Q2 2024 Earnings Call Roundup: Tech and Energy Sectors Show Resilience

WNS (Holdings) Limited (WNS) Q1 2025 Earnings Call Transcript

Ryan Potter - Citi Surinder Thind - Jefferies Bryan Bergin - TD Cowen Nate Svensson - Deutsche Bank Maggie Nolan - William Blair Puneet Jain - JPMorgan Dave Koning - Baird Vincent Colicchio - Barrington Research Good morning, and welcome to the WNS Holdings Fiscal 2025 First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. Now I would like to turn the call over to David Mackey, WNS' Executive Vice President of Finance and Head of Investor Relations. David, please go ahead. David Mackey Thank you, and welcome to our fiscal 2025 first quarter earnings call. With me today on the call, I have WNS' CEO, Keshav Murugesh; WNS' CFO, Sanjay Puria; and our Corporate Financial Controller, Arijit Sen. A press release detailing our financial results was issued earlier today. This release is also available on the Investor Relations section of our website at www.wns.com. Today's remarks will focus on the results for the fiscal first quarter ended June 30, 2024. Some of the matters that will be discussed on today's call are forward-looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, those factors set forth in the company's Form 20-F. This document is also available on the company website. During this call, management will reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliations of these non-GAAP financial measures to GAAP results can be found in the press release issued earlier today. Some of the non-GAAP financial measures management will discuss are defined as follows: Net revenue is defined as revenue less repair payments. Adjusted operating margin is defined as operating margin excluding amortization of intangible assets, share-based compensation, acquisition-related expenses or benefits, and impairment of goodwill and intangible assets. We are also excluding costs related to our ADS program termination and costs associated with the transition to voluntarily reporting on U.S. domestic issuer forms. Adjusted net income, or ANI, is defined as profit excluding amortization of intangible assets, share-based compensation, acquisition-related expenses or benefits, goodwill and intangible asset impairment, ADS program termination costs, the transition to voluntarily reporting on U.S. domestic issuer forms and all associated taxes. These terms will be used throughout the call today. I would now like to turn the call over to WNS' CEO, Keshav Murugesh. Keshav? In the fiscal first quarter, WNS' financial results were in line with company expectations, posting net revenue of $312.4 million. Now this represents a year-over-year decrease of 1.6% on a reported basis and a 1.8% reduction on a constant currency basis. Sequentially, net revenue decreased by 4.1% on a reported basis and by 3.9% on a constant currency basis after adjusting for products. Demand continues to be healthy for business transformation initiatives, leveraging digital and analytics while certain client volumes and project-based work remain pressured. During the first quarter, we added eight new logos, including one large transformational deal and expanded 36 existing relationships. In the fiscal first quarter, our ongoing efforts to improve access to capital and increase share price stability made significant progress. As discussed last quarter, on March 28, the company reached its first major milestone exchanging our ADSs for ordinary shares. This change helped facilitate WNS' addition to the Russell 2000 Index on June 28. In addition, effective this quarter, we have voluntarily transitioned to domestic filer status and are reporting our financials under U.S. GAAP. This transition should enable WNS to access additional index fund complexes, improve ESG visibility, and make our financials more consistent with peers. With respect to capital allocation, on May 30, WNS held an extraordinary general meeting, where our shareholders overwhelmingly approved repurchases of up to 4.1 million ordinary shares. The company began executing against these plans in early June, buying back over 1.6 million shares in fiscal first quarter at a total cost of $84.2 million and we will be continuing our repurchase programs in Q2. As AI and Gen AI continue to be important themes for our clients, shareholders as well as employees, we wanted to provide some additional color on our efforts in these areas. We continue to see that WNS' ability to combine domain, data and digital is resonating well with clients and that our industry-specific and process-specific knowledge remains the key to unlocking the power of data and technology. From a technology perspective, as we have discussed, WNS has significant experience and a proven track record of leveraging artificial intelligence in our services as well as solutions. In fact, the company has now been delivering AI projects for more than 15 years, utilizing quantitative analytics as well as machine learning algorithms to help improve outcomes. Later, the company introduced the WNS Analytics and Decision Engine framework or WADE, which combines multiple components of an AI solution including data sourcing, data correlation and virtualization, data analysis and machine learning modeling and a presentation layer into a single compact structure. Since then, the breadth and depth of our AI capabilities have continued to progress embedding the power of deep learning and big data into our offerings. WNS has been invested in employee training as well as reskilling, launched AI co-creation labs to drive innovation and form strategic partnerships with leading technology firms, including the three major hyperscalers. We have also now created best practice consulting frameworks for leveraging ethical AI across strategy, data management, governance as well as business outcomes. As a result of all these efforts in fiscal 2024, approximately one-third of company revenue was delivered with AI as a component of the solution. Today, WNS's AI practice has approximately 7,000 resources globally, and we have created over 70 industry-specific AI models. Our extensive experience with AI has provided the foundation for our ability to develop and deploy Gen AI use cases as well as solutions, which leverage the power of large language models. To date, we have developed over 100 unique Gen AI use cases with more than 30 ready for deployment and have integrated Gen AI into eight of our WNS proprietary digital assets. We have now successfully implemented Gen AI solutions for six of our clients and currently have an additional 11 installations in progress. Several of our recent client wins include Gen AI as a key element of the overall solution and we estimate that in fiscal 2025, 5% or more of total company revenue will have a Gen AI component. Increasingly, clients are looking for partners who can help them drive technology-led process transformation to deliver superior outcome, great customer experiences and maximize business impact. These initiatives are larger in size, strategic, complex and disruptive in nature and require executive level support. To capitalize on this evolving trend. Over the past 18 months, WNS has increased our organizational focus on elevating our relationships to the highest levels of client organizations and properly positioning our end-to-end transformational capabilities. Some of the key investments include the addition of six senior level vertically aligned Chief Growth Officers focused on driving large deals, the expansion of our regional sales model into Continental Europe and Canada to help build in-country relationships and the hiring of a global head of advisory to drive WNS' positioning with the analyst and adviser community and help identify captive carve-out opportunities. We have also updated the sales team, including strategic hires for consultative selling across technology enablement and domain expertise. And as a result, over the past five quarters, the WNS' sales force has grown by 16%. In addition, WNS announced last month that we have added a new head of strategic growth initiatives responsible for establishing CXO-level relationships for WNS and expanding our geographic reach. This executive position is working closely with our Chief Growth Officer, business unit heads and myself to engage directly with CXOs, understand and address their critical business challenges and create new and exciting opportunities for WNS. Our focused approach is already bearing fruit in the form of large deal signings and a material increase in our large deal pipeline. As discussed last quarter, the company closed four large deals in fiscal Q4. And in the fiscal first quarter, we added one more large deal and made good progress on several others. Our pipeline now includes more than 20 large deals, each over $10 million in ACV, which have the potential to close this fiscal year. These deals totaled more than $400 million in ACV, and we believe WNS is well positioned for success in many of these opportunities. In summary, demand for digital transformation and cost reduction initiatives remain healthy, and our new business pipeline has expanded to record levels. At the time -- at the same time, fiscal full-year 2025 visibility continues to be challenged by the timing of large deals and the macro uncertainty, which is impacting business volumes and project-based work. WNS remains focused on accelerating profitable growth and investing in AI as well as Gen AI. We are confident that these strategic initiatives are well underway and that successful execution through the remainder of this year will position the company well entering fiscal 2026. In addition, we remain committed to investing ahead of the curve in technology-enabled offerings, leveraging AI as well as Gen AI, improving our access to capital and opportunistically repurchasing stock. I would now like to turn the call over to our CFO, Sanjay Puria, to further discuss our results as well as outlook. Sanjay? As mentioned earlier, in fiscal quarter 1, we have voluntarily shifted from foreign private issuer status reporting under IFRS to domestic filer status reporting under U.S. GAAP, and we'll be filing our first Form 10-Q in the coming weeks. In a press release issued on July 9, WNS provided U.S. GAAP historical financials and reconciliations to previously reported IFRS numbers for fiscal 2023 and fiscal 2024. We have also provided additional details, including restated fiscal 2022 financials in our quarterly metrics FY, posted on the company's website this morning. All of the numbers discussed today will be on a U.S. GAAP basis. In the fiscal first quarter, WNS net revenue came in at $312.4 million, down 1.6% from $317.5 million posted in the same quarter of last year and down 1.8% on a constant currency basis. Sequentially, net revenue decreased by 4.1% on a reported basis and 3.9% on a constant currency basis. The sequential revenue decline was driven by volume reductions with certain clients, continued weakness in discretionary project-based revenues, the impact of our annual productivity improvements and unfavorable currency movements. Quarter one, volume reductions were primarily in the OTA or online travel sector and was greater than expected in our April guidance. In this space, we must continue to expect transaction volumes and client forecast to be highly volatile given macro exposure. Company-specific challenges and the potential risks and opportunities from automation. This headwind were partially offset by healthy demand for digitization and cost reduction focus initiatives. In the first quarter, WNS recorded $0.6 million of short-term high-margin revenue. Adjusted operating margin in quarter one was 18.4% as compared to 20.1% last year and 20.9% last quarter. Year-over-year, adjusted operating margin decreased as a result of lower revenue and employee utilization and higher SG&A levels associated with marketing programs, sales hiring, large healthcare client ramp down costs and bad debt. These headwinds were partially offset by improved productivity and favorable currency movements. Sequentially, margin reduced as a result of lower volume, the impact of annual productivity commitments, the higher quarter one SG&A levels and unfavorable currency movements. The company's net other income expense was $0.3 million of net expense in the first quarter as compared to $1.5 million of net income in quarter one of fiscal 2024 and $0.8 million of net income last quarter. Both year-over-year and sequentially, the unfavorable variance, the result of higher debt levels and lower cash balances driven primarily by our share repurchase. In addition, year-over-year results were adversely impacted by $0.8 million of nonrecurring interest income on tax returns recorded last year. WNS' effective tax rate for quarter one came in at 23.1% as compared to 21.7% last year and in the prior quarter. Both year-over-year and sequentially, changes in the effective tax rate were driven by our geographical profit mix and the percentage of work delivered from tax incentive facilities. The company's adjusted net income for quarter one was $44 million compared with $51.1 million in the same quarter of fiscal 2024 and $53.9 million last quarter. Adjusted diluted earnings were $0.93 per share in quarter 1, down from $1.02 in the first quarter of last year, and from $1.12 last quarter. As of June 30, 2024, WNS balances in cash and investments totaled $301.5 million and the company had $301.5 million in debt. In the first quarter, WNS generated $21.4 million of cash from operating activities, incurred $10.7 million in capital expenditures and made debt repayments of $10.5 million. The company also repurchased 1,644,000 shares of stock at an average price of $51.24 which impacted quarter one cash by $78 million. DSO in the first quarter came in at 36 days as compared to 34 days reported in quarter one of last year and 33 days last quarter. With respect to other key operating metrics, total headcount at the end of the first quarter was 60,513, and our attrition rate was 34% as compared to 32% reported in quarter one of last year and 33% in the previous quarter. We expect attrition to average in the low to mid-30% range but the rate could remain volatile quarter-to-quarter in the current labor environment. Build seat capacity at the end of the quarter one increased to 41,676 and WNS average 71% work from office during the quarter. In our press release issued earlier today, WNS provided our revised full-year guidance for fiscal 2025. Based on the company's current visibility levels, we expect net revenue to be in the range of $1.290 billion to $1.354 billion, representing year-over-year growth of 0% to 5% on both a reported basis and constant currency basis. As Keshav mentioned, guidance factors in known client ramp-downs and reduced visibility to client volumes and discretionary projects. Guidance does not include short-term revenues, incremental revenue from our large insurance captives or an improvement in the macro environment. Top line projection assumes an average British pound to U.S. dollar exchange rate of 1.28 for the remainder of the fiscal year. Full-year adjusted net income for fiscal 2025 is expected to be in the range of $203 million to $215 million based on a INR 83.4 to U.S. dollar exchange rate for the remainder of fiscal 2025. This implies adjusted EPS of $4.42 to $4.68 assuming a diluted share count of approximately 45.9 million shares. Excluding the $0.21 of onetime benefits to tax and interest income in fiscal 2024, the midpoint of guidance represents an 8% increase in adjusted EPS. With respect to capital expenditures, WNS currently expects our requirement for fiscal 2025 to be up to $65 million. [Operator Instructions] And the first question comes from Ryan Potter with Citi. Your line is now open. Ryan Potter Hi, thanks for taking my question. I just wanted to start on the kind of large deal execution. I know last quarter, you mentioned that you signed four large deals, and this quarter, you've already signed one. Could you give us some color on how those ramps of these large deals have progressed so far? Was there any revenue contribution from these deals in 1Q? And how much of a revenue contribution from the ramps do you expect in 2Q. And then on the one large deal you signed in 1Q, how does that compare versus your initial kind of pipeline conversion expectations? David Mackey Yes, I'll answer that question, Ryan. The four large deals that we signed in Q4 had minimal revenue contribution in Q1, insignificant, which is what we expected. These deals, though, are staffed, they are ramping. They're a big part of the story in terms of the offset in our fiscal second quarter to the large healthcare ramp down that we see coming. And the expectation is that those four large deals should be reaching steady state, if not early than towards the end of fiscal Q3. Relative to the one large deal that we signed in the first quarter, no contribution in Q1 and minimal contribution expected in Q2. I think we continue to see good progress, as Keshav mentioned in his prepared remarks on these large deals. Given the complexity and the business impact and the level of disruptions that they create, obviously, the timing is something that we don't have a ton of visibility to. But having the large number of large deals that we have now in the pipeline and the expanding number of large deals that we have in the pipeline gives us good confidence about our ability to close some of these deals here in Q2 and again in Q3. Ryan Potter Got it. I guess maybe kind of following up on that and the visibility comment. It seems like the second half kind of assumes a relatively sharp kind of revenue growth acceleration. I mean that's based on my math, maybe it's a little bit off. But what gives you confidence in this implied second half? Is it continuing to close these large deals? Is it some improvement in kind of client volumes? I guess what needs to happen to hit the low end of the outlook versus the top end for the full-year? David Mackey Sure. So I think, first and foremost, it's important to understand that when you look at our guidance for fiscal '25, the assumption for Q2 is that revenue will be relatively flat. We're looking at roughly $13.5 million sequential ramp down because of the loss of the large healthcare client that we need to make up. So if you look at the underlying growth and momentum in the business, even in fiscal Q2, it's extremely healthy. As I mentioned, we don't expect to see a full quarter's worth of revenue from the four large deals that were signed in Q4 in Q2. So that ramp continues into Q3 plus everything that we've sold in Q1 and Q2. So I think we're pretty comfortable with the build. There is nothing assumed in terms of incremental volume from existing clients in Q3 and Q4. As a matter of fact, we have assumed continued weakness in those volumes, particularly in the travel space in Q3 and Q4. So our goal here, obviously, is to try and provide a forecast that's realistic, but also somewhat derisked from that perspective. As we said last quarter, we expected volume declines in the travel space. They actually came in worse than what we expected. But to the extent that we can, we've tried to derisk this. We've looked at the client forecast. We've tried to be conservative about what they provided us. But essentially, it's the expansion of existing relationships in terms of new process additions. It's the sale of small and medium-sized deals, which remains healthy, that gives us confidence in the back half of the year. And then obviously, we need to close some of these large deals to meet those numbers. But our expectation is, given the large number of these deals and the size of these deals that we should be able to do that here in Q2 and Q3. And one moment for the next question. The next question will come from Surinder Thind with Jefferies. Your line is open. Surinder Thind Thank you. I'd like to start with a question on the Gen AI implementations that you guys have done or deployed to date. Are you able to provide any color on the relative benefit that the client is seeing or put another way, the impact of revenue that you guys are experiencing in terms of the productivity improvement and how those are being made up? David Mackey Sure, Surinder. So I think when you look at the breadth of the Gen AI use cases that we've implemented and the deals where we've put Gen AI to use at this point, we have not seen any revenue pressure. The reality is the goals of the deals that we've signed and the goals of the existing clients where we've leveraged these tools to date has been more about expanded benefits than it has been looking for clients to take out cost. Overall, the -- while there's been productivity on some of these, the goals from our clients are more about customer satisfaction, new revenue streams, looking at ways for them to retain and attract new clients. So I don't think when you look at the revenue impacts from these today, they've all been additive for us. They haven't been negative to date. Now again, it's not to say that we don't expect to see some level of pressure over time as Gen AI implementations at scale start to get put in. But the niche solutions that we're leveraging today tend to be more additive to WNS's revenues and capabilities than negative. Surinder Thind That's helpful. And then a question about just attrition and the commentary around maybe being a bit more volatile. Any color that you can provide there that helps us understand the dynamics? David Mackey I think just more, Surinder, about the overall environment and the fact that quarter-to-quarter, those numbers do tend to move. When we came out of COVID, we obviously had a significantly elevated attrition rate. We were running in the low 40s. And we knew that was not going to be a sustainable attrition rate for the company. We've gotten down to kind of more normal levels over time. We've been as low as 28%. We've been as high as 35%, 36%. I think it's more just to set the expectation that putting up a 34% attrition rate like we did this quarter versus 33% or 32% or 35%. It's not something that's unusual. So we do, as Keshav said, in his prepared remarks, I'm sorry, as Sanjay said in the prepared remarks, we do expect that attrition rate to be relatively stable in the low to mid-30s. But overall, on a quarter-to-quarter basis, that number can move around. One moment for the next question. The next question comes from Bryan Bergin with TD Cowen. Your line is now open. Bryan Bergin Hi. Thank you. I wanted to ask on the large deals. So just curious if there is some reliance on winning a handful of those still as you forecast to '25 growth outlook and then just more broadly, there seems to be more large deals here that we're talking about, is this an overall expansion of the market or really the company-specific benefits that you see based on that strong sales headcount growth? Keshav Murugesh Yes, Bryan, thank you. That's a good question. So I think what's exciting about some of these large deals is they are essentially a result of the investments that WNS has now been making over the past few quarters in particular. The focus that we brought into this area over the last year or 1.5 years or so. And the fact that we hired and invested significantly behind some real solid talent across each of our sales functions as well as the business units. And I think what is interesting is that the change that we are seeing is we are now interacting with first and foremost, CXO-level community and people who do not have budgets to provide, but more importantly, who have to deliver impact to the street. So these are CEO, CFOs, and Chief Operating Officers and that profile, one. Second thing is, in most cases, these are deals being created, where there was no deal when the discussion started. So these are not the traditional kind of deals that come through the adviser networks or through the analyst community. And obviously, with this high-impact sales team, and the investments we made on the vertical side, we continue to invest very strongly in those channels. But the reality is a lot of these large deals are new creations being created directly by some of these new leaders that we have brought in as well as this new exciting journey that we have embarked on. So that's one. The second thing I would say is, from our point of view, exciting to see a scale up in a number of these deals. We are happy with the five deals that we won between last quarter as well as this quarter. We are also delighted to see a lot of the other deals, making good progress at this point in time. In fact, of those 20 deals, a few of those deals are at very advanced stages. So our expectation is over the next quarter and the following quarters, we'll start seeing more of these wins, which will result in not just momentum for '25. But more importantly, position the company strongly for 2026. So I'm really excited about this initiative. And while all this is happening, the bread and butter in terms of hunting and farming the traditional revenue sources is not at all flagging. David Mackey And I think just to add to that, to your specific question, Bryan, about the need for large deals to meet the guidance. The answer is obviously, yes. We do need a couple of these deals to come through. But again, I think the comfort and the confidence in being able to do that lies in to Keshav's point, the size of the large deal pipeline, right? I mean, to convert two or three large deals out of a pipeline of more than 20 is not exactly a hit rate that we would be proud of as an organization. So we think the opportunity is clearly there for that to happen. Bryan Bergin All right. Understood. And then on the travel vertical. So just can we talk a little bit more on the volume pressure? Is it broad-based across the portfolio more concentrated in the kind of cohort of larger travel clients? I know you've talked about a larger OTA client. Just curious if there's signs of relief in any of the larger cohort here. David Mackey Yes. So I'll take a first cut at that. And Arijit can join in here as well and give some color on the travel space. I think overall, Bryan, we're dealing with multiple, multiple headwinds that are affecting the revenue portfolio in the travel space. And particularly, I think it's important to note that where we're seeing the pressure is fundamentally in the OTA or the online travel space where we have a high degree of customer service or CX exposure. So we know that business is always going to be more volatile than, for example, our airline business where we do a lot of operations management or a lot of finance and accounting related activities. That being said, we're seeing that the pressure is across the entire OTA portfolio. And it's driven by a number of different things. Some of it is macro related. Some of it is client strategy change. Some of it is mix of business. And some of it is we're starting to see clients get a little bit more aggressive about pushing certain types of transactions to automated channels. Now again, that's not to be confused with Gen AI. This is more about clients redirecting certain types of services to chatbots and automated channels that historically have been done through voice-based channels. In terms of the volume reductions that we've seen, I think the expectation is that we have to continue to see pressure in this space until something happens differently, right? We also know that coming out of the pandemic, there was a rightsizing that needed to take place for the OTA business. So lots of things going on here. It's been a consistent pressure across the last 1.5 years in this space. The good news is, I think, at this point, we've meaningfully derisked it. I mean our OTA revenues in the first quarter were less than 5% of total company revenue. So the hope is here that while we may continue to see some pressure throughout the rest of the year, the bottom line is the ability to impact us in fiscal '25 and the ability to impact us potentially going forward as things like productivity and AI and Gen AI continue to infuse themselves is also reducing. Arijit Sen Having said that, just the good part also is that some of the large deals that Keshav talked about, we are seeing a lot of traction amongst clients in travel. And as we go forward, we'll be -- we're trying to see -- we believe that the mix of business has moved from OTA into other areas of travel, which also will make this revenue a lot more stickier. And therefore, that's what we're working on as well. One moment for the next question. The next question comes from Nate Svensson with Deutsche Bank. Your line is open. Nate Svensson Hi, guys. Thanks for the question. I had a two-parter on the insurance vertical. So I think previously, you talked about the volume impact from a couple of insurance clients who are exiting a few key geographies, and it looks like insurance revenues decelerated pretty materially in the quarter. So just wondering if you can give an update on the volumes in the insurance vertical more generally and kind of what you expect from that business through the remainder of the year? And then the follow-up there is just any update on the insurance captive. I think last time you spoke, you talked about something like I don't know, 25% of the Phase 2 revenues with 75% of that opportunity outstanding. So how are things progressing on the capital front as well. David Mackey Sure. So when you look at the insurance revenues in the first quarter. A couple of things. Clearly, as we had alluded to and as we saw in the first quarter, volumes were impacted for specifically three or four of our larger clients as they look to exit what I would call lower-profit businesses. So for U.S. insurers, this is the impact of having fewer claims and fewer policies in force as they've gotten out of states like Florida, California and Louisiana based on the number of disasters and the inability to charge premiums. Now again, our hope here is that over the next three to six months, we'll see some relief there. I do believe that there is now more of an ability for them to charge in those areas. So hopefully, we start to see some of those volumes come back. But the expectation is that at least at this point, the volumes in that space should be fairly stable. The issue in the U.K. that we have on the insurance side was a proactive decision that one of our clients made from a strategic perspective to get out of kind of the low-end regional broker channels and focus on high net worth types of activities. So we should have also seen that impact already in the numbers and have anniversaried it. But overall, I think we expect the insurance space will be a good growth engine kind of as we move throughout the rest of the year, but let Arijit give you some color on that. Arijit Sen Yes. Thanks, Dave. So like Dave said, I think we are very focused in terms of growing the insurance business. If you recall, one of the large clients who worked in Q4 was actually in the space. And again, a lot of -- we're seeing a lot of traction in the sales pipeline related to insurance clients. And that's why we are quite confident that going forward, this sector for us will grow significantly. David Mackey Yes. And that being said to the second part of your question, we have not included anything new relative to the large insurance captive. We continue to have good healthy discussions with them, not only about the rest of the Phase 2 of our relationship that still has yet to ramp up, but also about new opportunities that we can take over within their portfolio. So I'd say that remains an opportunity. Obviously, not one that would be included in the large deal pipeline and not one that's included in guidance either. So the sooner we can get some closure on some of those pieces of business and get them ramping that has the ability to materially impact fiscal '25 and fiscal '26. Nate Svensson Got it. I appreciate the color there. So for my follow-up question, it's great to see the increased buyback authorization and sort of lower share count assumptions. I guess can you give color on the cadence of that expected buyback through the remainder of the year? Is that going to be maybe more weighted to 2Q or the back half? Or is it just you're going to be more opportunistic? And then I guess the more general follow-up on capital allocation more generally is, I guess, what are your thoughts on M&A given the new buyback assumptions, we've lapped the acquisitions a couple of quarters ago at this point. So just thoughts on buybacks, thoughts on M&A and other capital allocation more generally going forward. David Mackey Yes. So our buyback program, as you recall in the prepared remarks, this issue was already signed in Q1. And the program continues -- will continue into Q2. We think currently our entire buyback should be concluded by quarter 2. We have a plan that's out, and we're looking to buy back almost 2.5 million shares by the end of quarter 2. From a capital allocation program, M&A continues to be a focus area for us. We are on the lookout for strategic tuck-in M&As that we think will give us a capability addition to our portfolio. Having said that, our capital allocation, as you recall, is on four pillars. So M&A continues to be our core pillar, share repurchases, which were anywhere which is underway. We have capital allocation -- CapEx expenditure is almost $65 million for this year, we plan and we have scheduled debt repayment that's also planned for this year. Keshav Murugesh Yes. And I'll just add here that we continue to be very confident about our business. We continue to make all the investments in each one of the core areas that we have to be investing in at this point in time. We realize that there are a few nonrecurring kind of headwinds, but nothing that is underlying the growth themes that the company is after at this point in time. And therefore, if you leave out those one-timers, which are headwinds that we spoke about earlier, both for 2024 as well as 2025, growth is more or less in double digits. And therefore, from our point of view, as far as capital allocation goes, we believe that our stock is underpriced, and therefore, we will continue to progress with our buybacks. One moment for the next question. The next question comes from Maggie Nolan with William Blair. Your line is open. Margaret Nolan What are your expectations for the cadence of operating margin over the course of the year, given some of the moving parts on revenue and some of the cost considerations you discussed? David Mackey Hi. Thank you. Yes. So I'll take that one, Maggie. I think the expectation in Q2 at this point in time as we have the ramp down in the large healthcare clients and the ramp-up of the large deals from Q4, particularly, right? As I mentioned earlier, the expectation is that revenue sequentially will be relatively flat. I think the expectation on the margin side is also that we will be relatively flat from Q1 to Q2. So I think overall, Q1 and Q2 are going to look a lot alike. The opportunity for margin expansion as we move into Q3 and Q4 is leveraging those investments that Keshav spoke about, rightsizing the headcount based on the ramp-ups and the ramp downs that we have taken place in Q2. And then the normal productivity that tends to work its way through our P&L across the four quarters of the year based on our ability to digest the annual productivity improvements and the wage increases. So kind of a normal cadence other than the fact -- I think Q1 came in a little bit higher than we had expected, which is a good thing. The expectation is that it will be flattish to Q2, but then we should see, as we move through the back half of the year and revenue starts to reaccelerate, we should be able to see operating leverage and margins to improve. Margaret Nolan Thank you. And I believe in the prepared remarks, you said in 2025, you're expecting 5% or more of revenue will have a generative AI component to it. Are those types of engagements going to be structured differently than your typical engagement in the past that did not have a generative AI component? Or is there anything else unique about those contracts that we should be considering? David Mackey I think it's a combination of things, Maggie. I think in some cases, we're putting generative AI capabilities into existing processes that we manage to help make them more efficient, to help drive different kinds of results and different kinds of behaviors. And in those cases, I don't expect a material change to how we're going to charge or how the relationship is going to be in the short run. I think for some of the newer deals where we're seeing meaningful components of Gen AI as part of the service and solution, we are seeing more non-FTE types of relationships put into place, whether that's transaction-based or outcome-based, or gain sharing kind of base. But I think as we've spoken about in the past, as the Gen AI services and solutions go more mainstream, as we implement them more at scale across a customer base and start relationships with Gen AI types of capabilities. The expectation is that our portfolio of work should shift more towards non-FTE structures than what we've historically seen. So our expectation is that while, again, that creates some risk that comes with gain sharing. It also creates margin opportunity for us. One moment for the next question. The next question comes from Puneet Jain with JPMorgan. Your line is open. Puneet Jain Hi, thanks for taking my question. Are you seeing any changes in client behavior, specifically a pause as they try and understand, assess how Gen AI impact their business processes. I'm assuming the large deals you are signing, like they do not include any benefits from Gen AI or any potential applications of Gen AI at this point? Keshav Murugesh So, Puneet, thanks for the question. So I think the first thing is clients continue to be focused on whatever is strategic for themselves. So whether it is cost leadership, whether it is the transformation kind of areas, whether it is, which is the right partner for them to help them navigate the opportunity, and potentially whatever steps that they see through Gen AI that's really their focus. One of the things that we have seen over the past few quarters is the general hike that we saw around generative AI, at least from a client point of view, has subsided, has given the way to much more focus around the ecosystem outside, the economic situation, the challenges they're facing with their business and how they can leverage strategic partners like us in terms of just delivering what they need to deliver to their shareholders, right? So we're back to cost impact, digital transformation as well as safety of the right partner who brings digital domain and data all together to deliver the outcomes. Now obviously, AI and generative AI continue to be a very important team in that. And therefore, we are seeking their partners in terms of who are the right people who understand their business, who understand data better, and who can as when the time is right, provide the right solutions and outcomes for them. And in the scheme of things, as we look at some of the large deal pipeline that we're talking about, Obviously, we are looking at leveraging some of the generative AI infused solutions that we anyway have, right? And that is what gives us confidence that while the client is still figuring out how they want to deal with some of this, they also have a lot of comfort and confidence that WNS has through its offering program, infused all of these solutions into the outcome-based kind of solutions that we are providing for them. So you have to assume that all of these solutions are digital-led, technology-led, transformation-led, very heavy on domain, but also have a mix of generative AI as a result of which we're able to provide them outstanding pricing and outcome-based models. David Mackey Yes. And just to add a little color to Keshav's comment, Puneet. Two of the four large deals that we signed in Q4 have a Gen AI component, one in the insurance space, one in the shipping and logistics space. But to Keshav's point, I think what's most important is to understand that clients don't come to us and say, they want an AI or a Gen AI solution. What they're doing is they're coming to us saying they want a solution to a business problem. How we deliver that for them is far less important than the business results we're capable of delivering. Puneet Jain Understood. Understood. No, that's good to know and thanks for that detailed answer. I'd like to follow up on Maggie's questions on margins. Like with this GAAP reporting from here on, like, I guess, like some of the lease expenses will move above the line. So how should we think about margins like for this year, for the entire year, adjusted operating margin levels as well as beyond this year? David Mackey Yes. So let me take that. So if you look at from an IFRS to U.S. GAAP perspective, adjusted operating margin would trend about 1% lower. However, having said that, the interest cost that we also see would be lower by almost 1.1%. So at the ANI level, we are seeing a very marginal increase of 10 basis points. And some of that will flow into the EPS to about $0.03 to $0.04 impact from IFRS to U.S. GAAP. David Mackey Yes. So in general, I think the expectation now would be that overall adjusted operating margin will run 100 basis points lower than it used to, right? I think we're still 20% plus in terms of adjusted operating margins, which keeps us in an industry-leading position. But the reality is, instead of running, for example, this year in a 21% to 22% range, we're going to be running in a 20% to 21% range. Sanjay Puria And maybe, Puneet I'll just add. It's just a reclassification. Overall, ANI is just neutral or in fact, positive. It has just moved from operating margin before interest line, which is like there is always an operating margin after interest, just [indiscernible] specifically the lease charges from bottom to the top. So overall, net to net, it's neutral. But yes, on the operating margin, it's 100% impact at this stage. Puneet Jain Got it. No, I understand like the reclassification. So quickly, if I can quickly ask like about this year's margin. So the first half, you will be 18.5 devoted. So do you feel confident that like with revenue growth with everything like you can get to 20% plus margins for the entire year? One moment for the next question. The next question comes from Dave Koning with Baird. Your line is open. Dave Koning Hi, guys. Thank you. And just to kind of review the obviously, four verticals, healthcare will step down next quarter and be down pretty significantly year-over-year, the rest of the year, which verticals are going to make up for it and see what seems like a pretty big sequential step-ups in the next couple of quarters and year-over-year as well. Like where should we really see that from a vertical basis? David Mackey Sure. So I think as you rightly say, Dave, obviously, Q2 is going to be a challenge for us, primarily because of the healthcare vertical ramp down and the ongoing challenges that we see in the travel space. So with that kind of in mind, when you look at where the opportunities are, we talked about the ramp-up in insurance in Q2 based on the large deal that we signed in Q4. We're going to talk about a ramp-up in Q2 and into Q3 in the shipping and logistics space, which we believe will be one of our leading verticals for this fiscal year. When you look at the high-tech professional services vertical. That should be a growth engine for us as well as utilities, which has been on a really nice trend over the last four, five quarters. So I think overall, the business should be very, very healthy across most of our verticals with the exception of travel and healthcare. Dave Koning Got you. Okay. That's helpful. And then one other thing I just noticed the largest client was up pretty substantially year-over-year. I know it's not huge, it's maybe 5%, 6% of total revs, but it was up mid-20s percent or so year-over-year. What was that? And is that sustainable? David Mackey Yes, I think it is, right? So we've got a client who is expanding their relationship with us. They've been a client and a really good client and a top five client for an extended period of time, but we found new ways to engage with them. We found other things to do with them. We're seeing volume increases with this customer. So overall, the relationship is healthy, and it's helping you see it largely impacting our utility space. One moment for the next question. The next question comes from Vincent Colicchio with Barrington Research. Your line is open. Vincent Colicchio Yes. Hi, guys. Thank you. I think your, Keshav, your headcount increased 1% sequentially. Could you help us understand how your headcount may grow relative to revenue growth for the balance of the year? Keshav Murugesh Yes. So from a headcount perspective, the reason why headcount grew was we've had some -- because the Q4 wins, we've had to ramp up some headcount to account for the increase in Q2. They've also mentioned that in Q2, we will have the reduction in the healthcare client. And therefore, utilization of headcount would -- has been low in Q1, and we expect that to improve as we go into Q2 and Q3 onwards. And as we start ramping up other deals as well. So from a headcount perspective, I think that's the reason why Q1 came in slightly higher versus Q4. But as we go forward in the year and as the healthcare client ramps down, I think you will see a more steady increase in headcount versus revenue. David Mackey Yes. I think the other thing that's important, Vincent, and I'm glad you brought it up. The ramp down that we're going to see in Q2 relative to the healthcare client, was a heavily technology-enabled set of services. So the reality is what you're going to see is a disproportionate ramp-down in revenue relative to a ramp down in headcount. This is going to affect for the full year, it's going to affect our revenue per employee metrics. But essentially to reaccelerate that growth and to reaccelerate it based on the four deals that we signed in Q4, the one we signed in Q1 and the deals that are in the large deal pipeline, we're going to need to be aggressively hiring through the rest of the year. Vincent Colicchio And Keshav, kudos to your investments in the sales side, I mean the increase in transformational deals in the pipeline looks fairly impressive. Are you expecting that pipeline to continue to expand for transformational deals as the year progresses? Keshav Murugesh Yes, Vincent, first of all, thank you for the compliment about it because of the new restructuring that we did in terms of our corporate kind of structure as well as that goes to all the people managing each of the strategic business units and sales of this company. So it's all in their credit. But having said that, I must tell you this is the new way of business for WNS for the long term. So not only will -- we will continue to focus on building new large transformational deal impact. But I think over a period of time, as each of these deals come to fruition, I think there's a new discipline and there's a new excitement of creating this pipeline, which I think will carry well into 2026 and '27. I think that's what is the most exciting area of growth for WNS. And again, I just want to underline the fact that these are deals being created where there is no deal that is coming in the market. It is actually coming as a result of our senior people interacting with decision makers on the other side understanding their pain points, understanding the value proposition that they would like to have and then crafting its solution on a win-win basis, leveraging the best of WNS digital, domain, data, AI, generative AI and outcome-based impact of pricing. David Mackey And one other point I'd like to make, Vincent, and it's subtle, but I think it's important. We've historically, as a company, talked about large deals as being $5 million plus in ACV or annual contract value. The 20-plus deals that Keshav spoke about in his prepared remarks are all more than $10 million in ACV. So the reality is we still have what we consider historically to be large deals in the pipeline. We still have expansion opportunities in the pipeline. But this very large deal pipeline and several of them having moved down a path over the last couple of quarters here, last several quarters. It's something that's very new for us. And it's really in addition to what we've historically seen as opposed to in place of. At this time, we have no further questions in the queue. This will conclude today's conference call. Thank you for your participation. You may now disconnect.

Infosys Limited (INFY) Q1 2025 Earnings Call Transcript

Sandeep Mahindroo - Head of Investor Relations Salil Parekh - Chief Executive Officer and Managing Director Jayesh Sanghrajka - Chief Financial Officer Ladies and gentlemen, good day, and welcome to Infosys Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Mahindroo. Thank you, and over to you, sir. Sandeep Mahindroo Thanks, Nirav. Hello, everyone, and welcome to Infosys earnings call for Q1 FY'25. Joining us on this call is CEO & MD, Mr. Salil Parekh; CFO, Mr. Jayesh Sanghrajka, and other members of the leadership team. We'll start the call with some remarks on the performance of the company, subsequent to which the call will be opened up for questions. Please note that anything we say which refer to our outlook for the future is a forward-looking statement, which must be read in conjunction with the risk that the company faces. A full statement and explanation of all these risks is available in our filings with the SEC, which can be found on www.sec.gov. Thanks, Sandeep. Good evening, and good morning to everyone on the call. We started the financial year with a strong performance in quarter one across multiple dimensions, including broad-based revenue growth expansion -- broad-based revenue growth, expansion in operating margin, strong large deal wins, and strong cash generation. Our revenues for the quarter grew 3.6% sequentially and 2.5% year-on-year in constant currency terms. I'm particularly pleased with 7.9% growth in financial services segment where we are seeing improvement in client spend in North America. All geographies and most industry groups grew sequentially, volume growth turned positive after several quarters, we also had an improvement in realization. We had another quarter of strong large deal wins with 34 large deals at a total contract value of $4.1 billion. Our clients see us as a preferred partner of choice for consolidation, cost takeout, and efficiency programs. This is also a reflection of our leadership trend. With the mobilization of our margin program, we see positive impact on our operating metrics and pricing. This resulted in our margin expanding by one point sequentially. Jayesh will elaborate on margin puts and takes later on the call. Free cash flow was highest ever at $1.1 billion. Our employee attrition rate was at 12.7%. We continue to see strong traction from our clients with generative AI programs delivered through Topaz. Enterprises are focused on their own data set that can be used in generative AI large language models. As an example, we are partnering with a telecommunications leader to transform the product engineering practices with AI and to elevate both the customer and employee experience. Another example is how we are optimizing and modernizing IT infrastructure services and transforming the IT operating model with AI for a leading bank. We're helping several of our clients prepare for the AI transformation journey by building strong data foundations with robust cloud capabilities using our Cobalt cloud services. Industry analysts acknowledge our leadership in the domain of enterprise-generative AI. We continue to invest in strengthening our AI capabilities and building AI for our solutions for clients. During the quarter, we launched Aster, a marketing suite of AI-amplified solutions for our clients to create brand experiences with enhanced marketing efficiency and accelerated performance effectiveness. Our investment in nurturing our global workforce with AI-first skills and expertise continues as over 270,000 of our employees are now well-trained in building a wide range of AI-powered solutions for our clients. We are today uniquely positioned as a digital-first, cloud-first and AI-first brand in the market, and our continued differentiation has helped us being recognized among the 100 most valuable brands in the world by Kantar BrandZ. We have also been ranked among the most trusted brands across US and India. Along with our overall robust performance in Q1 and strong opportunity pipeline, we are seeing early signs of improvement in financial services vertical in the US. While discretionary spends continue to be under pressure, a highly differentiated offering around driving efficiencies at scale and transformation capabilities around generative AI have positioned us well in the market. With respect to our recent acquisition of in-tech, we have received the required approvals and have closed the acquisition. Given our strong performance in Q1 and our current outlook, we have revised our revenue growth guidance for the full financial year to 3% to 4% growth in constant currency. Our operating margin guidance for the financial year remains at 20% to 22%. With that, let me hand it over to Jayesh to share his update. Thank you. Jayesh Sanghrajka Thank you, Salil. Good morning and good evening everyone and thank you for joining the call today. We entered FY'25 focusing on key strategic priorities, including market share gains to accelerate revenue growth and drive margin improvement through Project Maximus. I'm delighted to highlight results that we have achieved across different business dimensions this quarter, including strong and broad-based revenue growth across all gears and most verticals year-on-year in constant currency terms, sequentially positive volume growth after several quarters coupled with improvement in realization. Financial services returned to positive sequential growth after six quarters with 7.9% growth in constant currency terms. 34 large deals signed during the quarter, which is a record number of deals in any quarter, large deal TCV at $4.1 billion including 58% net new. Deal pipeline continues to remain strong, 1% operating margin expansion sequentially. Improvement in operating parameters including 1.8% increase in utilization and lowest on-site mix in ten quarters. Highest-ever free cash flow generation in the quarter with free cash flows normalized for tax refunds at 104% of net profits, fifth consecutive quarter of reduction in unbilled, attrition has remained stable, and increase in return on equity by 1.5% Q-o-Q to 33.6%, primarily resulting from higher payouts to investors. With that, let me now elaborate with details. Revenue for Q1 was $4.7 billion, up 3.6% sequentially and 2.5% year-on-year in constant currency terms. This included benefit from improved realization from one-timers of 0.5%. Operating margin improved by 1% sequentially to 21.1%, led by 1.4% improvement in gross margins on account of strong operating performance across different dimensions. The major components of sequential margin work are as follows. Tailwinds of 2.2% comprising of normalization of Q4 one-timers of 1%, 0.8% benefit from Project Maximus largely from higher utilization and value-based selling, 0.4% from the improvement in realization mentioned above, partly offset the headwinds of 1.2% from higher variable pay, higher leave costs offset by currency and others. We continue to drive Project Maximus across the organization with strong intensity. Headcount at the end of the quarter stood at over 315,000 with utilization further increasing to 85.3%. LTM attrition was stable at 12.7%. Unbilled revenues dropped for the first consecutive quarter to $1.7 billion. Free cash flows for the quarter was highest ever at $1,094 million, a sequential increase of 29%. DSO for the quarter was 72 days compared to 71 days in Q4. Consolidated cash and cash equivalents stood at $4.3 billion after factoring in payout of $1.4 billion towards dividend declared in Q4. Consequently, return on equity increased sequentially to 33.6%. Yield and cash balances were at 7% in Q1. EPR for the quarter was 29.4%, which is in line with our expectations for the year. EPS grew by 7% in INR and by 5.4% in dollar terms on a year-on-year basis. We closed 34 large deals with TCV of $4.1 billion, 58% of this was net new. Vertical-wise, we signed eight deals each in retail and communication, six in EURS, five in Financial Services, four in Manufacturing, two in Hi-Tech, and one in Life Sciences. Region-wise we signed 21 large deals in America, 12 in Europe, and one in RoW. Coming to Verticals. BFSI returned to positive growth after six quarters, led by ramp ups of large deals and absence of one-off last quarter. In the US, we see some recovery in areas like mortgage, capital markets and cards and payments. Overall, clients still remain cautious on spending and are focusing to deliver maximum business value through deals combining transformation, technology and operations. Pipeline remains strong, and we are working with the clients to accelerate their adoption of GenAI for modernizing legacy platforms, fraud detection, credit process simplification, et cetera. In Manufacturing, growth was broad-based across geographies and sub-verticals like industrial, automotive, and aerospace. While pressure on discretionary spend persists, we see increased benefits of vendor consolidation, opportunities around resolving supply chain bottlenecks and rationalizing infrastructure and applications. We see strong interest on GenAI with deep client engagement. Our capability and pipeline in the engineering states will be solidified by acquisition of in-tech which will help us accelerate the segment growth in FY'25. Growth in communication was led by ramp-up of recent large deal wins. Overall environment, however, remains cautious with continued OpEx pressure and delayed decision-making. Telcos, despite challenges, are navigating their way by focusing on rapid digitization and reprioritization of spend. Uncertainties in retail sector continues with clients focusing on cost takeoffs to fund their business transformation journey. There are opportunities around areas like customer and employee experience, predictive analytics, digital marketing, and landscape modernization. While the pipeline remains healthy, decision cycles continue to stay elongated. Environment in EURS continues to be impacted by high interest rates and geopolitical conflicts which are influencing the spend patterns. While pressure on discretionary spends persists, our differentiation in areas like energy transition, integration business, and human experience is helping us build a strong pipeline. Hi-Tech vertical continues to remain soft. Driven by our strong all-round performance in Q1, improvement in US financial services, strong large deal closures and in-tech acquisition, we are increasing the revenue guidance to 3% to 4% in constant currency terms. We are maintaining our operating margin guidance at 20% to 22%. And with that, we can open the call for the questions. Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Ladies and gentlemen, we will wait for a moment while the question queue assembles. [Operator Instructions] The first question is from the line of Ankur Rudra from JPMorgan. Please go ahead. Ankur Rudra Hi, thank you, and good to see very good numbers after a while. Just wanted to get a sense of, Salil, you know, what's the breakup of the very strong momentum this quarter? If you could, between the large deals that you've won over the last year, any kind of improvement in execution of short cycle business or discretionary business, and potentially better execution? And also when you answer that, if you can talk about how client conversations are changing, if there's anything turning a bit more positive and any change in the momentum on the short cycle deal, while large deal we can see is going on very strongly. Thanks. Salil Parekh Thanks Ankur. The view on discretionary or short cycle, what we are seeing is in financial services in the US, we've seen that shift that we have highlighted and we saw that during the quarter. Outside of that, the discretionary still remains similar to where we were when we started the year, which is still in a difficult situation. So, that's the one that we have seen the change in. The client conversations, in general, there's a lot of talk and discussion with generative AI, but the programs, even though they're not POCs, the actual projects are not large revenue projects and transformation is not so much what we are seeing. So even in a large deal, the vast majority still cost take out efficiency, consolidation, automation, that type of work. And in some instances where there is, these are funded massively through cost take out, the transformation is. So it's not really big, big, large spends there. So, that's how we are seeing the discretionary work at this time. Ankur Rudra Thank you. And, you know, from here on, are you -- I mean, while you've seen this change in financial services, in your client conversations, do you sense there's anything in particular clients especially in, you know, maybe the Hi-Tech space or energy and utility where you've highlighted problems still persist, or even manufacturing, which might change the client behavior, maybe not this year, but into next year, what are the main things clients may be waiting for? Salil Parekh So there, first on energy utilities, we've had a good outcome last year. We've seen sort of similar discussions now, not a huge change. Manufacturing again, good outcome last year will be decent growth. This is just slower than last year. So not like a big, big change there. On Hi-Tech it's still difficult as you point out. I don't know what the trigger could be. Of course, on a macro level, there is not with client, but generally speaking, a view that if US inflation and interest rate and all of those discussions change, that will change something. But we don't know what will that trigger be. Ankur Rudra Okay, appreciate it. Maybe just one question for Jayesh. Jayesh, you know, great performance on the margins. Could you maybe talk about how do you think about the percentage from here on? Utilization, especially including trainees seems to be high. I guess, that indicates fewer trainees in the system. What sort of headwind will we see from there? Secondly, I'm guessing there'll be wage hikes at some point in the next couple of quarters. So how are you thinking about what will help you maintain if not improve margins from here and extend Project Maximus? Jayesh Sanghrajka Yeah. So Ankur, thank you for that first of all, and if you look at the Project Maximus and we have talked about the five pillars of Project Maximus, many of them are starting to show results, VBS, which is Value Based Selling is one of them. Efficient pyramid, where utilization and other factors are other part of it. Lean and automation is a third piece in that. So there are many of these tracks which are showing results and we still believe there is more need there. Of course, in terms of, if you look at the headwinds, you know, you will have comp review at some point in time during the year that could be an headwind. We have at this point in time not decided the timing et cetera of that. So that would be headwinds. Some of the large deals that we have signed, the transition and ramp up of that would be a headwind. So we will have to balance that as we go through the year. At this point in time, we are very confident of our margin guidance. Thank you. Next question is from the line of Keith from BMO. Please go ahead. Keith Bachman Hi. Thank you very much. First, I wanted to get some additional feedback on financial services. You indicated that you thought that business outcomes or business energy had improved. I just want to hear a little bit more about that. It's certainly something we haven't heard from some of our software-related companies, but what do you think is the driver of the improvement in financial services in particular? Salil Parekh So Keith, there, if you look at our commentary on that, we are seeing some recovery in US financial services, specifically in the areas like mortgages, capital markets, and card payments and the larger clients there. So we are seeing some volumes coming in and some recovery -- some early signs of recovery in those areas. Keith Bachman Do you think that's Infosys or do you think that's, in other words, are you wining share in those accounts or do you think that's more broader base in saying North American banks that there is a general trend towards recovery and spend? Salil Parekh So, I think, it's combination of various factors. It's where, you know, where, I mean, there are instances where we are consolidating, there are instances where we have won new and larger businesses. As I talked about, some of the large deal wins also in the financial service sector. So I think there are multiple combination of those factors in that. Keith Bachman Okay. And then, just on the margin guide, in terms of puts and takes, you highlighted some on the previous question. How is the -- you closed the deal that's adding almost $200 million in revenue on a run rate basis, how is that impacting margins, and/or any other issues you want to call out, including any comments on FX impact as you see it today in terms of margins? And that's it from me. Thank you very much. Salil Parekh Keith, I didn't get the question clearly, if you could repeat? Keith Bachman How is the M&A, the recent transaction that you closed, how is that impacting margins? And then also, how do you see the exchange rate is impacting margins as you look out over the next couple of quarters? FX rates. Salil Parekh So, Keith, the acquisition that we have done, compared to the size of the company is relatively smaller to have a material margin impact. And as you would have seen from our filings also, the in-tech is coming with healthy margins. And there are opportunities, et cetera, in synergies. Coming to the ForEx. The ForEx has remained range bound for last couple of quarters. So, at this point in time, we don't really see an impact. But, you know, as you would appreciate, ForEx is range-bound, I mean, ForEx is unpredictable, and it can have the margin benefit of -- or impact depending on which way it goes. At this point in time, it is remaining range-bound. Keith Bachman Okay. All right. Perfect. Many thanks. Congratulations on solid results. Thank you. Next question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead. Kumar Rakesh Hi. Good evening. Thank you for taking my question. My first question was for Jayesh, just a clarification. So during the press briefing, you talked about 40 bps of one-off impact in the margin. So can you just help us understand the revenue and the margin impact coming out of that? And I understand it is a recovery which you have made from one of the customers based in India, if that is correct. Thanks. Jayesh Sanghrajka Yeah. So, that's right. This is for a customer base in India, it's one-off, you know, in the revenue and therefore most of that has flown into margin directly. So, 0.5% on revenue pretty much impacting, 40 bps on margins. Kumar Rakesh Got it. Thanks for that. My second question was, Salil, for hyperscalers, we are seeing the growth is accelerating. And also the AI demand, especially for some of the chip makers such as NVIDIA, has been quite strong. So it doesn't seem like the discretionary demand is entirely missing in the market. So, is there a transformation in the underlying business mix which is happening where possibly discretionary demand for now at least is moving towards platform and hardware makers and not coming to services companies? Salil Parekh So there, the view we have is what we saw and we've highlighted so far the shift in financial services in the US shows that some of that type of demand is coming now. We will wait and see across all the industries whether it's what you are describing or whether tech services project discretionary work also comes back, whether there will be transformation programs in tech which will also come. We are definitely seeing more and more discussions in enterprises on generative AI programs. Jayesh also shared a couple of examples, I shared a couple of examples. So we do see, and these are not POC, these are actual projects where we are participating, so we do see that. My own sense is this US FS is one data point. We will wait and see what some of the other data points look like. Kumar Rakesh So, Salil, what I was trying to understand was that is there a decoupling of discretionary demand which is happening or is this a sequence in which we'll see first the hardware and platform makers getting the discretionary demand and eventually coming to services? So, is that a decoupling or a sequence of event which eventually comes to services as well? What do you think would be the chain of events? Salil Parekh That's difficult to say. So again, it's just this year, one quarter what we saw was that in Financial Services US, some of that discretionary work is there, and whether it was decoupled or following on from something, difficult to say, but we did see some evidence on that. Thank you. Next question is from line of Nitin Padmanabhan from Investec. Please go ahead. Nitin Padmanabhan Yeah, hi, good evening. Congrats on the quarter. I just wanted your thoughts on one, the financial services phase. You did mention that you saw growth from mortgages, cards, payments, and obviously capital markets. When you think of the sustainability of the recovery, how should we think about it? Because mortgages, for it to continue to give you a delta would require rates to come down meaningfully. And from a cards perspective, it looks like delinquencies in the US are rising. So it's like a mixed data point that we see on the outside. But just wanted your thoughts on how are you thinking about the sustainability of the recovery on the financial services phase. And then I had one more quick question. Salil Parekh So, Nitin there what we are seeing right now is early signs, as I said, you know, of recovery. Of course, it's early signs, so we don't know how sustainable at this point in time it is going to remain, but the fact that we saw volume growth after many quarters, we saw strong growth in our financial services after, again, six-odd quarters. So I think those are the positives that we are taking. We are seeing large deals, both the ones that we had signed and the ones we are -- there in the pipeline. So all of that put together gives us a little bit of confidence on that. But yeah, we have to see more data points to see how the year progresses. Nitin Padmanabhan So, one of your smaller peers characterized it as financial services who have sort of stalled multiple projects in the past, and having sort of not spent for almost six quarters, having to make those spend because that's causing problems and thereby that seeing a pickup with short cycle projects on those deals, would you characterize it similarly? Are you seeing something similar? Salil Parekh I wouldn't say that, Nitin, to be very honest. You know, we are seeing this not specific to one-off clients, it could be limited to one-off clients, for that player, I can't comment on that. But we are not seeing it concentrated in one client, et cetera. Nitin Padmanabhan Right. And lastly, on the guidance, I think if we include the acquisition and normalize the earlier guidance for the acquisition, I think the earlier guidance would have been in the 2% to 4% range. Now, it looks like they've narrowed it to 3% to 4%, including the acquisition on both cases, despite the strong beat in the current quarter. So, is it just that you're being very watchful and careful about it or is there something more to it that you specifically worry about? Jayesh Sanghrajka So Nitin there we don't really break up the guidance into what is organic and what is true for a specific acquisition that we have done. Having said that, if you look at our filings, the in-tech revenue for the last year was EUR170 million, and we -- I mean, we've just closed it, so we'll only get part of that revenue. So you can do a back-of-the-envelope calculation and the rest of it is going to be all the factors that Salil talked about Q1 performance, including large deal wins, the volume in US financial services while the discretionary still continues to remain challenging. Nitin Padmanabhan So perfect. That's all from my end. Thank you and all the best. Thank you. Next question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead. Vibhor Singhal Yeah, hi. Good evening. Thanks for taking my question and congrats on a very solid start to the financial year. Salil, two questions from my side. One is, we have seen that, I mean, almost all verticals have done really well for us this quarter, but for the retail sectors. I think retail sector is something which is like in the almost entire industry, your peers also have kind of spoken about it. What is the outlook on this sector? I mean, what do you think the clients are waiting for to restart their spends? And where could those spends be coming in, in terms of the domains that we are looking at? And then I have a follow-up question. Jayesh Sanghrajka So Vibhor, I think there, I think it's a sectoral challenge at this point in time, the whole sector is going to -- going through challenges. And it's not specific to us. And as Salil was mentioning earlier, one of the factors could be US interest rates recovering, et cetera. But it's hard to predict what will lead to recovery in the sector at this point in time. Vibhor Singhal No. I mean just to drill a bit little further on that, what exactly is, I mean, so we know that macro overhang is on most of the BFSI companies and all. At this point of time, any specific thing that you think could be a trigger apart from let's say, I mean, of course the interest rate that you mentioned that could possibly see these companies reverting their spend or difficult to call out that again? Salil Parekh So retail typically has higher exposure to discretionary as well, right? So and that is going to be linked to the macro environment largely, Vibhor. So, I think that would be one of the key reasons. Otherwise, outside of that, we are winning these, if you look at this quarter also, we have won eight large deals in retail as well. But the discretionary spending has to come back. Vibhor Singhal Got it. Got it. My second question is I think at the end of the last quarter, we had mentioned that we are expecting the first half to be better than the second half. Any change in that outlook given the deal win in this quarter has been quite strong. So do you -- if those were to slightly ramp up in the second half, would you be -- would it be correct to say that maybe we can expect second half to be slightly better than what we were expecting it three months ago? Salil Parekh So Vibhor, two parts there. We still continue to believe our first half is going to be better than the second half, and I think Q1 is just a testimony of that, from that perspective, we've delivered from there. Of course, the fact that we have increased guidance is also a proof that we are seeing the three quarters better than what we envisaged earlier. Vibhor Singhal Got it. Got it. Great. Thank you so much for taking my questions and wish you all the best. Thank you. Next question is from the line of Gaurav Rateria from Morgan Stanley. Please go ahead. Gaurav Rateria Hi. Thanks for taking my question. So Salil the first question is on revenue. It looks like -- Gaurav, sorry to interrupt you. There is a slight disturbance from the line. Can you speak through the handset? Yeah. Salil, the first question is for you. On revenue, it looks like it has surprised you positively, which is why you've raised the guidance. So, is it led by the ramp-ups on the deals happening faster than you expected? Is it led by leakage in the discretionary improving compared to the last few quarters that you have seen? Salil Parekh So, this is Salil. The way this quarter has gone, what we have seen is, the volumes have been strong. We then see that change in the financial services in the US, which has given us more, more positive outcome for the quarter. Then, some of the work that we're doing in terms of working with our clients on value and pricing has also translated overall into the mix for our revenue. And then, the way we saw the outlook as we did some of the large deals in this quarter, which was a good outcome, that gives us a little bit more visibility into the year. So, all of those things led us to look at this as being a stronger outcome. Gaurav Rateria Got it. Any reason to believe that this momentum could decelerate in near-term? Any data point to suggest that? Or as of now you would expect the momentum to continue from a near-term perspective? Salil Parekh So what we have done is, we've taken what we have seen in this quarter across the different industries and service offerings and then put in, as Jayesh shared, what is more typical, which is our second half is usually lower than our first half. And with that, we have created the outlook for the year, but we didn't take into account any other trigger beyond what I just shared. Gaurav Rateria Thank you. Last question for Jayesh. What would be the incremental levers for margins from here on utilization is near peak, subcon has already stabilized. Just trying to understand what could be the additional levers over the coming quarters. Thank you. Jayesh Sanghrajka So, Gaurav, if you look at there, you know, again, across all the pillars of Maximus, there are multiple of them are firing. Value Based Selling, we have seen, you know, as we talked earlier, we have seen improvement in realization. So, that's one lever we do have, we continue to have. We did talk about hiring some freshers as we go through the year. So that would help in getting some better role ratios or better role mixes, etcetera, near-shoring lean automation. So there are multiple levers. We still have to improve or offset the headwinds. The headwinds that we see as today is, as I said earlier, again is comp, which is a -- which is a decision we'll take as we progress through the year, and the ramp up of the deals won towards the end of last year as well as this quarter. Thank you. Next question is from the line of Bryan Bergin from TD Cowen. Please go ahead. Bryan Bergin Hi. Good evening. Thank you. First question I had on is on generative AI. Can you provide some detail on how GenAI may be impacting your delivery productivity and whether it may be changing any nature of the contracting conversations with clients yet? Salil Parekh Thanks. Thanks for the question. On delivery and generative AI, so what we have done, we have taken all of our service lines and start to put in place the impact of generative AI and broadly AI into this. And that change is ongoing, a lot of it has happened. Where we are seeing some of the benefits on delivery relate to areas, for example, software development or process optimization. There's also a large benefit on productivity for more customer service type of areas that we have already demonstrated proof of. We don't have a lot of footprint on that within our current mix, but we know from new work that's something that is being discussed with clients. In each of these for the contracting, the way our clients are looking at it, within their own enterprise, on their own data set, when there's a client where we see and where they have, let's say, for software development, a single, uniform approach across the whole company, which is not that frequent because of acquisitions and different decisions in different divisions and department, then the range of benefits is potentially higher, and the contracting discussions are around what of those benefits will accrue with the client. So, a lot of these discussions are in that spirit. There is some benefits that accrue to us and some to the client. But there are very few clients within their own data sets which have large, consistent tech landscapes which can give the full benefit of generative AI right away. Many clients also need their data infrastructure to be put in place where sometimes that is not in place today between structured and unstructured data. So the work actually starts with building a data program, when they're able to spend that on a data program, and then to have the cloud capability in place so that a lot of, part of the data, part of the apps on the cloud for a client. So, the discussion is typically on, here's the roadmap for generative AI in an enterprise, given the landscape of tech, and here are the first steps, data and cloud, and then here's something that can actually deliver impact today, which could be more, let's say a smaller area of the company. But these are all discussions which are done, which eventually relate to how contracting is done. Bryan Bergin Okay, that's helpful. Thank you for the color. My follow-up is a clarification just on the 1Q one-time item, I think, you cited 40 bps, quarter-over-quarter op margin benefit, and a similar revenue impact. Was that expected in your prior guidance or was that a surprise or a new item that wasn't expected before on the plan? Jayesh Sanghrajka That wasn't expected in our guidance that was a new item. Thank you. Next question is from the line of James Friedman from Susquehanna International. Please go ahead. James Friedman Hi. Good evening and let me echo the congratulations. Salil, in terms of banking, is the improvement contemplated to continue? James, sorry to interrupt. Can you speak a little louder please? James Friedman Oh, I'm sorry. In terms of the banking vertical, the BFSI vertical, is the growth contemplated to continue? Salil Parekh So what we see today is this change in the US Financial Services, we don't -- the way we've constructed our outlook is we are assuming that will be the way it will progress. So, we have not assumed that it will change. We will not also assume that it will become much larger. We will not also assume that this will move to some other geography in financial services. So, we don't know, but that's what the assumption is into our guidance, all the client discussions seem to indicate that US Financial Services, we will have this sort of attraction. So that's the way we build our outlook. James Friedman Got it. Thank you. And then in terms of Europe, it has been an important source of growth for the company this cycle. Could you unpack some of the trends that you're seeing in Europe? Salil Parekh On Europe, so what we are seeing is, different things in different places. So, for example, in the Nordic countries, we've had good traction over the last few quarters and even a little bit before in how we've engaged with clients and we've seen some good expansion of our large deal programs. We've seen some of that in Continental Europe broadly, if you look at some of the large deals across Telco. We've seen that a different type of a positive traction in Germany, where we are seeing some of our local Europe competitors are having more constraints and where we are benefiting from those constraints as we are expanding. So it's different in different geographies, and our focus -- or even industry, our focus has been to be a little bit more fine-tuned into that market and then try to get the benefit of it. Thank you. Next question is from the line of Sumeet Jain from CLSA India. Please go ahead. Sumeet Jain Yeah, hi, thanks for the opportunity. Firstly, I wanted to check, you know, in your previous guidance of 1% to 3% you gave in April, was in-tech acquisition part of that guidance? Jayesh Sanghrajka So, Sumeet, this is Jayesh here. We had clearly called out at that point in time that in-tech acquisition isn't part of it, because we were -- I mean, it was pending approval from various regulatory authorities. Sumeet Jain Right. So, maybe in-tech acquisition now being closed and the 50 basis point impact on revenue in India business, can one assume these are the two primary factors for your revision in the guidance? Jayesh Sanghrajka Not necessary. Again, as I said, we don't break out our guidance between, you know, the in-tech and non in-tech from that perspective. But if you look at the numbers that we printed when we announced the acquisition in-tech, revenue was around EUR170 million. And it's only going to be part of the year considering we just concluded or closed the transaction. And there are other factors, our Q1 performance, volume, financial services, growth offset by the continuing softness in the discretionary part of the business. Sumeet Jain Got it. That's helpful. And secondly, I wanted to check, in your cost line item, the third-party items you bought for service delivery is significantly down this quarter, almost one percentage point of your revenue, and also down on an absolute level. So can you just give us a sense as to, from the bookkeeping perspective, how to look at this line expense item going forward? Jayesh Sanghrajka So there, Sumeet, as we have said earlier as well, the third-party hardware, software cost is an integral part of many of the large deals where we take over turnkey projects from the clients, including technology landscape of theirs. And that is therefore dependent on the kind of deals, and how the ramp up or ramp down of those deal depends -- deals happen across the quarter. So it is going to be to that extent dependent on which deals and how it ramps up and down. Sumeet Jain Got it. And lastly, just on the India business, can you give us a sense what kind of project it was? Because it's a pretty sharp jump we have seen this quarter. So any large deal ramp-up we are seeing there, or some government contract, what exactly is the nature of this one-time impact? Jayesh Sanghrajka So Sumeet there, first of all, the India business is relatively much smaller. So anything that happens in that business shows up in percentage terms much larger. But having said that, it was one-time impact on one of our India clients, you know, and it's one-off. So I think we should just take it as one-off. Sumeet Jain Got it. Thanks for the opportunity and all the best. Thank you. Next question is from the line of Kawaljeet Saluja from Kotak Securities. Please go ahead. Kawaljeet Saluja Hey, hi, thank you, everyone. You know, great to see a well-rounded performance, congratulations. Just a couple of questions. First is for Jayesh. Jayesh, you know that 40 bps recovery that you see, does it show up in either ECL or provision for post sales client support or, you know, it's just basically a direct flow-through from revenues, yeah. Jayesh Sanghrajka It's 40 bps -- 50 bps on revenue cover, which is impacting 40 bps on margins. Kawaljeet Saluja Okay. And basically does it tie-in with provision for post sales client support or that's something which is separate? Okay, got it. Yeah. Second thing is wage revision. You know, I mean, I guess the cycle got -- cycle of wage revision was changed last year. Do we get back into wage division cycle, which is a lot more normalized, which is actually starting second quarter or that's something on which you have not taken a call yet? Jayesh Sanghrajka So if you recall, Kawal, last year we did our wage revisions in effective November. So, at this point in time we haven't really decided. We are evaluating, considering all the factors that we always consider, including the inflation, including when was the last wage revision taken, the environment, the macro environment, as well as the peer practice. And we will take a call considering all of these factors. Having said that, as I called out in our margin walk also, we have increased our variable pay during the quarter versus last year as well as last quarter. Kawaljeet Saluja Okay, that's very helpful. A final question is Jayesh for you and Salil, both of you have articulated the fact that you want the profitability to improve in the medium term. And then there are number of structures, levers, that will be utilized to drive that expansion. I mean, what kind of an environment, and what kind of levers does one need to see to gain that directional comfort of profitability improvement from here on as such? Jayesh Sanghrajka So, Kawal, if you look at our margin walks across the last three or four quarters since we launched the Project Maximus, you would see consistently the contribution from the Project Maximus across various pillars from L&A, Lean and Automation, from Value Based Selling, on the pyramids, et cetera, or things like that. So you will see, I mean, you have seen that, and our endeavor is to continuously focus on all of that. At this point in time, they are offsetting the headwinds to a large extent. The endeavor is to more than offset the headwinds in the mid-term. Thank you. Next question is from the line of Jonathan Lee from Guggenheim Securities. Please go ahead. Jonathan Lee Great. Good evening and thanks for taking our question. A lot of moving parts here. Jonathan, sorry to interrupt you. May I request you to speak a little louder, please? Jonathan Lee Hey, great. Good evening and thanks for taking our questions. A lot of moving parts here on the margin side. Can you remind us how we should be thinking about seasonality through the year, especially as you think about the impact from Project Maximus and large deal ramps? Salil Parekh So, margin -- on Jonathan margin, one of the headwinds would be comp decision as and when we take. There are seasonalities in our business model, which is furloughs that impact us in Q3 and Q4, that also impact both pricing to some extent and margin therefore. But those are the large seasonalities that we have in our model. Outside of that, our margins are going to be dependent on our acceleration on Project Maximus as well as the revenue and volume growth, which helps us flattening our pyramid and therefore benefit from the pyramid. Jonathan Lee I appreciate that color. And second, can you help us think through what's contemplated in your outlook, both at the low end and at the high end, as it relates to vertical performance based on your expected large deal ramps or what's in your pipeline? Sandeep Mahindroo Jonathan, sorry, your question didn't come across as clearly. Would you repeat that, please? Jonathan Lee Can you help us think through what's contemplated in your outlook as it relates to vertical performance based on expected large deal ramps and what's in your pipeline, both at the low end and at the high end of the range? Salil Parekh So there, Jonathan, it's very difficult to call out which vertical performance will end up to low end and high end of our range. I think we run various models internally to get to the margin band. Some of them, you know, get us to the lower end of the band, and some of the assumptions will get us to the higher end of the band. I don't think there is any secular segment that is going to drive either ways. Thank you. Next question is from the line of Girish Pai from BOB Capital Markets. Please go ahead. Girish Pai Yeah. Thanks for the opportunity. The 3% to 4% guidance, if I do my math, comes to about 1% to 1.5% CQGR from here on. It seems way too conservative, because that also includes the in-tech acquisition. So are you assuming that the 2H FY'25 is going to be pretty bad? Jayesh Sanghrajka So Girish, there let me give little more color on the math. If you look at the first quarter, our year-on-year growth has been 2.5% and 50 bps as I say of that is one-off. So that's the first point. We have always maintained that our H1 is going to be better than the H2 and that the guidance bakes in on that. And then there is in-tech. So all of that put together makes up for a guidance of 3% to 4%. Girish Pai Okay. The next question is on US Financial Services. You think this is more a Infosys-specific situation? Or do you think this is a much more broad-based that the other vendors who have US Financial Service exposure would also be doing well? Or this is something very specific to you? Salil Parekh So, this is Salil, so difficult for us to say like for the other companies. We can see that some of that benefit on financial services, in cards, in payments, we see some of the benefits which came through with some of our clients, but I'm not able to tell if it's just Infosys or not. We do feel we have a very strong set of capabilities from digital, cloud, generative AI, cost and efficiency. So we do see much more connect with clients, but difficult to say for the others. Girish Pai Okay. If I may squeeze in one last question, Salil, you mentioned that interest rates are one factor which could probably be driving demand. So are the customers looking at the start of a cutting cycle or are they looking at a certain level of fed funds rate before they kind of start spending in a much bigger fashion? Salil Parekh So there, I think, my point in the prior comment was more on what is the macro environment. So first, we don't know if that sort of, if that's a trigger or it's not a trigger. We are typically seeing a large digital program, the large program, even now with Generative AI, our clients are still not ready to launch on them. So the sort of more specific point you make, difficult for us to take a view on that. Thank you very much. Ladies and gentlemen, we'll take that as the last question. I will now hand the conference over to the management for closing comments. Salil Parekh Thank you. So, thank you everyone for joining us. It's really wonderful to get all the questions. We are delighted with the strong first quarter growth, margin, cash, large deals, volume. So very, very good to see that outcome for our business. We have a good outlook, so the change in guidance gives a sense of what we see in the outlook, 3% to 4% growth. We hold the margin 20% to 22%. Good to see Financial Services in the US have that change. We feel extremely strong in what we're building in Generative AI, and we can see the traction to that in the projects and programs we're doing. And we believe we are well positioned really as a company where we are benefiting from a variety of areas, whether it's in digital, whether it's in cloud, whether it's in technology transformation or cost efficiency. All of these are something that we can support our clients with and we remain well-positioned to do that through this year and into the future. So thank you again for joining us and catch up at the next quarter call. Thank you very much. Ladies and gentlemen, on behalf of Infosys, that concludes this conference. Thank you for joining us. And you may now disconnect your lines. Thank you.

Schlumberger Limited (SLB) Q2 2024 Earnings Call Transcript

James West - Evercore ISI David Anderson - Barclays Scott Gruber - Citigroup Arun Jayaram - JPMorgan Neil Mehta - Goldman Sachs Dan Kutz - Morgan Stanley Luke Lemoine - Piper Sandler Saurabh Pant - Bank of America Marc Bianchi - TD Cowen Kurt Hallead - Benchmark Thank you everyone for standing by. Welcome to the SLB Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to James R. McDonald, Senior President of Investor Relations and Industry Affairs. Please go ahead. James McDonald Thank you, Leah. Good morning, and welcome to the SLB second quarter 2024 earnings conference call. Today's call is being hosted from London following our board meeting held earlier this week. Joining us on the call are Olivier Le Peuch, Chief Executive Officer; and Stephane Biguet, Chief Financial Officer. Before we begin, I would like to remind all participants that some of the statements we'll be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. For more information, please refer to our latest 10-K filing and other SEC filings, which can be found on our website. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our second quarter press release, which is on our website. And finally, in conjunction with our proposed acquisition, SLB and ChampionX have filed materials with the SEC, including the registration statement with the proxy statement and prospectuses. These materials can be found on the SEC's website or from the parties' websites. This was a very strong second quarter for SLB, showcasing our ability to harness the ongoing growth cycle while driving efficiencies throughout our business. During today's call, I will cover three topics. First, I will review our second quarter results. Then I will describe the dynamics of the cycle and how we are positioning our business for further growth and margin expansion. Finally, I will share our updated outlook for the full year and discuss our ongoing commitment to returns to shareholders. Stephane will then provide additional details on our financial results, and we will open the line for your questions. Let's begin. I'm very pleased with our strong second quarter performance. Sequentially, revenue increased 5%. Adjusted EBITDA grew 11%. Adjusted EBITDA margin expanded 142 basis points, and we generated $776 million of free cash flow. These results were driven by continued growth momentum in international markets, with more than half of our international geo units posting the highest revenue quarter of the cycle. Overall, international revenue grew 6% sequentially, led by the Middle East and Asia, which continued to set new records with two-thirds, 8 out of 12, of the year units in the area posting record high quarterly revenue. This was fueled by capacity expansion projects, new gas developments and production and recovery investments across the region. Additionally, the ongoing strength of the offshore markets supported further growth in Europe and Africa as well as Latin America. This was particularly pronounced in deepwater basins, including Brazil, West Africa and Norway, where we continued to benefit from strong backlog conversion in OneSubsea. We also benefited from new project on land, notably in Argentina and North Africa. Meanwhile, in North America, revenue increased 3% sequentially. This was led by the Gulf of Mexico, where we saw increased running and higher digital revenue from sales of exploration data licenses. However, this sequential growth was partially offset by lower drilling in U.S. land as the market continues to be constrained by weaker gas prices, capital discipline and ongoing market consolidation. Next, let me describe how this growth played out across the divisions. In our core divisions, we continue to harness this cycle, with revenue growing 4% sequentially and pretax segment operating margins expanding by 120 basis points. Growth was led by our Production Systems and Reservoir Performance divisions, which visibly expanded margins due to the favorable conversion of backlog as well as many business line operating and record activity levels. Demand for our services and equipment is being further reinforced by the combination of long-cycle development activity and the acceleration of production recovery investments, particularly in the Middle East and Asia and Latin America. Well construction also grew sequentially, supported by offshore developments, although this was partially offset by weaker land activity in North America. Overall, the core divisions continue to deliver margin expansion, combining to post their 14th consecutive quarter of year-on-year pretax segment operating margin expansion. Meanwhile, in Digital & Integration, I was very pleased to see highly accretive sequential growth, highlighted by our digital business, reaching a new quarterly high and supporting visible sequential margin expansion. This puts us on track to achieve our full year ambition of digital revenue growth in the high-teens. We have opportunities to build on this momentum as customers are increasingly choosing to partner with SLB to modernize their digital infrastructure, as you have seen in a number of announcements included in today's release. At the end of the second quarter, we had 6,900 users on the Delfi platform, an increase of 28% year-on-year. Additionally, the number of connected assets increased by 57%, and trailing 12-months compute hours increased by 43%. Combined with our first quarter results, SLB first half adjusted EBITDA grew in mid-teens compared to the same period last year, in line with our full year ambition. Moving forward, we will remain focused on driving quality revenue growth and leveraging operational efficiency to grow EBITDA, expand operating margins, generate robust cash flows and meet our commitment to return to shareholders. I'm here to clearly express my full gratitude to the entire SLB team for delivering such a strong second quarter and first half results. Next, let me describe how the market is evolving and the steps we are taking to capture profitable growth across the business. As the cycle continues, investments will increasingly be targeted to in the most resilient area of the market, including key international markets such as the Middle East and Asia and in offshore globally. In these areas, we are seeing long-cycle gas and deepwater projects, production and recovery activity to address natural decline and increased digital adoption to drive efficiency and performance. This is an optimal environment for our business, and we are seizing each of these opportunity. In the Middle East, in addition to the exposure to the oil capacity expansion program across the region, we continue to benefit from the acceleration and scale of investments in gas development, both conventional and unconventional, leveraging our fit-for-basin technology and differentiated integration capability. Offshore, we see the benefits of our OneSubsea JV as highlighted by the number of high value contracts awarded and partnership included in today's release. Through OneSubsea, we're helping customers unlock reserves and reduce cycle times through an extensive subsea production processing technology portfolio. And we are increasingly being offered the opportunity to partner with customers in early engineering phases to unlock the economics of the assets. In production and recovery, we are seeing customers embrace our offerings as they work to offset natural decline, extend performance and maximize the value of their producing assets. We have many solutions to help customers access resource to our production system and reservoir performance division, and this is showing up in the strong results these divisions are achieving. As this market continue to evolve, we expect to strengthen our portfolio to fully capture this growing opportunity through our pending acquisition of ChampionX. Finally, underpinning nearly everything we do is the power of digital and AI. In today's market, accelerating the time to returns and extracting new level of efficiency are top of mind for our customers. And they are increasingly recognizing that upscaling their digital infrastructures is key, is a key enabler in these areas, presenting us with significant opportunities for high margin growth. In summary, SLB is well-positioned across key resilient markets. We remain focused on expanding margins through quality revenue growth, and this is complemented by heightened focus on operating efficiency, support structure optimization and strategic resource allocation in certain markets to align with expected levels of activity going forward. To support these ongoing cost efficiency actions, we recorded a charge this quarter, and Stephane will share additional details on this topic later in the call. Overall, the positive market dynamics and our continued focus on operating efficiency present a strong backlog for continued outperformance. We look forward to enhancing these dynamics to deliver further growth and margin expansion in the second half of 2024 and in 2025. On that note, let me conclude my opening remarks by showing our updated outlook for the year. Based on our strong second quarter and first half results, we expect full year adjusted EBITDA growth in the range of 14% to 15% and full year adjusted EBITDA margins at or above 25%. Specific to the third quarter, we expect sequential revenue growth in the low single-digits, enhanced by further margin expansion. This will accelerate as we move towards the end of the year, with visible increase in top-line growth and an uptick in margin expansion during the first quarter due to seasonally higher year end digital and product sets. Lastly, we've returned $1.5 billion to shareholders over the first quarter, through the combination of stock repurchase and dividends. In the second half of the year, we expect to generate higher EBITDA and strong cash flows, supporting our full year commitments. Directionally, we expect a strong exit of the year to position us for continued revenue growth, margin expansion and cash generation, reinforcing our commitment to continue returns to shareholders in 2025. Thank you, Olivier, and good morning, ladies and gentlemen. Overall, our second quarter revenue of $9.1 billion, increased 5% sequentially, mostly driven by the international markets, led by the Middle East and Asia. Sequentially, our pre-tax segment operating margins expanded 135 basis points to 20.3%, as margins increased in each of our four divisions. Company-wide adjusted EBITDA margin for the second quarter was 25%, representing a sequential increase of 142 basis points. In absolute dollars, adjusted EBITDA increased 11% sequentially and 17% year-on-year. As a result, second quarter earnings per share, excluding charges and credits, was $0.85. This represents an increase of $0.10 sequentially and $0.13 or 18%, when compared to the second quarter of last year. During the quarter, we've recorded $0.01 of merger and integration charges relating to the Aker subsea transaction and $0.07 of charges in connection with a program that we have recently, started to realign and optimize the support and service delivery structure in certain parts of our organization. This includes adjusting resources as a result of lower activity levels in North America, centralizing certain digital delivery services and improving efficiency in our support structure. This program, which will result in additional charges in the third quarter, will drive further margin expansion in the second half of the year and into 2025. The related actions will be completed by the end of the year. Let me now go through the second quarter results for each division. Second quarter Digital & Integration revenue of $1.1 billion increased 10% sequentially, with margins expanding 435 basis points to 31%. The sequential revenue growth was entirely due to higher digital sales, as APS revenue was flat. The strong margin performance was driven by improved digital profitability, as a result of robust exploration data sales and the higher uptake of digital solutions. APS margins were essentially flat. We expect the digital revenue growth and margin expansion to continue in both Q3 and Q4. Reservoir performance revenue of $1.8 billion increased 5% sequentially, while margins improved 98 basis points to 20.6%. These increases were primarily due to strong growth internationally, led by higher activity in the Middle East and Asia. Well construction revenue of $3.4 billion increased 1% sequentially, well margins of 21.7% increased 125 basis points, driven by strong measurements and fluids activity internationally. Finally, production systems revenue of $3 billion increased 7% sequentially, driven by the strong activity in the international markets led by Europe and Africa. Margins expanded 146 basis points to 15.6% on improved profitability in Subsea Production Systems and artificial lift. Now turning to our liquidity. Our cash flow was strong, as we generated $1.4 billion of cash flow from operations and free cash flow of $776 million during the quarter. We expect our cash flow to continue to improve throughout the rest of the year. As a result, our free cash flow in the second half of this year will be materially higher than the first half. Capital investments, inclusive of CapEx and investments in APS projects and exploration data, were $666 million in the second quarter. For the full year, we are still expecting capital investments to be approximately $2.6 billion. As I mentioned last quarter, under the securities laws, we were prohibited from repurchasing our stock during the period between the mailing of the proxy in connection with the ChampionX acquisition and ChampionX's shareholders' vote. Following the shareholder vote in June, we have resumed our stock repurchase program. And during the quarter, we repurchased 9.9 million shares for a total purchase price of $465 million. During the first half of the year, total returns to shareholders in the form of stock repurchases and dividends were approximately $1.5 billion, representing half of our $3 billion commitment for all of 2024. Finally, we issued $1.5 billion of bonds during the second quarter. The proceeds either have been or will be used to refinance our debt obligations. We are pleased with our current capital structure, which allows us to prioritize returns to shareholders, as illustrated by our $3 billion total returns commitment for 2024 and our $4 billion commitment for 2025. I will now turn the conference call back to Olivier. Olivier Le Peuch Thank you, Stephane. And ladies and gentlemen, I believe we will open the floor for your questions. [Operator Instructions] Our first question is from the line of James West with Evercore ISI. James West Good morning Olivier and Stephane. Olivier, I know in your guidance for the year, you didn't used the word or highlight raise, but it seems like there was a slight EBITDA guide raise. I guess, one is, am I correct in that? And two, is the guidance for '25 that you'd already laid out, I guess, now starting from a bit higher base, the numbers need to kind of move up across the board? Olivier Le Peuch No. That's a fair assessment and a fair reading of our guidance in the prepared remarks. We have originally been guiding the EBITDA growth year-on-year in the mid-teens and we have here confirmed that, as we have delivered the second quarter and foresee further margin expansion in the second half driven by the different factor we highlighted, we still foresee the EBITDA growth year-on-year to be now in the range of 14% to 15%. Hence, I believe this is indeed a very solid outlook for EBITDA growth year-on-year and in line with our previous guidance, but certainly on the back of international margin expansion. The success we have had in the second quarter, we expect to carry on, as we continue to execute with greater revenue and favorable market position in the second half. James West And then maybe just a quick follow-up for me. It seems like international, we obviously know offshore looks great, but international land, particularly in the Middle East, across the Middle East, whether it's KSA or UAE, looks like expansion is going to be significantly or going to be strong. Maybe it's not much above your expectations, but very, very strong growth. Could you maybe highlight what you're seeing in the Middle East right now across the region? If there's any particular projects that make sense to highlight, I'd love to hear that. Olivier Le Peuch Yes. I think it's fair to say that, we see a large breadth of growth engine across the region, Middle East and also North Africa, driven by a combination of all capacity expansion program that I think you may know are still in full swing in many countries, including KSA, but most visibly the UAE, the Kuwait and Iraq are running after and Libya, are running after visible oil capacity expansion program and activity as such is indeed going up. The addition of large conventional and unconventional gas projects that are being accelerated in several countries to respond to local demand and to desire to transition. I think we are seeing it obviously in Saudi and we commented a lot on this before. You may have seen into the earnings press release that, we have been awarded an extension and the large markets for our drilling services for the unconventional program in Saudi. We continue to fully participate into the other country where this is very relevant including UAE committing to accelerate their own commercial, including Qatar that continue to expand and including Algeria that is starting to look back and clearly having a path forward to also activity increase. All across the Middle East, we see growth year-on-year. We see, as I said, the vast majority of the GeoUnit having record revenue for this cycle and for many record ever activity. Hence, we benefit from this very large growth and multiple levels of activity growth in the Middle East and we foresee it continuing going forward. Next we go to the line of David Anderson with Barclays. David Anderson Hey, good morning, gentlemen. I want to talk about the key resilient markets that you mentioned a few times that are driving SLB's growth going forward. I was wondering if you could give us kind of your longer-term views on global natural gas markets, and how they're developing. And kind of maybe your demand assumptions through the end of the decade. Because I noticed that there was a number of contracts and awards that you're hiring were natural gas, so for unconventional Qatar, Egypt. So I'm just wondering, is your -- are you expecting your overall mix of business to shift towards natural gas in the coming years? Is that already happening? Olivier Le Peuch No. I will be -- I will say that more generically as we see resilience on 3 aspects, resilience on the steel oil capacity expansion and deepwater oil developments happening and having significant resilience. And you may foresee not an existing deepwater program in oil in the Latin Americas region, but you will see emerging new oil developments coming into Africa. So that's a strong resilient aspect of deepwater. You see and you can anticipate a gas resilience in deepwater development more in the Isthmeb, Turkey and Asia region. And then you have the complex of indeed Middle East that is both reinforcing their oil capacity, as I mentioned. And gas so it's not only one market. I think gas, we have increased our share of gas activity in Middle East visibly. We are very well exposed. I would say we are long on gas in the Middle East region. And we believe that it's a matter of offshore long cycle, both oil and gas, Middle East oil capacity and on commercial gas developments and Asia for gas security reason, offshore development for gas as well. So it's a mix that is favorable. And then we should not forget about North America that I think has continued high intensity technology deployment to support sustained production growth for oil, particularly in the short term. David Anderson So if I could dig in a little bit more on the offshore. You had highlighted OneSubsea's performance this quarter, with the backlog conversion. We saw a number of announcements as well during the quarter on the OneSubsea. I was wondering, could you talk a little bit about the order book, how that's shaping up this year's date compared to last year? And just kind of overall your offshore portfolio, are you expecting growth to start to accelerate in the next couple of quarters and into 2025? Olivier Le Peuch I think we see the market of deepwater. I think you have two markets. You have the market offshore shallow that is highly concentrated in Middle East and to the States and in Asia. And then you have the deepwater market that is consolidated in Americas, Africa and some part of Asia and Isthmeb. And I think what we see, if you look at more generically, we see three legs of activity developing for the future of deepwater, large and offshore, large, but deepwater in particular. There is a strong portfolio of projects underway from Guyana to Brazil, from Norway to part of Asia that we'll continue to complete and develop to the next two or three years and are part of the portfolio of subsea deployment that we have across. Then you have an ongoing set of FID, and we expect that offshore FID this year will be reaching $100 billion exceeding this and the same for 2025. And this FID is led by a combination of oil, a lot of oil FID being developed and being nearing decision in the coming months and some have just been approved and you have seen some of the announcements in Patria and Angola. We are very pleased with this because that would feed our pipeline of subsea going forward. And lastly, we should not forget that there is a third leg. The third leg is coming from exploration and appraisal activity that is not only happening in Namibia or not only happening in Brazil or in Suriname or in Asia, but I think it's very strong across many basin in frontier region as well as in infrastructure led exploration. We believe that, this third leg will certainly add quarters, if not years of growth to the deepwater outlook. Hence, we are very confident on our exposure to the deepwater market. To the offshore market at large, as we commented before that, offshore represent about 50% of our revenue exposure internationally and we see it extremely resilient and we see multiple legs in the deepwater market going forward. Next we go to the line of Scott Gruber with Citigroup. Scott Gruber Good morning. Wanted to ask about how you think about segmenting the portfolio next year when ChampionX comes in. I guess the heart of the question is, you have this awesome digital business, it's growing rapidly, it's going to be $3 billion or so in revenues next year. Does the ChampionX acquisition provide opportunity for you to think about re-segmenting the portfolio to further highlight the digital business? Olivier Le Peuch First, I cannot comment, obviously, as you understand, where we stand on the -- with regulatory process and usual process clearance on the ChampionX. But obviously, we are looking at the way we could at the time of the closing and restructure and get better exposure to the digital if we can do this in a way that will indeed expose and provide a little bit more direct measurement of our success and ambition going forward in digital. That's the integration team looking into it and we will make decision in due time and inform you. Scott Gruber Okay. We will wait for the details, but good to hear. And then you mentioned low single-digit revenue growth in 3Q and continued margin expansion, but it does sound like the margin expansion potential may be stronger into 4Q, with those year-end sales. Can you just provide a bit more color on how you see the margin expansion potential shaping up for 3Q? And then, if you want to, any additional color on 4Q? Olivier Le Peuch Yes. We would expect that, on the low single-digit global growth sequentially in the fourth quarter to still increase our margin expansion and not give more precise guidance. We expect an uptick in the fourth quarter, driven first by an acceleration of our top-line sequential growth in the fourth quarter, in part due to the year-end effect of product sales in both software, digital and in some of our equipment division. This will lead to acceleration also our margin expansion, giving us a very good exit point if you like, as we enter 2025, an ambition to continue growth, as I mentioned and further expand the margin. That's setting the scene very well as we conclude the year with the guidance we have shared and preparing 2025 an overview of growth and margin expansion. Good morning, Olivier. You highlighted margin expansion for SLB through quality revenue growth, digital and efficiency gains. I was wondering if you could maybe elaborate on just the concept of quality revenue growth, what you're referring to there and just maybe some of the plans to boost efficiency. I assume there's some cost structure alignment going on at the company, maybe you can give us some more thoughts on that? Olivier Le Peuch Yeah. I think quality revenue growth is focusing selectively on we believe -- where we believe we have the most operational leverage, the most pressing upside and the most technology adoption potential to suit our growth with higher accretive margin and hence to support our margin ambition expansion going forward. We have demonstrated this fairly well in the second quarter. We continue to focus on this selectively. The market internationally remains tight and it favors the best performer from execution and we'll use this to deploy technology, fit-for-basin technology, use our unique integration capability and spice it up, if I may, with digital capability to increase and improve our margin going forward. So that's where we look at what we call quality revenue growth. And indeed, we have taken some measure to further support this by adjusting and relooking at our support structure and where we could and we should adjust to prepare for supporting our growth and adjusting our asset to fit where we see the most resilience going forward. So that has been also contributing and will continue to contribute to margin expansion going forward. Arun Jayaram That's helpful. Just a follow-up on D&I, your margins rebounded to 31%. You reiterated your high-teens growth outlook for digital. I was wondering if you could maybe give us a sense of D&I margin progression over the balance of the year and just how you're thinking about the APS business broadly in Canada in terms of SLB's broader portfolio. Stephane Biguet So yes, we were quite happy with the not only the top-line growth, but the margin expansion in the D&I division in the second quarter. And as I said earlier, it was all due to the digital business. So, APS was flat. And as it relates to the rest of the year, we do definitely expect the digital margins to continue improving in the second half. It will accelerate even more so in the fourth quarter on higher sales, but also on the effect of the changes we are making in the digital delivery and support organization to pull resources on a more global and regional basis to scale the business more efficiently. So as it relates to the APS business, again, it's always it is mostly flat quarter-on-quarter. So all the upside is coming from digital. And your question on Canada, I think we have signaled before that we were looking at divesting the asset and it's very much the case. We have actually reached -- we have launched a formal process again. We are quite happy with the results. So we will move to the second phase of this process, which is that we had several offers. We have shortlisted -- selected set of buyers and we are moving to negotiation with the selected set of buyers. It's so far so good. It's going well on this process and we'll update you later. Yes. Good morning, team. Olivier, I'd love your perspective on deepwater markets and offshores, particularly given some of the incremental investment in Subsea? And just how -- maybe you can characterize the different regions where deepwater is growing and what activity you're seeing and how that fits into your long-term strategy? Olivier Le Peuch It's a longer for better outlook first. It's a market that has multiple legs, as I said. Actually, if I start to list all the deepwater basins currently under production in future FID and future exploration, I think it would be a long list. What characterized this cycle, it is very broad in term of region of the world and deepwater basins that are being either explored and that are being redeveloped. I think there is there are two or three fundamental reasons for this. First and foremost is that, the deepwater assets from be it oil or gas typically geologically very strong asset and advantaged assets. Hence, they received utmost focus and priority when the IOCs are high grade in our portfolio. They typically concentrate on some of these assets, followed by select international independents and some NOCs for which deepwater is their backyard and their center of expertise. We see FID growth, we see exploration growth and we see existing deepwater basin very solid going forward, hence very resilient and multi finger and multi legs, I would say, outlook for deepwater. That's quite unique. It's not one basin. It's constrained by some rig capacity and it's shifting to the right to some extent, but it's longer for better. It's elongating if I would say, as a deepwater market and for the good, because it's -- we have new basins emerging like Namibia. We have basin being FID like Suriname. We have a lot of explore activity in Asia, many parts of Asia with some gas success and discovery in Indonesia particularly. We still have the hot East Med or Turkey basin and we have new oil being explored in South Angola or in South of Brazil in the new Pelotas Basin. It's all hot and it's very diverse, and not forgetting about the deep formation into the Gulf of Mexico coming back and if not Mexico as well in the South of the Gulf. More work into the future, more bookings in the future, and I think a very key and regional market for us, as we are very exposed to that offshore deepwater. Neil Mehta Thank you. The follow-up is just around return of capital. Obviously, some of the dynamics around ChampionX precluded you from buying back as much stock as you probably wanted to in the last quarter, but seems like you're leaning into it. Just talk about your return of capital intentions and how you're thinking about taking advantage of any dislocation that might exist in the stock? Stephane Biguet Neil, we did try to take the most advantage of this by resuming very quickly our stock buybacks in June right after the shareholders vote. We were able to accelerate there and actually catch up on to the point where we go to just about half of our full year commitment. So the commitment remains the same for 2024 at this moment. It's a total of $3 billion between dividends and buybacks. We will continue to monitor our cash flow, continue to look at our capital allocation. For example, potential cash proceeds from divestitures depending on their timing can be an upside to buybacks. But for the moment, the target for '24 remains $3 billion. And our next question is from Dan Kutz with Morgan Stanley. Dan Kutz Hey, thanks. Good morning. I wanted to ask a question more generally on M&A. I'd love to get a sense of kind of your appetite as it stands today for incremental acquisitions, given that you guys have been pretty active recently? And to the extent that that's still that M&A ranks high on your capital allocation priority list, would just love if you could talk about some of the characteristics that you would look for and potential targets. It seems like, the theme of the recent acquisitions was kind of stability, longevity and growth, given that they were kind of production or new energy related. Just hoping you could kind of give us your latest thoughts on your M&A appetite. Stephane Biguet Thanks, Dan. So you mentioned we've been quite active indeed. So at this stage, we are really focusing on making those acquisitions and various transactions from Aker Subsea to Aker Carbon Capture to the planned acquisition of ChampionX as a success. So we are the focus currently is more on integration than on new M&A. And really in terms of prioritization in for the capital allocation at this moment, we are really prioritizing returns to shareholders. Dan Kutz Great. That's helpful. And then that kind of is a good lead into my next question. So on Aker Carbon Capture specifically, I mean, we can see the financials of the standalone entity. I think the revenue growth has revenue has nearly doubled the last two years. I don't think folks are doubting the top-line growth story or growth potential for that business. But can you just talk about some opportunities to kind of drive margin improvement, given following the transaction and given the resources of SLB combined with Aker Carbon Capture? Olivier Le Peuch Thank you, Dan. So first, I would comment maybe stepping up on the CCS as a market. I think we see this as a very attractive market for us considering the adjacency on the sequestration and considering the integration capability we have acquired and the technology we have acquired through Aker Carbon Capture. So the market independently and at this point, we see this market growing at more than 50% a year. And I'm very accretive to our growth. And we don't see this slowing down necessarily soon. And obviously, the addition of Aker Carbon Capture give us an opportunity to participate at scaling market where Aker Carbon Capture was not exposed to, partly in North America, where we're getting a lot of inbound requests as we form this combination, unique combination with what we have invested into our own capture technology with carbon capture commercial technology, we are seeing a lot of inbound requests and we have been awarded and part of two DOE-funded projects in North America and another shipping ban request from a company that are exploring and/or pursuing some carbon capture in North America. We see the same in Middle East. This will complement the strong pipeline that Aker Carbon Capture has already developed in Europe with three active projects and most likely more to come. We see that, we will combine our strengths in technology deployment at scale in every basin in the world, combining this with the subsurface sequestration technology leadership we have to offer customers an all in capability from sequestration design execution to carbon capture, combining our technology with the technology of our carbon capture. We are very positive on this and we believe that, as this business will scale, as we will be in a position to add on many new innovation technology on it, this will result into margin expansion and into ability to extract a lot of value from this acquisition. Hi. Good morning. Arun touched on it a little earlier with his question, but you mentioned cost efficiency programs a couple of times in the release. It sounded like maybe these were primarily support costs. First, is that correct? Secondly, would it be possible to maybe frame the magnitude of these? Stephane Biguet Thanks for the question, Luke. Really this program is about extracting the most margin expansion and returns out of this growth cycle. It's not just support, even though it's one of the key element of it. You have three main components. First, there's a more tactical adjustment, if you want, of our operational resources in mostly in U.S. land to account basically for the lower-than-expected rig count levels. The second one relates to digital. We are centralizing or regionalizing a certain number of delivery services to improve resource utilization, so that we can better respond to the rapid adoption of our digital solutions. Indeed the third one, not a small component, about half of it if you want, is increasing efficiency in our functional superstructure. It's something we do all the time. But here, we are completing the deployment of our new ERP system. We really want to extract the most out of this and it allows us to streamline some of the superstructure. In terms of magnitude, you've seen the charge this quarter. It's slightly over $100 million pretax. I don't expect that, this will exceed this amount in the third quarter. We are still in the process of finalizing all the plans. I cannot give you a number on that, but it should not be of a bigger magnitude. Then this will result in great savings and optimization of our cost lines, which you will see gradually towards the end of the year and of course in 2025. Hi, good morning, Olivier and Stephane. I guess, I just want to go back to the OneSubsea joint venture, especially on the all-electric, the groundbreaking award you announced with Norway. That's a big deal, I think, from both a technical and a commercial opportunity standpoint. Olivier, if you don't mind spending a little time on that, how should we think about that opportunity unfolding? What are the constraint, especially on the regulatory side of that? Just talk to the opportunity on just that all electric subsea side of things. Olivier Le Peuch Yes. This is a great question, Saurabh. We are very excited. We are very excited because we believe this is one of the leg of technology deployment that could change the game in the long-term and in the subsea infrastructure deployment. First, because it allows a lower footprint, a smaller footprint, reducing and eliminating hydraulics into the subsea and eliminate -- ultimately eliminating cost. And secondly, allowing full digital control of the subsea infrastructure. And last, obviously, having an impact onto the carbon footprint of this infrastructure. So we believe that for recovery, cost and low carbon, we believe that there is a future for our deepwater all-electric bid on the subsurface. And as you have seen, we you might have seen that we have announced earlier in the year and last year that we have made progress and being awarded several contracts on a completion subsurface all-electric solution. I will continue to lead in this domain and combine it with all-electric subsidiary or subsea infrastructure that then when combined together with the subsurface give us an opportunity to fully digitize and fully control and provide our customers and the operators the ability to optimize recovery and control and optimize the maintenance as well in this field. So that's part of the future of deepwater is electric and we're very pleased to have been awarded this as a result of our consortium actually, [Indiscernible] for other operators. So this will take place in several basins we believe, in particular in Brazil and another place and we'll be ready to deploy this for our customers. Saurabh Pant Okay. That's fantastic color, Olivier. Maybe I have a quick unrelated follow-up on the D&I side of things. I think in the press release, you mentioned in a couple of places about just the second quarter being held by exploration data license sales. I know these tend to be lumpy, but is there anything to read into this on what's happening on the exploration side of things? It does sound there are more exploration around across the globe, but is it just lumpiness in the second quarter? Or is there anything we can read into on just where exploration is going? Olivier Le Peuch No. I think the trend has been up, and I think it has been contributing in line with our ambition for digital growth as the data exploration sales has been a success. And we foresee this to continue to grow going forward in the quarters to come. Sometime, it will be up and sometime it will be slightly down, but we foresee a growth and I think this is driven by the frontier exploration. This is driven by infrastructure led exploration in natural basins and this is driven by new generation of software digital application that can relook an existing basin and extract more value for understanding and finding new hydrocarbon and or new gas finds into the existing basins. So, we're very pleased to have a leading offering both in term of digital capability to repossess existing data sets and also to be able to enhance the vintage data sets and to be having this in the right basin and the right place and parts linked too many of these licensing rounds. You're right to say that, many licensing round expected this year, no less than actually 70 licensing rounds are being announced across many parts of the world and I think some of them have been highly successful. Deepwater has been a success for critical finds and critical hydrocarbon, both oil and gas in the last few quarters and we expect this to continue. There's increased interest into the Apollo pass, which is the last hot spot South of Brazil. You have the Namibe Basin south of Angola, North of Namibia. You have Indonesia, India. You have Bangladesh, you have many, many spots that are being discovered and being explored with fresh data sets and the opportunity to indeed boost and support our participation to this market going forward. I think we will continue to participate and maximize this, and this will be, on occasion, lumpy, but we believe this will continue to grow. Saurabh Pant Perfect. No, that's a very thorough answer, Olivier. I know you have made this business as an asset-light, so it's accretive to your returns to your margins. That's all very good to hear. Thank you. Olivier. I'll turn it back. Thank you. I didn't catch if you said, but could you update us on your outlook for international and North America revenue growth in 2024? Olivier Le Peuch I think we have been guiding earlier this year. We remain fit on this guidance that, internationally, we foresee double-digit growth when excluding Aker and Russia. North America, we have been guiding originally positive up to mid-single growth and we have been realizing this down as the North America has been clearly impacted going forward. But, we still have opportunity to grow in the second half and to improve our margin as well in this basin as we adjust our resource and get the most out of deepwater market in Gulf of Mexico as well as our participation with technology intensity in some part of the North American land market. No change international and lower growth in North America, compared to original guidance. Marc Bianchi Yes. Makes sense. Maybe for Stephane, back on the cost savings, you mentioned that another charge in 3Q not to exceed what we saw in second quarter for the actions you're taking. Can you help us with how much of a profit uplift or cost saving benefit you may get on a quarterly basis in the back half of the year and then once everything finally reaches its full implementation? Stephane Biguet Yes. Sure. As I said, we will really complete everything. All the actions will be taken by the end of the year. But you will see gradually the effect on our margins in the second half. By the way, this is of course why we are confident in the updated, more precise guidance we gave for the full year EBITDA. We will update you more precisely on the savings once we are done at the end of Q3. In general, as a rough rule of thumb, if you want, you can assume that, the payback on these actions is between 9 to 12 months. Our final question comes from Kurt Hallead with Benchmark. Kurt Hallead Thanks for fitting me in here. Appreciate the insights as always. Olivier, I think from my standpoint, Olivier, I'm kind of curious, right? We've now had five or six months or so to kind of digest the shift in game plan by Saudi Arabia from offshore to ton of conventional gas. You kind of, referenced that very explicitly in your commentary about unconventional gas being a growth market for you. But I guess from where I sit, right, we're five or six months into this process. What have you picked up incrementally with respect to that opportunity? And more importantly, what kind of legs do you see for that dynamic for you in Saudi in particular? Olivier Le Peuch I think you may have been reading and don't want to speak on behalf of Saudi Aramco, but I think their commitment to their program to increase gas production by 60% from 2020 is very clear. I think this touched both the conventional and unconventional gas reserve in Saudi. The most visible element of this is obviously the unconventional gas large Jafurah project. You may have seen they've also explored successfully new finds, both oil and gas, in the recent months. So, the country is set to expand in gas to complement their oil capacity, sustained capacity and slight expansion. And we are -- as I said, favorably exposed, and we have reinforced this exposure, strengthened this exposure with our recent wins, as you may have seen in the earnings press release from this morning. So, we're very pleased. But the market is not only one project. The market is not only one aspect. The market is much more diversified in Saudi and furthermore in Middle East. So, we are exposed to many aspects of the Saudi activity, both production and recovery, exploration, CCS, as well as, well construction and production equipment, both offshore and onshore. So we are very -- we have a very diversified exposure to this, and we benefit favorably to the exposure of the growth accelerated growth in Jafurah. So, we're very pleased to where we are. And we are one of the most beneficiary of the accelerated gas expansion as highlighted in our EPR highlights. So that's where we stand. Kurt Hallead Great. That's great color. Always appreciate it. Thank you. And I'll now be turning the call back to Olivier for closing remarks. Olivier Le Peuch Thank you. Thank you, Leah. So ladies and gentlemen, as we conclude today's call, I would like to leave you with the following takeaways. First, the growth momentum continues with many of our international [GeoUnits] reaching new cycle highs. Combined with the increased adoption of digital technologies, the stage is set for further growth and margin expansion throughout the rest of 2024 and into 2025. Second, in this environment, no company is better positioned than SLB to capture quality growth. Our differentiated operating footprint, leading technical and digital offerings and sustained commitment to operating efficiency and value creation have set us apart throughout the cycle. Moving ahead, we remain favorably positioned in the highest quality area of the market, supported by our differentiated technology deployment, integration capabilities and performance. And third, with a strong first half of the year behind us and full confidence in further international revenue growth, we are optimally positioned to continue our margin expansion journey to generate cash and to fulfill our commitment to return to shareholders both in 2024 and in 2025. This is an excellent environment for our business, and I'm confident that we will continue to deliver outstanding performance for our customers and our shareholders in the quarters ahead. With that, I will conclude this morning's call. Thank you very much for joining. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

Halliburton (HAL) Q2 2024 Earnings Call Transcript

Good day and thank you for standing by. Welcome to the second quarter 2024 Halliburtonearnings call At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to David Coleman, senior director, investor relations. Please go ahead. David Coleman -- Senior Director, Investor Relations Hello, and thank you for joining the Halliburton second quarter 2024 conference call. We will make the recording of today's webcast available for seven days on Halliburton's website after this call. Joining me today are Jeff Miller, chairman, president, and CEO; and Eric Carre, executive vice president and CFO. Some of today's comments may include forward-looking statements reflecting Halliburton's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2023, Form 10-Q for the quarter ended March 31, 2024, recent current reports on Form 8-K, and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today also include non-GAAP financial measures. Should you invest $1,000 in Halliburton right now? Before you buy stock in Halliburton, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now... and Halliburton wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $741,989!* Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our second quarter earnings release and in the quarterly results and presentation section of our website. Now, I'll turn the call over to Jeff. Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer Thank you, David, and good morning, everyone. Halliburton delivered solid second quarter results that demonstrated the strength of our international business and the differentiation of our North America service offerings. Here are the quarter highlights. We delivered total company revenue of $5.8 billion and operating margin of 18%. International revenue was $3.4 billion and grew 8% year over year, led by Latin America, which delivered a 10% increase. North America revenue was $2.5 billion, an 8% decrease year over year compared to a 12% decline in rig count over the same period. Our Drilling and Evaluation division and our Completion and Production division both demonstrated margin improvement year over year. Finally, during the second quarter we generated $1.1 billion of cash flow from operations and about $800 million of free cash flow and repurchased $250 million of our common stock. I'll begin our discussion with the international markets, where Halliburton's strategy of profitable growth delivered another solid quarter. International revenue grew 8% year over year, with growth demonstrated by each region. This marks the 12th consecutive quarter of year-on-year growth in our international business. As I look ahead for the remainder of this year, my outlook today is consistent with our expectations at the start of the year. I expect steady growth for Halliburton throughout the remainder of 2024. In our international markets, we see strong demand for Halliburton services, high activity levels, and equipment tightness across all major basins. We expect our international business to deliver about 10% revenue growth for the full year. I am pleased with the profitable growth we're seeing across our product lines. And today, I would like to highlight three specific ones in more detail. The first is our Landmark Software business. I recently attended our Landmark Forum, LIFE2024, in Athens, Greece. It is an annual event where we share our latest software innovations and our customers share their successes and future opportunities. While in Athens, I had the opportunity to meet with dozens of customers and they told me how excited they were about our latest offerings like unified ensemble modeling, scalable earth model, and our latest developments in AI and machine learning. These tools change the way customers work by driving efficiencies from asset level planning through production. The conference included customer presentations that showcased their business transformation and their use of Halliburton Landmark's tools. Our customers tell us we create unique value with our iEnergy cloud platform, which seamlessly integrates into their workflows. I am confident that Landmark's DecisionSpace 365 will expand and add to our customers' productivity and innovation journey. Next, Halliburton's artificial lift product line is growing in the international markets at double the rate of our overall international business. It embodies our successful M&A strategy of bolt-on acquisitions that bring leading technology into our portfolio. We organically grow new technologies through our global footprint and through collaboration with our customers to engineer solutions that maximize their assets value. As one example, this quarter we launched our GeoESP line, which is engineered for the harsh geothermal environment. The GeoESP line solves for extreme thermal cycling, scale development, abrasion, and corrosion. While geothermal ESP technology has applications across the globe, Halliburton sees substantial growth opportunities in Europe where customers require advanced technology to bring geothermal to scale. Finally, Halliburton's drilling services are key to our success in the international markets. We had another strong quarter in unconventional drilling with our iCruise X rotary steerable system and our LOGIX autonomous drilling platform. We deployed advancements that improved drilling speed and reliability and set several interval records during the quarter. We invest in differentiated drilling technology and we expect our strong performance and reliable execution to drive above-market growth. For example, in the Middle East, our drilling services revenue grew about 30% year over year. I am pleased with our international business and look forward to deepening our strategy and delivering additional profitable growth. Turning to North America, our second quarter revenue declined 3% compared to the first quarter. Halliburton's first half 2024 results were largely as we expected. However, as we have seen, rig counts and overall service activity declined through the quarter. As I look to the second half of 2024, I now expect full year North America revenues to decline 6% to 8% versus last year, driven by lower activity. I expect that the second half of 2024 will be near the low point of activity levels this cycle, and while it's too early to give specific guidance for 2025 in North America, I expect activity to be directionally higher than the second half of 2024. Here's how I think about this. First, I expect an increase in activity after E&P companies complete their acquisitions and establish new development plans. Second, some of the merged assets will be divested to smaller operators who will put them to work. Finally, I expect some recovery in natural gas activity. Six years ago, when we set our strategy to maximize value in North America, I understood it may take a market like we see today where North America activity declined by over 200 rigs in the last 18 months to demonstrate the margin resilience and earnings power of our strategy. I am pleased that Halliburton delivered strong C&P margins through this period and I am confident that our strategy will deliver strong results in the future. We're committed to our strategy to maximize value in North America because it delivers shareholder value and it is the right strategy for this market. For Halliburton, we focused on returns. We allocate capital to the markets and products that drive superior returns and margins. We prioritize returns over market share, and to that end, we retired a few fleets this quarter. We developed differentiated technologies to solve for the unique requirements of the North America market. And lastly, we improve efficiencies for our customers through those technologies, service quality, and execution. I expect this strategy will deliver leading performance for our customers and a structurally more resilient North America business for Halliburton. A key part of how we do this is our strategic investment in technology. One technology I'm excited about is the latest addition to Octiv, a key component of the ZEUS platform. Today, Octiv is a cornerstone of how we deliver large multi-well pads with unmatched precision and consistency. As our customers execute completions with ever-increasing size and intensity, automation, as delivered by Octiv, provides better control and more effective delivery for simul-frac and trimulfrac operations. During the second quarter, we completed field trials of the latest level of Octiv automation called AutoFrac. With the single click of a button, AutoFrac executes the entire frac job from ramp up at the start to ramp down at the end, making autonomous fracturing a reality. This new level of automation gives customers control to execute the frac design exactly how they want it without human intervention. Following our commercial trials, AutoFrac is ready to scale and I'm excited about what this technology means for our customers and for Halliburton. Lastly, we see rapid adoption in North America of our iCruise rotary steerable system. We consistently reduce drilling times for our customers and create significant value. In the Permian Basin, the number of rigs running the system has increased by almost 45% since the start of this year. We are on pace to triple our footage drilled in North America this year and I'm excited about the market adoption of iCruise. North America is the largest oilfield services market in the world. We are crystal clear on how we maximize value in North America. We have demonstrated that this strategy works. And that's why I am confident that we will continue to deliver strong returns through this cycle. To step back, Halliburton's returns and cash flows are strong and I am pleased with our performance this quarter. I'm just back from a few weeks in Europe/Africa. What I saw is a microcosm of Halliburton around the world. The quality of our people, the clarity of our strategy, our leading technologies, the depth of our pipeline of opportunities, and the competitiveness of our business segments all give me incredible confidence in Halliburton's future. Now, I'll turn the call over to Eric to provide a few more details on our financial results. Thank you, Jeff, and good morning. Our Q2 reported net income per diluted share was $0.80. Total company revenue for the second quarter of 2024 was $5.8 billion, flat sequentially. Operating income was $1 billion, a sequential increase of 5%, and operating margin was 18%, a sequential increase of 69 basis points. Beginning with our Completion and Production division, revenue in Q2 was $3.4 billion, sequentially flat. Operating income was $723 million, up 5% when compared to Q1 2024, and operating income margin was 21%. These results were primarily driven by strong international completion and production performance, offsetting softer results in North America. In our Drilling and Evaluation division, revenue in Q2 was $2.4 billion, while operating income was $403 million, both sequentially flat from Q1 2024. Operating margin was 17%, a sequential increase of 20 basis points. These results reflect the strength of our global D&E business despite the roll-off of seasonal software sales in Q2 which affected every region. Now, let's move on to geographic results. Our Q2 international revenue increased 3% sequentially. Europe/Africa revenue in the second quarter of 2024 was $757 million, an increase of 4% sequentially. This increase was primarily driven by higher well construction activity and improved wireline activity in Norway, along with increased completion tool sales and higher stimulation activity in West Africa. Middle East Asia revenue in the second quarter of 2024 was $1.5 billion, an increase of 5% sequentially. This increase was primarily related to higher activity in the Middle East across multiple product lines and higher fluid services in Asia. Latin America revenue in the second quarter of 2024 was $1.1 billion, sequentially flat. In North America, revenue was $2.5 billion, representing a 3% decrease sequentially. This decline was primarily driven by decreased pressure pumping services in US land and decreased completion tool sales and testing services in the Gulf of Mexico. Moving on to other items. In Q2, our corporate and other expense was $65 million. For the third quarter of 2024, we expect our corporate expenses to increase slightly. Our SAP deployment remains on budget and is on schedule to conclude in 2025. In Q2, we spend $29 million, or about $0.03 per diluted share, on SAP S4 migration, which is included in our results. For the third quarter, we expect SAP expenses to increase slightly. Net interest expense for the quarter was $92 million. For the third quarter 2024, we expect net interest expense to be roughly flat. Other, net expense for Q2 was $20 million, which was lower than anticipated, driven by favorable FX movements. For the third quarter of 2024, we expect this expense to be approximately $35 million. Our effective tax rate for Q2 was 22.5%, lower than expected due to discrete items. Based on our anticipated geographic earnings mix, we expect our third quarter of 2024 effective tax rate to increase approximately 1%. Capital expenditures for Q2 were $347 million. For the full year of 2024, we expect capital expenditures to be approximately 6% of revenue. Our Q2 cash flow from operations was $1.1 billion and free cash flow was $793 million. During the quarter, we repurchased $250 million of our common stock. For the full year 2024, we expect free cash flow to be at least 10% higher than in 2023. Now, let me provide you with some comments on our expectations for the third quarter. In our Completion and Production division, we anticipate sequential revenue to be down 1% to 3% and margins to decrease by 75 basis points to 125 basis points. In our Drilling and Evaluation division, we expect sequential revenue to increase 2% to 4% and margins to increase by 25 basis points to 75 basis points. I will now turn the call back to Jeff. Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer Thanks, Eric. Here are a few key points I would like you to take away from our discussion today. I am pleased with our 18% margins and about $800 million of free cash flow in the second quarter. We are well on track to deliver over 10% free cash flow growth this year. I'm excited about our international business where our technology portfolio has never been stronger. I am confident that our strategy to maximize value in North America is working, and I expect it continues to deliver strong returns. Finally, I am convinced that our collaborative approach and value proposition differentiate us from our competitors and are directly aligned with how our customers expect to drive improved performance. And now, let's open it up for questions. [Operator instructions] Our first question will come from the line of Dave Anderson with Barclays. So, North America is softening a little bit, not a surprise. A lot of your fleet, though, is under contract with e-fleet. I think it's around 40% or so. And you're continuing to roll out equipment. So I'm just wondering about the recontracting of those. I think you typically have like two-to-three-year contracts. I would assume, like, maybe a third of that gets repriced each year or something like that. So what does that look like right now in terms of contracting? I think -- I'm assuming demand still outstrips supply here. So, is pricing able to still move higher in there? Are you doing to blend in, extend deals with some customers who want more? Just a little color around the repricing of that, on the e-fleets. Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer Yeah, well let's -- still see a lot of demand, Dave, for e-fleets. I mean, clearly it's a leading technology and we rolled a couple out this quarter and signed some more contracts. And so, that's a runway through the end of this year and into '25 that we see today. We don't have any contracts that expires early till next year. And so, that's a process that we're working through. I'm not going to go through all that on this call, but we're signing up with repeat customers, which is a pretty good indicator of the value that they're creating. So, feel confident about that process, but really don't want to go through it on the call. David Anderson -- Analyst Totally understand. But would you expect that most of those fleets stay with existing customers? Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer Yeah, I feel -- yes. Yes, still confident. I mean, these are the same customers in some cases that are signing up the second and even beyond their fleets. And so, no reason to believe that they would not. And we're clearly on the path to the 40% in 2024 and 2025 as well. I mean, I think that's just that trajectory gets clearer every day. David Anderson -- Analyst Yeah, that makes a lot of sense. And if I shift over to your international story here, and within the 10% revenue growth, you highlighted Middle East up 5% this quarter sequentially. Can you just talk about that part of the international story for you and kind of how you see that growth? Should growth start to accelerate here? There's big unconventional play over there that I know you're involved in. I don't know if you can talk about any other contracting opportunities with that, but I would -- am I wrong to think that that growth should start to accelerate in the Middle East, even, I mean, within the 10%, I know, but really into next year as well? Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer No, you're not wrong. Look, I'm very confident around our business in the Middle East and as you say, I'm not going to talk about contracts, but Aramco obviously is a fantastic operator and we've got a lot of exposure to both the unconventional and the gas work in Saudi Arabia. We've got -- our typical services, a lot of exposure and even some creative sort of new things. So, I'm very optimistic, actually bullish around Middle East. Our next question will come from the line of Arun Jayaram with J.P. Morgan. Arun Jayaram -- Analyst Good morning. Jeff, my first question is on North America. You now expect revenues down 6% to 8% year over year. How would you characterize the declines in terms of impact from lower activity levels versus, call it, pricing impacts? Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer Look, it's -- primarily this is activity based. The fact that we -- and then we retired a few fleets during the quarter as well, but this is activity and that's, as we look at activity for the year, gas market actually took a leg down. I didn't think it would come up, but I didn't really expect it to take a leg down either, so it's not flat. And I think M&A takes some time to digest, and so that has an impact on activity broadly and clearly efficiencies. I mean, we've got terrific technology. We talk about efficiencies all the time, but we also catch up to rigs. Glad we're at the leading edge of that technology and that performance makes Halliburton more value, but it really doesn't change the activity outlook. Arun Jayaram -- Analyst Understood, understood. Jeff, you've obviously been on the road quite a bit internationally. You expect 10% year-over-year growth this year. I was wondering if you could give us any qualitative or even quantitative thoughts on how you think international spending trends in 2025 for industry and how is growth prospects internationally next year? Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer Look, they look strong for next year internationally. I mean, we see a lot of projects that are either just now being hindered or activity going into next year and in some cases, it takes a while to get the international up and going. And so, probably the activity that picks up the soonest will be where it's sort of NOC driven, which would look in some cases like obviously the Middle East. Others where IOCs are engaged, it takes a lot of negotiation, contract extensions for them. And so, I'm seeing meaningful work. I just talked about my trip to Europe, Africa, and I see meaningful step-up there. Still excited about Latin America and what's possible there. And so, no, I feel really confident both in Halliburton's outlook for '25 and the industries. Our next question comes from the line of Neil Mehta with Goldman Sachs. Neil Mehta -- Analyst Good morning, team, Jeff. I guess the first question just building on North America, what do you think is going to be the driver that forms the bottom in activity? I think you alluded to some of those points around M&A and natural gas, but maybe you can unpack that more. And are you seeing any green shoots in customer conversations that would suggest that $2.8 trillion is the bottom? Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer Yeah, look, I think that customers, in a lot of cases, are working through plans for 2025 now. And, let me maybe just step back and give you kind of where I see capacity and industry structure, because I think that's really important from a services standpoint. We've got -- new equipment is not being built. The old equipment is attriting. And I think that, I talked about retiring fleets this quarter. I mean, this is sort of shrinking of capacity availability and it's happening pretty much in real time, I think, across the board. And clearly as we look at next year, I say all that to say, I do expect an increase in activity around companies that get sort of new plans in place. I expect assets end up in the hands of new teams, which is -- I never bet against North America entrepreneurs. That will happen. I do expect some pick up in gas next year, at least not a leg down from here. So, clearly, I would expect a leg up. And I don't think it takes a lot of activity to firm things up, I think, is the point I'm making here. Neil Mehta -- Analyst Thanks, Jeff. And then, just to follow up, it was a very good quarter for free cash flow and the company has been very consistent around $250 million of return of capital. So there's probably two parts to that question. One is, how should we think about working capital in the balance of the year and how should we think about your commitment to returning capital to shareholders? Eric Carre -- Executive Vice President, Chief Financial Officer Yeah, Neil, it's Eric. So as we said in terms of the working capital, I mean, the working capital will evolve in a way that is consistent with our overall guidance of free cash flow being up over 10% compared to last year. We had more of a working capital headwinds in 2023, so that's a significant delta between the two years. And as an organization, we continue to focus on the overall efficiency of working capital as a whole. In terms of cash return, we bought back $250 million in Q1, $250 million in Q2, and I think generally speaking, it's a good kind of guiding point in terms of what we intend at this stage to do for the remaining of 2024. Our next question comes from the line of James West with Evercore ISI. So, Jeff, as you think about -- and I don't want to beat a dead horse too much, but if you think about North America going into next year, I'm increasingly bullish on the outlook for '25 and certainly for '26, both with oil prices where they are and gas prices which should rebound nicely. And we have this huge power demand pull coming from the tech industry. And I think the tech industry is more fully aligned with the oil and gas industry than it's probably ever been. So I'm curious about your customer conversations, how they're thinking about, how do we get this gas to market, how do we size up crews or size up equipment and get ready for what's going to be a surge in demand and kind of pair that with constructing more natural gas-fired power generation and things of that nature to meet data centers and AI demand? How are your conversations kind of evolving there? Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer Look, there's a lot of discussion around what to do with gas. I think your point around data centers and alignment, it just -- in my view, that will be takeaway for gas at some point. Seems easier to lay data lines and gas pipelines. And the -- gas is such a fantastic fuel and resource for this country that I think it's directionally absolutely correct. In terms of timing, I think that will come on. I think it's early to still work through the mechanics of what that means to plants but I expect all that's coming together in the degree to which gas gets taken away that only creates more runway for oil in the Permian Basin. So I'm like -- I'm -- share your excitement around what data centers and AI mean for our industry in terms of natural gas takeaway and we've got a pretty good seat at that and get to watch it really closely and excited. James West -- Analyst Got it. OK. That makes a lot of sense. And then, iCruise, you mentioned adoption. Now, I mean, we had great adoption internationally, but it sounds like you're getting better adoption in the US as well. Could you maybe highlight, kind of, what you're seeing with the iCruise and technology and how that's unfolding? Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer Yeah, thanks. Look, man, I'm really pleased with the technology in North America and I really like the way we're going to market with it because you were going to market with full services, our own services, we're also selling direct sales and some rentals and that tells me three things about the technology. It tells me, A, it's in high demand. B, it tells me that it's very reliable because we could sell it that way and C, it's delivering performance And I'm really pleased with the customers that are adopting it because in my view, this kind of adoption is really, these are the gold standard of, in my view, drillers that, good drilling organizations that pick this tool up and say, wow, we really like it. We want more of it. And so, like I said, I think we've got a really good runway around drilling in North America and it's all rooted in sort of investments we've made over quite a few years, but I believe we're there today. James West -- Analyst Got it. North America is a nice cash flow machine for you guys. All right. Thanks, Jeff. Our next question will come from the line of Luke Lemoine with Piper Sandler. If you kind of revised the international outlook a little bit for this year, could you walk us through some of the puts and takes that have unfolded, or is some of this just a push into '25 on the spend? Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer Well, look, we're sort of halfway through the year and we've got really good visibility into the balance of the year. And so, I didn't think we'd hit the high end of the range. So wanted to tighten that up for you guys as we look out. Q4 will be the highest international quarter we have, typically with software sales and tool sales. But day in and day out, we're continuing to grow, and we're very focused on profitable growth. And as I think I alluded to earlier, my expectation is that we see a continuing march internationally of growth. And oil price says that, our clients are saying that, my own project inventory is saying that. So if you describe it as a push, that's one way to think about it. But just from where we sit today, I know what we can get done and I thought it would be worthwhile to narrow that a bit. Luke Lemoine -- Piper Sandler -- Analyst OK. And then, you touched on it a little bit earlier, but could you walk through some of the various unconventional international opportunities you're seeing develop over the next two or three years? Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer Certainly. Look, Saudi Arabia and Argentina today are meaningful markets that are -- really have heft and are executing. The -- and I think what has changed and so the rest of the middle east I'm excited about and Middle East is a pretty big place if you think about it in terms of sort of from the Mediterranean all the way to back into Saudi, that's a long way. But there's a lot of activity being talked about. And I think we're right in the middle of those, I think. I know we're in the middle of those discussions. We've got a lot of experience in this. And I think what's different today is the sort of ability to accept sort of what the testing is. The early days activity of this, I think there's a lot of sort of we've seen starts and stops internationally, but now we have a proven model in two international markets where you get through the initial phase and then it becomes a meaningful contributor to production and I think that's being sort of seen by other places where they have good reservoirs, good rock and working through, I think, very thoughtfully and pragmatically what does it take to get from A to B. And so, from my perspective, that's a much better discussion than sort of a scramble or wildcat sort of move all over the world. These are very serious operators that are taking a long view. Our next question comes from the line of Saurabh Pant with Bank of America. Good. Thank you. Maybe, Jeff, I'll start with a question on D&E margin. Obviously, Eric, you guided to the third quarter, but anything beyond that, not just fourth quarter, but '25, how should we think about margin expansion opportunity because this is a primarily international driven business, right? How should we think about the impact from net pricing improvement, technology uptake? I know you talked about Landmark, right? But just help us a little bit with the margin expansion opportunity in D&E. Eric Carre -- Executive Vice President, Chief Financial Officer Yeah, I think the way to look at D&E margins is really the progression on year-on-year basis. There tends to be quite a bit of difference between different quarters as we recognize revenue around software impacts mostly Q1, Q4, etc. So it's really the year-on-year progression by quarter that you need to pay attention to from that perspective. We continue to improve the margins in D&E. We firmly believe that it continues as we get into next year. Jeff talked about the progression of the directional drilling business in North America. We continue to see progression and adoption of the new drilling technologies in the international markets as well. So directionally, we continue to be very confident in the growth of our D&E margins as we go into 2025. Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer Maybe a little more color on that, because when I think about our drilling business, we rolled out iCruise, which is the drilling tool, the BHA, and then, that penetration has grown to -- we're drilling a lot more feet with our iCruise than we are our legacy tools. Probably, 60%, 70% percent of our fleet is that today. But what follows on that is an equal sort of step-up in efficiency, performance and actually margin for us around our iStar technology, which is basically the LWD technology that goes with it. And that adoption or actually implementation is much less, I want to say, in the 20% range. So we've got a very good glide path of things that structurally improve margins for the most part D&E. And so, I see that as part of my confidence around, look, we just need to continue to retire the old as it's time and replace it with the new. And that is structurally improving our capital efficiency. Saurabh Pant -- Bank of America Merrill Lynch -- Analyst OK. Fantastic. Now, that's helpful. And just one on the production side of things. I know you talked about artificial lifting in your prepared remarks. Good to see international growing at a much faster pace than the overall international market for lift. But if we focus on the production chemicals side of things, I know you acquired Athlon, you've been investing time and money to expand that business, right? Maybe just update us on that, Jeff, where does the production chemicals fit and what's the opportunity just on that side for Halliburton? Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer Well, according to that business, it's clearly part of our portfolio, but it's also an inherently sort of lower returning business than the balance of our business. So we run it like all of our business with a focus on profitability and returns. I'm pleased at the pace we're filling our plant in Saudi Arabia. And that business has a long sales cycle. But we know a lot about chemicals and continue to execute that. Saurabh Pant -- Bank of America Merrill Lynch -- Analyst OK. Fantastic. OK, Jeff, Eric, thank you. I'll turn it back. Our next question comes from Scott Gruber with Citi. Good morning. I'm curious, diesel prices have come off a little bit and there's hopes for a natural gas price recovery next year. So, Jeff, I'm curious, what gas price would close the cost of fuel delta between e-frac when using CNG and traditional diesel? I don't think it's $4 or $5 gas. I want to check that with you and just overall how would you describe e-frac economics even in an environment of healthier gas? Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer It's a couple things. It's a lot higher than that to start with. I mean, if we just use sort of Btu six times, six times four, at $4, you're still a long way from diesel prices. The other thing is the efficiency of the mousetrap. I mean, it's just -- our e-fleets are creating value well beyond the economic trade-off with gas. That's not to say there isn't a lot of runway around economic trade-off with gas, but that platform in and of itself is just a better operating machine and it provides technology for clients that really they can't get -- that's not available in another form. And whether that's AutoFrac, Octiv, what we're doing with sensory in terms of understanding recovery, a lot of this. And so, we're able to help solve for delivering what was planned with precision and in measuring performance of what was placed in the reservoir. That's a whole different kettle of fish, but it's all attached to the ZEUS platform. And so, all of that runs together. So when I think about e-fleets broadly, yes, there is the gas arbitrage which is happening all the time and like I said, long way to go on gas arbitrage before that ever comes up. But I think more importantly is what we're able to achieve with that technology for our customers. Scott Gruber -- Analyst Makes a lot of sense. And ultimately it sounds like Octiv and AutoFrac are going to help kind of further that ultimate penetration for e-frac with your customers and kind of extend any type of saturation point that ultimately could be hit. Just as you think a few years out, as you develop these softwares, develop a platform for a more efficient operation, where do you think e-frac goes as a percent of Halliburton's fleet? And kind of when do you get there? Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer Well, look, I think we talked about this. We'll eclipse 40% this year. I expect we're at 50% next year. And we continue to invest both in the -- we're at scale today. And that allows us then to both improve or continue to extend the technology around the pump itself and the power systems, and then also the software that we're talking about that really addresses in my view what operators are focused on which is recovery and placement and a whole lot of things that affect productivity over time. And so, we're extending that moat around that technology every day. And so, I'm confident that as we continue into the future, we've got quite a glide path of ideas and things that will make that, yet again, even more effective for customers over time. So, pleased with where we are there. Our next question comes from Doug Becker with Capital One. So, Halliburton's North America revenue is regularly outperforming the North America rig count. Just wondering if you could just highlight some of the key drivers of that outperformance that you expect going forward and really asking to try and calibrate how Halliburton's North American revenue might outperform the rig count next year. Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer I think a lot of it, it's -- e-fleets are contracted. That's a large part of our business. The performance is leading in terms of efficiency and technology and we continue to invest in technology that differentiates Halliburton. And that's one of the key things. I mean, it's consistent with our strategy. I'll pivot back to our strategy just for a minute but we want to -- maximizing value in North America means that we're very targeted about what we do, what we invest in, where we spend money and on those things that we know will create differentiation. And clearly, technology is one of those key areas and not technology for the sake of technology but targeted technology that can solve for automation, that can solve for subsurface understanding and measurements, direct measurements. And so, that focus allows us to outperform on the revenue side of that and the maximize value again. That strategy hasn't changed at all and gives me a lot of confidence into '25 and beyond in terms of where Halliburton is in the market. Dougla Becker -- Capital One Securities -- Analyst I mean, is it too aggressive to think about in a flat North America rig count environment? Halliburton's revenue is still growing 5% next year in that type of environment. Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer Yeah, I mean, it could be. We need to watch it unfold next year. But look, I -- again, I'll go back to -- our performance in the market is going to outperform. It's early on '25 but I've got confidence in the technology and the solutions that we provide for our customers that are unique and that puts us in the position to outperform. Dougla Becker -- Capital One Securities -- Analyst Right. That completely makes sense. And then, just a quick one on the e-fleets. We've been hearing more talk about white space even on dedicated or contracted fleets. Just wanted to get a little bit better sense for your e-fleets. Is there any risk of white space? I fully appreciate that they're long-term contracts and they justify the returns, but just thinking about any potential white space risk on those contracts. Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer No, not the case. Our clients -- that contract -- again, these are contracted with customers with long programs, they're going to use these e-fleets. It will be always -- if there were white space, this is the fleet that they will keep working no matter what. It is -- when you're delivering lower cost of ownership, you are -- and delivering the technology and the client is committed to the fleet, that's the fleet that's always working. Our last question today will come from Marc Bianchi with TD Cowen. Marc Bianchi -- Analyst Hey. Thank you. The first one I had was on the activity outlook. Jeff, you mentioned that it could improve here from the second half of '24, but it sounds like you're stopping short of talking about revenue. And I guess maybe following on some of Doug's question, when you look at how hard it is to call revenue, is price -- uncertainty about price the main thing or maybe talk about the top one, two or three things that are uncertain around revenue versus activity. Jeffrey Allen Miller -- Chairman, President, and Chief Executive Officer No, I think the uncertainty around activity is really the driver here. And when we look at the second half of the year, we've had some customers that did -- we caught up with them and they're still customers and they plan to go to work again next year and maybe even later this year. So no, that's not my concern. It is, again, I'll pivot back to our strategy in terms of maximizing value. We've got a lot of tools that allow us to do that technically. And, I think it's just a question of pacing of things happening in -- whether it's setting plans or other things. But, the '25 will be, in my view, clearly higher than the second half of 2024. Marc Bianchi -- Analyst OK. Great. And then, the other one I had, maybe this one's for Eric, but just looking at the third quarter guide for C&P, the margin reduction sequentially seems pretty steep for the revenue reduction we're getting. Could you talk about maybe some of the moving pieces there, what might be driving that margin weakness? Eric Carre -- Executive Vice President, Chief Financial Officer Yes, I mean, there's the -- the margin guidance is actually a combination of what we talked about for North America, but really Q3 margins in the international business are going to be lower than Q2 as well. So there's just not too much to read into this except there's a lot of moving parts in the business. It's not just North America. It's multiple product lines as well. OK. Well, thank you. Let's wrap up the call here. I know all of you have a very busy day ahead of you, and maybe I'll give you a few minutes back before your next call. But as we close out today's call, it's important to step back and remember this. Halliburton delivered 18% margins and about $800 million of free cash flow in the second quarter. We're well on track to deliver 10% free cash flow growth this year. Our international business and its technology portfolio have never been stronger. Our strategy to maximize value in North America is working. We are committed to maximizing value, not market share, and I expect that strategy continues to deliver strong returns. Look forward to speaking with you next quarter. This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Earnings call: Kinder Morgan sees rise in natural gas demand By Investing.com

Kinder Morgan , Inc. (NYSE:KMI) reported a solid financial quarter, with increased demand for natural gas largely due to the expansion of LNG export facilities and the growing needs of power generation, particularly from artificial intelligence and data centers. Executive Chairman Rich Kinder highlighted the reliability of natural gas compared to renewable energy sources, which are not yet capable of providing consistent power around the clock. President Kim Dang noted a 4% rise in adjusted EPS and a 3% increase in EBITDA, emphasizing the long-term demand growth for natural gas. The company also announced a 2% dividend increase amidst a backdrop of operational challenges, including the impact of Hurricane Beryl. Kinder Morgan's financial strength and strategic positioning in the natural gas market point to a robust outlook, despite some operational setbacks. The company's focus on optimizing its asset portfolio and investing in projects with long-term contracts suggest confidence in the ongoing demand for natural gas, particularly as a reliable energy source for emerging technologies and infrastructure. Kinder Morgan, Inc. (KMI) has demonstrated a solid financial performance and strategic positioning in the natural gas market. To further enrich this analysis, let's turn to some key metrics and insights from InvestingPro. InvestingPro Data shows Kinder Morgan's Market Cap stands at a substantial 47.74 billion USD, reflecting its significant presence in the industry. The company's P/E Ratio is currently 19.72, which aligns with the industry average, suggesting a balanced valuation of the company's earnings. Additionally, Kinder Morgan has a Price / Book ratio of 1.57 for the last twelve months as of Q2 2024, which can be an indicator of the market's valuation of the company's net assets. From the InvestingPro Tips, it's worth noting that Kinder Morgan has raised its dividend for 6 consecutive years, indicating a commitment to returning value to shareholders. This is particularly relevant to the article's mention of the company's recent dividend increase. Moreover, Kinder Morgan is trading near its 52-week high, which underscores the bullish sentiment around the company's stock, a sentiment also reflected by the large price uptick over the last six months. For readers interested in deeper analysis and additional insights, there are more InvestingPro Tips available for Kinder Morgan. These tips can provide valuable context for investors considering the company's stock. For instance, while the stock generally trades with low price volatility, suggesting stability, the RSI suggests it is currently in overbought territory, which could indicate a potential retraction or consolidation in the near term. For those looking to leverage these insights, consider using the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription at InvestingPro. With this subscription, investors can access a total of 10 InvestingPro Tips for Kinder Morgan, providing a comprehensive view of the company's financial health and stock performance. Kinder Morgan's financial strength, as evidenced by the positive metrics and the strategic insights from InvestingPro, positions the company as a potentially attractive investment, particularly for those focused on the long-term demand for natural gas and the stability of dividend-paying stocks. Operator: Welcome to the Quarterly Earnings Conference Call. All lines have been placed on a listen-only mode until the question-and-answer session of today's call. Today's call is also being recorded. If you do have any objections, you may disconnect at this time. And I would now like to turn the call over to Rich Kinder, Executive Chairman of Kinder Morgan. Thank you. You may begin. Rich Kinder: Thank you, Sue. As usual, before we begin, I'd like to remind you that KMI's earnings release today and this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934, as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosures on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release as well as review our latest filings with the SEC for important material assumptions, expectations, and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. Now on these investor calls, I'd like to share with you our perspective on key issues that affect our Midstream Energy segment. I previously discussed increased demand for natural gas resulting from the astounding growth in LNG export facilities. And last quarter, I talked about the expected growth in the need for electric power as another significant driver of natural gas demand. Since that call, there has been extensive discussion on this topic with the consensus developing that electricity demand will increase dramatically by the end of the decade, driven in large part by AI and new data centers. I'm a firm believer in anecdotal evidence, particularly when it comes from the actual users of that power and the utilities who will supply it, and from the regulators who have to make sure that the need gets satisfied. And the anecdotal evidence over the last few months has been jaw-dropping. Let me give you just a few examples. In Texas, the largest power market in the US, ERCOT now predicts the state will need 152 gigawatts of power generation by 2030. That's a 78% increase from 2023's peak power demand of about 85 gigawatts. This new estimate is up from last year's estimate of 111 gigawatts for 2030. Other anecdotal evidence also supports a vigorous growth scenario. For example, one report indicates that Amazon (NASDAQ:AMZN) alone is expected to add over 200 data centers in the next several years, consistent with the large expansions being undertaken by other tech companies chasing the need to service AI demand. Annual electricity demand growth over the last 20 years has averaged around one-half of 1%. Within the last 60 days, we've seen industry experts predict annual growth from now until 2030 at a range of 2.6% to one projection of an amazing 4.7%. So the question becomes, how will that demand be satisfied and how much of a role will natural gas play? Many developers of data centers would prefer to rely on renewables for their power, but achieving the needed 24/7 reliability by relying only on renewables is almost impossible and growth in usage is limited by the need for new electric transmission lines, which are difficult to permit and build on a timely basis. Batteries will help some and some tech companies now want to use dedicated nuclear power for their facilities. But as the Wall Street Journal recently pointed out, they will likely increase reliance on natural gas to replace the diverted nuclear power. Again, anecdotal evidence is key. In Texas, a program that would extend low-cost loans for new natural gas-fired generating facilities was massively oversubscribed, which an ERCOT official predicting a day's gas daily could result in an additional 20 gigawatts to 40 gigawatts just in the state of Texas. And the Governor has already suggested expanding this low-cost loan program. That oversubscription, I think, is clear evidence that the generators are projecting increased demand for natural gas-fired facilities. Perhaps Ernest Moniz, Secretary of Energy under President Obama summed it up best when he said and I quote, there's some battery storage, there's some renewables, but the inability to build electricity transmission infrastructure is a huge impediment, so we need the gas capacity. As an example of how industry players see the world developing, S&P Global Insights has quoted in Gas Daily reports that US utilities plan to add 133 new gas plants over the next several years. And this view is reflected in the significant new project in the Southeastern United States that we are announcing today. While it's hard to peg an exact estimate of increased demand for natural gas, as a result of all this growth and the need for electric power, we believe it will be significant and makes the future even more robust for natural gas demand overall and for our midstream industry. And with that, I'll turn it over to Kim. Kim Dang: Okay. Thanks, Rich. I'll make a few overall points and then I'll turn it over to Tom and David to give you all the details. We had a solid quarter. Adjusted EPS increased by 4%, EBITDA increased by 3%, and those were driven by growth in our natural gas segment and our two refined products business segments. We ended the quarter at 4.1 times debt-to-EBITDA and we continue to return significant value to our shareholders. Today, our Board approved a dividend of $0.2875 per share and we expect to end the year roughly on budget. Now, let's turn and talk about natural gas for a minute. The long-term fundamentals in natural gas have gotten stronger over the course of this year with the incremental demand expected from power and backing-up data centers that Rich just took you through. Overall, WoodMac (ph) projects gas demand to grow by 20 Bcf between now and 2030, with a more than doubling of the LNG exports as well as an almost 50% increase in exports to Mexico. However, they are projecting a 3.9 Bcf a day decrease in power demand. As Rich's comments indicated, we simply do not believe that will be the case given the anticipated power-related growth in gas demand associated with AI and data centers, coal conversions, and new capacity to shore up reserve margins and backup renewables. Let's start with the data center demand. Utility IRPs and press releases published since 2023 reflect 3.9 Bcf a day of incremental demand, and we would expect that number to grow as other utilities update their IRPs. It's early in the process, but we're currently evaluating 1.6 Bcf a day of potential opportunities. Most estimates we have seen are between 3 and 10 of incremental gas demand associated with AI. Rich took you through the 20 Bcf a day of natural gas power that Texas is contemplating, subsidizing, I should have said 20 gigawatts as well as the US projection of 133 new gas plants over the next several years. At Kinder Morgan, we're having commercial discussions on over 5 Bcf a day of opportunities related to power demand, and that includes the 1.6 of data center demand. Certainly, not all these projects will come to fruition, but that gives you a sense of the activity levels we're seeing and supports our belief the growth in natural gas between now and 2030 will be well in excess of the 20 Bcf a day. Not including -- not included in the 5 Bcf of activity that we're seeing is capacity SNG signed up on its successful open season for its proposed approximately $3 billion South System 4 Expansion that's designed to increase capacity by 1.2 Bcf a day. Upon this completion, this project will help to meet the growing power demand and local distribution company demand in the Southeastern markets. Mainly as a result of this project, our backlog increased by $1.9 billion to $5.2 billion during the quarter. In the past, we have indicated that we thought the demand for natural gas would allow us to continue to add to the backlog, and South System 4 project is an example of that. We continue to see substantial opportunities beyond this project to add to our backlog. The current multiple on our backlog is about 5.4 times. During the quarter, we also saw some very nice decisions from the Supreme Court. On the Good Neighbor Plan, the court stayed the plan, finding that we are likely to prevail on the merits. There's still a lot to play out here, but I do not think the Good Neighbor Plan will be implemented in its current form. It is likely to be at least a few years before a new or revised plan could be put together and a few years beyond that for compliance. And in the interim, we've got a presidential election. The overturning of the Chevron (NYSE:CVX) doctrine, which gave deference to regulatory agencies when the law is not clear, is also a positive. Together, these decisions will help mitigate the regulatory barrage we've seen over the last couple of years. And with that, I'll turn it over to Tom to give you some details on our business performance for the quarter. Tom Martin: Thanks, Kim. Starting with the natural gas business unit, transport volumes increased slightly in the quarter versus the second quarter of 2023. Natural gas gathering volumes were up 10% in the quarter compared to the second quarter of 2023, driven by Haynesville and Eagle Ford volumes, which were up 21% and 8% respectively. Given the current gas price environment, we now expect gathering volumes to average about 6% below our 2024 plan, but still 8% over 2023. We view the slight pullback in gathering volumes as temporary that higher production volumes will be necessary to meet demand growth from LNG expected in 2025. Looking forward, we continue to see significant incremental project opportunities across our natural gas pipeline network to expand our transportation capacity and storage capabilities in support of growing natural gas markets between now, 2030 and beyond. At our products pipeline segment, refined product volumes were up 2%, crude and condensate volumes were flat in the quarter compared to the second quarter of 2023. For the full year, we expect refined product volumes to be slightly below our plan about 1%, but 2% over 2023. Regarding development opportunities, the company plans to convert its Double H Pipeline system from crude oil to natural gas liquid service, providing Williston Basin producers and others with NGL capacity to key market hubs. The approximately $150 million project is supported by definitive agreements and the initial phase of the project is anticipated to be in service in the first quarter of 2026, with the pipe remaining in crude service well into 2025. Future phases could provide incremental capacity, including in support of volumes out of the Powder River Basin. In our Terminals business segment, our leased liquid capacity remains high at 94%. Utilization and project opportunities at our key hubs at the Houston Ship Channel and the New York Harbor remain very strong, primarily due to favorable blend margins. Our Jones Act tankers are 100% leased through 2024 and 92% leased in 2025, assuming likely options are exercised. And currently, market rates remain well above our vessels at current -- currently contracted rates. The CO2 segment experienced lower oil production volumes at 13%, lower NGL volumes at 17%, and lower CO2 volumes at 8% in the quarter versus the second quarter of 2023. For the full year, we expect oil volumes to be 2% below our budget and 10% below 2023. During the quarter, the CO2 segment optimized its asset portfolio in the Permian Basin through two transactions for a net outlay of $40 million. The segment divested its interest in five fields and acquired the North McElroy Unit currently producing about 1,250 barrels a day of oil and an interest in an undeveloped leasehold directly adjacent to our SACROC field. The impact of these two transactions is to replace fields with high production decline rates and limited CO2 flood opportunities with fields that have attractive potential CO2 flood projects. In the Energy Transition Ventures group, they continue to have many carbon capture sequestration project discussions that utilize our CO2 expertise for potential projects to take advantage of our existing CO2 network in the Permian Basin and our recently leased 10,800 acres of pore space near sources of emissions in the Houston ship channel. These transactions take time to develop, but the activity level and customer interest are picking up. With that, I'll turn it over to David Michels. David Michels: All right. Thanks, Tom. So a few items before we cover the quarterly performance. As Kim mentioned, we're declaring a dividend of $0.2875 per share, which is $1.15 per share annualized, up 2% from our 2023 dividend. As disclosed in the press release, we're changing our Investor Day presentation from annual to biannual. We plan to continue to publish our detailed annual budget early in the first quarter as normal. Also, last one before we get to the quarterly performance, I'd like to recognize our accountants, planners, legal teams, business unit teams, everyone involved in the preparation for our earnings release and our 10-Q filing, we already have a tough close at this time of year with many working during the July 4th holiday period. And additionally, many of our Houston-based colleagues were impacted by Hurricane Beryl. I want to thank you all for going above and beyond to meet the challenges presented by power outages and damage and not missing a beat with regards to our quarterly reporting and analysis schedule. For the quarter, we generated revenue of $3.57 billion, up $71 million from the second quarter of last year. Our cost of sales were down $4 million, so our gross margin increased by 3%. We saw our year-over-year growth from natural gas products and terminals businesses, the main drivers were contributions from our acquired South Texas Midstream assets, greater contributions from our natural gas transportation and storage services and higher contributions from our SFPP asset. Our CO2 business unit was down versus last year, mainly due to lower crude oil volumes due to some timing of recovery of oil in the second quarter of 2023. Interest expense was up due to higher short-term debt balance due in part to our South Texas Midstream acquisition. We generated net income attributable to KMI of $575 million. We produced EPS of $0.26, which is flat with last year. On an adjusted net income basis, which excludes certain items, we generated $548 million, up 1% from Q2 of 2023. We generated adjusted EPS of $0.25, which is up 4% from last year. Our average share count reduced by 18 million shares or 1% due to our share repurchase efforts. [Technical Difficulty] up 2% from last year. Our second-quarter DCF was impacted by higher sustaining CapEx and lower cash taxes, both of which are at least in part due to timing. We expect cash taxes to be favorable for the full year and sustaining capital to be in line with budget for the full year. On a year-to-date basis, EPS is up 5% to last year and our adjusted EPS is up 9% from last year, so good growth. On our balance sheet, we ended the second quarter with $31.5 billion of net debt and a 4.1 times net debt to adjusted EBITDA ratio, which is consistent with where we budgeted to end the quarter. Our net debt has decreased $306 million from the beginning of the year and I'll provide a high-level reconciliation of that change. We generated $2.9 billion of cash flow from operations year-to-date. We've paid out dividends of $1.3 billion. We've spent CapEx of $1.2 billion and that includes growth sustaining and contributions to our joint ventures. And we had about $100 million of other uses of capital, including working capital. And that gets you close to the $306 million decrease in net debt for the year. And with that, I'll turn it back to Kim. Kim Dang: Okay. And so now we'll open it up for questions. Sue, if you could come on, please. Operator: [Operator Instructions] Our first question is from Manav Gupta with UBS. You may go ahead. Manav Gupta: Thank you, guys. First, a quick question here. The backlog went up pretty much, I mean, on a good note, which is very positive, but the multiple also went up just a little. So if you could just talk about the dynamics of those two things here. Kim Dang: Okay. Sure. So the backlog, as I said, was up by $1.9 billion. That's really two projects that are driving that. It's the South System 4 that we mentioned and then it is also Double H is the other one and it's our share of South System 4. And then with respect to the multiple, yes, it increased a little bit. As we always say, the reason that we give you the multiple is to give you guys some idea of the returns that we're getting on these projects so that you can be able to model the EBITDA. Now it is not our goal ever to -- we're not targeting a specific multiple and getting a specific multiple on the backlog when we look at these projects. When we look at these projects, we're looking at an internal rate of return. And so -- and we have a threshold for that, and we have a pretty high threshold for our projects. And that threshold is well, well, well in excess of our cost of capital. And then we vary around that threshold, what I'd say, marginally depending on the risk of a project. And so if we have -- and projects that we do, that are connected to our existing infrastructure, where it's not greenfield, tend to have a much higher multiple associated with it. When we are having to loop a pipeline or something, those typically might have a little bit higher multiple, but they're still meeting our return thresholds. And so I think these are very -- despite the fact that the multiple on the backlog is going up a little bit because of these projects, these are still very, very attractive return projects. Manav Gupta: Thank you for a very detailed response. My quick follow-up here is, you mentioned the demand coming from data centers and we completely agree with you. When you are having these discussions with the data center operators, we believe at one point, these data center operators were not even talking to natural gas companies, they were only talking to renewable sources. Have you seen a change in sentiment where reliability has become a key factor, so you are a bigger part of these conversations than you were probably 18 or 24 months ago? Kim Dang: Yeah. I'd say our initial reaction was similar to yours when we started to see this demand was, they're probably going to target renewables. But as we have had discussions with them, I think that the two things are key from their perspective. One is reliability, and two is feed the market. And so I think natural gas, and Rich said this last quarter, given the reliability of natural gas, it is going to play, we believe, a key role in supplying energy to these data centers. John Mackay: Hey, team. Thanks for the time. Maybe we'll pick up a little bit on that last one, surprisingly. So if you guys are talking about 5 Bcf of power demand discussions right now, would just be curious to hear a little bit from you on where you're seeing that geographically. Is it primarily Texas? Is it elsewhere in the portfolio? And anything you can comment on in terms of speed-to-market? And again, that might be a Texas versus kind of more FERC jurisdiction kind of discussion, but both of those would be interesting. Thanks. Kim Dang: Okay. No, I think the -- and Sital and Tom, you guys supplement here. But this the 5 Bcf is overall power, so some of that's related to AI and some of it's just related to coal replacements, shoring up reserve margins, backing up renewables. So it's across the board, we're seeing it in Texas, we're seeing it in Arkansas, we're seeing it in Kentucky, we're seeing it in Georgia. Desert in Arizona, desert Southwest, I mean it's -- it is in almost all the markets we serve. We're seeing some sort of increase in power demand. John Mackay: And maybe just on the kind of time-to-market in terms of how long it could bring -- how long it could take to bring to the market? Kim Dang: It's very much dependent on where these are going to be cited. And so it depends on, is it a regulated market? Is it an unregulated market? So that's just going to vary depending on the market location. John Mackay: Yeah. Appreciate that. And just a second question, you guys talked a little bit about some kind of portfolio optimization here. There's the CO2, I guess, you could call it asset swap. There's a line in the release on maybe some divestitures in the nat gas segment. I guess, I'd just be curious overall for an updated view on how you're thinking about kind of portfolio pruning and optimization over time. Kim Dang: Okay. So on natural gas, I'm not sure. We did have a divestiture earlier in the year, which was a gathering asset, but not -- that wasn't during this quarter. And so that was just -- it was an asset that wasn't core to our portfolio and we had someone approach us, and so the price made sense, and so we sold it. On the CO2 sale, we had three -- four fields where there was limited opportunity for incremental CO2 floods. And that is our business, is injecting CO2 to produce more oil. And so we sold those fields that had limited opportunity. And then we acquired a field called North McElroy, which we think has a very good flood potential. And then we acquired a leasehold interest in some property that is adjacent to some of our most prolific areas of SACROC, that we think will also be a great CO2 flood opportunity. John Mackay: Okay. Thanks for the time. Operator: Thank you. Our next question is from Keith Stanley with Wolfe Research. You may go ahead. Keith Stanley: Hi, good afternoon. Wanted to follow up -- hi. I wanted to follow up on the SNG South System project. Can you just talk to the timeline for regulatory approval, start of construction? And is it all coming into service in late 2028 and/or phased over time? And then it -- sorry for the multipart question, is it also fair to assume your customer here is your partner, Southern, on the project or is it a broader customer base supporting this project? Sital Mody: Yeah. So, Keith, this is Sital. One, we had an open season. We do have a broad customer base in terms of regulatory timeline with an in-service of 2028. Clearly, we plan a project of this scale to pre-file and then and then do a [firm filing] (ph), probably without getting into too much detail, there is always competition sometime next summer with a targeted in-service date of late '28. So that's probably the 50,000 foot view on bottom line. Did I answer your question? Keith Stanley: Yeah. And then just on -- yes, yes, you did. Does it on -- does the contribution come in all in the end of 2028 or has it phased in over time as you see it? Sital Mody: So we have -- we do have initial phase in '28 and we do have some volumes trickling into year after. Keith Stanley: Okay, great. Thank you. Second question. Wanted to touch back on the Texas loan program for gas-fired power plants. How can we think about the opportunity for Kinder here? So, say Texas builds 20 gigawatts of new gas-fired power plants over the next five years. What type of market share do you have in the Texas market today [in] (ph) connecting to power plants? What's a typical sort of capital investment to do a plant tie-in? Just any sort of thoughts of what it could mean for opportunities for the intrastate system? Sital Mody: So, if I had to take a snapshot and don't quote me on this, probably today we're about 40%, probably have a 40% share in Texas in terms of connecting and the cost to connect, I really think it's going to vary depending on where the ultimate location is going to be. We do have some unique opportunities where it's actually quite low in terms of -- it's very capital-efficient and there are some targeted opportunities that might involve a little bit more capital. Kim Dang: It really gets to how -- are they going to be located on our existing system or are we going to need to build a lateral and how far is -- how long is that lateral going to need to be? And then are there going to be opportunities where it requires some expansion of like some mainline capacity? So that's what Sital means. So it's just going to depend with respect to how big the capital opportunity is. Jeremy Tonet: Just wanted to pivot back to Double H conversion here and how the -- did you say how the NGLs are getting out of Guernsey at this point on -- with this project and I guess, are you working with any other midstreamers on this project overall? Sital Mody: So, one, our goal is to get it to market, the market being Conway and Mont Belvieu. And I think when you think about it broadly, a couple of calls ago, we talked about the basin in general and our desire to get egress both on the residue side and this is an opportunity to get egress on the NGL side. We see the basin are growing quite significantly. The GORs are rising. And so without getting into the complicated structures here because we are in a very competitive situation, I'll just leave it at this that we are able to get to both the Conway and the Mont Belvieu markets. Kim Dang: Yeah. And I'd say the other thing, Jeremy, when Sital says the market is growing, we don't expect some big growth in crude. He's really talking about the NGLs and the gas because of the increase in GOR. Sital Mody: That's right. Jeremy Tonet: Got it. Okay. And maybe just pivoting when talking about a highly competitive market as far as Permian natural gas egress is concerned. Just wondering any updated thoughts you could provide with regards to the potential for brownfield expansion, be it through GCX expanding or greenfield as well getting to a different market or even the potential to market a joint solution at the same time. Just wondering how you see this market evolving, given that 2026 Permian gas egress looks like a deja vu all over again. Sital Mody: Yeah. Look, good question, and the question is your -- unfortunately, I don't have a different answer for you this time. We still aren't prepared to sanction the GCX project, still in discussions with our customers on the broader Permian egress opportunity. We've been, as I said, pursuing opportunity. We don't have anything firmed up. There is -- it's a competitive space. We are open to all sorts of structures on that front and are willing to consider what's best for the basin. Theresa Chen: Hi, I wanted to follow-up on the Double H line of questions. Can you tell us how much capacity the pipe will be in once it converted to NGL service? And would you expect the line to be highly utilized right away in first quarter of 2026, or will there be potentially a multi-quarter or multi-year ramp in the commitments? Sital Mody: So, in terms of capacity, this is all -- this is going to depend on the hydraulic combinations of our suppliers and ultimately what market they take that to. So, I think the takeaway here is, we've got a firm commitment that will likely start day one. And then as we scale the project, it is scalable, both from the Bakken and from the Powder River, and really the ultimate capacity is going to depend on the customer. Theresa Chen: Thank you. Operator: Thank you. Our next question is from Spiro Dounis with Citi. You may go ahead. Spiro Dounis: Thanks, operator. Afternoon, everybody. First question, maybe just to talk about capital spending longer term. Historically, you've talked about spending near the upper end of that sort of $1 billion to $2 billion range, but Rich and Kim, if I sort of combine your statements at the outset, it seems to suggest, like, there's a pretty robust opportunity set ahead that maybe wasn't contemplated when you sort of last gave us that update. So, I'm curious, as you think about these larger projects coming in, like SNG and then the broader power demand you referenced earlier, are you still sort of on track to be in that $2 billion zone long term? Kim Dang: Yeah. I'd say we wouldn't say $1 billion to $2 billion anymore. We would just say around $2 billion. And, around $2 billion could be $2 billion, it could be $2.3 billion. I mean, just in that general area is what I would say. When you think about something like an SNG, it's got a 2028 in-service, and so that's going to be capital that you're spending, just call it rough math two years of construction. So, most of that capital will be in '27 and '28. And so, that's filling out the outer years of potential CapEx. So, around $2 billion. Spiro Dounis: Okay. So, it sounds like not a material departure from before. Got it. And then... Kim Dang: And I'd say, look, I'd say on the stuff that Rich and I are talking about, as I said, the $5 billion project -- I mean, the 5 Bcf a day projects that we're pursuing, that's stuff that we're pursuing today, right? That's not things that are in the backlog today. And so, part of my point on the -- is -- was, we continue to see great opportunity beyond SNG. SNG, the 1.2 Bcf a day is not included in the 5 Bcf a day of potential opportunity. So, I think projects like SNG continue to fill out that CapEx in the outer years and give us more confidence that we'll be spending $2 billion for a number of years to come. Spiro Dounis: Got it. Okay. That's helpful color. And then switching gears a bit here, Kim, you talked about some of the sort of regulatory events that are sort of becoming tailwinds now, headwinds at first, and I know one other sort of macro factor that sort of got you last year or two was with interest rates that were on the rise. I guess as we look forward, I'm not sure what your view is, but it seems like we're setting up for some rate cuts later this year. So, maybe, David, maybe you could just remind us, as we think about your floating rate exposure, what does that look like in 2025, and is this a potential tailwind for you? Kim Dang: Yeah. And I'll let -- it is a potential tailwind because the forward curve today is -- for 2025, is below what we've experienced in 2024 to date and what the balance of the year is. So, '25 curve is below '24, but I'll let David give you an update on our floating rate exposure. David Michels: Yeah. It could be -- we'll see if we actually get these rate cuts or not. Remember, we all expected a bunch of rate cuts in 2024 as well, but we didn't get them. We do have a fair amount of floating rate debt exposure. We've intentionally brought it down a little bit because it's been unfavorable to later on additional swaps in the last couple of years, and so our floating rate debt exposure has come down from about $7.5 billion to about $5.3 billion. Additionally, we've locked in a little bit of that $5.3 billion for 2025, similar to past practice to take advantage of some of the forward curve, the favorable interest rate forward curves that we're seeing for next year. So, about 10% of that, I think, is locked in for 2025 at favorable rates. The rest of it gives us a good opportunity to take advantage of any short-term interest rate cuts that we see coming to the market. Michael Blum: Thanks. Good afternoon, everyone. So, I wanted to get back to the discussion on the data centers. It seems like the hyperscalers are much less price-sensitive, and they're willing to pay higher PPAs to secure power. So, do you think that could translate into you earning higher returns than you've gotten historically on some of these potential gas pipeline projects, and is there any way to quantify that? Kim Dang: I think that -- I think we're early in the game. I think that's hard to judge at this point. I would say, again, their two priorities are going to be reliability and speed to market. And I think that's what you're seeing -- that's what you're hearing from the power guys on the -- when they're getting the PPAs. So, I think we will get -- I think we are confident that we'll be able to meet our return hurdles on these projects, but exactly what we're going to get on these projects at this point, I think it's too early to say that. And, generally these things will be -- there'll be some competition. And so, I wouldn't expect us to get outrageous returns by any stretch. Michael Blum: Okay. That makes sense. Thanks for that. And then, just one more follow-up on Double H. I believe the capacity -- the oil capacity of that pipe was, I think, 88 million barrels a day, so -- 88,000 barrels a day. So, I'm just wondering, should we assume that the NGL capacity will be kind of similar? Sital Mody: Well, I mean, it depends on the receiving delivery. Just think about it this way. I'll just make it real simple. If you're at the beginning of the pipe and at the end of the pipe, it could be. If you're in the middle of the pipe and bringing in volumes, it could be more. I mean, it just depends. So... Kim Dang: It depends on downstream as well. But yeah, I mean, I think for the Double H pipe itself, I mean, if you're coming in at the origin and going out at the terminus, yeah, I mean, that's fair. But as Sital points out there, maybe people coming in at various points, and then the downstream points are going to matter as well. Michael Blum: Got it. Thank you. Operator: Thank you. Our next question is from Tristan Richardson with Scotiabank. You may go ahead. Tristan Richardson: Hi, good afternoon. Maybe just one more on the CO2 portfolio. Can you talk about sort of capital needs or opportunities with the new portfolio? Historically, you've spent $200 million to $300 million annually here and you noted that there are greater flood opportunities with the new assets. Curious kind of how this changes capital deployment in CO2? And then also in the context of -- I think in the past, you've noted a 10-year development plan of around $900 million. Just curious sort of what the new portfolio kind of looks like going forward. Anthony Ashley: Okay. Tristan, it's Anthony. I think I wouldn't expect a material change in the capital numbers -- the annual capital numbers for CO2. We weren't spending a lot on any of the divested assets. There are obviously opportunities that you mentioned with regards to the two new assets. I think the undeveloped acreage that we're talking about, that will become part of our annual SACROC numbers. And then North McElroy, we think there's excellent opportunity there, as Kim and Tom said. But we've got to do a pilot first. And so, we'll be proving out that opportunity. And once we prove out that opportunity, I think we'll have more to say on that. Tristan Richardson: Thanks, Anthony. And then maybe just on refined products, it seems like the lower 48 maybe saw a later start to the summer driving season. But it also seems like perhaps volumes have picked up in late June and end of July. Can you talk about what you're seeing this season and maybe what's contributing to that 1% below your initial budget? Anthony Ashley: Yeah. I would say gasoline overall is reasonably flat. We've actually seen a bit of a pickup in jet fuel, primarily on the West Coast, as you saw in the release. And then on renewable diesel, we've seen a decent pickup on renewable diesel. We're still a decent bit below our total capacity on the renewable diesel hub capacity. And I think we did 48 a day in the third quarter -- I'm sorry, in the second quarter. We've got 57 a day of capacity. As that additional refinery comes on later this year, I think that'll continue to continue to pick up. But with respect to being just slightly below our budget, we had probably slightly higher gasoline numbers in there, but we're reasonably flat with the prior year. Kim Dang: Yeah, the other thing I'd say on the volumes is, the volumes are one component of the revenue, right, price is the other. And what we've generally seen out in California is that we're moving longer haul barrels rather than some of the shorter haul. So, from an overall revenue standpoint, I think we're in good shape on the refined products. Tristan Richardson: Appreciate it, Kim. Thank you guys very much. Operator: Thank you. Our next question is from Harry Mateer with Barclays. You may go ahead. Harry Mateer: Hi. Good afternoon. So, first question for South System Expansion 4, how should we think about funding that given you have the JV opco structure [Songas] (ph)? And I guess specifically, how much of an opportunity is there for some non-recourse debt financing to be used at the [Songas] (ph) entity itself? David Michels: Yeah, it's a good question. I think we're -- it's still early stages and we're still evaluating all our options. Generally with these JV arrangements, we prefer to fund at the parent level because our cost of capital is attractive, but we are evaluating our different funding opportunities. I don't -- we've never really been big fans of project financing, puts a lot of pressure on the project and so forth, but we're still evaluating the best course forward. Because of the build time, it's going to take some amount of time to get the pipeline into service. So, there is likely just to be going to be a fair amount of equity contributions in order to fund that as opposed to at the entity level itself. But it's something that we're looking at actively. Harry Mateer: Okay. Thank you. And then second in Energy Transition Ventures, I'm curious where and whether acquisition opportunities in RNG might fit right now when you're looking at growth potential in that business. Kim Dang: Yeah. I'll say a couple of things on that and then Anthony can follow up. But look, I think that business has been harder to operate than we would have expected. And as a result of that, until we get our hands fully around the existing operations, we have sort of stood down, if you will, looking at any significant acquisition opportunities. And I think that once we have these plants operating on a more consistent basis, that we will -- we can reevaluate that. But at this point in time, I think we've just -- we've got to get those plants up and operating consistently. But we think we are on the path to do that and hopefully, that will be the case for the second half of this year. Harry Mateer: Great. Thank you. Operator: Thank you. Our next question is from Samir Quadir with Seaport Global Securities. You may go ahead. Sunil Sibal: Yeah, hi, good afternoon. This is Sunil Sibal. So, starting off on the new projects that you announced, could you talk a little bit about the contractual construct behind those? What kind of contract durations you have supporting those two projects? Kim Dang: Yeah. Generally on the South System 4, we've got 20-year take-or-pay contracts with creditworthy shippers. And then we also have a contract that is -- that's underpinning the Double H project. So, consistent with how we've done -- how we do our other projects, I mean, we want to make sure that we've got good credit and good quality cash flow that are supporting a capital builds? Sunil Sibal: Understood. Then on the full year expectations, I think you mentioned you're tracking a little bit below budget as far as gathering volumes are concerned. Could you talk a little bit about which basins et cetera are tracking below what we were expecting at the start of the year? Kim Dang: Yeah. I think just -- I mean, what we're assuming for the balance of the year is volumes that are relatively flat with the volumes the first half of this year. So, we're not assuming a big ramp-up in volumes the second half of this year, pretty consistent with what we saw in the first half. And then in terms of the big -- the three big basins where we are going to be South are going to be Eagle Ford, Haynesville, and Bakken. And so, we've seen a little bit of weakness, I think, in each of those, probably a little more in the Haynesville than in the others. Sital Mody: Yes, I mean, you saw producers react to the pricing in the Haynesville, which is why we've had a little bit of a pullback. But it's prudent. Tom Martin: But we expect that to ramp up later this year and the next year as demand picks up. Rich Kinder: All right. Thank you very much for listening and have a good evening. Operator: Thank you. That does conclude today's conference. Thank you all for participating. You may disconnect at this time.