Q2 2024 Earnings: IPG, SS&C, Coursera, and Arthur J. Gallagher Report Mixed Results

The Interpublic Group of Companies, Inc. (IPG) Q2 2024 Earnings Call Transcript

Jerry Leshne - Senior Vice President of Investor Relations Philippe Krakowsky - Chief Executive Officer Ellen Johnson - Chief Financial Officer Good morning and welcome to the Interpublic Group Second Quarter 2024 Conference Call. All participants are in a listen-only mode until the question-and-answer portion. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Mr. Jerry Leshne, Senior Vice President of Investor Relations. Sir, you begin. Jerry Leshne Good morning. Thank you for joining us. This morning, we are joined by our CEO, Philippe Krakowsky and by Ellen Johnson, our CFO. We have posted our earnings release and our slide presentation on our website, interpublic.com. We will begin with prepared remarks to be followed by Q&A. We plan to conclude before market open at 9:30 Eastern Time. During this call, we will refer to forward-looking statements about our company. These are subject to the uncertainties and the cautionary statement that are included in our earnings release and the slide presentation. These are further detailed in our 10-Q and other filings with the SEC. We will also refer to certain non-GAAP measures. We believe that these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow greater transparency in the review of our financial and operational performance. At this point, it is my pleasure to turn things over to Philippe Krakowsky. Philippe Krakowsky Thank you, Jerry. As usual, I'll begin our call with a high-level view of our results and the business overall. Ellen will then provide additional insights on the quarter and I'll conclude with highlights at our agencies to be followed by your Q&A. This morning, we are reporting a solid second quarter highlighted by moderate acceleration of our growth as well as margin expansion from the same period a year ago. To begin with revenue, second quarter organic growth before billable expenses came in at 1.7% bringing organic growth in the first half to 1.5%. In the quarter, we were paced by growth in Continental Europe, LatAm and the U.K., followed by increases in our other markets group and the U.S. Each of our 3 operating segments grew organically from a year ago. And underneath that, consistent with our performance over some time, we were again led by IPG Health and IPG Mediabrands. We saw strong performance as well at Deutsch LA, Golin and at Acxiom, we saw solid growth in the quarter. Also in keeping with recent quarters, underperformance at our digital specialty agencies weighed on our consolidated growth. That drag was about 1% of organic growth in the second quarter. From the standpoint of client sector performance, growth was driven by health care, food and beverage and consumer goods. Retail was approximately flat and we saw decreases in financial services, tech and telecom and auto and transportation. As we've called out previously, the tech and telecom sector continued to weigh on growth by approximately 1% organically in the quarter. Most of that decrease was due to the loss of a large AOR assignment with a telco client late last year. For the sake of clarity, I would note that excluding double counting, the tech and telco sector and our digital specialist combined weighed on Q2 organic revenue growth by negative 1.7%. Turning to expenses and margin; our teams continue to effectively balance cost discipline with ongoing investment in the evolution of our business. Second quarter adjusted EBITA margin was 14.6%, an improvement of 40 basis points from a year ago. We had strong leverage on base payroll which helped drive 180 basis points of operating leverage on salaries and related expenses compared to a year ago that was partially offset by planned investments in technology, business transformation and senior talent particularly for centralized platform resources which resulted in increased office and other and SG&A expense. Diluted earnings per share in the quarter was $0.57 as reported and $0.61 as adjusted for acquired intangibles amortization and a small impact from net business dispositions. During the quarter, we repurchased 2.2 million shares, returning $68 million to shareholders. On our last call with you, we noted that due to a decision by a major and ongoing health care client in late March related to their global consumer advertising work, the high end of the 1% to 2% growth range, that we had targeted as we entered the year would not be achievable. As the year has progressed, we are seeing modest incremental uncertainty in the macro environment and in domestic consumer sentiment. Our view is, therefore, that we expect to achieve approximately 1% organic growth for the full year. And with that level of growth, we continue to target adjusted 2024 EBITA margin of 16.6%. Looking ahead, we anticipate that the strongest and most consistent growth areas of our business such as our data and tech-driven media offerings, specialist health care marketing expertise, PR and experiential marketing capabilities are positioned to continue their strong performance. The common thread in the growth of our 2 largest businesses, IPG Mediabrands and IPG Health which are also our most successful businesses, has to do with the specialized high-value services that they provide to marketers. These rely on skill sets that are more technical, reach audiences with greater precision and lead directly to outcomes that we can assess and optimize. As you heard from us in the past, these include audience segmentation work, predictive analytics and data-driven decisioning, much of it powered by Acxiom and all of which has been built by in-house engineering talent creating technology solutions that rely on machine learning algorithms and more recently, newer AI capabilities. The developments we're seeing in Generative AI will be equally fundamental to the transformation of a broader set of our offerings. Collaborations with Adobe, Amazon, Blackbird.AI, Getty Images, Google, Microsoft and others have given us secure enterprise access to advanced AI tools and large language models which are increasingly informing every area of our business, including insight generation, creative ideation in production and work in our earn and experiential communications practices, as well as further enhancing our media and precision marketing capabilities. Over the past 12 months, our progress with these emerging technologies has been significant. The ongoing upskilling of our people has been central to this process. We see this as a strategic imperative and have made it the responsibility of every operating leadership team across the company. Generative AI produces foundational capabilities and new canvases for us to work more expansively with our clients. Over time, this offers the promise of reigniting many of our creative offerings as engines of value creation. As you heard last quarter, we recently became the first company to unite all facets of the content supply chain by integrating Adobe's GenStudio AI product into our marketing technology platform, the IPG engine. That engine sits at the enterprise level and is a unified set of standards, practices and a technology layer which in turn is built on consumer insights at scale, fueled by our Acxiom data and identity products. It seamlessly connects media strategies and targeting, including predictive modeling of what we call high-value audiences to creative concepts and messaging across all marketing disciplines. We then move from data all the way through activation by which we mean the production and dissemination of campaigns, whether on marketing technology platforms in earned media or in paid media investments across all formats and channels. Our engine then analyzes the impact of this activity for purposes of attribution and optimization. This allows us to do with our communication strategies, creative assets and all forms of marketing activity what we've been doing in media which is true personalization at scale. This is an end-to-end solution which helps our clients better engage, convert and retain customers through the entire funnel, assessing and understanding the value of their investments across media, marketing and sales channels. In a world in which data-driven audience insights are key to delivering performance for our clients and one in which AI will play an increasingly important role, access to high-quality proprietary data at scale will be essential to success. Acxiom continues to have the industry's top-performing audience data to engage with customers at an individual level without the need for cookies or other proxies. Our tech stack and marketing engine optimized performance using this global data spine, of 2.5 billion real people with Acxiom ID attributes that are meaningfully greater than those available from any other industry data set in which we can match to significantly more global device IDs and our closest competitors. The engine at Acxiom are now core to every significant engagement across the company and help power many of the new business wins I'll cover later in my remarks. Now though, let's turn things over to Ellen for a more detailed view of our quarterly results. Ellen Johnson Thank you, Philippe. As a reminder, my remarks will track to the presentation slides that accompany our webcast. Beginning with the highlights on Slide 2 of the presentation, our second quarter revenue before billable expenses or net revenue was flat from a year ago, with an organic increase of 1.7%. Our organic net revenue increase was 1.3% in the U.S. and was 2.6% in our international markets. Over the first 6 months of the year, our consolidated organic revenue increase was 1.5%. Second quarter adjusted EBITA was $338.9 million, an increase of 2.6% from a year ago and our margin was 14.6% compared with 14.2% a year ago. Our diluted earnings per share was $0.57 as reported and $0.61 as adjusted. The adjustments exclude the after-tax impact of the amortization of acquired intangibles and a non-operating gain from sales of certain small nonstrategic businesses. It is important to note that our EPS in last year's second quarter included the benefit of $0.17 per share related to the settlement of normal course, federal income tax audits. We repurchased 2.2 million shares during the quarter and 4.1 million shares in the first half of the year. Turning to Slide 3; you'll see our P&L for the quarter. I'll cover revenue and operating expenses in detail in the slides that follow. Turning to second quarter revenue in more detail on Slide 4; our net revenue in the quarter was $2.33 billion. Compared to Q2 '23, the impact of the change in exchange rates was negative 60 basis points. Our net divestitures were 1.2%. Our organic net revenue was 1.7%. For the 6 months, our organic increase was 1.5%. In terms of client sectors in the second quarter, our growth was led by very strong performance in health care and in the food and beverage sector. Consumer goods and our other category of public sector and diversified industrials also grew in the quarter. Retail was approximately flat. Going the other way, we saw decreases in the financial services, tech and telecom and auto and transportation sectors. Lower revenue in the auto sector was due to a client loss at Mediabrands at the end of last year and lower spend from existing clients. The bottom of the slide is a look at our segments. Our Media Data & Engagement Solutions segment increased organically by 80 basis points. We again saw strong growth in our media businesses, whose out performance was largely offset by decreases at our digital specialist agencies as Philippe noted and by decreased revenue at MRM. Our integrated advertising and creativity-led Solutions segment increased organically by 3%. We were led by strong growth in IPG Health at Deutsch LA. At our Specialized Communications and Experiential Solutions segment, organic growth was 1.3% led by very strong performance at Golin in public relations, while our experiential group decreased in the quarter, largely due to cost cutting by a major client at Jack Morton. Moving on to Slide 5, organic net revenue growth by region. The U.S. was 66% of net revenue in the quarter and grew 1.3% organically. We were led by strong growth at IPG Mediabrands and IPG Health. We also saw notable contributions to growth from Deutsch LA, our PR offerings and Acxiom. That was partially offset by headwinds at our digital specialists, decreased revenue at MRM as a loss of a telecom client at McCann late last year. International markets with 34% of net revenue in the quarter and grew 2.6% organically. The U.K. grew 3.4% organically. We were led by growth at our creative agencies and by growth in Media and Golin in Public Relations. Continental Europe grew 6.3% organically in the quarter, led by strong performance at McCann that included new business wins as well as increases with existing clients. We had growth in each of our largest national markets. Asia Pac decreased 2.4% organically. Strong growth in India, where we are the second largest holding company was paced by Mediabrands and FCB but that was more than offset in the region by decreases in most other national markets. Other -- organic growth in LatAm was 4.1%, led by IPG Mediabrands. We continue to see notably strong growth in Mexico. In our other markets group which is Canada, the Middle East and Africa, we grew 1.5%, led by growth in the Middle East. It is worth noting as well that Israel grew in the quarter. Moving on to Slide 6 and operating expenses in the quarter. Our net operating expenses which exclude billable expenses, the amortization of acquired intangibles and restructuring adjustments decreased 50 basis points from a year ago compared with reported net revenue that was flat of last year. The result was our adjusted EBITA margin expanded to 14.6% from 14.2% a year ago. As you can see on the slide, our ratio of total salaries and related expense as a percentage of net revenue was 66.9% compared with 68.7% a year ago. Underneath that result, we lowered our expense for base payroll, benefits and tax which was 57.8% of net revenue compared to 59.4% a year ago. Our performance-based incentive compensation increased slightly as a percentage of net revenue to 3.5% from 3.4%. Severance expense was 1.5% of net revenue which is somewhat elevated from typical levels and compares with 1.7% of net revenue a year ago. Our actions in the second quarter address areas of the business where performance has lacked. Temporary labor expense was 3% of net revenue compared with 3.2% in Q2 '23. Each of these ratios is presented in the appendix on Slide 31. Also on this slide, our office and other direct expense was 15.4% of net revenue compared with 14.6%. Underneath that comparison is planned investment in technology and business transformation. We continue to leverage our expense for occupancy which decreased 10 basis points from last year. Our SG&A expense was 1.2% of net revenue compared with 60 basis points a year ago. The increase reflects higher levels of strategic investments in senior enterprise leadership and the implementation of centralized platform. On Slide 7, we present the detail on adjustments to our reported second quarter results in order to provide better transparency and a picture of comparable performance. This begins on the left-hand side of the reported results and from left to right, exterior [ph] to adjusted EBITA and our adjusted diluted EPS. Our expense for the amortization of acquired intangibles in the second column was $20.4 million. The other adjustments in the quarter are small and related to previous restructuring and sales of nonstrategic businesses. At the foot of the slide, with the bridge per diluted share between EPS as reported at $0.57 to adjusted earnings of $0.61. Slide 8 depicts our adjustments for the 6 months. Adjusted diluted earnings per share was $0.96 for the period. On Slide 9, we turn to cash flow in the quarter. Cash from operations was $120.7 million compared with $35.2 million in the second quarter of '23. Operating cash flow before working capital was $249.1 million compared with $246 million a year ago. As a reminder, our operating cash flow is highly seasonal and can be volatile by quarter due to changes in working capital. In our investing activities, we used a net $40.4 million, primarily consisting of $34.8 million in CapEx. Our financing activities used $451.2 million. This reflects the maturity of our $250 million senior notes in April which we paid in cash as well as our regular quarterly dividend and share repurchases. Our net decrease in cash for the quarter was $383.6 million. On Slide 10 is the current portion of our balance sheet. We ended the quarter with $1.55 billion of cash and equivalents. Slide 11 depicts the maturities of our outstanding debt. As you can see on this schedule, total debt at quarter end was $2.9 billion. Our next maturity is not until 2028. In summary, on Slide 12, our strong financial discipline continues and the strength of our balance sheet and liquidity mean that we really remain well positioned both financially as well as commercially. I would like to express my gratitude for the efforts of our people. Thank you, Ellen. As I mentioned earlier, our organizational structure continued to evolve and we're working at pace to enhance the parts of our business that are growing and also to address underperforming areas of the portfolio. Going forward, we're going to continue to move to more holistic solutions and make greater precision and performance a part of all of our service offerings. Our interactions with major marketers will also increasingly be guided by senior functional and client leaders at the corporate IPG level. This ensures that we're connecting more of the portfolio to horizontal platform capabilities such as data, commerce, media activation and production. The common denominator across our strategic priorities is to broaden the range of business issues that we can help clients address with our best-in-class assets. Our goal is to continue to become a more strategic partner supporting client needs as they seek to derive more value from connecting marketing and technology in order to power their businesses. An example of this is retail media which is one of the prominent growth sectors we've mentioned to you previously. As more retailers build digital media networks and increase their call for standards and as marketers look to increase investment in this dynamic space, we see this as a promising area of growth. IPG's unified retail media network solution which is housed within Mediabrands and grounded in Acxiom data is differentiated in the market because it allows our clients to evaluate their brand's retail media buys across audience, measurement, optimization and business intelligence criteria, so as to determine which retail networks are performing best for their business objectives. This solution played a significant part in our successful defense and expansion of our assignment for Ulta Beauty during the quarter. Ulta Beauty selected a bespoke unit within Mediabrands which includes teams from Mediahub, Kinesso and Acxiom to handle Ulta's media needs in programmatic, addressable and social as well as the marketers retail media unit, UB Media which had formerly been serviced by a competitor. The client specifically noted the combination of a creative and data-driven approach as assets in fostering connections with Ulta Beauty consumers, ensuring consumer engagement and delivering business building results. Another significant win announced earlier this week will see us take on creative, production, shopper and PR earned media responsibility for driving growth for a number of Kellanova's iconic priority brands. This is the result of an integrated offering combining FCB globally, Weber and Momentum supported by MullenLowe and the Martin Agency in key international markets and on certain brand assignments. And as mentioned, our production capability and the IPG engine also played important roles in our proposal to the client. Notable wins in the quarter saw a Generative AI search platform Perplexity, appoint UM as its media agency of record. After Levi's had consolidated its global media account with UM which builds on a 4-year relationship between UM and Levi's in the Americas. UM was also named media AOR by Alliance Pharma. Reckitt capped McCann content studios which is a core component of our production offering as its social and influencer agency of record for its U.K. health brands. And at General Motors, Buick appointed McCann Worldgroup China as its full-service agency. Another of our core multinational clients, Unilever, named Golin its global PR agency of record for laundry detergents. Top American champagne maker, Korbel chose Carmichael Lynch as its media and brand AOR. And Deutsch LA, we mentioned earlier continued to expand both its relationship with Adobe to include social work for Gen AI app Firefly, Acrobat, Photoshop and other brands. Weber Shandwick was selected by 5-Hour Energy as its partner on creative, media relations, social media and influencer strategy and Mazda Canada named FCB/SIX to lead its strategy, creative and tech work for CRM. Of course, even in a world where technology and platform capabilities are so essential. Creativity remains at the heart of what many of our clients need in order to build their brands and business. Integrating ideas into audience-led and accountable solutions is a must that creativity can be a differentiator and our performance of creative competitions continues to indicate we're well placed when it comes to the talent and craft required to make work that makes a difference for ambitious marketers. Just last week, the New York Festivals Advertising Awards named Interpublic as its Holding Company of the Year. This is a competition that recognizes our industry's best and is judged by our peers which makes it an important hallmark for the quality of our work. In May, we were also honored as Creative Holding Company of the Year at The One Show. And at the Cannes Lions Festival of Creativity which is our industry's largest global award show, Interpublic also outperformed our peers, winning 10 of the festival's highest honors, the Grand Prix more than any other company and almost twice as many as the nearest competitor. Notable categories where we won a Grand Prix include gaming, live brand experience, digital craft and data-enhanced creativity. In terms of client sectors, we won Grand Prix in both the health and pharma categories. Also at the festival, FCB was named Regional Network of the Year in North America for the sixth year in a row. IPG Health was named Healthcare Network of the Year for the third consecutive year and Area 23 won Healthcare Agency of the Year for the fourth year in a row. Unique to the public relations arena, Golin and Weber Shandwick, both won multiple Grand Prix. Our success going forward rests on our ability to combine this kind of creative excellence and innovative thinking with our deep data and tech capabilities. And that's the key reason that during the quarter, we announced that we're further unifying our data engineering, martech and ad tech resources under one leadership team. This move fully aligns Acxiom's data, identity resolution and marketing cloud services with the teams responsible for the engineering behind IPG's integrated marketing engine. Within this centralized technology and data stack, we're powering workflow, customer experience, media, commerce and production. And by unifying marketing on one platform, we can drive marketing performance for clients in real time as well as build brands for long-term success. As you know, this combination of data, tech and marketing expertise has been key to our long-term success at IPG Mediabrands. And while our tech-enabled media offerings are consistently ranked as best-in-class by marketers, during the past 12 to 18 months, we have seen a number of clients place a greater premium on efficiency and costs. Given that marketplace evolution, we have pivoted and are now able to deliver value not only with advanced and effective media solutions but also through our growing practice in principal media buying. This new component of our media practice will take time to scale fully but represents an incremental option for media value creation for current and prospective clients as well as the new avenue for growth for what has consistently been our strongest performing business. As mentioned at the outset of my remarks, we continue to see disparate performance across the portfolio due in part to an asset mix that features more concentration in certain traditional practice areas than some of our peers. An area that's become a regular feature of these conversations is the performance of 2 of our specialty digital agencies, R/GA and Huge. Having made adjustments to the workforce at each of those operations and co-located their headquarters within the IPG Innovation dock, we are now formally evaluating strategic alternatives for these premium agency brands. The right partner could help unlock greater value for their clients and people. We'll keep you posted on progress in this process as appropriate. And those teams remain focused on delivering the top-tier service and innovative solutions for their clients that they're known for. As you know, we spent a number of years outperforming the sector when it comes to top line growth and continue to consistently win many of the industry's most competitive pitches. That said, the challenges we're facing at certain of our agencies, coupled with the shift in the media landscape to principal buying have led to recent losses that will weigh on our results, particularly as we head into 2025. We have a solid new business pipeline for the remainder of this year and are finalists in several large ongoing reviews. These opportunities, organic growth in our existing client base and accelerating the development of new capabilities in areas such as retail media and commerce, we'll continue to have our full focus as we look to deliver the best outcome this year and reignite a higher level of growth going forward. In certain high-growth areas where scale would benefit our competitive position and the company's overall growth profile such as commerce, retail, media and business transformation, we will also consider M&A as an avenue to effect a more rapid transformation of our portfolio. As mentioned earlier, for the full year, we expect to achieve organic growth of approximately 1% and at that level, continue to target adjusted EBITDA margin of 16.6%. Additional areas for value creation include our strong balance sheet and liquidity as well as our long-standing and ongoing commitment to capital returns. As always, we thank our partners and our people as well as those of you on this call. And with that, let's open the floor to your questions. [Operator Instructions] Our first question is from Adrien de Saint Hilaire with Bank of America. Adrien de Saint Hilaire Philippe, first of all, you talked about 3 factors impacting organic sales growth for the second half. I'm curious how do you think those factors impact 2025 as well? And then the second question I would have is Europe has been outperforming the U.S. at IPG but also at many peers and that also seems to be true across the ad market. From my seat, that seems a bit counterintuitive, given the different GDP growth in Europe versus the U.S.? I'd be curious as to why that is in your opinion? Philippe Krakowsky Sure. The first question I can unpack only obviously up to a point. So what I think I would call out for you is we've obviously mentioned that with a number of the recent headline decisions, those are clients who remain very important and sizable partners to us. So the focus here is clearly going to be on delivering the best possible service and solutions because unlike other "losses", there's clearly the opportunity to regrow some of those relationships. And the other thing I would point out is I think you're right that at this point, the impact of wins and losses sort of from a net new business perspective, sitting where we are sitting right now, we're essentially neutral. We had a pretty sizable string of wins, say, about a year ago. And so the new business headwind is a question for '25 and yet, we don't have a budget for '25. And it's kind of early to project that far out, given that we've got about half a year to go. And so I think the focus is going to be the new business pipeline growing, new capabilities with existing clients. Obviously, when that large telco loss, it is maybe 70% of what's in that segment down goes away, some recovery in tech would clearly be wind in our sails. And then the strategic assessment of options that we talked about for the digital specialists would also change the math a bit. So I can't really quantify that for you. I can just give you a sense of what the moving parts are. And then I think I'm going to ask Ellen to just sort of step in. Because on the Europe question, you've heard us before, it gets very, very specific with us. It's not a very big region. So it really becomes client specific in a market that can have an impact. Ellen Johnson Sure. Yes, Europe is about 9% of our revenue and we did see growth across all major markets, Spain, Germany, France, in particular. We had some nice wins through our creative agencies, particularly McCann. But we also had growth at IPG Health. And really, it was a decent breadth of the portfolio that grew; so both, across clients and client sectors. So it has been a relatively strong region for us. The next question is from David Karnovsky with JPMorgan. David Karnovsky You spoke earlier to some incremental uncertainty and softening in consumer sentiment. Just wanted to see if you could expand on that a bit, what you're hearing from clients in terms of their level of confidence and investment. And then you also mentioned the capability in principal media as being a factor on your views over the past 18 months. As you're now scaling up your offering there, do you see Mediabrands in a better position at this point to compete for new business? Philippe Krakowsky Well, look, I mean I guess I'll take them in order. But -- so on tone of the business, I would broaden the aperture fairly significantly. And I would say to you that given the levels of uncertainty that we are seeing across the world and I'm talking geopolitically, socially. And then the sense that domestically, fiscal policy is kind of stuck in neutral. It stands to reason that the operating environment has become more challenging. And I know that you heard as much from a couple of our competitors, right? I think we're all seeing the same thing. Now if I wanted to give you a bit more texture to that or detailed granularity from the kinds of conversations you're talking about with clients, I don't think it's like a year ago where there was this pervasive, an almost universal feeling that there was a recession right around the corner. But in the time since the last call that we had with all of you, there is a bit more caution. And the way we see it is decisions on reviews, decisions on client spend are either taking a bit longer to be made or sort of delayed with a little bit of a hey, it's indefinite, we'll get back to it. And that's in certain areas of the business or at some marketers. It's not across the board. But to the extent that it's begun to be something that we're factoring into our thinking, we felt that it needed to be called out. Your principal buying question; look, I think it tracks and it's really consistent with discussions that we've had with you and with all of you when we see each other in settings unlike this one, we've completed the foundational work that incremental dimension to our media offering is now up and running. It is early. It will need time to ramp up. We will and are approaching clients and media partners in a way that's measured because as that part of our buying mix increases steadily over time, we're always going to be a client-first organization. So it's essentially a question of which clients want to opt in which clients want to access the market in this mode. Our media business has been really, really successful for a long time without that. So there are plenty of folks in our portfolio who are part of the franchise because they want the effectiveness, the tools, the data powered kind of decisioning and the platform approach to it. But in essence, we're going to be operating with multiple buying models. So we'll definitely bring principal into pitch situations because we've seen circumstances, I'd say going back to -- we mentioned a loss of Mediabrands in automotive last year where, clearly, the nature and the quality of the product was not in question and yet, that -- the premium on efficiency is something that, as the world has become more uncertain and there's been a lot of this pressure on client P&Ls, cost of money, this broader uncertainty. So we definitely think it will be a benefit because we've seen in circumstances where late in a process, that's become a gating item and a decision that obviously didn't go our way. Our next question is from Steven Cahall with Wells Fargo. Steven Cahall That was a lot of helpful context there at the end around the shift in media buying to the more principal-based model. And how you're looking to reposition that with some of the internal changes you mentioned around centralization as well as inorganic opportunities in places like retail marketing. Could you just expand on how we should think about the time to do things internally, maybe specifically as it relates to the principal-based media buying you were just discussing. And then how significant your inorganic opportunity appetite is. I think your last big deal was Acxiom; that was very transformative. Philippe Krakowsky I'm kind of going for folks who've been following us probably if you look at like a 20-year horizon only; but yes. Steven Cahall Yes, that's true. So only -- and you've delevered really quickly from that or at least shown that you can delever as needed. So it sounds like you're kind of teeing up potentially some bigger M&A to come. So I just want to make sure I am understanding that correctly and that we're thinking about that correctly. And then, where do you kind of think about the trend for creative and all this. I think some of our concern is that while creative is never going to go away, it's maybe being devalued, whether it's due to retail marketing expansion or whether it's just due to some of the AI capabilities that makes it a little cheaper. It's still a big part of the business. So where do you see the future of the creative part. Philippe Krakowsky Sure, that's a lot. So on principal, it will take, as I said, sometime, we're very focused on it. We're -- obviously, you have to go into the market, you have to engage with the media owners and secure the inventory in that way. You've got to get clients who opt into the model and understand the benefits. And then, obviously, that volume yields a kind of benefit. So I think that, that will be range and bearing over the course of the next year. And we're going to go -- we're going to move thoughtfully but at pace, as I said, about a few other things. On your M&A question, I think what I would say to you is that I do talk a bit about how our asset mix doesn't tilt as heavily to some of these, at least in terms of scale, the capability sets are there. We show up and win with them. But whether it's that scale is valued by certain kinds of clients because you can sort of show up with something that's a very comprehensive solution and again, efficiency, not even in the media space. But also, clearly, the more sale to win that you have, the better it is. So we are going to look in commerce and retail media in particular. And then I guess the business transformation but I would define it as further down the stack sort of less focused on the comm side and more on engineering and kind of how can you help clients rework processes so that they can be much more digital in the ways that they work, including their marketing. So I think those are areas where we will probably look for inorganic opportunities. And I -- look, you know us very well. We're very thoughtful about how we approach M&A. That's not going to change. We're very balanced in that, as you said, we delevered very quickly. We were very transparent with you about why we were doing it and how we were going to do it given the scale of it. But I think that you could change the growth profile of the business with something out there or maybe one or 2 things that might not be at the scale of what we did with Acxiom. But they're clearly going to be larger than the very modest kinds of deals that we've been known for, for some time. So hopefully, that helps unpack the thinking. And no, you -- I forgot. And then you had the creative question. I guess my observation for you is that creative is still very important and a big idea still matters. If you look at the Kellanova news this week, clearly, a client who we're excited about because they believe that big ideas can have a big impact for them in terms of driving growth and what their mission is coming out of their spin. So I think that creative is important but it is important that you integrate it, that you basically figure out how FCB has done a terrific job for us to plug into the data stack, get more precise about what you do and have that, in essence, incorporated into your strategy and have your strategy be about where business opportunities sit and where business outcomes can be driven. And then you engage all of the deep understanding of brands and the craft around creativity. And then you can actually have pretty good outcomes, right? And so I think there's a way. And then I think the other thing, as I said at the outset also is if you incorporate certain components of what Gen AI tools provide and you can take creativity and bring it to bear in a lot of new ways. You can sort of do ideation faster and get to hypotheses -- good hypotheses, better hypotheses faster. You can democratize creativity and distribute it in ways that reach a lot of your clients. Ancillary audiences or partners that you might not have been able to do in the past; so we're still focused there. We probably, as I said, that's one of those might we have more exposure to traditional relative to some of our peers, yes. And the question is going to be a version of both what I said which is we're going to look at underperformance and think about what needs to be addressed or streamlined but we're also going to keep pushing them to transform. Our next question is from Tim Nollen with Macquarie. Tim Nollen I wonder if you could comment, please, on the news this week that Google is not going to be deprecating cookies. And I'm asking -- I'm interested in IPG's perspective, in particular, because of all the work you do with Acxiom in first-party data and all the good stuff there. So I'm just curious, it seems like this is sort of a positive for the ad industry and that the risk of later disruption seems to have gone away. But for you guys, I wonder, is it positive? Or is it maybe a little less positive than if cookies had been removed and all the great stuff that Acxiom can do with first-party data is maybe not quite as important as it was before. Just don't know how to interpret the news. Philippe Krakowsky Well, stop, start, stop, start, right? So it is not necessarily unexpected at this point. It's something that they've announced and kind of pulled back on and redefined. And even now, I don't know that we know exactly how it's going to play out. I think you've heard us say for a long time that we feel very comfortable with and prepared for a world where proxies go away. And I think you're right that, that would be a world in which Acxiom would be even more valuable to clients. And so when GDPR rolled out, we lost less than 1% of our data. So I think it speaks to the quality of what's there and then the know-how in the first-party data management space. So we would be more than happy. I think you're right, we would welcome and it would probably be a modest accelerant if that Band-Aid eventually gets fully ripped off. But what the stop-start of it has done is that it's made it really clear to clients that they need to take control of their first-party data and they need to have a lot more kind of agency and autonomy when it comes to that. So in a lot of conversations with clients, including some of the wins that we called out, that complexity and the understanding that we can help them figure out how to build and own their own ID Graph means that we're still seeing the benefit of it and we're still seeing opportunity from it. And I think everybody has gotten used to the lack of clarity about whether or when it's really going to fully happen. You're right. I think if we finally cross that line, it would be a modest incremental upside to us. Our next question is from Cameron McVeigh with Morgan Stanley. Cameron McVeigh Philippe, you mentioned a bit earlier about personalization at scale with AI. I'm curious if you're currently seeing any impact on creative revenue from AI tools and what the potential opportunity looks like to increase the total volume of creative output? And what success ultimately looks like to you in implementing some of this Gen AI technology? Philippe Krakowsky Sure. Look, I mean, I think personalization -- mass personalization, personalization at scale done right. The demand for that is going to be significant for some time, right? Because I think we've all gotten used to sort of a world where you say marketers always need more of everything. So I would break down the AI thing maybe into a couple of buckets. I'd say to you that there are parts of our business where AI has been core to what we do for some time, right? And we talk about that, media, data, performance. And so there, it's going to help us keep up with a very, very rapid rate of change and I think further accelerate what are already our most successful businesses. Then areas where platform and tech solutions are required like production in commerce and CRM, I think Gen AI is an incremental opportunity because I can't think of any client who doesn't leave activities that they know need doing undone due to some kind of constraint, right? So either the tech is limited, the output isn't what you want it to be, there are budget limitations, you don't have the right talent. So even as you see like sort of some of the economics of this, you're kind of going, okay, the unit cost of whatever asset we're talking about goes down. But the resources can be reinvested. We've seen this in our media business where tech allowed us to become a higher-value partner to clients, right? And you saw that in the scale of engagement. You saw that in -- because we had highly skilled folks with skill sets that clients couldn't find anywhere else. What we were able to, in essence, command in the way of the labor hours get redistributed and they go upstream. So I think what you're going to sort of see is resources get reinvested, the nature of the work changes, the nature of the talent evolves. And then what folks in our space bring -- and some of our clients who are very, very sophisticated say, we need people with a lot of experience, people who bring terrific judgment and understand how to use all these tools, we need your objectivity. In some cases, I think we also have the ability to sell tools and tech, whether it's the licenses or something SaaS-like there. And then I think the last thing I'd point out is back to the prior question, quality of data at scale is going to be really important. Because once everybody begins to have all of these same tool sets, then how you build and train the models and what you actually are able to give them that is unique data from which to. Because you're going to be bringing a lot of the discipline that you've got in the more quantity areas of the business too, the content creation and the creative part of the business. So again, there's a ways to go but we do see areas -- I mean, right now, we're actually doing a lot of not only insisting that our folks get trained but we're doing a lot of training for our clients and that's become a line of business for us. So I can't tell you with kind of clarity that it's going to be X percent this and it's going to be X percent that but these are all places where we're seeing conversations and opportunities showing up. And our last question comes from Julien Roch with Barclays. Julien Roch The first one is, can we get organic on a revenue basis rather than a net sales. Publicis gave us both for the first half '24. Second question is, are your production capability unified under one roof like Publicis WP [ph] and now Omnicom and how many employees do you have in production? And then lastly, why move to 1% rather than a range? Q4 is an adjustment quarter. So 1% is surprisingly precise to me. Does 1% actually mean more like 0.7%, 1.3% or is it really 1% on the dot. And before you answer, I'm afraid I have to correct you as patented French wines [ph] now but there is no such thing as American champagne. Philippe Krakowsky [Indiscernible] but you know what, it's what we call it here, so I don't know what to tell you. So on production, we have a global integrated production engine. In the last 3, 4 years, it's evolved because production used to be about creativity and it's obviously become far more strategic. And you've heard us talk quite a bit about the way in which we are moving to scaled platform services, data, the engineering talent centralized, media activation, retail, media and commerce. So production has been moving along that track for us for a while. It is very strategic. It has to be very upstream. And the connectivity to what we do with Acxiom, what we do with the Kinesso teams, what we now do with the Adobe Gen AI studio so that we can tag and get the right taxonomy sitting underneath that and go sort of from data all the way through to audiences, all the right formats, to push it out, not just in the ad tech ecosystem but across martech and earned media. And then optimize in flight while it's live. So I called out what we've just -- and a win with Reckitt obviously, it was part of the work that we've just won with Kellanova. So I think there is still going to be the need to -- we still have a few outliers here and there that have built specific production capabilities either with deep digital expertise or with some kind of domain expertise but we're well down the way to having that operate as a unified haul. So that's one question. I'm not sure I understood the first question because I'll take a look at what -- I didn't know that we were putting our organic growth number out in any way that was different than somebody who was also reporting on a net basis. And then what was the middle question? Remind me, I apologize. Julien Roch So the last question is why move to 1% rather than the range with Q4 being an adjustment quarter, 1% sounds surprisingly precise. So do you actually mean more like 0.7% to 1.3% when you say 1%? Or is it really 1% precisely? Philippe Krakowsky We said approximately. I mean I think we had taken 2% off the table the last conversation which you know we're always very direct. And there's definitely a bit more chop in the water at the moment. It feels like there's a measure of uncertainty that has worked its way back into conversations since 3 months ago. And so when we say approximately 1%, that feels to us like there's still some ranginess to that but it's only the middle of the year. So, it feels to us as if -- we're not being that precise; we're telling you that it's kind of -- it's moved from 1% to 2% to closer to 1%. Thank you. And I'll now turn the call back to Philippe for any final thoughts. Philippe Krakowsky Thank you, Sue. We appreciate the time and the interest. We look forward to updating you again in October. Thank you. Thank you. That does conclude today's conference. You may disconnect at this time.

Earnings call: IPG reports moderate growth and strategic shifts in Q2 By Investing.com

Interpublic Group (IPG) has reported a moderate second-quarter performance with a focus on strategic shifts and margin expansion. The company saw organic growth before billable expenses at 1.7% for Q2, contributing to a first-half growth of 1.5%. Despite underperformance in some digital specialty agencies and pressures in the tech and telecom sector, IPG's Health and Mediabrands segments stood out positively. The company is targeting approximately 1% organic growth for the full year and aims for an adjusted EBITA margin of 16.6% by 2024. IPG's commitment to integrating emerging technologies, such as Generative AI, and their focus on principal media buying are central to their strategy. Additionally, IPG is considering M&A opportunities in key growth areas and evaluating strategic alternatives for some of its digital agencies. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights Interpublic Group (ticker: IPG) continues to navigate market challenges while capitalizing on strategic growth opportunities. The company's focus on enhancing its data and tech offerings, as well as exploring new business avenues, positions it to adapt to the evolving media landscape. Despite some setbacks, IPG's commitment to delivering value to its clients and shareholders remains steadfast as it progresses towards its long-term financial targets. InvestingPro Insights Interpublic Group (IPG) has demonstrated a commitment to shareholder returns, as evidenced by its sustained dividend payments. The company has not only maintained dividend payments for 14 consecutive years but has also raised its dividend for 11 consecutive years. This consistent return to shareholders underlines the company's financial stability and its confidence in maintaining a steady income stream. InvestingPro Tips indicate that despite some analysts revising their earnings downwards for the upcoming period, IPG is still expected to be profitable this year. The company's stock is trading at an attractive P/E ratio of 10.43, which is low relative to near-term earnings growth, suggesting that the stock may be undervalued. Additionally, IPG operates with a moderate level of debt, which provides some flexibility in its financial operations. InvestingPro Data shows that IPG has a market cap of 11.13B USD and a PEG Ratio for the last twelve months as of Q1 2024 of 0.47, which could indicate potential for future earnings growth relative to its share price. Moreover, the company's Gross Profit Margin for the same period stands at 22.1%, which, while it may point towards weaker gross profit margins as one of the InvestingPro Tips suggests, still reflects a level of profitability. For readers looking to delve deeper into IPG's financial health and future prospects, InvestingPro offers additional tips. There are currently 9 more InvestingPro Tips available for IPG, which can be accessed at https://www.investing.com/pro/IPG. For those interested in subscribing, use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. These insights could be particularly valuable for investors considering IPG's strategic focus on emerging technologies and market positioning. Full transcript - Interpublic Grp (IPG) Q2 2024: Operator: Good morning and welcome to the Interpublic Group Second Quarter 2024 Conference Call. All participants are in a listen-only mode until the question-and-answer portion. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Mr. Jerry Leshne, Senior Vice President of Investor Relations. Sir, you begin. Jerry Leshne: Good morning. Thank you for joining us. This morning, we are joined by our CEO, Philippe Krakowsky and by Ellen Johnson, our CFO. We have posted our earnings release and our slide presentation on our website, interpublic.com. We will begin with prepared remarks to be followed by Q&A. We plan to conclude before market open at 9:30 Eastern Time. During this call, we will refer to forward-looking statements about our company. These are subject to the uncertainties and the cautionary statement that are included in our earnings release and the slide presentation. These are further detailed in our 10-Q and other filings with the SEC. We will also refer to certain non-GAAP measures. We believe that these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow greater transparency in the review of our financial and operational performance. At this point, it is my pleasure to turn things over to Philippe Krakowsky. Philippe Krakowsky: Thank you, Jerry. As usual, I'll begin our call with a high-level view of our results and the business overall. Ellen will then provide additional insights on the quarter and I'll conclude with highlights at our agencies to be followed by your Q&A. This morning, we are reporting a solid second quarter highlighted by moderate acceleration of our growth as well as margin expansion from the same period a year ago. To begin with revenue, second quarter organic growth before billable expenses came in at 1.7% bringing organic growth in the first half to 1.5%. In the quarter, we were paced by growth in Continental Europe, LatAm and the U.K., followed by increases in our other markets group and the U.S. Each of our 3 operating segments grew organically from a year ago. And underneath that, consistent with our performance over some time, we were again led by IPG Health and IPG Mediabrands. We saw strong performance as well at Deutsch LA, Golin and at Acxiom, we saw solid growth in the quarter. Also in keeping with recent quarters, underperformance at our digital specialty agencies weighed on our consolidated growth. That drag was about 1% of organic growth in the second quarter. From the standpoint of client sector performance, growth was driven by health care, food and beverage and consumer goods. Retail was approximately flat and we saw decreases in financial services, tech and telecom and auto and transportation. As we've called out previously, the tech and telecom sector continued to weigh on growth by approximately 1% organically in the quarter. Most of that decrease was due to the loss of a large AOR assignment with a telco client late last year. For the sake of clarity, I would note that excluding double counting, the tech and telco sector and our digital specialist combined weighed on Q2 organic revenue growth by negative 1.7%. Turning to expenses and margin; our teams continue to effectively balance cost discipline with ongoing investment in the evolution of our business. Second quarter adjusted EBITA margin was 14.6%, an improvement of 40 basis points from a year ago. We had strong leverage on base payroll which helped drive 180 basis points of operating leverage on salaries and related expenses compared to a year ago that was partially offset by planned investments in technology, business transformation and senior talent particularly for centralized platform resources which resulted in increased office and other and SG&A expense. Diluted earnings per share in the quarter was $0.57 as reported and $0.61 as adjusted for acquired intangibles amortization and a small impact from net business dispositions. During the quarter, we repurchased 2.2 million shares, returning $68 million to shareholders. On our last call with you, we noted that due to a decision by a major and ongoing health care client in late March related to their global consumer advertising work, the high end of the 1% to 2% growth range, that we had targeted as we entered the year would not be achievable. As the year has progressed, we are seeing modest incremental uncertainty in the macro environment and in domestic consumer sentiment. Our view is, therefore, that we expect to achieve approximately 1% organic growth for the full year. And with that level of growth, we continue to target adjusted 2024 EBITA margin of 16.6%. Looking ahead, we anticipate that the strongest and most consistent growth areas of our business such as our data and tech-driven media offerings, specialist health care marketing expertise, PR and experiential marketing capabilities are positioned to continue their strong performance. The common thread in the growth of our 2 largest businesses, IPG Mediabrands and IPG Health which are also our most successful businesses, has to do with the specialized high-value services that they provide to marketers. These rely on skill sets that are more technical, reach audiences with greater precision and lead directly to outcomes that we can assess and optimize. As you heard from us in the past, these include audience segmentation work, predictive analytics and data-driven decisioning, much of it powered by Acxiom and all of which has been built by in-house engineering talent creating technology solutions that rely on machine learning algorithms and more recently, newer AI capabilities. The developments we're seeing in Generative AI will be equally fundamental to the transformation of a broader set of our offerings. Collaborations with Adobe, Amazon (NASDAQ:AMZN), Blackbird.AI, Getty Images, Google (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) and others have given us secure enterprise access to advanced AI tools and large language models which are increasingly informing every area of our business, including insight generation, creative ideation in production and work in our earn and experiential communications practices, as well as further enhancing our media and precision marketing capabilities. Over the past 12 months, our progress with these emerging technologies has been significant. The ongoing upskilling of our people has been central to this process. We see this as a strategic imperative and have made it the responsibility of every operating leadership team across the company. Generative AI produces foundational capabilities and new canvases for us to work more expansively with our clients. Over time, this offers the promise of reigniting many of our creative offerings as engines of value creation. As you heard last quarter, we recently became the first company to unite all facets of the content supply chain by integrating Adobe's GenStudio AI product into our marketing technology platform, the IPG engine. That engine sits at the enterprise level and is a unified set of standards, practices and a technology layer which in turn is built on consumer insights at scale, fueled by our Acxiom data and identity products. It seamlessly connects media strategies and targeting, including predictive modeling of what we call high-value audiences to creative concepts and messaging across all marketing disciplines. We then move from data all the way through activation by which we mean the production and dissemination of campaigns, whether on marketing technology platforms in earned media or in paid media investments across all formats and channels. Our engine then analyzes the impact of this activity for purposes of attribution and optimization. This allows us to do with our communication strategies, creative assets and all forms of marketing activity what we've been doing in media which is true personalization at scale. This is an end-to-end solution which helps our clients better engage, convert and retain customers through the entire funnel, assessing and understanding the value of their investments across media, marketing and sales channels. In a world in which data-driven audience insights are key to delivering performance for our clients and one in which AI will play an increasingly important role, access to high-quality proprietary data at scale will be essential to success. Acxiom continues to have the industry's top-performing audience data to engage with customers at an individual level without the need for cookies or other proxies. Our tech stack and marketing engine optimized performance using this global data spine, of 2.5 billion real people with Acxiom ID attributes that are meaningfully greater than those available from any other industry data set in which we can match to significantly more global device IDs and our closest competitors. The engine at Acxiom are now core to every significant engagement across the company and help power many of the new business wins I'll cover later in my remarks. Now though, let's turn things over to Ellen for a more detailed view of our quarterly results. Ellen Johnson: Thank you, Philippe. As a reminder, my remarks will track to the presentation slides that accompany our webcast. Beginning with the highlights on Slide 2 of the presentation, our second quarter revenue before billable expenses or net revenue was flat from a year ago, with an organic increase of 1.7%. Our organic net revenue increase was 1.3% in the U.S. and was 2.6% in our international markets. Over the first 6 months of the year, our consolidated organic revenue increase was 1.5%. Second quarter adjusted EBITA was $338.9 million, an increase of 2.6% from a year ago and our margin was 14.6% compared with 14.2% a year ago. Our diluted earnings per share was $0.57 as reported and $0.61 as adjusted. The adjustments exclude the after-tax impact of the amortization of acquired intangibles and a non-operating gain from sales of certain small nonstrategic businesses. It is important to note that our EPS in last year's second quarter included the benefit of $0.17 per share related to the settlement of normal course, federal income tax audits. We repurchased 2.2 million shares during the quarter and 4.1 million shares in the first half of the year. Turning to Slide 3; you'll see our P&L for the quarter. I'll cover revenue and operating expenses in detail in the slides that follow. Turning to second quarter revenue in more detail on Slide 4; our net revenue in the quarter was $2.33 billion. Compared to Q2 '23, the impact of the change in exchange rates was negative 60 basis points. Our net divestitures were 1.2%. Our organic net revenue was 1.7%. For the 6 months, our organic increase was 1.5%. In terms of client sectors in the second quarter, our growth was led by very strong performance in health care and in the food and beverage sector. Consumer goods and our other category of public sector and diversified industrials also grew in the quarter. Retail was approximately flat. Going the other way, we saw decreases in the financial services, tech and telecom and auto and transportation sectors. Lower revenue in the auto sector was due to a client loss at Mediabrands at the end of last year and lower spend from existing clients. The bottom of the slide is a look at our segments. Our Media Data & Engagement Solutions segment increased organically by 80 basis points. We again saw strong growth in our media businesses, whose out performance was largely offset by decreases at our digital specialist agencies as Philippe noted and by decreased revenue at MRM. Our integrated advertising and creativity-led Solutions segment increased organically by 3%. We were led by strong growth in IPG Health at Deutsch LA. At our Specialized Communications and Experiential Solutions segment, organic growth was 1.3% led by very strong performance at Golin in public relations, while our experiential group decreased in the quarter, largely due to cost cutting by a major client at Jack Morton. Moving on to Slide 5, organic net revenue growth by region. The U.S. was 66% of net revenue in the quarter and grew 1.3% organically. We were led by strong growth at IPG Mediabrands and IPG Health. We also saw notable contributions to growth from Deutsch LA, our PR offerings and Acxiom. That was partially offset by headwinds at our digital specialists, decreased revenue at MRM as a loss of a telecom client at McCann late last year. International markets with 34% of net revenue in the quarter and grew 2.6% organically. The U.K. grew 3.4% organically. We were led by growth at our creative agencies and by growth in Media and Golin in Public Relations. Continental Europe grew 6.3% organically in the quarter, led by strong performance at McCann that included new business wins as well as increases with existing clients. We had growth in each of our largest national markets. Asia Pac decreased 2.4% organically. Strong growth in India, where we are the second largest holding company was paced by Mediabrands and FCB but that was more than offset in the region by decreases in most other national markets. Other -- organic growth in LatAm was 4.1%, led by IPG Mediabrands. We continue to see notably strong growth in Mexico. In our other markets group which is Canada, the Middle East and Africa, we grew 1.5%, led by growth in the Middle East. It is worth noting as well that Israel grew in the quarter. Moving on to Slide 6 and operating expenses in the quarter. Our net operating expenses which exclude billable expenses, the amortization of acquired intangibles and restructuring adjustments decreased 50 basis points from a year ago compared with reported net revenue that was flat of last year. The result was our adjusted EBITA margin expanded to 14.6% from 14.2% a year ago. As you can see on the slide, our ratio of total salaries and related expense as a percentage of net revenue was 66.9% compared with 68.7% a year ago. Underneath that result, we lowered our expense for base payroll, benefits and tax which was 57.8% of net revenue compared to 59.4% a year ago. Our performance-based incentive compensation increased slightly as a percentage of net revenue to 3.5% from 3.4%. Severance expense was 1.5% of net revenue which is somewhat elevated from typical levels and compares with 1.7% of net revenue a year ago. Our actions in the second quarter address areas of the business where performance has lacked. Temporary labor expense was 3% of net revenue compared with 3.2% in Q2 '23. Each of these ratios is presented in the appendix on Slide 31. Also on this slide, our office and other direct expense was 15.4% of net revenue compared with 14.6%. Underneath that comparison is planned investment in technology and business transformation. We continue to leverage our expense for occupancy which decreased 10 basis points from last year. Our SG&A expense was 1.2% of net revenue compared with 60 basis points a year ago. The increase reflects higher levels of strategic investments in senior enterprise leadership and the implementation of centralized platform. On Slide 7, we present the detail on adjustments to our reported second quarter results in order to provide better transparency and a picture of comparable performance. This begins on the left-hand side of the reported results and from left to right, exterior [ph] to adjusted EBITA and our adjusted diluted EPS. Our expense for the amortization of acquired intangibles in the second column was $20.4 million. The other adjustments in the quarter are small and related to previous restructuring and sales of nonstrategic businesses. At the foot of the slide, with the bridge per diluted share between EPS as reported at $0.57 to adjusted earnings of $0.61. Slide 8 depicts our adjustments for the 6 months. Adjusted diluted earnings per share was $0.96 for the period. On Slide 9, we turn to cash flow in the quarter. Cash from operations was $120.7 million compared with $35.2 million in the second quarter of '23. Operating cash flow before working capital was $249.1 million compared with $246 million a year ago. As a reminder, our operating cash flow is highly seasonal and can be volatile by quarter due to changes in working capital. In our investing activities, we used a net $40.4 million, primarily consisting of $34.8 million in CapEx. Our financing activities used $451.2 million. This reflects the maturity of our $250 million senior notes in April which we paid in cash as well as our regular quarterly dividend and share repurchases. Our net decrease in cash for the quarter was $383.6 million. On Slide 10 is the current portion of our balance sheet. We ended the quarter with $1.55 billion of cash and equivalents. Slide 11 depicts the maturities of our outstanding debt. As you can see on this schedule, total debt at quarter end was $2.9 billion. Our next maturity is not until 2028. In summary, on Slide 12, our strong financial discipline continues and the strength of our balance sheet and liquidity mean that we really remain well positioned both financially as well as commercially. I would like to express my gratitude for the efforts of our people. And with that, I'll turn it back to Philippe. Philippe Krakowsky: Thank you, Ellen. As I mentioned earlier, our organizational structure continued to evolve and we're working at pace to enhance the parts of our business that are growing and also to address underperforming areas of the portfolio. Going forward, we're going to continue to move to more holistic solutions and make greater precision and performance a part of all of our service offerings. Our interactions with major marketers will also increasingly be guided by senior functional and client leaders at the corporate IPG level. This ensures that we're connecting more of the portfolio to horizontal platform capabilities such as data, commerce, media activation and production. The common denominator across our strategic priorities is to broaden the range of business issues that we can help clients address with our best-in-class assets. Our goal is to continue to become a more strategic partner supporting client needs as they seek to derive more value from connecting marketing and technology in order to power their businesses. An example of this is retail media which is one of the prominent growth sectors we've mentioned to you previously. As more retailers build digital media networks and increase their call for standards and as marketers look to increase investment in this dynamic space, we see this as a promising area of growth. IPG's unified retail media network solution which is housed within Mediabrands and grounded in Acxiom data is differentiated in the market because it allows our clients to evaluate their brand's retail media buys across audience, measurement, optimization and business intelligence criteria, so as to determine which retail networks are performing best for their business objectives. This solution played a significant part in our successful defense and expansion of our assignment for Ulta Beauty (NASDAQ:ULTA) during the quarter. Ulta Beauty selected a bespoke unit within Mediabrands which includes teams from Mediahub, Kinesso and Acxiom to handle Ulta's media needs in programmatic, addressable and social as well as the marketers retail media unit, UB Media which had formerly been serviced by a competitor. The client specifically noted the combination of a creative and data-driven approach as assets in fostering connections with Ulta Beauty consumers, ensuring consumer engagement and delivering business building results. Another significant win announced earlier this week will see us take on creative, production, shopper and PR earned media responsibility for driving growth for a number of Kellanova's iconic priority brands. This is the result of an integrated offering combining FCB globally, Weber and Momentum supported by MullenLowe and the Martin Agency in key international markets and on certain brand assignments. And as mentioned, our production capability and the IPG engine also played important roles in our proposal to the client. Notable wins in the quarter saw a Generative AI search platform Perplexity, appoint UM as its media agency of record. After Levi's (NYSE:LEVI) had consolidated its global media account with UM which builds on a 4-year relationship between UM and Levi's in the Americas. UM was also named media AOR by Alliance Pharma (LON:ALAPH). Reckitt capped McCann content studios which is a core component of our production offering as its social and influencer agency of record for its U.K. health brands. And at General Motors (NYSE:GM), Buick appointed McCann Worldgroup China as its full-service agency. Another of our core multinational clients, Unilever (LON:ULVR), named Golin its global PR agency of record for laundry detergents. Top American champagne maker, Korbel chose Carmichael Lynch as its media and brand AOR. And Deutsch LA, we mentioned earlier continued to expand both its relationship with Adobe to include social work for Gen AI app Firefly, Acrobat, Photoshop and other brands. Weber Shandwick was selected by 5-Hour Energy as its partner on creative, media relations, social media and influencer strategy and Mazda Canada named FCB/SIX to lead its strategy, creative and tech work for CRM. Of course, even in a world where technology and platform capabilities are so essential. Creativity remains at the heart of what many of our clients need in order to build their brands and business. Integrating ideas into audience-led and accountable solutions is a must that creativity can be a differentiator and our performance of creative competitions continues to indicate we're well placed when it comes to the talent and craft required to make work that makes a difference for ambitious marketers. Just last week, the New York Festivals Advertising Awards named Interpublic as its Holding Company of the Year. This is a competition that recognizes our industry's best and is judged by our peers which makes it an important hallmark for the quality of our work. In May, we were also honored as Creative Holding Company of the Year at The One Show. And at the Cannes Lions Festival of Creativity which is our industry's largest global award show, Interpublic also outperformed our peers, winning 10 of the festival's highest honors, the Grand Prix more than any other company and almost twice as many as the nearest competitor. Notable categories where we won a Grand Prix include gaming, live brand experience, digital craft and data-enhanced creativity. In terms of client sectors, we won Grand Prix in both the health and pharma categories. Also at the festival, FCB was named Regional Network (LON:NETW) of the Year in North America for the sixth year in a row. IPG Health was named Healthcare Network of the Year for the third consecutive year and Area 23 won Healthcare Agency of the Year for the fourth year in a row. Unique to the public relations arena, Golin and Weber Shandwick, both won multiple Grand Prix. Our success going forward rests on our ability to combine this kind of creative excellence and innovative thinking with our deep data and tech capabilities. And that's the key reason that during the quarter, we announced that we're further unifying our data engineering, martech and ad tech resources under one leadership team. This move fully aligns Acxiom's data, identity resolution and marketing cloud services with the teams responsible for the engineering behind IPG's integrated marketing engine. Within this centralized technology and data stack, we're powering workflow, customer experience, media, commerce and production. And by unifying marketing on one platform, we can drive marketing performance for clients in real time as well as build brands for long-term success. As you know, this combination of data, tech and marketing expertise has been key to our long-term success at IPG Mediabrands. And while our tech-enabled media offerings are consistently ranked as best-in-class by marketers, during the past 12 to 18 months, we have seen a number of clients place a greater premium on efficiency and costs. Given that marketplace evolution, we have pivoted and are now able to deliver value not only with advanced and effective media solutions but also through our growing practice in principal media buying. This new component of our media practice will take time to scale fully but represents an incremental option for media value creation for current and prospective clients as well as the new avenue for growth for what has consistently been our strongest performing business. As mentioned at the outset of my remarks, we continue to see disparate performance across the portfolio due in part to an asset mix that features more concentration in certain traditional practice areas than some of our peers. An area that's become a regular feature of these conversations is the performance of 2 of our specialty digital agencies, R/GA and Huge. Having made adjustments to the workforce at each of those operations and co-located their headquarters within the IPG Innovation dock, we are now formally evaluating strategic alternatives for these premium agency brands. The right partner could help unlock greater value for their clients and people. We'll keep you posted on progress in this process as appropriate. And those teams remain focused on delivering the top-tier service and innovative solutions for their clients that they're known for. As you know, we spent a number of years outperforming the sector when it comes to top line growth and continue to consistently win many of the industry's most competitive pitches. That said, the challenges we're facing at certain of our agencies, coupled with the shift in the media landscape to principal buying have led to recent losses that will weigh on our results, particularly as we head into 2025. We have a solid new business pipeline for the remainder of this year and are finalists in several large ongoing reviews. These opportunities, organic growth in our existing client base and accelerating the development of new capabilities in areas such as retail media and commerce, we'll continue to have our full focus as we look to deliver the best outcome this year and reignite a higher level of growth going forward. In certain high-growth areas where scale would benefit our competitive position and the company's overall growth profile such as commerce, retail, media and business transformation, we will also consider M&A as an avenue to effect a more rapid transformation of our portfolio. As mentioned earlier, for the full year, we expect to achieve organic growth of approximately 1% and at that level, continue to target adjusted EBITDA margin of 16.6%. Additional areas for value creation include our strong balance sheet and liquidity as well as our long-standing and ongoing commitment to capital returns. As always, we thank our partners and our people as well as those of you on this call. And with that, let's open the floor to your questions. Operator: [Operator Instructions] Our first question is from Adrien de Saint Hilaire with Bank of America (NYSE:BAC). Adrien de Saint Hilaire: Philippe, first of all, you talked about 3 factors impacting organic sales growth for the second half. I'm curious how do you think those factors impact 2025 as well? And then the second question I would have is Europe has been outperforming the U.S. at IPG but also at many peers and that also seems to be true across the ad market. From my seat, that seems a bit counterintuitive, given the different GDP growth in Europe versus the U.S.? I'd be curious as to why that is in your opinion? Philippe Krakowsky: Sure. The first question I can unpack only obviously up to a point. So what I think I would call out for you is we've obviously mentioned that with a number of the recent headline decisions, those are clients who remain very important and sizable partners to us. So the focus here is clearly going to be on delivering the best possible service and solutions because unlike other "losses", there's clearly the opportunity to regrow some of those relationships. And the other thing I would point out is I think you're right that at this point, the impact of wins and losses sort of from a net new business perspective, sitting where we are sitting right now, we're essentially neutral. We had a pretty sizable string of wins, say, about a year ago. And so the new business headwind is a question for '25 and yet, we don't have a budget for '25. And it's kind of early to project that far out, given that we've got about half a year to go. And so I think the focus is going to be the new business pipeline growing, new capabilities with existing clients. Obviously, when that large telco loss, it is maybe 70% of what's in that segment down goes away, some recovery in tech would clearly be wind in our sails. And then the strategic assessment of options that we talked about for the digital specialists would also change the math a bit. So I can't really quantify that for you. I can just give you a sense of what the moving parts are. And then I think I'm going to ask Ellen to just sort of step in. Because on the Europe question, you've heard us before, it gets very, very specific with us. It's not a very big region. So it really becomes client specific in a market that can have an impact. Ellen Johnson: Sure. Yes, Europe is about 9% of our revenue and we did see growth across all major markets, Spain, Germany, France, in particular. We had some nice wins through our creative agencies, particularly McCann. But we also had growth at IPG Health. And really, it was a decent breadth of the portfolio that grew; so both, across clients and client sectors. So it has been a relatively strong region for us. Operator: The next question is from David Karnovsky with JPMorgan (NYSE:JPM). David Karnovsky: You spoke earlier to some incremental uncertainty and softening in consumer sentiment. Just wanted to see if you could expand on that a bit, what you're hearing from clients in terms of their level of confidence and investment. And then you also mentioned the capability in principal media as being a factor on your views over the past 18 months. As you're now scaling up your offering there, do you see Mediabrands in a better position at this point to compete for new business? Philippe Krakowsky: Well, look, I mean I guess I'll take them in order. But -- so on tone of the business, I would broaden the aperture fairly significantly. And I would say to you that given the levels of uncertainty that we are seeing across the world and I'm talking geopolitically, socially. And then the sense that domestically, fiscal policy is kind of stuck in neutral. It stands to reason that the operating environment has become more challenging. And I know that you heard as much from a couple of our competitors, right? I think we're all seeing the same thing. Now if I wanted to give you a bit more texture to that or detailed granularity from the kinds of conversations you're talking about with clients, I don't think it's like a year ago where there was this pervasive, an almost universal feeling that there was a recession right around the corner. But in the time since the last call that we had with all of you, there is a bit more caution. And the way we see it is decisions on reviews, decisions on client spend are either taking a bit longer to be made or sort of delayed with a little bit of a hey, it's indefinite, we'll get back to it. And that's in certain areas of the business or at some marketers. It's not across the board. But to the extent that it's begun to be something that we're factoring into our thinking, we felt that it needed to be called out. Your principal buying question; look, I think it tracks and it's really consistent with discussions that we've had with you and with all of you when we see each other in settings unlike this one, we've completed the foundational work that incremental dimension to our media offering is now up and running. It is early. It will need time to ramp up. We will and are approaching clients and media partners in a way that's measured because as that part of our buying mix increases steadily over time, we're always going to be a client-first organization. So it's essentially a question of which clients want to opt in which clients want to access the market in this mode. Our media business has been really, really successful for a long time without that. So there are plenty of folks in our portfolio who are part of the franchise because they want the effectiveness, the tools, the data powered kind of decisioning and the platform approach to it. But in essence, we're going to be operating with multiple buying models. So we'll definitely bring principal into pitch situations because we've seen circumstances, I'd say going back to -- we mentioned a loss of Mediabrands in automotive last year where, clearly, the nature and the quality of the product was not in question and yet, that -- the premium on efficiency is something that, as the world has become more uncertain and there's been a lot of this pressure on client P&Ls, cost of money, this broader uncertainty. So we definitely think it will be a benefit because we've seen in circumstances where late in a process, that's become a gating item and a decision that obviously didn't go our way. Operator: Our next question is from Steven Cahall with Wells Fargo (NYSE:WFC). Steven Cahall: That was a lot of helpful context there at the end around the shift in media buying to the more principal-based model. And how you're looking to reposition that with some of the internal changes you mentioned around centralization as well as inorganic opportunities in places like retail marketing. Could you just expand on how we should think about the time to do things internally, maybe specifically as it relates to the principal-based media buying you were just discussing. And then how significant your inorganic opportunity appetite is. I think your last big deal was Acxiom; that was very transformative. Philippe Krakowsky: I'm kind of going for folks who've been following us probably if you look at like a 20-year horizon only; but yes. Steven Cahall: Yes, that's true. So only -- and you've delevered really quickly from that or at least shown that you can delever as needed. So it sounds like you're kind of teeing up potentially some bigger M&A to come. So I just want to make sure I am understanding that correctly and that we're thinking about that correctly. And then, where do you kind of think about the trend for creative and all this. I think some of our concern is that while creative is never going to go away, it's maybe being devalued, whether it's due to retail marketing expansion or whether it's just due to some of the AI capabilities that makes it a little cheaper. It's still a big part of the business. So where do you see the future of the creative part. Philippe Krakowsky: Sure, that's a lot. So on principal, it will take, as I said, sometime, we're very focused on it. We're -- obviously, you have to go into the market, you have to engage with the media owners and secure the inventory in that way. You've got to get clients who opt into the model and understand the benefits. And then, obviously, that volume yields a kind of benefit. So I think that, that will be range and bearing over the course of the next year. And we're going to go -- we're going to move thoughtfully but at pace, as I said, about a few other things. On your M&A question, I think what I would say to you is that I do talk a bit about how our asset mix doesn't tilt as heavily to some of these, at least in terms of scale, the capability sets are there. We show up and win with them. But whether it's that scale is valued by certain kinds of clients because you can sort of show up with something that's a very comprehensive solution and again, efficiency, not even in the media space. But also, clearly, the more sale to win that you have, the better it is. So we are going to look in commerce and retail media in particular. And then I guess the business transformation but I would define it as further down the stack sort of less focused on the comm side and more on engineering and kind of how can you help clients rework processes so that they can be much more digital in the ways that they work, including their marketing. So I think those are areas where we will probably look for inorganic opportunities. And I -- look, you know us very well. We're very thoughtful about how we approach M&A. That's not going to change. We're very balanced in that, as you said, we delevered very quickly. We were very transparent with you about why we were doing it and how we were going to do it given the scale of it. But I think that you could change the growth profile of the business with something out there or maybe one or 2 things that might not be at the scale of what we did with Acxiom. But they're clearly going to be larger than the very modest kinds of deals that we've been known for, for some time. So hopefully, that helps unpack the thinking. And no, you -- I forgot. And then you had the creative question. I guess my observation for you is that creative is still very important and a big idea still matters. If you look at the Kellanova news this week, clearly, a client who we're excited about because they believe that big ideas can have a big impact for them in terms of driving growth and what their mission is coming out of their spin. So I think that creative is important but it is important that you integrate it, that you basically figure out how FCB has done a terrific job for us to plug into the data stack, get more precise about what you do and have that, in essence, incorporated into your strategy and have your strategy be about where business opportunities sit and where business outcomes can be driven. And then you engage all of the deep understanding of brands and the craft around creativity. And then you can actually have pretty good outcomes, right? And so I think there's a way. And then I think the other thing, as I said at the outset also is if you incorporate certain components of what Gen AI tools provide and you can take creativity and bring it to bear in a lot of new ways. You can sort of do ideation faster and get to hypotheses -- good hypotheses, better hypotheses faster. You can democratize creativity and distribute it in ways that reach a lot of your clients. Ancillary audiences or partners that you might not have been able to do in the past; so we're still focused there. We probably, as I said, that's one of those might we have more exposure to traditional relative to some of our peers, yes. And the question is going to be a version of both what I said which is we're going to look at underperformance and think about what needs to be addressed or streamlined but we're also going to keep pushing them to transform. Operator: Our next question is from Tim Nollen with Macquarie. Tim Nollen: I wonder if you could comment, please, on the news this week that Google is not going to be deprecating cookies. And I'm asking -- I'm interested in IPG's perspective, in particular, because of all the work you do with Acxiom in first-party data and all the good stuff there. So I'm just curious, it seems like this is sort of a positive for the ad industry and that the risk of later disruption seems to have gone away. But for you guys, I wonder, is it positive? Or is it maybe a little less positive than if cookies had been removed and all the great stuff that Acxiom can do with first-party data is maybe not quite as important as it was before. Just don't know how to interpret the news. Philippe Krakowsky: Well, stop, start, stop, start, right? So it is not necessarily unexpected at this point. It's something that they've announced and kind of pulled back on and redefined. And even now, I don't know that we know exactly how it's going to play out. I think you've heard us say for a long time that we feel very comfortable with and prepared for a world where proxies go away. And I think you're right that, that would be a world in which Acxiom would be even more valuable to clients. And so when GDPR rolled out, we lost less than 1% of our data. So I think it speaks to the quality of what's there and then the know-how in the first-party data management space. So we would be more than happy. I think you're right, we would welcome and it would probably be a modest accelerant if that Band-Aid eventually gets fully ripped off. But what the stop-start of it has done is that it's made it really clear to clients that they need to take control of their first-party data and they need to have a lot more kind of agency and autonomy when it comes to that. So in a lot of conversations with clients, including some of the wins that we called out, that complexity and the understanding that we can help them figure out how to build and own their own ID Graph means that we're still seeing the benefit of it and we're still seeing opportunity from it. And I think everybody has gotten used to the lack of clarity about whether or when it's really going to fully happen. You're right. I think if we finally cross that line, it would be a modest incremental upside to us. Operator: Our next question is from Cameron McVeigh with Morgan Stanley (NYSE:MS). Cameron McVeigh: Philippe, you mentioned a bit earlier about personalization at scale with AI. I'm curious if you're currently seeing any impact on creative revenue from AI tools and what the potential opportunity looks like to increase the total volume of creative output? And what success ultimately looks like to you in implementing some of this Gen AI technology? Philippe Krakowsky: Sure. Look, I mean, I think personalization -- mass personalization, personalization at scale done right. The demand for that is going to be significant for some time, right? Because I think we've all gotten used to sort of a world where you say marketers always need more of everything. So I would break down the AI thing maybe into a couple of buckets. I'd say to you that there are parts of our business where AI has been core to what we do for some time, right? And we talk about that, media, data, performance. And so there, it's going to help us keep up with a very, very rapid rate of change and I think further accelerate what are already our most successful businesses. Then areas where platform and tech solutions are required like production in commerce and CRM, I think Gen AI is an incremental opportunity because I can't think of any client who doesn't leave activities that they know need doing undone due to some kind of constraint, right? So either the tech is limited, the output isn't what you want it to be, there are budget limitations, you don't have the right talent. So even as you see like sort of some of the economics of this, you're kind of going, okay, the unit cost of whatever asset we're talking about goes down. But the resources can be reinvested. We've seen this in our media business where tech allowed us to become a higher-value partner to clients, right? And you saw that in the scale of engagement. You saw that in -- because we had highly skilled folks with skill sets that clients couldn't find anywhere else. What we were able to, in essence, command in the way of the labor hours get redistributed and they go upstream. So I think what you're going to sort of see is resources get reinvested, the nature of the work changes, the nature of the talent evolves. And then what folks in our space bring -- and some of our clients who are very, very sophisticated say, we need people with a lot of experience, people who bring terrific judgment and understand how to use all these tools, we need your objectivity. In some cases, I think we also have the ability to sell tools and tech, whether it's the licenses or something SaaS-like there. And then I think the last thing I'd point out is back to the prior question, quality of data at scale is going to be really important. Because once everybody begins to have all of these same tool sets, then how you build and train the models and what you actually are able to give them that is unique data from which to. Because you're going to be bringing a lot of the discipline that you've got in the more quantity areas of the business too, the content creation and the creative part of the business. So again, there's a ways to go but we do see areas -- I mean, right now, we're actually doing a lot of not only insisting that our folks get trained but we're doing a lot of training for our clients and that's become a line of business for us. So I can't tell you with kind of clarity that it's going to be X percent this and it's going to be X percent that but these are all places where we're seeing conversations and opportunities showing up. Operator: And our last question comes from Julien Roch with Barclays (LON:BARC). Julien Roch: The first one is, can we get organic on a revenue basis rather than a net sales. Publicis gave us both for the first half '24. Second question is, are your production capability unified under one roof like Publicis WP [ph] and now Omnicom and how many employees do you have in production? And then lastly, why move to 1% rather than a range? Q4 is an adjustment quarter. So 1% is surprisingly precise to me. Does 1% actually mean more like 0.7%, 1.3% or is it really 1% on the dot. And before you answer, I'm afraid I have to correct you as patented French wines [ph] now but there is no such thing as American champagne. Philippe Krakowsky: [Indiscernible] but you know what, it's what we call it here, so I don't know what to tell you. So on production, we have a global integrated production engine. In the last 3, 4 years, it's evolved because production used to be about creativity and it's obviously become far more strategic. And you've heard us talk quite a bit about the way in which we are moving to scaled platform services, data, the engineering talent centralized, media activation, retail, media and commerce. So production has been moving along that track for us for a while. It is very strategic. It has to be very upstream. And the connectivity to what we do with Acxiom, what we do with the Kinesso teams, what we now do with the Adobe Gen AI studio so that we can tag and get the right taxonomy sitting underneath that and go sort of from data all the way through to audiences, all the right formats, to push it out, not just in the ad tech ecosystem but across martech and earned media. And then optimize in flight while it's live. So I called out what we've just -- and a win with Reckitt obviously, it was part of the work that we've just won with Kellanova. So I think there is still going to be the need to -- we still have a few outliers here and there that have built specific production capabilities either with deep digital expertise or with some kind of domain expertise but we're well down the way to having that operate as a unified haul. So that's one question. I'm not sure I understood the first question because I'll take a look at what -- I didn't know that we were putting our organic growth number out in any way that was different than somebody who was also reporting on a net basis. And then what was the middle question? Remind me, I apologize. Julien Roch: So the last question is why move to 1% rather than the range with Q4 being an adjustment quarter, 1% sounds surprisingly precise. So do you actually mean more like 0.7% to 1.3% when you say 1%? Or is it really 1% precisely? Philippe Krakowsky: We said approximately. I mean I think we had taken 2% off the table the last conversation which you know we're always very direct. And there's definitely a bit more chop in the water at the moment. It feels like there's a measure of uncertainty that has worked its way back into conversations since 3 months ago. And so when we say approximately 1%, that feels to us like there's still some ranginess to that but it's only the middle of the year. So, it feels to us as if -- we're not being that precise; we're telling you that it's kind of -- it's moved from 1% to 2% to closer to 1%. Operator: Thank you. And I'll now turn the call back to Philippe for any final thoughts. Philippe Krakowsky: Thank you, Sue. We appreciate the time and the interest. We look forward to updating you again in October. Thank you. Operator: Thank you. That does conclude today's conference. You may disconnect at this time.

SS&C Technologies Holdings, Inc. (SSNC) Q2 2024 Earnings Call Transcript

Daniel Perlin - RBC Capital Markets Andrew Schmidt - Citigroup Peter Heckmann - D.A. Davidson & Co. Alexei Gogolev - J.P. Morgan Surinder Thind - Jefferies James Faucette - Morgan Stanley Kevin McVeigh - UBS Ladies and gentlemen, thank you for standing by and welcome to the SS&C Technologies Q2 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now hand today's call over to Justine Stone, Head of Investor Relations. Please go ahead. Justine Stone Welcome everybody and thank you for joining us for our Q2 2024 Earnings Call. I'm Justine Stone, Investor Relations for SS&C Technologies. With me today is Bill Stone, Chairman and Chief Executive Officer, Rahul Kanwar, President and Chief Operating Officer, and Brian Schell, our Chief Financial Officer. Before we get started, we need to review the Safe Harbor Statement. Please note the various remarks we make today about future expectations, plans, and prospects, including the financial outlook we provide constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factor section of our most recent annual report on Form 10-K, which is on file with the SEC and can also be accessed on our website. These forward-looking statements represent our expectations only as of today, July 25th, 2024. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. During today's call, we will be referring to certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to comparable GAAP financial measures is included in today's earnings release, which is located in the Investor Relations section of our website at www.ssctech.com. Thanks, Justine, and welcome, everyone. Our second quarter results are record adjusted revenue of $1,452.4 million, up 6.5% and $20 million ahead of our forecast. Our adjusted diluted earnings per share were $1.27, up 17.6% adjusted consolidated EBITDA was [$558.9 million] (ph) for the quarter, and our EBITDA margin was up 170 basis points, the 38.5%. Our second quarter adjusted organic revenue growth was 6.4%. The revenue acceleration was driven by strength in our alternatives, GIDS, wealth and investment technology and Intralinks businesses. The surprise upside came largely in our GID business, the outperformance driven by seasonality and some accelerated license revenue. Our recurring revenue growth for financial services was 7.7%, which includes all software enabled services and maintenance revenue. Second quarter cash from operations were $385 million up 16.8% from Q2 2023. Our cash flow conversion percentage for the quarter was over 120%. We paid down $25.2 million in debt in Q2 2024. Bring our net leverage ratio to 2.84 times, consolidated EBITDA. In Q2 2024, we bought back 3.7 million shares for $227 million at an average price of $62.17 per share, this is the highest share buyback in one quarter in SS&C's history. Last week, the Board Of Directors renewed a one year, $1 billion common stock repurchase program. We continue to believe stock repurchases are a good use of our capital. On the M&A front, valuations are still elevated, but we are seeing an increase in relevant targets coming to market. We will continue to look, but our returns need to be as attractive or greater than buying back our own stock. I'll now turn it over to Rahul to discuss the quarter in more detail. Rahul Kanwar Thanks, Bill. Our business had a good quarter with the strongest organic revenue growth since 2021. Our alternative fund administration business had strong growth across the board in private markets, hedge funds, and retail alternatives where we provide both fund administration and transfer agency services and support registered alternative and interval funds. SS&C is uniquely positioned to serve this growing area with the combination of our transfer agency and fund administration services. We have seen early success in the wealth and investment technology business unit collaborating on client relationship management and sales opportunities. Trust Suite, momentum continues, the sales pipeline is robust and we're being invited to participate in the largest RFPs in the market. DomaniRx's second release was put in production on July 1st and the platform can now process claims for all lines of business. We have processed over 100 million claims since going live in January and have migrated our first new client onto the platform. Domani's key strengths include enhanced functionality running on the SS&C private cloud, will [stop] (ph) with self-service capabilities and customized reporting. I will now turn the call over to Brian to discuss the financials. Brian Schell Thanks, Rahul. And good day, everyone. Our Q2 2024 GAAP results reflect revenues of $1.452 billion, net income of $190 million, and diluted earnings per share of $0.75. Our adjusted revenues were also $1.452 billion, an increase of 6.5% over Q2 2023. The increase of $89 million over prior year was primarily driven by incremental revenue contribution from the alternatives with GIDS and Intralinks businesses. Acquisitions contributed $4 million and foreign exchange had an unfavorable impact of $2 million. As a result, adjusted organic revenue growth on a constant currency basis was 6.4%. Our core expenses increased 3.3% or $29.2 million excluding acquisitions and on a constant currency basis. Adjusted Consolidated EBITDA attributable to SS&C was $559 million or 38.5% of adjusted revenue and increase of $57 million or 11.2% from Q2 2023. The 38.5% EBITDA margin reflects a year-over-year improvement of 170 basis points driven by the positive impact of both revenue growth and disciplined expense management. Net interest expense this quarter was $113 million, a decrease of $5 million from Q2 2023. Adjusted net income was $320 million, up 15.7%, and adjusted diluted EPS $1.27, an increase of 17.6%. The effective tax rate used for adjusted net income was 26%. Increased share repurchases drove the diluted share count down to $252.3 million from $253.3 million in Q1 2024. SS&C ended the second quarter with $462.7 million in cash and cash equivalents and $6.7 billion in gross debt. SS&C's net debt, as defined in our credit agreement, which excludes cash and cash equivalents of the $88.5 million held at DomaniRX was $6.3 billion. Our last 12 months consolidated EBITDA used for covenant complaints was $2.2 billion. Based on net debt of approximately $6.3 billion, our total leverage ratio was 2.84 times and our secured leverage ratio was 1.6 times. In May, we refinanced our Term B loan consisting of five tranches with a new single $3.9 billion Term B loan tranche as well as a $750 million senior note. The refinancing resulted in a $28 million non-cash loss on the extinguishment of debt and the capitalization of $35 million of new deferred financing fees. The refinancing activity resulted in extending our debt maturity by approximately 3.7 years and diversifying our funding sources, but still positioned to benefit from any reduction in short-term rates. As we look forward to the third quarter and the remainder of the year with respect to guidance, note that we will maintain our focus on client service and assume that retention rates will continue to be in the range of our most recent results. We will manage our expenses with a cost-discipline approach by controlling and aligning variable expenses to ensure efficiency, increasing productivity, improve our operating margins to leverage our scale, and effectively investing in the business through marketing, sales, and R&D to take advantage of future growth opportunities. Specifically, we have assumed foreign currency exchange rates will be at current levels, short-term interest rates to remain at current levels, a tax rate of approximately 26% on an adjusted basis, capital expenditures to be 4.1% to 4.5% of revenues, which is a slight reduction from prior guidance, and a stronger waiting to share repurchase versus debt reduction subject to changes to market conditions. For the third quarter of 2024, we expect revenue to be in the range of $1.42 billion to $1.46 billion and 5.3% organic revenue growth at the midpoint. Adjusted net income in the range of $304.6 million to $320.6 million. Interest expense excluding amortization of deferred financing costs and original issue discount in the range of $107 million to $109 million, diluted shares in the range of 251.6 million to 252.6 million shares, and adjusted diluted EPS in the range of $1.21 to $1.27. For the full year of 2024, we are raising revenue guidance by $12 million and expect revenue to be in the range of $5.706 billion to $5.866 billion and 4.9% organic revenue growth at the midpoint. Adjusted net income in the range of $1.246 billion to $1.326 billion, diluted shares in the range of 250.9 million to 253.9 million shares. Adjusted diluted EPS in the range of $4.98 to $5.22 and cash from operating activities to be in the range of $1.305 billion to $1.385 billion. Our updated 2024 guidance reflects our strong results in the first half of the year with a continued positive outlook for the remainder of the year. And now back to Bill. William Stone Thanks, Brian. We obviously have strong quarter on both the top and bottom-line. We continue to be bullish about our business and our updated guidance [has offset] (ph) 4.9% organic growth at the midpoint and $5.10 in adjusted diluted earnings per share. I'd also like to announce that on September 18th of 2024, we'll hold an Analyst Day at NASDAQ market site in New York City. Formal invites will go out in the coming weeks and please reach out to Justine if you have any questions. We also be hosting our SS&C deliver client conference in New Orleans, Louisiana on October 6 to 8. This premier event is designed for executives and decision makers across SS&C's solutions set and features hands-on learning, industry insights, and many networking opportunities. I'm pleased to announce this year's keynote speaker is my friend David Rubenstein, co-founder and co-chairman of the Carlyle Group, which SS&C was a portfolio company from 2005 until 2014. We look forward to hosting hundreds of our clients and prospects in October. I'd now like to turn it over to questions. [Operator Instructions] Your first question is from the line of Dan Perlin with RBC Capital Markets. Daniel Perlin Thanks. Good evening. Great to see the organic trends just continuing to improve here. I just had a quick question on the guidance. It looks like at the midpoint it seems to suggest, if we use kind of the midpoint for third quarter and then take the full year number, that the fourth quarter's organic growth kind of steps down a little bit, maybe more meaningfully. I'm just trying to understand, like is this just tougher comps as we kind of look at the numbers or something structural that we need to be mindful of -- or is this just kind of overall conservatism since we're not -- we're a little bit away from maybe putting up the numbers on the fourth quarter. Thanks. William Stone Yeah, Dan, I would just say that the Q4 is really a comp issue. Q4 of '23 was particularly strong and again as you well know we are in the process of meeting and beating our numbers. So we are still focused hard on making sure we have a strong number, but a number that we expect to hit. Daniel Perlin Okay. No, that's great. And then just a quick follow-up. Your leverage is at 2.8 turns now. Obviously you just re-upped $1 billion buyback and you just did the biggest buyback in the company's history for the quarter. And you kind of mentioned a little bit, Bill about the M&A kind of environment in the pipeline. I'm just wondering what do you see out there? How is it stacking up in terms of overall capital allocation? I understand you got a hurdle rate for your buyback versus M&A. But it does sound like M&A is picking back up and even in kind of your -- I guess, is your Intralinks report that you recently put out it sounded like within North America, the deal flow was looking pretty good. So I would just love to get your thoughts on where you sit today given your balance sheet is pretty healthy. William Stone Yes. As you well know we've really built the company around organic revenue growth and acquisitions. We see a lot of stuff out there. We see things that are on the low end of ridiculously priced. So we are willing to look hard. We would like to deploy capital in acquisitions. We would like to further build out our portfolio of products and services. And in each of our business units are kind of beating the bushes for opportunities. So I wouldn't be surprised if we were able to close a couple of tuck-ins and maybe something a little more substantial. I don't see any $5 billion or $10 billion acquisitions on the near-term horizon, although SS&C will be in the running, if any of those things come on the market. Your next question is from the line of Andrew Schmidt with Citi. Andrew Schmidt Hi, Will, Rahul, Brian, thanks for taking my questions. Maybe it's a higher-level question for me. Obviously, the last three quarters, we've seen you maintain at least mid-single digit organic growth. Maybe talk about the sustainability and visibility of consistently delivering that. And if anything, what's changed? I realize that we are a more stable level in terms of the GIDS performance. Health care is stable versus one years to two years ago, but if there is anything else deeper in the business that drives that stabilization that would be helpful. And I realize I might be jumping on the Analyst Day, but anything there would be helpful. Thanks a lot guys. William Stone Andrew, I'd just say in general that we have a strong focus on organic revenue growth. We have looked at a bunch of acquisitions, but the ones that we really like are pricing at 10 times revenue. So we don't like them that much at that price. So when you start focusing on organic revenue, you start looking on how you're pricing. We've done a pretty good job of getting a little more discipline there. And you also make sure that the pitches that we go out in order to cross-sell and up-sell, as well as new names are crisp and impacted. So I think we've done a good job there. And I think Rahul probably has a couple of anecdotes or additions that would also give you some clarity. Rahul Kanwar Yes. I think the thing that I would add to that is product development. We've spent a lot of energy over the last really several quarters, making sure that what we are selling into a particular type of customer will bring in all of SS&C to bear. And so that is starting to show up in larger deals and better win rates, and we expect that to continue. Andrew Schmidt Got it. Thank you Will and Rahul. Yes, certainly shining through in the product updates that you are putting through to the market. So we see that. I appreciate those comments. And then maybe just a question on the outlook. Just the raise and the EPS outlook relative to the second quarter result and that in conjunction with higher level of share repurchase. I'm wondering if there was some reinvestment that was baked in or if there's some that you're kind of saving for some potential outperformance in the back half, it just looks like the raise was a little bit lighter than the outperformance. So anything there would be helpful. Thank you. William Stone Well again as we said, our GIDS business was particularly strong, and we don't expect a repeat of the strength of that business in Q3 or Q4. We have some opportunities but often they're multi-quarter sales cycles. We have a good pipeline, but that certainly could be a little bit of a headwind to us. And then we also are -- we're very excited about our trust suite that we're bringing out into the marketplace. It is getting a lot of positive reaction. And I think we're executing and hopefully, it will surprise you positively. Daniel Perlin Got it. Thank you Bill. And sorry, just one more housekeeping since you mentioned at the GIDS business, the accelerated license revenue? Like could you shed some light on that? Was that timing, just any details on that? And then I'll jump back in the queue. Thanks a lot for your responses here. Rahul Kanwar It is mostly timing. There were some deals that we had forecast that's coming in, in Q3 and Q4, and we were able to pull them into Q2. Your next question is from the line of Peter Heckmann with D.A. Davidson. Peter Heckmann Hi, good afternoon. Thanks for taking my question. I guess how would you characterize the overall spending environment? And we hear you in terms of where certain areas are producing a little bit better organic growth. But I guess, what do you view in terms of like the next couple of years catalysts that could potentially cause you to look at switching vendors, upgrading? And what do you think are the demand drivers there? Is it regulatory? Is it technology? Or is it price? William Stone Well, I think it's all of those. I think price is probably the least important of the three. I also think as you see of these cyberattacks and the outages for large-scale businesses, they start looking hard at who their vendors are in and how much money are there vendors putting into their security walls and their expertise and the number of layers they have in order to kind of stop the bad guys. And similar to things like made off in others that caused a real fee change in and how people did their books, whether they did them in-house or they did them with an outside administrator. I think technology is going to be one of those things that, yes, you saved a few hundred thousand and maybe even a few million over three-year or four-year deal, and then you got burned for about 15 or 20. And they are going to start deciding that playing technology on the cheap is a risky business. So I think that's going to be a real driver. I also think how you deploy the newest technologies, whether that is deep learning, machine learning, RPA, AI, ML, all of those things, right? I think the key there is has to work, and it has to work better than what you had before. You can't go show them something that's really pretty and it's slow or it doesn't -- isn't as accurate. So there's a lot of things that go into deploying new technologies. It's not just, well, we use large language models. And we are really steeped in AI. And maybe, I think those kinds of things are real opportunities for us. And I think as long as we focus and deliver applications that show that, hey we are here for the long term. We're going to give you improvements every quarter, every 6 months, every year, and you're going to see that your business improves because you chose the right partner. Peter Heckmann Yes, that's helpful. And then just any comments just on wealth specifically mentioned it as one driver of organic growth. But I guess, how would you characterize there? Is that more on the adviser tech side or more on the [long-only] (ph) side? William Stone I think it's in both. You're going to have, obviously the wealth and investment technology is a very strong area. And just as you've seen on Envestnet getting sold or at least in the process of being sold. And all the number of mergers and private equity buying into different wealth technology companies, I don't see that stopping. There is however many trillions being transferred from generation to generation and the younger people getting this money are not going to wait for a monthly statement or a quarterly statement or along those lines, they're going to want instantaneous access to their money. And I think things like you see on the T+1 and other things where the regulators are understanding when you have things like Venmo and other instantaneous money movers, people don't want to wait 24 hours for trade to settle or the money to be available or anything else. So you're going to have to be nimble enough to handle the people that are recipients the current generations really large scale wealth accumulation. Your next question is from the line of Alexei Gogolev with JPMorgan. Alexei Gogolev Hi, Bill, [indiscernible] Gogolev here. Great to hear from you. Last time we met you flagged growing confidence that SS&C will be able to achieve high single-digit organic revenue growth in the mid-term. So sort of following up on some of the questions that my colleagues have asked, are you seeing some sort of time or pockets of opportunity that could drive further growth acceleration? William Stone I think we see that, Alex. I think the question is that you have to not just see them, you have to act on them and you have to get ink on paper. And I think the large-scale things that we think are happening are people to outsource and even for us to take various lift-out where we can give them tremendous expense savings, better technology and a happier client base, and we can earn a lot of money in processing that business. We think there's a number of those that are in the marketplace. We think we are well positioned. So I think those types of things and then things like what we're rolling out as new products and new services as they kick in, I think you'll see increasing organic revenue growth. I think the reduction in year-over-year revenue in health care went from 8.5% to 4.5% or 8.5% to 4.8%. I think Q3 will be better than that may be breakeven or even a little better on a growth basis. And then I think we'll start accelerating in Q4 and throughout '25 and '26. So I think there's a number of different catalysts that can drive mid to high single digits, but it's execution. We've got great strategies. Alexei Gogolev Understood, Bill. And just to build up on the answer that you just provided. You've always positioned having your own data centers and infrastructure is a strong competitive advantage. Could you discuss how your customers reacted to outages last week? And if you've seen any incremental demand on the back of that? William Stone Well, I think we've had many follow-up calls with customers of ours that in their stack, they had some of the companies that had real difficulty in our own tech stack, we have very little of the companies that have had problems. So knock on probably [fib marble] (ph) here. We are well served by our technology team that's very disciplined and also as many layers security around our data processing centers. We run our own private cloud. It doesn't mean we don't get attacked. Of course, we get attacked by everybody else. But we are not Amazon. We're not Azure. We're not a Target. And the number of people coming after us is a mere fraction of what we go after large-scale disruption of the US economy. So we are confident in what we're doing. We spend tons of money and we believe that we are getting value. [Operator Instructions] Your next question is from the line of Surinder Thind with Jefferies. Surinder Thind Thank you. Bill, can you maybe talk about the pipeline that DomaniRx given that you've now had a few successful clients on the platform, what you're seeing, maybe what the conversations are like and just time frame for any new announcements? William Stone Well, we have a good pipeline and we have a pipeline with very large health care insurance claims payers. And I think we have a better bread box. So we have a great opportunity if we can execute in a way that those large-scale organizations say, you can handle this. Not only can you handle it, DomaniRx has very little latency. It is processed up second, a number of our competitors are processing in multi-second. And when you are doing millions of claims, that's very unpopular. But we think we have some competitive advantage there. As Rahul said before, we have self-service capabilities. We have very strengthened reporting capabilities and a lot of good things for finance, so that they can really understand where they're spending money and on which drugs and which market. So we think we have great opportunities. There's vagaries in every market, there's vagaries here too. So we have to execute, but we put 1.5 million hours into Domani. And as I tell our prospects and clients, it works and that's a pretty big statement. Surinder Thind That's helpful. And just as clarify -- is it larger deals, longer sales cycle in the rest of your business? Or how should we think about that? William Stone I wouldn't necessarily say longer sales cycles, but most health care plans start [1] (ph). You give the opportunities on a January 1, '24. Damn, it's July '24. And now we get a big opportunity on January 1, '25. And for the biggest ones, you're really going to have to be planning starting now and hopefully taking them line on 1/1/26. But there are enormous type companies that can pay upwards to $100 million a year on some of these claims processing things that they do. And we just need to be ready. The system has to continue to get better and we have to continue to delight our customers. Surinder Thind Thank you. And then on Blue Prism, just any update there, what you are seeing externally? And then just as a follow-up on the earlier comments about obviously doing a lot of continued work in AI/ML and it takes a lot of time to prove those technologies. But just update on the internal efficiency initiatives there and if there is any change that you see coming not necessarily this year, but as you look out over the next 1, 2, 3 years that maybe you can squeeze a bit more from an efficiency perspective? Rahul Kanwar Yes. We are continuing to roll out Blue Prism within SS&C. In some ways, we are building momentum because as more people get trained up, we have more capacity to have additional processes, be subject to that robotic process automation and AI type enhancements. We are also -- we just released the next generation of Blue Prism, which actually as part of its workflow as GenAI capabilities, so you can use GenAI natural language type interface to design your workflows, which makes it easier for us to roll out internally but also improves our product differentiation from others in the marketplace. So we feel really good about Blue Prism and how it's helping us, and we certainly expect it to accelerate from here. William Stone And I would just add to that, that what we find when people start to embrace it, their jobs get better. And some people -- we have a lot of green eyeshades and a lot of warm bands around this SS&C. So often, you have to bring the horses to water multiple times, and it's best if it's really summing up. So they're thirsty. So I think those opportunities is where we have things where, wow, I wish I would have done this a year ago because it makes their job better, it makes the treasury parts of their job, sort of not drudgery anymore because they're not doing it. They have some digital work we're doing it. So I think we are sticking to the knitting. We constantly monitor how many digital workers by business unit. And I know they are very happy about all the calls that Rahul and I make to them. Your next question is from the line of James Faucette with Morgan Stanley. James Faucette Thanks a lot. A couple of broad questions. I want to follow up on the Blue Prism question and I appreciate your comments there. Just wondering what you see as the competitive landscape right now? And I love to hear how you're thinking about that opportunity having evolved to [weight-in] (ph) specifically whether or not you think you maybe can be the beneficiary of some of the hiccups we've seen from some of the public RPA vendors? William Stone Yes. We think if we keep our hiccups at a very minimum, will be a big recipient because our business is profitable, sweatening to sustainable. It means we can invest. I know that a lot of these companies that you follow in and bunch of your colleagues follow. It is how much money, private equity money can we burn before we have to be profitable. And I think a little bit that fuse has kind of played its way out. So now you have to build sustainable businesses. And I think that's what we've done. We also have to accelerate our revenue growth. And I think we've added a new Chief Revenue Officer, we have some high expectations there. But it is all proof in the pudding. You can get up to bat, but someone got to hit the ball. And I think that's the thing we are driving that. And I think we are more than cautiously optimistic. But I wouldn't tell you that we are drunkenly optimistic either. So we are going to execute, and I think we should begin to see double-digit revenue growth in Blue Prism for the foreseeable future. James Faucette Got it. Silver forecasting is always appreciated. As far as the Genesis platform, I'd love to hear the early feedback from your customers on the product and specifically, what you're trying to do with the capability set across Advent, Eze, and GlobeOp. I guess I'm trying to get a sense for what portion of your customer base do you think this will be most applicable for? And how do you think that Genesis will impact that segment? Rahul Kanwar So when we combined Advent and then subsequently institutional and investment management, that combined business is now maybe a little over $1.5 billion in annual revenue and has a lot of the different products that are geared towards wealth asset managers, financial institutions, particularly on the software side. And it's only been a few months, but we find what we are able to do is start to take a look at product road maps for products like Genesis and Aloha and Singularity and others. And make sure that things that we think are worthwhile to build, we're putting the right amount of muscle kind of, and we're making sure that we've got a good launch plan and a good customer validation process. And that's starting to show up in some of the results. So early days, but it feels like we're on the right track. Your next question is from the line of Kevin McVeigh of UBS. Kevin McVeigh Great. Thank you so much. And congratulations on really just terrific results. Maybe just for Bill. Bill, given the kind of technology efficiencies that Blue Prism are bringing to bear, is it changing the go-to-market strategy with your clients? I mean I know you've spoken a lot about bigger kind of lift and shift opportunities? Has it accelerated that process? And does the efficiencies at Blue Prism bring to bear afford you kind of a wider lens in terms of go-to-market strategy? Just given some of the potential returns as a result of the efficiencies. I wanted to start there because it feels like there's a step function change in the business from a revenue growth perspective that just is beyond kind of some of the segmentation. And I just wanted to maybe try to frame that a little bit. William Stone Well, I think, Kevin that was the intent when we bought Blue Prism was to buy something that was horizontal that would act as almost like the floor for all of our different applications and services to kind of hang off on or to improve with and be able to present a technological differentiator that we can train everybody on across the enterprise. Now the enterprise is pretty broad, and we've done 75 acquisitions. So there is a lot of teaching and training and implementing a Blue Prism both internally at SS&C. And then as we take people out it fits externally, they get a lot of confidence because we're using it, right? We are eating our own dog food. We're processing on Blue Prism across almost every one of our disciplines inside SS&C. And so that's the whole holly-grail of this thing. And I think that it is -- we think the train has left the station. But I think there was a hill to get the train up first, right? You got to get into those places and you had to really start to educate the IT departments of our clients. When traditionally, we've been functional experts talk to us about retrospective or prospective accounting rules or how to value a multistep bond or whatever it is, right? But now you got to go in and talk about large language models and how you're going to deploy machine learning or RPA and that's an education. And I think we're doing it and we're doing it pretty well. And we have a very talented tech team. Kevin McVeigh That makes a lot of sense. And then just does that afford bigger opportunity, Bill? Because obviously, you're talking to a wider audience. So it almost sounds like it's more transformational opportunities. So most of those clients scale and size, I guess just given the complexity of what you are taking. William Stone It does, but it also brings in every tech-focused consulting firm and horizontal consulting firm and tech firm, right? Now you run into all the -- what we used to call manpower shops out of India, whether that's Cognizant or Tata or Infosys or any of the other ones, unless you start bumping into Accenture and the ones here in the states. So it's a different kind of a competitive landscape. We really like that we bring expertise in what our clients are trying to do, so we can kind of help their IT people and try to explain to them. That's not how this really works. This is how it works. This is what really momentum trading means. This is what -- how traders and portfolio managers are looking at risk in their portfolios. And what is the value of real-time versus near real time and being able to go across what they're doing in technology and show them that you are going to spend $5 million doing it that way, if you spend $500,000, you would get the same result. But you would be a hero because you save the organization $4.5 million. And in some of these places have enormous budgets. A couple of hundred million dollars for firms that are a couple of hundred people or 300 people, 400 people. So there's a lot of opportunity in there, but there is a lot of competition. At this time, there are no further questions. I will now hand today's call over to Bill Stone for any closing remarks. William Stone Thank you, Tamica, and thanks, everybody, for being on the call. We really appreciate it. We are working hard for you as we always have. We like to work hard for you and give you great results. So until next time, we'll be out there working on great results. Thanks again. This concludes today's call. Thank you for joining. You may now disconnect your lines.

Coursera, Inc. (COUR) Q2 2024 Earnings Call Transcript

Cam Carey - Head of Investor Relations Jeff Maggioncalda - President, Chief Executive Officer and Director Ken Hahn - Chief Financial Officer Ladies and gentlemen, thank you for standing by, and welcome to Coursera's Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode and please be advised that this call is being recorded. After the speakers prepared remarks, there will be a question-and-answer session. [Operator Instructions] I'd like to turn call over to Cam Carey, Head of Investor Relations. Mr. Carey, you may begin. Cam Carey Hi, everyone, and thank you for joining us for Coursera's Q2 2024 earnings conference call. With me today is Jeff Maggioncalda, Coursera's Chief Executive Officer; and Ken Hahn, our Chief Financial Officer. Following their prepared remarks, we will open the call for questions. Our earnings press release, including financial tables was issued after market close and is posted on our Investor Relations website located at investor.coursera.com where this call is being simultaneously webcast and where versions of our prepared remarks and supplemental slides are available. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP measures to the most directly comparable GAAP measure can be found in today's earnings press release and supplemental presentation on our investor relations website. Please note, all growth percentages refer to year-over-year change unless otherwise specified. Additionally, all statements made during this call relating to future results and events are forward-looking statements based on current expectations and beliefs. Actual results and events could differ materially from those expressed or implied in these forward-looking statements due to a number of risks and uncertainties, including those are discussed in our earnings press release, supplemental materials and our most recently SEC filings. Thanks, Cam and good afternoon, everyone. It's great to be with you all. I'm pleased to share that we delivered a solid set of operating and financial results as we execute on our growth initiatives. We surpassed more than two million enrollments in our generative AI catalog of courses, credentials, and hands-on projects. We welcomed nearly seven million new learners to our platform, one of our highest quarterly increases since 2020. We launched more entry-level Professional Certificates in any single quarter in our history, in fact, more than the entirety of 2022 with new titles coming from leading partners like Google Cloud, IBM, Meta, and Microsoft. We have made significant strides in introducing and enhancing AI-powered product innovations, including Coursera Coach, Course Builder, GenAI Academy for Teams, and a new suite of academic integrity features. And importantly, we are reaffirming our full year 2024 outlook ranges for revenue and Adjusted EBITDA. Now, I'd like to begin with a brief overview of how the landscape is evolving before focusing on how we are executing to address the evolving opportunity in education. As we've discussed, Coursera's platform sits at the intersection of several long-term, secular trends. The digital transformation of every institution in our society. The urgent need for skills development. And the evolution of higher education to better meet demands of a changing economy, shifting demographics, and the globalization of talent. Navigating these trends is not an easy task. As the generative AI revolution unfolds, individuals are anxious about displacement and job security and businesses are struggling to adapt. And we see this outlined in almost every study to date. Microsoft and LinkedIn recently published their 2024 Work Trend Index Annual Report. They found that nearly 80% of leaders agree that their company needs to adopt AI to stay competitive, but 60% worry their organization's leadership lacks a plan and vision to implement AI. And these dynamics are affecting their talent strategy. 66% of leaders say they wouldn't hire someone without AI skills. And 71% said that they'd rather hire a less experienced candidate with AI skills than a more experienced candidate without them. That leads to the second trend. We need for skill development. In June, we published Coursera's sixth annual Global Skills Report, drawing on data and insights from our global learning community. Several of the key findings reaffirm the Microsoft report. First, AI literacy has emerged as a global imperative, and employees are not waiting for their employers to catch up. Recent trends in our learner demand demonstrate how they are taking skills development into their own hands, for example, in 2023, our generative AI content saw one enrollment per minute. In 2024, it has quadrupled to four enrollments per minute. Second, learners are increasingly turning to industry micro-credentials to gain essential digital skills for jobs. And third, regional skill adoption is not occurring at an equal pace, with countries facing the risk of being left behind. Access to a more affordable, relevant, and flexible system of higher education can help ensure that anyone, anywhere has equal access to the skills, credentials, and job opportunities to compete in our fast-changing world. And this brings to me the final trend, the transformation of higher education. Academic institutions acknowledge their need to evolve. In June, we convened nearly 100 higher education leaders from over 20 countries, including campus and government customers, as well as university and industry partners at our headquarters for our annual Future of Higher Education Summit. We asked them what was their institution's biggest challenge in the coming year, and there were three top responses that focused on, one, modernizing curriculum to meet the needs of learners. Number two, adapting quickly to emerging skill demands from employers. And number three, embracing new technology to bolster their teaching and learning. As university decision-makers, workforce development leaders, and industry experts, their feedback continues to reinforce my conviction in our vision for the future of higher education. The strategic assets that differentiate our ecosystem with quality and trust. And the global need for a platform like Coursera. Now, let's discuss how we are executing on this vision with recent progress across each of Coursera's platform advantages. The first advantage is our educator partners and the premium credentials that they create. When Coursera's founders put their first course online, the global receptivity they experienced was driven by two important elements. First, Andrew and Daphne were professors at Stanford University, a trusted institution with global authority and brand recognition. And second, they provided expertise and skills development in emerging technologies that were desired by the labor market. Over a decade later, the same value proposition continues to power Coursera's content engine with many of our educator partners focused on ensuring equitable access to critical skills in order to thrive in today's digital economy. Across our catalog from short hands-on projects to longer forms of study and credentials, including a new degree from Clemson University, generative AI is being infused into the curriculum so that every learner, no matter the stage of their journey, can acquire the skills necessary and the branded credentials necessary to acquire, retain, and advance their career. Now, let's discuss highlights for several of our recent announcements, starting with the entry-level Professional Certificates. It was a record quarter for our content engine. In Q2, we added 15 new certificates from leading technology brands like Google Cloud, IBM, Meta, and Microsoft. The programs are designed for learners looking to start or switch into high-demand careers like cloud support, cybersecurity, data analyst, JavaScript developer, product manager, project manager, and many more. We now offer more than 60 entry-level Professional Certificates, with a strong pipeline of additional titles coming later this year. But our efforts to enhance this catalog are not solely focused on new launches. Recently, we announced that eight certificates from IBM, Meta, and Microsoft have been upgraded with job-specific, generative AI content. This is the start of a broader initiative to enhance our existing certificate catalog, ensuring that these credentials keep pace with transforming job roles and emerging skill requirements. As the industry experts that develop and deploy these technologies, our partners are uniquely positioned to help individuals navigate a rapidly evolving labor market and ensure businesses are equipped with the tools and training to transform their technology and their talent. And we are leveraging new capabilities, like Course Builder, to dramatically reduce the time and cost of content production, without sacrificing quality. Next, we now have more than 250 generative AI courses and guided projects. Short-form content plays an important role in introductory learning, as well as rapid skills development. However, we know that individuals and institutions also value longer forms of study to build a deeper level of expertise, earn academic credit with verified learning, and critically important, stand out to employers in order to retain or secure a job. This is the value of a branded credential. Our generative AI catalog started with high-quality, short-form content, but we are excited about a growing selection of generative AI credentials that can create more value for our learners and Enterprise customers. Recently, we announced several new Specializations and certificates from top partners like DeepLearning.AI, Vanderbilt University, the University of Michigan, and the University of Colorado Boulder. Additionally, we launched the third pillar of our GenAI Academy offering, GenAI for Teams. Our earlier programs focused on foundational AI literacy for all employees, as well as executive education to help leaders formulate an AI strategy. But GenAI for Teams curates the use of generative AI to specific job roles and functions, offering real-world applications and secure, hands-on practice right inside the courses. We are starting with the Software and Product, Data, and Marketing teams, as these functions are estimated to have outsized initial benefits from the innovation unlock and productivity gains created by integrating generative AI into their daily operations. Individuals and institutions are looking to harness the potential of emerging technologies and these new course offerings are the initial stages of a strategic initiative to help our educator partners create a broad portfolio of generative AI credentials. We are creating a leading destination for learners looking to discover, develop, and demonstrate generative AI skills for career advancements and for businesses looking to transform their talent. This brings me to our second major advantage, the global reach of our platform. As I referenced earlier, we added nearly seven million new registered learners, growing our global base to 155 million by the end of June. We grew the number of Paid Enterprise Customers by nearly 20% to over 1,500, with recent additions coming from all verticals, especially businesses. And to serve the broad needs of our rapidly expanding ecosystem, we continue to invest in our platform's third advantage, which is product innovation. Our innovation efforts continue to be focused on how we can uniquely leverage generative AI across our platform, including content, data, technology, and marketing. For today's updates, I'd like to start with Coursera Coach. Earlier this month, we were pleased to announce the general availability of Coach for our paid Consumer learners and all Enterprise Customers. We also unveiled an updated visual identity for Coach, along with a redesigned, more integrated user experience. As a reminder, Coursera Coach is our interactive, AI-powered guide that is tailored to learners' unique goals and anchored in the expert content on Coursera. To date, Coach has been used by more than 700,000 learners and can currently respond in 21 languages, supported by the underlying large language models. Today, Coach enables learners to ask questions to clarify material and stay on track. Summarize key takeaways for better note-taking. Practice for quizzes and tests to solidify knowledge and identify gaps. And explore how their learning aligns with current or future career goals. In the future, we expect Coach will play an increasingly prominent role throughout Coursera's platform, from personalized learning and discovery, to career counseling and guidance. Next is Course Builder, which we introduced to our Enterprise customers earlier this year. Our AI-assisted authoring tool allows any business, government, or campus customer to easily and quickly produce high quality courses at scale. Additionally, Course Builder can blend learning modules from our catalog of university and industry partners with internal content, training, and expertise in order to create custom, private courses that are tailored to the unique needs of each organization. We have a number of enhancements planned for the coming quarters, but I am excited about the positive early feedback we are receiving from the nearly 100 institutions that have started using Course Builder. And for my final product update, I'd like to discuss our recent advancements in AI-powered academic integrity. Online learning has become a powerful tool for institutions to better prepare students for a rapidly changing world, and it plays an important role in both affordability and accessibility. However, universities must ensure that it meets the rigorous standards required for academic credit. While generative AI introduces new risks for student misconduct and cheating, it also provides unprecedented opportunities for universities to enhance academic integrity at scale. Our platform is utilized by universities in several ways, as educator partners, Campus customers, and Degree providers, which is why I was particularly excited to announce a new suite of generative AI-powered features designed to help scale assessment creation and grading, strengthen academic integrity, and enhance learning and evaluation. The features include broad capabilities like AI-assisted grading, assessment generation, automated peer review, proctoring, plagiarism detection, viva exams, and more. This launch builds on our recent recognition as the first online learning platform to receive the American Council on Education's Authorized Instructional Platform designation, helping ensure student outcomes genuinely reflect their effort, mastery of course material, and their skills. These are major steps in protecting the reputation and value of online learning and industry micro-credentials, making it easier for universities to recognize them for academic credit and for employers to validate a candidate's qualifications for employment. It also helps individuals and institutions everywhere benefit from trusted, verified learning on Coursera. To wrap up my opening remarks, a reminder of the most important initiatives we are focused on in the second half. First, we are broadening our catalog of entry-level Professional Certificates, including new launches and upgrades to existing titles. Second, we're focused on growing our Enterprise segment, helping our business, government, and campus customers keep pace with generative AI and labor market demands. And third, we're focused on scaling our Degree programs with a focus on flexibility, affordability, and credit pathways from our Consumer catalog. Finally, we are investing in product innovation that can deliver more value and a differentiated experience for the millions of learners coming to Coursera every quarter. I'd like to now turn it over to Ken. Ken, please go ahead. Ken Hahn Thank you, Jeff and good afternoon, everyone. I am pleased to report solid second quarter results for Coursera. In Q2, we generated total revenue of $170.3 million, which was up 11% from a year ago. Our platform's ability to address the diverse needs of customers around the world, from individual learners to large institutions continues to serve us well as we navigate the trends reshaping higher education. In addition to providing a broad, global lens, this approach allows us to target our growth opportunities with a common set of assets and shared investments, including content, product, data, and marketing. And this creates operating leverage in our model, which we continue to demonstrate with the strong bottom-line and free cash flow performance we delivered once again this quarter. Please note that for the remainder of this call, as I review our business performance and outlook, I will discuss our non-GAAP financial measures, unless otherwise noted. For the second quarter, gross profit was $92.3 million and a 54% gross margin, up from 53% in the prior year. Total operating expense was $86.8 million, or 51% of revenue, an improvement of percentage points from the prior year period on continuing operating discipline in our R&D and G&A functions. Net income was $13.8 million, or 8.1% percent of revenue and Adjusted EBITDA was $10.4 million, or 6.1% of revenue. While we do not optimize for EBITDA in any single quarter, our first half performance has continued to demonstrate the leverage inherent in our model and provided us with a strong start toward achieving our 2024 Adjusted EBITDA margin target of approximately 4%. Now, let's discuss cash performance. We generated strong free cash flow of approximately $17 million which I'll remind you is inclusive of more than $2 million in purchases of content assets, which we now treat similarly to the other categories of capital expenditures, effectively lowering our free cash flow computation. As Jeff mentioned, partner receptivity to this type of strategic content arrangement has been exciting, particularly due to the important role we believe trusted brands and verified credentials will play in the future of learning, skills development, and career advancement. Moving to the balance sheet. In Q2, we repurchased 2.7 million shares of our common stock for approximately $31 million, excluding commissions. This was inclusive of the $16 million we bought back in April, which I discussed on our prior call, as well as the remaining $15 million we expected to complete in the weeks that followed. This resulted in us ending the quarter with approximately $709 million of unrestricted cash and cash equivalents with no debt. And over the past year, we returned $95 million to shareholders through stock repurchases while preserving the primary focus of our capital allocation strategy which emphasizes growth. We believe that our strong financial position is an asset that provides resilience and strategic optionality, which is particularly valuable during a period of rapid technological change and the focus on prioritizing growth in terms of our capital allocation strategy has not changed. But we also believe it is important to address future dilution concerns of our investors, so management has recommended, with the compensation committee approval, the introduction of a price floor of $10 per share for all future employee grants, effectively limiting the number of shares issued for dollar-denominated stock based compensation. This action, along with our completed repurchase program, are a direct reflection of the value we place on shareholder equity. As we navigate near-term trends to better position ourselves for future growth opportunities, we remain focused on executing on our long-term strategy to lead our large, early, and dynamic markets. Now, let's discuss the performance of our segments in more detail, starting with Consumer. Consumer revenue was $97.3 million, up 12% from the prior year on growth in Coursera Plus, driven by ongoing demand for entry-level Professional Certificates and generative AI courses and credentials. Segment gross profit was $52.4 million, or 54% of Consumer revenue, up from 52% in the prior year period. And our top-of-funnel activity remained robust, with approximately 7 million new registered learners this quarter, which did include a higher mix coming from regions outside of North America. I was pleased by our execution in Consumer this quarter, particularly the number of high-quality, branded credentials we launched, including several that were created under our new content production arrangements that can include more favorable revenue share economics and, in many cases, exclusivity. Moving on to our Enterprise segment. Enterprise revenue was $58.7 million, up 8% from a year ago on growth across our business, campus, and government verticals, including some signs of stabilization in the corporate learning market. Segment gross margin was $39.9 million, or 68% of Enterprise revenue, compared to 71% a year ago. As a reminder, Q2 of last year was slightly higher-than-expected due to a one-time benefit of a contract amendment with one of our educator partners, which had the effect of increasing our Enterprise segment margin by four percentage points for that historic quarter. Removing the one-time variance, Enterprise segment margin would have been up slightly year-over-year. The total number of Paid Enterprise Customers increased to 1,511, up 17% from a year ago. And our Net Retention Rate for Paid Enterprise Customers was 93% as we continue to work through some government partnerships with more transitory budgets. And finally, our Degrees segment. Degrees revenue was $14.3 million, up 14% from a year ago on growth in new students and scaling of recent programs. The total number of Degrees Students grew 19% from a year ago to 22,600. As a reminder, there is no content cost attributable to the Degrees segment, so Degrees segment gross margin was 100% of revenue. Now, onto our financial outlook. For Q3, we are expecting revenue to be in the range of $171 million to $175 million. For Adjusted EBITDA, we are expecting a range of breakeven to positive $4 million. For the full year 2024, we are reaffirming our ranges. We anticipate revenue to be in the range of $695 million to $705 million. For Adjusted EBITDA, we are expecting a range of $24 million to $28 million, maintaining our adjusted EBITDA margin annual target of approximately 4%. We have a strong record of successfully managing to the annual Adjusted EBITDA margin target we commit to at the beginning of the year and I have been pleased by our ongoing discipline, demonstrated by the strong operating leverage we delivered in the first half of 2024. I'll now turn the call back to Jeff for closing comments. Jeff Maggioncalda Thanks, Ken. Increasing equitable access to high-quality learning is the reason why we were founded and it is also the reason why many leading companies choose to join us in our mission. One of these important partners is Microsoft and I'm thrilled with how our relationship continues to deepen and grow. In addition to announcing their latest certificates in May, we are thrilled to share that Coursera has partnered with Microsoft and a community organization called Women in Cloud to launch the Universal Access to Microsoft Skills Scholarship. This scholarship open to everyone provides five thousand recipients access to all Microsoft Specializations and Professional Certificates on Coursera. Learners who successfully complete a Professional Certificate through this scholarship will be awarded a complimentary voucher for the industry-recognized Microsoft certification exam. It is part of our shared commitment to providing equitable access to the essential skills and branded credentials that can empower learners to start, switch, or advance their careers while also filling critical skill gaps in the evolving economy. Generative AI can act as both a disruptor and an enabler. Whether it widens or narrows the opportunity gap depends on our ability to make education and skilling equally accessible on a global scale. Leading partners like Microsoft who are creating the next generation of technology, tools, and services that will fundamentally reshape work and the labor market more broadly are embracing their collective responsibility to harness the potential of generative AI, turning it into an engine of opportunity for everyone. We are proud of Coursera's role and especially our partners who we work with in recognizing the importance of turning this threat into an opportunity through education. Your first question comes from the line of Josh Bearer with Morgan Stanley. Josh Baer Great. Thanks for the question and congrats on the upside in Q2. I had a few or a couple on guidance for the rest of the year. One on revenue, just trying to understand why revenue would decelerate so much in Q3 and then re-accelerate back from like 4.5% growth in Q3 to double digits in Q4, just that setup as far as the seasonality there. And then on the expense side, if you could talk a little bit about what expenses were pushed from Q2 into the back half of the year and ultimately understanding how you keep the annual margin guidance in that framework, but how EBITDA margins are, why they would deteriorate so much in the back half. And like just given your OpEx base here in Q2, how can you even spend that much in the back half, like why wouldn't margins move higher? Thank you. Ken Hahn Great. Hi, Josh. This is Ken. With regards to the revenue, the forecast we do at an individual level across the different segments in light of product introductions, content introductions, and based on that and the significant content introductions, we release this past quarter, which we'll start to see through the rest of the year and which we expect to release during the rest of the year. It's a forecast based on this number. So that's how we came up with Q3 versus rest of the year split. As it relates to expenses and EBITDA, we beat pretty handily. As you know, this has been the cadence we've used since the day when public, in fact, since long before we were public, where we target a yearend. We have beat our annual guidance one year. We try to spend down to it to optimize for growth. It's too early to predict anything on the frontend now, but we're spending towards opportunity for the second half of the year. We won't waste money, so if we can't spend it, you'll see upside there, but it's not what we're presently forecasting. But again, it's similar to the exact same approach we've had for the last five years. Your next question comes from Stephen Sheldon with William Blair. Stephen Sheldon Hey, thanks. Appreciate you taking my questions. First, I just wanted to ask what you're seeing in terms of the budgetary environment for Enterprise L&D. I think Ken in your prepared remarks in stabilization and corporate learning, and we've been hearing at least some similar commentary from a few other providers in recent months. So could you provide some more detail on what you're seeing there, and when do you think we could move beyond stabilization and back to better growth? Jeff Maggioncalda Yes, hey, Stephen, this is Jeff. I'll take a first crack, and then Ken, feel free to chime in. So the two markets, the regions where we've seen Coursera for Business hit the most has been in Europe and to some degree North America. And that's kind of where we're seeing some signs of stabilization. This is the case across many different variables. It's retention of contracts. It's NRR. It's bookings that are all looking a bit healthier. Hard to say exactly why, but I still think that part of what we're dealing with is hangover from COVID. When businesses closed their offices, the training budgets that were traditionally used for people in live sort of sessions, I think got shifted a bit. And we saw a little bit of the pullback of that spend out of online and back to in-person in the years following COVID reopening. And I think we're starting to see a little bit of a stabilization for that reason. We are seeing most of the stabilization that in Europe and North America, where we had originally seen most of the weakness. And to your question around when we think it might open up again, it's hard to say for sure, but this generally I think continues to evolve and take shape. My view of this is everybody knows it's important. There's a lot of risk and uncertainty. So companies are trying to figure out the right way to move it, move through it. But the technology is going to afford opportunities in different dimensions to different companies. There's definitely this question of how might a company use General AI to create value for customers? And Coursera has tried to really jump on this with language translations, with Coach, with Course Builder, with Academic Integrity. We went through a bunch of those. But in addition to using the technology to create value, and frankly, many companies are struggling to figure out how to do that in their business models, at least that's what I'm hearing, there is that productivity piece, which is to what degree can General AI unlock productivity gains? And this is going to be different based on different teams and job roles. So the role that General AI might have in making a software developer more efficient could be different than the role that General AI has in making marketers more efficient and more effective in the marketing. I think companies are just starting to see now that this technology can both create value and create efficiency. And with the GenAI Academy for Teams, we are pretty excited that we now have team -specific training from the biggest brands, Microsoft, Google, Amazon, Meta, et cetera on how to use GenAI to unlock productivity. And that is when I think we are going to start seeing budgets open up a bit more is when there is a clear ROI associated with either value create or productivity unlocked by using this technology for specific job roles. And we are pretty optimistic still that we will be one of the winners not losers because of GenAI and perhaps part of what we are seeing here in the bookings strength is some indication that GenAI is going to be a real opportunity for Coursera. Ken, anything you add to that? Ken Hahn No, I think it was quite thorough and exciting to be talking about it actually rebound given that this is where enterprise slowed down first a couple of years ago. Stephen Sheldon Yes, that is all very helpful, Jeff. I appreciate all the commentary. This is a quick follow-up. The consumer, what do you see in terms of free-to-pay learner conversion? I know that was one component that you called out that drove this slow down or expected to drop this slowdown in consumer. So is that playing out to your expectations any signs of stabilization improvement there after being dragged that you called out last quarter? Jeff Maggioncalda Yes, we are actually seeing a little bit better than stabilization. So it certainly has not gotten worse and we are seeing some positive indications there. Obviously, it goes hand in hand with the content launches as well. I mean, content that is valuable, new, in demand by learners, and especially, we are excited about this job specific credentials. We are getting the credential, we hope, anticipate that if learners in, especially emerging markets, are interested in winning new types of job opportunities because they know how to use GenAI, a credential will help. In developed economies like Europe, North America learning skills and having a credential that says, I know how to do my job with AI and I could do it productively and effectively, we think that will be something that becomes a real value proposition and it could also help with conversion rates. But we're excited that GenAI and the team-specific, job -specific titles and credentials will be effective in continuing to see stabilization improvement of the conversion rates. Ken Hahn Jeff and I might chip in that we've seen some particularly nice performance internationally and which is a little bit further to the discussion earlier with Josh on the product side, seeing C-plus growth in India promotion, some of the geo-price content. So we're starting to see the result of some of the product innovation we've had, particularly outside NAMR, because a lot of that has been focused on international. Your next question comes from the line of Jeffrey Silber with BMO Capital Markets. Jeffrey Silber That's close enough. You had mentioned in your prepared remarks about, I think you called it a new content production arrangement with potentially more favorable revenue share and potentially some exclusivity. Can we get a little bit more color, maybe some examples, and any more framework around the different economics would be great. Thanks. Jeff Maggioncalda Sure, Jeff. Let me talk a little bit about the strategy. Ken, you could talk about the financials and economics. So the generative AI is a big deal. The moment I touched it, I was like, this is going to change a lot of things. It's going to change jobs. It's going to change the skills required to do jobs. It's going to have impact with task automation. It's going to change the way that we learn in a far more personalized way, and it will also change the way we create content, me being like the world. So when we talk about Course Builder, we're not just talking about tools for our customers to use. These are tools that we're using internally as well. And as we look at the rate of launch of new content, it really requires a few things. First, there has to be demand in the market for these types of titles. We're seeing demand. Second, partners have to want to launch titles and credentials with their brands on them. And we're seeing, I would say, unprecedented interest among industry partners who are saying that this next wave of technology, Generative AI, is going to feel a little bit like the cloud wars, where it's not just about building the technology. It's about training people on how to use it, credentializing people who learn how to use it, and making sure that the labor markets understand who's got the skills to really take advantage of this technology. So we're seeing a lot of interest from industry partners saying we want to be training people on our foundation models. We want to do this not only in a general way, but in a job specific way. But a lot of these industry partners don't necessarily have the expertise and capacity to build out the content and the credentials in the way that we know how to. So we are basically teaming up with our partners to help them produce this content, and we are using a whole lot of Generative AI tools to do it. So it is still humans producing the content. Our partners are the ones who are branding it, but Coursera is taking on a bigger and bigger role in the production of this partner branded content. And what this does is it causes us to invest certain money that gets capitalized, and it also causes us to be able to create different economic arrangements. And maybe Ken you could talk a little bit about the resources we are putting into this as an investment, and the way that the incremental rev-share, might be different on these types of Coursera-produced partner branded titles. Ken Hahn Absolutely. And your description, of course, on what those represent means there are some of our best brands, right? These are important companies who we're doing this with. We don't disclose the specifics, of course, with the individual relationships, out of respect for our partners. But what we've done is we've invested in this automation, obviously, in a transaction in which we take on the production costs. We take on all the risks, which makes a lot of sense because we're the experts here. And, again, importantly, doing so with minimal out of pocket. We have some pretty significant technological capabilities now with product we've built to build this product. It makes it easy for us to invest very profitably on these. We talked about this as part of a change, actually, technically, in definition, around free cash flow a couple of quarters ago because we were including this in the free cash flow calculation, which is a negative to us. And we wanted people to understand what that was, which is a tremendous opportunity, we think, to strategically build the business and create better economics. And so we've allocated $20 million of budget this year. We spent, as I mentioned in my prepared remarks, a couple million dollars this past quarter. And it's highly attractive, both strategically and financially. So I think you will continue to hear about progress here and success. Jeff Maggioncalda And, Ken, any kind of way of thinking about, or I don't want to use the word guidance, but the incremental economic sharing that happens when the titles get consumed in the consumer segment? Ken Hahn Well, because of the relationship, of course, we have better economics from a rev share standpoint. It varies client by client, but it's pretty specific. But it is a significantly higher margin with us taking all the risk and funding entirely. Your next question comes from Brian Peterson with Raymond James. Brian Peterson Thanks, gentlemen. Congrats on the strong quarter. It's nice to see the acceleration in Degrees. I know you mentioned to ramp up the new students, new partnerships. I'm curious in your level of visibility there, in any sense on how we should be thinking about the medium term growth rates for that cycle. Thanks, Jeff. Jeff Maggioncalda Yes, Ken. We typically give guidance at the beginning of the year. I don't know if there's anything in addition by segment that you want to say or not. Ken Hahn We haven't provided any updated guidance across the board. We've done that historically when we had radical changes, but I wouldn't assume anything different. Otherwise, we'd provide some guidance just to be helpful with people in their models, but nothing off the -- 10% which we reiterated last year, for the year. Jeff Maggioncalda Yes, and I guess what I might add, just as a little bit of texture on the segment. We have been moving more and more towards this notion of what we call pathway Degrees. The idea that you can start a college degree on Coursera in open content without you can start at any time, you don't have to go through the admissions process, it's a lot more flexible and affordable. And if you earn credit by taking the open content, then you can finish your degree faster and more inexpensively. Like, that basic model, we think, is going to be the model for a lot of degrees all around the world. So, we're excited about that model because it really plays to this whole idea that you can blend industry content with higher education, and you can do online at any time, even as you have it count towards a more structured, traditional higher education degree. So we're seeing signs in the pathway degrees strategy from learners that this is really the kind of flexibility, affordability, ROI that they're looking for, and we're going to continue to do more of that. A key enabler of this is these credit recommendations from American Council on Education and ECTS, which is the European Credit Transfer System. We have 30 certificates now that are ACE recommended, 15 which are ECTS recommended, and this really helps us unlock this pathway degree kind of opportunity. Your next question comes from the line of Taylor McGinnis with UBS. Taylor McGinnis Yes, hi. Thanks so much for taking my question. So, you mentioned the record number of entry -level professional certificates launched in the quarter, and it seems like that was a key driver of the outperformance. So, as you look ahead, and how much of the expected 3Q rate slow down, and like the inflection in 4Q? Might be tied to expected certificate launches and so was there some for instance like certificates that might have been launched earlier than they expected that may be benefited 2Q and might be weighing on 3Q. Jeff Maggioncalda Yes. Hey, Taylor. So maybe Ken you could talk a little bit about the financial piece. I'll just say that with respect to the titles that we're launching we have really seen as I said a step up in interest among partners and increase in efficiency and I think quality on the production side so that certainly has had an impact on Q2. By the way among these titles and these professional certificates we had four from IBM, four from Microsoft, two from Google Cloud, one from Meta, one from AWS and one from ADP. So these are these are big brands doing lots of search, they certainly influence our sense that there's going to be good supply of this type of content and credential. And we are optimistic there's going to be healthy demand. We don't want to get ahead of ourselves, though, on demand. I mean, North America still is not what it was last year in terms of the traffic and conversion that we were seeing in the consumer segment. There's still some uncertainty around how these titles are going to perform. We have pretty good confidence that we're going to be continuing to launch a whole lot of these things in the coming six months. But we're not really sure exactly what the appetite is going to be. And Ken, I don't know if you want to link any of the content that was delivered in Q2 or expected in Q3, Q4 against the guidance on the consumer, on the overall revenue segment, the overall revenues for the rest of the year. Ken Hahn Sure. Well, as it relates to Q3 and the content titles specifically, one of the things was we had a tough compare. In 2023, Q3 of 2023, we had a blockbuster release without too much detail related to cybersecurity, which really moved the revenue. And so year-over-year for that new launch, we're offsetting that partially and mitigating it somewhat with the 15th certificates launched in Q2 that we'll see coming. But that was the reason is we had a blockbuster a year ago. And so in the year-over-year comparison, we don't see quite the same growth. Taylor McGinnis That's really helpful. Thank you so much. And then for my second question, Ken, could you just maybe break out the uptick like in expense growth that you guys are expecting in the back half? Could you maybe just talk about the drivers of that and how much of that might be tied to investments around content? Ken Hahn Yes, a lot of the content, to be clear is hits the balance sheet as we can find the opportunities to fund those. We'll have continued to spend in R&D. We've actually done a pretty nice job of continuing to bring down the OpEx as a percentage of spend. And then where there's more marketing opportunity cost effectively, we'll be spending there as well. We'll continue to monitor through the course of the year. Again, we try to get to an annual guide, which we set as 4% at the beginning of this year, and work within that. But if we can't spend it effectively, we'll let more drop down. We're just in the process of, as we look to growth opportunities for next year, making sure we can fully fund those. Your next question comes from the line of Rishi Jaluria with RBC. Chris Fountain Hi, this is Chris Fountain for Rishi Jaluria. Thanks for taking my question. I wanted to ask about your large cash balance. Can you just remind us how you're thinking about the primary use of the cash in the near term within your capital allocation strategy? Thank you. Jeff Maggioncalda Yes, thanks Chris. Let me take a higher level view and Ken, I don't know if you want to talk anything about Q2 and some of the sort of uses of cash that hit the adjusted EBITDA reconciliation, but at a really high level and certainly not just Ken and me and the management team, also the board. I mean, we have a board and a leadership team that frankly thinks that what we're about to see with generative AI as it transforms economies around the world. It is going to be significant opportunities. EdTech, as we all know, has been a tough place in the last few quarters. That creates certain opportunities for companies with a lot of distribution and a really healthy balance sheet like Coursera. I don't know what the capabilities of say, GPT5 are going to be or the next version of Gemini Ultra. But at any moment, we can potentially see some nonlinear capabilities hit the market and maybe there will be some startups or some other companies, perhaps more mature companies that find something that is dramatically more valuable than what people have experienced before. In those instances, having bought a global platform, a great brand and a house of many other great brands, a big balance sheet that could take a breakout kind of technology and pump it through a global distribution system, like we think that's not completely unlikely. And so we do like the optionality of being able to make moves like that if we want to. We've been pretty intensely investigating opportunities. And so what we in conversation with our board have decided is there's some really interesting times coming. And we think that our position in this landscape is changing rapidly as an online educator is pretty attractive and will put us in the driver's seat in many ways. Ken, I don't know if you want to talk a little bit about Q2 and sort of how you're thinking about balance sheet. Ken Hahn Yes, sure. So at the highest level, you just hit the most important point, which is the strategic focus and the belief that holding cash for strategic opportunities is what the team and board are aligned around. I would say further on that topic, and you mentioned it, we've been pretty active without anything to talk about concrete that's closed. We can see in our EBITDA reconciliation this time, for the first time, M&A related costs on a transaction that didn't close that were pretty significant. We achieved our EBITDA target for the quarter, and again, we will for the year. Regardless of that [inaudible], but I think it points to the efforts we're making and expect to continue to make. It was a $3.4 million charge, and when you're spending that much on a potential M&A transaction, that means it's of significant size. So we're hard at work, continuing to look at other opportunities, but that I think is a further little bit of insight into how we're thinking about capital allocation and timing. Your next question comes from the line of Ryan MacDonald with Needham and Company. Ryan MacDonald Hi. Thanks for taking my questions, and congrats on a nice quarter. I wanted to double click on Brian's question earlier about the Degree segment. Last quarter, you talked about that Degrees, growth in that segment would be a bit more back half weighted into the year. Just curious if this is still sort of the expectation, given the strong 14% growth that you put up in second quarter here, and perhaps what are you seeing on a cohort basis as we head towards the fall with the existing programs you've gotten? How comfortable are you feeling about the trajectory of that business segment? Jeff Maggioncalda Yes, I guess what I would say is, as we saw it with it today or yesterday, there is a sea change that's happening in the U.S. around the way online degrees get managed and who manages them, who creates them, and how they come to market, what the business models are. And so what I would say is, we really like our basic strategy of these pathway degrees. We think it's pretty much unique to us, and we think it's going to be something that learners frankly really want. That being said, there's a lot that's changing. And so we want to be thoughtful and somewhat cautious about how it's going to be to navigate these. So I would say no real update from our previous guidance that was a while ago on the Degree segment, kind of revenue growth, and we think we've got the right general design pattern for a degree that's going to work for working adults globally, but there's still quite a bit to figure out. And so we're on our journey to redefining this $2 trillion market called the College Degree. Ryan MacDonald Thanks. Maybe as a follow-up, just talked about the consumer segment. Can you give us a sense of maybe timing within the quarter of the pro cert launches and perhaps the magnitude of upside from consumers that came from these new launches, like in second quarter, relative to maybe more of a knock-on effect or positive impact from these new launches that we should expect in the back half of the year? Thanks. Ken Hahn Sure, Brian, we haven't specifically broken out the guidance by what's coming from new content. They were released throughout the quarter but toward the back part of it. So you'll expect more impact in this quarter than last quarter. I think that's about as much color as it would make sense to provide. Is that helpful? And by the way, the other thing that we're not sure about, I mean, a lot of this really is, the world is shaping up in certain ways. And we're definitely launching a lot of new titles, but there was a part of the script where we talked about refreshing existing titles. I mean, we have a whole 7,000 courses on the platform. And whether it's how you negotiate or how you manage people or how you do data analysis, we truly believe that virtually everything is going to change because of GenAI. It will certainly be the creation of new content that we think can feed the growth engine. But we're also quite optimistic about the relevance of our existing content if we upgrade it with our partners to include what's a GenAI way of doing that? Of course, that'll be changing rapidly, but that will also really stimulate a sort of a refresh cycle. And I think a novelty among learners to say, hey when the next major in advance in GenAI comes out, now what do I need to learn about how to do my job well? And so we think there's a really broad field for not only launching new titles, but refreshing existing titles that makes them newly relevant to a wide audience. I mean, almost like everybody who has a job. Like this is what we're really shooting for. We really want to try to redefine the target market to essentially every working person in the world who's got the retool the way they do their jobs. Our final question comes from Devin Au with KeyBanc Capital Markets. Devin Au Hey, Jeff. Hey, Ken. Thanks for taking my question, and congrats on the strong results here. I want to ask about enterprise, specifically NRR, which has down ticked slightly again, and I think you called out some challenges under new government segment. Could you just elaborate more on that front? Is that kind of similar dynamics to what you saw last quarter, and how many of these, I guess, similar types of customers who are facing transitory budgets are likely to come up for renewals later this year? Thanks. Jeff Maggioncalda Yes, thanks, Devin. Yes, this is Jeff. I'll give you high level. And I've said this in the past, which I hope is somewhat helpful. I realize it's not as crystal clear as you might like, but the NRRs are really different by business versus campus versus government. On the government side, which we mentioned, some of these deals are multi-million dollar deals, and they really can have an outsized effect if one or two end up having been funded by a transitory budget that does not renew. So, say COVID -era money, that is not then available. And so, there is a bit of work through that we have to do, and we did mention that there is that a substantial way, a drag on NRRs, came from certain big gov-related deals that did not have the persistence of budget that we had hoped would be there. I will say that vis-a-vis previous quarters, Coursera for Business, actually helped bump up the NRR overall. So, it's one of these things where certain segments are doing better than others. It's kind of helpful to diversify. At the same time, the C4G has got, the Coursera government has some big whales in it, and when some of those don't persist in the budgeting frame, it hurts. We do expect that, well, I say our targets are to have NRRs of 120%. And within our business, in terms of the buyers and the learners, we do see pockets where the NRRs large and healthy, and what we are trying to do is basically identify those use cases, put more effort and attention towards selling and supporting those, find those use cases that might shake loose because the budgets were a little bit more transitory, and don't do those as frequently going forward. Ken, anything you would add to that? Ken Hahn Thanks for asking. Materially, there is nothing incremental to add. I think that's about, that covers it all in detail. I hope it was helpful. Devin Au No, it was super helpful, Jeff and Ken, appreciate it. Cam Carey Well, thank you, Devin. That wraps today's Q&A session. A replay of this webcast will be available on our investor relations website. Thank you for joining us and take care. This concludes today's conference call. Thank you for your participation. And you may now disconnect.

Arthur J. Gallagher & Co. (AJG) Q2 2024 Earnings Call Transcript

Arthur J. Gallagher & Co. (NYSE:AJG) Q2 2024 Earnings Conference Call July 25, 2024 5:15 PM ET Company Participants J. Patrick Gallagher - Chairman and Chief Executive Officer Douglas Howell - Chief Financial Officer Conference Call Participants Elyse Greenspan - Wells Fargo Michael Zaremski - BMO Capital Markets Gregory Peters - Raymond James & Associates, Inc. David Motemaden - Evercore ISI Mark Hughes - Truist Securities Robert Cox - Goldman Sachs Group, Inc. Michael Ward - Citigroup Inc. Grace Carter - Bank of America Merrill Lynch Meyer Shields - Keefe, Bruyette & Woods, Inc. Operator Good afternoon, and welcome to Arthur J. Gallagher & Co's Second Quarter 2024 Earnings Conference Call. Participants have been placed on a listen-only mode. Your lines will be open for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time. Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws. The Company does not assume any obligation to update information or forward-looking statements provided on this call. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer the information concerning forward-looking statements and risk factors sections contained in the Company's most recent 10-K, 10-Q and 8-K filings for more details on such risks and uncertainties. In addition, for reconciliations of the non-GAAP measures discussed on this call as well as other information regarding these measures, please refer to the earnings release and other materials in the Investor Relations section of the Company's website. It is now my pleasure to introduce J. Patrick Gallagher, Jr., Chairman and CEO of Arthur J. Gallagher & Co. Mr. Gallagher, you may begin. J. Patrick Gallagher Thank you very much. Good afternoon. Thank you for joining us for our second quarter 2024 earnings call. On the call with me today is Doug Howell, our CFO, other members of the management team and the heads of our operating business divisions. We had an excellent second quarter. For our combined Brokerage and Risk Management segments we posted 14% growth in revenue, 7.7% organic growth and 8.1% if you include interest income. We also completed 12 new mergers totaling $72 million of estimated annualized revenue. Reported net earnings margin expansion of 35 basis points, adjusted EBITDAC margin expansion of 102 basis points to 31.4%. GAAP earnings per share of $1.70, up 15% year-over-year, and adjusted earnings per share of $2.68, up 19% year-over-year, another great quarter by the team and right in line with the expectations we provided at our June IR Day. Moving to results on a segment basis, starting with the Brokerage segment. Reported revenue growth was 14%. Organic growth was 7.7% at the midpoint of guidance, and above 8% if you include interest income. Adjusted EBITDAC margin expansion was 98 basis points at the upper end of our June IR Day expectations. Let me give you some insights behind our Brokerage segment organic. And just to level set, the following figures do not include interest income. Within our PC retail operations, we delivered 6% in the U.S. and Canada, 7% in the UK, Australia and New Zealand. Our global employee benefit brokerage and consulting business posted organic of about 3%, that would have been 5% without the timing impact from some lumpy life case sales. Shifting to our reinsurance, wholesale and specialty businesses, overall organic of 12%. This includes Gallagher Re at 13%, UK specialty at 10% and U.S. wholesale at 11%, excellent growth, whether retail, wholesale or reinsurance. Next, let me provide some thoughts on the PC insurance pricing environment, starting with the primary insurance marketplace. Global second quarter renewal premiums, which include both rate and exposure changes, were up about 5%. So no change from what we discussed four weeks ago at our June Investor meeting. Renewal premium increases continue to be broad-based, up across all of our major geographies and most product lines. For example, property was up 2% to 4%, general liability up 5% to 7%, umbrella and commercial auto up 8% to 10%, workers' comp up 1% to 3%, D&O down about 5%, cyber was flat and personal lines up over 10%. So many lines are still seeing strong increases. Moving to the reinsurance market and mid-year renewals. Property reinsurance renewals saw modest price declines concentrated at the top-end of reinsurance towers due to the increased capacity from both traditional reinsurers and the ILS market. Offsetting this was underlying exposure growth, combined with increased demand, resulting in flat year-over-year premium for reinsurers overall. U.S. Casualty renewals saw terms and conditions tightened and some modest price increases. Reinsurers continue to heavily scrutinize submissions given the industry's unfavorable prior year reserve development and reinsurers view of the current loss cost trends. In our view, insurance and reinsurance carriers continue to behave rationally. Raising rates the most where it is needed to generate an adequate underwriting profit by line, by industry and by geography. We continue to see this differentiation in our data between property and casualty lines. Carriers believe property maybe close to approaching price and exposure adequacy. And thus, we are seeing property renewal premium increases moderating, but mostly within large accounts. Underlying that accounts with premiums around $1 million or greater are seeing renewal premiums flattish year-over-year. Yet on the other hand, in the small and mid-sized client space, where we are an industry leader, we are seeing increases of 7% for the second quarter. Shifting to casualty classes, we are seeing the greatest renewal premium increases and signs of these increases advancing. In fact, global second quarter umbrella and commercial auto renewal premium increases are in the high-single digits, and there is little differentiation by client size. We have been highlighting worsening social inflation, medical expenses and growing historical reserve concerns for quite some time. And thus, we continue to believe further rate increases are to come in casualty. While renewal premium increases are rational carrier response in the current environment, our clients have experienced multiple years of increased costs. Having a trusted adviser like Gallagher can help businesses navigate a complex insurance market by finding the best coverage for our clients while mitigating price increases, and that's our job as brokers. Moving to comments on our customers' business activity. During the second quarter, our daily indications continue to show positive mid-year policy endorsements, audits and cancellations, similar with last year's levels across most geographies. So activity remains solid, and we are not seeing signs of global economic slowdown. Within the U.S., the labor market in balance remains intact with more open jobs than unemployed people looking for work. And with continued wage growth and further medical cost inflation, employers remain focused on attracting and retaining talent while controlling costs. So I see solid demand for our services and advice in 2024 and in 2025. Across the brokerage operations, I believe we continue to win market share due to our superior client value proposition, niche expertise, outstanding service and our extensive data and analytics offerings. Frankly, the smaller local brokers that we are competing against, about 90% of the time, just can't match the value we provide, and that is leading to more net brokerage wins for Gallagher. So when we pull all this together, we continue to see full-year 2024 brokerage organic in the 7% to 9% range, and that would be another outstanding year. Moving on to our Risk Management segment, Gallagher Bassett. Revenue growth was 13%, including organic of 7.7%. Adjusted EBITDAC margins were 20.6%, up 120 basis points versus last year, and in line with our June IR Day expectations. We continue to benefit from new business wins, outstanding retention, increases in customer business activity and higher new rising claims. Looking forward, we see organic in the next two quarters around 7% and margins around 20.5% that would bring full-year 2024 organic to 9% and margins to approximately 20.5%, and that, too, would be an outstanding year. Let me shift to mergers and acquisitions. We completed 12 new mergers during the second quarter, representing about $72 million of estimated annualized revenue. I'd like to thank all of our new partners for joining us, and extend a very warm welcome to our growing Gallagher family of professionals. Looking ahead, our pipeline remains very strong. We have around 60 term sheets being signed and prepared, representing around $550 million of annualized revenue. Good firms always have a choice, and we will be very excited if they choose to join Gallagher. Let me conclude with some comments regarding our bedrock culture. Last month, we reflected on the 40th anniversary of becoming a public company. Michael Bob Gallagher, Chairman and CEO at the time, knew above all, we must maintain our unique culture of teamwork, integrity and client service. Those values are captured in the 25 tenets with the Gallagher Way. Thanks to all of our global colleagues that live and breathe the Gallagher Way day in and day out. Our culture is stronger and more vibrant than ever, and it's our culture that continues to differentiate us as a firm and help to drive an average annual total shareholder return of more than 16% over the past 40 years. That is the Gallagher Way. Okay. I'll stop now and turn it over to Doug. Doug? Douglas Howell Thanks, Pat, and hello, everyone. Today, I'll start with our earnings release. I'll comment on second quarter organic growth and margins by segment. Punchline is we came in right in line with our June IR Day commentary. I'll also update you on how we are seeing organic growth and margin shape up for the second half of the year. Then I'll shift to the CFO commentary document that we posted on our IR website, and I'll walk through the typical modeling helpers that we provide. And I'll conclude my prepared remarks with a few comments on cash, M&A and capital management. Okay. Let's flip to Page 3 of the earnings release. Headline Brokerage segment second quarter organic growth of 7.7%. Again, that's right in line with our June IR day, where we forecasted a range of 7.5% to 8%. Notably, we would have been above 8% if a few large live sales had not shifted from second quarter to later in the year. We signaled this possible timing to our June IR Day. So again, no new news here. Recall that we also foreshadowed in late June a small headwind from contingents that adversely impacted all inorganic by about 25 basis points. And finally, just a reminder, that we don't include interest income and organic. If we did, that would have pushed organic higher by about 40 basis points. We believe the investments that we have made in people, sales tools, niche experts and data and analytics are leading to strong new business production and favorable client retention across the globe. Additionally, the insurance market backdrop remains supportive of growth. Pat said renewal premium changes 5% in the quarter. However, our July's renewal premium change thus far is above second quarter. And with an active hurricane season predicted and noise around U.S. casualty reserves growing louder again this quarter, it's not unreasonable to expect mid single-digit or greater renewal premium changes in the second half of 2024. So our organic investments, combined with the insurance market conditions, continues to support our 2024 full-year Brokerage segment organic outlook. We are still seeing it in that 7% to 9% range. So now flip to Page 5 of the earnings release to the Brokerage segment adjusted EBITDAC table. Second quarter adjusted EBITDAC margin was 33.1%, up 98 basis points over last year and at the upper end of our June IR Day expectations. Let me walk you through a bridge from last year. First, if you pull out last year 2023 second quarter, you'd see we reported back then adjusted EBITDAC margin of 32.1%. Second, you need to adjust for current period FX rates, which had a very limited impact on margin this quarter. So 2023 adjusted FX margin was also 32.1%. Third, organic and interest gave us nearly 110 basis points of margin expansion this quarter and then the impact of M&A and divestitures used about 10 basis points of margin. That gets you to second quarter 2024 margins of 33.1%, and therefore, that's nearly 100 basis points of brokerage margin expansion. That's really, really great work by the team. As we look ahead to the second half of 2024, we are still expecting margin expansion in the 90 basis points to 100 basis points range. So third and fourth quarter will look a lot like second quarter. Recall, first quarter 2024 still had the roll-in impact of the Buck acquisition. So the math for full-year 2024 will show about 60 basis points of full-year expansion, but that would be about 80 basis points full-year without Buck, which feels about right, assuming we posted organic in the 7% to 9% range. Let's move now to the Risk Management segment and the organic and EBITDAC tables on Pages 5 and 6 of the earnings release. Another excellent quarter. We saw solid new business, fantastic retention and growing claim count. We posted organic of 7.7% and margins at 20.6%, both were right in line with our June IR Day outlook. Looking forward, as Pat said, we see organic in each of the next two quarters around 7% and margins around 20.5%. If we were to post that, we would finish the year with organic of 9% and margins of approximately 20.5%. That also would be great work by the team. Turning to Page 6 of the earnings release and the corporate segment shortcut table. Adjusted second quarter numbers came in just better than the favorable end of our June IR Day expectations. All of that was due to some favorable tax items within the corporate expense line. All right. Now let's move to the CFO commentary document, starting on Page 3, a few comments. First, foreign exchange. The dollar has weakened over the past month, so please make sure you incorporate these updated revenue and EPS impacts from FX in your models for the Brokerage and Risk Management segment. Second, Brokerage segment amortization expense. Recall, while this impacts reported GAAP results, we adjusted out so it doesn't impact adjusted non-GAAP earnings. This line can also be a bit noisy from time to time. Late this quarter, we received updated third-party M&A valuation estimates on a third - or excuse me, on a few recent acquisitions and also made some balance sheet adjustments at the end of the quarter. You'll see that in Footnote two at the bottom of the page. Looking forward, we expect amortization expense of about $155 million per quarter. Again, all of that is adjusted out, but it does cause some noise in the reported GAAP results. Now it's the risk management amortization and depreciation line. Here too, we received updated M&A valuation estimates for our recent acquisition, which is also described in Footnote five. The net impact to non-GAAP results is about $0.01 to EPS this quarter. Going forward, we are now expecting a lower level of depreciation and amortization as a result of that M&A valuation report. Turning to the Corporate segment on Page 4, no change to our outlook for the third and fourth quarter. Flipping to Page 5 to our tax credit carryforwards. It shows about $800 million at June 30. While this benefit won't show up in the P&L, it does benefit our cash flow by about $150 million to $180 million a year, which helps us fund future M&A. Turning now to Page 6, the investment income table. We call this modeling help breaks down the components of investment income, premium finance revenues, book gains and equity investments in third-party brokers. And as a reminder, none of these items are included in our organic growth computations that we present on Pages 3 and 5 of our earnings release. The punchline here is not much has changed from what we provided at our June IR Day. We are still embedding two 25 basis point rate cuts in the second half of 2024, and we have updated our estimates in this table for current FX rates. When you ship down on that page to the rollover revenue table, second quarter 2024 column, the subtotal shows $128 million and $142 million before divestitures. The $142 million was better than our IR Day outlook due to a few acquisitions performing very well during June. Looking forward, the pinkish columns to the right include estimated revenues for M&A closed through yesterday. So just a reminder, you'll need to make a pick for future M&A. Moving down on that page, you'll see Risk Management segment rollover revenues have been updated for our early third quarter acquisition. For the next two quarters, we expect approximately $20 million and $15 million, respectively. Please make sure to reflect these additional revenues in your models. Moving now to cash, capital management and M&A funding. Available cash on hand at June 30 was approaching $700 million. When combined with our expected free cash flow in the second half of 2024, which is typically stronger than the first half, we are well positioned for our pipeline of M&A opportunities. In total, we continue to estimate we could have $3.5 billion to fund M&A opportunities during 2024 and another $4 billion in 2025, all while maintaining a solid investment-grade debt rating. And remember, if we don't spend it all, it opens the door for share repurchases as well. Okay. Another excellent quarter and fantastic first half of the year. Looking ahead, we see continued strong organic growth due to net new business wins, a large and growing M&A pipeline, and many opportunities for productivity improvements. Add that to a winning culture, and I too believe we are very well positioned to deliver another terrific year here in 2024. Thanks to all the hard work by the team, and back to you, Pat. J. Patrick Gallagher Thanks, Doug. Operator, do you want to open it up for questions, please? Question-and-Answer Session Operator Yes, sir. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Elyse Greenspan with Wells Fargo. Please proceed with your question. Elyse Greenspan Hi, thanks. Good evening. My first question is on the wholesale organic growth. You guys said it came in at 11% in the quarter. I believe the IR Day guide was 7% to 9%, and I think that reflected the slowdown you expected in open brokerage, I think, on the property side. So what changed relative to that guidance, and how the results came in, in the quarter? Douglas Howell Listen, we had a terrific finish to the end of June. Submissions were up 31% during June. There is a - clearly a continued use of wholesalers. We're not seeing really any significant shift back to the primary market and the submissions were up and so our guidance is up. Elyse Greenspan Okay. And then you - at your IR Day, you also had said when we think about next year, that it feels a lot like 2024. I think the assumption right is perhaps something still within the range of 7% to 9% organic in brokerage. I'm assuming that still remains the case, if you could confirm that. It's obviously been a few weeks. And then if that's the case next year, if this year's margin expansion was 80 basis points without the Buck and M&A noise, would that be the rule of thumb in terms of margin expansion for next year if you're in the 7% to 9% organic growth range? Douglas Howell Well, yes, let's reaffirm that we see next year, it could be very similar to this year. Let's see what happens with hurricane season, casualty rates, interest rates, the election. So there's some unknowns that are happening, but we still think that next year feels a lot like where this year will come in. When it comes to margin expansion, let us work on that a little bit during our budget season. We'll start that before our September IR Day. We should have a good idea in October. But there's nothing systemic out there that would cause us to believe that in a 7% to 9% organic environment, you could see margins up in that 75 basis point to 100 basis point range. Elyse Greenspan Okay. Thanks. And then my last one. You guys said - you said you have $3.5 billion to fund M&A this year. How much did you spend in the first half of the year? And given the pipeline that you guys see, does it feel like there might be some buyback this year? Or is it still kind of TBD? Douglas Howell So I think we've spent around $700 million thus far this year. We have some commitments out there. Do I see us having some buybacks? Maybe. We do have the large earn-out payable that's due right after the first of the year also. That's generally - we don't include that in that number. We kind of anticipate that, but that - we'll see. I just got off the phone an hour ago with one of our M&A bird dogs here in the U.S., and he's really starting to feel upward pressure on opportunities for M&A. There are some that are sitting there thinking that we'll see what happens with the November election. If it goes Republican, there's a lot of proposals to drop the capital gains rate maybe down to 15%. So you might have people that try to push that into January. If the Democrats win, then there might be a push to get things sold before the end of the year. So we're sitting very similar to where we were before an election three and a half years ago and where we were seven and a half years ago. There is a lot of uncertainty on M&A flow that revolves around the presidential election. So I think we've got a great shot of using it all. And if not, we'll take a look at what happens on share repurchases. Elyse Greenspan Thank you. Douglas Howell Thanks, Elyse. Operator Our next question is from Mike Zaremski with BMO Capital Markets. Please proceed with your question. Michael Zaremski Hey. Thanks. Good afternoon. I hope this question makes sense. But on the pricing environment, you always give good commentary on the renewal premium changes and you kind of give it overall and by product line. And so the RPC, right, has decelerated more recently to around 5%, how is that interchanging with your organic growth? Why is there a bigger delta now between your organic and RPC versus what we saw early this year and last year? Douglas Howell All right. So a great thing and maybe we haven't talked about it directly for quite a few quarters, but you always have to think about the opt-in, opt-out of the buyers' behavior. When prices are going up, buyers opt out of coverages, which might mean they increase the deductible, lower a limit or just don't buy certain coverages. As prices start to moderate or slower amounts of increases, they tend to opt back in. They reduce their deductibles, they raised their limits and maybe they buy coverages and they said, we just couldn't afford before. So if you go all the way back into our investor materials, there is always a delta between rate and exposure and what our organic growth is. And so that's why in periods when you see property is up 12%, we're not growing our property lines by 12%. They're growing 7%, 8%, 9% that's actually our revenue. So you always have to remember the opt-in, opt-out impact. Then the other thing to do is you got the dynamic of large accounts versus mid-market and small accounts that can influence that. So we're giving you a feel of what's going on in the market, but the behavior of our actual customers can vary depending on - by rational buying behavior. Prices go down, I buy more. Prices go up, I buy less. J. Patrick Gallagher As Doug said - let me hit on that as well, Mike. Let's not forget what our job is. So Doug hit right on it. When rate and exposure looks like it's up 12% and you say, well, how come you're not seeing that write in your renewal book? Our job is to mitigate that. And we start right with that promise like wait a minute, here's where we see the market coming. A good broker gets out in front of this with their clients' months. Here's what we see in the market, here is what's coming, what are we going to do about it? Let's take retentions up. Remember, you dropped to cover before now it's time to add it. So there's a lot of moving parts between those two numbers. Michael Zaremski Got it. And obviously, it's great you guys disclosed it. And so I guess I just want to put a final point on it. So is it fair to say that you're doing a good job for your clients and on a year-over-year basis, it's putting out a little bit of, I guess, pressure on your organic year-over-year? And separately related rate [indiscernible] do clients have the same amount of flexibility as they do in other lines that would cause the RPC disconnect to continue? J. Patrick Gallagher Yes, definitely. Absolutely. Number one, yes, if you throw me the softball, we're doing a good job for our clients, the answer is going to be best in the business. And we think these numbers show that. And we think the growth numbers show it. Absolutely. And yes, you'll continue to see always some change between what's being reported as growth in units of exposure and premium rates based on what we do. And the tools in our toolbox are unbelievable. So do you want to look at a captive? Would you like to take your attention up? It's not just, do you buy insurance or don't. Let's start with the things that maybe are the last things you should insure and the first things you'll self-insure. There's a lot of that work going on with our people every single day. By the way, that appetite for risk is very individual. It's not prescriptive. You can't take a book, there's no AI that says, Oh, an auto dealer has this much appetite for risk based on the number of cars in a lot. It's not how it works. So that's where our profession comes in and dealing with those people, and then our advice is critical. It's not just, well, I'm pretty bold here. I think $1 million retention makes a lot of sense. Wait, wait, wait, we think it looks better this way. And that's what we get paid to do. Michael Zaremski Okay. That's helpful. And just lastly, pivoting to reinsurance. To the extent you have a view, one of the largest reinsurers today put out some data kind of showing that reinsurance demand. I mean you guys have done a great job not only taking market share, but kind of being able to keep your organic high because of that demand, increased like mid teens-ish this year. And if we kind of think about what's going on in personal lines, there's a lot of inflation. So just curious, would you expect kind of demand for reinsurance. I don't know if you think all the way into 2025 yet, but to remain at kind of pretty high levels relative to historical and relative to this year? J. Patrick Gallagher It'll go up. Yes, I do for a lot of reasons. I think that you're going to see the opportunity to buy more at prices that look more reasonable. And there have been cutbacks in the purchase of certain. The other thing is that these nuclear verdicts are real, and people are seeing that and they're going, it doesn't cost us much to buy on the high-end, the top of the tower, it does downward there's a lot more activity. And I still want to be sitting here with some goofball jury comes up with a $1 billion award. Michael Zaremski Got it. So coming as seaside too, maybe more demand. Okay. Thank you very much. J. Patrick Gallagher Thanks, Mike. Operator Our next question is from the line of Gregory Peters with Raymond James. Please proceed with your question. Gregory Peters Hey, good afternoon everyone. J. Patrick Gallagher Hey, Greg. Gregory Peters I guess for my first question, during your Investor Day, you spoke about net new business wins and clearly, your results reflect that. I was wondering if you could give us some more color on how the quarter shaped up and how we should think about your net new business in the second quarter versus, say, the net new business wins in the second quarter last year or some additional metrics around that? Douglas Howell Well, it'll take me a minute to dig it out, but I can tell you that June year-to-date, we've actually expanded the spread between new and lost by a full point. And I think that's probably the best way to look at it. The absolute numbers are kind of irrelevant. Our non-recurring is also coming back. Before some of the non-recurring revenues might have been putting just a slight drag on organic, but now they're actually being in line with just our recurring business. So you're seeing an expansion of our spread between new and lost. How do we see that going forward? Greg, it gets more and more complicated. I actually think our team will do a better job showing our wares and our capabilities in a more of a stable rate environment versus kind of some of the chaotic rate environment that we've been seeing over the last few years. We've developed - we spent so much money on resources in the last five years. Three of those were consumed with COVID. Two of those have been consumed with some chaotic market behavior. Put our guys on a field with kind of calm rate environment, a client that's not trying to just save their business and rebuilding it after COVID, I think you'd be amazed at the digital and data and analytics and expertise. And now bring our reinsurance folks into bear, stack them up with our wholesalers, I got to tell you, it is a compelling offer at the point of sale that I would think that would absolutely deliver better net new business, more new, less loss as our clients really see the capabilities that we have built over the last five years. Arguably, maybe we've spent $1 billion in capabilities over the last seven years, something like that. So that's going to come out at the point of sale and give us a little calm in the market, and I think you're going to see our new business continue to go up. Gregory Peters Excellent color. Thank you. One of the things you've also talked expansively about in the past is the offshore centers of excellence. And this kind of dovetails with the opportunities for margin expansion. Is it your sense for Arthur J. Gallagher that you sort of maximize those opportunities? Or do you see further potential to - for more opportunities in offshoring to help drive some margin improvement? J. Patrick Gallagher Well, this is Pat, Greg. Let me take the operational side of that, and I'll throw the ball to Doug for the numbers and any kind of discussion there. But everywhere I look, I see opportunity and unbelievable benefits from using our centers of excellence. We started off checking policies 20 years ago with 12 people. We now have 12,000 people supporting over 400 services in 100 countries. It is unbelievable the level of professionalism that they help us attain. And that is a differentiator at the point of sale. It's a differentiator when we're recruiting. It's a differentiator in everything we do, and I don't see any sense of that slowing down or not being something that continues to expand. It's not just about replacing heads by any means. It's about having the people that should be doing things, doing them and freeing up those that should be doing other things, giving them the time to do that, which I do think feeds into retention and new business. So I think the - our centers of excellence are a unique product offering back to Doug's point about all the things we've invested in I think they are a very beneficial add to our sales list of things we provide at Gallagher. And as we grow through acquisitions alone, everyone of those people join us and we immediately start plugging them into this resource, which is another one of the reasons they join us. So to me, it's a very differentiating thing that we do. I think our team there is absolutely spectacular, and I'll let Doug address the numbers. Douglas Howell Yes. I think if you talk about the growth path of our offshore centers of excellence, I think remember they work only for us. They're an integral part of our team. There isn't that they or we they are us. If you look at some of our outlook, if we're going to be $20 billion of revenue, there'll be almost 30,000 folks there. So the growth path of our India and other area service centers will grow faster than the headcount in our other areas. But more importantly on this is we've been on this nearly 20-year journey now to standardize, make our operations consistent. It really is going to allow us to deploy AI into that environment. AI is terrific when you have consistency of information and repeatable behaviors and processes. And we have that, and we've spent nearly 20 years doing this. We have a jump, I believe, compared to most by almost a decade. And I think that some of the tests that we're using with AI now will make our folks there better, will make the different type of job for our folks in the centers better, it will make our sales folks better, our service folks better. And I can speak, and I've got 57% of my entire global finance, worldwide finance team operating out of there, and I can see it going to 80%. So it is going to be a service and sales differentiator for us because of the hard work we've put in for the last 15 years. Gregory Peters Thanks for the color. Just a point of clarification. And I probably should know this number, Doug, but I don't remember. On the capital management side, you said, well, listen, if we can't do the deals, you get through your earn-out, you might consider share repurchase. When was the last time you guys were active in share repurchase? Douglas Howell Well, let's see, it probably was maybe in 2000, when was Brexit? 2007 or 2008 years ago, whatever Brexit was. Gregory Peters Okay. All right. No, no. Thanks for the answers. Douglas Howell Thanks, Greg. J. Patrick Gallagher Thanks, Greg. Operator Our next questions are from the line of David Motemaden with Evercore. Please proceed with your question. David Motemaden Hey. Thanks. Good evening. I just had a question. I was hoping to get a little bit more color on the July RPC acceleration that you mentioned, Doug, maybe just a little bit around the lines. Is it property moderation kind of pausing, or is a casualty acceleration? What's going on there? Douglas Howell Well, actually, a little bit of both. We actually saw it in property. And actually, property is a pretty heavy quarter for us here in the second quarter. If you think it's about a third of our business, I think here in the second quarter, it might comprise 50% of our mix. So property in July. We did see a slight tick up. I'm talking a point or so. I'm not talking about is five or eight points. It's one point to two. Casualty rates are showing some, I wouldn't say acceleration. We used the word advancement in terms of where they are because - but they're steady. We'll see what happens with the - with pricing here in the second half of the year coming out of the carriers. So I would expect that to advance more. So not a jump up, but certainly, again, our dailies, they come out overnight. I looked at it last night, and we're seeing a tick up on both property and on casualty. David Motemaden Got it. Thanks. And there was a line in the press release on the adjusted comp ratio that caught my eye, just where you noted savings related to headcount controls. That's the first time I've seen that in, I can't remember how long. I'm just wondering, is that a - I guess, is that to do with - something to do with the offshore centers or is this more of a concerted effort to show some margin expansion as we think about this year and into next year? Douglas Howell I think that the answer is this. First of all, if you look at what we did during COVID, we actually took out quite a few folks, and we've been hiring back since then. Our business has grown into that. We haven't stopped hiring by any means, so it's not an indication of everything. I think the teams just are seeing of their workload models that we're probably okay staffed in the environment that we are right now. So I would read that into it, but nothing systemic, but just maybe that we've hired back into the capacity that we need in 2023. David Motemaden Got it. Okay. That's helpful. And then maybe just sneaking one more in. Just on the contingent commission accruals that you guys had made the true-up to this quarter. I guess, we have seen a lot of noise this quarter on casualty reserves, particularly on the more recent years. I'm wondering how you feel about the potential for more of those reserve adjustments to come through and how that might impact the contingents? Douglas Howell All right. First of all, on the supplementals, we've done pretty well year-to-date. Contingents, we did have some development that happened. We're probably not accruing as, I don't want to use the word bullish, but I will for the second. And as we were - as maybe we could. Casualty, we're cautious on it. Some of our programs and some of our binding operations, you got to be a little bit careful on performance-related compensation there. But I don't see a systemic shift in how we believe that our total compensation is going to happen. Maybe some bumps a little bit per quarter, but we're talking a couple of $3 million on a $130 million number year-to-date. So it's pretty small. David Motemaden Yes. Understood. Fair. Thank you. J. Patrick Gallagher Thanks, David. Operator Our next question is from the line of Mark Hughes with Truist Securities. Please proceed with your question. Mark Hughes Yes. Thank you. Good afternoon. On the risk management business, maybe we've gotten used to the elevated growth for quite an extended period of time, the 7% in the next couple of quarters. Could you maybe just talk about the growth environment there relative to what it might have been in prior years? And what's your expectation? Is this a little bit of a lull? Or is this a good number? Douglas Howell Right. So first of all, let's make sure you asked about the history is that I think in 2022, we posted about 12% annual organic growth, 2023, it was - excuse me, 2021 was - it was 12%, 2022 was about 13% and last year is pushing 16%. This year, if we get 9%, we did talk about a couple of very large wins that we had that incepted in mid-2023. What we're seeing in our book of business right now is actually reassuring, not that we need reassurance. This is a great near double-digit grower and has been for a very long time is we're starting to see more and more opportunities in that $2 million to $10 million type customer a year. If you look at the amount of new business sales that are happening relative to, let's say, five years ago, it's nearly doubled now. We're double the size, too, but the carriers are beginning to understand that we offer a highly customizable solution. Self-insureds are seeing that our outcomes are better. So I think that there's a market awakening that we - when we pay nearly $12 billion or $13 billion primarily workers' comp and general liability claims that would be one of the top five, six, seven tiers in the U.S. as measured by total claims paid. So the expertise customizable services is becoming more and more known in the industry. So we're getting many more trips to the plate. Maybe a couple of fewer home runs, but I think we're going to see a lot of doubles and triples out there. So I wouldn't call it a lull because we're in now 9% this year, but we did have two years of some pretty big wins in there. J. Patrick Gallagher But we wrote all the big ones. That's not, but [indiscernible] is a lot more difficult, more lumpy than the stuff we're seeing now. Douglas Howell Yes. Mark Hughes Yes. Understood. And then the any way to break out the - within the wholesale to open brokerage versus the MGA and binding? Douglas Howell Yes. Listen, I think that right now, open brokerage is maybe in that 11% to 13% range. And I think that binding and programs might be in the low-mid-single digits, something like that. J. Patrick Gallagher Mark, what I'm - what I'm most impressed with and pleased with is the fact that you're seeing that open brokerage number keep moving in nice double digits. My experience with these types of markets, especially with property is that the first line you kind of see submission slow down, people sort of stay where they are. There is a - our submission count is up substantially for the quarter, for the month, for the year. We are not seeing business flow back to the primaries. So the I think change that we've seen that were excess and surplus is becoming much more of the norm and where people want to check out what a wholesaler can do, and then we earn that business, we're not losing it. So submission counts are up, retention rates are up, new business is up, and that's pretty exciting. Mark Hughes Great. Appreciate it. Thank you. J. Patrick Gallagher Thanks, Mark. Operator Thank you. Our next question is from the line of Rob Cox with Goldman Sachs. Please proceed with your question. Robert Cox Hey, thanks. Yes. Just a question going back on the opt-in, opt-out dynamics. Just curious, does that flow through net new business and that's what's kind of driving the one point higher, you said June year-to-date of net new business? Or is that something else entirely? J. Patrick Gallagher Yes, I think some of that flows back - well, so for instance, a good example of that is a lot of our public entity clients, and as you know, we're very, very sizable in the public entity sector. They just work off a budget. And if the primary premiums are rising, they're taking bigger retentions, they're dropping limits, and they don't - they're not necessarily comfortable with that. So when the opportunity to buy those back up comes up, and they had an extra layer, they expand their coverage, oftentimes, we will call that new business. And at the same time, we're facing the renewal reductions on the stuff that stays with us. But it is a factor of what's available and what their budget restraints are. Douglas Howell Yes, I think it's a little tough for us. If they write a new cover and it goes through a different - if an existing client writes a new cover that goes through our wholesale business, that would be new business. If it's a change in premium level or like a slightly lower deductible or slightly low - higher retention, that would go as renewal change. It's a little tough sometimes to split that apart. But - so part of it goes to new business. Probably if I were going to guess, maybe 20%, 25% goes through new business and 75% would go through the renewal premium change. Robert Cox Okay. Thanks for walking us through the nuances there. And then just on the revenue indications from the audit endorsements and cancellations, those are remaining positive. Just curious if the rate of change on those is either accelerating or is that decelerating at this point? Douglas Howell All right. Great question. So on the surface, we're about the same as they were last year second quarter. But what happened last year's second quarter, we actually had quite a bit of endorsements that came out of the mini banking crisis. You were seeing a lot of banks increasing their D&Os in April of - March, April of 2023. We didn't have that repeat this year, probably a good thing we're not having that crisis. But interestingly, flat year-over-year, carve that out, that's still up pretty nice. Robert Cox Got it. Thank you. J. Patrick Gallagher Thanks, Rob. Operator The next question is from the line of Mike Ward with Citi. Please proceed with your question. Michael Ward Thanks guys. I was wondering if you could update us on the progress with your integrated approach where you're going to market with multiple businesses at a time? I think you talked about leveraging programs, reinsurance and Gallagher Bassett together? Douglas Howell All right. So yes, there's some good program development going on that combines those three together. Then also, you're having the introductions that happen across the units. I think our introductions to our reinsurance folks coming out of our carrier relations folks to the carriers is working very well. We're seeing some nice wins on that. Getting our program folks integrally involved with the reinsurers to create the capital, find the fronting market, it's going very well, at least from the CFO's chair. J. Patrick Gallagher Yes. Mike, I think when we talked about that, we weren't talking about taking just individual accounts and saying the way we want to do this is all together now on the XYZ manufacturing company. What we're talking about is what Doug was hitting on. We're now meeting with insurance companies quite regularly, and we're saying, let's talk about the broad base of our relationship. And at that table are our reinsurance people, our benefits people, our service people on the claims side as well as the property casualty production and marketing folks. That is working extremely well for us, and that's really what Doug was talking about. Now at the same time, in RPS, looking across a broad base of programs. We are looking at those saying, okay, we've got about 250 programs in the company. Where are we not, a, doing the reinsurance, b, doing the claims and what should we be doing to make sure that our retailers are using those programs as well. So it's kind of a mixed bag, and it's not like we just take XYZ account to the market and say now it's all or nothing, or to the client and say it's all or nothing. I hope that color gives you a little bit of reference to what we were talking about the last time around as well. Michael Ward Yes. No, that's helpful. Thank you. And then second question was just on the political election scenario type theme. Curious if you have any other kind of tax credit generation prospects in the pipeline, and any, I guess, political risk to those in the near term that we see? Douglas Howell Well, most of our tax credits are already in the bank. So I think we feel pretty comfortable about that. What are we working on? I think that with 45Q that really was passed under the previous above - all above-the-line inflation reduction at, it's made the tax credit market much more common, much more defined, broader, but we're pretty well suited for tax credits for the next four to five years. I'm not - I don't think we need to plunge in to new tax credit projects right now because we just generate the credits and they sit on the shelf for four or five years. The team is working on it, and there are some exciting things that are happening out there across all forms of clean energy that are exciting. But I don't see us doing something big in the next 1.5 years. Let's burn through these credits first, and then we'll see about what we can do. And by that time, there'll be a robust market out there for tax credits. You can get insurance on it now that much more to ensure the credit. So that's a good change in the law. Right now, I think the law is pretty well suited for us to do something in a few years and probably not have to do it with a lot of capital investment into it either. Michael Ward Okay. So maybe if I'm thinking about it right, that - this dynamic should help bolster you in terms of, I don't know, having extra leverage in the M&A scenario if rates are cut. That should help sort of bolster your competitive edge, I would think. And do you have like a sort of update on the PE interest in the market? Douglas Howell Well, listen not to belabor the PE update. Like I said I just got off the phone with our bird dog. And I got to tell you, my soap box is that I had during the IR Day about the new, what I call less than transparent equity structures that PEs are now doing in order to buy nice family-owned brokers. I think there's starting to be more and more of - the curtain has been pulled back on that, and I think that sellers are really looking at. They don't have the same equity. At Gallagher, you got one equity, owners, employees, people that sell into the business and you on this call own the same equity across the board. That's not how it works now with the PE structures, and it all looks okay, do the models on it, looks okay, what happens if everything goes up in a linear line. Get a little bit of a down draft on that, and the people that give their family's lifetime of work to the PE firms get very little. And I'm telling you that is something that needs to be aware out there. And I think that when I talked at one of the bird dog today, he said, it's becoming more and more apparent to sellers they're getting the last spot of the trough. J. Patrick Gallagher Let me take another side of that too, Mike. Second quarter, I believe it was Marsh Perry put out a reporter Optus partners. There were 62 buyers of properties in the second quarter alone. There's a lot of private equity interest in our space. That's not stupid money. I do believe that the multiples have risen, that we've been paying for these properties because of that interest over the years. Having said that, I think the quarter was 20% down in actual transactions. So you've got maybe smarter money, maybe smaller amounts of money, but the transaction count is coming down. I think sellers, as Doug said, are getting a little bit more discerning. And I do think when you take a look at what's happened with some of the roll-ups who are now at a point where it's time to go public, and I won't mention any names, you know who they are, well, let's see how that goes. It isn't an easy slog, and I think sellers are seeing that as well. And by the way, it's pretty easy to join somebody that's going to change, nothing in your shop until they want to go public. Better, I think, as Doug said, and joined me that everybody from the family to you all as investors, you have the same stack. Now one other comment on this. When we do an acquisition, we give the opportunity for everybody in that acquisition from that point on to participate in this equity. We've got an employee stock purchase plan. We have an LTIP program for management and senior producers. We've got all kinds of ways for people to participate in our success and our growth. You sell to the PE people, the owners do great, PE investors hopefully do great, and that's it baby. Well, I like our model. Michael Ward Awesome. Thank you, guys. Operator Our next question is from the line of Grace Carter with Bank of America. Please proceed with your question. Grace Carter Hi everyone. I wanted to start on the risk management guidance. I think you all mentioned maybe around 9% for the year. I think that the prior guide was maybe 9% to 11%. Could you go over maybe anything that's changed since we last spoke in June? Thanks. Douglas Howell I think the degree of difference on a full-year on - listen, we're talking about a couple of million dollars on the difference between the 9% and 10%. So I wouldn't say that it's made $5 million. So there's nothing that's just - we think that we've got better insight for the rest of the year and so that range is coming maybe to the lower end of it than the upper end of it. Grace Carter Thank you. And also on the brokerage organic growth guide, I think that you all had mentioned you are considering narrowing it maybe to 7.5% to 8.5% at the Investor Day. Just keeping it at a wider range of 7% to 9%, does that just reflect uncertainty in the environment? Or has anything changed since then? Or am I just reading too much into it entirely? Douglas Howell Maybe the latter. I think it's been four weeks since we talked to you. We just finally got one more data point, and that's the close of June. So we'll talk to you again in September. And either way, listen, anywhere in that range. Look at that, that's 7% to 9% growth on top of 9% last year, 9% before. When you go back in 2019, we grew 6% all in. anywhere in that range is a terrific year. And if we can repeat it again next year, it's another terrific year. Grace Carter Cool. Thank you. Operator Thank you. Our last question will be from the line of Meyer Shields with KBW. Please proceed with your questions. Meyer Shields Thanks. Two quick ones, I think. First, I was hoping - hopefully, we won't need to know this, but give us a sense as to the contingent commissions exposure to hurricane season? Douglas Howell No, it's very small. J. Patrick Gallagher Very small. Most of that hurricane exposed business, especially in Florida, is in the excess and surplus, Meyer, we're the largest excess and surplus broker, I think, in the state. A lot of that is - all that's in the E&S markets and none of those are subject to contingents. Meyer Shields Okay. Perfect. That is good news. Second question, just looking for a brief overview of your appetite for additional acquisitions in personal lines, I guess, both within high net worth and beyond that? Douglas Howell Well, you're talking about personal line just being a pure auto writer, that's probably not what we're going to do. We're not great at it. We're an adviser. So if somebody is going to use us to use our advice to help them buy their insurance, that's the business of what we'd like to be in. High net worth on, we do a terrific job of it. I'm telling you our folks are some of the very best in the business, and that's an important spot right now. There's planes, there's boats, there's houses on sand bars, there's - how is on views that have landslide risk, high net worth needs an adviser probably as much as any complex mid-market commercial client. Just going on and trying to buy an auto writer, auto is probably not what we're looking to do. If it's going to be one of those things that it takes advice will be there in that space. J. Patrick Gallagher We're actually very excited about the stuff there. I think that's - it's, a Doug said, a real opportunity for us. Douglas Howell Well take your call, Meyer. Just go ahead, we'll help you out with it. Meyer Shields I've got a ping pong table. That's about it. Douglas Howell Well, there's a slip and fall on that one coming. J. Patrick Gallagher I think that's our last comment. So just our last question, let me make just a few comments on the way out here. Thank you, again, very much all of you for joining us. I know it's a little late, and thanks to all of our Gallagher colleagues around the world for their hard work and their dedication. These quarters don't just happen. Thanks to your efforts, that means our people we're in a really enviable position our net new business is up. Our M&A pipeline is growing. I'm proud of the year-to-date financial performance. And as you can tell, I'm bullish on 2024 and beyond. So 40 years, 16% TSR, compound average annual growth rate, pretty good 40 years. I'm looking forward to the next 40. Thanks for being with us. Operator That does conclude today's conference call. You may disconnect your lines at this time.