Q2 2024 Earnings: Energy and Tech Companies Show Strong Performance

Range Resources Corporation (RRC) Q2 2024 Earnings Call Transcript

Laith Sando - Vice President, Investor Relations Dennis Degner - Chief Executive Officer Mark Scucchi - Chief Financial Officer Alan Engberg - Vice President Liquid Marketing Welcome to the Range Resources Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Statements made during this conference call that are not historical facts are forward-looking statements. Such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. After the speaker's remarks, there will be a question-and-answer period. At this time, I would like to turn the call over to Mr. Laith Sando, Vice President, Investor Relations at Range Resources. Please go ahead, sir. Laith Sando Thank you, operator. Good morning, everyone, and thank you for joining Range's Second Quarter 2024 Earnings Call. The speakers on today's call are Dennis Degner, Chief Executive Officer; and Mark Scucchi, Chief Financial Officer. Hopefully, you've had a chance to review the press release and updated investor presentation that we've posted on our website. We may reference certain slides on the call this morning. You also find our 10-Q on Range's website under the Investors tab or you can access it using the SEC's EDGAR system. Please note, we'll be referencing certain non-GAAP measures on today's call. Our press release provides reconciliations of these to the most comparable GAAP figures. We've also posted supplemental tables on our website that include realized pricing details by product, along with calculations of EBITDAX, cash margins and other non-GAAP measures. With that, let me turn the call over to Dennis. Dennis Degner Thanks, Laith, and thanks to all of you for joining the call today. Range's Second Quarter plan was executed successfully and consistent with our strategy for the year, which remains unchanged, operating safely while driving continued operational improvements, generating free cash flow with a peer-leading capital efficiency and prudent allocation of that free cash flow balancing returns of capital to shareholders with further debt reduction and the long-term development of our world-class asset base. I believe our second quarter results reflect the ongoing advancement of these objectives and demonstrate the resilience of Range's business through cycles. Our operational and financial updates highlight Range's high quality, low breakeven inventory and liquids optionality, which drove another successful quarter while generating free cash flow. Our low capital intensity continues to be on display in quarters like Q2 and is the result of Range's class-leading drilling and completion costs, shallow base decline, large blocky core inventory and talented team. These key attributes result in a required reinvestment rate that is among the best in the industry, providing Range a solid foundation for consistently generating significant free cash flow and returns to shareholders while positioning Range to help meet future energy demand through our diverse transportation portfolio. Bolstering Range's profitability and durability is our liquids contribution. As seen in the Second Quarter results, liquids revenue provided an uplift to natural gas prices. With NGL price realizations providing a substantial premium relative to Henry Hub natural gas. When we roll all of that together, our liquids revenue uplift our low capital intensity. Along with a thoughtful rightsized hedging program, you get a unique story, generating the lowest breakeven among natural gas producers and the most resilient organic free cash flow as evidenced by our second quarter results and 2024 projections. Importantly, with our vast inventory of derisked high-quality Marcellus wells, we have the ability to compound our per share growth in free cash flow for decades to come. As we look back on the second quarter, all-in capital came in at $175 million, with a total capital for the first half of the year totaling $345 million. Capital spend for the quarter reflected our base level of activity along with a spot rig and frac crew we had in early 2024. For the remainder of the year, we will be running 2 dedicated horizontal rigs and single base frac crew, which will generate our planned $30 million to $45 million of in-process well inventory, very similar to what Range did last year. Also consistent with prior years, we will see capital spending decrease across the second half of the year, while production is set to modestly increase aligning with expected improvements in natural gas prices heading into 2025. Production for the second quarter came in at 2.15 Bcf equivalent per day, driven by continued strong well performance from long laterals and ongoing optimization of gathering systems that enhance performance. Range's second quarter liquids were approximately 30% of production, slightly lower versus Q1 as a result of a propane cargo that was delayed into early July. Liquids production is back up to 32% today, near recent highs, reflecting our increased focus on liquids-rich activity in the first half of the year. We turned to sale of 17 wells across our wet and super-rich acreage, but 7 of these wells on pads with existing production. As we've discussed for years, returning to existing pads is a durable, repeatable part of our program. Returning to pads allows us to minimize our operating surface footprint, and reutilize existing infrastructure while also supporting efficient, nimble operations. Combined, this results in a normalized well cost per foot for Range that is differentiated versus peers. Year-to-date, well performance and production has also been strong, aided by gathering system optimization efforts that have included compression expansions in Southwest PA. These type of expansions are a normal course of business as the team continually works to optimize field level performance and support production from our long lateral development. Production for the second half of the year is expected to be approximately 2.2 Bcf equivalent per day, placing us near the high end of our previously communicated production guidance. Turning to operations. Drilling activity during the quarter added 10 laterals with an average horizontal length of just over 14,300 feet per well, but several over 15,000 feet. And we have now drilled nearly 90 wells in the program's history with lateral lengths greater than 15,000 feet. For completions, the team continued to successfully operate with the new build electric frac fleet that was onboarded at the start of the year. We saw continued strong performance from the equipment and personnel across 3 different pads in the second quarter. Frac efficiencies finished at just over 9 stages per day while completing approximately 800 stages for the quarter, showcasing the consistent repeatable nature of our program and placing us on track for the activity plans we've communicated for the year. Supporting our frac efficiencies is Range's water sharing program, which contributed approximately $1 million in cost savings above levels a year ago. Looking forward, we believe we will see similar savings from third-party water utilization given our blocky acreage position and existing water infrastructure. Cash lease operating expenses finished the quarter better than anticipated at $0.11 per Mcfe shaped by strong well performance from optimized gathering and efficient water logistics. As we look forward to the second half of the year, we project a similar level of expense performance, and are, therefore, improving our previous guidance for lease operating expenses down to $0.11 to $0.13 per Mcfe. Turning to marketing and starting with NGLs. Range's flexible transportation portfolio continued to access premium export markets during Q2. As one of the only U.S. producers with access to international LPG upside, we generated another fantastic quarter in terms of Range NGL price realizations. Looking at the NGL macro, international propane demand continues to grow. Chinese propane imports reached an all-time high in the second quarter as they continue to add PDH capacity to consume more propane. At the same time, limited growth in non-U.S. propane supply has led to tightened international fundamentals and an improved arb for U.S. exporters. Range's flexible marketing and transportation portfolio allowed us to take advantage of this international opportunity, exporting the vast majority of propane produced during the second quarter. Simultaneously, Range demonstrated its ability to optimize sales by pivoting butane volume into the domestic market to maximize margins. As a result, Range NGLs received $24.35 per barrel in the second quarter, $1.26 per barrel premium to the Mont Belvieu equivalent. Looking ahead to the balance of 2024 and into early 2025, we expect domestic stock tightening to combine with export demand to support absolute and relative NGL pricing and we expect Range's NGL price realizations will remain a positive differentiator. On the natural gas side, Range's pricing relative to NYMEX was right in line with our expectation as we sold the vast majority of our gas into the Midwest and Gulf Coast regions. On the macro front, we have seen U.S. natural gas production declining year-over-year, driven by maintenance or lower activity levels from industry, alongside durable demand for natural gas that can be observed in areas such as LNG exports and increased gas power burden. So we believe the fundamentals continue to be in place for improving natural gas pricing going forward. Before handing it over to Mark, I wanted to quickly touch on our most recent corporate sustainability report that was published last week. This report continues to showcase the company's resilience as a safe low-cost natural gas producer with an enviable emissions profile. Range had a great year for safety with 0 employee incidents for the year. Range also continued its strong environmental performance, driving a 67% reduction in methane emissions intensity over the past 5 years, reaching just under 0.2% and or more than 90% below the EPA's methane fee threshold. We look forward to discussing these and other results during future meetings. So where does that leave us as we're more than halfway through 2024? As stated, we remain constructive on the outlook for natural gas and NGLs, but importantly, even in the presence of relatively high natural gas storage levels and the current commodity backdrop. The resilience of Range's business is on full display. Our ability to generate free cash flow through the cycles is underpinned by our large, contiguous, high-quality acreage position, operational efficiencies, NGL uplift, diverse marketing portfolio and talented team. We believe the future of natural gas and NGLs remain strong and we believe Range is positioned well to generate substantial value for shareholders in the years ahead. I'll now turn it over to Mark to discuss the financials. Mark Scucchi Thanks, Dennis. With the first half of 2024 behind us, Range is making steady progress, executing a disciplined investment program prudent for this year and forward thinking for next year. Range's most fundamental objective is to safely and consistently generate cash flow for its stakeholders. Our program for 2024 was designed to successfully navigate fluctuating commodity prices while continuing to generate free cash flow, pay dividends, buy back shares and repurchase debt. While investing in the long-term development of our high-quality assets. As mentioned during our last call, Range has an efficient plan to maintain steady production this year with the flexibility to adapt to near-term commodity prices and resulting economics while also positioning our long-term business for eventual growth as demand increases from domestic and international customers. As incremental demand materializes in basin, near basin and further downstream, Range has the cost structure, inventory and infrastructure to remain a reliable long-term energy supplier. Results of the second quarter continue to highlight the business strength generated by Range's production mix and transportation portfolio. Realized price per unit of production before NYMEX hedging was $0.51 above NYMEX Henry Hub prices is a byproduct of our diversified mix and production and sales outlooks. Including hedges, Range realized $3.10 per Mcfe or $1.22 above NYMEX Henry Hub prices. Resilient pricing yielded second quarter cash margins per unit of production of $1.22, a healthy 37% margin, resulting in cash flow before working capital of approximately $237 million. Cash flow for the quarter was allocated to $175 million in capital investments. The repurchase of $48 million in senior notes, along with roughly $19 million in dividends and $20 million in common shares repurchased. Cash margins were generated by diverse sales and a rightsized hedging program, but also by continued deliberate focus on unit costs. During the second quarter, total cash unit costs were $1.88, down $0.07 from the first quarter, decreases in interest expense and G&A are a byproduct of reduced debt and thoughtful spending. Gathering, processing and transport for the second quarter declined $0.05 from last quarter and is a function of prevailing commodity prices and timing of NGL cargos. Second quarter NGL market prices declined, reducing processing costs and with lower natural gas prices, we also experienced lower fuel and electricity costs, all right way risk contract elements that maintain margins. Range's NGL sales benefit from direct access to international markets out of the East Coast. One cargo loading occurred in the first days of July. As such, the volumes to be loaded were inventory at quarter end with the GP&T costs and revenues being recognized in July, which should bring third quarter GP&T back towards the midpoint of guidance. Right after safety and sound environmental practices capital allocation is among the most important corporate responsibilities. As you can see during the second quarter, we continue to carefully balance funding of prudent investments in the business with returns of capital, while maintaining financial strength. Prudent investment to us is responsive to both the near-term realities of commodity prices while also investing in the future to be prepared for the approaching growth in natural gas demand. With low full cycle costs, Range has been able to generate free cash flow while investing in modest inventory to enable efficient growth when the market calls for it. At the same time, we prioritize financial strength so that we can make opportunistic decisions. That financial strength enables Range to execute what has been a very efficient share repurchase program. And it's a program we have greater flexibility to execute as we remain within our target debt levels. Looking at the balance sheet briefly. The notes due 2025 mature in less than 1 year. Those notes are easily covered by cash on hand, cash to be generated in coming quarters and an undrawn revolving credit facility. Suffice it to say that we believe there is ample liquidity to efficiently retire this debt as the maturity date approaches. With the ratings upgrade from S&P this quarter and a positive outlook for Moody's, we believe the strength of Range's business is being recognized. One significant element of our financial strategy that provides a stabilizing effect to better enable efficient funding and investments is our thoughtfully constructed and carefully executed hedging program. We believe added predictability from appropriately sized hedging provides exposure to improve long-term natural gas market dynamics while also increasing confidence in near-term forecasted cash flow. A stable financial foundation enables better planned, more consistent, efficient operations while protecting the balance sheet and can also create opportunities for reinvestment and shareholder returns. Range's hedging philosophy has produced successful results that have served the company well, and we expect will continue to do so in the future. Presently Range has approximately 55% of second half 2024 natural gas hedged with an average floor price of $3.70. And in 2025, approximately 35% hedged with an average floor price of $3.90, providing Range a stable base to consistently generate free cash flow through market cycles. Financial results rely on safe, efficient operations and the Range team executed another successful quarter, delivering planned production on budget. As a reminder, the plan we announced for 2024 differs slightly from most others in the industry. And at our capital efficiency, low full cycle cost, paired with advantaged marketing of our production generates meaningful margin at current commodity prices, meaning Range has options, options on how we redeploy capital into the drill bit, infrastructure like water facilities that can provide durable cost reductions or low-cost lateral extending inventory enhancing land, among other attractive alternatives. When comparing capital efficiency on a per unit of production basis or any similar metric, a year of depleting inventory can enhance optics in the short run for some. We believe lasting efficiency, particularly in the face of expected growing demand provides Range shareholders greater leverage to improving markets. Range's business plan continues to be executed on what we believe is the largest per share exposure to core Appalachia inventory, paired with the transport and sales portfolio delivering production across the U.S. and internationally, all underpinned by a strong financial foundation. We have the team, assets and balance sheet to succeed through price cycles, and we believe the Range business can and will continue to deliver significant value to investors. Dennis, back to you. Dennis Degner Thanks, Mark. The first half of the year results for Range reflect a consistent theme communicated in past quarters. Execution of another maintenance plus operational program as planned. consistent advancement in our overall efficiencies, generating free cash flow and prudent allocation of that cash flow, balancing returns of capital, further balance sheet improvements and the optimal development of our world-class asset base. You've heard us state this before, but we continue to believe the results communicated today showcase that Range's business is in the best place in company history, having derisked a high-quality inventory measured in decades and translated that into a business capable of generating free cash flow through these types of cycles. [Operator Instructions] The first question is from Roger Read of Wells Fargo. Roger Read Congratulations on the quarter. Mark, I'd like to come back on some stuff you were saying there at the very end. Some of the opportunities you listed to, let's call it, enhanced margins, improved returns, et cetera. If we were to think about those in terms of magnitude of what they can do for you, but also sort of the time line of achievability. How would that list of opportunities shake out? Mark Scucchi Yes. It's a good question, and it's a broad question just because of the breadth of opportunity Range has ahead of it. I think Dennis and I both have touched on various ways in which we can continue to drive down our cash unit cost structure as well as the capital efficiency. You've seen the team be very efficient on direct operating costs, LOE continued mindful execution out in the field. Water handling is a topic we consistently discussed, which touches on both improvements in LOE and our capital efficiency. So that's a day-to-day exercise by the team in the field, but it's also some modest capital investments. As you know, that was part of our capital allocation process for this year. Something we hadn't done in any size or consequence for roughly a decade. That blocked-up nature of our acreage position is really a lot of efficient handling and use of that infrastructure and expanding that this year became timely, and with -- what we expect to be about a 1 year or better payback on that investment, it should pay back many years into the future. As you work your way down, the cost structure, I think, GP&T being a larger line item, it's clearly an area of focus. That's a focus for cost, but I think more importantly, it's about margins. It's about maintaining and enhancing that portfolio of sales outlets we have. So today, it's a great outlet moving 80% of our gas out of the basin. But over time, we think that Range will continue to have the opportunity to sell its molecules into strong end markets, be it today with our existing production profile or when the market calls for it, and there's incremental production. We think that we will have the ability to move those molecules to strong end markets as well, be it natural gas or natural gas liquids. And then on the capital front, again, the common topics that come to mind are extending lateral lengths, which again, you've seen us allocate a little bit of capital to the land to be able to do that as well as just efficiently running crews this year, running 2 rigs and 1 frac crew, for example, is all it takes a Range to execute this program this year, the steady efficient maintenance program and potentially running those for a full 12 months to generate very modest growth into next year, given the inventory that we've built up over the last few years. So all those factors together plan to not just one specific area of improvement, but whittling down across the cost structure and the capital efficiency. Roger Read No, I appreciate that clarification. And then the other question I had more sort of what is the tripwire or whatever. But as you think about setting up your hedging for 2025, I mean, obviously, you're 35% there. But if we think about getting kind of equivalent to this year, is there -- is that something that's going to be episodic? Or is there a price level you'd feel more comfortable with? Or as you think about the macro potentially 25 and a little better supply-demand balance across the country do you want to be more patient on hedging? How are you thinking about that? Mark Scucchi Yes, I'll start with we feel very good about where the 2025 book stands today. Just backing up to the philosophy, we're running an enterprise a going concern, 30-plus years of drilling inventory. So this is about managing risk in the business prudently while not hedging away the upside in the cash flow. So to that end, the philosophy is to try to cover the fixed cost to maintain steady operations, picking up and dropping crews and things is extremely inefficient and costly. So having more stable predictability of that cash flow, we think, adds a lot of value. So with that in mind, how do you shape 2025. Well, we feel like the book was designed to do that at the prices we were able to lock in. It's also shaped based on the fundamentals as we see them unfolding over the next 12 and 18 months. LNG in service is clearly a focus in the headlines. Some facilities are early and some facilities may be delayed. So as we see those opportunities becoming reality late this year and early next year, the incremental positions that were added are really front-end loaded the first half of 2025 and they're in the form of collars, so that we can provide some downside protection while retaining positive exposure to improved gas prices in the first half of the year. So that's really how we think about next year. Our next question comes from Michael Scialla of Stephens. Michael Scialla Dennis and Mark, you both mentioned you see the improving natural gas fundamentals moving forward and your '24 production guidance is moving to the high end of the Range. If that doesn't play out, just curious what changed to your plans, you're contemplating? Or do you feel like with the natural gas liquids revenues that you're really not the company that would need to adjust your plans, be it curtailing production or delaying any more turn-in lines? Dennis Degner Michael, I'll start by really maybe reiterating a bit of the approach that we communicated for this year's program. And we're at a very lean what we would call base level type activity level and program for '24, which we think is kind of a base level way of thinking about the business on the go-forward there or what we'll call it somewhat maintenance plus. So the 2 rigs flat plus the 1 base frac crew. And so it's generating that $35 million to -- $30 million to $45 million of in-process inventory this year, very similar to last year. And so to answer your question, as we start to think about 2025, we wanted to set ourselves up with flexibility and really good options. And so by setting it up that way, we have the ability to take some of that inventory and reshape our production profile for 2025. And ultimately, we know that will have an impact for '26 in the go forward. But if we also see further delays in LNG facilities or anything else that puts commodities at risk, we could consider how to use that inventory differently. But I think when we look at the capital program for this year, at that $620 million to $670 million level, I mean, clearly, there are going to be some aspects like the water infrastructure that Mark touched on just a few moments ago that are going to be more onetime one-off capital investments in nature once a decade, if you will. But really, that's a decent way of thinking about our program and then the ability to toggle and use that inventory based upon what we see from a commodity standpoint. There's a lot of reasons to believe that this is going to look better, I think, in 2025, though. There's too many demand components that you can point to. And I think power is clearly one of them. And even when you just look at the incremental $1.5 billion a day on the power burn side that's played into natural gas's contribution just year-to-date. And so we think there's a lot of reasons to be excited about 2025. We've got the right inventory set up and program that's lean to allow us to reshape production in '25 based upon what we see from the market. Michael Scialla Appreciate that. Just want to get your thoughts on kind of political front with the federal judge blocking the pause on LNG facilities and it bring court to return the Chevron doctrine. Does that make you any more optimistic on the regulatory environment? Anything specific you might think could be done within Appalachia that would improve maybe take away capacity or anything along those lines? Dennis Degner Well, I think when you look at the demand component, I'll maybe start with the way we ended maybe the prior question. But I think when you look at all the variables that are playing into the demand conversation on the go forward, we've said and maybe in smaller group meetings, it's hard to see how you -- when you think about the political avenue, you almost feel like you get to the same place, maybe through a different path with regardless of what happens with the administration here and the go forward, meaning if you're going to further bolster the grid, electrify what we do here in the Lower 48, if you're talking about data centers and AI, you have to see natural gas playing a more prominent role in that conversation for low-cost, reliable power generation. So when we look at -- and that then follows with a real serious conversation about permit reform. So I think it was encouraging to see just within the last day or 2 here, the announcement from Senator Manchin and Barrasso over some permit reform language that's being moved forward. And we think those are the right signals. So we would look at that as there are others, clearly, both in D.C. and also on the home front here like companies like Range that see that there's a real need for us to play an expanded role. When you look at our inventory, we have the ability to do that, especially with our asset base, having the ability to feed supply gas into the PJM market, which serves of around 65 million people. So we see a lot of positive outlook, but it's going to really need to be supported by some permit reform for sure. Our next question comes from Doug Leggate of Wolfe Research. Doug Leggate So I guess, Mark, my first question might be for you or whoever wants to take this, it's relating to takeaway capacity. Our understanding is that both some of the publics and the privates are not renewing term takeaway or fixed takeaway, as things kind of roll around for renewal and I'm wondering how that opportunity sits for a company like yourself, given your inventory depth and why you think that might be the case? In other words, why those folks are not taking the takeaway. Any kind of magnitude you can offer on timing would be really helpful. And I've got a follow-up, please. Mark Scucchi Doug, that's a good question because the most common understanding, which is accurate, is that in aggregate, the pipeline is coming out of Appalachia or [indiscernible]. We're focused on what Range can access and over time, what Range can utilize. So today, we have a great portfolio, but we think there's a lot of opportunities for Range to use even existing capacity coming out of the basin even before we think about what eventually will be Brownfield expansions and eventually even perhaps some new pipelines. But just to start out, there's capacity that's either underutilized, was not signed up for firm transport, so it's just used on shorter-term nature. There's capacity that some companies did sign up under firm and through various proceedings to projected those contracts or remarketed them and lay it off. So the pipeline exists. So it really comes down to a market share question. And then that leads you down the road of who has the inventory to use it for the next 5, 10, 15-plus years, to be able to stand behind it to underwrite that capacity and fully use it for an extended term. So that's clearly an opportunity for Range at the appropriate time to grow and utilize capacity. It's not only a question of what capacity Range has to take on or chooses to take on itself, but our end customers have their own capacity. So you can sell 2 end markets anywhere across Lower 48 essentially, to those customers that have their own, be it utilities or marketers or you name it. So MVP, while we don't have capacity on it, holders of MVP capacity, a number of them are existing customers via other paths, so we can expand those relationships and sell to them. And like I said, eventually, to Dennis' point earlier, the simple needs of the population of industry, of reindustrialization in the Lower 48 increased power demand, electrification across industries, there's going to have to be expansions, both on the electric side, whether you're talking distribution, power generation and pipelines to get there. So Brownfield expansion is potentially a new pipeline at some point. And then bringing it closer to home for Range, the in-basin and near basin as we term it sometimes is significant demand, again, to the power side of the equation or industrial that represents a tremendous opportunity, even leveraging our existing portfolio where 1/3 of our gas goes to the Midwest, for example, to areas where there's significant construction of industrial demand and plans of various types in nearby states. So great opportunity here, really underpinned by inventory and duration of Range's story. Doug Leggate Mark, forgive me for asking for a quick clarification. This is not my second question, but can you offer any kind of magnitude and timing is a very quick, here's the number, here's the timing, how it impacts Range. Mark Scucchi I think perhaps it's a little bit early as we get a little closer to 2025 and think about and refine what that capital budget may look like. As we've said, growth is an option. It's a question of when, not if. So coordinating infrastructure, be it gathering, processing, compression and longer-term transport layered in with the marketing to the end customers and those relationships is all part of the process. Doug Leggate Okay. My follow-up is really a balance sheet debt question. You've obviously done a tremendous job rightsizing the balance sheet. But I think the one certainty that we can see with the forward curve and the demand supply situation for gas is significantly higher volatility, which means breakeven and balance sheet capital structure becomes a big part of your equity volatility. So my question is, you have a couple of fairly sizable bond maturities over the next 3 to 5 years. Will you refinance those? Or will you pay them down? How do you see the right capital structure in an extraordinarily volatile environment for Range? Mark Scucchi Well, I'll start with the target debt range is net debt of $1 billion to $1.5 billion, which we are within, giving us a lot of options, both in returns of capital and further deleveraging. So we certainly plan to stay within that and optimize the balance sheet to your point, it reduces cost of capital, hopefully brings out some of the risking, if you will and brings out some of the volatility. So to that point, the '25, as I mentioned during the opening comments, we've got ample liquidity to take care of those. We have the revolver, lots of cash on the balance sheet and cash flow to be generated in the coming quarters further deleveraging is likely. We'll balance that with returns of capital. And capital markets are open as well. So there's clearly options there as we roll forward through the next few quarters. There is a step down in the call price on the 2029, the 8.25% notes early next year. So that presents a possible time to consider after that passes of what a refinancing might look like. So at the highest level, I'll say, fortunately, we have a lot of good options ahead of us to optimize the balance sheet further deleverage while also achieving our return of capital objectives. Our next question comes from Jake Roberts of TPH & Company. Jake Roberts I was curious on the -- getting some more granularity on the TIL cadence in the second quarter and being aware of that the current mix is at 32%. But just wondering if that liquids weighting is going to push that number higher in Q3? And then ultimately, what it may shake out in Q4 with the dry well line, just to get to that more than 30% for the year. Dennis Degner If I take a step back, the way we're looking at our turn-in-line cadence for the year, I mean right now, we're approximately 50% of our turn-in-lines having been sent to the sales line. But over the bulk of those clearly we're in Q2. By nature, that's going to then carry a lot of weight as you start to think about that modest, but ratable production increase that we'll see between Q3 and Q4, very much similar to the profiles that we've seen over the last several years, because the turn-in-lines have all been 100% on the wet side, and a lot of that is going to also be consistent in Q3 as well, we would expect to see a similar liquids contribution in percentage weighting factor in the back half of the year to what we've seen here through the first half as well. The dry gas TILs, clearly, we're still keeping those, we'll say, under evaluation. When you look at how the gathering system has really performed with some of the optimization efforts that have been ongoing over the last 6 to 9 months, we're -- it's still a little early, but we're really seeing that pay dividends in a way where it's allowing us to think in a very flexible way about how deep into the year do we want to push those dry gas TILs. So ultimately between the flexibility there, the way the liquids turn-in-line cadence is shaping up and on top of it, just the production profile and the base decline being low, we're really seeing that we should have a consistent liquids contribution through the balance of the year. Jake Roberts Okay. And then my second question, I know you spoke earlier about some of the flexibility as we look at 2025, particularly around natural gas pricing, but I'm wondering if the forecasted tightness in the export -- LPG export capacity in 2025 is also factoring into that conversation and how we should we might think about that side of the program? And then I'm also curious if you could offer any thoughts on the potential for that export capacity utilization to remain closer to 100% following the additional capacity in late 2025 and 2026. Dennis Degner Yes. I think the export utilization has been really a great story in a lot of ways for the past probably 12 months plus now. But you're spot on. I mean we consistently see that it's running in the high 80%, almost bumping 90% range on a -- we'll just say a month in and month out basis out of the Gulf. For us, it really presents a unique advantage, and we've said this a number of times, but our ability to get our products to the water and not only to the water, but also in Philadelphia out of the Northeast has really proven to be a differentiator for us. And so when you start to think about the go forward, we would expect to see some ongoing congestion from time to time in the Gulf and as that continues to persist and raise its head, our relative value that we harvest by getting out versus Mont Belvieu will continue to really shine for us in the go forward. So you're right, that export capacity in '25 and beyond is going to continue to grow. But when you start to think about the demand component and the supply that probably follows with that out of other basins in the South, Again, we expect to see our relative value versus Mont Belvieu to continue to shine on the go forward, being able to get our products to the water in the Northeast. Just out of curiosity, you all talk about obviously delivering your maintenance kind of plus activity level and building a little bit of a optional DUC backlog. Can you give some color around when you look at that, are you doing it more for gas C-type wells? Or is there really an opportunity also, given your constructive liquids outlook to build that more as a liquids-oriented backlog that gives you some better pricing optionality. Dennis Degner Yes. Scott, I think the best way to think about our inventory and the way that we'll just say what that looks like, it will mirror a lot of what you see in our activity base on a program year kind of year in and year out. But by nature, it's inherently going to lean more toward the liquids-rich side of our asset base. Program year in and year out, we run around 65% to 70% on the liquid side. So between our wet and super-rich inventory. And then the other, we'll just say 30% is going to be more on the dry side. So I would expect on the go forward when we build some inventory, it's primarily going to be leaning towards the liquid side. Inherently, by the way, we shape our program where our inventory lies, where we see infrastructure capacity as well, but we always leave some flexibility in how we look at our inventory and what we -- where we drill and based upon what we're seeing going on in the market. And our ability, I know we touch on this a lot, but it's a real differentiator for us. But our ability to move back to pads with existing production allows us to just really be nimble and be able to react to what we're seeing and what we think is going to be most helpful for the go forward. So inventory balance and mix should look real similar to the rest of the program, but it will lean towards the liquid side. Scott Hanold So when I think about that, should I -- when you think about like executing potential growth when it makes sense, is that more of -- well, as much as improving dry gas prices, but also whether there's NGL -- just export capacity as well? Is that -- is it sort of a balance of that? Dennis Degner I think it's in all of the above. And clearly, when you look at the realization uplift that comes with our NGL contribution, inherently, we're going to lean toward over the course of time, just like you're seeing in the balance of this year, I would expect to see a small improvement in our liquids contribution just over the course of time. So it could be a small number, but it's going to be inherently because of the way our inventory is laid out, I would expect to see that to be a small improving percentage factor over the course of time. And going into that is our ability to get to the water. Again, what we see that's going on with the global markets and our ability to take advantage of that revenue uplift and how it impacts our free cash flow. Scott Hanold Okay. That's clear. And then my follow-up is probably for Mark. You obviously hit the buybacks on both the debt as well as the equity, can you give us some sense of like how do you think about the balance in doing that? Like what makes most sense to create incremental shareholder value at this point? Is it the debt or is it the buybacks? Or is it a combination? Just give us a sense of how you think about that. Mark Scucchi Yes, it's a fair question, and we've shied away from giving a purely formulaic approach to it because commodity prices change, cost of the field may change, demands may change and that growth is a question again of when. So First and foremost, our job is to have safe, efficient operations and provide energy, natural gas and natural gas liquids to our customers and sell this profitably. So that's the first thing. Underpinning that is the strong balance sheet, which we're there within our target range. So from here forward, we like the optionality of leaning in one direction or another. So I'll just leave it as the balance sheet is within the target and continues to get stronger, we can kind of turn that restate up or down on the returns of capital as we see appropriate to provide the greatest returns, the strongest driver of free cash flow and cash flow per share over time. So I can't give you a specific number. We prefer the flexibility in executing the programs. But suffice it to say that our behavior will not be that dissimilar from what you've seen from us over the last few years. One year, we bought back $400 million in shares. Commodity prices came in, and we became a little bit more conservative. So we're just responsive to cash flow, prices and changes in relative value over it. But again, I'll just leave it with the punchline of as we stay within and move further into our target debt range, we've got greater flexibility. Our next question comes from Neil Mehta of Goldman Sachs. Neil Mehta I had a couple of questions on NGL macro, but also your price realization. So the first question on Slide 35, your price calculation. You guys have done a great job realizing above the equivalent Mont Belvieu barrel, just be your perspective on how do you continue to get towards the top end of the $0.75 to $1.50? What are the headwinds? What are the tailwinds? And what are you doing to get the best netback. Alan Engberg Neil, this is Alan Engberg. I managed a marketing program at Range. So I'll take a stab at answering your question. We -- it's not all that magical. A lot of what we do is we've got diversity in the portfolio, and we've managed to set up the portfolio such that we're not overly exposed to Mont Belvieu. In fact, we've weighted a lot of it, whether it's ethane, propane or butane towards international markets where we saw significant growth. So going forward, I think the macro looks really good still internationally. We've got tremendous growth in ethane demand, particularly out of Asia, but also out of Europe. Ethane going into ethylene steam crackers. Most of them are seeing that if they're operating using feed other than ethane, they're disadvantaged. So they're shifting a lot of their feed capacity towards ethane and that is creating just continued ethane demand growth. So we feel that for our contracts that are priced internationally on ethane, given that demand growth, we're just going to continue to see good realization relative to the domestic benchmarks. Similarly, on LPG, you've heard the story, I'm sure quite a bit about just PDH growth, particularly in Asia, and that is still continuing to go on. We're operating at relatively low capacity utilization internationally, which some people view as a negative, but really, I view that as a positive because as that capacity growth slows down, we're going to start getting a tighter market and the capacity utilization is actually going to be increasing. So we're going to see a runway of continued demand growth for multiple years on the international front for LPG. We've got exposure to that currently. And it's worked out really well, again, for Range, relative to the domestic market indices. So going forward, we like our position. We're very happy to have an 80% of our portfolio on the LPG side capable of into the export market, but also being a very flexible portfolio that allows us to pivot when the time is right or when the seasonality is right between domestic and export markets. Neil Mehta Yes. That kind of builds into the follow-up, which is Slide 24. We share your constructive NGL view, but we get a lot of pushback on the propane side, particularly on China, given the challenge of the economy out there. So I'd love your perspective real time of what you're seeing on the ground in Asia from a demand perspective? And can propane perform in the face of what seems to be a soft Eastern demand picture. Alan Engberg Well, so I agree with you, everything we're reading as far as the economy in China has been less than stellar. But it's still -- it's massive, right? And the demand growth has still been there. In fact, I think Dennis referenced it in his remarks, his prepared remarks that during the second quarter, we actually hit the U.S. that is hit another record in terms of exports to China. We -- I'm trying to see what that number was. I don't have it in front of me, but suffice it to say, the -- here it is, 843,000 barrels per day is what China imported during the second quarter from propane standpoint. So it's been massive. The operating rates that I was talking about for the PDH units despite the economy not really performing as strongly as a lot of people were hoping it would, those operating rates have actually increased. During the second quarter, we got into the mid-70% utilization rate. And again, that's against a weak economic backdrop. So the feeling is once -- if the economy starts improving and the government is making efforts to stimulate the economy. Once that happens, those utilization rates are going to continue to grow, and that demand will continue to grow as well. And then I'll add further that international supply of LPG has actually been relatively flat. OPEC actually during the second quarter was down 8% year-on-year from an export standpoint. So it just emphasizes that the U.S. is the source of supply into that demand. And that demand from our standpoint, continues to look quite strong. Our next question comes from Arun Jayaram of JPMorgan. Arun Jayaram I wanted to ask you around just how you're thinking about kind of 2025. I know you touched on this earlier in the call. So in the -- going into 2024, you had about $30 million of capital that you used kind of to build some well inventory. And then this year, I think the number is $45 million. So you have about $75 million of capital, which is call it in well inventory. As you look at the macro picture today, is the plan to maybe move to a maintenance CapEx and to deliver a lower CapEx number for 2025 or with the strip, call it, around $340 million would you plan to maybe grow a little bit given your attractive returns at those types of gas prices? Dennis Degner Yes. I think when we start to think about the 2025 program, I mean, I think where we see today, we wanted to set up the flexible options so that we have the ability to reshape our production profile for the '25 or we have the ability to stay at a maintenance plus level type activity until you get to the back of '25 or into 2026. If you have a scenario this year, as an example, where you're blowing down your inventory and you're running a program that doesn't set you up for flexibility. That presents a unique challenge then as you start to lean into the market improvements, whether it's early '25, middle of '25 or if it's leading into 2026. So we like the in-process inventory that's been generated. It gives us that ability to either utilize it and think differently about our capital maybe on the low end or it allows us to then use that as a, we'll say, again, keeping it at a maintained level? Or do you grow that from there based upon what kind of rig and frac crew program we have. our lean 1 frac crew program, these 2 rigs really kick out just a little bit more inventory than the 1 frac crew consumes. And we feel like by the time you aggregate that impact, it has the ability to reshape the production for the first half of the year. If you think about our maintenance program in the last several years, we've always had -- the production character has had a bit of a sign wave, where the back half of the year sees a modest, but ratable increase. And then when you get to the first half of that following year, you're always going to see a bit of a dip until you then pick your activity and turn in lines back up from the early on half the year activity levels. So we feel like we have the ability to reshape that and change the way we think about feeding into growing demand in the market and what it presents to us. So a little early for us to define exactly what that looks like, but we like the options that we have at our disposal and the ability to utilize that inventory to keep ourselves at also the leading edge of a capital-efficient program. Arun Jayaram Got it. And just my follow-up, Dennis, I was wondering if you could highlight where you think your leading-edge D&C cost per foot are in Appalachia, maybe relative to your initial guide, and you highlighted averaging 9 stages per day, which is a very, very efficient kind of frontier there. And maybe comment on some of the efficiency gains you're seeing from the zoos fleet? And how much do you see is there to go on the drilling versus the completion efficiency side of the equation? Dennis Degner Yes, a really good question. When we look at our drilling performance, the drilling team has done a fantastic job. Last year, we saw a little over a 40% improvement in our drilling efficiencies through basically utilization of some upgrades on our super-spec drilling rigs, there were some testing that we did last year. And there's always a, we'll just say, an ongoing testing type nature to the program, very KPI-driven and looking back on performance. And so that's translated into an ongoing efficiency that we're seeing this year as well. So very consistent from year-to-year. The frac side on completions, the team continues to see improvements when we return to pads with existing production. I think we touched on it a few months ago. But ultimately, when we return to a pad with existing production we see that it could be as much as a 30% improvement in efficiencies. You route out nonproductive time, you look for ways to more efficiently manage ingress, egress, et cetera. And it all translates into the numbers that you're seeing. So the zoos fleet has really performed well for us. And I would say, it's as good or better than where we've been in the past few years. So hard to imagine, but in 2010, when I joined the organization, industry standard was around 3 stages a day for a 24-hour frac crew. And here we are doing 3x that amount and it's just unbelievable. So hats off to everybody on the service side plus our team there in South Point. I think when you translate that into the cost per foot side, Arun, what you get is something that with current cost, you're probably seeing somewhere in the $800 to $900 per foot range. We have seen some deflation that's helped along with the efficiencies that start to kind of materialize. But on a very limited basis, as you would imagine. We're nearing the end of today's conference. We will go to Paul Diamond from Citi for a final question. Paul Diamond Just a quick one, kind of piggyback in a bit on the deflationary expectations into kind of the tail end of this year and into 2025. Just wondering if you could put a few numbers around how you're seeing the market really playing out? Dennis Degner Yes. Paul, when I think about where we're seeing deflation play out, it's kind of a -- it's different than historically where maybe commodities up, service cost up, commodities down, service costs down. And what I mean by that is now you're seeing in some regards, I'll use the electric fleet as an example. E-fleets on the completion side are at 100% type utilization level across the Lower 48 and many of those are structured around multiyear contracts. And so on one hand, that may not present a significant deflation exposure. But in our case, what it does, it also has a natural protection against prices going up in '25 and '26 through the term of the contract when you could see activity levels go the other way. Similar type storyline on some of our drilling rig exposures, where we are starting to see some opportunity is when you start to see relief in areas like oil prices, you start to see potential relief in diesel fuel, frac sand and some of your other consumables. It may not be -- by the time you look at an individual line item, maybe they may not have a lot of, I'll just say, a large impact. But in aggregate, it starts to become meaningful dollars. So it's a little bit early. And I think part of we'll just say deflationary savings that could transform or be a part of our program. We're going to most likely be a part of our RFP process we roll out in the fall, and then that will translate into our D&C per foot for next year. Paul Diamond Understood. And just one more quick follow-up. You talked about your water sharing program and kind of it being a bit more of a longer-term opportunity set. Just wondering if you could put some numbers around that. I mean, how big do you see that opportunity set over in the medium and the longer term. Dennis Degner The water sharing program has been really a great story, and it all started with our team there in South Point and their creativity to reach out to other producers several years ago now and look for the ability to utilize their produced water as a part of our operations space. So it's -- we think across the board, it's a win-win. Looking back, we've routinely now for several years, recycled approximately 140% to 150% of our annual produced water volumes. So it's 100% of ours plus the remainder coming from other producers in the area. When you look at water costs and what that could translate into, and again, we've seen a range of somewhere plus or minus $10 million in potential savings on an annual basis because of the ability to take low-cost water. And also, it really complements our environmental stewardship efforts that you'll see in our CSR report kind of year after year. When you look at the investments that we're making into our water infrastructure this year, that's to support long-term, low capital efficiency and also that low water cost. So we think this is something that for decades to come, we can continue to repeat, and again, with our development runway with our inventory, it sets us up well to be able to capture those cost savings. This concludes today's question-and-answer session. I'd like to turn the call back over to Mr. Degner for his concluding remarks. Dennis Degner I'd just like to thank everyone for joining us on the call, as always, in the healthy Q&A. If you have any follow-up questions, don't hesitate to reach out to our Investor Relations team, and we'll see you on the next call in October. Thank you. Thank you for your participation in today's conference. You may disconnect.

Earnings call: Tyler Technologies exceeds Q2 expectations, boosts cloud focus By Investing.com

Tyler Technologies, Inc. (NYSE: NYSE:TYL) has reported a successful second quarter, surpassing expectations with strong growth in revenues and earnings. The company, which specializes in software for the public sector, has shown a robust performance in its recurring and SaaS revenues, while also marking significant progress in its cloud migration efforts. With a healthy market outlook and strategic acquisitions contributing to its growth, Tyler Technologies is poised for continued expansion in the public sector software space. In conclusion, Tyler Technologies is effectively executing its strategy to transition clients to the cloud, with a strong focus on SaaS and public sector digital modernization. The company's financials reflect the success of this strategy, and with steady client budgets and a focus on cost-efficiency, Tyler Technologies is well-positioned to maintain its growth trajectory. Tyler Technologies' recent earnings report has caught the attention of investors, showcasing the company's upward trajectory in the public sector software market. To add depth to the financial picture painted, let's consider some key metrics and insights from InvestingPro: InvestingPro Data highlights that Tyler Technologies has a market capitalization of $23.98 billion, a testament to its significant presence in the industry. However, the company's P/E ratio stands at a lofty 114.86, reflecting a premium valuation that investors are willing to pay for its growth prospects. This is further substantiated by the adjusted P/E ratio for the last twelve months as of Q1 2024, which is slightly higher at 115.51. Despite a high earnings multiple, Tyler Technologies has demonstrated consistent revenue growth, with the last twelve months as of Q1 2024 showing a 6.77% increase. This is complemented by a solid gross profit margin of 44.42%, indicating the company's ability to maintain profitability amidst its expansion efforts. InvestingPro Tips reveal that Tyler Technologies is trading at a high revenue valuation multiple and near its 52-week high, with the price being 98.52% of this peak. This suggests that investor confidence remains strong, with the market pricing in future growth expectations. Additionally, analysts predict the company will be profitable this year, which aligns with the positive outlook presented in the earnings report. For investors seeking more in-depth analysis, InvestingPro offers additional tips on Tyler Technologies, which could further inform investment decisions. By using the coupon code PRONEWS24, users can get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, unlocking a wealth of information including 13 additional InvestingPro Tips for Tyler Technologies. In summary, while Tyler Technologies trades at a premium, its consistent revenue growth and market optimism, as reflected in its near 52-week high trading price, underscore its potential for sustained growth in the public sector software domain. Operator: Hello, and welcome to today's Tyler Technologies Second Quarter 2024 Conference Call. Your host for today's call is Lynn Moore, President and CEO of Tyler Technologies. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded today, July 25, 2024. I would like to turn the call over to Hala Elsherbini, Tyler's Senior Director, Investor Relations. Please go ahead. Hala Elsherbini: Thank you, Matt, and welcome to our call. With me today is Lynn Moore, our President and Chief Executive Officer; and Brian Miller, our Chief Financial Officer. After I give the safe harbor statement, Lynn will have some initial comments on our quarter, and then Brian will review the details of our results and update our annual guidance for 2024. Lynn will end with some additional comments, and then we'll take your questions. During this conference call, management may make statements that provide information other than historical information and may include projections concerning the Company's future prospects, revenues, expenses and profits. Such statements are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections. We would refer you to our Form 10-K and other SEC filings for more information on those risks. Also, in our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release. We have also posted on the Investor Relations section of our website under the Financials tab, schedules with supplemental information, including information about quarterly recurring revenues and bookings. On the Events and Presentations tab, we posted an earnings summary slide deck to supplement our prepared remarks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise. Lynn? Lynn Moore: Thanks, Hala. We built on the momentum from our strong first quarter performance to, again, deliver exceptional second quarter results marked by consistently high execution and a continuation of solid operating and financial performance. Each of our key metrics across revenues, earnings, operating margin and cash flow exceeded our expectations. These results are especially meaningful given the significant shift towards SaaS in our new software contract mix, which pressured revenues and margins. Recurring revenues grew 8.4% and comprised 83% of our total revenues. SaaS revenues grew 23.2%, our 14th consecutive quarter of SaaS revenue growth of 20% or more above our target of a 20% CAGR in SaaS revenues through 2025. In addition, transaction revenues were ahead of plan driven by higher transaction volumes, including an increase in e-filing volumes and expanded payment services. Since committing to our cloud-first strategy in 2019, we've been intently focused on supporting our public sector's clients' digital transformation and guiding their migration to Tyler's next-generation cloud applications. Last year, we reached an inflection point where valuable, long-term recurring SaaS revenues surpassed on-premises' license and maintenance revenues. We're pleased to reach another milestone as we have now essentially completed the exit of our Dallas data center. This move is a significant achievement in our cloud migration road map as we continue to scale our deployments at AWS and drive more durable growth and margin benefits from our SaaS-based operating model. The public sector market remains healthy, characterized by high levels of RFP and sales demo activity. Our new business pipeline remains at elevated levels, reflecting the robust market environment, growing cross-sell opportunities and continued strong execution by our sales organization. Our leading market position and competitive strengths, including our deep domain expertise continue to differentiate us in the marketplace. These strengths underpin our long-term strategic focus on four key growth drivers, leveraging our unmatched installed base, expanding into new markets, completing our cloud transition and growing our payments business. Our large client base represents one of our most significant assets, and we're pleased to see strong go-to-market execution with significant cross-sell and upsell wins during the quarter, which included a joint effort with our Justice Group, leveraging our Digital Solution division's strong relationships in Florida, for an agreement with the Florida Department of Corrections to manage all aspects of money transfer services for correctional facilities across the state. The contract brings together disbursement solutions from our Rapid Financial Solutions acquisition, inmate trust and accounting and e-communications from the VendEngine acquisitions and payments through our Digital Solutions division. A single sourced enterprise supervision and enterprise public safety contract with Cherokee Nation, Oklahoma, adding to its existing enterprise ERP solutions. The SaaS agreement was a joint collaborative sales effort resulting in a total Tyler client win. Additionally, we continue to innovate and elevate our clients' resident engagement experience by empowering citizens with direct connections to government through Tyler's MyCivic platform. In Mississippi, we expanded citizen access to mental health resources with the Mississippi State Department of Health, leveraging our state enterprise agreement. We continue to advance our cloud transition and make substantial progress with our product version consolidation efforts, which will accelerate our continued migration of on-premises clients to the cloud. We're also pleased with the numerous second quarter SaaS contract wins, which underscore the public sector market's recognition of cloud benefits, including enhanced security. One of the key themes that emerged during client interactions at our recent Connect 2024 user conference was a notable shift in client openness to embrace cloud technology and a growing expectation among on-premises clients that they will migrate to the cloud. This shift is especially apparent in the state and federal market with our application platform and in the public safety market, where 90% of second quarter public safety contract value was SaaS compared to 13% a year ago. Primarily as a result of this accelerated shift in public safety cloud adoption, SaaS arrangements comprised 97% of our new software contract value in the second quarter. Additionally, we signed 111 flips of on-premises clients, including a number of larger clients, with the average ARR flips growing 21.8%. We also had a very successful go-live in May with the SaaS migration of the Idaho State Court system. This is our first flip to the cloud of a statewide court system, and Idaho went live just four months after the project kicked off. This high-profile migration has been watched closely by other statewide and large county courts and its successful execution is certainly a positive reference point as we engage with other large core clients about moving to the cloud. Key second quarter new SaaS deals and flips included a competitive win with the City of Topeka, Kansas for multiple integrated solutions, including enterprise ERP, enterprise permitting & licensing, enterprise asset management for nearly $700,000 in ARR. And ERP Pro and Payments contract with Richland County, Wisconsin, funded via ARPA funds. That was executed on an accelerated 90-day sales cycle, leveraging our enhanced sales enablement and competitive intel teams. The Idaho State Police signed a SaaS contract for our integrated enterprise public safety suite including CAD, records management and e-citations. This Tier 1 competitive win demonstrates our growing momentum with state public safety agencies and represents the sixth state police agency to adopt our enterprise public safety solutions. The United County, New York Department of Emergency Services also chose our integrated Public Safety Suite for 64 agency client-driven, SaaS deployment. Hunt County, Texas, upgraded to Enterprise Public Safety from our Public Safety Pro solution and Spotsylvania County, Virginia, signed a contract for our enforcement Mobile Solutions, joining eight of the 14 largest Virginia agencies using Tyler Public Safety applications. We signed an enterprise justice SaaS flip with Fulton County, Georgia, which includes Atlanta. The contract with ARR of $1.9 million follows Fulton County's Enterprise appraisal and tax SaaS flip signed in the first quarter, and includes integrated justice solutions such as prosecutor and jail as well as additional client management services under our unified One Tyler approach. We also signed an enterprise supervision expansion with the Arizona Supreme Court that builds on the success of adult probation to add juvenile probation for all 15 counties across the state. We leveraged the state relationship, which led to a five-year enterprise justice agreement with the Phoenix Municipal Court, representing in excess of $2.25 million in ARR. This strategic and highly competitive win includes five one-year extension options and paves the way for expansion and new court software opportunities in a large population state. Another theme coming out of Connect '24 was pronounced interest in AI and our expanded AI capabilities that were added through our 2023 acquisitions. High interest is turning into multiple new deals and cross-sell wins for our application platform, leveraging our augmented field operation solutions, formerly ARInspect with four inspection SaaS arrangements in the quarter across state, environmental, health and regulatory agencies. These included the California State Board of Pharmacy to configure and automate five regulatory inspection types, the Kentucky Department Environmental Protection, the New York Department of Health and the Arkansas Department of Labor and Licensing, which was a cross-sell win leveraging our Digital Solutions division state enterprise relationship. Another key to our growth strategy is expanding our differentiated payments business. And similar to our first quarter results, higher transaction volumes contributed to better-than-expected transaction revenues. In the second quarter, we signed 195 new payments deals across Tyler Software clients, representing approximately $8 million in projected ARR. In our state enterprise portal business, we secured extensions for our digital government and payment processing services under four state enterprise contracts, including Hawaii, New Jersey, Kansas and Kentucky and also won a sole source award with the state of Rhode Island as no extensions remained under the previous contract. We also signed a two-year renewal with the state of Illinois for our Outdoor and Enterprise Licensing Solutions. Now I'd like Brian to provide more detail on the results for the quarter and our updated annual guidance for 2024. Brian Miller: Thanks, Lynn. Total revenues for the quarter were $541 million, up 7.3% and organically grew 6.5%. Subscriptions revenue increased 12.1% and organically rose 11.8%. Within subscriptions, our SaaS revenues grew 23.2% to $156 million and grew organically 22.5%. Keep in mind that there's often a lag from the signing of a new SaaS flip or SaaS deal or flip to the start of revenue recognition that can vary from one to several quarters. Because of this, as well as the timing of SaaS renewals and related price increases, SaaS revenue growth both year-over-year and sequentially may fluctuate from quarter to quarter. Transaction revenues grew 3.8% to $177.7 million. Transaction revenues exceeded our plan, primarily due to higher transaction volumes from new and existing clients, including recreational licenses such as hunting and fishing, which begin their peak season during Q2. In addition, e-filing revenues grew 11.2%. The year-over-year comparison for transaction revenues continued to be impacted by the change in mid-2023 from the gross model to the net model for payments under one of our state enterprise agreements. This will no longer be a factor in year-over-year growth comparisons in the second half of the year, and our expectation is for mid- to high teens growth in transaction revenues in the second half of 2024. SaaS deals comprised approximately 97% of our Q2 new software contract value compared to 82% last year. During the quarter, we added 203 new SaaS arrangements and converted 111 existing on-premises clients to SaaS with a total contract value of approximately $127 million. In Q2 of last year, we added 170 new SaaS arrangements and had 94 on-premises conversions with total contract value of approximately $93 million. More importantly, the average ARR associated with our Q2 flips increased 21.8% over last year as larger clients such as Fulton and Clayton Counties in in Metropolitan Atlanta, Georgia; the cities of Tucson, Arizona and Birmingham, Alabama; and the Columbus, Ohio City schools flipped to the cloud, including transaction revenues, expansions with existing clients and professional services, total bookings increased 7.3% on an organic basis. Our total annualized recurring revenue was approximately $1.8 billion, up 8.4% and organically grew 7.8%. In previous quarters, we discussed our expectation that 2023 would be the operating margin trough from our cloud transition and that 2024 would mark a return to operating margin expansion. Our non-GAAP operating margin in the second quarter was 24.5%, up 150 basis points from last year. The margin expansion reflects improved margins from our cloud operations, along with expensive effective operating expense management and improving professional services margins. As we discussed on previous calls, merchant and interchange fees from our payments business under the gross revenue model have a meaningful impact on our overall margins as they are passed through to clients and are included in both revenues and cost of revenues. We incurred merchant fees of approximately $45 million in Q2. Because of strong earnings and effective working capital management, both cash flows from operations and free cash flow were above expectations for the quarter at $64.3 million and $48.6 million, respectively. Cash flow in the quarter was impacted by approximately $29 million of incremental cash taxes due to Section 174. We ended the quarter with $600 million of convertible debt outstanding and cash and investments of approximately $262 million. Our net leverage at quarter end was approximately 0.65x trailing 12-month pro forma EBITDA. Our updated 2024 annual guidance is as follows: We expect total revenues will be between $2.120 billion and $2.150 billion. The midpoint of our guidance implies organic growth of approximately 9%. We expect that merchant fees will be up approximately 6% over last year, and then implied organic growth, excluding merchant fees, would be approximately 20 basis points higher. We expect GAAP diluted EPS will be between $5.76 and $5.96 and may vary significantly due to the impact of discrete tax items on the GAAP effective tax rate. We expect non-GAAP diluted EPS will be between $9.25 and $9.45. We expect our free cash flow margin will be between 18% and 20%, including an estimated impact of approximately $60 million of incremental cash taxes related to Section 174. Other details of our guidance are included in our earnings release and in the Q2 earnings deck posted on our website. Now I'd like to turn the call back over to Lynn. Lynn Moore: Thanks, Brian. Our exceptional performance in the first half of 2024 positions us well for a strong second half. We're pleased with our progress across all fronts as we remain on track with key initiatives around our four-pronged growth strategy while demonstrating our competitive strength and model durability. Our cloud transition is beginning to generate the expected benefits of margin improvement and enhanced client experience. As you know, in 2019, we launched a multiyear cloud strategy to shift our solutions and operations to a cloud-first business model, leading our clients to a future in the cloud. As we enter the next phase of our cloud journey, and as more new and existing clients embrace our cloud strategy, we see increasing opportunities to prove areas critical to our clients that ultimately affect client satisfaction, including product release cycles, product consistency, performance reliability and cost effectiveness. To effectively address these areas and lead this change, I'm pleased to share that Russell Gainford has been promoted to Chief Cloud Officer, effective immediately. Over the past three years, Russell has proven his ability to own the overall vision for Tyler's cloud-first strategy. And in his new capacity, he will continue to drive our cloud initiatives across our organization, including developing our cloud technology and operation standards, controls and business processes, overseeing our strategic business partner and vendor relationships as well as architecting the organizational design and staffing plans in collaboration with operational leaders. Shifting to capital allocation. Our disciplined approach bolsters our strong balance sheet as we've repaid our term debt during this period of higher interest rates. This coupled with our ability to consistently generate strong free cash flow provides tremendous flexibility to take advantage of opportunities to make investments that drive shareholder value, including product development, M&A and potentially stock buybacks. And while the bar is currently high for acquisitions, we continue to evaluate strategic tuck-in acquisitions, while building liquidity to be in a position to address our convertible debt maturity in March of '26. I'm also pleased to highlight that Tyler recently was recognized by two leading publications as we were included on Times list of America's best midsized companies and Forbes' Best Employers for Women's list. Before I close, I'd like to welcome our two new board members, Margot Carter and Andy Teed, who were elected at our May 9th Annual Meeting. Margot brings a wealth of experience in cloud software and SaaS transformations, AI and payments. She currently serves as President of Living Mountain Capital, where she invests in and advises companies and private equity firms on digital transformation and innovative strategies. She has an extensive background in finance M&A and corporate governance and has served on several public company boards. Andy is a seasoned technology executive with significant public sector experience. He currently serves as the CEO of Eco Parking Technologies, an integrated lighting and parking guidance company. Prior to that, Andy spent nearly 20 years at Tyler in various senior leadership roles. His extensive public sector experience and familiarity with our products and clients along with his knowledge of cloud technologies, make Andy a valuable addition to our Board. I also want to thank our two outgoing Board Directors, Dusty Womble and [Mary Landro] for their years of service and contributions to Tyler's success. Finally, I'd like to express my appreciation to our entire Tyler team for their hard work and continued commitment to driving growth while leading our clients on their digital modernization journeys. Our leadership is aligned with a unified focus on cloud living, and I've never been more confident in our prospects and Tyler's future. Now, we'd like to open the line for Q&A. Operator: [Operator Instructions] The first question is from the line of Alexei Gogolev with JPMorgan (NYSE:JPM). Your line is now open. Alexei Gogolev: Thank you, Brian. Congratulations with great results. Brian, I was wondering the components of higher CapEx, what were they? If you could elaborate on that? And why are we seeing some decline in R&D? And does this have anything to do with your plans to reallocate certain R&D components? Remember, you were saying you were planning to do that for COGS going into OpEx? Brian Miller: Those two are related, but they're not related to any reclassification of R&D. They're just interrelated in terms of as we perform different R&D projects. Some of them fall in the category of requiring capitalization and others are expensed. And sometimes, there's a -- and this just reflects a little bit of a shift between those two. So more of our development costs are being expensed and less being -- I'm sorry, more being capitalized and less are being expensed to R&D. So, it's just a shift between capitalization and expense based on the nature of the projects. Alexei Gogolev: Understood. And then the second one about your AWS contract renewal. Could you elaborate on the potential benefits to gross margin and whether you think there will be a one-off benefit or you expect to unlock more discounts as you progress through the contract? Lynn Moore: Yes, Alex, I think it's a couple of things. We did sign that long-term extension as we continue to commit more and more of our clients going into AWS and more and more spend each year, we do receive some additional discounts. So, I would expect those to continue. I think the other side is just -- is really just some of the operational efficiencies that we're starting to see the product optimization as we continue to optimize and move them into AWS version consolidation, the things that we've talked about. So, it's a number of factors, but I do expect looking forward that some of our gross margins would improve. I don't know that I would look -- I think as you look out over the next six, seven years, our Tyler 2030 vision, I would expect several of our gross margin lines to improve. I don't know that necessarily it's going to happen in the next 12 months, but we are making progress on all of those items. Operator: Next question is from the line of Matt VanVliet with BTIG. Your line is now open. Matt VanVliet: Continuing to have more success at the state level, curious how much of that's being driven by the integration sort of more holistically on the sales team with the NIC (NASDAQ:EGOV) team and sort of some of those hunting licenses versus the product maturation and the acceptance of cloud at that level. And as you look on a go-forward basis, how much of these deals are having sort of multiproduct together to where the more, I guess, combined sales effort is paying off here? Lynn Moore: Yes, Matt, it's a good point. We are seeing more momentum, certainly more cross-sell momentum in that state space. I think it's a testament to our DSD division's long-standing relationships and really our enhanced focus on leveraging those these last couple of years. There's things that we've done. We've talked about in the last couple of earnings calls around compensation and sales commissions and also executive leadership compensation that sort of try to break down some of those barriers and enhance those cross-sell opportunities. We are seeing more and more multiproduct deals. I think I referenced a few in my notes earlier. And that again, that's just -- it's a testament to what we've been -- what I've been sort of calling for the last couple of years, this vision of one Tyler operating more as a singular unified company, breaking down any sort of internal barriers that might have been just a slight hindrance in the past around cross sells and upsells. And I think we're starting to see that pay off as relationships are continuing to forge and as they start to become more and more productive. Operator: Next question is from the line of Rob Oliver with Baird. Your line is now open. Rob Oliver: Great. Lynn, my question is for you. Just a pretty rapid and somewhat stunning, I guess, I would say, having followed you guys a long time increase in public safety's willingness -- public safety's customers willingness to adopt the cloud. And you guys clearly are right there to address that opportunity. I was just wondering this is one of the areas within core Tyler that has been historically the most competitive. And I think somewhat of a modest concern for investors. I was hoping you could address the extent to which this cloud move is really underscoring competitive advantages for you guys, perhaps the relationship with AWS as you take a sector of your market that historically was somewhat more reticent to move to the cloud, how that is helping you? And then as you look at that public safety pipeline where you see sort of current Tyler customers and where that cross-sell advantage might be? Lynn Moore: Yes, you're right, Rob. Public safety has -- it's actually been a little bit surprising their results this year. At the end of last year and really coming into this year, we had made the decision that we were going to really lead our clients to the cloud sort of like the position we took across all of Tyler. And you're right, the momentum is there. Momentum is an interesting thing. And as you know, our clients talk and so I think right now, it is a competitive advantage for us. We are able to offer all of our core public safety products in a SaaS environment. That's not necessarily the case with all of our competitors. It's still a very competitive market. I like where we sit right now. I like some of our key wins or against some really key Tier 1 competitors, some that I mentioned in my remarks earlier, like Idaho State police deal. So, it's an interesting dynamic and one that I think is -- I talked earlier about momentum it is building momentum, and it's exciting to see. And I think we're also starting to see the impact of some of the cybersecurity concerns, which are -- they're heightened across all of our clients, but we've seen a number of flips. I think we had six flips in public safety in Q2. A couple of those were actually the result of some ransomware. And so being able to be nimble and stand up those clients very quickly, perhaps not with full functionality, but get them up and running where they can do their job has actually shown a lot of benefits and starting to give confidence to our clients and to their surrounding communities that the cloud is something that they should be looking at. Operator: Next question is from the line of Michael Turrin with Wells Fargo (NYSE:WFC). Your line is now open. Michael Turrin: Great, looks like a strong Q2 for SaaS, fairly even split between new deals and conversions and the metrics. So, I was just hoping you could maybe speak to the drivers there. How you'd expect that mix between new deals and conversions likely trends. And if anything, seasonal in terms of Q2 and what we're looking at, we should be mindful of there? Brian Miller: Yes. I don't think there's anything particularly seasonal around the pace of those, both the timing of new deals and especially the timing of flips can be a little bit lumpy. So, we certainly expect the trend to continue to be over the mid- and long term for the number of flips and the size of flips to continue to increase. That was one of the big factors this quarter was that the average ARR from flips this quarter was up almost 20%, and we highlighted some of those larger flips that are taking place. But I think in general, obviously, we're at a very high percentage of SaaS at 97% of the new business. I think public safety still will have some license deals in the second half of the year. And so that may even fall back a little bit. But the trend that Lynn just described is certainly continuing of greater acceptance of SaaS and public safety. So, I think you'll continue to see the flips trend upward, although they may bounce around a little bit from quarter to quarter and that the continuing -- the vast majority of our new deals coming in and SaaS will also continue. Lynn Moore: Yes. I think, Michael, too, I think when you look at the numbers and compare quarter-over-quarter from last year, we've talked about the public sector market and how budgets are healthy and sales pipeline is strong. I think you're seeing that. We had I think if you look at our total new software deals, it's up about 11% year-over-year. Our flips are actually up about 18% and our new SaaS deals were up about 20%. Licenses, as Brian mentioned, are continuing to decline. I think licenses in Q2 were a little less than 1% of total revenues. And for the year, maybe a little less than 1.5% is what we're looking for the rest of the year. You're seeing the results of a good healthy market, and you're seeing the results of that market continuing to embrace SaaS and the cloud. Operator: Next question is from the line of Charles Strauzer with CJS Securities. Your line is now open. Charles Strauzer: Just looking at guidance for the back half of the year, is there anything abnormal that we should think about when modeling the cadence of the back half? Just anything [indiscernible] into our thinking here. Brian Miller: I don't think there's a whole lot at a very high level, I think you'll continue to see revenue step up a bit from where they were in the second quarter, particularly around professional services, we'll continue to see grow a bit. SaaS will continue to see growth sequentially. I think the biggest growth in the second half will be, as you'd expect, SaaS revenues continue to step up quarter-to-quarter as more new customers come online and as we execute more flips and we get the impact of those revenues. The other revenue lines, I think generally, you'll see be fairly consistent with where they were in the second quarter across the third and fourth quarters. And dropping down to the bottom line, I think you'll see earnings generally in the same range that we see in the second quarter in the third and fourth quarters. And cash flow, certainly, the third quarter historically is by far our strongest cash flow quarter because of timing of maintenance collections and that will be the case as well. Operator: Next question is from the line of Alex Zukin with Wolfe Research. Your line is now open. Alex Zukin: I'm going to try to link a few threads and just throw something out there, which is it seems like your -- the flips are happening faster, they're larger. You're promoting somebody to run cloud full-time immediately. And so, I guess my question is, does it feel as though the value of that maintenance portfolio, the value of these flips given even the attach rate and the expanded portfolio of other services that you're cross-selling and the transactional revenues, is it just growing -- like if you look at the value of that pipeline, is it a lot larger than maybe what you were previously anticipating? And kind of how do you see that -- how should we think about that playing out in the P&L over the course of the next year or two? Lynn Moore: Yes, Alex, I would say, I think in the last several quarters, we're actually starting to see a little bit more uplift than what we had expected. But I think what it does is when you step back and you look at our long-term Tyler 2030 goals, I'd say what's been happening over the last several quarters now as it's really validating what we've set out to do and what we said we're going to do. I would like to -- when you think about timing, one of the things we've constantly said is that as we look out to 2030, it won't be linear. But again, each quarter where I start to see some of these what I'm now calling momentums makes me feel even more confident about what we're doing and what we've set out to do. Operator: Next question is from the line of Saket Kalia with Barclays (LON:BARC). Your line is now open. Saket Kalia: Okay. Great and echo the nice results in the quarter. Brian, maybe my question is for you. I want to just talk about the payments business a little bit. I think you said mid- to high teens growth -- revenue growth in the second half, and you correct me there if I'm wrong. But is there a way that you think about kind of the payments business as sort of an equation, right, between kind of same-store sales growth plus sort of share gains? Or maybe said another way, kind of a net revenue retention in that business plus new logo. How do you think about sort of that equation, even anecdotally as part of that kind of mid- to high teens growth rate in the second half? Brian Miller: Yes. I think, and obviously, the change from the sort of low single-digit growth in the first half to the mid- to high teens in the second half, mostly revolves around that, the impact of us lapping the gross to net change from one of our state contracts midyear last year. But if you break down that kind of high teens growth, I think, generally, sort of the -- and it's a high level, but the sort of the same same-store growth or the same customer growth is typically kind of high-single digits, maybe approaching 10%, but kind of in that range is how we think about it. Some of that around our Digital Solutions division state contracts where they either have higher transaction volumes or we add additional services in a state that drive more revenues with that same customer. And then the difference going up into the mid- to high teens is sort of our new customer growth, and that's really reflecting the impact of driving the payments platform into our local government customer base and attaching it to both new and existing software customers. And we've talked about those being higher margin, higher premium pricing kinds of engagements. And those are the ones we're talking about. For example, this quarter that added $8 million of new ARR from new payment customers in our -- associated with our software customers. So, that's kind of generally how we think about that split. Lynn Moore: Yes. And I think when we think -- I think we outlined when we're looking out to Tyler 2030, we looked at transaction growth. It was really -- we're projecting long-term CAGR of sort of low double-digit growth. One of the things we're also seeing, Saket, is we've gotten a lot better at onboarding our clients. We're getting a lot more efficiencies there. And so, we're actually starting to get revenues recognized sooner. And then over time, to your point about sort of same-store sales is trying to drive further and further adoption across that client base is a significant driver. Operator: Next question is from the line of Terrell Tillman with Truist. Your line is now open. Terrell Tillman: I have one question and it'd almost be in two parts. So just bear with me. First, in terms of Idaho, congrats, Lynn, on the successful go-live. It sounded like four months, that's pretty strong. I'm curious though, you said this is an important milestone, I know you have some really large, on-prem or kind of private cloud customers in courts, but also maybe some that are more ready to move. How are you thinking about some of these other potential large, court flip opportunities, whether they're actionable this year or into next year? And then, Brian, just the second part of this question is, with CSI, ResourceX, ARInspect. I was intrigued last quarter because there were some big deals there. I think you said it was about a $4 million kind of quarterly run rate on those AI-based kind of solutions. Does that still hold? Or is it picking up from there? Lynn Moore: Yes. Good question, Terry. On the Idaho SaaS flip, our courts -- there's only so many state court implementations out there. And so, getting the first one out there on time, live and referenceable was a pretty impressive feat by our people. And I'm going to make a little sidebar comment because we've talked about it before over the years. But I think one of the things that's really impressive about our teams is all the work that we do behind the scenes. We talk a lot about the numbers, but there's a lot of work that goes into getting these clients up and actionable, whether it's a SaaS flip or even just a new implementation, and our teams just did an incredible job. And as you know, this entire business is a reference business. And there were a lot of state courts who had inquired, have been asking about the SaaS flip, but they all were sort of keeping an eye on Idaho. So do I expect that to translate into other large, statewide SaaS flips or just other large court SaaS flips, I do. I'm not going to say that they're going to start happening in the month of September. But I think as you look out over the coming quarters, you'll start to see that momentum grow and build in that market? Brian Miller: Yes. With respect to the three acquisitions from last year that have strong AI capabilities, they continue to perform really well in terms of the new business market, and they are continuing to grow. We highlighted last quarter a couple of large deals, and I think we mentioned a few of those this time as well. I think we've been really pleased with the speed at which those have started to contribute and we're able to leverage cross-sells. Of course, that's part of the thesis behind all of those acquisitions that we can leverage our existing sales organizations in our existing customer base and new deal opportunities to sell more of those newly acquired products. And I think we've been really pleased with the speed at which we've been able to execute on those and particularly CSI adding that to some of our large court deals. ResourceX already had some large client engagements, and we're continuing to see those come on board as well in ARInspect. We called out several state deals there this quarter. So those are all performing really well and contributing nicely kind of out of the box. Lynn Moore: Yes, there's a lot of buzz for these out in the marketplace, Terry. And as Brian said, it's kind of twofold. On the one hand, it's a great playbook that we've run for many years, a tuck-in acquisition that we can get in the hands of our sales teams and get out to our installed base but also in areas like ResourceX, for example, I mean, it's a differentiator for us in our new enterprise ERP sales. So, it's both a competitive advantage in new sales but also a huge opportunity to deploy through our installed base. Operator: Next question is from the line of Josh Reilly with Needham & Company. Your line is now open. Josh Reilly: Just on the Dallas data center closure, can you just remind us in the income statement where the expenses for that data center lie? And what's the implication for our second half modeling with that shutting down? And then just secondarily, along the margin front, can you just give us some color on what drove the margin improvement in services? Brian Miller: I'll take the first part of it. Most of the cost for the data center are up in cost of subscriptions. So, they're up in the gross margin line, there's also -- I mean there's depreciation, there's operating costs and there's some personnel costs. Those -- the first data center that closed, the Dallas data center is a colo facility. So, there's not a real estate impact there. So those costs will be part of our margin profile in the second half of the year. But also remind you that around the second data center, which we expect to close around the end of next year, the bubble costs or the duplicate costs of running that data center and incurring costs in AWS as we migrate customers out, those costs continue to increase until they go away because we continue to move more customers out of that data center as we progress towards its closure. The impact of the closing of the first data center is somewhat offset by the ongoing impact of the second data center. And then we'll get a bigger bump at the end of -- after that data center closes in '25. So again, I think overall, I think operating margins are probably pretty consistent in the second half of the year with where they are here in Q2. Lynn Moore: Yes, I'd say -- I'd add to that, Josh. One of the things that's gratifying to me is we outlined this vision of closing the data centers a couple of years ago, and we're basically hit it on track. And that takes a lot of work by a lot of people. And again, it continues to validate some of the things that we've outlined a couple of years ago as we started our cloud transformation. So that's gratifying to see. The other obvious upside of getting out of the Dallas data center and eventually out of the [indiscernible] data center is all the future CapEx savings. We would spend a lot of money over the next five, seven years, adding to those capabilities had we not done that. Your question on pro services gross margins, it's a couple of things. I would say, one, it's been an enhanced focus, sort of a top-down focus from the management team over the last year plus. It's something that we're dissecting and continue to dissect and look at things around really focusing on those gross margins, utilization, things like that. The other thing that's been driving it is we're starting to see a little more stability in our workforce, and we've been seeing that for several quarters. So turnover is a lot lower. And in the Pro Services area, when you experience elevated turnover, which we did coming out of COVID, we did during sort of that period post COVID when people were transferring out and going through -- the grass is always greener. It's tough because it takes a long time to get people trained, up to speed and get to a point where they can be out in the field and be billable. And so, I think it's part of what we're seeing overall in the labor market. But having that return of more stability and more consistent, historical Tyler turnover levels is certainly helping. But it's also been an enhanced focus from the management team. Brian Miller: I think the ongoing move to the cloud helps us there as well because in a general sense, we're able to deploy software more efficiently in the cloud. And version consolidation helps us as well to some extent there on both services and support. Lynn Moore: And to that point, Brian, I guess, remote delivery of services, it's something we really started around COVID and clients continue to have more and more acceptance of that delivery model. Operator: Next question is from the line of Peter Heckmann with D.A. Davidson. Your line is now open. Peter Heckmann: Most of my questions have been answered. I just wanted to follow up on the NIC transaction and just see if you're seeing any changes in terms of those self-funded, state-level IT portal deals. If the states are looking for something different, something more and then just curious about the -- it looks like you had good renewal activity here in the first half. But do you -- I guess, what's your perception of other states migrating to that self-funded portal model in the future? Or do you think it's more likely that you do something more on an agency-by-agency basis at the state level? Lynn Moore: Well, it's a little bit of both. Peter, the state-funded model is what old NIC now DSD grew up with. And there's -- I think there's going to be continued demand for that type of model as budgets are constrained. We talked about it, last quarter the significant deal we signed with -- last quarter, quarter before the California State Parks, which that deal could not have happened. It's the largest contract in Tyler's history, and that deal could not have happened absent the self-funded model. I do think you're going to -- we're also going to continue to see more and more agency by agency. That's part of our strategy, getting more products in on a targeted agency basis that's probably more aligned with the more historical Tyler model. We've done some things internally over the last couple of quarters really consummated in the last year. We've done an internal realignment between our Platform Solutions division and our Digital Solutions division so that we can take advantage of both of those opportunities, align our sales teams, eliminate some overlap but really start to drive both types of sales as we go forward. Operator: Next question is from the line of Jonathan Ho with William Blair. Your line is now open. Jonathan Ho: Can you give us a little bit of additional color about your thoughts around cybersecurity and what this could potentially mean in terms of either upsell opportunities or accelerated transition to the cloud? Just want to get a sense for how much this is sort of impacting the industry as a whole. Lynn Moore: Yes, Jonathan. I mean, as we know, it's a reality. We always say it's even -- it's not a matter of if, it's when. And cybersecurity event has certainly impacted both our clients and other public sector agencies that aren't our clients. It is a natural opportunity to accelerate discussions around moving to the cloud and flipping to the cloud. We've had a number of those. We don't necessarily -- I talked about a couple of public safety that happened last quarter. I don't really like to highlight them too much. but that's -- it's a reality that's going on in the market. And one of the things that I think we're getting better at is as we're flipping clients to the cloud for whatever reason but certainly in the cyber -- as a result, cybersecurity is, it is an opportunity to get them more modern and add some more products in the mix. So again, it's out there. we're all dealing with it. And our goal really is to be as responsive to our clients as possible, and we've gotten better. I've mentioned at public safety -- we've also gotten better about being able to stand up clients really quickly, maybe not with the full functionality that they might have had in an on-premise system out of the box but enough to get them going, which also gives us an opportunity to sort of reevaluate all of their requirements and potentially upsell other items. And so yes, it's just out there. Operator: Next question is from the line of Kirk Materne with Evercore. Your line is now open. Kirk Materne: Yes. Congrats on the quarter. Lynn, I was wondering, on the public safety side, when customers are now flipping in a bigger way towards cloud, how does that change the competitive environment for you? Meaning, I'd imagine there are a lot of smaller competitors that don't necessarily either have the scale on the cloud side or potentially or as advanced as you all, is that leading to better, I guess, win rates in that particular segment of your business as well? Lynn Moore: Yes. I think, Kirk, it's certainly a competitive differentiator right now. And I think we've seen this historically across different business lines. There's always times when competitors sort of make a move and then we make a move. I'd say right now, I like where we sit with public safety. We have the most comprehensive offering. We have the most comprehensive offering that can be deployed in the cloud. There are some smaller players who certainly have some cloud-native offerings but may not have the depth of functionality and may not really be good candidates for some of these larger deals and whether or not their ability to execute on it. What's been impressive, I think over the last 18 months or so -- 12, 18 months at public safety is the execution on this strategy. It's a shift in mindset for that sales team, it's a shift in mindset for all the operational teams and messaging that out to the market, it's resonating, and it's something that's exciting to see. I remember a couple of years ago talking about how it could be several years, maybe five, six years before we were even at 50% SaaS levels at public safety. And it just shows you that the changing dynamics in the market. And fortunately, we've been in a position through some of the work we've done over the years to not only capitalize on it but also help lead it. Operator: Next question is from the line of Gabriela Borges with Goldman Sachs (NYSE:GS). Your line is now open. Kelly Galanis: This is Kelly Galanis on for Gabriela. Congrats on the quarter as well. Given that a lot of your customers are now kind of on a new fiscal year, can you share some early observations on what customer budgets are looking like this year relative to last year? And then, how much of this stronger demand that you're seeing is tied to these healthy budgets versus kind of just demand for cloud and these other the factors you're talking about. Lynn Moore: Yes. I don't know that -- yes, we -- for a lot of our clients are on June 30 fiscal year. But I don't know that we necessarily have significant insight in those budgets. They're pretty steady. They're pretty healthy. Most of our sales procurement cycles are multiple years long or certainly long, not all multiple years but they tend to be lengthy. I think -- I'm sorry, I lost my more train of thought there. So yes, I think the budgets are healthy right now. And I think our win rates are good. One of the things that I've -- we have noticed this year is, I think, probably a leading indicator is when you look across our product lines, all of the indicators are still strong. And really, most of our divisions, almost all of our products are either at or above sort of what their sales projection was for the year in terms of being midyear. So that's a good tailwind as we look out over the next several quarters. And right now, we're not seeing any -- certainly no negative changes in the public sector budgets. Brian Miller: Yes. And I think the other -- the other side of that strong demand is this increasing desire for digital modernization, and it's really how governments increasingly do -- address doing more with less resources. So, to the extent that they have really struggling with understaffing, a lot of workers left the public sector space during COVID and in general, government has not rebuilt its workforce. So, they're trying to perform these essential services with staffing constraints and really turning to technology as how they do that. So I think it's a little bit even more than just the traditional replacing a 20-year-old system that's at end of life and is dying but being more strategic about it and saying, okay, the new technology will help me do the things I have to do with either the budget or the personnel constraints that I'm forced to deal with. Operator: Next question is from the line of Mark Schappel with Loop Capital Markets. Your line is now open. Mark Schappel: Nice job on the quarter. John, question for you in your prepared remarks, you noted continued progress you're making around your product version consolidation efforts. Just wondering if you could elaborate on the progress you made during the quarter on that front and also what we can expect maybe in the coming quarters here. John Marr: Yes, sure, Mark, obviously, version consolidation has been a big part of what I've been calling sort of Phase 1 of our cloud transformation. Phase 1 is selecting AWS. It's a product optimization, it's version consolidation. It's the flips, it's exiting the data centers. Version consolidation is critical for a lot of reasons. One is we need to get down to a single product. We need to get down to a cloud release. We need to get our clients up-to-date on the modern versions. Otherwise, they're not really going to be flipping the cloud. That's part of the foundation for that. We don't really go I don't know that you see necessarily quarter-by-quarter progress, but you see goals that are being hit and attained. Anecdotally, for example, in our enterprise ERP division, which is formerly our munis product we now have about 95% of our clients down on a single version, whereas a couple of years ago, there were several versions with maybe hundreds of clients on different types of versions. So that's significant progress that's been made, and it's a focus across all of our divisions and all of our operating units, and they're making similar progress. Operator: Thank you for your question. There are no additional questions waiting at this time. So, I'll pass the call back to Lynn Moore for any closing remarks. Lynn Moore: Thanks, Matt. And thanks, everybody, for joining us today. If you have any further questions, please feel free to contact Brian Miller or myself. Thanks, everybody. Have a great day. Operator: That concludes the conference call. Thank you for your participation. You may now disconnect your lines.

Earnings call: Range Resources posts strong Q2 results, eyes future growth By Investing.com

In the second quarter of 2024, Range Resources Corp . (NYSE:RRC) reported robust earnings, underlined by a strategic focus on operational efficiency and cost management that resulted in significant free cash flow. The company's diversified production mix, particularly its liquids contribution, and access to international markets played a key role in its financial performance. With a capital expenditure of $175 million for the quarter, Range Resources achieved a production rate of 2.15 billion cubic feet equivalent per day (Bcf/d) and anticipates maintaining this momentum with an expected production of around 2.2 Bcf/d for the second half of the year. The company's financial resilience is evident in its cash margin of $1.22 per unit of production and a cash flow of approximately $237 million, which has been strategically allocated across capital investments, debt repurchases, dividends, and share repurchases. Range Resources remains bullish on the future of natural gas and natural gas liquids (NGLs), with a strong balance sheet and a hedging program that ensures stability and predictability in its operations. Range Resources' second-quarter earnings reflect a company that is leveraging its strategic initiatives and market position to deliver value to its shareholders. With a disciplined approach to capital expenditure and a keen eye on market dynamics, Range Resources is navigating the natural gas and NGL markets with confidence. The company's focus on cost management and efficiency, alongside its proactive hedging strategy, positions it to capitalize on the anticipated growth in international demand for LPG and to adjust to market conditions as necessary. Investors and stakeholders can expect Range Resources to continue its trajectory of financial resilience and operational excellence. Range Resources Corp. (RRC) has demonstrated solid earnings and operational efficiency in its Q2 2024 results. To further understand the company's financial health and investment potential, here are some insights based on real-time data from InvestingPro and InvestingPro Tips: For investors looking for detailed analysis and additional insights, there are more InvestingPro Tips available. By using the coupon code PRONEWS24, you can get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. This offers access to comprehensive metrics and professional guidance to inform your investment decisions. There are a total of 8 additional InvestingPro Tips listed on https://www.investing.com/pro/RRC, which provide a deeper dive into Range Resources' performance and potential. Operator: Welcome to the Range Resources Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Statements made during this conference call that are not historical facts are forward-looking statements. Such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. After the speaker's remarks, there will be a question-and-answer period. At this time, I would like to turn the call over to Mr. Laith Sando, Vice President, Investor Relations at Range Resources. Please go ahead, sir. Laith Sando: Thank you, operator. Good morning, everyone, and thank you for joining Range's Second Quarter 2024 Earnings Call. The speakers on today's call are Dennis Degner, Chief Executive Officer; and Mark Scucchi, Chief Financial Officer. Hopefully, you've had a chance to review the press release and updated investor presentation that we've posted on our website. We may reference certain slides on the call this morning. You also find our 10-Q on Range's website under the Investors tab or you can access it using the SEC's EDGAR system. Please note, we'll be referencing certain non-GAAP measures on today's call. Our press release provides reconciliations of these to the most comparable GAAP figures. We've also posted supplemental tables on our website that include realized pricing details by product, along with calculations of EBITDAX, cash margins and other non-GAAP measures. With that, let me turn the call over to Dennis. Dennis Degner: Thanks, Laith, and thanks to all of you for joining the call today. Range's Second Quarter plan was executed successfully and consistent with our strategy for the year, which remains unchanged, operating safely while driving continued operational improvements, generating free cash flow with a peer-leading capital efficiency and prudent allocation of that free cash flow balancing returns of capital to shareholders with further debt reduction and the long-term development of our world-class asset base. I believe our second quarter results reflect the ongoing advancement of these objectives and demonstrate the resilience of Range's business through cycles. Our operational and financial updates highlight Range's high quality, low breakeven inventory and liquids optionality, which drove another successful quarter while generating free cash flow. Our low capital intensity continues to be on display in quarters like Q2 and is the result of Range's class-leading drilling and completion costs, shallow base decline, large blocky core inventory and talented team. These key attributes result in a required reinvestment rate that is among the best in the industry, providing Range a solid foundation for consistently generating significant free cash flow and returns to shareholders while positioning Range to help meet future energy demand through our diverse transportation portfolio. Bolstering Range's profitability and durability is our liquids contribution. As seen in the Second Quarter results, liquids revenue provided an uplift to natural gas prices. With NGL price realizations providing a substantial premium relative to Henry Hub natural gas. When we roll all of that together, our liquids revenue uplift our low capital intensity. Along with a thoughtful rightsized hedging program, you get a unique story, generating the lowest breakeven among natural gas producers and the most resilient organic free cash flow as evidenced by our second quarter results and 2024 projections. Importantly, with our vast inventory of derisked high-quality Marcellus wells, we have the ability to compound our per share growth in free cash flow for decades to come. As we look back on the second quarter, all-in capital came in at $175 million, with a total capital for the first half of the year totaling $345 million. Capital spend for the quarter reflected our base level of activity along with a spot rig and frac crew we had in early 2024. For the remainder of the year, we will be running 2 dedicated horizontal rigs and single base frac crew, which will generate our planned $30 million to $45 million of in-process well inventory, very similar to what Range did last year. Also consistent with prior years, we will see capital spending decrease across the second half of the year, while production is set to modestly increase aligning with expected improvements in natural gas prices heading into 2025. Production for the second quarter came in at 2.15 Bcf equivalent per day, driven by continued strong well performance from long laterals and ongoing optimization of gathering systems that enhance performance. Range's second quarter liquids were approximately 30% of production, slightly lower versus Q1 as a result of a propane cargo that was delayed into early July. Liquids production is back up to 32% today, near recent highs, reflecting our increased focus on liquids-rich activity in the first half of the year. We turned to sale of 17 wells across our wet and super-rich acreage, but 7 of these wells on pads with existing production. As we've discussed for years, returning to existing pads is a durable, repeatable part of our program. Returning to pads allows us to minimize our operating surface footprint, and reutilize existing infrastructure while also supporting efficient, nimble operations. Combined, this results in a normalized well cost per foot for Range that is differentiated versus peers. Year-to-date, well performance and production has also been strong, aided by gathering system optimization efforts that have included compression expansions in Southwest PA. These type of expansions are a normal course of business as the team continually works to optimize field level performance and support production from our long lateral development. Production for the second half of the year is expected to be approximately 2.2 Bcf equivalent per day, placing us near the high end of our previously communicated production guidance. Turning to operations. Drilling activity during the quarter added 10 laterals with an average horizontal length of just over 14,300 feet per well, but several over 15,000 feet. And we have now drilled nearly 90 wells in the program's history with lateral lengths greater than 15,000 feet. For completions, the team continued to successfully operate with the new build electric frac fleet that was onboarded at the start of the year. We saw continued strong performance from the equipment and personnel across 3 different pads in the second quarter. Frac efficiencies finished at just over 9 stages per day while completing approximately 800 stages for the quarter, showcasing the consistent repeatable nature of our program and placing us on track for the activity plans we've communicated for the year. Supporting our frac efficiencies is Range's water sharing program, which contributed approximately $1 million in cost savings above levels a year ago. Looking forward, we believe we will see similar savings from third-party water utilization given our blocky acreage position and existing water infrastructure. Cash lease operating expenses finished the quarter better than anticipated at $0.11 per Mcfe shaped by strong well performance from optimized gathering and efficient water logistics. As we look forward to the second half of the year, we project a similar level of expense performance, and are, therefore, improving our previous guidance for lease operating expenses down to $0.11 to $0.13 per Mcfe. Turning to marketing and starting with NGLs. Range's flexible transportation portfolio continued to access premium export markets during Q2. As one of the only U.S. producers with access to international LPG upside, we generated another fantastic quarter in terms of Range NGL price realizations. Looking at the NGL macro, international propane demand continues to grow. Chinese propane imports reached an all-time high in the second quarter as they continue to add PDH capacity to consume more propane. At the same time, limited growth in non-U.S. propane supply has led to tightened international fundamentals and an improved arb for U.S. exporters. Range's flexible marketing and transportation portfolio allowed us to take advantage of this international opportunity, exporting the vast majority of propane produced during the second quarter. Simultaneously, Range demonstrated its ability to optimize sales by pivoting butane volume into the domestic market to maximize margins. As a result, Range NGLs received $24.35 per barrel in the second quarter, $1.26 per barrel premium to the Mont Belvieu equivalent. Looking ahead to the balance of 2024 and into early 2025, we expect domestic stock tightening to combine with export demand to support absolute and relative NGL pricing and we expect Range's NGL price realizations will remain a positive differentiator. On the natural gas side, Range's pricing relative to NYMEX was right in line with our expectation as we sold the vast majority of our gas into the Midwest and Gulf Coast regions. On the macro front, we have seen U.S. natural gas production declining year-over-year, driven by maintenance or lower activity levels from industry, alongside durable demand for natural gas that can be observed in areas such as LNG exports and increased gas power burden. So we believe the fundamentals continue to be in place for improving natural gas pricing going forward. Before handing it over to Mark, I wanted to quickly touch on our most recent corporate sustainability report that was published last week. This report continues to showcase the company's resilience as a safe low-cost natural gas producer with an enviable emissions profile. Range had a great year for safety with 0 employee incidents for the year. Range also continued its strong environmental performance, driving a 67% reduction in methane emissions intensity over the past 5 years, reaching just under 0.2% and or more than 90% below the EPA's methane fee threshold. We look forward to discussing these and other results during future meetings. So where does that leave us as we're more than halfway through 2024? As stated, we remain constructive on the outlook for natural gas and NGLs, but importantly, even in the presence of relatively high natural gas storage levels and the current commodity backdrop. The resilience of Range's business is on full display. Our ability to generate free cash flow through the cycles is underpinned by our large, contiguous, high-quality acreage position, operational efficiencies, NGL uplift, diverse marketing portfolio and talented team. We believe the future of natural gas and NGLs remain strong and we believe Range is positioned well to generate substantial value for shareholders in the years ahead. I'll now turn it over to Mark to discuss the financials. Mark Scucchi: Thanks, Dennis. With the first half of 2024 behind us, Range is making steady progress, executing a disciplined investment program prudent for this year and forward thinking for next year. Range's most fundamental objective is to safely and consistently generate cash flow for its stakeholders. Our program for 2024 was designed to successfully navigate fluctuating commodity prices while continuing to generate free cash flow, pay dividends, buy back shares and repurchase debt. While investing in the long-term development of our high-quality assets. As mentioned during our last call, Range has an efficient plan to maintain steady production this year with the flexibility to adapt to near-term commodity prices and resulting economics while also positioning our long-term business for eventual growth as demand increases from domestic and international customers. As incremental demand materializes in basin, near basin and further downstream, Range has the cost structure, inventory and infrastructure to remain a reliable long-term energy supplier. Results of the second quarter continue to highlight the business strength generated by Range's production mix and transportation portfolio. Realized price per unit of production before NYMEX hedging was $0.51 above NYMEX Henry Hub prices is a byproduct of our diversified mix and production and sales outlooks. Including hedges, Range realized $3.10 per Mcfe or $1.22 above NYMEX Henry Hub prices. Resilient pricing yielded second quarter cash margins per unit of production of $1.22, a healthy 37% margin, resulting in cash flow before working capital of approximately $237 million. Cash flow for the quarter was allocated to $175 million in capital investments. The repurchase of $48 million in senior notes, along with roughly $19 million in dividends and $20 million in common shares repurchased. Cash margins were generated by diverse sales and a rightsized hedging program, but also by continued deliberate focus on unit costs. During the second quarter, total cash unit costs were $1.88, down $0.07 from the first quarter, decreases in interest expense and G&A are a byproduct of reduced debt and thoughtful spending. Gathering, processing and transport for the second quarter declined $0.05 from last quarter and is a function of prevailing commodity prices and timing of NGL cargos. Second quarter NGL market prices declined, reducing processing costs and with lower natural gas prices, we also experienced lower fuel and electricity costs, all right way risk contract elements that maintain margins. Range's NGL sales benefit from direct access to international markets out of the East Coast. One cargo loading occurred in the first days of July. As such, the volumes to be loaded were inventory at quarter end with the GP&T costs and revenues being recognized in July, which should bring third quarter GP&T back towards the midpoint of guidance. Right after safety and sound environmental practices capital allocation is among the most important corporate responsibilities. As you can see during the second quarter, we continue to carefully balance funding of prudent investments in the business with returns of capital, while maintaining financial strength. Prudent investment to us is responsive to both the near-term realities of commodity prices while also investing in the future to be prepared for the approaching growth in natural gas demand. With low full cycle costs, Range has been able to generate free cash flow while investing in modest inventory to enable efficient growth when the market calls for it. At the same time, we prioritize financial strength so that we can make opportunistic decisions. That financial strength enables Range to execute what has been a very efficient share repurchase program. And it's a program we have greater flexibility to execute as we remain within our target debt levels. Looking at the balance sheet briefly. The notes due 2025 mature in less than 1 year. Those notes are easily covered by cash on hand, cash to be generated in coming quarters and an undrawn revolving credit facility. Suffice it to say that we believe there is ample liquidity to efficiently retire this debt as the maturity date approaches. With the ratings upgrade from S&P this quarter and a positive outlook for Moody's (NYSE:MCO), we believe the strength of Range's business is being recognized. One significant element of our financial strategy that provides a stabilizing effect to better enable efficient funding and investments is our thoughtfully constructed and carefully executed hedging program. We believe added predictability from appropriately sized hedging provides exposure to improve long-term natural gas market dynamics while also increasing confidence in near-term forecasted cash flow. A stable financial foundation enables better planned, more consistent, efficient operations while protecting the balance sheet and can also create opportunities for reinvestment and shareholder returns. Range's hedging philosophy has produced successful results that have served the company well, and we expect will continue to do so in the future. Presently Range has approximately 55% of second half 2024 natural gas hedged with an average floor price of $3.70. And in 2025, approximately 35% hedged with an average floor price of $3.90, providing Range a stable base to consistently generate free cash flow through market cycles. Financial results rely on safe, efficient operations and the Range team executed another successful quarter, delivering planned production on budget. As a reminder, the plan we announced for 2024 differs slightly from most others in the industry. And at our capital efficiency, low full cycle cost, paired with advantaged marketing of our production generates meaningful margin at current commodity prices, meaning Range has options, options on how we redeploy capital into the drill bit, infrastructure like water facilities that can provide durable cost reductions or low-cost lateral extending inventory enhancing land, among other attractive alternatives. When comparing capital efficiency on a per unit of production basis or any similar metric, a year of depleting inventory can enhance optics in the short run for some. We believe lasting efficiency, particularly in the face of expected growing demand provides Range shareholders greater leverage to improving markets. Range's business plan continues to be executed on what we believe is the largest per share exposure to core Appalachia inventory, paired with the transport and sales portfolio delivering production across the U.S. and internationally, all underpinned by a strong financial foundation. We have the team, assets and balance sheet to succeed through price cycles, and we believe the Range business can and will continue to deliver significant value to investors. Dennis, back to you. Dennis Degner: Thanks, Mark. The first half of the year results for Range reflect a consistent theme communicated in past quarters. Execution of another maintenance plus operational program as planned. consistent advancement in our overall efficiencies, generating free cash flow and prudent allocation of that cash flow, balancing returns of capital, further balance sheet improvements and the optimal development of our world-class asset base. You've heard us state this before, but we continue to believe the results communicated today showcase that Range's business is in the best place in company history, having derisked a high-quality inventory measured in decades and translated that into a business capable of generating free cash flow through these types of cycles. With that, let's open up the line for questions. Operator: [Operator Instructions] The first question is from Roger Read of Wells Fargo (NYSE:WFC). Roger Read: Congratulations on the quarter. Mark, I'd like to come back on some stuff you were saying there at the very end. Some of the opportunities you listed to, let's call it, enhanced margins, improved returns, et cetera. If we were to think about those in terms of magnitude of what they can do for you, but also sort of the time line of achievability. How would that list of opportunities shake out? Mark Scucchi: Yes. It's a good question, and it's a broad question just because of the breadth of opportunity Range has ahead of it. I think Dennis and I both have touched on various ways in which we can continue to drive down our cash unit cost structure as well as the capital efficiency. You've seen the team be very efficient on direct operating costs, LOE continued mindful execution out in the field. Water handling is a topic we consistently discussed, which touches on both improvements in LOE and our capital efficiency. So that's a day-to-day exercise by the team in the field, but it's also some modest capital investments. As you know, that was part of our capital allocation process for this year. Something we hadn't done in any size or consequence for roughly a decade. That blocked-up nature of our acreage position is really a lot of efficient handling and use of that infrastructure and expanding that this year became timely, and with -- what we expect to be about a 1 year or better payback on that investment, it should pay back many years into the future. As you work your way down, the cost structure, I think, GP&T being a larger line item, it's clearly an area of focus. That's a focus for cost, but I think more importantly, it's about margins. It's about maintaining and enhancing that portfolio of sales outlets we have. So today, it's a great outlet moving 80% of our gas out of the basin. But over time, we think that Range will continue to have the opportunity to sell its molecules into strong end markets, be it today with our existing production profile or when the market calls for it, and there's incremental production. We think that we will have the ability to move those molecules to strong end markets as well, be it natural gas or natural gas liquids. And then on the capital front, again, the common topics that come to mind are extending lateral lengths, which again, you've seen us allocate a little bit of capital to the land to be able to do that as well as just efficiently running crews this year, running 2 rigs and 1 frac crew, for example, is all it takes a Range to execute this program this year, the steady efficient maintenance program and potentially running those for a full 12 months to generate very modest growth into next year, given the inventory that we've built up over the last few years. So all those factors together plan to not just one specific area of improvement, but whittling down across the cost structure and the capital efficiency. Roger Read: No, I appreciate that clarification. And then the other question I had more sort of what is the tripwire or whatever. But as you think about setting up your hedging for 2025, I mean, obviously, you're 35% there. But if we think about getting kind of equivalent to this year, is there -- is that something that's going to be episodic? Or is there a price level you'd feel more comfortable with? Or as you think about the macro potentially 25 and a little better supply-demand balance across the country do you want to be more patient on hedging? How are you thinking about that? Mark Scucchi: Yes, I'll start with we feel very good about where the 2025 book stands today. Just backing up to the philosophy, we're running an enterprise a going concern, 30-plus years of drilling inventory. So this is about managing risk in the business prudently while not hedging away the upside in the cash flow. So to that end, the philosophy is to try to cover the fixed cost to maintain steady operations, picking up and dropping crews and things is extremely inefficient and costly. So having more stable predictability of that cash flow, we think, adds a lot of value. So with that in mind, how do you shape 2025. Well, we feel like the book was designed to do that at the prices we were able to lock in. It's also shaped based on the fundamentals as we see them unfolding over the next 12 and 18 months. LNG in service is clearly a focus in the headlines. Some facilities are early and some facilities may be delayed. So as we see those opportunities becoming reality late this year and early next year, the incremental positions that were added are really front-end loaded the first half of 2025 and they're in the form of collars, so that we can provide some downside protection while retaining positive exposure to improved gas prices in the first half of the year. So that's really how we think about next year. Operator: Our next question comes from Michael Scialla of Stephens. Michael Scialla: Dennis and Mark, you both mentioned you see the improving natural gas fundamentals moving forward and your '24 production guidance is moving to the high end of the Range. If that doesn't play out, just curious what changed to your plans, you're contemplating? Or do you feel like with the natural gas liquids revenues that you're really not the company that would need to adjust your plans, be it curtailing production or delaying any more turn-in lines? Dennis Degner: Michael, I'll start by really maybe reiterating a bit of the approach that we communicated for this year's program. And we're at a very lean what we would call base level type activity level and program for '24, which we think is kind of a base level way of thinking about the business on the go-forward there or what we'll call it somewhat maintenance plus. So the 2 rigs flat plus the 1 base frac crew. And so it's generating that $35 million to -- $30 million to $45 million of in-process inventory this year, very similar to last year. And so to answer your question, as we start to think about 2025, we wanted to set ourselves up with flexibility and really good options. And so by setting it up that way, we have the ability to take some of that inventory and reshape our production profile for 2025. And ultimately, we know that will have an impact for '26 in the go forward. But if we also see further delays in LNG facilities or anything else that puts commodities at risk, we could consider how to use that inventory differently. But I think when we look at the capital program for this year, at that $620 million to $670 million level, I mean, clearly, there are going to be some aspects like the water infrastructure that Mark touched on just a few moments ago that are going to be more onetime one-off capital investments in nature once a decade, if you will. But really, that's a decent way of thinking about our program and then the ability to toggle and use that inventory based upon what we see from a commodity standpoint. There's a lot of reasons to believe that this is going to look better, I think, in 2025, though. There's too many demand components that you can point to. And I think power is clearly one of them. And even when you just look at the incremental $1.5 billion a day on the power burn side that's played into natural gas's contribution just year-to-date. And so we think there's a lot of reasons to be excited about 2025. We've got the right inventory set up and program that's lean to allow us to reshape production in '25 based upon what we see from the market. Michael Scialla: Appreciate that. Just want to get your thoughts on kind of political front with the federal judge blocking the pause on LNG facilities and it bring court to return the Chevron (NYSE:CVX) doctrine. Does that make you any more optimistic on the regulatory environment? Anything specific you might think could be done within Appalachia that would improve maybe take away capacity or anything along those lines? Dennis Degner: Well, I think when you look at the demand component, I'll maybe start with the way we ended maybe the prior question. But I think when you look at all the variables that are playing into the demand conversation on the go forward, we've said and maybe in smaller group meetings, it's hard to see how you -- when you think about the political avenue, you almost feel like you get to the same place, maybe through a different path with regardless of what happens with the administration here and the go forward, meaning if you're going to further bolster the grid, electrify what we do here in the Lower 48, if you're talking about data centers and AI, you have to see natural gas playing a more prominent role in that conversation for low-cost, reliable power generation. So when we look at -- and that then follows with a real serious conversation about permit reform. So I think it was encouraging to see just within the last day or 2 here, the announcement from Senator Manchin and Barrasso over some permit reform language that's being moved forward. And we think those are the right signals. So we would look at that as there are others, clearly, both in D.C. and also on the home front here like companies like Range that see that there's a real need for us to play an expanded role. When you look at our inventory, we have the ability to do that, especially with our asset base, having the ability to feed supply gas into the PJM market, which serves of around 65 million people. So we see a lot of positive outlook, but it's going to really need to be supported by some permit reform for sure. Operator: Our next question comes from Doug Leggate of Wolfe Research. Doug Leggate: So I guess, Mark, my first question might be for you or whoever wants to take this, it's relating to takeaway capacity. Our understanding is that both some of the publics and the privates are not renewing term takeaway or fixed takeaway, as things kind of roll around for renewal and I'm wondering how that opportunity sits for a company like yourself, given your inventory depth and why you think that might be the case? In other words, why those folks are not taking the takeaway. Any kind of magnitude you can offer on timing would be really helpful. And I've got a follow-up, please. Mark Scucchi: Doug, that's a good question because the most common understanding, which is accurate, is that in aggregate, the pipeline is coming out of Appalachia or [indiscernible]. We're focused on what Range can access and over time, what Range can utilize. So today, we have a great portfolio, but we think there's a lot of opportunities for Range to use even existing capacity coming out of the basin even before we think about what eventually will be Brownfield expansions and eventually even perhaps some new pipelines. But just to start out, there's capacity that's either underutilized, was not signed up for firm transport, so it's just used on shorter-term nature. There's capacity that some companies did sign up under firm and through various proceedings to projected those contracts or remarketed them and lay it off. So the pipeline exists. So it really comes down to a market share question. And then that leads you down the road of who has the inventory to use it for the next 5, 10, 15-plus years, to be able to stand behind it to underwrite that capacity and fully use it for an extended term. So that's clearly an opportunity for Range at the appropriate time to grow and utilize capacity. It's not only a question of what capacity Range has to take on or chooses to take on itself, but our end customers have their own capacity. So you can sell 2 end markets anywhere across Lower 48 essentially, to those customers that have their own, be it utilities or marketers or you name it. So MVP, while we don't have capacity on it, holders of MVP capacity, a number of them are existing customers via other paths, so we can expand those relationships and sell to them. And like I said, eventually, to Dennis' point earlier, the simple needs of the population of industry, of reindustrialization in the Lower 48 increased power demand, electrification across industries, there's going to have to be expansions, both on the electric side, whether you're talking distribution, power generation and pipelines to get there. So Brownfield expansion is potentially a new pipeline at some point. And then bringing it closer to home for Range, the in-basin and near basin as we term it sometimes is significant demand, again, to the power side of the equation or industrial that represents a tremendous opportunity, even leveraging our existing portfolio where 1/3 of our gas goes to the Midwest, for example, to areas where there's significant construction of industrial demand and plans of various types in nearby states. So great opportunity here, really underpinned by inventory and duration of Range's story. Doug Leggate: Mark, forgive me for asking for a quick clarification. This is not my second question, but can you offer any kind of magnitude and timing is a very quick, here's the number, here's the timing, how it impacts Range. Mark Scucchi: I think perhaps it's a little bit early as we get a little closer to 2025 and think about and refine what that capital budget may look like. As we've said, growth is an option. It's a question of when, not if. So coordinating infrastructure, be it gathering, processing, compression and longer-term transport layered in with the marketing to the end customers and those relationships is all part of the process. Doug Leggate: Okay. My follow-up is really a balance sheet debt question. You've obviously done a tremendous job rightsizing the balance sheet. But I think the one certainty that we can see with the forward curve and the demand supply situation for gas is significantly higher volatility, which means breakeven and balance sheet capital structure becomes a big part of your equity volatility. So my question is, you have a couple of fairly sizable bond maturities over the next 3 to 5 years. Will you refinance those? Or will you pay them down? How do you see the right capital structure in an extraordinarily volatile environment for Range? Mark Scucchi: Well, I'll start with the target debt range is net debt of $1 billion to $1.5 billion, which we are within, giving us a lot of options, both in returns of capital and further deleveraging. So we certainly plan to stay within that and optimize the balance sheet to your point, it reduces cost of capital, hopefully brings out some of the risking, if you will and brings out some of the volatility. So to that point, the '25, as I mentioned during the opening comments, we've got ample liquidity to take care of those. We have the revolver, lots of cash on the balance sheet and cash flow to be generated in the coming quarters further deleveraging is likely. We'll balance that with returns of capital. And capital markets are open as well. So there's clearly options there as we roll forward through the next few quarters. There is a step down in the call price on the 2029, the 8.25% notes early next year. So that presents a possible time to consider after that passes of what a refinancing might look like. So at the highest level, I'll say, fortunately, we have a lot of good options ahead of us to optimize the balance sheet further deleverage while also achieving our return of capital objectives. Operator: Our next question comes from Jake Roberts of TPH & Company. Jake Roberts: I was curious on the -- getting some more granularity on the TIL cadence in the second quarter and being aware of that the current mix is at 32%. But just wondering if that liquids weighting is going to push that number higher in Q3? And then ultimately, what it may shake out in Q4 with the dry well line, just to get to that more than 30% for the year. Dennis Degner: If I take a step back, the way we're looking at our turn-in-line cadence for the year, I mean right now, we're approximately 50% of our turn-in-lines having been sent to the sales line. But over the bulk of those clearly we're in Q2. By nature, that's going to then carry a lot of weight as you start to think about that modest, but ratable production increase that we'll see between Q3 and Q4, very much similar to the profiles that we've seen over the last several years, because the turn-in-lines have all been 100% on the wet side, and a lot of that is going to also be consistent in Q3 as well, we would expect to see a similar liquids contribution in percentage weighting factor in the back half of the year to what we've seen here through the first half as well. The dry gas TILs, clearly, we're still keeping those, we'll say, under evaluation. When you look at how the gathering system has really performed with some of the optimization efforts that have been ongoing over the last 6 to 9 months, we're -- it's still a little early, but we're really seeing that pay dividends in a way where it's allowing us to think in a very flexible way about how deep into the year do we want to push those dry gas TILs. So ultimately between the flexibility there, the way the liquids turn-in-line cadence is shaping up and on top of it, just the production profile and the base decline being low, we're really seeing that we should have a consistent liquids contribution through the balance of the year. Jake Roberts: Okay. And then my second question, I know you spoke earlier about some of the flexibility as we look at 2025, particularly around natural gas pricing, but I'm wondering if the forecasted tightness in the export -- LPG export capacity in 2025 is also factoring into that conversation and how we should we might think about that side of the program? And then I'm also curious if you could offer any thoughts on the potential for that export capacity utilization to remain closer to 100% following the additional capacity in late 2025 and 2026. Dennis Degner: Yes. I think the export utilization has been really a great story in a lot of ways for the past probably 12 months plus now. But you're spot on. I mean we consistently see that it's running in the high 80%, almost bumping 90% range on a -- we'll just say a month in and month out basis out of the Gulf. For us, it really presents a unique advantage, and we've said this a number of times, but our ability to get our products to the water and not only to the water, but also in Philadelphia out of the Northeast has really proven to be a differentiator for us. And so when you start to think about the go forward, we would expect to see some ongoing congestion from time to time in the Gulf and as that continues to persist and raise its head, our relative value that we harvest by getting out versus Mont Belvieu will continue to really shine for us in the go forward. So you're right, that export capacity in '25 and beyond is going to continue to grow. But when you start to think about the demand component and the supply that probably follows with that out of other basins in the South, Again, we expect to see our relative value versus Mont Belvieu to continue to shine on the go forward, being able to get our products to the water in the Northeast. Operator: Our next question comes from Scott Hanold of RBC. Scott Hanold: Just out of curiosity, you all talk about obviously delivering your maintenance kind of plus activity level and building a little bit of a optional DUC backlog. Can you give some color around when you look at that, are you doing it more for gas C-type wells? Or is there really an opportunity also, given your constructive liquids outlook to build that more as a liquids-oriented backlog that gives you some better pricing optionality. Dennis Degner: Yes. Scott, I think the best way to think about our inventory and the way that we'll just say what that looks like, it will mirror a lot of what you see in our activity base on a program year kind of year in and year out. But by nature, it's inherently going to lean more toward the liquids-rich side of our asset base. Program year in and year out, we run around 65% to 70% on the liquid side. So between our wet and super-rich inventory. And then the other, we'll just say 30% is going to be more on the dry side. So I would expect on the go forward when we build some inventory, it's primarily going to be leaning towards the liquid side. Inherently, by the way, we shape our program where our inventory lies, where we see infrastructure capacity as well, but we always leave some flexibility in how we look at our inventory and what we -- where we drill and based upon what we're seeing going on in the market. And our ability, I know we touch on this a lot, but it's a real differentiator for us. But our ability to move back to pads with existing production allows us to just really be nimble and be able to react to what we're seeing and what we think is going to be most helpful for the go forward. So inventory balance and mix should look real similar to the rest of the program, but it will lean towards the liquid side. Scott Hanold: So when I think about that, should I -- when you think about like executing potential growth when it makes sense, is that more of -- well, as much as improving dry gas prices, but also whether there's NGL -- just export capacity as well? Is that -- is it sort of a balance of that? Dennis Degner: I think it's in all of the above. And clearly, when you look at the realization uplift that comes with our NGL contribution, inherently, we're going to lean toward over the course of time, just like you're seeing in the balance of this year, I would expect to see a small improvement in our liquids contribution just over the course of time. So it could be a small number, but it's going to be inherently because of the way our inventory is laid out, I would expect to see that to be a small improving percentage factor over the course of time. And going into that is our ability to get to the water. Again, what we see that's going on with the global markets and our ability to take advantage of that revenue uplift and how it impacts our free cash flow. Scott Hanold: Okay. That's clear. And then my follow-up is probably for Mark. You obviously hit the buybacks on both the debt as well as the equity, can you give us some sense of like how do you think about the balance in doing that? Like what makes most sense to create incremental shareholder value at this point? Is it the debt or is it the buybacks? Or is it a combination? Just give us a sense of how you think about that. Mark Scucchi: Yes, it's a fair question, and we've shied away from giving a purely formulaic approach to it because commodity prices change, cost of the field may change, demands may change and that growth is a question again of when. So First and foremost, our job is to have safe, efficient operations and provide energy, natural gas and natural gas liquids to our customers and sell this profitably. So that's the first thing. Underpinning that is the strong balance sheet, which we're there within our target range. So from here forward, we like the optionality of leaning in one direction or another. So I'll just leave it as the balance sheet is within the target and continues to get stronger, we can kind of turn that restate up or down on the returns of capital as we see appropriate to provide the greatest returns, the strongest driver of free cash flow and cash flow per share over time. So I can't give you a specific number. We prefer the flexibility in executing the programs. But suffice it to say that our behavior will not be that dissimilar from what you've seen from us over the last few years. One year, we bought back $400 million in shares. Commodity prices came in, and we became a little bit more conservative. So we're just responsive to cash flow, prices and changes in relative value over it. But again, I'll just leave it with the punchline of as we stay within and move further into our target debt range, we've got greater flexibility. Operator: Our next question comes from Neil Mehta of Goldman Sachs (NYSE:GS). Neil Mehta: I had a couple of questions on NGL macro, but also your price realization. So the first question on Slide 35, your price calculation. You guys have done a great job realizing above the equivalent Mont Belvieu barrel, just be your perspective on how do you continue to get towards the top end of the $0.75 to $1.50? What are the headwinds? What are the tailwinds? And what are you doing to get the best netback. Alan Engberg: Neil, this is Alan Engberg. I managed a marketing program at Range. So I'll take a stab at answering your question. We -- it's not all that magical. A lot of what we do is we've got diversity in the portfolio, and we've managed to set up the portfolio such that we're not overly exposed to Mont Belvieu. In fact, we've weighted a lot of it, whether it's ethane, propane or butane towards international markets where we saw significant growth. So going forward, I think the macro looks really good still internationally. We've got tremendous growth in ethane demand, particularly out of Asia, but also out of Europe. Ethane going into ethylene steam crackers. Most of them are seeing that if they're operating using feed other than ethane, they're disadvantaged. So they're shifting a lot of their feed capacity towards ethane and that is creating just continued ethane demand growth. So we feel that for our contracts that are priced internationally on ethane, given that demand growth, we're just going to continue to see good realization relative to the domestic benchmarks. Similarly, on LPG, you've heard the story, I'm sure quite a bit about just PDH growth, particularly in Asia, and that is still continuing to go on. We're operating at relatively low capacity utilization internationally, which some people view as a negative, but really, I view that as a positive because as that capacity growth slows down, we're going to start getting a tighter market and the capacity utilization is actually going to be increasing. So we're going to see a runway of continued demand growth for multiple years on the international front for LPG. We've got exposure to that currently. And it's worked out really well, again, for Range, relative to the domestic market indices. So going forward, we like our position. We're very happy to have an 80% of our portfolio on the LPG side capable of into the export market, but also being a very flexible portfolio that allows us to pivot when the time is right or when the seasonality is right between domestic and export markets. Neil Mehta: Yes. That kind of builds into the follow-up, which is Slide 24. We share your constructive NGL view, but we get a lot of pushback on the propane side, particularly on China, given the challenge of the economy out there. So I'd love your perspective real time of what you're seeing on the ground in Asia from a demand perspective? And can propane perform in the face of what seems to be a soft Eastern demand picture. Alan Engberg: Well, so I agree with you, everything we're reading as far as the economy in China has been less than stellar. But it's still -- it's massive, right? And the demand growth has still been there. In fact, I think Dennis referenced it in his remarks, his prepared remarks that during the second quarter, we actually hit the U.S. that is hit another record in terms of exports to China. We -- I'm trying to see what that number was. I don't have it in front of me, but suffice it to say, the -- here it is, 843,000 barrels per day is what China imported during the second quarter from propane standpoint. So it's been massive. The operating rates that I was talking about for the PDH units despite the economy not really performing as strongly as a lot of people were hoping it would, those operating rates have actually increased. During the second quarter, we got into the mid-70% utilization rate. And again, that's against a weak economic backdrop. So the feeling is once -- if the economy starts improving and the government is making efforts to stimulate the economy. Once that happens, those utilization rates are going to continue to grow, and that demand will continue to grow as well. And then I'll add further that international supply of LPG has actually been relatively flat. OPEC actually during the second quarter was down 8% year-on-year from an export standpoint. So it just emphasizes that the U.S. is the source of supply into that demand. And that demand from our standpoint, continues to look quite strong. Operator: Our next question comes from Arun Jayaram of JPMorgan (NYSE:JPM). Arun Jayaram: I wanted to ask you around just how you're thinking about kind of 2025. I know you touched on this earlier in the call. So in the -- going into 2024, you had about $30 million of capital that you used kind of to build some well inventory. And then this year, I think the number is $45 million. So you have about $75 million of capital, which is call it in well inventory. As you look at the macro picture today, is the plan to maybe move to a maintenance CapEx and to deliver a lower CapEx number for 2025 or with the strip, call it, around $340 million would you plan to maybe grow a little bit given your attractive returns at those types of gas prices? Dennis Degner: Yes. I think when we start to think about the 2025 program, I mean, I think where we see today, we wanted to set up the flexible options so that we have the ability to reshape our production profile for the '25 or we have the ability to stay at a maintenance plus level type activity until you get to the back of '25 or into 2026. If you have a scenario this year, as an example, where you're blowing down your inventory and you're running a program that doesn't set you up for flexibility. That presents a unique challenge then as you start to lean into the market improvements, whether it's early '25, middle of '25 or if it's leading into 2026. So we like the in-process inventory that's been generated. It gives us that ability to either utilize it and think differently about our capital maybe on the low end or it allows us to then use that as a, we'll say, again, keeping it at a maintained level? Or do you grow that from there based upon what kind of rig and frac crew program we have. our lean 1 frac crew program, these 2 rigs really kick out just a little bit more inventory than the 1 frac crew consumes. And we feel like by the time you aggregate that impact, it has the ability to reshape the production for the first half of the year. If you think about our maintenance program in the last several years, we've always had -- the production character has had a bit of a sign wave, where the back half of the year sees a modest, but ratable increase. And then when you get to the first half of that following year, you're always going to see a bit of a dip until you then pick your activity and turn in lines back up from the early on half the year activity levels. So we feel like we have the ability to reshape that and change the way we think about feeding into growing demand in the market and what it presents to us. So a little early for us to define exactly what that looks like, but we like the options that we have at our disposal and the ability to utilize that inventory to keep ourselves at also the leading edge of a capital-efficient program. Arun Jayaram: Got it. And just my follow-up, Dennis, I was wondering if you could highlight where you think your leading-edge D&C cost per foot are in Appalachia, maybe relative to your initial guide, and you highlighted averaging 9 stages per day, which is a very, very efficient kind of frontier there. And maybe comment on some of the efficiency gains you're seeing from the zoos fleet? And how much do you see is there to go on the drilling versus the completion efficiency side of the equation? Dennis Degner: Yes, a really good question. When we look at our drilling performance, the drilling team has done a fantastic job. Last year, we saw a little over a 40% improvement in our drilling efficiencies through basically utilization of some upgrades on our super-spec drilling rigs, there were some testing that we did last year. And there's always a, we'll just say, an ongoing testing type nature to the program, very KPI-driven and looking back on performance. And so that's translated into an ongoing efficiency that we're seeing this year as well. So very consistent from year-to-year. The frac side on completions, the team continues to see improvements when we return to pads with existing production. I think we touched on it a few months ago. But ultimately, when we return to a pad with existing production we see that it could be as much as a 30% improvement in efficiencies. You route out nonproductive time, you look for ways to more efficiently manage ingress, egress, et cetera. And it all translates into the numbers that you're seeing. So the zoos fleet has really performed well for us. And I would say, it's as good or better than where we've been in the past few years. So hard to imagine, but in 2010, when I joined the organization, industry standard was around 3 stages a day for a 24-hour frac crew. And here we are doing 3x that amount and it's just unbelievable. So hats off to everybody on the service side plus our team there in South Point. I think when you translate that into the cost per foot side, Arun, what you get is something that with current cost, you're probably seeing somewhere in the $800 to $900 per foot range. We have seen some deflation that's helped along with the efficiencies that start to kind of materialize. But on a very limited basis, as you would imagine. Operator: We're nearing the end of today's conference. We will go to Paul Diamond from Citi for a final question. Paul Diamond: Just a quick one, kind of piggyback in a bit on the deflationary expectations into kind of the tail end of this year and into 2025. Just wondering if you could put a few numbers around how you're seeing the market really playing out? Dennis Degner: Yes. Paul, when I think about where we're seeing deflation play out, it's kind of a -- it's different than historically where maybe commodities up, service cost up, commodities down, service costs down. And what I mean by that is now you're seeing in some regards, I'll use the electric fleet as an example. E-fleets on the completion side are at 100% type utilization level across the Lower 48 and many of those are structured around multiyear contracts. And so on one hand, that may not present a significant deflation exposure. But in our case, what it does, it also has a natural protection against prices going up in '25 and '26 through the term of the contract when you could see activity levels go the other way. Similar type storyline on some of our drilling rig exposures, where we are starting to see some opportunity is when you start to see relief in areas like oil prices, you start to see potential relief in diesel fuel, frac sand and some of your other consumables. It may not be -- by the time you look at an individual line item, maybe they may not have a lot of, I'll just say, a large impact. But in aggregate, it starts to become meaningful dollars. So it's a little bit early. And I think part of we'll just say deflationary savings that could transform or be a part of our program. We're going to most likely be a part of our RFP process we roll out in the fall, and then that will translate into our D&C per foot for next year. Paul Diamond: Understood. And just one more quick follow-up. You talked about your water sharing program and kind of it being a bit more of a longer-term opportunity set. Just wondering if you could put some numbers around that. I mean, how big do you see that opportunity set over in the medium and the longer term. Dennis Degner: The water sharing program has been really a great story, and it all started with our team there in South Point and their creativity to reach out to other producers several years ago now and look for the ability to utilize their produced water as a part of our operations space. So it's -- we think across the board, it's a win-win. Looking back, we've routinely now for several years, recycled approximately 140% to 150% of our annual produced water volumes. So it's 100% of ours plus the remainder coming from other producers in the area. When you look at water costs and what that could translate into, and again, we've seen a range of somewhere plus or minus $10 million in potential savings on an annual basis because of the ability to take low-cost water. And also, it really complements our environmental stewardship efforts that you'll see in our CSR report kind of year after year. When you look at the investments that we're making into our water infrastructure this year, that's to support long-term, low capital efficiency and also that low water cost. So we think this is something that for decades to come, we can continue to repeat, and again, with our development runway with our inventory, it sets us up well to be able to capture those cost savings. Operator: This concludes today's question-and-answer session. I'd like to turn the call back over to Mr. Degner for his concluding remarks. Dennis Degner: I'd just like to thank everyone for joining us on the call, as always, in the healthy Q&A. If you have any follow-up questions, don't hesitate to reach out to our Investor Relations team, and we'll see you on the next call in October. Thank you. Operator: Thank you for your participation in today's conference. You may disconnect.

Wex (WEX) Q2 2024 Earnings Call Transcript | The Motley Fool

Thank you for standing by. My name is Kayla. At this time, I would like to welcome everyone to the WEX Q2 2024 Earnings Call. [Operator instructions] I would now like to turn the call over to Steve Elder, senior vice president of investor relations. Thank you, operator, and good morning, everyone. With me today is Melissa Smith, our chair and CEO; and Jagtar Narula, our CFO. The press release we issued earlier this morning and a slide deck to walk through our prepared remarks have been posted to the Investor Relations section of our website at wexinc.com. A copy of the release has also been included in an 8-K we filed with the SEC earlier this morning. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income, which we sometimes refer to as ANI; adjusted operating income and related margin; as well as adjusted free cash flow during our call. Please see Exhibit 1 of the press release for an explanation and reconciliation of these non-GAAP measures. The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis due to the uncertainty and the indeterminant amount of certain elements that are included in reported GAAP earnings. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors. Including those discussed in our press release and the risk factors identified in our annual report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 23, 2024, and subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. Thank you, Steve, and good morning, everyone. We appreciate you joining us today. This quarter, we delivered record quarterly revenue of $673 million, representing an 8% year-over-year increase for the same period last year. Excluding the impact of fluctuations in fuel prices and foreign exchange rates, Q2 revenue grew 9% year over year. Total volume across the organization in the second quarter grew 9% year over year to $60 billion, driven by the growth in all three segments. Our Q2 adjusted net income per diluted share was $3.91, an increase of 8% compared to the same quarter last year, driven by quarterly revenue growth, expanding margins, and share repurchases. Excluding the impact of fluctuations in fuel prices and foreign exchange rates, adjusted EPS grew 10% year over year. Overall, our top-line results fell short of our expectations. That being said, we delivered another quarter of record revenue, and our adjusted EPS came in above the top end of our guidance range. Given volume trends we are seeing primarily in the travel business, we are reducing our outlook for the remainder of the year, which Jagtar will detail shortly. We have strong conviction in our growth strategy and are continuing to deliver against our operational efficiency targets that drive commercial reinvestment and expansion. We remain well-positioned to deliver strong financial results over the long term across a variety of economic conditions. Now let's turn to our segment performance, beginning with mobility. The segment revenue growth in visibility was 5.7% and including a headwind of 1.7% due to lower fuel prices. The addition of new customers resulted in 3% growth in the number of vehicles on our platform versus the same quarter last year. This, coupled with pricing actions, drove an increase in the quarterly revenue growth rate. In mobility, we continue to strengthen our leadership position. Beyond our intention to continue growing in our core markets, we are focusing on near adjacencies that can help our customers simplify the business of running their business, which, in turn, further drives our growth. On the OTR side of the mobility segment, we're pleased by important renewals and business expansion with Snyder, Werner Enterprises, and TransAm trucking. We continue to closely track the trucking industry as it works its way through the macroeconomic cycle. While customer sentiment is turning toward being a little light at the end of the tunnel, results remain mixed in the freight market. While we weathered the cycle with the industry, WEX remains steadfast in its service to the trucking industry with innovative products. We understand this industry's challenges, particularly those in the independent owner-operator segment in small fleets. For them, access to discounts at truck stops remains a challenge. In Q2, we launched the pilot for a unique solution to address this challenge. Tailored for truckers, 10-4 BY WEX enables independent owner-operators and small businesses to save money on their largest expenses and brings a mobile-first experience that provides secure transactions at the pump. We're pleased with our pilot results thus far and expect to soon make this app widely available. I want to briefly touch on PACER, which we acquired in Q4 last year to give us access to our near-adjacent markets and field service management. PACER remains on track to contribute 2% to the mobility segment revenue this year. We remain focused on scaling the PACER sales efforts, along with cross-selling the product into our existing customer base. Turning now to our benefits segment. We continue to see strong growth of HSA accounts on our platform. As of this quarter, we now serve 8.2 million HSA accounts, representing 8.3% growth versus the prior-year quarter. We are pleased with benefit wins and renewals across American Benefit Administrators, Enterprise Group Planning, and Admin America. Compared to where we were at this point last year, we are particularly encouraged by the strong contributions we're seeing from our referral partners. Our pipeline and close rates are more robust than this time last year. While there's still a lot to be done as we turn to the second half of the year, we're seeing good trends that bode well for next year's performance. Finally, in our corporate payments segment, purchase volume increased 12% compared to the same quarter a year ago. We're pleased to have signed a number of expansions and new relationships with customers, including fintech company, upgrades, Jack Henry, and Allied Payment Network this quarter. We believe this business is well-positioned to the long term with one of the most competitive offerings in the industry, underpinned by a best-in-class virtual card solution and strong, long-term client relationships. We are a preferred payment solution provider for our partners who trust WEX for our reliability and our ability to simplify complex transactions on a global scale. Now let's review our progress in key strategic initiatives through the first half of 2024. As I mentioned earlier, we are expanding our position as a market leader by meeting our customers where they are with new innovative solutions. I want to highlight the progress we are making against our EV solutions, focused on enabling mixed fleet of the future, as well as the application of artificial intelligence to drive both customer value and enhance WEX's business model. On the commercial EV front, we're alive and in the market with our public charging solutions, as well as our home charging solutions, focused on employee reimbursement. We also expect to roll out our captive charging solution for depot or private infrastructure charging later this year. With these three solutions released, we'll continue to develop further solutions with our customers that we believe will resonate with the unique needs of commercial fleet operators. The revenue per vehicle that we are earning with our EV solutions is currently in line with our overall average revenue per vehicle, and we are confident that it will become greater as we introduce additional products and functionality. We are seeing the largest interest in our mixed fleet solutions from our government and enterprise customers, and we are on track with our current-year EV growth goals. In addition to having a current pipeline of more than 50,000 potential EV vehicles. We believe the majority of our customers will operate in a mixed fleet world for the foreseeable future. Our strength in both fuel and EV solutions, coupled with our seamless integration into customer systems, uniquely position us to help them navigate this complexity and maximize their operational efficiency. We also maintained our practice of embracing digital transformation and harnessing cutting-edge technologies to revolutionize our operations through strategic investments in artificial intelligence. Our efforts are already yielding results, helping us drive both model efficiency and unique customer value. On the efficiency front, we attribute our trending improvements on credit losses, in part, to enhanced AI tooling, allowing us to better adjudicate credit, review credit line increases, and spot abnormal behavior that can be indicative of a pending loss event. Looking ahead, we're excited to keep leveraging AI capabilities in order to transform our customer experiences with specific focus on enhancing our customer service operations and risk functions. This tech-forward approach continues to uncover new efficiencies that translate directly to our bottom line, supporting our profitability, both in the near and long term. Moving on to our operational improvement initiatives. I am pleased to report significant progress through the path of 2024 toward our $100 million annual cost-saving target that we announced last year. As of the end of the second quarter, we've realized approximately $106 million in cost savings on a run-rate basis, exceeding our full-year goal. We expect to deliver more efficiency in the second half of the year. Consistent with our previously stated strategy, about half of these savings are being strategically reinvested to drive long-term growth. With a focus on our commercial teams, differentiating our technical infrastructure, and enhancing our risk management capabilities. These investments are yielding positive results, improving our operational efficiency, and positioning us for sustained growth regardless of market dynamics. We remain committed to balancing cost optimization with strategic reinvestment to ensure WEX's continued success in innovation leadership. During the quarter, we also realigned the responsibilities of certain executive leadership team members to streamline the structure of our business and best position us to achieve our long-term strategic objectives and growth ambitions. As a result, Carlos Carriedo is now head of Americas payments and mobility. Jay Dearborn is now head of international, and Robert Deshaies is now the head of benefits. These realigned roles will ensure our customers remain at the center of everything we do while honing our focus and accelerating innovation to drive long-term success. As I conclude my prepared remarks, I'd like to reiterate that, while we posted strong results, we are not satisfied with this level of growth. That said, WEX's strong market position and our ability to deliver consistently strong financial results, even in challenging economic conditions, gives me great confidence in the overall resiliency of our business model and our ability to generate strong performance in any environment. That confidence is further underlined by our performance over the past decade, where we have grown revenue at a compounded annual growth rate of 13.5% despite effects of a global pandemic or any passing fuel price volatility, more than tripled our earnings per share and generated nearly $4 billion in adjusted free cash flow. In this market environment, we believe that buying back our own shares continues to represent a compelling value. To that end, we bought approximately $100 million during Q2 and an additional $70 million during the month of July. In the near future, we expect to enter into an accelerated share repurchase agreement to purchase an additional $300 million in WEX common stock. Jagtar will discuss this more shortly. This decision reflects our commitment to our shareholders, as well as our confidence in WEX's intrinsic value and growth potential. Furthermore, our solid balance sheet strong cash generation, and low leverage ratio afford us the flexibility to pursue strategic growth investments while accelerating share repurchases. This approach allows us to reinvest in our future growth while simultaneously driving immediate value to our shareholders through opportunistic share repurchases. I remain confident that our strong market position, strategic growth initiatives, and culture of innovation have positioned WEX for sustainable long-term success. With that, I'll turn it over to Jagtar to walk you through this quarter's financial performance in more detail. Jagtar? Jagtar Narula -- Chief Financial Officer Thanks, Melissa, and good morning, everyone. Our second quarter results fell a bit short of our guidance for revenue, while adjusted EPS came in above the top end of our range. While we are not satisfied with these results on revenue, they do represent a record high, and we are also seeing a number of positive trends. As expected, mobility revenue growth accelerated from last quarter. And our benefits segment revenue growth is also in line with our expectations. These strong positives were offset by softness in travel-related volumes, which we expect to persist for the remainder of the year. Our adjusted EPS results were the highest we have ever reported for the second quarter of the year and show continued execution against our strategic initiatives, even in the face of a year-over-year decline in fuel prices. Now let's start with the details of the quarter results. For the second quarter, total revenue was $673.5 million, an 8% increase over Q2 2023 with more than 80% of revenue for the quarter, recurring in nature. We had solid growth rates in each of the segments. As a reminder, we define recurring revenue as payment processing and account servicing revenue, revenue from our factoring business, income from custodian HSA cash assets, transaction processing fees, and other smaller items. In total, adjusted operating income margin for the company was 40.7%, which is up from 40.3% last year. Segment margins increased in both corporate payments and benefits compared to the prior year. From an earnings perspective, on a GAAP basis, we had net income of $77 million in Q2 or $1.83 per share. Non-GAAP adjusted net income was $164 million or $3.91 per diluted share, which is an increase of 8% over last year. Now let's move on to segment results, starting with mobility. Mobility revenue for the quarter was $359.6 million, a 6% increase in the prior year. Fuel prices are strong but have retreated 2% compared to the last year with a domestic average fuel price in Q2 of $3.62 versus $3.68 in 2023. The Q2 fuel price was slightly lower than our guidance but did not have a significant impact on revenue versus our expectation. As we expected, normalizing for the change in fuel prices, the revenue growth rate in Q2 accelerated compared to Q1. We remain on track to deliver full-year segment revenue growth at the high end of our long-term range when taking into account changes in fuel prices. Payment processing transactions increased 2% year over year, which was in line with our expectations. Local customers in the U.S. increased 1.5% compared to last year. And over-the-road payment processing transactions were up 2.2% versus year-ago levels. This is the first quarter since Q1 of 2023, the payment processing transactions have increased, reflecting the anticipated stabilization following the credit policy changes we made a year ago. Next, let's turn to late fees. The net late fee rate increased 1 basis point versus the prior year. Finance fee revenue increased $1 million or 2%. As expected, the late fee rate and related revenue have stabilized compared to last year as we lap the credit policy changes made a year ago. The slight increase in revenue is primarily due to the amount earned on each late fee. The net interchange rate in mobility segment was 1.29%, which is up 4 basis points over our 2023 net interchange rate. The increase reflects continued benefits for the interest rate escalator clauses contained in various merchant contracts, the rate benefit from lower domestic fuel prices, and higher rates earned from merchant contract renewals at favorable terms. Compared to Q1, this rate is down slightly due to the mix of diesel gallons and a one-time item reducing the current quarter. The mobility segment adjusted operating income margin for the quarter was 42.9%, down from 44.2% in Q2 2023. The decline in fuel price this year is the primary reason for the lower margins. Moving on, credit losses decreased $3 million in the mobility segment versus last year and were below the guidance range at 14 basis points of purchase volume, compared to 15 basis points last year. Loss rates were significantly better than what was expected in our Q2 guidance. Charge-offs during the quarter were also better than expected, particularly in OTR customer base, leading to the lower expense. Compared to last year, loss rates are similar as we have now lapped the credit policy changes made a year ago. Moving now to corporate payments. Total segment revenue for the quarter increased 10% to $134.1 million. Purchase volume issued by WEX was $25.8 billion, which is an increase of 12% versus last year. The net interchange rate in the segment was up 2 basis points sequentially. Booking.com did begin testing their new process this quarter. Approximately $1 billion of volume was processed under the new in-sourcing arrangement, but this did not have a material impact on revenue and the interchange rate in Q2 compared to our guidance. Consumer travel demand was softer than we expected in the quarter, primarily with our smaller OTA customers. Travel-related customer purchase volume grew 12% compared to last year, which is down significantly from the growth rates we have seen recently. This is due to the transition of Booking.com volume, softness with smaller OTAs, and lower-than-expected growth in airline-related spend. The interchange rate for the travel-related customers is up 1 basis point from Q1 due to the timing of incentive recognition. Our nontravel customer revenue was up 11%, driven by a 13% increase in purchase volume, and net interchange rate for non-travel customers was up 11 basis points sequentially. Direct sales in the U.S. continued to perform above expectations in Q2. We continue to optimize the time it takes to onboard a new customer, as well as the supplier enablement process we used to grow these programs. The corporate payments segment delivered an adjusted operating income margin of 55.5%, up from 54.4% in Q2 last year, driven by sustained acceleration in volume. Finally, let's look at the benefits segment. We again achieved strong results in this segment with Q2 revenue of $179.8 million, which is an increase of $20.6 million or 13% over the prior year. SaaS accounts grew 3% in Q2 versus the prior year to $20 million. The core market dynamics of this business are strong, as exemplified by underlying SaaS account growth, excluding the declines in Medicare Advantage accounts, which was 7% year over year. Benefits segment purchase volume increased 9%, leading to a 6% increase in payment processing revenue. We also realized approximately $52 million in revenue from the custodial HSA cash deposits that were invested by WEX Bank and from funds held at third-party banks, compared to $42 million last year. The average interest rate earned on these balances increased from 4.4% last year to 4.9% this year. We believe this rate will be relatively stable for the next few years because 75% of our HSA-related investments are deployed in laddered fixed-rate investments that protect future revenue from interest rate changes. Interest rate impacts in the remaining portfolio which includes short-term deposits held at third-party banks will be balanced by the reinvestment of lower-yielding, fixed-rate invested at higher rates as they mature. To summarize, the revenue from our benefits business is well shielded from changes in interest rates. And as we've discussed previously, our overall balance sheet hedge protects the company from macroeconomic interest rate movement is materially impacting overall earnings. Now turning to margins. The benefits segment adjusted operating income margin was 39.6%, compared to 37.2% in 2023. The increase in margin versus last year is driven by the high flow-through of custodial income. Now I will provide an update on the balance sheet and our liquidity position. We remain in a healthy financial position and ended the quarter with $683 million of cash. We have $804 million of available borrowing capacity and corporate cash of $143 million, as defined under the company's credit agreement at quarter end. The total outstanding balance of our revolving line of credit and term loans was $3 billion. The leverage ratio as defined in the credit agreement stands at 2.5 times and which is at the low end of our long-term target of 2.5 to 3.5 times. Our ability to invest in the business and return capital to shareholders while also maintaining conservative debt level puts us in an end of the position. Next, I would like to turn to cash flow. WEX generates a significant amount of cash each year. Using our definition, quarterly adjusted free cash flow was $161 million in Q2. Our primary discretionary use of cash so far this year has been to repurchase shares. We repurchased $174 million of our own shares in the first half of the year, including $100 million during Q2. In addition, we have purchased an additional $70 million of our common stock during July. We believe in the long-term business momentum of WEX. Earlier, Melissa illustrated the solid revenue and earnings growth the company has seen over the last decade. The business drivers of the company have remained sound, and we believe the stock price is a compelling value at recent levels. As a result, we also expect to enter into an accelerated share repurchase agreement in the near future to repurchase at least an additional $300 million of our common stock. We expect to receive approximately 80% of these shares upfront with final settlement expected to recur in the fourth quarter of 2024. At our present share price, this equates to approximately 4% of our outstanding shares and when combined with a $70 million of shares already repurchased in July represents almost 5% of shares outstanding. Since reinitiating our share repurchase in 2022, we have acquired approximately 4.8 million shares at a cost of $830 million, which equates to an average cost of $173 per share. Since April of 2022, we have reduced our share count by more than 7%. We believe our expected continued strong revenue and adjusted net income growth, combined with a prudent capital allocation plan, is a very compelling story for our shareholders. Looking forward, we remain committed to managing capital allocation between organic investment, M&A, and returning capital to shareholders. Finally, let's move to revenue and earnings guidance for the third quarter and full year. We expect many of the trends from the second quarter to continue, and we are updating our 2024 guidance primarily to reflect trends in the corporate payments segment. Starting with the third quarter, we expect to report revenue in the range of $688 million to $698 million. We expect ANI EPS to be between $4.42 and $4.52 per diluted share. For the full year, we expect to report revenue in the range of $2.68 billion to $2.72 billion. We expect ANI EPS to be between $15.98 and $16.38 per diluted share. For the full year, the midpoint of these updated ranges represents a decrease of $50 million in revenue, including the Q2 shortfall and $0.17 of EPS compared to the midpoint of our previous guidance. Although there are small moving parts in the mobility and benefits segment, the decrease in revenue guidance is primarily related to the corporate payments segment. Overall, we are pleased with the nontravel portion of the segment, which further accelerated in the second quarter. However, we are reducing travel customer purchase volume expectations for the second half of the year as we anticipate the softness we saw in Q2 among our smaller OTAs will continue for the remainder of the year. In addition, we are seeing second-half purchase volume weakness in some large customers with multiple payment options. Some of these customers gave us a high share of wallet over the last 12 months but are balancing out their spend in the second half of the year. We do not believe these short-term spending decisions reflect any longer-term impact to our volume of business with these customers, and we remain confident in our ability to grow the market. Note that these changes also have an impact on the amount of network incentives that we expect to earn this year, which is reflected in our revised guidance. Much of the decline in revenue expectations is being offset by lower expected credit losses in the mobility segment, a variety of strategic cost-cutting measures, and the share buybacks that I discussed. Finally, one other quick modeling note. We expect Q3 revenue in mobility to be relatively strong as there are two more business days in the current year versus last year. With that, operator, please open the line for questions. Operator [Operator instructions] Our first question comes from the line of Tien-Tsin Huang with J.P. Morgan. Your line is open. Tien-Tsin Huang -- JPMorgan Chase and Company -- Analyst Thanks so much. Good morning. I wanted to ask just maybe if you can give a little bit more detail on your, on what you're seeing on the ground on the fleet side. I think you mentioned the market is mixed but like at the end of the tunnel. What's driving that -- like that end-of-the-tunnel comment there? Thank you. Melissa D. Smith -- Chair, President, and Chief Executive Officer Yeah, sure, Tien-Tsin. A couple of things. When we are out talking to customers, they're starting to be a little bit more bullish. I'd say it's still mixed. We're also seeing within the portfolio itself same-store sales flat in the quarter, which is a good sign for that segment of our business. And so some of this data driven. Some of it's more anecdotal from commentary we're hearing from the field. Tien-Tsin Huang -- JPMorgan Chase and Company -- Analyst Got you. And then on the travel side, I heard the OTAs on the smaller side are driving some of the weakness. Any comments on geography? Because I think Asia was believed to be weaker coming out of Visa. And any updated thinking internal around booking and the impact and when that will show up starting in the fourth quarter? Melissa D. Smith -- Chair, President, and Chief Executive Officer Yeah. Why don't I start? And I think, Jagtar, you probably want to add on to this. If I look at the mix within our portfolio itself, what we saw was stronger growth in the U.S. and still actually decent growth in Europe but more muted growth in Europe within our portfolio. We also saw that the average transaction size has continued to go up. It was up 5% year over year, and so you continue to see some pricing leverage that's happening across the portfolio. Jagtar Narula -- Chief Financial Officer Yeah. I'll talk about booking. So, Tien-Tsin, we saw Booking has started their transition to the new model. We saw about $1 billion flow through the new model in Q2, which was kind of relatively immaterial. We expect that to accelerate in Q3 and Q4. We expect roughly 30% of their volumes to flow through in the new model in Q3, growing to about 40% in Q4. And just to kind of reiterate from the impact to next year, we've talked about it having an incremental 1% impact to total revenue for the company that's still reiterating that. That's still what we believe. And your next question comes from the line of Andrew Jeffrey with William Blair. Your line is open. Andrew Jeffrey -- Analyst Hi. Good morning. I appreciate you taking the question. Melissa, Jagtar, I wonder if you could unpack the comment around travel or OTA customer wallet share a little bit because I know one of the potential offsets longer term at Booking is the thought around being able to capture additional wallet share. But it sounds like maybe in the near term, as volume comes off, some customers are maybe spreading spend around. I just wanted to understand that dynamic a little bit. Melissa D. Smith -- Chair, President, and Chief Executive Officer There's a bunch of things that are happening within the portfolio. And I guess let me start probably just addressing that question, and Jagtar may want to add on to that. Within our travel customer portfolio, many of the online travel agencies use multiple providers, and they do that for business updates new purposes, and they put volume across. What Jagtar mentioned in his comments is that we've got a little bit more lumpiness in how that volume is coming through right now. So we've got the advantage of that in the first half of this year. And we think that we're going to see the disadvantage of that, which is going to affect comparability of year-over-year performance in the second half of the year, is not something that's new. And then on top of that, we are seeing really great spend volume with the large OTAs. The growth have been really strong. We're getting the advantage still of this move into the merchant model. And so the growth that we're seeing with the larger European OTAs, we're certainly getting an advantage of that, and that's being offset by weakness that we're seeing with the smaller, online travel agency, which are really just returning to more normal growth patterns. And then Jagtar talked about the fact that we're also seeing softness with airline spend, which, for us, is in Europe, and it tends to be online travel agencies that are using our product for low-cost air carriers within the European market. Jagtar Narula -- Chief Financial Officer Andrew, the only thing I'd add to that -- sorry, I was just going to say the only thing I'd add to that, so as Melissa mentioned, the share of wallet item predominantly in some of our larger OTA customers. Our expectations with these customers, this is really a calendarization in 2024 where we saw them spend more with us in the first half and maybe a little less with us in the back half, but then, right, we expect volumes to return as we look out in the future. So I really view that kind of share of wallet item as a timing item. Andrew Jeffrey -- Analyst OK. That's helpful color. And I just wanted to get a little more color on benefits where it looks like HSA accounts are returning to growth. Should we expect the combination of new wins onboarding lapping the Medicare Advantage losses and perhaps a better open enrollment season to reaccelerate HSA growth, especially as we look out into next year? Melissa D. Smith -- Chair, President, and Chief Executive Officer What we're seeing right now, because you're going to go through those drivers, we're seeing an increase. We talked about 8% growth in HSA accounts year over year so far in the sales season. We're definitely seeing more momentum and close. Rates are higher. Pipelines look really strong, and most of the majority of the sales happen in the second half of the year. So we still have more work to do, but we are feeling pretty good about what's happening across the portfolio and how that's going to line up for next year's growth. Jagtar Narula -- Chief Financial Officer Yeah. Andrew, I would say what we've closed so far this year at this point in the year versus where we were at this point of the year last year, we are ahead. So that's a good sign of validating our expectations. Your next question comes from the line of Nate Svensson with Deutsche Bank. Your line is open. Nath Svensson -- Deutsche Bank -- Analyst Hi. Thanks for the question. I just wanted to ask on corporate payments and the outlook for the full year. So I think previously, you had talked about both revenue growth and volume growth being in the high single digits. Obviously, it sounds like that is coming down. So I just wanted to clarify, revenue guide coming down by $50 million. It sounds like a vast majority of that is in corporate payments. So I just wanted to clarify the math there and then any nuances or updates on the cadence through the year. I think, Jagtar, on the last call, you talked about year-over-year growth decelerating through the year, so I just wanted to see if there's any updates to the thinking there. Jagtar Narula -- Chief Financial Officer Yeah. So I would say, at the beginning of the year, we were guiding to high single-digits growth. I'd say corporate payments now, we're expecting low single-digit growth with this guidance change. I think in response to your question, it might be useful for me to dive into a little bit more detail on the guidance change. Let me start with what isn't changing in the guidance, right? So our benefits business continues to track to the growth rates we expected, that we guided to at the beginning of the year, and that business is doing well. Mobility, as we expected, accelerated in Q2, and it's still exactly what we expected and we've guided to. Likewise, I would say in Q2, the nontravel corporate portion of our corporate payments business, we also saw revenue acceleration, and so we're quite pleased with that business as well. So really, where we're making the guidance change is, call it, the 10% to 15% of the company revenue that's on the travel business. So I want to point out that the travel, the guidance change isn't related to any customer attrition, right? We continue to have good relationships with our customers and find value in our solutions. So really where the guidance changes, one, right, we saw a slight impact from the bookings announcement we made last quarter. The transition is going well, as I said earlier, but it's got a little bit faster than we expected, and that's had some impact to our expectations for the year. I'd say that's about a $5 million impact in the overall guidance change. The other big piece is the large customers that Melissa talked about. What we're really seeing there is the timing impacts. So we saw the benefit of that in the first half of the year and expect some deceleration from them in the second half of the year. And then it's the smaller OTAs where we're seeing softness. Part of the softness, I think Melissa mentioned, is related to the virtual card acceptance, especially among certain airlines, predominantly in Europe. But we're also seeing, right, overall volume growth outside of the airlines with the smaller OTA has come in lower than our expectations. So we expect that to continue for the balance of the year. And then that -- finally, that flows into our incentive fee recognition program. So we're seeing some softness, but we remain confident in our relationships with the customers. And so overall, as I said earlier, about 2% this year is what we're expecting for growth, low single digits. Nath Svensson -- Deutsche Bank -- Analyst That is great color. I appreciate all the detail there. Another one, kind of on the outlook for the rest of the year. So it's nice to see another quarter of solid operating margin expansion, and you talked about sort of the cost-saving efficiencies that you've realized being sort of ahead of plan year to date. So just wondering on your thoughts on your ability to continue expanding margins in the back half of this year, particularly given that you're lapping some really strong margin expansion from the back half of 2023 -- sorry, 2023. So anything we should keep in mind for our models with regards to the cadence or the magnitude of margin expansion in the back half? Jagtar Narula -- Chief Financial Officer Yeah. I would say we continue to focus on cost containment, I'd call it. So we were at a roughly $106 million run rate on the cost-saving initiative exiting Q2. We think we'll add on the order of another $10 million on that run rate as we go through the year, so that will add incrementally to margins as we go through the year. Melissa D. Smith -- Chair, President, and Chief Executive Officer One of the things that we said in the last call that we had front loaded some of the reinvestment, and so that's why you're seeing more pickup in the second half of the year. And your next question comes from the line of Nik Cremo with UBS. Your line is open. Nik Cremo -- UBS -- Analyst Good morning. Thanks for taking my questions. First, I just wanted to follow up on the benefits segment. Could you just provide what your expectations are for SaaS account growth for the next two quarters that's embedded? Is it 10% to 15% 2024 segment revenue guide rates aside? And then does that give you line of sight for this business to reaccelerate back into the longer-term target range of 15% to 20% in 2025? Thank you. Melissa D. Smith -- Chair, President, and Chief Executive Officer We talked about the fact that we're going to -- that we had 8% HSA growth in the quarter. As you go through the course of the year, we will continue through our sales cycles. A lot of the implementations happen at the beginning of next year. There's typically the very end of this year is when you start to see more of a search from a growth perspective. And so I'd say that, right now, what we're doing is more lining up the business in order to get prepared for the enrollment season and next year. And when we think about the business, what we want to make sure that we're doing is that we're signing more than our fair share in terms of new customers. We will get a benefit of the custodial counts, which is a relatively new source of revenue for us. We now also are getting the benefit of some of the compliance tools that we picked up with the census. You saw that that actually come through more in the first quarter a little bit lumpy and when that comes through. So it accelerates growth in the first quarter in particular, and so we feel like we actually have a lot of tools right now to continue to build upon this business and to make sure that we are outgrowing the market. Jagtar Narula -- Chief Financial Officer And in terms of SaaS account growth, we're expecting a slight acceleration as we go through the year. We did about -- before the Medicare Advantage item, we did about 3% SaaS account growth in Q2, and we're expecting, call it, mid-single digits in the second half. Nik Cremo -- UBS -- Analyst Got it. Thanks for all the additional color. And then for my follow-up on the corporate payments segment, focusing on the nontravel portion. It was great to see the yield improved 11 basis points sequentially, much stronger than expected. If you could just provide details on what drove the improvement and if that should be kind of like the new baseline rate for this segment. And then also, we just noticed that the volume on the nontravel side appear to be down about high single digits quarter over quarter so curious what was going on there. Thank you. Jagtar Narula -- Chief Financial Officer Yeah. So the rate in the volume is actually the same item, which was related to a little bit of mix. We have a particularly large customer that's at a low rate that processed a little bit less in the second half. I expect them to do more later in the year, but that mix effect helped the rate in the second quarter. When we look at the back half of the year, overall, we're expecting our take rates to roughly match the first half of the year to be roughly flat. There'll be some timing. Q3 will be a little lower. Q4 will be a little higher. But overall on average, we expect about the same second half that we did first half. Melissa D. Smith -- Chair, President, and Chief Executive Officer Other things that were in that mix that we were particularly proud of is the direct segment. Jagtar talked about the fact that we've continued to build into that sales force, and it has continued to deliver. We had 25% growth year over year in the quarter. That part of the business is a place that we're going to continue to build into. Nik Cremo -- UBS -- Analyst No. Great to see the continued progress on the direct side of the business. Thank you. Operator And your next question comes from the line of Andrew Bauch with Wells Fargo. Please go ahead. Andrew Bauch -- Wells Fargo Securities -- Analyst Hey, thanks for taking the question. Nice to see the cost-savings plan get into place. Can you talk about reinvesting half of that back in the business, things like commercial team, tech upgrades? But maybe if you could put a finer point on -- are these reinvestments segment directed? How do you kind of anticipate the commercial team starting to contribute to growth? And anything else you can provide on that reinvestment strategy. Melissa D. Smith -- Chair, President, and Chief Executive Officer So when we look at those categories, as we're going through and thinking where we want to allocate our reinvestment, we're looking across the company at places that we think are going to drive the highest return. Jagtar has done a great job working with the rest of the business. And so it's really spread throughout. It's not directed in any one particular area. I'd say that we have been focused in marketing engine with our mobility business. We've been ramping sales within corporate payments, and so it's kind of really spread across. Jagtar Narula -- Chief Financial Officer Likewise, on the tech side, it's really spread across all three lines of business, as well in terms of investments we're making. Andrew Bauch -- Wells Fargo Securities -- Analyst Got it. And then after this buyback, maybe we could just get a refresh on your capital allocation strategy and how you're thinking about longer-term structure maybe a little bit more in detail. Melissa D. Smith -- Chair, President, and Chief Executive Officer Yeah. I wouldn't say that anything is really changed. When we think about capital allocation, we care deeply about organic growth, and so that's the first place we spend quite a bit of time and thought. And we have been ramping both our tech and product teams over the last couple of years. It's a place that we think is really important to the long-term growth of the company. We still have in our framework 2% to 3% growth from M&A. And then opportunistically, we're going to buy back stock, and we are very bullish on the long term of the company and feel like that is not represented in our stock price. And so we've been really aggressive about share buyback. We bought back $174 million at the first part of the year and then another $70 million in July. And now on top of that, we're talking about this $300 million accelerated repurchase program. And so it's just a place that we feel provides a good return for our shareholders and just shows the confidence we have in our ability to continue to grow the company. And your next question comes from the line of Ramsey El-Assal with Barclays. Your line is open. Ramsey El-Assal -- Barclays -- Analyst Hi. Thanks for taking my question. I wanted to ask about a comment that you made most in the prepared remarks around new adjacencies in mobility, and I know PACER sounds like you're executing on that very well. Are you seeing -- maybe you could elaborate that a little bit for us. And are you seeing other similar opportunities? I know that sort of field services, are there other adjacencies that we could expect you to kind of move into? Melissa D. Smith -- Chair, President, and Chief Executive Officer Yeah. We're thinking about this in two different ways. First are the things our customers very naturally need. So we've launched a product into the marketplace for our North American fleet customers that allows expanded acceptance so that they can buy other things that are generally maintenance related for their vehicles but just expanding their ability to purchase in a controlled manner. EV, I would put in that same category. We've got this migration that's going into a mixed fleet environment, and so we've extended products in that area. The 104 products that I talked about on the call, it's thinking about the over-the-road customer in a segment that we're not participating in now, which are owner-operators, the really small segment of the marketplace that will have more credit constraints associated with that but having offerings to that customer set that draws them in to start using our products. And as they get bigger, then they can advance into some of the existing products that we have now. And so we're looking across the portfolio at customer needs that we feel like are unmet in places that we feel like we can actually build out the offerings in order to provide even more value to our customers. And then I would say PACER is kind of a step beyond that, where we're looking at a place where we can even more deeply expand vertical capability within our customer segment. And so that, for me, is a little bit more of a test, and we continue to learn as we go through that process where the real near adjacencies are clear, customer-driven needs. Ramsey El-Assal -- Barclays -- Analyst OK. And my follow-up is on electric vehicles, and the 50,000-vehicle pipeline you mentioned was a larger number than I anticipated. So I guess the question there is what is the size of the pipeline relative to the number of electric vehicles that are in your fleet today? Sort of what's there today? How fast do you convert the 50,000? And are they incremental vehicles? Or do you see this more as like sort of a swap-out, fossil fuel for electric? Melissa D. Smith -- Chair, President, and Chief Executive Officer So we have hundreds now. So it is significantly larger than the existing customer segment that we have right now. They're using the products. The way that I think about this, I think that the news is people are hearing consumer demand dwindle has had very little impact of our experience here, where, from a commercial perspective, the places that we've seen in demand or government fleets, very largest fleets that have ESG commitments that they've made into the marketplace. And then there's a bunch of others that are testing because they really want to understand the total cost of ownership. They believe that this is going to happen. It's just a question of timing, and so they want to get better educated across that. And with the government fleet, in particular, we do business with the federal government but also over half of the states in the United States. So we have a very close relationship and are in a position to help them through this migration, and they're going to be the leading side of that. So it is a pretty big ramp. And we've said all along that we don't know when this is going to happen, but we know that we need to be very well-positioned for when it does, and we feel like that's where we are right now. And the next question comes from the line of Sanjay Sakhrani. Your line is open. Sanjay Sakhrani -- Analyst Thank you. I want to drill down a little bit more on the weakness in travel and just the sensitivities. I guess this weakness on the smaller OTAs, what's the risk it trickles up? Like is there any relation in that? And then what are you guys assuming for the second half? Like where is there risk to whatever your assumption is? Melissa D. Smith -- Chair, President, and Chief Executive Officer Sanjay, I'll start. So two-thirds of the revenue in our travel segment -- and again, Jagtar said the travel part of our business is between -- it was 12% in the second quarter. It's relatively a small part of the business. But two-thirds of that revenue is comprised of the smaller online travel agencies. And if you look in the mix of that customer base, what you're seeing is airline spend was negative 7% in the second quarter, so you saw this really deceleration that's been happening specifically with airline, which is, in part, because of acceptance issues and, in part, because there just is more softness. Right now, it's normalizing. And then if you look across the rest of the portfolio, I would say it's growing at a normal market rate. And so when we think about the business long term, we think about the fact that we do business with hundreds of online travel agencies. We represent what's happening across the market, and so we should return spend volumes on an annual basis to a normal market rate trend. And so we feel pretty confident in how this will play out over time. The anomalies that we're seeing with the small online travel agencies in air is not represented, and it's not what we're doing with the larger travel agencies almost all hotels spend that we're doing with the larger travel agencies. So that airline issue, we don't think we'll bleed through. Sanjay, in terms of extensions, we've factored in kind of what we know today, and we feel pretty good about, right? So if I look at what we've assumed for volumes in the second half, right, inclusive of kind of booking volume, as well that are transitioning to the new model but total volumes travel, we're expecting to be flat in the second half to last year because of the weakness we're seeing, as well as kind of the timing considerations on the larger OTAs, so flat. If you look at the same point last year, volumes were growing in the 40% range. So this is a moderation in travel volume growth, so we feel like we've taken kind of a very realistic approach here. And then outside the travel, nontravel, we're kind of expecting a continuation of the trends that we saw in the first half in the latest quarter, so we feel really good about that. Sanjay Sakhrani -- Analyst OK. Just a follow-up question, Jagtar, on the interest rate sensitivity. I mean, they're talking about lower rates. I'm just curious how that factors in for you guys on a go-forward basis. You talked about sort of stability or being well-hedged in the -- on the healthcare side, just broadly speaking, and then I think I heard you mention the interest rate escalators. How do those work when rates decline? Jagtar Narula -- Chief Financial Officer Yeah. So roughly, the way I think about it is a 100-basis-point change in rates flows through our P&L at about $35 million on the revenue side. About half of that, call it, $15 million-ish would be on the mobility segment. So every 100-basis-point change would be, call it, a $15 million impact to mobility. And the next question comes from the line of Mihir Bhatia with Bank of America. Your line is open. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Good morning. Thanks for taking my question. Maybe I wanted to start a little bit with the expense leverage in the business. Obviously, just executed on your $100 million cost-saving initiative. But I was curious, as you get a little bit slower top line here this quarter with the corporate payments guide down, how should we be thinking about expense reduction? Would you need to do additional ones to get to maintain margin? Or is this just you think very temporary, and nothing needs to be done? Melissa D. Smith -- Chair, President, and Chief Executive Officer So are you referring to the guide, what we actually have in the guide or beyond? Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Well, both, I guess, like I'm trying to understand, one, the expense leverage in the business. And secondly, are you assuming incremental expense actions in the back half? Melissa D. Smith -- Chair, President, and Chief Executive Officer So the way that we're thinking about cost structure is a couple of ways. We have a long-term growth algorithm. And so as we -- because we grow, it's a little bit easier in a way to manage costs because you can actually just make sure that you're scaling up costs appropriately. And so we feel very confident, long term, our ability to continue to scale, depending on what's happening from a growth perspective. We've also -- I think of it as a flywheel. There's a couple of flywheels that are going right now. There's a flywheel around cost savings, which have been driven across the company, looking at places that we can use technology in order to create efficiencies. I don't see that that's going to stop. That level of discipline is something we want to continue to do. And then the second flywheel for us is AI, which we feel like we've seen meaningful results from that already, and it's a lever that we're continuing to lean into because we think that that has an ability to also continue to significantly alter cost structure. And so those are places that when I think about this at more of a strategic level that we are continuing to emphasize going forward. Jagtar Narula -- Chief Financial Officer Yeah. I'll just add sort of specific to the guide on a very tactical level, right, we baked in cost savings in the second half of the year, just pulling levers on headcount growth, vendor spend, and the like to the tune of about $10 million to $15 million. So that was a direct response to the weakness we saw in travel. We looked at what cost levers we could pull. But over the long term, I think our cost actions would be at the more strategic level than Melissa talked about. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst OK. That's helpful. Maybe just switching, I wanted to go back to the question around capital allocation, maybe specifically on M&A. In that, what does the pipeline look like right now? Are there particular businesses or like segments, I assume benefits, corporate payments, is that where we should be where you're thinking about more for M&A? Or is it -- I guess maybe you tell us like how are you thinking about M&A right now? Melissa D. Smith -- Chair, President, and Chief Executive Officer Yeah. The pipeline continues to be across the portfolio. We've been less likely to do scale plays, which we have done historically, and we've been using that money more for share buyback. But in terms of geographic expansion, product expansion, smaller-scale players, those are places that we continue to be interested and continue to work through our pipeline as well. I feel like we're in a maturing cycle right now where multiples are starting to make a little bit more sense in the marketplace, and we've been really pretty thoughtful about making sure that we're maintaining financial discipline, too. And I will now turn the call back over to Steve Elder. Steven Alan Elder -- Senior Vice President, Global Investor Relations Thank you, Kayla. Just wanted to thank everyone once again for joining us this quarter, and we'll look forward to speaking with you again at the end of the third quarter.

EQT Corporation (EQT) Q2 2024 Earnings Call Transcript

Cameron Horwitz - Managing Director, Investor Relations and Strategy Toby Rice - President and Chief Executive Officer Jeremy Knop - Chief Financial Officer Thank you for standing by. And welcome to the EQT Second Quarter 2024 Results Conference Call. [Operator Instructions] I now like to turn the call over to Cameron Horwitz, Managing Director, Investor Relations and Strategy. You may begin. Cameron Horwitz Good morning and thank you for joining our second quarter 2024 earnings results conference call. With me today are Toby Rice, President and Chief Executive Officer; and Jeremy Knop, Chief Financial Officer. In a moment, Toby and Jeremy will present their prepared remarks with a question-and-answer session to follow. An updated investor presentation has been posted to the Investor Relations portion of our website and we will reference certain slides during today's discussion. A replay of today's call will be available on our website beginning this evening. I'd like to remind you that today's call may contain forward-looking statements. Actual results and future events could materially differ from these forward-looking statements because of the factors described in yesterday's earnings release, in our investor presentation, the Risk Factors section of our most recent Form 10-K and Form 10-Q and in subsequent filings we make with the SEC. We do not undertake any duty to update any forward-looking statements. Today's call also contains certain non-GAAP financial measures. Please refer to our most recent earnings release and investor presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. Thanks Cam, and good morning, everyone. This week marked a significant milestone in the history of our company as we closed the acquisition of Equitrans Midstream transforming EQT into America's only large-scale, vertically integrated natural gas business. To put the significance of our combined companies into perspective, EQT's assets now encompass nearly 2 million acres of leasehold, producing more than 6 Bcfe per day with almost 4,000 low-cost remaining drilling locations, more than 2,000 miles of gathering lines with greater than 8 Bcfe per day of throughput, nearly 500 miles of water lines, 43 Bcfe of natural gas storage, 800,000 horsepower of compression, almost 950 miles of critical transmission infrastructure, plus the newly commissioned 300-mile Mountain Valley Pipeline, all of which are located at the Gateway of Appalachia, and ideally positioned to serve growing U.S. and international natural gas demand for decades to come. This combination creates a differentiated business model among the U.S. energy landscape, as EQT is now at the absolute low end of the North American natural gas cost curve. A low cost structure is the only competitive advantage one can have in a commodity business, and with the closing of Equitrans' acquisition, EQT's unlevered free cash flow breakeven price is projected to be $2 per million BTU which further downside potential upon synergy capture. This cost profile structurally derisks our business in the low parts of the commodity cycle which in turn eliminates the longer term need to defensively hedge thus unlocking unmatched upside to higher price environments. We believe the sustainable cost structure advantage combined with our scale, peer leading inventory depth, low emissions profile and world-class operating team offers the best risk -adjusted exposure to natural gas prices of any publicly investible asset in the world. I also want to welcome Equitrans employees and shareholders to the EQT crew. We're excited to get to work on locking the full potential of our combined company's asset base. With the acquisition closing a full quarter ahead of our original timeline, we estimate savings of nearly $150 million relative to our initial underwriting assumptions even before synergies. We're also able to more rapidly mobilize our integration team which has a proven track record of turning around EQT and efficiently integrating three large-scale acquisitions over the past several years including seamlessly onboarding an entire midstream division with the XcL acquisition last fall. This accelerated closing amplifies our momentum and pulls forward our timeline to synergy capture. We have continued to study synergy potential since announcement and have identified further upside potential driven by completion efficiency gains through water asset integration which is on top of early compression uplift results that are exceeding our high-end synergy assumption and we plan to share additional details as our teams work through the integration process. Shifting gears June 14th, 2024 marked a historic moment of progress for our country as natural gas began flowing through Mountain Valley Pipeline. The gas moving through this critical infrastructure will provide low cost, low emission energy to millions of Americans while strengthening our national security. The upstream development underpinning flows on MVP will generate hundreds of millions of dollars of royalties every year to local communities in the Appalachian region while supporting well-paying private sector jobs. Downstream, the delivery of low cost Appalachian gas will strengthen the competitiveness of American manufacturers whose energy input costs will be a fraction of the price paid by global competitors, which should further support a manufacturing renaissance in America. MVP will also provide utilities access to cheap, reliable fuel to power America's data center and artificial intelligence buildout which is one of the strongest secular growth stories in the world. Since announcing the Equitrans' acquisition earlier this year, we have fielded significant inbound interest from end users of gas in the region, underscoring the depth of demand in the value of EQT's MVP capacity. MVP's volumes alone are estimated to reduce carbon emissions by up to 60 million tons per year via displacement of legacy coal generation, which to put in context is five times the emission reductions associated with Tesla's electric vehicles. In fact, thanks to MVP's completion, EVs in the southeast region can now run on low-emission EQT gas delivered through MVP, rather than the coal generation powering many of them today. Given the regional exposure, upstream inventory depth, and counterparty quality, we believe MVP is among the most valuable natural gas pipelines in the world, and EQT is honored to be the operator and steward of this critical infrastructure. Turning to second quarter results, we experienced yet another quarter of operational outperformance marked again by incremental efficiency gains. A tangible example of this on our recent Mallory C Pad in Lycoming County, Pennsylvania, where our top-holed rigs recently drilled the fastest well to kick-off point in EQT history, with the overall average drilling time to kick off point across the pad being 25% faster than the offset wells we drilled in 2022. This efficiency improvement is resulting in tangible well cost savings as the average top-holed drilling cost on the Mallory C Pad came in 14% below our pre-drill estimate. Within completions, recent improvements in logistics planning and water throughput have driven materially faster completion times on our latest wells. Our average footage completed per day is up 6% year-over-year thus far in 2024, but our most recent pads implementing new logistics techniques have outpaced our average 2023 completion speed by more than 35%, indicating the potential for material future capital efficiency improvements. Notably, this average excludes a pad we are currently fracking, which today has seen completed footage per day that is a whopping 120% faster than our 2023 program average and set a new EQT standard with more than 3,200 feet of lateral completed in a single day. As I mentioned previously, we believe the integration of EQT and Equitrans' water systems can help sustain these completion efficiency improvements as streamlining water logistics is one of the most imperative elements to systematically increasing completed footage per day. Despite efficiency gains accelerating activity into Q2, our second quarter CapEx still came in below the midpoint of our guidance range, highlighting how operational efficiency gains are driving tangible per well cost savings. Alongside well cost savings, we are also seeing strong well performance across our asset base, which drove upside to our second quarter volumes despite price related curtailments. As shown on slide 6 of our investor deck, this represents a continuation of the track record of productivity gains that have been a hallmark of EQT since new management took over in 2019. Over this period, third party data shows we have seen a nearly 40% improvement in average EUR per lateral foot, while most of our peers have seen productivity degradation as core inventory is exhausted. As a result, EQT is now generating the highest average EUR per foot of any major operator across the Appalachian Basin. I also want to highlight this productivity improvement has come despite a material increase in field pressures across Equitrans' gathering system over the same period, which essentially makes it more difficult to flow our wells. We see significant upside from investing in compression to lower system pressures, which in turn should further improve well productivity and further reduce our upstream maintenance capital requirements in future years. On slide 7 of our investor deck, we highlight data from three recent infield examples showing how impactful adding compression and lowering line pressure can be on existing wells. After lowering system pressures by approximately 300 PSI, we saw per well production rates immediately jump by roughly 50% on average across the three projects. Over the first 12 months post-pressure reduction, we forecast cumulative production gains ranging from 18% to 27%, which in effect, lowers our base PDP decline rate and we believe will translate to higher EURS per well. Notably, the average production uplift from these projects is approximately 2x more than what we assumed in our $175 million per annum of upside synergies with the E-Train deal, indicating potential for even more positive benefit than we originally expected. These concrete examples underscore the impact of adding compression to lower system pressures on thousands of producing wells that comprise EQT's base production. This uplift on base volumes should in turn allow us to drill and complete fewer wells to maintain production, driving sustainable improvements and long-term capital efficiency. We are currently in the process of identifying optimal compression locations across the E-Train system and expect the tailwinds from lower maintenance capital to begin accruing in 2026. Turning to our recent ESG report, I am proud to highlight that we took another material step forward towards our ambitious environmental goals as our 2023 Scope 1 and 2 legacy production segment, greenhouse gas emissions declined by 35% year-over-year to approximately 281,000 tons. We have now reduced our historical Scope 1 and 2 production emissions by nearly 70% over the past five years and are squarely on track to achieve our ambitious and peer leading net zero goal by 2025. From an emissions intensity perspective, we achieved our 2025 greenhouse gas emissions intensity goal of 160 tons per Bcfe, a full year ahead of schedule. Looking at methane after significantly outperforming our pneumatic device replacement timeline, the methane intensity from our production operations is now 0.0074%, which is more than 60% below our 2025 goal and 97% below the one future 2025 target, making EQT among the lowest methane intensity producers of natural gas anywhere in the world. Thanks, Toby. Before I summarize Q2 results, I want to take a moment to thank our shareholders for the tremendous show of support in last week's vote on the Equitrans acquisition, of EQT shares cast more than 99% voted in favor of the deal despite this being an unconventional acquisition relative to what investors have become accustomed to in upstream M&A over the past decade. We see this vote underscoring the strong support from investors. They share a philosophical view that being at the absolute low end of the cost curve will create differentiated and sustainable long-term value amid a volatile commodity price landscape. Since taking over EQT in 2019, we as a management team have never been more [inaudible] that this company is on the right strategic path, and we look forward to continuing our track record of execution on behalf of our shareholders. Shifting to second quarter results, as planned, we curtailed one Bcf per day of growth production throughout most of the quarter, which along with non-operated curtailments impacted net production by approximately 60 Bcfe during Q2. Despite curtailments, strong operational efficiency and well performance drove production of 508 Bcfe above the high end of our guidance range. Per unit operating costs came in at $1.40 per Mcfe below the low end of guidance due to LOE and G&A expenses coming in below expectations. CapEx also came in below the midpoint of guidance despite an accelerated development pace, as efficiency gains drove lower than expected well costs. Turning to the balance sheet, we're off to a fast start on our deleveraging plan as we repaid $600 million of 2025 senior notes last month with cash on hand and proceeds from the Equitrans transaction. We exited the quarter with net debt of roughly $4.9 billion down from $5.7 billion at the end of 2023. Concurrent with the closing of Equitrans, we also upsized our revolver from $2.5 billion to 3.5 billion, which speaks to the depth of support for our bank group. This revolver is on par with the largest companies in the energy industry and gives us ample liquidity to handle any foreseeable natural gas price scenario moving forward. With the close of Equitrans this week, pro forma gross debt is expected to be approximately $13.5 billion, inclusive over the redemption of Equitrans is 14% preferred equity at closing. With the deal closing sooner than we originally anticipated, we expect our deleveraging timetable to be pulled forward by approximately six months. On the midstream side, we plan to pursue a minority equity sale of Equitrans as regulated assets, which are projected to generate approximately $700 million of adjusted EBITDA. This strategy will allow EQT to retain full operational control and upside value associated with synergy capture and future pipeline expansions. We're also marketing the remaining 60% of our non-operated assets in Northeast Pennsylvania and are in active discussions with both domestic and international buyers. We continue to target reducing our long-term debt to $5 billion to $7 billion and are highly confident in achieving our goal. Alongside planned after sales, we have further de-risked our deleveraging plan by increasing our near-term hedge position. We're approximately 60% hedged in the second half of 2024 with an average floor price of roughly $3.30 per MMBtu and approximately 60% hedged in the first half of 2025 at an average floor price of roughly $3.20 per MMBtu. We are actively building our hedge position in the second half of 2025 in order to bulletproof our deleveraging plan in any reasonable natural gas price scenario. Turning briefly to the Appalachia macro landscape, while the pace of eastern storage builds is moderated, absolute storage levels remain high on the back of warm winter weather last year, thus pressuring Appalachia pricing this year. In response to market fundamentals, we continue to tactically curtail production, including over the past weeks, and expect to continue this tactical curtailment program during the upcoming fall shoulder season. To this end, our second half 2024 production guidance assumes 90 Bcfe of anticipated curtailments, which should have a meaningful impact on both eastern and total U.S. storage levels as the market wraps up injection season. I want to highlight that normalized for the roughly 180 Bcfe of total curtailments that we expect this year, our production would have been above the high end of our original 2024 guidance range, which speaks to the productivity and operational efficiency gains that Toby spoke to a few minutes ago. While Appalachian storage is elevated today, the startup of MVP last month should provide support to Appalachian differentials moving forward. To put MVP's impact in context, assuming MVP flows at just half of its capacity on average for a year implies 300 to 400 Bcf of gas that otherwise would end up in Eastern storage that now will be directed to the Southeast demand centers. Given total maximum Eastern storage is roughly 975 Bcf, MVP flows represent a material and structural shift and local supply and demand fundamentals, which in turn should help tighten local basis over the coming years. In fact, between MVP coal retirements and organic load growth, we see implied Appalachian demand approaching 41 Bcf per day by 2030 compared with 35 to 36 Bcf per day of current basin supply, which should translate to better local pricing and present a sustainable growth opportunity for EQT at some point in the coming years, given we have the deepest, highest quality inventory of any operator in the basin. Turning to guidance, we have issued pro forma Q3 and Q4 metrics on slide 29 of our investor presentation. Our cash operating expenses are expected to range from approximately $1.10 to $1.25 per Mcfe in the second half of the year, which at the midpoint is roughly $0.25 per Mcfe below our standalone operating expenses in Q2. This reflects the benefit of eliminating expenses associated with the Equitrans acquisition or the most notable movement being our gathering rates, which are forecasted to decline from $0.59 per Mcfe in Q2 to just $0.05 to $0.09 per Mcfe in the second half of the year. Inclusive of the benefits from third-party revenue and the full run rate distributions from our MVP ownership, our net operating expense should equate to roughly $0.75 to $0.85 per Mcfe by the fourth quarter, which is approximately $0.60 per Mcfe lower than standalone EQT and drive home the relative advantage of our vertically integrated cost structure. It's also worth highlighting that we do not embed any of the $250 million of base synergies into our Q3 or Q4 numbers as we have conservatively modeled base synergy capture beginning in mid-2025. As I mentioned previously, our second half 2024 production outlook embeds approximately 90 Bcfe of strategic curtailments this fall, which we will opportunistically execute should gas prices remain depressed. I'd note that curtailments are driving approximately $0.05 per Mcfe of upward pressure on our second half 2024 cost structure. So our 2025 expenses should be even lower than the range as I cited previously. While we still need to go through our full budgeting process for 2025, we preliminarily expect an all in pro forma capital budget in the range of $2.3 billion to $2.6 billion. Beyond 2025, we forecast long term pro forma capital spending ranging from $2.1 billion to $2.4 billion per annum prior to capturing the $175 million of upside annual synergies we laid out with the Equitrans acquisition announcement. Said another way, our long term capital spending inclusive of Equitrans should essentially be in line with standalone EQT capital spend in 2024. And this is before capturing upside synergies, which speaks to the structural capital efficiency improvements accruing in our upstream business. At recent strip pricing, we forecast pro forma cumulative free cash flow of approximately $16.5 billion from 2025 to 2029 in an average annual gas price of roughly $3.60 per MMBtu over this period. Even assuming a $2.75 natural gas price over this period, EQT will still generate north of $9 billion of five year cumulative free cash flow. While the bulk of our peers would be cash flow neutral or negative, underscoring the power of our low cost structure and highlighting how EQT is uniquely positioned to create differentiated shareholder value in all parts of the commodity cycle. And with that, I'll turn the call back over to Toby for some concluding remarks. Toby Rice Thanks Jeremy. In closing, July 10th marks the five year anniversary of the EQT takeover. It has been a lifetime of work but passed by in the blink of an eye. We have been reflecting recently on what this management team has accomplished together, taking a struggling company with great assets and transforming it into a best-in-class producer recognized as an industry leader. We have increased production over 50% from 4 Bcfe per day to 6.3 Bcfe per day and have transformed our free cash flow cost structure from $3 per million BTU to a peer-leading $2 per million BTU through operational improvements and thoughtful and accretive M&A deals. Normalized for natural gas prices, we have grown the free cash flow generation of EQT by 5x and increased free cash flow per share by nearly 2x and we have repaired our balance sheet and reattained investment grade credit ratings. Today, we are executing at a high level operationally with identified opportunities and completions and midstream set to drive yet another step change in operational improvements. We are executing financially with a fast start to our deleveraging plan and robust support from our bank group and shareholders and we are executing strategically at an industry leading pace as we continue to transform EQT into the energy company of the future. I'd now like to open the call up for questions. Your first question comes from a line of Arun Jayaram from J.P. Morgan. Arun Jayaram Good morning, gentlemen. My questions are regarding kind of the asset sales or divestiture program. Jeremy, maybe I was wondering if you could start with the process to sell some of your non-op in the Northeast. Could you gauge the level of interest that you're seeing for the remaining 60%? And do you still believe the market is supportive of a similar valuation marker as you got in the Equitrans transaction? Jeremy Knop Hey, Jeremy. Good morning. Yes, we're seeing really good interest. I think I would characterize it as really a renewed set of interest, a lot of new names, actually, in the process from the international space that we didn't see the first time around. So that's been really encouraging, a lot of great engagement. So I think our feeling towards that process remains really positive. And I hope to get that wrapped up by your end. Arun Jayaram Great. And then my follow-up is you've highlighted kind of a structure you planned to pursue in terms of carving out your regulated assets and selling a minority interest in those assets. Do you plan to reduce gross debt at the EQT parent level as part of that process? And just a question that's come up is, do you, what type of partner approvals, is there a row for an MVP but could you just go through some of those types of things that you need to do to process that the next phase of your leveraging program? Jeremy Knop Yes, taking the route that we outlined in the prepared remarks actually bypasses most of the sort of considerations you might typically get hung up in with like drag rides, tag rides, and a deal like that. So it really simplifies it and I think it really provides a better, higher quality, more diverse set of assets to back an investment which drives the cost of capital down. So look, we've spent a lot of time, we've had a lot of discussions with a lot of parties on this already, even pre-closing. And so with closing happening a couple days ago, we're really in the thick of getting that data organized so we can kick that process off. And I hope to be able to get that wrapped up as soon as yearend. It might bleed into early Q1 but I think there's a real chance that all gets wrapped up this year as well. Your next question comes from the line of Doug Leggate from Wolfe Research. Doug Leggate Hey guys, thanks for having me on and congratulations. I didn't quite realize it'd been five years Toby. It has indeed flown by. I've got two quick questions, I hope. The first one is on the capital budget for the next two or three years alongside the compression results that you've had. What we're trying to figure out is how much of the spending is related to that de-bottle making, if you like, and when does it roll over so that you basically get back to a steady state level of spending associated with your growing program? Toby Rice Yes Doug, thanks for the question. On the compression, higher level, we just refer to this as pressure system optimization across our systems. We think this is going to be about a few hundred million dollars. Now the timing of that, there's some lead time there, so that's probably going to start maybe 12 months from now, and that could span over a couple of years just determining on the type of pace that we see. But that being said, we have in our '25 budget right now, we have included some cushion to be able to get those projects started as quickly as possible. And the results that we showed, the pilot that we showed today about the compression uplift is really encouraging and will lead to some really exciting returns that we'd like to accelerate as quickly as possible. Jeremy Knop Yes Doug, welcome back by the way. If you look at what we've put in our new slide deck that we put out last time, we put a couple case studies in from some recent pad level compression projects that we've installed. These are not a perfect proxy to centralized compression, which is a lot, it's going to have a much broader impact superior to what these examples show. But even those examples at $3 gas, I mean these are, you're generating 2.5x to 3x your money on that compression on just the pad level. So again, on a centralized basis, it's going to be higher than that. And then beyond just uplifting that base PDP for the existing production, you're going to see an impact on all of our future development as well. So the rate of return on this compression is superior to probably any well we could pick to drill. And as Toby said, the spend amount is really not that much. When you space it out across a couple of years on an annual basis, it's mitigated even more. But if you look at slide 8 of our investor presentation, the delta between that 2025 guidance number and then what we call long term right below that, you can kind of think about that as the annual difference in sort of uplift and spending we might see in a given year while we're doing that before reverting to a much lower range long term. And as a reminder that lower range that we show from $2.1 billion to $2.4 billion long term that excludes the $175 million of synergies that we called upside synergies. So I would say that upside synergy assumption assumed a level of uplift from compression less than what we're already seeing on even a pad level basis. So I think that number is probably even biased higher as we see the benefits of these projects come to fruition. Doug Leggate So guys I'm sorry for the follow-up but just to simplify it. So would it be a stretch to say that when you get to that point with the synergies your run rate capital could be under $2 billion? Okay, that's what I was trying to get to. Thank you, guys. My follow-up is a quick one. Hopefully Jeremy, managed to right down your fairway. Why is any ownership of the regulated assets make sense? Jeremy Knop Yes, that's a great question, actually. It's something we've kind of debated internally as we've thought about the right structure here. So for the regulated assets specifically, if you start with the transmission storage segment of Equitrans, that is really an extension of the gathering system. There are a lot of big header pipes that cross state lines, and so they are regulated. Maintaining the right pressures on those systems, being able to control things like expansions, is really integral to managing the gathering systems appropriately. And then when you think about those pipes then flowing into a longer distance regulated pipeline like MVP, maintaining that interconnection, that pressure at an appropriate level, it all kind of works together as a single system. And then as we think about MVP, as we talked about last quarter, the expansion on that project, we think is a highly economic expansion. That's something that we want to get done to evacuate more gas out of Appalachia and get it to a premium end market in the southeast. We want to make sure that project happens. Whether 5 or 10 years from now, it makes sense to still own something like MVP. Once all that expansion is completed, I think that's something we'll always evaluate. But I think at this juncture, we do want to maintain the operatorship and ownership of it. Toby Rice Yes, Doug, I'd say at a very high level, what we're doing here at EQT is creating a culture that is going to be able to pick up every penny, nickel and dime within our operating footprint. And one of the ways that we can drive the value creation is to expand the size of the operational footprint. And so there is an element of having those transmissions, a bigger commercial system, is going to make it a little bit easier for us to identify and capture some of those opportunities. So that's just another factor that we have in the back of our heads as well. Doug Leggate I guess that's pretty clear. Thanks for taking my questions in place and thanks for your comments, Jeremey. Your next question comes from a line of Neil Mehta from Goldman Sachs. Neil Mehta Yes, congratulations on closing the transaction, team. Two questions on the macro here. First is just can you talk through your hedging strategy, both near and long term, and how does the E-Train acquisition play into your hedging decisions going forward as you want to take advantage of the volatile market that you talk about. Jeremy Knop Yes, good morning, Neil. I'll break it into kind of two pieces. Near term, it's really all focused on balance sheet, de-risking, de-leveraging. I call that through 2025. Beyond 2025, I think our view is the deal we just did not only unlocks the value we've been talking about, but it really provides a structural hedge for our business. So the need to hedge beyond that. We won't have financial leverage to really protect. We won't have operating leverage to protect. And so we don't really have to hedge at all. I think if we do, it'll be more opportunistic, but it'll be pretty small in nature probably at max around a 20% level if we just get really bearish on the outlook for some reason. But otherwise, I think the goal strategically of what we're trying to do is set ourselves up where we don't have to hedge, because we see so much more upside than downside. But I think as you've even seen this year you've seen gas prices go as low as about $1.60, rebounded over $3, and now trade back towards $2, right. So you're already seeing this theme of volatility play out. And the best way to capture value from that is to not have to hedge. And so that's really the long-term plan and how we're trying to position. Neil Mehta That's helpful. And then can you just talk through, you've done a great job walking us through your long-term views around data centers and power demand growth, which we agree is a very compelling story. 2025 is a little trickier just because you've got some pushout of some major projects like Golden Pass, and we're trying to digest the spare capacity that might be in the system too. So how do you think about the supply demand outlook for gas as we think about 2025, and what are you guys watching as markers? Jeremy Knop Yes, so I think the key thing we're watching probably going into yearend is production. I think this number hovering around 102, it's a healthy number, but if you see a surge into winter again, if other producers turn on a lot of volume, I think we are watching for that because that could be a near-term headwind to price. I think at most that would impact the first half of 2025. I know the team at Goldman has been pushed out into 2026 for a golden path and service date. I think with some of the updates that we've seen even this week with that bankruptcy process of Zachry Holdings, it seems like that might get pulled back forward, but a couple of these key factors on the LNG side are really going to drive that. So I see it really is a story of production and a story of LNG. I don't beyond that see any sort of step change benefits necessarily in 2025 that are going to move the needle nearly as much as those two factors. Your next question comes from a line of Scott Hanold from RBC. Scott Hanold Good morning. Hey, a question on now that MVP is online, I'm just kind of curious is there any change in the dynamics you're seeing in the Appalachian or the Southeast market now that's flowing and related to that, have you seen any moves by some of the Appalachian producers to increase activity given the, obviously extraction of some of the volumes in the basin? Jeremy Knop Yes, so this is actually something really exciting that we've been really pleasantly surprised by. So I guess on the production side, we have not seen any reaction. So we have, production continues to be flat consistent with our expectations. What has surprised us though is that in that end market, we model the way we sort of mark that station 165 pricing where we're selling gas, we've sort of modeled it around a $0.20 premium dip to M2 pricing. We have seen pricing recently kind of average $0.50 to $0.70 above, so significantly higher than what we have assumed. And there have been periods of time where it's well worth $1 above M2. And so I think we've been really encouraged by how much gas that market has been taking. Part of it has been impacted by some maintenance on Transco, but I think for being a midsummer period, seeing that demand and that premium price already show up, I think is an awesome really early side marker. And so I think that the benefit we might see in winter periods could be even better as well, and certainly better than maybe what we have forecasted, but it's still early. There's a new price marker that flat put out for that station 165 market. So we're watching like everybody else to see how that develops, but I think all signs are pointing to a really positive direction on that. Toby Rice Yes, Scott, one other thing I'd just have you take a look at on slide 6 where we talk about the improving EURS for EQT. If you look at sort of where the peers are at and you see in the EURS come down over time, that's just a sign of some of the inventory, the core inventory depletion. The read-through there is there could be some pressure against operators and their willingness to go out there and accelerate or grow purely just to preserve inventory. So that's another thing that's happening in the background and there's only a couple operators that really have high-quality inventory like EQT and [inaudible] where we've been pretty vocal in staying in this maintenance mode, but continue to supply the market. So I think that's an important backdrop just to keep in the back of your head. Scott Hanold I appreciate that. Sounds good. Here's my follow-up, Toby. Look, you've been never shy to discuss politics from time to time. And as it relates to being a gas producer, what do you think the biggest issues are for the upcoming election? Like, what are the things that are you really focused on? Toby Rice Well, I'd say we align our politics with the politics of our customers, which is every American that uses our products. So we don't try and be too biased one way or the other, just really centered on the facts. Listen, I think we're in a period of time where people are only going to get smarter about energy. There are some clips talking about some politicians talking about banning fracking. And this is a time for us as an industry and as Americans to hold leaders accountable for statements that I think are really damaging and cause completely unintended impacts. I mean, as it relates to hydraulic fracturing and the ban of that. We cannot ignore the science on this. Over 10 years it's been studied in under the Obama administration. The EPA put out a report saying hydraulic fracturing is safe. And understanding the implications of these type of decisions 98% of the wells in this country require hydraulic fracturing. That goes away. You snap your fingers and the production in the United States, which we fought for decades to create America as an energy powerhouse, would sort of evaporate. And we'd see production in this country drop 35%. That's going to lead to a lot of terrible things. And the ironic thing is as an oil and gas operator this is a price times volume game, our production at EQT would go down call it 25%, our corporate decline, but price would skyrocket. And that's the tough part here is that it would actually be constructive for prices but it be bad for Americans and that's why we need to make sure our politicians are putting the right policies in place with all the crazy things that are happening in this world we're really encouraged to see that energy is still at the top of the list of the as a key issue for American voters and it's something that we need to take very seriously. Your next question comes from a line of Josh Silverstein from UBS. Josh Silverstein Good morning, guys. Just on the [inaudible] for next year I'm trying to think about the trajectory of the natural gas volumes. Do we think about no kind of the second half run rate going forward with the curtailment coming back? Do you think you'd probably keep this the volumes curtailed? So maybe a little bit more clarity there will be helpful. Thanks. Jeremy Knop Yes, Josh, I think in our view it's just maintenance mode. I mean I think in our prepared remarks we commented that if we had not retailed this year, we would have been above the high end of the range originally that was 2,300 Bcfe on the high end, We're running our business in maintenance mode so I would expect looking at the next year that's the volume level you look at. I think the only difference there is that the divestment of our non-op interest in some of the transaction impacts from that but aside from that we're running enough in a steady maintenance of cadence. Josh Silverstein Got it. So that kind of around maybe like 550 or kind of quarterly Candance or around them? Right, got it, okay, so still growth in the next year relative to the back half , got it. Okay. And then just on the pro forma kind of cash flow profile, when you first announced the transaction with E-Train, you mentioned about 30% of the pro forma cash flow would be midstream. I'm wondering if that still holds given that the minority sales that you guys are looking at what the number actually be lower and if it is lower would you want to reduce that even further to where you guys want to be performing? Thanks. Jeremy Knop Yes, it really comes down to kind of what value and multiple we would sell that at. But yes, I mean, all else equal, if you sell down some of that, it should drop a little bit. But that's factored into how we look at pro forma leverage already. So I don't think it really impacts how we think about our plans. And the only other thing that's going to impact that next year, too, is obviously gas prices. So if prices decline or go up a lot, that percent of midstream is going to oscillate with that as well. Your next question comes from a line of Roger Reed from Wells Fargo. Roger Read Yes, thanks. Good morning, everybody. I'd like to take a look slide 11, you have the organic deleveraging and the free cash flow expectations, '25 through '29. I'm just curious. Clearly, you're not going to be aggressive on the hedging side in the future. So what's sort of the underlying assumption on gas prices, gas volumes that gets us the numbers you lay out there? Jeremy Knop Yes, so the numbers we look at on page 11 are really based on our internal assumptions around the asset sales and then where strip pricing is today. But look, that's the reason why we're also hedging. If you look at just organic free cash flow, really between now and the end of 2025, at $2.75 gas prices, you're still generating over $1 billion of free cash flow. So I really, in any case that we've laid out, if we take a more conservative lean to that, if things just go wrong in the macro for whatever reason, I think we still feel really good about that assumption. That initial target we have, the specific target of $7.5 billion by the end of 2025, I'd call that our initial target level. I think that's within a margin of safety that the rating agencies outlined for us. But longer term, we would like to take that lower. That's why we talked about that $5 billion to $7 billion level. That could oscillate in time, depending on where we are in the cycle, depending on the opportunities of where else to invest cash. And look, we also want to very intentionally position ourselves so we have ample liquidity so that if there is volatility in the macro landscape and in our stock, that we're positioned to step in and buy a lot of stock back counter-stick quickly. If you don't pay down debt below a mid-cycle level, if you don't have a lot of liquidity, you can't do that. So another example of that revolver we just expanded by $1 billion to a $3.5 billion size, that's also trying to tee up and position ourselves for volatility and to take advantage of those opportunities. So this is all kind of placed hand in hand together with how we're trying to position ourselves to maximize value as we reallocate capital in the coming years. Your next question comes from the line of David Deckelbaum from TD Cowen. David Deckelbaum Thanks Toby and Jeremy for taking my questions. I wanted to just go back to the capital progression just in the context of the benefits that you've seen on the upstream side, I think you highlighted obviously the impressive achievements is getting your cycle times down on completions, like 35%. How much of that is reflected in the reduction in spend in '25 versus '24? And I guess just in conjunction with that, how much do you expect upstream CapEx to moderate next year? Toby Rice Yes, we have a small amount of those completion efficiencies baked into our '25 plan right now given the newness of this step change in completion efficiencies, we want to see a little bit more time, but we'll continue to add that back in there. And in the second part of the question? David Deckelbaum I was just thinking about this if you think year-over-year, what you're spending on upstream in '25 in that $2.3 billion to $2.6 billion versus this year? Toby Rice Yes, I would say, we think the upstream spending profile is going to be pretty similar to what we had pre-E -Train. I'd say that the impacts of the reduced CapEx are going to really start once those compression projects start hitting the front lines, which I'd say ballpark 12 to 18 months before that slope down. So everything that you're seeing in the upstream spending now is really just driven by base operating efficiencies and balancing the service pricing we see. Jeremy Knop David, from like a modeling perspective, I think about it this way at a high level. We've baked in the guidance we've given on those capital cost numbers. We've baked in all the capital costs, but we haven't baked in the benefits. We haven't baked in the, really the completion benefits, nearly to the level that we're actually seeing right now, we haven't baked in the $175 million of upside synergies even though the more work we do I think our bias is that that number probably grows. So I think there's a lot still on the table beyond what we have given out that we're hopeful to achieve but it's still early innings and so we want to see more definitive results there before we actually bake that into our definitive guidance. David Deckelbaum Yes, thanks, Jeremy. Just continuing on that I guess that long-term guidance of $2.1 billion to $2.4 billion at the midpoint is it fair to say that that's just reflecting the benefits from the installed compression bringing down that upstream budget relative to sort of the $2.3 billion the $2.6 billion in '25? Toby Rice No, we'd say that $2.1 billion to $2.4 billion really reflects that the spend on the compression is behind us. As we mentioned earlier in the call that $175 million of annual cost reductions as a result of that spending would be -- reduce that $2.1 billion $2.4 billion lower so I think we're going to just continue to quantify this and then you can see that come down in the future. Your next question comes from a line of Kevin MacCurdy from Pickering Energy Partners. Kevin MacCurdy Hey, good morning. We appreciate all the details on 2025 included in slide 8 and the further commentary you've offered in the Q&A. I have just a few more clarifying questions on that slide. I guess my first question is does the adjusted EBITDA number include the MVP distributions for next year and it's just annualizing your 4Q guidance kind of a good run rate for that? Jeremy Knop That number that EBITDA number actually does not include the MVP distributions because that's going to be more of an equity method investment. So we'll provide clarity on that as we go forward. And the second part of your question was what again? Kevin MacCurdy And if it's just a good estimate to annualize the fourth quarter guidance for the MVP distribution for 2025. Jeremy Knop Yes, I think it is for MVP specifically. I think on a whole company basis, the main impact was what we noted in our remarks earlier that curtailments are skewing the per unit cost metrics higher. So I think as you look into 2025, if you were to look at per unit metrics, those should skew lower, assuming no curtailments. But otherwise I think it should be a pretty decent proxy, which is why we broke it out separately. Kevin MacCurdy Great. And then you mentioned that this outlook was built using a maintenance production number. What is the risk of shut-ins coming back next year? And how have you thought about that in terms of your free cash flow or does the lower cost structure kind of reduce that shut-in risk? Jeremy Knop Yes, we don't proactively, on like a year ahead basis, bake in things like shut-ins, that's more of in response to the market. So if we did say the whole thesis in '25 -'26 analogy just got derailed for some reason, and there was a need to curtail, that would take production below that this sort of quarterly annualized number that I think you were getting at. But that's something that I think we would address more real-time as the market evolve. Your next question comes from the line of Jake Roberts with TPH. Jake Roberts Good morning. Maybe staying on that topic, is there any difference in how we should be thinking about the curtailments being baked into the guide of the back half of this year relative to what we saw in the first half? And what we're trying to think about is if there's a change in ECT's elasticity of supply between the two periods, perhaps with MVP online. Jeremy Knop No, I don't think MVP impacts that at all. I think we maintain full flexibility. I do think having midstream wholly owned where those MVCs effectively have been integrated away, I think that does give us a tremendous amount more flexibility to be a little more, yes, I guess really to pursue curtailments more than maybe we had in the past where we felt like we otherwise had a big debt obligation we're having to pay to the midstream service provider. But I think our reaction in the back half this year is more just governed by pricing. We haven't changed sort of the pricing levels we outlined earlier this year where we would look to curtail just because we own the midstream. I think we still have that sort of floor threshold level sort of focused on earning returns on shareholder capital, not just well CapEx, not just maintaining realized pricing above cash cost. It's got to be higher than that. So that's why we're proactively trying to guide to that. Jake Roberts Got it. Thank you. Quick second one. On slide 7, the three sites you've highlighted, I think you mentioned that you see kind of thousands of opportunities across the field to implement this. Can you give a sense of which how many wells each site touches, so to speak? Toby Rice Well, I wouldn't say that that would be the way we think about it. I would just say at a very high level, we just look at the system pressures. We've got over a dozen gathering systems that are all hydraulically connected. Each one of those has operating pressure that is sort of based on the amount of volume that's going through there, vintage of the wells that feed that, drive that. We also layer in where our development program is going to go and that will influence pressures as well. So there's the exercise that the teams have run through is sort of forecasting what those system pressures look like and then assessing through compression what the productivity uplift will be if we lower the system pressures three, four, 500 PSI and what that will look like. So I would say as a whole, this is a pretty large opportunity for us at EQT and it's really exciting to look at the evolution of the improvements we made in this business. I'd say the last five years have really been focused on optimizing the efforts on site, drilling, completing wells and being more efficient on the production side. But now the efficiencies that we're focused on are going to be really more on the midstream footprint and the actual field wide improvements. Your next question comes from the line of Michael Scialla from Stephens. Michael Scialla Yes, good morning, everybody. I just want to ask on the expansion of MPP. Sounds like I heard you right the time frame you're thinking there's maybe five years down the road even though you're seeing pricing they're getting a pretty hefty premium to other parts of the basin. So just wanted to explore that timing is that because you don't think the demand there -- is there right now or just any more color you could provide on the timing of that expansion? Jeremy Knop Yes. I'm not sure where the five years came from. I think we're excited to pursue that expansion as soon as possible actually. I think the only the only thing that we would that would cause us any delay is just making sure that it was time to come online with that expansion project on Transco to take all the gas but beyond that I think we were incentivized to get that built as soon as possible. And again that net to EQT that's a cost of probably $200 million to $250 million net to get that built and I would say that the guidance that we have given out in our slide deck that longer-term guidance today. I just say there's ample cushion built in. So I wouldn't expect that CapEx number longer term to really change it all despite the timing that we decide to pursue that expansion project. So that remains something that high on our priority list to get knocked out. Michael Scialla No, okay, great. Sorry, I misheard you on that. Have you started an open season there yet, or is that still down the road? Jeremy Knop No. I mean we just closed two days ago, so it's a little quick to do that. But I think it's something that we're going to start exploring quickly. Michael Scialla Got you. And just want to ask on curtailments, can you say how much you're currently curtailing in that 90 Bcf in the second half? Is that all assumed to be in the third quarter? Any more color you can provide there. Jeremy Knop Look, it's in response to the market if we can make money selling gas who wouldn't curtail anything obviously. But our assumption right now is that the majority of those curtailments probably take place in September and October We have curtailed even over the past week some volumes on given days depending on weather depending on maybe it's over a weekend not up quite to a 1 Bcf a day level, but we do on a very dynamic basis optimized realized pricing to make sure that we're optimizing value creation and not just giving our product away for price where we can't make money. And that's what we'll continue to do, Your next question comes from line of Noel Parks from Tuohy Brothers. Noel Parks Hi, good morning. Just had a couple. I was wondering you talked a bit about the impact of MVP on regional gas storage especially in the east and where do you say we are in really offsetting the effect of seasonality as a big driver of gas pricing LNG eventually as a feed then is going to offset that, but just some thoughts on where you think we are at this point. Jeremy Knop Yes, I mean look, winter has always been, and I expect to continue to be the biggest source of demand for natural gas. I think I'd love to see a world where power generation grows and helps increase that demand in the summer time as well, so you kind of see two peaks in the market, but I think it's probably a little too early to say exactly how quickly that develops. Now I will say if you look at our slides from last quarter, what we outlined in power demand growth for natural gas, and the fact that over the past decade you've had increase of about 10 Bcf a day just on the power side, and now what's happening with load growth on top of that, on top of coal retirements, I do think we are moving that direction in time, but it doesn't mean you're getting away from seasonality, it just means that you have a lot of demand at peak summer and a lot of demand peak winter, so I just think the nature that's going to evolve a little bit, and then LNG send out in the middle of that, which also could be somewhat seasonally driven, I think only amplify that seasonality. Noel Parks Got it, and I wondered just if you had thoughts on the outlook for industrial demand, both sort of in-region and out-of-region in terms of gas from more of an energy security resiliency level, just taking a greater role and sort of on a microgrid level as power demand overall keeps increasing. Jeremy Knop Yes, I mean, look, I think this theme of reshoring manufacturing is going to continue, it seems like they're both sides of the aisle are very supportive of that. I think the sort of deglobalization movement out of Asia for manufacturing will be a tailwind to that. I think energy policy and prices in Europe are a tailwind for that. That is something that is baked into our comments that we made earlier on about Appalachia demand growing upwards by the end of the decade, maybe to 40, 41 Bcf a day. There is a component of that baked in, but I would say the beauty of industrial is it's pretty steady, it's pretty predictable, and I think if you look at recent history of that, it has been flat to slowly growing, and I think that trend should continue. I wouldn't say there's any sort of big catalyst needle movers that should really skew up a fundamentals model all that much. Toby Rice Yes, I'd say at a very high level, energy insecurity is going to continue to be a big theme around the world and even in parts of this country, and the volatility that we see is only going to drive consumers of natural gas closer to the source of where that energy is produced to reduce the number of things in between their manufacturing facility and the source of energy. That's one way they can protect their supply and protect their business. And that just is going to mean that we think this volatility is going to drive more in base and demand for natural gas products. That concludes our question and answer session. I will now turn the call back over to Toby Rice for closing remarks. Toby Rice Thanks everybody for being here today. With this being our five year anniversary, I just want to reiterate to everybody that all of the progress that we've made at EQT would not have been possible without the shareholders. It was you that voted 80% to put in a new management team here and give us this opportunity to realize the full potential of EQT. It was you all that voted, brought in a board of directors that has really been amazing at guiding us through this amazing transformation. And with this 99% shareholder vote supporting transformative transaction with the E-Train assets, you've given us a platform to continue this momentum. And we're really excited about working hard for you going forward. This concludes today's conference call. Thank you for your participation. You may now disconnect.

Earnings call: Bread Financial reports a net income of $133 million By Investing.com

Bread Financial Holdings Inc. (NYSE: BFH), a leading financial services provider, reported a solid performance in the second quarter of 2024, with a net income of $133 million and earnings per diluted share of $2.66. The company's tangible book value saw a significant year-over-year increase, and direct-to-consumer deposits continued to grow robustly. Despite facing regulatory challenges and a dynamic macroeconomic environment, Bread Financial is optimistic about achieving its long-term strategic goals and financial targets. Bread Financial remains focused on responsible growth, enhancing digital offerings, and driving operational excellence. The company's proactive approach to managing the macroeconomic and regulatory environment, along with its strategic partnerships and disciplined capital management, positions it well for future performance. Despite some challenges, the outlook for Bread Financial remains cautiously optimistic as it navigates through the current economic landscape. Bread Financial Holdings Inc. (NYSE: BFH) has demonstrated resilience in the face of economic headwinds, as shown by its recent quarterly performance. According to InvestingPro data, the company's market capitalization stands at $2.59 billion, with a P/E ratio (adjusted for the last twelve months as of Q1 2024) of 6.22, indicating that the stock is trading at a low earnings multiple. This could suggest that the stock is potentially undervalued relative to its earnings. Despite a revenue decline of 5.14% over the last twelve months as of Q1 2024, Bread Financial has maintained a solid operating income margin of 20.33%, which points to effective cost management and operational efficiency. Additionally, the company has consistently rewarded its shareholders, maintaining dividend payments for 9 consecutive years, with a recent dividend yield of 1.61%. InvestingPro Tips highlight several key aspects for potential investors to consider. Analysts have revised their earnings estimates upwards for the upcoming period, which may signal confidence in the company's future performance. Furthermore, Bread Financial has experienced a strong return over the last three months, with a price total return of 43.51%, reflecting positive market sentiment. However, it's important to note that the company suffers from weak gross profit margins, and analysts expect net income to drop this year. Moreover, the stock's price movements have been quite volatile, which could indicate higher risk for investors. For those interested in a deeper analysis, there are 12 additional InvestingPro Tips available, which can provide more nuanced insights into Bread Financial's performance and outlook. To explore these further, visit https://www.investing.com/pro/BFH and use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. Operator: Good morning, and welcome to Bread Financial's Second Quarter 2024 Earnings Conference Call. My name is Towanda, and I will be coordinating your call today. At this time, all parties have been placed on a listen-only mode. Following today's presentation, the floor will be opened for your questions. [Operator Instructions] It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial. Sir, the floor is yours. Brian Vereb: Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website at breadfinancial.com. On the call today, we have Ralph Andretta, President and Chief Executive Officer; and Perry Beberman, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the Company's earnings release and other filings with the SEC. Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website. With that, I would like to turn the call over to Ralph Andretta. Ralph Andretta: Thank you, Brian, and good morning to everyone joining the call. Starting with the highlights from the second quarter on Slide 2. I am pleased to report another quarter of solid results as we continue to navigate a challenging consumer and regulatory environment. Our strong results include net income of $133 million and earnings per diluted share of $2.66 or adjusted diluted EPS of $2.67 after adjusting for the anti-dilutive impact of our capped call transactions, which are related to the 2023 issuance and of convertible notes, which Perry will discuss more fully. Notably, our balance sheet continued to improve as we increased our tangible book value by 25% year-over-year to nearly $49 per share, improved our common equity Tier 1 capital ratio by 170 basis points year-over-year to 13.8% reduced our double leverage ratio to 110%, achieving our target of less than 115%. Additionally, direct-to-consumer deposits increased 20% and year-over-year to $7.2 billion, representing 14 consecutive quarters of growth. During our Investor Day in June, we highlighted the Company's transformation and our energized culture. The strong returns and capital generation that our business model can deliver and how our responsible capital allocation will build sustainable long-term value for our shareholders. We also announced our newest partnership with Saks Fifth Avenue. In the third quarter of this year, we expect to complete the conversion of the existing Saks portfolio and launched the new and enhanced program. In the second quarter, we made further progress implementing more of our mitigation strategy in response to the CFPB's rule on credit card late fees. Our ongoing discussions with brand partners have been productive, and we now have various pricing changes in market, including increased APRs and statement fees. We are closely monitoring the ongoing litigation related to the rule, and we'll continue to implement our mitigation strategies given the uncertainty surrounding the timing and outcome. Regardless of the litigation outcome, we are confident in our ability to generate strong results and achieve our long-term strategic objectives and financial targets. From a macroeconomic perspective, consumer spending continues to moderate, reflecting persistent inflation and higher interest rates. As a result, second quarter trends reflected lower transaction sizes accompanied by more frequent shopping trips as well as reduced discretionary and big-ticket spending. Credit sales were also impacted by our proactive credit tightening as we remain disciplined given economic pressures affecting payment capacity. Our credit actions have proven effective as delinquencies have trended lower, and the net loss rate is expected to have peaked in the second quarter. Our second quarter results reflect our position of strength with increased capital flexibility and financial resilience. We are better equipped to address uncertainty than ever before, positioning us well to generate long-term value for our shareholders. Turning to Slide 3. Our disciplined capital allocation strategy focuses on funding responsible, profitable growth, improving our capital metrics, reducing parent debt, and driving long-term shareholder value. Indicative of the success of this strategy is the 410 basis point improvement in our common equity Tier 1 capital ratio over the last three years, as shown in the chart on the left. As I mentioned previously, we have also made progress on our debt reduction, as shown in the second chart. Over the last three years, we have reduced parent-level debt by 53%. And this quarter, we achieved our long-term double leverage ratio target of less than 115%. This is an impressive achievement given where we were just four years ago when I joined the Company. Finally, our tangible book value of $49 per share has grown at a 22% compound annual rate since the second quarter of 2021. Supported by our strong cash flow, we expect to continue to grow our tangible book value over time. Turning to Slide 4. Our key focus remains on growing responsibly, managing the macroeconomic and regulatory environment, accelerating digital and technology offerings and driving operational excellence. As we highlighted during our Investor Day in June, our decisions are focused on creating sustainable value over the long term by effectively managing our credit risk while scaling and diversifying our product offerings, we can grow responsibly. Managing the macroeconomic and regulatory environment effectively is fundamental to our success. Although litigation is ongoing and timing and outcome unknown, we will continue to take actions to mitigate the potential financial impact of the CFPB late fee rule. We are confident in our strategy and have an experienced leadership team that has successfully navigated through regulatory changes in the past, such as card. Accelerating our digital and technology capabilities remains a top priority. We are committed to fueling innovation, leveraging data and AI, and scaling our platform to enhance satisfaction for our customers, partners and associates. Finally, our heightened focus on operational excellence to drive improved customer experience, enterprise-wide efficiency, reduce risk and value creation is embedded in our decision-making. Our goal is to consistently generate operational and expense efficiencies that enable reinvestment in our business support responsible growth and achieve our targeted returns. Our experienced leadership team remains focused on generating strong returns through prudent capital and risk management, reflecting our unwavering commitment to drive sustainable, profitable growth and build long-term value for our shareholders through challenging economic and regulatory environments. Now, I will turn it over to Perry to review the quarter's financials and to discuss our outlook. Perry Beberman: Thanks, Ralph, and good morning, everyone. Before I dive into the second quarter financial highlights, I'd like to discuss the financial benefits of the cap call transactions we entered into when we issued our convertible notes in 2023. The cap call transactions are set up to reduce the potential dilutive impact of the convertible notes up to a stock price of $61.48. Our GAAP diluted share count does not incorporate the anti-dilutive impact of these cap call transactions, which you can see incorporated in our adjusted non-GAAP figures on Slide 5. More specifically, the share amounts used in calculating adjusted net income per diluted share and adjusted income from continuing operations per diluted share have been adjusted for the anti-dilutive impact of our cap call transactions. Reflecting this, our adjusted net income per diluted share was $2.67 and our adjusted income from continuing operations per diluted share was $2.66 in the second quarter. Moving to Slide 6, which provides our second quarter financial highlights. During the second quarter, credit sales of $6.6 billion decreased 7% year-over-year, reflecting moderating consumer spend and our strategic credit tightening, partially offset by new partner growth. Average loans of $17.9 billion increased 1% year-over-year, driven by growth in co-brand programs, highlighting our continued focus on product diversification. Revenue was $0.9 billion in the quarter, down 1% year-over-year due to reduced merchant discount fees resulting from lower big ticket credit sales. Income from continuing operations increased $69 million due to a higher reserve release and lower noninterest expense compared to the same period last year. Looking at the financials in more detail on Slide 7. Total net interest income for the quarter remained essentially flat year-over-year, while noninterest income is down $8 million, resulting from the previously mentioned lower merchant discount fees on big ticket purchases. Total noninterest expense decreased 12% year-over-year primarily driven by a decrease in card and processing costs, including fraud and a reduction in depreciation and amortization costs and marketing expenses. Additional details on expense drivers can be found in the appendix of the slide deck posted on our website. Pretax pre-provision earnings or PPNR increased $48 million or 11%. Turning to Slide 8. Loan yield increased 30 basis points year-over-year, benefiting from the upward trend in the prime rate, which caused our variable price loans to move higher in tandem, along with some small amount of CFPB mitigation-related APR increase impacts. Both loan yield of 26.4% and net interest margin of 18.0% were lower sequentially following typical seasonal trends. We expect a seasonal improvement in the net interest margin in the third quarter of 2024. On the funding side, we are seeing total funding costs moderate as deposit costs are stabilizing. Additionally, as you can see on the bottom right chart, our funding mix continues to improve, fueled by growth in direct-to-consumer deposits, which increased to $7.2 billion at quarter end, while wholesale deposits declined. Direct-to-consumer deposits accounted for 40% of our average total funding, up from 33% a year ago. While we anticipate that direct-to-consumer deposits will continue to grow steadily, we will maintain the flexibility of our diversified funding sources, including secured and wholesale funding to opportunistically and efficiently fund and manage our long-term growth objectives. Moving to credit on Slide 9. Our delinquency rate for the second quarter was 6.0%, modestly down 20 basis points from the first quarter as a result of our credit-tightening actions. From this point forward, we expect future quarters to largely follow historical seasonal trends until we see broader macroeconomic improvements. The net loss rate was 8.6% for the quarter compared to 8.0% in the second quarter of 2023 and 8.5% in the first quarter of 2024. The second quarter net loss rate was elevated compared to last year due to more challenging macroeconomic conditions, pressure in consumer payment rates as well as ongoing credit tightening and our slower responsible loan growth impacting the denominator. As anticipated, the second quarter net loss rate is expected to represent the peak for 2024. We anticipate a reduction in the net loss rate in the third quarter to 8% or slightly below before increasing seasonally in the fourth quarter to the low 8% level. Our outlook assumes a slow gradual improvement in the macroeconomic environment as it will take time for the lingering effects of a prolonged period of elevated inflation to dissipate. As expected, the reserve rate of 12.2% remained within the range we have seen over the past six quarters. In this challenging macroeconomic environment, our conservative economic scenario weightings remained unchanged in our credit reserve modeling, and we believe our loan loss reserve provides an appropriate margin of protection. Consistent with what I said last quarter and based on our economic outlook, we expect the reserve rate to be lower at year-end 2024 versus year-end 2023, reflecting an overall improvement in delinquencies as well as improved credit quality in the portfolio. Further, our total loss absorption capacity comprised of the total company tangible common equity plus credit reserve rate ended the quarter at 26% of total loans, an increase of 100 basis points from last quarter and 270 basis points from a year ago, demonstrating a strong margin of protection should more adverse economic conditions arise. Looking at our credit risk distribution mix, the percentage of cardholders with a 660-plus credit score improved 200 basis points sequentially and remained above pre-pandemic levels despite continued inflationary pressures. This improvement is primarily a result of our prudent credit tightening actions as well as our more diversified product mix. We continue to proactively manage our credit risk to protect our balance sheet and ensure we are appropriately compensated for the risk we take. Moving to Slide 10, which provides our 2024 financial outlook. While there is uncertainty surrounding the timing and outcome of the ongoing CFPB late fee rule litigation, our outlook now assumes no impact from the CFPB late fee rule this year. Considering that a stay is an effect, the number of motions, hearings and other procedural matters, including appeals, expected to take place in the litigation over the coming months as well as a pursued implementation period following the final legal ruling, our base case is that the rule does not become effective in 2024. Our full year contemplates a slower credit sales growth rate as a result of moderation in consumer spending and credit tightening, both of which pressure loan and revenue growth and the net loss rate in the near term. In addition, our 2024 outlook assumes two interest rate decreases by the Federal Reserve in the second half of the year, which are expected to slightly pressure total net interest income. Based on our current economic outlook, proactive credit tightening actions, higher gross credit losses, and visibility into our new business pipeline, we expect 2024 average loans to be down low single digits on a percentage basis relative to 2023. Total revenue growth for 2024, excluding gain on portfolio sales is anticipated to be down low to mid-single digits with a full year net interest margin lower than 2023, reflecting higher reversals of interest and fees due to expected higher gross credit losses declining interest rates and a continued shift in product mix to co-brand and proprietary products. This guidance includes the impact of early CFPB mitigation pricing changes, which are not material to the full year 2024 guidance. As a result of efficiencies gained from ongoing investments in technology modernization and digital advancement, along with disciplined expense management and reduced fraud we expect expenses to be down mid-single digits relative to 2023. Expenses are projected to increase in the second half of 2024 versus the first half, driven primarily by the addition of Saks Fifth Avenue portfolio and increased sequential marketing expenses of around $10 million in the third quarter. We would expect fourth quarter expenses to be higher than the third quarter based on seasonally higher employee compensation and benefits costs, and further increased marketing expenses. As I mentioned earlier, the second quarter net loss rate is expected to be the peak for the year, and we continue to expect a full year net loss rate in the low 8% range for 2024. With the first half loss rate at 8.6% and a projected improved second half loss rate of approximately 8%, that would currently imply a full year net loss rate of around 8.3%. Again, our outlook assumes a gradual modest improvement in the economic conditions throughout the year aligned with most economists. Finally, our full year normalized effective tax rate is expected to be in the range of 25% to 26%. Quarter-over-quarter variability will continue due to timing of certain discrete items. We are confident in our ability to successfully manage risk return trade-offs through this challenging macroeconomic and regulatory environment, while continuing to make strategic investments that drive long-term value for our stakeholders. Before opening the call for your questions, I want to take a moment to reiterate the financial targets that we shared during our Investor Day in June. You can see these targets on Slide 11. Note, this slide assumed an October 1 CFPB late fee rule change effective date. From a debt perspective, as Ralph mentioned earlier, we've already successfully reduced our double leverage ratio to less than 115%. For capital, our goal is to build total risk-based capital to around 16% with an initial CET1 build to approximately 14%. Over the longer term, we plan to optimize our capital mix through additional Tier 1 and Tier 2 capital which will allow us to lower our corresponding CET1 ratio. Overall, we will continue to grow tangible book value with the goal of generating a low to mid 20% ROTCE in the medium-term, and mid-20% ROTCE in the long term. While there are many scenarios currently in play regarding our timing to achieve our target, given the uncertainty around the economy and potential regulatory changes, we are well positioned to deliver responsible growth, strong returns and capital distribution opportunities over time. Operator, we are now ready to open up the lines for questions. Operator: [Operator Instructions] Our first question comes from the line of Mihir Bhatia with Bank of America (NYSE:BAC). Your line is open. Mihir Bhatia: I wanted to start maybe by talking about just the purchase volume trends. Look, you obviously have a pretty diverse customer base. And you've talked previously about low-income consumers being impacted by inflation. And so, I guess a couple of questions on that. One is, are you seeing those impacts starting to moderate as we've had some wage growth here? And then also relatedly, is the pressures on the consumer spreading up the income scale? Or are you still seeing the pressures concentrated in that segment? Maybe just talk about that a little bit just from a where you're seeing the pressures on what kinds of products, what kinds of retailers or categories, maybe? Ralph Andretta: Yes. Thanks for the question. We're still seeing consumers no matter where they are in the Vantage change help moderate self-budget. We see the biggest impact in discretionary and big ticket is where we see the biggest impact in terms of spend moderation. But I think as we move forward, as we said, we think we've peaked in the second quarter. I don't think it's going to be an immediate rush to the point of sale. I think it's going to be a gradual improvement over time. People are still suffering from high inflation and the high interest rates. So, while we are -- we're anticipating a little bit of improvement, and I think it's going to be very moderate as we move forward. But big ticket and discretionary spend were the biggest impact. Mihir Bhatia: Anything from the -- on the income side? Like is it just mostly still in the low-income consumer only? Perry Beberman: Yes. So, this is Perry. So, what I think I'd share with you is that view on the economy overall I think we've been saying this, and I think we're all saying the consumer has been pretty resilient. But they are definitely feeling the effects of that cumulative prolonged period of inflation and now the higher interest rates that are impacting them with inflation is still about 2% while it's coming down, that's a positive. Higher interest rates on things like their mortgages, auto, credit cards, personal loans, that they rose their spending power, and through higher monthly interest cost. So, you've got that affordability gap that's still out there or lower and middle-income Americans. So, I think that's where you're going, it's right? The top third that consumers are just fine. Their higher income, higher scoring. They're not showing any signs of stress, and we're seeing that in our portfolio. Those high scores are not being affected. But that doesn't tell us or other 2/3, and you are starting to see some of that stress creep up a little bit in the risk scores because these folks are trying to make ends meet and these other things are putting pressure on them. Now that said, there are positive signs that we're seeing. And I think we're all seeing it with what we expect to materialize in the second half of the year, and that was led by what we just saw with this quarter, where, as you mentioned, wage growth outpaced inflation. So that is good. And that's particularly going to help the 2/3 of the consumers who are trying to rebuild their discretionary income. And I think that's going to be a positive. Inflation is coming down. So hopefully, again, wage growth stays up, inflation comes down, that's more positive. Now you will have a little bit of offset with some modest increase in employment that everybody is expecting to finish the year at 4%, but that's all in our outlook and forecast. But -- so we're monitoring the consumers really carefully. We have a really strong credit team that is taking credit actions appropriately. And -- but I think we're all waiting to see how this economy unfolds in the back half of the year. Mihir Bhatia: And then if I could switch gears on credit. Just obviously, 2Q came in better than your initial guide. You gave some pretty good commentary on 3Q and 4Q and what your expectations are. And what I was curious though was what is your view as you enter into 2025, should that -- do you expect losses to continue to moderate? I mean, you mentioned about them being kind of a seasonal until you see the economy improve. So, like my question is really, do you need the economy to improve to get your losses down towards your target? Or have the credit actions you've taken drive that loss rate lower, closer to your long-term targets? Because I mean you're still at 8%, right? So, if you just get seasonality from here, like are we just going to stay above the long-term targets till you get an economic improvement? Perry Beberman: So, I think you have a couple of things, a number of things that go into that. I'm not going to give guidance on 2025 at this point, but I can give you my thoughts on how this trend is going to play out over time, right? Our credit actions will the peak benefit that will happen in the second half of this year. So, the full benefit of our credit actions haven't yet materialized all the way through. So that will be a run rate benefit into, call it 2025. Then we're expecting -- what I'll say, is a slow gradual improvement in customer behavior. It's going to take a prolonged number of quarters for the consumer behavior to improve given that they're trying to deal with three years of this persistent high inflation and higher interest rates. And that is going to take time to unwind. I mean there is no fast fix. We're not expecting a big stimulus to come in and all of sudden consumer payments just improved dramatically. So, I expect there to be a slow gradual improvement through next year. But to get back to that 6% number that fast seems that would be a tough ask of the consumer. But I do think there's going to be continued gradual improvement. Operator: Our next question comes from the line of Jeff Adelson with Morgan Stanley (NYSE:MS). Your line is open. Jeff Adelson: Just one point of clarification on the revenue guide. I know you removed the late fee rule implementation from the fourth quarter versus your last quarter guide. But I think last quarter, you also had discussed a scenario where the late fee rule didn't go into effect. You were looking for, I think, down mid-single now you're looking for down low to mid-single digits. Can you just talk about where some of the improvement came from there? Is that just continued efforts on the late fee offsets and CITs you've put out there? Or what else may have changed in the outlook? Perry Beberman: Yes. It's a modest change in the outlook, to your point. I think part of it is we're only expecting two rate reductions, fed rate reductions. As I remember, we're a little asset-sensitive. So, we will see a little bit of NIM compression when you have that. We also probably feel a little bit more confident about the second half of the year loss rate and what that means in terms of reversal of interest and fees. And then, we also have the line of sight into the CFPB mitigation actions while not material. It's just -- we're just trying to get everything down a little tighter to what we expect to see. Jeff Adelson: And just a follow-up on credit. I know at the Investor Day, you were talking about some nice stability in not only your early stage but your mid- and late-stage delinquencies. Could you just give us an update on what you're seeing there this quarter? And -- if I could maybe just pick a little bit on the monthly data. It did look like your second derivative on total delinquencies did increase a little bit this past month. Is there anything to that? Or do you probably still expect that trend of slowing will kind of continue to come through? Perry Beberman: Yes. I think what I would characterize things is stable and improving that, again, we're in an improving economy, credit actions are taking place -- you've got some seasonal things happening within delinquency. So again, our early stages is stable, and we're starting to see some improvement in -- very slow improvement in those mid to late stages. But the roll rates remain high in those later stages because nothing's changed for, I'll say, the consumer who does go delinquent, they have a hard time getting out of delinquency once they're in. And that's when you think thematically around why you need wage growth and things to improve for them, that's what we hear from the customer, what strain them. It's just that high inflation and wages aren't keeping up. Operator: Our next question comes from the line of Sanjay Sakhrani with KBW. Your line is open. Sanjay Sakhrani: Perry, could you maybe just talk about what you might be looking at in your data to give you an indication of whether or not the consumer is sort of flat to doing worse. I mean, do you look at like monthly minimum payments, cash drawdowns. I'm just curious because I think there's a lot of confusion as we've heard from some of the questions before. We're hearing the consumer slowing down, they're spending, but you guys are saying this is the industry that the consumer is generally fine. So maybe you can just give us a little bit more on sort of what informs you that the consumer is doing well. And then secondly, just -- if rates start coming down, how quickly does that feed into the health of your consumer? Does it help them improve their health? Perry Beberman: Sanjay, great questions in there. And that's where the benefits of having as many consumers as we do that we can monitor through stratification segmentation. We do look at what's happening with our consumer. And we talked about this before, when you hear, I'll say the being banks talk, they have a much fuller view of those high-net-worth customers, they have the view of customers who are not credit eligible that we don't underwrite. So -- and you'll hear things from the big networks and they're giving perspectives on spend overall. What we monitor are things like their payment trends, how many people are making no payment, how many people are making min pay, multiples of min pay. So, we are starting to see fewer customers at zero pay and more making min pay. But that's something we want to very carefully. So you do look at on us, payment behaviors, off us payment behaviors. So I think it's -- so when we say the customer is, I'll say, improving, it's from the result of the credit actions and a little bit of this wage growth that's in place. So, I don't want to give an indication that, wow, things are improving dramatically. It's stable with modest improvement, and that's what we expect to see in the back part of the year. I mean for us to guide. We're still going to have 8% losses in the back half of the year. That's still a pretty strained environment for the consumer. While improving, it's going to take a slow gradual improvement to return to our, I'll say, through-the-cycle targets. Sanjay Sakhrani: And then your base case or late change to implication next year. Can you just maybe give us a little bit more detail on sort of how those mechanisms work? And then, how does that affect like your ability -- I mean I don't know the change has been much of you guys always felt like you can offset it and you can still grow book value. But I'm just curious on the margins, what kind of impact does it have to the fundamentals on a go-forward basis -- your ability to sort of overcome some of the impact? Perry Beberman: Yes. So, look, the reason why we took it out of our guidance for this year, and when we see where things are going right now, the parties involved with the litigation, they're still little getting over where this litigation should be hurt, right? And that now is set for, I think it's August 27, and that could possibly result in another appeal of the judge's ruling. And this is before the courts actually consider the merits of the lawsuit filed by the industry. So that's why we don't think the impact will happen in 2024. We're not taking that assumption of what that could mean to 2025. but the teams continue to work very closely with all of our brand partners. We've been very thoughtful about the timing of when we roll out changes to the consumer for some of the changes that we have put in the market, we took a, I'll say, a half step towards the back part of 2023. It was some pricing that was already in our guidance. Some of the things that we just put in market around paper statement fee and some, again, further pricing APR increases. As you know, APR increases take time like 18 months up to three years to fully get the benefit of that to work through the P&L. And we're also monitoring very closely any change in customer behavior, because you don't want to have the unintended consequence where it more than offset the good of what you're trying to get from it. So that's being carefully watched. And so, the rollout will continue throughout this year. We're assuming the change will go into effect at some point next year. We don't really have our guide on that at this point, but we have the teams working as if it will happen in short order right after the litigation gets through. Again, not knowing any outcome of the upcoming elections, and we don't want to speculate on that. Operator: Our next question comes from the line of Moshe Orenbuch with TD Cowen. Your line is open. Moshe Orenbuch: Great. And most of my questions have been asked and answered. But maybe if -- coming back to the kind of macro issue of the low-end consumer and the timing of kind of rebounding of growth, is there a way to kind of segregate out portions of your portfolio or if your partners to think about like what could be kind of earlier and the leader in that? How do you sort of think about that? And kind of -- because we've noticed some of the kind of low-end furniture type are starting to see a little bit of a rebound. So, is there a way to talk about what portions of your portfolio, even where there's been that pressure and when we could start seeing some of the rebound in on what pieces? Perry Beberman: So, I'd answer that a couple is one, we'll answer with regard to rebounding growth. We're going to have a number of tailwinds behind us from a growth standpoint. One, think about general macro improvement, like you said, these consumers start to get wage growth going inflation comes down, it can free up more discretionary income, that will help the lower end consumer. And wage growth has been more prominent in the lower income brackets than the high-income bracket. So that will be an aid to these consumers. The second thing that will impact our, I'll say, loan growth is when we march back down towards a 6% loss rate versus being over eight and you think about the interest and fees associated with that, too, that's almost a 3% tailwind as we march back towards that. And then as the consumer is improving, we then unwind some of those credit tightening strides that were in place around line increases, higher approval rates, and all that will as well be a tailwind to growth. And that's not the -- you mentioned what Ralph talked about, the terrific business development team that we have out there that are continuing to win opportunistic deals for us. Moshe Orenbuch: Maybe just kind of think on that note, as you kind of look out at the landscape, do you see opportunities for additional portfolios, either conversions or kind of start-up opportunities. And now that perhaps the late fee issue is at least on hold for a while? How are the potential partner? What's that channel look like? Ralph Andretta: Yes, it's Ralph. We do. We announced Saks Fifth Avenue earlier this year, early this quarter, really excited about that to get that in next -- in the third quarter. And this morning, we just announced HP. So, we're excited about that opportunity. It's a de novo opportunity for us. And if you look at HP, we have Dell (NYSE:DELL), Sony (NYSE:SONY) and even to B&H Photo in there, we have a real-nice electronic vertical, which we really like. And the pipeline is always active. Our business development team, I'll match up against any. I think it's second to none. And we're always engaged in deals that are coming due. And also, again, what I love about our team, it's up and down the spectrum. So, it's $100 million deals to the $1 billion deals, we're able to play very comfortably in that with those guidelines. And they're active and busy, and we certainly see, we win more than our share as we go forward. Perry Beberman: Yes. And you've asked a question about with the CFPB happening or not happening, the one thing I think that's common in the marketplace, all of our competitors are, I'll say, pretty rational, right? Sometimes it's something that's strategic that somebody wants to win really badly and that won't take lesser economics. But traditionally, you win based on your capabilities and the partnership. And the CFPB ruling is contemplated in the economics through the discussions, whether the partner somewhere else, they stay where they are or they come to us, it has to be contemplated, and we are very capital disciplined. And with the amount of opportunity in front of us, we're also making sure we're selective with who we're signing and that it fits with our strategic verticals as well as delivering the right capital return for our shareholders. Operator: Our next question comes from the line of Bill Carcache with Wolfe Research Securities. Your line is open. Bill Carcache: Following up on your comments about the resiliency of the consumer. There is a view among some that we could see a delayed charge-off effect as customers that are delinquent today and potentially would have charged off by now in a normal cycle, have instead been able to avoid charging off because of all the financial support they received during COVID. Is that a risk that you worry about in your portfolio? Perry Beberman: So great question. I think that dovetails into the question earlier. You're starting to see some of the pressure start to creep up the risk bands. And I think that is something that everybody is watching are some of those middle-income American starting to feel the pressure that the lower and moderate-income Americans had felt last year, right? And this has been a theme that we've talked about, I think, for over 18 months that stimulus that had built up and the savings that were in place, for the lower- and moderate-income Americans had been depleted. And those are the people that when you see our portfolio. That's why you're seeing the peak losses come through because that has already happened. And now, we've taken credit actions to make sure we've taken care of the population that we see at risk. But that's why partly you think there's going to be prolonged period of time for losses to get all the way back down to the 6% range because the stress is still there. I mean, that's the issue with our economy right now is this prolonged period of high inflation, high interest rates, consumer debt is high, it's impacting folks. So, it's a concern, but I don't see it as something where there's going to be a -- this next wave coming through because we're really on top of this. Bill Carcache: And then as a follow-up, with your CET1 now at 13.8% very close to that initial target that you laid out at your Investor Day, is it reasonable to start modeling buybacks as you cross that 14% threshold? Perry Beberman: So, what I would say is our first binding constraint is total risk-based capital, and that needs to get above 16%. And then I would share -- this, I think I mentioned this previously at Investor Day, but I did it, then we have a last slug of CECL phase-in that will happen in January 2025, so in the first quarter '25 and that's 65 basis points. So, we've got to care for that care for the expected growth in the portfolio. And that's when -- and then obviously continue to look at our debt stack and other things. But I think that's when you start to think about where we need to be to start having considerations of other capital opportunities. Operator: Our next question comes from the line of Vincent Caintic with BTIG. Your line is now open. Vincent Caintic: First question, I wanted to focus on NIM and specifically the loan yield. So, understanding that the loan yield was down quarter-over-quarter due to seasonality. But I wanted to get a sense of how much you've been able to add price as a CFPB mitigants. So, I was wondering if there's a way maybe separate out the seasonality versus the pricing you've been able to put in. And then separately, if there's any other impact. So, for instance, the tightening credit underwriting, if that's maybe pushing you up market and therefore, having a lower price? Perry Beberman: Yes. NIM, the 18% this quarter being down 70 basis points linked quarter. That was really pressured from the sequentially higher reversal of interest and fees, as well as not delinquencies improving coupled with a mix in the book as we're booking fewer private label cards that tend to have some more late fees. We're seeing a little bit lower yield from those. So that's a result of having a little bit better early-stage delinquency. And so, you should expect the net interest margin to come back up in the third quarter seasonally, also aided by a lower reversal of interest and fees in the third quarter as you'll have a meaningful reduction in losses. As it relates to your question on how much of the mitigation action APRs are built through. Again, it takes a long time for APR changes to burn into that full rate yield. And we've been really consistent on saying that I put that chart together, I think, over a year ago, illustrate how long that can take. And so, it's not a meaningful impact in this quarter. It will just continue to slowly steadily impact the improving loan yield, but then you also have, like I mentioned earlier, risk mix changes, product mix changes and you could have a lower interest rate environment at some point. Vincent Caintic: And then second question, just on the credit reserve. So, it was just nice seeing the credit reserves drop this quarter alongside the execution on losses for the quarter. Just wondering for your expectations for the third quarter and fourth quarter, is your expectations for the full year built into the credit reserves, so we should just expect credit reserves to sort of say stable at this rate going forward? Or as time goes on and you're actually able to you execute on the guidance for the third and fourth quarter loss rate, we should be expecting that credit reserve to continue to come down? Perry Beberman: So, what I would expect to have happen is, look, pleased that the reserve rate came down this quarter. It was funny because we had prior questions, do you ever see a point where you could have peak losses and have a reduction in your reserve rate, and it just happens that yes, we can and we did, right? This quarter, we hit the peak losses and we have our reserve rate coming down. And that's a reflection of the better credit quality and delinquency that's in the current portfolio. So as the year goes on, if everything holds steady, I expect that we'll have a seasonal drop in the fourth quarter. And that's, again, why we have confidence that the end of this year, we'll have a lower reserve rate than where we exited 2023. But I do expect a pretty stable reserve rate, not expecting sharp declines in the reserve rate consistent with what we've said. We expect a slow, steady improvement in the portfolio quality over time. I would expect something similar with the reserve rate over time. And the other part of this is, I mentioned it in the prepared remarks, our weightings of adverse scenarios remained unchanged at this point. So, the change from last quarter to this quarter is solely due to the improving credit quality. In time as we have more confidence in a more benign economic outlook, those can get unwound, but that will be much further down the road. Operator: Our next question comes from the line of John Pancari with Evercore IS. Your line is open. John Pancari: Good morning. On the late fee side, again, I know you removed it from your outlook. I guess just as it is and from what you're seeing in terms of the expected impacts. Has the expected impact to revenue from the late fee? Any of those expectations? Have they changed at all and as well as the magnitude of the offsets that you expect, anything behind the scenes has it changed at all in terms of the expected impact aside from, I know your efforts to dial in the pricing changes, et cetera? Perry Beberman: No, I wouldn't say that anything's changed in terms of our approach or the strategies, right? I mean these -- it's unfortunate. I mean, this is what happens when you get regulator making changes, probably not fully understanding the impact of what this would mean to all consumers. We are moving forward with higher APRs for everyone. We've introduced other fees there other policy changes that are in place. We put this -- I'll say, the paper statement fee and there is not something that we necessarily thought I'd say, the normal course of action, we would have done were not for the CFPB making this rule change. But we are rolling that out, I'll say, thoughtfully and watching the changing consumer behavior as it relates to APRs or private label and things like that. We're not seeing any change in behavior. What we are seeing with the paper statement fee, as you would expect, many are opting to go digitally, which will benefit our expenses over time, which was great because we have real nice opportunities that drive people to 100% digital engagement. So, I'd say everything that is happening right now is happening as expected. John Pancari: And then separately, on the funding side, I know you indicated deposit costs stabilizing. Could you give us a little bit more color there what you're seeing and you're able to see the -- I guess, your expectation of the trajectory here on deposit costs? And maybe if you could just comment a little bit on how you expect deposit growth to progress in coming quarters. Perry Beberman: Yes. So, we've got our direct-to-consumer deposits sitting at about 40% of our total funding. We've communicated our goal is to get to 50% of our funding from direct-to-consumer deposits and expect that each quarter here out, we'll continue to grow thoughtfully with that. Our pricing, because of the way we are structured, we don't have brick-and-mortar and all this and to have checking accounts, we are comfortable being towards the top of the league table as you see deposit pricing come down some. We actually were just in market recently with a small reduction in some of the deposit pricing. So, we're monitoring it. We're very actively monitor to make sure that we're getting the growth in deposits that we expect. And on I expect it's pretty stable right now. But if there's sharp declines in Fed funds and the market moves, we'll be prepared to move appropriately but making sure that we are where we want to be positioned to keep attracting deposits. Operator: Our next question comes from the line of Terry Ma with Barclays (LON:BARC). Your line is open. Terry Ma: I think you indicated you don't expect much incremental revenue from the mitigation actions this year. Can you maybe just talk about how the pricing actions and the incremental fees are progressing and when you would expect more meaningful contribution from those measures? Perry Beberman: Yes. I think when -- wedge is in, it's the best way to say it, right? So, every month that goes by, more and more of the portfolio spend volume or balance will be subject to the higher APRs. And that just takes time. And I'll just point you to the chart that I put out there as an illustration previously, gives you an idea of where are you 12 months after that. And so, you're only partway through the benefit a whole 12 months after the fact that you increased the paper statement fees. It's not a large amount in the this, I'll say, certainly not this upcoming quarter. As we get into next year, it will become a more meaningful amount. But even then, the expectations, we're going to have a lot more customers going paperless and digital. Other policy change that we have and waiver policies and other things, all those are going to go in effect. And some of this I probably was remiss in saying this earlier if I didn't, is we're not trying to put these actions in place to accrete a ton of revenue in the near term while we wait for resolution on the litigation. We are trying to do very thoughtfully with our brand partners time the rollout of these things. So that we're not doing anything detrimental to the consumer before something like the late fee drop goes in. And if we do have to put some things in place earlier as we are, there may be a point where there is some consideration of investing more back into the program in consideration with that brand partner. Terry Ma: And then on the reserve rate being lower as you exit this year compared to last year. I think another peer had initially messaged that earlier this year, but is now indicating kind of like a flat reserve ratio year-over-year. So maybe just speak to your confidence in the macro and the performance of your portfolio to take that reserve rate lower this at the end of this year? Perry Beberman: Yes. What I'd say is that, look, I can't speak to everyone else's models, right? But industry-wide, we call it -- we're hearing something normalization, seasoning of recent vintages, consumer pressure, we're creeping up into different risk score seems to be a theme for them. Now what I'd remind you of is that we moved our reserve rate up earlier than others based on anticipated impacts to our customers of high inflation, and it proved to be the right action as we've had a stable reserve rate for over six quarters. So based on the expected stable and slightly improving macro conditions, our improved credit quality and resulting delinquencies should allow for modest reductions of our reserve rate over time again, with fourth quarter having a normal seasonal reduction before the first quarter increases back up a little bit. But that's what we're expecting to see. And we feel very confident in our process. We were and we use the term conservative, I'd call it just prudent, right? We have a very experienced team of people at this company who've been through different macro environments. And we knew to get ahead of this thing early and anticipating what inflation can mean to our customers. Now others didn't increase their reserve rates to the degree we did. And now they're continuing to see pressure and maybe they need to get to where a different spot than where we are. But we feel very confident with where we are and confident in the guidance that we're giving. Operator: Our next question comes from the line of Reggie Smith with JPM. Your line is open. Reggie Smith: I guess real quick, can you remind us what proportion of your portfolio has been -- or you've been able to kind of implement or had the partner agreed to some of these mitigation efforts? And then, I have a few follow-ups. Perry Beberman: We have not given a proportion of the portfolio. But I would tell you that conversations have happened with 100% of the brand partners. And as we had talked about previously, each brand partner is unique. Some are opting for somewhere promo fees, some of the companies or this or other they introduce other fees for credit. Some are changing service level agreements, serving strategy. So, I mean, there's a lot that goes into these things and others have to -- are discussing partner compensation changes, different revenue share things. So again, our commercial team is very active with all of the partners. And as I mentioned earlier, that's why I use the word thoughtful rollout of these strategies. Reggie Smith: And I guess with that said, I would imagine that right now, given the uncertainty that I guess any agreement that hasn't been struts probably on hold so we get more clarity? Perry Beberman: I don't know if I would use the word on hold. I'd say they're all progressing and in a state of readiness to take appropriate action. I mean look, time is our friend. Let's just call that what it is, right? Every month that goes by and delays our company is getting stronger and stronger from a capital standpoint. The macro environment is improving. We're in a better state of readiness for whatever we have to do systemically from a technology side to implement product changes. So, we're feeling very good about our ability to get strong returns should a regulatory change to be put in place. Reggie Smith: And then if I could ask -- when I look at the model, I guess the processing costs were down sequentially, definitely lower than we had expected. You called out, I guess, some efficiencies there. What's driving that? Is that the Fiserv (NYSE:FI) deal? And how sustainable is that kind of run rate that we have there? Perry Beberman: Yes. So, as with the expenses, we're at a, I'll say, probably a low point for the year, right? We've had benefits year-over-year as our fraud team has done an amazing job getting fraud strategies in place to tighten things down. The whole industry experienced some fraud attacks last year. Now I think most of the industry has got under control and our team certainly does. We're going to see an increase in expenses in the third quarter because you've got Saks coming online. So that's a portfolio purchase for servicing and the cost involved with getting that up and going as well, you're going to see an increase in marketing, sequential marketing is going to be up about $10 million in the third quarter. And then in the fourth quarter, expenses will rise again from there because fourth quarter is always sequentially higher for us as a result of, again, further increases in marketing for the holiday seasons as well as our employee benefits costs are seasonally higher in that quarter. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Ralph Andretta for closing remarks. Ralph Andretta: Sure. Well, a couple of thank you for -- thank you to Perry for fielding all the questions today. I appreciate that very much. And thank you to all of you for your continued interest in Bread. We look forward to you look forward to talking to you again in next quarter. And everybody, have a terrific day. Take care. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.