been able to attract good operating deposits in corporate investment bank. We've seen some growth in the commercial bank as well. And so all that's kind of performing as you'd expect. And you wouldn't really expect pricing to move there until the Fed starts to move. It will stay pretty competitive at that point. And we still expect betas to be pretty high on the way down as you start to see that eventually happen. On the consumer side, standard pricing is not moving. And really, what you're seeing is you're seeing people continue to spend some of the money that's in their checking accounts and/or move some of it into either CDs or higher-yielding savings accounts. And so you still see some of that activity happening across the consumer space and the wealth space, where you still have some people moving into higher-yielding alternatives. The pace of that migration has slowed at least for now. And so we'll see how that progresses through the rest of the year, but it has slowed a bit over the last number of months. Ken Usdin -- Jefferies -- Analyst OK. And on the lending side, I think what you guys showed is not unexpected at all based on general softness to start the year. So I think you and others have just kind of generically hope that we get an improvement. But with rates where they are, is there any impediment to just seeing an improvement in loan growth as the year goes on? Or is it baked into kind of the demand function that you're seeing underneath? Mike Santomassimo -- Chief Financial Officer Yes. I think what we're seeing so far is exactly what we expected to see at the beginning of the year. And I know different people have different views back in January, but this is exactly what we expected, which is pretty low demand. Now as I said in my commentary, it's a little bit lower than what we had modeled but not substantially at this point. And it really is a demand function. When you look at what we're hearing from clients in the commercial bank or some of the clients in the corporate investment bank, they're looking -- they're being cautious still and saying, "OK, I'm not going to build inventories as much as I might in a different environment." They're being thoughtful about the cost of credit and how that impacts investments they're making or the timing and the pacing of that. And so on the commercial side, it really is a demand issue at this point. On the consumer side, you continue to see some growth in card balances. Given the size of the balance sheet, that's not going to move the whole balance sheet very materially, given where we start from. And then the mortgage side just continues to decline a little bit, given the market that we've got there. And in auto, we're seeing a little bit more decline, given some of the changes we made about a year and a half ago, one year, a year and a half ago on some of the credit tightening and eventually, that will start to turn. So I think those are the dynamics that we're seeing right now. Ken Usdin -- Jefferies -- Analyst Thanks, Mike. Operator The next question will come from Betsy Graseck of Morgan Stanley. Your line is open. Betsy Graseck -- Morgan Stanley -- Analyst Hi. Good morning. Charlie Scharf -- Chief Executive Officer Hey, Betsy. Betsy Graseck -- Morgan Stanley -- Analyst Hey. OK. A couple of just quickies here. One is on the net interest income outlook that's unchanged, could you remind us what the interest rate environment is that's the base case for that analysis? Mike Santomassimo -- Chief Financial Officer Sure. It's Mike, Betsy. Welcome back. When you look at the environment, we're not guessing sort of what's going to happen, right? So I think as you sort of look at the different variables there, embedded in our baseline forecast is that we would expect somewhere around three rate cuts this year. And that's what's underlying sort of our thinking at this point. Betsy Graseck -- Morgan Stanley -- Analyst And was that the same as last quarter, same assumption set? Or has that changed at all? Mike Santomassimo -- Chief Financial Officer No. I mean -- yes. No, look, it's definitely less than what I think was being projected by the market, and that's what we put out on our slide in January. And when you look at the impact of that, in isolation, you certainly would see a benefit from less rate cuts. But I do think you have to put that in the context of, OK, now what's going to happen with client behavior and mix shifts as we look for the rest of the year? I mean it's certainly clear, we feel better today than we did in January about our guidance and our forecast there. But I do think we have to let some more time play out to see how people react to what's happening. And I think even you got to be really careful to take what happened over a day or two and extrapolate too far, right? We're seeing a bunch of that be given back today even. And what we've seen over the last couple of years is that every time you have this strong reaction, either up or down in expectation for rates, that reaction tends to moderate a little bit over a pretty short period of time. And so let's -- we'll see how that plays out. Betsy Graseck -- Morgan Stanley -- Analyst OK. And anything -- and obviously, we've had quite a bit of activity, volatility on the long end of the curve. How do you think about that? And is there opportunity set for maybe pulling in some more deposits and reinvesting in securities, given the slightly improved long-end rates here? Mike Santomassimo -- Chief Financial Officer Yes, yes. And we've started to do that to some degree in the first quarter where we have been starting to buy some securities, mainly mortgages, given where rates and levels have been. And that's been a good trade, I think, for us so far. And so I think you'll certainly see us continue to deploy more cash into securities, at least at some modest levels as we look forward over the next quarter. Betsy Graseck -- Morgan Stanley -- Analyst OK. Thanks so much, Mike. Operator The next question will come from Erika Najarian of UBS. Your line is open. Erika Najarian -- UBS -- Analyst Hi. Good morning. Just to follow up on Betsy's questions. On the net interest income outlook, you had a peer that had a more modest upgrade to that outlook than expected. You held firm on your NII guide. I guess to that end, as we think through whether or not there are going to be three cuts or no cuts, above and beyond just marking the market, the NII to the rate curve is the implication to volumes, right? Like you mentioned in response to Betsy's question, the client behavior. And so I guess I just wanted to understand in terms of the range of outcomes of zero, which is being talked about a couple of days ago with three embedded in your estimates, how should we think about how you're thinking about volumes in terms of loans and deposit behavior? In other words, have you considered a wider range of volume outcomes as you think about the curve outlook? Mike Santomassimo -- Chief Financial Officer Yes. No, I'll try to -- I'll take an attempt at that, Erika, and you can tell me if I covered it all. But it's certainly -- we're at a point in time, and I said this on a call with media earlier this morning, like we're at a time where it's difficult to sort of model the different outcomes that you could expect to see with net interest income, just given all the dynamics that are happening there. And as you said, like I think the fact that rates might be higher than what people expected a week ago. That could change, first of all, but let's stipulate. At this point, people are thinking it's going to be higher for a little bit longer. We do have to wait and see how clients are going to react. And I think we do our best to try to come up with a range of outcomes there. And given that -- given what's happening in rates plus what's happening in quantitative tightening, what's happening in sort of the economy overall, it's going to all matter in terms of what happens with deposit levels. And let's see how that plays out. But I think as I come back to what I said earlier, we feel better than we did today than we did in January about where we are, but there's a lot to play out for the rest of the year. Erika Najarian -- UBS -- Analyst Got it. And just a follow-up, kind of a two-part question but hopefully very related to one another. It was -- the lifting of the consent order was clearly huge for how the market was perceiving Wells. As we think about further remediation, how should we think about how you're thinking about the potential cost saves that you could extract from all the processes that may be in place, has been focused solely on the remediation? And I ask that not in light of the usual recycled question, but clearly had a massive outperformance, like Ebrahim mentioned, on investment banking and trading. And as we think about those expenses, should we start expecting the reinvestment back to potentially accelerate? And also on investment banking and trading, I know there's a lot of seasonality, but are these new run rates? I guess it's hard for us to tell what the base is because obviously, as you -- as Charlie mentioned, you're underpenetrated across the board. So should we continue to see a moving up of this base despite the seasonality as we look forward? Charlie Scharf -- Chief Executive Officer OK. There's a lot in there. Let me start, Mike, and then you chime in. So first of all, Mike, you can comment on like investment banking and trading. But again, we're not going to answer the question on how you should think about what investment banking and trading will be in the future. What we're focused on are, are we building businesses? Are we taking share in a way which is profitable? And that's exactly what we're starting to do. And there is volatility of the business, but we're focused on building it over a period of time, and that's what we're seeing. And so the way we would think about it when we look at our own forecasting is we would expect to see our market shares rise over a period of time, and quarter by quarter, know that it will be subject to volatility that exists. Mike Santomassimo -- Chief Financial Officer And when you think about the first quarter in particular, there's always going to be seasonality on the trading side. That happens pretty much every year, so you can't just take that as a run rate. And on the investment banking side, you've certainly seen some very high issuance volumes on the investment-grade debt side. So that's likely maybe pulling some issuance forward later in the year but we'll see. And then some of the M&A revenue that's embedded in there can be somewhat episodic and volatile, just given the timing of deals and closings and stuff. And so you do have to look at those 2 lines over a longer period of time. Charlie Scharf -- Chief Executive Officer And then on your question on expenses, again, it is -- we were in the exact same place that we've been, which is we're not thinking about at all. We're not doing work. We're not thinking about whether there are efficiencies to be gotten out of all the risk and control work that we're doing. In fact, we're still on the other side of that, which is we still have more open consent orders. And we're still committed to do whatever is necessary, including spending whatever is necessary to get that work done properly and build it into the infrastructure of the company. I've said there'll be a point at which when it's built into what we do and there's a high degree of confidence, that it is part of the culture and our processes, that we will have an opportunity to figure out how to do some of those things more efficiently. But that's not on our radar screen at all. What is on our radar screen is the fact that there's still a lot of inefficiency left within the company, completely away from the money that we're spending on this. And that's where we're focused, and that's why we have the ability to invest in card and invest in investment banking and trading and accelerate the branch refurbishments and hire more bankers in Commercial Banking and things like that. So I would just still continue to separate the fact that we're committed to get the work done, we're going to do whatever is necessary to spend there, and that's not the area of focus for us when it comes to efficiency. Erika Najarian -- UBS -- Analyst That was clear, Charlie. Thank you. Operator The next question will come from Steven Chubak of Wolfe Research. Your line is open, sir. Steven Chubak -- Wolfe Research -- Analyst Hi. Good morning, Charlie. Good morning, Mike. So I wanted to start off just on a question maybe unpacking the NII commentary a bit more. In the prepared remarks, Mike, you noted that you expected NII to be troughing toward the end of this year. So less concerned about the full year '24 outlook. But I was hoping you could just speak to the inputs or assumptions that, that's supporting that expectation around troughing or stabilization, given further rate cuts that are reflected in the forward curve beyond '24. Mike Santomassimo -- Chief Financial Officer Yes. When you look at all the different factors, Steve, there's obviously nothing that's sort of unique to sort of our balance sheet. But when you look at both the asset repricing that's happening in securities, you look at what's happening and you just sort of project forward on sort of the loans and the other parts of the balance sheet, that's obviously a key input as you sort of look forward. And then at some point, you would expect that the migration and deposit mix starts to stabilize as you go forward. And I'm a little intentional -- I'm intentional in the words we use in terms of toward the end of the year. Is it right at this year? Is it early next year? Like it's going to be -- we're getting closer to that point in terms of when it's going to trough. Calling the exact date with a high degree of certainty is difficult in this environment. But it's all the things that sort of we've talked about over the coming -- over the last few quarters are going to drive that. And then it starts with like deposits and deposit mix and deposit pricing and then goes through the rest of where we think the assets sort of net out. Steven Chubak -- Wolfe Research -- Analyst That's helpful color. And for my follow-up, might be regretting this question. But Charlie, it relates to how you responded to Erika's last one relating to the asset cap specifically. I recognize that you're focused internally on just addressing or remediating all the various consent orders. But externally, investors are clearly spending much more time evaluating the different potential sources of earnings or return uplift once these regulatory restrictions are eliminated, whether it's deposit recapture, growth in trading book and reduction in that elevated risk and control spend. Don't expect you to quantify it, don't expect you to speculate on timing for when the asset cap can get lifted. But just given that focus for investors, it might just be helpful if you can contextualize how you're thinking about some of those potential benefits. Charlie Scharf -- Chief Executive Officer Sure. And I'm not sure you shouldn't feel like frankly ask the question, you get it? Or you should ask whatever you want. I just try to be as clear as I can on what I think we'll be in a position to answer, and I don't want you guys to get frustrated by the level of consistency of the things that we want to be careful about. But to your question, which is, I think, entirely reasonable, I'd put into a couple of categories. I think first of all, probably the most important thing with the asset cap, quite frankly, is not the pure economics at this point that will come from the lifting of the asset cap. It is still a reputational overhang for us. And while the lifting of the sales practices consent order was extremely important for those that have just read the newspapers, certainly, those that follow the stock care a lot about the asset cap and we understand that. And so that is just initially, I think, an important factor in terms of how we'll be viewed as opposed to what we'll actually do. I think when we look at what we have done to proactively manage the company to keep ourselves below the asset cap, there are two, you've got two categories. You've got places where we have gone and said, please make your business smaller just because of normal deposit flows and consumer business and things like that, we'll have some asset pressure and we need to offset at some place. And then there's the opportunity cost of what we haven't been able to do because we've had the asset cap, and then what does that mean going forward. On the first piece, we have limited our ability certainly within our trading businesses for some very low-risk things such as financing our customers and things like that. So by not allowing them to provide a level of financing, which is very low risk, we have not captured as much trading flow as we otherwise would have seen. In our corporate businesses, we've been very, very careful to encourage our bankers to bring in sizable corporate deposits that weren't clearly operational deposits, and in some cases, been a little more aggressive about asking them actually not to have it here because we wanted to make room for other things that we thought were really important strategically such as not being closed for business on the consumer side, which those folks would not understand, is hopefully just something that's temporary. So those are the places that in the short term would benefit from the asset cap being lifted. I think when you get beyond that, the reality is when you look at what we've been able to do and the amount of excess capital that we have, we're trying to deploy that by -- through the dividend and through our share buybacks because there's only so much that we should keep around and not return to shareholders. But we still -- as I talked about, we think there are plenty of opportunities when you look around our different businesses to achieve higher returns by reinvesting it inside the business. It's not anything which is -- I would describe it as dramatic. But in terms of the things that we can do when we don't have the constraints, take our -- whether it's our consumer business or our wealth business to build out our banking product set, to be more aggressive about being full spectrum in terms of where we are on the lending side and the deposit side. Across all of our businesses, we've been very, very conservative in what we have asked people to do because we don't want to have an asset cap issue. So again, I would describe it as it's the -- it would be the ability to grow in the things that we're confident at that we do well, that we have, in some ways, consciously and in some ways, unconsciously restrained the company from doing. But all in all, certainly, without an asset cap, it's not a neutral. It's a positive because of the things that we proactively stopped as well as we're just limited in our ability to take advantage of the franchise that we have. And you've seen others that don't have those constraints but have the quality franchise as well, and you see how they benefited not just versus us but versus the broader banking set. Steven Chubak -- Wolfe Research -- Analyst It's really helpful context, Charlie. Thanks so much for taking my question. Charlie Scharf -- Chief Executive Officer Of course. Operator The next question will come from John Pancari of Evercore ISI. Your line is open. John Pancari -- Evercore ISI -- Analyst Good morning. On the 2024 NII guide, I understand that you feel better about the NII outlook here but you're watching customer behavior. I know you did mention loan growth. Did you lower your loan growth outlook that's baked into that guidance this quarter versus what you had in there last quarter? And either way, are you able to help us with what that expectation is on the loan growth front? Mike Santomassimo -- Chief Financial Officer Yes. John, it's Mike. What we said in January is that we expected loans to decline in the first half, and so that's about what we're seeing, right? So again, it's slightly lower than what we modeled, but it's pretty close to sort of what our expectation. And then we expect a little bit of growth in the second half of the year, and overall balances weren't going to do much for the full year. And so at this point, could we be off on that a little bit? Maybe. And could it be a little lower? Maybe. Could it be a little higher? Yes, for sure. And so -- but I think the more meaningful drivers this year of where NII ends up, it's going to come back to deposits, right? And what's the level? What's the mix? What's the pricing look like, given where the environment is? And I think that will be the more meaningful place to focus. John Pancari -- Evercore ISI -- Analyst OK. And related to that, any deposit growth expectation that you could share? Mike Santomassimo -- Chief Financial Officer Yes. I mean I think again, it's -- our full-year guidance that we gave you or assumptions we gave you in January, where we thought the commercial side would be pretty flat to where we are, to where we started the year, that's coming in slightly better than what we had modeled. In the consumer side, we would likely see a little bit of more decline as well as mix shift. And again, that's what you're seeing so far. Charlie Scharf -- Chief Executive Officer Listen, we just -- we want to be really careful in all this, right? We're not -- we're trying to be as transparent as we can be about what we're seeing without getting over our skis and making predictions that none of us have the answers to. And so like when you boil it all down in terms of the customer activity that we're seeing, a touch less here, a touch more there. There's not a big change from what we said three months ago in terms of flows on the deposit and the lending side. It really is relatively small relative to the big NII picture and what's going to drive NII at this point. So if we saw big changes there, we might say, let's change guidance. But it's tweaking along the way and we'll see how it continues to pan out. And then what we said is relative to the rate environment, it's just -- again, it's -- this is a full year number and we've had a couple of months go by. It's just too early to mark the whole thing to market based upon that. But again, we also wanted to just provide the context, as Mike has said and I said in my remarks, certainly, what we've seen is helpful relative to just the pure overall rate and curve piece of it. John Pancari -- Evercore ISI -- Analyst OK. That's very helpful. I appreciate the color there. If I could just ask one more along the credit side. NPA decline is encouraging there, and I know it can be volatile. Can you just maybe talk about NPA inflows? Did you see a pullback there? Did you see that on the CRE side? Is there anything to extract in that? Mike Santomassimo -- Chief Financial Officer Yes. No, look, I think what you're seeing on the -- when you talk about commercial real estate, you're really talking about office. And what you saw in the office space is actually it not moved at all and get worse or not get worse in the quarter. And so you actually saw nonperforming assets not -- coming down a little bit in the CRE space as we've charged off some loans, and they weren't replaced by other items. And so that's a positive in the sense that it's not deteriorating at this point. And then everything else is sort of moving around like as you would expect. There's not substantial movements across the rest of the portfolio. John Pancari -- Evercore ISI -- Analyst Great. Thanks, Mike. Operator The next question comes from Matt O'Connor of Deutsche Bank. Your line is open. Matt O'Connor -- Deutsche Bank -- Analyst Good morning. I want to follow up on the comment that costs this year could come in higher on higher revenues, investment advisory, and I would assume the same if banking and trading continue to be so strong. Obviously, that's a net positive to earnings overall. But how would you frame the operating leverage if you can pick which revenue buckets? But if those market-sensitive revenues are $1 billion higher, is there kind of 40% cost against that, 50%? How would you frame that? Mike Santomassimo -- Chief Financial Officer Yes. And really what we're referring to when we mentioned that is primarily in the wealth management business is where we're focused, given where market levels are. And that business is -- the cost-to-income ratio is pretty stable there in terms of the revenue-related comp. And so it's a little less than 50% in terms of how to think about it. So the operating leverage is good. Matt O'Connor -- Deutsche Bank -- Analyst OK. That's helpful. And then just specifically on banking and trading, I mean, I know you guys invested in those businesses, so there's upfront cost when the revenues come. But it seems like the operating leverage in that segment has been very, very strong. And is that something that you think can continue if those revenues continue to surprise? Or could we see some upward pressure to cost from that, again, a positive to earnings overall but -- Mike Santomassimo -- Chief Financial Officer Yes. No, look, I think the cost to invest there, as Charlie noted, is in our numbers, right, so that's already there. So we're already anticipating that. And at this point, we don't see that being a big pressure point one way or the other. But obviously, as you know, if revenues like far exceed our expectations in a positive way, that would come with a little bit of comp, too. So that would be a good thing overall. Matt O'Connor -- Deutsche Bank -- Analyst Yeah. Agreed. OK. Thank you. Operator The next question will come from Gerard Cassidy of RBC Capital Markets. Your line is open. Gerard Cassidy -- RBC Capital Markets -- Analyst Thank you. Hi, Mike, Charlie. Mike, you touched on your noninterest-bearing deposits declined to about 26% of deposits. Do you guys have a sense what's the long-term normalization level for noninterest-bearing deposits as you look out over the 12-month horizon? Assuming rates do not go up, we have stable rates, maybe they come down a little bit. Mike Santomassimo -- Chief Financial Officer Yes. Look, I mean, it's a hard thing to say with a whole lot of certainty, Gerard, in terms of exactly where it's going to stabilize. It will stabilize at some point, particularly as you look at the underlying mix of the consumer deposit base, right? A good chunk of our consumer deposits are in accounts less than 250. They are generally operating accounts for a lot of people, and so this thing will stabilize as we go. But as you've seen, we've had some pretty consistent, plus or minus a little bit, each quarter as we've gone through the last number of quarters. But at some point soon, that will start to -- we would expect that to stabilize, but we'll see exactly where it does. Gerard Cassidy -- RBC Capital Markets -- Analyst And is it fair to assume that the rate of change in the deposit betas is declining, where eventually those deposit betas flatten out as well? Mike Santomassimo -- Chief Financial Officer Yes. Once you start seeing more stabilization in the mix, that's when you'll see deposit costs on the consumer side stabilize, right? Because what you're seeing now is people -- as I mentioned earlier, people are spending money in their checking account, low-interest cost for us. And then you're seeing growth in CDs and some of the savings accounts, which are higher cost. And that mix shift will stabilize. It's very related to your first question around noninterest-bearing, right? Once -- they're kind of related together, right? Once you get to sort of that core operating balance in people's accounts, then that's when you'll see both of those stabilize. Gerard Cassidy -- RBC Capital Markets -- Analyst Great. And then just as a follow-up on credit. Obviously, you guys put up overall good numbers and especially in that commercial real estate area, as you highlighted. Coming back to the credit cards, you pointed out that the charge-offs were up but in line with the expectations. Assuming the economy does not head into a recession later this year and unemployment goes up to 6%, say it stays around 4%, what are you guys thinking for like a peak in net charge-offs or credit cards? And when do you think you could reach that? Mike Santomassimo -- Chief Financial Officer Yes. Look, I think you got to really dig into the underlying dynamics of what's happening in the portfolio, right? We're in the middle of a refresh of our product set. We're seeing faster growth in new accounts and new balances coming on than maybe other players, just given the investments we've been making now for the better part of three years. And so that -- with that comes some maturation of the new vintages. At some point, that should peak and you'll start to see sort of the normal behavior. But I'd just come back to, we spend a lot of time looking at each of the underlying vintages here. Everything is performing pretty much -- very much on top of what we would have expected or, in a couple of cases, maybe slightly better. And the quality of the new accounts we're putting on are -- the credit quality of them looks very good and continues to be the case. So I would just say that we're in that normal phase of maturation. And as it sort of peaks, we'll sort of let you know when we sort of feel like we're there, but it should be coming over the coming quarters. Gerard Cassidy -- RBC Capital Markets -- Analyst Great. Thank you. Operator And the next question will come from Dave Rochester of Compass Point Research. Your line is open, sir. Dave Rochester -- Compass Point Research and Trading -- Analyst Hey. Good morning guys. Appreciate all the color on the NII and loan trend outlook. I was just wondering on the loan side if you've noted any sensitivity at all in activity levels in general among your commercial customers to presidential elections in the past. And how big of a headwind, if any, you think that could be this year? Mike Santomassimo -- Chief Financial Officer Yes. I mean that's hard. I think certainly, it will be a factor that people incorporate into their thinking of how aggressive or not they want to be in investments they're making. But at this point, that would be really hard to kind of prove out with any sort of empirical data. I think at this point, what we're seeing most is related to the overall sort of macroeconomic environment we're in with such high rates, and people having some uncertainty just generally around where things go from here. But I'm sure that will factor in at least to a small degree at some point as we go through the year. Dave Rochester -- Compass Point Research and Trading -- Analyst Yes. OK, I appreciate that. And then just on the trading line, Matt had mentioned the momentum you've seen earlier. You obviously had a great year in trading last year. You had your strongest quarter yet this year. And you've talked about making a lot of investments in the business in recent years. You're still making those now. It seems like you have a lot of momentum in this area where you could grow that this year as well despite having a huge year last year. Just wanted to get your take on all that. Mike Santomassimo -- Chief Financial Officer Well, the environment is going to matter a lot. And so we've certainly been helped by some of the volatility that we've seen over the last four, five quarters. And so that could change the outcome quite materially for all of us in the industry and the trading line. So keep that in mind. But as you said, we're continuing to make -- systematically make some investments there, and we feel good about that. And I think we continue to see some good performance from a market share point of view across those places we've been making the investments. But as Charlie also noted, we're somewhat constrained in some of those businesses. But we feel good about the progress that the team has made over the last couple of years. Dave Rochester -- Compass Point Research and Trading -- Analyst All right. Great. Thanks. Operator And our final question for today will come from Vivek Juneja of J.P. Morgan. Your line is open, sir. Vivek Juneja -- JPMorgan Chase and Company -- Analyst Hi. Thanks for taking my questions. A couple of questions. Firstly, financial advisors. Can you give some color on what those numbers have been doing over the past year, past quarter since that's not disclosed anymore? Are you building? What types of advisors? Experience is that new recruits from college. Any color, Mike? Mike Santomassimo -- Chief Financial Officer Yes, sure. So as you pointed out, over the last -- if you go back a couple of years ago, and you definitely saw some declines that we were seeing in the advisor workforce. But Barry Sommers and team have been working really hard to sort of not only stem some of the attrition but also begin to really ramp up the recruiting again. And I think we're starting to see some of that come through. And so a lot of that -- we're back to like more normal, maybe slightly below normal attrition levels across the business, which is good. And we're feeling very good about our ability to recruit high-quality advisors. And so I think that trend you saw a couple of years ago was definitely different. And we'll continue to stay at it. We're mostly focused on experienced advisors, a little less on, as you mentioned, college recruits and that type of thing. Charlie Scharf -- Chief Executive Officer Yes, the only thing -- listen, Vivek, this is -- I mean, we're recruiting -- I mean, it's across -- there's no one prototype here. We are -- we've recruited some of the biggest teams in the country that have traded over the last year and a half. And these are people that wouldn't have come to Wells Fargo before that because of the issues. And it was competitive and they chose to come here because of our capabilities, not because of what we're willing to pay them. At the same side, we're staffing up in our bank branches and those are more entry-level people, people who come out of the banker workforce. And it's going to be across the board. But there's no doubt that the trajectory we have with our FA population is very different today than several years ago. Vivek Juneja -- JPMorgan Chase and Company -- Analyst OK. That's helpful. A completely different question, I want to go back to NII, not to beat the dead horse. But given that higher rates -- I mean, sorry, less rate cuts are better for you, if we -- so that should help NII now. But if we see rate cuts and eventually in '25, does that mean that the troughing of NII could get pushed further back? Mike Santomassimo -- Chief Financial Officer Yes. I mean look, we'll see, Vivek, where it exactly troughs. Obviously, sort of the exact pace of rate cuts is part of the equation, but we also have to look at sort of the broader trends that we've talked about throughout the call, right? And how do depositors sort of react? Where does the mix shift stabilize? And how do -- what do we see from a competitive environment? So all of that matters as you sort of look at where exactly it's going to trough. Vivek Juneja -- JPMorgan Chase and Company -- Analyst OK. Thanks. Charlie Scharf -- Chief Executive Officer All right. Thank you, everyone. Appreciate it. We'll talk to you next quarter. Answer:

the Wells Fargo first-quarter 2024 earnings conference call

Operator Welcome, and thank you for joining the Wells Fargo first-quarter 2024 earnings conference call. [Operator instructions] Please note that today's call is being recorded. I would now like to turn the call over to John Campbell, director of investor relations. Sir, you may begin the conference. John Campbell -- Director, Investor Relations Good morning. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss first-quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our first-quarter earnings materials, including the release, financial supplement, and presentation deck are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financial reference, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I'll now turn the call over to Charlie. Charlie Scharf -- Chief Executive Officer Thanks, John. I'll make some brief comments about our first quarter results and then update you on our priorities. I'll then turn the call over to Mike to review our results in more detail before we take your questions. Let me start with some first-quarter highlights. Our solid results reflect the progress we're making to improve and diversify our financial performance and the continued strength in the U.S. economy. It's gratifying to see the investments we're making across the franchise contributing to higher revenue versus the fourth quarter, as an increase in noninterest income more than offset an expected decline in net interest income. Noninterest income also benefited from higher equity markets, which benefited our Wealth and Investment Management business. Net charge-offs were higher than a year ago as expected and stable from the fourth quarter. Credit trends remain generally consistent. Consumer delinquencies continue to perform as we've forecasted, and year-over-year growth in consumer spend remains consistent with prior quarters. In our commercial portfolios, the weakness we see continues to be in certain commercial office properties, but our expectations have not significantly changed versus what we anticipated last quarter. Mike will discuss the specific items that drove an increase in expenses from a year ago, but we continued to execute on our efficiency initiatives, including reducing headcount, which has declined every quarter since the third quarter of 2020. Average commercial and consumer loans were both down from the fourth quarter as higher rates are impacting demand and we are continuing to reduce our exposure in certain portfolios. Average deposits were relatively stable from the fourth quarter as growth in interest-bearing deposits offset lower noninterest-bearing deposits. Our capital position remains strong and returning excess capital to shareholders remains a priority. As we stated on our last earnings call, we expect to repurchase more common stock this year than we did in 2023. In the first quarter, we repurchased a total of $6.1 billion in common stock, and our average common shares outstanding declined 6% from a year ago. Now let me update you on the progress we're making on our strategic priorities, starting with our risk and control work. Earlier this year, the OCC terminated a consent order issued in 2016 regarding sales practices misconduct. The closure of this order was an important milestone as it is confirmation that we operate much differently today around sales practices. As I repeatedly said, our risk and control work remains our top priority, and closing consent orders is an important sign of progress. This is the sixth consent order that our regulators have terminated since I joined Wells Fargo in 2019. Building our risk and control framework is a continuous ongoing effort, and as we implement changes, we track effectiveness along the way. The numerous internal metrics we track show that the work is clearly improving our control environment, and we see that we are completing interim deliverables, but we will not be satisfied until all of our work is complete. So it will remain our top priority and our approach will not change. As I highlighted in my recent annual letter, we have added approximately 10,000 people across numerous risk and control-related groups, and we're spending over $2.5 billion more per year than in 2018 in these areas, and we are a stronger, better company for our customers, communities, and employees. While we're moving forward with confidence, I will repeat what I've said in the past. Regulatory pressures on banks' long-standing issues such as ours is high. And until we complete our work and until it is validated by our regulators, we remain at risk of further regulatory actions. Additionally, as we implement heightened controls and oversight, new issues could be found and these may result in regulatory actions. At the same time, we're making progress on our risk and control work, we're executing on our strategic priorities to better serve our customers and help drive higher returns over time. We continue to introduce attractive new products as we build our credit card business. Last month, we launched Autograph Journey, designed for frequent travelers who could earn points wherever they book travel. Our new product offerings continue to drive strong credit card spend, up approximately $5 billion or 14% from a year ago. We continue to make investments in talent and technology to strengthen Corporate and Investment Banking. More than 50 new senior hires have joined our CIB since 2019, with many of these in key coverage and product groups within banking. In February, Doug Braunstein, who has more than 35 years of industry experience, joined Wells Fargo as a vice chairman. Doug is a world-class banker, and he's working alongside the great team he's assembled to continue to grow the franchise. In addition, given the breadth of Doug's experience, he's also providing counsel on broader business issues beyond client development. As we look forward, it's always helpful to be grounded in the facts. We continue to see strength in the U.S. economy. Spending patterns of consumers using our debit and credit cards remain generally consistent and continue to grow year over year. Consumer credit is performing as we expect, wholesale credit continues to perform well, and our views around commercial real estate have not significantly changed since last quarter. These are all positives. In addition, we remain committed and confident in our ability to increase efficiencies across the enterprise. And areas we have targeted for investment such as credit card, investment banking, and trading are performing well. We are beginning to see early signs of share and fee growth, which will be important as we diversify our revenues and reduce net interest income as a percentage of revenue. And we remain bullish on opportunities across our other businesses, again, more positives. Having said that, markets and rates will likely remain volatile. And as risk managers, we are prepared if trends were to change. We've historically managed credit through multiple cycles and believe that the actions we've taken over the last several years position us well. We have strong capital and liquidity positions. As we're building many of our businesses, we have done so within a consistent level of risk appetite. And our business model and franchise value differentiates us from most of who we compete with, regardless of the environment. So what does all of this mean for our outlook? Simply said, our views haven't changed from last quarter. While we could look at specific data points on a specific date and alter our guidance, there is not enough of a consistent pattern to change our views, but what we see is helpful. Our focus remains the same. We are transforming Wells Fargo and are investing to build a well-controlled, best-growing and higher-returning company while we work to become more efficient. I'm pleased with the progress we've made, and I'm optimistic about the future opportunities ahead. I will now turn the call over to Mike. Mike Santomassimo -- Chief Financial Officer Thank you, Charlie, and good morning, everyone. Net income for the first quarter was $4.6 billion or $1.20 per diluted common share. Our first quarter results included $284 million or $0.06 per share for the FDIC special assessment as a result of the regional bank failures last year. Recall last quarter, our results included $1.9 billion for the special assessment, and this additional amount reflects recent updates provided by the FDIC, including potential recoveries, which were highlighted in their disclosure. The ultimate amount of our special assessment may continue to change as the FDIC determines the actual losses and recoveries to the deposit insurance fund. Turning to Slide 4. Net interest income declined $1.1 billion or 8% from a year ago due to the impact of higher interest rates on funding costs, including the impact of customers migrating to higher-yielding deposit products as well as lower loan balances, partially offset by higher yields on earning assets. First quarter results were largely as expected with loan balances a little lower and deposit balances in the businesses a little higher than our expectations. Our full-year net interest income guidance has not changed from last quarter, and we still expect 2024 net interest income to be approximately 7% to 9% lower than 2023. We also continue to expect net interest income will trough toward the end of this year. It is still early in the year and, ultimately, the amount of net interest income we earn will depend on a variety of factors, many of which are uncertain, including deposit balances, mix and pricing, the absolute level of interest rates, and the shape of the yield curve and loan demand. On Slide 5, we highlight loans and deposits. Average loans were down from both the fourth quarter and a year ago. Credit card loans continue to grow, almost other categories declined. I'll highlight specific drivers when discussing our operating segment results. Average loan yields increased 69 basis points from a year ago to over 6%, reflecting the higher interest rate environment. Average deposits declined 1% from a year ago, reflecting lower deposits in our consumer businesses, as customers continued spending and reallocating cash into higher-yielding alternatives. While growth in average deposits from the fourth quarter was modest, we have grown deposits in our commercial businesses for two consecutive quarters, which reflected our success in attracting clients' operational deposits. Period-end deposits included in the chart on the bottom of the page were up 2% from the fourth quarter, but some of this growth reflected a temporary increase driven by a quarter end that was on a payday and a holiday. While the pace of growth slowed, our average deposit costs continued to increase as expected, rising 16 basis points from the fourth quarter to 174 basis points with higher deposit costs across most operating segments. Our mix of deposits continue to shift with our percentage of noninterest-bearing deposits declining to 26%. Turning to noninterest income on Slide 6. We were pleased with the growth in noninterest income across all of our business segments. Growth in noninterest income more than offset lower net interest income, reflecting a revenue growth from both the fourth quarter and a year ago. Noninterest income was up 17% from a year ago with strong growth in investment advisory fees and brokerage commissions, deposit and lending-related fees, trading and investment banking fees. As Charlie highlighted, we benefited from market conditions as well as the investments we've been making in our businesses. I will highlight the specific drivers of this growth when discussing the segment results. Turning to expenses on Slide 7. First quarter noninterest expense increased 5% from a year ago, driven by higher operating losses, the FDIC special assessment, an increase in revenue-related compensation predominantly due to higher investment and advisory fees in our Wealth and Investment Management business, and higher technology and equipment expense. These increases were partially offset by the impact of efficiency initiatives, including lower professional and outside services expense, which declined 10% from a year ago. The higher operating losses were driven by customer remediation accruals for a small number of historical matters that we are working hard to get behind us. The increase in personnel expense from the fourth quarter was driven by approximately $650 million of seasonally higher expenses in the first quarter, including payroll taxes, restricted stock expense for retirement-eligible employees, and 401(k) matching contributions. Not including expense for the FDIC special assessment in the first quarter, our full-year 2024 noninterest expense guidance is unchanged and is still expected to be approximately $52.6 billion. However, we continue to watch a couple of items. Our guidance included $1.3 billion of operating losses for the year, which we still believe is a reasonable estimate even with a higher level of operating losses in the first quarter. However, we have outstanding litigation, regulatory, and customer remediation matters that could impact operating losses during the remainder of the year. Also, if market valuations remain at current levels or move higher, that would increase investment in advisory fees and revenue-related compensation could be higher than we assumed in our expense guidance for this year, which would be a good thing. We'll continue to update you as the year progresses. Turning to credit quality on Slide 8. Net loan charge-offs declined 3 basis points from the fourth quarter to 50 basis points of average loans. Credit performance trends were consistent with what we saw last quarter. The decline reflected lower commercial net loan charge-offs, which were down $131 million from the fourth quarter to 25 basis points of average loans. The reduction was driven by lower losses in our commercial real estate office portfolio. We did not see further deterioration in the performance of our CRE office portfolio versus the fourth quarter and, therefore, our expectations have not changed. We continue to expect additional losses in the coming quarters. However, the amounts will likely be uneven and episodic. Consumer net loan charge-offs continue to increase as expected and were up $28 million from the fourth quarter to 84 basis points of average loans. While auto losses continue to decline, benefiting from the tightening actions we implemented starting in late 2021, credit card losses increased in line with our expectations. Nonperforming assets declined 2% from the fourth quarter, driven by the lower CRE office nonaccruals, reflecting the realization of losses and paydowns in the quarter. Moving to Slide 9. Based on the consistent credit trends I noted before, our allowance for credit losses was down modestly, driven by declines for commercial real estate and auto loans, partially offset by a higher allowance for credit card loans. The table on the page shows the allowance for credit losses coverage ratio for commercial real estate, including the breakdown of the office portfolio. We didn't increase our allowance for this portfolio in the first quarter, and the coverage ratio in our CIB commercial real estate office portfolio of 11% was stable compared with the fourth quarter. Turning to capital and liquidity on Slide 10. Our capital position remains strong, and our CET1 ratio of 11.2% continue to be well above our 8.9% regulatory minimum plus buffers. We repurchased $6.1 billion of common stock in the first quarter. While the amount of stock we repurchase each quarter will vary, we continue to expect to repurchase more common stock this year than we did in 2023. Turning to our operating segments, starting with Consumer Banking and Lending on Slide 11. Consumer, Small, and Business Banking revenue declined 4% from a year ago, driven by our lower deposit balances. We continue to invest in talent, technology, and branches to improve the customer experience. Our branches are becoming more advice focused with teller transactions declining while banker visits have increased. We are modernizing and optimizing the branch network. The number of branches declined 6% from a year ago, while at the same time, we are accelerating the refurbishment of our branch network. In addition, the enhancements we are making to our mobile app continue to drive momentum in mobile adoption, and we surpassed 30 million active mobile customers in the first quarter, up 6% from a year ago. Mobile logins also reached a milestone, surpassing 2 billion logins for the first time in the first quarter, up 18% from a year ago. Home lending revenue was stable from a year ago as higher mortgage banking income was offset by lower net interest income, as loan balances continued to decline. Credit card revenue increased 6% from a year ago, driven by the higher loan balances. Payment rates remained relatively stable compared with the fourth quarter and were above pre-pandemic levels. Auto revenue declined 23% from a year ago, driven by continued loans rate compression and lower loan balances. Personal lending revenue was up 7% from a year ago and included the impact of higher loan balances. Turning to some key business drivers on Slide 12. Retail mortgage originations declined 38% from a year ago, reflecting the progress we've made on our strategic objective to simplify the business as well as the decline in the mortgage market. We also made significant progress in reducing the amount of third-party mortgage loans we service, down 21% from a year ago. We also continued to reduce the head count in home lending, which was down 33% from a year ago. Balances in our auto portfolio were down 12% compared to last year. Origination volume declined 18% from a year ago, reflecting credit tightening actions, but increased 24% from a slow fourth quarter. Debit card spend increased 4% from a year ago with growth in most categories, except for fuel and travel. Credit card spending remained strong. It was up 14% from a year ago. All categories grew with stronger growth in nondiscretionary spend. New account growth continued to be strong, up 12% from last year. Turning to Commercial Banking results on Slide 13. Middle Market Banking revenue was down 4% from a year ago, driven by lower net interest income due to higher deposit costs, partially offset by higher deposit-related fees. Asset-Based Lending and Leasing revenue decreased 7% year over year and included lower revenue from equity investments. Average loan balances were stable compared to a year ago as growth in Asset-Based Lending and Leasing was offset by declines in Middle Market Banking. Weaker loan demand reflected the impact of clients being cautious, given the higher rate environment and the anticipation of lower rates this year as well as some potential uncertainty in an election year. Turning to Corporate and Investment Banking on Slide 14. Banking revenue increased 5% from a year ago, driven by higher investment banking revenue due to increased activity across all products. Our results benefited from the areas where we have had strength for some time, such as investment-grade debt capital markets and from the talent we've been attracting into the business. While it is still early, we are encouraged by the green shoots we are seeing. Commercial real estate revenue was down 7% from a year ago and included the impact of lower loan balances. Markets revenue increased 2% from a year ago, driven by continued strong performance in structured products, credit products and foreign exchange. Our trading results continue to benefit from market conditions, and the investments we have made in technology and talent to round out the business have enabled us to produce strong results even as market dynamics have changed. Average loans declined 4% from a year ago. Banking clients have taken advantage of strong capital markets pay off loans. In addition to weak loan demand in commercial real estate given market conditions, balances also declined due to credit tightening actions we implemented last year, along with our efforts to actively reduce certain property types in the portfolio. On Slide 15, Wealth and Investment Management revenue increased 2% compared to a year ago. Lower net interest income driven by lower deposit balances as customers reallocated cash into higher-yielding alternatives was more than offset by higher asset-based fees due to increased market valuations. While cash alternatives as a percentage of total client assets was higher than a year ago, it has declined in the past two quarters as the migration of deposits into cash alternatives has slowed significantly. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so first-quarter results reflected market valuations as of January 1st, which were higher from a year ago. Asset-based fees in the second quarter will reflect market valuations as of April 1st, which were higher from both a year ago and from January 1st. Slide 16 highlights our corporate results. Revenue grew from a year ago due to improved results in our affiliated venture capital business on lower impairments. In summary, our results in the first quarter reflected the progress we're making to improve our financial performance. We grew revenue, driven by strong growth in our fee-based businesses. We continue to make progress on our efficiency initiatives. We increased capital return to shareholders and maintained our strong capital position. We'll now take your questions. Questions & Answers: Operator Thank you. [Operator instructions] And our first question will come from John McDonald of Autonomous Research. Your line is open, sir. John McDonald -- Autonomous Research -- Analyst Hi. Good morning. Guys, I wanted to ask about your profitability targets and kind of how you're seeing the journey to the mid-teens ROTCE goal. Mike, maybe you could talk about that through the lens of 12% return on tangible common equity this quarter. Where do you think you're kind of overearning, underearning? And what does that journey to the mid-teens look like over the next couple of years? Mike Santomassimo -- Chief Financial Officer Hey, John. It's Mike. Thanks for the question. So look, I think not much has changed in our thinking on the topic. And so as you sort of think about it on a long-term basis, there's no reason -- we still -- there's still no reason why our businesses shouldn't have returns like the best of our peers. And as we sort of go through that journey, obviously, we are where we are in terms of the returns today. And as we get toward closer to 15%, it's going to be the same kinds of drivers that we've been talking about now for a while. We've got to continue to optimize sort of capital and balance sheet. You saw us return some via buybacks today. We're making investments on each of our businesses, and so we'll need to start seeing some of the returns there. And this was one quarter of it but a good quarter that shows some of the benefits of those investments we're making across a whole range of the businesses, which is good to see, and Charlie highlighted a bunch of that in his commentary. And then we've got to stay on the efficiency journey, which we continue to believe is not done. And we've got a lot of work to do to continue to drive efficiency across the company, and we're going to stay at that as we look forward. And so I think it's really those drivers that get in. We still have confidence that we're going to get there. Charlie Scharf -- Chief Executive Officer Hey, John. It's Charlie. Let me just add a couple of things. Number one is just as a reminder to everyone, we tried to be clear as NII was rising and we got to certainly either at the peak or near the peaks that we were out-earning, and that we didn't look at those ROEs at those points as sustainable, but that our clear journey was to continue to get there on a sustainable basis. I think second of all, when we look at -- obviously, it's very hard to draw any conclusion from a specific quarter, right? You've got the FDIC. We've got operating losses, which we've talked about where our expectations are for the full year which are different than the quarter. So it's very hard to draw a conclusion on a specific quarter. But when we look at what is going to get us there, we are very consistent on what those things are. Number one is improve business performance, and we tried to highlight where we see that. And those areas that we don't talk about are areas that we are still bullish on, but we'd like to see some more improvement and the ability to increase our returns in those parts of the company, as well as continued capital return as well as the limitations we have because of the asset gap. So again, our thesis hasn't changed, our views haven't changed and our confidence in getting there hasn't changed. John McDonald -- Autonomous Research -- Analyst OK. And then one just quick follow-up there. Do you think this 11% CET1 is probably kind of the ballpark of where you hang out regardless of the minimum just because it feels like you have super regional banks that aren't G-SIBs that are running at 10%, 10.5%, you have bigger banks at 12%, 13%. Does 11% kind of feel like the right ballpark, which means you can return most of what you're generating now? Charlie Scharf -- Chief Executive Officer I would say it's something that we continue to think through. You know our existing needs today with buffers are at 8.9%. At 8.9%, everyone understands that Basel III endgame is coming but likely with significant revisions. So I don't -- I think as the quarters continue, we'll learn more about where that will come out, and we'll be able to be more informed where we'll wind up. We've always tried to be on the more conservative end, but there's a point at which too much is too much, which is why we bought the amount this quarter that we bought back. John McDonald -- Autonomous Research -- Analyst OK. Thank you. Operator The next question will come from Ebrahim Poonawala of Bank of America. Your line is open, sir. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst Hey. Good morning. I guess just following up on that. As we think about Basel, your capital levels, even with 100 basis points buffer, you probably have $12 billion of excess capital. Given what we saw in 1Q and I heard you, Mike, year over year, you're going to be higher but that doesn't give enough color. I'm just wondering, should we expect the pace of buybacks to continue, given that where the stock is trading, which is still fairly attractive valuations? Mike Santomassimo -- Chief Financial Officer Yes, it's Mike. Thanks for the question. As you look at the pacing, we're really not going to provide specific guidance on like what we'll do quarter to quarter. I think obviously, as you pointed out, we've got significant excess capital to where we need to be. We'll be able to handle with whatever comes out of Basel III quite easily with where we are today, gives us the ability to be there and invest as we've got opportunities with clients. And so we've got lots of flexibility. And each quarter, we'll go through the same process we go through every quarter, which is thinking about sort of where the capital requirements are going to go, looking at all the different risks that are out there across the spectrum, whether it's rates or other, and then looking at what we're seeing from client activity. And then we'll make a decision on the pacing of it. But as you say, we're still very confident we'll do more than we did last year, but pacing will kind of leave to -- we'll cover that each quarter after we report. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst Got it. And I guess just separately, I think there's a lot of focus on market share opportunity for Wells beating capital markets, IB, corporate lending, and I think Charlie referenced the hiring of Doug Braunstein. Would appreciate additional color in terms of areas where you see within corporate capital markets where there's market share to be had. And what's the level of investment/infrastructure needed in order for competing in that space and winning market share? Charlie Scharf -- Chief Executive Officer Yes, let me start out. I think first of all, when we talk about the level of investment that's necessary, we're making the investment and it's embedded in what we're spending. And so we are funding that through normal course of business. Some of the folks that we're hiring or replacing other people and others are additions, but that's part of what it is. And so we don't anticipate any kind of step-up in the expense base to fund what we're doing, which we feel great about. We've got the ability to spend along the way and to actually see them paying off for itself. Listen, I said this very consistently, which is we are extremely underpenetrated across almost all segments of the investment banking space. But we've been stronger on the debt side. We have not been as strong on the equity side. And by the way, all for reasons that relate to our own willingness to invest over the last decade and a half, not because of the opportunity or because of our business model, it's just the opposite. It's just not something that the senior management team here was supportive of, and we feel very differently than that. And so when we look across coverage in the equity space by industry, on the strategic side and how that relates to our -- the existing high-quality debt platform that we have, again, we're prioritizing industries based upon where we already have strength and relationship and where there are significant wallets. But we feel really great about our ability to serve a broad set of customers and their desire to do business with us because of both the platform and the talent that we have here. And then when we look at our -- the trading side of our business, a big part of what we do there is to support our efforts within the investment bank. But it also is to leverage the broader institutional relationships that we have where we do a lot with those institutions, but we haven't necessarily leveraged trading flow as part of that. And so to do that, we're making investments not just in people but in technology. We are -- as I alluded to, we're not doing any of this by rethinking the way we think of our risk tolerances. It really is about getting the right products, the right services, the right people, and calling on our customer base with a different degree of credibility and desire that we've had in the past. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst Such a great color. Thank you. Operator The next question comes from Ken Usdin of Jefferies. Your line is open, sir. Ken Usdin -- Jefferies -- Analyst Thank you. Good morning. I'm wondering if we could talk a little bit about just that kind of last mile of deposit repricing. You talked about the mix shift and noninterest down and interest-bearing up. But just wondering just what's happening on the pricing side. And are you still seeing both sides, consumer and wholesale? If you can maybe just kind of give us the dynamics that's happening underneath and how you expect that to continue as we get to this -- as we stay in this rates peak? Mike Santomassimo -- Chief Financial Officer Sure. I'll take that, Ken. As you look at the commercial side, not much has changed. It's pretty competitive. We're not seeing it move one way or the other in a significant way as you sort of look over the last quarter. Good news is we've been able to attract good operating deposits in corporate investment bank. We've seen some growth in the commercial bank as well. And so all that's kind of performing as you'd expect. And you wouldn't really expect pricing to move there until the Fed starts to move. It will stay pretty competitive at that point. And we still expect betas to be pretty high on the way down as you start to see that eventually happen. On the consumer side, standard pricing is not moving. And really, what you're seeing is you're seeing people continue to spend some of the money that's in their checking accounts and/or move some of it into either CDs or higher-yielding savings accounts. And so you still see some of that activity happening across the consumer space and the wealth space, where you still have some people moving into higher-yielding alternatives. The pace of that migration has slowed at least for now. And so we'll see how that progresses through the rest of the year, but it has slowed a bit over the last number of months. Ken Usdin -- Jefferies -- Analyst OK. And on the lending side, I think what you guys showed is not unexpected at all based on general softness to start the year. So I think you and others have just kind of generically hope that we get an improvement. But with rates where they are, is there any impediment to just seeing an improvement in loan growth as the year goes on? Or is it baked into kind of the demand function that you're seeing underneath? Mike Santomassimo -- Chief Financial Officer Yes. I think what we're seeing so far is exactly what we expected to see at the beginning of the year. And I know different people have different views back in January, but this is exactly what we expected, which is pretty low demand. Now as I said in my commentary, it's a little bit lower than what we had modeled but not substantially at this point. And it really is a demand function. When you look at what we're hearing from clients in the commercial bank or some of the clients in the corporate investment bank, they're looking -- they're being cautious still and saying, "OK, I'm not going to build inventories as much as I might in a different environment." They're being thoughtful about the cost of credit and how that impacts investments they're making or the timing and the pacing of that. And so on the commercial side, it really is a demand issue at this point. On the consumer side, you continue to see some growth in card balances. Given the size of the balance sheet, that's not going to move the whole balance sheet very materially, given where we start from. And then the mortgage side just continues to decline a little bit, given the market that we've got there. And in auto, we're seeing a little bit more decline, given some of the changes we made about a year and a half ago, one year, a year and a half ago on some of the credit tightening and eventually, that will start to turn. So I think those are the dynamics that we're seeing right now. Ken Usdin -- Jefferies -- Analyst Thanks, Mike. Operator The next question will come from Betsy Graseck of Morgan Stanley. Your line is open. Betsy Graseck -- Morgan Stanley -- Analyst Hi. Good morning. Charlie Scharf -- Chief Executive Officer Hey, Betsy. Betsy Graseck -- Morgan Stanley -- Analyst Hey. OK. A couple of just quickies here. One is on the net interest income outlook that's unchanged, could you remind us what the interest rate environment is that's the base case for that analysis? Mike Santomassimo -- Chief Financial Officer Sure. It's Mike, Betsy. Welcome back. When you look at the environment, we're not guessing sort of what's going to happen, right? So I think as you sort of look at the different variables there, embedded in our baseline forecast is that we would expect somewhere around three rate cuts this year. And that's what's underlying sort of our thinking at this point. Betsy Graseck -- Morgan Stanley -- Analyst And was that the same as last quarter, same assumption set? Or has that changed at all? Mike Santomassimo -- Chief Financial Officer No. I mean -- yes. No, look, it's definitely less than what I think was being projected by the market, and that's what we put out on our slide in January. And when you look at the impact of that, in isolation, you certainly would see a benefit from less rate cuts. But I do think you have to put that in the context of, OK, now what's going to happen with client behavior and mix shifts as we look for the rest of the year? I mean it's certainly clear, we feel better today than we did in January about our guidance and our forecast there. But I do think we have to let some more time play out to see how people react to what's happening. And I think even you got to be really careful to take what happened over a day or two and extrapolate too far, right? We're seeing a bunch of that be given back today even. And what we've seen over the last couple of years is that every time you have this strong reaction, either up or down in expectation for rates, that reaction tends to moderate a little bit over a pretty short period of time. And so let's -- we'll see how that plays out. Betsy Graseck -- Morgan Stanley -- Analyst OK. And anything -- and obviously, we've had quite a bit of activity, volatility on the long end of the curve. How do you think about that? And is there opportunity set for maybe pulling in some more deposits and reinvesting in securities, given the slightly improved long-end rates here? Mike Santomassimo -- Chief Financial Officer Yes, yes. And we've started to do that to some degree in the first quarter where we have been starting to buy some securities, mainly mortgages, given where rates and levels have been. And that's been a good trade, I think, for us so far. And so I think you'll certainly see us continue to deploy more cash into securities, at least at some modest levels as we look forward over the next quarter. Betsy Graseck -- Morgan Stanley -- Analyst OK. Thanks so much, Mike. Operator The next question will come from Erika Najarian of UBS. Your line is open. Erika Najarian -- UBS -- Analyst Hi. Good morning. Just to follow up on Betsy's questions. On the net interest income outlook, you had a peer that had a more modest upgrade to that outlook than expected. You held firm on your NII guide. I guess to that end, as we think through whether or not there are going to be three cuts or no cuts, above and beyond just marking the market, the NII to the rate curve is the implication to volumes, right? Like you mentioned in response to Betsy's question, the client behavior. And so I guess I just wanted to understand in terms of the range of outcomes of zero, which is being talked about a couple of days ago with three embedded in your estimates, how should we think about how you're thinking about volumes in terms of loans and deposit behavior? In other words, have you considered a wider range of volume outcomes as you think about the curve outlook? Mike Santomassimo -- Chief Financial Officer Yes. No, I'll try to -- I'll take an attempt at that, Erika, and you can tell me if I covered it all. But it's certainly -- we're at a point in time, and I said this on a call with media earlier this morning, like we're at a time where it's difficult to sort of model the different outcomes that you could expect to see with net interest income, just given all the dynamics that are happening there. And as you said, like I think the fact that rates might be higher than what people expected a week ago. That could change, first of all, but let's stipulate. At this point, people are thinking it's going to be higher for a little bit longer. We do have to wait and see how clients are going to react. And I think we do our best to try to come up with a range of outcomes there. And given that -- given what's happening in rates plus what's happening in quantitative tightening, what's happening in sort of the economy overall, it's going to all matter in terms of what happens with deposit levels. And let's see how that plays out. But I think as I come back to what I said earlier, we feel better than we did today than we did in January about where we are, but there's a lot to play out for the rest of the year. Erika Najarian -- UBS -- Analyst Got it. And just a follow-up, kind of a two-part question but hopefully very related to one another. It was -- the lifting of the consent order was clearly huge for how the market was perceiving Wells. As we think about further remediation, how should we think about how you're thinking about the potential cost saves that you could extract from all the processes that may be in place, has been focused solely on the remediation? And I ask that not in light of the usual recycled question, but clearly had a massive outperformance, like Ebrahim mentioned, on investment banking and trading. And as we think about those expenses, should we start expecting the reinvestment back to potentially accelerate? And also on investment banking and trading, I know there's a lot of seasonality, but are these new run rates? I guess it's hard for us to tell what the base is because obviously, as you -- as Charlie mentioned, you're underpenetrated across the board. So should we continue to see a moving up of this base despite the seasonality as we look forward? Charlie Scharf -- Chief Executive Officer OK. There's a lot in there. Let me start, Mike, and then you chime in. So first of all, Mike, you can comment on like investment banking and trading. But again, we're not going to answer the question on how you should think about what investment banking and trading will be in the future. What we're focused on are, are we building businesses? Are we taking share in a way which is profitable? And that's exactly what we're starting to do. And there is volatility of the business, but we're focused on building it over a period of time, and that's what we're seeing. And so the way we would think about it when we look at our own forecasting is we would expect to see our market shares rise over a period of time, and quarter by quarter, know that it will be subject to volatility that exists. Mike Santomassimo -- Chief Financial Officer And when you think about the first quarter in particular, there's always going to be seasonality on the trading side. That happens pretty much every year, so you can't just take that as a run rate. And on the investment banking side, you've certainly seen some very high issuance volumes on the investment-grade debt side. So that's likely maybe pulling some issuance forward later in the year but we'll see. And then some of the M&A revenue that's embedded in there can be somewhat episodic and volatile, just given the timing of deals and closings and stuff. And so you do have to look at those 2 lines over a longer period of time. Charlie Scharf -- Chief Executive Officer And then on your question on expenses, again, it is -- we were in the exact same place that we've been, which is we're not thinking about at all. We're not doing work. We're not thinking about whether there are efficiencies to be gotten out of all the risk and control work that we're doing. In fact, we're still on the other side of that, which is we still have more open consent orders. And we're still committed to do whatever is necessary, including spending whatever is necessary to get that work done properly and build it into the infrastructure of the company. I've said there'll be a point at which when it's built into what we do and there's a high degree of confidence, that it is part of the culture and our processes, that we will have an opportunity to figure out how to do some of those things more efficiently. But that's not on our radar screen at all. What is on our radar screen is the fact that there's still a lot of inefficiency left within the company, completely away from the money that we're spending on this. And that's where we're focused, and that's why we have the ability to invest in card and invest in investment banking and trading and accelerate the branch refurbishments and hire more bankers in Commercial Banking and things like that. So I would just still continue to separate the fact that we're committed to get the work done, we're going to do whatever is necessary to spend there, and that's not the area of focus for us when it comes to efficiency. Erika Najarian -- UBS -- Analyst That was clear, Charlie. Thank you. Operator The next question will come from Steven Chubak of Wolfe Research. Your line is open, sir. Steven Chubak -- Wolfe Research -- Analyst Hi. Good morning, Charlie. Good morning, Mike. So I wanted to start off just on a question maybe unpacking the NII commentary a bit more. In the prepared remarks, Mike, you noted that you expected NII to be troughing toward the end of this year. So less concerned about the full year '24 outlook. But I was hoping you could just speak to the inputs or assumptions that, that's supporting that expectation around troughing or stabilization, given further rate cuts that are reflected in the forward curve beyond '24. Mike Santomassimo -- Chief Financial Officer Yes. When you look at all the different factors, Steve, there's obviously nothing that's sort of unique to sort of our balance sheet. But when you look at both the asset repricing that's happening in securities, you look at what's happening and you just sort of project forward on sort of the loans and the other parts of the balance sheet, that's obviously a key input as you sort of look forward. And then at some point, you would expect that the migration and deposit mix starts to stabilize as you go forward. And I'm a little intentional -- I'm intentional in the words we use in terms of toward the end of the year. Is it right at this year? Is it early next year? Like it's going to be -- we're getting closer to that point in terms of when it's going to trough. Calling the exact date with a high degree of certainty is difficult in this environment. But it's all the things that sort of we've talked about over the coming -- over the last few quarters are going to drive that. And then it starts with like deposits and deposit mix and deposit pricing and then goes through the rest of where we think the assets sort of net out. Steven Chubak -- Wolfe Research -- Analyst That's helpful color. And for my follow-up, might be regretting this question. But Charlie, it relates to how you responded to Erika's last one relating to the asset cap specifically. I recognize that you're focused internally on just addressing or remediating all the various consent orders. But externally, investors are clearly spending much more time evaluating the different potential sources of earnings or return uplift once these regulatory restrictions are eliminated, whether it's deposit recapture, growth in trading book and reduction in that elevated risk and control spend. Don't expect you to quantify it, don't expect you to speculate on timing for when the asset cap can get lifted. But just given that focus for investors, it might just be helpful if you can contextualize how you're thinking about some of those potential benefits. Charlie Scharf -- Chief Executive Officer Sure. And I'm not sure you shouldn't feel like frankly ask the question, you get it? Or you should ask whatever you want. I just try to be as clear as I can on what I think we'll be in a position to answer, and I don't want you guys to get frustrated by the level of consistency of the things that we want to be careful about. But to your question, which is, I think, entirely reasonable, I'd put into a couple of categories. I think first of all, probably the most important thing with the asset cap, quite frankly, is not the pure economics at this point that will come from the lifting of the asset cap. It is still a reputational overhang for us. And while the lifting of the sales practices consent order was extremely important for those that have just read the newspapers, certainly, those that follow the stock care a lot about the asset cap and we understand that. And so that is just initially, I think, an important factor in terms of how we'll be viewed as opposed to what we'll actually do. I think when we look at what we have done to proactively manage the company to keep ourselves below the asset cap, there are two, you've got two categories. You've got places where we have gone and said, please make your business smaller just because of normal deposit flows and consumer business and things like that, we'll have some asset pressure and we need to offset at some place. And then there's the opportunity cost of what we haven't been able to do because we've had the asset cap, and then what does that mean going forward. On the first piece, we have limited our ability certainly within our trading businesses for some very low-risk things such as financing our customers and things like that. So by not allowing them to provide a level of financing, which is very low risk, we have not captured as much trading flow as we otherwise would have seen. In our corporate businesses, we've been very, very careful to encourage our bankers to bring in sizable corporate deposits that weren't clearly operational deposits, and in some cases, been a little more aggressive about asking them actually not to have it here because we wanted to make room for other things that we thought were really important strategically such as not being closed for business on the consumer side, which those folks would not understand, is hopefully just something that's temporary. So those are the places that in the short term would benefit from the asset cap being lifted. I think when you get beyond that, the reality is when you look at what we've been able to do and the amount of excess capital that we have, we're trying to deploy that by -- through the dividend and through our share buybacks because there's only so much that we should keep around and not return to shareholders. But we still -- as I talked about, we think there are plenty of opportunities when you look around our different businesses to achieve higher returns by reinvesting it inside the business. It's not anything which is -- I would describe it as dramatic. But in terms of the things that we can do when we don't have the constraints, take our -- whether it's our consumer business or our wealth business to build out our banking product set, to be more aggressive about being full spectrum in terms of where we are on the lending side and the deposit side. Across all of our businesses, we've been very, very conservative in what we have asked people to do because we don't want to have an asset cap issue. So again, I would describe it as it's the -- it would be the ability to grow in the things that we're confident at that we do well, that we have, in some ways, consciously and in some ways, unconsciously restrained the company from doing. But all in all, certainly, without an asset cap, it's not a neutral. It's a positive because of the things that we proactively stopped as well as we're just limited in our ability to take advantage of the franchise that we have. And you've seen others that don't have those constraints but have the quality franchise as well, and you see how they benefited not just versus us but versus the broader banking set. Steven Chubak -- Wolfe Research -- Analyst It's really helpful context, Charlie. Thanks so much for taking my question. Charlie Scharf -- Chief Executive Officer Of course. Operator The next question will come from John Pancari of Evercore ISI. Your line is open. John Pancari -- Evercore ISI -- Analyst Good morning. On the 2024 NII guide, I understand that you feel better about the NII outlook here but you're watching customer behavior. I know you did mention loan growth. Did you lower your loan growth outlook that's baked into that guidance this quarter versus what you had in there last quarter? And either way, are you able to help us with what that expectation is on the loan growth front? Mike Santomassimo -- Chief Financial Officer Yes. John, it's Mike. What we said in January is that we expected loans to decline in the first half, and so that's about what we're seeing, right? So again, it's slightly lower than what we modeled, but it's pretty close to sort of what our expectation. And then we expect a little bit of growth in the second half of the year, and overall balances weren't going to do much for the full year. And so at this point, could we be off on that a little bit? Maybe. And could it be a little lower? Maybe. Could it be a little higher? Yes, for sure. And so -- but I think the more meaningful drivers this year of where NII ends up, it's going to come back to deposits, right? And what's the level? What's the mix? What's the pricing look like, given where the environment is? And I think that will be the more meaningful place to focus. John Pancari -- Evercore ISI -- Analyst OK. And related to that, any deposit growth expectation that you could share? Mike Santomassimo -- Chief Financial Officer Yes. I mean I think again, it's -- our full-year guidance that we gave you or assumptions we gave you in January, where we thought the commercial side would be pretty flat to where we are, to where we started the year, that's coming in slightly better than what we had modeled. In the consumer side, we would likely see a little bit of more decline as well as mix shift. And again, that's what you're seeing so far. Charlie Scharf -- Chief Executive Officer Listen, we just -- we want to be really careful in all this, right? We're not -- we're trying to be as transparent as we can be about what we're seeing without getting over our skis and making predictions that none of us have the answers to. And so like when you boil it all down in terms of the customer activity that we're seeing, a touch less here, a touch more there. There's not a big change from what we said three months ago in terms of flows on the deposit and the lending side. It really is relatively small relative to the big NII picture and what's going to drive NII at this point. So if we saw big changes there, we might say, let's change guidance. But it's tweaking along the way and we'll see how it continues to pan out. And then what we said is relative to the rate environment, it's just -- again, it's -- this is a full year number and we've had a couple of months go by. It's just too early to mark the whole thing to market based upon that. But again, we also wanted to just provide the context, as Mike has said and I said in my remarks, certainly, what we've seen is helpful relative to just the pure overall rate and curve piece of it. John Pancari -- Evercore ISI -- Analyst OK. That's very helpful. I appreciate the color there. If I could just ask one more along the credit side. NPA decline is encouraging there, and I know it can be volatile. Can you just maybe talk about NPA inflows? Did you see a pullback there? Did you see that on the CRE side? Is there anything to extract in that? Mike Santomassimo -- Chief Financial Officer Yes. No, look, I think what you're seeing on the -- when you talk about commercial real estate, you're really talking about office. And what you saw in the office space is actually it not moved at all and get worse or not get worse in the quarter. And so you actually saw nonperforming assets not -- coming down a little bit in the CRE space as we've charged off some loans, and they weren't replaced by other items. And so that's a positive in the sense that it's not deteriorating at this point. And then everything else is sort of moving around like as you would expect. There's not substantial movements across the rest of the portfolio. John Pancari -- Evercore ISI -- Analyst Great. Thanks, Mike. Operator The next question comes from Matt O'Connor of Deutsche Bank. Your line is open. Matt O'Connor -- Deutsche Bank -- Analyst Good morning. I want to follow up on the comment that costs this year could come in higher on higher revenues, investment advisory, and I would assume the same if banking and trading continue to be so strong. Obviously, that's a net positive to earnings overall. But how would you frame the operating leverage if you can pick which revenue buckets? But if those market-sensitive revenues are $1 billion higher, is there kind of 40% cost against that, 50%? How would you frame that? Mike Santomassimo -- Chief Financial Officer Yes. And really what we're referring to when we mentioned that is primarily in the wealth management business is where we're focused, given where market levels are. And that business is -- the cost-to-income ratio is pretty stable there in terms of the revenue-related comp. And so it's a little less than 50% in terms of how to think about it. So the operating leverage is good. Matt O'Connor -- Deutsche Bank -- Analyst OK. That's helpful. And then just specifically on banking and trading, I mean, I know you guys invested in those businesses, so there's upfront cost when the revenues come. But it seems like the operating leverage in that segment has been very, very strong. And is that something that you think can continue if those revenues continue to surprise? Or could we see some upward pressure to cost from that, again, a positive to earnings overall but -- Mike Santomassimo -- Chief Financial Officer Yes. No, look, I think the cost to invest there, as Charlie noted, is in our numbers, right, so that's already there. So we're already anticipating that. And at this point, we don't see that being a big pressure point one way or the other. But obviously, as you know, if revenues like far exceed our expectations in a positive way, that would come with a little bit of comp, too. So that would be a good thing overall. Matt O'Connor -- Deutsche Bank -- Analyst Yeah. Agreed. OK. Thank you. Operator The next question will come from Gerard Cassidy of RBC Capital Markets. Your line is open. Gerard Cassidy -- RBC Capital Markets -- Analyst Thank you. Hi, Mike, Charlie. Mike, you touched on your noninterest-bearing deposits declined to about 26% of deposits. Do you guys have a sense what's the long-term normalization level for noninterest-bearing deposits as you look out over the 12-month horizon? Assuming rates do not go up, we have stable rates, maybe they come down a little bit. Mike Santomassimo -- Chief Financial Officer Yes. Look, I mean, it's a hard thing to say with a whole lot of certainty, Gerard, in terms of exactly where it's going to stabilize. It will stabilize at some point, particularly as you look at the underlying mix of the consumer deposit base, right? A good chunk of our consumer deposits are in accounts less than 250. They are generally operating accounts for a lot of people, and so this thing will stabilize as we go. But as you've seen, we've had some pretty consistent, plus or minus a little bit, each quarter as we've gone through the last number of quarters. But at some point soon, that will start to -- we would expect that to stabilize, but we'll see exactly where it does. Gerard Cassidy -- RBC Capital Markets -- Analyst And is it fair to assume that the rate of change in the deposit betas is declining, where eventually those deposit betas flatten out as well? Mike Santomassimo -- Chief Financial Officer Yes. Once you start seeing more stabilization in the mix, that's when you'll see deposit costs on the consumer side stabilize, right? Because what you're seeing now is people -- as I mentioned earlier, people are spending money in their checking account, low-interest cost for us. And then you're seeing growth in CDs and some of the savings accounts, which are higher cost. And that mix shift will stabilize. It's very related to your first question around noninterest-bearing, right? Once -- they're kind of related together, right? Once you get to sort of that core operating balance in people's accounts, then that's when you'll see both of those stabilize. Gerard Cassidy -- RBC Capital Markets -- Analyst Great. And then just as a follow-up on credit. Obviously, you guys put up overall good numbers and especially in that commercial real estate area, as you highlighted. Coming back to the credit cards, you pointed out that the charge-offs were up but in line with the expectations. Assuming the economy does not head into a recession later this year and unemployment goes up to 6%, say it stays around 4%, what are you guys thinking for like a peak in net charge-offs or credit cards? And when do you think you could reach that? Mike Santomassimo -- Chief Financial Officer Yes. Look, I think you got to really dig into the underlying dynamics of what's happening in the portfolio, right? We're in the middle of a refresh of our product set. We're seeing faster growth in new accounts and new balances coming on than maybe other players, just given the investments we've been making now for the better part of three years. And so that -- with that comes some maturation of the new vintages. At some point, that should peak and you'll start to see sort of the normal behavior. But I'd just come back to, we spend a lot of time looking at each of the underlying vintages here. Everything is performing pretty much -- very much on top of what we would have expected or, in a couple of cases, maybe slightly better. And the quality of the new accounts we're putting on are -- the credit quality of them looks very good and continues to be the case. So I would just say that we're in that normal phase of maturation. And as it sort of peaks, we'll sort of let you know when we sort of feel like we're there, but it should be coming over the coming quarters. Gerard Cassidy -- RBC Capital Markets -- Analyst Great. Thank you. Operator And the next question will come from Dave Rochester of Compass Point Research. Your line is open, sir. Dave Rochester -- Compass Point Research and Trading -- Analyst Hey. Good morning guys. Appreciate all the color on the NII and loan trend outlook. I was just wondering on the loan side if you've noted any sensitivity at all in activity levels in general among your commercial customers to presidential elections in the past. And how big of a headwind, if any, you think that could be this year? Mike Santomassimo -- Chief Financial Officer Yes. I mean that's hard. I think certainly, it will be a factor that people incorporate into their thinking of how aggressive or not they want to be in investments they're making. But at this point, that would be really hard to kind of prove out with any sort of empirical data. I think at this point, what we're seeing most is related to the overall sort of macroeconomic environment we're in with such high rates, and people having some uncertainty just generally around where things go from here. But I'm sure that will factor in at least to a small degree at some point as we go through the year. Dave Rochester -- Compass Point Research and Trading -- Analyst Yes. OK, I appreciate that. And then just on the trading line, Matt had mentioned the momentum you've seen earlier. You obviously had a great year in trading last year. You had your strongest quarter yet this year. And you've talked about making a lot of investments in the business in recent years. You're still making those now. It seems like you have a lot of momentum in this area where you could grow that this year as well despite having a huge year last year. Just wanted to get your take on all that. Mike Santomassimo -- Chief Financial Officer Well, the environment is going to matter a lot. And so we've certainly been helped by some of the volatility that we've seen over the last four, five quarters. And so that could change the outcome quite materially for all of us in the industry and the trading line. So keep that in mind. But as you said, we're continuing to make -- systematically make some investments there, and we feel good about that. And I think we continue to see some good performance from a market share point of view across those places we've been making the investments. But as Charlie also noted, we're somewhat constrained in some of those businesses. But we feel good about the progress that the team has made over the last couple of years. Dave Rochester -- Compass Point Research and Trading -- Analyst All right. Great. Thanks. Operator And our final question for today will come from Vivek Juneja of J.P. Morgan. Your line is open, sir. Vivek Juneja -- JPMorgan Chase and Company -- Analyst Hi. Thanks for taking my questions. A couple of questions. Firstly, financial advisors. Can you give some color on what those numbers have been doing over the past year, past quarter since that's not disclosed anymore? Are you building? What types of advisors? Experience is that new recruits from college. Any color, Mike? Mike Santomassimo -- Chief Financial Officer Yes, sure. So as you pointed out, over the last -- if you go back a couple of years ago, and you definitely saw some declines that we were seeing in the advisor workforce. But Barry Sommers and team have been working really hard to sort of not only stem some of the attrition but also begin to really ramp up the recruiting again. And I think we're starting to see some of that come through. And so a lot of that -- we're back to like more normal, maybe slightly below normal attrition levels across the business, which is good. And we're feeling very good about our ability to recruit high-quality advisors. And so I think that trend you saw a couple of years ago was definitely different. And we'll continue to stay at it. We're mostly focused on experienced advisors, a little less on, as you mentioned, college recruits and that type of thing. Charlie Scharf -- Chief Executive Officer Yes, the only thing -- listen, Vivek, this is -- I mean, we're recruiting -- I mean, it's across -- there's no one prototype here. We are -- we've recruited some of the biggest teams in the country that have traded over the last year and a half. And these are people that wouldn't have come to Wells Fargo before that because of the issues. And it was competitive and they chose to come here because of our capabilities, not because of what we're willing to pay them. At the same side, we're staffing up in our bank branches and those are more entry-level people, people who come out of the banker workforce. And it's going to be across the board. But there's no doubt that the trajectory we have with our FA population is very different today than several years ago. Vivek Juneja -- JPMorgan Chase and Company -- Analyst OK. That's helpful. A completely different question, I want to go back to NII, not to beat the dead horse. But given that higher rates -- I mean, sorry, less rate cuts are better for you, if we -- so that should help NII now. But if we see rate cuts and eventually in '25, does that mean that the troughing of NII could get pushed further back? Mike Santomassimo -- Chief Financial Officer Yes. I mean look, we'll see, Vivek, where it exactly troughs. Obviously, sort of the exact pace of rate cuts is part of the equation, but we also have to look at sort of the broader trends that we've talked about throughout the call, right? And how do depositors sort of react? Where does the mix shift stabilize? And how do -- what do we see from a competitive environment? So all of that matters as you sort of look at where exactly it's going to trough. Vivek Juneja -- JPMorgan Chase and Company -- Analyst OK. Thanks. Charlie Scharf -- Chief Executive Officer All right. Thank you, everyone. Appreciate it. We'll talk to you next quarter.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Hello and thank you for standing by. Welcome to WM's first-quarter 2024 earnings conference call. [Operator instructions] I would now like to hand the conference over to Ed Egl, Senior director of investor relations. You may begin. Ed Egl -- Senior Director, Investor Relations Thank you, Tawanda. Good morning, everyone. And thank you for joining us for our first-quarter 2024 earnings conference call. With me this morning are Jim Fish, president and chief executive officer; John Morris, executive vice president and chief operating officer; and Devina Rankin, executive vice president and chief financial officer. You will hear prepared comments from each of them today. Jim will cover high-level financials and provide a strategic update, John will cover an operating overview and Devina will cover the details of the financials. Before we get started, please note that we follow Form 8-K that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release, and the schedules for the press release include important information. During the call, you will hear forward-looking statements which are based on current expectations, projections, or opinions about future periods. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including our most recent Form 10-K. John will discuss our results in the areas of yield and volume, which, unless stated otherwise, are more specifically references to internal revenue growth or IRG from yield or volume. During the call, Jim, John, and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization. Any comparisons, unless otherwise stated, will be with the prior year period. Net income, EPS, income from operations and margin, operating EBITDA and margin, and prior period operating expense results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations. Additionally, projected future operating EBITDA and margin is anticipated to be adjusted to exclude such items that are not currently determinable but may be significant. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release and tables, which can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections. This call is being recorded and will be available 24 hours a day beginning approximately 1 P.M.. Eastern Time today. To hear a replay of the call, access the WM website at www.investors.wm.com. Time-sensitive information provided during today's call, which is occurring on April 25th, 2024, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of WM is prohibited. Now I'll turn the call over to WM's president and CEO, Jim Fish. Jim Fish -- President and Chief Executive Officer All right. Thanks, Ed, and thank you all for joining us. The WM team delivered another quarter of strong financial results to start 2024, powered by outstanding operational performance in the Collection and Disposal business. Total company operating EBITDA grew nearly 15% in the first quarter and margin expanded 240 basis points, driven by substantial momentum on cost optimization efforts and disciplined execution on our pricing programs. Last quarter, we said the areas of strength in 2024 would look very similar to those of 2023 and that was definitely the case in Q1. Continued traction on cost optimization led to our third consecutive quarter of operating EBITDA margin above 29.5%, with Q1 coming in at 29.6% in the historically lowest margin quarter of the year. This margin result exceeded our expectations and reflects the tangible benefits of technology on our operating costs, the sustained effectiveness of our pricing strategy and the substantial progress we're delivering on our sustainability initiatives. It's our track record in these areas that gives us confidence we're positioned to deliver our highest-ever full-year operating EBITDA margin between 29.7% and 30.2%, which is more than 100 basis points of expansion from 2023 at the midpoint. Our ability to convert more of each revenue dollar to earnings and free cash flow allows us to raise our prior outlook for both operating EBITDA and free cash flow by $100 million. As we progress through 2024, we're maintaining our focus on three priorities, disciplined pricing across each line of business, leveraging technology to permanently reduce our cost to serve our customers, and executing on our strategic investments in sustainability growth. John and Devina will cover more details on where we're seeing traction within the cost structure and where we have further runway, so I want to spend a few minutes on the other two priorities, our pricing strategy and the progress we're making in expanding our sustainability businesses. Beginning with pricing, we're pleased with the results we've seen from embracing a customer lifetime value model. Our teams are able to leverage customer-specific analysis to understand where a customer is on their journey and design actionable strategies that will extend customer attention, improve profitability or both. We're confident that we've found a winning approach to data-driven decision-making that optimizes price to reflect the value of the services we deliver, the strength of the asset network and our leading commitment to environmental sustainability. Our first quarter results, again, show that we have the ability to leverage price increases to cover costs and grow margin while also reducing customer churn. Shifting to our sustainability businesses, during the quarter, we delivered growth projects across the recycling and Renewable Energy businesses. This includes completing a large recycling upgrade in Germantown, Wisconsin. The updated facility relies on state-of-the-art equipment that reduces labor costs, increases throughput by 20%, up to 60 tons of material per hour, and improves product quality. We have another nine upgraded facilities scheduled for completion this year and we'll be opening three new recycling facilities and expanding our industry-leading single stream network even further. Additionally, we've completed a new renewable natural gas facility this quarter at our DFW Landfill in the Dallas-Fort Worth market, and we remain on track to commission another four new renewable natural gas facilities in 2024. We're also excited to announce that WM was just named the official sustainability partner of Major League Baseball. WM's work with MLB is the first collaboration of its kind between an environmental services company and a professional sports league team -- sports team league. With this partnership, we have the opportunity to offer services to all 30 MLB clubs in the United States and Canada. We expect to leverage our expertise to build comprehensive plans to improve the environmental impact of Major League Baseball and its clubs. In closing, I want to thank our WM team for their -- for all their hard work during the quarter. I'm immensely proud of their dedication and execution, which have helped achieve such strong financial results. And I'll now turn the call over to John to discuss our operational results. John Morris -- Executive Vice President, Chief Operating Officer Thanks, Jim, and good morning. In the first quarter, operating expenses and percentage of revenue improved 210 basis points year over year to 60.9%, continuing the positive trend of our discipline management of operating costs, particularly in our collection business. Through strategic investments and innovative solutions and process optimization, we delivered improvements in operational efficiency, extracting costs and setting a new standard for managing the middle of the P&L. Combining this strong operating expense performance with the discipline pricing performance Jim described, we greatly enhanced overall operating EBITDA margins. In the first quarter, operating EBITDA in our Collection and Disposal business grew $212 million and margin expanded 310 basis points to 36.6%. As we continue our journey of automation and optimization, we remain committed to harnessing the power of technology to drive sustainable growth, further reduce costs, and improve profitability. In the first quarter of 2024, our continued adoption of technology and automation initiatives led to substantial reductions in both labor costs and repair and maintenance expenses. On the labor front, efficiency in all three of our collection lines of business improved meaningfully from the first quarter of 2023 as our implementation continues to gain traction. As an example, we're seeing nice improvements in performance from our routing efficiency program, Next Day Optimization or NDO, in our industrial line of business. This tool allows us to more dynamically route and it improves our efficiency, which is reducing our cost to serve and improving our asset planning. Currently, we have deployed NDO at 92% of our collection sites and the majority of those are already achieving or exceeding efficiency targets. Additionally, we are achieving great results in the automation of our residential routes. Through Q1, we have automated over 650 routes and removed almost 800 rear load trucks since 2022. This has led to upwards of a 30% efficiency gain and residential EBITDA margins approaching 20%. The integration of these technology investments coupled with the benefits of improved driver retention have resulted in 135 basis point improvement in labor costs as a percentage of revenue. In the first quarter of 2024, driver turnover improved to about 18% down from over 22% a year ago. We expect ongoing benefits from continued moderation inflation, as well as the investments we're making in our people and processes as we progress through the year. Turning to repair and maintenance, in the first quarter, repair and maintenance spending decreased year over year for the first time in several years and spending as a percentage of revenue improved 50 basis points. In addition to our strong process discipline, we are also leveraging technology to reduce these costs. These technologies have enabled us to digitize much of our workflow, beginning with all of our technicians who now have portable technology in their hands. These tools facilitate our ability to assign and track work, drive technician efficiency, reduce downtime, and improve asset utilization. Our results are encouraging and we see further runway to optimize repair and maintenance costs in the future. In addition to great operating cost performance, we continue to deliver topline growth primarily through discipline execution on our pricing programs. Our customer lifetime value model continues to drive strong organic revenue growth and our sales metrics in the quarter are a clear indication of our success in profitably growing the Collection and Disposal business. Churn was near the lowest rate that we've ever seen in 8.5%, new business improved 16%, and continues to outpace lost business. Rollbacks remain in the low double digits, net service increases remain positive and our net promoter score improved by almost 12% year over year. Looking at our revenue growth, as Jim said, we've seen a strong start to the year in pricing. Volume has been relatively consistent with our original expectations with the exception of our temporary roll-off business. The softness in its volume category reflects some slowness in the homebuilding and industrial segments of the macro economy. C&D was also impacted with the lapping of volumes related to Hurricane Ian cleanup last year. With that said, our two bellwethers for demand, commercial collection and MSW volumes were positive in the quarter and we also experienced a nice uptick in special waste tons in the quarter. For the full year, we now expect total revenue growth of between 5% and 5.75%. The revision from our prior expectation is driven by two things. The softer temporary roll-off volumes mentioned and a lower outlook for energy surcharge revenue given the decline in the average diesel cost relative to our expectations. Our pricing remains on track and in some lines of business ahead of our original expectations. Our teams delivered outstanding performance in the first quarter and I can't thank them enough for all their contributions to our success. I'll now turn the call over to Devina to discuss our first-quarter financial results in further detail. Devina Rankin -- Executive Vice President, Chief Financial Officer Thanks, John, and good morning. Growing our adjusted operating EBITDA margin by 240 basis points in the first quarter stands out as the best indicator of WM's strong start to the year. As John discussed, the lion's share of this margin expansion came from the optimization of our operating performance in the collection business, with labor efficiency and improved repair and maintenance costs driving a 270 basis point improvement in our total company margin from the core. Our continued focus on managing our back office spending also contributed 20 basis points of margin expansion in the quarter, with SG&A as a percentage of revenue coming in at 9.5%. Commodity impacts in the quarter largely offset each other as fuel price impacts benefited margin by about 40 basis points and recycling results decreased margin by about 30 basis points, primarily from the impact of higher recycled commodity pricing in the brokerage business. The remainder of the margin bridge from Q1 of 2023 to Q1 of 2024 relates to a headwind of about 60 basis points from the combined impacts of incentive compensation and costs incurred by our corporate team to drive adoption of our optimization program. Our strong margin and earnings combined with benefits from working capital and lower cash incentive compensation payments led to robust growth in first-quarter cash from operations. We're starting the year strong with cash flow from operations as a percentage of revenue up over 500 basis points to 26.5%, demonstrating the value of our margin expansion to growing the company's cash flow yield. Capital expenditures totaled $668 million in the quarter with both capital spending to support the base business and our investments in sustainability growth tracking as planned. Our first-quarter free cash flow of $714 million allowed us to invest across all of our capital allocation priorities. We returned more than $550 million to shareholders paying more than $300 million in dividends and repurchasing $250 million of our stock. And all of this, we still maintained our leverage ratio at our target levels of about 2.6 times. With our strong balance sheet and robust earnings and cash flow outlook, we are well-positioned to continue our commitment to shareholder returns and long-term growth. Our effective tax rate in the first quarter was 18.6%, which includes a $37 million benefit from investment tax credits related to the development of renewable natural gas projects. As we noted during our fourth-quarter earnings call, our original expectation was that we would see $120 million benefit in 2024 from the ITC and we now expect $145 million for the full year. We expect this to benefit both our tax expense and free cash flow in 2024. As Jim mentioned, our great start to the year has put us on a higher growth trajectory for the full year than we initially anticipated when we gave guidance last quarter. We're confident that our full-year operating EBITDA margin results can exceed the very strong 29.6% we achieved in the first quarter and that is reflected in our increased outlook for 2024 operating EBITDA and margin. As we think about the balance of the year, we anticipate that outsized earnings and margin growth continues in the second and third quarters from our pricing programs and momentum and operating efficiencies that began late in the third quarter of 2023. We continue to expect that growth in our sustainability businesses will be more weighted to the back half of the year as more recycling and renewable natural gas projects begin operations. Pulling these points together, we want to emphasize that $85 million of the $100 million increase in our operating EBITDA guidance for the year is attributable to our team's strong execution on driving efficiency and the improved cost to serve in the collection business. The remaining $15 million is related to higher recycled commodity price expectations for the year. To wrap up, we're very pleased to deliver our first quarter results that exceeded our own high expectations. Our sustained strong results are a testament to the investments we have made in talent, technology, and assets over the past several years. As always, I want to thank the entire WM team for their focus and dedication to delivering on our commitments to our customers, our communities and our shareholders. With that, Tawanda, let's open the line for questions. Questions & Answers: Operator Thank you. [Operator instructions] Our first question comes from the line of Tyler Brown with Raymond James. Your line is open. Tyler Brown -- Raymond James -- Analyst Hey. Good morning. Jim Fish -- President and Chief Executive Officer Good morning. Devina Rankin -- Executive Vice President, Chief Financial Officer Good morning. John Morris -- Executive Vice President, Chief Operating Officer Good morning, Tyler. Tyler Brown -- Raymond James -- Analyst Hey. So I guess, we got to come back to this stellar merger performance here. So, John, if I just look at Collection and Disposal EBITDA, I think, you said it was up $212 million on maybe only $190 million increase in revenue. So I just want to understand how we're getting such incredible flow through. I mean, it sounds like you're seeing outright deflation in certain items, but maybe just a little more color, and just to be clear, there wasn't, Devina, any sort of one-time accrual reversal or anything else that really impacted the quarter. Is that correct? Devina Rankin -- Executive Vice President, Chief Financial Officer So I'll start with the easy one and confirm there were no accrual reversals or one-time items in the first quarter. The only kind of one-timer that we could point out is actually the loss of Ian volumes from the prior year that would have been a hill to climb from a margin perspective, because as you know, storm volumes come at high margins. So in fact, the $212 million operating EBITDA growth in the Collection and Disposal business came with 310 basis points of margin expansion to 36.6% in the Collection and Disposal business. John Morris -- Executive Vice President, Chief Operating Officer Yeah. A little more color, Tyler. I think a few things are occurring. One is, as I mentioned in my prepared remarks, we're seeing a nice uptick in efficiency in all three lines of business, from the mid-single digits up to the high-single digits for residential. Residential was a really good story if you look at the table in the back and you see we still traded about 2.9% of the volume down, but we made a good bit more money for the quarter and I think we're starting to strike a better balance there. I mentioned in a prepared remarks, residential margins are approaching 20% at the EBITDA line. I think the M&R piece is certainly worthwhile on touching. Last year we took delivery of about 1,450 trucks. We'll get about 1,800 this year and that's having a meaningful impact. We felt like we've been chasing M&R costs and labor related to maintenance and repairs. And for us to actually tamp down costs quarter-over-quarter for the year is something, as I mentioned, we haven't done in a number of years. So I think it's been good efficiency, good cost discipline. Our pricing remains robust, especially across the Collection and Disposal lines. So I think a lot of that came together in Q1. And as Devina mentioned, there really was no one-timer that benefited that. That was just strong execution by the team in the field. Tyler Brown -- Raymond James -- Analyst Yeah. Absolutely. Now, John, you mentioned 20% resi margin. So can you just remind us where those margins were a few years ago, because I believe they're a fair bit lower. And then do you think that those can approach more company average or is this kind of more where you would expect them? John Morris -- Executive Vice President, Chief Operating Officer Yeah. You're testing my memory here, Tyler. But I would say around 10%, 11% is what I recall. Tyler Brown -- Raymond James -- Analyst Yeah. John Morris -- Executive Vice President, Chief Operating Officer And I've said when we started down this journey, if you will, to really rationalize some of the residential business, we wanted residential to compete with commercial and industrial, and while we're not quite there yet, we can see a point where that gets a little bit closer to converging. And I think as that happens, that 2.5% to 3% volume that we've been kind of trading off on average will start to moderate as we get closer to that line. Tyler Brown -- Raymond James -- Analyst OK. And then my last one here, Devina, just want to make sure that we kind of have a level set on Q2. So if I look back historically, margins do typically rise, I don't know, 150 basis points, 200 basis points sequentially from Q1 to Q2. Just anything to think about why that wouldn't be the case or can you just help us shape the Q2 margin expectation? Thank you. Devina Rankin -- Executive Vice President, Chief Financial Officer Yeah. I think it's a great question. What I would tell you that we're looking at is a little softer climb from Q1 to Q2 in the normal sequential trends, but still a marked improvement from Q1, and coming in, I would say above 30%, pretty handily in Q2 and Q3 in particular. We're currently expecting a little north of 30% in Q2 and potentially even north of 31% in Q3. Jim Fish -- President and Chief Executive Officer Tyler, I think part of that, I'm not sure it's -- that we're seeing any softening, it's just that we're kind of in uncharted territory here in terms of margin. I mean, which is a good thing, but to have a range that includes, and we've talked about numbers starting with a three for a long time and now we finally have a number that starts with a three in our guidance range. So we're just being a little bit cautious about it. We certainly saw the trend that you just mentioned from Q1 to Q2 and on, but as did the field. But we feel like we're being maybe a little cautious as we get into some uncharted territory. Tyler Brown -- Raymond James -- Analyst Yeah. Totally get it. Thank you so much. Operator Thank you. Please stand by for our next question. Our next question comes from the line of Bryan Burgmeier with Citi. Your line is open. Bryan Burgmeier -- Citi -- Analyst Thanks for taking the question. I believe you said, revised EBITDA guidance is about $85 million and underlying improvement. I guess there would be a headwind from the roll-off volume. So it's maybe even more than $100 million sort of underlying number. Did fuel costs play a role in the EBITDA guidance raise? And maybe just from a big picture, what changed over the last two months to three months that maybe allowed you to realize these savings a little bit quicker than you may have anticipated in your original view? Devina Rankin -- Executive Vice President, Chief Financial Officer Yeah. A great question. I would tell you in terms of the $85 million, it really is predominantly oriented to two things. And one, the biggest driver is our cost efficiency performance and the really strong execution on reducing cost to serve that John's talked so much about on labor and repair and maintenance. The other is the strong execution on price and that's moderately ahead of the expectations that we had when we came into the year and we think that will hold for the rest of 2024. With respect to fuel, it really didn't impact our dollar outlook for the business. What it did impact is our margin outlook for the business. And so the help in margin was 40 basis points in the quarter and we think that some of that margin help continues into Q2 and Q3. With respect to how we executed in Q1 that gave us confidence in raising the margin outlook. I would tell you, we saw a really strong margin performance in the fourth quarter, really beginning in the third quarter of 2023, but again in Q4. And because Q4 and Q1 on a seasonally adjusted basis tend to be lower volume and lower margin quarters for us, we really wanted to preserve some of the upside potential until we saw some of the normal seasonal upticks in our business in the second quarter, but with the strong performance in the first quarter, we really could not wait to reflect that we now expect a full year that will hit that 100 margin -- 100 basis points of margin expansion. John Morris -- Executive Vice President, Chief Operating Officer I mean, I think, the risk there, Devina, was, as we discussed it, Bryan, the risk was with such a strong performance, if we didn't raise guidance, there might've been questions on this call about, so is there something that we're not seeing that you're seeing, is there something that you had that benefited you, and of course, Devina already answered that. The answer was no. But we were a little concerned that if we didn't raise margin after such a huge margin performance, that by the way, was on the heels of two other quarters, that you might start asking questions about it, are we missing something and you're not missing anything, we're just improving the margin that much. Bryan Burgmeier -- Citi -- Analyst Got it. Got it. Thanks for that detail. Last question for me is, I know we were waiting for a little bit more detail on the investment tax credits and it seems like you put a comment in the press release, $37 million in 1Q, $145 million for the year. I guess I'm just curious if that was kind of in line with your original expectations and are we still kind of tracking for like a $300 million benefit over the course of your investments through 2026? Thank you. Good luck in the quarter. I'll turn it over. Devina Rankin -- Executive Vice President, Chief Financial Officer Great. Thank you. So our original expectations for 2024 were $120 million. So our current outlook of $145 million is a $25 million increase of the ITC benefit in 2024 specifically. With regard to our full outlook for ITC capture over the development plan that we have outlined, we are tracking toward the high end of the original range of $250 million to $300 million. Operator Thank you. Please stand by for our next question. Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open. Jerry Revich -- Goldman Sachs -- Analyst Yes. Hi. Good morning, everyone. Jim Fish -- President and Chief Executive Officer Good morning. Devina Rankin -- Executive Vice President, Chief Financial Officer Good morning, Jerry. Jerry Revich -- Goldman Sachs -- Analyst Really nice performance this quarter and over time you folks have consistently expanded margins by 20 basis points, 30 basis points per year, almost like clockwork. And I'm wondering, as we think about the long-term plan from here, should we be thinking about 2025 as a lower year of margin expansion, because we're getting such good price cost spread this year or does that not factor into how you're thinking about the longer term plan that you folks unveiled what six months or nine months ago? Devina Rankin -- Executive Vice President, Chief Financial Officer It's a great question and while it's a little too early for us to be looking to specifically set guidance for 2025, I do agree with you that there are some fundamentals that would make us a little more cautious to effectively repeating a 20 basis point to 30 basis point margin expansion year on year. But that being said, I would tell you there are some fundamentals with respect to what we're seeing that we know have additional runway and growth, and those fundamentals really come on the labor and repair and maintenance side. So repair and maintenance long term has been below 9% of revenue. In Q1, we're at 9.5%. So 50 basis points of savings across a year is $100 million of EBITDA. So if we could see ourselves get there, I do think that that's one of the things that could give us some incremental traction above that 20 basis points to 30 basis points long-term. The one thing that we don't really have clarity on yet, but we -- based on what we know today will be a headwind is that the alternative fuel tax credits will expire at the end of 2024 and that's been about a $55 million benefit to our operating expenses on an annual basis. So that could be a headwind that would temp down our margin for the years ahead. But we really do think there's strong traction in labor and repair and maintenance that will more than offset that headwind. Jim Fish -- President and Chief Executive Officer Jerry, I think there's some, it's always going to be a combination of headwinds and tailwinds. Tara's here, she can talk about the fact that we have a bit of a tailwind next year when it comes to recycle shutdowns. I mean, this year we're going to see somewhere in the neighborhood of $30 million, maybe a little less, as an impact, a negative impact on us from shutting down these recycle plants while we rebuild them. That drops off pretty significantly next year. So you probably have somewhere in the neighborhood of a $25 million pickup or tailwind next year. The other thing that John and I and Devina have all talked a lot about is this kind of reduction in heads, but doing it in a low-impact way. So it's just through attrition. And when we think about that, as I look at our actual headcount from 2022, it's down over 2,000 people, and none of those people were not -- none of those people were riffed. We're not going through an arbitrary reduction in force. That's just choosing to not replace folks and we've given about four or five different categories where that happens. But several of those categories are still not complete. One of them John's talked about, which is the shift from rear load to automated side load. Each time you do that, there is a person that is no longer needed on the back of the truck. As you can imagine, we have pretty high turnover there, so we just take advantage of that through attrition. Similarly, in [Inaudible] and the recycling business, as we rebuild these plants, we're seeing somewhere between a 30% and 40% reduction in labor cost and so there are some related heads that come out with that. So we still, even in 2024, have another, probably, John, 1,200 total heads that will come out -- John Morris -- Executive Vice President, Chief Operating Officer Right -- Jim Fish -- President and Chief Executive Officer -- if you combine those two categories and that takes us from 2,000 to 3,200, 3,300. So that's a big, big part of this, is that we're doing this in a more labor-efficient way and it really is coming to fruition. Jerry Revich -- Goldman Sachs -- Analyst Super. And Jim, maybe just to expand on the recycling part of that conversation. So we have the plant downtime this year, but also the returns on the capex that you folks are delivering. So what level of improvement are you anticipating 2025 versus 2024? Correct me if I'm wrong, I think the original plan called for something like a $90 million year-over-year benefit. Is that still the plan for 2025 versus 2024, so we get that on top of the $25 million swing that you spoke to? Tara Hemmer -- Senior Vice President, Chief Sustainability Officer I can speak to that. So as we mentioned, Jerry, we have 13 plants that we expect to bring online this year and another 13 next year, and those remain on track today. If you think about our exit in 2024 related to headcount, we'll be at a point where we've gotten 70% of the headcount out by the end of 2024 on the automation journey. So we should see not just the pickup from shutdown costs, but also from the benefit of 30% improvement in labor costs and operating expenses from those plants. It's a great example of how we're able to bring to life in some of these communities. We were just up at Germantown last week for the grand opening celebration, and bringing in more capacity is a great way to differentiate WM and these key markets that we operate in. Jim Fish -- President and Chief Executive Officer So to use a baseball analogy, since we just signed a deal with Major League Baseball, Tara will be in the seventh inning at the end of the year? Tara Hemmer -- Senior Vice President, Chief Sustainability Officer Exactly. Seventh inning stretch. Jim Fish -- President and Chief Executive Officer All right. Perfect. Operator Thank you. Jerry Revich -- Goldman Sachs -- Analyst I appreciate the discussion. Thank you. Jim Fish -- President and Chief Executive Officer Yeah. Thanks, Jerry. Operator Please stand by for our next question. Our next question comes from the line of Sabahat Khan with RBC Capital Markets. Your line is open. Sabahat Khan -- RBC Capital Markets -- Analyst Great. Thanks and good morning. Quite a lot of color there on kind of the tangible labor savings. Is there any way to quantify some of the operational efficiencies or savings in terms of the technology investments that you're making, some of the data analytics tools, just in terms of how much bps you might expect over one year, three years and what you're kind of seeing relative to expectations? John Morris -- Executive Vice President, Chief Operating Officer Well, I think, the one line we can certainly look at, I think Devina had some of that in her prepared remarks, is kind of what the ratio is of direct labor to revenue. We saw a nice improvement there. I think that's a combination of two things. One, we've continued to be very disciplined about pricing. We've said we're playing the long game here and I comment about customer lifetime value. So I think part of the benefit is we've continued to drive quality revenue at the topline across all the collection lines, and frankly, the post-collection line is worth noting. It didn't come out, but this was our best quarter in history from a landfill pricing standpoint and a transfer station perspective. So the topline is strong. But I mentioned efficiency and part of what's driving that mid to up to high single-digit efficiency is the use of technology to drive efficiency. Our turnover number's worth commenting on again, because we are at all-time lows at about 18% and that takes a lot of pressure off if you think about the cost, the friction cost of training folks, putting second people in trucks, and all those things. So that's another part of it. And we're down about 750 routes year over year and you can look at our volume. Part of it's being driven by the automation of residential, but the rest of it is we are less capital intensive for basically doing more work in the commercial industrial lines year over year. Jim Fish -- President and Chief Executive Officer John, you mentioned also -- and John mentioned that in his script that 90% of the roll-off line of business has been rolled out on this NDO, which is the term for our optimization model. But we haven't rolled out commercial and haven't rolled out residential on that model yet. So we still have a fair amount of room to go there and all of this was really four years or five years ago an admission by us that our routing was not as efficient as it could be if we truly used technology to benefit that. I think that's probably the case across the entire industry and so four years or five years ago, we decided that that had to change and now you're seeing the fruits of that. Sabahat Khan -- RBC Capital Markets -- Analyst Great. And then, I guess, as you think about optimizing pricing and some of the data analytics you're using to figure out the right price for the right customer based on their value, do you believe based on the work you've done to date that the model is at a right place? I'm sure there's an element of test and learn, but do you think you've got the right factors? What sort of your data telling you in terms of how well that model's working? Jim Fish -- President and Chief Executive Officer I think we -- I -- look, there's always room for improvement. So I would not say that we've perfected this. But from when I was a price guy back in the early 2000s, it's night and day. I think the team has done a spectacular job using data and analytics to their benefit and making sure that we are looking at the customer who really drives the decision and as opposed to driving the decision just purely based on a number that we needed to hit in our price metrics. So I would tell you that we've made a ton of progress there. Are we perfect? We're not, but so much better than we used to be. John Morris -- Executive Vice President, Chief Operating Officer I would say, Jim, our customer metrics, I commented on it. That's really the barometer. Jim Fish -- President and Chief Executive Officer OK. John Morris -- Executive Vice President, Chief Operating Officer When you look at our gross and net PIs, when you look at customer churn, service increases and decrease in our net promoter score, I think those are all the measurements sort of right to the equal sign of how effective our program is. Sabahat Khan -- RBC Capital Markets -- Analyst And then just one quick one, I guess, on the revenue guidance update there. I think just want to get a little bit more color on the software rollout portion. It sounds like a bit of homebuilding and industrial slowdown. Is that just a change in the view of how the macro's going to evolve for the rest of the year based on what you've seen here today or was there any specific issue that came up in industry? I just want to get a bit more color on the evolution of the view on the roll-off and the macro? Thanks. Jim Fish -- President and Chief Executive Officer Yeah. I think the takeaway here is we were guiding to about 1% volume and now we're probably down to about a 0.5%. So it's a move, but it's not that meaningful of a move. It's early in the year, too. I would tell you that when we were preparing for today, we're obviously looking at Q1, Q4, and we've seen a little bit of an uptick here in April. It looks like it's getting a tad better. I think the bigger news is aside from a little softness in the housing sector, which we spoke to, I think the rest of the business is still performing well. When you look at our post-collection volume, particularly MSW and our commercial volume still performing well, that's what really gives us conviction about the $100 million for the balance a year that Devina commented on. Sabahat Khan -- RBC Capital Markets -- Analyst Great. Thank you. Operator Thank you. Please stand by for our next question. Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is open. Hilary Lee -- Morgan Stanley -- Analyst Hi. This is Hilary Lee on for Toni. Thanks for taking the questions and congrats on the quarter, guys. Just want to touch on pricing a little bit. So when you said earlier that you expect price to hold for the rest of the year, does that mean you're expecting core price to be closer to around that 7% rather than the 6% you said last quarter? Jim Fish -- President and Chief Executive Officer Well, we did say for price that, and I mentioned it earlier, that we actually exceeded a little bit of our expectations. So we're not changing anything for the year, but your point is well taken, that we actually ended up a little bit higher than the full-year guidance and so that's a positive for us. At this point, we'll leave it where we originally set it though. Hilary Lee -- Morgan Stanley -- Analyst Got it. And as a follow-up, just wanted to touch on the sustainability. I know last quarter you talked about having about $115 million of EBITDA coming from the sustainability investments for 2024. Just wondering if you would be able to kind of give us a little bit of information on potentially the cadence or kind of the split between RNG and recycling. Any details would help. Thanks. Tara Hemmer -- Senior Vice President, Chief Sustainability Officer Sure. The $15 million increase that Devina referenced, the most significant portion of that is from recycling and really from commodity prices, and not a whole lot of benefit from the Renewable Energy business. And the reason for that is we today have about 85% of our volume locked in, in either short, mid- or long-term offtake at this point, which is an increase from what we had said during our last call, which was roughly two-thirds. So while RIN prices are increasing and we saw -- we've seen increased RIN prices, we've also seen some offsetting items on really natural gas prices and power prices related to a more mild winter that we had this year. Devina Rankin -- Executive Vice President, Chief Financial Officer And in terms of the cadence of when that shows up, it will be more heavily weighted toward Q3 and Q4, because our timeline with regard to the incremental projects that are coming online is weighted toward the back half of the year. Hilary Lee -- Morgan Stanley -- Analyst Great. Thanks for the questions and congrats again on the quarter. Devina Rankin -- Executive Vice President, Chief Financial Officer Thank you. Jim Fish -- President and Chief Executive Officer Thank you. Operator Please stand by for our next question. Our next question comes from the line of Michael Hoffman with Stifel. Your line is open. Michael Hoffman -- Stifel Financial Corp. -- Analyst Thank you. Good morning, everyone. Devina, Jim, John, do we have a new baseline in margins? We can now say 29.5 to 30 is the new baseline and we'll grow from there? Devina Rankin -- Executive Vice President, Chief Financial Officer There's certainly nothing in the current year that tells us that this isn't the right baseline. So I do think that that's a great way to look at it, Michael. Everything that you know about the WM culture is one that's focused on the customer and focused on continuous improvement and I think those two things shown through and that commitment won't stop. So I do think the new baseline can go upward from here. Michael Hoffman -- Stifel Financial Corp. -- Analyst And then everybody, of course, is trying to figure out how they're supposed to model 25 already. But if we -- you have to have some assumptions. So like what we think inflation is, what we think GDP is. If we said 3% inflation and 2.5% GDP, your price cost spread on that number should still produce probably 30 basis points of margin and then you still have everything John and Tamara, sorry, Tara. That's a mouthful. This is my sixth earnings call in the last seven hours. So it's running together. All that self-help's still left too. Is that the right way to think about without putting the number on the increments? I start with 30 price cost spread management, somewhere between 29.5 and 30, add that 30 to it, and then I get self-help? Devina Rankin -- Executive Vice President, Chief Financial Officer I think that you've characterized it well in terms of self-help. I think it's that continuous improvement mindset, as well as some of the things that were out of our control like truck deliveries for a while. We've really moved past that headwind and are starting to see strong traction from getting the assets that we need to run our business. Jim Fish -- President and Chief Executive Officer I look at it as continuous improvement, Michael. Self-help kind of sounds like I was an alcoholic and I'm coming off the bottle. Michael Hoffman -- Stifel Financial Corp. -- Analyst I didn't mean it pejoratively. I think of it as things that you can do that you control as opposed to relying on the macro. Jim Fish -- President and Chief Executive Officer I know. Just giving you a little bit of a hard time. Michael Hoffman -- Stifel Financial Corp. -- Analyst But what are you drinking these days? So cadence, Devina, in 4Q, you said first half, second half, EBITDA growth should be about equal. Does anything change with the performance at this juncture? Devina Rankin -- Executive Vice President, Chief Financial Officer The only thing I would say is that first half solid waste growth is even greater than what we had projected, because what you saw is the strong margin performance and growth from the solid waste business really showed up more quickly than we anticipated. So that solid waste lift comes more heavily weighted toward the first half of the year. Michael Hoffman -- Stifel Financial Corp. -- Analyst So a little more weighting than slightly as opposed to evenly. OK. Devina Rankin -- Executive Vice President, Chief Financial Officer Right. Michael Hoffman -- Stifel Financial Corp. -- Analyst And on the $85 million of operational leverage, how much of that is the ITC benefit that runs through gross margin instead of through the tax line? Devina Rankin -- Executive Vice President, Chief Financial Officer None of it, zero. Michael Hoffman -- Stifel Financial Corp. -- Analyst OK. Devina Rankin -- Executive Vice President, Chief Financial Officer All of it in the tax line. Michael Hoffman -- Stifel Financial Corp. -- Analyst Perfect. And then given the improvement in retention, I would assume the safety metrics are also at all-time goods? John Morris -- Executive Vice President, Chief Operating Officer Yeah. That's a good point, Michael. I mean, it takes that -- that's sort of a leading indicator of what we can expect from safety, but there's a clear distinction between somebody who's tenured in the seat and somebody who's not and that's not a critique of folks who are new in the seat. It's just a matter of having that experience and we do see a pretty wide spread between those who are tenured in operating a vehicle and those who are not. So as we continue to hold that number down, we expect the safety results to continue to improve as well. Jim Fish -- President and Chief Executive Officer By the way, Michael, most -- as we've said before, but the most important metric in this move from rear load to ASL is a safety metric. It's not a financial metric. Financials obviously are better, but it's a safety metric. And so as we continue to take a person from the back of the truck, which is the most dangerous place, honestly, in our entire operation behind the truck, as we continue to move that person inside the cab, that will benefit us significantly. Michael Hoffman -- Stifel Financial Corp. -- Analyst Yeah. And the last one for me, one of the powers of the roll-off business is that when it does slow, you park equipment, reposition drivers and raise prices. Is there anything different in this cycle? John Morris -- Executive Vice President, Chief Operating Officer No. Jim Fish -- President and Chief Executive Officer No. John Morris -- Executive Vice President, Chief Operating Officer Michael, I think you said it well. I mean, that's something we've been very focused on. Some of the technologies we've implemented over the last handful of quarters are really starting to show benefits is really around capacity planning and making sure that we can see around the corner, using, frankly, data and analytics that we didn't use a handful of years ago to be very predictive with a very small deviation between what history would tell us we need to plan for and what we actually plan for and we're still getting better at that. Jim Fish -- President and Chief Executive Officer But we might see a revenue hit per volume, but you might not see much, if anything, in EBITDA because you'd make those adjustments so quickly. That's part of the point. John Morris -- Executive Vice President, Chief Operating Officer We talked about the volume being down for the quarter, Michael, but I think the revenue was off about $7 million. So when you look at the amount of volume versus what we got from a revenue quality standpoint, from a margin standpoint, from that perspective, it was a good trade-off. Michael Hoffman -- Stifel Financial Corp. -- Analyst Great. All right. Thanks. Jim Fish -- President and Chief Executive Officer Thank you. Operator Please stand by for our next question. Our next question comes from the line of Stephanie Moore with Jefferies. Your line is open. Stephanie Moore -- Jefferies -- Analyst Hi. Good morning. Thank you. Jim Fish -- President and Chief Executive Officer Good morning. Devina Rankin -- Executive Vice President, Chief Financial Officer Good morning. Stephanie Moore -- Jefferies -- Analyst I wanted to maybe circle back on the automation opportunity within residential. Apologize if I missed it, but where are we left in terms of automating some of those routes, automated sidearms and the like? What has been complete? What is left to do? And then I think you did mention the opportunity for greater automation on the commercial side as well. So maybe if you could just expand on that opportunity and the timeline of starting to really kind of accelerate those efforts? Thank you. John Morris -- Executive Vice President, Chief Operating Officer I did comment briefly on that. We've taken about 800 rear-load trucks out of the fleet and about 650 rear-load routes since we really started earnestly pursuing this in early Q2. We've got roughly another 350 to 400 routes we have targeted this year. And I say 350 to 400 because it has to do with some truck deliveries. And that probably, when we get done in 2024, that probably puts us in about the sixth inning. If you want to continue with the baseball analogy, we've still got some room to go there. So hopefully that clarifies that. Jim Fish -- President and Chief Executive Officer And the commercial? John Morris -- Executive Vice President, Chief Operating Officer Commercial? I think on the commercial side where we continue to see benefit is really driving efficiency, and Jim commented on it. We've got some more sophisticated, frankly, tools to help us route our vehicles. And in some cases, the dynamic element is where we think, although it's less in commercial than roll-off, there is a dynamic element to commercial and our ability to real-time route that and to route around real-time traffic is another capability that we are just putting in the system now. Stephanie Moore -- Jefferies -- Analyst Got it. And then just to maybe touch on the labor aspect. So clearly seeing an incredible improvement in labor. You called out turnover. So I guess, if we could kind of break out the components, clearly turnover is at a significantly higher level. Are you seeing actual labor costs come down? Is the average employee being more productive because you're seeing more tenure? If you could just kind of maybe explain what we're seeing on the labor side or even back -- or is there a deflationary element of this as well? Thanks. Devina Rankin -- Executive Vice President, Chief Financial Officer Yeah. That's a great question. And I would tell you, in terms of the inflationary cost pressure on wages, we have seen that soften. We're currently at about 5% wage inflation for our driver population and that's certainly down from low-double digits at its peak. And so that's the labor component that's associated with inflation. The other pieces, John really talked about them, whether it's the route optimization work, efficiency, driver and technician retention, improved turnover. And then truck deliveries helps on that front too, because ultimately that is their office and they feel appreciated and like they have the assets that they need in order to serve the customer. And so we're seeing help in each of those aspects of the business. I think that the widening impact in terms of margin expansion from labor in the operating expense category is most significant on the efficiency front, but certainly helps on the improved inflation headwind. Stephanie Moore -- Jefferies -- Analyst Got it. Thank you so much. Operator Thank you. Please stand by for our next question. Our next question comes from the line of Tobey Sommer with Truist. Your line is open. Jack Wilson -- Truist Securities -- Analyst Yeah. Good morning. This is Jack Wilson on for Tobey. Can you maybe speak to sort of the other benefits of the recycling facility upgrades, other than sort of the potential to remove some positions and is that capacity-based or is that some efficiency gains we'll be seeing? Tara Hemmer -- Senior Vice President, Chief Sustainability Officer Sure. There's really two other components. The first is we really improve the quality of material that's generated. So we're able to sell some of the material at higher price points. So really moving mixed paper into higher grades and we get a price premium. That's been demonstrated in all of the automated MRFs that we brought online. And then also we're increasing the capacity at these facilities quite significantly and so we're able to bring in more volume and that's going to be a great example of how we can tie that back to our customers and grow recycling volumes and also grow our collection volumes too. Jack Wilson -- Truist Securities -- Analyst Thank you very much. Operator Thank you. Please stand by for our next question. Our next question comes from the line of Noah Kaye with Oppenheimer. Your line is open. Noah Kaye -- Oppenheimer and Company -- Analyst Good morning. Thanks for taking the questions. So the really strong flow through into free cash flow performance. Can we just walk through how we get that improvement of $100 million? It sounds like obviously there's the operating performance, maybe also some tax items going on and then some working capital improvements. How do we think about the delta? Devina Rankin -- Executive Vice President, Chief Financial Officer Yeah. So it really is an EBITDA story and the EBITDA dollar growth that we are projecting of $100 million is expected to flow directly through and the reason you don't have a tax offset there from the higher earnings is because we have $25 million of incremental expected ITC. So those two kind of offset each other such that our outlook for cash taxes is effectively flat. So EBITDA is what drove our outlook for $100 million increase in free cash flow for the year. I would tell you, I do expect some upside from that potentially, because we had such a strong quarter from a working capital perspective and certainly stronger than we expected. So in my experience, you have to wait to see whether that's timing related and so we didn't incorporate any working capital benefit in the revised guidance. Noah Kaye -- Oppenheimer and Company -- Analyst That's really clear and helpful. Thanks, Devina. And then a question that might not have a clear answer, but on PFAS, it seems like the EPA regulations kind of played out as expected, although pretty inequitable to have exemptions for municipal but not private solid waste it seems. I guess two things. One, can you talk about your expectations for costs, impacts, if everything kind of stands up the way it does as written today? And two, your thoughts on how that might potentially change, whether with congressional action or any further action on the part of EPA? John Morris -- Executive Vice President, Chief Operating Officer So no, I would tell you we're obviously, that's a topic we're following. I'm sure the whole industry is following very closely. There was some language in the last release from EPA that had some language about some protection for the landfill, but candidly, it didn't go far enough to give us a lot of security around the topic. So we're going to stay close to that. And as you can imagine, we're very vocal in all the right offices to make sure that we find a pragmatic approach to handling this, because it is an issue that obviously has to be managed. I would tell you that landfills, both C and D, are still considered to be very viable, long-term responsible repositories for PFAS, so we still see it as an opportunity. The CERCLA designation, which gives a little bit more latitude on the Superfund side, actually, we see that as an opportunity for some of, in particular, DoD sites that are going to start getting cleaned up. We're already doing some of that work now. And then lastly, I would tell you on the cost side, a little hard to predict now. What I will tell you is very encouraging, though. When I was with our post-collection team in the last few days, there's a lot going on on the technology front that we think we can bolt-on to our post-collection sites to be able to really effectively manage that at a cost that we can pass on to the customer. So hopefully I captured it all. Noah Kaye -- Oppenheimer and Company -- Analyst Yeah. Thanks very much, John. Appreciate it. Operator Thank you. Please stand by for our next question. Our next question comes from the line of Tony Bancroft with Gabelli Funds. Your line is open. Tony Bancroft -- Gabelli Funds -- Analyst Hey. Thanks so much. Congratulations, Jim, Devina, and John, and that team on a great quarter. I just -- longer term, what do you -- is there -- are there any opportunities maybe through something transformational, either be it like these large regionals that are still around that everyone talks about or maybe something in a different line of business? What is your sort of longer-term outlook on the business and any interest in other, maybe other opportunities? John Morris -- Executive Vice President, Chief Operating Officer Yeah. I think there certainly are always opportunities for us over the last couple of years. We've been focused on internal opportunities. We did say that with respect to M&A, that we were sticking with our guidance that we've given the last couple of years of $100 million to $200 million, but that there was some opportunity and the pipeline looked pretty strong. So I do think there's opportunity for us to grow both organically, as we've talked a lot on this call, but also inorganically and we just got to make sure it's the right acquisition that we feel like has a good strategic long-term prospect. Tony Bancroft -- Gabelli Funds -- Analyst Great. Thank you so much. Great job. John Morris -- Executive Vice President, Chief Operating Officer Thank you. Devina Rankin -- Executive Vice President, Chief Financial Officer Thank you, Tony. Operator Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Jim Fish for closing remarks. Jim Fish -- President and Chief Executive Officer OK. Well, thank you all for joining us today. We appreciate your participation and we look forward to talking to you next quarter. Answer:

WM's first-quarter 2024 earnings conference call

Operator Hello and thank you for standing by. Welcome to WM's first-quarter 2024 earnings conference call. [Operator instructions] I would now like to hand the conference over to Ed Egl, Senior director of investor relations. You may begin. Ed Egl -- Senior Director, Investor Relations Thank you, Tawanda. Good morning, everyone. And thank you for joining us for our first-quarter 2024 earnings conference call. With me this morning are Jim Fish, president and chief executive officer; John Morris, executive vice president and chief operating officer; and Devina Rankin, executive vice president and chief financial officer. You will hear prepared comments from each of them today. Jim will cover high-level financials and provide a strategic update, John will cover an operating overview and Devina will cover the details of the financials. Before we get started, please note that we follow Form 8-K that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release, and the schedules for the press release include important information. During the call, you will hear forward-looking statements which are based on current expectations, projections, or opinions about future periods. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including our most recent Form 10-K. John will discuss our results in the areas of yield and volume, which, unless stated otherwise, are more specifically references to internal revenue growth or IRG from yield or volume. During the call, Jim, John, and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization. Any comparisons, unless otherwise stated, will be with the prior year period. Net income, EPS, income from operations and margin, operating EBITDA and margin, and prior period operating expense results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations. Additionally, projected future operating EBITDA and margin is anticipated to be adjusted to exclude such items that are not currently determinable but may be significant. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release and tables, which can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections. This call is being recorded and will be available 24 hours a day beginning approximately 1 P.M.. Eastern Time today. To hear a replay of the call, access the WM website at www.investors.wm.com. Time-sensitive information provided during today's call, which is occurring on April 25th, 2024, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of WM is prohibited. Now I'll turn the call over to WM's president and CEO, Jim Fish. Jim Fish -- President and Chief Executive Officer All right. Thanks, Ed, and thank you all for joining us. The WM team delivered another quarter of strong financial results to start 2024, powered by outstanding operational performance in the Collection and Disposal business. Total company operating EBITDA grew nearly 15% in the first quarter and margin expanded 240 basis points, driven by substantial momentum on cost optimization efforts and disciplined execution on our pricing programs. Last quarter, we said the areas of strength in 2024 would look very similar to those of 2023 and that was definitely the case in Q1. Continued traction on cost optimization led to our third consecutive quarter of operating EBITDA margin above 29.5%, with Q1 coming in at 29.6% in the historically lowest margin quarter of the year. This margin result exceeded our expectations and reflects the tangible benefits of technology on our operating costs, the sustained effectiveness of our pricing strategy and the substantial progress we're delivering on our sustainability initiatives. It's our track record in these areas that gives us confidence we're positioned to deliver our highest-ever full-year operating EBITDA margin between 29.7% and 30.2%, which is more than 100 basis points of expansion from 2023 at the midpoint. Our ability to convert more of each revenue dollar to earnings and free cash flow allows us to raise our prior outlook for both operating EBITDA and free cash flow by $100 million. As we progress through 2024, we're maintaining our focus on three priorities, disciplined pricing across each line of business, leveraging technology to permanently reduce our cost to serve our customers, and executing on our strategic investments in sustainability growth. John and Devina will cover more details on where we're seeing traction within the cost structure and where we have further runway, so I want to spend a few minutes on the other two priorities, our pricing strategy and the progress we're making in expanding our sustainability businesses. Beginning with pricing, we're pleased with the results we've seen from embracing a customer lifetime value model. Our teams are able to leverage customer-specific analysis to understand where a customer is on their journey and design actionable strategies that will extend customer attention, improve profitability or both. We're confident that we've found a winning approach to data-driven decision-making that optimizes price to reflect the value of the services we deliver, the strength of the asset network and our leading commitment to environmental sustainability. Our first quarter results, again, show that we have the ability to leverage price increases to cover costs and grow margin while also reducing customer churn. Shifting to our sustainability businesses, during the quarter, we delivered growth projects across the recycling and Renewable Energy businesses. This includes completing a large recycling upgrade in Germantown, Wisconsin. The updated facility relies on state-of-the-art equipment that reduces labor costs, increases throughput by 20%, up to 60 tons of material per hour, and improves product quality. We have another nine upgraded facilities scheduled for completion this year and we'll be opening three new recycling facilities and expanding our industry-leading single stream network even further. Additionally, we've completed a new renewable natural gas facility this quarter at our DFW Landfill in the Dallas-Fort Worth market, and we remain on track to commission another four new renewable natural gas facilities in 2024. We're also excited to announce that WM was just named the official sustainability partner of Major League Baseball. WM's work with MLB is the first collaboration of its kind between an environmental services company and a professional sports league team -- sports team league. With this partnership, we have the opportunity to offer services to all 30 MLB clubs in the United States and Canada. We expect to leverage our expertise to build comprehensive plans to improve the environmental impact of Major League Baseball and its clubs. In closing, I want to thank our WM team for their -- for all their hard work during the quarter. I'm immensely proud of their dedication and execution, which have helped achieve such strong financial results. And I'll now turn the call over to John to discuss our operational results. John Morris -- Executive Vice President, Chief Operating Officer Thanks, Jim, and good morning. In the first quarter, operating expenses and percentage of revenue improved 210 basis points year over year to 60.9%, continuing the positive trend of our discipline management of operating costs, particularly in our collection business. Through strategic investments and innovative solutions and process optimization, we delivered improvements in operational efficiency, extracting costs and setting a new standard for managing the middle of the P&L. Combining this strong operating expense performance with the discipline pricing performance Jim described, we greatly enhanced overall operating EBITDA margins. In the first quarter, operating EBITDA in our Collection and Disposal business grew $212 million and margin expanded 310 basis points to 36.6%. As we continue our journey of automation and optimization, we remain committed to harnessing the power of technology to drive sustainable growth, further reduce costs, and improve profitability. In the first quarter of 2024, our continued adoption of technology and automation initiatives led to substantial reductions in both labor costs and repair and maintenance expenses. On the labor front, efficiency in all three of our collection lines of business improved meaningfully from the first quarter of 2023 as our implementation continues to gain traction. As an example, we're seeing nice improvements in performance from our routing efficiency program, Next Day Optimization or NDO, in our industrial line of business. This tool allows us to more dynamically route and it improves our efficiency, which is reducing our cost to serve and improving our asset planning. Currently, we have deployed NDO at 92% of our collection sites and the majority of those are already achieving or exceeding efficiency targets. Additionally, we are achieving great results in the automation of our residential routes. Through Q1, we have automated over 650 routes and removed almost 800 rear load trucks since 2022. This has led to upwards of a 30% efficiency gain and residential EBITDA margins approaching 20%. The integration of these technology investments coupled with the benefits of improved driver retention have resulted in 135 basis point improvement in labor costs as a percentage of revenue. In the first quarter of 2024, driver turnover improved to about 18% down from over 22% a year ago. We expect ongoing benefits from continued moderation inflation, as well as the investments we're making in our people and processes as we progress through the year. Turning to repair and maintenance, in the first quarter, repair and maintenance spending decreased year over year for the first time in several years and spending as a percentage of revenue improved 50 basis points. In addition to our strong process discipline, we are also leveraging technology to reduce these costs. These technologies have enabled us to digitize much of our workflow, beginning with all of our technicians who now have portable technology in their hands. These tools facilitate our ability to assign and track work, drive technician efficiency, reduce downtime, and improve asset utilization. Our results are encouraging and we see further runway to optimize repair and maintenance costs in the future. In addition to great operating cost performance, we continue to deliver topline growth primarily through discipline execution on our pricing programs. Our customer lifetime value model continues to drive strong organic revenue growth and our sales metrics in the quarter are a clear indication of our success in profitably growing the Collection and Disposal business. Churn was near the lowest rate that we've ever seen in 8.5%, new business improved 16%, and continues to outpace lost business. Rollbacks remain in the low double digits, net service increases remain positive and our net promoter score improved by almost 12% year over year. Looking at our revenue growth, as Jim said, we've seen a strong start to the year in pricing. Volume has been relatively consistent with our original expectations with the exception of our temporary roll-off business. The softness in its volume category reflects some slowness in the homebuilding and industrial segments of the macro economy. C&D was also impacted with the lapping of volumes related to Hurricane Ian cleanup last year. With that said, our two bellwethers for demand, commercial collection and MSW volumes were positive in the quarter and we also experienced a nice uptick in special waste tons in the quarter. For the full year, we now expect total revenue growth of between 5% and 5.75%. The revision from our prior expectation is driven by two things. The softer temporary roll-off volumes mentioned and a lower outlook for energy surcharge revenue given the decline in the average diesel cost relative to our expectations. Our pricing remains on track and in some lines of business ahead of our original expectations. Our teams delivered outstanding performance in the first quarter and I can't thank them enough for all their contributions to our success. I'll now turn the call over to Devina to discuss our first-quarter financial results in further detail. Devina Rankin -- Executive Vice President, Chief Financial Officer Thanks, John, and good morning. Growing our adjusted operating EBITDA margin by 240 basis points in the first quarter stands out as the best indicator of WM's strong start to the year. As John discussed, the lion's share of this margin expansion came from the optimization of our operating performance in the collection business, with labor efficiency and improved repair and maintenance costs driving a 270 basis point improvement in our total company margin from the core. Our continued focus on managing our back office spending also contributed 20 basis points of margin expansion in the quarter, with SG&A as a percentage of revenue coming in at 9.5%. Commodity impacts in the quarter largely offset each other as fuel price impacts benefited margin by about 40 basis points and recycling results decreased margin by about 30 basis points, primarily from the impact of higher recycled commodity pricing in the brokerage business. The remainder of the margin bridge from Q1 of 2023 to Q1 of 2024 relates to a headwind of about 60 basis points from the combined impacts of incentive compensation and costs incurred by our corporate team to drive adoption of our optimization program. Our strong margin and earnings combined with benefits from working capital and lower cash incentive compensation payments led to robust growth in first-quarter cash from operations. We're starting the year strong with cash flow from operations as a percentage of revenue up over 500 basis points to 26.5%, demonstrating the value of our margin expansion to growing the company's cash flow yield. Capital expenditures totaled $668 million in the quarter with both capital spending to support the base business and our investments in sustainability growth tracking as planned. Our first-quarter free cash flow of $714 million allowed us to invest across all of our capital allocation priorities. We returned more than $550 million to shareholders paying more than $300 million in dividends and repurchasing $250 million of our stock. And all of this, we still maintained our leverage ratio at our target levels of about 2.6 times. With our strong balance sheet and robust earnings and cash flow outlook, we are well-positioned to continue our commitment to shareholder returns and long-term growth. Our effective tax rate in the first quarter was 18.6%, which includes a $37 million benefit from investment tax credits related to the development of renewable natural gas projects. As we noted during our fourth-quarter earnings call, our original expectation was that we would see $120 million benefit in 2024 from the ITC and we now expect $145 million for the full year. We expect this to benefit both our tax expense and free cash flow in 2024. As Jim mentioned, our great start to the year has put us on a higher growth trajectory for the full year than we initially anticipated when we gave guidance last quarter. We're confident that our full-year operating EBITDA margin results can exceed the very strong 29.6% we achieved in the first quarter and that is reflected in our increased outlook for 2024 operating EBITDA and margin. As we think about the balance of the year, we anticipate that outsized earnings and margin growth continues in the second and third quarters from our pricing programs and momentum and operating efficiencies that began late in the third quarter of 2023. We continue to expect that growth in our sustainability businesses will be more weighted to the back half of the year as more recycling and renewable natural gas projects begin operations. Pulling these points together, we want to emphasize that $85 million of the $100 million increase in our operating EBITDA guidance for the year is attributable to our team's strong execution on driving efficiency and the improved cost to serve in the collection business. The remaining $15 million is related to higher recycled commodity price expectations for the year. To wrap up, we're very pleased to deliver our first quarter results that exceeded our own high expectations. Our sustained strong results are a testament to the investments we have made in talent, technology, and assets over the past several years. As always, I want to thank the entire WM team for their focus and dedication to delivering on our commitments to our customers, our communities and our shareholders. With that, Tawanda, let's open the line for questions. Questions & Answers: Operator Thank you. [Operator instructions] Our first question comes from the line of Tyler Brown with Raymond James. Your line is open. Tyler Brown -- Raymond James -- Analyst Hey. Good morning. Jim Fish -- President and Chief Executive Officer Good morning. Devina Rankin -- Executive Vice President, Chief Financial Officer Good morning. John Morris -- Executive Vice President, Chief Operating Officer Good morning, Tyler. Tyler Brown -- Raymond James -- Analyst Hey. So I guess, we got to come back to this stellar merger performance here. So, John, if I just look at Collection and Disposal EBITDA, I think, you said it was up $212 million on maybe only $190 million increase in revenue. So I just want to understand how we're getting such incredible flow through. I mean, it sounds like you're seeing outright deflation in certain items, but maybe just a little more color, and just to be clear, there wasn't, Devina, any sort of one-time accrual reversal or anything else that really impacted the quarter. Is that correct? Devina Rankin -- Executive Vice President, Chief Financial Officer So I'll start with the easy one and confirm there were no accrual reversals or one-time items in the first quarter. The only kind of one-timer that we could point out is actually the loss of Ian volumes from the prior year that would have been a hill to climb from a margin perspective, because as you know, storm volumes come at high margins. So in fact, the $212 million operating EBITDA growth in the Collection and Disposal business came with 310 basis points of margin expansion to 36.6% in the Collection and Disposal business. John Morris -- Executive Vice President, Chief Operating Officer Yeah. A little more color, Tyler. I think a few things are occurring. One is, as I mentioned in my prepared remarks, we're seeing a nice uptick in efficiency in all three lines of business, from the mid-single digits up to the high-single digits for residential. Residential was a really good story if you look at the table in the back and you see we still traded about 2.9% of the volume down, but we made a good bit more money for the quarter and I think we're starting to strike a better balance there. I mentioned in a prepared remarks, residential margins are approaching 20% at the EBITDA line. I think the M&R piece is certainly worthwhile on touching. Last year we took delivery of about 1,450 trucks. We'll get about 1,800 this year and that's having a meaningful impact. We felt like we've been chasing M&R costs and labor related to maintenance and repairs. And for us to actually tamp down costs quarter-over-quarter for the year is something, as I mentioned, we haven't done in a number of years. So I think it's been good efficiency, good cost discipline. Our pricing remains robust, especially across the Collection and Disposal lines. So I think a lot of that came together in Q1. And as Devina mentioned, there really was no one-timer that benefited that. That was just strong execution by the team in the field. Tyler Brown -- Raymond James -- Analyst Yeah. Absolutely. Now, John, you mentioned 20% resi margin. So can you just remind us where those margins were a few years ago, because I believe they're a fair bit lower. And then do you think that those can approach more company average or is this kind of more where you would expect them? John Morris -- Executive Vice President, Chief Operating Officer Yeah. You're testing my memory here, Tyler. But I would say around 10%, 11% is what I recall. Tyler Brown -- Raymond James -- Analyst Yeah. John Morris -- Executive Vice President, Chief Operating Officer And I've said when we started down this journey, if you will, to really rationalize some of the residential business, we wanted residential to compete with commercial and industrial, and while we're not quite there yet, we can see a point where that gets a little bit closer to converging. And I think as that happens, that 2.5% to 3% volume that we've been kind of trading off on average will start to moderate as we get closer to that line. Tyler Brown -- Raymond James -- Analyst OK. And then my last one here, Devina, just want to make sure that we kind of have a level set on Q2. So if I look back historically, margins do typically rise, I don't know, 150 basis points, 200 basis points sequentially from Q1 to Q2. Just anything to think about why that wouldn't be the case or can you just help us shape the Q2 margin expectation? Thank you. Devina Rankin -- Executive Vice President, Chief Financial Officer Yeah. I think it's a great question. What I would tell you that we're looking at is a little softer climb from Q1 to Q2 in the normal sequential trends, but still a marked improvement from Q1, and coming in, I would say above 30%, pretty handily in Q2 and Q3 in particular. We're currently expecting a little north of 30% in Q2 and potentially even north of 31% in Q3. Jim Fish -- President and Chief Executive Officer Tyler, I think part of that, I'm not sure it's -- that we're seeing any softening, it's just that we're kind of in uncharted territory here in terms of margin. I mean, which is a good thing, but to have a range that includes, and we've talked about numbers starting with a three for a long time and now we finally have a number that starts with a three in our guidance range. So we're just being a little bit cautious about it. We certainly saw the trend that you just mentioned from Q1 to Q2 and on, but as did the field. But we feel like we're being maybe a little cautious as we get into some uncharted territory. Tyler Brown -- Raymond James -- Analyst Yeah. Totally get it. Thank you so much. Operator Thank you. Please stand by for our next question. Our next question comes from the line of Bryan Burgmeier with Citi. Your line is open. Bryan Burgmeier -- Citi -- Analyst Thanks for taking the question. I believe you said, revised EBITDA guidance is about $85 million and underlying improvement. I guess there would be a headwind from the roll-off volume. So it's maybe even more than $100 million sort of underlying number. Did fuel costs play a role in the EBITDA guidance raise? And maybe just from a big picture, what changed over the last two months to three months that maybe allowed you to realize these savings a little bit quicker than you may have anticipated in your original view? Devina Rankin -- Executive Vice President, Chief Financial Officer Yeah. A great question. I would tell you in terms of the $85 million, it really is predominantly oriented to two things. And one, the biggest driver is our cost efficiency performance and the really strong execution on reducing cost to serve that John's talked so much about on labor and repair and maintenance. The other is the strong execution on price and that's moderately ahead of the expectations that we had when we came into the year and we think that will hold for the rest of 2024. With respect to fuel, it really didn't impact our dollar outlook for the business. What it did impact is our margin outlook for the business. And so the help in margin was 40 basis points in the quarter and we think that some of that margin help continues into Q2 and Q3. With respect to how we executed in Q1 that gave us confidence in raising the margin outlook. I would tell you, we saw a really strong margin performance in the fourth quarter, really beginning in the third quarter of 2023, but again in Q4. And because Q4 and Q1 on a seasonally adjusted basis tend to be lower volume and lower margin quarters for us, we really wanted to preserve some of the upside potential until we saw some of the normal seasonal upticks in our business in the second quarter, but with the strong performance in the first quarter, we really could not wait to reflect that we now expect a full year that will hit that 100 margin -- 100 basis points of margin expansion. John Morris -- Executive Vice President, Chief Operating Officer I mean, I think, the risk there, Devina, was, as we discussed it, Bryan, the risk was with such a strong performance, if we didn't raise guidance, there might've been questions on this call about, so is there something that we're not seeing that you're seeing, is there something that you had that benefited you, and of course, Devina already answered that. The answer was no. But we were a little concerned that if we didn't raise margin after such a huge margin performance, that by the way, was on the heels of two other quarters, that you might start asking questions about it, are we missing something and you're not missing anything, we're just improving the margin that much. Bryan Burgmeier -- Citi -- Analyst Got it. Got it. Thanks for that detail. Last question for me is, I know we were waiting for a little bit more detail on the investment tax credits and it seems like you put a comment in the press release, $37 million in 1Q, $145 million for the year. I guess I'm just curious if that was kind of in line with your original expectations and are we still kind of tracking for like a $300 million benefit over the course of your investments through 2026? Thank you. Good luck in the quarter. I'll turn it over. Devina Rankin -- Executive Vice President, Chief Financial Officer Great. Thank you. So our original expectations for 2024 were $120 million. So our current outlook of $145 million is a $25 million increase of the ITC benefit in 2024 specifically. With regard to our full outlook for ITC capture over the development plan that we have outlined, we are tracking toward the high end of the original range of $250 million to $300 million. Operator Thank you. Please stand by for our next question. Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open. Jerry Revich -- Goldman Sachs -- Analyst Yes. Hi. Good morning, everyone. Jim Fish -- President and Chief Executive Officer Good morning. Devina Rankin -- Executive Vice President, Chief Financial Officer Good morning, Jerry. Jerry Revich -- Goldman Sachs -- Analyst Really nice performance this quarter and over time you folks have consistently expanded margins by 20 basis points, 30 basis points per year, almost like clockwork. And I'm wondering, as we think about the long-term plan from here, should we be thinking about 2025 as a lower year of margin expansion, because we're getting such good price cost spread this year or does that not factor into how you're thinking about the longer term plan that you folks unveiled what six months or nine months ago? Devina Rankin -- Executive Vice President, Chief Financial Officer It's a great question and while it's a little too early for us to be looking to specifically set guidance for 2025, I do agree with you that there are some fundamentals that would make us a little more cautious to effectively repeating a 20 basis point to 30 basis point margin expansion year on year. But that being said, I would tell you there are some fundamentals with respect to what we're seeing that we know have additional runway and growth, and those fundamentals really come on the labor and repair and maintenance side. So repair and maintenance long term has been below 9% of revenue. In Q1, we're at 9.5%. So 50 basis points of savings across a year is $100 million of EBITDA. So if we could see ourselves get there, I do think that that's one of the things that could give us some incremental traction above that 20 basis points to 30 basis points long-term. The one thing that we don't really have clarity on yet, but we -- based on what we know today will be a headwind is that the alternative fuel tax credits will expire at the end of 2024 and that's been about a $55 million benefit to our operating expenses on an annual basis. So that could be a headwind that would temp down our margin for the years ahead. But we really do think there's strong traction in labor and repair and maintenance that will more than offset that headwind. Jim Fish -- President and Chief Executive Officer Jerry, I think there's some, it's always going to be a combination of headwinds and tailwinds. Tara's here, she can talk about the fact that we have a bit of a tailwind next year when it comes to recycle shutdowns. I mean, this year we're going to see somewhere in the neighborhood of $30 million, maybe a little less, as an impact, a negative impact on us from shutting down these recycle plants while we rebuild them. That drops off pretty significantly next year. So you probably have somewhere in the neighborhood of a $25 million pickup or tailwind next year. The other thing that John and I and Devina have all talked a lot about is this kind of reduction in heads, but doing it in a low-impact way. So it's just through attrition. And when we think about that, as I look at our actual headcount from 2022, it's down over 2,000 people, and none of those people were not -- none of those people were riffed. We're not going through an arbitrary reduction in force. That's just choosing to not replace folks and we've given about four or five different categories where that happens. But several of those categories are still not complete. One of them John's talked about, which is the shift from rear load to automated side load. Each time you do that, there is a person that is no longer needed on the back of the truck. As you can imagine, we have pretty high turnover there, so we just take advantage of that through attrition. Similarly, in [Inaudible] and the recycling business, as we rebuild these plants, we're seeing somewhere between a 30% and 40% reduction in labor cost and so there are some related heads that come out with that. So we still, even in 2024, have another, probably, John, 1,200 total heads that will come out -- John Morris -- Executive Vice President, Chief Operating Officer Right -- Jim Fish -- President and Chief Executive Officer -- if you combine those two categories and that takes us from 2,000 to 3,200, 3,300. So that's a big, big part of this, is that we're doing this in a more labor-efficient way and it really is coming to fruition. Jerry Revich -- Goldman Sachs -- Analyst Super. And Jim, maybe just to expand on the recycling part of that conversation. So we have the plant downtime this year, but also the returns on the capex that you folks are delivering. So what level of improvement are you anticipating 2025 versus 2024? Correct me if I'm wrong, I think the original plan called for something like a $90 million year-over-year benefit. Is that still the plan for 2025 versus 2024, so we get that on top of the $25 million swing that you spoke to? Tara Hemmer -- Senior Vice President, Chief Sustainability Officer I can speak to that. So as we mentioned, Jerry, we have 13 plants that we expect to bring online this year and another 13 next year, and those remain on track today. If you think about our exit in 2024 related to headcount, we'll be at a point where we've gotten 70% of the headcount out by the end of 2024 on the automation journey. So we should see not just the pickup from shutdown costs, but also from the benefit of 30% improvement in labor costs and operating expenses from those plants. It's a great example of how we're able to bring to life in some of these communities. We were just up at Germantown last week for the grand opening celebration, and bringing in more capacity is a great way to differentiate WM and these key markets that we operate in. Jim Fish -- President and Chief Executive Officer So to use a baseball analogy, since we just signed a deal with Major League Baseball, Tara will be in the seventh inning at the end of the year? Tara Hemmer -- Senior Vice President, Chief Sustainability Officer Exactly. Seventh inning stretch. Jim Fish -- President and Chief Executive Officer All right. Perfect. Operator Thank you. Jerry Revich -- Goldman Sachs -- Analyst I appreciate the discussion. Thank you. Jim Fish -- President and Chief Executive Officer Yeah. Thanks, Jerry. Operator Please stand by for our next question. Our next question comes from the line of Sabahat Khan with RBC Capital Markets. Your line is open. Sabahat Khan -- RBC Capital Markets -- Analyst Great. Thanks and good morning. Quite a lot of color there on kind of the tangible labor savings. Is there any way to quantify some of the operational efficiencies or savings in terms of the technology investments that you're making, some of the data analytics tools, just in terms of how much bps you might expect over one year, three years and what you're kind of seeing relative to expectations? John Morris -- Executive Vice President, Chief Operating Officer Well, I think, the one line we can certainly look at, I think Devina had some of that in her prepared remarks, is kind of what the ratio is of direct labor to revenue. We saw a nice improvement there. I think that's a combination of two things. One, we've continued to be very disciplined about pricing. We've said we're playing the long game here and I comment about customer lifetime value. So I think part of the benefit is we've continued to drive quality revenue at the topline across all the collection lines, and frankly, the post-collection line is worth noting. It didn't come out, but this was our best quarter in history from a landfill pricing standpoint and a transfer station perspective. So the topline is strong. But I mentioned efficiency and part of what's driving that mid to up to high single-digit efficiency is the use of technology to drive efficiency. Our turnover number's worth commenting on again, because we are at all-time lows at about 18% and that takes a lot of pressure off if you think about the cost, the friction cost of training folks, putting second people in trucks, and all those things. So that's another part of it. And we're down about 750 routes year over year and you can look at our volume. Part of it's being driven by the automation of residential, but the rest of it is we are less capital intensive for basically doing more work in the commercial industrial lines year over year. Jim Fish -- President and Chief Executive Officer John, you mentioned also -- and John mentioned that in his script that 90% of the roll-off line of business has been rolled out on this NDO, which is the term for our optimization model. But we haven't rolled out commercial and haven't rolled out residential on that model yet. So we still have a fair amount of room to go there and all of this was really four years or five years ago an admission by us that our routing was not as efficient as it could be if we truly used technology to benefit that. I think that's probably the case across the entire industry and so four years or five years ago, we decided that that had to change and now you're seeing the fruits of that. Sabahat Khan -- RBC Capital Markets -- Analyst Great. And then, I guess, as you think about optimizing pricing and some of the data analytics you're using to figure out the right price for the right customer based on their value, do you believe based on the work you've done to date that the model is at a right place? I'm sure there's an element of test and learn, but do you think you've got the right factors? What sort of your data telling you in terms of how well that model's working? Jim Fish -- President and Chief Executive Officer I think we -- I -- look, there's always room for improvement. So I would not say that we've perfected this. But from when I was a price guy back in the early 2000s, it's night and day. I think the team has done a spectacular job using data and analytics to their benefit and making sure that we are looking at the customer who really drives the decision and as opposed to driving the decision just purely based on a number that we needed to hit in our price metrics. So I would tell you that we've made a ton of progress there. Are we perfect? We're not, but so much better than we used to be. John Morris -- Executive Vice President, Chief Operating Officer I would say, Jim, our customer metrics, I commented on it. That's really the barometer. Jim Fish -- President and Chief Executive Officer OK. John Morris -- Executive Vice President, Chief Operating Officer When you look at our gross and net PIs, when you look at customer churn, service increases and decrease in our net promoter score, I think those are all the measurements sort of right to the equal sign of how effective our program is. Sabahat Khan -- RBC Capital Markets -- Analyst And then just one quick one, I guess, on the revenue guidance update there. I think just want to get a little bit more color on the software rollout portion. It sounds like a bit of homebuilding and industrial slowdown. Is that just a change in the view of how the macro's going to evolve for the rest of the year based on what you've seen here today or was there any specific issue that came up in industry? I just want to get a bit more color on the evolution of the view on the roll-off and the macro? Thanks. Jim Fish -- President and Chief Executive Officer Yeah. I think the takeaway here is we were guiding to about 1% volume and now we're probably down to about a 0.5%. So it's a move, but it's not that meaningful of a move. It's early in the year, too. I would tell you that when we were preparing for today, we're obviously looking at Q1, Q4, and we've seen a little bit of an uptick here in April. It looks like it's getting a tad better. I think the bigger news is aside from a little softness in the housing sector, which we spoke to, I think the rest of the business is still performing well. When you look at our post-collection volume, particularly MSW and our commercial volume still performing well, that's what really gives us conviction about the $100 million for the balance a year that Devina commented on. Sabahat Khan -- RBC Capital Markets -- Analyst Great. Thank you. Operator Thank you. Please stand by for our next question. Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is open. Hilary Lee -- Morgan Stanley -- Analyst Hi. This is Hilary Lee on for Toni. Thanks for taking the questions and congrats on the quarter, guys. Just want to touch on pricing a little bit. So when you said earlier that you expect price to hold for the rest of the year, does that mean you're expecting core price to be closer to around that 7% rather than the 6% you said last quarter? Jim Fish -- President and Chief Executive Officer Well, we did say for price that, and I mentioned it earlier, that we actually exceeded a little bit of our expectations. So we're not changing anything for the year, but your point is well taken, that we actually ended up a little bit higher than the full-year guidance and so that's a positive for us. At this point, we'll leave it where we originally set it though. Hilary Lee -- Morgan Stanley -- Analyst Got it. And as a follow-up, just wanted to touch on the sustainability. I know last quarter you talked about having about $115 million of EBITDA coming from the sustainability investments for 2024. Just wondering if you would be able to kind of give us a little bit of information on potentially the cadence or kind of the split between RNG and recycling. Any details would help. Thanks. Tara Hemmer -- Senior Vice President, Chief Sustainability Officer Sure. The $15 million increase that Devina referenced, the most significant portion of that is from recycling and really from commodity prices, and not a whole lot of benefit from the Renewable Energy business. And the reason for that is we today have about 85% of our volume locked in, in either short, mid- or long-term offtake at this point, which is an increase from what we had said during our last call, which was roughly two-thirds. So while RIN prices are increasing and we saw -- we've seen increased RIN prices, we've also seen some offsetting items on really natural gas prices and power prices related to a more mild winter that we had this year. Devina Rankin -- Executive Vice President, Chief Financial Officer And in terms of the cadence of when that shows up, it will be more heavily weighted toward Q3 and Q4, because our timeline with regard to the incremental projects that are coming online is weighted toward the back half of the year. Hilary Lee -- Morgan Stanley -- Analyst Great. Thanks for the questions and congrats again on the quarter. Devina Rankin -- Executive Vice President, Chief Financial Officer Thank you. Jim Fish -- President and Chief Executive Officer Thank you. Operator Please stand by for our next question. Our next question comes from the line of Michael Hoffman with Stifel. Your line is open. Michael Hoffman -- Stifel Financial Corp. -- Analyst Thank you. Good morning, everyone. Devina, Jim, John, do we have a new baseline in margins? We can now say 29.5 to 30 is the new baseline and we'll grow from there? Devina Rankin -- Executive Vice President, Chief Financial Officer There's certainly nothing in the current year that tells us that this isn't the right baseline. So I do think that that's a great way to look at it, Michael. Everything that you know about the WM culture is one that's focused on the customer and focused on continuous improvement and I think those two things shown through and that commitment won't stop. So I do think the new baseline can go upward from here. Michael Hoffman -- Stifel Financial Corp. -- Analyst And then everybody, of course, is trying to figure out how they're supposed to model 25 already. But if we -- you have to have some assumptions. So like what we think inflation is, what we think GDP is. If we said 3% inflation and 2.5% GDP, your price cost spread on that number should still produce probably 30 basis points of margin and then you still have everything John and Tamara, sorry, Tara. That's a mouthful. This is my sixth earnings call in the last seven hours. So it's running together. All that self-help's still left too. Is that the right way to think about without putting the number on the increments? I start with 30 price cost spread management, somewhere between 29.5 and 30, add that 30 to it, and then I get self-help? Devina Rankin -- Executive Vice President, Chief Financial Officer I think that you've characterized it well in terms of self-help. I think it's that continuous improvement mindset, as well as some of the things that were out of our control like truck deliveries for a while. We've really moved past that headwind and are starting to see strong traction from getting the assets that we need to run our business. Jim Fish -- President and Chief Executive Officer I look at it as continuous improvement, Michael. Self-help kind of sounds like I was an alcoholic and I'm coming off the bottle. Michael Hoffman -- Stifel Financial Corp. -- Analyst I didn't mean it pejoratively. I think of it as things that you can do that you control as opposed to relying on the macro. Jim Fish -- President and Chief Executive Officer I know. Just giving you a little bit of a hard time. Michael Hoffman -- Stifel Financial Corp. -- Analyst But what are you drinking these days? So cadence, Devina, in 4Q, you said first half, second half, EBITDA growth should be about equal. Does anything change with the performance at this juncture? Devina Rankin -- Executive Vice President, Chief Financial Officer The only thing I would say is that first half solid waste growth is even greater than what we had projected, because what you saw is the strong margin performance and growth from the solid waste business really showed up more quickly than we anticipated. So that solid waste lift comes more heavily weighted toward the first half of the year. Michael Hoffman -- Stifel Financial Corp. -- Analyst So a little more weighting than slightly as opposed to evenly. OK. Devina Rankin -- Executive Vice President, Chief Financial Officer Right. Michael Hoffman -- Stifel Financial Corp. -- Analyst And on the $85 million of operational leverage, how much of that is the ITC benefit that runs through gross margin instead of through the tax line? Devina Rankin -- Executive Vice President, Chief Financial Officer None of it, zero. Michael Hoffman -- Stifel Financial Corp. -- Analyst OK. Devina Rankin -- Executive Vice President, Chief Financial Officer All of it in the tax line. Michael Hoffman -- Stifel Financial Corp. -- Analyst Perfect. And then given the improvement in retention, I would assume the safety metrics are also at all-time goods? John Morris -- Executive Vice President, Chief Operating Officer Yeah. That's a good point, Michael. I mean, it takes that -- that's sort of a leading indicator of what we can expect from safety, but there's a clear distinction between somebody who's tenured in the seat and somebody who's not and that's not a critique of folks who are new in the seat. It's just a matter of having that experience and we do see a pretty wide spread between those who are tenured in operating a vehicle and those who are not. So as we continue to hold that number down, we expect the safety results to continue to improve as well. Jim Fish -- President and Chief Executive Officer By the way, Michael, most -- as we've said before, but the most important metric in this move from rear load to ASL is a safety metric. It's not a financial metric. Financials obviously are better, but it's a safety metric. And so as we continue to take a person from the back of the truck, which is the most dangerous place, honestly, in our entire operation behind the truck, as we continue to move that person inside the cab, that will benefit us significantly. Michael Hoffman -- Stifel Financial Corp. -- Analyst Yeah. And the last one for me, one of the powers of the roll-off business is that when it does slow, you park equipment, reposition drivers and raise prices. Is there anything different in this cycle? John Morris -- Executive Vice President, Chief Operating Officer No. Jim Fish -- President and Chief Executive Officer No. John Morris -- Executive Vice President, Chief Operating Officer Michael, I think you said it well. I mean, that's something we've been very focused on. Some of the technologies we've implemented over the last handful of quarters are really starting to show benefits is really around capacity planning and making sure that we can see around the corner, using, frankly, data and analytics that we didn't use a handful of years ago to be very predictive with a very small deviation between what history would tell us we need to plan for and what we actually plan for and we're still getting better at that. Jim Fish -- President and Chief Executive Officer But we might see a revenue hit per volume, but you might not see much, if anything, in EBITDA because you'd make those adjustments so quickly. That's part of the point. John Morris -- Executive Vice President, Chief Operating Officer We talked about the volume being down for the quarter, Michael, but I think the revenue was off about $7 million. So when you look at the amount of volume versus what we got from a revenue quality standpoint, from a margin standpoint, from that perspective, it was a good trade-off. Michael Hoffman -- Stifel Financial Corp. -- Analyst Great. All right. Thanks. Jim Fish -- President and Chief Executive Officer Thank you. Operator Please stand by for our next question. Our next question comes from the line of Stephanie Moore with Jefferies. Your line is open. Stephanie Moore -- Jefferies -- Analyst Hi. Good morning. Thank you. Jim Fish -- President and Chief Executive Officer Good morning. Devina Rankin -- Executive Vice President, Chief Financial Officer Good morning. Stephanie Moore -- Jefferies -- Analyst I wanted to maybe circle back on the automation opportunity within residential. Apologize if I missed it, but where are we left in terms of automating some of those routes, automated sidearms and the like? What has been complete? What is left to do? And then I think you did mention the opportunity for greater automation on the commercial side as well. So maybe if you could just expand on that opportunity and the timeline of starting to really kind of accelerate those efforts? Thank you. John Morris -- Executive Vice President, Chief Operating Officer I did comment briefly on that. We've taken about 800 rear-load trucks out of the fleet and about 650 rear-load routes since we really started earnestly pursuing this in early Q2. We've got roughly another 350 to 400 routes we have targeted this year. And I say 350 to 400 because it has to do with some truck deliveries. And that probably, when we get done in 2024, that probably puts us in about the sixth inning. If you want to continue with the baseball analogy, we've still got some room to go there. So hopefully that clarifies that. Jim Fish -- President and Chief Executive Officer And the commercial? John Morris -- Executive Vice President, Chief Operating Officer Commercial? I think on the commercial side where we continue to see benefit is really driving efficiency, and Jim commented on it. We've got some more sophisticated, frankly, tools to help us route our vehicles. And in some cases, the dynamic element is where we think, although it's less in commercial than roll-off, there is a dynamic element to commercial and our ability to real-time route that and to route around real-time traffic is another capability that we are just putting in the system now. Stephanie Moore -- Jefferies -- Analyst Got it. And then just to maybe touch on the labor aspect. So clearly seeing an incredible improvement in labor. You called out turnover. So I guess, if we could kind of break out the components, clearly turnover is at a significantly higher level. Are you seeing actual labor costs come down? Is the average employee being more productive because you're seeing more tenure? If you could just kind of maybe explain what we're seeing on the labor side or even back -- or is there a deflationary element of this as well? Thanks. Devina Rankin -- Executive Vice President, Chief Financial Officer Yeah. That's a great question. And I would tell you, in terms of the inflationary cost pressure on wages, we have seen that soften. We're currently at about 5% wage inflation for our driver population and that's certainly down from low-double digits at its peak. And so that's the labor component that's associated with inflation. The other pieces, John really talked about them, whether it's the route optimization work, efficiency, driver and technician retention, improved turnover. And then truck deliveries helps on that front too, because ultimately that is their office and they feel appreciated and like they have the assets that they need in order to serve the customer. And so we're seeing help in each of those aspects of the business. I think that the widening impact in terms of margin expansion from labor in the operating expense category is most significant on the efficiency front, but certainly helps on the improved inflation headwind. Stephanie Moore -- Jefferies -- Analyst Got it. Thank you so much. Operator Thank you. Please stand by for our next question. Our next question comes from the line of Tobey Sommer with Truist. Your line is open. Jack Wilson -- Truist Securities -- Analyst Yeah. Good morning. This is Jack Wilson on for Tobey. Can you maybe speak to sort of the other benefits of the recycling facility upgrades, other than sort of the potential to remove some positions and is that capacity-based or is that some efficiency gains we'll be seeing? Tara Hemmer -- Senior Vice President, Chief Sustainability Officer Sure. There's really two other components. The first is we really improve the quality of material that's generated. So we're able to sell some of the material at higher price points. So really moving mixed paper into higher grades and we get a price premium. That's been demonstrated in all of the automated MRFs that we brought online. And then also we're increasing the capacity at these facilities quite significantly and so we're able to bring in more volume and that's going to be a great example of how we can tie that back to our customers and grow recycling volumes and also grow our collection volumes too. Jack Wilson -- Truist Securities -- Analyst Thank you very much. Operator Thank you. Please stand by for our next question. Our next question comes from the line of Noah Kaye with Oppenheimer. Your line is open. Noah Kaye -- Oppenheimer and Company -- Analyst Good morning. Thanks for taking the questions. So the really strong flow through into free cash flow performance. Can we just walk through how we get that improvement of $100 million? It sounds like obviously there's the operating performance, maybe also some tax items going on and then some working capital improvements. How do we think about the delta? Devina Rankin -- Executive Vice President, Chief Financial Officer Yeah. So it really is an EBITDA story and the EBITDA dollar growth that we are projecting of $100 million is expected to flow directly through and the reason you don't have a tax offset there from the higher earnings is because we have $25 million of incremental expected ITC. So those two kind of offset each other such that our outlook for cash taxes is effectively flat. So EBITDA is what drove our outlook for $100 million increase in free cash flow for the year. I would tell you, I do expect some upside from that potentially, because we had such a strong quarter from a working capital perspective and certainly stronger than we expected. So in my experience, you have to wait to see whether that's timing related and so we didn't incorporate any working capital benefit in the revised guidance. Noah Kaye -- Oppenheimer and Company -- Analyst That's really clear and helpful. Thanks, Devina. And then a question that might not have a clear answer, but on PFAS, it seems like the EPA regulations kind of played out as expected, although pretty inequitable to have exemptions for municipal but not private solid waste it seems. I guess two things. One, can you talk about your expectations for costs, impacts, if everything kind of stands up the way it does as written today? And two, your thoughts on how that might potentially change, whether with congressional action or any further action on the part of EPA? John Morris -- Executive Vice President, Chief Operating Officer So no, I would tell you we're obviously, that's a topic we're following. I'm sure the whole industry is following very closely. There was some language in the last release from EPA that had some language about some protection for the landfill, but candidly, it didn't go far enough to give us a lot of security around the topic. So we're going to stay close to that. And as you can imagine, we're very vocal in all the right offices to make sure that we find a pragmatic approach to handling this, because it is an issue that obviously has to be managed. I would tell you that landfills, both C and D, are still considered to be very viable, long-term responsible repositories for PFAS, so we still see it as an opportunity. The CERCLA designation, which gives a little bit more latitude on the Superfund side, actually, we see that as an opportunity for some of, in particular, DoD sites that are going to start getting cleaned up. We're already doing some of that work now. And then lastly, I would tell you on the cost side, a little hard to predict now. What I will tell you is very encouraging, though. When I was with our post-collection team in the last few days, there's a lot going on on the technology front that we think we can bolt-on to our post-collection sites to be able to really effectively manage that at a cost that we can pass on to the customer. So hopefully I captured it all. Noah Kaye -- Oppenheimer and Company -- Analyst Yeah. Thanks very much, John. Appreciate it. Operator Thank you. Please stand by for our next question. Our next question comes from the line of Tony Bancroft with Gabelli Funds. Your line is open. Tony Bancroft -- Gabelli Funds -- Analyst Hey. Thanks so much. Congratulations, Jim, Devina, and John, and that team on a great quarter. I just -- longer term, what do you -- is there -- are there any opportunities maybe through something transformational, either be it like these large regionals that are still around that everyone talks about or maybe something in a different line of business? What is your sort of longer-term outlook on the business and any interest in other, maybe other opportunities? John Morris -- Executive Vice President, Chief Operating Officer Yeah. I think there certainly are always opportunities for us over the last couple of years. We've been focused on internal opportunities. We did say that with respect to M&A, that we were sticking with our guidance that we've given the last couple of years of $100 million to $200 million, but that there was some opportunity and the pipeline looked pretty strong. So I do think there's opportunity for us to grow both organically, as we've talked a lot on this call, but also inorganically and we just got to make sure it's the right acquisition that we feel like has a good strategic long-term prospect. Tony Bancroft -- Gabelli Funds -- Analyst Great. Thank you so much. Great job. John Morris -- Executive Vice President, Chief Operating Officer Thank you. Devina Rankin -- Executive Vice President, Chief Financial Officer Thank you, Tony. Operator Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Jim Fish for closing remarks. Jim Fish -- President and Chief Executive Officer OK. Well, thank you all for joining us today. We appreciate your participation and we look forward to talking to you next quarter.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning everyone, and welcome to ExxonMobil Corporation's first-quarter 2024 earnings webcast. Today's call is being recorded. I'll now turn it over to Ms. Marina Matselinskaya. Please go ahead. Marina Matselinskaya -- Director, Investor Relations Good morning, everyone. Welcome to ExxonMobil's first-quarter 2024 earnings call. We appreciate you joining the call today. I'm Marina Matselinskaya, director of investor relations. I'm joined by Darren Woods, chairman and CEO, and Kathy Mikells, senior vice president and CFO. This presentation and prerecorded remarks are available on the Investors section of our website. They are meant to accompany the first-quarter earnings news release, which is posted in the same location. Shortly, Darren will give you an overview of our performance. Then we'll take your questions. During today's presentation, we'll make forward-looking comments, which are subject to risks and uncertainties. Please read our Cautionary Statement on Slide 2. You can find more information on the risks and uncertainties that apply to any forward-looking statements in our SEC filings on our website. Note that we also provided supplemental information at the end of our earnings slides, which are posted on the website. And now, please turn to Slide 3 for Darren's remarks. Darren Woods -- Chairman and Chief Executive Officer Thanks for joining us. Our strategy and the way our people are executing created significant value in the first quarter. We delivered $8.2 billion of earnings and $14.7 billion of cash flow. Even more important, we continued to strengthen the underlying earnings power of the company. An important driver of this improved earnings power is our ongoing focus on structural cost savings, which reached $10.1 billion in the quarter versus 2019, furthering our progress toward our goal of $15 billion by 2027. Capex in the quarter was $5.8 billion as we continue to invest in advantaged growth projects that will drive future earnings and cash flow. At the same time, we further strengthened our balance sheet, bringing our net debt to capital down to 3%, the lowest in more than a decade. To reward our shareholders, we distributed $6.8 billion in cash, including $3.8 billion in dividends. For all of 2023, ExxonMobil was the third-largest total dividend payer in the S&P 500. Only Microsoft and Apple paid more. We also repurchased about $3 billion of shares. Buybacks were temporarily paused until the shareholders of Pioneer voted on the combination of our companies, which they approved on February 7th. Post-close, we expect buybacks to ramp up to a pace of $20 billion a year. Our ongoing success this quarter reflects the intense focus we have had for the past seven years on improving every aspect of our business. We developed a strategy tied more directly to our core competitive advantages. We reorganized the company to create a group of centralized organizations that fully utilizes the significant synergies between our businesses. We set and met ambitious plans to improve the fundamental earnings power of the company, and we established a track record of excellence in execution that is second to none. Our focus on shareholder value extends beyond the work we're doing to drive profitable growth. I'll give you three examples from the quarter that demonstrates how we are working to insure that the value we've created is not diminished through third-party actions. First, we filed for arbitration to confirm our rights and establish the value that the Chevron/Hess transaction places on the Guyana asset. This will allow us to evaluate options to maximize the value for our shareholders. Any responsible management team would do the same. Second, we're continuing our lawsuit against two special interest activists masquerading as investors. We're asking the court to require the SEC's existing rules be consistently applied in order to restore the integrity of the system. We believe the system will only work properly if the rules are clearly understood and clearly applied to all parties. And third, we successfully defended the Pioneer merger against a frivolous lawsuit designed to abuse a legitimate legal process. These actions are so common they are often referred to as a, quote, "merger tax." In our case, however, the court ruled in our favor and sanctioned the lawyer for operating in bad faith. While the results of these efforts may not show up in any discrete quarterly result, they underpin long-term value and demonstrate our strong commitment to doing what's right. I'll leave you with a few key takeaways. Our work to improve the fundamental earnings power of ExxonMobil is continuing apace. By executing with excellence on our strategy, we expect to grow our earnings potential by an additional $12 billion from 2023 to 2027 at constant prices and margins, a growth rate of more than 10% per year. A significant driver of this earnings growth will be our delivery of additional structural cost savings totaling $15 million by 2027. In the quarter, we continued to deliver unprecedented success in Guyana with growing production creating additional value for our shareholders and the Guyanese people. Our strategic projects, which are another important driver of our planned earnings improvement, helped deliver record first-quarter refining throughput and strong performance chemicals volume growth, and there are more projects planned for start-up in 2025. All of this is without the contribution of Pioneer. With Pioneer, we'll be positioned to drive earnings, cash flow, and shareholder distributions even higher. We continue to work constructively with the FTC as they conduct a very thorough review and remain confident that no competition issues should hinder the transaction. We've been working diligently on our integration plans, and we're ready to begin executing Day 1 on the significant synergies this combination will create. Looking beyond our plan period and into the future, we see attractive, large-scale opportunities to leverage our core capabilities in our existing businesses and in brand new markets with brand new products, something our competitors can't do. The success of this company and our unique set of competitive advantages is built on our greatest strength and most important advantage, great people. They are the best team in the business, able to successfully overcome any challenge. Through their work at ExxonMobil, they are making a positive difference in the world, meeting people's essential needs for energy and products today, and far into the future. I'm extremely proud to represent them and cannot thank them enough. Before we begin our Q&A session, I wanted to take this opportunity to introduce Jim Chapman, our new Vice President, Treasurer, and Investor Relations. Jim brings a breadth of capital market and functional experience to this role and is looking forward to working with all of you. Thank you. Marina Matselinskaya -- Director, Investor Relations Thank you, Darren. [Operator instructions] With that, operator, please open the line for our first question. Questions & Answers: Operator Thank you. [Operator instructions] The first question comes from Devin McDermott of Morgan Stanley. Devin McDermott -- Morgan Stanley -- Analyst Hey. Good morning. Thanks for taking my question. And Jim, congrats on the new role if you're on the line. I wanted to start on Guyana, and not on the arbitration process, although I appreciate some of the posted prepared remarks on that, but instead just on the operations and growth potential. You have another really strong operational quarter, and then you've now also taken FID on Whiptail, which is new since the last call, and gives us now a line of sight in all the plan development through the end of this 2027 guidance period. If we step back, as you bring these new FPSOs online, you also have a very active exploration and appraisal program. So I was wondering if you'd talk a little bit about that exploration and appraisal strategy here. What you're focused on over the next few years? The additional opportunities you see? And how that influences your view of longer-term growth potential post '27 in Guyana? Darren Woods -- Chairman and Chief Executive Officer Yeah, sure. Good morning, Devin. I'll try to address the broader picture here for you. I'll start, though, with just following up on the comment you made around the operations, performance of the operations. I think while we build these projects and bring them on, in record time under budget, the value that the organization then drives from them through the operational optimization and look into the bottleneck brings a significant additional value. I continue to see opportunities to do that as we bring these platforms on. I feel really good about the collective effort of the organization to drive value of the plans that we already have in place through 2027. As you say, we're doing more exploration. I think every time we drill, we're collecting information that allows us to better characterize that whole block and focus in on potential new areas of opportunity, and that's basically the work that our teams are very engaged in, is continuing to collect information, continuing to do seismic, continuing to drill. And through that work, update our reservoir models, update our understanding of that block, and then look for new opportunities. That's going to be a continuous progress. I feel that's what the work that we're doing. As we develop that, learn more, we'll put together more longer-term plans, and once we have confidence that we've got a clear line of sight to how this plays itself out going forward in the future, we'll bring that to the community and share that with all of you. Kathy, anything to add? Kathy Mikells -- Senior Vice President, Chief Financial Officer I'd just mentioned, we had planned kind of four of what I'll call wildcat wells this year. We did have one discovery, a new discovery, Bluefin. We haven't quantified what that is yet, but as you mentioned, Darren, most of the drilling that we're doing is more about supporting existing production and the next couple of projects that we have coming online. Devin McDermott -- Morgan Stanley -- Analyst Great. And thanks. Operator The next question is from Neil Mehta of Goldman Sachs. Neil Mehta -- Goldman Sachs -- Analyst Good morning, Darren, Kathy, team. Just wanted to build on the comments on structural cost savings. So Slide 7 is helpful. It gives us a little bit more of a breakdown by each of the four segments of how you're thinking about cost savings to get to the $15 billion. But, I was wondering if you could put a little bit more meat on the bone so you can give us examples, potentially by segment, of things that you're doing so we can bring that story to life. Darren Woods -- Chairman and Chief Executive Officer Yeah, I'll talk maybe on the macro with respect to where the costs are coming from and how they break down, and then I'll let Kathy add any specifics that she wants to. But, I'd just say, Neil, if you look at what we've been doing here in the $10 billion of structural cost savings that we've achieved to date, really has to do with the reorganizations that we started back in 2018, and the continued progress we make in centralizing activities. Finding areas of synergies and focusing on how we drive the most value out of those synergies. Eliminating areas of duplication. Taking expertise and experience that we've had in the past scattered across the corporation in different silos. Putting those into centralized organizations. Getting the collective wisdom of that group and experience to focus on some of our toughest challenges. Part of that is making sure that we're the lowest cost supplier, and so reducing cost is a big challenge that the organization's looking at, and these experts are continuing to look for opportunities to optimize. To strike the balance of higher reliability, safer operations, while continuing to find efficiencies, and that's exactly what they've been doing. I think it's important to put the cost reductions in context that, as we've made these reductions, our reliability has improved. As we've made these reductions, our safety has improved. We have less injuries on our facilities all around the world. As we've made these reductions, our environmental performance has improved. So it's a great example of how we can do both of these things with the right experience and capabilities. I think where we're just are at the early stages of last of quantifying the value and developing a clear line of sight to how we can take advantage of the most recent centralized organizations, we'll be going through a plan process this year. Now that we've got those organizations in place and working with the rest of the businesses and the other centralized organizations to figure out what more can we bring to the table, but I'm extremely optimistic that not only will we hit the $15 billion, certainly by 2027, but I suspect we'll find even more. With respect to a macro breakdown, I think the way to think about it is roughly split evenly today between our upstream and our product solutions business. Kathy, any specifics you want to add? Kathy Mikells -- Senior Vice President, Chief Financial Officer I guess a little bit more color, I'll add. If I just talk about, what went on in the period. We saw most of the year-over-year incremental savings coming through upstream and coming through energy products. In upstream, that was driven largely by operational efficiencies. In the information that we would have pushed earlier this morning in terms of the more thorough discussion of the Investor Relations slides that we published on our website. I talked about an example at Kearl where we've basically automated all of our heavy trucking there and how that drives both, as Darren mentioned, an improvement overall from a safety perspective, but also operating efficiency with the logistics and just efficiency of that trucking operation. If I then contrast that with energy products, we had a really heavy slate of maintenance in this past quarter, and those turnarounds were actually done more efficiently than the same turnarounds the last time the company would have had to have executed them. And so that drove structural cost savings for us. If I then try and look forward, what do we anticipate between now and 2027? Part of what I mentioned is some of these centralized organizations are really responsible for driving savings across the company. We have our Global Operations and Sustainability Organization. That organization is using statistical maintenance analysis across our entire footprint in order to drive better efficiency and effectiveness in our planned maintenance activity. Again, as Darren mentioned, that should drive improvement in safety and, importantly, improvement in reliability as well. We have stood up last year a Global Business Solutions Organization, and they're really responsible for standardizing some of these big end-to-end processes that we have, procure-to-pay, record-to-report, as well as our planning activities. As we standardize those, we can implement more technology in order to improve the automation of many of those activities. When we benchmark ourselves, we know that we're too heavy on manual activities relative to what we would consider best in class, and so that should drive incremental savings. Then, I'll just mention supply chain. Again, another central organization we stood up last year, really trying to now leverage the scale of the entire company. That's all about logistics and how can we leverage our scale to drive more efficient logistics, how can we leverage our scale to drive more effective supply chain, including utilizing more effective procurement. It's also about then driving down materials and broader inventory as we just get more efficient. As we look forward, we have big savings expected coming out of those areas. Neil Mehta -- Goldman Sachs -- Analyst Thank you. Big numbers. Thank you. Darren Woods -- Chairman and Chief Executive Officer Thank you, Neil. Operator The next question is from Roger Read of Wells Fargo. Roger Read -- Wells Fargo Securities -- Analyst Yeah. Thanks. Good morning. I'd like to come back to one of the things addressed in the opening comments on the Pioneer transaction and the expectation at the Q2 close. Can you just give us an idea of what final hurdles we're actually waiting for here? I know there is various rules with the FTC and so forth in terms of days. Just curious what gives you the confidence on the Q2 close here. Darren Woods -- Chairman and Chief Executive Officer Yeah. Good morning, Roger. I'll give you just kind of a high-level perspective. I'm not going to obviously comment on the specifics of the discussion and the work that we've been doing with the FTC, other than to say it has been a constructive engagement there. We are working with them cooperatively, if it's supplied in, an enormous amount of material, documents, contracts, line items on productions and sales, so I think a very thorough review of this transaction. As we've said all along, we're very confident that there are no antitrust issues and I would just say we're very optimistic that we'll continue, we'll meet the objective that we said very early to close in the second quarter. Operator The next question is from Betty Jiang with Barclays. Betty Jiang -- Barclays -- Analyst Good morning. Thank you for taking my question. Maybe bring in the question earlier about the cost savings, bringing that in the context of the $12 billion of earning growth potential you see between 2023 and 2027. Really appreciate the additional color given on the key drivers between upstream, downstream and structural savings, but I want to ask about the cadence of that earning growth profile. Whether that's expected to be ratable through the period? And what do you see as the upside and downside risk to that outlook? Kathy Mikells -- Senior Vice President, Chief Financial Officer Sure. I'm happy to answer that question. So if you look at overall we've said $15 billion in cost savings from 2019 to 2027. We've achieved kind of on a year-to-date basis about $10 billion that means we have about $5 billion to go. You wouldn't expect that cost savings or other drivers of improvement are necessarily ratable. I mean we see different initiatives kind of come quarter to quarter, so I'd say, I don't expect it to be to be ratable, but I expect us to put up meaningful cost savings every year. If you then look at some of the other drivers of that earnings growth, I think it's really important as you think about the EMPSbusiness, that growth really goes hand in hand with execution of strategic projects which also drives our high value products growth. We expect about double the volume of high value products from '19 to 2027 and in 2027 we expect those products will comprise about 40% of our total earnings at a kind of constant margin. This year we're relatively light on strategic projects in EMPS. Next year in 2025 we will be really heavy, and so we'll have the Strathcona, renewable diesel coming online. We'll be executing the Resid upgrade project in Singapore and we'll have China 1 coming on, among other things, including increasing our capacity for advanced recycling at certain locations. So we have a lot of activity that will then start to bring incremental earnings power in 2025 and beyond. Then I'd say if you look over at what's happening in the upstream business, we're continuing to get growth obviously out of Guyana in the Permian. That growth in advantaged assets is a real key driver in terms of overall growth in upstream, one of the things you would have seen in our presentation is that on a year-to-date basis now 44% of our production volumes in upstream are from these advantaged assets which are a key driver of earnings growth. Then I'd say the other thing to think about in upstream is we will start to get production growth, so actual volume growth improvement, but that tends to come more strongly in the beyond 2025 period. So hopefully that gives you a good feel for some of the drivers and when we would be anticipating them starting to get reflected in our underlying earnings. Yeah. I'll just add to Kathy's comments. If you look at cost reductions, which Kathy talked about the value of those contributing to our earnings growth, I think there's not a lot of downside there. I think with the structural changes that we've made and have yet to realize the benefits of, we've got a pretty good track record now here over the last seven years of actually seeing those, what were initially concepts translate into bottom-line savings. So we've got a very high degree of confidence, and that frankly our challenge in reducing cost or driving improvements in the business, is not a lack of ideas or opportunities. It's how we prioritize and execute the highest value of those. So we've got a great opportunity set for improving our own business and it's just a question of pacing that in a way that maintains the other objectives that we have in the business in terms of delivery day in and day out. On the revenue side of the equation, to Kathy's point, the strategic projects are kind of at the heart of growing the revenue and the value side on the top line. I would say, we recognized going back in time, that critical to doing that was, was advantage projects, and then an organization that had the capability to effectively deliver those advantage projects. Then finally, an organization that was capable of starting those up seamlessly and getting them online quickly. I think if you look at the big projects that we brought on today, all this portfolio projects we developed back in 2018, we're continuing to execute that. The ones we brought online, we've been very pleased with. One with the project execution, the technologies organizations contribution to that and then how we've started up and run those. So I think that gives me a lot of confidence going forward that the model that we put together, the focus that we put in each of our businesses to contribute their area of expertise to overall corporate success is demonstrating a lot of success. I've got a lot of confidence going forward that will deliver that -- continues to deliver that portfolio, that's demonstrated its value for what we've done to date. I think feel pretty confident about delivering through 2027 and frankly beyond. Betty Jiang -- Barclays -- Analyst Great. Thank you. That's a really robust pipeline of projects to watch. Thank you for all the detail answer. Darren Woods -- Chairman and Chief Executive Officer Sure. Operator The next question is from Bob Brackett of Bernstein Research. Bob Brackett -- AllianceBernstein -- Analyst Good morning. I had a question around on the use of the phrase carbon materials. It seems fairly new, it feels fairly new. Feels, again pursuing some things in the battery chain. Could you give us a little more flavor on what you're contemplating there? Darren Woods -- Chairman and Chief Executive Officer Sure. Good morning, Bob. It's good to hear from you. I think one of the points we're trying to make is this company has a very broad suite of capabilities that's anchored, frankly, in technology and technology that's focused on transforming hydrogen and carbon molecules. A lot of what we've done to date and the value that the companies generated over the last many decades has been a function of energy and the consumption of those molecules to meet the growing demands for energy. But, we also have a very broad portfolio of other products that we make through that molecule transformation expertise, and into the chemical business, as well as lubricants, and fluids and things that we do out of our refineries. So there's a much broader set of capabilities and products than I think, frankly, what people give us credit for. I would just point to Proxima as a great example of some time back we recognize that the demand for gasoline would trip and particularly in developed countries. And the question we challenged our technology organization with was, how can we use these molecules to make other products that are required to meet other needs in society? And Proxima, I think while it's early in its development, it's going to be -- it's going to demonstrate that we can take that expertise, apply it to a feedstock that will become more and more advantaged with time and make other products that are needed for the world, and that will bring a lot of significant benefits in those applications. The carbon ventures and the carbon materials is a very similar initiative. It's just a little earlier, in its construct. If you look at the world's efforts to decarbonize, it's clear to us that carbon over time will become more and more advantaged feedstock. And so the challenge we've given our organization is, what can we do with carbon molecules? How can we meet growing needs and large markets? And they have to be large markets, because we're going to do -- if we are going to do something that moves the needle for the corporation, we have to do it at scale. What we are looking at there is how do we use the capabilities we have in molecule transformation applied to carbon to meet, these batteries are just one example, carbon fibers are another. There's a number of things today we had our applications for, but there's either a performance dimension that needs to be improved, or a cost dimension that needs to be improved. We think we have a line of sight for how we can do that, how we can improve the performance aspects using our technology capabilities and at the same time find ways to reduce the cost of production. It is early days, I would say. We put it out there in this call to make sure people are beginning to think more broadly about what this company is capable of, and how our future could evolve in a very different direction than where we have come from. The beauty of how we are positioning ourselves is we are using the same core capabilities and advantages. It gives us a lot of optionality and flexibility, to the extent these other new markets work out and demand picks up and we see great opportunities, we can shift more resources into that space. If it takes us longer there or if the transition takes longer, we have our base business and continue to invest in products that the world needs today. We have the ability to adjust depending on how things evolve and depending on what direction the world goes. I think it is a great example of anchoring back on some very core capabilities that have very broad application. We are excited by what we see as some potentially very high-value new markets with some very high-value unique products that we can supply to meet those needs. Bob Brackett -- AllianceBernstein -- Analyst Very clear. A question would be the materiality threshold. Should we think about runways to billion-dollar businesses or $10 million businesses? Is that too simplistic? Darren Woods -- Chairman and Chief Executive Officer I think it is a good measure to think about. It has to be over $1 billion if it is going to be material. We are looking at very large markets into the billions. Bob Brackett -- AllianceBernstein -- Analyst Great. Very clear. Thank you. Operator The next question is from Jason Gabelman of TD Cowen. Jason Gabelman -- TD Cowen -- Analyst Hey. Morning. I had a question about uses of cash and the balance sheet. I think this quarter we are seeing Exxon's net debt to cap move down. Some of your peers are starting to move up as commodities come off a bit. That is seemingly a bit of a differentiator between you and peers. I thought it would be a good opportunity if you could remind us how you think about utilizing that balance sheet capacity moving forward given you are still operating from a position of strength, whether it be deploying for future M&A, increasing buybacks or other opportunities. Thanks. Kathy Mikells -- Senior Vice President, Chief Financial Officer I am happy to talk about that. As you correctly referenced, our net debt to cap has come down. It is about 3% now. Our approach in terms of capital allocation has not changed. It continues to be very consistent. First and foremost, we want to make sure we are making investments in this business that ultimately drive the long-term earnings and cash flow growth that create the virtual cycle of us being able to enhance shareholder returns and return cash to shareholders via dividends as well as a more consistent share of purchase program. That is job No. 1. I would mention that capex is not radible. I have seen many people comment on a light capex number that we had in the first quarter. We are very much on our plan. Many times our capex is influenced by milestone payments, just as an example. It is not radible over the course of the year. We have guided to $23 billion to $25 billion in capex, and that guidance remains we are very much on plan. When we think about investing in our business, obviously we are very focused on the advantaged slate of investments that we have organically in front of us. But, obviously M&A is another type of investment that we make. Again, where we see we can make one-in-one equal more than two, largely by adding synergies to some type of acquisition. Obviously getting ready to close the Pioneer acquisition would be a terrific example of that. We know a strong balance sheet is a competitive advantage. We have continued to really maintain and strengthen that balance sheet. This quarter we paid down a little over $1 billion in debt. That is part of the reason why you see our net debt to cap ratio coming down. That gives us a lot of flexibility to ensure that we are consistently investing in the business through the cycle. It just gives us optionality, understanding that we operate in a very cyclical business, and then clearly we're looking to reward our shareholders. I think you see that with our very consistent approach to the dividend. It needs to be sustainable. It needs to be competitive. It needs to be growing. We obviously raise the quarterly dividend in the fourth quarter by $0.04 and continue to review that over time. I would mention one thing with regard to share repurchases. We did have the Pioneer vote this quarter, and so we were out of the market for a period of time. We did about $3 billion in share repurchases. A run rate to hit the $17.5 billion, which is what we've kind of guided to this year, would be more like $4.4 billion. So our program will naturally dial up our execution, so that we're on track to complete the $17.5 billion share repurchase program on a stand-alone basis, and then I would remind you that we've said we anticipate taking that program pace up to $20 billion annually after we close the Pioneer acquisition. So we feel really good about where our balance sheet is at and our consistent capital allocation strategy and that that will drive long-term returns for shareholders. Darren Woods -- Chairman and Chief Executive Officer And I would just add to Kathy's points that -- and just remind everybody, if you look at where we stand today, and Jason made the point that we're deviating from our peers in terms of continuing to generate cash and drive down net debt. That's anchored in the strategy that we've put in place in 2018, which is find advantaged projects and invest in those to grow the earnings power of the business and that's now beginning to manifest itself. So I think you've got to have a long-term view on this. Having a robust balance sheet to make sure that we're positioned when opportunities come along and we see clear advantages to invest, that we have the capability to do that. Thanks for the question. Jason Gabelman -- TD Cowen -- Analyst Yep. Got it. Thanks. Operator The next question is from Ryan Todd of Piper Sandler. Ryan Todd -- Piper Sandler -- Analyst Thanks. Maybe one on chemicals. I mean, your chemicals businesses, the two segments, continue to show kind of modestly better than expected recovery along the bottom or off the bottom here. Is this more of a feedstock tailwind that we're seeing in the near term? Are you seeing any improvements that are noticeable in terms of demand and overall global supply demand? And I guess in the meantime, while things are weak, what are you managing to do with your product mixer operations to drive relative performance there in chemicals? Darren Woods -- Chairman and Chief Executive Officer Yeah. Sure, Ryan. I'll take that. First thing I would say is, if you look at the chemical business and kind of the margin indicators that we use to judge the health of the chemical businesses, we are at a historic kind of bottom of cycle number. And so I think, it's a very challenging chemical markets today, as I know many of you know. But even in that very challenged market, we are continuing to deliver very good results. I think if you compare similar markets that were even close to these bottom of cycle conditions, we were in a very different place in the past with respect to earnings than we find ourselves today, where we delivered close to $800 million of earnings this quarter, despite the very difficult market conditions. Those market conditions are driven more by supply than demand. Frankly, we're continuing to see growth in demand, not as high as we've seen historically, but continued good growth and frankly in the first quarter saw some of that pick up. The challenge has been the supply that's come on to meet that growth and so that is depressing overall industry margins. As you know, the investments that we make and the way we run our business, is to make sure that we're advantaged versus the average chemical player. So even in these markets that are set by other capacity, the work that we've done to position ourselves, more advantaged -- in a more advantaged position in competition continues to deliver a value. You can see that with the growth, not only in the high-value products, which are coming on with our projects, and frankly, that growth is in line with what we had expected. So we're continuing to see the demand for the high-value products that we've invested in, but we're also seeing in our base volume, value in those with respect to how we positioned ourselves, and so it's -- and we're seeing advantages in the structural, structural cost reduction. So I would tell you, every part of what we've been doing to improve the earnings power of the organization is manifesting itself in our chemical business and showing up in differentiating earnings. And feed to your point, feed advantages play an important role in that. So that's yet again another advantage that we have versus the typical industry player, but that is reflective of the broader strategy that we have. So I think we feel good about where we're at in a very difficult market. Our view is that those market conditions are going to be with us for a little while here going forward, but we also feel like we're well-positioned to be successful there. And as that shakes out and some of the less able competitors have no success in this space, we'll see growth continue to move and eventually we'll see margins pick back up and we'll be very well-positioned. Kathy Mikells -- Senior Vice President, Chief Financial Officer And just the other thing I'd add to that is, I think if you look at our chemical businesses performance and compare that to peers and other players, you see the differentiation and the excellent execution really coming through. We're in clearly bottom of cycle conditions right now, and yet we're still generating pretty good earnings and cash flow in our chemical business. And then I would just mention that as Darren noted, our footprint tends to be North American weighted. So if you just look at our PE and PP footprint, we're heavily North American weighted and relatively lightly weighted to Asia compared to the rest of industry, and Asia is especially at very, very bottom of cycle conditions. Ryan Todd -- Piper Sandler -- Analyst Great. Thanks, both of you. Operator The next question is from Stephen Richardson of Evercore ISI. Stephen Richardson -- Evercore ISI -- Analyst Good morning. Darren, I was wondering if you could talk a little bit about the Baytown project and maybe just if you could give us a little bit more on what your view of adequate incentives there would be. If the PTC on green hydrogen was extended to blue, would that be sufficient to sanction the project? And then, sorry, just as a follow on to that, as you talk about a level playing field across technology neutrality, is your view that a new gray hydrogen ATR should get some sort of incentive? Maybe you could just give us the context of how you are thinking about that project and what it needs to move forward. Thank you. Darren Woods -- Chairman and Chief Executive Officer Yeah. Sure. I'm happy to do that, Steve. What I would say is it's a -- that work we're doing to develop it is I think demonstrating the difficulty of starting brand new businesses and value chains where none exists, and that we're kind of simultaneously trying to build demand, trying to build supply, and then trying to in the early days of this market establish financial incentives to do that. So three core key variables to a successful business, all kind of basically being generated for the first time in this space along this value chain. So I just put that out there as it's a challenging construct, but frankly, one that plays to our strengths and the ability to look along the entire value chain, and we are uniquely situated to manage each piece of that. There are very few, if any, companies out there that have a portfolio and capabilities that extend end-to-end along this value chain. So I feel good about what we're doing there and the work that we've put in place. And frankly, it looks to me like a very viable project. We are continuing to progress that, but it will require that the necessary incentives are in place. With respect to what's required with, with incentives, I would say the IRA and the incentives that were developed as part of the IRA are enough to do that. The challenge is taking the IRA, which I believe rightly focused on carbon intensity and incentivizing carbon intensity, translating that legislation into regulation, and if the regulation reflects the intent of that legislation and writes the rules focused on carbon intensity, that will be enough to justify and to incentivize and give us a return on this investment. We don't focus so much on the green, the blue, and color schemes. We instead focus on how can we meet what is ultimately the objective here, which is to reduce the CO2 associated with production of these products. And we think all the work we've been doing in our facilities and our feedstock and decarbonizing those contributes to that. And so we feel like we're well-positioned with the existing set of incentives, as long as those incentives are fairly reflected in the regulations and a level playing field. What I mean by that is, staying focused on carbon intensity and ignoring colors. Stephen Richardson -- Evercore ISI -- Analyst Very clear. Thank you. Darren Woods -- Chairman and Chief Executive Officer OK. Operator The next question is from John Royall of J.P. Morgan. John Royall -- JPMorgan Chase and Company -- Analyst Hi. Good morning. Thanks for taking my question. So I just had a question about the refinery sale in France. I know you have a very ambitious program for growth in the downstream business, but you have been trimming and high grading a bit with some asset sales. Other majors are also reducing their European footprint in refining. Can you just speak to how strategic the remaining European portfolio is? And could we see some more assets shake out in European downstream? Darren Woods -- Chairman and Chief Executive Officer Yeah. Sure. I would tell you what you are seeing with the sale and France is really the latest in what's been a fairly long trend with us focused on high grading refineries to refineries that are -- that have the capability to address a broad suite of products and high-value products. And so integrated facilities that make not only petroleum products, but also make chemicals and lubricants and basically a broad array of high-value products, and so we've been over time focused on that. They need to be advantaged sites. They need to be -- we have a cost of supply curve. I think you all have heard me talk about this many times across all of our businesses, but we look around the world and make sure that our facilities are on the low cost of supply, so that as the margins move up and down, that we never become the marginal supplier and having an integrated facility helps with that. But it also acts as a hedge to make sure that we're not dependent on any one sector for the success of one of our manufacturing facilities. The reorganizations that we put in place have helped greatly with this, and if you think about these integrated facilities, we used to have them split up among different parts of the organizations, different businesses running them, and in fact, even different manufacturing organizations running them. Today, that's not the case today. Today they are being run by a single business with a single leadership team and so I feel like -- I feel very good about that. But it is this continuing high grade. We were doing it all the way back when I was president of the refining company, so it's been a long-term strategy. We're not in a hurry. We're taking our term to make sure that we find the right buyer that has the right value proposition, one that exceeds our own internal values, and if we can find that, we will then track and transact if we can. We'll continue to optimize and improve those refineries to the best of our abilities. But I would say we've worked our way down the portfolio till we feel pretty good about the position that we're in today. That the refineries that we have in the portfolio are advantaged, have a mix of either feed advantages or product advantages or both. And frankly, our focus has been on making sure they are running reliably, running safely, running efficiently, and these centralized organizations and our global operations and sustainability organization have been a huge enabler to helping each of these facilities and our chemical plants, our refineries, lubricant facilities, all improve their performance, run better, run more profitably, run safer, run more reliably. So I feel really good about the position that we're in and we'll continue to look at our portfolio. It's always been the case that we're looking, to make sure that the value we see in those facilities exceed the values that others might and feel good about our position there. Kathy Mikells -- Senior Vice President, Chief Financial Officer Just the other thing I'd add to that is the investment environment is certainly a bit more difficult in Europe. If you go back and look at the end of 2022, the additional taxes that were levied onto the energy sector. If you look at expanded disclosure requirements that Europe is looking for, or if you look at regulation around reducing carbon footprint and not necessarily implementing regulation that's technology agnostic and focused on just reducing carbon intensity, that all makes Europe a much tougher investment proposition. So that's certainly one of the things that we look at in any place across the globe as we look to make future investment decisions. John Royall -- JPMorgan Chase and Company -- Analyst Thank you. Darren Woods -- Chairman and Chief Executive Officer Thank you. Operator Next question is from Biraj Borkhataria of RBC. Biraj Borkhataria -- RBC Capital Markets -- Analyst Quite fitting to take the next question from an analyst sitting in London, but I just have one question. You have a lot of energy coming into your portfolio in the coming years, the Golden Pass, Qatar, etc. You have quite a high oil weighting in the current sales mix. Are you looking to diversify over time or would you like to maintain that kind of 80% to 90% oil link exposure in your contract base over time? Thank you. Darren Woods -- Chairman and Chief Executive Officer Good morning, Biraj. Thank you. I would tell you, we're not as focused on an absolute mix number, as much as the advantaged investment opportunities that we can find in those businesses. We see long-term demand for oil continuing, albeit with a much lower emissions footprint as we continue to find ways to decarbonize. We also see long-term demand for natural gas, and so I think as we look at both of those, both the liquids and the gas side of the equation, we see a long-term future there and an opportunity for this company to participate if we have advantaged projects that position us on a low cost of supply, and so that's how we think about that. And that advantaged position, which manifests itself in cost of supply, as you know obviously manifests itself in above industry average returns, which is the objectives that we set for ourselves and so that's how we're thinking about it. And frankly, we'll let the opportunity that we find in these advantaged investments set the proportion of the portfolio that those represent. We will not invest in a project that I'm not convinced doesn't, one, leverage our core competitive advantages, that two, then results in a project which is advantaged versus other, and that three then, is on the low cost of supplies. Because as good as the market may look today out the window, we know there are cycles. We don't think the cycles are going away and so we remain very focused on making sure that we take advantage of the upswings, but we're prepared for the downswings and we'll be very successful. And as we just talked about in the chemical business, great example of being in the very bottom of a downswing and continuing to generate cash and make good solid earnings, and that's the ambition we have for all of our businesses. Biraj Borkhataria -- RBC Capital Markets -- Analyst Understood. And just as a follow-up to that, there's obviously been ongoing security challenges in Mozambique. What is your view at this point on whether you'd be interested in doing a second floating facility? Because obviously monetizing the onshore part has become very challenging. Darren Woods -- Chairman and Chief Executive Officer Yeah. I think obviously you rightly pointed out there, security challenges there. I think there's been a lot of good progress made with respect to that. I think Mozambique, the country of Mozambique, the government of Mozambique recognizes the importance, not only for the project, frankly for the people of Mozambique that needs to be addressed and effectively managed. I think they've made good progress in doing that. My view is with time, we've seen this in other places around the world, that will get addressed, and it will result in an opportunity to invest onshore. With respect to onshore/offshore, we frankly, it comes back to the point I made at the beginning of your question, which is it depends on the returns that we can generate with respect to investment opportunities and how competitive those supply points are. If we can do that offshore, we obviously will. If it takes going onshore to do that, then we'll focus on onshore, but it will be a function of the returns of the projects. Biraj Borkhataria -- RBC Capital Markets -- Analyst OK. Thank you very much. Operator The next question is from Josh Silverstein of UBS. Josh Silverstein -- UBS -- Analyst Good morning, guys. Just wanted to see if I can get an update on the timing of the gas to power project in Guyana, and what benefits this may have to cost and operations in the country, and if there are any other projects like this that you guys may be looking at over time. Thanks. Darren Woods -- Chairman and Chief Executive Officer Yeah. Sure. I think this is something that we've been engaged with the government on for quite some time. I think as we look at going into some of the countries that are on a growth path, on a developing path, we look for opportunities of how our footprint and presence in those countries and markets can help the people in the community and this is a great example of that, of getting the gas that's produced offshore, onshore, so they can replace what is a relatively inefficient, high-emissions power generation system that's fairly unreliable with something that's cleaner, lower emissions, and much more reliable and should be much more cost-effective. And so I think it's kind of a win-win proposition, particularly for the people of Guyana. So we're working on bringing that gas to shore. Our expectation is we'll have that brought up sometime end of 2024. Obviously the government's working on the receiving end of that gas and responsible for putting in the power station. That's an independent project that's developing. We're also working on the distribution system. And so it's really -- I think the impact of that will come when we get both pieces together and get that linked up and effectively delivering power to the market. Operator The next question is from Paul Cheng of Scotiabank. Paul Cheng -- Scotiabank -- Analyst Thank you. Hi. Good morning. Darren, in the presentation you talked about the direct air capture. Can you give us some idea there? And you're saying that you aim to reduce the cost by half, and that won't be sufficient. So what will be needed in order -- how much is the actual cost reduction from the current level in order for that to be competitive or that to be a real business for you? And also can you talk about that, how your approach or technology is different than what's currently in the market, especially one of your competitors in the U.S., they already have a -- they said that they have a commercial operation ready, and it's going to come on stream very, very soon. Thank you. Darren Woods -- Chairman and Chief Executive Officer Yeah. Sure. Good morning, Paul. Yeah, what I would say with -- may I start with the last point of your comment, which is, yeah, there are alternatives out there today versus what we're working on. The issue is the cost associated with them. And we're not looking at what we can commercialize in the short term based on what I would say is a very narrow market of limited customers who are willing to pay a very high price to demonstrate a level of decarbonization. We're focused on how we can make this technology broadly applicable at a cost that society can afford. So that's -- we are very focused on the long term, not the short term. And our view is the available technologies today don't meet the cost requirements. That's somewhere between the $600,000 per ton of CO2 removed, and our view is if you try to apply that across the emissions challenge the planet has, the world won't be able to pay for that, so we've got to find a reduction. Our cost, we've set an initial target of cutting the cost in half, just because that is a significant step change, recognizing it won't be enough. If we can get the technology, if we can develop the technology to a point that we're successful there, that gets us on this path and demonstrates the value of the concepts that we are developing to keep on going and drive further down. With respect to the technology and how it compares to what's commercially available out there, I would say part of the reason why this is proprietary technology is today its proprietary and so I'm going to keep it that way. I would say, it is a brand-new approach. There are others who are out there working on new approaches as well, which frankly we're happy about. This is a tough challenge to break and I'm not pretending like we're going to be the ones to solve it, but I am confident that we will give it our all, applying our capabilities, others are doing that. As I said in my prepared remarks that we posted, if there's a breakthrough, it doesn't so much matter who has the breakthrough. I think we're going to have a role to play, because once we have a technology that gets to the right cost level, you are going to need global deployment at scale. And I suspect that the technology that will be required for the future lower cost direct air capture, will be different than what we've got today and will require some of the technical capabilities that we have. So I see a role for us in the future if this nut gets cracked. We feel good about what we've seen so far, but we're very early into it, and we're hopeful that we'll make the progress that we're aspiring to and continue to drive the cost down. Your last point you asked, I think to me, if you're going to be -- if the world's -- if it's going to be affordable, you've got to get into $100-ish a ton of CO2 to start talking about broad deployment around the world. I think that's ultimately where we need to get to. Marina Matselinskaya -- Director, Investor Relations Thank you everybody for joining the call and for your questions today. We will post the transcript of our Q&A session on our investor website next week. Additionally, we look forward to connecting again on May 29th for our Annual Shareholders Meeting. Now let me turn it back to the operator to close the call. Answer:

ExxonMobil Corporation's first-quarter 2024 earnings webcast

Operator Good morning everyone, and welcome to ExxonMobil Corporation's first-quarter 2024 earnings webcast. Today's call is being recorded. I'll now turn it over to Ms. Marina Matselinskaya. Please go ahead. Marina Matselinskaya -- Director, Investor Relations Good morning, everyone. Welcome to ExxonMobil's first-quarter 2024 earnings call. We appreciate you joining the call today. I'm Marina Matselinskaya, director of investor relations. I'm joined by Darren Woods, chairman and CEO, and Kathy Mikells, senior vice president and CFO. This presentation and prerecorded remarks are available on the Investors section of our website. They are meant to accompany the first-quarter earnings news release, which is posted in the same location. Shortly, Darren will give you an overview of our performance. Then we'll take your questions. During today's presentation, we'll make forward-looking comments, which are subject to risks and uncertainties. Please read our Cautionary Statement on Slide 2. You can find more information on the risks and uncertainties that apply to any forward-looking statements in our SEC filings on our website. Note that we also provided supplemental information at the end of our earnings slides, which are posted on the website. And now, please turn to Slide 3 for Darren's remarks. Darren Woods -- Chairman and Chief Executive Officer Thanks for joining us. Our strategy and the way our people are executing created significant value in the first quarter. We delivered $8.2 billion of earnings and $14.7 billion of cash flow. Even more important, we continued to strengthen the underlying earnings power of the company. An important driver of this improved earnings power is our ongoing focus on structural cost savings, which reached $10.1 billion in the quarter versus 2019, furthering our progress toward our goal of $15 billion by 2027. Capex in the quarter was $5.8 billion as we continue to invest in advantaged growth projects that will drive future earnings and cash flow. At the same time, we further strengthened our balance sheet, bringing our net debt to capital down to 3%, the lowest in more than a decade. To reward our shareholders, we distributed $6.8 billion in cash, including $3.8 billion in dividends. For all of 2023, ExxonMobil was the third-largest total dividend payer in the S&P 500. Only Microsoft and Apple paid more. We also repurchased about $3 billion of shares. Buybacks were temporarily paused until the shareholders of Pioneer voted on the combination of our companies, which they approved on February 7th. Post-close, we expect buybacks to ramp up to a pace of $20 billion a year. Our ongoing success this quarter reflects the intense focus we have had for the past seven years on improving every aspect of our business. We developed a strategy tied more directly to our core competitive advantages. We reorganized the company to create a group of centralized organizations that fully utilizes the significant synergies between our businesses. We set and met ambitious plans to improve the fundamental earnings power of the company, and we established a track record of excellence in execution that is second to none. Our focus on shareholder value extends beyond the work we're doing to drive profitable growth. I'll give you three examples from the quarter that demonstrates how we are working to insure that the value we've created is not diminished through third-party actions. First, we filed for arbitration to confirm our rights and establish the value that the Chevron/Hess transaction places on the Guyana asset. This will allow us to evaluate options to maximize the value for our shareholders. Any responsible management team would do the same. Second, we're continuing our lawsuit against two special interest activists masquerading as investors. We're asking the court to require the SEC's existing rules be consistently applied in order to restore the integrity of the system. We believe the system will only work properly if the rules are clearly understood and clearly applied to all parties. And third, we successfully defended the Pioneer merger against a frivolous lawsuit designed to abuse a legitimate legal process. These actions are so common they are often referred to as a, quote, "merger tax." In our case, however, the court ruled in our favor and sanctioned the lawyer for operating in bad faith. While the results of these efforts may not show up in any discrete quarterly result, they underpin long-term value and demonstrate our strong commitment to doing what's right. I'll leave you with a few key takeaways. Our work to improve the fundamental earnings power of ExxonMobil is continuing apace. By executing with excellence on our strategy, we expect to grow our earnings potential by an additional $12 billion from 2023 to 2027 at constant prices and margins, a growth rate of more than 10% per year. A significant driver of this earnings growth will be our delivery of additional structural cost savings totaling $15 million by 2027. In the quarter, we continued to deliver unprecedented success in Guyana with growing production creating additional value for our shareholders and the Guyanese people. Our strategic projects, which are another important driver of our planned earnings improvement, helped deliver record first-quarter refining throughput and strong performance chemicals volume growth, and there are more projects planned for start-up in 2025. All of this is without the contribution of Pioneer. With Pioneer, we'll be positioned to drive earnings, cash flow, and shareholder distributions even higher. We continue to work constructively with the FTC as they conduct a very thorough review and remain confident that no competition issues should hinder the transaction. We've been working diligently on our integration plans, and we're ready to begin executing Day 1 on the significant synergies this combination will create. Looking beyond our plan period and into the future, we see attractive, large-scale opportunities to leverage our core capabilities in our existing businesses and in brand new markets with brand new products, something our competitors can't do. The success of this company and our unique set of competitive advantages is built on our greatest strength and most important advantage, great people. They are the best team in the business, able to successfully overcome any challenge. Through their work at ExxonMobil, they are making a positive difference in the world, meeting people's essential needs for energy and products today, and far into the future. I'm extremely proud to represent them and cannot thank them enough. Before we begin our Q&A session, I wanted to take this opportunity to introduce Jim Chapman, our new Vice President, Treasurer, and Investor Relations. Jim brings a breadth of capital market and functional experience to this role and is looking forward to working with all of you. Thank you. Marina Matselinskaya -- Director, Investor Relations Thank you, Darren. [Operator instructions] With that, operator, please open the line for our first question. Questions & Answers: Operator Thank you. [Operator instructions] The first question comes from Devin McDermott of Morgan Stanley. Devin McDermott -- Morgan Stanley -- Analyst Hey. Good morning. Thanks for taking my question. And Jim, congrats on the new role if you're on the line. I wanted to start on Guyana, and not on the arbitration process, although I appreciate some of the posted prepared remarks on that, but instead just on the operations and growth potential. You have another really strong operational quarter, and then you've now also taken FID on Whiptail, which is new since the last call, and gives us now a line of sight in all the plan development through the end of this 2027 guidance period. If we step back, as you bring these new FPSOs online, you also have a very active exploration and appraisal program. So I was wondering if you'd talk a little bit about that exploration and appraisal strategy here. What you're focused on over the next few years? The additional opportunities you see? And how that influences your view of longer-term growth potential post '27 in Guyana? Darren Woods -- Chairman and Chief Executive Officer Yeah, sure. Good morning, Devin. I'll try to address the broader picture here for you. I'll start, though, with just following up on the comment you made around the operations, performance of the operations. I think while we build these projects and bring them on, in record time under budget, the value that the organization then drives from them through the operational optimization and look into the bottleneck brings a significant additional value. I continue to see opportunities to do that as we bring these platforms on. I feel really good about the collective effort of the organization to drive value of the plans that we already have in place through 2027. As you say, we're doing more exploration. I think every time we drill, we're collecting information that allows us to better characterize that whole block and focus in on potential new areas of opportunity, and that's basically the work that our teams are very engaged in, is continuing to collect information, continuing to do seismic, continuing to drill. And through that work, update our reservoir models, update our understanding of that block, and then look for new opportunities. That's going to be a continuous progress. I feel that's what the work that we're doing. As we develop that, learn more, we'll put together more longer-term plans, and once we have confidence that we've got a clear line of sight to how this plays itself out going forward in the future, we'll bring that to the community and share that with all of you. Kathy, anything to add? Kathy Mikells -- Senior Vice President, Chief Financial Officer I'd just mentioned, we had planned kind of four of what I'll call wildcat wells this year. We did have one discovery, a new discovery, Bluefin. We haven't quantified what that is yet, but as you mentioned, Darren, most of the drilling that we're doing is more about supporting existing production and the next couple of projects that we have coming online. Devin McDermott -- Morgan Stanley -- Analyst Great. And thanks. Operator The next question is from Neil Mehta of Goldman Sachs. Neil Mehta -- Goldman Sachs -- Analyst Good morning, Darren, Kathy, team. Just wanted to build on the comments on structural cost savings. So Slide 7 is helpful. It gives us a little bit more of a breakdown by each of the four segments of how you're thinking about cost savings to get to the $15 billion. But, I was wondering if you could put a little bit more meat on the bone so you can give us examples, potentially by segment, of things that you're doing so we can bring that story to life. Darren Woods -- Chairman and Chief Executive Officer Yeah, I'll talk maybe on the macro with respect to where the costs are coming from and how they break down, and then I'll let Kathy add any specifics that she wants to. But, I'd just say, Neil, if you look at what we've been doing here in the $10 billion of structural cost savings that we've achieved to date, really has to do with the reorganizations that we started back in 2018, and the continued progress we make in centralizing activities. Finding areas of synergies and focusing on how we drive the most value out of those synergies. Eliminating areas of duplication. Taking expertise and experience that we've had in the past scattered across the corporation in different silos. Putting those into centralized organizations. Getting the collective wisdom of that group and experience to focus on some of our toughest challenges. Part of that is making sure that we're the lowest cost supplier, and so reducing cost is a big challenge that the organization's looking at, and these experts are continuing to look for opportunities to optimize. To strike the balance of higher reliability, safer operations, while continuing to find efficiencies, and that's exactly what they've been doing. I think it's important to put the cost reductions in context that, as we've made these reductions, our reliability has improved. As we've made these reductions, our safety has improved. We have less injuries on our facilities all around the world. As we've made these reductions, our environmental performance has improved. So it's a great example of how we can do both of these things with the right experience and capabilities. I think where we're just are at the early stages of last of quantifying the value and developing a clear line of sight to how we can take advantage of the most recent centralized organizations, we'll be going through a plan process this year. Now that we've got those organizations in place and working with the rest of the businesses and the other centralized organizations to figure out what more can we bring to the table, but I'm extremely optimistic that not only will we hit the $15 billion, certainly by 2027, but I suspect we'll find even more. With respect to a macro breakdown, I think the way to think about it is roughly split evenly today between our upstream and our product solutions business. Kathy, any specifics you want to add? Kathy Mikells -- Senior Vice President, Chief Financial Officer I guess a little bit more color, I'll add. If I just talk about, what went on in the period. We saw most of the year-over-year incremental savings coming through upstream and coming through energy products. In upstream, that was driven largely by operational efficiencies. In the information that we would have pushed earlier this morning in terms of the more thorough discussion of the Investor Relations slides that we published on our website. I talked about an example at Kearl where we've basically automated all of our heavy trucking there and how that drives both, as Darren mentioned, an improvement overall from a safety perspective, but also operating efficiency with the logistics and just efficiency of that trucking operation. If I then contrast that with energy products, we had a really heavy slate of maintenance in this past quarter, and those turnarounds were actually done more efficiently than the same turnarounds the last time the company would have had to have executed them. And so that drove structural cost savings for us. If I then try and look forward, what do we anticipate between now and 2027? Part of what I mentioned is some of these centralized organizations are really responsible for driving savings across the company. We have our Global Operations and Sustainability Organization. That organization is using statistical maintenance analysis across our entire footprint in order to drive better efficiency and effectiveness in our planned maintenance activity. Again, as Darren mentioned, that should drive improvement in safety and, importantly, improvement in reliability as well. We have stood up last year a Global Business Solutions Organization, and they're really responsible for standardizing some of these big end-to-end processes that we have, procure-to-pay, record-to-report, as well as our planning activities. As we standardize those, we can implement more technology in order to improve the automation of many of those activities. When we benchmark ourselves, we know that we're too heavy on manual activities relative to what we would consider best in class, and so that should drive incremental savings. Then, I'll just mention supply chain. Again, another central organization we stood up last year, really trying to now leverage the scale of the entire company. That's all about logistics and how can we leverage our scale to drive more efficient logistics, how can we leverage our scale to drive more effective supply chain, including utilizing more effective procurement. It's also about then driving down materials and broader inventory as we just get more efficient. As we look forward, we have big savings expected coming out of those areas. Neil Mehta -- Goldman Sachs -- Analyst Thank you. Big numbers. Thank you. Darren Woods -- Chairman and Chief Executive Officer Thank you, Neil. Operator The next question is from Roger Read of Wells Fargo. Roger Read -- Wells Fargo Securities -- Analyst Yeah. Thanks. Good morning. I'd like to come back to one of the things addressed in the opening comments on the Pioneer transaction and the expectation at the Q2 close. Can you just give us an idea of what final hurdles we're actually waiting for here? I know there is various rules with the FTC and so forth in terms of days. Just curious what gives you the confidence on the Q2 close here. Darren Woods -- Chairman and Chief Executive Officer Yeah. Good morning, Roger. I'll give you just kind of a high-level perspective. I'm not going to obviously comment on the specifics of the discussion and the work that we've been doing with the FTC, other than to say it has been a constructive engagement there. We are working with them cooperatively, if it's supplied in, an enormous amount of material, documents, contracts, line items on productions and sales, so I think a very thorough review of this transaction. As we've said all along, we're very confident that there are no antitrust issues and I would just say we're very optimistic that we'll continue, we'll meet the objective that we said very early to close in the second quarter. Operator The next question is from Betty Jiang with Barclays. Betty Jiang -- Barclays -- Analyst Good morning. Thank you for taking my question. Maybe bring in the question earlier about the cost savings, bringing that in the context of the $12 billion of earning growth potential you see between 2023 and 2027. Really appreciate the additional color given on the key drivers between upstream, downstream and structural savings, but I want to ask about the cadence of that earning growth profile. Whether that's expected to be ratable through the period? And what do you see as the upside and downside risk to that outlook? Kathy Mikells -- Senior Vice President, Chief Financial Officer Sure. I'm happy to answer that question. So if you look at overall we've said $15 billion in cost savings from 2019 to 2027. We've achieved kind of on a year-to-date basis about $10 billion that means we have about $5 billion to go. You wouldn't expect that cost savings or other drivers of improvement are necessarily ratable. I mean we see different initiatives kind of come quarter to quarter, so I'd say, I don't expect it to be to be ratable, but I expect us to put up meaningful cost savings every year. If you then look at some of the other drivers of that earnings growth, I think it's really important as you think about the EMPSbusiness, that growth really goes hand in hand with execution of strategic projects which also drives our high value products growth. We expect about double the volume of high value products from '19 to 2027 and in 2027 we expect those products will comprise about 40% of our total earnings at a kind of constant margin. This year we're relatively light on strategic projects in EMPS. Next year in 2025 we will be really heavy, and so we'll have the Strathcona, renewable diesel coming online. We'll be executing the Resid upgrade project in Singapore and we'll have China 1 coming on, among other things, including increasing our capacity for advanced recycling at certain locations. So we have a lot of activity that will then start to bring incremental earnings power in 2025 and beyond. Then I'd say if you look over at what's happening in the upstream business, we're continuing to get growth obviously out of Guyana in the Permian. That growth in advantaged assets is a real key driver in terms of overall growth in upstream, one of the things you would have seen in our presentation is that on a year-to-date basis now 44% of our production volumes in upstream are from these advantaged assets which are a key driver of earnings growth. Then I'd say the other thing to think about in upstream is we will start to get production growth, so actual volume growth improvement, but that tends to come more strongly in the beyond 2025 period. So hopefully that gives you a good feel for some of the drivers and when we would be anticipating them starting to get reflected in our underlying earnings. Yeah. I'll just add to Kathy's comments. If you look at cost reductions, which Kathy talked about the value of those contributing to our earnings growth, I think there's not a lot of downside there. I think with the structural changes that we've made and have yet to realize the benefits of, we've got a pretty good track record now here over the last seven years of actually seeing those, what were initially concepts translate into bottom-line savings. So we've got a very high degree of confidence, and that frankly our challenge in reducing cost or driving improvements in the business, is not a lack of ideas or opportunities. It's how we prioritize and execute the highest value of those. So we've got a great opportunity set for improving our own business and it's just a question of pacing that in a way that maintains the other objectives that we have in the business in terms of delivery day in and day out. On the revenue side of the equation, to Kathy's point, the strategic projects are kind of at the heart of growing the revenue and the value side on the top line. I would say, we recognized going back in time, that critical to doing that was, was advantage projects, and then an organization that had the capability to effectively deliver those advantage projects. Then finally, an organization that was capable of starting those up seamlessly and getting them online quickly. I think if you look at the big projects that we brought on today, all this portfolio projects we developed back in 2018, we're continuing to execute that. The ones we brought online, we've been very pleased with. One with the project execution, the technologies organizations contribution to that and then how we've started up and run those. So I think that gives me a lot of confidence going forward that the model that we put together, the focus that we put in each of our businesses to contribute their area of expertise to overall corporate success is demonstrating a lot of success. I've got a lot of confidence going forward that will deliver that -- continues to deliver that portfolio, that's demonstrated its value for what we've done to date. I think feel pretty confident about delivering through 2027 and frankly beyond. Betty Jiang -- Barclays -- Analyst Great. Thank you. That's a really robust pipeline of projects to watch. Thank you for all the detail answer. Darren Woods -- Chairman and Chief Executive Officer Sure. Operator The next question is from Bob Brackett of Bernstein Research. Bob Brackett -- AllianceBernstein -- Analyst Good morning. I had a question around on the use of the phrase carbon materials. It seems fairly new, it feels fairly new. Feels, again pursuing some things in the battery chain. Could you give us a little more flavor on what you're contemplating there? Darren Woods -- Chairman and Chief Executive Officer Sure. Good morning, Bob. It's good to hear from you. I think one of the points we're trying to make is this company has a very broad suite of capabilities that's anchored, frankly, in technology and technology that's focused on transforming hydrogen and carbon molecules. A lot of what we've done to date and the value that the companies generated over the last many decades has been a function of energy and the consumption of those molecules to meet the growing demands for energy. But, we also have a very broad portfolio of other products that we make through that molecule transformation expertise, and into the chemical business, as well as lubricants, and fluids and things that we do out of our refineries. So there's a much broader set of capabilities and products than I think, frankly, what people give us credit for. I would just point to Proxima as a great example of some time back we recognize that the demand for gasoline would trip and particularly in developed countries. And the question we challenged our technology organization with was, how can we use these molecules to make other products that are required to meet other needs in society? And Proxima, I think while it's early in its development, it's going to be -- it's going to demonstrate that we can take that expertise, apply it to a feedstock that will become more and more advantaged with time and make other products that are needed for the world, and that will bring a lot of significant benefits in those applications. The carbon ventures and the carbon materials is a very similar initiative. It's just a little earlier, in its construct. If you look at the world's efforts to decarbonize, it's clear to us that carbon over time will become more and more advantaged feedstock. And so the challenge we've given our organization is, what can we do with carbon molecules? How can we meet growing needs and large markets? And they have to be large markets, because we're going to do -- if we are going to do something that moves the needle for the corporation, we have to do it at scale. What we are looking at there is how do we use the capabilities we have in molecule transformation applied to carbon to meet, these batteries are just one example, carbon fibers are another. There's a number of things today we had our applications for, but there's either a performance dimension that needs to be improved, or a cost dimension that needs to be improved. We think we have a line of sight for how we can do that, how we can improve the performance aspects using our technology capabilities and at the same time find ways to reduce the cost of production. It is early days, I would say. We put it out there in this call to make sure people are beginning to think more broadly about what this company is capable of, and how our future could evolve in a very different direction than where we have come from. The beauty of how we are positioning ourselves is we are using the same core capabilities and advantages. It gives us a lot of optionality and flexibility, to the extent these other new markets work out and demand picks up and we see great opportunities, we can shift more resources into that space. If it takes us longer there or if the transition takes longer, we have our base business and continue to invest in products that the world needs today. We have the ability to adjust depending on how things evolve and depending on what direction the world goes. I think it is a great example of anchoring back on some very core capabilities that have very broad application. We are excited by what we see as some potentially very high-value new markets with some very high-value unique products that we can supply to meet those needs. Bob Brackett -- AllianceBernstein -- Analyst Very clear. A question would be the materiality threshold. Should we think about runways to billion-dollar businesses or $10 million businesses? Is that too simplistic? Darren Woods -- Chairman and Chief Executive Officer I think it is a good measure to think about. It has to be over $1 billion if it is going to be material. We are looking at very large markets into the billions. Bob Brackett -- AllianceBernstein -- Analyst Great. Very clear. Thank you. Operator The next question is from Jason Gabelman of TD Cowen. Jason Gabelman -- TD Cowen -- Analyst Hey. Morning. I had a question about uses of cash and the balance sheet. I think this quarter we are seeing Exxon's net debt to cap move down. Some of your peers are starting to move up as commodities come off a bit. That is seemingly a bit of a differentiator between you and peers. I thought it would be a good opportunity if you could remind us how you think about utilizing that balance sheet capacity moving forward given you are still operating from a position of strength, whether it be deploying for future M&A, increasing buybacks or other opportunities. Thanks. Kathy Mikells -- Senior Vice President, Chief Financial Officer I am happy to talk about that. As you correctly referenced, our net debt to cap has come down. It is about 3% now. Our approach in terms of capital allocation has not changed. It continues to be very consistent. First and foremost, we want to make sure we are making investments in this business that ultimately drive the long-term earnings and cash flow growth that create the virtual cycle of us being able to enhance shareholder returns and return cash to shareholders via dividends as well as a more consistent share of purchase program. That is job No. 1. I would mention that capex is not radible. I have seen many people comment on a light capex number that we had in the first quarter. We are very much on our plan. Many times our capex is influenced by milestone payments, just as an example. It is not radible over the course of the year. We have guided to $23 billion to $25 billion in capex, and that guidance remains we are very much on plan. When we think about investing in our business, obviously we are very focused on the advantaged slate of investments that we have organically in front of us. But, obviously M&A is another type of investment that we make. Again, where we see we can make one-in-one equal more than two, largely by adding synergies to some type of acquisition. Obviously getting ready to close the Pioneer acquisition would be a terrific example of that. We know a strong balance sheet is a competitive advantage. We have continued to really maintain and strengthen that balance sheet. This quarter we paid down a little over $1 billion in debt. That is part of the reason why you see our net debt to cap ratio coming down. That gives us a lot of flexibility to ensure that we are consistently investing in the business through the cycle. It just gives us optionality, understanding that we operate in a very cyclical business, and then clearly we're looking to reward our shareholders. I think you see that with our very consistent approach to the dividend. It needs to be sustainable. It needs to be competitive. It needs to be growing. We obviously raise the quarterly dividend in the fourth quarter by $0.04 and continue to review that over time. I would mention one thing with regard to share repurchases. We did have the Pioneer vote this quarter, and so we were out of the market for a period of time. We did about $3 billion in share repurchases. A run rate to hit the $17.5 billion, which is what we've kind of guided to this year, would be more like $4.4 billion. So our program will naturally dial up our execution, so that we're on track to complete the $17.5 billion share repurchase program on a stand-alone basis, and then I would remind you that we've said we anticipate taking that program pace up to $20 billion annually after we close the Pioneer acquisition. So we feel really good about where our balance sheet is at and our consistent capital allocation strategy and that that will drive long-term returns for shareholders. Darren Woods -- Chairman and Chief Executive Officer And I would just add to Kathy's points that -- and just remind everybody, if you look at where we stand today, and Jason made the point that we're deviating from our peers in terms of continuing to generate cash and drive down net debt. That's anchored in the strategy that we've put in place in 2018, which is find advantaged projects and invest in those to grow the earnings power of the business and that's now beginning to manifest itself. So I think you've got to have a long-term view on this. Having a robust balance sheet to make sure that we're positioned when opportunities come along and we see clear advantages to invest, that we have the capability to do that. Thanks for the question. Jason Gabelman -- TD Cowen -- Analyst Yep. Got it. Thanks. Operator The next question is from Ryan Todd of Piper Sandler. Ryan Todd -- Piper Sandler -- Analyst Thanks. Maybe one on chemicals. I mean, your chemicals businesses, the two segments, continue to show kind of modestly better than expected recovery along the bottom or off the bottom here. Is this more of a feedstock tailwind that we're seeing in the near term? Are you seeing any improvements that are noticeable in terms of demand and overall global supply demand? And I guess in the meantime, while things are weak, what are you managing to do with your product mixer operations to drive relative performance there in chemicals? Darren Woods -- Chairman and Chief Executive Officer Yeah. Sure, Ryan. I'll take that. First thing I would say is, if you look at the chemical business and kind of the margin indicators that we use to judge the health of the chemical businesses, we are at a historic kind of bottom of cycle number. And so I think, it's a very challenging chemical markets today, as I know many of you know. But even in that very challenged market, we are continuing to deliver very good results. I think if you compare similar markets that were even close to these bottom of cycle conditions, we were in a very different place in the past with respect to earnings than we find ourselves today, where we delivered close to $800 million of earnings this quarter, despite the very difficult market conditions. Those market conditions are driven more by supply than demand. Frankly, we're continuing to see growth in demand, not as high as we've seen historically, but continued good growth and frankly in the first quarter saw some of that pick up. The challenge has been the supply that's come on to meet that growth and so that is depressing overall industry margins. As you know, the investments that we make and the way we run our business, is to make sure that we're advantaged versus the average chemical player. So even in these markets that are set by other capacity, the work that we've done to position ourselves, more advantaged -- in a more advantaged position in competition continues to deliver a value. You can see that with the growth, not only in the high-value products, which are coming on with our projects, and frankly, that growth is in line with what we had expected. So we're continuing to see the demand for the high-value products that we've invested in, but we're also seeing in our base volume, value in those with respect to how we positioned ourselves, and so it's -- and we're seeing advantages in the structural, structural cost reduction. So I would tell you, every part of what we've been doing to improve the earnings power of the organization is manifesting itself in our chemical business and showing up in differentiating earnings. And feed to your point, feed advantages play an important role in that. So that's yet again another advantage that we have versus the typical industry player, but that is reflective of the broader strategy that we have. So I think we feel good about where we're at in a very difficult market. Our view is that those market conditions are going to be with us for a little while here going forward, but we also feel like we're well-positioned to be successful there. And as that shakes out and some of the less able competitors have no success in this space, we'll see growth continue to move and eventually we'll see margins pick back up and we'll be very well-positioned. Kathy Mikells -- Senior Vice President, Chief Financial Officer And just the other thing I'd add to that is, I think if you look at our chemical businesses performance and compare that to peers and other players, you see the differentiation and the excellent execution really coming through. We're in clearly bottom of cycle conditions right now, and yet we're still generating pretty good earnings and cash flow in our chemical business. And then I would just mention that as Darren noted, our footprint tends to be North American weighted. So if you just look at our PE and PP footprint, we're heavily North American weighted and relatively lightly weighted to Asia compared to the rest of industry, and Asia is especially at very, very bottom of cycle conditions. Ryan Todd -- Piper Sandler -- Analyst Great. Thanks, both of you. Operator The next question is from Stephen Richardson of Evercore ISI. Stephen Richardson -- Evercore ISI -- Analyst Good morning. Darren, I was wondering if you could talk a little bit about the Baytown project and maybe just if you could give us a little bit more on what your view of adequate incentives there would be. If the PTC on green hydrogen was extended to blue, would that be sufficient to sanction the project? And then, sorry, just as a follow on to that, as you talk about a level playing field across technology neutrality, is your view that a new gray hydrogen ATR should get some sort of incentive? Maybe you could just give us the context of how you are thinking about that project and what it needs to move forward. Thank you. Darren Woods -- Chairman and Chief Executive Officer Yeah. Sure. I'm happy to do that, Steve. What I would say is it's a -- that work we're doing to develop it is I think demonstrating the difficulty of starting brand new businesses and value chains where none exists, and that we're kind of simultaneously trying to build demand, trying to build supply, and then trying to in the early days of this market establish financial incentives to do that. So three core key variables to a successful business, all kind of basically being generated for the first time in this space along this value chain. So I just put that out there as it's a challenging construct, but frankly, one that plays to our strengths and the ability to look along the entire value chain, and we are uniquely situated to manage each piece of that. There are very few, if any, companies out there that have a portfolio and capabilities that extend end-to-end along this value chain. So I feel good about what we're doing there and the work that we've put in place. And frankly, it looks to me like a very viable project. We are continuing to progress that, but it will require that the necessary incentives are in place. With respect to what's required with, with incentives, I would say the IRA and the incentives that were developed as part of the IRA are enough to do that. The challenge is taking the IRA, which I believe rightly focused on carbon intensity and incentivizing carbon intensity, translating that legislation into regulation, and if the regulation reflects the intent of that legislation and writes the rules focused on carbon intensity, that will be enough to justify and to incentivize and give us a return on this investment. We don't focus so much on the green, the blue, and color schemes. We instead focus on how can we meet what is ultimately the objective here, which is to reduce the CO2 associated with production of these products. And we think all the work we've been doing in our facilities and our feedstock and decarbonizing those contributes to that. And so we feel like we're well-positioned with the existing set of incentives, as long as those incentives are fairly reflected in the regulations and a level playing field. What I mean by that is, staying focused on carbon intensity and ignoring colors. Stephen Richardson -- Evercore ISI -- Analyst Very clear. Thank you. Darren Woods -- Chairman and Chief Executive Officer OK. Operator The next question is from John Royall of J.P. Morgan. John Royall -- JPMorgan Chase and Company -- Analyst Hi. Good morning. Thanks for taking my question. So I just had a question about the refinery sale in France. I know you have a very ambitious program for growth in the downstream business, but you have been trimming and high grading a bit with some asset sales. Other majors are also reducing their European footprint in refining. Can you just speak to how strategic the remaining European portfolio is? And could we see some more assets shake out in European downstream? Darren Woods -- Chairman and Chief Executive Officer Yeah. Sure. I would tell you what you are seeing with the sale and France is really the latest in what's been a fairly long trend with us focused on high grading refineries to refineries that are -- that have the capability to address a broad suite of products and high-value products. And so integrated facilities that make not only petroleum products, but also make chemicals and lubricants and basically a broad array of high-value products, and so we've been over time focused on that. They need to be advantaged sites. They need to be -- we have a cost of supply curve. I think you all have heard me talk about this many times across all of our businesses, but we look around the world and make sure that our facilities are on the low cost of supply, so that as the margins move up and down, that we never become the marginal supplier and having an integrated facility helps with that. But it also acts as a hedge to make sure that we're not dependent on any one sector for the success of one of our manufacturing facilities. The reorganizations that we put in place have helped greatly with this, and if you think about these integrated facilities, we used to have them split up among different parts of the organizations, different businesses running them, and in fact, even different manufacturing organizations running them. Today, that's not the case today. Today they are being run by a single business with a single leadership team and so I feel like -- I feel very good about that. But it is this continuing high grade. We were doing it all the way back when I was president of the refining company, so it's been a long-term strategy. We're not in a hurry. We're taking our term to make sure that we find the right buyer that has the right value proposition, one that exceeds our own internal values, and if we can find that, we will then track and transact if we can. We'll continue to optimize and improve those refineries to the best of our abilities. But I would say we've worked our way down the portfolio till we feel pretty good about the position that we're in today. That the refineries that we have in the portfolio are advantaged, have a mix of either feed advantages or product advantages or both. And frankly, our focus has been on making sure they are running reliably, running safely, running efficiently, and these centralized organizations and our global operations and sustainability organization have been a huge enabler to helping each of these facilities and our chemical plants, our refineries, lubricant facilities, all improve their performance, run better, run more profitably, run safer, run more reliably. So I feel really good about the position that we're in and we'll continue to look at our portfolio. It's always been the case that we're looking, to make sure that the value we see in those facilities exceed the values that others might and feel good about our position there. Kathy Mikells -- Senior Vice President, Chief Financial Officer Just the other thing I'd add to that is the investment environment is certainly a bit more difficult in Europe. If you go back and look at the end of 2022, the additional taxes that were levied onto the energy sector. If you look at expanded disclosure requirements that Europe is looking for, or if you look at regulation around reducing carbon footprint and not necessarily implementing regulation that's technology agnostic and focused on just reducing carbon intensity, that all makes Europe a much tougher investment proposition. So that's certainly one of the things that we look at in any place across the globe as we look to make future investment decisions. John Royall -- JPMorgan Chase and Company -- Analyst Thank you. Darren Woods -- Chairman and Chief Executive Officer Thank you. Operator Next question is from Biraj Borkhataria of RBC. Biraj Borkhataria -- RBC Capital Markets -- Analyst Quite fitting to take the next question from an analyst sitting in London, but I just have one question. You have a lot of energy coming into your portfolio in the coming years, the Golden Pass, Qatar, etc. You have quite a high oil weighting in the current sales mix. Are you looking to diversify over time or would you like to maintain that kind of 80% to 90% oil link exposure in your contract base over time? Thank you. Darren Woods -- Chairman and Chief Executive Officer Good morning, Biraj. Thank you. I would tell you, we're not as focused on an absolute mix number, as much as the advantaged investment opportunities that we can find in those businesses. We see long-term demand for oil continuing, albeit with a much lower emissions footprint as we continue to find ways to decarbonize. We also see long-term demand for natural gas, and so I think as we look at both of those, both the liquids and the gas side of the equation, we see a long-term future there and an opportunity for this company to participate if we have advantaged projects that position us on a low cost of supply, and so that's how we think about that. And that advantaged position, which manifests itself in cost of supply, as you know obviously manifests itself in above industry average returns, which is the objectives that we set for ourselves and so that's how we're thinking about it. And frankly, we'll let the opportunity that we find in these advantaged investments set the proportion of the portfolio that those represent. We will not invest in a project that I'm not convinced doesn't, one, leverage our core competitive advantages, that two, then results in a project which is advantaged versus other, and that three then, is on the low cost of supplies. Because as good as the market may look today out the window, we know there are cycles. We don't think the cycles are going away and so we remain very focused on making sure that we take advantage of the upswings, but we're prepared for the downswings and we'll be very successful. And as we just talked about in the chemical business, great example of being in the very bottom of a downswing and continuing to generate cash and make good solid earnings, and that's the ambition we have for all of our businesses. Biraj Borkhataria -- RBC Capital Markets -- Analyst Understood. And just as a follow-up to that, there's obviously been ongoing security challenges in Mozambique. What is your view at this point on whether you'd be interested in doing a second floating facility? Because obviously monetizing the onshore part has become very challenging. Darren Woods -- Chairman and Chief Executive Officer Yeah. I think obviously you rightly pointed out there, security challenges there. I think there's been a lot of good progress made with respect to that. I think Mozambique, the country of Mozambique, the government of Mozambique recognizes the importance, not only for the project, frankly for the people of Mozambique that needs to be addressed and effectively managed. I think they've made good progress in doing that. My view is with time, we've seen this in other places around the world, that will get addressed, and it will result in an opportunity to invest onshore. With respect to onshore/offshore, we frankly, it comes back to the point I made at the beginning of your question, which is it depends on the returns that we can generate with respect to investment opportunities and how competitive those supply points are. If we can do that offshore, we obviously will. If it takes going onshore to do that, then we'll focus on onshore, but it will be a function of the returns of the projects. Biraj Borkhataria -- RBC Capital Markets -- Analyst OK. Thank you very much. Operator The next question is from Josh Silverstein of UBS. Josh Silverstein -- UBS -- Analyst Good morning, guys. Just wanted to see if I can get an update on the timing of the gas to power project in Guyana, and what benefits this may have to cost and operations in the country, and if there are any other projects like this that you guys may be looking at over time. Thanks. Darren Woods -- Chairman and Chief Executive Officer Yeah. Sure. I think this is something that we've been engaged with the government on for quite some time. I think as we look at going into some of the countries that are on a growth path, on a developing path, we look for opportunities of how our footprint and presence in those countries and markets can help the people in the community and this is a great example of that, of getting the gas that's produced offshore, onshore, so they can replace what is a relatively inefficient, high-emissions power generation system that's fairly unreliable with something that's cleaner, lower emissions, and much more reliable and should be much more cost-effective. And so I think it's kind of a win-win proposition, particularly for the people of Guyana. So we're working on bringing that gas to shore. Our expectation is we'll have that brought up sometime end of 2024. Obviously the government's working on the receiving end of that gas and responsible for putting in the power station. That's an independent project that's developing. We're also working on the distribution system. And so it's really -- I think the impact of that will come when we get both pieces together and get that linked up and effectively delivering power to the market. Operator The next question is from Paul Cheng of Scotiabank. Paul Cheng -- Scotiabank -- Analyst Thank you. Hi. Good morning. Darren, in the presentation you talked about the direct air capture. Can you give us some idea there? And you're saying that you aim to reduce the cost by half, and that won't be sufficient. So what will be needed in order -- how much is the actual cost reduction from the current level in order for that to be competitive or that to be a real business for you? And also can you talk about that, how your approach or technology is different than what's currently in the market, especially one of your competitors in the U.S., they already have a -- they said that they have a commercial operation ready, and it's going to come on stream very, very soon. Thank you. Darren Woods -- Chairman and Chief Executive Officer Yeah. Sure. Good morning, Paul. Yeah, what I would say with -- may I start with the last point of your comment, which is, yeah, there are alternatives out there today versus what we're working on. The issue is the cost associated with them. And we're not looking at what we can commercialize in the short term based on what I would say is a very narrow market of limited customers who are willing to pay a very high price to demonstrate a level of decarbonization. We're focused on how we can make this technology broadly applicable at a cost that society can afford. So that's -- we are very focused on the long term, not the short term. And our view is the available technologies today don't meet the cost requirements. That's somewhere between the $600,000 per ton of CO2 removed, and our view is if you try to apply that across the emissions challenge the planet has, the world won't be able to pay for that, so we've got to find a reduction. Our cost, we've set an initial target of cutting the cost in half, just because that is a significant step change, recognizing it won't be enough. If we can get the technology, if we can develop the technology to a point that we're successful there, that gets us on this path and demonstrates the value of the concepts that we are developing to keep on going and drive further down. With respect to the technology and how it compares to what's commercially available out there, I would say part of the reason why this is proprietary technology is today its proprietary and so I'm going to keep it that way. I would say, it is a brand-new approach. There are others who are out there working on new approaches as well, which frankly we're happy about. This is a tough challenge to break and I'm not pretending like we're going to be the ones to solve it, but I am confident that we will give it our all, applying our capabilities, others are doing that. As I said in my prepared remarks that we posted, if there's a breakthrough, it doesn't so much matter who has the breakthrough. I think we're going to have a role to play, because once we have a technology that gets to the right cost level, you are going to need global deployment at scale. And I suspect that the technology that will be required for the future lower cost direct air capture, will be different than what we've got today and will require some of the technical capabilities that we have. So I see a role for us in the future if this nut gets cracked. We feel good about what we've seen so far, but we're very early into it, and we're hopeful that we'll make the progress that we're aspiring to and continue to drive the cost down. Your last point you asked, I think to me, if you're going to be -- if the world's -- if it's going to be affordable, you've got to get into $100-ish a ton of CO2 to start talking about broad deployment around the world. I think that's ultimately where we need to get to. Marina Matselinskaya -- Director, Investor Relations Thank you everybody for joining the call and for your questions today. We will post the transcript of our Q&A session on our investor website next week. Additionally, we look forward to connecting again on May 29th for our Annual Shareholders Meeting. Now let me turn it back to the operator to close the call.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Welcome to the Bristol-Myers Squibb first-quarter 2024 earnings conference call. [Operator instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Tim Power, vice president and head of investor relations. Please go ahead. Tim Power -- Vice President, Investor Relations Thank you, and good morning, everyone. Thanks for joining us this morning for our first-quarter 2024 earnings call. Joining me this morning with prepared remarks are Chris Boerner, our board chair and chief executive officer; and David Elkins, our chief financial officer. Also participating in today's call are Adam Lenkowsky, our chief commercialization officer; and Samit Hirawat, our chief medical officer and head of global drug development. As you'll note, we've posted slides to bms.com that you can use to follow along with for Chris and David's remarks. Before we get started, I'll read our forward-looking statement. During this call, we'll make statements about the company's future plans and prospects that constitute forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in these SEC filings. These forward-looking statements represent our estimates as of today and should not be relied upon as representing our estimates as of any future date. We specifically disclaim any obligation to update forward-looking statements even if our estimates change. We'll also focus our comments on our non-GAAP financial measures, which are adjusted to exclude certain specified items. Reconciliations of certain non-GAAP financial measures to the most comparable GAAP measures are available at bms.com. And with that, I'll hand it over to Chris. Chris Boerner -- Chief Executive Officer Thank you, Tim, and good morning, everyone. Q1 was a busy quarter for us and a good start to 2024. Starting on Slide 4, and knowing what an active quarter we had, I wanted to start by telling you how we think about our performance across four dimensions. First, the performance of our commercial portfolio was good and broadly in line with our expectations, even with some products impacted by inventory or gross to nets. Second, we made solid progress advancing our pipeline. Third, we closed four import transactions that strengthened our long-term growth profile during Q1. And fourth, we're taking decisive actions to improve productivity. Taken together, Q1 performance was broadly aligned to our internal expectations. Importantly, there is no change to the underlying business outlook we provided in February. As you know, we've included the accounting impact of the recently closed transactions in our non-GAAP EPS guidance. Let's turn to Slide 5 for some details. I'll start with some highlights on commercial performance. We've seen real strength across key brands, including Eliquis, Opdualag, Reblozyl, Yervoy and Breyanzi. And though the BCMA space remains competitive, our objective is to return Abecma to growth over time with the KarMMa-3 approval as we move into a larger patient population. Turning to Opdivo, Camzyos, and Sotyktu. What's important about all three brands is that demand grew while revenue was impacted by other factors such as inventory and gross to nets. Today, we are seeing the inventory patterns for Opdivo and Camzyos normalizing. And for Sotyktu, we're steadily building commercial script volume as access continues to improve this year. David will give you more details, but taken together, the commercial performance in Q1 is in line with our expectation and sets us up for the year. Second, we made important progress advancing our pipeline. This includes two important cell therapy approvals, the initiation of new registration trials, an important proof-of-concept data for Opdualag in lung cancer from a prespecified analysis of our phase 2 during Q1. We're looking forward to starting a phase 3 registrational trial versus standard of care in a segment consisting of about 20% to 30% of non-small cell lung cancer patients. And not on this slide, but important for patients is Milvexian, which has the potential to be the only oral Factor XIa medicine in AFIB and ACS. The trials are continuing following the most recent DSMB review with enrollment accelerating. Third, we closed four important deals during the quarter. Across all four, we have added assets, capabilities and expertise that strengthen our ability to drive long-term growth as we exit the 2020s. Our team is driving performance of Krazati, the RayzeBio plant in Indiana is now operational, we're in the process of filing an application to supply clinical product for RYZ101 from the site, SystImmune's first-in-class bispecific ADC is advancing into global clinical trials in tumors, including lung and overtime breast cancer. And we are very excited about the potential of KarXT from Karuna, which I will review on Slide 6. The team is on track and focused on two objectives: First, launch preparations are underway and on track for KarXT; second, we are executing against a robust clinical program for this important asset. On this slide, you can see the significant unmet need in schizophrenia and highlights of data recently presented for KarXT. These data demonstrated its compelling long-term efficacy as KarXT was associated with significant improvements in symptoms of schizophrenia across all efficacy measures without evidence of metabolic or movement disorder side effects. This reinforces the very attractive profile for this medicine as an important advancement for patients and a significant commercial opportunity for the company. Underpinning our efforts to navigate this decade is an enhanced focus on driving operational productivity and efficiency, and we have made some notable progress already this year. Let's go to Slide 7. At a company level, we have clearly identified brands and programs that are most critical to both near and latter half of the decade performance. Across the organization, we have initiated efforts to delayer and streamline decision-making. And within R&D, we are optimizing the portfolio to focus our internal efforts on higher ROI programs. These are programs with compelling science, significant commercial value and in therapeutic categories where BMS is positioned and resourced to win. As a result of these actions, we anticipate cost savings of approximately $1.5 billion by the end of 2025, which will allow us to reinvest in high priority growth brands and R&D programs. With our heightened focus on improving productivity and efficiencies, we're strengthening the company's long-term growth profile. This is a snapshot of what has been a very busy start to the year. And while we clearly have more work to do this year, we're off to a good start. Let me close on Slide 8. Overall, our business outlook remains unchanged. We remain confident that we will deliver top line growth for the year consistent with what we communicated in February. And our underlying non-GAAP EPS forecast has also remained unchanged. We are taking important actions to effectively manage the decade. Our management team is focused on ensuring the disciplined execution required to deliver both this year and set us up for the longer term. I want to thank the employees of BMS, including new team members from our recent acquisitions for their contributions and commitment to delivering for patients. Let me now hand it over to David. David? David Elkins -- Chief Financial Officer Thank you, Chris, and good morning, everyone. As Chris highlighted, we're off to a good start to the year with top-line growth as shown on Slide 10. As a reminder, unless otherwise stated, all comparisons are made from the same period in 2023 and sales growth rates will be discussed on an underlying basis, which excludes the impact of foreign exchange. Building our momentum coming out of last year, we're executing against our plan to drive our growth portfolio, which delivered approximately 11% sales increase in the first quarter compared to the prior year and now represents approximately 40% of our total revenue. This growth was broad-based with most growth brands recording significant increases in the quarter. Our legacy portfolio also contributed to overall sales growth in the quarter, with strong sales of Eliquis, which remains an important cash flow generator for the company. Now turning to the first-quarter performance of our key brands, and starting with oncology on Slide 11. On this slide, you can see the impact of our strategy and broadening our I-O franchise and expanding in new targeted solid tumor therapies. Global sales of Opdivo were impacted by inventory work down and timing of orders in the U.S., partially offset by demand growth. As we said in the past, we expect to see growth at a more modest pace than 2024. And Opdualag, a standard of care treatment in first-line melanoma, generated strong quarterly sales with U.S. sales growth primarily driven by strong market share. We are very encouraged by the future expansion potential of Opdualag, not only in adjuvant melanoma, but also in our plans to develop it in first-line lung cancer. This, along with the anticipated launch of our Opdivo subcutaneous formulation next year, we will extend our I-O franchise well into the next date. Our targeted solid tumor therapies expanded with the addition of Krazati after the completion of Mirati acquisition in late January. Our reported sales represent a partial quarter. On a pro forma basis, Krazati global sales in Q1 were approximately $27 million, primarily in the U.S. With recent conditional marketing approval by the European Commission, we look forward to bringing Krazati to more patients toward the end of the year. Augtyro's first-quarter performance reflects positive early sales trends. We remain focused on driving awareness and penetration based upon its potential best-in-class profile. Now moving to Slide 12 and our cardiovascular franchise. Eliquis remains the market-leading oral anticoagulant worldwide. Q1 sales in the U.S. grew 12%, primarily due to strong demand, including increased market share. Internationally, sales were roughly in line with prior year. Camzyos generated strong sales in the quarter, nearly tripling its performance versus Q1 of last year. In the U.S., sales were driven by demand growth including an almost 25% increase in commercial dispenses since Q4 of 2023. Sequentially, U.S. sales of Camzyos were impacted by the inventory dynamics of approximately $20 million and gross-to-net impacts from the typical copay reset at the start of the new year. We expect the momentum of Camzyos to continue, supported by the compelling real-world evidence in over 1,500 patients presented earlier this month at ACC. Let's now turn to Slide 13 and discuss our hematology business. Our legacy brand, Revlimid, saw sales decline in the first quarter. Utilization of free drug program normalized in the quarter. We continue to anticipate variability in Revlimid sales quarter to quarter based upon historic dispensing patterns in specialty pharmacies, as anticipated, increased volumes of U.S. generics starting in March. Turning to Reblozyl, growth in the quarter was driven primarily by the strong U.S. launch of the broader commands label and first-line MDS. International sales growth benefited from the new market launches, and we look forward to bringing Reblozyl to more patients with the recent first-line approvals in the EU and Japan. In cell therapy portfolio, global Breyanzi sales growth reflected the strength of the clinical profile and improved manufacturing capacity. Consistent with what we previously communicated, starting in Q2, we expect Breyanzi to benefit from the recent new indications and expanded manufacturing capacity. With Abecma, U.S. performance in the quarter was impacted by ongoing competitive pressures. Future demand will benefit from the recent KarMMa-3 approval, which expands the addressable patient population. Internationally, Abecma demand growth was offset by unfavorable pricing pressures to secure access. Now moving to immunology on Slide 14. Zeposia sales in the quarter were primarily due to demand of new patient starts with multiple sclerosis. Sotyktu sales performed in line with our expectation. During the quarter, we delivered on our goal of achieving roughly 10,000 commercially paid prescriptions. Sales in the quarter reflected increased demand and expanded commercial access. In addition, we expect to add another large PBM later this year that will expand access coverage by approximately 30 million lives. Now turning to Slide 15. I will walk you through the remainder of our P&L, and my comments will be on a non-GAAP basis. As expected, gross margin decreased compared to the prior year, primarily due to product mix. Excluding acquired in-process R&D, first-quarter operating expenses increased mainly due to the impact of the recent acquisitions and higher cost to support the overall portfolio. We expect this growth to be mitigated later in the year through savings and productivity initiatives I will speak to shortly. Other income and expense declined as expected in the first quarter, primarily due to lower PD-1 royalty rate and the financing costs associated with the recent transactions. Acquired in-process R&D in the quarter was $12.9 billion, primarily due to the previously disclosed onetime charge of $12.1 billion for the Karuna transaction and $800 million for SystImmune. Our tax rate in the quarter was impacted by the onetime nondeductible in-process R&D charge for Karuna. Before the impact of acquired in-process R&D, our first-quarter earnings would have been $1.89. Taking into account the impact from the recent transactions, including acquired in-process R&D, we reported an earnings per share loss of $4.40. Now moving to the balance sheet and capital allocation on Slide 16. Cash flow from operations remained strong with approximately $2.8 billion generated in the quarter, resulting in approximately $10 billion in cash and cash equivalents and marketable debt securities on hand as of March 31. Our strategic approach to capital allocation remains unchanged. We are committed to the dividend. And as we said previously, we plan to utilize our cash flow to repay approximately $10 billion of debt over the next 2 years. And we remain financially disciplined around business development to further strengthen the company's long-term growth profile. Next, let's turn to Slide 17 to discuss our productivity initiative. As Chris described earlier, we have taken action to increase productivity and efficiency and focus our efforts on the assets and -- with the highest potential ROI and those most likely to drive our long-term growth. As part of this process, we are making deliberate choices to prioritize the assets that have the greatest clinical benefit to impact areas of high unmet need and where we can deliver the most value for patients. We will disproportionately invest in higher-return opportunities, which improves our portfolio ROI and strengthens our growth profile in the second half of the decade. After a thoughtful process, we have made the decision to discontinue and externalize several clinical assets. We anticipate cost savings from these actions of approximately $1.5 billion by the end of 2025, thereby absorbing the incremental opex expense from the recent deals. These cost savings will come from across the organization include reductions in direct clinical expense, site rationalization and elimination of open roles, and reduction in headcount. As we realize these savings, we will reinvest in the highest potential opportunities. Now turning to Slide 18. I'll walk through the impact of our recently closed acquisition on our EPS guidance. As you can see on this slide, if you take our previously stated non-GAAP EPS guidance range of $7.10 to $7.40 from February and include the previously stated impact of deal dilution and the onetime impact of acquired in-process R&D, our revised range continues to reflect the strong outlook of the business, as we told you in February. Now let's walk through the details of our guidance on Slide 19, starting with revenue. As is our practice, we provide revenue guidance on a reported basis as well as on an underlying basis, which assumes currency remains consistent with prior year. We continue to expect 2024 total revenues to increase in the low single-digit range at report rates as well as excluding foreign exchange. This reflects our confidence in the growing momentum of our growth portfolio including products such as Opdivo, Reblozyl, Breyanzi, Camzyos, and Sotyktu. And as a reminder, the sotatercept royalty will be included in the other growth revenue line. We continue to expect gross margin to be approximately 74%. As we saw last year, we should see a sequential dip in Q2 related to our sales mix. Excluding acquired in-process R&D, we continue to expect our total operating expenses to increase in the low single-digit range, reflecting incremental costs associated with the recent acquisitions partially offset by the realization of internal savings through the productivity initiatives I mentioned earlier. Given the timing of the deal closures, we expect to come in at the upper end of our guidance range with an expected step-up in Q2 and the remaining opex to be more evenly spread across the back half of the year. We remain aligned with our previous operating margin to target at least 37% through next year. For OI&E, we now expect approximately $250 million of expense primarily reflecting the debt financing costs from Karuna and RayzeBio. The tax rate was affected by onetime nondeductible expense of the Karuna acquired and process R&D charge, which impacted our non-GAAP net income. Excluding this impact, the estimated underlying tax rate in the quarter was about 19.5%. And as a result, we now see full-year underlying tax rate of about 18%. Before we move to Q&A, let me take a minute to review some of the key highlights on our call today. We grew the top line, we advanced the pipeline, and we are executing our productivity initiative and our expectations for the underlying strength of the business remains unchanged from the beginning of the year. Finally, I'd like to recognize our BMS employees around the world for their unwavering hard work and commitment as we continue to make progress in strengthening the company's long-term growth profile and bringing truly transformational medicines to patients. With that, I'll now turn the call over to Tim for Q&A. Tim Power -- Vice President, Investor Relations Thanks, David. Can we go to the first question, please? Questions & Answers: Operator Absolutely. [Operator instructions] Our first question comes from Geoff Meacham with Bank of America. Please go ahead. Geoff Meacham -- Bank of America Merrill Lynch -- Analyst Good morning, everyone, thanks for the question. Just had one for Chris or maybe for David. On the cost savings, how much would you say was legacy Bristol, either workforce or facilities versus optimizing integration of all your recent deals? I guess I'm trying to get a sense for whether you think there's further optimization to come as you guys focus on the new launch portfolio. Thank you. Chris Boerner -- Chief Executive Officer Good morning, Geoff. I'll let David answer that. David Elkins -- Chief Financial Officer Yes. Thanks, Jeff, for the question. The majority of the savings come from the historical BMS. As we talked about, the main drivers of the $1.5 billion savings really came into three buckets. First was really looking at the portfolio, obviously, with the Mirati, Karuna, and with RayzeBio. We have really important portfolios that we're bringing into the overall portfolio. It gave us the opportunity to look at that and maximize the ROI in totality of the portfolio as well as adjusting for some updates on new data and the competitiveness. The second thing that we really looked at for legacy BMS is how do we become more agile, quicker decision-making and streamline the organization by removing layers of management so decisions can be more quickly. And there, we talked about the roughly 2,200 affected employees as a result of those changes. And then lastly, we went through all of our third-party relationships, continuing to look for efficiencies in third-party service providers, and that was the last category. And a lot of those activities are also legacy BMS. So the vast majority of the savings are coming for in-house existing operations. Tim Power -- Vice President, Investor Relations Thanks, David. Can we go to the next question, please? Operator Our next question comes from Chris Shibutani with Goldman Sachs. Please go ahead. Chris Shibutani -- Goldman Sachs -- Analyst Thank you. Good morning. Obviously, a lot of moving parts operationally, strategically. I think investors have been keen to get a sense for how you're thinking about potentially a trough level of earnings. I think the notion that there might be some visibility into where you could begin to see some growth, and I know in your vocabulary you used about exiting the decade and into the next. Help us with where you are with that thinking since we haven't had that clarity with all the moving parts. But how are you thinking about the potential to communicate that kind of timeline and level? Chris Boerner -- Chief Executive Officer OK. Chris. I'll take that one. And I think they're embedded in that question, maybe two things. First is how we're thinking about how we're going to guide around this trough and then there's maybe a second question in there, which is when we think we'll see that trough and what's the timing of it. With respect to the first question, look, we've been engaging with investors on this topic over the last number of months. A bit of context here, given the industry dynamics, we -- certainly, I believe companies in this industry need to be judicious with respect providing long-term guidance. But we get why you are asking the question here because it's something that we're going to need to continue to engage with investors on to strike the right balance in terms of how we think about providing guidance on this topic. A little uncertainty that we know that related to this question, though, is the impact of IRA on Eliquis. And once that price is public, and remember, that's going to happen in the September time frame, we'll provide the impact of Eliquis both on the top line as well as on EPS. In terms of how we think about the timing of the trough, based on our current plans, we start to see an impact in 2026. And then as we said earlier in the year, we anticipate to be returning to growth before the end of the decade. And then obviously, we're clearly focused on accelerating both the timing and the pace of growth in the back half of the decade, and that's going to influence timing as well. But thanks for the question, Chris. Tim Power -- Vice President, Investor Relations All right. Can we go to the next question, please? Operator Our next question comes from Chris Schott with J.P. Morgan. Please go ahead. Chris Schott -- JPMorgan Chase and Company -- Analyst Great. Thanks so much. Just a two-parter, coming back to the restructuring. I guess the first part is, is the redeployment of savings going to be mostly focused on the R&D side or on SG&A? And just related to that, in terms of investment in the growth drivers, it seems like elements such as payer dynamics and competitive launches are impacting uptake of some of the new launch assets. So I'm just interested in which products do you see having the greatest potential for improvement with further investment, and how you, I guess, balance SG&A versus either further R&D or just dropping some of those savings to the bottom line as you're considering kind of how to redeploy that $1.5 billion? Chris Boerner -- Chief Executive Officer Thanks, Chris. Let me just say a couple of words and then I'll turn it over to David for the first part of your question and Adam can come in on the back end. First, as David mentioned, when we thought about these efficiencies, we were really thinking along three lines: The need to invest in the pipeline, ensuring that we had adequate investment for our growth products and then needing to be more agile and focused as an organization. In terms of how we think about allocating those redeployment opportunities, I would say, generally speaking, they're in that order with the majority going back into R&D. But David, do you want to start? David Elkins -- Chief Financial Officer And yes, Chris, thanks for the question. The way to think about two-thirds of the savings associated in the R&D area and about a third is in MS&A. But importantly, if you really think about the acquisitions that we've just done, if you think about Mirati and Krazati, in particular, really important development programs in first-line lung, both the doublet as well as the triplet. And then if you think about Karuna, and Adam can talk further about this, we see multiple indications -- billion-dollar indications in this space. We talked about schizophrenia, the adjuvant schizophrenia as well is moving into Alzheimer's with agitation and psychosis. So there's significant investments that you have to make there. And then if you think about Ray Ligand and RayzeBio, we see multiple MDs being able to come out of this. We're also -- we finished the manufacturing in Minneapolis. We're going to be able to supply our clinical studies out of that. So significant investments in those three areas, which through all of that as well as reprioritizing our existing BMS portfolio, what we've been able to do is increase the ROI of the portfolio. But just as importantly, we increased the growth profile of the company in the second half of the decade. So there's a lot of work that's going under the surface in order to continue to maximize the value of the portfolio and strengthen the growth profile of the company. Adam? Adam Lenkowsky -- Chief Commercialization Officer Yes, Chris. Thanks for the question. So we're making good progress across the totality of our growth portfolio. As David shared, we saw strong year-on-year demand growth across the majority of our growth products. And we continue to be focused on accelerating our key brands. And we're doing what we said we would do as we continue to drive our growth portfolio. So just a few of the products that I think is important to mention, Opdualag has become a new standard of care in first-line metastatic melanoma, grew 76%. Reblozyl continue to deliver strong performance post first-line. COMMANDS approval grew over 70% as well. We have increased investment at the end of last year behind products like Sotyktu, Breyanzi, and Camzyos. Camzyos continues to demonstrate strong growth. We had 25% growth of new patients added on to commercial drug quarter over quarter. Breyanzi, we also increased our investment. We're a much stronger supply position today than we were last year and increasingly being recognized as a best-in-class CAR-T. And as David mentioned, we're readying for the launch of KarXT in September, which is a very significant multibillion-dollar opportunity. I would say that a product like Abecma has been more challenging for us. But we have an opportunity now with the KarMMa-3 approval to work to return back much growth over time as we move into a larger patient population. But adding it all up, we continue to make good progress in delivering strong commercial execution and performance. Tim Power -- Vice President, Investor Relations Thanks, Adam. Can we go to the next question, please. Operator Our next question will come from Evan Seigerman with BMO. Please go ahead. Evan Seigerman -- BMO Capital Markets -- Analyst Hi, guys. Thank you so much for taking the question. Kind of a follow-up to what we've been talking about. So when you talk about the cost savings reinvested, do you mean that you're going to manage your margins by titrating the reinvestment of the cost savings? Are you going to deploy the $1.5 billion kind of informed by the science or potential for growth? And then a follow-up, as you mentioned you're going to discontinue and externalize several clinical assets. Any commentary as to which ones you're thinking about, that would be great. Chris Boerner -- Chief Executive Officer Thanks, Evan. We'll have David start, and then Samit. David Elkins -- Chief Financial Officer Yes. Thanks, Evan. As I said in my prepared remarks, we're looking at our operating margins as we previously communicated in that 30% range. So that $1.5 billion of savings that we'll achieve by the end of next year, that's being reinvested both in the portfolio as I described earlier, particularly with the acquisitions that we did. But we've also had good progress like Opdualag where we're going to continue those clinical studies as well. And all of that put together, as I was saying, really strengthens not only the ROI, but the growth profile of the business in the second half of the decade. And I'll turn it over to Samit on the audits that we're looking at to externalize. Samit Hirawat -- Chief Medical Officer and Head of Global Drug Development Yes. Thank you, David. And just to build on what David said, from a pipeline perspective, we took a very thoughtful approach to see -- from our rich pipeline, what are the assets that we are not going to be continuing on our own. So first thing that we looked at is the evolving science from the ongoing exploration of our clinical assets An example over there where we look at CTLA-4 in our pipeline that we were developing, we had set the bar with ipilimumab, which is already a high bar to then look at the data and then we decided that if the data are not going to be better than ipilimumab, we shouldn't be continuing that program. So we decided not to continue with that. Similarly, when we looked at external and internal data for the -- alpha program, that did not meet the muster, and we wanted to look at the real return on that investment as well for patients, and we are not going to continue that program. The second way we looked at it is that our science may be really good. Data evolution is really good, but does it really make sense from -- for a company our size to continue a program if it's not going to be ultimately a growth driver. So from that perspective, if you think about 158, where the data are pretty good in myelofibrosis, but really, from our perspective, does not meet the threshold to be a driver for our growth potential. So that program, we are not going to be continuing. And then, of course, we continue to look at our dire to be either first-in-class or best-in-class product profile. So from that perspective, we continue to focus on what we will continue versus not. Overall, I would say that we have about -- discontinued about 12 programs at this time, but in a continuum. And so throughout the year, we'll continue to look at these same principles and see what else we need to take out from our pipeline and either externalize it or not be able to develop it further. Tim Power -- Vice President, Investor Relations Thanks, Samit. Can we go to the next question please, Rocco? Operator Our next question comes from Seamus Fernandez with Guggenheim Securities. Please go ahead. Seamus Fernandez -- Guggenheim Partners -- Analyst Great. Thanks for the question. So just wanted to check in on your thoughts around IRA and the impacts associated with that as we approach 2026 in particular. And if you might be able to provide us any color on progress or process in the negotiations or price fixing that may come from the U.S. government. And then just the second question, hoping you might comment help frame for us the Opdivo opportunity in lung cancer and when we might gain some incremental visibility on that? Is it going to be more from clinical trial hitting Clinicaltrials.gov, and we'll get some information in that regard first? Or will we actually see the data in this potential subset? Chris Boerner -- Chief Executive Officer Thanks for the question, Seamus. Maybe I'll start, have Adam weigh in a little bit more on IRA. With respect to the ongoing discussions with CMS, we're not going to be commenting. As I said earlier, we will have the outcome of that public in September and we'll be able to provide more insight at that point. But Adam, you can speak to some of the other aspects of IRA and then Samit. Adam Lenkowsky -- Chief Commercialization Officer Yes. Thank you, Chris and Seamus, thanks for the question. As it relates to IRA, there are obviously multiple components to it. There's the negotiation. There's also the change in the Part D benefit design. So in 2024, we don't anticipate significant impact across our portfolio across Eliquis, Revlimid or other brands. We do expect, though, more substantial changes to the Part D benefit next year since the products are impacted by the redesign. We are carefully evaluating each product individual dynamics now and we'll see into the future. And we're monitoring very closely to understand the impact of, for example, out-of-pocket caps and other shifts that are happening in the system. So as we move from a $3,500 cap to a $2,000 cap, we would expect to see more patients' ability to fill their medicines and improve as it becomes lower at the pharmacy counter. But obviously, we'll need to do more -- data before we can provide additional details. Samit Hirawat -- Chief Medical Officer and Head of Global Drug Development Thank you, Adam. And then thanks, Seamus, for the question. For Opdualag, let's just take a step back and understand what we were planning to do -- try to do. So for Opdualag, we conducted a study of Opdualag plus chemotherapy in first-line non-small cell lung cancer. At first, we wanted to define the dose. So we tested a couple of doses in the first part of the study. And in the second part of the study, then we randomize the patient to receive Opdualag plus chemotherapy versus nivolumab plus scheme therapy. And as we have said before, what we wanted to understand is the drug applicable for all patients? Or are we going to find a differential activity in a subset of patients. And what we have said is we have found a subgroup of patients where the drug's activity is good and encourages us to now go into a phase 3 trial. And so we are looking forward to presenting the data in the second half of this year as well as initiating the trial versus standard of care in the second half of this year, and we are planning that. We'll be executing that. As soon as we have that ready, you will be hearing about it. In addition to that, Opdualag, of course, other opportunities. As you know, we are already waiting for the data for the adjuvant melanoma trial and we're looking forward to the data evolution toward the back end of this year in first-line hepatocelluar carcinoma as well. Tim Power -- Vice President, Investor Relations Thanks very much, Samit. Rocco, could we go to the next question please? Operator Our next question comes from Terence Flynn with Morgan Stanley. Please go ahead. Terence Flynn -- Morgan Stanley -- Analyst Great. Thanks for taking the question. Maybe a two-part for me on the CAR-T franchise. David, I think you mentioned something about Abecma ex-U.S. pricing dynamics, some change there to help boost access. Can you just provide a little bit more detail if that was a one-off in a specific country or what's going on there? And then on Breyanzi, Gilead has talked more recently about moving in the U.S. out to some of these secondary community hospitals as they think about expanding, particularly in the second-line label indication. And so is that something that you guys are considering as well? Or do you feel pretty good about your current footprint for Breyanzi at the primary academic hospitals? Chris Boerner -- Chief Executive Officer Thanks, Terence. I'll let Adam take both of those. Adam Lenkowsky -- Chief Commercialization Officer So as it relates to Breyanzi, what we saw in the quarter was we were able to stabilize the decline in the U.S. Sales were roughly flat versus last quarter. What you're referring to internationally is we did see strong demand growth, which we expect to continue, but that demand growth was offset by negative price and skew reimbursement, mainly in Germany. So that's where that took place. And now with KarMMa-3, it gives us the opportunity to have a different conversation with our customers about our data in a larger patient population. And our -- is to return Abecma to growth over time as we move into this much or patient population. Now for Breyanzi, we're very excited about this product. In Q1, we increased sales over 50% versus the prior year. We anticipate robust growth this year because not only just in accelerated growth in LBCL, as Breyanzi is increasingly recognized as the best-in-class CD19, we also expect to see expanded indications. We just received approval in the U.S. for CLL and with additional approval as anticipated next month in follicular lymphoma and mantle cell lymphoma. And this is going to roughly double the addressable market for Breyanzi. We're also very encouraged by our expanded manufacturing capacity and now in a much stronger position to meet demand. We're seeing about 20% outpatient use today for Breyanzi, and we expect that to continue based on the differentiated safety profile. So taken together, we're very excited about the growth profile of Breyanzi. Tim Power -- Vice President, Investor Relations Can we go to the next question, please? Operator Our next question will come from Tim Anderson at Wolfe Research. Please go ahead. Adam Jolly -- Wolfe Research -- Analyst This is Adam on for Tim at Wolfe Research. So just on Sotyktu, can you give us some updated market share metrics, things like new-to-brand share or versus Otezla in the oral category percent use in first-line versus later lines, that sort of thing? And also, any details on when the free drug program might begin to wind down. Chris Boerner -- Chief Executive Officer Sure. I'll take that, Adam. Thanks for the question. So we're continuing to make progress with Sotyktu, and we're executing our plan. We delivered in the quarter what we said we would do, and that's reaching approximately 10,000 paid prescriptions, that's what we shared in January, and we expect to roughly double that to 20,000 paid prescriptions in Q4. So that's where we're focused on driving today. Remember, we also said there would be an increase in gross to net due to broader rebating needed to secure improved access and this impacted sales in Q1, but the volume that we'll see will more than offset that throughout the year. So we talked about improving our access position. And aside from the wins that we announced last year in CVS and Signet ESI, we saw access improvement with Sotyktu, which was added to Optum. And as David mentioned, we do expect to announce additional improved formulary access including a large PBM with approximately 30 million lives. So we remain focused on securing zero steps by 2025. And when you have that better access position, the need for a bridge becomes less and less important. And so basically, when you look at -- when you have better access, patients are moved faster into commercial product because they go directly to the specialty pharmacy. As far as market share, look, this is a highly competitive market. We look at launch analogs at the top of the funnel or written prescriptions, and the Sotyktu performance is ahead of products like Tremfya, Cosentyx at the same time ago launch. We are laser focused on share growth versus Otezla, which is a critical area of focus and becoming the oral standard of care in the market over time. Tim Power -- Vice President, Investor Relations Thanks, Adam. Rocco, could we go to the next question, please? Operator Our next question comes from Dave Risinger with Leerink Partners. Please go ahead. David Risinger -- Leerink Partners -- Analyst Thanks very much and thanks. And thanks for all of the detailed perspectives that you're sharing. So I'm hoping that you can help with other income specs in the future, including the look for AstraZeneca, other incomes run rate and the anticipated step down in coming years. Chris Boerner -- Chief Executive Officer Thanks, Dave. David? David Elkins -- Chief Financial Officer Yes. So this year was the big step down in the PD-1 rate. And then the other thing impacting that is the diabetes that will step down next year as well. The other thing to keep in mind, as I said in the prepared remarks is on the interest for the additional debt that we just did. That was the big change in the guidance that we just provided for this year, going from $250 million of OI&E income down to $250 million of expense. And the bulk of that is related to the additional interest cost, which is around $13 billion with 5.3% interest rate. And that's slightly offset by the royalty income. Tim Power -- Vice President, Investor Relations Thanks, David. We'll go to the next question, please. Operator And our next question comes from Mohit Bansal with Wells Fargo. Please go ahead. Mohit Bansal -- Wells Fargo Securities -- Analyst OK. Thank you very much for my question. I actually want to probe the trough guidance comment a little bit further. It does seem like that you are considering it. But if that is the case, can you talk a little bit about the puts and takes there regarding timing of such guidance? I'm asking because it depends on when you think the trough is, if it is '26 or '28 because, I mean, you might not want to provide if it is '28, but just now because it is still a little bit uncertain regarding the timing of it. So what are the puts and takes regarding the timing of it when you eventually decide to provide it? Chris Boerner -- Chief Executive Officer Yes. So maybe I'll start and then David can chime in if he has any additional -- anything else that he would like to provide. I think the way we're thinking about the trough guidance, and again, it's something that we have been engaged with investors for the last number of months. I think the way I would think about it is, first and foremost, probably the underlying question on guidance right now is what is the impact of IRA on Eliquis? We will, as I said earlier, be in a position in September when the price for Eliquis coming out of the IRA process is known and public at that point to talk about what that price is and the impact of -- on Eliquis on both the top line as well as on EPS. And then in terms of how we're thinking about the timing of the trough again, and we said this back at the beginning of the year, we see the impact starting in 2026 and our plan is to be growing by the end of this decade. David, anything else you would add? David Elkins -- Chief Financial Officer I think you covered it, Chris. Tim Power -- Vice President, Investor Relations Thanks, Chris. Could we go to the next question please, Rocco? Operator Our next question is from Carter Gould with Barclays. Please go ahead. Carter Gould -- Barclays -- Analyst Good morning. Thanks for taking the questions and for all the color today. I wanted to dig into Camzyos for a second. You did have data at ACC and sort of the current rate or the one with that seemed very positive. And just when you think about that REMS registry data and the potential to potentially get the REMS modified down the road, should we be reading into that data? Any level of confidence or anything on that front you want to message? And I guess along those lines as well just, I believe housekeeping on -- did I hear a $20 million inventory impact in the quarter? I know the something was called on the slides, but I'm not sure that was quantified. Any help there would be great, too. Chris Boerner -- Chief Executive Officer Yes. Thanks, Carter. Maybe Samit can start and then Adam. Samit Hirawat -- Chief Medical Officer and Head of Global Drug Development Yes. Thank you, Carter, for the question. So for Camzyos, we remain obviously very confident in the overall profile of Camzyos. It has been a very transformational therapy for patients. And as you mentioned, data at ACC clearly showed from the patients that have been treated in the real world that there is transformational outcome. And from a safety perspective, with 80% of the patients being treated, the 2.5- and the 5-milligram dose, the overall outcomes remain really, really positive as well as the impact on the ejection fraction is minimal at best. So certainly, it gives us an opportunity to collate that data and find the conversations continuing with the FDA at appropriate times. Remember, we've also got the nonobstructive hypothetic cardiomyopathy study that we'll be reading out early next year. So that will provide another opportunity for us to also engage deeper into conversations for the REMS program as a whole and how we can bring this therapy to more patients as well as decrease the burden on the patients. With that, let me pass it on to Adam to comment more. Adam Lenkowsky -- Chief Commercialization Officer Yes. Thanks for the question. We're pleased with Camzyos' performance in the quarter. We saw a nice acceleration in new patient starts. We saw about a 25% increase in patients added to commercial dispense, but that was offset as you mentioned, by approximately $25 million inventory work down from Q4 to Q1. And we saw a -- gross to net impact as well from copay restart that happened at the beginning of the year. What we see from Camzyos is consistent positive feedback from physicians and patients. It's very positive. We're also making very good progress in the launch internationally as we work to secure reimbursement. So we're seeing good momentum for Camzyos and we feel good about the performance of this important product now until the end of the year, for sure. Tim Power -- Vice President, Investor Relations Great. Let's go to the next question. Operator And our next question comes from Steve Scala with TD Cowen. Please go ahead. Steve Scala -- TD Cowen -- Analyst Thank you so much. This is a different version of earlier questions, but there are a number of potential obstacles in Bristol's future, Eliquis IRA price and patent exploration, Opdivo patent exploration, other patent expirations, etc. But based on your replies to those earlier questions, it sounds like that Bristol views the IRA price of Eliquis as the single biggest obstacle to profits in the next decade. Is that the conclusion that you'd like us to draw? And then the second question is that it was noted Revlimid free drug was lower in Q1. Just to confirm, is that consistent with prior Revlimid guidance? And what is the reason it is lower? Was there just fewer patients requesting free drug? Or did Bristol changed the terms? Chris Boerner -- Chief Executive Officer So, Steve, I'll start, and then I'll ask the -- the last part of your question. We've highlighted the issue around the Eliquis price and the negotiations because that is an important consideration in the midterm as we think about this sort of transition period that we're going through that we've talked about in the middle of the decade. And so we'll have greater insight into what that impact is later this year, and we'll be able to provide more of an estimate for the impact both on top line and on EPS as we get into the back half of the decade at that time. What I would say, though, as I step back, I mean, clearly, you've articulated that the importance of Eliquis. And as we've discussed in the past, we have a number of LOEs that we faced during the course of the decade. But I think it's important to note as well that we've talked a lot about the importance of the growth portfolio that we had. We saw nice double-digit growth with that portfolio in the quarter. We actually are now -- about 40% of the overall business is comprised by that portfolio of products. And remember, this is a diversified portfolio of assets across each of our therapeutic areas, and we feel good about the potential of that portfolio going not only through the end of this year, but to be a catalyst for growth in the back half of the decade. And then we saw very nice progress with the pipeline over the course of the quarter. So I think it's important to recognize that while IRA has an impact in the middle of the decade, we feel very good about being able to more than compensate for that with a very young and attractive growth profile coming from our growth portfolio and the pipeline. David? David Elkins -- Chief Financial Officer Steve, on your question around Revlimid, just a couple of comments I'll make on that. One is what I said is that the free drug programs come down to normal levels. So no change in the program there. Just throughout last year, those levels came down in the start of this year, remember, every calendar year, it starts again, back at traditional levels. So that was in relation to that comment. The other thing as it relates to Revlimid is, as we said, there's no change to our guidance this year. As previously said, it was $1.5 billion to $2 billion step down this year and the same next year. So for this year, if you remember, we exited last year at $6 billion. So we'll be in that $4 billion to $4.5 billion is our best view this year and then a further step down next year. So we'll be through the LOE of Revlimid basically at the end of next year. And then as Chris talked about, we'll get insight to what's happening with Eliquis from an IRA perspective when that price becomes public here in September and recall that the LOE for Eliquis is in 2008. And then lastly, the thing I'd say about from an LOE perspective as it relates to Opdivo is that LOE is in December of 2028. So '29 is when that LOE would start. And then three things I'd say about that as we think about that franchise. One is we're looking forward to launching the subcutaneous formulation of that early next year. And we believe that will help that franchise continue into the next decade. I think you've heard Samit talk about Opdualag and that combination. We're really excited, number one, with its performance and standard of care in first-line melanoma, but also with the data that we're seeing in lung, we're really excited about continuing that program into phase 3 and bringing that. And also, there's other tumor types that Opdualag will come in. So as we think about that franchise, there's multiple avenues for that franchise to continue into the next decade. Chris Boerner -- Chief Executive Officer Just adding one thing, Steve, around Revlimid, we had seen some volatility in generic dispensing in the quarter, including some generic supply shortages. And so Revlimid, and our legacy portfolio, continues to be a strong source of cash flow for the organization. Tim Power -- Vice President, Investor Relations Great. Let's go to the next question, please. Operator And our next question today comes from Trung Nguyen with UBS. Please go ahead. Trung Nguyen -- UBS -- Analyst Hi, guys. Trung Nguyen from UBS. Two from me, if that's OK. Just one on the cost-saving program. How is that $1.5 billion split between this year and 2025? There's no change to your opex guide, but I think you noted savings were absorbed by the deals. Is 2024 the main year you'll see most of these cost realized? And then just on Abecma, you have KarMMa-3 on the label now. You noted it's going to be important for growth. How quickly can we start to see that helping? Is it realistic to see an inflection immediately? Chris Boerner -- Chief Executive Officer Thanks for the question. David, then Adam. David Elkins -- Chief Financial Officer Yes. The vast majority of the savings comes through this year. Because if you think through the actions that we're taking, whether it's positions the portfolio actions, we made those actions immediately and the third-party spend, we'll receive that. And then you had to annualize fully next year. So that's really the difference between '24 and '25. But it's safe to say that most of all the actions we're taking, 90% of those are being done this quarter. Adam Lenkowsky -- Chief Commercialization Officer Yes. Trung, as it relates to Abecma, we're certainly pleased with the regulatory approvals of KarMMa-3 in a triple class-exposed setting in the U.S., in Europe and in Japan. This will remain a very competitive space with multiple products and modalities available. Our focus is on educating physicians on the KarMMa data, Abecma's differentiated and predictable safety profile as well as the manufacturing reliability that we've had with Abecma. We're also focused on expanding our site footprint in the U.S. and around the globe, making Abecma available to more patients. So we believe that there is a place for multiple assets in this market, and our objective is to return Abecma to growth over time as we move into a larger patient population. Tim Power -- Vice President, Investor Relations Let's go to the next question, please. Operator Our next question comes from Matthew Phipps with William Blair. Please go ahead. Matt Phipps -- William Blair and Company -- Analyst Hi. Thanks for taking my questions. Adam, I was wondering if you can comment on -- is there any path to grow Opdualag in melanoma outside the United States? Or will additional data be needed? And then maybe for Samit. KRYSTAL-12, I don't suppose you can give us any tidbits on trends and overall survival at this point. I know study is ongoing there, but maybe, if not just confidence in that data set that it stands today being able to support full approval. Adam Lenkowsky -- Chief Commercialization Officer Yes. I'll start. Thanks for the question. First, I'd say we're pleased with our continued progress as Opdualag has become the standard of care in the United States in first-line metastatic melanoma. We saw over 70% growth versus prior year. And our market share now is above 25% in the U.S., and we still have further room to grow penetrating what's still around 15% monotherapy use. It's exciting because we're also starting to launch internationally in markets like Australia, in Canada and Brazil as well as several European markets. We still have not had an opportunity to launch in Germany, but we are working on that negotiation. And we're hopeful that we have an opportunity to launch there sometime in the back end of this year and into next year. Additionally, as spoken earlier, we're very pleased to have the proof-of-concept study with LAG-3 on top of PD-L1s and chemo in first-line lung cancer. And when you add that up, coupled with opportunities with lung and -- melanoma, Opdualag truly has the potential to meaningfully extend our I-O franchise well into the next decade. Samit Hirawat -- Chief Medical Officer and Head of Global Drug Development And thank you for the question. If I think about KRYSTAL trial, remember, this is a study with a -- progression-free survival. And you will see the data being presented at ASCO. Overall survival data remains immature at this time. So I will not be able to comment on the specifics of that, but really excited for the confirmation of the single arms that you previously done now with the randomized study here. Tim Power -- Vice President, Investor Relations Let's go to the next question, please. Operator Our next question comes from Olivia Brayer with Cantor Fitzgerald. Olivia Brayer -- Cantor Fitzgerald -- Analyst Hey. Good morning, guys and thank you for the question. What does the commercial rollout strategy look like for KarXT as we look past that September PDUFA? And any thoughts around Medicaid negotiations? And then when do you think we start to see some meaningful growth from that franchise, whether that's next year or more so in 2026? Chris Boerner -- Chief Executive Officer Adam? Adam Lenkowsky -- Chief Commercialization Officer Yes. Thanks for the question. So we're very excited about the opportunity to launch KarXT later this year. This is a very important drug with significant commercial potential. As we talked about, KarXT will be the first innovative therapy in schizophrenia approved for decades. And what we've shared is KarXT offers like Prexileg efficacy without the significant adverse event that's plagued the D2 such as weight gain, lipidemia, EPS. And we know how compelling this is for physicians. We are rapidly preparing for the launch and the plans are going well, and we will be ready to launch by the summer, well in advance of our PDUFA date. We've been focused on prelaunch efforts and made very good progress preparing for the launch. So Karuna had made good progress in sourcing a very experienced commercial organization and our field medical and our access teams have already begun meaningful conversations with thought leaders and payers. Our prelaunch efforts today are focused on driving awareness of this new mechanism. We're currently building out a large neuroscience field sales organization. In fact, we've increased the investment across multiple fronts to maximize the opportunity that we have. So we also need to ensure that physicians have a positive first experience. So we're -- building our customer model to make sure that we have the optimal physician caregiver and patient support. And as you alluded to, we know that achieving rapid access is important. And so this is a largely Medicaid and Medicare opportunity, around 70%, and our access teams already today. We will leverage our large access organization to ensure rapid access for patients. Our teams have already been out and meeting with state Medicaid Directors and the feedback on the product profile has been very, very positive. So over half of state Medicaid programs either have no step edits or a single step edit. So our goal is to improve the quality of access to only one step edit, which you know is going to take some time, but we're very confident in our ability to achieve quality access for this product. So given a September '26 PDUFA and some of the timelines to obtain broad Medicaid coverage, we effectively see this as a 2025 launch, but we're very excited about the potential of KarXT and we plan to make this a very big product for Bristol-Myers Squibb. Tim Power -- Vice President, Investor Relations Thanks, Adam. We're starting to run a little short in time, maybe take two or three more. Can we go to the next one? Operator Our next question comes from James Shin with Deutsche Bank. Please go ahead. James Shin -- Deutsche Bank -- Analyst Hey. Good morning, guys. Thanks for taking my questions. I had a question on Opdualag phase 2 for frontline multiple cell lung. The full data set is for readout in the second half, but can you share if what you've seen is any different or comparable to the other LAG-3 non-small cell data sets such as TACD? Samit Hirawat -- Chief Medical Officer and Head of Global Drug Development Certainly, I can take that question. Look, obviously, I can't comment on what others have seen. All we know is they've seen six patients worth of data. Hard to compare six patients worth of data with more than 200 patients treated with Opdualag plus chemotherapy in the first-line setting. What we have seen is overall review of our own data set, looking at the various endpoints that we looked at as well as the biomarkers we looked at in our file and we remain confident in the profile of the drug to take it forward into the phase 3. Tim Power -- Vice President, Investor Relations OK. Let's go to the next one, please. Operator Our next question comes from Kripa Devarakonda with Truist Securities. Please go ahead. Kripa Devarakonda -- Truist Securities -- Analyst Hi, guys. Thank you so much for taking my question and for all the color on the call. I had a question about your acquisition of RayzeBio and now that you've got enablement and we're seeing -- it's getting to be very competitive, just wanted to see what the urgency and what this strategy is to build out the radiopharma pipeline. And also, when can we see more details on what the priorities are and also regarding actinium production going live. Chris Boerner -- Chief Executive Officer Well, let me start and then I'll ask Samit and Adam to speak. Let me just at a high level, though, say, that we continue to be incredibly excited about radiopharmaceuticals as a platform. It's one of the fastest-growing platform in solid tumor oncology. We believe we have a best-in-class asset that we've acquired with Rayze. The integration of that team has gone very well. We continue to be very excited and happy with the bringing online of the facility in Indianapolis. So in terms of us getting that asset, incredible enthusiasm and the integration has gone well. But Samit, maybe you and Adam can speak to details. Samit Hirawat -- Chief Medical Officer and Head of Global Drug Development Yes. Thank you for the question. For Rayze, as Chris just mentioned, the platform is absolutely exciting and very encouraging data that we have seen emerging from the first program that is already in phase 3 for the SSTR directed radioligand therapy. And that phase 3 program is right now enrolling in the GAP NET indication as well as the small cell lung cancer phase 1 studies ongoing, and we are looking to see a couple of other indications added over there, and we're designing those trials as we speak and conduct those. So it holds a huge amount of promise because of the specificity of the directed radiation to the tumor itself. Thereafter, we're looking forward to additional IND filing later this year, and that might then be able to start our actually very specific tumor-directed indication within HCC at the back half of this year. And then thereafter, we are looking to be an IND generation coming from this platform as we go forward. Within Indianapolis, manufacturing facility now up and running. We're looking forward to supplying the Actinium part of it as well as the drug product toward the back half -- or back end to early part of next year, and that will certainly help in terms of continuing to supply and taking it forward. We are learning lessons from the front runners and those lessons will be very helpful as we go into the commercial stages in a couple of years. Chris Boerner -- Chief Executive Officer Adam, anything to add? Adam Lenkowsky -- Chief Commercialization Officer Yes, I'll just add just a few things. RayzeBio was a important strategic acquisition that we believe continue to diversify our oncology portfolio. It's -- as Chris mentioned, we see this as a modality that's going to continue to grow over time. It will be a competitive space. But what we liked about RayzeBio, this is going to be an IND engine. And the lead program RYZ101 is already in phase 3 development, as you heard earlier, for Gap nets. -- but we have opportunities in small cell lung cancer, in breast cancer and potentially many other tumor types. So this is tremendously complementary to our existing portfolio. Tim Power -- Vice President, Investor Relations Maybe we go to our last question, if you don't mind, Rocco? Operator Our final question comes from Akash Tewari with Jefferies. Please go ahead. Unknown speaker Morning. Thanks for taking our questions. This is Avi on Akash. We just have two quick questions. The first one is a follow-up for KarXT. So do you think patients on the drug will develop cardio dyskinesia? If not, how will that help position KarXT in the schilphrenia market? And then our second question is for CAR-T. So why do you think CAR-T for autoimmune more attractive than CD19 bispecifics? And also, would you consider approaches that don't require -- depletion? Chris Boerner -- Chief Executive Officer Samit? Samit Hirawat -- Chief Medical Officer and Head of Global Drug Development Sure. Thank you. First of all, great profile for KarXT that I think Adam has spoken about earlier from a safety profile perspective and the data has recently been presented also at the SURS conference where we do not see the same toxicities that are seen with the atypical such as the target dyskinesia, the movement disorders as well as many of the other elements that have been spoken about, so I won't repeat. So that's why we are very confident on the profile and looking forward to bring it to the patients with schizophrenia. And then as David said earlier, with other indications as well for ADsychosis, agitation, bipolar disorders, and others that we are exploring. On the CAR-T side, certainly an advantage for a single infusion leading to good outcomes for patients, especially starting with SLE in the refractory setting, where patients have had multiple other treatments ongoing and organ dysfunction factors in these patients. That is the advantage, a single infusion, if that can cause tremendous transformational outcomes for these patients. As you know, our program is quite large. So we are also looking at multiple sclerosis as well as systemic sclerosis as well as idiopathic fibrosis. So those programs as they enroll patients will generate the data, and we're hoping to be able to present some data from SLE this year and certainly, future approaches might include non-lymphodepletion therapies, but we're not ready for that right now. Chris Boerner -- Chief Executive Officer Thanks, Samit. And maybe I'll just close by saying, first, thank you all for joining the call today. I know it is a very busy day for all of you. So maybe I'll just leave you with a few things. First, we're off to a very good start in 2024. Our performance this quarter reflects execution and actions that we've taken to strengthen the company's long-term growth profile. Our business out remains unchanged from the beginning of the year. And of course, we look forward to sharing our continued progress on future calls. And with that, we'll close the call. And as always, the team is available to answer any questions you have following today's discussion, and I hope all of you have a very good day. Answer:

the Bristol-Myers Squibb first-quarter 2024 earnings conference call

Operator Welcome to the Bristol-Myers Squibb first-quarter 2024 earnings conference call. [Operator instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Tim Power, vice president and head of investor relations. Please go ahead. Tim Power -- Vice President, Investor Relations Thank you, and good morning, everyone. Thanks for joining us this morning for our first-quarter 2024 earnings call. Joining me this morning with prepared remarks are Chris Boerner, our board chair and chief executive officer; and David Elkins, our chief financial officer. Also participating in today's call are Adam Lenkowsky, our chief commercialization officer; and Samit Hirawat, our chief medical officer and head of global drug development. As you'll note, we've posted slides to bms.com that you can use to follow along with for Chris and David's remarks. Before we get started, I'll read our forward-looking statement. During this call, we'll make statements about the company's future plans and prospects that constitute forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in these SEC filings. These forward-looking statements represent our estimates as of today and should not be relied upon as representing our estimates as of any future date. We specifically disclaim any obligation to update forward-looking statements even if our estimates change. We'll also focus our comments on our non-GAAP financial measures, which are adjusted to exclude certain specified items. Reconciliations of certain non-GAAP financial measures to the most comparable GAAP measures are available at bms.com. And with that, I'll hand it over to Chris. Chris Boerner -- Chief Executive Officer Thank you, Tim, and good morning, everyone. Q1 was a busy quarter for us and a good start to 2024. Starting on Slide 4, and knowing what an active quarter we had, I wanted to start by telling you how we think about our performance across four dimensions. First, the performance of our commercial portfolio was good and broadly in line with our expectations, even with some products impacted by inventory or gross to nets. Second, we made solid progress advancing our pipeline. Third, we closed four import transactions that strengthened our long-term growth profile during Q1. And fourth, we're taking decisive actions to improve productivity. Taken together, Q1 performance was broadly aligned to our internal expectations. Importantly, there is no change to the underlying business outlook we provided in February. As you know, we've included the accounting impact of the recently closed transactions in our non-GAAP EPS guidance. Let's turn to Slide 5 for some details. I'll start with some highlights on commercial performance. We've seen real strength across key brands, including Eliquis, Opdualag, Reblozyl, Yervoy and Breyanzi. And though the BCMA space remains competitive, our objective is to return Abecma to growth over time with the KarMMa-3 approval as we move into a larger patient population. Turning to Opdivo, Camzyos, and Sotyktu. What's important about all three brands is that demand grew while revenue was impacted by other factors such as inventory and gross to nets. Today, we are seeing the inventory patterns for Opdivo and Camzyos normalizing. And for Sotyktu, we're steadily building commercial script volume as access continues to improve this year. David will give you more details, but taken together, the commercial performance in Q1 is in line with our expectation and sets us up for the year. Second, we made important progress advancing our pipeline. This includes two important cell therapy approvals, the initiation of new registration trials, an important proof-of-concept data for Opdualag in lung cancer from a prespecified analysis of our phase 2 during Q1. We're looking forward to starting a phase 3 registrational trial versus standard of care in a segment consisting of about 20% to 30% of non-small cell lung cancer patients. And not on this slide, but important for patients is Milvexian, which has the potential to be the only oral Factor XIa medicine in AFIB and ACS. The trials are continuing following the most recent DSMB review with enrollment accelerating. Third, we closed four important deals during the quarter. Across all four, we have added assets, capabilities and expertise that strengthen our ability to drive long-term growth as we exit the 2020s. Our team is driving performance of Krazati, the RayzeBio plant in Indiana is now operational, we're in the process of filing an application to supply clinical product for RYZ101 from the site, SystImmune's first-in-class bispecific ADC is advancing into global clinical trials in tumors, including lung and overtime breast cancer. And we are very excited about the potential of KarXT from Karuna, which I will review on Slide 6. The team is on track and focused on two objectives: First, launch preparations are underway and on track for KarXT; second, we are executing against a robust clinical program for this important asset. On this slide, you can see the significant unmet need in schizophrenia and highlights of data recently presented for KarXT. These data demonstrated its compelling long-term efficacy as KarXT was associated with significant improvements in symptoms of schizophrenia across all efficacy measures without evidence of metabolic or movement disorder side effects. This reinforces the very attractive profile for this medicine as an important advancement for patients and a significant commercial opportunity for the company. Underpinning our efforts to navigate this decade is an enhanced focus on driving operational productivity and efficiency, and we have made some notable progress already this year. Let's go to Slide 7. At a company level, we have clearly identified brands and programs that are most critical to both near and latter half of the decade performance. Across the organization, we have initiated efforts to delayer and streamline decision-making. And within R&D, we are optimizing the portfolio to focus our internal efforts on higher ROI programs. These are programs with compelling science, significant commercial value and in therapeutic categories where BMS is positioned and resourced to win. As a result of these actions, we anticipate cost savings of approximately $1.5 billion by the end of 2025, which will allow us to reinvest in high priority growth brands and R&D programs. With our heightened focus on improving productivity and efficiencies, we're strengthening the company's long-term growth profile. This is a snapshot of what has been a very busy start to the year. And while we clearly have more work to do this year, we're off to a good start. Let me close on Slide 8. Overall, our business outlook remains unchanged. We remain confident that we will deliver top line growth for the year consistent with what we communicated in February. And our underlying non-GAAP EPS forecast has also remained unchanged. We are taking important actions to effectively manage the decade. Our management team is focused on ensuring the disciplined execution required to deliver both this year and set us up for the longer term. I want to thank the employees of BMS, including new team members from our recent acquisitions for their contributions and commitment to delivering for patients. Let me now hand it over to David. David? David Elkins -- Chief Financial Officer Thank you, Chris, and good morning, everyone. As Chris highlighted, we're off to a good start to the year with top-line growth as shown on Slide 10. As a reminder, unless otherwise stated, all comparisons are made from the same period in 2023 and sales growth rates will be discussed on an underlying basis, which excludes the impact of foreign exchange. Building our momentum coming out of last year, we're executing against our plan to drive our growth portfolio, which delivered approximately 11% sales increase in the first quarter compared to the prior year and now represents approximately 40% of our total revenue. This growth was broad-based with most growth brands recording significant increases in the quarter. Our legacy portfolio also contributed to overall sales growth in the quarter, with strong sales of Eliquis, which remains an important cash flow generator for the company. Now turning to the first-quarter performance of our key brands, and starting with oncology on Slide 11. On this slide, you can see the impact of our strategy and broadening our I-O franchise and expanding in new targeted solid tumor therapies. Global sales of Opdivo were impacted by inventory work down and timing of orders in the U.S., partially offset by demand growth. As we said in the past, we expect to see growth at a more modest pace than 2024. And Opdualag, a standard of care treatment in first-line melanoma, generated strong quarterly sales with U.S. sales growth primarily driven by strong market share. We are very encouraged by the future expansion potential of Opdualag, not only in adjuvant melanoma, but also in our plans to develop it in first-line lung cancer. This, along with the anticipated launch of our Opdivo subcutaneous formulation next year, we will extend our I-O franchise well into the next date. Our targeted solid tumor therapies expanded with the addition of Krazati after the completion of Mirati acquisition in late January. Our reported sales represent a partial quarter. On a pro forma basis, Krazati global sales in Q1 were approximately $27 million, primarily in the U.S. With recent conditional marketing approval by the European Commission, we look forward to bringing Krazati to more patients toward the end of the year. Augtyro's first-quarter performance reflects positive early sales trends. We remain focused on driving awareness and penetration based upon its potential best-in-class profile. Now moving to Slide 12 and our cardiovascular franchise. Eliquis remains the market-leading oral anticoagulant worldwide. Q1 sales in the U.S. grew 12%, primarily due to strong demand, including increased market share. Internationally, sales were roughly in line with prior year. Camzyos generated strong sales in the quarter, nearly tripling its performance versus Q1 of last year. In the U.S., sales were driven by demand growth including an almost 25% increase in commercial dispenses since Q4 of 2023. Sequentially, U.S. sales of Camzyos were impacted by the inventory dynamics of approximately $20 million and gross-to-net impacts from the typical copay reset at the start of the new year. We expect the momentum of Camzyos to continue, supported by the compelling real-world evidence in over 1,500 patients presented earlier this month at ACC. Let's now turn to Slide 13 and discuss our hematology business. Our legacy brand, Revlimid, saw sales decline in the first quarter. Utilization of free drug program normalized in the quarter. We continue to anticipate variability in Revlimid sales quarter to quarter based upon historic dispensing patterns in specialty pharmacies, as anticipated, increased volumes of U.S. generics starting in March. Turning to Reblozyl, growth in the quarter was driven primarily by the strong U.S. launch of the broader commands label and first-line MDS. International sales growth benefited from the new market launches, and we look forward to bringing Reblozyl to more patients with the recent first-line approvals in the EU and Japan. In cell therapy portfolio, global Breyanzi sales growth reflected the strength of the clinical profile and improved manufacturing capacity. Consistent with what we previously communicated, starting in Q2, we expect Breyanzi to benefit from the recent new indications and expanded manufacturing capacity. With Abecma, U.S. performance in the quarter was impacted by ongoing competitive pressures. Future demand will benefit from the recent KarMMa-3 approval, which expands the addressable patient population. Internationally, Abecma demand growth was offset by unfavorable pricing pressures to secure access. Now moving to immunology on Slide 14. Zeposia sales in the quarter were primarily due to demand of new patient starts with multiple sclerosis. Sotyktu sales performed in line with our expectation. During the quarter, we delivered on our goal of achieving roughly 10,000 commercially paid prescriptions. Sales in the quarter reflected increased demand and expanded commercial access. In addition, we expect to add another large PBM later this year that will expand access coverage by approximately 30 million lives. Now turning to Slide 15. I will walk you through the remainder of our P&L, and my comments will be on a non-GAAP basis. As expected, gross margin decreased compared to the prior year, primarily due to product mix. Excluding acquired in-process R&D, first-quarter operating expenses increased mainly due to the impact of the recent acquisitions and higher cost to support the overall portfolio. We expect this growth to be mitigated later in the year through savings and productivity initiatives I will speak to shortly. Other income and expense declined as expected in the first quarter, primarily due to lower PD-1 royalty rate and the financing costs associated with the recent transactions. Acquired in-process R&D in the quarter was $12.9 billion, primarily due to the previously disclosed onetime charge of $12.1 billion for the Karuna transaction and $800 million for SystImmune. Our tax rate in the quarter was impacted by the onetime nondeductible in-process R&D charge for Karuna. Before the impact of acquired in-process R&D, our first-quarter earnings would have been $1.89. Taking into account the impact from the recent transactions, including acquired in-process R&D, we reported an earnings per share loss of $4.40. Now moving to the balance sheet and capital allocation on Slide 16. Cash flow from operations remained strong with approximately $2.8 billion generated in the quarter, resulting in approximately $10 billion in cash and cash equivalents and marketable debt securities on hand as of March 31. Our strategic approach to capital allocation remains unchanged. We are committed to the dividend. And as we said previously, we plan to utilize our cash flow to repay approximately $10 billion of debt over the next 2 years. And we remain financially disciplined around business development to further strengthen the company's long-term growth profile. Next, let's turn to Slide 17 to discuss our productivity initiative. As Chris described earlier, we have taken action to increase productivity and efficiency and focus our efforts on the assets and -- with the highest potential ROI and those most likely to drive our long-term growth. As part of this process, we are making deliberate choices to prioritize the assets that have the greatest clinical benefit to impact areas of high unmet need and where we can deliver the most value for patients. We will disproportionately invest in higher-return opportunities, which improves our portfolio ROI and strengthens our growth profile in the second half of the decade. After a thoughtful process, we have made the decision to discontinue and externalize several clinical assets. We anticipate cost savings from these actions of approximately $1.5 billion by the end of 2025, thereby absorbing the incremental opex expense from the recent deals. These cost savings will come from across the organization include reductions in direct clinical expense, site rationalization and elimination of open roles, and reduction in headcount. As we realize these savings, we will reinvest in the highest potential opportunities. Now turning to Slide 18. I'll walk through the impact of our recently closed acquisition on our EPS guidance. As you can see on this slide, if you take our previously stated non-GAAP EPS guidance range of $7.10 to $7.40 from February and include the previously stated impact of deal dilution and the onetime impact of acquired in-process R&D, our revised range continues to reflect the strong outlook of the business, as we told you in February. Now let's walk through the details of our guidance on Slide 19, starting with revenue. As is our practice, we provide revenue guidance on a reported basis as well as on an underlying basis, which assumes currency remains consistent with prior year. We continue to expect 2024 total revenues to increase in the low single-digit range at report rates as well as excluding foreign exchange. This reflects our confidence in the growing momentum of our growth portfolio including products such as Opdivo, Reblozyl, Breyanzi, Camzyos, and Sotyktu. And as a reminder, the sotatercept royalty will be included in the other growth revenue line. We continue to expect gross margin to be approximately 74%. As we saw last year, we should see a sequential dip in Q2 related to our sales mix. Excluding acquired in-process R&D, we continue to expect our total operating expenses to increase in the low single-digit range, reflecting incremental costs associated with the recent acquisitions partially offset by the realization of internal savings through the productivity initiatives I mentioned earlier. Given the timing of the deal closures, we expect to come in at the upper end of our guidance range with an expected step-up in Q2 and the remaining opex to be more evenly spread across the back half of the year. We remain aligned with our previous operating margin to target at least 37% through next year. For OI&E, we now expect approximately $250 million of expense primarily reflecting the debt financing costs from Karuna and RayzeBio. The tax rate was affected by onetime nondeductible expense of the Karuna acquired and process R&D charge, which impacted our non-GAAP net income. Excluding this impact, the estimated underlying tax rate in the quarter was about 19.5%. And as a result, we now see full-year underlying tax rate of about 18%. Before we move to Q&A, let me take a minute to review some of the key highlights on our call today. We grew the top line, we advanced the pipeline, and we are executing our productivity initiative and our expectations for the underlying strength of the business remains unchanged from the beginning of the year. Finally, I'd like to recognize our BMS employees around the world for their unwavering hard work and commitment as we continue to make progress in strengthening the company's long-term growth profile and bringing truly transformational medicines to patients. With that, I'll now turn the call over to Tim for Q&A. Tim Power -- Vice President, Investor Relations Thanks, David. Can we go to the first question, please? Questions & Answers: Operator Absolutely. [Operator instructions] Our first question comes from Geoff Meacham with Bank of America. Please go ahead. Geoff Meacham -- Bank of America Merrill Lynch -- Analyst Good morning, everyone, thanks for the question. Just had one for Chris or maybe for David. On the cost savings, how much would you say was legacy Bristol, either workforce or facilities versus optimizing integration of all your recent deals? I guess I'm trying to get a sense for whether you think there's further optimization to come as you guys focus on the new launch portfolio. Thank you. Chris Boerner -- Chief Executive Officer Good morning, Geoff. I'll let David answer that. David Elkins -- Chief Financial Officer Yes. Thanks, Jeff, for the question. The majority of the savings come from the historical BMS. As we talked about, the main drivers of the $1.5 billion savings really came into three buckets. First was really looking at the portfolio, obviously, with the Mirati, Karuna, and with RayzeBio. We have really important portfolios that we're bringing into the overall portfolio. It gave us the opportunity to look at that and maximize the ROI in totality of the portfolio as well as adjusting for some updates on new data and the competitiveness. The second thing that we really looked at for legacy BMS is how do we become more agile, quicker decision-making and streamline the organization by removing layers of management so decisions can be more quickly. And there, we talked about the roughly 2,200 affected employees as a result of those changes. And then lastly, we went through all of our third-party relationships, continuing to look for efficiencies in third-party service providers, and that was the last category. And a lot of those activities are also legacy BMS. So the vast majority of the savings are coming for in-house existing operations. Tim Power -- Vice President, Investor Relations Thanks, David. Can we go to the next question, please? Operator Our next question comes from Chris Shibutani with Goldman Sachs. Please go ahead. Chris Shibutani -- Goldman Sachs -- Analyst Thank you. Good morning. Obviously, a lot of moving parts operationally, strategically. I think investors have been keen to get a sense for how you're thinking about potentially a trough level of earnings. I think the notion that there might be some visibility into where you could begin to see some growth, and I know in your vocabulary you used about exiting the decade and into the next. Help us with where you are with that thinking since we haven't had that clarity with all the moving parts. But how are you thinking about the potential to communicate that kind of timeline and level? Chris Boerner -- Chief Executive Officer OK. Chris. I'll take that one. And I think they're embedded in that question, maybe two things. First is how we're thinking about how we're going to guide around this trough and then there's maybe a second question in there, which is when we think we'll see that trough and what's the timing of it. With respect to the first question, look, we've been engaging with investors on this topic over the last number of months. A bit of context here, given the industry dynamics, we -- certainly, I believe companies in this industry need to be judicious with respect providing long-term guidance. But we get why you are asking the question here because it's something that we're going to need to continue to engage with investors on to strike the right balance in terms of how we think about providing guidance on this topic. A little uncertainty that we know that related to this question, though, is the impact of IRA on Eliquis. And once that price is public, and remember, that's going to happen in the September time frame, we'll provide the impact of Eliquis both on the top line as well as on EPS. In terms of how we think about the timing of the trough, based on our current plans, we start to see an impact in 2026. And then as we said earlier in the year, we anticipate to be returning to growth before the end of the decade. And then obviously, we're clearly focused on accelerating both the timing and the pace of growth in the back half of the decade, and that's going to influence timing as well. But thanks for the question, Chris. Tim Power -- Vice President, Investor Relations All right. Can we go to the next question, please? Operator Our next question comes from Chris Schott with J.P. Morgan. Please go ahead. Chris Schott -- JPMorgan Chase and Company -- Analyst Great. Thanks so much. Just a two-parter, coming back to the restructuring. I guess the first part is, is the redeployment of savings going to be mostly focused on the R&D side or on SG&A? And just related to that, in terms of investment in the growth drivers, it seems like elements such as payer dynamics and competitive launches are impacting uptake of some of the new launch assets. So I'm just interested in which products do you see having the greatest potential for improvement with further investment, and how you, I guess, balance SG&A versus either further R&D or just dropping some of those savings to the bottom line as you're considering kind of how to redeploy that $1.5 billion? Chris Boerner -- Chief Executive Officer Thanks, Chris. Let me just say a couple of words and then I'll turn it over to David for the first part of your question and Adam can come in on the back end. First, as David mentioned, when we thought about these efficiencies, we were really thinking along three lines: The need to invest in the pipeline, ensuring that we had adequate investment for our growth products and then needing to be more agile and focused as an organization. In terms of how we think about allocating those redeployment opportunities, I would say, generally speaking, they're in that order with the majority going back into R&D. But David, do you want to start? David Elkins -- Chief Financial Officer And yes, Chris, thanks for the question. The way to think about two-thirds of the savings associated in the R&D area and about a third is in MS&A. But importantly, if you really think about the acquisitions that we've just done, if you think about Mirati and Krazati, in particular, really important development programs in first-line lung, both the doublet as well as the triplet. And then if you think about Karuna, and Adam can talk further about this, we see multiple indications -- billion-dollar indications in this space. We talked about schizophrenia, the adjuvant schizophrenia as well is moving into Alzheimer's with agitation and psychosis. So there's significant investments that you have to make there. And then if you think about Ray Ligand and RayzeBio, we see multiple MDs being able to come out of this. We're also -- we finished the manufacturing in Minneapolis. We're going to be able to supply our clinical studies out of that. So significant investments in those three areas, which through all of that as well as reprioritizing our existing BMS portfolio, what we've been able to do is increase the ROI of the portfolio. But just as importantly, we increased the growth profile of the company in the second half of the decade. So there's a lot of work that's going under the surface in order to continue to maximize the value of the portfolio and strengthen the growth profile of the company. Adam? Adam Lenkowsky -- Chief Commercialization Officer Yes, Chris. Thanks for the question. So we're making good progress across the totality of our growth portfolio. As David shared, we saw strong year-on-year demand growth across the majority of our growth products. And we continue to be focused on accelerating our key brands. And we're doing what we said we would do as we continue to drive our growth portfolio. So just a few of the products that I think is important to mention, Opdualag has become a new standard of care in first-line metastatic melanoma, grew 76%. Reblozyl continue to deliver strong performance post first-line. COMMANDS approval grew over 70% as well. We have increased investment at the end of last year behind products like Sotyktu, Breyanzi, and Camzyos. Camzyos continues to demonstrate strong growth. We had 25% growth of new patients added on to commercial drug quarter over quarter. Breyanzi, we also increased our investment. We're a much stronger supply position today than we were last year and increasingly being recognized as a best-in-class CAR-T. And as David mentioned, we're readying for the launch of KarXT in September, which is a very significant multibillion-dollar opportunity. I would say that a product like Abecma has been more challenging for us. But we have an opportunity now with the KarMMa-3 approval to work to return back much growth over time as we move into a larger patient population. But adding it all up, we continue to make good progress in delivering strong commercial execution and performance. Tim Power -- Vice President, Investor Relations Thanks, Adam. Can we go to the next question, please. Operator Our next question will come from Evan Seigerman with BMO. Please go ahead. Evan Seigerman -- BMO Capital Markets -- Analyst Hi, guys. Thank you so much for taking the question. Kind of a follow-up to what we've been talking about. So when you talk about the cost savings reinvested, do you mean that you're going to manage your margins by titrating the reinvestment of the cost savings? Are you going to deploy the $1.5 billion kind of informed by the science or potential for growth? And then a follow-up, as you mentioned you're going to discontinue and externalize several clinical assets. Any commentary as to which ones you're thinking about, that would be great. Chris Boerner -- Chief Executive Officer Thanks, Evan. We'll have David start, and then Samit. David Elkins -- Chief Financial Officer Yes. Thanks, Evan. As I said in my prepared remarks, we're looking at our operating margins as we previously communicated in that 30% range. So that $1.5 billion of savings that we'll achieve by the end of next year, that's being reinvested both in the portfolio as I described earlier, particularly with the acquisitions that we did. But we've also had good progress like Opdualag where we're going to continue those clinical studies as well. And all of that put together, as I was saying, really strengthens not only the ROI, but the growth profile of the business in the second half of the decade. And I'll turn it over to Samit on the audits that we're looking at to externalize. Samit Hirawat -- Chief Medical Officer and Head of Global Drug Development Yes. Thank you, David. And just to build on what David said, from a pipeline perspective, we took a very thoughtful approach to see -- from our rich pipeline, what are the assets that we are not going to be continuing on our own. So first thing that we looked at is the evolving science from the ongoing exploration of our clinical assets An example over there where we look at CTLA-4 in our pipeline that we were developing, we had set the bar with ipilimumab, which is already a high bar to then look at the data and then we decided that if the data are not going to be better than ipilimumab, we shouldn't be continuing that program. So we decided not to continue with that. Similarly, when we looked at external and internal data for the -- alpha program, that did not meet the muster, and we wanted to look at the real return on that investment as well for patients, and we are not going to continue that program. The second way we looked at it is that our science may be really good. Data evolution is really good, but does it really make sense from -- for a company our size to continue a program if it's not going to be ultimately a growth driver. So from that perspective, if you think about 158, where the data are pretty good in myelofibrosis, but really, from our perspective, does not meet the threshold to be a driver for our growth potential. So that program, we are not going to be continuing. And then, of course, we continue to look at our dire to be either first-in-class or best-in-class product profile. So from that perspective, we continue to focus on what we will continue versus not. Overall, I would say that we have about -- discontinued about 12 programs at this time, but in a continuum. And so throughout the year, we'll continue to look at these same principles and see what else we need to take out from our pipeline and either externalize it or not be able to develop it further. Tim Power -- Vice President, Investor Relations Thanks, Samit. Can we go to the next question please, Rocco? Operator Our next question comes from Seamus Fernandez with Guggenheim Securities. Please go ahead. Seamus Fernandez -- Guggenheim Partners -- Analyst Great. Thanks for the question. So just wanted to check in on your thoughts around IRA and the impacts associated with that as we approach 2026 in particular. And if you might be able to provide us any color on progress or process in the negotiations or price fixing that may come from the U.S. government. And then just the second question, hoping you might comment help frame for us the Opdivo opportunity in lung cancer and when we might gain some incremental visibility on that? Is it going to be more from clinical trial hitting Clinicaltrials.gov, and we'll get some information in that regard first? Or will we actually see the data in this potential subset? Chris Boerner -- Chief Executive Officer Thanks for the question, Seamus. Maybe I'll start, have Adam weigh in a little bit more on IRA. With respect to the ongoing discussions with CMS, we're not going to be commenting. As I said earlier, we will have the outcome of that public in September and we'll be able to provide more insight at that point. But Adam, you can speak to some of the other aspects of IRA and then Samit. Adam Lenkowsky -- Chief Commercialization Officer Yes. Thank you, Chris and Seamus, thanks for the question. As it relates to IRA, there are obviously multiple components to it. There's the negotiation. There's also the change in the Part D benefit design. So in 2024, we don't anticipate significant impact across our portfolio across Eliquis, Revlimid or other brands. We do expect, though, more substantial changes to the Part D benefit next year since the products are impacted by the redesign. We are carefully evaluating each product individual dynamics now and we'll see into the future. And we're monitoring very closely to understand the impact of, for example, out-of-pocket caps and other shifts that are happening in the system. So as we move from a $3,500 cap to a $2,000 cap, we would expect to see more patients' ability to fill their medicines and improve as it becomes lower at the pharmacy counter. But obviously, we'll need to do more -- data before we can provide additional details. Samit Hirawat -- Chief Medical Officer and Head of Global Drug Development Thank you, Adam. And then thanks, Seamus, for the question. For Opdualag, let's just take a step back and understand what we were planning to do -- try to do. So for Opdualag, we conducted a study of Opdualag plus chemotherapy in first-line non-small cell lung cancer. At first, we wanted to define the dose. So we tested a couple of doses in the first part of the study. And in the second part of the study, then we randomize the patient to receive Opdualag plus chemotherapy versus nivolumab plus scheme therapy. And as we have said before, what we wanted to understand is the drug applicable for all patients? Or are we going to find a differential activity in a subset of patients. And what we have said is we have found a subgroup of patients where the drug's activity is good and encourages us to now go into a phase 3 trial. And so we are looking forward to presenting the data in the second half of this year as well as initiating the trial versus standard of care in the second half of this year, and we are planning that. We'll be executing that. As soon as we have that ready, you will be hearing about it. In addition to that, Opdualag, of course, other opportunities. As you know, we are already waiting for the data for the adjuvant melanoma trial and we're looking forward to the data evolution toward the back end of this year in first-line hepatocelluar carcinoma as well. Tim Power -- Vice President, Investor Relations Thanks very much, Samit. Rocco, could we go to the next question please? Operator Our next question comes from Terence Flynn with Morgan Stanley. Please go ahead. Terence Flynn -- Morgan Stanley -- Analyst Great. Thanks for taking the question. Maybe a two-part for me on the CAR-T franchise. David, I think you mentioned something about Abecma ex-U.S. pricing dynamics, some change there to help boost access. Can you just provide a little bit more detail if that was a one-off in a specific country or what's going on there? And then on Breyanzi, Gilead has talked more recently about moving in the U.S. out to some of these secondary community hospitals as they think about expanding, particularly in the second-line label indication. And so is that something that you guys are considering as well? Or do you feel pretty good about your current footprint for Breyanzi at the primary academic hospitals? Chris Boerner -- Chief Executive Officer Thanks, Terence. I'll let Adam take both of those. Adam Lenkowsky -- Chief Commercialization Officer So as it relates to Breyanzi, what we saw in the quarter was we were able to stabilize the decline in the U.S. Sales were roughly flat versus last quarter. What you're referring to internationally is we did see strong demand growth, which we expect to continue, but that demand growth was offset by negative price and skew reimbursement, mainly in Germany. So that's where that took place. And now with KarMMa-3, it gives us the opportunity to have a different conversation with our customers about our data in a larger patient population. And our -- is to return Abecma to growth over time as we move into this much or patient population. Now for Breyanzi, we're very excited about this product. In Q1, we increased sales over 50% versus the prior year. We anticipate robust growth this year because not only just in accelerated growth in LBCL, as Breyanzi is increasingly recognized as the best-in-class CD19, we also expect to see expanded indications. We just received approval in the U.S. for CLL and with additional approval as anticipated next month in follicular lymphoma and mantle cell lymphoma. And this is going to roughly double the addressable market for Breyanzi. We're also very encouraged by our expanded manufacturing capacity and now in a much stronger position to meet demand. We're seeing about 20% outpatient use today for Breyanzi, and we expect that to continue based on the differentiated safety profile. So taken together, we're very excited about the growth profile of Breyanzi. Tim Power -- Vice President, Investor Relations Can we go to the next question, please? Operator Our next question will come from Tim Anderson at Wolfe Research. Please go ahead. Adam Jolly -- Wolfe Research -- Analyst This is Adam on for Tim at Wolfe Research. So just on Sotyktu, can you give us some updated market share metrics, things like new-to-brand share or versus Otezla in the oral category percent use in first-line versus later lines, that sort of thing? And also, any details on when the free drug program might begin to wind down. Chris Boerner -- Chief Executive Officer Sure. I'll take that, Adam. Thanks for the question. So we're continuing to make progress with Sotyktu, and we're executing our plan. We delivered in the quarter what we said we would do, and that's reaching approximately 10,000 paid prescriptions, that's what we shared in January, and we expect to roughly double that to 20,000 paid prescriptions in Q4. So that's where we're focused on driving today. Remember, we also said there would be an increase in gross to net due to broader rebating needed to secure improved access and this impacted sales in Q1, but the volume that we'll see will more than offset that throughout the year. So we talked about improving our access position. And aside from the wins that we announced last year in CVS and Signet ESI, we saw access improvement with Sotyktu, which was added to Optum. And as David mentioned, we do expect to announce additional improved formulary access including a large PBM with approximately 30 million lives. So we remain focused on securing zero steps by 2025. And when you have that better access position, the need for a bridge becomes less and less important. And so basically, when you look at -- when you have better access, patients are moved faster into commercial product because they go directly to the specialty pharmacy. As far as market share, look, this is a highly competitive market. We look at launch analogs at the top of the funnel or written prescriptions, and the Sotyktu performance is ahead of products like Tremfya, Cosentyx at the same time ago launch. We are laser focused on share growth versus Otezla, which is a critical area of focus and becoming the oral standard of care in the market over time. Tim Power -- Vice President, Investor Relations Thanks, Adam. Rocco, could we go to the next question, please? Operator Our next question comes from Dave Risinger with Leerink Partners. Please go ahead. David Risinger -- Leerink Partners -- Analyst Thanks very much and thanks. And thanks for all of the detailed perspectives that you're sharing. So I'm hoping that you can help with other income specs in the future, including the look for AstraZeneca, other incomes run rate and the anticipated step down in coming years. Chris Boerner -- Chief Executive Officer Thanks, Dave. David? David Elkins -- Chief Financial Officer Yes. So this year was the big step down in the PD-1 rate. And then the other thing impacting that is the diabetes that will step down next year as well. The other thing to keep in mind, as I said in the prepared remarks is on the interest for the additional debt that we just did. That was the big change in the guidance that we just provided for this year, going from $250 million of OI&E income down to $250 million of expense. And the bulk of that is related to the additional interest cost, which is around $13 billion with 5.3% interest rate. And that's slightly offset by the royalty income. Tim Power -- Vice President, Investor Relations Thanks, David. We'll go to the next question, please. Operator And our next question comes from Mohit Bansal with Wells Fargo. Please go ahead. Mohit Bansal -- Wells Fargo Securities -- Analyst OK. Thank you very much for my question. I actually want to probe the trough guidance comment a little bit further. It does seem like that you are considering it. But if that is the case, can you talk a little bit about the puts and takes there regarding timing of such guidance? I'm asking because it depends on when you think the trough is, if it is '26 or '28 because, I mean, you might not want to provide if it is '28, but just now because it is still a little bit uncertain regarding the timing of it. So what are the puts and takes regarding the timing of it when you eventually decide to provide it? Chris Boerner -- Chief Executive Officer Yes. So maybe I'll start and then David can chime in if he has any additional -- anything else that he would like to provide. I think the way we're thinking about the trough guidance, and again, it's something that we have been engaged with investors for the last number of months. I think the way I would think about it is, first and foremost, probably the underlying question on guidance right now is what is the impact of IRA on Eliquis? We will, as I said earlier, be in a position in September when the price for Eliquis coming out of the IRA process is known and public at that point to talk about what that price is and the impact of -- on Eliquis on both the top line as well as on EPS. And then in terms of how we're thinking about the timing of the trough again, and we said this back at the beginning of the year, we see the impact starting in 2026 and our plan is to be growing by the end of this decade. David, anything else you would add? David Elkins -- Chief Financial Officer I think you covered it, Chris. Tim Power -- Vice President, Investor Relations Thanks, Chris. Could we go to the next question please, Rocco? Operator Our next question is from Carter Gould with Barclays. Please go ahead. Carter Gould -- Barclays -- Analyst Good morning. Thanks for taking the questions and for all the color today. I wanted to dig into Camzyos for a second. You did have data at ACC and sort of the current rate or the one with that seemed very positive. And just when you think about that REMS registry data and the potential to potentially get the REMS modified down the road, should we be reading into that data? Any level of confidence or anything on that front you want to message? And I guess along those lines as well just, I believe housekeeping on -- did I hear a $20 million inventory impact in the quarter? I know the something was called on the slides, but I'm not sure that was quantified. Any help there would be great, too. Chris Boerner -- Chief Executive Officer Yes. Thanks, Carter. Maybe Samit can start and then Adam. Samit Hirawat -- Chief Medical Officer and Head of Global Drug Development Yes. Thank you, Carter, for the question. So for Camzyos, we remain obviously very confident in the overall profile of Camzyos. It has been a very transformational therapy for patients. And as you mentioned, data at ACC clearly showed from the patients that have been treated in the real world that there is transformational outcome. And from a safety perspective, with 80% of the patients being treated, the 2.5- and the 5-milligram dose, the overall outcomes remain really, really positive as well as the impact on the ejection fraction is minimal at best. So certainly, it gives us an opportunity to collate that data and find the conversations continuing with the FDA at appropriate times. Remember, we've also got the nonobstructive hypothetic cardiomyopathy study that we'll be reading out early next year. So that will provide another opportunity for us to also engage deeper into conversations for the REMS program as a whole and how we can bring this therapy to more patients as well as decrease the burden on the patients. With that, let me pass it on to Adam to comment more. Adam Lenkowsky -- Chief Commercialization Officer Yes. Thanks for the question. We're pleased with Camzyos' performance in the quarter. We saw a nice acceleration in new patient starts. We saw about a 25% increase in patients added to commercial dispense, but that was offset as you mentioned, by approximately $25 million inventory work down from Q4 to Q1. And we saw a -- gross to net impact as well from copay restart that happened at the beginning of the year. What we see from Camzyos is consistent positive feedback from physicians and patients. It's very positive. We're also making very good progress in the launch internationally as we work to secure reimbursement. So we're seeing good momentum for Camzyos and we feel good about the performance of this important product now until the end of the year, for sure. Tim Power -- Vice President, Investor Relations Great. Let's go to the next question. Operator And our next question comes from Steve Scala with TD Cowen. Please go ahead. Steve Scala -- TD Cowen -- Analyst Thank you so much. This is a different version of earlier questions, but there are a number of potential obstacles in Bristol's future, Eliquis IRA price and patent exploration, Opdivo patent exploration, other patent expirations, etc. But based on your replies to those earlier questions, it sounds like that Bristol views the IRA price of Eliquis as the single biggest obstacle to profits in the next decade. Is that the conclusion that you'd like us to draw? And then the second question is that it was noted Revlimid free drug was lower in Q1. Just to confirm, is that consistent with prior Revlimid guidance? And what is the reason it is lower? Was there just fewer patients requesting free drug? Or did Bristol changed the terms? Chris Boerner -- Chief Executive Officer So, Steve, I'll start, and then I'll ask the -- the last part of your question. We've highlighted the issue around the Eliquis price and the negotiations because that is an important consideration in the midterm as we think about this sort of transition period that we're going through that we've talked about in the middle of the decade. And so we'll have greater insight into what that impact is later this year, and we'll be able to provide more of an estimate for the impact both on top line and on EPS as we get into the back half of the decade at that time. What I would say, though, as I step back, I mean, clearly, you've articulated that the importance of Eliquis. And as we've discussed in the past, we have a number of LOEs that we faced during the course of the decade. But I think it's important to note as well that we've talked a lot about the importance of the growth portfolio that we had. We saw nice double-digit growth with that portfolio in the quarter. We actually are now -- about 40% of the overall business is comprised by that portfolio of products. And remember, this is a diversified portfolio of assets across each of our therapeutic areas, and we feel good about the potential of that portfolio going not only through the end of this year, but to be a catalyst for growth in the back half of the decade. And then we saw very nice progress with the pipeline over the course of the quarter. So I think it's important to recognize that while IRA has an impact in the middle of the decade, we feel very good about being able to more than compensate for that with a very young and attractive growth profile coming from our growth portfolio and the pipeline. David? David Elkins -- Chief Financial Officer Steve, on your question around Revlimid, just a couple of comments I'll make on that. One is what I said is that the free drug programs come down to normal levels. So no change in the program there. Just throughout last year, those levels came down in the start of this year, remember, every calendar year, it starts again, back at traditional levels. So that was in relation to that comment. The other thing as it relates to Revlimid is, as we said, there's no change to our guidance this year. As previously said, it was $1.5 billion to $2 billion step down this year and the same next year. So for this year, if you remember, we exited last year at $6 billion. So we'll be in that $4 billion to $4.5 billion is our best view this year and then a further step down next year. So we'll be through the LOE of Revlimid basically at the end of next year. And then as Chris talked about, we'll get insight to what's happening with Eliquis from an IRA perspective when that price becomes public here in September and recall that the LOE for Eliquis is in 2008. And then lastly, the thing I'd say about from an LOE perspective as it relates to Opdivo is that LOE is in December of 2028. So '29 is when that LOE would start. And then three things I'd say about that as we think about that franchise. One is we're looking forward to launching the subcutaneous formulation of that early next year. And we believe that will help that franchise continue into the next decade. I think you've heard Samit talk about Opdualag and that combination. We're really excited, number one, with its performance and standard of care in first-line melanoma, but also with the data that we're seeing in lung, we're really excited about continuing that program into phase 3 and bringing that. And also, there's other tumor types that Opdualag will come in. So as we think about that franchise, there's multiple avenues for that franchise to continue into the next decade. Chris Boerner -- Chief Executive Officer Just adding one thing, Steve, around Revlimid, we had seen some volatility in generic dispensing in the quarter, including some generic supply shortages. And so Revlimid, and our legacy portfolio, continues to be a strong source of cash flow for the organization. Tim Power -- Vice President, Investor Relations Great. Let's go to the next question, please. Operator And our next question today comes from Trung Nguyen with UBS. Please go ahead. Trung Nguyen -- UBS -- Analyst Hi, guys. Trung Nguyen from UBS. Two from me, if that's OK. Just one on the cost-saving program. How is that $1.5 billion split between this year and 2025? There's no change to your opex guide, but I think you noted savings were absorbed by the deals. Is 2024 the main year you'll see most of these cost realized? And then just on Abecma, you have KarMMa-3 on the label now. You noted it's going to be important for growth. How quickly can we start to see that helping? Is it realistic to see an inflection immediately? Chris Boerner -- Chief Executive Officer Thanks for the question. David, then Adam. David Elkins -- Chief Financial Officer Yes. The vast majority of the savings comes through this year. Because if you think through the actions that we're taking, whether it's positions the portfolio actions, we made those actions immediately and the third-party spend, we'll receive that. And then you had to annualize fully next year. So that's really the difference between '24 and '25. But it's safe to say that most of all the actions we're taking, 90% of those are being done this quarter. Adam Lenkowsky -- Chief Commercialization Officer Yes. Trung, as it relates to Abecma, we're certainly pleased with the regulatory approvals of KarMMa-3 in a triple class-exposed setting in the U.S., in Europe and in Japan. This will remain a very competitive space with multiple products and modalities available. Our focus is on educating physicians on the KarMMa data, Abecma's differentiated and predictable safety profile as well as the manufacturing reliability that we've had with Abecma. We're also focused on expanding our site footprint in the U.S. and around the globe, making Abecma available to more patients. So we believe that there is a place for multiple assets in this market, and our objective is to return Abecma to growth over time as we move into a larger patient population. Tim Power -- Vice President, Investor Relations Let's go to the next question, please. Operator Our next question comes from Matthew Phipps with William Blair. Please go ahead. Matt Phipps -- William Blair and Company -- Analyst Hi. Thanks for taking my questions. Adam, I was wondering if you can comment on -- is there any path to grow Opdualag in melanoma outside the United States? Or will additional data be needed? And then maybe for Samit. KRYSTAL-12, I don't suppose you can give us any tidbits on trends and overall survival at this point. I know study is ongoing there, but maybe, if not just confidence in that data set that it stands today being able to support full approval. Adam Lenkowsky -- Chief Commercialization Officer Yes. I'll start. Thanks for the question. First, I'd say we're pleased with our continued progress as Opdualag has become the standard of care in the United States in first-line metastatic melanoma. We saw over 70% growth versus prior year. And our market share now is above 25% in the U.S., and we still have further room to grow penetrating what's still around 15% monotherapy use. It's exciting because we're also starting to launch internationally in markets like Australia, in Canada and Brazil as well as several European markets. We still have not had an opportunity to launch in Germany, but we are working on that negotiation. And we're hopeful that we have an opportunity to launch there sometime in the back end of this year and into next year. Additionally, as spoken earlier, we're very pleased to have the proof-of-concept study with LAG-3 on top of PD-L1s and chemo in first-line lung cancer. And when you add that up, coupled with opportunities with lung and -- melanoma, Opdualag truly has the potential to meaningfully extend our I-O franchise well into the next decade. Samit Hirawat -- Chief Medical Officer and Head of Global Drug Development And thank you for the question. If I think about KRYSTAL trial, remember, this is a study with a -- progression-free survival. And you will see the data being presented at ASCO. Overall survival data remains immature at this time. So I will not be able to comment on the specifics of that, but really excited for the confirmation of the single arms that you previously done now with the randomized study here. Tim Power -- Vice President, Investor Relations Let's go to the next question, please. Operator Our next question comes from Olivia Brayer with Cantor Fitzgerald. Olivia Brayer -- Cantor Fitzgerald -- Analyst Hey. Good morning, guys and thank you for the question. What does the commercial rollout strategy look like for KarXT as we look past that September PDUFA? And any thoughts around Medicaid negotiations? And then when do you think we start to see some meaningful growth from that franchise, whether that's next year or more so in 2026? Chris Boerner -- Chief Executive Officer Adam? Adam Lenkowsky -- Chief Commercialization Officer Yes. Thanks for the question. So we're very excited about the opportunity to launch KarXT later this year. This is a very important drug with significant commercial potential. As we talked about, KarXT will be the first innovative therapy in schizophrenia approved for decades. And what we've shared is KarXT offers like Prexileg efficacy without the significant adverse event that's plagued the D2 such as weight gain, lipidemia, EPS. And we know how compelling this is for physicians. We are rapidly preparing for the launch and the plans are going well, and we will be ready to launch by the summer, well in advance of our PDUFA date. We've been focused on prelaunch efforts and made very good progress preparing for the launch. So Karuna had made good progress in sourcing a very experienced commercial organization and our field medical and our access teams have already begun meaningful conversations with thought leaders and payers. Our prelaunch efforts today are focused on driving awareness of this new mechanism. We're currently building out a large neuroscience field sales organization. In fact, we've increased the investment across multiple fronts to maximize the opportunity that we have. So we also need to ensure that physicians have a positive first experience. So we're -- building our customer model to make sure that we have the optimal physician caregiver and patient support. And as you alluded to, we know that achieving rapid access is important. And so this is a largely Medicaid and Medicare opportunity, around 70%, and our access teams already today. We will leverage our large access organization to ensure rapid access for patients. Our teams have already been out and meeting with state Medicaid Directors and the feedback on the product profile has been very, very positive. So over half of state Medicaid programs either have no step edits or a single step edit. So our goal is to improve the quality of access to only one step edit, which you know is going to take some time, but we're very confident in our ability to achieve quality access for this product. So given a September '26 PDUFA and some of the timelines to obtain broad Medicaid coverage, we effectively see this as a 2025 launch, but we're very excited about the potential of KarXT and we plan to make this a very big product for Bristol-Myers Squibb. Tim Power -- Vice President, Investor Relations Thanks, Adam. We're starting to run a little short in time, maybe take two or three more. Can we go to the next one? Operator Our next question comes from James Shin with Deutsche Bank. Please go ahead. James Shin -- Deutsche Bank -- Analyst Hey. Good morning, guys. Thanks for taking my questions. I had a question on Opdualag phase 2 for frontline multiple cell lung. The full data set is for readout in the second half, but can you share if what you've seen is any different or comparable to the other LAG-3 non-small cell data sets such as TACD? Samit Hirawat -- Chief Medical Officer and Head of Global Drug Development Certainly, I can take that question. Look, obviously, I can't comment on what others have seen. All we know is they've seen six patients worth of data. Hard to compare six patients worth of data with more than 200 patients treated with Opdualag plus chemotherapy in the first-line setting. What we have seen is overall review of our own data set, looking at the various endpoints that we looked at as well as the biomarkers we looked at in our file and we remain confident in the profile of the drug to take it forward into the phase 3. Tim Power -- Vice President, Investor Relations OK. Let's go to the next one, please. Operator Our next question comes from Kripa Devarakonda with Truist Securities. Please go ahead. Kripa Devarakonda -- Truist Securities -- Analyst Hi, guys. Thank you so much for taking my question and for all the color on the call. I had a question about your acquisition of RayzeBio and now that you've got enablement and we're seeing -- it's getting to be very competitive, just wanted to see what the urgency and what this strategy is to build out the radiopharma pipeline. And also, when can we see more details on what the priorities are and also regarding actinium production going live. Chris Boerner -- Chief Executive Officer Well, let me start and then I'll ask Samit and Adam to speak. Let me just at a high level, though, say, that we continue to be incredibly excited about radiopharmaceuticals as a platform. It's one of the fastest-growing platform in solid tumor oncology. We believe we have a best-in-class asset that we've acquired with Rayze. The integration of that team has gone very well. We continue to be very excited and happy with the bringing online of the facility in Indianapolis. So in terms of us getting that asset, incredible enthusiasm and the integration has gone well. But Samit, maybe you and Adam can speak to details. Samit Hirawat -- Chief Medical Officer and Head of Global Drug Development Yes. Thank you for the question. For Rayze, as Chris just mentioned, the platform is absolutely exciting and very encouraging data that we have seen emerging from the first program that is already in phase 3 for the SSTR directed radioligand therapy. And that phase 3 program is right now enrolling in the GAP NET indication as well as the small cell lung cancer phase 1 studies ongoing, and we are looking to see a couple of other indications added over there, and we're designing those trials as we speak and conduct those. So it holds a huge amount of promise because of the specificity of the directed radiation to the tumor itself. Thereafter, we're looking forward to additional IND filing later this year, and that might then be able to start our actually very specific tumor-directed indication within HCC at the back half of this year. And then thereafter, we are looking to be an IND generation coming from this platform as we go forward. Within Indianapolis, manufacturing facility now up and running. We're looking forward to supplying the Actinium part of it as well as the drug product toward the back half -- or back end to early part of next year, and that will certainly help in terms of continuing to supply and taking it forward. We are learning lessons from the front runners and those lessons will be very helpful as we go into the commercial stages in a couple of years. Chris Boerner -- Chief Executive Officer Adam, anything to add? Adam Lenkowsky -- Chief Commercialization Officer Yes, I'll just add just a few things. RayzeBio was a important strategic acquisition that we believe continue to diversify our oncology portfolio. It's -- as Chris mentioned, we see this as a modality that's going to continue to grow over time. It will be a competitive space. But what we liked about RayzeBio, this is going to be an IND engine. And the lead program RYZ101 is already in phase 3 development, as you heard earlier, for Gap nets. -- but we have opportunities in small cell lung cancer, in breast cancer and potentially many other tumor types. So this is tremendously complementary to our existing portfolio. Tim Power -- Vice President, Investor Relations Maybe we go to our last question, if you don't mind, Rocco? Operator Our final question comes from Akash Tewari with Jefferies. Please go ahead. Unknown speaker Morning. Thanks for taking our questions. This is Avi on Akash. We just have two quick questions. The first one is a follow-up for KarXT. So do you think patients on the drug will develop cardio dyskinesia? If not, how will that help position KarXT in the schilphrenia market? And then our second question is for CAR-T. So why do you think CAR-T for autoimmune more attractive than CD19 bispecifics? And also, would you consider approaches that don't require -- depletion? Chris Boerner -- Chief Executive Officer Samit? Samit Hirawat -- Chief Medical Officer and Head of Global Drug Development Sure. Thank you. First of all, great profile for KarXT that I think Adam has spoken about earlier from a safety profile perspective and the data has recently been presented also at the SURS conference where we do not see the same toxicities that are seen with the atypical such as the target dyskinesia, the movement disorders as well as many of the other elements that have been spoken about, so I won't repeat. So that's why we are very confident on the profile and looking forward to bring it to the patients with schizophrenia. And then as David said earlier, with other indications as well for ADsychosis, agitation, bipolar disorders, and others that we are exploring. On the CAR-T side, certainly an advantage for a single infusion leading to good outcomes for patients, especially starting with SLE in the refractory setting, where patients have had multiple other treatments ongoing and organ dysfunction factors in these patients. That is the advantage, a single infusion, if that can cause tremendous transformational outcomes for these patients. As you know, our program is quite large. So we are also looking at multiple sclerosis as well as systemic sclerosis as well as idiopathic fibrosis. So those programs as they enroll patients will generate the data, and we're hoping to be able to present some data from SLE this year and certainly, future approaches might include non-lymphodepletion therapies, but we're not ready for that right now. Chris Boerner -- Chief Executive Officer Thanks, Samit. And maybe I'll just close by saying, first, thank you all for joining the call today. I know it is a very busy day for all of you. So maybe I'll just leave you with a few things. First, we're off to a very good start in 2024. Our performance this quarter reflects execution and actions that we've taken to strengthen the company's long-term growth profile. Our business out remains unchanged from the beginning of the year. And of course, we look forward to sharing our continued progress on future calls. And with that, we'll close the call. And as always, the team is available to answer any questions you have following today's discussion, and I hope all of you have a very good day.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day. And welcome to the Blackstone first-quarter 2024 investor call. Today's conference is being recorded. [Operator instructions] At this time, I'd like to turn the conference over to Weston Tucker, head of shareholder relations. Please go ahead. Weston Tucker -- Head of Shareholder Relations Thanks, Katie, and good morning, and welcome to Blackstone's first-quarter conference call. Joining today are Steve Schwarzman, chairman and CEO; Jon Gray, president and chief operating officer; and Michael Chae, chief financial officer. Earlier this morning, we issued a press and slide presentation, which are available on our website. We expect to filed our 10-Q report in a few weeks. I'd like to remind you that today's call may include forward-looking statements, which are uncertain and may differ from actual results materially. We do not undertake any duty to update these statements. For discussion of some of the factors that could affect results, please see the risk factors section of our 10-K. We'll also refer to certain non-GAAP measures and you'll find reconciliations in the press release on the shareholders page of our website. Also, note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blackstone fund. This audiocast is copyrighted material of Blackstone and may not be duplicated without consent. So on results quickly, we reported GAAP net income for the quarter of $1.6 billion, distributable earnings were $1.3 billion or $0.98 per common share and we declared a dividend of $0.83, which will be paid to holders of record as of April 29th. With that, I'll turn the call over to Steve. Steve Schwarzman -- Chairman and Chief Executive Officer Good morning, and thank you for joining our call. Blackstone reported strong results for the first quarter of 2024, including healthy distributable earnings of $1.3 billion as Weston mentioned, underpinned by the highest fee-related earnings in six quarters. On our January earnings call, following a volatile multi-year period for global markets, we noted an improving external environment and shared our view that 2023 would be the cyclical bottom for our firm. While changing market conditions take time to translate to financial results, including realizations and performance revenues, we are seeing positive momentum across many key forward indicators at our firm. Inflows were $34 billion in the first quarter and $87 billion over the past two quarters. We invested $25 billion in quarter one and $56 billion in the past two quarters with a strengthening pipeline of new commitments. We're planting the seeds of future value and what we believe is a favorable time for deployment. At the same time, our fundraising in the Private Wealth channel meaningfully accelerated in the first quarter. Sales for our perpetual life vehicles increased more than 80% from the fourth quarter to $6.6 billion. We've stated before that short-term movements in stock and bond markets impact capital flows in this channel. But ultimately, flows follow performance as well as innovation as we're seeing now. We've delivered 10.5% net returns annually for BREIT's largest share class over more than seven years and 10% for BCRED over three-plus years. And we continue to successfully launch new strategies, including our private equity vehicle, BXPE, in the first quarter. With $241 billion of AUM in Private Wealth at Blackstone, we have the leading platform in our industry by far. We've established a significant first mover advantage with the number one market share for each of our major season products, along with a high percentage of repeat business across strategies. Blackstone is built on long-term investment performance. We've achieved 15% net returns annually in corporate private equity and infrastructure since inception, 14% in opportunistic real estate and secondaries, 12% in tactical opportunities, and 10% in credit. In the first quarter, our funds reported steady appreciation overall, highlighted by strength in infrastructure, credit, and our multi-asset investing platform, BXMA. Our portfolio is in excellent shape, and our limited partners continue to benefit and we've positioned their capital, emphasizing new neighborhoods, such as digital infrastructure, logistics, and energy transition. The firm's thematic approach to deployment is informed by the real time data and insights we gather from our global portfolio, which helps us to identify trends early and build conviction around our ideas. Blackstone is the largest and most diversified firm in the alternatives area with over $1 trillion of assets under management and we believe our knowledge advantage consequently is a unique asset in our industry. For example, digital infrastructure, one of the firm's highest conviction investment themes today, is a powerful example of this knowledge advantage at work. Just as we recognized the rise of e-commerce nearly 15 years ago and started buying warehouses, we anticipated a paradigm shift around demand for data centers, driven by growth in content creation, cloud adoption, and most importantly now, the revolution underway in artificial intelligence. Others now know that AI requires exponentially more computing power and capacity than was previously imagined. On a personal basis, in less than two weeks, I am participating in the dedication ceremony for the Schwarzman College of Computing at MIT, which will be heavily focused on this area. What has Blackstone done with our conviction? We identified QTS, the fifth largest U.S. data center REIT as a well-positioned but poorly trading public company with tremendous long-term potential. Our BREIT, BIP Infrastructure, and BPP perpetual strategies acquired the company for $10 billion in 2021, and its lease capacity has already grown sixfold in less than three years. Today, QTS is the largest data center company in North America. We are building a variety of other center platforms around the world as well. In total, Blackstone vehicles now own $50 billion of data centers globally, including facilities under construction. And there is an additional $50 billion in prospective future development pipeline. Blackstone is highly differentiated in our ability to conceptualize the new business area and transform it into a $100 billion potential opportunity. We are also actively investing in other companies in AI-related areas. We're buying as well as financing several firms that design, build, and service data centers. We recently financed a cloud infrastructure business supporting AI development. And now we've transitioned to addressing the sector's growing power needs, leveraging our sizable energy infrastructure platform, which includes the largest private renewables developer in North America. There are several other powerful megatrends that we expect to drive the firm forward, both in terms of where we invest and where we raise capital. The most compelling of these today include the secular rise of private credit, where we have one of the world's largest platforms; infrastructure, energy transition, life sciences, and the expansion of alternatives globally and particularly in Asia. In each of these areas, we've established leading platforms with tremendous momentum. Looking forward in 2024, the market environment will remain complex. The economy is stronger than expected but is starting to slow a bit. In terms of inflation, despite the recent U.S. CPI readings, we are seeing a decelerating wage growth and minimal input cost increases across many of our companies. In real estate, we see shelter costs moderating, contrary to government data. We believe inflation will trend lower this year, although, the pace of decline has slowed recently. Geopolitical turbulence, including wars in the Middle East and Ukraine, adds further uncertainty to the business environment. And 2024 is a major election year as we all know with nearly half of the world's population going to the polls, which injects unpredictability around the future of important policies that impact the global economy. Blackstone is well-positioned against this evolving backdrop. Our portfolio is concentrated in compelling sectors and we have the industry's largest dry powder balance of nearly $200 billion to take advantage of opportunities. Our long-term capital provides the flexibility and firepower to invest while affording us the patience to sell assets when the time is right. The firm itself could not be in a stronger position with minimal net debt and no insurance liabilities, allowing us to distribute $4.7 billion to shareholders over the past 12 months through dividends and share repurchases. And we are in the early days of penetrating markets of enormous size and potential. With that, I'll turn it over to John. Jon Gray -- President and Chief Operating Officer Thank you, Steve, and good morning, everyone. We are pleased with the firm's performance in the first quarter and the momentum building across our business. This momentum is underpinned by three key developments; first, the transaction environment has strengthened; secondly, in private credit, demand from both investors and borrowers is expanding; and third, our private wealth business is reaccelerating. I'll discuss each of these areas in more detail, starting with the transaction environment. The market backdrop has become more supportive. The 10-year treasury yield is still down from its October peak despite the recent run-up. Borrowing spreads have tightened significantly and the availability of debt capital has increased significantly. We're also seeing M&A activity and the IPO market restarting. As we've stated before, the recovery will not be a straight line but we're not waiting for the all-clear sign to invest. We deployed $25 billion in the first quarter and committed an additional $15 million to pending deals, including subsequent to quarter end. We were most active in our credit and insurance area, which I'll discuss further in a moment. In real estate, we shared our view in January that commercial real estate values were bottoming, providing the foundation for an increase in transaction activity. This has coincided with several major investments by Blackstone. Just last week, we announced a $10 billion take-private of a high-quality rental housing platform, Air Communities, which follows our announcement in January to privatize Tricon Residential. Rental housing remains a major investment theme for us given the structural shortage in this space. U.S. is building roughly the same number of homes today as in 1960 despite having almost twice the population. We are also quite focused on European real estate where we've now raised $7.6 billion for our new flagship vehicle as of quarter end. In private equity, we closed the acquisition of Rover in the first quarter, a leading digital marketplace in the pet space, along with an online payments business in Japan and a healthcare platform in India. The economy in India, which I visited two weeks ago, remains incredibly strong. We're fortunate to have what we believe is the largest private equity and real estate platform in that country. Back home, our dedicated life science business announced a $750 million collaboration with Moderna to support the development of mRNA vaccines for influenza. And our growth equity fund invested in 7 Brew, an innovative quick service coffee franchisor. As Steve highlighted, we are planting the seeds of future realizations. Turning to the second key development, our expansion in private equity credit. There is powerful innovation underway in the traditional model of providing credit to borrowers. Our corporate, insurance, and real estate debt businesses comprise over 60% of the firm's total inflows in the first quarter and nearly 60% of deployment. We continue to see strong interest in non-investment grade strategies, such as opportunistic, direct lending and high yield real estate lending. We're also now seeing a dramatic increase in demand from our clients for all forms of investment grade private credit, including infrastructure, particularly in energy transition and digital infrastructure, residential real estate, commercial and consumer finance, fund finance, and other types of asset based credit. In our investment grade focused business, we believe there is a massive opportunity to deliver higher returns to clients with lower risk by moving a portion of their liquid IG portfolios to private markets. Alternatives have taken meaningful share of public equity portfolios over the past 30 years but little on the fixed-income side. In the insurance channel, this migration has been underway and we've created a capital light, open architecture model that can serve a multitude of limited partners. Worth noting we crossed the $200 billion AUM milestone in insurance this quarter, up 20% year over year. In addition to our four largest clients, we now have FMA relationships with 14 insurers, which continue to grow in number and size. We placed or originated $14 billion of A-rated credits on average for them in the first quarter, up 71% year over year and nearly $50 billion since the start of 2023. These credits generated approximately 200 basis points of excess spread over comparably rated liquid credits. In addition to insurance clients, pension funds and other LPs see the value we're creating in private credit, and there's been a strong response to our product offerings. With nearly $420 billion in BXCI and real estate credit, we're extremely well-positioned to directly originate high quality assets on behalf of a much larger universe of investors. We've also established numerous origination relationships as well as bank partnerships, most recently with Barclays and KeyBank in areas like consumer credit card receivables, fund finance, home improvement, and infrastructure credit, and we plan to add more. These arrangements are a win-win. They create more flow for our investors who want to hold these investments, these assets long term, and they help our partners better serve their customers. We expect our credit and insurance platforms to grow significantly from here. Moving to the third key development, the reaccelerating trends in our private wealth business. In January, we noted our momentum building as market volatility receded. And with the launch of BXPE, we now offer three large-scale perpetual vehicles, providing individual investors access to even more of the scale and breadth of Blackstone. Our sales in the wealth channel were a robust $8 billion in the first quarter, including $6.6 billion for the perpetual strategies, as Steve noted. Subscriptions for the perpetuals increased 83% from Q4 and marked the best quarter of fundraising from individuals in nearly two years. BCRED led the way, raising $2.9 billion. BXPE has received very strong investor reception, raising $2.7 billion in its debut quarter, and we plan to expand to more distributors over the coming months. Over 90% of advisors that have transacted with BXPE have previously done so with BREIT or BCRED, illustrating the affinity for our products and the power of the Blackstone brand in this channel. At the same time, BREIT has successfully navigated a challenging two-year period for real estate markets. Its semi-liquid structure has worked as designed by providing liquidity while protecting performance. BREIT has delivered double the return of the public REIT index since inception over seven years. This outperformance continued with strong results in Q1, underpinned by outstanding portfolio positioning that includes growth in its data center exposure. Repurchase requests in BREIT have fallen 85% from the peak to the lowest level in nearly two years and the vehicle is no longer in proration. We're now seeing encouraging signs in terms of new sales while repurchase requests are continuing their decline in April as well. We are confident in the recovery of BREIT flows over time given performance. When looking at the $80 trillion private wealth landscape overall, allocations remain extremely low, and we expect a long runway of growth ahead. In closing, the firm is exceptionally well-positioned, supported by both cyclical and secular tailwinds, that's why we believe the future is very bright for Blackstone. With that, I'll turn things over to Michael Chae. Michael Chae -- Chief Financial Officer Thanks, Jon, and good morning, everyone. Firm delivered strong results in the first quarter, highlighted by the reacceleration of fee-related earnings. I'll first review financial results and will then discuss investment performance and the forward outlook. Starting with results. Fee-related earnings increased 12% year over year to $1.2 billion or $0.95 per share, the highest level in six quarters and the third-best quarter in firm history, powered by double-digit growth in fee revenues, coupled with the firm's robust margin position. With respect to revenues, the firm's expansive breadth of strategies lifted management fees to a record $1.7 billion. Notably, Q1 reflected the 57th consecutive quarter of year-over-year growth of base management fees at Blackstone. Fee-related performance revenues doubled year over year to $296 million generated by multiple perpetual capital vehicles in credit and real estate, including a steadily growing contribution from our direct lending business, scheduled crystallization in our European BPP logistics strategy, and BREIT. The setup for these high-quality revenues is favorable in 2024 and beyond, which I'll discuss further in a moment. With respect to margins, FRE margin was 57.9% in the first quarter, in line with full-year 2023. Distributable earnings were $1.3 billion in the first quarter or $0.98 per common share, stable year over year and underpinned by the growth in FRE. Net realizations remain muted at $293 million. And going forward, we expect a lag between improving markets and a step-up in net realizations. In the meantime, the firm's strong underlying FRE generation has supported a consistent and attractive baseline of earnings with Q1 representing the 10th consecutive quarter of FRE over $1 billion. We did execute a number of sales in the quarter, including a stake in one of the largest cell tower platforms, public stock of the London Stock Exchange Group and the sales of certain other public and private holdings. We also closed or announced several dispositions in our real estate and infrastructure perpetual vehicles, which as a reminder, do not earn performance revenues based on individual asset sales but on NAV appreciation. These included a trophy retail asset in Milan for EUR1.3 billion, representing the largest real estate single asset sale ever in Italy, portfolio of warehouses in Southern California and a prime office building in Seoul. Each of these sales generated a substantial profit individually and in aggregate, a gross multiple of invested capital of approximately two times. These dispositions exemplify the significant quality and embedded value within the firm's investment portfolio. Turning to investment performance. Our funds generated healthy overall appreciation in the first quarter, as Steve noted. Infrastructure led the way with 4.8% appreciation in the quarter and 19% over the last 12 months with broad gains across digital, transportation, and energy infrastructure. The QTS data center business was the single largest driver of appreciation for BIP, BREIT, and BPP U.S. and for the firm overall in Q1. The comingled BIP vehicle has generated 15% net returns annually since inception, powering continued robust growth with platform AUM increasing 22% year over year to $44 billion. The corporate PE funds appreciated 3.4% in the quarter and 13% for the LTM period. Our operating companies overall reported healthy, albeit decelerating, revenue growth along with margin strength. In credit, we reported another outstanding quarter in the context of strong fundamentals and debt marks generally and tightening spreads with a gross return for the private credit strategies of 4.1% and 17% for the LTM period. The default rate across our nearly 2,000 noninvestment grade credits is less than 40 basis points over the last 12 months with zero new defaults in our private credit business in Q1. Our multi-asset investing platform, BXMA, reported a 4.6% gross return for the absolute return of composite and 12% for the last 12 months, the best quarterly performance in over three years and the 16th quarter in a row of positive returns. Since the start of 2021, the composite has delivered nearly double the return of the 60-40 portfolio net of fees, a remarkable result in liquid markets. Finally, in real estate, the Core+ funds appreciated 1.2% in the first quarter, while the BREP opportunistic funds appreciated 0.3%. These returns include the negative impact of currency translation for our non-U.S. holdings related to the stronger U.S. dollar, equating to 20 and 60 basis points impact on each strategy respectively. As Jon noted, we see a recovery under way in commercial real estate, and in our portfolio cash flows are growing or stable in most areas. Overall, strong returns lifted net accrued performance revenue on the balance sheet, affirmed store value sequentially to $6.1 billion or $5 per share. Meanwhile, performance revenue eligible AUM in the ground increased to a record $515 billion. The resiliency and strength of the firm's investment performance over many years and across cycles powers the Blackstone innovation machine and provides the foundation of future growth. Moving to the outlook, where several embedded drivers support a favorable multiyear picture of growth. First, the firm has raised approximately $80 billion that is not yet earning management fees and new drawdown fund vintages that haven't yet turned on along with certain other funds. These will commence when investment periods are activated or capital is deployed depending on the strategy. We plan to activate our corporate private equity flagship this quarter, which has raised over $19 billion to date, followed by an effective four month of fee holiday. We expect to activate several other drawdown funds over the balance of the year followed by respective fee holidays. Second, our platform perpetual strategies has continued to expand, now comprising 45% of the firm's fee-earning AUM. As a reminder, our private wealth perpetual vehicles, including BREIT and BCRED, generate fee-related performance revenues quarterly as will BXPE starting in Q4 of this year. Our institutional strategies, BPP and real estate and BIP and infrastructure, generate these revenues on multiyear schedules with a sizable crystallization for the comingled BIP vehicle scheduled to occur in Q4 of this year with respect to three years of accrued gains. Third, our investment grade-focused credit business is on a strong positive trajectory, as Jon highlighted, and we expect $25 billion to $30 billion of inflows again this year from our four major insurance clients alone. In closing, the firm is moving forward in a position of significant strength. Our momentum is accelerating in key growth channels and our underlying earnings power emerging from this period of hibernation continues to build. We have great confidence in the outlook for the firm. With that, we thank you for joining the call. I would like to open it up now for questions. Questions & Answers: Operator Thank you. [Operator instructions] We'll go first to Michael Cyprys with Morgan Stanley. Michael Cyprys -- Morgan Stanley -- Analyst Hi. Good morning. Thanks for taking the question. I wanted to dig in on infrastructure, the platform continues to build, I heard $44 billion AUM, strong returns, 15% net. Maybe you could just update us on the platform build-out, the initiatives here that can help accelerate growth. It seems like there's a tremendous market opportunity out there. Just curious what you see as the gating item on seeing this business multiples of the size, maybe talk about some of the steps you're taking around expanding your origination funnel and infrastructure and as well as expanding the vehicles for capital raising across the return spectrum and customer sets globally? Jon Gray -- President and Chief Operating Officer Infrastructure is clearly an area with a lot of potential for us. As a reminder, our program is less than six years old at this point, and we're already at $44 billion. The key, like building everything we do is delivering performance for the customers. Sean Klimczak and the team have delivered 15% net returns since inception in an open ended vehicle, which is different than many of the other players in the space. We think that is a very powerful model because it allows us to partner with other long-term holders and it matches the duration of the capital to long duration infrastructure. We positioned the business in three big areas; transportation infrastructure, coming out of COVID; energy and energy transition, obviously, a very important area today for a whole host of reasons; and then digital infrastructure, which Michael pointed out, has been the biggest driver of value both in real estate and in infrastructure and across the firm in this most recent quarter. So we think we've done a really exceptional job deploying the capital. We have a lot of clients who are quite pleased. I think the base business can grow. And I think there are opportunities geographically to expand this. Our current fund is focused primarily on the U.S. but we've done a number of large things in Europe. And I think there's opportunities in infrastructure in both Europe and Asia over time, and it's an area that we have real strength. I would add to the mix, infrastructure credit, something we're doing as well. And interestingly, when you think about what we're doing for insurance clients, what we have in infrastructure and things like digital infrastructure, green energy, it's very helpful for investment grade debt as well given our insights and relationships. So this is an area where we're still seeing investors showing a lot of enthusiasm. I think it will continue to be a growth area on the back of what we built. I think we can create other products. And we see this growing to be, I think, as we've talked about in previous calls, a triple digit AUM business. Michael Chae -- Chief Financial Officer And Jon, I'd just add on, and I think you might agree that, I think if you step back, Mike, you could analogize it's sort of the multi decade growth path of real estate, that business overall with respect to another area of relapse that's infrastructure, and that is geographic/regional expansion, expansion up and down the risk return spectrum, cross asset classes between equity and debt and also serving different customer channels, whether it's retail insurance or institutional. So that's another way to dimension it. Michael Cyprys -- Morgan Stanley -- Analyst Great. Thank you. Operator Thank you. We'll go next to Craig Siegenthaler with Bank of America. Craig Siegenthaler -- Bank of America Merrill Lynch -- Analyst Good morning, everyone. My question is on real estate. So with deployments picking up with both the Tricon and Apartment Income take privates, and John, I heard your comments earlier this morning, but it sounds like the Blackstone house view is that the work from home and interest rate hit are now baked into cap rates. So given all this, can you comment on where we are in the investing cycle, be it dry powder at BREP, BPP, and BREIT? And I also wanted your perspective on returns now that BREIT is back above its BREP, putting 2Q in a better position for FRPR? Jon Gray -- President and Chief Operating Officer As we've talked about and you noted, there have been two big headwinds here. One in the office sector, specifically in the U.S. where we have very little exposure, the impact of remote work and also capital needs in older office buildings. The second thing has just been the movement upward in interest rates and the rise in spreads that happened. And both of those, I believe, peaked back in October and that has really worked its way through the market. Interestingly, of course, there'll still be plenty of challenging headlines from assets that were financed in a different environment as they work their way through the system, and that's sort of -- it's almost as if something happened to a ship at sea and then it comes ashore. We saw this after the financial crisis where real estate values bottomed in that summer of '09 but you had negative headlines in real estate for the next three years. We spent a lot of that time, of course, deploying capital into that dislocated period where people were still cautious. What gives us confidence as we look forward here is one is this reduction in cost of capital. We've obviously seen spreads tighten a fair amount, probably 125 basis points in CMBS in the first quarter and through the end of the fourth quarter last year. We also saw CMBS issuance go up fivefold versus the first quarter of 2023. So that -- and the fact that the Fed at some point here will be bringing rates down, and that's important as well. The other thing I'd add is on the supply front. We've seen in logistics an 80% decline in new starts. We've seen in multifamily a 50% decline in peak starts -- from peak starts as well. And so that starts to lay the groundwork. In terms of timing, I would think about this period of time is a time of seed planting that you want to be investing into this dislocation because there's a lot of uncertainty, there maybe fore sellers, there maybe public companies trading at discounts. And then over time, as things start to normalize, you start to accelerate on the realization. But first, I think it's the deployment period then the realization period as you move out similar to that post GFC period, that's certainly the way we're playing it. And in terms of capital, we obviously have a very large $30 billion global fund. We said we've raised over 7.5 in Europe, we have most of our $8-plus billion Asia fund still uninvested. So a lot of opportunistic capital to deploy. So we're forward leaning as it relates to deployment, even though we recognize there's still going to be a lot of assets from the previous period working their way through the system. Operator Thank you. We'll go next to Alex Blostein with Goldman Sachs. Alex Blostein -- Goldman Sachs -- Analyst Hey. Good morning, everybody. Thank you for the question. My question is around BXPE. Really strong momentum out of the gate, obviously, $2.7 billion that you guys highlighted this quarter and over the last couple of months. What's the vision for this product, I guess, in terms of both capacity and maybe the appropriate size for the strategy as well as the pace at which you feel comfortable taking in inflows? And I don't want to draw too much parallel with BREIT, obviously, very different product, very different customer base. But thinking of that one, I think, peaking at north of $70 billion, how are you thinking about the size and opportunity for BXPE? Jon Gray -- President and Chief Operating Officer Well, I think it's a great question, Alex. One of the things we did when we designed BXPE was to make the platform as broad as possible so that we could scale the product and we could be flexible on behalf of investors in terms of where we deployed it. So control large scale private equity is part of it; U.S., Europe, Asia is part of it; Tactical Opportunities, more hybrid equity, part of it; life sciences growth, part of it; secondaries, infrastructure, some opportunistic credit. It's a very broad platform and it enables us to deploy a lot. One of the advantages of Blackstone is just our scale and the amount of deal flow we see across all these different areas. And particularly our connectivity with many other sponsors in the private equity space through our secondaries, our credit business, our GP stakes business, we can be great partners to those folks. Obviously, we can manufacture a lot of transactions ourselves. So we think the potential scale here is quite large. You pointed out BREIT scale, we're over $30 billion of equity, nearly $60 billion of assets in BCRED. We think this can grow a lot. The key is we have to deliver strong performance to the underlying customers. We have to be disciplined in how we deploy capital and thoughtful. I think we've been doing that. I think we'll continue to do that. And that's what gives us a lot of confidence, which is investors want exposure to private equity, individual investors want a little bit of a different structure, and that's why I think BXPE is so attractive. So I think as we come out of this period over the last two years where there's been a lot of caution and negativity, as market sentiment improves, as we show the strong performance from our other individual investor products, I think there's a potential here of pretty good size. Again, we've got to do a good job deploying capital but I've got a lot of confidence, particularly given the breadth of the platform. So the short answer is I think this can grow to be much larger than it is today. Operator Thank you. We'll go next to Dan Fannon with Jefferies. Dan Fannon -- Jefferies -- Analyst Hi. Thanks. Good morning. Michael, last quarter, the message for this year on margins was stability. The first quarter was flat with last year. As you think about the momentum in the business that you highlighted and the prospects for growth and growth in AUM, how are you thinking about margins as you think about the rest of the year? Michael Chae -- Chief Financial Officer I think my message is consistent. First of all, in terms of the actual result, as you noted in the first quarter, quite stable, quite consistent, quite in line with both the first quarter a year ago and the full-year 2023. I think, as always, we guide people to look not at individual quarters but at sort of the -- on a full-year basis. And I think on that basis, we would again encourage people to think about this as -- reinforce margin stability as a guidepost. And then, again, consistent with our message over a long time, on a longer-term basis, we do think there's operating leverage built into our model. We obviously actively manage our cost structure. And we think long term, there is a -- it's a robust margin position that we'll scale and leverage over time. So back to where we started, I would reinforce margin stability as the message and over the long term, feel optimistic about the ability to increase that. Operator Thank you. We'll go next to Glenn Schorr with Evercore ISI. Glenn Schorr -- Evercore ISI -- Analyst Hello there. I got a question to peel back the onion a little bit on this commentary on bank partnership. So when we watch you do something like Barclays where you've taken a credit card book and give to your insurance clients, that makes sense to us, that's like a cash transaction, it's tangible. So we read a little more about the rising of synthetic risk transfer trends. And I'm just curious, that's something that's obviously harder for us to follow. It gives us shivers. It reminds us about 16 years ago. Curious of your thoughts on how much SRT is going on in the industry, how much you do, and maybe you can talk about what type of partnerships you envision going forward? Jon Gray -- President and Chief Operating Officer SRTs are an area we're very active. I think we're the market leader today in terms of working with our bank partners. For them, these are capital relief transactions, as you know, where you're sharing in or taking first loss positions. We've been doing this with a variety of banks who are highly creditworthy institutions. One of the advantages we have is the strength we have across asset ownership and also corporate and real estate credit. So if we do these with bank partners, we can go through them in detail. The most active area has been subscription lines to date, which as you probably know, subscription lines to private equity firms have had virtually no defaults over the last 30, 40 years. So we like that area. When we work in investment grade or noninvestment grade, much of it's been around revolvers, which historically have had much lower loss ratios. And we were able to go through these portfolios and look at the credits we're taking. We do this, of course, not as Blackstone but on behalf of our investors in various vehicles and funds. The returns -- we've been doing this, by the way, for a number of years. And I just think our ability to look at the underlying credit as opposed to just make a macro call is our competitive advantage and our ability to do this and scale with the bank. So I see this as a win-win. It helps banks with some of the Basel pressure, balance sheet pressures they have and we're able to generate favorable returns. So I think this is a very good thing for the system overall. I think we're doing it in a quite responsible way. Our team is very experienced in how they execute these transactions. Operator Thank you. We'll go next to Crispin Love with Piper Sandler. Crispin Love -- Piper Sandler -- Analyst Thanks. Good morning. So in recent weeks, there's definitely been a shift in the rate outlook as we're likely in a higher for longer scenario, which is very different than just three months ago. So can you just talk a little bit about how that might impact your outlook for investment activity and putting dry power to work going forward and then just how it might shift the areas where you're most excited about deploying capital? Jon Gray -- President and Chief Operating Officer Well, I do think it extends the investment window a bit for our $191 billion of dry powder. I think as people were getting closer to anticipating rate cuts, you saw big rallies in both equity and debt markets and that can make it a little bit tougher to deploy capital. In some ways, it's helpful for financings but it also can drive prices up. From our perspective, because we're buying assets so often for longer periods of time, the fact that a rate cut may happen 90 days or 180 days later is not really a long-term negative and if anything, allows us to get into some assets at more favorable pricing. So the way I would think about it is it extends out to deployment period. It may slow some of the realizations and push them out a bit as well. But when we think about delivering value for our customers, we see it as a positive. Obviously, for businesses like our credit business, which is mostly floating rate, it enhances returns for our underlying customers. I do think it's important to note that unlike October and the end of the summer when rates moved and spreads really gapped out, we haven't seen that accompanying change. So market seem to be in a much healthier spot. But I do think it probably prolongs the investment window here. And as we keep saying, we're not going to wait for the all-clear sign. You saw a big ramp-up. We had $25 billion of deployment in the quarter. And I think in terms of commitments and then as of quarter end-plus beyond the quarter end, we have another $15 billion that's committed. So you're seeing us move. We did our first deal in growth in quite some time. Real estate, we've talked about, we've obviously accelerated there. In our secondaries business, the pipeline of deals we're looking at is about two times where it was 90 days ago. So we're seeing a pickup in activity. It won't be everywhere. But I do think it creates more of a chance for us to deploy capital at prices we find attractive. Operator Thank you. We'll go next to Brian Bedell with Deutsche Bank. Brian Bedell -- Deutsche Bank -- Analyst Great. Thanks. Good morning, folks. Maybe just to add on to that question on that pace of deployment in two specific areas, real estate, and credit. Just going back to the comment you just made, Jon, about extending the period. But does that make you sort of more excited about potential opportunities given that's extension of the period that could depress prices in real estate? And with massive dry powder, especially in real estate, could that bring that level of deployment back up to sort of prior year levels in the mid to high $40 billion ranges? And then just secondarily in private credit, a little different dynamic with less dry powder but more fundraising. So I guess, same question there or do you think you can get up to sort of similar types of record levels in the mid to high $40 billions in like on, say, for 2024 for deployment? Jon Gray -- President and Chief Operating Officer Brian, it's hard to put numbers on things, so I'll talk about it directionally. I do think when rates go up, the market tends -- the public markets tend to move much more than what we see in the private market. So for real estate, I do think that creates more opportunity for scalable deployment as some of those stocks move on, particularly if the debt market hangs in there. And so that disconnect can create opportunity. We've seen a pickup in Europe in real estate as well, some of that relating to distress, and there's very negative sentiment, even though the fundamentals on the ground are actually pretty good in our chosen sectors. And we're seeing overall in Europe, I think there, we'll see rates come down more quickly than the U.S., which is helpful. So short answer, yes, it should help real estate deployment. On private credit, we've got a lot of momentum, particularly in the investment grade and asset based -- asset backed area, that's where we're probably most active right now. The need for capital around digital and energy infrastructure, enormous. The needs for power tied to digital infrastructure but also electrification of vehicles, reshoring, very significant. And there's going to be a huge need for capital. So we see that almost regardless of the interest rate environment. I do think on the direct lending side, we've seen some spread tightening. Rates coming down will be helpful to see deal activity and I think at that point, we'll see a pickup. But regardless, our pipeline and credit both on the investment grade and noninvestment grade size has accelerated. So it's hard to say exactly how this happens but we feel good about the momentum and deployment. And I use my very scientific briefcase indicator, how many investment memos I'm taking home over a weekend, and it's definitely been trending up. So I think that bodes well. It's hard to predict exactly how it manifests itself. But it feels like, certainly, this will be a more active year than last year for deployment. Brian Bedell -- Deutsche Bank -- Analyst Yeah. That's helpful. Thank you. Operator Thank you. We'll go next to Ken Worthington with J.P. Morgan. Ken Worthington -- JPMorgan Chase and Company -- Analyst Hi. Good morning. Looking into BPP, net accrued performance revenue, $73 million. I assume, down on this quarter's crystallizations. But IRRs are down to 6%, which I think is below the hurdle rate there. I know BPP is a collection of front-end investments, like BioMed and Mileway. What needs to happen here for returns to recover and accrued performance fees to build into what I think are big crystallizations anticipated for next year? Jon Gray -- President and Chief Operating Officer So, Ken, you pointed it out correctly. It's a bunch of different vehicles with different hurdle rates and different performance, some of which obviously are at higher levels, some at lower levels. It feels to us, as we've been talking about, that real estate has moved toward this lower ebb. And it's fortunately a cyclical business, right? When you stop building new supply, as the cost of capital comes down, you get a recovery, and if you look back over time to the early '90s after the 2001 downturn, certainly after the GFC. The great thing is these are long-duration vehicles. The capital is going to stick with us for quite some time. And ultimately, we'll get other opportunities when these crystallization events come up. And so I would say the fact that we think we're positioned in some really good sectors, really good geographies, we have big exposure to logistics, in Europe in particular. We've got some really high quality -- we have data centers in some of our investment vehicles here as well. I would say, overall, it's a combination of the quality of what we own and the sentiment in the sector improving. And when that happens, we'll get these unrealized performance fees that happen on a regular basis. So to me, it's a matter of time. It goes to the larger issue of a large portion of our earnings in hibernation, the fact that we're still able to earn $0.98 even though incentive fees are well off what we think their long term potential are, realizations in our opportunistic funds and private equity funds below potential. I think there's a lot of embedded upside in this firm, and you pointed out to one area of BPP. It's hard to put an exact date because it's going to be a function of sort of the pace of the recovery. But we're pretty confident that commercial real estate over time recovers and that foundation is starting to come into place. Ken Worthington -- JPMorgan Chase and Company -- Analyst Great. Thank you very much. Operator We'll go next to Ben Budish with Barclays. Ben Budish -- Barclays -- Analyst Hi. Good morning and thanks for taking the question. I wanted to follow up on, I think, Dan's question earlier on the margins. Just a couple of kind of housekeeping items maybe for Michael. On the fee-related performance comp ratio, it looks like that has been sort of trending -- it was a bit lower in the quarter than we expected, and it looks like it's been a little bit volatile over the last like year or so versus sort of 40% range we tend to expect. So any color there? And then sort of on the same lines, the stock based comp stepped up a little bit in the quarter. Just curious how we should be thinking about that trending throughout the rest of the year. Michael Chae -- Chief Financial Officer I think on the margins on the fee-related performance revenues, there is variability over time. But I think it's important to point out, as a practical matter, we think about sort of fee revenues and comp holistically on a business-by-business basis. And so -- and that gives us the ability, I think, to manage that, I think, thoughtfully over time. So you'll see variability over the long run for BREP margins where some are aligned with the firm margin overall. But in the near term, you will see that move around based on the fact that we manage things holistically, I think, for the benefit of the firm and shareholders. On equity-based comp, I think when you step back, there is seasonality in the first quarter around that line item. And sort of movements between, say, Q4 of last year and Q1 are affected by that as well as other puts and takes. But if you sort of step back and look at the kind of growth trajectory. In Q1, it grew about 19% year over year. That's lower than the 2023 overall growth rate, which was 23%. That, in turn, was about half the growth rate of 2022 overall. And so we do expect -- you are seeing this move lower over time given sort of stable grant levels and we think that's positive. Ben Budish -- Barclays -- Analyst Got it. Thank you very much. Operator Thank you. We'll go next to Steve Chubak with Wolfe Research. Steven Chubak -- Wolfe Research -- Analyst Hi. Good morning. So it was encouraging to hear the positive commentary on private credit deployment despite the reopening of public or syndicated markets. But given the increased competition for deals, you know that credit spreads are tightening, high levels of credit dry powder. Curious if you're seeing any tangible signs or evidence of credit underwriting standards potentially growing more lax and how that could dampen the pace of deployment across the credit platform? Jon Gray -- President and Chief Operating Officer It's a good [Technical Difficulty] Operator Please standby as we reconnect our speakers. Jon Gray -- President and Chief Operating Officer And obviously, at very high multiples. Today, in the first quarter on our direct lending, the average loan to value was 44%. And now part of that, of course, is driven by the fact that interest costs to have coverage given the high base rates, there's only so much debt you can bear. So we're definitely not seeing reckless levels in any way in terms of what we've seen in terms of loan to value. Spreads have come down but on direct lending today are probably 500 over, still pretty good by historic standards. Interestingly, liquid markets have tightened far further. So if you look at investment grade or high yield, we've seen much more movement there. So we still see this as a sector where the risk return for lending money is quite favorable. If you're earning 500 over a base rate today, that's 5.5 plus upfront fees, you're earning 11.5% on an unleveraged basis if you put a little leverage better than that. So the risk return to us still feels compelling. Some sponsors risk for the common equity, not the capital structure. So overall, we have not seen signs of excess. And there's pretty good discipline in the market and that gives us a lot of confidence. Michael Chae -- Chief Financial Officer Jon, I'll just chime in on that. Two things, one, to put a fine point on Jon's point about 44% loan to values, what that obviously means is, because these are mostly sponsored transactions with new equity being invested, that 56% of the capital structure on a new deal is being put up with cash equity junior to this debt from high-quality sponsors. So that is sort of another dimension too that we think the risk reward here. And then on default rates, as I mentioned in my remarks, less than 40 basis points for our business in the first quarter. There is -- we are demonstrating -- because I think a couple of years ago, there were some concern in the marketplace about what would happen with the default rates for folks like us. There is differentiation, there is outperformance depending on the borrower selection and the individual private credit player. And so we're operating at a fraction, I think, of the overall market default rate, which is normalizing. So I think we feel really -- and that's while being a leader in deploying capital in private credit. Steven Chubak -- Wolfe Research -- Analyst Great color. Thanks for taking my question. Operator Thank you. We'll go next to Brennan Hawken with UBS. Brennan Hawken -- UBS -- Analyst Good morning. Thanks for taking my question. Just two on real estate, one housekeeping, and one sort of more forward looking. Could you touch on the impact of the rate hedge in BREIT in the first quarter and April to date? And then more on the forward-looking side, appreciate the comments on supply and real estate. But given that rates have actually started to back up and sure long rates are a little off the peak but not by much. What drives the confidence in real estate bottoming, wouldn't we need the cap rates to move up as much as base rates or close to as much as base rates have moved up in order to draw that demand into the market? Michael Chae -- Chief Financial Officer Brennan, first, just on the data question in terms of the impact of the swaps, it was about 1 point out of the 1.8% net performance for BREIT. Jon Gray -- President and Chief Operating Officer And then on cost of capital, certainly a rising 10 year, not helpful, but I think it's important to put it into context. As you noted, it's lower than it was in October but also debt capital being so important. So if you went back to October, it was extremely difficult to borrow money. Spreads were much wider and banks were very reluctant to lend in the space. In the first quarter, as I noted, we've seen a fivefold increase in CMBS issuance. So the fact that debt capital is more available and the cost is meaningfully lower because of the spread not as much the base rates, that's a helpful sign. So it is more positive than it was six months ago. Backing up 10-year treasury, as I noted, not helpful. But the fact that overall, it does feel to us at some point here the Fed is going to bring rates down, there will be some downward pressure, that should be helpful. But the cost of capital overall coming down is helpful. And that's why we're seeing, even today, despite the backup in rates more folks showing up to buy assets than certainly we saw six months ago. Brennan Hawken -- UBS -- Analyst Thanks for that color. Operator Thank you. We'll go next to Bill Katz with TD Cowen. Bill Katz -- TD Cowen -- Analyst OK. Thank you very much for taking the question. Just coming back to the opportunity in global wealth management. I was wondering if you could talk a little bit about where you're seeing the volume coming from, to the extent you get that kind of granularity from the distributors? And then secondly, just given the tremendous focus on many of your peers into the space, also wondering how you sort of see the competitive environment unfolding as we look ahead? Jon Gray -- President and Chief Operating Officer So, Bill, we see demand pretty broad based. Obviously, we have a lot of strength in U.S. with the biggest distribution partners. We've been at this, as a reminder, for a very long time. We've got a lot of relationships with financial advisors and their underlying customers. The performance of our drawdown funds, the performance of BREIT, of BCRED, has created a lot of goodwill that we're able to tap into. And so I would say it's broad based in the U.S. We are seeing strength overseas as well. Japan is a market where we certainly have seen more openness to our products and we've had success there. Historically, some of the markets more tied to China, Hong Kong, Singapore are a little slower today, but we've had strength in those markets over time also. And Europe, I'd say, is an emerging market as is Canada. So I think it's a global story. It's still primarily U.S. but it's growing. And within the U.S., what's interesting is we're still -- if you look at the penetration of financial advisors, still in the very early days. Really a small percentage are allocating to alternatives. And we think that can broaden quite significantly as these products deliver for clients as they begin to recognize the benefit of alternatives trading some liquidity for higher returns. So we think there's a lot of room to grow. And the fact that we have 300 plus people on Joan Solotar's team, we've got this very powerful brand, we've had strong performance. All of that, I think, bodes well for us and makes us a differentiated player in this space. Operator Thank you. We'll go next to Brian McKenna with Citizens JMP. Brian McKenna -- JMP Securities -- Analyst Great. Thanks. Good morning, everyone. I believe you've recently hired a senior data exec to leverage AI across your private equity portfolios. So can you talk about your approach to leveraging data and AI across your portfolios and what that might mean for additional value creation over time? And then can you also talk about how you leverage data on the deployment front? I'm assuming a lot of the data you have across the entire platform gives you insight into emerging trends globally. And so how does all of this translate into where you ultimately invest? Jon Gray -- President and Chief Operating Officer So AI is obviously hugely important for our business, for the global economy. I would just frame this by saying, we set up our data science business back in 2015. We've got more than 50 people on that team today. We have focused historically on predictive AI, which is basically numbers in, numbers out. So you could look at a company and you could look at their pricing history and you could do much more sophisticated revenue management than human beings could do, similarly in terms of staffing. And we've been using that as a tool for investing for quite some time now and we'll continue to do this. And we've been pushing it out to some of our portfolio companies. I would point out also that Steve personally with his investments at MIT and Oxford has been a leader thinking about AI. And that has, I think, pushed the firm to try to do more in this space because we had more recognition something profound was happening here. I would say on the generative AI front, it's still very early days in terms of applications. The ability to take language and put that into the machine, produce language or videos, I think it will have a powerful impact, but that's going to take a bit of time. And what I think it will do most is impact customer engagement for many of our companies. I think it will also, on the content side, help in software development and media development. And we're working by hiring data scientists working with our teams, we hired a senior executive recently. But I'd still say on the generative side, it's early days. Now on the investing overall, what we've tried to do is focus on the infrastructure around AI and that is primarily data centers. And by going out there and investing in $50 billion of data centers that we own or have under construction and another $50 billion in development pipeline globally, which Steve talked about that really is the infrastructure. We're also spending a lot of time on power, which is a key necessity to build these data centers. And then we've made a number of investments around cloud companies, contractors building these, the whole ecosystem. So as a firm, we're trying to spend a lot of time. It's early days for us. The biggest impact has been around the infrastructure. But we're working hard to find ways to help our companies be more competitive, and we're certainly trying to make our investment process better. So an area definitely worth focusing on. Brian McKenna -- JMP Securities -- Analyst Thank you, Jon. Operator Thank you. We'll go next to Patrick Davitt with Autonomous Research. Patrick Davitt -- Autonomous Research -- Analyst Hey. Good morning, everyone. Thanks. So there's been increasing regulatory focus on the more illiquid stuff, the ABS that you and others are originating for insurance balance sheets and to what extent those should have a higher risk weighting. I know insurance regulators work very slow. But what are you hearing from your 18 big insurance clients on that issue and are you seeing this concern factor into new business conversations with that channel at all? Jon Gray -- President and Chief Operating Officer So I think there's a lot of discussion around these areas. A lot of the focus has been around securitizations or synthetic securitizations, creating different ratings than a direct rating. A lot of the activities, though, that we've been talking about here have been literally doing private assets investment grade, and very similar to what insurance companies have been doing in commercial mortgages and private placement debt for decades. What we're really doing is taking that model of senior, what we believe safe debt on average A rated in infrastructure, in all forms of asset based finance, in residential finance, and putting that directly on insurance company balance sheets. And I think regulators and participants see that as generally a good thing because it's generating higher returns. There's a little less liquidity. Although I would point out when you look at things like ABS bonds, there's not a lot of liquidity as it is, but there is a little less liquidity. But the risk profile of the assets is very much in line, if not safer, than what our clients have done historically. So I think there's going to be more scrutiny. As you know, in the insurance space, we made a conscious choice. We're not an insurance company. We really see ourselves more like BlackRock or PIMCO, what they do for liquid assets for insurance companies, we're doing a similar dynamic for insurance companies and private assets. And we think what we're doing is very sound, it saves, it generates, on average, 200 basis points of higher return than comparably rated liquid assets. We think this is a good thing for policyholders. So we think there will be a lot of dialog with regulators, but the activities we're focused on, we think will be well received over time. Operator With no additional question in the queue, I'd like to turn the call back over to Mr. Tucker for any additional or closing comments. Weston Tucker -- Head of Shareholder Relations Thanks, everyone, for joining us today and look forward to following up after the call. Answer:

the Blackstone first-quarter 2024 investor call

Operator Good day. And welcome to the Blackstone first-quarter 2024 investor call. Today's conference is being recorded. [Operator instructions] At this time, I'd like to turn the conference over to Weston Tucker, head of shareholder relations. Please go ahead. Weston Tucker -- Head of Shareholder Relations Thanks, Katie, and good morning, and welcome to Blackstone's first-quarter conference call. Joining today are Steve Schwarzman, chairman and CEO; Jon Gray, president and chief operating officer; and Michael Chae, chief financial officer. Earlier this morning, we issued a press and slide presentation, which are available on our website. We expect to filed our 10-Q report in a few weeks. I'd like to remind you that today's call may include forward-looking statements, which are uncertain and may differ from actual results materially. We do not undertake any duty to update these statements. For discussion of some of the factors that could affect results, please see the risk factors section of our 10-K. We'll also refer to certain non-GAAP measures and you'll find reconciliations in the press release on the shareholders page of our website. Also, note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blackstone fund. This audiocast is copyrighted material of Blackstone and may not be duplicated without consent. So on results quickly, we reported GAAP net income for the quarter of $1.6 billion, distributable earnings were $1.3 billion or $0.98 per common share and we declared a dividend of $0.83, which will be paid to holders of record as of April 29th. With that, I'll turn the call over to Steve. Steve Schwarzman -- Chairman and Chief Executive Officer Good morning, and thank you for joining our call. Blackstone reported strong results for the first quarter of 2024, including healthy distributable earnings of $1.3 billion as Weston mentioned, underpinned by the highest fee-related earnings in six quarters. On our January earnings call, following a volatile multi-year period for global markets, we noted an improving external environment and shared our view that 2023 would be the cyclical bottom for our firm. While changing market conditions take time to translate to financial results, including realizations and performance revenues, we are seeing positive momentum across many key forward indicators at our firm. Inflows were $34 billion in the first quarter and $87 billion over the past two quarters. We invested $25 billion in quarter one and $56 billion in the past two quarters with a strengthening pipeline of new commitments. We're planting the seeds of future value and what we believe is a favorable time for deployment. At the same time, our fundraising in the Private Wealth channel meaningfully accelerated in the first quarter. Sales for our perpetual life vehicles increased more than 80% from the fourth quarter to $6.6 billion. We've stated before that short-term movements in stock and bond markets impact capital flows in this channel. But ultimately, flows follow performance as well as innovation as we're seeing now. We've delivered 10.5% net returns annually for BREIT's largest share class over more than seven years and 10% for BCRED over three-plus years. And we continue to successfully launch new strategies, including our private equity vehicle, BXPE, in the first quarter. With $241 billion of AUM in Private Wealth at Blackstone, we have the leading platform in our industry by far. We've established a significant first mover advantage with the number one market share for each of our major season products, along with a high percentage of repeat business across strategies. Blackstone is built on long-term investment performance. We've achieved 15% net returns annually in corporate private equity and infrastructure since inception, 14% in opportunistic real estate and secondaries, 12% in tactical opportunities, and 10% in credit. In the first quarter, our funds reported steady appreciation overall, highlighted by strength in infrastructure, credit, and our multi-asset investing platform, BXMA. Our portfolio is in excellent shape, and our limited partners continue to benefit and we've positioned their capital, emphasizing new neighborhoods, such as digital infrastructure, logistics, and energy transition. The firm's thematic approach to deployment is informed by the real time data and insights we gather from our global portfolio, which helps us to identify trends early and build conviction around our ideas. Blackstone is the largest and most diversified firm in the alternatives area with over $1 trillion of assets under management and we believe our knowledge advantage consequently is a unique asset in our industry. For example, digital infrastructure, one of the firm's highest conviction investment themes today, is a powerful example of this knowledge advantage at work. Just as we recognized the rise of e-commerce nearly 15 years ago and started buying warehouses, we anticipated a paradigm shift around demand for data centers, driven by growth in content creation, cloud adoption, and most importantly now, the revolution underway in artificial intelligence. Others now know that AI requires exponentially more computing power and capacity than was previously imagined. On a personal basis, in less than two weeks, I am participating in the dedication ceremony for the Schwarzman College of Computing at MIT, which will be heavily focused on this area. What has Blackstone done with our conviction? We identified QTS, the fifth largest U.S. data center REIT as a well-positioned but poorly trading public company with tremendous long-term potential. Our BREIT, BIP Infrastructure, and BPP perpetual strategies acquired the company for $10 billion in 2021, and its lease capacity has already grown sixfold in less than three years. Today, QTS is the largest data center company in North America. We are building a variety of other center platforms around the world as well. In total, Blackstone vehicles now own $50 billion of data centers globally, including facilities under construction. And there is an additional $50 billion in prospective future development pipeline. Blackstone is highly differentiated in our ability to conceptualize the new business area and transform it into a $100 billion potential opportunity. We are also actively investing in other companies in AI-related areas. We're buying as well as financing several firms that design, build, and service data centers. We recently financed a cloud infrastructure business supporting AI development. And now we've transitioned to addressing the sector's growing power needs, leveraging our sizable energy infrastructure platform, which includes the largest private renewables developer in North America. There are several other powerful megatrends that we expect to drive the firm forward, both in terms of where we invest and where we raise capital. The most compelling of these today include the secular rise of private credit, where we have one of the world's largest platforms; infrastructure, energy transition, life sciences, and the expansion of alternatives globally and particularly in Asia. In each of these areas, we've established leading platforms with tremendous momentum. Looking forward in 2024, the market environment will remain complex. The economy is stronger than expected but is starting to slow a bit. In terms of inflation, despite the recent U.S. CPI readings, we are seeing a decelerating wage growth and minimal input cost increases across many of our companies. In real estate, we see shelter costs moderating, contrary to government data. We believe inflation will trend lower this year, although, the pace of decline has slowed recently. Geopolitical turbulence, including wars in the Middle East and Ukraine, adds further uncertainty to the business environment. And 2024 is a major election year as we all know with nearly half of the world's population going to the polls, which injects unpredictability around the future of important policies that impact the global economy. Blackstone is well-positioned against this evolving backdrop. Our portfolio is concentrated in compelling sectors and we have the industry's largest dry powder balance of nearly $200 billion to take advantage of opportunities. Our long-term capital provides the flexibility and firepower to invest while affording us the patience to sell assets when the time is right. The firm itself could not be in a stronger position with minimal net debt and no insurance liabilities, allowing us to distribute $4.7 billion to shareholders over the past 12 months through dividends and share repurchases. And we are in the early days of penetrating markets of enormous size and potential. With that, I'll turn it over to John. Jon Gray -- President and Chief Operating Officer Thank you, Steve, and good morning, everyone. We are pleased with the firm's performance in the first quarter and the momentum building across our business. This momentum is underpinned by three key developments; first, the transaction environment has strengthened; secondly, in private credit, demand from both investors and borrowers is expanding; and third, our private wealth business is reaccelerating. I'll discuss each of these areas in more detail, starting with the transaction environment. The market backdrop has become more supportive. The 10-year treasury yield is still down from its October peak despite the recent run-up. Borrowing spreads have tightened significantly and the availability of debt capital has increased significantly. We're also seeing M&A activity and the IPO market restarting. As we've stated before, the recovery will not be a straight line but we're not waiting for the all-clear sign to invest. We deployed $25 billion in the first quarter and committed an additional $15 million to pending deals, including subsequent to quarter end. We were most active in our credit and insurance area, which I'll discuss further in a moment. In real estate, we shared our view in January that commercial real estate values were bottoming, providing the foundation for an increase in transaction activity. This has coincided with several major investments by Blackstone. Just last week, we announced a $10 billion take-private of a high-quality rental housing platform, Air Communities, which follows our announcement in January to privatize Tricon Residential. Rental housing remains a major investment theme for us given the structural shortage in this space. U.S. is building roughly the same number of homes today as in 1960 despite having almost twice the population. We are also quite focused on European real estate where we've now raised $7.6 billion for our new flagship vehicle as of quarter end. In private equity, we closed the acquisition of Rover in the first quarter, a leading digital marketplace in the pet space, along with an online payments business in Japan and a healthcare platform in India. The economy in India, which I visited two weeks ago, remains incredibly strong. We're fortunate to have what we believe is the largest private equity and real estate platform in that country. Back home, our dedicated life science business announced a $750 million collaboration with Moderna to support the development of mRNA vaccines for influenza. And our growth equity fund invested in 7 Brew, an innovative quick service coffee franchisor. As Steve highlighted, we are planting the seeds of future realizations. Turning to the second key development, our expansion in private equity credit. There is powerful innovation underway in the traditional model of providing credit to borrowers. Our corporate, insurance, and real estate debt businesses comprise over 60% of the firm's total inflows in the first quarter and nearly 60% of deployment. We continue to see strong interest in non-investment grade strategies, such as opportunistic, direct lending and high yield real estate lending. We're also now seeing a dramatic increase in demand from our clients for all forms of investment grade private credit, including infrastructure, particularly in energy transition and digital infrastructure, residential real estate, commercial and consumer finance, fund finance, and other types of asset based credit. In our investment grade focused business, we believe there is a massive opportunity to deliver higher returns to clients with lower risk by moving a portion of their liquid IG portfolios to private markets. Alternatives have taken meaningful share of public equity portfolios over the past 30 years but little on the fixed-income side. In the insurance channel, this migration has been underway and we've created a capital light, open architecture model that can serve a multitude of limited partners. Worth noting we crossed the $200 billion AUM milestone in insurance this quarter, up 20% year over year. In addition to our four largest clients, we now have FMA relationships with 14 insurers, which continue to grow in number and size. We placed or originated $14 billion of A-rated credits on average for them in the first quarter, up 71% year over year and nearly $50 billion since the start of 2023. These credits generated approximately 200 basis points of excess spread over comparably rated liquid credits. In addition to insurance clients, pension funds and other LPs see the value we're creating in private credit, and there's been a strong response to our product offerings. With nearly $420 billion in BXCI and real estate credit, we're extremely well-positioned to directly originate high quality assets on behalf of a much larger universe of investors. We've also established numerous origination relationships as well as bank partnerships, most recently with Barclays and KeyBank in areas like consumer credit card receivables, fund finance, home improvement, and infrastructure credit, and we plan to add more. These arrangements are a win-win. They create more flow for our investors who want to hold these investments, these assets long term, and they help our partners better serve their customers. We expect our credit and insurance platforms to grow significantly from here. Moving to the third key development, the reaccelerating trends in our private wealth business. In January, we noted our momentum building as market volatility receded. And with the launch of BXPE, we now offer three large-scale perpetual vehicles, providing individual investors access to even more of the scale and breadth of Blackstone. Our sales in the wealth channel were a robust $8 billion in the first quarter, including $6.6 billion for the perpetual strategies, as Steve noted. Subscriptions for the perpetuals increased 83% from Q4 and marked the best quarter of fundraising from individuals in nearly two years. BCRED led the way, raising $2.9 billion. BXPE has received very strong investor reception, raising $2.7 billion in its debut quarter, and we plan to expand to more distributors over the coming months. Over 90% of advisors that have transacted with BXPE have previously done so with BREIT or BCRED, illustrating the affinity for our products and the power of the Blackstone brand in this channel. At the same time, BREIT has successfully navigated a challenging two-year period for real estate markets. Its semi-liquid structure has worked as designed by providing liquidity while protecting performance. BREIT has delivered double the return of the public REIT index since inception over seven years. This outperformance continued with strong results in Q1, underpinned by outstanding portfolio positioning that includes growth in its data center exposure. Repurchase requests in BREIT have fallen 85% from the peak to the lowest level in nearly two years and the vehicle is no longer in proration. We're now seeing encouraging signs in terms of new sales while repurchase requests are continuing their decline in April as well. We are confident in the recovery of BREIT flows over time given performance. When looking at the $80 trillion private wealth landscape overall, allocations remain extremely low, and we expect a long runway of growth ahead. In closing, the firm is exceptionally well-positioned, supported by both cyclical and secular tailwinds, that's why we believe the future is very bright for Blackstone. With that, I'll turn things over to Michael Chae. Michael Chae -- Chief Financial Officer Thanks, Jon, and good morning, everyone. Firm delivered strong results in the first quarter, highlighted by the reacceleration of fee-related earnings. I'll first review financial results and will then discuss investment performance and the forward outlook. Starting with results. Fee-related earnings increased 12% year over year to $1.2 billion or $0.95 per share, the highest level in six quarters and the third-best quarter in firm history, powered by double-digit growth in fee revenues, coupled with the firm's robust margin position. With respect to revenues, the firm's expansive breadth of strategies lifted management fees to a record $1.7 billion. Notably, Q1 reflected the 57th consecutive quarter of year-over-year growth of base management fees at Blackstone. Fee-related performance revenues doubled year over year to $296 million generated by multiple perpetual capital vehicles in credit and real estate, including a steadily growing contribution from our direct lending business, scheduled crystallization in our European BPP logistics strategy, and BREIT. The setup for these high-quality revenues is favorable in 2024 and beyond, which I'll discuss further in a moment. With respect to margins, FRE margin was 57.9% in the first quarter, in line with full-year 2023. Distributable earnings were $1.3 billion in the first quarter or $0.98 per common share, stable year over year and underpinned by the growth in FRE. Net realizations remain muted at $293 million. And going forward, we expect a lag between improving markets and a step-up in net realizations. In the meantime, the firm's strong underlying FRE generation has supported a consistent and attractive baseline of earnings with Q1 representing the 10th consecutive quarter of FRE over $1 billion. We did execute a number of sales in the quarter, including a stake in one of the largest cell tower platforms, public stock of the London Stock Exchange Group and the sales of certain other public and private holdings. We also closed or announced several dispositions in our real estate and infrastructure perpetual vehicles, which as a reminder, do not earn performance revenues based on individual asset sales but on NAV appreciation. These included a trophy retail asset in Milan for EUR1.3 billion, representing the largest real estate single asset sale ever in Italy, portfolio of warehouses in Southern California and a prime office building in Seoul. Each of these sales generated a substantial profit individually and in aggregate, a gross multiple of invested capital of approximately two times. These dispositions exemplify the significant quality and embedded value within the firm's investment portfolio. Turning to investment performance. Our funds generated healthy overall appreciation in the first quarter, as Steve noted. Infrastructure led the way with 4.8% appreciation in the quarter and 19% over the last 12 months with broad gains across digital, transportation, and energy infrastructure. The QTS data center business was the single largest driver of appreciation for BIP, BREIT, and BPP U.S. and for the firm overall in Q1. The comingled BIP vehicle has generated 15% net returns annually since inception, powering continued robust growth with platform AUM increasing 22% year over year to $44 billion. The corporate PE funds appreciated 3.4% in the quarter and 13% for the LTM period. Our operating companies overall reported healthy, albeit decelerating, revenue growth along with margin strength. In credit, we reported another outstanding quarter in the context of strong fundamentals and debt marks generally and tightening spreads with a gross return for the private credit strategies of 4.1% and 17% for the LTM period. The default rate across our nearly 2,000 noninvestment grade credits is less than 40 basis points over the last 12 months with zero new defaults in our private credit business in Q1. Our multi-asset investing platform, BXMA, reported a 4.6% gross return for the absolute return of composite and 12% for the last 12 months, the best quarterly performance in over three years and the 16th quarter in a row of positive returns. Since the start of 2021, the composite has delivered nearly double the return of the 60-40 portfolio net of fees, a remarkable result in liquid markets. Finally, in real estate, the Core+ funds appreciated 1.2% in the first quarter, while the BREP opportunistic funds appreciated 0.3%. These returns include the negative impact of currency translation for our non-U.S. holdings related to the stronger U.S. dollar, equating to 20 and 60 basis points impact on each strategy respectively. As Jon noted, we see a recovery under way in commercial real estate, and in our portfolio cash flows are growing or stable in most areas. Overall, strong returns lifted net accrued performance revenue on the balance sheet, affirmed store value sequentially to $6.1 billion or $5 per share. Meanwhile, performance revenue eligible AUM in the ground increased to a record $515 billion. The resiliency and strength of the firm's investment performance over many years and across cycles powers the Blackstone innovation machine and provides the foundation of future growth. Moving to the outlook, where several embedded drivers support a favorable multiyear picture of growth. First, the firm has raised approximately $80 billion that is not yet earning management fees and new drawdown fund vintages that haven't yet turned on along with certain other funds. These will commence when investment periods are activated or capital is deployed depending on the strategy. We plan to activate our corporate private equity flagship this quarter, which has raised over $19 billion to date, followed by an effective four month of fee holiday. We expect to activate several other drawdown funds over the balance of the year followed by respective fee holidays. Second, our platform perpetual strategies has continued to expand, now comprising 45% of the firm's fee-earning AUM. As a reminder, our private wealth perpetual vehicles, including BREIT and BCRED, generate fee-related performance revenues quarterly as will BXPE starting in Q4 of this year. Our institutional strategies, BPP and real estate and BIP and infrastructure, generate these revenues on multiyear schedules with a sizable crystallization for the comingled BIP vehicle scheduled to occur in Q4 of this year with respect to three years of accrued gains. Third, our investment grade-focused credit business is on a strong positive trajectory, as Jon highlighted, and we expect $25 billion to $30 billion of inflows again this year from our four major insurance clients alone. In closing, the firm is moving forward in a position of significant strength. Our momentum is accelerating in key growth channels and our underlying earnings power emerging from this period of hibernation continues to build. We have great confidence in the outlook for the firm. With that, we thank you for joining the call. I would like to open it up now for questions. Questions & Answers: Operator Thank you. [Operator instructions] We'll go first to Michael Cyprys with Morgan Stanley. Michael Cyprys -- Morgan Stanley -- Analyst Hi. Good morning. Thanks for taking the question. I wanted to dig in on infrastructure, the platform continues to build, I heard $44 billion AUM, strong returns, 15% net. Maybe you could just update us on the platform build-out, the initiatives here that can help accelerate growth. It seems like there's a tremendous market opportunity out there. Just curious what you see as the gating item on seeing this business multiples of the size, maybe talk about some of the steps you're taking around expanding your origination funnel and infrastructure and as well as expanding the vehicles for capital raising across the return spectrum and customer sets globally? Jon Gray -- President and Chief Operating Officer Infrastructure is clearly an area with a lot of potential for us. As a reminder, our program is less than six years old at this point, and we're already at $44 billion. The key, like building everything we do is delivering performance for the customers. Sean Klimczak and the team have delivered 15% net returns since inception in an open ended vehicle, which is different than many of the other players in the space. We think that is a very powerful model because it allows us to partner with other long-term holders and it matches the duration of the capital to long duration infrastructure. We positioned the business in three big areas; transportation infrastructure, coming out of COVID; energy and energy transition, obviously, a very important area today for a whole host of reasons; and then digital infrastructure, which Michael pointed out, has been the biggest driver of value both in real estate and in infrastructure and across the firm in this most recent quarter. So we think we've done a really exceptional job deploying the capital. We have a lot of clients who are quite pleased. I think the base business can grow. And I think there are opportunities geographically to expand this. Our current fund is focused primarily on the U.S. but we've done a number of large things in Europe. And I think there's opportunities in infrastructure in both Europe and Asia over time, and it's an area that we have real strength. I would add to the mix, infrastructure credit, something we're doing as well. And interestingly, when you think about what we're doing for insurance clients, what we have in infrastructure and things like digital infrastructure, green energy, it's very helpful for investment grade debt as well given our insights and relationships. So this is an area where we're still seeing investors showing a lot of enthusiasm. I think it will continue to be a growth area on the back of what we built. I think we can create other products. And we see this growing to be, I think, as we've talked about in previous calls, a triple digit AUM business. Michael Chae -- Chief Financial Officer And Jon, I'd just add on, and I think you might agree that, I think if you step back, Mike, you could analogize it's sort of the multi decade growth path of real estate, that business overall with respect to another area of relapse that's infrastructure, and that is geographic/regional expansion, expansion up and down the risk return spectrum, cross asset classes between equity and debt and also serving different customer channels, whether it's retail insurance or institutional. So that's another way to dimension it. Michael Cyprys -- Morgan Stanley -- Analyst Great. Thank you. Operator Thank you. We'll go next to Craig Siegenthaler with Bank of America. Craig Siegenthaler -- Bank of America Merrill Lynch -- Analyst Good morning, everyone. My question is on real estate. So with deployments picking up with both the Tricon and Apartment Income take privates, and John, I heard your comments earlier this morning, but it sounds like the Blackstone house view is that the work from home and interest rate hit are now baked into cap rates. So given all this, can you comment on where we are in the investing cycle, be it dry powder at BREP, BPP, and BREIT? And I also wanted your perspective on returns now that BREIT is back above its BREP, putting 2Q in a better position for FRPR? Jon Gray -- President and Chief Operating Officer As we've talked about and you noted, there have been two big headwinds here. One in the office sector, specifically in the U.S. where we have very little exposure, the impact of remote work and also capital needs in older office buildings. The second thing has just been the movement upward in interest rates and the rise in spreads that happened. And both of those, I believe, peaked back in October and that has really worked its way through the market. Interestingly, of course, there'll still be plenty of challenging headlines from assets that were financed in a different environment as they work their way through the system, and that's sort of -- it's almost as if something happened to a ship at sea and then it comes ashore. We saw this after the financial crisis where real estate values bottomed in that summer of '09 but you had negative headlines in real estate for the next three years. We spent a lot of that time, of course, deploying capital into that dislocated period where people were still cautious. What gives us confidence as we look forward here is one is this reduction in cost of capital. We've obviously seen spreads tighten a fair amount, probably 125 basis points in CMBS in the first quarter and through the end of the fourth quarter last year. We also saw CMBS issuance go up fivefold versus the first quarter of 2023. So that -- and the fact that the Fed at some point here will be bringing rates down, and that's important as well. The other thing I'd add is on the supply front. We've seen in logistics an 80% decline in new starts. We've seen in multifamily a 50% decline in peak starts -- from peak starts as well. And so that starts to lay the groundwork. In terms of timing, I would think about this period of time is a time of seed planting that you want to be investing into this dislocation because there's a lot of uncertainty, there maybe fore sellers, there maybe public companies trading at discounts. And then over time, as things start to normalize, you start to accelerate on the realization. But first, I think it's the deployment period then the realization period as you move out similar to that post GFC period, that's certainly the way we're playing it. And in terms of capital, we obviously have a very large $30 billion global fund. We said we've raised over 7.5 in Europe, we have most of our $8-plus billion Asia fund still uninvested. So a lot of opportunistic capital to deploy. So we're forward leaning as it relates to deployment, even though we recognize there's still going to be a lot of assets from the previous period working their way through the system. Operator Thank you. We'll go next to Alex Blostein with Goldman Sachs. Alex Blostein -- Goldman Sachs -- Analyst Hey. Good morning, everybody. Thank you for the question. My question is around BXPE. Really strong momentum out of the gate, obviously, $2.7 billion that you guys highlighted this quarter and over the last couple of months. What's the vision for this product, I guess, in terms of both capacity and maybe the appropriate size for the strategy as well as the pace at which you feel comfortable taking in inflows? And I don't want to draw too much parallel with BREIT, obviously, very different product, very different customer base. But thinking of that one, I think, peaking at north of $70 billion, how are you thinking about the size and opportunity for BXPE? Jon Gray -- President and Chief Operating Officer Well, I think it's a great question, Alex. One of the things we did when we designed BXPE was to make the platform as broad as possible so that we could scale the product and we could be flexible on behalf of investors in terms of where we deployed it. So control large scale private equity is part of it; U.S., Europe, Asia is part of it; Tactical Opportunities, more hybrid equity, part of it; life sciences growth, part of it; secondaries, infrastructure, some opportunistic credit. It's a very broad platform and it enables us to deploy a lot. One of the advantages of Blackstone is just our scale and the amount of deal flow we see across all these different areas. And particularly our connectivity with many other sponsors in the private equity space through our secondaries, our credit business, our GP stakes business, we can be great partners to those folks. Obviously, we can manufacture a lot of transactions ourselves. So we think the potential scale here is quite large. You pointed out BREIT scale, we're over $30 billion of equity, nearly $60 billion of assets in BCRED. We think this can grow a lot. The key is we have to deliver strong performance to the underlying customers. We have to be disciplined in how we deploy capital and thoughtful. I think we've been doing that. I think we'll continue to do that. And that's what gives us a lot of confidence, which is investors want exposure to private equity, individual investors want a little bit of a different structure, and that's why I think BXPE is so attractive. So I think as we come out of this period over the last two years where there's been a lot of caution and negativity, as market sentiment improves, as we show the strong performance from our other individual investor products, I think there's a potential here of pretty good size. Again, we've got to do a good job deploying capital but I've got a lot of confidence, particularly given the breadth of the platform. So the short answer is I think this can grow to be much larger than it is today. Operator Thank you. We'll go next to Dan Fannon with Jefferies. Dan Fannon -- Jefferies -- Analyst Hi. Thanks. Good morning. Michael, last quarter, the message for this year on margins was stability. The first quarter was flat with last year. As you think about the momentum in the business that you highlighted and the prospects for growth and growth in AUM, how are you thinking about margins as you think about the rest of the year? Michael Chae -- Chief Financial Officer I think my message is consistent. First of all, in terms of the actual result, as you noted in the first quarter, quite stable, quite consistent, quite in line with both the first quarter a year ago and the full-year 2023. I think, as always, we guide people to look not at individual quarters but at sort of the -- on a full-year basis. And I think on that basis, we would again encourage people to think about this as -- reinforce margin stability as a guidepost. And then, again, consistent with our message over a long time, on a longer-term basis, we do think there's operating leverage built into our model. We obviously actively manage our cost structure. And we think long term, there is a -- it's a robust margin position that we'll scale and leverage over time. So back to where we started, I would reinforce margin stability as the message and over the long term, feel optimistic about the ability to increase that. Operator Thank you. We'll go next to Glenn Schorr with Evercore ISI. Glenn Schorr -- Evercore ISI -- Analyst Hello there. I got a question to peel back the onion a little bit on this commentary on bank partnership. So when we watch you do something like Barclays where you've taken a credit card book and give to your insurance clients, that makes sense to us, that's like a cash transaction, it's tangible. So we read a little more about the rising of synthetic risk transfer trends. And I'm just curious, that's something that's obviously harder for us to follow. It gives us shivers. It reminds us about 16 years ago. Curious of your thoughts on how much SRT is going on in the industry, how much you do, and maybe you can talk about what type of partnerships you envision going forward? Jon Gray -- President and Chief Operating Officer SRTs are an area we're very active. I think we're the market leader today in terms of working with our bank partners. For them, these are capital relief transactions, as you know, where you're sharing in or taking first loss positions. We've been doing this with a variety of banks who are highly creditworthy institutions. One of the advantages we have is the strength we have across asset ownership and also corporate and real estate credit. So if we do these with bank partners, we can go through them in detail. The most active area has been subscription lines to date, which as you probably know, subscription lines to private equity firms have had virtually no defaults over the last 30, 40 years. So we like that area. When we work in investment grade or noninvestment grade, much of it's been around revolvers, which historically have had much lower loss ratios. And we were able to go through these portfolios and look at the credits we're taking. We do this, of course, not as Blackstone but on behalf of our investors in various vehicles and funds. The returns -- we've been doing this, by the way, for a number of years. And I just think our ability to look at the underlying credit as opposed to just make a macro call is our competitive advantage and our ability to do this and scale with the bank. So I see this as a win-win. It helps banks with some of the Basel pressure, balance sheet pressures they have and we're able to generate favorable returns. So I think this is a very good thing for the system overall. I think we're doing it in a quite responsible way. Our team is very experienced in how they execute these transactions. Operator Thank you. We'll go next to Crispin Love with Piper Sandler. Crispin Love -- Piper Sandler -- Analyst Thanks. Good morning. So in recent weeks, there's definitely been a shift in the rate outlook as we're likely in a higher for longer scenario, which is very different than just three months ago. So can you just talk a little bit about how that might impact your outlook for investment activity and putting dry power to work going forward and then just how it might shift the areas where you're most excited about deploying capital? Jon Gray -- President and Chief Operating Officer Well, I do think it extends the investment window a bit for our $191 billion of dry powder. I think as people were getting closer to anticipating rate cuts, you saw big rallies in both equity and debt markets and that can make it a little bit tougher to deploy capital. In some ways, it's helpful for financings but it also can drive prices up. From our perspective, because we're buying assets so often for longer periods of time, the fact that a rate cut may happen 90 days or 180 days later is not really a long-term negative and if anything, allows us to get into some assets at more favorable pricing. So the way I would think about it is it extends out to deployment period. It may slow some of the realizations and push them out a bit as well. But when we think about delivering value for our customers, we see it as a positive. Obviously, for businesses like our credit business, which is mostly floating rate, it enhances returns for our underlying customers. I do think it's important to note that unlike October and the end of the summer when rates moved and spreads really gapped out, we haven't seen that accompanying change. So market seem to be in a much healthier spot. But I do think it probably prolongs the investment window here. And as we keep saying, we're not going to wait for the all-clear sign. You saw a big ramp-up. We had $25 billion of deployment in the quarter. And I think in terms of commitments and then as of quarter end-plus beyond the quarter end, we have another $15 billion that's committed. So you're seeing us move. We did our first deal in growth in quite some time. Real estate, we've talked about, we've obviously accelerated there. In our secondaries business, the pipeline of deals we're looking at is about two times where it was 90 days ago. So we're seeing a pickup in activity. It won't be everywhere. But I do think it creates more of a chance for us to deploy capital at prices we find attractive. Operator Thank you. We'll go next to Brian Bedell with Deutsche Bank. Brian Bedell -- Deutsche Bank -- Analyst Great. Thanks. Good morning, folks. Maybe just to add on to that question on that pace of deployment in two specific areas, real estate, and credit. Just going back to the comment you just made, Jon, about extending the period. But does that make you sort of more excited about potential opportunities given that's extension of the period that could depress prices in real estate? And with massive dry powder, especially in real estate, could that bring that level of deployment back up to sort of prior year levels in the mid to high $40 billion ranges? And then just secondarily in private credit, a little different dynamic with less dry powder but more fundraising. So I guess, same question there or do you think you can get up to sort of similar types of record levels in the mid to high $40 billions in like on, say, for 2024 for deployment? Jon Gray -- President and Chief Operating Officer Brian, it's hard to put numbers on things, so I'll talk about it directionally. I do think when rates go up, the market tends -- the public markets tend to move much more than what we see in the private market. So for real estate, I do think that creates more opportunity for scalable deployment as some of those stocks move on, particularly if the debt market hangs in there. And so that disconnect can create opportunity. We've seen a pickup in Europe in real estate as well, some of that relating to distress, and there's very negative sentiment, even though the fundamentals on the ground are actually pretty good in our chosen sectors. And we're seeing overall in Europe, I think there, we'll see rates come down more quickly than the U.S., which is helpful. So short answer, yes, it should help real estate deployment. On private credit, we've got a lot of momentum, particularly in the investment grade and asset based -- asset backed area, that's where we're probably most active right now. The need for capital around digital and energy infrastructure, enormous. The needs for power tied to digital infrastructure but also electrification of vehicles, reshoring, very significant. And there's going to be a huge need for capital. So we see that almost regardless of the interest rate environment. I do think on the direct lending side, we've seen some spread tightening. Rates coming down will be helpful to see deal activity and I think at that point, we'll see a pickup. But regardless, our pipeline and credit both on the investment grade and noninvestment grade size has accelerated. So it's hard to say exactly how this happens but we feel good about the momentum and deployment. And I use my very scientific briefcase indicator, how many investment memos I'm taking home over a weekend, and it's definitely been trending up. So I think that bodes well. It's hard to predict exactly how it manifests itself. But it feels like, certainly, this will be a more active year than last year for deployment. Brian Bedell -- Deutsche Bank -- Analyst Yeah. That's helpful. Thank you. Operator Thank you. We'll go next to Ken Worthington with J.P. Morgan. Ken Worthington -- JPMorgan Chase and Company -- Analyst Hi. Good morning. Looking into BPP, net accrued performance revenue, $73 million. I assume, down on this quarter's crystallizations. But IRRs are down to 6%, which I think is below the hurdle rate there. I know BPP is a collection of front-end investments, like BioMed and Mileway. What needs to happen here for returns to recover and accrued performance fees to build into what I think are big crystallizations anticipated for next year? Jon Gray -- President and Chief Operating Officer So, Ken, you pointed it out correctly. It's a bunch of different vehicles with different hurdle rates and different performance, some of which obviously are at higher levels, some at lower levels. It feels to us, as we've been talking about, that real estate has moved toward this lower ebb. And it's fortunately a cyclical business, right? When you stop building new supply, as the cost of capital comes down, you get a recovery, and if you look back over time to the early '90s after the 2001 downturn, certainly after the GFC. The great thing is these are long-duration vehicles. The capital is going to stick with us for quite some time. And ultimately, we'll get other opportunities when these crystallization events come up. And so I would say the fact that we think we're positioned in some really good sectors, really good geographies, we have big exposure to logistics, in Europe in particular. We've got some really high quality -- we have data centers in some of our investment vehicles here as well. I would say, overall, it's a combination of the quality of what we own and the sentiment in the sector improving. And when that happens, we'll get these unrealized performance fees that happen on a regular basis. So to me, it's a matter of time. It goes to the larger issue of a large portion of our earnings in hibernation, the fact that we're still able to earn $0.98 even though incentive fees are well off what we think their long term potential are, realizations in our opportunistic funds and private equity funds below potential. I think there's a lot of embedded upside in this firm, and you pointed out to one area of BPP. It's hard to put an exact date because it's going to be a function of sort of the pace of the recovery. But we're pretty confident that commercial real estate over time recovers and that foundation is starting to come into place. Ken Worthington -- JPMorgan Chase and Company -- Analyst Great. Thank you very much. Operator We'll go next to Ben Budish with Barclays. Ben Budish -- Barclays -- Analyst Hi. Good morning and thanks for taking the question. I wanted to follow up on, I think, Dan's question earlier on the margins. Just a couple of kind of housekeeping items maybe for Michael. On the fee-related performance comp ratio, it looks like that has been sort of trending -- it was a bit lower in the quarter than we expected, and it looks like it's been a little bit volatile over the last like year or so versus sort of 40% range we tend to expect. So any color there? And then sort of on the same lines, the stock based comp stepped up a little bit in the quarter. Just curious how we should be thinking about that trending throughout the rest of the year. Michael Chae -- Chief Financial Officer I think on the margins on the fee-related performance revenues, there is variability over time. But I think it's important to point out, as a practical matter, we think about sort of fee revenues and comp holistically on a business-by-business basis. And so -- and that gives us the ability, I think, to manage that, I think, thoughtfully over time. So you'll see variability over the long run for BREP margins where some are aligned with the firm margin overall. But in the near term, you will see that move around based on the fact that we manage things holistically, I think, for the benefit of the firm and shareholders. On equity-based comp, I think when you step back, there is seasonality in the first quarter around that line item. And sort of movements between, say, Q4 of last year and Q1 are affected by that as well as other puts and takes. But if you sort of step back and look at the kind of growth trajectory. In Q1, it grew about 19% year over year. That's lower than the 2023 overall growth rate, which was 23%. That, in turn, was about half the growth rate of 2022 overall. And so we do expect -- you are seeing this move lower over time given sort of stable grant levels and we think that's positive. Ben Budish -- Barclays -- Analyst Got it. Thank you very much. Operator Thank you. We'll go next to Steve Chubak with Wolfe Research. Steven Chubak -- Wolfe Research -- Analyst Hi. Good morning. So it was encouraging to hear the positive commentary on private credit deployment despite the reopening of public or syndicated markets. But given the increased competition for deals, you know that credit spreads are tightening, high levels of credit dry powder. Curious if you're seeing any tangible signs or evidence of credit underwriting standards potentially growing more lax and how that could dampen the pace of deployment across the credit platform? Jon Gray -- President and Chief Operating Officer It's a good [Technical Difficulty] Operator Please standby as we reconnect our speakers. Jon Gray -- President and Chief Operating Officer And obviously, at very high multiples. Today, in the first quarter on our direct lending, the average loan to value was 44%. And now part of that, of course, is driven by the fact that interest costs to have coverage given the high base rates, there's only so much debt you can bear. So we're definitely not seeing reckless levels in any way in terms of what we've seen in terms of loan to value. Spreads have come down but on direct lending today are probably 500 over, still pretty good by historic standards. Interestingly, liquid markets have tightened far further. So if you look at investment grade or high yield, we've seen much more movement there. So we still see this as a sector where the risk return for lending money is quite favorable. If you're earning 500 over a base rate today, that's 5.5 plus upfront fees, you're earning 11.5% on an unleveraged basis if you put a little leverage better than that. So the risk return to us still feels compelling. Some sponsors risk for the common equity, not the capital structure. So overall, we have not seen signs of excess. And there's pretty good discipline in the market and that gives us a lot of confidence. Michael Chae -- Chief Financial Officer Jon, I'll just chime in on that. Two things, one, to put a fine point on Jon's point about 44% loan to values, what that obviously means is, because these are mostly sponsored transactions with new equity being invested, that 56% of the capital structure on a new deal is being put up with cash equity junior to this debt from high-quality sponsors. So that is sort of another dimension too that we think the risk reward here. And then on default rates, as I mentioned in my remarks, less than 40 basis points for our business in the first quarter. There is -- we are demonstrating -- because I think a couple of years ago, there were some concern in the marketplace about what would happen with the default rates for folks like us. There is differentiation, there is outperformance depending on the borrower selection and the individual private credit player. And so we're operating at a fraction, I think, of the overall market default rate, which is normalizing. So I think we feel really -- and that's while being a leader in deploying capital in private credit. Steven Chubak -- Wolfe Research -- Analyst Great color. Thanks for taking my question. Operator Thank you. We'll go next to Brennan Hawken with UBS. Brennan Hawken -- UBS -- Analyst Good morning. Thanks for taking my question. Just two on real estate, one housekeeping, and one sort of more forward looking. Could you touch on the impact of the rate hedge in BREIT in the first quarter and April to date? And then more on the forward-looking side, appreciate the comments on supply and real estate. But given that rates have actually started to back up and sure long rates are a little off the peak but not by much. What drives the confidence in real estate bottoming, wouldn't we need the cap rates to move up as much as base rates or close to as much as base rates have moved up in order to draw that demand into the market? Michael Chae -- Chief Financial Officer Brennan, first, just on the data question in terms of the impact of the swaps, it was about 1 point out of the 1.8% net performance for BREIT. Jon Gray -- President and Chief Operating Officer And then on cost of capital, certainly a rising 10 year, not helpful, but I think it's important to put it into context. As you noted, it's lower than it was in October but also debt capital being so important. So if you went back to October, it was extremely difficult to borrow money. Spreads were much wider and banks were very reluctant to lend in the space. In the first quarter, as I noted, we've seen a fivefold increase in CMBS issuance. So the fact that debt capital is more available and the cost is meaningfully lower because of the spread not as much the base rates, that's a helpful sign. So it is more positive than it was six months ago. Backing up 10-year treasury, as I noted, not helpful. But the fact that overall, it does feel to us at some point here the Fed is going to bring rates down, there will be some downward pressure, that should be helpful. But the cost of capital overall coming down is helpful. And that's why we're seeing, even today, despite the backup in rates more folks showing up to buy assets than certainly we saw six months ago. Brennan Hawken -- UBS -- Analyst Thanks for that color. Operator Thank you. We'll go next to Bill Katz with TD Cowen. Bill Katz -- TD Cowen -- Analyst OK. Thank you very much for taking the question. Just coming back to the opportunity in global wealth management. I was wondering if you could talk a little bit about where you're seeing the volume coming from, to the extent you get that kind of granularity from the distributors? And then secondly, just given the tremendous focus on many of your peers into the space, also wondering how you sort of see the competitive environment unfolding as we look ahead? Jon Gray -- President and Chief Operating Officer So, Bill, we see demand pretty broad based. Obviously, we have a lot of strength in U.S. with the biggest distribution partners. We've been at this, as a reminder, for a very long time. We've got a lot of relationships with financial advisors and their underlying customers. The performance of our drawdown funds, the performance of BREIT, of BCRED, has created a lot of goodwill that we're able to tap into. And so I would say it's broad based in the U.S. We are seeing strength overseas as well. Japan is a market where we certainly have seen more openness to our products and we've had success there. Historically, some of the markets more tied to China, Hong Kong, Singapore are a little slower today, but we've had strength in those markets over time also. And Europe, I'd say, is an emerging market as is Canada. So I think it's a global story. It's still primarily U.S. but it's growing. And within the U.S., what's interesting is we're still -- if you look at the penetration of financial advisors, still in the very early days. Really a small percentage are allocating to alternatives. And we think that can broaden quite significantly as these products deliver for clients as they begin to recognize the benefit of alternatives trading some liquidity for higher returns. So we think there's a lot of room to grow. And the fact that we have 300 plus people on Joan Solotar's team, we've got this very powerful brand, we've had strong performance. All of that, I think, bodes well for us and makes us a differentiated player in this space. Operator Thank you. We'll go next to Brian McKenna with Citizens JMP. Brian McKenna -- JMP Securities -- Analyst Great. Thanks. Good morning, everyone. I believe you've recently hired a senior data exec to leverage AI across your private equity portfolios. So can you talk about your approach to leveraging data and AI across your portfolios and what that might mean for additional value creation over time? And then can you also talk about how you leverage data on the deployment front? I'm assuming a lot of the data you have across the entire platform gives you insight into emerging trends globally. And so how does all of this translate into where you ultimately invest? Jon Gray -- President and Chief Operating Officer So AI is obviously hugely important for our business, for the global economy. I would just frame this by saying, we set up our data science business back in 2015. We've got more than 50 people on that team today. We have focused historically on predictive AI, which is basically numbers in, numbers out. So you could look at a company and you could look at their pricing history and you could do much more sophisticated revenue management than human beings could do, similarly in terms of staffing. And we've been using that as a tool for investing for quite some time now and we'll continue to do this. And we've been pushing it out to some of our portfolio companies. I would point out also that Steve personally with his investments at MIT and Oxford has been a leader thinking about AI. And that has, I think, pushed the firm to try to do more in this space because we had more recognition something profound was happening here. I would say on the generative AI front, it's still very early days in terms of applications. The ability to take language and put that into the machine, produce language or videos, I think it will have a powerful impact, but that's going to take a bit of time. And what I think it will do most is impact customer engagement for many of our companies. I think it will also, on the content side, help in software development and media development. And we're working by hiring data scientists working with our teams, we hired a senior executive recently. But I'd still say on the generative side, it's early days. Now on the investing overall, what we've tried to do is focus on the infrastructure around AI and that is primarily data centers. And by going out there and investing in $50 billion of data centers that we own or have under construction and another $50 billion in development pipeline globally, which Steve talked about that really is the infrastructure. We're also spending a lot of time on power, which is a key necessity to build these data centers. And then we've made a number of investments around cloud companies, contractors building these, the whole ecosystem. So as a firm, we're trying to spend a lot of time. It's early days for us. The biggest impact has been around the infrastructure. But we're working hard to find ways to help our companies be more competitive, and we're certainly trying to make our investment process better. So an area definitely worth focusing on. Brian McKenna -- JMP Securities -- Analyst Thank you, Jon. Operator Thank you. We'll go next to Patrick Davitt with Autonomous Research. Patrick Davitt -- Autonomous Research -- Analyst Hey. Good morning, everyone. Thanks. So there's been increasing regulatory focus on the more illiquid stuff, the ABS that you and others are originating for insurance balance sheets and to what extent those should have a higher risk weighting. I know insurance regulators work very slow. But what are you hearing from your 18 big insurance clients on that issue and are you seeing this concern factor into new business conversations with that channel at all? Jon Gray -- President and Chief Operating Officer So I think there's a lot of discussion around these areas. A lot of the focus has been around securitizations or synthetic securitizations, creating different ratings than a direct rating. A lot of the activities, though, that we've been talking about here have been literally doing private assets investment grade, and very similar to what insurance companies have been doing in commercial mortgages and private placement debt for decades. What we're really doing is taking that model of senior, what we believe safe debt on average A rated in infrastructure, in all forms of asset based finance, in residential finance, and putting that directly on insurance company balance sheets. And I think regulators and participants see that as generally a good thing because it's generating higher returns. There's a little less liquidity. Although I would point out when you look at things like ABS bonds, there's not a lot of liquidity as it is, but there is a little less liquidity. But the risk profile of the assets is very much in line, if not safer, than what our clients have done historically. So I think there's going to be more scrutiny. As you know, in the insurance space, we made a conscious choice. We're not an insurance company. We really see ourselves more like BlackRock or PIMCO, what they do for liquid assets for insurance companies, we're doing a similar dynamic for insurance companies and private assets. And we think what we're doing is very sound, it saves, it generates, on average, 200 basis points of higher return than comparably rated liquid assets. We think this is a good thing for policyholders. So we think there will be a lot of dialog with regulators, but the activities we're focused on, we think will be well received over time. Operator With no additional question in the queue, I'd like to turn the call back over to Mr. Tucker for any additional or closing comments. Weston Tucker -- Head of Shareholder Relations Thanks, everyone, for joining us today and look forward to following up after the call.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Hello and welcome to Citi's first-quarter 2024 earnings call. Today's call will be hosted by Jen Landis, head of Citi investor relations. [Operator instructions] Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Ms. Landis, you may begin. Jen Landis -- Head of Investor Relations Thank you, operator. Good morning and thank you all for joining our first-quarter 2024 earnings call. I am joined today by our chief executive officer, Jane Fraser; and our chief financial officer, Mark Mason. I'd like to remind you that today's presentation, which is available for download on our website, citigroup.com, may contain forward-looking statements which are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these statements due to a variety of factors, including those described in our earnings materials as well as in our SEC filings. And with that, I'll turn it over to Jane. Jane Fraser -- Chief Executive Officer Thank you, Jen, and good morning to everyone. Today, I'm going to touch on the macroeconomic environment before I update you on the progress we're making, and then I'll discuss the quarter. While global economic performance was surprisingly asynchronized last year, the overall story has been consistent of late, one of economic resiliency supported by tight labor markets and the consumer. Growth this year looks poised to slow in many markets, and conditions are generally disinflationary. We're already seeing some central banks in the emerging markets starting to cut rates. In the U.S., a soft landing is viewed as increasingly likely. But we continue to see a tale of two Europe with Germany hurt by the weak demand for goods, while Southern European countries, such as Spain and Greece, benefit from stronger demand in services. In Asia, Japan is joining in the areas of bright spot, and China's economy has gained some more traction, although its property market remains a concern. Amidst all these dynamics, we continue to focus on executing against our strategy and delivering the best of Citi to all our stakeholders. I said 2024 will be a pivotal year for us as we put our business and organizational simplification largely behind us and we focus on two main priorities: the transformation and the performance of our businesses and the firm. Last month marked the end to the organizational simplification that we announced in September. The result is a cleaner, simpler management structure that fully aligns to and facilitates our strategy. We are now more client-centric. We're already seeing faster decision-making and a nimbler organization at work. We have clear lines of accountability, starting with my management team, fewer layers, increased spans of control, and frankly, much less bureaucracy and needless complexity. It will all help us run the company more efficiently, will enhance our clients' experience, and improve our agility and ability to execute. And while reducing expenses wasn't the primary driver of the program, more roles were ultimately impacted than the 5,000 that we discussed in January. We also took a number of other steps to sharpen our business focus and improve returns by right placing businesses to better capture synergies, exiting certain businesses in markets that just didn't fit with our strategy, and rightsizing the workforce in wealth. As a result of all these combined steps, which include the simplification, we are eliminating approximately 7,000 positions, which will generate $1.5 billion of annualized run rate expense saves. The combination of these actions and the measures we're taking to eliminate our remaining stranded costs will drive $2 billion to $2.5 billion in cumulative annualized run rate saves in the medium term. We are keeping a close eye on the execution of these efforts and overall resourcing to ensure we safeguard our commitment to the transformation. As you know, given its magnitude and scale, the transformation is a multiyear effort to address issues that have spanned over two decades. We've made steady progress as we retire multiple legacy platforms, streamline end-to-end processes, and strengthen our risk and control environment, all of which are necessary not only to meet the expectations of our regulators but also to serve our clients more effectively. A transformation of this magnitude, well, it's never linear. So while we've made good progress in many areas, there are a few where we are intensifying our efforts, such as automating certain regulatory processes and the data related to regulatory reporting. We're committed to getting these right, and we look to self-fund the necessary investments to do so. Turning to the quarter. We had a good start to a pivotal year. We reported net income of approximately $3.4 billion, earnings per share of $1.58, and an RoTCE of 7.6% on over $21 billion of revenues. Our revenues were up over 3% year over year excluding divestitures, which was primarily the $1 billion gain from the India consumer sale last year. Our expenses were slightly down quarter over quarter, excluding the FDIC special assessments. Services continues to perform well and generate very attractive returns. Revenue was up 8% for the quarter. Both businesses won new mandates and deepened relationships with existing clients. Fees were up a pleasing 10% for services year over year driven by the investments we've made across our product offering, platforms, and client experience. In Securities Services, we took share again this quarter. And in TTS, cross-border activity continued to outpace global GDP growth, and commercial card spend remained robust. We look forward to diving deeper into these two businesses at our investor presentation on services in June. Markets bounced back from a tough final quarter in '23. While revenues were down 7% as lower volatility impacted rates and currencies, that was off a very strong first quarter last year. We saw good client activity in Equities and in spread products, where both new issuance and securitization activity were particularly robust. We fully integrated our financing and securitization capabilities within our Markets business, and we started to see the benefits of having a unified spread product offering for our clients. The rebound in Banking gained speed during the quarter, led by near-record levels of investment-grade debt issuance as improved market conditions enables issuers to pull forward activity. And after a bit of a slow start, ECM picked up in the second half of the quarter, notably in convertibles. Our strong performance in both DCM and ECM drove Investment Banking revenue growth of 35% and overall banking revenue growth of 49%. While M&A revenues are still low across The Street, I was pleased that we participated in some of the significant deals announced in the quarter, such as Diamondback's merger with Endeavour Energy and Catalent's merger with Nova Holdings. We are cautiously optimistic that we could see a measured reopening of the IPO market in the second quarter in light of improved market valuation. Corporate sentiment is quite positive, especially in the U.S., and our clients around the world have very sound balance sheets. We very much look forward to welcoming Vis Raghavan to Citi to lead our Banking franchise in early June. Like other new top talents who've joined the firm, he will inject fresh thinking to help us achieve our firm's full potential. In wealth, while revenues were down in the quarter, we grew fees and gathered an estimated $22 billion of net new assets over the past 12 months. As you've seen, Andy continues to form his team and is focused on three areas, first, rationalizing the expense base; second, turning on the growth engine by focusing on investment revenues; and third, enhancing our platforms and capabilities to elevate the client experience. Now these won't happen overnight, but getting these things right will help us get more than our fair share of the $5 trillion of assets that our clients have away from us. And that will help us get our returns to where they need to be in this business in the medium term. U.S. PB had double-digit revenue growth for the sixth straight quarter. We feel good about our position and our resiliency as a prime lend-centric issuer and are seeing positive momentum across proprietary card and partner card businesses. Healthy spend growth persists in branded cards primarily driven by our more affluent customers. Across both portfolios, increased demand for credit continues to drive strong growth in interest-earning balances. And while they're only a small part of our portfolio, we are keeping an eye on the customers in the lower FICO bands. We also continue to see strong engagement in digital payment offerings, such as Citi Pay, as a point-of-sale lending product, which is easily integrated into merchants' checkout processes. And we are driving more value from our retail branches as well as getting the expense base right to increase returns there. Our balance sheet is strong across the board, an intentional result of our high-quality assets, robust capital and liquidity positions, and rigorous risk management. During the first quarter, we returned $1.5 billion in capital to our common shareholders, and that includes $500 million through share buyback. Our CET1 ratio ticked up to a preliminary 13.5%, and we grew our tangible book value per share to $86.67. We have a great franchise around the world with great clients who are served by great colleagues. I'm pleased with where we are and I'm excited about where we're going. With the organizational simplification behind us and a good quarter under our belt, we have started this critical year on the right foot. Now while there will be bumps in the road, no doubt, we will continue to execute with discipline, and we are committed to reaching our medium-term targets. With that, I'd like to turn it over to Mark, and then we will both be delighted, as always, to take your questions. Thank you. Mark Mason -- Chief Financial Officer Thanks, Jane, and good morning, everyone. I'm going to start with the firmwide financial results, focusing on our year-over-year comparisons for the first quarter, unless I indicate otherwise, and then spend a little more time on the business. On Slide 6, we show financial results for the full firm. In the first quarter, we reported net income of approximately $3.4 billion, EPS of $1.58, and an RoTCE of 7.6% on $21.1 billion of revenue. Total revenues were down 2% on a reported basis. Excluding divestiture-related impacts, largely consisting of the $1 billion gain from the sale of the India consumer business in the prior year, revenues were up more than 3% driven by growth across Banking, USPB, and services, partially offset by declines in Markets and wealth. Expenses were $14.2 billion, up 7% on a reported basis. Excluding divestiture-related impact and the incremental FDIC special assessment, expenses were up 5%. Cost of credit was approximately $2.4 billion primarily driven by higher card net credit losses, which were partially offset by ACL releases in wealth, Banking, and legacy franchise. At the end of the quarter, we had nearly $22 billion in total reserves with a reserve-to-funded loan ratio of approximately 2.8%. On Slide 7, we show the expense trend over the past five quarters. We reported expenses of $14.2 billion, which included the incremental FDIC special assessment of roughly $250 million. Also included in this number are $225 million of restructuring charges largely related to the organizational simplification. In total, we've incurred approximately $1 billion of restructuring costs over the last two quarters. As part of these actions, we expect approximately $1.5 billion of annualized run rate saves over the medium term related to our head count reduction of approximately 7,000. In addition to the restructuring, we took approximately $260 million of repositioning costs largely related to our efficiency efforts across the firm, including a reduction of stranded costs associated with the consumer divestiture. The expected savings from these actions will allow us to continue to fund additional investments in the transformation this year. And relative to the prior year, the remainder of the expense growth was largely driven by inflation and volume-related expenses, partially offset by productivity savings. In the remainder of the year, we expect a more normalized level of repositioning, which is already embedded in our guidance. Therefore, you can expect our quarterly expense trend to go down from here, in line with our $53.5 billion to $53.8 billion ex FDIC expense guidance. On Slide 8, we show net interest income, deposits, and loans, where I'll speak to sequential variances. In the first quarter, net interest income decreased by $317 million largely driven by markets, which resulted in a 4 basis point decrease in net interest margin. Excluding Markets, net interest income was relatively flat. Average loans were up $4 billion primarily driven by loans in spread products and Markets as well as card and mortgage loans in U.S. Personal Banking, partially offset by declines in service. And average deposits were up nearly $7 billion primarily driven by services as we continue to grow high-quality operating deposits. On Slide 9, we show key consumer and corporate credit metrics. This quarter, we adjusted our FICO distribution to be more aligned with the industry reporting practices and now show our FICO mix using a 660 threshold. Across branded cards and retail services, approximately 85% of our card loans are to consumers with FICO scores of 660 or higher. And we remain well reserved with a reserve-to-funded loan ratio of 8.2% for our total card portfolio. In our corporate portfolio, the majority of our exposure is investment grade, which is reflected in our low level of nonaccrual loans at 0.5% of total corporate loans. As a reminder, our loan loss reserves incorporate a scenario weighted average unemployment rate of approximately 5%, which includes a downside scenario unemployment rate of close to 7%. As such, we feel very comfortable with the nearly $22 billion of reserves we have in the current environment. Turning to Slide 10. I'd like to take a moment to highlight the strength of our balance sheet, capital and liquidity. We maintain a very strong $2.4 trillion high-quality balance sheet, which increased 1% sequentially. Despite this increase, we were able to decrease our risk-weighted assets, reflecting our continued optimization efforts and focus on capital efficiency. Our balance sheet is a reflection of our risk appetite, strategy, and diversified business model. The foundation of our funding is a $1.3 trillion deposit base, which is well diversified across regions, industries customers and account types. The majority of our deposits, $812 billion, are corporate and span 90 countries. Most of our corporate deposits reside in operating accounts that are crucial to how our clients fund their daily operations around the world. In most cases, we are fully integrated in our client systems and help them efficiently manage their operations through our three integrated services, payments and collections, liquidity management, and working capital solutions, all of which greatly increased the stickiness of these deposits. The majority of our remaining deposits, about $423 billion, are well diversified across the Private Bank, Citigold, retail, and Wealth at Work as well as across regions and products. Now turning to the asset side. Over the last several years, we've maintained a strong risk appetite framework and have been very deliberate about how we deploy our deposits and other liabilities into high-quality assets. This starts with our $675 billion loan portfolio, which is well diversified across consumer and corporate loans. And the duration of the total portfolio is approximately 1.2 years. About one-third of our balance sheet is held in cash and high-quality, short-duration investment securities that contribute to our nearly $1 trillion of available liquidity resources. And for the quarter, we had an LCR of 117%. So to wrap it up, we are active and deliberate in the management of our balance sheet, which is reflected in our high-quality assets and strong capital and liquidity position. On Slide 11, we show the sequential CET1 walk to provide more detail on the drivers this quarter. First, we generated $3.1 billion of net income to common shareholders, which added 27 basis points. Second, we returned $1.5 billion in the form of common dividends and share repurchases, which drove a reduction of about 13 basis points. Third, we saw an increase in our disallowed DTA, which resulted in a 10 basis point decrease. And finally, the remaining 6 basis point benefit was largely driven by a reduction in RWA. We ended the quarter with a preliminary 13.5% CET1 capital ratio, approximately 120 basis points or over $13 billion above our regulatory capital requirement of 12.3%. That said, our current capital requirement does not yet reflect our simplification efforts, the benefits of our transformation, or the full execution of our strategy, all of which we expect to bring down capital requirements over time. So now turning to Slide 12. Before I get into the businesses, let me remind you that in the fourth quarter, we implemented a revenue-sharing arrangement within Banking and between Banking services and Markets to reflect the benefits that businesses get from our relationship-based lending. The impact of revenue sharing is included in the all other line for each business in our financial supplement. In services, revenues were up 8% this quarter driven by continued momentum across both TTS and Securities Services. Net interest income increased 6% driven by higher deposit and trade loan spreads. Noninterest revenue increased 14% largely driven by continued strength across underlying fee drivers. In TTS, fourth quarter volumes increased 9%, U.S. dollar clearing volumes increased 3%, and commercial card spend volume increased 5%, all of which was driven by strong corporate client activity. In Securities Services, our preliminary assets under custody and administration increased 11%, benefiting from higher market valuations as well as new client onboarding. The growth in both businesses is a direct result of our continued investment in product innovation, the client experience, and platform modernization to gain share across all client segments. TTS continues to maintain its No. 1 position with large corporate and FI clients and see good momentum in the commercial client segment, and we continue to gain share in Securities Services. Expenses increased 11% largely driven by continued investments in technology and product innovation. Cost of credit was $64 million as net credit losses remain low. Net income was approximately $1.5 billion. Average loans were up 4% primarily driven by strong demand for working capital loans in TTS. Average deposits were down 3% as the impact of quantitative tightening more than offset new client acquisitions and deepening with existing clients. However, it is worth noting that we continue to see good operating deposit inflow, and services continues to deliver a high ROTCE of 24.1% for the quarter. On Slide 13, we show the results for Markets for the first quarter. Markets revenues were down 7% as lower fixed-income revenues more than offset growth in Equities. Fixed income revenues decreased 10% driven by rates and currencies, which were down 21% on the back of lower volatility and a strong quarter in the prior year. This was partially offset by strength in spread products and other fixed income, which was up 26% driven by an increase in client activity, particularly in asset-backed lending. And we continue to see good underlying momentum in Equities with revenues up 5% driven by growth across cash trading and equity derivatives. And we continue to make progress in prime with balances up more than 10%. Expenses increased 7% largely driven by the absence of a legal reserve release last year. Cost of credit was $200 million primarily driven by macroeconomic assumptions related to loans and spread products that impacted reserves. Net income was approximately $1.4 billion. Average loans increased 8% primarily driven by asset-backed lending and spread products due to an improvement in market activity. Average trading assets increased 4% sequentially largely driven by seasonally stronger activity in the first quarter. Markets delivered an RoTCE of 10.4% for the quarter. On Slide 14, we show the results for Banking for the first quarter. Banking revenues increased 49% driven by growth in Investment Banking and corporate lending and lower losses on loan hedges. As I previously mentioned, corporate lending results include the impact of revenue sharing from Investment Banking, services and Markets. Investment Banking revenues increased 35% driven by DCM and ECM as improved market sentiment led to an increase in issuance activity, particularly investment grade, which is running at near-record levels. Advisory revenues declined given the low level of announced merger activity last year. However, in the quarter, we participated in the pickup in announced M&A across sectors, including those where we've been investing, such as technology and healthcare. Corporate lending revenues, excluding mark-to-market on loan hedges, increased 34% largely driven by higher revenue share. We generated positive operating leverage this quarter as expenses decreased 4% driven by actions taken to rightsize the expense base. Cost of credit was a benefit of $129 million primarily driven by changes in portfolio composition. The NPL rate was 0.3% of average loans, and we ended the quarter with a reserve-to-funded loan ratio of 1.5%. Net income was approximately $536 million. Average loans decreased 6% as we maintain strict discipline around capital efficiency as we optimize corporate loan balances. RoTCE was 9.9% for the quarter, reflecting a rebound in activity, reserve releases, and continued expense discipline. On Slide 15, we show the results for wealth for the first quarter. Wealth revenues decreased 4% driven by a 13% decrease in NII from lower deposit spreads and higher mortgage funding costs, partially offset by higher investment fee revenue. We're seeing good momentum in noninterest revenue, which was up 11% as we benefited from higher investment assets across regions driven by increased client activity as well as market valuation. Expenses were up 3% driven by technology investments focused on risk and controls as well as platform enhancements, partially offset by the initial benefits of expense reductions as we continue to rightsize the workforce. Cost of credit was a benefit of $170 million driven by a reserve release of approximately $200 million primarily related to a change in estimate as we enhanced our data related to margin lending collateral. Net income was $150 million. End-of-period client balances increased 6% driven by higher client investment assets. Average loans were flat as we continue to optimize capital usage. Average deposits decreased 1%, largely reflecting lower deposits in the Private Bank and Wealth at Work and the continued shift of deposits to higher-yielding investments on Citi's platform, which more than offset the transfer of relationships and the associated deposits from USPB. Client investment assets were up 12% driven by net new investment asset flows and the benefit of higher market valuation. RoTCE was 4.6% for the quarter. Looking ahead, we're going to improve the returns of our wealth business by executing on our three foundational priorities. As Jane mentioned, this will take time, but over the medium to longer term, we view this as a greater than 20% return business. On Slide 16, we show the results for U.S. Personal Banking for the first quarter. U.S. Personal Banking revenues increased 10% driven by NII growth of 8% and lower partner payments. Branded cards revenues increased 7% driven by interest-earning balance growth of 10% as payment rates continue to moderate. And we continue to see healthy growth in spend volumes up 4% primarily driven by our more affluent customers. Retail services revenues increased 18% primarily driven by lower partner payments due to higher net credit losses as well as interest-earning balance growth of 9%. Retail banking revenues increased 1% driven by higher deposit spreads, loan growth, and improved mortgage margins. Expenses were roughly flat due to lower compensation costs, including repositioning, offset by higher volume-related expenses. Cost of credit of approximately $2.2 billion increased 34% largely driven by higher NCLs of $1.9 billion as card loan vintages that were originated over the last few years were delayed in their maturation due to the unprecedented levels of government stimulus during the pandemic and are now maturing. In branded cards, the NCL rate came in at 3.65%, in line with our expectations. In Retail Services, the NCL rate of 6.32% was slightly above the high end of our guidance range for the full year and will likely remain above the range in the second quarter, reflecting historical seasonality patterns. However, given the persistent inflation, higher interest rates, and continued sales pressure at our partners, we now expect to be closer to the high end of the full-year NCL guidance range for Retail Services. This expectation, along with the continued mix shift from transactors to revolvers across both portfolios, led to an ACL build of approximately $340 million. Net income decreased to $347 million. Average deposits decreased 10% as the transfer of relationships and the associated deposits to our wealth business more than offset the underlying growth. RoTCE for the quarter was 5.5%. We recognize that this business is facing a number of headwinds from a regulatory perspective and from higher credit costs given where we are in the credit cycle, both of which are putting pressure on returns for the quarter and for the full year 2024. However, this doesn't impact our longer-term view of the business. We feel good about our position as a prime and lend-centric issuer. We will continue to take mitigating actions to manage through the headwinds, lap the credit cycle, and drive more value from retail banking and retail services while improving the overall operating efficiency of the business, all of which will ultimately result in a higher-returning business over the medium term. On Slide 17, we show results for all other on a managed basis, which includes Corporate/Other and legacy franchises and excludes divestiture-related items. Revenues decreased 9% primarily driven by closed exits and wind-downs as well as higher funding costs, partially offset by higher revenue in Mexico. And expenses increased 18% primarily driven by the incremental FDIC special assessment and restructuring charges, partially offset by lower expenses from the wind-down and exit markets. Slide 18 shows our full-year 2024 outlook and medium-term guidance, both of which remain unchanged. We have accomplished a lot over the past few years and have made substantial progress on simplifying our business and organizational structure. The year is off to a good start as we are laser-focused on executing the transformation and enhancing the business performance. These two priorities will not only enable us to be a more efficient, agile company but a client-centric one that brings together the best of Citi to drive revenue growth and improved return and we are on the path to reach our 11% to 12% return target over the medium term. With that, Jane and I will be happy to take your questions. Questions & Answers: Operator [Operator instructions] Our first question will come from Mike Mayo with Wells Fargo. Your line is open. Please go ahead. Mike Mayo -- Wells Fargo Securities -- Analyst Hi. Well, you just finished your seven months of your org simplification, and you said 7,000 positions go away with $1.5 billion of expense savings. So that's very concrete. But more generally, after 20, 30, 40 years of matrix structure down to five lines of business, you're reporting these differently. You're talking about them differently. But the question that I think a lot of people have is are you simply reporting these lines of business differently? Or are you actually running them differently? Jane Fraser -- Chief Executive Officer Thank you, Mike, for the question. The simplification that we've just gone through, it is what we said it is. It is the most consequential set of changes not only to the organization model that we have but how we run the bank. It's aligned the structure with the strategy. It's simplified the bank. It's eliminated needless complexity. It's created greater transparency into the five businesses and their performance, as you can see. It's increased accountability. And very simply, it's just easier for our people to focus on our clients but also getting things done and the execution that we have ahead of us. So maybe if I try and bring this a bit more alive, the first thing we did was we elevated the five businesses, and that eliminated the ICG and PBWM layer. And that's -- and we brought all the elements that the businesses needed to run end to end under the direct management of those five business heads, an example being operations. It's enabled transparency, greater accountability. And this end-to-end and total P&L focus, so focus on the bottom line and the returns driving growth, expense discipline, etc. We also right-place businesses to align with the strategy. So Banking all being under one umbrella, the investment bank, the corporate bank, commercial bank, really helping us drive synergies there. Putting finance FNS and securitization into markets so that we have a unified spread product there, also beginning to see the benefits of that this quarter. So that's an example on the businesses. But I do want to highlight a couple of other areas around this change. So by eliminating the regional layer and putting in a far slimmer, lighter management structure in place in the geographies, that's enabled us to make sure that our countries are focused on client delivery and legal entity management. And we've eliminated the whole shadow geographic P&L. We've eliminated a large number of committees in the geographies. This is where a lot of the functional management roles were streamlined and eliminated through the last seven months. And we also broke the regions into smaller, lighter clusters, and that allows us to much better capture the big changes in trade flows and financial flows, etc., we're seeing around the world. It's just much nimbler. The third piece, we created the client organizations. So that organization makes sure that our core capabilities and disciplines are being applied firmwide to drive revenue synergies. And then the government has got a lot easier. It took up a lot of time, and we've given much clearer mandates in. We've more than halved the number of committees. That's 200 committees-plus that we've eliminated in the firm, either by consolidating them or eliminating them. This stands in there, if you exclude me, 98% of the firm now operates within eight layers. That is a much, much faster decision-making. It's much quicker to get execution done. It also means that you can very quickly get closer to where the engine of the firm is. We've got clear accountabilities. We've eliminated most co-heads. We've reduced matrix reporting. We've got the producer-to-nonproducer ratio improved. So all of this really means, as I've said, a clearer deck, so we can be laser-focused on business performance in those five businesses and the transformation. It already feels different. Around my table, I'm much closer to the businesses and the clients. It makes it much easier for Mark and I and the rest of the team to run the bank like an operator versus the head of a holding company. You don't have to go through these aggregator layers to get things done. And we're done, as we said we would be, at this point. We're wrapping up the final consultation period. Not an easy few months with the organization. We've had to say goodbye to some very good people. We put a lot of change through the organization. And now as we close the chapter on this, we look forward to being back in BAU mode again, continuing to drive improvements in simplification and processes and alike. But now the focus is going to be really getting the full benefit from all the changes we've made in business and organization and moving forward. Operator Our next question is from Glenn Schorr at Evercore. Your line is open. Please go ahead. Glenn Schorr -- Evercore ISI -- Analyst Thanks very much. So I think it shows how much you've helped us see the simpler organization. I think people have totally bought in to the expense story. So a lot of credit for you guys. I think where I personally and others still have questions on is on the revenue side and getting to those 4% to 5% medium-term targets. So could you take us just conceptually where we're going to -- where you think you'll drive that growth from this baseline we're at now? And if you want, you can totally use my second question in there and tell us what good things you're doing inside the Investment Banking line to help tease out one of the answers. Jane Fraser -- Chief Executive Officer It's not that one in, Glenn. So I'll kick off with some of this, pass it to Mark, and then I'll come back to Banking. So look, we are laser-focused on the growth and improving the returns of these businesses to where they should and will be in the medium term. And it's not just a growth story, but let me anchor it in those medium-term return targets. In services, we want to continue around the mid-20s in RoTCE. Banking should be getting to around 15%, Markets 10% to 13%. So we'd like to see at the higher end of that range; USPB getting that back to the mid-teens and then moving on to the high teens in the medium term; and then lastly, as Andy and Mark have talked about, getting wealth to a 15% to 20% return in the medium term, but the goal is to the mid-20s in the longer term here. And we're confident that our strategy is going to drive the revenue growth of 4% to 5% CAGR in the medium term. And that's a combination of maintaining our leadership in certain businesses, gaining shares in others. We have good client growth. Look at our win rate, for example, in TTS at over 80%. We've got our commercial bank also bringing in new clients in the mid-market and helping them accelerate their growth and success around the world. But Mark, let me pass it over to you. Mark Mason -- Chief Financial Officer Sure. We appreciate the acknowledgment around the expenses. As you know, we've been quite focused on that and working hard to ensure that we deliver on what we say we're going to do there. I'd point on the revenue line, I'd first point to if you look back since Investor Day, we've in fact been able to deliver on the guidance that we've given for the medium term, so that 4% to 5% top-line growth. And yes, it was a different rate environment, but that growth that we delivered over the past couple of years has been a mix of both revenue and underlying business strength. As you think about the guidance we talked about for this year, we talked about the NII ex Markets being down modestly. And so what that means is that the momentum and the growth that we expect is going to come from the noninterest revenue. And I think this quarter is a good example of where and how that's likely to play through, so the revenue top line being up 3-plus percent. But when you look through each of the businesses and if you look on each of the pages where we disclose the revenue, you can see the underlying NIR growth in the bottom left-hand corner of each of those pages, that's coming through as well. So Securities Services, up 14% with growth in both TTS between cross-border, clearing commercial cards but also -- and Securities Services, right, with the growth that we're seeing from continued momentum in assets under custody. We expect that trend to continue with existing clients and more -- and new clients as well as how we do more with our commercial market middle -- commercial middle-market business, excuse me, so NIR growth there. The Investment Banking piece is the other driver of fees. We're seeing that wallet start to rebound. We're part of that rebound. The announced transactions, we're part of those in sectors that we've been investing in. We're bringing in new talent to help us realize and experience that. And even in wealth, where we're not pleased with the top line performance this quarter of down 4%, when you look through that, we do have good underlying NII growth in the quarter in wealth. And that's up 11% year over year. And it's in the area that Andy and the team is leaning in on, which is investments and not just in one region but across all the regions. And then finally, the USPB piece, which is showing good NII growth as well. So the long and short of it is that the 4% growth that's implied in $80 billion to $81 billion is going to be continued momentum largely in fees, helping us to deliver for our clients and make continued progress toward that medium-term target. Jane Fraser -- Chief Executive Officer So let me pick up -- sorry, I'm sure Jen Landis will give us the evil eye for sneaking in a second question there, Glenn. But let me pick up on Banking and what's going on there. So we have a very clear strategy that we've been executing over the last couple of years really to lay the foundation for growth in Banking. North America is our key priority. It's the biggest contributor to the global IB wallet. Tech, healthcare and industrials are likely to constitute over 50% of the fee wallet going forward. So we have better aligned our resources to position the franchise for this, defending areas of traditional strength in industrials and the like, energy, while investing in high-growth sectors, such as healthcare and technology, with some strong talent. Financial sponsors are sitting on $3 trillion of estimated firepower, which they are incentivized to deploy. So they're likely to be between 20% to 30% of global Investment Banking fees. We've great relationships with this community. We built that over years and decades. You're going to see us more active in the levfin space in the right situations for our key clients. And we'll continue to ensure we're well-positioned and active around this important opportunity. You will likely see us seeking to remain competitive in the private capital asset class. That can be an important source of liquidity for many clients. And the middle market will be fertile hunting ground for corporate and private equity. And our investment bank and commercial bank are going to be closely coordinated to harvest the deal flow around the world. And indeed, the new org structure that I was just talking about really enables us to drive a more joined-up, client-centric strategic coverage across corporate, commercial, and investment banking. So over and above the wallet recovery, Mark and I can be very laser-focused on ensuring that we're driving revenue growth from a more holistic focus on the wallet share across flow and episodic activity. Vis Raghavan is the right person to take over at this important moment for our Banking franchise. The momentum that we've been generating with the foundations we've been laying, the intention here from him is to accelerate that. He will focus on increasing our performance intensity, driving productivity and disciplined growth, and he will keep us firmly on the path toward delivering on our commitments, fundamentally improving the operating margin, generating higher returns and that all important fee revenue. Operator Our next question is from Betsy Graseck at Morgan Stanley. Your line is open. Please go ahead. Betsy Graseck -- Morgan Stanley -- Analyst Hi. Good morning. I guess a couple of questions. Well, I know we talked through the institutional securities business already on moving that expense ratio a little bit. Could we dig in a little bit on the wealth side? Because the expense ratio there is running a little higher, and so it would be useful just to understand the pace or speed or time frame when we should expect to see that start to inflect. Jane Fraser -- Chief Executive Officer Yes, absolutely. And some of it, just as a reminder, the actions that we've been taking on org simplification and Andy has also been taking in the wealth business, we will work through notice periods in the coming weeks. And so you'll start -- you'll see the impact coming through in our head count numbers and in wealth and the expense base next quarter. Look, as Mark said in his opening and Andy has been talking about, this should be a sort of up to a 30% pre-tax margin business. Andy is focused on rationalizing the expense base. He's also, as Mark said, turning on the growth engine. He's enhancing platforms and capabilities to elevate the client experience. The heart of the opportunity for us lies with our existing clients. They are an extraordinary client base, but they're underpenetrated. The operating efficiency is frankly going to be -- is going to come on the revenue side here. That said, Andy has taken a number of pretty decisive moves this quarter on the expense side. Mark, let me pass it over to you. Mark Mason -- Chief Financial Officer Yes. So I mean, look, I think that the quarter expenses that you see of growth of 3% is not yet reflective of the work that Andy has been steadfast at. There is still some investment in there in technology and in the platform that's important. But I think coming out of the first quarter, you'll start to see some of the reduction in expenses that's a byproduct of that work. And the work has been across the entire expense base in the wealth business. So that includes non-client-facing roles and support staff. It includes looking at the productivity of existing bankers and advisors. And those kind of reductions will start to play out in the subsequent quarters. I do want to point out, as Jane mentioned, this is a growth business for us. And so you can see on some of the metrics on Page 15, the bottom left, some of those good signs of investment momentum. And I highlight that because as the expenses come down from some of those efficiencies, there will be a need for us to continue to invest and replenish low-performing or low-producing bankers and advisors with resources that actually can generate the revenues we expect and take advantage of the client opportunity that's in front of us. So long-winded way of saying there's some operating efficiency upside for us for sure. It's a combination of the top line and the expense we're playing through the balance of the quarters and the year here. Operator Our next question is from Jim Mitchell at Seaport Global. Your line is open. Please go ahead. Jim Mitchell -- Seaport Global Securities -- Analyst Ok. Good morning, Jane and Mark, I very much appreciate the comments on your growth opportunities and driving growth. Revenues are often dictated by the macro, that it's a little bit out of your control. Can you talk a little bit about the flexibility on the expenses? You have a range in 2026 of 51 to 53. So if revenues are coming in below the targets, is it, I guess, a, fair to assume you'd be at the very low end of that range? Or is -- and I think there is some revenue growth built in there. So is there some flexibility to the downside to try to get to your targets in a tougher revenue environment? Mark Mason -- Chief Financial Officer Yes. Look, I mean, the top-line growth, as you've heard us say, is a CAGR of 4% to 5%. We put that target out there, 51 to 53 as a range of what we're working toward. We've given you a good sense of how we expect to get there with the $2 billion to $2.5 billion reduction by then. We've already signaled the $1.5 billion that's in front of us. The reality is that if there's softness in revenues, that's why we have a range. Obviously, the volume-related expenses would come down with any softness in revenue. And depending on the drivers of why that revenue is softening, we'd look at the investments that we're making across the business and make sure that those are appropriately calibrated for where we are in the cycle and what we're seeing on the top line. With that said, we've got to continue to invest in the transformation. We're not going to compromise that. That's going to be something that we have to spend on to ensure we continue to get right. But that's kind of how the dynamic works. There's a top -- we've got a mix of businesses that I think we've demonstrated resiliency around if you think about the past couple of years. And we expect for those to continue to drive some top-line momentum, but we've got levers in case they don't. Operator Our next question is Ebrahim Poonawala at Bank of America. Your line is open. Please go ahead. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst Thank you. I guess just one question, Mark, around capital. So you talked about $13 billion over the reg minimum. By my -- like you could easily be doing two times the buyback you did in one quarter, if not more. Just I know you don't like to talk about out quarters, but give us a sense of at least this quarter, should we expect the pace of buybacks to increase? And if you could provide additional color as we think about the rest of the year would be greatly appreciated. Mark Mason -- Chief Financial Officer Sure. Look, you know and I've said it repeatedly, Jane has said it repeatedly, given where we trade, we think buying back is smart. And we'd like to do as much as we possibly can and as much as makes sense in light of the uncertainty that's out there. We have run at about $13.5 billion this quarter. That does give us capacity above the $13.3 billion. But it's important to keep in mind that there's client demand that will continue to evolve. We want to make sure we can support the clients that want to do business with us, whether that be in Markets or other parts of the franchise. And then there's still uncertainty out there about how the capital regulation evolves. The good news is we are hearing kind of favorable things about how the Basel III endgame proposal could evolve, but that hasn't happened yet. It's not finalized, it's not in place yet. And so we want to see how that continues to play out. We're obviously in the midst of a CCAR process. We want to see how that evolves. And we'll continue to take the buyback decision on a quarter-by-quarter basis. But we recognize that there's an opportunity there, and we'll get after it just as soon as it makes good sense for us. Operator Our next question is from Erika Najarian at UBS. Please unmute your line and ask your question. Erika Najarian -- UBS -- Analyst Hi. Good afternoon. So clearly, the theme of this -- that's emerging on the Q&A is a healthy skepticism about your revenue targets in line with the -- in light of the expense declines, which is not really as analysts we're sort of a little bit parroting what we're hearing from long-only investors that haven't yet jumped into the stock. So to that end, I guess I'm going to ask Ebrahim's question differently then ask a question about card late fees. How are you balancing -- clearly, your valuation would demand that the buybacks be ramped up from $500 million. But growing revenues at a 4% to 5% CAGR would mean potentially some capital clawback into the business. I guess, how are you balancing that, especially given that the demand for buyback is louder at Citi than any other money center peer? And could you give us a sense of what card late fees are and how that would impact the $80 billion to $81 billion for the year if we do get an earlier implementation in October? Mark Mason -- Chief Financial Officer Thank you, Erika. On the first part of the question, I'd just remind you and everyone else that we're playing for the long term here, right? So we have set some medium-term targets. Obviously, Jane has recasted the vision and the strategy. I think we're making very good progress against that. But we're playing for the long term. And what that means is that we have to continue to invest in the franchise. It's why I've given you a range around the expenses, at least in part. It's why I've continued to stress the importance of protecting the transformation and risk and control spend. And it's why I started the answer to Ebrahim's question by saying that we want to be sure that we can match the client demand out there where the returns to do so makes sense. And so we are having to balance kind of the use of capital and other resources against that longer-term strategic objective and utilize it where it makes sense and generates good returns against the idea of returning that to shareholders. And so this is -- we'll continue to do that. It's an everyday assessment. It's an everyday discussion with the teams. Frankly, it's why things like the revenue sharing has been put in place to intensify the discussion around the clients that we're using balance sheet with and ensuring that we're driving broader revenues across the platform. And so that's kind of how we're operating in terms of making that trade-off on a regular basis in addition to, obviously, the broader regulatory environment that we're in. In terms of the second part of your question around late fees, we haven't disclosed kind of the dollar amount of the late fees. What I would say is that we did and have factored that into the $80 billion to $81 billion. And the only thing I'd add to that is it did kind of -- it's being implemented a bit earlier than what we had assumed. But again, it's inside of the range of the guidance that I've given you for top-line revenue for the year. Jane Fraser -- Chief Executive Officer And just as a reminder, 85% of our two card portfolios are prime. And in CRS, where you tend to see some of the lower-income households, we do have that. The economics of the fee change will be shared with our partners in CRS. So we want our customers to pay on time. We have a number of mechanisms to do so. But in terms of the economics, I think we, along with the rest of the industry, will be putting in mitigating actions over time, some of which we've already begun to implement. Operator Our next question is from John McDonald at Autonomous Research. Your line is open. Please go ahead. John McDonald -- Autonomous Research -- Analyst Thanks. Mark, I was hoping you could give a little more color on how you're feeling about the credit card charge-offs. You maintained the outlook for the year. You mentioned the higher end on Retail Services. Do you still feel like you'll see a peak this year? And what kind of metrics are you looking at in terms of delinquency formation and seasoning to inform that view that you might see the peak in card charge-offs this year. Mark Mason -- Chief Financial Officer Yes. Thanks, John. It's -- we have obviously continued to manage this portfolio very actively. We've seen continued top-line growth. We've seen continued average interest-earning balance growth. We've talked about how we expect for the cost of credit to normalize, and we've seen that continue to happen. The range that we've given on branded cards, we're inside of that range. When you look at the spend across the portfolios, the spend is really happening with the affluent customers more so than anything else. And so we're watching the lower-income customer profile or customers that we have. But again, as Jane mentioned, we tend to skew to the higher end to begin with. Where we're really seeing the pressure is where I mentioned in terms of Retail Services. And so there, the current NCLs are higher than the high end of the full-year range that I've given. But if you look back, that is not inconsistent with seasonality that we've seen in the past in that portfolio, where the first two quarters are higher than the back half of the year, in part because of coming out of the holiday season and how the -- and how losses tend to mature or materialize through that process. And so I'd expect to not only see them be higher than the average range in Q1 but also in Q2 before coming down. And then I still expect that in 2025, you tend to see them further normalize and come down a bit off of these ranges. But look, the reality is that we continue to watch it, and the factors that are out there that are important include how unemployment evolves, what happens with inflation, what happens with interest rates. And those will be important factors as to how the loss rates continue to evolve over time. I think the final point I'd make, and I mentioned it in the prepared remarks, is that we have to remember that the loss rates in both portfolios reflect kind of multiple vintages maturing at the same time. And you'll recall, and this is an industry dynamic through the COVID and pandemic period, losses were at an all-time low, payment rates at all-time highs, supported by government stimulus. And now coming out of that, we're seeing the COVID vintages mature, albeit at a lagged pace from what would be normal. And we're seeing the incremental acquisitions that we've done start to mature at their normal pace. And so these loss rates are exacerbated by that impact, and that's an important factor we can't lose sight of. But the bottom line is that we're watching it. The macro factors matter. We feel good about the quality mix that we have, and we'll kind of see how things evolve from here. John McDonald -- Autonomous Research -- Analyst OK. And on the branded side, you still expect kind of the peak this year -- you're still inside of the range for the full year and expect 2025 you could move lower on the branded charge-offs? Mark Mason -- Chief Financial Officer Yes. I still kind of expect that trend line of peaking and then kind of moving a bit lower in branded. Operator Our next question is from Ken Usdin at Jefferies. Your line is open. Please go ahead. Ken Usdin -- Jefferies -- Analyst Great. Thanks. Can I follow up on the card line of thinking and just asking Mark to talk a little bit about just cost of credit? We did still see some card-related build this quarter even with the comments you just made and seasonal softer loan growth. So just from a bigger-picture perspective, how do you think -- continue to think about reserve builds from here and how that informs your outlook for cost of credit? Mark Mason -- Chief Financial Officer Yes. Sure. Look, I think that when I think about the reserve build, I think it's the same factors that come into play. So obviously, the view on the macro is important. And right now, if you think about some of the key macro factors that impact the cards portfolio, the unemployment assumptions weighted is about 5%. The downside is about 7% kind of weighted over the period. And so feel -- how that evolves will be an important factor. How HBI evolves would be important consideration here for this portfolio, but also what happens with volumes becomes a factor on reserve builds and how important or how much they increase or decrease. And then the final piece is mix, and it's kind of related to that revolver point. As we see the mix evolve from transactors to revolvers, that's going to play into how much of a reserve from a lifetime point of view we have to continue to build. And so it's why I mentioned on John's question the importance of looking at the interest rates, looking at what's happening with inflation, watching the lower-income customer base because all of those things combined with how we think about the scenarios and the weighting will be a factor on the reserves. But I will say, Ken, as I sit here and think about what we have in the quarter, I feel very good about the reserve levels. The 8.2% combined kind of ACL to loan ratio feels right for the mix of this portfolio, and we'll continue to watch it. Ken Usdin -- Jefferies -- Analyst OK. And a separate question on TTS. That NII related to TTS has been remarkable with rising rates this quarter. Granted, there was a lesser day and there could be currency stuff in there. The first quarter, that step back, I'm just wondering like where is that in its asset liability sensitivity, the TTS/NII? And what are your thoughts about that piece of the NII puzzle going forward? Mark Mason -- Chief Financial Officer Sure. Yes. I mean, I think I'd say a couple of things. We do have kind of some Argentina playing through the NII line. I will say that the best way to think about it is kind of the underlying beta activity. And we have seen -- this is a corporate client, it is an institutional client. We have seen betas, particularly in the U.S., at kind of normalized or terminal levels and playing a bit through that. We are seeing betas outside of the U.S. continue to increase as it relates to the TTS client base. But all of that, again, is inside of the range that we've talked about. I don't expect to see kind of year-over-year growth on the NII line, anywhere close to kind of what we've seen in prior years, prior quarters, just in light of kind of how the rate environment's evolved and in light of kind of quantitative and tightening and the impact on deposit levels. The last point I'd make on this is we will continue to drive and see growth as it relates to the operating deposits. And that will be an important tailwind that kind of plays through. Operator Our next question is from Vivek Juneja at J.P. Morgan. Your line is open. Please go ahead. Vivek Juneja -- JPMorgan Chase and Company -- Analyst Hi. Thank you. Jane, Mark. Just a question maybe on Argentina. You had -- you've shown $100 million in NII, total net income benefit of $500 million after tax. So probably implying about $500 million, $600 million of noninterest income benefit. Which line item -- sorry, which segment did that come through? And is that sustainable? Mark Mason -- Chief Financial Officer Yes. Look, there's a mix, obviously, of things that are driving that net income, including a tax impact on the heels of last year Argentina devaluation activity that's in that line. But the short answer is that if you think about the nature of business that we do in Argentina, it is a big part of our institutional client relationships. And the primary activities include some of the TTS type of activities that we've talked about, so liquidity management, payments, custody within the services business. And so you'd see a good portion of the activity in Argentina playing through the services business, some of it in Markets as well. But again, the majority of the activity in services. Operator [Operator instructions] Our next question is from Scott Siefers at Piper Sandler. Your line is open. Please go ahead. Scott Siefers -- Piper Sandler -- Analyst Hi, everyone. Thanks for taking the question. Mark, I think you touched on at least a component of this a couple of questions ago, but maybe just broadly an update on your rate positioning. I guess I only ask because it looks like we might be starting to diverge in terms of global rate trajectories, if we potentially go lower in Europe but higher here for a while. In the aggregate, do these kind of complicate your management or make you feel better or worse about the overall NII momentum for the company? Mark Mason -- Chief Financial Officer Yes. Let me try and take it in two pieces, I guess. So one is, if I think about how the rate implies have evolved from the three to six to now something a little bit north of one in the context of what I expect for our performance, it doesn't have a material impact on the guidance that I've given of $80 billion to $81 billion. And in part, that's because as I think about the timing for the plan cuts, which was generally backloaded as well as some of the other factors that play through. So Argentina just announced a policy rate reduction yesterday or a couple of days ago. If rates are a bit higher for longer, we'll watch how the betas continue to evolve. I mentioned earlier the late fees for the cards business happened a bit sooner. Late fees are actually booked in our NII line. And so those factors put me in a place where I feel like there'll certainly be puts and takes around how that rate curves evolved. And therefore, I'm very comfortable kind of leaving the guidance where it is. To answer your broader question in terms of kind of how we're positioned, I'd point you to the 10-K that we have that's out. And in that 10-K, we offer, as we have before, a number of IRE scenarios for plus or minus 100 basis points and what it means for our business. And if you look at it, you'll see that for the aggregate firm for Citi, U.S. dollar and non-U.S. dollar, that we're asset-sensitive. So as rates increase, we should see an increase in our NII performance. But if you look at the breakdown and that's about -- I think it was about $1.4 billion or something in terms of the impact of that move. But if you look at the breakdown, what the breakdown will show is that for U.S. dollar, at this point, we're neutral. So if rates were to go up, rates were to go down, no material impact as it relates to our revenue. For the non-U.S. dollar, we're still quite asset-sensitive, right? And so that should give you some sense for at that -- and we recognize the limitations with IRE. It assumes a 100 basis point parallel shift across the curve, the static balance sheet, etc. But that should give you some sense for the implications of the rate curve moves as it relates to our book of business. Operator Our next question is from Gerard Cassidy at RBC Capital Markets. Your line is open. Please go ahead. Gerard Cassidy -- RBC Capital Markets -- Analyst Mark, can you share with us -- there's been obviously a lot of conversation around the credit card charge-offs and the credit quality there. If we could shift over to the corporate side, which obviously is very strong. We've seen spreads narrow in the markets on high-yield corporate debt, leverage debt, etc. It's very robust out there. But around the global geopolitical risk, do you think the spreads will be widening? Can you guys share with us what you're seeing on the corporate side in terms of competition? Are underwriting standards getting a little weaker now as people are trying to grow their books? What are you seeing on that front? Mark Mason -- Chief Financial Officer Look, we're still seeing good demand for corporate credit. And what I'd say is that we've been very disciplined about where we want to play on the risk profile here. We've been very disciplined in terms of the investment grade, large multinationals that we serve. And that hasn't shifted from an underwriting point of view. We have seen spaces like private credit pick up quite a bit. And that, I think, will continue to evolve. I think importantly, as we think about our corporate lending activity, you'll note that actually, we've been very disciplined about how we want to deploy balance sheet. And part of that, again, is a byproduct of the revenue sharing that we've implemented, where there's been healthy debate and discussion around the names that we want to continue to serve and whether they're positioned to take advantage of the broader platform that we have. And so I think the space will continue to evolve. I think there's been good, healthy demand despite continued strong balance sheet. And part of that demand has been because of where rates are likely to go and continue to evolve. And I think we're well-positioned to be thoughtful about that. But Jane, you may want to add a couple of points to it. Jane Fraser -- Chief Executive Officer Yes. Look around the world, the corporate client base and our commercial banking mid-market client base have very healthy balance sheets. And we're also seeing market access gradually opening up as well, which is also helpful for the quality issuers across all asset classes. We've seen both the issuers taking advantage as well as the investors. The deals are well oversubscribed. So that's also been beneficial as corporates think about their financing needs. The other piece I'd just pop out there as well is the recent large M&A announcements in multiple industries is a sign of rising confidence from CEOs and boards. Active discussions are increasing as supportive capital markets create confidence as people think about larger strategic transactions. This is going to feed acquisition finance, bridge financing and some of the higher-margin capital markets and lending activity as well. So as we look forward, I think it's recognizing the shift in some of the drivers from companies just investing, refinancing, looking at where they can, diversifying their capital raising in different quarters. But I'd just close by saying I couldn't agree with you more about geopolitical risks and fragility. I think the market's too -- it's too benign in its risk pricing on some of these factors. Mark Mason -- Chief Financial Officer Important for us to take this [Inaudible]. Operator Our next question is from Matt O'Connor at Deutsche Bank. Your line is open. Please go ahead. Matt O'Connor -- Deutsche Bank -- Analyst Hi. In your prepared remarks, you talked about intensifying certain efforts regarding regulatory processes and data on Slide 4 here and was just wondering if you could elaborate on, I guess, what you're doing or trying to do differently on that front and if there's any meaningful financial impact. Jane Fraser -- Chief Executive Officer Yes. Look, I think, Matt, as we've talked about many times, transformation is our top priority. It will be for the next few years. It is foundational for our future success both in terms of delivering the strategy and the medium-term financial path. And we've been making significant investments behind it as well as not only on the consent order but also making sure we've got this modern efficient infrastructure. We're currently deep into a very large body of work, upgrading our data architecture, automating manual controls and processes, consolidating fragmented tech platforms. And all of these help enhance our business performance more broadly, not just the risk and control in the medium term. As I've said, though, there are a few areas where we are intensifying our processes and data remediation, particularly related to regulatory reporting. We're committed to getting these right. The org changes will help us with execution and making sure that we're -- we have the impetus and everything that we need behind it, the investments that we need. We keep a close eye on execution, making sure we've got the right level of resourcing and expertise. And we'll invest what we need to do to make sure that we address these different concerns. I can't go into much more detail in terms of our CSI obviously. But something of this magnitude, you'd expect us to have some areas where we have good progress and others where we need to intensify efforts. Mark Mason -- Chief Financial Officer Yes. And I mean, I think that's exactly right. But you'd also expect that in this type of environment and on the heels of the regional bank stress last year that we're looking at stress scenarios. We're enhancing our CCAR processes. We're enhancing our resolution and recovery processes, all of those things just to -- kind of to make sure that we're shoring up capabilities. And you'd expect that across the industry, quite frankly. Operator Our next question is from Saul Martinez at HSBC. Your line is open. Please go ahead. Saul Martinez -- HSBC -- Analyst Hi. Good Afternoon. I'll change tack a little bit here. But I'm curious if there's any update on the Mexican IPO. And more specifically, I'm kind of curious how set in stone the IPO process is. You will have a new administration. And even if it's the candidate from the same party, she may have a less confrontational view of the private sector, perhaps be more allowing of a local bank to extract value from buying a bank. I guess, if the facts on the ground were to change, would you be open to a sale potentially being back on the table? Because it does seem like this is a situation where a private market valuation could be higher and even materially higher than a public market valuation. Jane Fraser -- Chief Executive Officer The guiding principle that we have and we've had all along is making sure that we make a decision here that is in the best interest of our shareholders and makes the most sense for them. We are -- never say never, but we are very focused on the IPO path here. We believe it is the right one for our shareholders. We're well on track in the path in Mexico. We're very pleased to bring Ignacio Deschamps in as the Banamex Chairman to help guide the IPO process. We announced some management teams for the two banks earlier this quarter. We're far down the path of the technological separation of both banks and then the full legal separation in the second half of the year. Obviously, the election is coming up fairly shortly. But we're not anticipating that we would be deviating from the IPO path. That is the path that we are on at the moment. I'll never say never. But we do believe that this is the right one. But we'll keep an eye on what's happening in Mexico as we always do. Operator Our next question is from Chris Kotowski at Oppenheimer. Please go ahead. Chris Kotowski -- Oppenheimer and Company -- Analyst Thanks. Just a quick one for Mark. Previously, you had talked about "bending the cost curve" between the third and the fourth quarter of this year. And on this call, I thought I heard you say it's basically bent, that second quarter should be down and we should be sequentially lower from here. So did it just happen six months earlier? Or is there still some other bending that comes late this year? Mark Mason -- Chief Financial Officer I'll take it. I'll take that. Jane Fraser -- Chief Executive Officer Damn, I wanted that one. Mark Mason -- Chief Financial Officer I'll take that -- I mean I'll take the win, a downward trajectory from here through the end of the year, in line with the guidance of 53.5% to 53.8%, and so yes. Operator Our next question is from Steven Chubak of Wolfe Research. Your line is open. Please go ahead. Steven Chubak -- Wolfe Research -- Analyst I did want to ask on DFAST and SCB, just recognizing this will be the last opportunity before the results come out. The macro scenario, Fed assumptions look quite similar to last year. But just given the significant transformation that's underway, repositioning actions, which -- and nearly depressed earnings last year, wanted to get a sense as to whether there are any ideal factors that could result in greater SCB volatility in the coming exam and just broader thoughts on the longer-term trajectory for the SCB just given the org simplification efforts that are underway. Mark Mason -- Chief Financial Officer Yes. Steven, the first part of your question is just impossible to answer, to be candid with you, right? I mean it's -- we obviously have an internal base scenario we've run. We have a severely adverse scenario that we've run. We've provided a balance sheet as part of the submission. But ultimately, the regulators have to run through their models the information that we've provided, and that informs what happens with the stress capital buffer. And we don't have as much transparency to that as we'd like. And so really hard to call at this stage. The second part of your question, I think, is spot on and I kind of alluded to in my prepared remarks in that we have the medium-term targets that we've set. And we're still in the midst of kind of the execution of our strategy, the evolution of the business mix and the business model, the mix toward more consistent, predictable and repeatable revenue streams that would impact PPNR, the simplification, which obviously plays through an expense base that will be lower when we get to, that medium-term period. So all of those things, the divestitures and kind of what that means and how that might impact the G-SIB score and the like and the freeing up of capital, which we've already freed up $6 billion or so. And so all of those things have kind of yet to have been factored in and we believe will be beneficial to the SCB over the medium term. Operator Our next question is from Mike Mayo at Wells Fargo. Your line is open. Please go ahead. Mike Mayo -- Wells Fargo Securities -- Analyst Hi. A follow-up, Mark. You said TTS -- you said, "We will have growth in operational deposits." And I was just wondering what gives you such confidence that you will. Or is that accelerating or the same pace or what? Mark Mason -- Chief Financial Officer We have seen growth in the quarter in operating deposits. The confidence comes from the focus that we've had with our existing clients as well as the growth we've seen with new clients, doing more with existing and more countries, more deeply penetrating the commercial middle-market base. And so we've been very thoughtfully focused on deposits that obviously give us the most value and also provide the most stickiness as it relates to that relationship. And so yes, the confidence is rooted in what we're seeing in the way of underlying operating deposit growth, including inside this quarter. Jane Fraser -- Chief Executive Officer It's also a lot of the investments that we've been making fuel a lot of the growth we've got. We have market-leading product innovations, and those continue to drive good returns, good growth. If it's Citi Token Services, Citi Payment Express, 24/7 -- all of these different elements really mean that this business is utterly invaluable and indispensable to our clients, and the stickiness of the deposits and the operating deposits comes with that. So we feel good about that growth. And you'll hear more about this as well, Mike, in the Investor Day in mid-June, which will be, I think -- we hope will be very helpful to everyone so you really get your arms around how this business operates, makes money and see why we call it a crown jewel. Operator Our next question is from Vivek Juneja at J.P. Morgan. Your line is open. Please go ahead. Vivek Juneja -- JPMorgan Chase and Company -- Analyst Mark, a completely different topic because I think I understood your answer could be just for my previous question to be the tax benefit. So we'll leave it at that. I don't know if it is different, then I need to go down that part. But the question I was -- I signed on to ask was you talked about the percentage of revolvers increasing in -- from transactors in the private label and the retail partner cards. What is that percentage? And how does it compare with what it was prepandemic? Mark Mason -- Chief Financial Officer Yes. I don't -- we haven't broken down the transactor versus revolver mix, and so I'm not going to get into that. I will say that the revolver levels are at least back to where they were prepandemic and leave it at that. But we are seeing kind of continued revolver activity, which you'd expect kind of given the way the cycle has evolved and given payment rates have started to moderate and the stimulus has kind of unwound. And so all of that is kind of consistent with expectations, but obviously, as a factor in reserve levels, as I mentioned earlier. Operator Our final question is from Betsy Graseck at Morgan Stanley. Your line is open. Please go ahead. Betsy Graseck -- Morgan Stanley -- Analyst Thanks so much. I just wanted to make sure of one thing on the expenses. I know in the past, you've talked about the fact that 1Q will be a little elevated with the restructuring, and you showed that was the $225 million in the quarter. And then when we look to 2Q, we should -- should we still be expecting a step-down in 2Q? And is that step-down just the elimination of the $225 million? Or is there some restructuring that we're likely to see in 2Q as well? In other words, should I just fade sequentially 2, 3, 4Q to hit your annual number? Or is there a bigger step-down in 2Q that I should still be expecting here? Mark Mason -- Chief Financial Officer Sure. I think you should just fade it, to answer your question very directly. But I'd also point out that in Q1, if you really look through to it, it has the $250 million of FDIC charge in it. So when you back that out, we effectively are coming in lower than what we had guided, right? Despite that, I'm telling you the same -- I'm making the same point, which is you can expect a downward trend from here through to the end of the year. And while there won't be additional restructuring charge, there will be the normal BAU activity around repositioning that plays through. So hopefully, that answers your question, Betsy. The guidance still holds, and the downward trend is what we are managing toward as we kind of play out the balance of the year. Operator There are no further questions. I will turn the call over to Jen Landis for closing remarks. Jen Landis -- Head of Investor Relations Thank you all for joining us. If you have any follow-up questions, please call us and we look forward to talking to you. Thank you very much. Answer:

Citi's first-quarter 2024 earnings call

Operator Hello and welcome to Citi's first-quarter 2024 earnings call. Today's call will be hosted by Jen Landis, head of Citi investor relations. [Operator instructions] Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Ms. Landis, you may begin. Jen Landis -- Head of Investor Relations Thank you, operator. Good morning and thank you all for joining our first-quarter 2024 earnings call. I am joined today by our chief executive officer, Jane Fraser; and our chief financial officer, Mark Mason. I'd like to remind you that today's presentation, which is available for download on our website, citigroup.com, may contain forward-looking statements which are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these statements due to a variety of factors, including those described in our earnings materials as well as in our SEC filings. And with that, I'll turn it over to Jane. Jane Fraser -- Chief Executive Officer Thank you, Jen, and good morning to everyone. Today, I'm going to touch on the macroeconomic environment before I update you on the progress we're making, and then I'll discuss the quarter. While global economic performance was surprisingly asynchronized last year, the overall story has been consistent of late, one of economic resiliency supported by tight labor markets and the consumer. Growth this year looks poised to slow in many markets, and conditions are generally disinflationary. We're already seeing some central banks in the emerging markets starting to cut rates. In the U.S., a soft landing is viewed as increasingly likely. But we continue to see a tale of two Europe with Germany hurt by the weak demand for goods, while Southern European countries, such as Spain and Greece, benefit from stronger demand in services. In Asia, Japan is joining in the areas of bright spot, and China's economy has gained some more traction, although its property market remains a concern. Amidst all these dynamics, we continue to focus on executing against our strategy and delivering the best of Citi to all our stakeholders. I said 2024 will be a pivotal year for us as we put our business and organizational simplification largely behind us and we focus on two main priorities: the transformation and the performance of our businesses and the firm. Last month marked the end to the organizational simplification that we announced in September. The result is a cleaner, simpler management structure that fully aligns to and facilitates our strategy. We are now more client-centric. We're already seeing faster decision-making and a nimbler organization at work. We have clear lines of accountability, starting with my management team, fewer layers, increased spans of control, and frankly, much less bureaucracy and needless complexity. It will all help us run the company more efficiently, will enhance our clients' experience, and improve our agility and ability to execute. And while reducing expenses wasn't the primary driver of the program, more roles were ultimately impacted than the 5,000 that we discussed in January. We also took a number of other steps to sharpen our business focus and improve returns by right placing businesses to better capture synergies, exiting certain businesses in markets that just didn't fit with our strategy, and rightsizing the workforce in wealth. As a result of all these combined steps, which include the simplification, we are eliminating approximately 7,000 positions, which will generate $1.5 billion of annualized run rate expense saves. The combination of these actions and the measures we're taking to eliminate our remaining stranded costs will drive $2 billion to $2.5 billion in cumulative annualized run rate saves in the medium term. We are keeping a close eye on the execution of these efforts and overall resourcing to ensure we safeguard our commitment to the transformation. As you know, given its magnitude and scale, the transformation is a multiyear effort to address issues that have spanned over two decades. We've made steady progress as we retire multiple legacy platforms, streamline end-to-end processes, and strengthen our risk and control environment, all of which are necessary not only to meet the expectations of our regulators but also to serve our clients more effectively. A transformation of this magnitude, well, it's never linear. So while we've made good progress in many areas, there are a few where we are intensifying our efforts, such as automating certain regulatory processes and the data related to regulatory reporting. We're committed to getting these right, and we look to self-fund the necessary investments to do so. Turning to the quarter. We had a good start to a pivotal year. We reported net income of approximately $3.4 billion, earnings per share of $1.58, and an RoTCE of 7.6% on over $21 billion of revenues. Our revenues were up over 3% year over year excluding divestitures, which was primarily the $1 billion gain from the India consumer sale last year. Our expenses were slightly down quarter over quarter, excluding the FDIC special assessments. Services continues to perform well and generate very attractive returns. Revenue was up 8% for the quarter. Both businesses won new mandates and deepened relationships with existing clients. Fees were up a pleasing 10% for services year over year driven by the investments we've made across our product offering, platforms, and client experience. In Securities Services, we took share again this quarter. And in TTS, cross-border activity continued to outpace global GDP growth, and commercial card spend remained robust. We look forward to diving deeper into these two businesses at our investor presentation on services in June. Markets bounced back from a tough final quarter in '23. While revenues were down 7% as lower volatility impacted rates and currencies, that was off a very strong first quarter last year. We saw good client activity in Equities and in spread products, where both new issuance and securitization activity were particularly robust. We fully integrated our financing and securitization capabilities within our Markets business, and we started to see the benefits of having a unified spread product offering for our clients. The rebound in Banking gained speed during the quarter, led by near-record levels of investment-grade debt issuance as improved market conditions enables issuers to pull forward activity. And after a bit of a slow start, ECM picked up in the second half of the quarter, notably in convertibles. Our strong performance in both DCM and ECM drove Investment Banking revenue growth of 35% and overall banking revenue growth of 49%. While M&A revenues are still low across The Street, I was pleased that we participated in some of the significant deals announced in the quarter, such as Diamondback's merger with Endeavour Energy and Catalent's merger with Nova Holdings. We are cautiously optimistic that we could see a measured reopening of the IPO market in the second quarter in light of improved market valuation. Corporate sentiment is quite positive, especially in the U.S., and our clients around the world have very sound balance sheets. We very much look forward to welcoming Vis Raghavan to Citi to lead our Banking franchise in early June. Like other new top talents who've joined the firm, he will inject fresh thinking to help us achieve our firm's full potential. In wealth, while revenues were down in the quarter, we grew fees and gathered an estimated $22 billion of net new assets over the past 12 months. As you've seen, Andy continues to form his team and is focused on three areas, first, rationalizing the expense base; second, turning on the growth engine by focusing on investment revenues; and third, enhancing our platforms and capabilities to elevate the client experience. Now these won't happen overnight, but getting these things right will help us get more than our fair share of the $5 trillion of assets that our clients have away from us. And that will help us get our returns to where they need to be in this business in the medium term. U.S. PB had double-digit revenue growth for the sixth straight quarter. We feel good about our position and our resiliency as a prime lend-centric issuer and are seeing positive momentum across proprietary card and partner card businesses. Healthy spend growth persists in branded cards primarily driven by our more affluent customers. Across both portfolios, increased demand for credit continues to drive strong growth in interest-earning balances. And while they're only a small part of our portfolio, we are keeping an eye on the customers in the lower FICO bands. We also continue to see strong engagement in digital payment offerings, such as Citi Pay, as a point-of-sale lending product, which is easily integrated into merchants' checkout processes. And we are driving more value from our retail branches as well as getting the expense base right to increase returns there. Our balance sheet is strong across the board, an intentional result of our high-quality assets, robust capital and liquidity positions, and rigorous risk management. During the first quarter, we returned $1.5 billion in capital to our common shareholders, and that includes $500 million through share buyback. Our CET1 ratio ticked up to a preliminary 13.5%, and we grew our tangible book value per share to $86.67. We have a great franchise around the world with great clients who are served by great colleagues. I'm pleased with where we are and I'm excited about where we're going. With the organizational simplification behind us and a good quarter under our belt, we have started this critical year on the right foot. Now while there will be bumps in the road, no doubt, we will continue to execute with discipline, and we are committed to reaching our medium-term targets. With that, I'd like to turn it over to Mark, and then we will both be delighted, as always, to take your questions. Thank you. Mark Mason -- Chief Financial Officer Thanks, Jane, and good morning, everyone. I'm going to start with the firmwide financial results, focusing on our year-over-year comparisons for the first quarter, unless I indicate otherwise, and then spend a little more time on the business. On Slide 6, we show financial results for the full firm. In the first quarter, we reported net income of approximately $3.4 billion, EPS of $1.58, and an RoTCE of 7.6% on $21.1 billion of revenue. Total revenues were down 2% on a reported basis. Excluding divestiture-related impacts, largely consisting of the $1 billion gain from the sale of the India consumer business in the prior year, revenues were up more than 3% driven by growth across Banking, USPB, and services, partially offset by declines in Markets and wealth. Expenses were $14.2 billion, up 7% on a reported basis. Excluding divestiture-related impact and the incremental FDIC special assessment, expenses were up 5%. Cost of credit was approximately $2.4 billion primarily driven by higher card net credit losses, which were partially offset by ACL releases in wealth, Banking, and legacy franchise. At the end of the quarter, we had nearly $22 billion in total reserves with a reserve-to-funded loan ratio of approximately 2.8%. On Slide 7, we show the expense trend over the past five quarters. We reported expenses of $14.2 billion, which included the incremental FDIC special assessment of roughly $250 million. Also included in this number are $225 million of restructuring charges largely related to the organizational simplification. In total, we've incurred approximately $1 billion of restructuring costs over the last two quarters. As part of these actions, we expect approximately $1.5 billion of annualized run rate saves over the medium term related to our head count reduction of approximately 7,000. In addition to the restructuring, we took approximately $260 million of repositioning costs largely related to our efficiency efforts across the firm, including a reduction of stranded costs associated with the consumer divestiture. The expected savings from these actions will allow us to continue to fund additional investments in the transformation this year. And relative to the prior year, the remainder of the expense growth was largely driven by inflation and volume-related expenses, partially offset by productivity savings. In the remainder of the year, we expect a more normalized level of repositioning, which is already embedded in our guidance. Therefore, you can expect our quarterly expense trend to go down from here, in line with our $53.5 billion to $53.8 billion ex FDIC expense guidance. On Slide 8, we show net interest income, deposits, and loans, where I'll speak to sequential variances. In the first quarter, net interest income decreased by $317 million largely driven by markets, which resulted in a 4 basis point decrease in net interest margin. Excluding Markets, net interest income was relatively flat. Average loans were up $4 billion primarily driven by loans in spread products and Markets as well as card and mortgage loans in U.S. Personal Banking, partially offset by declines in service. And average deposits were up nearly $7 billion primarily driven by services as we continue to grow high-quality operating deposits. On Slide 9, we show key consumer and corporate credit metrics. This quarter, we adjusted our FICO distribution to be more aligned with the industry reporting practices and now show our FICO mix using a 660 threshold. Across branded cards and retail services, approximately 85% of our card loans are to consumers with FICO scores of 660 or higher. And we remain well reserved with a reserve-to-funded loan ratio of 8.2% for our total card portfolio. In our corporate portfolio, the majority of our exposure is investment grade, which is reflected in our low level of nonaccrual loans at 0.5% of total corporate loans. As a reminder, our loan loss reserves incorporate a scenario weighted average unemployment rate of approximately 5%, which includes a downside scenario unemployment rate of close to 7%. As such, we feel very comfortable with the nearly $22 billion of reserves we have in the current environment. Turning to Slide 10. I'd like to take a moment to highlight the strength of our balance sheet, capital and liquidity. We maintain a very strong $2.4 trillion high-quality balance sheet, which increased 1% sequentially. Despite this increase, we were able to decrease our risk-weighted assets, reflecting our continued optimization efforts and focus on capital efficiency. Our balance sheet is a reflection of our risk appetite, strategy, and diversified business model. The foundation of our funding is a $1.3 trillion deposit base, which is well diversified across regions, industries customers and account types. The majority of our deposits, $812 billion, are corporate and span 90 countries. Most of our corporate deposits reside in operating accounts that are crucial to how our clients fund their daily operations around the world. In most cases, we are fully integrated in our client systems and help them efficiently manage their operations through our three integrated services, payments and collections, liquidity management, and working capital solutions, all of which greatly increased the stickiness of these deposits. The majority of our remaining deposits, about $423 billion, are well diversified across the Private Bank, Citigold, retail, and Wealth at Work as well as across regions and products. Now turning to the asset side. Over the last several years, we've maintained a strong risk appetite framework and have been very deliberate about how we deploy our deposits and other liabilities into high-quality assets. This starts with our $675 billion loan portfolio, which is well diversified across consumer and corporate loans. And the duration of the total portfolio is approximately 1.2 years. About one-third of our balance sheet is held in cash and high-quality, short-duration investment securities that contribute to our nearly $1 trillion of available liquidity resources. And for the quarter, we had an LCR of 117%. So to wrap it up, we are active and deliberate in the management of our balance sheet, which is reflected in our high-quality assets and strong capital and liquidity position. On Slide 11, we show the sequential CET1 walk to provide more detail on the drivers this quarter. First, we generated $3.1 billion of net income to common shareholders, which added 27 basis points. Second, we returned $1.5 billion in the form of common dividends and share repurchases, which drove a reduction of about 13 basis points. Third, we saw an increase in our disallowed DTA, which resulted in a 10 basis point decrease. And finally, the remaining 6 basis point benefit was largely driven by a reduction in RWA. We ended the quarter with a preliminary 13.5% CET1 capital ratio, approximately 120 basis points or over $13 billion above our regulatory capital requirement of 12.3%. That said, our current capital requirement does not yet reflect our simplification efforts, the benefits of our transformation, or the full execution of our strategy, all of which we expect to bring down capital requirements over time. So now turning to Slide 12. Before I get into the businesses, let me remind you that in the fourth quarter, we implemented a revenue-sharing arrangement within Banking and between Banking services and Markets to reflect the benefits that businesses get from our relationship-based lending. The impact of revenue sharing is included in the all other line for each business in our financial supplement. In services, revenues were up 8% this quarter driven by continued momentum across both TTS and Securities Services. Net interest income increased 6% driven by higher deposit and trade loan spreads. Noninterest revenue increased 14% largely driven by continued strength across underlying fee drivers. In TTS, fourth quarter volumes increased 9%, U.S. dollar clearing volumes increased 3%, and commercial card spend volume increased 5%, all of which was driven by strong corporate client activity. In Securities Services, our preliminary assets under custody and administration increased 11%, benefiting from higher market valuations as well as new client onboarding. The growth in both businesses is a direct result of our continued investment in product innovation, the client experience, and platform modernization to gain share across all client segments. TTS continues to maintain its No. 1 position with large corporate and FI clients and see good momentum in the commercial client segment, and we continue to gain share in Securities Services. Expenses increased 11% largely driven by continued investments in technology and product innovation. Cost of credit was $64 million as net credit losses remain low. Net income was approximately $1.5 billion. Average loans were up 4% primarily driven by strong demand for working capital loans in TTS. Average deposits were down 3% as the impact of quantitative tightening more than offset new client acquisitions and deepening with existing clients. However, it is worth noting that we continue to see good operating deposit inflow, and services continues to deliver a high ROTCE of 24.1% for the quarter. On Slide 13, we show the results for Markets for the first quarter. Markets revenues were down 7% as lower fixed-income revenues more than offset growth in Equities. Fixed income revenues decreased 10% driven by rates and currencies, which were down 21% on the back of lower volatility and a strong quarter in the prior year. This was partially offset by strength in spread products and other fixed income, which was up 26% driven by an increase in client activity, particularly in asset-backed lending. And we continue to see good underlying momentum in Equities with revenues up 5% driven by growth across cash trading and equity derivatives. And we continue to make progress in prime with balances up more than 10%. Expenses increased 7% largely driven by the absence of a legal reserve release last year. Cost of credit was $200 million primarily driven by macroeconomic assumptions related to loans and spread products that impacted reserves. Net income was approximately $1.4 billion. Average loans increased 8% primarily driven by asset-backed lending and spread products due to an improvement in market activity. Average trading assets increased 4% sequentially largely driven by seasonally stronger activity in the first quarter. Markets delivered an RoTCE of 10.4% for the quarter. On Slide 14, we show the results for Banking for the first quarter. Banking revenues increased 49% driven by growth in Investment Banking and corporate lending and lower losses on loan hedges. As I previously mentioned, corporate lending results include the impact of revenue sharing from Investment Banking, services and Markets. Investment Banking revenues increased 35% driven by DCM and ECM as improved market sentiment led to an increase in issuance activity, particularly investment grade, which is running at near-record levels. Advisory revenues declined given the low level of announced merger activity last year. However, in the quarter, we participated in the pickup in announced M&A across sectors, including those where we've been investing, such as technology and healthcare. Corporate lending revenues, excluding mark-to-market on loan hedges, increased 34% largely driven by higher revenue share. We generated positive operating leverage this quarter as expenses decreased 4% driven by actions taken to rightsize the expense base. Cost of credit was a benefit of $129 million primarily driven by changes in portfolio composition. The NPL rate was 0.3% of average loans, and we ended the quarter with a reserve-to-funded loan ratio of 1.5%. Net income was approximately $536 million. Average loans decreased 6% as we maintain strict discipline around capital efficiency as we optimize corporate loan balances. RoTCE was 9.9% for the quarter, reflecting a rebound in activity, reserve releases, and continued expense discipline. On Slide 15, we show the results for wealth for the first quarter. Wealth revenues decreased 4% driven by a 13% decrease in NII from lower deposit spreads and higher mortgage funding costs, partially offset by higher investment fee revenue. We're seeing good momentum in noninterest revenue, which was up 11% as we benefited from higher investment assets across regions driven by increased client activity as well as market valuation. Expenses were up 3% driven by technology investments focused on risk and controls as well as platform enhancements, partially offset by the initial benefits of expense reductions as we continue to rightsize the workforce. Cost of credit was a benefit of $170 million driven by a reserve release of approximately $200 million primarily related to a change in estimate as we enhanced our data related to margin lending collateral. Net income was $150 million. End-of-period client balances increased 6% driven by higher client investment assets. Average loans were flat as we continue to optimize capital usage. Average deposits decreased 1%, largely reflecting lower deposits in the Private Bank and Wealth at Work and the continued shift of deposits to higher-yielding investments on Citi's platform, which more than offset the transfer of relationships and the associated deposits from USPB. Client investment assets were up 12% driven by net new investment asset flows and the benefit of higher market valuation. RoTCE was 4.6% for the quarter. Looking ahead, we're going to improve the returns of our wealth business by executing on our three foundational priorities. As Jane mentioned, this will take time, but over the medium to longer term, we view this as a greater than 20% return business. On Slide 16, we show the results for U.S. Personal Banking for the first quarter. U.S. Personal Banking revenues increased 10% driven by NII growth of 8% and lower partner payments. Branded cards revenues increased 7% driven by interest-earning balance growth of 10% as payment rates continue to moderate. And we continue to see healthy growth in spend volumes up 4% primarily driven by our more affluent customers. Retail services revenues increased 18% primarily driven by lower partner payments due to higher net credit losses as well as interest-earning balance growth of 9%. Retail banking revenues increased 1% driven by higher deposit spreads, loan growth, and improved mortgage margins. Expenses were roughly flat due to lower compensation costs, including repositioning, offset by higher volume-related expenses. Cost of credit of approximately $2.2 billion increased 34% largely driven by higher NCLs of $1.9 billion as card loan vintages that were originated over the last few years were delayed in their maturation due to the unprecedented levels of government stimulus during the pandemic and are now maturing. In branded cards, the NCL rate came in at 3.65%, in line with our expectations. In Retail Services, the NCL rate of 6.32% was slightly above the high end of our guidance range for the full year and will likely remain above the range in the second quarter, reflecting historical seasonality patterns. However, given the persistent inflation, higher interest rates, and continued sales pressure at our partners, we now expect to be closer to the high end of the full-year NCL guidance range for Retail Services. This expectation, along with the continued mix shift from transactors to revolvers across both portfolios, led to an ACL build of approximately $340 million. Net income decreased to $347 million. Average deposits decreased 10% as the transfer of relationships and the associated deposits to our wealth business more than offset the underlying growth. RoTCE for the quarter was 5.5%. We recognize that this business is facing a number of headwinds from a regulatory perspective and from higher credit costs given where we are in the credit cycle, both of which are putting pressure on returns for the quarter and for the full year 2024. However, this doesn't impact our longer-term view of the business. We feel good about our position as a prime and lend-centric issuer. We will continue to take mitigating actions to manage through the headwinds, lap the credit cycle, and drive more value from retail banking and retail services while improving the overall operating efficiency of the business, all of which will ultimately result in a higher-returning business over the medium term. On Slide 17, we show results for all other on a managed basis, which includes Corporate/Other and legacy franchises and excludes divestiture-related items. Revenues decreased 9% primarily driven by closed exits and wind-downs as well as higher funding costs, partially offset by higher revenue in Mexico. And expenses increased 18% primarily driven by the incremental FDIC special assessment and restructuring charges, partially offset by lower expenses from the wind-down and exit markets. Slide 18 shows our full-year 2024 outlook and medium-term guidance, both of which remain unchanged. We have accomplished a lot over the past few years and have made substantial progress on simplifying our business and organizational structure. The year is off to a good start as we are laser-focused on executing the transformation and enhancing the business performance. These two priorities will not only enable us to be a more efficient, agile company but a client-centric one that brings together the best of Citi to drive revenue growth and improved return and we are on the path to reach our 11% to 12% return target over the medium term. With that, Jane and I will be happy to take your questions. Questions & Answers: Operator [Operator instructions] Our first question will come from Mike Mayo with Wells Fargo. Your line is open. Please go ahead. Mike Mayo -- Wells Fargo Securities -- Analyst Hi. Well, you just finished your seven months of your org simplification, and you said 7,000 positions go away with $1.5 billion of expense savings. So that's very concrete. But more generally, after 20, 30, 40 years of matrix structure down to five lines of business, you're reporting these differently. You're talking about them differently. But the question that I think a lot of people have is are you simply reporting these lines of business differently? Or are you actually running them differently? Jane Fraser -- Chief Executive Officer Thank you, Mike, for the question. The simplification that we've just gone through, it is what we said it is. It is the most consequential set of changes not only to the organization model that we have but how we run the bank. It's aligned the structure with the strategy. It's simplified the bank. It's eliminated needless complexity. It's created greater transparency into the five businesses and their performance, as you can see. It's increased accountability. And very simply, it's just easier for our people to focus on our clients but also getting things done and the execution that we have ahead of us. So maybe if I try and bring this a bit more alive, the first thing we did was we elevated the five businesses, and that eliminated the ICG and PBWM layer. And that's -- and we brought all the elements that the businesses needed to run end to end under the direct management of those five business heads, an example being operations. It's enabled transparency, greater accountability. And this end-to-end and total P&L focus, so focus on the bottom line and the returns driving growth, expense discipline, etc. We also right-place businesses to align with the strategy. So Banking all being under one umbrella, the investment bank, the corporate bank, commercial bank, really helping us drive synergies there. Putting finance FNS and securitization into markets so that we have a unified spread product there, also beginning to see the benefits of that this quarter. So that's an example on the businesses. But I do want to highlight a couple of other areas around this change. So by eliminating the regional layer and putting in a far slimmer, lighter management structure in place in the geographies, that's enabled us to make sure that our countries are focused on client delivery and legal entity management. And we've eliminated the whole shadow geographic P&L. We've eliminated a large number of committees in the geographies. This is where a lot of the functional management roles were streamlined and eliminated through the last seven months. And we also broke the regions into smaller, lighter clusters, and that allows us to much better capture the big changes in trade flows and financial flows, etc., we're seeing around the world. It's just much nimbler. The third piece, we created the client organizations. So that organization makes sure that our core capabilities and disciplines are being applied firmwide to drive revenue synergies. And then the government has got a lot easier. It took up a lot of time, and we've given much clearer mandates in. We've more than halved the number of committees. That's 200 committees-plus that we've eliminated in the firm, either by consolidating them or eliminating them. This stands in there, if you exclude me, 98% of the firm now operates within eight layers. That is a much, much faster decision-making. It's much quicker to get execution done. It also means that you can very quickly get closer to where the engine of the firm is. We've got clear accountabilities. We've eliminated most co-heads. We've reduced matrix reporting. We've got the producer-to-nonproducer ratio improved. So all of this really means, as I've said, a clearer deck, so we can be laser-focused on business performance in those five businesses and the transformation. It already feels different. Around my table, I'm much closer to the businesses and the clients. It makes it much easier for Mark and I and the rest of the team to run the bank like an operator versus the head of a holding company. You don't have to go through these aggregator layers to get things done. And we're done, as we said we would be, at this point. We're wrapping up the final consultation period. Not an easy few months with the organization. We've had to say goodbye to some very good people. We put a lot of change through the organization. And now as we close the chapter on this, we look forward to being back in BAU mode again, continuing to drive improvements in simplification and processes and alike. But now the focus is going to be really getting the full benefit from all the changes we've made in business and organization and moving forward. Operator Our next question is from Glenn Schorr at Evercore. Your line is open. Please go ahead. Glenn Schorr -- Evercore ISI -- Analyst Thanks very much. So I think it shows how much you've helped us see the simpler organization. I think people have totally bought in to the expense story. So a lot of credit for you guys. I think where I personally and others still have questions on is on the revenue side and getting to those 4% to 5% medium-term targets. So could you take us just conceptually where we're going to -- where you think you'll drive that growth from this baseline we're at now? And if you want, you can totally use my second question in there and tell us what good things you're doing inside the Investment Banking line to help tease out one of the answers. Jane Fraser -- Chief Executive Officer It's not that one in, Glenn. So I'll kick off with some of this, pass it to Mark, and then I'll come back to Banking. So look, we are laser-focused on the growth and improving the returns of these businesses to where they should and will be in the medium term. And it's not just a growth story, but let me anchor it in those medium-term return targets. In services, we want to continue around the mid-20s in RoTCE. Banking should be getting to around 15%, Markets 10% to 13%. So we'd like to see at the higher end of that range; USPB getting that back to the mid-teens and then moving on to the high teens in the medium term; and then lastly, as Andy and Mark have talked about, getting wealth to a 15% to 20% return in the medium term, but the goal is to the mid-20s in the longer term here. And we're confident that our strategy is going to drive the revenue growth of 4% to 5% CAGR in the medium term. And that's a combination of maintaining our leadership in certain businesses, gaining shares in others. We have good client growth. Look at our win rate, for example, in TTS at over 80%. We've got our commercial bank also bringing in new clients in the mid-market and helping them accelerate their growth and success around the world. But Mark, let me pass it over to you. Mark Mason -- Chief Financial Officer Sure. We appreciate the acknowledgment around the expenses. As you know, we've been quite focused on that and working hard to ensure that we deliver on what we say we're going to do there. I'd point on the revenue line, I'd first point to if you look back since Investor Day, we've in fact been able to deliver on the guidance that we've given for the medium term, so that 4% to 5% top-line growth. And yes, it was a different rate environment, but that growth that we delivered over the past couple of years has been a mix of both revenue and underlying business strength. As you think about the guidance we talked about for this year, we talked about the NII ex Markets being down modestly. And so what that means is that the momentum and the growth that we expect is going to come from the noninterest revenue. And I think this quarter is a good example of where and how that's likely to play through, so the revenue top line being up 3-plus percent. But when you look through each of the businesses and if you look on each of the pages where we disclose the revenue, you can see the underlying NIR growth in the bottom left-hand corner of each of those pages, that's coming through as well. So Securities Services, up 14% with growth in both TTS between cross-border, clearing commercial cards but also -- and Securities Services, right, with the growth that we're seeing from continued momentum in assets under custody. We expect that trend to continue with existing clients and more -- and new clients as well as how we do more with our commercial market middle -- commercial middle-market business, excuse me, so NIR growth there. The Investment Banking piece is the other driver of fees. We're seeing that wallet start to rebound. We're part of that rebound. The announced transactions, we're part of those in sectors that we've been investing in. We're bringing in new talent to help us realize and experience that. And even in wealth, where we're not pleased with the top line performance this quarter of down 4%, when you look through that, we do have good underlying NII growth in the quarter in wealth. And that's up 11% year over year. And it's in the area that Andy and the team is leaning in on, which is investments and not just in one region but across all the regions. And then finally, the USPB piece, which is showing good NII growth as well. So the long and short of it is that the 4% growth that's implied in $80 billion to $81 billion is going to be continued momentum largely in fees, helping us to deliver for our clients and make continued progress toward that medium-term target. Jane Fraser -- Chief Executive Officer So let me pick up -- sorry, I'm sure Jen Landis will give us the evil eye for sneaking in a second question there, Glenn. But let me pick up on Banking and what's going on there. So we have a very clear strategy that we've been executing over the last couple of years really to lay the foundation for growth in Banking. North America is our key priority. It's the biggest contributor to the global IB wallet. Tech, healthcare and industrials are likely to constitute over 50% of the fee wallet going forward. So we have better aligned our resources to position the franchise for this, defending areas of traditional strength in industrials and the like, energy, while investing in high-growth sectors, such as healthcare and technology, with some strong talent. Financial sponsors are sitting on $3 trillion of estimated firepower, which they are incentivized to deploy. So they're likely to be between 20% to 30% of global Investment Banking fees. We've great relationships with this community. We built that over years and decades. You're going to see us more active in the levfin space in the right situations for our key clients. And we'll continue to ensure we're well-positioned and active around this important opportunity. You will likely see us seeking to remain competitive in the private capital asset class. That can be an important source of liquidity for many clients. And the middle market will be fertile hunting ground for corporate and private equity. And our investment bank and commercial bank are going to be closely coordinated to harvest the deal flow around the world. And indeed, the new org structure that I was just talking about really enables us to drive a more joined-up, client-centric strategic coverage across corporate, commercial, and investment banking. So over and above the wallet recovery, Mark and I can be very laser-focused on ensuring that we're driving revenue growth from a more holistic focus on the wallet share across flow and episodic activity. Vis Raghavan is the right person to take over at this important moment for our Banking franchise. The momentum that we've been generating with the foundations we've been laying, the intention here from him is to accelerate that. He will focus on increasing our performance intensity, driving productivity and disciplined growth, and he will keep us firmly on the path toward delivering on our commitments, fundamentally improving the operating margin, generating higher returns and that all important fee revenue. Operator Our next question is from Betsy Graseck at Morgan Stanley. Your line is open. Please go ahead. Betsy Graseck -- Morgan Stanley -- Analyst Hi. Good morning. I guess a couple of questions. Well, I know we talked through the institutional securities business already on moving that expense ratio a little bit. Could we dig in a little bit on the wealth side? Because the expense ratio there is running a little higher, and so it would be useful just to understand the pace or speed or time frame when we should expect to see that start to inflect. Jane Fraser -- Chief Executive Officer Yes, absolutely. And some of it, just as a reminder, the actions that we've been taking on org simplification and Andy has also been taking in the wealth business, we will work through notice periods in the coming weeks. And so you'll start -- you'll see the impact coming through in our head count numbers and in wealth and the expense base next quarter. Look, as Mark said in his opening and Andy has been talking about, this should be a sort of up to a 30% pre-tax margin business. Andy is focused on rationalizing the expense base. He's also, as Mark said, turning on the growth engine. He's enhancing platforms and capabilities to elevate the client experience. The heart of the opportunity for us lies with our existing clients. They are an extraordinary client base, but they're underpenetrated. The operating efficiency is frankly going to be -- is going to come on the revenue side here. That said, Andy has taken a number of pretty decisive moves this quarter on the expense side. Mark, let me pass it over to you. Mark Mason -- Chief Financial Officer Yes. So I mean, look, I think that the quarter expenses that you see of growth of 3% is not yet reflective of the work that Andy has been steadfast at. There is still some investment in there in technology and in the platform that's important. But I think coming out of the first quarter, you'll start to see some of the reduction in expenses that's a byproduct of that work. And the work has been across the entire expense base in the wealth business. So that includes non-client-facing roles and support staff. It includes looking at the productivity of existing bankers and advisors. And those kind of reductions will start to play out in the subsequent quarters. I do want to point out, as Jane mentioned, this is a growth business for us. And so you can see on some of the metrics on Page 15, the bottom left, some of those good signs of investment momentum. And I highlight that because as the expenses come down from some of those efficiencies, there will be a need for us to continue to invest and replenish low-performing or low-producing bankers and advisors with resources that actually can generate the revenues we expect and take advantage of the client opportunity that's in front of us. So long-winded way of saying there's some operating efficiency upside for us for sure. It's a combination of the top line and the expense we're playing through the balance of the quarters and the year here. Operator Our next question is from Jim Mitchell at Seaport Global. Your line is open. Please go ahead. Jim Mitchell -- Seaport Global Securities -- Analyst Ok. Good morning, Jane and Mark, I very much appreciate the comments on your growth opportunities and driving growth. Revenues are often dictated by the macro, that it's a little bit out of your control. Can you talk a little bit about the flexibility on the expenses? You have a range in 2026 of 51 to 53. So if revenues are coming in below the targets, is it, I guess, a, fair to assume you'd be at the very low end of that range? Or is -- and I think there is some revenue growth built in there. So is there some flexibility to the downside to try to get to your targets in a tougher revenue environment? Mark Mason -- Chief Financial Officer Yes. Look, I mean, the top-line growth, as you've heard us say, is a CAGR of 4% to 5%. We put that target out there, 51 to 53 as a range of what we're working toward. We've given you a good sense of how we expect to get there with the $2 billion to $2.5 billion reduction by then. We've already signaled the $1.5 billion that's in front of us. The reality is that if there's softness in revenues, that's why we have a range. Obviously, the volume-related expenses would come down with any softness in revenue. And depending on the drivers of why that revenue is softening, we'd look at the investments that we're making across the business and make sure that those are appropriately calibrated for where we are in the cycle and what we're seeing on the top line. With that said, we've got to continue to invest in the transformation. We're not going to compromise that. That's going to be something that we have to spend on to ensure we continue to get right. But that's kind of how the dynamic works. There's a top -- we've got a mix of businesses that I think we've demonstrated resiliency around if you think about the past couple of years. And we expect for those to continue to drive some top-line momentum, but we've got levers in case they don't. Operator Our next question is Ebrahim Poonawala at Bank of America. Your line is open. Please go ahead. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst Thank you. I guess just one question, Mark, around capital. So you talked about $13 billion over the reg minimum. By my -- like you could easily be doing two times the buyback you did in one quarter, if not more. Just I know you don't like to talk about out quarters, but give us a sense of at least this quarter, should we expect the pace of buybacks to increase? And if you could provide additional color as we think about the rest of the year would be greatly appreciated. Mark Mason -- Chief Financial Officer Sure. Look, you know and I've said it repeatedly, Jane has said it repeatedly, given where we trade, we think buying back is smart. And we'd like to do as much as we possibly can and as much as makes sense in light of the uncertainty that's out there. We have run at about $13.5 billion this quarter. That does give us capacity above the $13.3 billion. But it's important to keep in mind that there's client demand that will continue to evolve. We want to make sure we can support the clients that want to do business with us, whether that be in Markets or other parts of the franchise. And then there's still uncertainty out there about how the capital regulation evolves. The good news is we are hearing kind of favorable things about how the Basel III endgame proposal could evolve, but that hasn't happened yet. It's not finalized, it's not in place yet. And so we want to see how that continues to play out. We're obviously in the midst of a CCAR process. We want to see how that evolves. And we'll continue to take the buyback decision on a quarter-by-quarter basis. But we recognize that there's an opportunity there, and we'll get after it just as soon as it makes good sense for us. Operator Our next question is from Erika Najarian at UBS. Please unmute your line and ask your question. Erika Najarian -- UBS -- Analyst Hi. Good afternoon. So clearly, the theme of this -- that's emerging on the Q&A is a healthy skepticism about your revenue targets in line with the -- in light of the expense declines, which is not really as analysts we're sort of a little bit parroting what we're hearing from long-only investors that haven't yet jumped into the stock. So to that end, I guess I'm going to ask Ebrahim's question differently then ask a question about card late fees. How are you balancing -- clearly, your valuation would demand that the buybacks be ramped up from $500 million. But growing revenues at a 4% to 5% CAGR would mean potentially some capital clawback into the business. I guess, how are you balancing that, especially given that the demand for buyback is louder at Citi than any other money center peer? And could you give us a sense of what card late fees are and how that would impact the $80 billion to $81 billion for the year if we do get an earlier implementation in October? Mark Mason -- Chief Financial Officer Thank you, Erika. On the first part of the question, I'd just remind you and everyone else that we're playing for the long term here, right? So we have set some medium-term targets. Obviously, Jane has recasted the vision and the strategy. I think we're making very good progress against that. But we're playing for the long term. And what that means is that we have to continue to invest in the franchise. It's why I've given you a range around the expenses, at least in part. It's why I've continued to stress the importance of protecting the transformation and risk and control spend. And it's why I started the answer to Ebrahim's question by saying that we want to be sure that we can match the client demand out there where the returns to do so makes sense. And so we are having to balance kind of the use of capital and other resources against that longer-term strategic objective and utilize it where it makes sense and generates good returns against the idea of returning that to shareholders. And so this is -- we'll continue to do that. It's an everyday assessment. It's an everyday discussion with the teams. Frankly, it's why things like the revenue sharing has been put in place to intensify the discussion around the clients that we're using balance sheet with and ensuring that we're driving broader revenues across the platform. And so that's kind of how we're operating in terms of making that trade-off on a regular basis in addition to, obviously, the broader regulatory environment that we're in. In terms of the second part of your question around late fees, we haven't disclosed kind of the dollar amount of the late fees. What I would say is that we did and have factored that into the $80 billion to $81 billion. And the only thing I'd add to that is it did kind of -- it's being implemented a bit earlier than what we had assumed. But again, it's inside of the range of the guidance that I've given you for top-line revenue for the year. Jane Fraser -- Chief Executive Officer And just as a reminder, 85% of our two card portfolios are prime. And in CRS, where you tend to see some of the lower-income households, we do have that. The economics of the fee change will be shared with our partners in CRS. So we want our customers to pay on time. We have a number of mechanisms to do so. But in terms of the economics, I think we, along with the rest of the industry, will be putting in mitigating actions over time, some of which we've already begun to implement. Operator Our next question is from John McDonald at Autonomous Research. Your line is open. Please go ahead. John McDonald -- Autonomous Research -- Analyst Thanks. Mark, I was hoping you could give a little more color on how you're feeling about the credit card charge-offs. You maintained the outlook for the year. You mentioned the higher end on Retail Services. Do you still feel like you'll see a peak this year? And what kind of metrics are you looking at in terms of delinquency formation and seasoning to inform that view that you might see the peak in card charge-offs this year. Mark Mason -- Chief Financial Officer Yes. Thanks, John. It's -- we have obviously continued to manage this portfolio very actively. We've seen continued top-line growth. We've seen continued average interest-earning balance growth. We've talked about how we expect for the cost of credit to normalize, and we've seen that continue to happen. The range that we've given on branded cards, we're inside of that range. When you look at the spend across the portfolios, the spend is really happening with the affluent customers more so than anything else. And so we're watching the lower-income customer profile or customers that we have. But again, as Jane mentioned, we tend to skew to the higher end to begin with. Where we're really seeing the pressure is where I mentioned in terms of Retail Services. And so there, the current NCLs are higher than the high end of the full-year range that I've given. But if you look back, that is not inconsistent with seasonality that we've seen in the past in that portfolio, where the first two quarters are higher than the back half of the year, in part because of coming out of the holiday season and how the -- and how losses tend to mature or materialize through that process. And so I'd expect to not only see them be higher than the average range in Q1 but also in Q2 before coming down. And then I still expect that in 2025, you tend to see them further normalize and come down a bit off of these ranges. But look, the reality is that we continue to watch it, and the factors that are out there that are important include how unemployment evolves, what happens with inflation, what happens with interest rates. And those will be important factors as to how the loss rates continue to evolve over time. I think the final point I'd make, and I mentioned it in the prepared remarks, is that we have to remember that the loss rates in both portfolios reflect kind of multiple vintages maturing at the same time. And you'll recall, and this is an industry dynamic through the COVID and pandemic period, losses were at an all-time low, payment rates at all-time highs, supported by government stimulus. And now coming out of that, we're seeing the COVID vintages mature, albeit at a lagged pace from what would be normal. And we're seeing the incremental acquisitions that we've done start to mature at their normal pace. And so these loss rates are exacerbated by that impact, and that's an important factor we can't lose sight of. But the bottom line is that we're watching it. The macro factors matter. We feel good about the quality mix that we have, and we'll kind of see how things evolve from here. John McDonald -- Autonomous Research -- Analyst OK. And on the branded side, you still expect kind of the peak this year -- you're still inside of the range for the full year and expect 2025 you could move lower on the branded charge-offs? Mark Mason -- Chief Financial Officer Yes. I still kind of expect that trend line of peaking and then kind of moving a bit lower in branded. Operator Our next question is from Ken Usdin at Jefferies. Your line is open. Please go ahead. Ken Usdin -- Jefferies -- Analyst Great. Thanks. Can I follow up on the card line of thinking and just asking Mark to talk a little bit about just cost of credit? We did still see some card-related build this quarter even with the comments you just made and seasonal softer loan growth. So just from a bigger-picture perspective, how do you think -- continue to think about reserve builds from here and how that informs your outlook for cost of credit? Mark Mason -- Chief Financial Officer Yes. Sure. Look, I think that when I think about the reserve build, I think it's the same factors that come into play. So obviously, the view on the macro is important. And right now, if you think about some of the key macro factors that impact the cards portfolio, the unemployment assumptions weighted is about 5%. The downside is about 7% kind of weighted over the period. And so feel -- how that evolves will be an important factor. How HBI evolves would be important consideration here for this portfolio, but also what happens with volumes becomes a factor on reserve builds and how important or how much they increase or decrease. And then the final piece is mix, and it's kind of related to that revolver point. As we see the mix evolve from transactors to revolvers, that's going to play into how much of a reserve from a lifetime point of view we have to continue to build. And so it's why I mentioned on John's question the importance of looking at the interest rates, looking at what's happening with inflation, watching the lower-income customer base because all of those things combined with how we think about the scenarios and the weighting will be a factor on the reserves. But I will say, Ken, as I sit here and think about what we have in the quarter, I feel very good about the reserve levels. The 8.2% combined kind of ACL to loan ratio feels right for the mix of this portfolio, and we'll continue to watch it. Ken Usdin -- Jefferies -- Analyst OK. And a separate question on TTS. That NII related to TTS has been remarkable with rising rates this quarter. Granted, there was a lesser day and there could be currency stuff in there. The first quarter, that step back, I'm just wondering like where is that in its asset liability sensitivity, the TTS/NII? And what are your thoughts about that piece of the NII puzzle going forward? Mark Mason -- Chief Financial Officer Sure. Yes. I mean, I think I'd say a couple of things. We do have kind of some Argentina playing through the NII line. I will say that the best way to think about it is kind of the underlying beta activity. And we have seen -- this is a corporate client, it is an institutional client. We have seen betas, particularly in the U.S., at kind of normalized or terminal levels and playing a bit through that. We are seeing betas outside of the U.S. continue to increase as it relates to the TTS client base. But all of that, again, is inside of the range that we've talked about. I don't expect to see kind of year-over-year growth on the NII line, anywhere close to kind of what we've seen in prior years, prior quarters, just in light of kind of how the rate environment's evolved and in light of kind of quantitative and tightening and the impact on deposit levels. The last point I'd make on this is we will continue to drive and see growth as it relates to the operating deposits. And that will be an important tailwind that kind of plays through. Operator Our next question is from Vivek Juneja at J.P. Morgan. Your line is open. Please go ahead. Vivek Juneja -- JPMorgan Chase and Company -- Analyst Hi. Thank you. Jane, Mark. Just a question maybe on Argentina. You had -- you've shown $100 million in NII, total net income benefit of $500 million after tax. So probably implying about $500 million, $600 million of noninterest income benefit. Which line item -- sorry, which segment did that come through? And is that sustainable? Mark Mason -- Chief Financial Officer Yes. Look, there's a mix, obviously, of things that are driving that net income, including a tax impact on the heels of last year Argentina devaluation activity that's in that line. But the short answer is that if you think about the nature of business that we do in Argentina, it is a big part of our institutional client relationships. And the primary activities include some of the TTS type of activities that we've talked about, so liquidity management, payments, custody within the services business. And so you'd see a good portion of the activity in Argentina playing through the services business, some of it in Markets as well. But again, the majority of the activity in services. Operator [Operator instructions] Our next question is from Scott Siefers at Piper Sandler. Your line is open. Please go ahead. Scott Siefers -- Piper Sandler -- Analyst Hi, everyone. Thanks for taking the question. Mark, I think you touched on at least a component of this a couple of questions ago, but maybe just broadly an update on your rate positioning. I guess I only ask because it looks like we might be starting to diverge in terms of global rate trajectories, if we potentially go lower in Europe but higher here for a while. In the aggregate, do these kind of complicate your management or make you feel better or worse about the overall NII momentum for the company? Mark Mason -- Chief Financial Officer Yes. Let me try and take it in two pieces, I guess. So one is, if I think about how the rate implies have evolved from the three to six to now something a little bit north of one in the context of what I expect for our performance, it doesn't have a material impact on the guidance that I've given of $80 billion to $81 billion. And in part, that's because as I think about the timing for the plan cuts, which was generally backloaded as well as some of the other factors that play through. So Argentina just announced a policy rate reduction yesterday or a couple of days ago. If rates are a bit higher for longer, we'll watch how the betas continue to evolve. I mentioned earlier the late fees for the cards business happened a bit sooner. Late fees are actually booked in our NII line. And so those factors put me in a place where I feel like there'll certainly be puts and takes around how that rate curves evolved. And therefore, I'm very comfortable kind of leaving the guidance where it is. To answer your broader question in terms of kind of how we're positioned, I'd point you to the 10-K that we have that's out. And in that 10-K, we offer, as we have before, a number of IRE scenarios for plus or minus 100 basis points and what it means for our business. And if you look at it, you'll see that for the aggregate firm for Citi, U.S. dollar and non-U.S. dollar, that we're asset-sensitive. So as rates increase, we should see an increase in our NII performance. But if you look at the breakdown and that's about -- I think it was about $1.4 billion or something in terms of the impact of that move. But if you look at the breakdown, what the breakdown will show is that for U.S. dollar, at this point, we're neutral. So if rates were to go up, rates were to go down, no material impact as it relates to our revenue. For the non-U.S. dollar, we're still quite asset-sensitive, right? And so that should give you some sense for at that -- and we recognize the limitations with IRE. It assumes a 100 basis point parallel shift across the curve, the static balance sheet, etc. But that should give you some sense for the implications of the rate curve moves as it relates to our book of business. Operator Our next question is from Gerard Cassidy at RBC Capital Markets. Your line is open. Please go ahead. Gerard Cassidy -- RBC Capital Markets -- Analyst Mark, can you share with us -- there's been obviously a lot of conversation around the credit card charge-offs and the credit quality there. If we could shift over to the corporate side, which obviously is very strong. We've seen spreads narrow in the markets on high-yield corporate debt, leverage debt, etc. It's very robust out there. But around the global geopolitical risk, do you think the spreads will be widening? Can you guys share with us what you're seeing on the corporate side in terms of competition? Are underwriting standards getting a little weaker now as people are trying to grow their books? What are you seeing on that front? Mark Mason -- Chief Financial Officer Look, we're still seeing good demand for corporate credit. And what I'd say is that we've been very disciplined about where we want to play on the risk profile here. We've been very disciplined in terms of the investment grade, large multinationals that we serve. And that hasn't shifted from an underwriting point of view. We have seen spaces like private credit pick up quite a bit. And that, I think, will continue to evolve. I think importantly, as we think about our corporate lending activity, you'll note that actually, we've been very disciplined about how we want to deploy balance sheet. And part of that, again, is a byproduct of the revenue sharing that we've implemented, where there's been healthy debate and discussion around the names that we want to continue to serve and whether they're positioned to take advantage of the broader platform that we have. And so I think the space will continue to evolve. I think there's been good, healthy demand despite continued strong balance sheet. And part of that demand has been because of where rates are likely to go and continue to evolve. And I think we're well-positioned to be thoughtful about that. But Jane, you may want to add a couple of points to it. Jane Fraser -- Chief Executive Officer Yes. Look around the world, the corporate client base and our commercial banking mid-market client base have very healthy balance sheets. And we're also seeing market access gradually opening up as well, which is also helpful for the quality issuers across all asset classes. We've seen both the issuers taking advantage as well as the investors. The deals are well oversubscribed. So that's also been beneficial as corporates think about their financing needs. The other piece I'd just pop out there as well is the recent large M&A announcements in multiple industries is a sign of rising confidence from CEOs and boards. Active discussions are increasing as supportive capital markets create confidence as people think about larger strategic transactions. This is going to feed acquisition finance, bridge financing and some of the higher-margin capital markets and lending activity as well. So as we look forward, I think it's recognizing the shift in some of the drivers from companies just investing, refinancing, looking at where they can, diversifying their capital raising in different quarters. But I'd just close by saying I couldn't agree with you more about geopolitical risks and fragility. I think the market's too -- it's too benign in its risk pricing on some of these factors. Mark Mason -- Chief Financial Officer Important for us to take this [Inaudible]. Operator Our next question is from Matt O'Connor at Deutsche Bank. Your line is open. Please go ahead. Matt O'Connor -- Deutsche Bank -- Analyst Hi. In your prepared remarks, you talked about intensifying certain efforts regarding regulatory processes and data on Slide 4 here and was just wondering if you could elaborate on, I guess, what you're doing or trying to do differently on that front and if there's any meaningful financial impact. Jane Fraser -- Chief Executive Officer Yes. Look, I think, Matt, as we've talked about many times, transformation is our top priority. It will be for the next few years. It is foundational for our future success both in terms of delivering the strategy and the medium-term financial path. And we've been making significant investments behind it as well as not only on the consent order but also making sure we've got this modern efficient infrastructure. We're currently deep into a very large body of work, upgrading our data architecture, automating manual controls and processes, consolidating fragmented tech platforms. And all of these help enhance our business performance more broadly, not just the risk and control in the medium term. As I've said, though, there are a few areas where we are intensifying our processes and data remediation, particularly related to regulatory reporting. We're committed to getting these right. The org changes will help us with execution and making sure that we're -- we have the impetus and everything that we need behind it, the investments that we need. We keep a close eye on execution, making sure we've got the right level of resourcing and expertise. And we'll invest what we need to do to make sure that we address these different concerns. I can't go into much more detail in terms of our CSI obviously. But something of this magnitude, you'd expect us to have some areas where we have good progress and others where we need to intensify efforts. Mark Mason -- Chief Financial Officer Yes. And I mean, I think that's exactly right. But you'd also expect that in this type of environment and on the heels of the regional bank stress last year that we're looking at stress scenarios. We're enhancing our CCAR processes. We're enhancing our resolution and recovery processes, all of those things just to -- kind of to make sure that we're shoring up capabilities. And you'd expect that across the industry, quite frankly. Operator Our next question is from Saul Martinez at HSBC. Your line is open. Please go ahead. Saul Martinez -- HSBC -- Analyst Hi. Good Afternoon. I'll change tack a little bit here. But I'm curious if there's any update on the Mexican IPO. And more specifically, I'm kind of curious how set in stone the IPO process is. You will have a new administration. And even if it's the candidate from the same party, she may have a less confrontational view of the private sector, perhaps be more allowing of a local bank to extract value from buying a bank. I guess, if the facts on the ground were to change, would you be open to a sale potentially being back on the table? Because it does seem like this is a situation where a private market valuation could be higher and even materially higher than a public market valuation. Jane Fraser -- Chief Executive Officer The guiding principle that we have and we've had all along is making sure that we make a decision here that is in the best interest of our shareholders and makes the most sense for them. We are -- never say never, but we are very focused on the IPO path here. We believe it is the right one for our shareholders. We're well on track in the path in Mexico. We're very pleased to bring Ignacio Deschamps in as the Banamex Chairman to help guide the IPO process. We announced some management teams for the two banks earlier this quarter. We're far down the path of the technological separation of both banks and then the full legal separation in the second half of the year. Obviously, the election is coming up fairly shortly. But we're not anticipating that we would be deviating from the IPO path. That is the path that we are on at the moment. I'll never say never. But we do believe that this is the right one. But we'll keep an eye on what's happening in Mexico as we always do. Operator Our next question is from Chris Kotowski at Oppenheimer. Please go ahead. Chris Kotowski -- Oppenheimer and Company -- Analyst Thanks. Just a quick one for Mark. Previously, you had talked about "bending the cost curve" between the third and the fourth quarter of this year. And on this call, I thought I heard you say it's basically bent, that second quarter should be down and we should be sequentially lower from here. So did it just happen six months earlier? Or is there still some other bending that comes late this year? Mark Mason -- Chief Financial Officer I'll take it. I'll take that. Jane Fraser -- Chief Executive Officer Damn, I wanted that one. Mark Mason -- Chief Financial Officer I'll take that -- I mean I'll take the win, a downward trajectory from here through the end of the year, in line with the guidance of 53.5% to 53.8%, and so yes. Operator Our next question is from Steven Chubak of Wolfe Research. Your line is open. Please go ahead. Steven Chubak -- Wolfe Research -- Analyst I did want to ask on DFAST and SCB, just recognizing this will be the last opportunity before the results come out. The macro scenario, Fed assumptions look quite similar to last year. But just given the significant transformation that's underway, repositioning actions, which -- and nearly depressed earnings last year, wanted to get a sense as to whether there are any ideal factors that could result in greater SCB volatility in the coming exam and just broader thoughts on the longer-term trajectory for the SCB just given the org simplification efforts that are underway. Mark Mason -- Chief Financial Officer Yes. Steven, the first part of your question is just impossible to answer, to be candid with you, right? I mean it's -- we obviously have an internal base scenario we've run. We have a severely adverse scenario that we've run. We've provided a balance sheet as part of the submission. But ultimately, the regulators have to run through their models the information that we've provided, and that informs what happens with the stress capital buffer. And we don't have as much transparency to that as we'd like. And so really hard to call at this stage. The second part of your question, I think, is spot on and I kind of alluded to in my prepared remarks in that we have the medium-term targets that we've set. And we're still in the midst of kind of the execution of our strategy, the evolution of the business mix and the business model, the mix toward more consistent, predictable and repeatable revenue streams that would impact PPNR, the simplification, which obviously plays through an expense base that will be lower when we get to, that medium-term period. So all of those things, the divestitures and kind of what that means and how that might impact the G-SIB score and the like and the freeing up of capital, which we've already freed up $6 billion or so. And so all of those things have kind of yet to have been factored in and we believe will be beneficial to the SCB over the medium term. Operator Our next question is from Mike Mayo at Wells Fargo. Your line is open. Please go ahead. Mike Mayo -- Wells Fargo Securities -- Analyst Hi. A follow-up, Mark. You said TTS -- you said, "We will have growth in operational deposits." And I was just wondering what gives you such confidence that you will. Or is that accelerating or the same pace or what? Mark Mason -- Chief Financial Officer We have seen growth in the quarter in operating deposits. The confidence comes from the focus that we've had with our existing clients as well as the growth we've seen with new clients, doing more with existing and more countries, more deeply penetrating the commercial middle-market base. And so we've been very thoughtfully focused on deposits that obviously give us the most value and also provide the most stickiness as it relates to that relationship. And so yes, the confidence is rooted in what we're seeing in the way of underlying operating deposit growth, including inside this quarter. Jane Fraser -- Chief Executive Officer It's also a lot of the investments that we've been making fuel a lot of the growth we've got. We have market-leading product innovations, and those continue to drive good returns, good growth. If it's Citi Token Services, Citi Payment Express, 24/7 -- all of these different elements really mean that this business is utterly invaluable and indispensable to our clients, and the stickiness of the deposits and the operating deposits comes with that. So we feel good about that growth. And you'll hear more about this as well, Mike, in the Investor Day in mid-June, which will be, I think -- we hope will be very helpful to everyone so you really get your arms around how this business operates, makes money and see why we call it a crown jewel. Operator Our next question is from Vivek Juneja at J.P. Morgan. Your line is open. Please go ahead. Vivek Juneja -- JPMorgan Chase and Company -- Analyst Mark, a completely different topic because I think I understood your answer could be just for my previous question to be the tax benefit. So we'll leave it at that. I don't know if it is different, then I need to go down that part. But the question I was -- I signed on to ask was you talked about the percentage of revolvers increasing in -- from transactors in the private label and the retail partner cards. What is that percentage? And how does it compare with what it was prepandemic? Mark Mason -- Chief Financial Officer Yes. I don't -- we haven't broken down the transactor versus revolver mix, and so I'm not going to get into that. I will say that the revolver levels are at least back to where they were prepandemic and leave it at that. But we are seeing kind of continued revolver activity, which you'd expect kind of given the way the cycle has evolved and given payment rates have started to moderate and the stimulus has kind of unwound. And so all of that is kind of consistent with expectations, but obviously, as a factor in reserve levels, as I mentioned earlier. Operator Our final question is from Betsy Graseck at Morgan Stanley. Your line is open. Please go ahead. Betsy Graseck -- Morgan Stanley -- Analyst Thanks so much. I just wanted to make sure of one thing on the expenses. I know in the past, you've talked about the fact that 1Q will be a little elevated with the restructuring, and you showed that was the $225 million in the quarter. And then when we look to 2Q, we should -- should we still be expecting a step-down in 2Q? And is that step-down just the elimination of the $225 million? Or is there some restructuring that we're likely to see in 2Q as well? In other words, should I just fade sequentially 2, 3, 4Q to hit your annual number? Or is there a bigger step-down in 2Q that I should still be expecting here? Mark Mason -- Chief Financial Officer Sure. I think you should just fade it, to answer your question very directly. But I'd also point out that in Q1, if you really look through to it, it has the $250 million of FDIC charge in it. So when you back that out, we effectively are coming in lower than what we had guided, right? Despite that, I'm telling you the same -- I'm making the same point, which is you can expect a downward trend from here through to the end of the year. And while there won't be additional restructuring charge, there will be the normal BAU activity around repositioning that plays through. So hopefully, that answers your question, Betsy. The guidance still holds, and the downward trend is what we are managing toward as we kind of play out the balance of the year. Operator There are no further questions. I will turn the call over to Jen Landis for closing remarks. Jen Landis -- Head of Investor Relations Thank you all for joining us. If you have any follow-up questions, please call us and we look forward to talking to you. Thank you very much.

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You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day and welcome to the Conagra Brands third quarter fiscal year 2024 earnings conference call. All participants will be in a listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Melissa Napier, SVP, investor relations. Please go ahead. Melissa Napier -- Senior Vice President, Investor Relations Good morning. Thank you for joining us today for our live question-and-answer session on today's results. Once again, I'm joined this morning by Sean Connolly, our CEO; and Dave Marberger, our CFO. We may be making some forward-looking statements and discussing non-GAAP financial measures during this session. Please see our earnings release, prepared remarks, presentation materials, and filings with the SEC, which can all be found in the investor relations section of our website for more information, including descriptions of our risk factors, GAAP to non-GAAP reconciliations, and information on our comparability items. Operator, please introduce the first question. Questions & Answers: Operator The first question today comes from Andrew Lazar with Barclays. Please go ahead. Andrew Lazar -- Barclays -- Analyst Great. Thanks so much. Good morning, everybody. Sean Connolly -- Chief Executive Officer Good morning. Dave Marberger -- Chief Financial Officer Good morning. Andrew Lazar -- Barclays -- Analyst Good morning. I guess, Sean, based on scanner data, most expected, I think, some upside in grocery and snacks and maybe a bit more weakness in refrigerated and frozen. This dynamic was certainly more extreme, I think, in the quarter than I think many had modeled. So, I guess, in grocery and snacks, Conagra had about a 4% benefit from price mix, and that was, you know, well ahead of what we'd thought. So, curious kind of what drove that. And then in refrigerated and frozen, you talked about success in single-serve meals, but trying to, you know, corroborate how we sort of marry that with the 8% organic sales decline in that segment? And maybe that's more of a function of refrigerated, you know, versus frozen in some way. So, those two aspects would be really helpful. Sean Connolly -- Chief Executive Officer Yeah, let me unpack all of that for you, Andrew. As I said in the prepared remarks, things unfolded very much in line with what we expected. And as you heard us say, our investments in frozen have driven a nearly 7-point swing in our scanner volume from Q1 to the most recent four weeks, where volume came in down a fairly modest 1.2%. So, very strong progress in frozen overall, which is important because that's been the focus of our investment. What you're seeing and the reason for the optics being a bit confusing is the reason the R&F segment in total numbers don't show the same magnitude of inflection is noise in the refrigerated part of the business, which was, by the way, also consistent with what we anticipated. Recall, our refrigerated businesses are predominantly pass-through categories and one of the rare areas in our portfolio where we've actually experienced deflation and rolled back prices accordingly, as pass-through categories do. And while, you know, that creates some short-term volatility in dollars until it's in the base as deflation passes through, importantly, margins are preserved due to the lower COGS. The other dynamic that I'll point out there in R&F is, in addition to that piece, our table spreads business benefited in Q3 a year ago due to a large competitor having a particularly weak quarter due to supply chain challenges. So, that's kind of some color on R&F and why the divergence between frozen and refrigerated. With respect to grocery and snacks segment, we also expected a solid quarter in the G&S segment, and we got it. And there were several factors there, from pricing in tomatoes to bounce back in canned meat like chili, Vienna sausage, where, you know, remember, we had a recall in the year-ago period, but also strong innovation like our new Wendy's chili, where we've grown significant market share. So, overall, our grocery brands are great consumer options for people who are seeking to make convenient meals at a great value. It's also a good mix for us. But I think the big picture is one of the benefits of a scale, diversified portfolio is that, as they say, there are horses for courses. So, you -- you're inherently hedged when the macro environment is less stable than normal. Big picture for us, I like the volume momentum we saw in Q3, I like what I've seen so far in Q4, and I expect further progress from here. Andrew Lazar -- Barclays -- Analyst Got it. Got it. Then I guess, just lastly, it's -- you know, obviously, volumes in the quarter we're still down, but a sequential improvement, and that's obviously what the expected step-up in investment spend. So, I guess, you know, you kind of talked to this a little bit, but how would you characterize like the current volume momentum and would you expect volume trends to inflect positively, you know, by the time we get to the start of FY '25 or are dynamics still such, in the broader industry, that that's a little bit hard to peg right now? Thank you. Sean Connolly -- Chief Executive Officer Well, it's one of the reasons why, you know, we're looking at this so closely. It's one of the reasons why I referenced the most recent four-week scanner data and frozen being down a mere 1.2. We obviously are seeing and expect to continue to see further progress. You know, we're not going to draw the line in the sand and say, you know, this is the month, this is the day where it's going to cross over. You know, next quarter, obviously, when we give '25 guidance and have our annual operating plans fully rolled up, we'll give you that color. But, you know, it's moving in the right direction. That's the bottom line. I mean, this is a food thing. Everybody wants to see volumes go in the right direction. I think companies and investors are, you know, willing to see investment in order to do that. But what I think people want to see overall is can you hold your gross margins while you're making those investments in getting the volume results that you want to see. And that's what was particularly encouraging to me in the quarter is we pretty much got -- we made the investments we intended to make, we got the volume improvements that we wanted to see, we've got continued volume progress into Q4, and we've done all this while maintaining, even expanding, gross margins that we worked very hard to kind of claw back after the initial compression from all the huge inflation we experienced a couple of years ago. So, you know, that, I think, is a positive, and I think it foreshadows just continued momentum from here. Andrew Lazar -- Barclays -- Analyst Thank you. Operator The next question comes from Ken Goldman with J.P. Morgan. Please go ahead. Ken Goldman -- JPMorgan Chase and Company -- Analyst Hi. Thanks and good morning. I just wanted to ask a quick question about 4Q. Your implied guidance might suggest around minus 2% in organic sales growth. It's pretty similar to what you posted in 3Q. You know, some might say it's a little prudent, though, just given you do have an easier comparison both on one-, two-, three-, and four-year basis, just looking that through. You have the lapping of the Americold issue. So, I'm just curious if it's right to think that's a little bit prudent or there may be, you know, some offsets that maybe a little bit of a less of a help from mix perhaps. Just throwing that out there. Just trying to get a bit of color on those building blocks as you think about that. Sean Connolly -- Chief Executive Officer Ken, I'll make a -- just a quick overall comment and flip it to Dave. But, you know, after the last nine months of kind of elongated volume recovery, our posture has been one of let's lean toward prudent because, you know, the macro environment's been more volatile than I think anybody expected. And so, that's been our posture. That's why we didn't bake in anything heroic in our back half plans. And I think that will continue to be our posture until we see a macro that is just inherently bouncier than it's been. But it's going in the right direction, and that's good. And I think we're in the -- I like the way we're set up for Q4. Dave, do you want to make any additional comments on Ken's points? Dave Marberger -- Chief Financial Officer No, I think you pretty much hit it. I mean, Ken, we're expecting sequential volume improvement, and we've been talking about that and we've seen it through Q3, but we also expect to continue investing. So, obviously, both of those things impact the top line. And you referenced mix. You know, we do have mix impacts in this portfolio and they can be, you know, slightly positive or slightly negative any quarter. So, you know, as Sean mentioned, we want to be prudent, but, you know, they're the three key drivers that get us to the -- you know, toward the low end of the sales guidance range for the year. Sean Connolly -- Chief Executive Officer Yeah. And just to also to think about it this way, too, Ken is, you know, our fiscal ends in May, which is kind of an odd month. But, you know, what's happening for us in May is our new innovation is rolling into the marketplace. We are focused at that point of the year always on the next fiscal year and how do we build momentum in the next fiscal and big events like Fourth of July, back to school. And so, you know, we're really getting so late in the year now that a lot of our attention is focused on getting these annual operating plans finalized and trying to set up next year to be as strong as possible, including around, you know, key dates and holidays and things like that. Ken Goldman -- JPMorgan Chase and Company -- Analyst And then while we're talking about next year, and thank you for that, I realize it's too soon to provide any kind of quantitative numbers. I wouldn't ask for them -- or quantitative information rather. But at CAGNY, you said you're doing what you can to be as close as possible to be on algo, and I was just curious, you know, where your level of confidence on that topic stood today, how you're thinking about maybe balancing what might continue to be a challenging consumer environment, I guess, with, you know, maybe what also could be some friendly top-line comparisons, progress on cost savings, cash flow, and so forth. Just trying to think directionally how you guys are thinking about that now. Sean Connolly -- Chief Executive Officer Well, I -- you know, you were 100% right. We will give you our complete and total view of fiscal '25 on our next call. I think, for this call, I think the key messages to our investors are we are getting momentum on the volume line. We are moving kind of toward that Mendoza Line here that everybody wants to see us cross over at some point. Exactly when that happens, as you've heard from other companies, I think you'll get more perspective on that in the coming months as people finalize their plans. That will be true of us. But, you know, make no mistake about it, we've been watching the consumer for their readiness to kind of reestablish, well, you know, their typical behaviors, and we've said we're willing to kind of nudge them along if we see that readiness. And so, we've been methodical in not only monitoring their readiness but putting the investment out there to nudge them and measuring the response we -- very carefully. And we're getting a good response. We're getting close. You know, it's not as if the momentum is slowing. If anything, it accelerated in the last quarter. So, I think all I can say at this point is I like the setup. We just have to continue to do more of what we've been doing, continue to drive it, which is that mindset of volume is important but so is protecting margin. And that's, you know, one of the things in our materials today that you saw is why our supply chain team is so important. You know, that work we've got going on in supply chain to really maximize cost savings provides critical fuel for growth, and, you know, we expect that to continue. And that's how -- you know, ultimately, over the long haul, that's how we're going to drive volumes back positive again. We've got a really tremendous stuff going on in the supply chain. We have cost savings right now. And as you saw in our chief supply chain officer, Ale Eboli's presentation at CAGNY, we are on track to implement our connected shop floor program in half our facilities in the next couple of years, and that is outstanding performance overall. If you look across the industry, that's a leading position in the industry, and that will be key to margin expansion going forward. And so, we're very excited about that work and the legs that it still has in front of us. Operator The next question comes from David Palmer with Evercore. Please go ahead. David Palmer -- Evercore ISI -- Analyst Good morning, guys. A question on frozen. I'm curious, particularly on frozen entrees, what's your thought there about a return to growth in sales in that business? And if there's any sort of juxtaposition that you would make between frozen entrees and frozen vegetables and how you view the challenges and opportunities for each on returning to growth? Thanks. Sean Connolly -- Chief Executive Officer Sure. David, you saw in the presentation today that in Q3 of '24, our frozen single-serve meal business achieved over a 51% market share, which is up 1.7 points versus a year ago. And if you remember Tom McGough's comments from CAGNY, we have just -- we've become the leading frozen food producer in the United States largely because of the success we've had in frozen single-serve meals over the last five years. So, our performance there continues to be stellar and we continue to gain share. And by the way, you know, I've made the comment many times that we under-index as a company in terms of competing with private label. Nowhere is that truer than in frozen single-serve meals. So, for example, the entire size of private label in frozen single-serve meals is 1.8 points. Our business is 51.2 points in market share. And in fact, our growth in market -- unit market share in the last quarter was 1.7 points, which is almost the total equivalent of private label. So, we like our position -- our market -- in the market structure there. We like our brands, and we feel great about it. And it's been a growth juggernaut for us for the last five years, and I see no reason why that won't continue. In terms of Birds Eye in vegetables, vegetables is one of the categories where, earlier in the year, we saw consumers exhibit value-seeking behaviors. So, for example, we saw some trade-down from fresh to frozen -- and frozen vegetables to canned vegetables despite the obvious quality trade-offs. But Birds Eye is also one of the businesses that we are investing against, with a clear focus on the superior relative value of frozen vegetables versus other choices. In fact, the advertising we're running now is directly comparative, as I mentioned to you previously, and features the clear benefit of our stay fresh flash freezing process, which basically freezes time for the consumer and keeps our vegetables at the peak of freshness until the consumer is ready. So, it's a clear advantage. And in the most recent four weeks of scanner data, Birds Eye grew overall share even though our focus is really on the value-added tier. So, we've got investments there. We've got momentum there. And it's an important brand, and you're not going to see us slow down on the marketing support and the innovation front. David Palmer -- Evercore ISI -- Analyst You know, I just wanted to follow up on Ken's question, maybe one way to ask how -- is what ways are you going to be really reviewing your business in the coming months as you contemplate how you're going to be guiding fiscal '25? Is it simply just, you know, volumes getting closer to flat overall in the business or are there any areas of the business you would be particularly focused on that you will be -- that will really help you think about how you guide for '25? Thanks. Sean Connolly -- Chief Executive Officer Well, I think -- the way I think about it principally, David, is we are an ROI-minded management team. We are not bashful about putting investments out there to support our brands if they drive the impact that we want to see in the marketplace, which, in turn, drives the return on investment. So, where we are in our typical annual operating planning process is, you know, brand by brand, looking at the market fundamentals on what's happening within the brand dynamics, the competitive dynamics, the category, what do we know about the need for those consumers in those categories to have some kind of stimulus to kind of nudge them back to their normal behaviors, and what kind of lifts can we expect. So, we do that on a brand-by-brand basis, and that ultimately leads to our investment profile. So, we're in the midst of that right now. We are -- we've obviously run a lot of what you might consider to be test markets starting in Q2 in terms of those investments and understanding what those ROIs are, and we're racking it up right now. But I think what's encouraging is we are seeing responsiveness and we are seeing good ROI, and I think that, you know, bodes well going forward. David Palmer -- Evercore ISI -- Analyst Thank you. Operator The next question comes from Chris Carey with Wells Fargo. Please go ahead. Chris Carey -- Wells Fargo Securities -- Analyst Hi. Good morning. One thing that did stand out was that the inflation impact to margins did get a little bit worse quarter over quarter. Can you just expand on that if that's driven by commodities, non-commodities? I think you mentioned tomatoes with respect to some incremental pricing. Just any context on what is driving that and if there are any nuances? Sean Connolly -- Chief Executive Officer Yeah, I'll make a quick comment, Chris, and flip it to Dave. You know, obviously, inflation has slowed, but we're still in an overall inflationary environment. And some things, more recently, have inflated, and that has led to taking some price. So, you get the benefit of that. But it also -- you know, there's a lag effect. So, we've kind of taken you all through that -- the mechanics of how that works. And that's part of it, right, is you get -- when you get new inflation, you take new pricing, you got a bit of a lag effect, so you get a little bit of margin pressure in the early days while you're waiting for that to get reflected and then you see a pretty rapid inflection from that point on. So, that may be a piece of it. Dave, do you want to add more color? Dave Marberger -- Chief Financial Officer Yeah, just a little color. So, Chris, yeah, we -- you know, our inflation rate as a percentage of cost of goods sold for the quarter was 2.9%, which drove the 1.9% margin impact that you see in the materials. So, we're still on track for -- we said full year approximately 3%. We're still on track for that. Maybe a tick above that. But, you know, the inflationary areas, you mentioned tomatoes, we've talked about that. We've taken pricing. That was a big driver of the price mix in grocery and snacks for the quarter. We've also seen inflation and more broadly in vegetables, in different ingredients and sweeteners, starches. You know, we have some inflationary areas. These things ebb and flow. We still -- and we've talked about this in the past. We still have inflation in our manufacturing operations, both with our labor and overhead. And transportation, you know, is relatively flat, a little bit inflationary. So, we're pretty much in line. It is slightly higher. But generally, we're managing it to the full year expectation. Chris Carey -- Wells Fargo Securities -- Analyst OK. Perfect. Just -- and then a follow-up regarding the comment on pricing, just, you know, you mentioned tomatoes, among other things, in the grocery and snacks business. How would you characterize the positive pricing there in the quarter? Was that, you know, due to, you know, anomalies in the base period, anomalies in the quarter itself, or are we looking at what appears to be a more durable positive price mix for that division from here on new pricing or lingering pricing, which is now being fully reflected in the P&L? Thank you very much. Dave Marberger -- Chief Financial Officer Yeah, I mean, we obviously got -- the biggest benefit was from the tomato pricing, and we saw the expected benefits there. The elasticities were good and in line with what we expected. We also did have the benefit of mix in the quarter. So, our price mix, which was a little over 4% for the quarter, we did get a benefit of mix, which contributed as well. And so, you know, a lot of our businesses in grocery and snacks are, you know, progressing as we expected, and so that's driving a good mix for us. So, that was part of the equation as well in the quarter. Chris Carey -- Wells Fargo Securities -- Analyst OK. All right. Thank you. Operator The next question comes from Alexia Howard with Bernstein. Please go ahead. Alexia Howard -- AllianceBernstein -- Analyst Good morning, everyone. Sean Connolly -- Chief Executive Officer Good morning. Dave Marberger -- Chief Financial Officer Good morning, Alexia. Alexia Howard -- AllianceBernstein -- Analyst OK. So, can I ask to begin with just about the productivity improvements in the food service channels? It seemed as though they were particularly strong this quarter. Is that likely to continue going forward? Sean Connolly -- Chief Executive Officer It was definitely a strong margin performance for food service. They -- you know, there's been a little bit of weakness in traffic in food service, but I'd say, overall, it was a very good quarter. And I think, you know, that is just an example of the productivity and total cost savings performance we expect across the portfolio, Alexia. So, food service has opportunities, but we've also got opportunities across the international business and the retail business in the U.S. as well. So, we expect strong continued cost savings performance across the total portfolio. Alexia Howard -- AllianceBernstein -- Analyst Great. Thank you. And then can I just hone in on private label in the frozen vegetable area? There seems to be some confusion out here about whether private label is becoming more of a problem just broadly or whether it's actually still fairly contained. Is there anything that you're seeing in terms of private label, either in frozen vegetables or more broadly, that would suggest it's becoming more of an issue, or is it really that, you know, it's the supply chain challenges have been overcome on the private label side but there doesn't seem to be any major red flags or anything on the horizon? Sean Connolly -- Chief Executive Officer Yeah, let me kind of frame that up for you so you've got the big picture of how that works. Overall, as a company, we under-index, as I mentioned a few minutes ago, versus private label. That is obviously category-specific. So, there are some categories that have more private label. A good example is canned tomatoes, where you've basically got Hunts, you've got private label, and then you've got some kind of regional brands that are smaller in the area. One of the other categories where there is a larger piece of private label is frozen vegetables. But as you think about vegetables more broadly, vegetables are sold frozen, they're sold in the produce section, and they're sold in the canned food section in the center of the store, and there's been a lot of movement between that as value-seeking behaviors have been out there. And one of that has been actually about, you know, six months ago, some trade out of frozen into canned and we're seeing that come back. Within frozen vegetables, Alexia, there are -- there's kind of the commodity vegetable tier and then there's the more premium steamer and then value-added tier, which is sauce, season, and things like that. For the last two years, we have been focused on building our business and our innovation pipeline in the premium value-added space and actually pulling back on the commodity veg space, doing more value over volume, as you've heard us talk before. And the reason for that is because that's a lower-margin business. Not surprisingly, it's more commodity-oriented. So, there's a role for us to play or there's a -- that business plays a role for us as a company in terms of overhead absorption in our vegetable plants. But our aspiration is not to be, you know, the world leaders and fastest growers in commodity veg tier within frozen because, you know, that's just arguably a bit of a misuse of our resources that we can -- people and otherwise put elsewhere because there's not much of a profit pool there. So, you know, it's important for us to maintain a certain scale of business there for overhead absorption purposes, but that is not strategically where we play. When we look at frozen vegetables, we are looking, and you can see it in our innovation pipeline, in more premium products and more value-added tier. Alexia Howard -- AllianceBernstein -- Analyst Great. Thank you very much. I'll pass it on. Operator The next question comes from Rob Dickerson with Jefferies. Please go ahead. Rob Dickerson -- Jefferies -- Analyst Great. Thanks so much. Sean, just, I guess, you know, a question specific to frozen. You know, we -- it sounds like the ROIs, you know, on the investment -- on the investments have been attractive. You seem very kind of upbeat and, you know, encouraged to the momentum on the business. But at the same time, you know, when we think about kind of what's happened in the quarter, it doesn't really seem like a lot of that was driven necessarily by kind of upside, so to speak, you know, within that volume component within refrigerated and frozen. So, I'm just curious, like, you know, as you speak to those investments, you know, are we talking kind of more promotional activity? You're doing better and better pack and bigger pack sizes. Just trying to gauge, you know, kind of what's like your perspective as to why the ROIs are good and kind of what you're doing right because, optically, as we look at the number in the segment, you know, which does include refrigerated, you know, it's not really better and there was, I think, a little bit of an easier compare? So, I'm just trying to gauge -- get a little bit more color on that one piece. Sean Connolly -- Chief Executive Officer Yeah, I think to not get too twisted up in the optics of the combined R&F segment, if you look at I think it was Page 10 of our presentation today, which was consumption in our consumer domains, that's really the key kind of evidence point of what we're seeing from our investments. So, our investments have been heavily skewed toward frozen, as I mentioned, because that's a very strategic business for us. And that line -- that consumption line there in terms of volume change has moved from minus 7.8% in Q1 of fiscal '24 to minus 2.8% in Q3 '24. And in the most recent -- in the first month of the fourth quarter, that number is about a minus 1.2%. So, that's -- when I referenced the nearly 7-point swing in consumption that we've seen over the last couple of quarters, that's precisely what I'm talking about. And that is a very, very meaningful move in terms of the category. I think you'll be hard-pressed to find a bigger move more broadly in food. What is creating the noise in the R&F segment data is the refrigerated, which I don't have here for you broken out, volumes, dollars in the absolute, which is a function of two things that I referenced. One is the rollback in prices because of the deflationary categories there and also the wrap that we had in one of our -- in our table spreads business. So, that's really what's behind that. But the movement in the volume is the basis for the ROI comment that I made, and you can see how that movement has come out. It's been very material and continues to be. Rob Dickerson -- Jefferies -- Analyst And then just a quick question on gross margin, very simplistically. You know, clearly, we heard all your comments and prepared remarks around productivity, efficiencies, got a little bit more pricing in grocery and snacks. It's all positive. But I'm just curious, like, what changed relative to coming out of Q2, right, in early January? Because I think the commentary there previously for the year was gross margin would probably be similar back half maybe relative to Q2, but now, it seems like it'll clearly be better in the back half relative to Q2, and that kind of took place over the course of two months. So, it seems like something changed to the upside, just like to know what. That's all. Thanks. Dave Marberger -- Chief Financial Officer Yeah, Rob. So, I think you'd agree that if you'd look over the last six quarters, there's been a lot of volatility in our supply chain. And so, you know, when forecasting gross margin, we want to be -- we want to make sure that we're considering, you know, all scenarios around operations. The fact of the matter is that if you look a year ago, we had a lot of -- we still had a lot of things going on in the supply chain with some recalls and some other challenges that we had that did impact the profitability. So, as Sean talked about, you know, our core productivity programs are on track. We're focused on the projects we're executing. So, we're really seeing that benefit. You know, the inflation still coming in. We're still investing, and you see those as part of margin. And we still have a headwind from absorption so -- because the volumes are down. And importantly, we're driving inventory down, so our production in our plants has been down, and we're managing that. That's been a headwind. But we haven't had any other disruptions like we've had the last couple of years in supply chain given the environment that, you know, now, we're able to -- we're really encouraged that we're able to make -- fund the investments we want to fund and execute our productivity programs and drive, you know, the gross margins that we're looking for. So, you know, one quarter doesn't make a year, but, you know, we're really encouraged by what we saw this quarter, and we're going to build on it. Rob Dickerson -- Jefferies -- Analyst All right. Super. Thanks, Dave. Appreciate it. Dave Marberger -- Chief Financial Officer Yup. Answer:

the Conagra Brands third quarter fiscal year 2024 earnings conference call

Operator Good day and welcome to the Conagra Brands third quarter fiscal year 2024 earnings conference call. All participants will be in a listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Melissa Napier, SVP, investor relations. Please go ahead. Melissa Napier -- Senior Vice President, Investor Relations Good morning. Thank you for joining us today for our live question-and-answer session on today's results. Once again, I'm joined this morning by Sean Connolly, our CEO; and Dave Marberger, our CFO. We may be making some forward-looking statements and discussing non-GAAP financial measures during this session. Please see our earnings release, prepared remarks, presentation materials, and filings with the SEC, which can all be found in the investor relations section of our website for more information, including descriptions of our risk factors, GAAP to non-GAAP reconciliations, and information on our comparability items. Operator, please introduce the first question. Questions & Answers: Operator The first question today comes from Andrew Lazar with Barclays. Please go ahead. Andrew Lazar -- Barclays -- Analyst Great. Thanks so much. Good morning, everybody. Sean Connolly -- Chief Executive Officer Good morning. Dave Marberger -- Chief Financial Officer Good morning. Andrew Lazar -- Barclays -- Analyst Good morning. I guess, Sean, based on scanner data, most expected, I think, some upside in grocery and snacks and maybe a bit more weakness in refrigerated and frozen. This dynamic was certainly more extreme, I think, in the quarter than I think many had modeled. So, I guess, in grocery and snacks, Conagra had about a 4% benefit from price mix, and that was, you know, well ahead of what we'd thought. So, curious kind of what drove that. And then in refrigerated and frozen, you talked about success in single-serve meals, but trying to, you know, corroborate how we sort of marry that with the 8% organic sales decline in that segment? And maybe that's more of a function of refrigerated, you know, versus frozen in some way. So, those two aspects would be really helpful. Sean Connolly -- Chief Executive Officer Yeah, let me unpack all of that for you, Andrew. As I said in the prepared remarks, things unfolded very much in line with what we expected. And as you heard us say, our investments in frozen have driven a nearly 7-point swing in our scanner volume from Q1 to the most recent four weeks, where volume came in down a fairly modest 1.2%. So, very strong progress in frozen overall, which is important because that's been the focus of our investment. What you're seeing and the reason for the optics being a bit confusing is the reason the R&F segment in total numbers don't show the same magnitude of inflection is noise in the refrigerated part of the business, which was, by the way, also consistent with what we anticipated. Recall, our refrigerated businesses are predominantly pass-through categories and one of the rare areas in our portfolio where we've actually experienced deflation and rolled back prices accordingly, as pass-through categories do. And while, you know, that creates some short-term volatility in dollars until it's in the base as deflation passes through, importantly, margins are preserved due to the lower COGS. The other dynamic that I'll point out there in R&F is, in addition to that piece, our table spreads business benefited in Q3 a year ago due to a large competitor having a particularly weak quarter due to supply chain challenges. So, that's kind of some color on R&F and why the divergence between frozen and refrigerated. With respect to grocery and snacks segment, we also expected a solid quarter in the G&S segment, and we got it. And there were several factors there, from pricing in tomatoes to bounce back in canned meat like chili, Vienna sausage, where, you know, remember, we had a recall in the year-ago period, but also strong innovation like our new Wendy's chili, where we've grown significant market share. So, overall, our grocery brands are great consumer options for people who are seeking to make convenient meals at a great value. It's also a good mix for us. But I think the big picture is one of the benefits of a scale, diversified portfolio is that, as they say, there are horses for courses. So, you -- you're inherently hedged when the macro environment is less stable than normal. Big picture for us, I like the volume momentum we saw in Q3, I like what I've seen so far in Q4, and I expect further progress from here. Andrew Lazar -- Barclays -- Analyst Got it. Got it. Then I guess, just lastly, it's -- you know, obviously, volumes in the quarter we're still down, but a sequential improvement, and that's obviously what the expected step-up in investment spend. So, I guess, you know, you kind of talked to this a little bit, but how would you characterize like the current volume momentum and would you expect volume trends to inflect positively, you know, by the time we get to the start of FY '25 or are dynamics still such, in the broader industry, that that's a little bit hard to peg right now? Thank you. Sean Connolly -- Chief Executive Officer Well, it's one of the reasons why, you know, we're looking at this so closely. It's one of the reasons why I referenced the most recent four-week scanner data and frozen being down a mere 1.2. We obviously are seeing and expect to continue to see further progress. You know, we're not going to draw the line in the sand and say, you know, this is the month, this is the day where it's going to cross over. You know, next quarter, obviously, when we give '25 guidance and have our annual operating plans fully rolled up, we'll give you that color. But, you know, it's moving in the right direction. That's the bottom line. I mean, this is a food thing. Everybody wants to see volumes go in the right direction. I think companies and investors are, you know, willing to see investment in order to do that. But what I think people want to see overall is can you hold your gross margins while you're making those investments in getting the volume results that you want to see. And that's what was particularly encouraging to me in the quarter is we pretty much got -- we made the investments we intended to make, we got the volume improvements that we wanted to see, we've got continued volume progress into Q4, and we've done all this while maintaining, even expanding, gross margins that we worked very hard to kind of claw back after the initial compression from all the huge inflation we experienced a couple of years ago. So, you know, that, I think, is a positive, and I think it foreshadows just continued momentum from here. Andrew Lazar -- Barclays -- Analyst Thank you. Operator The next question comes from Ken Goldman with J.P. Morgan. Please go ahead. Ken Goldman -- JPMorgan Chase and Company -- Analyst Hi. Thanks and good morning. I just wanted to ask a quick question about 4Q. Your implied guidance might suggest around minus 2% in organic sales growth. It's pretty similar to what you posted in 3Q. You know, some might say it's a little prudent, though, just given you do have an easier comparison both on one-, two-, three-, and four-year basis, just looking that through. You have the lapping of the Americold issue. So, I'm just curious if it's right to think that's a little bit prudent or there may be, you know, some offsets that maybe a little bit of a less of a help from mix perhaps. Just throwing that out there. Just trying to get a bit of color on those building blocks as you think about that. Sean Connolly -- Chief Executive Officer Ken, I'll make a -- just a quick overall comment and flip it to Dave. But, you know, after the last nine months of kind of elongated volume recovery, our posture has been one of let's lean toward prudent because, you know, the macro environment's been more volatile than I think anybody expected. And so, that's been our posture. That's why we didn't bake in anything heroic in our back half plans. And I think that will continue to be our posture until we see a macro that is just inherently bouncier than it's been. But it's going in the right direction, and that's good. And I think we're in the -- I like the way we're set up for Q4. Dave, do you want to make any additional comments on Ken's points? Dave Marberger -- Chief Financial Officer No, I think you pretty much hit it. I mean, Ken, we're expecting sequential volume improvement, and we've been talking about that and we've seen it through Q3, but we also expect to continue investing. So, obviously, both of those things impact the top line. And you referenced mix. You know, we do have mix impacts in this portfolio and they can be, you know, slightly positive or slightly negative any quarter. So, you know, as Sean mentioned, we want to be prudent, but, you know, they're the three key drivers that get us to the -- you know, toward the low end of the sales guidance range for the year. Sean Connolly -- Chief Executive Officer Yeah. And just to also to think about it this way, too, Ken is, you know, our fiscal ends in May, which is kind of an odd month. But, you know, what's happening for us in May is our new innovation is rolling into the marketplace. We are focused at that point of the year always on the next fiscal year and how do we build momentum in the next fiscal and big events like Fourth of July, back to school. And so, you know, we're really getting so late in the year now that a lot of our attention is focused on getting these annual operating plans finalized and trying to set up next year to be as strong as possible, including around, you know, key dates and holidays and things like that. Ken Goldman -- JPMorgan Chase and Company -- Analyst And then while we're talking about next year, and thank you for that, I realize it's too soon to provide any kind of quantitative numbers. I wouldn't ask for them -- or quantitative information rather. But at CAGNY, you said you're doing what you can to be as close as possible to be on algo, and I was just curious, you know, where your level of confidence on that topic stood today, how you're thinking about maybe balancing what might continue to be a challenging consumer environment, I guess, with, you know, maybe what also could be some friendly top-line comparisons, progress on cost savings, cash flow, and so forth. Just trying to think directionally how you guys are thinking about that now. Sean Connolly -- Chief Executive Officer Well, I -- you know, you were 100% right. We will give you our complete and total view of fiscal '25 on our next call. I think, for this call, I think the key messages to our investors are we are getting momentum on the volume line. We are moving kind of toward that Mendoza Line here that everybody wants to see us cross over at some point. Exactly when that happens, as you've heard from other companies, I think you'll get more perspective on that in the coming months as people finalize their plans. That will be true of us. But, you know, make no mistake about it, we've been watching the consumer for their readiness to kind of reestablish, well, you know, their typical behaviors, and we've said we're willing to kind of nudge them along if we see that readiness. And so, we've been methodical in not only monitoring their readiness but putting the investment out there to nudge them and measuring the response we -- very carefully. And we're getting a good response. We're getting close. You know, it's not as if the momentum is slowing. If anything, it accelerated in the last quarter. So, I think all I can say at this point is I like the setup. We just have to continue to do more of what we've been doing, continue to drive it, which is that mindset of volume is important but so is protecting margin. And that's, you know, one of the things in our materials today that you saw is why our supply chain team is so important. You know, that work we've got going on in supply chain to really maximize cost savings provides critical fuel for growth, and, you know, we expect that to continue. And that's how -- you know, ultimately, over the long haul, that's how we're going to drive volumes back positive again. We've got a really tremendous stuff going on in the supply chain. We have cost savings right now. And as you saw in our chief supply chain officer, Ale Eboli's presentation at CAGNY, we are on track to implement our connected shop floor program in half our facilities in the next couple of years, and that is outstanding performance overall. If you look across the industry, that's a leading position in the industry, and that will be key to margin expansion going forward. And so, we're very excited about that work and the legs that it still has in front of us. Operator The next question comes from David Palmer with Evercore. Please go ahead. David Palmer -- Evercore ISI -- Analyst Good morning, guys. A question on frozen. I'm curious, particularly on frozen entrees, what's your thought there about a return to growth in sales in that business? And if there's any sort of juxtaposition that you would make between frozen entrees and frozen vegetables and how you view the challenges and opportunities for each on returning to growth? Thanks. Sean Connolly -- Chief Executive Officer Sure. David, you saw in the presentation today that in Q3 of '24, our frozen single-serve meal business achieved over a 51% market share, which is up 1.7 points versus a year ago. And if you remember Tom McGough's comments from CAGNY, we have just -- we've become the leading frozen food producer in the United States largely because of the success we've had in frozen single-serve meals over the last five years. So, our performance there continues to be stellar and we continue to gain share. And by the way, you know, I've made the comment many times that we under-index as a company in terms of competing with private label. Nowhere is that truer than in frozen single-serve meals. So, for example, the entire size of private label in frozen single-serve meals is 1.8 points. Our business is 51.2 points in market share. And in fact, our growth in market -- unit market share in the last quarter was 1.7 points, which is almost the total equivalent of private label. So, we like our position -- our market -- in the market structure there. We like our brands, and we feel great about it. And it's been a growth juggernaut for us for the last five years, and I see no reason why that won't continue. In terms of Birds Eye in vegetables, vegetables is one of the categories where, earlier in the year, we saw consumers exhibit value-seeking behaviors. So, for example, we saw some trade-down from fresh to frozen -- and frozen vegetables to canned vegetables despite the obvious quality trade-offs. But Birds Eye is also one of the businesses that we are investing against, with a clear focus on the superior relative value of frozen vegetables versus other choices. In fact, the advertising we're running now is directly comparative, as I mentioned to you previously, and features the clear benefit of our stay fresh flash freezing process, which basically freezes time for the consumer and keeps our vegetables at the peak of freshness until the consumer is ready. So, it's a clear advantage. And in the most recent four weeks of scanner data, Birds Eye grew overall share even though our focus is really on the value-added tier. So, we've got investments there. We've got momentum there. And it's an important brand, and you're not going to see us slow down on the marketing support and the innovation front. David Palmer -- Evercore ISI -- Analyst You know, I just wanted to follow up on Ken's question, maybe one way to ask how -- is what ways are you going to be really reviewing your business in the coming months as you contemplate how you're going to be guiding fiscal '25? Is it simply just, you know, volumes getting closer to flat overall in the business or are there any areas of the business you would be particularly focused on that you will be -- that will really help you think about how you guide for '25? Thanks. Sean Connolly -- Chief Executive Officer Well, I think -- the way I think about it principally, David, is we are an ROI-minded management team. We are not bashful about putting investments out there to support our brands if they drive the impact that we want to see in the marketplace, which, in turn, drives the return on investment. So, where we are in our typical annual operating planning process is, you know, brand by brand, looking at the market fundamentals on what's happening within the brand dynamics, the competitive dynamics, the category, what do we know about the need for those consumers in those categories to have some kind of stimulus to kind of nudge them back to their normal behaviors, and what kind of lifts can we expect. So, we do that on a brand-by-brand basis, and that ultimately leads to our investment profile. So, we're in the midst of that right now. We are -- we've obviously run a lot of what you might consider to be test markets starting in Q2 in terms of those investments and understanding what those ROIs are, and we're racking it up right now. But I think what's encouraging is we are seeing responsiveness and we are seeing good ROI, and I think that, you know, bodes well going forward. David Palmer -- Evercore ISI -- Analyst Thank you. Operator The next question comes from Chris Carey with Wells Fargo. Please go ahead. Chris Carey -- Wells Fargo Securities -- Analyst Hi. Good morning. One thing that did stand out was that the inflation impact to margins did get a little bit worse quarter over quarter. Can you just expand on that if that's driven by commodities, non-commodities? I think you mentioned tomatoes with respect to some incremental pricing. Just any context on what is driving that and if there are any nuances? Sean Connolly -- Chief Executive Officer Yeah, I'll make a quick comment, Chris, and flip it to Dave. You know, obviously, inflation has slowed, but we're still in an overall inflationary environment. And some things, more recently, have inflated, and that has led to taking some price. So, you get the benefit of that. But it also -- you know, there's a lag effect. So, we've kind of taken you all through that -- the mechanics of how that works. And that's part of it, right, is you get -- when you get new inflation, you take new pricing, you got a bit of a lag effect, so you get a little bit of margin pressure in the early days while you're waiting for that to get reflected and then you see a pretty rapid inflection from that point on. So, that may be a piece of it. Dave, do you want to add more color? Dave Marberger -- Chief Financial Officer Yeah, just a little color. So, Chris, yeah, we -- you know, our inflation rate as a percentage of cost of goods sold for the quarter was 2.9%, which drove the 1.9% margin impact that you see in the materials. So, we're still on track for -- we said full year approximately 3%. We're still on track for that. Maybe a tick above that. But, you know, the inflationary areas, you mentioned tomatoes, we've talked about that. We've taken pricing. That was a big driver of the price mix in grocery and snacks for the quarter. We've also seen inflation and more broadly in vegetables, in different ingredients and sweeteners, starches. You know, we have some inflationary areas. These things ebb and flow. We still -- and we've talked about this in the past. We still have inflation in our manufacturing operations, both with our labor and overhead. And transportation, you know, is relatively flat, a little bit inflationary. So, we're pretty much in line. It is slightly higher. But generally, we're managing it to the full year expectation. Chris Carey -- Wells Fargo Securities -- Analyst OK. Perfect. Just -- and then a follow-up regarding the comment on pricing, just, you know, you mentioned tomatoes, among other things, in the grocery and snacks business. How would you characterize the positive pricing there in the quarter? Was that, you know, due to, you know, anomalies in the base period, anomalies in the quarter itself, or are we looking at what appears to be a more durable positive price mix for that division from here on new pricing or lingering pricing, which is now being fully reflected in the P&L? Thank you very much. Dave Marberger -- Chief Financial Officer Yeah, I mean, we obviously got -- the biggest benefit was from the tomato pricing, and we saw the expected benefits there. The elasticities were good and in line with what we expected. We also did have the benefit of mix in the quarter. So, our price mix, which was a little over 4% for the quarter, we did get a benefit of mix, which contributed as well. And so, you know, a lot of our businesses in grocery and snacks are, you know, progressing as we expected, and so that's driving a good mix for us. So, that was part of the equation as well in the quarter. Chris Carey -- Wells Fargo Securities -- Analyst OK. All right. Thank you. Operator The next question comes from Alexia Howard with Bernstein. Please go ahead. Alexia Howard -- AllianceBernstein -- Analyst Good morning, everyone. Sean Connolly -- Chief Executive Officer Good morning. Dave Marberger -- Chief Financial Officer Good morning, Alexia. Alexia Howard -- AllianceBernstein -- Analyst OK. So, can I ask to begin with just about the productivity improvements in the food service channels? It seemed as though they were particularly strong this quarter. Is that likely to continue going forward? Sean Connolly -- Chief Executive Officer It was definitely a strong margin performance for food service. They -- you know, there's been a little bit of weakness in traffic in food service, but I'd say, overall, it was a very good quarter. And I think, you know, that is just an example of the productivity and total cost savings performance we expect across the portfolio, Alexia. So, food service has opportunities, but we've also got opportunities across the international business and the retail business in the U.S. as well. So, we expect strong continued cost savings performance across the total portfolio. Alexia Howard -- AllianceBernstein -- Analyst Great. Thank you. And then can I just hone in on private label in the frozen vegetable area? There seems to be some confusion out here about whether private label is becoming more of a problem just broadly or whether it's actually still fairly contained. Is there anything that you're seeing in terms of private label, either in frozen vegetables or more broadly, that would suggest it's becoming more of an issue, or is it really that, you know, it's the supply chain challenges have been overcome on the private label side but there doesn't seem to be any major red flags or anything on the horizon? Sean Connolly -- Chief Executive Officer Yeah, let me kind of frame that up for you so you've got the big picture of how that works. Overall, as a company, we under-index, as I mentioned a few minutes ago, versus private label. That is obviously category-specific. So, there are some categories that have more private label. A good example is canned tomatoes, where you've basically got Hunts, you've got private label, and then you've got some kind of regional brands that are smaller in the area. One of the other categories where there is a larger piece of private label is frozen vegetables. But as you think about vegetables more broadly, vegetables are sold frozen, they're sold in the produce section, and they're sold in the canned food section in the center of the store, and there's been a lot of movement between that as value-seeking behaviors have been out there. And one of that has been actually about, you know, six months ago, some trade out of frozen into canned and we're seeing that come back. Within frozen vegetables, Alexia, there are -- there's kind of the commodity vegetable tier and then there's the more premium steamer and then value-added tier, which is sauce, season, and things like that. For the last two years, we have been focused on building our business and our innovation pipeline in the premium value-added space and actually pulling back on the commodity veg space, doing more value over volume, as you've heard us talk before. And the reason for that is because that's a lower-margin business. Not surprisingly, it's more commodity-oriented. So, there's a role for us to play or there's a -- that business plays a role for us as a company in terms of overhead absorption in our vegetable plants. But our aspiration is not to be, you know, the world leaders and fastest growers in commodity veg tier within frozen because, you know, that's just arguably a bit of a misuse of our resources that we can -- people and otherwise put elsewhere because there's not much of a profit pool there. So, you know, it's important for us to maintain a certain scale of business there for overhead absorption purposes, but that is not strategically where we play. When we look at frozen vegetables, we are looking, and you can see it in our innovation pipeline, in more premium products and more value-added tier. Alexia Howard -- AllianceBernstein -- Analyst Great. Thank you very much. I'll pass it on. Operator The next question comes from Rob Dickerson with Jefferies. Please go ahead. Rob Dickerson -- Jefferies -- Analyst Great. Thanks so much. Sean, just, I guess, you know, a question specific to frozen. You know, we -- it sounds like the ROIs, you know, on the investment -- on the investments have been attractive. You seem very kind of upbeat and, you know, encouraged to the momentum on the business. But at the same time, you know, when we think about kind of what's happened in the quarter, it doesn't really seem like a lot of that was driven necessarily by kind of upside, so to speak, you know, within that volume component within refrigerated and frozen. So, I'm just curious, like, you know, as you speak to those investments, you know, are we talking kind of more promotional activity? You're doing better and better pack and bigger pack sizes. Just trying to gauge, you know, kind of what's like your perspective as to why the ROIs are good and kind of what you're doing right because, optically, as we look at the number in the segment, you know, which does include refrigerated, you know, it's not really better and there was, I think, a little bit of an easier compare? So, I'm just trying to gauge -- get a little bit more color on that one piece. Sean Connolly -- Chief Executive Officer Yeah, I think to not get too twisted up in the optics of the combined R&F segment, if you look at I think it was Page 10 of our presentation today, which was consumption in our consumer domains, that's really the key kind of evidence point of what we're seeing from our investments. So, our investments have been heavily skewed toward frozen, as I mentioned, because that's a very strategic business for us. And that line -- that consumption line there in terms of volume change has moved from minus 7.8% in Q1 of fiscal '24 to minus 2.8% in Q3 '24. And in the most recent -- in the first month of the fourth quarter, that number is about a minus 1.2%. So, that's -- when I referenced the nearly 7-point swing in consumption that we've seen over the last couple of quarters, that's precisely what I'm talking about. And that is a very, very meaningful move in terms of the category. I think you'll be hard-pressed to find a bigger move more broadly in food. What is creating the noise in the R&F segment data is the refrigerated, which I don't have here for you broken out, volumes, dollars in the absolute, which is a function of two things that I referenced. One is the rollback in prices because of the deflationary categories there and also the wrap that we had in one of our -- in our table spreads business. So, that's really what's behind that. But the movement in the volume is the basis for the ROI comment that I made, and you can see how that movement has come out. It's been very material and continues to be. Rob Dickerson -- Jefferies -- Analyst And then just a quick question on gross margin, very simplistically. You know, clearly, we heard all your comments and prepared remarks around productivity, efficiencies, got a little bit more pricing in grocery and snacks. It's all positive. But I'm just curious, like, what changed relative to coming out of Q2, right, in early January? Because I think the commentary there previously for the year was gross margin would probably be similar back half maybe relative to Q2, but now, it seems like it'll clearly be better in the back half relative to Q2, and that kind of took place over the course of two months. So, it seems like something changed to the upside, just like to know what. That's all. Thanks. Dave Marberger -- Chief Financial Officer Yeah, Rob. So, I think you'd agree that if you'd look over the last six quarters, there's been a lot of volatility in our supply chain. And so, you know, when forecasting gross margin, we want to be -- we want to make sure that we're considering, you know, all scenarios around operations. The fact of the matter is that if you look a year ago, we had a lot of -- we still had a lot of things going on in the supply chain with some recalls and some other challenges that we had that did impact the profitability. So, as Sean talked about, you know, our core productivity programs are on track. We're focused on the projects we're executing. So, we're really seeing that benefit. You know, the inflation still coming in. We're still investing, and you see those as part of margin. And we still have a headwind from absorption so -- because the volumes are down. And importantly, we're driving inventory down, so our production in our plants has been down, and we're managing that. That's been a headwind. But we haven't had any other disruptions like we've had the last couple of years in supply chain given the environment that, you know, now, we're able to -- we're really encouraged that we're able to make -- fund the investments we want to fund and execute our productivity programs and drive, you know, the gross margins that we're looking for. So, you know, one quarter doesn't make a year, but, you know, we're really encouraged by what we saw this quarter, and we're going to build on it. Rob Dickerson -- Jefferies -- Analyst All right. Super. Thanks, Dave. Appreciate it. Dave Marberger -- Chief Financial Officer Yup.