Q2 2024 Earnings: Mixed Results for Major Corporations

Aon plc (AON) Q2 2024 Earnings Call Transcript

Aon plc (NYSE:AON) Q2 2024 Earnings Conference Call July 26, 2024 8:30 AM ET Company Participants Greg Case - Chief Executive Officer Edmund Reese - Executive Vice President and Chief Financial Officer Christa Davies - Chief Financial Officer Eric Andersen - President Conference Call Participants Elyse Greenspan - Wells Fargo Andrew Kligerman - TD Securities Michael Zaremski - BMO Capital Markets Jimmy Bhullar - JPMorgan Robert Cox - Goldman Sachs David Motemaden - Evercore ISI Meyer Shields - KBW Grace Carter - Bank of America Cave Montazeri - Deutsche Bank Operator Good morning and thank you for holding. Welcome to Aon plc's Second Quarter 2024 Conference Call. At this time, all parties will be in a listen-only mode until the question-and-answer portion of today's call. I would also like to remind all parties that this call is being recorded. If anyone has any objection, you may disconnect your line at this time. It is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our first quarter 2024 results as well as having been posted on our website. Now it is my pleasure to turn the call over to Greg Case, CEO of Aon plc. Greg Case Good morning, everyone. Welcome to our second quarter conference call. I'm joined by Christa Davies, our CFO; and Eric Andersen, our President. Additionally, we're delighted to be joined by Edmund Reese, who will succeed Christa as CFO on July 29. On our call today, Christa and I will provide our usual prepared remarks, and Edmund will highlight a few initial observations before he officially steps in to report Q3. As in previous quarters, we posted a detailed financial presentation on our website. We begin by thanking our colleagues around the world, including the 7,700 colleagues we welcome from NFP for the great work they do to deliver for clients, on each of the three pillars of our 3x3 plan, delivering Risk Capital and Human Capital solutions through our Aon Client Leadership Model scaled by the Aon Business Services platform. Let's now turn to Edmund. Edmund, on behalf of Global Aon, we're thrilled to have you on our team and your first day on Investor Call as you officially step into the CFO role on Monday. Welcome. Edmund Reese Thank you, Greg, and good morning, everyone. I'm incredibly excited to be here. First, I want to start by thanking my Aon colleagues for their very warm welcome. I've connected with literally hundreds of colleagues over the last month. And it's been great to meet everyone and really experience the energy and the enthusiasm of Aon, and the commitment to deliver on our plans. What's been most exciting for me is seeing firsthand the investment in the corresponding growth opportunity for our clients, colleagues and shareholders as we deliver on a 3x3 plan over 2024, '25 and '26. And I have to say that with the 3x3 fully in place in '26 and the building momentum, equally compelling is the significant opportunity that will deliver value creation beyond '26 and over the long-term. Finally, the financial model is strong, and the company is performing and well positioned to continue to deliver long-term double-digit free cash flow growth. I also want to add that I'm looking forward to meeting investors and the sell-side in talking through how we will deliver on our guidance and continue to allocate and invest their capital with discipline, focused on high-return investments and capital return and, of course, reporting our third quarter results and fielding questions at that time. So Greg back to you. Greg Case Thanks, Edmund, and we're very excited to have you here. Before speaking to results in detail, we want to highlight a great example of the power of a united firm to deliver solutions where they're needed greatly. In Ukraine, until last month, there was no functioning war risk insurance market because carriers couldn't get reinsurance coverage due to standing war exclusions. Working with the US and Ukranian governments, we created a solution that provides insurance and reinsurance capital to Ukrainian insurers, which has already brought in $350 million of new capital, encompassing a first-of-its-kind structure that facilitates new investments and economic recovery. This structure enables rebuilding and economic activity during the war and much more rapid investment in reconstruction and resilience longer term. This product couldn't have been created without global connectivity, expertise, data and analytics, on-the-ground relationships and local market knowledge and our proven ability to match risk and capital across private and public sectors. This innovative structure helps protect and grow the economy and helps the people of Ukraine recover and rebuild. It's a compelling example of the positive impact that our industry can have in addressing major challenges in the global economy. Turning now to current quarter results. In Q2, our team delivered 6% total organic revenue growth with all solution lines at 6% or greater, and both Aon and NFP delivering mid-single-digit organic revenue growth. For clarification and transparency, the 6% organic performance for Aon is 6% without NFP. With this organic growth, in the addition of NFP, we delivered 18% total revenue growth, 19% adjusted operating income growth and margins of 27.4%, an increase of 10 basis points year-over-year and 60 basis points from our combined 2023 margin baseline, including only two months of NFP. Year-to-date, we delivered 5% organic revenue growth, 11% total revenue growth and adjusted operating margin expansion, contributing to 12% adjusted operating income growth and 7% growth in earnings per share. Turning to our solution lines. In Commercial Risk, organic revenue growth of 6% reflects double-digit growth in EMEA and LatAm, with strong growth in North America, driven by net new business growth and strong retention. On average, we saw growth in exposures and generally flat pricing, resulting in moderately positive market impact. And while we're starting to see the turnaround in external capital markets, our M&A services business had modest positive impact in the quarter, although the available pipeline remains strong and growing. For NFP, growth for the two months was consistent with our North American business. Overall, a strong result. Finally, we're making great progress on priority talent acquisitions with continuing focus in this area and expect these new colleagues to contribute to further growth over time. Turning to Reinsurance. 7% organic revenue growth in Q2 reflects strong growth in treaty, with strength internationally in LatAm, EMEA and APAC. We saw increased capacity in the US property CAT space, which provides ongoing opportunity for our clients to increase and optimize their coverage supported by our team's leading expertise, data analytics and insight. Health Solutions delivered 6% organic revenue growth with high-single-digit growth globally in core health and benefits and real strength in consumer-facing and executive benefits, driven by new business wins. The market environment reflects an increased health care cost trend and positive impact from enrollment levels. NFP's contribution was consistent with Aon's performance, an impressive result in the midst of the closing. And finally, Wealth Solutions organic revenue growth was 9%, an outstanding result, reflecting ongoing strength in pension derisking and core retirement. NFP also delivered strong growth, driven by asset inflows and market performance. Overall, we're pleased with both the top and bottom line growth in the quarter as we continue to deliver against our 3x3 plan on all fronts. Further, after only two months of NFP, early progress is fully on track or ahead of expectations. Four key growth and value creation opportunities highlight this strong start. First, on independent and connected, outlining how we're bringing NFP into Aon. Our teams are coming together with a shared vision and client-first mindset, and they're building connectivity across Aon and NFP. Our early close is increasing momentum as we work together to deliver wins and bring the best from Aon and NFP to our clients. Second, top line growth. We're seeing strong organic revenue growth from NFP. And though early, we're on track to deliver our revenue synergy commitments, noting that we modeled zero net impact in 2024 and have seen strong client and colleague retention. Third, NFP's M&A engine is operating exceptionally well and the pipeline remains very strong. We've completed 14 deals so far in 2024 at attractive multiples weighted toward commercial risk and health. And we're finding that our independent and connected value proposition is distinctive and highly attractive. And fourth, bottom line growth. We're on track to fully deliver in line with guidance on all aspects of the combination through efficiencies, cost synergies and free cash flow impact, leveraging operational best practices from Aon Business Services. In summary, our Q2 and year-to-date results demonstrate progress against our financial guidance and our 3x3 plan, which will deliver superior content and capability across Risk Capital and Human Capital through Aon Client Leadership, ensuring we bring relevant client solutions all the time, all enabled through Aon Business Services. This performance will deliver compelling long-term value creation for clients, colleagues and shareholders. Before I turn to Christa for one final time, I want to take a moment to thank her again for a great partnership, leadership and friendship, and for her inspiring and invaluable commitment to building our firm. Christa, over to you for your thoughts on our financial results and long-term outlook. Christa Davies Thank you so much, Greg, and thank you so much for the partnership. My time at Aon was and will continue to be the highlight of my career. I remain incredibly excited about the value creation potential we have ahead of us through the 3x3 plan. I'm thrilled to welcome Edmund, and I look forward to serving as an advisor to the team to support and ensure a smooth transition. Turning now to the quarter. As Greg highlighted, we delivered exceptional results in the second quarter, with 6% organic revenue growth highlighted by 7% in Wealth and 7% in -- sorry, 9% in Wealth and 7% in Reinsurance. Our overall organic revenue growth does not include the impact -- does include the impact of NFP, beginning from April '25 when we closed the acquisition. So we only had two months performance, NFP's Q2 performance was in line with the business case as it delivered mid-single-digit organic revenue growth. NFP also contributed to the 18% total revenue growth in the quarter, which translated into a 19% adjusted operating income growth, margins of 27.4% and 6% adjusted per share -- earnings per share growth. These results position us well to drive progress against all elements of the 3x3 plan, driving results in 2024 and over the long-term. As I reflect on our performance for the first half of the year, as Greg noted, organic revenue growth was 6% in Q2, driven by net new business generation and ongoing strong retention. We continue to expect mid-single-digit or greater organic revenue growth for the full year 2024 and over the long-term. As Greg described, we're making excellent progress with NFP. We continue to expect that NFP will contribute to the firm's overall revenue growth through organic revenue growth, including $175 million of net revenue synergies by 2026 and inorganic growth from ongoing M&A. While it's early, we're on track to achieve deal synergies, with no net impact in 2024 from cost and revenue synergies and positive impact in 2025 and 2026. This is exactly in line with the guidance we gave when we announced the deal. It's also worth noting that voluntary colleague attrition at NFP is down year-over-year. Moving to operating performance. We delivered strong operational improvement with adjusted operating margins of 33.8% in the first half, an increase of 20 basis points, driven by revenue growth, portfolio mix shift, efficiencies from Aon Business Services and restructuring savings, overcoming expense growth, including investments in colleagues and technology to drive long-term growth. If we consider the combined historic margin profile of Aon and NFP, including two-thirds of NFP's results from the second quarter of 2023, adjusted operating margins expanded 60 basis points in Q2 and 80 basis points year-to-date, which is how we think about ongoing margin expansion. We're making meaningful progress on our Aon Business Services strategy, including through our restructuring program, which helps to accelerate our 3x3 plan and contributes to margin expansion through net savings. We continue to streamline and improve operational processes, moving work to the best locations and enhancing colleague and client experience with powerful new tools such as our property, casualty, D&O, cyber and health risk analyzers. Restructuring savings in the second quarter were $25 million, resulting in $45 million of restructuring savings year-to-date and 60 basis points of contribution to adjusted operating margin year-to-date. Restructuring actions completed so far are expected to generate $95 million of savings in 2024. We expect restructuring savings will fall to the bottom line. At this time, we continue to expect $100 million of realized savings in 2024 as we continue to accelerate our plans for Aon Business Services and our business. As we think about adjusted operating margins moving forward, we continue to expect to drive adjusted operating margin expansion over the full year on a combined firm basis and the long-term through ongoing revenue growth, portfolio mix shift to higher revenue growth, higher margin areas of the portfolio, and efficiencies from Aon Business Services. As we previously communicated, we think the right baseline from which to measure 2025 adjusted operating margin growth is 30.6%. Calculated out as 31.6% from 2023, less 100 basis point drag from NFP for the period from the 2020 -- from the April '25 close through the end of 2024. We also expect fiduciary investment income to be relatively flat year-over-year based on current interest rate expectations. So we expect the tailwind we've seen in the first half of the year will be reduced in the back half. So we remain committed to driving full year adjusted operating margin expansion in 2024 and over the long-term against this adjusted baseline of 30.6%. Turning to EPS. Adjusted EPS grew 6% in Q2 and 7% year-to-date, reflecting double-digit adjusted operating income growth and ongoing share buyback, partially offset by higher interest expense, the issuance of 19 million shares to fund the acquisition of NFP and a higher tax rate. Turning now to free cash flow. We generated $721 million of free cash flow year-to-date, reflecting strong operating income growth and lower CapEx, offset by payments related to NFP transaction and integration charges, legal settlement expense, restructuring and higher cash tax payments, as we've previously communicated. As we look forward, our free cash flow outlook remains strong based on our strong expected operating income growth and a $500 million long-term opportunity in working capital. We've communicated that, in the near term, free cash flow will be impacted by restructuring, higher interest expense and NFP deal and integration costs. In 2025 and 2026, NFP is expected to add $300 million and $600 million of incremental free cash flow, respectively, contributing to our overall expectation of long-term double-digit free cash flow growth. We allocate capital based on ROIC and long-term value creation, which we've done through time through core business investment, share buyback and M&A. As we look historically, we have a successful track record of balancing organic investment, acquisitions, divestitures and share buyback as we continue to optimize our portfolio against our priority investment areas on an ROIC basis. Given the very strong long-term free cash flow outlook for the firm, we expect share repurchase will remain our highest ROIC opportunity. We completed $500 million of buyback in the first half and continue to expect share buyback to be substantial at $1 billion or more in 2024 based on our current M&A expectations for the rest of the year. We also expect to continue to invest organically and inorganically in content and capabilities that we can scale to address unmet client needs. Regarding M&A. Our M&A pipeline continues to be focused on our high priority areas, including the mid-market and attractive geographies that will bring scalable solutions to our clients' growing and evolving challenges, known that we closed an acquisition in France this quarter, bringing new specialist capabilities and health and benefits into Aon. We are also continuing to see success from NFP's impressive M&A engine. Since the beginning of 2024, NFP has completed 14 acquisitions at attractive multiples weighted towards commercial risk and health, representing $36 million in annualized revenue. As we previously communicated, we expect NFP to do M&A comprised of $45 million to $60 million of EBITDA per year, and they are on track for the full year 2024. We look forward to building on their established track record and executing against this strong pipeline to drive future growth in the space and value creation within our ROIC framework. Going forward, we'll continue to actively manage the portfolio and assess all capital allocation decisions on an ROIC basis, contemplating buyback, M&A and delevering. Turning now to our balance sheet and debt capacity. We remain confident in the strength of our balance sheet. As previously communicated, we expect our credit ratios to be elevated over the next 12 to 18 months, as we bring our leverage ratios back in line with levels consistent with our credit profile, driven by substantial free cash flow generation and incremental debt capacity from EBITDA growth, noting our track record of effectively managing leverage within our current ratings. In summary, our strong financial results in the quarter and year-to-date position us well to continue driving progress against all elements of our 3x3 plan and driving results in 2024 and over the long-term. We look forward to building on this momentum. With that, I'll turn the call back over to the operator, and Greg, Eric and I'd be delighted to take your questions. Question-and-Answer Session Operator Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question. Elyse Greenspan Hi, thanks. Good morning. Before I get into the questions, I just -- also just want to extend my congrats to Christa just on your successful career at Aon. Christa Davies Thanks so much, Elyse. Elyse Greenspan Yes. Thanks, Christa. My first question is on Commercial Risk. I guess it's two parts. Maybe, Greg, you said the overall organic growth wasn't impacted by NFP. Would that statement also hold true for Commercial Risk? And then can you also just expand on what turned in the quarter? You guys went from 3% to 6%, you saw a doubling of growth within that segment in the quarter. Greg Case Yes. Maybe I'll start, Elyse, but then important to get Eric's input and Christa's here, too. Listen, first of all, to your first question, yes, we want to be really clear about NFP has been two months. So you take NFP out completely, the 6% and all the solution line results would have been exactly the same without NFP. So that's exactly correct. And think about Commercial Risk, maybe put it in context a little bit. What we're seeing in Commercial Risk is exactly consistent with what you're seeing really across the firm. And you should expect and we expect that we're going to continue to make progress and build momentum in '24, '25 and '26 on the 3x3 plan. And again, this all starts with better understanding the client need and then taking some very specific hard steps to put Aon in a position to address this demand in a way that we think, Elyse, is going to be a better set of solutions and really distinctive and that's really the 3x3 plan, and you know what the elements of that are. And that's what delivered the 6% organic, the margin expansion and the OI growth. In Commercial Risk, specifically, again, even without NFP, 6% growth was driven by real strength in net new business generation and strong retention. And really the strong performance held across all major geographies. And we wouldn't probably get into quarter-to-quarter because the quarters are different. The mix is different between them. As we said in Q1, there were some external factors we saw last quarter that we didn't expect were ever going to repeat and they likely won't repeat, and they didn't repeat. And on average, you step back, you see growth in exposures, generally flat pricing resulting in modestly positive market impact. As we said, M&A services, we're starting to see the turnaround in external capital markets, but really M&A services really had a modest positive impact in the quarter. But our team, look, with the investments we've made and the caliber of that team and the capability are incredibly well positioned to take advantage of the growing and what is available pipeline out there now. And then again, with that said, NFP growth for the two months was consistent and that went into the overall, as Christa described. And I would also say we're making great progress on our priority hire pipeline in areas like energy and construction and expect these new colleagues to contribute to further growth over time. But really, Elyse what we're trying to highlight is Q2 is just a continuation of what we're doing with the 3x3 plan and you're starting to see that really play out and we expect it's going to continue for the rest of the year and then to '25 and '26 and beyond. But Eric, what would you add to that? Eric Andersen Yes, Greg. So first of all, I would say that strong retention and strong new business really are an outcome of the work that's been going on in the quarter. But just to touch a little bit on the priority hires, if I could, for a second, as you mentioned, in the key specialty areas, construction, energy, other industry areas. We're looking at those investments in people like we do any other investment. We want to bring in the best talent that is out there, support them with the best tools and analytics, whether it's the new analyzers that Christa talked about, some of the broker-led analytics, new tools like automated certificates of insurance to make sure we're providing the right colleague and client experience. But I would also say that the analyzers fit into what we've been doing around the $1 billion investment in ABS and those tools. And when you match that talent, that new talent and existing talent, right, the great talent that's already here at Aon, with those new tools, you begin to provide a different experience for our colleagues who can actually serve their clients better, but also to the clients themselves who get better insight from us really begin to unlock the analytics that we've been talking about, match that with the global broking capability, the access to the reinsurance capital, really the whole strategy around how we're bringing capital to clients, and you see a different experience. And we've seen it in client events, whether it's at RIMS or our property symposium or other client events that have been going on in the first half of the year, you really see the excitement from the clients who are starting to really understand what we're trying to give to them in the whole ecosystem of tools and talent and people. I could share stories and tell you some client wins and things. But really, the new news are these risk analyzers and you see it also on the Health side. The ability to show a client where their risks are, how they structure a program around it and then how they access global capital with a client leader who fully understands their business is actually helping us drive better, stronger retention and better net new business wins. Elyse Greenspan Thanks. And then my follow-up question, the tax rate in the quarter went to -- above 22%. I know you guys have typically guided, right, to 18.5%, which is like the five-year average. Is there something -- is your tax rate structurally higher with NFP? Or is there something one-off that we should think about when thinking about the run rate tax rate? Christa Davies Thanks so much for the question, Elyse. In Q2, similar to Q1, the tax rate was driven by a geographic mix of income and the impact of unfavorable discretes. I would note that discrete can be favorable or unfavorable in any one quarter, and therefore, the rate can be lumpy quarter-to-quarter. We really do think about it over the full year. And as you said, Elyse, we don't give guidance going forward, but that is a historical accurate rate going backwards. Elyse Greenspan And then one more quick one, Christa. I think you said NFP expected $45 million to $60 million of EBITDA in M&A, and you're on track this year, but I think there was $36 million of revenue so far. So is it just that you guys are -- see a pipeline that would probably be more back half than first half-weighted in terms of transactions? Christa Davies That is exactly right, Elyse. And what we've really seen is the acquisition activities NFP slowed down a little as they were negotiating with us for obvious reasons. But the pipeline looks incredibly strong in the back half of the year, and we think they are fully on track to deliver that $45 million to $60 million of EBITDA in 2024. Elyse Greenspan Thank you. Operator Thank you. Our next question comes from the line of Andrew Kligerman with TD Securities. Please proceed with your question. Andrew Kligerman Hey, good morning. And also just a congratulations to Christa on the next phase of her career. What an awesome run you've had at Aon. Just exceptional leadership operationally, technologically, I mean, unparalleled as a CFO. So we'll miss watching you in action, but congrats on the next phase. Christa Davies Thank you very much, Andrew. Andrew Kligerman Sure. And then I guess moving back to Commercial Risk Solutions, and Greg, you mentioned and Eric mentioned new hires in the energy area. Could you elaborate a little bit on where -- and actually, let me take a step back. I mean, there was a lot of maybe concern out there that net hires were negative at Aon. So could you talk about 2Q was net producer staffing positive or negative? Was that a big influence on the 2Q? And how do you see that playing out in the second half of the year? Do you think you'll be net hiring positive? Greg Case Yes. So thank you, Andrew. Appreciate it, and I really appreciate your perspectives. First, take a step back overall. Just to remind, we have currently the highest engagement we've had in basically almost forever. It's a really positive story that continues to evolve and build. And it really is a function of our colleagues understanding and really contributing to and leading the ability for us to support and help clients. And if you think about the example we started off with today, it's a powerful example of what we can do and the impact our firm can have, and that's really -- that generates a lot of energy around our firm. That's why our engagement is so high. That's reflected in our attrition, and our voluntary attrition continues to be very low, lower than back to pre-pandemic. So very, very positive from that standpoint. It's really against that context, we also, though, said, listen, there are some areas where we think there are some priority opportunities. Construction is one, energy is one, et cetera, and there are a few others around the firm. And we've had great fortune in bringing colleagues in to drive that. But I think Eric's point that we're not just -- this isn't about numbers, this is about capability. So it's bringing in great practitioners and then arming them with our colleagues with these capabilities, these set of analytics. And make no mistake about it, what we've done with the analyzers, we think, is unique and it really is supported by an Aon Business Services platform also unique. And then remember, we also made the unpopular decision to invest $1 billion to accelerate that capability. And you're starting to see that show up, the beginnings of that. You saw it in the second quarter, you'll see it in the third and the fourth quarter and into 2025 and 2026. So that's really what's going on in terms of where we are. And you'll see us continue to make that investment as it strengthens the firm and our client-serving capability. But Eric, what else you got there? Eric Andersen I would also -- I would broaden the aperture a little bit around just thinking about producers. Greg, you talked about the tools, which are absolutely right. But when you think about what we do for clients, it's more than just production. It's does the client manager or client executive understand the client industry? Does the broker, if it's an energy broker, be able to talk about the risks of a client? Or the claims people or the risk analytics people being able to sort of match that to the industry expertise? So when we talk about investments in areas like construction or energy or life sciences and pharmaceuticals, it really is broader than just a producer. You actually have to have that skill set to be able to serve that client all the way through the chain on the risk side and more and more so on the talent and health and wealth side as well. So we are investing in those areas where we see growth, and we plan to continue to make those investments as the year progresses. Andrew Kligerman So I guess just kind of putting the -- framing it a little bit. This 6% organic revenue growth, it fits in with your mid-single digit or higher objective and it really shouldn't come as a surprise, right? It kind of fits with this strategy that you're describing? Greg Case Yes. Andrew, if you step back and think about where we were, I know everyone tends to look at the quarter-to-quarter, we look at the overall trend over time, and in particular, just great, pure, core skill in our ability to make a difference with clients. And what we're describing is with the 3x3 plan, this is not conceptual. This is a serious double down on an organization around risk capital, which means we're connecting reinsurance and commercial risk capability in a way that's never been connected in our industry before. On the human capital side, as Eric talked about, with talent, health and retirement, that combination that has then been reinforced and supported and driven by Aon Business Services, and if you think about the talent, to the talent question you raised, we brought a very unique set of talent skills in Aon Business Services from our industry, but candidly, well outside of our industry from firms like Conagra and like Walmart, and like Google, and like Accenture and they've come together and did some things that have never been done. So that, to us, is the foundation that's been set down. And all you're seeing in the second quarter is just a manifestation of as that happens. That then gets amplified when you bring in capability, as Eric has described, and we're doing that and continuing to focus on that. So that's the story. And our view is, again, it's '24, '25 and '26. It's three commitments over the next three years that we think put us in a unique position to not only succeed with clients, but to build momentum, even Edmund alluded to this as he came in, to build momentum beyond 2026. So that's exactly what we're on track to do, and you can expect continuation in the second half of the year to see that play out. Andrew Kligerman Got it. And then just quickly on NFP. Christa mentioned $45 million to $60 million of EBITDA acquired -- each year. How about a more sizable middle market acquisition? Is that something in the cards? Or is it something that maybe you need to digest NFP and maybe a year or two or three down the road, you start thinking about that? Greg Case Listen, first of all, you always step back, as Christa described, and has always done around our ROIC, return on invested capital framework, and what we're trying to do to sort of maximize outcome for our clients but also for our shareholders. So everything is in the construct of that. Listen, we love this platform. This has been fantastic. We had very high expectations of NFP coming in and they've been exceeded. Now it's only two months, but Doug Hammond and the team have been fantastic working with Eric, absolutely fantastic. We love this platform, what this platform can do. So that's really where we're going to concentrate. We're going to focus on that and reinforce the M&A plan that Christa talked about and really bring capability of Aon Business Services into the middle market in a unique way as well. And if you think about it, we want our colleagues in NFP to understand had a great franchise and capability before, now with additional capability for Aon, wow, even more for that producer group. So this is really going to be our focal point in every way, shape or form. And what we're finding is that's absolutely true. And also NFP has capability that actually resonates across global Aon. So it really is going both ways sort of in the context of it. So look for us to focus on that, to get that right and that's going to be our mission and really our obsession as we sort of complete '24 and into 2025. Andrew Kligerman Awesome. Thanks, Greg. Operator Thank you. Our next question comes from the line of Mike Zaremski with BMO Capital Markets. Please proceed with your question. Michael Zaremski Hey, good morning. Back to the -- so on the -- just curious with the math when you say share repurchases is the highest ROIC opportunity. Am I wrong to assume that M&A now on the NFP platform would be a higher ROIC opportunity? But of course, given just the size of Aon and the amount of M&A you can do that you can't spend it all in the near term. Or am I thinking about the math incorrectly, assuming recently a market multiple is paid for M&A and smaller acquisitions. Christa Davies Yes. Thanks so much for the question. The first thing I'd say is if you model the free cash flow growth of Aon, which is substantial and accelerating as a result of the 3x3 plan and the investment we've made in restructuring and the return on that and NFP, the highest return on capital across Aon remains share buyback. It is a phenomenal return. It's a phenomenal return at today's price. It's a phenomenal return at our all-time highs. And so we will disproportionately allocate capital to share buyback, which is what you've seen us do, despite commitments we've got in 2024 on paying down debt and delevering and the NFP transaction costs and some other uses of cash in 2024. And we'll commit to do over $1 billion of buyback in 2024 and over the long-term because that's really driving amazing free cash flow growth, and therefore, amazing free cash flow per share growth for shareholders. Michael Zaremski Okay. Interesting. Some of your peers, I guess, maybe probably more optimistic on the margins that I'm modeling out. But just switching gears a bit to just the overall market environment in organic growth. Great to see an improvement in Risk Solutions and organic. Would it be -- I know you characterized the M&A environment is picking up a bit. I mean, would it be fair to say, I know you've given us tidbits in the past that financial lines, cyber where Aon is one of the leaders, is still kind of a drag, but lesser of a drag. And to the extent those lines eventually kind of pricing normalizes that we -- that this is just a kind of a pricing impact that's going on? Any other color you want to kind of provide on some of the macro that's been going on? Eric Andersen Sure. This is Eric. Why don't I take this one? I think, listen, what we're describing here is a transitioning market where you look at it across the global platform of Aon, you'd see essentially pricing is, we'd call it, flat. But within that, there's 100 mini markets. You've got property, you've got casualty, specialty lines, et cetera. Overall, you're still seeing, as you asked around cyber and D&O, you're seeing pricing very much in favor of a buyer, a buyer's market, but that pricing is moderating. So it's not as steep as it was earlier. On the transaction services, Greg mentioned it, but I would just say that we're seeing an appropriate share of the pipeline of things that are happening. So we feel pretty good about that. Property is, I would say, heading towards flat for -- on average. But with better risks, maybe there's an opportunity for a price decrease. For more challenging risk, maybe it's still up a little bit. Casualty is probably the area that's getting the most attention right now, especially based on sort of coming out of the pandemic, was the pricing right and there have been reserve needs. So there's questions around casualty, especially around auto and anything with wheels, I would say, but that will develop. But that is actually still an increasing market from a pricing standpoint. What I would also say, when you get into a scenario, like this client's behavior actually changes. They make different decisions. So as they're able to potentially save in certain areas, they will invest that premium elsewhere because during the last five years of a challenging market, they made decisions going the other way where they actually reduced some of the insurance, took higher retentions, narrower coverage, that type of thing. And so they're able to revisit some of those decisions in this kind of a market. So our expectation is as we go through the rest of the year, you're going to continue to see the market transition in the way that it is right now. But ultimately, client behavior changes. And it's one of actually, just to go back to the analyzer comment, it's one of the beauties of this risk analyzer on the insurance side that it actually compares their existing programs and allows them to make different risk trading decisions as to where to deploy new capital to protect themselves and change structure. So it is a great opportunity for clients to reevaluate where they are today and how they build the right financial protection for them going forward. Michael Zaremski Thank you. Operator Thank you. Our next question comes from the line of Jimmy Bhullar with JPMorgan. Please proceed with your question. Jimmy Bhullar Hi. Good morning. So first, I just had a question on organic growth in Commercial Risk. This was, I think, the best quarter you've had in over a year. So if you were to point to maybe two or three items that might have -- like what are the few large items that might have driven the uptick versus what you've seen in the last several quarters? I don't know to what extent it was hiring or capital markets activity, but any color that you could give on the drivers of the pickup? Greg Case So Jimmy, thanks for the question. I'll start, and Eric, add additional color from the client standpoint. As we talked about, Jimmy, this is really net new business generation and strong retention. Those are the two macro pieces sort of that drive this. What causes that? What causes that is literally what we're doing at the call phase with clients, and what we put in place last year on risk capital and human capital really reinforces that. Eric just talked about the examples on the risk analyzers. These investments, Jimmy, are unique. I mean they are literally putting us in a position where we can help clients see the risk market a bit differently and make different choices. The prior question was about unit price. This isn't about unit price. This is overall about overall volatility and how you think about it across the coverage lines. We have a chance to sort of talk to clients about that. That's why you win new logos. That's why you do more with clients. That's why you keep them longer. All those things are beginning to show up. And what we've highlighted is you can expect that to continue to progress for the back half of the year and into '25 and '26. So this is really what's driving what we're doing. This is the baseline. When you add on top of that the investments we're making in capability in some of these priority areas that we see great demand, we've name checked construction and energy. There are a few others, but those are the big pieces. And that's really the overall set of drivers. Eric, anything else you want to throw in there? Eric Andersen Greg, maybe let me pick it up a little bit of a level. We put out a report recently around a better decisions report that focused in on these four major trends that are happening around tech, trade, workforce and weather and how business leaders feel like they're not prepared to deal with all these. And this cyber-attack or system outage that happened this week is just one example that brings it to mind. And so clients are really looking hard at their risk exposures that give us an opportunity as a connected firm globally with the right analytics to be able to help them navigate some of these topics. And so we've been seeing this building in terms of client need and strong growth in Europe, strong growth in Latin America, connected around client opportunities everywhere in the world. So a lot of the underpinnings that have been our Aon United strategy have really begun to take effect in a period where clients feel significant need. Jimmy Bhullar Okay. And then maybe on the tax item, how much of the uptick in the tax rate versus last year was because of just the geographic and the product mix versus maybe some discrete items, just to get an idea on where it would have been otherwise? Christa Davies Yes. Thanks for the question. We haven't actually given that detail in terms of the split, but it is consistent with Q1 in that the two things driving it really are the mix of geographic income and unfavorable discretes. And I would say discretes can be favorable or unfavorable in any one quarter, which makes the tax rate lumpy by quarter, and I would go back to saying the way we think about it is over the course of a full year. Jimmy Bhullar Thank you. Operator Thank you. Our next question comes from the line of Rob Cox with Goldman Sachs. Please proceed with your question. Robert Cox Hey, thanks. So yes, there's been a couple of questions here on Commercial Risk, organic. But I don't think specifically on net new business in the US, which I think you guys were a little bit more cautious on last quarter. It looks like North America turned around a bit, and I don't think net new business would have necessarily been one of those things that were kind of nonrecurring last quarter. So any additional color on how that net new business trends in the US? And if it improved meaningfully, what would have driven that quarter-over-quarter? Greg Case Yes, Rob, thanks for the question. Step back for a second. Be careful with quarter-to-quarter you sort of compare where we are. Think about sort of Commercial Risk versus Q2 '23, we're 6% here, 5% the last quarter, so it's a progression over kind of a comparable quarter. And really, the fundamentals are exactly what we said they are. It really is net new business. It's better, it's stronger retention across the board. And also, by the way, the connectivity of our firm means we're doing things in human capital that leverages off of risk capital and then in risk capital it leverages off of human capital in ways that's sort of actually we're doing more with clients, and you're seeing that as well. And so that's the progression. And as we really dug into the 3x3 plan, as we closed last year and began this year, you're starting to see the momentum around that. You didn't see as much of that in Q1 as you now see in Q2, and we think it's going to continue to pick up as we continue to introduce the analyzers and all the capability and the service enhancements that Eric has talked about. So that really is the driver. This is really global, though. If you think about it, all of our solution lines are at 6% or greater, all of our solution lines. And the geographic strength was really global, even more so outside the US than even inside the US. And so that will continue to progress. And -- but that's really -- it's not complicated. It's just execution and we continue to execute and then amplified by priority capability we're bringing in from a hiring standpoint. Robert Cox Okay. Got it. Thank you. And then on this priority hiring pipeline, I think energy and construction are two areas with strong current growth. I guess, do you see growth in those areas continuing to be strong? And maybe you could help us size maybe the margin impact from this priority hiring pipeline. Eric Andersen Sure. And I would say, listen, if you go back to what I just said about those four trends and you think about trade and the reshoring. So that's usually manifest in our industry as construction as global supply chains become sort of nearer to home basis you see a significant amount of construction. Our enterprise client strategy where we are connecting with clients around the world, as they build into North America or they build into Mexico or other areas, we're there to capture and work with those clients on those exposures. Certainly, energy, not just traditional energy, but renewable energy. It's a very specific expertise both on a client management but also a sort of brokerage capability to be able to draw capital. Our ability to invest there is important. Don't forget the analytic investment that's needed as well to be able to provide the insight around how to strategically manage those risks and ultimately match capital to that risk. So we are investing across the spectrum of capability within that industry framework. You could put financial institutions, you could put pharmaceutical. We highlight construction and energy because they're so tangible and people can see what's happening, but there are certainly other areas where we are investing as well. But it goes across not just production, but through capability all the way through analytics. Robert Cox Okay. That makes a lot of sense. Thank you. And if I could sneak in one more. Just wanted to ask if the time line for NFP to be accretive to adjusted EPS is still 2026? And if you could provide any updated color there? Christa Davies Yes. So we are exactly on track with all deal financials and returns on the deal, including EPS accretion. Dilutive in '24, breakeven in '25 and accretive in '26. And I would note that free cash flow per share follows that same trajectory. And so we are super excited, albeit early days, two months in on delivering on the revenue synergies, the cost synergies and the free cash flow of $300 million in 2025 and $600 million in 2026. Robert Cox Thank you. Operator Thank you. Our next question comes from the line of David Motemaden with Evercore ISI. Please proceed with your question. David Motemaden Hey, thanks. Good morning. Also, I wanted to extend my congratulations to Christa and wish you good luck on the next chapter. Christa Davies Thanks so much, David. David Motemaden So I had a question just -- so Greg, when I -- it's a bigger picture question just sort of looking back over the last seven, eight years at the drivers of organic growth at Aon. And if I look historically, we've seen most of the organic growth really coming from productivity improvement as opposed to adding head count. Over this call and the last call, it's mentioned just hiring more than in the past, which I think is a welcome change. I just wanted to sort of level set my expectations here and how you guys are thinking about the balance between maybe adding head count now as well as productivity improvement going forward? Greg Case Yes. Really appreciate the question, David. Listen, to step back, again, this thesis we've talked about is consistent and it will continue forever with this team and it really is around capability and delivering one client at a time and how you create the maximum leverage to do that for that client. And that means that whether you call it productivity, effectiveness, we need better solutions, better content to support these clients. By the way, if you haven't seen this megatrend analysis Eric's talked about, we love to send you a copy. You've got to take a look at this. And this is not -- our genius, this is looking around the world in the sense of saying what are clients facing? And we not only did the megatrends report, we actually did a survey on top of it. Went out and talked to 800 C-suite executives around how they think about these megatrends. David, all four of these were kind of five alarm fires, three of which they basically said, I need help on. And so right now, I don't know exactly what to do. Against that, you need, again, whether you call it productivity, you need better capability. To be blunt, you've got to give them better insight and that's really been the investment. And if you think about it, part of the investment is connected investment. We actually have to operate as a global firm. If someone's coming out of Europe to invest in the US and our colleagues aren't talking to each other, that means our clients integrating for. No, we're not going to do that. We're going to serve in an integrated way on behalf of client need. And we've done that. And by the way, call that productivity over the last number of years, that served us really well. And what you've seen us now do with the 3x3 is say, look, we're going to double down on that. We see even more opportunity, again, coming out of this megatrends report and what we're hearing from clients, and we are doubling down. This is a Aon Business Services. This is talent, capability and the risk analytics. This is a $1 billion bet to really strengthen that. And then we've said with that capability, our ability then to bring in colleagues and to arm our current colleagues is now greater. And so the reason we see opportunity to bring additional talent is the need is high. And when they come in, it isn't just more bodies. It's more individuals, no doubt, but it's actually more individuals, each of whom have greater capability, both in analytics, but also in a way in which we are really delivering on their behalf. So this is what you see us doing right now and it really cuts across all of our solution lines. So it really is a nice combination sort of in terms of where we are. And we're going to be able to do this without backing up on our commitments, mid-single-digit or greater, improved margins and free cash flow. And just to be clear, what's happening on free cash flow is an opportunity for us, which we think is quite unique for us and for you, and it really is the translation of revenue into free cash flow. The 3x3 is going to take what has been a decade-plus double-digit free cash flow growth and it's going to strengthen it. And so that's with additional capability, magnified by additional individuals. And so really -- there really isn't one over the other, David, it's both, and we're doubling down on capability and in doing so, it creates the opportunity. It's also why NFP was so attractive for us. We can bring this capability now not just at the large corporate arena, but into the middle market and we can do so with this incredible platform called NFP. So that really -- that's the combination. Now that's easy to say and really hard to do and almost impossible to duplicate. But that's the mission, that's what we love. And that's what you're starting to see in Q2 and you'll see throughout the year. David Motemaden Great, thanks. That's helpful. And then maybe just a quick follow-up on that. You mentioned the middle market business. I guess, could you just now, with NFP, how much of the Commercial Risk business is middle market as you guys would define it? Eric Andersen Look, I think there is still a significant amount of room for us to grow in middle market. It's one of the reasons why we're so excited about this independent and connected philosophy that we're bringing to the NFP team. Independent as in we want their 900 salespeople certainly continuing to do what they've been doing historically for NFP, but they're seeing challenges to their client base around some of these risks that we've been talking about, whether it's cyber, et cetera, that are actually getting closer to the middle market as a real risk. And their ability to use Aon content or Aon producers and client leaders being able to use some of the NFP content for the middle market business that sits within Aon is such a great opportunity to drive more activity and more opportunity for us to serve that middle market client base. But we're still -- we still see a lot of runway in front of us on what you would call a $31 billion market. We're still relatively underweight in that space. And so there's a lot of good room to run here. David Motemaden Great. Thank you. Operator Thank you. Our next question comes from the line of Meyer Shields with KBW. Please proceed with your questions. Meyer Shields Great, thanks. Thanks so much. I also want to congratulate Christa on never having to take another question from me except for this one. Christa Davies Thank you, Meyer. Meyer Shields My pleasure. Is it safe to say that the geographic footprint of earnings, including NFP, with regard to taxes is different than legacy Aon over the last decade? Christa Davies We are definitely more US weighted, that is true, because NFP is more US weighted. Meyer Shields Okay. Perfect. That's what I wanted to know or confirm. And with regard to the investments in talent that you've been talking about, can you give us a sense of the timeline in terms of -- like how much of this unusual effort has already been done? And how does the hiring timeline compared to the productivity timeline? Eric Andersen Listen, I would say when we launched the 3x3 strategy back at the middle of -- the end of last year, we outlined for ourselves the priority investments that we wanted to make where we thought there was real need for us to serve clients. And so it is not something we started last week, if that's your question. We've been looking at it essentially over the last 12 months. How you actually build that pipeline of talent, how you actually get them into the firm, how you onboard them, how you take existing Aon clients and deploy them into those growth areas as well has been something that's been going on parallel to bringing in outside talent. So it's not just an outside talent discussion. So it's something that we identified as we laid out the 3x3 plan. It's something we see over the next two to three years as well as a real opportunity for the firm to invest in growth. Greg Case And Meyer, to your question on productivity, listen, productivity evolves over time. It doesn't happen immediately, as you know. If you ask yourself how much of the hiring shows up in Q2 of 2024? Limited, right? These folks are just coming in. But by the way, they ramp a lot faster when you give them the content capability Eric's describing because they have skills and capability and it's not going to their existing clients, it's going to new clients, which they love to be able to do and come in and build our portfolio. So for us, this amplification is going to really play out in '25 and '26 in a powerful way. But in the meantime, the capability we have across our current field is what's driving results. Meyer Shields Okay, perfect. That's what I needed to know. Operator Thank you. Our next question comes from the line of Grace Carter with Bank of America. Please proceed with your question. Grace Carter Hi. Thanks for taking my question. I have one more on, I guess, talent acquisition. I think you mentioned maybe some talent acquisition in NFP. Just how have you found, I guess, competition for talent in the middle market versus where you've historically played so far? And I guess, how receptive are people that have historically worked in the middle market to joining a larger organization? And how might your capabilities be an advantage when you're looking to hire in that market? Eric Andersen So thanks for the question. I would say there is a war for talent where there is good talent everywhere. So whether it's the large segment, whether it's the small segment, the mid-market segment, whether it's in Health and Wealth or Risk. So I think you can safely assume that where there are good people, there are people chasing those good people. And so when we laid out the premise for the NFP integration with Aon around independent and connected, we did that under the guise of understanding that would be valuable to the individual colleague at NFP is to be able to serve their client in the same format that they used to serve them in terms of that strong personal relationship, but give them better content and give them better tools over time. And so early on in the process, the content piece we are connecting very quickly, which can be connecting them to our broking centers, giving them access to our programs or facilities, showing, beginning to map out how do you deliver analytics at scale through ABS into the middle market client base. On the Health side, how do you actually -- with complementary client sets, how do you begin to aggregate the data to be able to give better insight to that client. So really what we're trying to do with the NFP colleague is make them better in terms of the tools that they have. They already have great relationships. It's how do we make them better in the areas that they want to serve those clients. We think that ultimately will allow us to draw more individual people in. We're already seeing that the pipeline on M&A is a better quality pipeline for the NFP team because this independent and connected capability is really resonating with these firms who are seeing that their clients are looking for more. They don't want to give up that relationship piece. And so I think we're finding the best of a big firm with a lot of capabilities and a mid-market firm that's strong in relationships and finding that connection, being able to use the analytics, being able to use the technology and being able to use the content, but in a way that drives for them better outcomes while still maintaining those relationships. So that's the goal and that's what we're -- as Christa said, two months in, early days. But we feel pretty good about how we've started. Grace Carter Thank you. And I also wanted to ask about the Wealth organic growth. It was quite a bit higher than how it's historically trended, maybe kind of in the mid-single digits, maybe low single digits. Is there anything in there that would be unusual this quarter? Or to what extent like these results are sustainable going forward? And can you just remind us if there's anything in the NFP acquisition that might change the mix of that business going forward? Thank you. Greg Case Appreciate the question. And just to be brief, we can go into any detail offline, if it's helpful, Grace, as you think about it. But listen, this has been -- it's just a terrific business and the team has done an amazing job. The pension risk transfer is a big, big part of the world these days, particularly in the US and the UK. We have an incredibly strong leading position in that. You're seeing that play through, the regulatory challenges and changes. So all these things sort of fit and NFP has an incredibly strong capability in this arena, too, and we're seeing that as well. But again, to emphasize what you see in the 9% is the Aon results overall, even without NFP, and that's what you see playing out. Just an exceptionally strong team in the current environment. Grace Carter Thank you. Operator Thank you. And our next question comes from the line of Cave Montazeri with Deutsche Bank. Please proceed with your question. Cave Montazeri Yes. I just wanted to follow up on your comments you just made on the last question. The NFP, the legacy NFP producers, are they already using the new tools from Aon? Or is that something that's going to take a bit longer to give them access to? Eric Andersen So in the planning process leading up to the close and then in the 90 days since we've closed, we've put a significant amount of work to connect them first with products and capabilities because I think that's the easiest thing to get started with. And then we're laying the track to be able to provide the analytic capabilities, both in Health, Wealth and in Risk, which will take a little bit of time as we go through the year. But we started with opening access to our broking center, opening products that we have an affinity or programs we have in Risk and Health to be able to offer them to their client base. So we've started with the things that are easier to connect, and we're laying the plans to do some of the more -- sort of the more structural things around analytics. Cave Montazeri Makes sense. And my second question is on cyber. In light of last week's CrowdStrike outage and the fact that it's unlikely to be the last time we see this given how interconnected the digital world is, on a go-forward basis, do you think your clients who already have cyber insurance, do you think they have the right amount of insurance and the right type of cyber protection in place in case their business comes to a halt due to systemic outage driven by the software glitch from the third-party or something of the like? Eric Andersen Sure. Listen, I think that's hard to answer that question on a macro basis in terms of what does each client have. Certainly, the focus has historically been on kind of malicious intent on a cyber-hack, but certainly a system outage not driven by a cyber-assault does create a new form of risk exposure. That's always been there, honestly, but maybe now is at the front of mind as people look to see the type of cover that they have. I think the insurance part of it, the risk taker part is certainly going to look at that from a scope of cover, price for the coverage, all that's healthy in a growing marketplace. But certainly, technology overall whether it's AI or cyber or what have you, it's certainly front of mind of our clients as we, Greg and I, both mentioned in that survey we just put out. And so I do think it will be an area where we continue to invest and want to be able to provide that capability and understanding to our clients with the cyber analyzer that we're launching. But certainly, when things like this happen, it certainly raises the profile and causes each of our clients to look pretty carefully at their own risk platform to understand it. Cave Montazeri Thank you. Operator Thank you. I would now like to turn the call back over to Greg Case for closing remarks. Greg Case Just wanted to do two things. First, again, recognize and welcome Edmund. Edmund, so awesome to have you around the leadership table, and just looking forward to our work and our mission together. And will be teed up and ready to go for Q3 to lead the call. So thanks for that, Edmund. And then, of course, to Christa. Christa, you are an extraordinary leader and an even more compelling individual. And thank you. Thank you so much on behalf of global Aon for 16 years of true, true excellence. Thanks so much. Talk to you soon everyone. Operator And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

Booz Allen Hamilton Holding Corporation (BAH) Q1 2025 Earnings Call Transcript

Matt Calderone - Executive Vice President & Chief Financial Officer Lindsay Joyce - VP, Financial Planning & Analysis and IR Horacio Rozanski - Chairman, Chief Executive Officer & President Good morning, and thank you for standing by, and welcome to Booz Allen Hamilton's Earnings Call covering First Quarter Fiscal Year 2025 Results. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions. I'd now like to turn the call over to Mr. Matt Calderone. Matt Calderone Thank you. Good morning, everyone, and thanks for joining the call. I would like to begin by introducing Lindsay Joyce. Lindsay has been a trusted advisor and core member of the Booz Allen finance team for nearly a decade. She joined the firm to help me establish our corporate development function and has since had a variety of roles in corporate and business finance. Lindsay is now a Vice President at Booz Allen, leading both Investor Relations and Financial Planning and Analysis. Lindsay, welcome, and over to you. Lindsay Joyce Thank you. Good morning, and thank you for joining us for Booz Allen's first quarter fiscal year 2025 earnings call. We hope you've had an opportunity to read the press release we issued earlier this morning. We have also provided presentation slides on our website and are now on Slide 2. With me to talk about our business and financial results are Horacio Rozanski, our Chairman, Chief Executive Officer and President, and Matt Calderone, Executive Vice President and Chief Financial Officer. As shown in the disclaimer on Slide 3, please keep in mind that some of the items we will discuss this morning are forward looking and may relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from forecasted results discussed in our SEC filings and on this call. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date made. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our first quarter fiscal year 2025 earnings release and slides. Numbers presented may be rounded and, as such, may vary slightly from those in our public disclosure. It is now my pleasure to turn the call over to our Chairman, CEO and President, Horacio Rozanski. We are now on Slide 4. Horacio Rozanski Thanks, Lindsay. It's great to have you on these calls, and good morning everyone. Matt and I are proud to share with you another quarter of strong momentum and double-digit top-line growth. Today, I'll begin with an overview of the first quarter in the context of our fiscal year and the investment thesis. Then, I'll describe how VoLT strategically positions us for continued growth and helps us attract exceptional talent. And finally, I'll share our priorities for the remainder of the fiscal year before turning it over to Matt for an in-depth look at our first quarter fiscal 2025 results. Beginning with performance, we built significant momentum in the quarter delivering double-digit organic revenue growth. Our bottom-line performance was comparatively softer due to a combination of operational and non-operational factors, which Matt will describe momentarily. Leading indicators for the business remains strong; headcount for the quarter was robust, cash flow was ahead of our own internal expectations, and our 1.72x book-to-bill was excellent. So, when looking at the full picture, we believe we are on track to meet our fiscal year 2025 guidance and achieve the high end of our investment thesis goals. Booz Allen's momentum shows beyond our financials. It is evident in the quality of the work we win, the innovative capabilities we deliver, and the exceptional talent we attract. This is because VoLT is working. VoLT, which stands for Velocity, Leadership and Technology, has put us at the center of the tech transformation taking place across national priority missions. Our ability to help clients utilize dual-use and leading-edge technologies faster and at scale is a powerful differentiator. At this time of historic challenge and change for our nation, Booz Allen is an innovation accelerator. This morning, let me share three examples that demonstrate this. The first is actually from one of the missions we have supported the longest, space. Space encompasses civilian, intelligence and defense missions. Today, Booz Allen's space business is more than $0.5 billion and growing. We have been a trusted US space partner since the beginning, more than 60 years, from our nation's response to Sputnik, to Apollo, to the Hubble Space Telescope. And we continue to help NASA launch the future and inspire the world, working on trajectories as we did 55 years ago using leading-edge analytics. We are the overarching system-of-systems integrator for Artemis, the mission to go back to the moon and create a lunar outpost for a flight to Mars. Importantly, and over the past year, Booz Allen has won several strategic contracts that position us to support and protect vital national security interests in space. Two weeks ago, I had the opportunity to spend time with our Colorado Springs teams and visit the United States Space Operations Command to discuss opportunities to modernize our nation's space capabilities. Coincidentally, while I was there, our team successfully uploaded and made operational what we believe is the first large language model in space onboard the International Space Station's National Lab. This intersection of AI and space is one of the next frontiers. And just as Booz Allen is a leading provider of AI to the federal government, we are on the cutting edge of this effort, too. The second example of VoLT in action is our long-standing work in Europe and our growing footprint supporting one of the most dynamic combatant commands, United States European Command, or EUCOM. Booz Allen has been a trusted partner supporting efforts in Europe for more than 30 years. Over the past 10 years, our work has grown nearly six-fold, from about 150 to more than 800 professionals. This growth accelerated to support our country's efforts during Russia's invasion of Ukraine. Through VoLT, we have the right people and solutions at the right time to help EUCOM leverage cutting-edge data science to speed decision making at the highest levels. That is why we are particularly proud to have won a critical recompete to continue our work supporting US missions across the continent. My third and final example for how VoLT is driving our momentum is our recent acquisition of PAR Government Systems Corporation. PAR is an original creator and leading engineering partner for preeminent software products and solutions, enabling tactical support that spans ground, air and space missions. This acquisition strategically augments Booz Allen's capabilities in situational awareness, mission readiness and detecting and defeating drone threats. It will help accelerate our ability to deliver mission-critical solutions to our nation's warfighters on the tactical edge. These examples from across the globe and beyond show how VoLT moves us forward and helps ensure we remain a vital partner in missions of national importance in the face of ongoing change. So, if VoLT is the engine powering our momentum, our people are the fuel that makes us go. Our people bring unmatched mission expertise and technological innovation to every project. And this is why I always speak about our people and not our contracts as the real key to our success. Booz Allen stays vibrant by attracting the best talent like Bill Vass, whom we welcomed last month as our new Chief Technology Officer. Bill brings more than 40 years of technology leadership and experience spanning industry and government. He will help Booz Allen accelerate our leadership in injecting dual-use tech into our clients' missions faster and at scale. Bill, welcome. And on the other end of the spectrum, we are building our pipeline of future stars through our summer internship program, which we call Summer Games. This year, we have 128 exceptional students participating in the program. Our interns collaborate on challenge projects in the areas of capability development, process improvement and social good. We believe good ideas come from every level in this firm, from our newest colleagues to our longest serving. This fits with Booz Allen's purpose to empower people to change the world. And that starts with empowering our own people, whether consultants, engineers, scientists, analysts, cyber professionals, and of course, summer interns. I am so, so proud of this team and want to thank again all of my Booz Allen colleagues, past, present and future. Returning to the here and now, today our collective focus is on the operational priorities we laid out in May. First, we will take full advantage of our record proposal pipeline. This includes continuing to win new work and recompetes, launching programs quickly and hiring excellent people to build the depth of our expertise. Second, we will continue to manage the business tightly to drive efficiency and effectiveness across all our functions. We have opportunities to improve margin, while we continue to mitigate growing budgetary uncertainty in an election year. And third, we will continue to implement VoLT at full speed by building the next-generation technology solutions and market positions, securing breakthrough technology partnerships, and maturing our internal capabilities. So in summary, we remain optimistic about our growth prospects even in an uncertain budgetary scenario and a contentious election environment. We believe in the fundamental strength of the business we have built and feel confident about the future. At 110 years young, Booz Allen is as vibrant and exciting as ever. And with that, Matt, over to you for a deep dive into our financial performance. Matt Calderone Thank you, Horacio. As you noted, Booz Allen continued to build momentum in the first quarter. Our VoLT strategy is working, and our work is increasingly at the center of the government's technology transformation. We are poised to keep growing and to deliver another strong fiscal year. For the quarter, on the positive side, our team once again delivered double-digit organic revenue growth. Cash performance was solid and, most important, our leading indicators were strong. On the demand side, we had key wins that yielded an excellent book-to-bill and record backlog. On the supply side, we continued to add the talent needed to support our growth objectives. Our bottom-line performance, however, was a bit softer than we anticipated. This was due to a number of individually small operational and non-operational factors that added up over the quarter. As we said previously, we managed the business for the full fiscal year. We have both the demand side and supply side momentum, as well as the operating levers available to us to meet our fiscal year 2025 objectives and achieve the top end of our investment thesis. I'll now cover our first quarter results in more detail. Please turn to Slide 6. Total revenue for the quarter grew about 11% year-over-year to $2.9 billion. Organic revenue was up 10.6% year-over-year and revenue excluding billable expenses increased 8.4%. Taking a look at the market breakdown. Our defense business continues to thrive, up 16% from the prior-year quarter. Our defense leaders won both recompetes and takeaway opportunities in missions of true national importance. Our civil business continues to perform well. Total revenue grew 12% year-over-year, and this performance was broad based. As expected, revenue in our intelligence business declined about 3% year-over-year. We continue to expect this business to demonstrate solid growth for the full fiscal year. Turning to Slide 7, we are pleased with both the scale and the quality of the work that our teams are capturing. We came out of the gate strong in the quarter, taking full advantage of our robust proposal pipeline. Net bookings for the first quarter were $5 billion and our quarterly book-to-bill was 1.72x. This yielded a trailing 12-month book-to-bill of 1.43x, our highest in five years. Total backlog as of June 30 hit an all-time record of $36 billion, up 16% year-over-year. And at the end of the first quarter, our qualified pipeline for the remainder of fiscal year 2025 stood at $55 billion. This is up 32% from a year ago. In short, we have the backlog and the pipeline necessary to fuel future growth. Moving now to headcount. Booz Allen closed the quarter with more than 35,000 people. We increased client staff headcount by more than 700 in the quarter, including 200 skilled professionals who joined Booz Allen through the PAR acquisition. This translated to 7.7% client staff growth year-over-year, ahead of our full year goal of 3% to 5%. We continue to recruit and hire aggressively to match our demand-side momentum. Turning now to the bottom-line. We generated $302 million in adjusted EBITDA in the first quarter, down 1.6% from the prior-year period. Our adjusted EBITDA margin was 10.3%, down 130 basis points year-over-year. Our profitability came in lower than expected due to a combination of factors. On the operational side, slightly softer contract level profitability, lower utilization and back-weighted client staff hiring during the quarter. And on the non-operational side, slightly higher expenses on a year-over-year basis. Some of these items are non-recurring and others are timing related and are expected to normalize over the course of the fiscal year. Working down the P&L, our net income was $165 million, 2.4% higher year-over-year. Adjusted net income declined 7% year-over-year to $180 million. Diluted earnings per share increased 4% year-over-year to $1.27 per share. Adjusted diluted earnings per share decreased 6% year-over-year to $1.38. These results include both a higher interest expense from our inaugural investment-grade bond offering and a higher tax rate than last fiscal year, moderately offset by a lower diluted share count. Moving now to the balance sheet. We ended the first quarter with $298 million of cash on hand, net debt of $3 billion, and a net leverage ratio of 2.7x adjusted EBITDA for the trailing 12 months. Free cash flow for the quarter was $20 million. Cash from operating activities improved to $52 million due to strong collections. CapEx in the quarter was $32 million and includes $16 million of previously accrued expenditures that were paid in the first quarter. Our balance sheet is strong. This gives us flexibility in how we operate the business and deploy capital to generate value. Turning now to capital deployment on Slide 8. We are committed to using our cash generation and balance sheet strength to drive superior value for our shareholders. In the first quarter, we deployed a total of $251 million. This includes roughly $156 million of capital returned to shareholders through almost $90 million in share repurchases, at an average price of $149.74 per share, and $66 million in quarterly cash dividends. It also includes approximately $93 million for acquisition of PAR in June. We believe this acquisition will increase the value we deliver to clients and accelerate our financial performance. We anticipate that PAR will add $80 million to $90 million in revenue for the balance of this fiscal year and will be mildly accretive to earnings. We also made $2 million of strategic investments through our corporate venture capital program, including our recently announced investment in Quindar, an early-stage commercial space technology company. Finally, I'll note that our Board has approved a quarterly dividend of $0.51 per share, which will be payable on August 30 to stockholders of record as of August 14. Now for look-ahead. We believe we have the momentum and operating flexibility to deliver strong top- and bottom-line performance for the full fiscal year. Please turn to Slide 9, as I run through our fiscal year 2025 guidance. At the top-line, we expect revenue growth of 8% to 11%. We expect to deliver adjusted EBITDA dollars in the range of $1.26 billion to $1.3 billion. This implies an adjusted EBITDA margin of about 11% for the full year. While we previously indicated a flatter quarterly margin profile for fiscal year 2025, we now expect a moderately ascending profile over the remaining three quarters. Our ADEPS guidance range is between $5.80 and $6.05 per share. Lastly, we expect operating cash flow between $825 million and $925 million, and free cash flow between $725 million and $825 million. In closing, I am extremely proud that in the final year of our three-year investment thesis, we are positioned to deliver at the top-end of our target range for adjusted EBITDA, almost entirely through organic performance. We continue to build our business for the future and are forging ahead with confidence. With that, operator, let's open the line for questions. Thank you so much. [Operator Instructions] One moment for our first question. And it comes from Mariana Pérez Mora with Bank of America. Please proceed. Mariana Pérez Mora Good morning, everyone, and a special welcome to Lindsay. So, my first question -- I have two, one business related and the other one more like technical. The first question is about the PAR acquisition. Could you please describe a little bit about like all the potential that you can unlock from this company's special, like, leading position with WinTAK and TAK, and install base they have, levering that with Booz Allen talent, customer intimacy and reputation, what is the combination of this acquisition and when and what type of synergies we could expect from this? Horacio Rozanski Thanks for that question, Mariana. We're very happy with the PAR acquisition. It's -- sometimes big innovators come in small packages, and this is one of those cases where we were able to find a company and close a transaction with really a carve out that really focuses on doing some really innovative edge-type work for the warfighter. That fits so well into our entire digital battlespace platform, and what we're trying to do about integrating information and bringing it together from multiple sources using, ultimately, artificial intelligence to filter it and putting in -- and giving the warfighter the information he or she needs at the time that they need it in the place that they need it. And so, this really will help augment and knit together a number of things that we are doing, and so it's very exciting. The basis for this acquisition is not cost reduction. As you said, it's really revenue synergies. And like we've always been saying, this acquisition fits the perspective of strategic acceleration. We're looking for companies that will take what we're doing and allow us to leapfrog both our competitors and our own efforts to be able to move faster and implement VoLT faster. Mariana Pérez Mora Thank you. And the second one to Matt, what makes you confident that you can achieve the EBITDA margin for the year in this trend? What are the key milestones that you'll be looking throughout the year to make sure that you can, or what efforts are you making sure you put in place to achieve the 11% versus the low-10%s that you print in the quarter? Horacio Rozanski Hey, Mariana, since I'm on a roll, let me give some context and then I'll turn it over to Matt, if that's okay. The primary view that we have is, of course, we are very happy with the top-line growth in the quarter. We're not as happy with the bottom-line results in this quarter, although as Matt pointed out and he will take you through, this is largely driven by timing and one-offs. So, the underlying profitability of the business remains very strong. What gives us the most confidence is the strong momentum that we see in the business. You see it in our book-to-bill, which is exceptional. You see it in our hiring, which is exceptional. You see it in PAR, which is a great small acquisition for us. And when we put all of that together, we are confident that we can achieve the objectives for FY '25 and then deliver at the top-end of our investment thesis. And I think what's really important is, aside from all of these numbers, we continue to invest in the things that are making VoLT accelerate us, because VoLT is working. We're winning not just a lot of work, but the type of work we want, and I'm sure we'll talk more about that. We're attracting exceptional technical talent that probably wouldn't have happened to Booz Allen five years ago. And we are positioning strategically to keep bringing leading-edge technology to missions of national importance, which is both an accelerator in the near term, but also gives us resiliency at a time of political uncertainty, of budgetary uncertainty, and the like. Yeah, thanks, Horacio. And just to add to that, Mariana, we've talked about this in the past. We manage the business for EBITDA dollars, not margin. So, our focus is on how do we drive profit dollars up and then margin will increase as a result. But to take you through first, sort of what drove the miss in Q1, profit was impacted by a number of factors, both operational and non-operational that were individually small, but they added up over the quarter. And as Horacio mentioned and I said in the prepared remarks, a significant portion of these were timing related or non-recurring. Just to go deeper, on the operational side, contract-level profitability was a touch soft, but the primary driver was a combination of lower client staff utilization and quite frankly, the pattern of when and how we added client staff over the quarter when they started billing that cost us about 1.5% in revenue ex-billable growth for the quarter on a year-over-year basis and obviously an equivalent amount of profit dollars. And then, on the non-operating side, compared to Q1 last year, we saw higher expenses in a couple of areas, including M&A, busy quarter, legal and regulatory expenses. But that said, our utilization metrics improved over the quarter and continue to trend up. And most important, we have the headcount we need to meet our fiscal year growth aspirations and really set us up well for the outyears as well. So, we're confident we have both the momentum and the operating levers, if needed, to deliver another really strong year on the bottom-line. Thank you. One moment for our next question, please. And it comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed. Sheila Kahyaoglu Good morning, Horacio, Matt and Lindsay. Thank you so much. So maybe just to continue on that topic, Matt and Horacio, I know you're going to get a lot of questions on this margin. Matt, I don't know if you're willing to quantify that 130-basis-point contraction year-over-year. How much of that was just timing of the hiring and client utilization versus contract structure and M&A fees, et cetera? Matt Calderone Yeah, Sheila, so, as I just said, the timing of when we added staff and they became billable as well as utilization costs about 1.5% on rev ex-billable. So, you can do the math and in terms of what that meant from a profit side. I would say, second, contract-level profitability was a little bit soft and then we probably had an equivalent amount on the non-operating side in terms of these one-time and timing-related activities. Sheila Kahyaoglu Okay. Sorry if I missed that 1.5%. And then, Horacio, maybe a bigger picture question for you. I think the defense business and civil have been home runs, double-digit growth, lapping difficult comps. So, how are you thinking about the runway of each of those customer segments for the remainder of the year? Horacio Rozanski Sure. I think the good news about the momentum is that it is really broad based across the portfolio. Our defense business, as I mentioned, won a couple of critical recompetes and really won some exceptionally important new work in the Pacific that we are very excited about, allowing us to bring technology to a set of missions that we care very much about that the country, cares deeply about. So, we see strong momentum, strong performance in our defense business really throughout the year, absent some major disruption, which will be industrywide, nationwide as a result of budgetary pressures in the fall or whatnot. When you go to our civil business, civil, as you said, has had tremendous growth for a long time. I think this is the 10th consecutive quarter of double-digit growth in our civil business. They won one key recompete. We had the extension of our CDM program, which is great news. And they have some critical recompetes in front of them that that they're preparing for. We're well positioned by, and they're all centered around bringing technology to key missions. So, these are places where we can't predict the future, but Booz Allen is very well positioned. And then, our intelligence business, even though in the quarter it showed a decline, actually the underlying momentum in that business is really strong. They won some really important work. This is the last quarter of the sort of the tough comp from last year because of the FocusedFox issue that we've talked about extensively and kind of so -- and we see this business growing over the course of the year. But again, importantly, we have transitioned a lot of this business in the last couple of years, first under Judi Dodson, then under Tom Pfeifer, from delivering excellent intelligence analysis to delivering extraordinary technology that [indiscernible] the accelerated intelligence analysis for the nation. So, again, this is a business that is sourcing critical talent and doing good things. And so, we expect momentum and growth across the entirety of our markets for the year. Thank you. One moment for our next question. And it comes from the line of Bert Subin with Stifel. Please proceed. Hey, Horacio, Matt. So, the bookings in the quarter were, I would say, unusually strong. If you look at the last few years sort of in the 1.0% maybe sort of that range in the first quarter and you were closer to 2.0% in this quarter. Obviously, some good momentum and I imagine, Matt, some of the comments you made around utilization was just sort of, I guess, now you're going to be getting ready to pursue some of that work. As we think about the second quarter, that's typically your strongest booking quarter over 2.0% on quarterly book-to-bill. Was there some pull forward there? Or do you think that momentum just keeps building on the award side? Horacio Rozanski Thanks for the question, Bert. The way to think about it is there's really strong underlying demand, strong momentum and a good budget right now. And so, based on those fundamentals, you would expect to see a good demand quarter this quarter. Our tactical sales engine is second to none, as you know, and our ability to take advantage when clients have money in their budgets and missions that matter to them, they take advantage of that opportunity to help them do it and to sell hard against it, is something we've done for years. I wouldn't say there was any pull forward. I would say, if anything, there was some stuff left over from the prior year that took longer to realize. I think what the exact number is going to be this year is driven by a number of factors. Even if we win a lot of work, the large contracts tend to get protested, and your guess is as good as ours as to when something comes off protest. But the reality is we have ample demand, we have ample ceiling, and we have the headcount to deliver against our commitments for the year. Bert Subin Got it. Maybe just a follow-up on that point. You mentioned recompetes earlier Horacio and you said you've seen some pretty good momentum there in terms of winning your recompetes. You highlighted last quarter that this was a higher-than-average recompete year. Can you just give us a sense for where we stand? Are you through some of the larger ones you've been watching, or are those still out in front of you? Horacio Rozanski Yes and yes, I suppose. There is -- as you know, we've built a portfolio that is really enviable in terms of the work that's there, the quality of the work that's there and how the underlying contracts grow. And when a recompete comes, it's really a recompete plus, because it generally comes with additional scope and significant increase in ceilings. As you said, we've been through some of those very successfully. There's a few of those left on the year that we obviously want to deliver against and we want to win. But importantly, the overall pipeline is really, really healthy. As Matt pointed out, we have a $55 billion pipeline that we're prosecuting actively, and that's up 32% year-over-year. So, the demand condition is really good, is really strong, and we intend to continue to win as much as we can. Thank you. One moment for our next question. That comes from the line of Cai von Rumohr with TD Cowen. Please proceed. Cai von Rumohr Yes. Thank you so much. So, Matt, you kind of explained what the factors were. I guess, I'm kind of interested to know why the factors were. Why did you lose the 1.5%? Because the timing and utilization? Because basically you've been talking about using AI so that you've basically been doing better there until this quarter. And then secondly, you mentioned the regulatory legal M&A expenses. Those are presumably timing. And how should we think as we look at the next quarter? I mean, are we going to see more of this sort of delay, so the second quarter is sort of still a little disappointing, or does it get a big snap back? And thirdly, and I apologize for all these questions, PAR, you said, is accretive, but if you look at their 10-K, it looks like that this business has a gross margin of about 6%. So, how does it become accretive on your numbers? Thanks. Matt Calderone Yeah, thanks, Cai. I'll try to take them in turn, but if I miss one, please bring me back. First, just to dig a little deeper into utilization, and Bert mentioned this, it really was a combination of factors, right, both prosecuting and ramping up for a significant proposal pipeline, including some meaningful new wins. We had some one-off contract-related issues, for example, the delay in funding for Ukraine, more people go out on military leave. And honestly, we can run the business a little tighter. We've been in a pretty heavy investment mode. We remain in investment mode, but our market leaders know what they need to do there. And from a perspective of just when we added staff over the course of the quarter, typically inter-quarter numbers don't matter, but it happens -- Q1 last year, we added a lot of staff early in the quarter, and Q1 this year, not just through the PAR acquisition, but even organically when staff started, it was towards the back end. So that adds up to the 1.5%. But as I mentioned in response to another question, utilization has been ticking up. We feel good about where that's headed. On the non-operational side, you're right, a lot of it's one-off or timing related. I don't want to get into Q2, but obviously, we feel very comfortable about our ability to deliver the full fiscal year. And then, on PAR, we've gotten this question quite a bit. Obviously, PAR itself being a public company, they had to disclose how they did -- how they broke out their accounting. I think it will look somewhat different under our model. We're comfortable that it will be very mildly accretive this year, which is not bad in year one of an acquisition. And as Horacio said, over time, we think we have the ability to not just generate incremental revenue, but margin by adding a lot of the AI and digital services we have on top to some of the great stuff they have like the TAK unit that provides information to warfighters at the edge. Thank you. One moment for our next question. That comes from the line of Matt Akers with Wells Fargo. Please proceed. Matt Akers Yes. Hey, good morning, guys. Thank you for the question. Matt, I wonder if you could comment anymore just on how would you think about modeling the quarters for the rest of the year, because we've got some of these costs going away after Q1. I know you got an easier compare in the intel business. So, I think you commented on the revenue ramp, but just any further color you can provide there? Matt Calderone No, I think we provided the right amount of color and you're thinking about it the right way, Matt. Obviously, we anticipate profit and margins to be moderately ascending over the back -- the remaining three quarters now. And as you mentioned, our comps will change. Matt Akers Yes, got it. Okay. And I guess any thoughts on free cash flow? A decent start to the year. Last couple of years you haven't been positive in Q1. Just any thoughts on working capital, where that goes from here, or just how you're doing there? Matt Calderone Yeah, we had a good start. I think collections were particularly strong. As we talked about this for the past couple of calls, we aspire to return to free cash flow conversion rate of 100% or greater and run a good vector to get there. Thank you. One moment for our next question. And it's from the line of Robert Spingarn with Melius Research. Please proceed. Scott Mikus Hi. This is Scott Mikus on for Rob Spingarn. Matt, you mentioned lower contract profitability in the quarter. I was just wondering if you could provide color on that. Was it more concentrated in defense, civil or intel contracts? Matt Calderone No, it was just slightly lower than we anticipated. It was spread across the business, no one factor that we're particularly worried about. Scott Mikus Okay. And then, Horacio, for you, one of the lessons learned from the war in Ukraine is how large quantities of inexpensive drones can have a significant impact on the battlefield. So, when we think about programs like the Air Force's CCA program or the DoD's JADC2 initiative, what do you want Booz's role to be in the digital and connected battle space? And how do you take advantage of the trend where hardware becomes increasingly more commoditized and the value is in the software that drives the hardware? Horacio Rozanski Scott, we've been on this trend for years and we've been anticipating it. We view ourselves as primary digital player that can bring information together at speed, at scale, to the warfighter from headquarters to the edge. And that is an important role that I believe Booz Allen is uniquely positioned to play because of our relationship with tech companies, because of our track record doing it, because of our own leadership in some leading-edge technologies like AI, like cyber, and because we're making investments. This quarter, we talk about PAR, but we've been talking about investments that we've been making across the board to make all of this work. And even the work that we're doing in space that I described in the prepared remarks fits into this as well. We need to have the ability to persistently look at an environment that's in conflict, to understand and anticipate threats, and to take them on in ways that are effective to the type of threat. As you know, we're doing a lot of work in in the Ukraine that informs and teaches us how to do this better, how to help our clients do this better. That work translates then into the work we're doing in the Indo-Pacific, the work we're doing in CENTCOM, and the work that we're doing across the board in contracts that have to do with readiness and helping our war fighters accelerate their ability to be ready and respond to these kinds of threats. Thank you. One moment for our next question. That comes from Noah Poponak with Goldman Sachs. Please proceed. I was wondering if you might spend a minute on medium- to long-term margins, where you think profitability can go beyond this year? I know you've talked about scale and driving revenue growth above the headcount growth. And I think also you've talked about favorable mix with faster growth in some of the more favorably contracted and higher margin parts of the business. Is that right? Are there offsets to that? And should we be thinking about higher margins over time or stable margins over time? Horacio Rozanski Why don't I start and then I'm sure Matt will want to add to this. Let me start by saying I'll take us back to the investment thesis. About three years ago, when we gave you our outlook, we said we thought margins were going to be in the mid-10%s to be able to invest in the business and invest in all of these new technologies that were going to drive the next wave of growth, in fact, the underlying strength of the business, the underlying profitability of the business has allowed us to both invest at an even higher level organically than we thought we would, while preserving our balance sheet capacity, and at the same time, deliver margins in the 11% range, which is a full 0.5 point higher than we anticipated. I think over time, the question is, as Matt pointed out, is how quickly can we have EBITDA dollar growth. And that's what we're going to be focused on. There's opportunities in the near term to accelerate that, that we're talking about it for this year, but there's opportunities in the long term, especially as outcome-based contracting and some of the other trends that we are anticipating and preparing for take more hold for overall profitability to continue to accelerate. Now, exactly when that is going to happen, I'm describing some long-term trends to you. I would not want to ascribe that to any given immediate fiscal year. But over the long term, we're very optimistic about Booz Allen's ability to drive above-market profitability growth rates. I agree. I think, you have the basic factors outlined. It's a question of our current contract mix and how does that evolve. We're generating scale in business, how do we use that scale, and then, to what extent can we build more of an outcome based contracting business, and we said that's something we aspire to. A lot of folks in the industry aspire to, but that's going to take a while. Noah Poponak Okay. And with regard to the top-line, I guess, the total organic revenue growth rate in the quarter is kind of the high end of the range for the year. The compares get a little easier through the rest of the year. I guess, what are the risk factors we should be contemplating for? What would take you to the low end now with nine months left in the year? Horacio Rozanski I can start. I think, obviously, environmentally, we are -- we all need to be very mindful of the fact, we are very mindful of the fact that this is an election year. This is a particularly challenging election environment with -- just in the last two or three weeks, the picture has changed so many times, and I assume it will continue to change or it may not, but it is unpredictable and that tends to have an impact on the way Congress behaves around passing appropriations bills and then continuing resolutions and so forth. And so, we're very mindful of that. We are continuing to monitor it closely and doing all the things we need to do internally to be successful, whether we have a stable budget environment, which would be ideal, or a more unstable one. Beyond that, we continue to work on a number of recompetes that obviously we want to win, and we continue to prosecute a very healthy pipeline, which we hope we will have significant wins in there, which will continue to push and accelerate our business. But if that decelerated, then you would see some impact on that. But on the whole and on the main, while we're cognizant of the risks and not dismissing any of them at all, we're optimistic. We're optimistic about the year, we're optimistic about our momentum, and we're optimistic about what happens even beyond this year. Thank you. One moment for our next question. That comes from the line of David Strauss with Barclays. Please proceed. Josh Korn Hi, good morning. Thanks for taking the question. This is actually Josh Korn on for David. So, I just wanted to ask how you expect the cost base to break out as a percent of sales this year as compared to last year, so in other words, COGS, billables, SG&A? Thanks. Matt Calderone Yeah, Dave. I think, as I mentioned, we've been in a pretty heavy investment phase to support, not just growth this year, but into the outyears, part of our commitment to being a compounder as we build this business for the long term. So, we continue to invest in the business. As I mentioned, we have some operating levers available to us as needed to make sure we deliver the full fiscal year. But Q2 for us really is determinant, to go back to the last question, in many years. We got a lot of momentum we built in Q1 on the leading indicator side, little work to do in terms of dropping profit to the bottom-line. But Q2 really will be important for us this year and in terms of in setting us up for next year and we'll sort of adjust our cost basis as appropriate based on what happens. Thank you. One moment for our next question, please. And it's from the line of Tobey Sommer with Truist Securities. Please proceed. Tobey Sommer Thank you. I was hoping you could give us some color on the pace of your hiring, if there are any changes there, and any comparable changing trends in billable headcount retention? Maybe touch on AI skills specifically as part of your answer? Thanks. Horacio Rozanski Hey, Tobey, I can start. Over the last couple of years, we did some really important work. Our COO, Kristine Martin Anderson, led some really important work that allowed us to shorten the cycle of both identifying candidates hiring and then making them billable. That's been an exciting development that has allowed us to lean into this market. This is a good labor market, more strongly. Frankly, the work that we are doing attracts people because this is one of the few places, if not the only place, where you can do all of this work, integrate all of these capabilities, bring AI to the edge against missions of national importance, and that puts us in a great recruiting position. And our attrition is some of the lowest numbers we've seen in many, many years. So, we feel good about where we are. As Matt pointed out, last year, we had more hires in April and fewer in June. This year, we had more hires in June and fewer in April. But we don't manage this business by the month. We manage the business for the year. And our overall headcount growth is on par with what we expected, maybe even a little bit ahead. On the AI front, I think the same story is true. We are -- VoLT is working. We are winning work that is exciting, and it's allowing us to attract talent that in itself, creates its own differentiation. And when you put that together with intellectual capital that Booz Allen has with the track record that we have, it's really a differentiating position. Matt Calderone Yes. Just to give you a couple of numbers to build on that. I was talking to Kristine last night about this, applications to Booz Allen in Q1 were up 33% year-over-year. And attrition, as Horacio said, we keep calling it historically low, but it's now seven consecutive quarters of historically low attrition. So, I think we need to adjust our baseline. It just speaks to the quality of the work we're doing and the quality of our value proposition. I said it before, but it bears repeating, slightly over a third of our hires come from employee referrals and that speaks to the fact that people who are here not just want to stay here, but they want to refer their friends. Toby? All right. I'm going to go to the next question on the queue. It comes from the line of Louie DiPalma with William Blair. Please proceed. Louie DiPalma Horacio, Matt and Lindsay, good morning, and congrats on your 110 year anniversary. Three years ago, you guys had a couple of percentage points of exposure to Afghanistan, which was a headwind during the winddown, if I recall correctly. And Matt, you mentioned how you were recently impacted by a delay in funding to Ukraine. So, along those lines, can you quantify Booz Allen's exposure to Ukraine if funding for that conflict were to dry up with the new administration? Horacio Rozanski Let me start. I mean, as I mentioned in the prepared remarks, we have about 800 people working across European Command, and that's not only Ukraine. That is a very broad-based level of support across the entire mission in the entire continent. As Matt mentioned, when we -- when there was a -- the funding interruption, there may have been about a 100, 150 of our professionals who could not bill to the contract, and then we had to hold until things restarted. I hope that gives you a sense of the exposure against the 35,000-strong footprint. I would view this as almost in the day to day, not as an exceptional level of exposure. But then, let me flip it on its head, which is to also say the work that we're doing in Ukraine in the -- for the United States in the Ukraine conflict is extraordinarily important to the nation in that conflict, but also extraordinarily important for what we're learning, that we're exporting to our missions across the world, and in particular, to IndoPACOM, where, as I've said before, our role, our goal is to be a leading provider of the fusion of information that is going to be required to be able to deter conflict in that theater. So, this is really exciting work. We are very proud of the work. We're very proud of the people we have working there who've made a tremendous difference for the country and who have been working almost literally around the clock now for two years at this level of off tempo. I think more broadly, Booz Allen's positioning against these missions of national importance make us resilient. We believe we're working on things that matter to the country and that transcend administrations and to sort of end where you started. This is, I think, why over 110 years we've successfully worked for so many administrations, we have made a difference to the nation, and we very much want to continue doing so while we grow and deliver exceptional resources to our shareholders. Louie DiPalma Thanks, Horacio. I get the sense you're saying that your European Command and theater work is very durable. And along -- on another note, you are obviously one of the largest cybersecurity service providers. And I think, in September, you're holding a Cyber Industry Day. And I was wondering, has there been any increased demand for your services from the CrowdStrike issue as you deal with the intelligence community and the overall DoD and Federal [SIV] (ph)? And also related to cyber, how are your zero trust implementations progressing? Thanks. Matt Calderone Yeah, I'll take this. The specific answer to your question is no, not yet on CrowdStrike. But taking a step back and you'll hear more about this in September, really it's the convergence of the battle space in cyber, we're calling it one battle space, right, across .gov, .com, .mil, a lot of the same threat actors, a lot of the same threat vectors, a lot of the same dynamics, the application of AI to cyber, both on offense and defense that span those three, that's really driving our current growth and where we think growth is headed in this market. So, we believe we're well positioned for this. Certainly, work may come out of it. Nothing has happened to date. In terms of your specific question, your last question, we're really pleased with where we headed on Thunderdome. We're seeing not just technically, but from in terms of client adoption, a lot of positive momentum there. Horacio Rozanski Yeah, Louie, I'll just round out Matt's answer by saying the power of VoLT is that we have invested across a broad range of technologies and have leading positions, not just in cyber and AI, but in even things like quantum, some aspects of space. And what we're seeing, and we began to talk about it last September, and without stealing our own thunder, we'll probably talk about it more as it relates to cyber next September, that these technologies are really all integrating, coming together. It's AI and cyber, AI and space, and increasingly AI and cyber in space. And Booz Allen's ability to span both these markets, but also these technology sets puts us in a unique position and gives us optimism for the future. Louie DiPalma Great. Thanks, Horacio. You don't want to steal your own thunder-dome. And thank you. And that's all the time we have for Q&A today. Thank you all to -- who participated, and I will pass it back to Horacio Rozanski for his final comments. Horacio Rozanski Thank you. And thank you all for your questions and for joining us this morning. I hope this discussion gave you a deeper understanding of our performance and why we feel confident we will deliver on our near- and long-term goals. Last month, a few of us had the great honor to ring the bell at the New York Stock Exchange, and it was a great moment in our company's long history and it really reflected our enduring presence and enduring impact. We talked about the future and how we're shaping our own future and the foresight and the agility that has kept us relevant and vibrant for 110 years and looking for 110 years more. Ultimately, this event was a testament to our incredible team and to the clients and to the shareholders who have put their trust in Booz Allen to continue to develop exceptional performance, and for that, we are forever grateful. And with that, have a great day and a great rest of the summer. And thank you all for participating in today's conference. And you may now disconnect.

Earnings call: Booz Allen reports growth and record backlog in Q1 FY2025 By Investing.com

Booz Allen (NYSE:BAH) Hamilton Holding Corporation (NYSE: BAH) has presented a robust first quarter for the fiscal year 2025, with significant top-line growth and a record backlog. Despite a softer bottom-line impacted by various factors, the company's leadership expressed confidence in achieving its fiscal year goals. The firm's VoLT strategy and recent acquisitions, including PAR Government Systems Corporation, were highlighted as key drivers of growth. Booz Allen's total revenue for the quarter stood at $2.9 billion, marking an 11% increase from the previous year, with organic revenue growth at 10.6%. The defense sector experienced a 16% revenue surge, although the intelligence sector saw a 3% decline. Adjusted EBITDA was $302 million, and the company reported a net income of $165 million. Booz Allen Hamilton's Q1 FY2025 results demonstrate a strong start to the year, with the company leveraging its VoLT strategy to drive growth. The leadership remains focused on achieving the high end of its investment thesis goals while navigating an election year that could affect the budget environment. With a solid pipeline and strategic investments in technology, Booz Allen is poised to maintain its momentum and deliver on its promises to stakeholders. Booz Allen Hamilton Holding Corporation (NYSE: BAH) has recently shown resilience in its first quarter performance, and the insights from InvestingPro provide a deeper dive into the company's financial health and market position. With a market capitalization of $18.07 billion, Booz Allen stands as a significant player in the consulting and technology services industry. The company's dedication to shareholder returns is evident, as it has increased its dividend for 8 consecutive years and maintained dividend payments for 13 consecutive years, showcasing a reliable commitment to its investors. InvestingPro Tips suggest that Booz Allen is trading at a low P/E ratio relative to near-term earnings growth, which could signal a potential value opportunity for investors considering the company's growth trajectory. Additionally, the company's stock is known to trade with low price volatility, providing a semblance of stability in a fluctuating market. For those interested in further analysis, there are 12 additional InvestingPro Tips available that could offer more nuanced investment perspectives on Booz Allen. In terms of financial metrics, Booz Allen's revenue growth over the last twelve months as of Q4 2024 stood at a robust 15.15%, reflecting the company's ability to expand its operations effectively. The gross profit margin in the same period was 23.06%, indicating a solid profitability level from its core business activities. Furthermore, the company's PEG ratio, which measures the price of a stock relative to its earnings growth rate, is at a low 0.26, suggesting that the stock may be undervalued based on its earnings trajectory. Investors seeking to make informed decisions can take advantage of the insights offered by InvestingPro, and by using the coupon code PRONEWS24, they can get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. This could be a valuable resource for those looking to deepen their understanding of Booz Allen's market potential and financial standing. Operator: Good morning, and thank you for standing by, and welcome to Booz Allen Hamilton's Earnings Call covering First Quarter Fiscal Year 2025 Results. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions. I'd now like to turn the call over to Mr. Matt Calderone. Matt Calderone: Thank you. Good morning, everyone, and thanks for joining the call. I would like to begin by introducing Lindsay (NYSE:LNN) Joyce. Lindsay has been a trusted advisor and core member of the Booz Allen finance team for nearly a decade. She joined the firm to help me establish our corporate development function and has since had a variety of roles in corporate and business finance. Lindsay is now a Vice President at Booz Allen, leading both Investor Relations and Financial Planning and Analysis. Lindsay, welcome, and over to you. Lindsay Joyce: Thank you. Good morning, and thank you for joining us for Booz Allen's first quarter fiscal year 2025 earnings call. We hope you've had an opportunity to read the press release we issued earlier this morning. We have also provided presentation slides on our website and are now on Slide 2. With me to talk about our business and financial results are Horacio Rozanski, our Chairman, Chief Executive Officer and President, and Matt Calderone, Executive Vice President and Chief Financial Officer. As shown in the disclaimer on Slide 3, please keep in mind that some of the items we will discuss this morning are forward looking and may relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from forecasted results discussed in our SEC filings and on this call. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date made. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our first quarter fiscal year 2025 earnings release and slides. Numbers presented may be rounded and, as such, may vary slightly from those in our public disclosure. It is now my pleasure to turn the call over to our Chairman, CEO and President, Horacio Rozanski. We are now on Slide 4. Horacio Rozanski: Thanks, Lindsay. It's great to have you on these calls, and good morning everyone. Matt and I are proud to share with you another quarter of strong momentum and double-digit top-line growth. Today, I'll begin with an overview of the first quarter in the context of our fiscal year and the investment thesis. Then, I'll describe how VoLT strategically positions us for continued growth and helps us attract exceptional talent. And finally, I'll share our priorities for the remainder of the fiscal year before turning it over to Matt for an in-depth look at our first quarter fiscal 2025 results. Beginning with performance, we built significant momentum in the quarter delivering double-digit organic revenue growth. Our bottom-line performance was comparatively softer due to a combination of operational and non-operational factors, which Matt will describe momentarily. Leading indicators for the business remains strong; headcount for the quarter was robust, cash flow was ahead of our own internal expectations, and our 1.72x book-to-bill was excellent. So, when looking at the full picture, we believe we are on track to meet our fiscal year 2025 guidance and achieve the high end of our investment thesis goals. Booz Allen's momentum shows beyond our financials. It is evident in the quality of the work we win, the innovative capabilities we deliver, and the exceptional talent we attract. This is because VoLT is working. VoLT, which stands for Velocity, Leadership and Technology, has put us at the center of the tech transformation taking place across national priority missions. Our ability to help clients utilize dual-use and leading-edge technologies faster and at scale is a powerful differentiator. At this time of historic challenge and change for our nation, Booz Allen is an innovation accelerator. This morning, let me share three examples that demonstrate this. The first is actually from one of the missions we have supported the longest, space. Space encompasses civilian, intelligence and defense missions. Today, Booz Allen's space business is more than $0.5 billion and growing. We have been a trusted US space partner since the beginning, more than 60 years, from our nation's response to Sputnik, to Apollo, to the Hubble Space Telescope. And we continue to help NASA launch the future and inspire the world, working on trajectories as we did 55 years ago using leading-edge analytics. We are the overarching system-of-systems integrator for Artemis, the mission to go back to the moon and create a lunar outpost for a flight to Mars. Importantly, and over the past year, Booz Allen has won several strategic contracts that position us to support and protect vital national security interests in space. Two weeks ago, I had the opportunity to spend time with our Colorado Springs teams and visit the United States Space Operations Command to discuss opportunities to modernize our nation's space capabilities. Coincidentally, while I was there, our team successfully uploaded and made operational what we believe is the first large language model in space onboard the International Space Station's National Lab. This intersection of AI and space is one of the next frontiers. And just as Booz Allen is a leading provider of AI to the federal government, we are on the cutting edge of this effort, too. The second example of VoLT in action is our long-standing work in Europe and our growing footprint supporting one of the most dynamic combatant commands, United States European Command, or EUCOM. Booz Allen has been a trusted partner supporting efforts in Europe for more than 30 years. Over the past 10 years, our work has grown nearly six-fold, from about 150 to more than 800 professionals. This growth accelerated to support our country's efforts during Russia's invasion of Ukraine. Through VoLT, we have the right people and solutions at the right time to help EUCOM leverage cutting-edge data science to speed decision making at the highest levels. That is why we are particularly proud to have won a critical recompete to continue our work supporting US missions across the continent. My third and final example for how VoLT is driving our momentum is our recent acquisition of PAR Government Systems Corporation. PAR is an original creator and leading engineering partner for preeminent software products and solutions, enabling tactical support that spans ground, air and space missions. This acquisition strategically augments Booz Allen's capabilities in situational awareness, mission readiness and detecting and defeating drone threats. It will help accelerate our ability to deliver mission-critical solutions to our nation's warfighters on the tactical edge. These examples from across the globe and beyond show how VoLT moves us forward and helps ensure we remain a vital partner in missions of national importance in the face of ongoing change. So, if VoLT is the engine powering our momentum, our people are the fuel that makes us go. Our people bring unmatched mission expertise and technological innovation to every project. And this is why I always speak about our people and not our contracts as the real key to our success. Booz Allen stays vibrant by attracting the best talent like Bill Vass, whom we welcomed last month as our new Chief Technology Officer. Bill brings more than 40 years of technology leadership and experience spanning industry and government. He will help Booz Allen accelerate our leadership in injecting dual-use tech into our clients' missions faster and at scale. Bill, welcome. And on the other end of the spectrum, we are building our pipeline of future stars through our summer internship program, which we call Summer Games. This year, we have 128 exceptional students participating in the program. Our interns collaborate on challenge projects in the areas of capability development, process improvement and social good. We believe good ideas come from every level in this firm, from our newest colleagues to our longest serving. This fits with Booz Allen's purpose to empower people to change the world. And that starts with empowering our own people, whether consultants, engineers, scientists, analysts, cyber professionals, and of course, summer interns. I am so, so proud of this team and want to thank again all of my Booz Allen colleagues, past, present and future. Returning to the here and now, today our collective focus is on the operational priorities we laid out in May. First, we will take full advantage of our record proposal pipeline. This includes continuing to win new work and recompetes, launching programs quickly and hiring excellent people to build the depth of our expertise. Second, we will continue to manage the business tightly to drive efficiency and effectiveness across all our functions. We have opportunities to improve margin, while we continue to mitigate growing budgetary uncertainty in an election year. And third, we will continue to implement VoLT at full speed by building the next-generation technology solutions and market positions, securing breakthrough technology partnerships, and maturing our internal capabilities. So in summary, we remain optimistic about our growth prospects even in an uncertain budgetary scenario and a contentious election environment. We believe in the fundamental strength of the business we have built and feel confident about the future. At 110 years young, Booz Allen is as vibrant and exciting as ever. And with that, Matt, over to you for a deep dive into our financial performance. Matt Calderone: Thank you, Horacio. As you noted, Booz Allen continued to build momentum in the first quarter. Our VoLT strategy is working, and our work is increasingly at the center of the government's technology transformation. We are poised to keep growing and to deliver another strong fiscal year. For the quarter, on the positive side, our team once again delivered double-digit organic revenue growth. Cash performance was solid and, most important, our leading indicators were strong. On the demand side, we had key wins that yielded an excellent book-to-bill and record backlog. On the supply side, we continued to add the talent needed to support our growth objectives. Our bottom-line performance, however, was a bit softer than we anticipated. This was due to a number of individually small operational and non-operational factors that added up over the quarter. As we said previously, we managed the business for the full fiscal year. We have both the demand side and supply side momentum, as well as the operating levers available to us to meet our fiscal year 2025 objectives and achieve the top end of our investment thesis. I'll now cover our first quarter results in more detail. Please turn to Slide 6. Total revenue for the quarter grew about 11% year-over-year to $2.9 billion. Organic revenue was up 10.6% year-over-year and revenue excluding billable expenses increased 8.4%. Taking a look at the market breakdown. Our defense business continues to thrive, up 16% from the prior-year quarter. Our defense leaders won both recompetes and takeaway opportunities in missions of true national importance. Our civil business continues to perform well. Total revenue grew 12% year-over-year, and this performance was broad based. As expected, revenue in our intelligence business declined about 3% year-over-year. We continue to expect this business to demonstrate solid growth for the full fiscal year. Turning to Slide 7, we are pleased with both the scale and the quality of the work that our teams are capturing. We came out of the gate strong in the quarter, taking full advantage of our robust proposal pipeline. Net bookings for the first quarter were $5 billion and our quarterly book-to-bill was 1.72x. This yielded a trailing 12-month book-to-bill of 1.43x, our highest in five years. Total backlog as of June 30 hit an all-time record of $36 billion, up 16% year-over-year. And at the end of the first quarter, our qualified pipeline for the remainder of fiscal year 2025 stood at $55 billion. This is up 32% from a year ago. In short, we have the backlog and the pipeline necessary to fuel future growth. Moving now to headcount. Booz Allen closed the quarter with more than 35,000 people. We increased client staff headcount by more than 700 in the quarter, including 200 skilled professionals who joined Booz Allen through the PAR acquisition. This translated to 7.7% client staff growth year-over-year, ahead of our full year goal of 3% to 5%. We continue to recruit and hire aggressively to match our demand-side momentum. Turning now to the bottom-line. We generated $302 million in adjusted EBITDA in the first quarter, down 1.6% from the prior-year period. Our adjusted EBITDA margin was 10.3%, down 130 basis points year-over-year. Our profitability came in lower than expected due to a combination of factors. On the operational side, slightly softer contract level profitability, lower utilization and back-weighted client staff hiring during the quarter. And on the non-operational side, slightly higher expenses on a year-over-year basis. Some of these items are non-recurring and others are timing related and are expected to normalize over the course of the fiscal year. Working down the P&L, our net income was $165 million, 2.4% higher year-over-year. Adjusted net income declined 7% year-over-year to $180 million. Diluted earnings per share increased 4% year-over-year to $1.27 per share. Adjusted diluted earnings per share decreased 6% year-over-year to $1.38. These results include both a higher interest expense from our inaugural investment-grade bond offering and a higher tax rate than last fiscal year, moderately offset by a lower diluted share count. Moving now to the balance sheet. We ended the first quarter with $298 million of cash on hand, net debt of $3 billion, and a net leverage ratio of 2.7x adjusted EBITDA for the trailing 12 months. Free cash flow for the quarter was $20 million. Cash from operating activities improved to $52 million due to strong collections. CapEx in the quarter was $32 million and includes $16 million of previously accrued expenditures that were paid in the first quarter. Our balance sheet is strong. This gives us flexibility in how we operate the business and deploy capital to generate value. Turning now to capital deployment on Slide 8. We are committed to using our cash generation and balance sheet strength to drive superior value for our shareholders. In the first quarter, we deployed a total of $251 million. This includes roughly $156 million of capital returned to shareholders through almost $90 million in share repurchases, at an average price of $149.74 per share, and $66 million in quarterly cash dividends. It also includes approximately $93 million for acquisition of PAR in June. We believe this acquisition will increase the value we deliver to clients and accelerate our financial performance. We anticipate that PAR will add $80 million to $90 million in revenue for the balance of this fiscal year and will be mildly accretive to earnings. We also made $2 million of strategic investments through our corporate venture capital program, including our recently announced investment in Quindar, an early-stage commercial space technology company. Finally, I'll note that our Board has approved a quarterly dividend of $0.51 per share, which will be payable on August 30 to stockholders of record as of August 14. Now for look-ahead. We believe we have the momentum and operating flexibility to deliver strong top- and bottom-line performance for the full fiscal year. Please turn to Slide 9, as I run through our fiscal year 2025 guidance. At the top-line, we expect revenue growth of 8% to 11%. We expect to deliver adjusted EBITDA dollars in the range of $1.26 billion to $1.3 billion. This implies an adjusted EBITDA margin of about 11% for the full year. While we previously indicated a flatter quarterly margin profile for fiscal year 2025, we now expect a moderately ascending profile over the remaining three quarters. Our ADEPS guidance range is between $5.80 and $6.05 per share. Lastly, we expect operating cash flow between $825 million and $925 million, and free cash flow between $725 million and $825 million. In closing, I am extremely proud that in the final year of our three-year investment thesis, we are positioned to deliver at the top-end of our target range for adjusted EBITDA, almost entirely through organic performance. We continue to build our business for the future and are forging ahead with confidence. With that, operator, let's open the line for questions. Operator: Thank you so much. [Operator Instructions] One moment for our first question. And it comes from Mariana Pérez Mora with Bank of America (NYSE:BAC). Please proceed. Mariana Pérez Mora: Good morning, everyone, and a special welcome to Lindsay. Horacio Rozanski: Thanks, Mariana. Good morning. Mariana Pérez Mora: So, my first question -- I have two, one business related and the other one more like technical. The first question is about the PAR acquisition. Could you please describe a little bit about like all the potential that you can unlock from this company's special, like, leading position with WinTAK and TAK, and install base they have, levering that with Booz Allen talent, customer intimacy and reputation, what is the combination of this acquisition and when and what type of synergies we could expect from this? Horacio Rozanski: Thanks for that question, Mariana. We're very happy with the PAR acquisition. It's -- sometimes big innovators come in small packages, and this is one of those cases where we were able to find a company and close a transaction with really a carve out that really focuses on doing some really innovative edge-type work for the warfighter. That fits so well into our entire digital battlespace platform, and what we're trying to do about integrating information and bringing it together from multiple sources using, ultimately, artificial intelligence to filter it and putting in -- and giving the warfighter the information he or she needs at the time that they need it in the place that they need it. And so, this really will help augment and knit together a number of things that we are doing, and so it's very exciting. The basis for this acquisition is not cost reduction. As you said, it's really revenue synergies. And like we've always been saying, this acquisition fits the perspective of strategic acceleration. We're looking for companies that will take what we're doing and allow us to leapfrog both our competitors and our own efforts to be able to move faster and implement VoLT faster. Mariana Pérez Mora: Thank you. And the second one to Matt, what makes you confident that you can achieve the EBITDA margin for the year in this trend? What are the key milestones that you'll be looking throughout the year to make sure that you can, or what efforts are you making sure you put in place to achieve the 11% versus the low-10%s that you print in the quarter? Horacio Rozanski: Hey, Mariana, since I'm on a roll, let me give some context and then I'll turn it over to Matt, if that's okay. The primary view that we have is, of course, we are very happy with the top-line growth in the quarter. We're not as happy with the bottom-line results in this quarter, although as Matt pointed out and he will take you through, this is largely driven by timing and one-offs. So, the underlying profitability of the business remains very strong. What gives us the most confidence is the strong momentum that we see in the business. You see it in our book-to-bill, which is exceptional. You see it in our hiring, which is exceptional. You see it in PAR, which is a great small acquisition for us. And when we put all of that together, we are confident that we can achieve the objectives for FY '25 and then deliver at the top-end of our investment thesis. And I think what's really important is, aside from all of these numbers, we continue to invest in the things that are making VoLT accelerate us, because VoLT is working. We're winning not just a lot of work, but the type of work we want, and I'm sure we'll talk more about that. We're attracting exceptional technical talent that probably wouldn't have happened to Booz Allen five years ago. And we are positioning strategically to keep bringing leading-edge technology to missions of national importance, which is both an accelerator in the near term, but also gives us resiliency at a time of political uncertainty, of budgetary uncertainty, and the like. So against that frame, I'll turn it over to Matt. Matt Calderone: Yeah, thanks, Horacio. And just to add to that, Mariana, we've talked about this in the past. We manage the business for EBITDA dollars, not margin. So, our focus is on how do we drive profit dollars up and then margin will increase as a result. But to take you through first, sort of what drove the miss in Q1, profit was impacted by a number of factors, both operational and non-operational that were individually small, but they added up over the quarter. And as Horacio mentioned and I said in the prepared remarks, a significant portion of these were timing related or non-recurring. Just to go deeper, on the operational side, contract-level profitability was a touch soft, but the primary driver was a combination of lower client staff utilization and quite frankly, the pattern of when and how we added client staff over the quarter when they started billing that cost us about 1.5% in revenue ex-billable growth for the quarter on a year-over-year basis and obviously an equivalent amount of profit dollars. And then, on the non-operating side, compared to Q1 last year, we saw higher expenses in a couple of areas, including M&A, busy quarter, legal and regulatory expenses. But that said, our utilization metrics improved over the quarter and continue to trend up. And most important, we have the headcount we need to meet our fiscal year growth aspirations and really set us up well for the outyears as well. So, we're confident we have both the momentum and the operating levers, if needed, to deliver another really strong year on the bottom-line. Mariana Pérez Mora: Thank you very much. Operator: Thank you. One moment for our next question, please. And it comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed. Sheila Kahyaoglu: Good morning, Horacio, Matt and Lindsay. Thank you so much. So maybe just to continue on that topic, Matt and Horacio, I know you're going to get a lot of questions on this margin. Matt, I don't know if you're willing to quantify that 130-basis-point contraction year-over-year. How much of that was just timing of the hiring and client utilization versus contract structure and M&A fees, et cetera? Matt Calderone: Yeah, Sheila, so, as I just said, the timing of when we added staff and they became billable as well as utilization costs about 1.5% on rev ex-billable. So, you can do the math and in terms of what that meant from a profit side. I would say, second, contract-level profitability was a little bit soft and then we probably had an equivalent amount on the non-operating side in terms of these one-time and timing-related activities. Sheila Kahyaoglu: Okay. Sorry if I missed that 1.5%. And then, Horacio, maybe a bigger picture question for you. I think the defense business and civil have been home runs, double-digit growth, lapping difficult comps. So, how are you thinking about the runway of each of those customer segments for the remainder of the year? Horacio Rozanski: Sure. I think the good news about the momentum is that it is really broad based across the portfolio. Our defense business, as I mentioned, won a couple of critical recompetes and really won some exceptionally important new work in the Pacific that we are very excited about, allowing us to bring technology to a set of missions that we care very much about that the country, cares deeply about. So, we see strong momentum, strong performance in our defense business really throughout the year, absent some major disruption, which will be industrywide, nationwide as a result of budgetary pressures in the fall or whatnot. When you go to our civil business, civil, as you said, has had tremendous growth for a long time. I think this is the 10th consecutive quarter of double-digit growth in our civil business. They won one key recompete. We had the extension of our CDM program, which is great news. And they have some critical recompetes in front of them that that they're preparing for. We're well positioned by, and they're all centered around bringing technology to key missions. So, these are places where we can't predict the future, but Booz Allen is very well positioned. And then, our intelligence business, even though in the quarter it showed a decline, actually the underlying momentum in that business is really strong. They won some really important work. This is the last quarter of the sort of the tough comp from last year because of the FocusedFox issue that we've talked about extensively and kind of so -- and we see this business growing over the course of the year. But again, importantly, we have transitioned a lot of this business in the last couple of years, first under Judi Dodson, then under Tom Pfeifer, from delivering excellent intelligence analysis to delivering extraordinary technology that [indiscernible] the accelerated intelligence analysis for the nation. So, again, this is a business that is sourcing critical talent and doing good things. And so, we expect momentum and growth across the entirety of our markets for the year. Sheila Kahyaoglu: Thank you. Operator: Thank you. One moment for our next question. And it comes from the line of Bert Subin with Stifel. Please proceed. Bert Subin: Hey, Horacio, Matt. So, the bookings in the quarter were, I would say, unusually strong. If you look at the last few years sort of in the 1.0% maybe sort of that range in the first quarter and you were closer to 2.0% in this quarter. Obviously, some good momentum and I imagine, Matt, some of the comments you made around utilization was just sort of, I guess, now you're going to be getting ready to pursue some of that work. As we think about the second quarter, that's typically your strongest booking quarter over 2.0% on quarterly book-to-bill. Was there some pull forward there? Or do you think that momentum just keeps building on the award side? Horacio Rozanski: Thanks for the question, Bert. The way to think about it is there's really strong underlying demand, strong momentum and a good budget right now. And so, based on those fundamentals, you would expect to see a good demand quarter this quarter. Our tactical sales engine is second to none, as you know, and our ability to take advantage when clients have money in their budgets and missions that matter to them, they take advantage of that opportunity to help them do it and to sell hard against it, is something we've done for years. I wouldn't say there was any pull forward. I would say, if anything, there was some stuff left over from the prior year that took longer to realize. I think what the exact number is going to be this year is driven by a number of factors. Even if we win a lot of work, the large contracts tend to get protested, and your guess is as good as ours as to when something comes off protest. But the reality is we have ample demand, we have ample ceiling, and we have the headcount to deliver against our commitments for the year. Bert Subin: Got it. Maybe just a follow-up on that point. You mentioned recompetes earlier Horacio and you said you've seen some pretty good momentum there in terms of winning your recompetes. You highlighted last quarter that this was a higher-than-average recompete year. Can you just give us a sense for where we stand? Are you through some of the larger ones you've been watching, or are those still out in front of you? Horacio Rozanski: Yes and yes, I suppose. There is -- as you know, we've built a portfolio that is really enviable in terms of the work that's there, the quality of the work that's there and how the underlying contracts grow. And when a recompete comes, it's really a recompete plus, because it generally comes with additional scope and significant increase in ceilings. As you said, we've been through some of those very successfully. There's a few of those left on the year that we obviously want to deliver against and we want to win. But importantly, the overall pipeline is really, really healthy. As Matt pointed out, we have a $55 billion pipeline that we're prosecuting actively, and that's up 32% year-over-year. So, the demand condition is really good, is really strong, and we intend to continue to win as much as we can. Operator: Thank you. One moment for our next question. That comes from the line of Cai von Rumohr with TD Cowen. Please proceed. Cai von Rumohr: Yes. Thank you so much. So, Matt, you kind of explained what the factors were. I guess, I'm kind of interested to know why the factors were. Why did you lose the 1.5%? Because the timing and utilization? Because basically you've been talking about using AI so that you've basically been doing better there until this quarter. And then secondly, you mentioned the regulatory legal M&A expenses. Those are presumably timing. And how should we think as we look at the next quarter? I mean, are we going to see more of this sort of delay, so the second quarter is sort of still a little disappointing, or does it get a big snap back? And thirdly, and I apologize for all these questions, PAR, you said, is accretive, but if you look at their 10-K, it looks like that this business has a gross margin of about 6%. So, how does it become accretive on your numbers? Thanks. Matt Calderone: Yeah, thanks, Cai. I'll try to take them in turn, but if I miss one, please bring me back. Cai von Rumohr: All right. Matt Calderone: First, just to dig a little deeper into utilization, and Bert mentioned this, it really was a combination of factors, right, both prosecuting and ramping up for a significant proposal pipeline, including some meaningful new wins. We had some one-off contract-related issues, for example, the delay in funding for Ukraine, more people go out on military leave. And honestly, we can run the business a little tighter. We've been in a pretty heavy investment mode. We remain in investment mode, but our market leaders know what they need to do there. And from a perspective of just when we added staff over the course of the quarter, typically inter-quarter numbers don't matter, but it happens -- Q1 last year, we added a lot of staff early in the quarter, and Q1 this year, not just through the PAR acquisition, but even organically when staff started, it was towards the back end. So that adds up to the 1.5%. But as I mentioned in response to another question, utilization has been ticking up. We feel good about where that's headed. On the non-operational side, you're right, a lot of it's one-off or timing related. I don't want to get into Q2, but obviously, we feel very comfortable about our ability to deliver the full fiscal year. And then, on PAR, we've gotten this question quite a bit. Obviously, PAR itself being a public company, they had to disclose how they did -- how they broke out their accounting. I think it will look somewhat different under our model. We're comfortable that it will be very mildly accretive this year, which is not bad in year one of an acquisition. And as Horacio said, over time, we think we have the ability to not just generate incremental revenue, but margin by adding a lot of the AI and digital services we have on top to some of the great stuff they have like the TAK unit that provides information to warfighters at the edge. So, hopefully -- did I catch all three? I think I did. Matt Akers: Matt, I wonder if you could comment anymore just on how would you think about modeling the quarters for the rest of the year, because we've got some of these costs going away after Q1. I know you got an easier compare in the intel business. So, I think you commented on the revenue ramp, but just any further color you can provide there? Matt Calderone: No, I think we provided the right amount of color and you're thinking about it the right way, Matt. Obviously, we anticipate profit and margins to be moderately ascending over the back -- the remaining three quarters now. And as you mentioned, our comps will change. Matt Akers: Yes, got it. Okay. And I guess any thoughts on free cash flow? A decent start to the year. Last couple of years you haven't been positive in Q1. Just any thoughts on working capital, where that goes from here, or just how you're doing there? Matt Calderone: Yeah, we had a good start. I think collections were particularly strong. As we talked about this for the past couple of calls, we aspire to return to free cash flow conversion rate of 100% or greater and run a good vector to get there. Matt Akers: Okay. Thank you. Operator: Thank you. One moment for our next question. And it's from the line of Robert Spingarn with Melius Research. Please proceed. Scott Mikus: Hi. This is Scott Mikus on for Rob Spingarn. Matt, you mentioned lower contract profitability in the quarter. I was just wondering if you could provide color on that. Was it more concentrated in defense, civil or intel contracts? Matt Calderone: No, it was just slightly lower than we anticipated. It was spread across the business, no one factor that we're particularly worried about. Scott Mikus: Okay. And then, Horacio, for you, one of the lessons learned from the war in Ukraine is how large quantities of inexpensive drones can have a significant impact on the battlefield. So, when we think about programs like the Air Force's CCA program or the DoD's JADC2 initiative, what do you want Booz's role to be in the digital and connected battle space? And how do you take advantage of the trend where hardware becomes increasingly more commoditized and the value is in the software that drives the hardware? Horacio Rozanski: Scott, we've been on this trend for years and we've been anticipating it. We view ourselves as primary digital player that can bring information together at speed, at scale, to the warfighter from headquarters to the edge. And that is an important role that I believe Booz Allen is uniquely positioned to play because of our relationship with tech companies, because of our track record doing it, because of our own leadership in some leading-edge technologies like AI, like cyber, and because we're making investments. This quarter, we talk about PAR, but we've been talking about investments that we've been making across the board to make all of this work. And even the work that we're doing in space that I described in the prepared remarks fits into this as well. We need to have the ability to persistently look at an environment that's in conflict, to understand and anticipate threats, and to take them on in ways that are effective to the type of threat. As you know, we're doing a lot of work in in the Ukraine that informs and teaches us how to do this better, how to help our clients do this better. That work translates then into the work we're doing in the Indo-Pacific, the work we're doing in CENTCOM, and the work that we're doing across the board in contracts that have to do with readiness and helping our war fighters accelerate their ability to be ready and respond to these kinds of threats. Operator: Thank you. One moment for our next question. That comes from Noah Poponak with Goldman Sachs (NYSE:GS). Please proceed. Noah Poponak: I was wondering if you might spend a minute on medium- to long-term margins, where you think profitability can go beyond this year? I know you've talked about scale and driving revenue growth above the headcount growth. And I think also you've talked about favorable mix with faster growth in some of the more favorably contracted and higher margin parts of the business. Is that right? Are there offsets to that? And should we be thinking about higher margins over time or stable margins over time? Horacio Rozanski: Why don't I start and then I'm sure Matt will want to add to this. Let me start by saying I'll take us back to the investment thesis. About three years ago, when we gave you our outlook, we said we thought margins were going to be in the mid-10%s to be able to invest in the business and invest in all of these new technologies that were going to drive the next wave of growth, in fact, the underlying strength of the business, the underlying profitability of the business has allowed us to both invest at an even higher level organically than we thought we would, while preserving our balance sheet capacity, and at the same time, deliver margins in the 11% range, which is a full 0.5 point higher than we anticipated. I think over time, the question is, as Matt pointed out, is how quickly can we have EBITDA dollar growth. And that's what we're going to be focused on. There's opportunities in the near term to accelerate that, that we're talking about it for this year, but there's opportunities in the long term, especially as outcome-based contracting and some of the other trends that we are anticipating and preparing for take more hold for overall profitability to continue to accelerate. Now, exactly when that is going to happen, I'm describing some long-term trends to you. I would not want to ascribe that to any given immediate fiscal year. But over the long term, we're very optimistic about Booz Allen's ability to drive above-market profitability growth rates. Noah Poponak: Okay. Matt Calderone: I agree. I think, you have the basic factors outlined. It's a question of our current contract mix and how does that evolve. We're generating scale in business, how do we use that scale, and then, to what extent can we build more of an outcome based contracting business, and we said that's something we aspire to. A lot of folks in the industry aspire to, but that's going to take a while. Noah Poponak: Okay. And with regard to the top-line, I guess, the total organic revenue growth rate in the quarter is kind of the high end of the range for the year. The compares get a little easier through the rest of the year. I guess, what are the risk factors we should be contemplating for? What would take you to the low end now with nine months left in the year? Horacio Rozanski: I can start. I think, obviously, environmentally, we are -- we all need to be very mindful of the fact, we are very mindful of the fact that this is an election year. This is a particularly challenging election environment with -- just in the last two or three weeks, the picture has changed so many times, and I assume it will continue to change or it may not, but it is unpredictable and that tends to have an impact on the way Congress behaves around passing appropriations bills and then continuing resolutions and so forth. And so, we're very mindful of that. We are continuing to monitor it closely and doing all the things we need to do internally to be successful, whether we have a stable budget environment, which would be ideal, or a more unstable one. Beyond that, we continue to work on a number of recompetes that obviously we want to win, and we continue to prosecute a very healthy pipeline, which we hope we will have significant wins in there, which will continue to push and accelerate our business. But if that decelerated, then you would see some impact on that. But on the whole and on the main, while we're cognizant of the risks and not dismissing any of them at all, we're optimistic. We're optimistic about the year, we're optimistic about our momentum, and we're optimistic about what happens even beyond this year. Josh Korn: Hi, good morning. Thanks for taking the question. This is actually Josh Korn on for David. So, I just wanted to ask how you expect the cost base to break out as a percent of sales this year as compared to last year, so in other words, COGS, billables, SG&A? Thanks. Matt Calderone: Yeah, Dave. I think, as I mentioned, we've been in a pretty heavy investment phase to support, not just growth this year, but into the outyears, part of our commitment to being a compounder as we build this business for the long term. So, we continue to invest in the business. As I mentioned, we have some operating levers available to us as needed to make sure we deliver the full fiscal year. But Q2 for us really is determinant, to go back to the last question, in many years. We got a lot of momentum we built in Q1 on the leading indicator side, little work to do in terms of dropping profit to the bottom-line. But Q2 really will be important for us this year and in terms of in setting us up for next year and we'll sort of adjust our cost basis as appropriate based on what happens. Josh Korn: Okay. Thank you. Just one for me. Operator: Thank you. One moment for our next question, please. And it's from the line of Tobey Sommer with Truist Securities. Please proceed. Tobey Sommer: Thank you. I was hoping you could give us some color on the pace of your hiring, if there are any changes there, and any comparable changing trends in billable headcount retention? Maybe touch on AI skills specifically as part of your answer? Thanks. Horacio Rozanski: Hey, Tobey, I can start. Over the last couple of years, we did some really important work. Our COO, Kristine Martin Anderson, led some really important work that allowed us to shorten the cycle of both identifying candidates hiring and then making them billable. That's been an exciting development that has allowed us to lean into this market. This is a good labor market, more strongly. Frankly, the work that we are doing attracts people because this is one of the few places, if not the only place, where you can do all of this work, integrate all of these capabilities, bring AI to the edge against missions of national importance, and that puts us in a great recruiting position. And our attrition is some of the lowest numbers we've seen in many, many years. So, we feel good about where we are. As Matt pointed out, last year, we had more hires in April and fewer in June. This year, we had more hires in June and fewer in April. But we don't manage this business by the month. We manage the business for the year. And our overall headcount growth is on par with what we expected, maybe even a little bit ahead. On the AI front, I think the same story is true. We are -- VoLT is working. We are winning work that is exciting, and it's allowing us to attract talent that in itself, creates its own differentiation. And when you put that together with intellectual capital that Booz Allen has with the track record that we have, it's really a differentiating position. Matt Calderone: Yes. Just to give you a couple of numbers to build on that. I was talking to Kristine last night about this, applications to Booz Allen in Q1 were up 33% year-over-year. And attrition, as Horacio said, we keep calling it historically low, but it's now seven consecutive quarters of historically low attrition. So, I think we need to adjust our baseline. It just speaks to the quality of the work we're doing and the quality of our value proposition. I said it before, but it bears repeating, slightly over a third of our hires come from employee referrals and that speaks to the fact that people who are here not just want to stay here, but they want to refer their friends. Operator: Toby? All right. I'm going to go to the next question on the queue. It comes from the line of Louie DiPalma with William Blair. Please proceed. Louie DiPalma: Horacio, Matt and Lindsay, good morning, and congrats on your 110 year anniversary. Louie DiPalma: Three years ago, you guys had a couple of percentage points of exposure to Afghanistan, which was a headwind during the winddown, if I recall correctly. And Matt, you mentioned how you were recently impacted by a delay in funding to Ukraine. So, along those lines, can you quantify Booz Allen's exposure to Ukraine if funding for that conflict were to dry up with the new administration? Horacio Rozanski: Let me start. I mean, as I mentioned in the prepared remarks, we have about 800 people working across European Command, and that's not only Ukraine. That is a very broad-based level of support across the entire mission in the entire continent. As Matt mentioned, when we -- when there was a -- the funding interruption, there may have been about a 100, 150 of our professionals who could not bill to the contract, and then we had to hold until things restarted. I hope that gives you a sense of the exposure against the 35,000-strong footprint. I would view this as almost in the day to day, not as an exceptional level of exposure. But then, let me flip it on its head, which is to also say the work that we're doing in Ukraine in the -- for the United States in the Ukraine conflict is extraordinarily important to the nation in that conflict, but also extraordinarily important for what we're learning, that we're exporting to our missions across the world, and in particular, to IndoPACOM, where, as I've said before, our role, our goal is to be a leading provider of the fusion of information that is going to be required to be able to deter conflict in that theater. So, this is really exciting work. We are very proud of the work. We're very proud of the people we have working there who've made a tremendous difference for the country and who have been working almost literally around the clock now for two years at this level of off tempo. I think more broadly, Booz Allen's positioning against these missions of national importance make us resilient. We believe we're working on things that matter to the country and that transcend administrations and to sort of end where you started. This is, I think, why over 110 years we've successfully worked for so many administrations, we have made a difference to the nation, and we very much want to continue doing so while we grow and deliver exceptional resources to our shareholders. Louie DiPalma: Thanks, Horacio. I get the sense you're saying that your European Command and theater work is very durable. And along -- on another note, you are obviously one of the largest cybersecurity service providers. And I think, in September, you're holding a Cyber Industry Day. And I was wondering, has there been any increased demand for your services from the CrowdStrike issue as you deal with the intelligence community and the overall DoD and Federal [SIV] (ph)? And also related to cyber, how are your zero trust implementations progressing? Thanks. Matt Calderone: Yeah, I'll take this. The specific answer to your question is no, not yet on CrowdStrike. But taking a step back and you'll hear more about this in September, really it's the convergence of the battle space in cyber, we're calling it one battle space, right, across .gov, .com, .mil, a lot of the same threat actors, a lot of the same threat vectors, a lot of the same dynamics, the application of AI to cyber, both on offense and defense that span those three, that's really driving our current growth and where we think growth is headed in this market. So, we believe we're well positioned for this. Certainly, work may come out of it. Nothing has happened to date. In terms of your specific question, your last question, we're really pleased with where we headed on Thunderdome. We're seeing not just technically, but from in terms of client adoption, a lot of positive momentum there. Horacio Rozanski: Yeah, Louie, I'll just round out Matt's answer by saying the power of VoLT is that we have invested across a broad range of technologies and have leading positions, not just in cyber and AI, but in even things like quantum, some aspects of space. And what we're seeing, and we began to talk about it last September, and without stealing our own thunder, we'll probably talk about it more as it relates to cyber next September, that these technologies are really all integrating, coming together. It's AI and cyber, AI and space, and increasingly AI and cyber in space. And Booz Allen's ability to span both these markets, but also these technology sets puts us in a unique position and gives us optimism for the future. Louie DiPalma: Great. Thanks, Horacio. You don't want to steal your own thunder-dome. Horacio Rozanski: Thank you for that. Operator: And thank you. And that's all the time we have for Q&A today. Thank you all to -- who participated, and I will pass it back to Horacio Rozanski for his final comments. Horacio Rozanski: Thank you. And thank you all for your questions and for joining us this morning. I hope this discussion gave you a deeper understanding of our performance and why we feel confident we will deliver on our near- and long-term goals. Last month, a few of us had the great honor to ring the bell at the New York Stock Exchange, and it was a great moment in our company's long history and it really reflected our enduring presence and enduring impact. We talked about the future and how we're shaping our own future and the foresight and the agility that has kept us relevant and vibrant for 110 years and looking for 110 years more. Ultimately, this event was a testament to our incredible team and to the clients and to the shareholders who have put their trust in Booz Allen to continue to develop exceptional performance, and for that, we are forever grateful. And with that, have a great day and a great rest of the summer. Operator: And thank you all for participating in today's conference. And you may now disconnect.

Earnings call: Honeywell exceeds guidance with strong Q2 2024 results By Investing.com

In the second quarter of 2024, Honeywell International Inc. (NASDAQ:HON) reported robust financial results, surpassing its adjusted earnings per share (EPS) guidance and hitting the upper range of its organic sales guidance. The company's aerospace sector spearheaded this growth, with three out of four strategic business groups posting positive advancements. Honeywell's focus on organic sales growth, product innovation, and strategic acquisitions has positioned it well for continued momentum. Notably, the company has deployed and committed significant capital towards acquisitions and share repurchases, totaling approximately $15 billion, going beyond its initial commitment of $13 billion. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights In summary, Honeywell has delivered a strong performance in the second quarter of 2024, with strategic investments and a focus on innovation driving growth. While some challenges remain, particularly in short-cycle businesses and margin pressures, the company's robust backlog and positive segment outlook suggest sustained growth potential. Honeywell's proactive approach to acquisitions and capital deployment demonstrates its commitment to enhancing its technology portfolio and strengthening its market position in key growth sectors. InvestingPro Insights In light of Honeywell International Inc.'s (HON) second quarter performance, InvestingPro data and tips offer additional context for investors evaluating the company's financial health and future prospects. With a market capitalization of $139.13 billion and a P/E ratio of 23.39, Honeywell stands as a significant player in the Industrial Conglomerates industry. The company's commitment to shareholder returns is underscored by its history of raising dividends for 13 consecutive years, and maintaining dividend payments for an impressive 40 years. InvestingPro Tips highlight that analysts are optimistic about Honeywell's upcoming period, with 7 analysts having revised their earnings upwards. Additionally, the company is noted for its low price volatility, providing a degree of stability in an investor's portfolio. The InvestingPro data also reveals a revenue growth of 2.64% over the last twelve months as of Q1 2024, reflecting the company's ability to expand its sales amidst various market conditions. Moreover, Honeywell's operating income margin stands at a robust 20.97%, indicating efficient management and strong profitability. Investors interested in a deeper analysis can find additional InvestingPro Tips for Honeywell, which can be accessed through InvestingPro's platform. For those looking to enhance their investment research, use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. There are 11 more InvestingPro Tips available that could provide further insights into Honeywell's performance and outlook. Full transcript - Honeywell Intl (HON) Q2 2024: Operator: Thank you for standing by and welcome to the Honeywell Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session. Please be advised that today's call is being recorded. I would now like to hand the call over to Sean Meakim, Vice President of Investor Relations. Please go ahead, sir. Sean Meakim: Thank you. Good morning and welcome to Honeywell's second quarter 2024 earnings conference call. On the call with me today are Chairman and Chief Executive Officer, Vimal Kapur; and Senior Vice President and Chief Financial Officer, Greg Lewis. This webcast and the presentation materials, including non-GAAP reconciliations are available on our Investor Relations website. From time-to-time we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our business as we see them today and are subject to risks and uncertainties including the ones described in our SEC filings. This morning, we will review our financial results for the second quarter share our guidance for the third quarter and provide an update on full year 2024. As always, we'll leave time for your questions at the end. With that I'll turn the call over to Chairman and CEO, Vimal Kapur. Vimal Kapur: Thank you, Sean, and good morning, everyone. Second quarter was another strong one for Honeywell. We exceeded the high end of our adjusted earnings per share guidance and achieved the high end of our organic sales guidance ranges. While aerospace continues to lead our growth, we are seeing broader participation across our portfolio. Three of our four strategic business groups contributed positive growth for the quarter, and we saw sequential improvement in growth rate from all four. Order rates were healthy across Honeywell, supporting our expectation of further organic growth acceleration into back half of the year. We are adding attractive new assets to our already compelling technology portfolio, which will enable us to create further value for our customers and shareholders alike. Let me take a few minutes to restate my priority as Chairman and CEO of Honeywell before we get into more detailed discussion on the second quarter 2024 results and update on our full 2024 year expectations. First, our key priority remains accelerating organic sales growth to deliver upper end of our long-term target range of 4% to 7%. In order to achieve this, we are enhancing how we think about our new product innovation, monetizing our vast installed base, accelerating software offerings and improving our leadership position in high-growth regions. As an early read on these efforts, our self help actions and aftermarket services are demonstrating favorable proof points, double-digit growth in the second quarter and accretive growth even when excluding aerospace. In fact, I'm pleased to highlight that our total Honeywell grew volume in the second quarter, and we expect further volume acceleration in the second half. Second, of the strength of our contemporary digital foundation, we are transforming how we run Honeywell through the latest version of our Honeywell Accelerator operating system. We are standardizing our business model to drive incremental value, enhancing our growth capabilities. Our integrated operating system principles enable us to deploy world-class digital supply chain and technology development capabilities at scale, along with multiple growth drivers that benefit the entire enterprise. For example, we are leveraging our digital capabilities and demand planning to more closely match production and material management, enabling us to capture incremental inventory improvement and reduce working capital intensity. We are also leveraging generative AI to maximize the potential benefit of our operating system, both for our customers and ourselves. As anticipated, Accelerator is proving to be a powerful source of profitable growth across all our businesses as an important tool to successfully integrate the recent addition to our portfolio. Third, we are excited about our progress on our portfolio optimization goals. We are demonstrating a commitment to accelerate deal flow through multiple strategic bolt-on acquisition in the $1 billion to $7 billion range in order to upgrade the quality of our business and financial profile. These acquisitions are aligned to three compelling megatrends around which we are focusing Honeywell, automation, the future of aviation and energy transition. The additions combined with a modest abstraction of non-core lines of business that are not aligned to these trends will enable us to accelerate value creation for our shareholders. Last, as we aim for ways to simplify and accelerate growth at Honeywell, we are taking our Honeywell Connected Enterprise strategy to the next stage by seamlessly integrating SCE [ph] into our strategic business groups. In 2018, we formed SCE to enable the creation of one unified industry-leading IoT forge platform to support the digital transformation for our customers. Over the last few years, we have been increasingly focused on scaling our commercial offering to deliver outcome-based solution in performance, sustainability and security. We are maintaining our robust software development expertise at the center and SCE Version 3.0 will more deeply integrate those centralized capabilities within our segment level commercial teams. This will deliver even better outcomes to our customers and drive sustained accretive software growth across the portfolio. As we demonstrate further progress against these priorities, we expect to deliver on our long-term financial algorithm and generate superior value for our shareholders. In the spirit of that progress, let's turn to Slide 3 to discuss our recent acquisition announcements. Our top M&A priority remains targeting bolt-on acquisition, as evidenced by our recent announcement. We are creating a flywheel of teams that strategically add to our technological capabilities, enhance our alignment to our three compelling megatrends and provide accretive growth that supports Honeywell's overall long-term financial framework. Let's discuss our recent deals in a bit more detail. Earlier this month, we announced our intention to acquire Air Products liquefied natural gas processing technology and equipment business for approximately $1.8 billion in all cash transactions. With this addition, Honeywell will be able to offer customers end-to-end solutions that optimize the management of natural gas assets. Currently, Honeywell provides a pre-treatment solution serving LNG customers globally and automation technology unified under the Honeywell Forge and Experion platforms. Air Products' complementary LNG business consists of comprehensive portfolio, including in-house design and manufacturing of coil-bound heat exchangers and related equipment. This acquisition will bolster our energy transition portfolio within energy and sustainability solutions. The LNG technology will immediately expand our installed base, creating new opportunities to compound growth in aftermarket services and digitalization through Honeywell Forge. Notably, this is the fourth acquisition Honeywell has announced this year as part of our disciplined capital deployment strategy, adding a business with accretive economics at an attractive valuation. In June, we announced the acquisition of CAES Systems or CAES for short from private equity firm, Advent International for $1.9 billion enhancing Honeywell's defense technology solution across land, sea, air and space. This business will enable us to provide new electromagnetic defense solutions for end-to-end radio frequency signal management for critical existing and emerging U.S. DoD platforms, which are forecasted to grow significantly at accretive rates in years to come. We are excited that this is the second aerospace-focused transaction we have announced this year, underscoring our alignment to the future of Aviation. The business adds state-of-the-art advanced manufacturing capabilities, impressive engineering talent and potential for significant commercial opportunities in international defense. Also in June, we completed the acquisition of Carrier's Global Access Solutions business, which positions the Honeywell as a leading provider of security solution for the digital age with opportunities for accelerating innovation and fast-growing cloud-enabled services. Honeywell will also benefit from businesses attractive growth and margin profile, valuable software content and accretive mix of recurring revenue with forecasted annual sales in excess of $1 billion when combined with our existing security portfolio. We are happy to welcome the Access Solutions team to Honeywell's Building Automation business. Together, the combination will build our long track record of delivering high-value critical building automation products, solutions and services to our customers globally. As we turn our attention to ensuring a steeples [ph] integration of the business into our portfolio, we'll utilize our multi facet tools of our accelerated operating system to streamline processes, digitalize operation and manifest the anticipated synergies that help make the deal compelling from a top and bottom line perspective. Cumulatively, the bolt-on acquisition of the past year represents over $2 billion of incremental annualized revenue with growth profiles well in excess of Honeywell's growth algorithm of 4% to 7%. Collectively, these deal represents an accretive margin profile to our current portfolio at valuation below of our own before factoring any expected sales synergies. Before I hand it off to Greg, I'll turn to Slide 4 to review our progress on overall capital deployment commitments. We are very excited to demonstrate significant progress on the commitment I made to you during the last May at Investor Day when we re-upped our intention to deploy at least $25 billion of capital in 2023 through 2025. With accelerated M&A deal activity this year, we have already deployed and committed approximately $10 billion acquisitions and approximately $5 billion of share buyback, exceeding our minimum pledge of $13 billion over a year early. However, this does not mean our work is done. Our robust balance sheet capacity provides us with the flexibility to allocate capital to accretive M&A, opportunistic share purchases and high-return growth capital. As the deal environment remains favorable, we will continue to reshape the portfolio by building on our already strong pipeline of high-value M&A opportunities as well as strategically proven [ph] select non-core assets. Into Honeywell fashion, you can expect us to maintain disciplined approach to generate highest return combination of capital deployment. Now let me turn over to Greg on Slide 5 to discuss the second quarter results in more detail as we provide our views on third quarter and full year 2024 guidance. Greg Lewis: Thank you, Vimal, and good morning, everyone. Let me begin on Slide 5. As a reminder, starting in the second quarter, we began excluding the impact of amortization expense for acquisition-related intangible assets and certain acquisition-related costs, including the related tax effects from segment profit and adjusted earnings per share. We believe this change provides investors with a more meaningful measure of our performance period to period, aligns the measure to how we evaluate performance internally and makes it easier to compare our performance to peers. In addition, our second quarter building automation results incorporate approximately 1 month of impact from the acquisition of Access Solution. With that, let's discuss our results. We delivered another strong quarter in a dynamic macro environment, meeting the high end of our organic sales range, landing above the midpoint of our segment margin guidance and exceeding the high end of our adjusted earnings per share guidance. Second quarter organic sales were up 4% year-over-year, supported by 16% organic growth in Aerospace Technologies, driven by another quarter of double-digit growth in both commercial aerospace and defense and space in addition to double-digit growth in our Building Solutions business Honeywell grew volumes by 1% for the second time in the past 10 quarters, and we expect further volume acceleration in the second half. Segment profit grew 4% year-over-year and segment margin contracted by 10 basis points to 23% as expansion in energy and sustainability solutions was offset by mix pressures in our other three businesses. Earnings per share for the second quarter was $2.36, up 6% year-over-year and adjusted earnings per share was $2.49, up 8% year-over-year, driven primarily by segment profit growth. A bridge for adjusted EPS from 2Q '23 to 2Q '24 can be found in the appendix of this presentation. Orders grew 4% year-over-year with a book-to-bill of 1, led by growth in BA, ESS and IA, including pockets of short-cycle strength with advanced materials and building products growing both year-over-year and quarter-over-quarter. Orders growth supported a 5% year-over-year increase in backlog to maintain our record level of $32 billion. Free cash flow was approximately $1.1 billion, roughly flat year-over-year versus the second quarter of '23 as higher net income and improved working capital from reduced inventory levels were offset by the timing of higher cash taxes. We continue to expect working capital becoming a more meaningful tailwind in the coming quarters as we unwind the multiyear buildup of inventory. This quarter, we were able to effectively reduce our days of supply each month in all our businesses by utilizing our accelerator digitalization capabilities, improving demand planning and optimizing production materials management, which gives me confidence that we are starting to systematically bend the curve. As Vimal discussed earlier, we made significant progress on our capital deployment strategy this quarter, allocating $6.4 billion to M&A, dividends, share repurchases and capital expenditures, including closing our $5 billion acquisition of Access Solutions. When combined with the anticipated closing of CAES and Air Products LNG businesses later this year, we are on track to deploy a record $14 billion of capital in 2024. Now let's spend a few minutes on the second quarter performance by business. In Aerospace Technologies, sales for the second quarter were up 16% organically, with double-digit growth in both defense and space and commercial aerospace. This marks the 13th consecutive quarter of double-digit growth in commercial aviation enabled by sustained growth in global flight activity and increased shipset deliveries. Defense and space growth accelerated in the second quarter as we continue to see robust global demand coupled with supply chain improvements, enabling an incremental volume unlock. Aerospace supply chain improvements remain on track as output increased by 14% in the second quarter, the eighth consecutive quarter of double-digit output growth. Segment margin in Aerospace Technologies contracted 60 basis points year-over-year to 27.2%, driven by expected mix pressure within our original equipment business, partially offset by commercial excellence net of inflation. For Industrial Automation, sales fell 8% organically in the quarter, primarily due to lower volumes and warehouse and workflow solutions, but overall sales improved 1% sequentially. Process Solutions revenue grew 1% in the quarter as another quarter of double-digit growth in our aftermarket services business was partially offset by headwinds in Thermal Solutions and Smart Energy. Our Sensing and Safety Technologies business declined modestly year-over-year, but saw sequential growth in both orders and sales, a positive indicator going forward. In Productivity Solutions and Services, sales improved year-over-year when excluding the impact of the $45 million quarterly license and settlement payments that ended in the first quarter. Orders in PSS grew double digits for the third consecutive quarter, and overall IA orders grew high single digits, led by growth of over 20% in Warehouse and Workflow solutions, driving an overall book-to-bill of 1.1. Industrial Automation segment margin contracted 90 basis points to 19% due to lower volume leverage and the end of payments under the license and settlement agreement in Productivity Solutions and Services. Excluding the impact of that agreement, margins expanded in the second quarter. Moving to Building Automation. Sales were up 1% organically as another quarter of excellent performance in our long-cycle Building Solutions business led the way, while we continue to work through lower volumes in our Building Products portfolio. Solutions grew 14% in the quarter with 20% growth in projects as a result of strength in data centers, health care and energy. Sales grew double digits sequentially, including one month of benefit from the acquisition of our Access Solutions business, highlighted by strong execution and solutions and further progress in fire and building management systems within building products. Double-digit orders growth was a highlight for building automation in the quarter, growing both sequentially and year-over-year in both solutions and products, resulting in an overall book-to-bill ratio of 1.1. Segment margin contracted 60 basis points to 25.3% due to mix headwinds and cost inflation, partially offset by productivity actions and commercial excellence. In Energy & Sustainability Solutions, sales grew 3% organically in the second quarter. Advanced Materials increased 8% year-over-year due to continued strength in fluorine products. UOP sales declined 4% as previously noted, difficult year-over-year comps in gas processing equipment projects more than offset solid growth in refining catalysts and aftermarket services. Orders were a highlight in ESS as book-to-bill was 1.2 in the second quarter, the third consecutive quarter of a book-to-bill above 1.0 primarily on greater than 20% growth in advanced materials and more than 60% growth in sustainable technology solutions. Segment margins expanded 200 basis points on a year-over-year basis to 25.2%, primarily driven by productivity actions. We continue to execute on our proven value creation framework underpinned by our Accelerator Operating System. This, combined with ongoing benefits from our long cycle end markets and the strength of our backlog give us confidence in our ability to navigate the current environment. Now let's turn to Slide 6 and talk about our third quarter and full year outlook. Our commercial and operational discipline have enabled us to deliver on our organic growth commitments, with continued long-cycle strength and modest sequential growth within certain of our short-cycle businesses, particularly in advanced materials, building products and sensing and safety technologies. While we are encouraged by our performance year-to-date and our robust backlog, the back half will remain influenced by the dynamic macroeconomic backdrop and varying levels of channel improvement across our portfolio. Given these dynamics and our recent acquisition announcements, we are increasing our 2024 top line expectations. We forecast sales to be in the range of $39.1 billion to $39.7 billion, which includes overall organic sales growth of 5% to 6% for the year, up from 4% to 6% previously, increasing the midpoint from our prior guidance. The sales forecast also includes the acquisition of CAES and Air Products LNG businesses, which we expect to close in the third quarter. Collectively, acquisitions are expected to add approximately $800 million to Honeywell sales in 2024. Sequential growth in the third and fourth quarters across most of the portfolio will be driven by continued progress in the aerospace supply chain, seasonal uplift from UOP in addition to other long-cycle businesses and areas of modest short-cycle improvement, which will vary depending on the end market exposures. For the third quarter, we anticipate sales in the range of $9.8 billion to $10 billion, up 4% to 6% organically with the benefit of roughly $300 million in acquisition-related revenue. Moving to segment margin as growth in our long-cycle businesses outpaces the short-cycle recovery, supporting the raise to our top line range, we expect to see a bit less favorable mix within some of our SPGs in the short term. However, from a long-term perspective, executing on robust demand for projects and original equipment sets our business up for a long tail of high-margin aftermarket revenue streams by expanding our vast installed base. When incorporating the impact of recently announced acquisitions, we now anticipate our overall segment margin to be in the range of 23.3% to 23.5%, flat to down 20 basis points year-over-year. Overall segment profit dollars will still grow significantly in 2024, between 6% and 9% as margins will continue to be supported by price cost discipline and productivity actions, including our focus on reducing raw material costs. From a segment perspective, Energy and Sustainability solutions and Building Automation will lead the group and margin expansion, followed by modest contraction for industrial automation as well as aerospace as a result of the CAES acquisition. For the third quarter, we anticipate overall segment margin in the range of 23.0% to 23.3% and down 30 to 60 basis points year-over-year and in line with the first two quarters of this year due to quarterly variability in aero mix, the anticipated close of CAES and normal seasonality within energy and sustainability solutions. Now let's spend a few minutes on our outlook by business. Looking ahead for Aerospace Technologies, we expect momentum from the first half to carry over into the second half as robust orders and increases in factory output will support growth. In commercial original equipment, we anticipate the second quarter to be our low point of the year for growth and some related supply chain challenges abate. We see strong sequential and year-over-year growth through the third and fourth quarters, particularly in air transport as build rate strength drives volume progression. In commercial aftermarket, we anticipate continued sales momentum, though growth rates will come down slightly in the back half as comps get more difficult. For defense and space, the global geopolitical backdrop, coupled with our robust order book and increased investments in our supply chain will provide support for sequential growth in the third and fourth quarters. As a result of these dynamics in a strong first half, we now forecast defense and space growth to be double digits for the year. We still expect Aerospace to lead Honeywell in 2024 with organic sales growth in the low double-digit range. For segment margin, the dynamics remain comparable to 2022 and 2023 as higher sales from lower margin products are partially offset by volume leverage. However, we now expect 2024 aero margins to decline modestly year-over-year due to the impact of the CAES acquisition. We anticipate the third quarter will be the low point in the year, reflecting the closing of CAES and less favorable quarterly mix. Industrial Automation, we're benefiting from solid orders momentum in most of our long-cycle businesses, while our short-cycle businesses are showing varying signs of sequential progress. In the third quarter, we expect modest sequential improvement in IA and a return to year-over-year growth in the back half. Second half sales growth will be led by Process Solutions, which will see further strength in our aftermarket services businesses and improvement in the Smart Energy and Thermal Solutions businesses that weighed on first half results. In Productivity Solutions and Services, sales will grow sequentially from here. Orders have grown double digits for three straight quarters in PSS, giving us confidence in our outlook for the second half and into 2025. Sensing and safety technologies will improve sequentially as we benefit from the fading effects of distributor destocking. Warehouse and workflow solutions will grow sequentially as we move through the trough in warehouse automation spending and should end the year around $1 billion in sales. As a result of these dynamics, we expect flattish organic sales growth in 2024. Margins will expand in the second half as we implement productivity actions and benefit from volume leverage through long-cycle seasonality and further short-cycle progress. Moving on to Building Automation. In the third quarter, we expect Building Solutions to outpace Building Product sales. In products, we anticipate sales to improve modestly sequentially in the third and the fourth quarters, supported by 2Q's favorable order trends. However, the magnitude remains dependent on the ongoing normalization of channel inventories. In Solutions, both projects and services orders grew over 20% in the second quarter, providing support for additional revenue growth in the back half and into 2025. Projects has been a standout, and we forecast double-digit growth for the year. As a reminder, the Access Solutions acquisition has now been incorporated into our guidance within Building Products. For the year, we continue to expect organic sales growth of low single digits. For segment margin, while we still anticipate expansion year-over-year, incremental shift in mix toward higher sales in our Building Solutions business will slow the pace of that expansion near term. Finally, in Energy and Sustainability Solutions, encouraging fundamentals in our end markets will drive a favorable growth outlook in the third quarter and the full year. In the third quarter, we expect sales to be roughly flat year-over-year and down slightly sequentially with typical seasonality in fluorine products as we exit the summer months, offsetting improvement in Electronic Materials and UOP. Notably, the second quarter marks the last of significant year-over-year unfavorable comps from large gas processing equipment projects in UOP. For the full year, sustained strength in catalysts in conjunction with an incremental back half recovery in electronic materials will support growth for ESS. Our confidence in our sustainable Technology Solutions business remains unchanged as a strong demand profile will drive robust growth for the year. Additionally, we expect the closing of our acquisition of Air Products LNG business to take place in the third quarter and have included this impact in our guidance. For the year, our organic growth outlook for ESS is low single digits. Margins should improve half over half, particularly in the fourth quarter as a result of typical catalyst reload seasonality, leading to full year margin expansion for ESS. Moving on to other key guidance metrics. Pension income will remain roughly flat to 2023 at approximately $550 million. As a result of the acquisitions and corresponding increase in interest expense, we now anticipate net below-the-line impact to be between negative $700 million and negative $800 million for the full year and between negative $185 million and negative $235 million in the third quarter. This guidance includes repositioning spend between $150 million and $225 million for the full year and between $30 million and $70 million in the third quarter as we invest further in high-return projects to support future growth and productivity. Adjusted effective tax rate will be around 21% for both the full year and the third quarter. We anticipate average share count to be approximately 655 million shares for both the full year and the third quarter as we have already achieved more than 1% share count reduction for the year, but we maintain balance sheet flexibility to deploy additional capital to achieve the highest shareholder returns. As a result of these inputs, we now anticipate full year adjusted earnings per share to be between $10.05 and $10.25, up 6% to 8% year-over-year. We expect third quarter earnings per share between $2.45 and $2.55 up 3% to 7% year-over-year. We expect free cash flow to benefit from progress on the multiyear unwind of working capital as we continue to extract more value from our digitization efforts through Accelerator. In addition, we'll continue to fund high CapEx projects, high-return CapEx projects focused on creating uniquely innovative, differentiated technologies. As a result, our free cash flow expectations are now in the $5.5 billion to $5.9 billion range, up 4% to 11%, excluding the impact of prior year settlements and commensurate with the revision to net income growth. So in summary, we delivered a strong first half of the year and anticipate continued top line acceleration in the second half as we benefit from strength in our long-cycle businesses. Our rigorous operating principles will enable us to execute through short-term mix pressure, and we remain confident in our long-term algorithm with a strong second half 2024 exit rate on revenue intact, giving us nice momentum into 2025. So with that, let me turn it back to Vimal on Slide 7. Vimal Kapur: Thank you, Greg. Before we end the call, let's take a moment to focus on the progress Honeywell has demonstrated on our long-term growth algorithm. While we significantly transformed the company over the past 10 years, we are not close to finish. We remain committed to delivering long-term organic growth in 4% to 7% range, coupled with a gross margin above 40%, segment margin profit above 25%, free cash flow margins in mid-teens plus and adjusted EPS growth of 8% to 12%. M&A deals like the three we highlighted today also play a key factor enabling us to achieve 1% to 2% EPS accretion, a key factor that will allow us to generate double-digit adjusted EPS growth on a through-cycle basis. I remain excited about the opportunity to lead Honeywell to the next phase of our transformation, executing on my key priorities of accelerating organic growth, optimizing our portfolio and evolving our Accelerator Operating System. We'll continue to update you as these efforts to drive improvement in our financial performance. And now let's turn to Slide 8 for the closing thoughts before we move into Q&A. In the first half of the year, we made material progress towards our capital deployment goals, closing the Access Solution deals and announcing three additional deals, Civitanavi, CAES and Air Products LNG business. This brings us to $10 billion in M&A since the beginning of the last year as we work towards achieving my key priorities of optimizing the portfolio. We will continue to effectively manage through the dynamic economic and geopolitical backdrop while delivering on our long-term financial framework. We executed well in the second quarter, meeting or exceeding all guidance metrics and our portfolio set up for top line growth acceleration in the second half as we benefit from easy comp, strong orders growth in the second quarter and strength in our long-cycle businesses. We are confident in our ability to weather near-term challenges and meet our financial targets. With that, Sean, let's take questions. Sean Meakim: Thank you, Vimal. Vimal and Greg are now available to answer your questions. We ask that you please be mindful of others in the queue by only asking one question and one related follow-up. Operator, please open the line for Q&A. Operator: Thank you. [Operator Instructions] Our first question comes from the line of Stephen Tusa with JPMorgan (NYSE:JPM). Please proceed with your question. Stephen Tusa: Can you guys just help us parse out the moving parts here? I mean, the below-the-line costs are higher, obviously, on interest, quantinuum costs are higher and you raised organic, but you're also including the revenue from acquisitions and then you're, I think, cutting core profit. So I just really want to get down to like what the size of the segment core profit reduction is, if any? And then just help us with the acquisitions and how much they're influencing the segment profit numbers? Greg Lewis: Sure. Sure. Thanks, Steve. So I think you've got thematics quite right there. Essentially, when you think about it, first of all, when we opened the year, we always said the first half was going to tell us a lot about how the full year was coming, particularly as it relates to short cycle. And now here we are through six months. And what we're seeing is the organic growth in its totality is still in the range of our guidance and actually doing quite well, which is why we took up the bottom. But it's a -- it's more heavily towards short cycle -- or sorry, towards long cycle than short. So there's good news in there, which is things like Building Solutions, our PaaS [ph] projects business and HPS and others are accelerating. But some of the short cycles are not accelerating as much as we had hoped. So that's really just changing the margin mix, particularly in IA and BA and I would say it's probably like two thirds, one third in terms of the -- if you think about our guidance at the midpoint, I think we're coming down by about $0.15 and probably about two thirds, one third the organic core business versus the acquisitions because as you rightly noted, we've added in the next set of acquisitions. But along with that, we're going to spend $4 billion in the back half of the year. And of course, that's going to cost us about 5% roundabout. So that's really the thematic changes that we're making here overall. But the encouraging thing is the back half exit rate is still very strong. So we're -- we feel really good about the back half in its totality at this point and it's going to be a really compelling exit rate. And again, layering on $2 billion of acquired revenue into next year, about 500 basis points of revenue. So I think very much on strategy and from kind of where Vimal is trying to take us at this point. Stephen Tusa: Sorry, what's the profit contribution from these acquisitions that are now in the numbers relative to what you guys had thought in early June? And what is the cut to the core segment profit ex quantinium, you know, dollar wise... Greg Lewis: Steve, it's about two thirds, one third. The $0.15 reduction at the midpoint is about two thirds relative to the core business, and it's about one third relative to our M&A net of interest. Julian Mitchell: Hi, good morning. Maybe just wanted to follow up on a couple of points there. So the segment profit dollar guide has come down, I think, about $100 million to $150 million. So I just wanted to check, Greg, what you're saying is, and that's a full year number, I think. You're saying that around two thirds of that is core dilution just from more long cycle mix versus short cycle? And then a third of it is just the newer acquisitions closing in Q3. Those are sort of negative EBITDA [ph] if you like. I just wanted to check that. And then when we're looking at... Greg Lewis: What I'm saying, Julian, is that at the EPS line, it's about a $0.15 reduction at the midpoint, and about two thirds of that is for the core business and about one third of that is due to the M&A, which is inclusive of the interest cost of actually making those acquisitions. Vimal Kapur: Julian, the point I will add there is the margin changes, not that something has gone shift in the businesses. It's the mix within the businesses, which is causing this margin changes. Like in case of aerospace, we continue to have OE versus aftermarket, market mix, in case of building automation, more solution, less products, similar dynamics in case of industrial automation. So I want to make it clear that underlying businesses remain strong. We are seeing margin expansion. We are seeing productivity. Our fixed cost remains very attractive. So it's mixed within the businesses. We are getting more longer-term long-cycle businesses, which in a way also solidifies our second half outlook. We are not factoring a significant uptake in the short cycle. We are factoring some but to which we have visibility. But majority of our outlook for second half is built upon long cycle businesses, continued growth in aerospace, sequentially quarter on quarter ramp up of UOP in the second of the year, specifically catalyst businesses, strong backlog and other solution businesses. So then all that comes together, it just makes the margin mix to what we have guided it to. Julian Mitchell: I see. Yes, I think a lot of the question just because it looks like the absolute sort of segment profit dollar guide is lower, not just sort of the margin mix... Vimal Kapur: That's right because of the dynamics of longer cycle businesses growing way greater than shorter cycle, it -- the margin mix is unfavorable. But if you roll it up to 2025 that factor should play off because this is not an underlying business margin issue. That's the point I'm highlighting. It's not that we are dropping margins somewhere, we're having price cost issue, we are not getting productivity. Our fixed cost has gone up. None of that is true. We are, in fact, getting excellent productivity and margin expansion. It's purely driven by mix within the businesses. Julian Mitchell: That's helpful. And do... Greg Lewis: Just keep in mind, short -- in most cases, our short cycle margins, think about them as being 30 points higher than our long-cycle project solution-oriented margin. So that's really what you're seeing. Revenue in its totality organically, roughly the same, but carrying a lower margin rate along with it. Julian Mitchell: That's very helpful. And on your point on the M&A, the fourth quarter, I think you're assuming sequentially, revenues are up maybe 9%. That's a lot more than normal, but you've got the deals coming in Q3. So just wondered sort of how much of those new deals add to that fourth quarter revenue if you have that to hand? Greg Lewis: Yes. I mean you should think that we're expecting closure of those deals in the third quarter, but likely to be mid- to late part of the third quarter. So there is some level of that step up. Remember, we always have a big step up in aero in Q4, and we expect that to also be true. We also have a lot of visibility into the ESS rev streams in Q4 as well. So catalyst reloads and so forth. So it is on the higher side of the revenue step-up for sure. But we feel good we've interrogated that quite deeply, and we feel good about the credibility around that outlook. Now the other thing I would just mention is, keep in mind, if you just take a step back for a minute on the M&A side. In the early days of these acquisitions, that's -- there's going to be some meaningful integration costs on the front end. But again, beyond 2024, these deals are nicely accretive as we get through that integration cost period. So again, good -- I think it's a very nice adder to the portfolio. And if you think about the work that was trying to do on improving the quality of the portfolio, this is all good news for '25 and beyond. Sean Meakim: And then Julian, this is Sean. Just one to put a button on your question around the incremental revenue in '24. On June 3rd, we announced the closing of the Access Solutions business. We also increased our guidance by $400 million for the year. Now this new guidance reflects another $400 million of related M&A revenue in '24. So full year '24, about $800 million, of which we had a month of Access Solutions in the month of June in the second quarter. Such would give you enough to kind of walk through the quarterly through the balance of the year. And then we talked about a run rate of close to $2 billion collectively going into '25. As Greg said, he's going to be -- each of these deals are coming in at accretive growth rates to the respective businesses as well as Honeywell overall. Operator: Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question. Nigel Coe: Good morning. I hate to be a bore, but I do want to come back to this guidance revision math. My understanding was that the LNG acquisition was actually margin accretive, but I think maybe 30%, 40%. So on that $400 million [ph] of incremental M&A revenue, it feels like you've got over $100 million of segment income coming through here. So it feels like the core guide is getting cut by maybe $200 million or so. Is that correct? And how do we think about that? Is that solely within the IA and BA segments? And is it all margin? Just want to clarify that. Greg Lewis: Sure. So most of the cut is in IA, BA [ph] for sure. That is where the short-cycle, long-cycle mix changes is most pronounced for sure. And yes, we're getting incremental segment profit on these new acquisitions. As I mentioned, there's going to be some integration costs on them early on and then net of the interest cost that we're going to bear. That's where we talk about, I don't know, $0.04 to $0.05 roughly of degradation in the EPS guide associated with that. Nigel Coe: But the repo costs are coming down, Greg, by about $50 million. So are you talking about integration costs over and above repo? I mean -- and can you just help us out how much segment... Greg Lewis: Yeah. Integration costs get incurred inside of segment profit unless there's a repositioning project associated, but there are... Nigel Coe: Okay... Greg Lewis: There are ongoing integration costs that go into the segment profit of the business that we're acquiring into that SPG. Nigel Coe: Okay. My last question, Greg, is what is the impact on segment income from the new acquisitions in the back half of the year? Greg Lewis: I don't think we're giving you a precise answer on that. There's a range around inside of what I was sharing. So I'm not going to give you like a point in precise number. Nigel Coe: Okay, no problem. Thanks. Operator: Thank you. Our next question comes from the line of Scott Davis with Melius Research. Please proceed with your question. Scott Davis: I'm looking at these book-to-bills on Slide 11. I don't think we -- we don't have a lot of history with you guys talking about book-to-bill. But they look pretty encouraging. I just wanted to get kind of your view on historically, they've been relatively volatile. Are they something that we can kind of take to the bank, if you will, that this does indicate a pretty sharp acceleration in the back half? Vimal Kapur: Yes, Scott, actually, one of the highlights for this earnings story is our orders performance in second quarter. Our orders grew double digit in Building Automation, high single in Industrial Automation and double-digit in Energy & Sustainability solution. So that has put our backlog now to $32 billion, up 5%. And that's really what is now flowing into our revenue of second half with a strong book-to-bill, which we did in second quarter. By the way, the forecast we have for the orders for the second half is also very strong. So essentially, we have pivoted towards our guide toward long cycle on the strength of the backlog and the forecast we are getting on the long-cycle businesses because it gives us more assurance and more visibility, and that's why we called out book-to-bill, which is nearly one. And we feel that this is standing on a very strong footing at this point of time. Scott Davis: Okay. And Vimal, could you walk around the world a little bit for us? I mean have you seen any meaningful changes in the key regions, notably China? Vimal Kapur: Yes. No, I would say -- I will call out the two biggest regions for us, China and Middle East. I would say China, Honeywell continues to do well, thanks to aero and energy businesses we have here. We scored high single in last year. We are trending towards similar rates this year. Short cycle businesses are challenged there, too, like the economic cycle of China, as we all read. Middle East remains a counterpoint for us. It is growing very strongly, specifically Saudi Arabia, also UAE, we see a strong momentum. And in a way, we are counting on that reversion in the times ahead to the slowdown of China progressively every passing year. Europe, actually, we are seeing a recovery. We have seen good revenue progression for Honeywell in first half of the year. So probably bottom is behind us, and that's how we are looking at times ahead for Europe for us. So that's kind of for some high-level comments on geography. Operator: Thank you. Our next question comes from the line of Andrew Obin with Bank of America (NYSE:BAC). Please proceed with your question. Andrew Obin: Just a question on aerospace. And as I said, maybe it's too long term. But just sort of thinking about the mix for aero into the second half, which I believe you've sort of highlighted as a drag. Vimal, are you guys changing your approach to monetizing programs in aero that are sunsetting because my understanding is that they have been sort of a steady source of upside over the past couple of years. Are you -- as you sort of become the Chairman, are you changing approach to how to think about your portfolio there? Vimal Kapur: I mean I would say we absolutely are looking to make aero more of a longer cycle growth sector for Honeywell. Aero has always faced cycle, up cycle, down cycle, and we are really positioning it to grow high single for until next 5 to 7 years. And there's an organic growth work which is happening around it through new products. But equally importantly, the acquisitions which we made of Civitanavi and CAES e, both are targeted to defense segment. And defense segment, we are bullish on the growth occurring in defense. Our backlogs are growing very nicely there. So we're really pivoting towards higher growth segments within aerospace to maintain our growth rates there in the times ahead. And I remain very both bullish and optimistic on how aero business is going to perform in the next several years ahead. Andrew Obin: And I guess I'm going to go back to the question that everybody else asked. As we go through sort of the list of the performance of businesses this quarter, right, I mean, it was very few exceptions. It seems that short-cycle businesses have actually done as well as you were expecting. So another way of asking the question, now that you're a Chairman, are you just taking a more conservative approach to sort of how to think about the framework going forward given the level of macro uncertainty out there? Vimal Kapur: I mean I think the macros are reality, Andrew, at the end of the day, that's something which I don't control. So long-cycle businesses are performing well because the segments we serve are attractive, energy transition, aerospace, and that's certainly helping us. I think short cycle businesses are reverting back. I'm not suggesting that they are contracting, but the reversion is more at the lower end of our initial estimate at start of the year versus at the mid or upper end of it. That's only subtle [ph] difference. And the swing between the mix of short and long is the difference in the margin because we are raising the low end of our guide of revenue, which shows our confidence in the overall business, organic growth, because my comment right from the day I started is organic growth is my highest priority and we are delivering on that. Our guide is 5 to 6. My goal will be, of course, to deliver on the upper end of it. And I would argue in the very first year of my inception in the job, that's not a bad outcome and we'll strive for that subsequent year. I don't leave any impression that short cycle is less important, long cycle is more important. I think it's just a derivative of how markets are performing and how we are performing in the markets at this point of time. Operator: Thank you. Our next question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question. Deane Dray: I was hoping to get some commentary if you're seeing any of the election worries delaying customer decisions, and it's not really related, but any impact from the CrowdStrike (NASDAQ:CRWD) fiasco early in the week, anything ripple through your businesses? Vimal Kapur: I mean, being nothing on the CrowdStrike, no impact on Honeywell. We are not a user of that software. We obviously pay a lot of attention to our cybersecurity strategy and remain very vigilant on that. So I'm never going to claim victory on that front. We need to stay vigilant. I think, on elections, look, I mean, we always will prepare for both the scenarios. That's not new for a company like Honeywell. But this year, elections are more than a US factor spinning around rest of the world. And clearly that is certainly been a factor on how economies are shaping up. That's my view. I think there was a lot of stories around, half the world is going through elections, but that's not playing out because the results are out and I think the biggest one in US, we are anxiously waiting on how the results will play out in a couple of months down the line. But we are prepared in either scenario. This is something we do for a living and we anticipate each outcome and how will it impact us? Deane Dray: That's great to hear. And just a second question. I know we're still early in the deal integration, but where would you highlight some of the revenue synergy opportunities? What would be the biggest and potential timing? Vimal Kapur: Look, I would like to highlight that all the deals we have announced, none of our deal ROIs are based on sales energy. We don't count it. Having said that, each of the 4 Ds [ph] we have done, they are highly synergetic to Honeywell and that has been our theme. I'm equally -- I'm bullish on all the four deals and synergies it brings. Aero has substantial synergies on both CAES acquisition and in Civitanavi acquisition. Same is true for both UOP and HPS and LNG because we were always present in LNG segment. This was not a new arrival for us. But with the deep technology expertise, this new Air Products business brings, it's just going to further enhance our LNG penetration and growth rate in that segment. And Carrier acquisition, we have talked in some of the earlier calls, it's all about taking that business truly global because the business is very concentrated in North America, and that's going to provide us sales synergies. So there are two factors in these acquisition I'll call out. The first is all the acquisitions we have made, they are accretive to the baseline growth rate of Honeywell, all of them. Second, the sales synergies are icing on the cake on top of it, and we will deliver on that as we integrate them in 2025 and more, and that's going to be a strong part of our earnings story in the times ahead. Operator: Thank you. Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question. Sheila Kahyaoglu: Good morning. Maybe just to start on the top line with aerospace. Can you talk about commercial OE, how you're thinking about where your MAX and 787 rates are today and how they progress through the year? Is Boeing (NYSE:BA) signaling any sort of change to your output as we think about the rest of the year and into '25? Vimal Kapur: Sheila, we are constantly calibrating our output with all the key OEMs on a 12 months earning frequency. That has been a process for a while now. I would say that based on the recent adjustment path, both Airbus and Boeing, we have calibrated our volumes aligned with them. It's not a major change. But there's some small change, specifically on the electronics side, where we don't have much past dues. But the change is not material to aerospace and not material to Honeywell. But our guide does factor changes, which have been signaled by both Airbus and Boeing recently. Greg Lewis: So you're in the right neighbourhood, yes. The way to think about aerospace by end market would be something approaching 20% for OE is reasonable, something like mid-teens for aftermarket and then double digits for defense and space. Sheila Kahyaoglu: Okay. And then just on the profitability, you have about 100 bps of contraction, I think, in the second half despite more typical selection credit dynamics. So how do we think about profitability in the second half and how that Cobham (LON:COB) acquisition changes that? Vimal Kapur: Yes. So as we talked about the mix inside of our deliveries has caused us quarter-to-quarter volatility, I'll call it, for lack of a better word. And the third quarter is likely going to be the lowest margin rate of the year for us, and we expect that will then recover back in fourth quarter. And that's based on, again, what we can see in terms of what's in the backlog, the margin on those products, et cetera. And we talked about the fact that aero on an organic basis, it was going to be roughly flat in margins this year and then layering on the CAES acquisition that will have a negative impact on that baseline and then we'll bring it back up from there. So as you start seeing the third and the fourth quarter prints, that's what you should expect to see inside the aero margin rate, but it's not a change in our overall outlook, definitely amplitude from quarter to quarter to quarter as we've been discussing, given the mix of the products we're delivering even inside the OE itself, but no real change in our outlook on how that is performing. Sheila Kahyaoglu: Thank you. Operator: Thank you. Our next question comes from the line of Andy Kaplowitz with Citigroup. Please proceed with your question. Andy Kaplowitz: Vimal or Greg, just maybe double-clicking on the short cycle businesses that are resulting in the lower expected organic margin in the second half. I think you said building products orders have been improving. Are they just improving more slower than you thought and you saw weaker-than-expected June? Is that one of the issues? And then maybe the same question on productivity solutions are sensing. What are you assuming for these businesses in terms of rate of recovery now? Greg Lewis: Yes. Thanks, Andy. So a couple of things to keep in mind. Just to remind, when we gave our guidance on June 3rd, it's obviously before the third month of the quarter and remember, half of our results happen in the third month of any given quarter. So that just speaks to like what we were able to see at that moment in time versus what we can see today. But your supposition is exactly right. There are certain parts of the short-cycle businesses inside of building products and inside of IA short cycle that are slower than we had hoped. And so that's really what's driving the margin mix. It's getting offset, as we mentioned, by the Building Solutions sales, the HPS project sales, et cetera. But they're still improving sequentially. So that's not -- that is also still true. They're improving sequentially, but not as robustly as we would have liked. Andy Kaplowitz: Helpful, Greg. And then obviously, you stepped up M&A activity considerably. Do you see the recent rate of M&A continuing? Is the M&A market conducive to that? And then you've talked about divestitures or ramping that up. Can you offset dilution that you might eventually get from divestitures to still grow that 10% in terms of -- in line with your longer-term algorithm? Vimal Kapur: That will only play out. I mean I can only on divestiture, I would say we are working on it, and I would be disappointed if we do not show any progress during 2024. And as those things play out, we'll update you on its implication on our earnings guide, if any, we have to take any cost actions, but that's work in progress. And you can expect to hear more from us as the year progresses. On M&A front, our pipeline is still active. We are obviously conscious of the fact we have done 4 Ds [ph] we have to integrate them. We don't want to take that lightly. But it doesn't mean that we are walking away from the market, and we're actually sourcing what's available out there. Operator: Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs (NYSE:GS). Please proceed with your question. Joe Ritchie: And so thanks for all the color. So just maybe just focused on BA and IA for a second and the margins that are expected for the year there. How has those expectations just change for those two particular segments for the year? Vimal Kapur: Yes. They're coming down versus what we had anticipated and again, mainly because of the back half margin performance expectations. But we still expect that on an overall basis, we will make progress in BA in particular. We ought to see a little bit of improvement. It's just not going to be as robust as we had thought in the beginning of the year. So think about that in 10s of basis points as opposed to 100 basis points. And on the IA side, similarly, we expect to make some progress in the year, but it's probably going to be in the 10s of basis points over all for the full year as opposed to 100 basis points type of range. Greg Lewis: But progress nonetheless... Vimal Kapur: Keep in mind, inside of IA, we are overcoming the very accretive license payments relative to the PSS business that were a nice lift for us, and now we're going to experience three quarters of that loss this year and one quarter of it next year. Joe Ritchie: Yes. Okay. Okay. Great. And then I guess just -- I know a lot of the comments on the - the change in margins has been driven by the mix commentary, and we've highlighted that already. I'm just curious, has anything changed from a pricing standpoint or like raw material inputs or inflation? Just any comments around that would be helpful. Vimal Kapur: The pricing Joe is trending in the direction we have signaled. We are at a rate of about 3%, and we expect second half to be a little slightly stronger. The punchline is our price cost is just about neutral, and our productivity is very strong, which is giving us the margin expansion across our businesses. And what -- as I explained before, the margin rates at EPS level is just mix within the businesses itself. But pricing remains at the right level. And we do expect this 3% - I've spoken before that the era 1% price is over, so we always should expect something greater than that, and we are demonstrating that in 2023. Greg Lewis: Yes. And again, on the inflation side, no big changes. There's always something that comes along... Vimal Kapur: Electronics, I would say, remains hot. That's where we continue to see elevated level of pricing, but others are I would say - and labor. Labor is and will remain a high elevated inflation category for us. Operator: Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Kapur for any final comments. Vimal Kapur: I want to express my appreciation to our shareholders for your ongoing support and again to our Honeywell future shapers, who are driving differentiated performance for our customers. Our future is bright, and we look forward to sharing our progress with you as we continue executing on our commitment. Thank you for listening, and please stay safe and healthy. Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.+

Earnings call: Xerox reports Q2 declines, maintains long-term targets By Investing.com

Xerox Holdings Corporation (XRX) reported a decrease in revenue for the second quarter of 2024 but maintained its confidence in achieving long-term financial targets. CEO Steve Bandrowczak outlined the company's progress in its reinvention strategy, focusing on simplifying operations and expanding digital and IT services, despite a 10% decline in Q2 revenue to $1.6 billion. While the company lowered its full-year guidance, it remains committed to its three-year target of a $300 million improvement in adjusted operating income. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights In summary, while Xerox faces challenges with declining revenues and profit in certain segments, the company is actively implementing a reinvention strategy aimed at long-term growth and efficiency. With a focus on digital transformation, cost savings initiatives, and market expansion, Xerox remains optimistic about its future performance and ability to meet its financial targets. InvestingPro Insights As Xerox Holdings Corporation (XRX) navigates through its transformation period, recent data from InvestingPro provides additional context to the company's financial health and market performance. With a market capitalization of approximately $1.46 billion, Xerox is a notable player in the Technology Hardware, Storage & Peripherals industry. The company's valuation suggests a compelling free cash flow yield, which aligns with the management's focus on improving cash generation and operational efficiency as part of its reinvention strategy. InvestingPro data indicates that Xerox is trading near its 52-week low, reflecting the significant pressure on the stock price, with a one-week total return of -9.38% and a six-month price total return of -38.28%. This may attract investors looking for potential value opportunities, especially considering the company's commitment to returning value to shareholders through dividends, having maintained dividend payments for 18 consecutive years. Two InvestingPro Tips that may be particularly relevant for investors considering Xerox's stock are: 1. Net income is expected to grow this year, which could signal a turnaround from the previous performance and align with the company's long-term financial targets. 2. Despite recent stock price volatility, analysts predict the company will be profitable this year, potentially providing a more optimistic outlook for investors. For those interested in a deeper analysis, InvestingPro offers additional tips on Xerox and other companies. There are currently 11 tips available for Xerox, which can be accessed by visiting https://www.investing.com/pro/XRX. Investors can benefit from these insights and more by using the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. Full transcript - Xerox Corp (NASDAQ:XRX) Q2 2024: Operator: Welcome to the Xerox Holdings Corporation's Second Quarter 2024 Earnings Release Conference Call. After the presentation there will be a question-and-answer session. [Operator Instructions]. At this time, I would like to turn the program over to Dave -- to Mr. David Beckel, Vice President and Head of Investor Relations. Please go ahead, sir. David Beckel: Good morning, everyone. I'm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation second quarter 2024 earnings release conference call, hosted by Steve Bandrowczak, Chief Executive Officer. He's joined by John Bruno, President and Chief Operating Officer and Xavier Heiss, Executive Vice President and Chief Financial Officer. At the request of Xerox Holdings Corporation, today's conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without the expressed permission of Xerox. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor and will make comments that contain forward-looking statements, which, by their nature, address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein. At this time, I'd like to turn the meeting over to Mr. Bandrowczak. Steve Bandrowczak: Good morning, and thank you for joining our Q2 2024 earnings call. Sequential improvements in adjusted operating income margin, cash flow, and revenue validate the comprehensive and strategic organizational changes implemented in Q1. Reinvention is a multi-year strategy to simplify operations and repositions Xerox towards market opportunities in print, digital, and IT services with the highest rates of underlying growth. With transformational changes of this magnitude, progress may not always unfold in a linear fashion. We experienced a short period of disruption in the first quarter during implementation of the redesigned operating model, but continued to execute reinvention according to plan. Notable improvements in operating processes and financial results since the reorganization further our confidence in this strategy's ability to deliver a targeted $300 million improvement in adjusted operating income above 2023 levels by the end of 2026. Summarizing results for the quarter, revenue of $1.6 billion decreased 10% in actual and constant currency. Excluding the impact of year-over-year fluctuations in backlog and reduction in non-strategic revenue associated with the reinvention, core business revenue declined only modestly. Adjusted EPS was $0.29, $0.15 lower year-over-year, primarily reflecting higher taxes and interest. Free cash flow was $115 million, an increase of $27 million compared to Q2 of last year. And adjusted operating margin of 5.4% was lower year-over-year by 70 basis points due to lower revenue offset by operating cost reductions. With the disruption in Q1 firmly behind us, the benefits of streamlined organizations with improved operating focus are materializing in the financial results. Q2 revenue was largely in line with expectations marking an improvement in trajectory from Q1. Adjusted operating income margin improved more than 300 basis points on a sequential basis and free cash flow grew sequentially and year-over-year. Momentum in equipment orders and pipeline, new product launches, and improved sales processes are expected to drive stronger revenue growth in the second half of the year than originally expected. Despite an improved outlook in the back half of the year, we lowered full-year revenue, adjusted operating income, and free cash flow guidance. The reduction in full-year guidance primarily reflects the impact of incremental reinvention actions, including geographic and offering simplification. The savings of which are now expected to be realized predominantly in 2025. Other impacts to margin, including higher freight and product costs, are also expected to be mitigated over time. Accordingly, the reduction in 2024 guidance has no bearing on our confidence in the three-year $300 million adjusted operating income improvement target. In fact, our confidence in the three-year outlook has grown over the past quarter due to progress in the identification and estimation of reinvention cost reduction initiatives, now totaling more than $700 million between 2023 and 2026, and the quality and rigor behind the management infrastructure recently put in place to execute those initiatives. John and Xavier will discuss the timing and consistency of future operating cost reductions in more detail. I'll now turn to our strategic priorities which continue to guide our decision framework as we execute the reinvention. Starting with a stronger core, the change to the business unit led operating model in Q1 and related changes to the sales organization were designed to catalyze [ph] market share growth by bringing sales and operations in closer alignment with the economic buyer of Xerox offering while improving sales efficiencies. We are seeing early evidence of the success of both fronts, now that our sales team has settled into the new operating model. The sales, marketing, and pricing teams are working more collaboratively to design offerings and marketing strategies specific to client segments and routes to market. Sales efficiency has improved through enhanced intelligence, better planning tools, and optimized sales coverage models. And work continues to reduce administrative burden giving the sales team what time to focus on the highest quality opportunities and target new accounts. These improvements are bearing out across top line key performance indicators. Equipment auto momentum continued Q2 with orders and pipeline both higher year-over-year. Supplies revenue also grew in the second quarter and the first half of the year. Services KPIs are similarly strong. Revenue renewal rates for large accounts remained above 100% in Q2 and for the last 12 months and across both print and digital services new business signings are higher year-to-date with renewal rates ahead of internal targets. The benefit improved sales operations will be augmented in the second half with a refreshed A3 product lineup, our largest and most successful product category. The lineup features what we believe is the world's first AI assisted multi-functional printers. The devices come with adaptive learning modules which save clients time by suggesting new and optimized workflows using AI-based algorithms to analyze device use patterns and user preferences. Also included are pre-loaded AI applications that enable users to summarize, convert handwritten notes, and automatically auto-redact any scanned documents. More importantly, these AI-enabled devices serves as a platform for a broader range of AI-assisted workflows including intelligent document processing currently deployed by Xerox as a digital service. The updated platform combined with cloud-hosted AI applications and integration opens the door for innovative new use cases. The change to the business unit operating model has also brought increased focus on expanding digital and IT service penetration across our client base. Stronger alignment between product development, solutioning, and sales teams is driving differentiated digital workflow solutions for traditional print clients who are increasingly looking to partners like Xerox to improve their most critical document workflow processes. Our strategy of expanding total addressable market with every print client is progressing accordingly. In Q2, we signed a deal with an existing print client in the European telecom space to provide an end-to-end customer acquisition solution for the client's new home broadband service. With the help of a strategic partner, we sourced unique customer data and applied proprietary intelligence to identify an optimum set of customer targets. We designed and executed an omnichannel marketing campaign across both digital and print media and using the response data from the campaign to recalibrate the targeting strategy, improving marketing effectiveness for the client over time. This solution demonstrates our ability to integrate print with advanced digital capabilities to provide incremental value to our clients. Increasingly we are utilizing artificial intelligence to optimize our digital solutions. This past quarter we signed a deal with an existing print client in the insurance industry to provide a digital workflow solution leveraging AI and machine learning which assists in the prevention of money laundering and financing of terrorism. This unique solution automates processes involved in the screening and detecting of fraud and other non-compliant activities greatly reducing the need for manual processes and client risk. The ability to sell advanced digital solutions such as intelligent document processing by leveraging print customer relationships is a key competitive advantage as we expand our digital services business. The new business signing for digital services are up double-digits year-to-date and we expect increased demand for solutions utilizing AI to provide a tailwind to growth for our digital services businesses in 2025. Moving to cost improvements. In Q2 operating expense decreased nearly 50 million year-over-year reflecting the benefits of the strategic actions taken in the prior year, the use of AI to optimize internal processes and the planned reduction in headcount associated with the structural reorganization. With headcount reduction largely behind us I'll focus this quarter turn to identifying future cost reduction initiatives and developing the systems and processes required to ensure the successful delivery of those initiatives. Our global business service organization or GBS is a key to the delivery of future savings as it enables continuous operating efficiencies through shared capabilities and platforms. Louie Pastor, our Chief Administration Officer, leads the GBS organization. He is also our Chief Transformation Officer putting control of both the design and implementation of the end-to-end structural changes in the hands of one leader. I am pleased with the progress his team has made to identify more than 700 million of gross cost savings through reinvention from 2023 to 2026. Finally, balanced capital allocation. This quarter we delivered year-over-year growth in free cash flow despite lower operating income and lower sales of finance receivables. We are in advanced talks to expand our forward flow agreement outside the U.S. which will enhance the company's free cash flow profile by reducing capital required to fund future lease originations in other regions. Balance sheet health and liquidity improved this quarter through the reduction of 300 million of debt and expansion of the ABL facility by 125 million. We expect free cash flow in future periods to be sufficient to both fund value accretive growth in digital and IT services and reduce debt. Through reinvention we intend to reduce leverage below three times EBITDA by the end of 2026. The payment of our $1 per share dividend remains a key priority. Our dividend yield is well above that of our peers but we fully expect our yield to return to more normalized levels as we execute our reinvention. I will now hand the call over to John to provide an update on specific reinvention initiatives. John G. Bruno: Thank you Steve. As Steve noted we made progress this quarter in design planning and implementation of structural changes expected to drive reductions in operating costs to meet our three-year 300 million adjusted operating income growth target. I'll spend time on today's call discussing the mechanics and assumptions underlining the target and key progress made in Q2. Sequentially higher operating income requires a leaner, less complex organization, fit for purpose to the market opportunities available to us. The structural reduction in organizational complexity through reinvention will be driven by three primary levers, geographic, offering, and continuous operating model simplification. These savings unlock require structural reduction in operating costs which when combined with a more favorable mix of revenue towards markets with higher underlying growth rates will drive cash flow sufficient to fund growth while reducing leverage. I'll start with an update on geographic simplification. We are currently executing a shift in how we distribute product in certain markets from a direct to an indirect model. This shift in distribution strategy does two things. One, it allows greater focus on providing print and digital service capabilities for channel partners who are best positioned to serve our clients within their region; and two, allocates more time and resources on being the leader in the markets in which we maintain direct operations. This quarter, we transitioned our operations in Ecuador and Peru from a direct to an indirect model, following a similar move in Chile and Argentina in the prior quarter. We continue to evaluate the optimal mix of direct versus indirect distribution by country, across our operations in Western and Eastern Europe, and will provide updates as transition decisions are made. Offering simplification will narrow and optimize our offerings over time to those with the greatest levels of competitive differentiation and profitability. Last quarter, we announced our decision to exit the manufacturing of certain production print equipment. We did this to refine our focus to the submarkets within production that are growing fastest and put more resources behind the development of a services led software enabled production print ecosystem, leveraging our free flow and XMPie software as examples. This quarter, we consolidated our remaining manufacturing operations globally and are ahead of plan in the sale of discontinued products. We continue to explore further rationalizations of our offerings to drive closer alignment with the needs of our clients and channel partners. One such example is the optimization of our A4 product for specific markets within the distribution channel where we have the most opportunity to gain share. As we discussed last quarter, operating model simplification will leverage the global business services organization to drive long-term enterprise-wide efficiencies and technology-enabled productivity gains. During the second quarter, the GBS organization began implementing 60 new initiatives to accelerate savings across key business functions, including reports to report, order to cash, global spend management, and the people operations. These efforts will help streamline and standardize global internal processes making it easier to do business with and within Xerox. Also in the second quarter, we entered into agreements with technology partners to transform our operations with enterprise-wide technology-led process improvements. And over the next few years, we plan to greatly reduce the technological debt associated with our legacy infrastructure by implementing a technology stack that mirrors the standardization of our global business processes. These agreements allow us to reduce the IP costs and improve business insights while providing greater flexibility and expanding our offerings and solutions. Another win this quarter was the redesign of our transportation network. Our teams negotiated key transportation contracts to derive economies of scale savings through the optimization of our transportation costs across our carrier network, reducing supply chain costs in future periods. These unlocks are critical enablers of broad-based organizational efficiencies and the operating savings that accompany those efficiencies. And to date, the reinvention office has identified over 300 savings initiatives resulting in more than 700 million in gross cost savings through 2026 across seven primary cost categories. In the second quarter, the reinvention office implemented a new management operating system, including comprehensive change management and accountability structures to ensure the successful realization of these initiatives and the continuous identification of further initiatives. With reinvention momentum and progress made thus far we are confident in our ability to deliver 300 million of incremental adjusted operating income by the end of 2026. Even after accounting for the shift in certain markets from direct to indirect distribution, a narrow production equipment focus, and potential erosion in our core print business and ongoing reinvestments in our growth businesses. When we enter 2027, we expect Xerox to be a transformed business with double-digit operating margins and more than 20% of revenue coming from higher growth, digital, and IT services businesses, as we reinvest growing levels of free cash flow and our discipline in our organic and inorganic investment opportunities. I'll now hand the call over to Xavier. Xavier Heiss: Thank you, John, and good morning, everyone. As Steve mentioned, the benefit associated with this year's organizational redesign are materializing in financial results. In Q2, adjusted operating income margin, adjusted operating profit, free cash flow on revenue-old-improved-sequentially, while free cash flow-improved year-over-year, despite the lower contribution from finance foreseeable activity. Total revenue declined 10% in actual and constant currency. Excluding the effect of backlog fluctuation, reduction in non-strategic revenue on order-reinvention action, total revenues this quarter declined 3% in constant currency to more than 200 basis point improvement from Q1. Core revenue in the first half of 2024 was below our expectations, mainly due to the first quarter performance. However, continued momentum in equipment orders on pipeline supported by the improvements in sales operations Steve noted earlier, new product launches on continued strength in signings activity gives us increased confidence both core and reported revenue will grow in the second half of the year. Turning to profitability. Similar to Q1, we incurred inventory charge associated with the exit of certain production print manufacturing operations. All profitability commentary to follow exclude this impact. Gross margin declined 50 basis points year-over-year due to lower volume on higher freight costs, partially countered by favorable currency effects on revenue mix. Adjusted operating margin of 5.4% declined 70 basis point year-over-year due mainly to lower gross profit, partially offset by the benefit of structural cost reductions. Total operating expense in Q2 declined 47 million year-over-year or close to 10%, reflecting headcount reduction action taken in Q1, no labor reduction in overhead on the flow through of cost reduction implemented in the prior year. Adjusted other expenses net were 13 million higher year-over-year due to an increase in non-financial interest expense associated with our recent debt refinancing activities. While our debt balance is not significantly higher year-over-year, non-financial interest expense increased due to higher interest rates on the lower portion of debt being allocated to our financing business, reflecting lower finance receivable balances year-over-year. Adjusted tax rate of 25.5% compared to a 20% tax rate in the prior year period. This increase in tax rate is a result of settling certain non-U.S. tax audit. Adjusted EPs of $0.29 in the second quarter was $0.15 lower than the prior year, driven by lower adjusted operating income, higher interest expense on a higher tax rate, partially helped by a lower share count. GAAP EPS of $0.11 was $0.52 higher year-over-year, as the prior year quarter included a $92 million net after tax charge associated with the donation of PARC of $0.58 per share. Let me now review revenue on cash flow in more detail. Starting with revenue, on the natural and constant currency basis Q2 equipment sales of 356 million declined around 15% year-over-year, compared to a roughly 26% decline in Q1. The effect of backlog fluctuation in the current and prior year on reinvention action, including geo simplification, accounted for most of the decline. Excluding this effect, equipment sales declined modestly, an improvement relative to Q1 which was negatively affected by the sales reorganization. After a brief period of disruption in Q1, we are seeing consistent improvement in equipment order velocity on pipeline, reflecting the intended benefit of closer alignment between our sales on offering teams and the economic buyer of our product. Each year, backlog compares continuous momentum in order on a refreshed A3 product lineup featuring a range of AI enabled capabilities give us confidence equipment revenue will return to growth in the second half of the year. Equipment revenue decline outpaced decline in installation activity in Q2 due to unfavorable product mix. Decline in installation activity mainly reflects the prior period reduction in backlog on the slight increase in current quarter backlog. Order activity outpaced installations again in this quarter, providing a tailwind to equipment revenue for Q3. Post sales revenue of 1.2 billion declined approximately 8% in actual on constant currency. Excluding the reduction in non-strategic lower margin paper on IT endpoint device placement on order re-invention actions, including geo simplification core sales revenue declined modestly. Consistent with past quarter I will provide additional commentary to help clarify underlying trends in our core businesses, which excludes the effect of backlog fluctuation on reduction in non-strategic revenue, including reinvention actions. For Q2, the effect of equipment backlog fluctuation in the current and prior year quarters contributed around 300 basis points to the year-over-year decline in total revenue. Additionally, lower sales of non-strategic paper IT endpoint device on decline in finance revenue, reflecting the change in our finance receivable strategy, contributed more than 200 basis points to the decline. Finally, other strategic actions to simplify our business on improved profitability, including geographic simplification, contributed around 150 basis point to the decline. When these impacts are removed, revenue declined low single digit, primarily reflecting decline in printed page volume, partially balanced by growth in digital on managed IT services as well as growth in supplies. For the second half of the year, we expect revenue growth on both reported basis and when adjusted for reinvention actions. Let's now review cash flow. Free cash flow was 115 million in Q2, higher by 27 million year-over-year. Operating cash flow was 123 million in Q2, 28 million higher than the prior year quarter. The increase was mainly driven by working capital benefit, partially counterbalanced by lower adjusted operating profit, lower cash from finance receivables, higher restructuring payment associated with reinvention on higher pension contribution. Finance assets were a source of cash of 161 million reflecting the benefit of our HPS Forward Flow program on lower origination year-over-year. This compared to a source of cash of 210 million in the prior year quarter, which included a large one time sales of finance receivable. Working capital was a use of cash of 133 million, a 115 million year-over-year improvement, driven mainly by the timing of accounts payable. Investing activity were a use of cash of 2 million, largely consistent with the prior year quarter. Financing activities consumed 336 million, reflecting the 217 million pay down of the remaining 2024 unsecured senior notes, along with the 82 billion of secured debt payment on dividend of 34 million. Turning to segment. Xerox Financial Services or XFS origination volume declined 41% year-over-year, reflecting XFS change in strategy to return its focus towards captive only financing solution. XFS finance receivable balance declined 9% sequentially in actual currency due to the runoff on sales of U.S. XFS origination on existing finance receivable on HPS funding of XFS origination. As previously highlighted, we expect our finance receivable balance to continue to decline on normalized closer to 1 billion by 2027, benefiting free cash flow in future period. In Q2, XFS revenue was down 12% year-over-year due to lower finance income on order fees associated with the decline in XFS finance receivable balance, partially offset by higher commissions from the sales of finance receivable asset. Q2 XFS segment profit was 4 million higher year-over-year, mainly due to lower bad debt expense, reflecting lower origination on a lower finance receivable balance. Print and Other revenue fell 10% year-over-year in Q2, due to lower equipment on post sales revenue for the reasons previously mentioned. Print and Other segment profit declined 25 million versus the prior year quarter, driven by lower revenue, partially offset by structural cost efficiencies. Turning to capital structure. We ended Q2 with 551 million of cash, cash equivalents on restricted cash. Around 2 billion of the remaining 3.3 billion of our outstanding debt support our finance asset, with the remaining debt of around 1.3 billion attributable to the non-financing business. Total debt consists of senior unsecured bond, financed receivables secured borrowing, term loan on a convertible note. During the second quarter, we retained the remaining 217 million of 2024 senior note. As a result, we have only 67 million of secured debt come in due in the balance of the year. Before addressing guidance, I want to provide additional details behind the more than 700 million of gross cost savings I notified to date through reinvention. In the past year we have implemented or are close to implementing initiatives that are expected to result in more than 425 million of run rate gross cost savings for 2026. We have notified around 275 million of additional savings opportunity to date including overwrite [ph] savings associated with geographic on offering simplification that will be implemented in 2025 and 2026 bringing total realized on estimated gross savings to more than 700 million through 2026. And our work continues to identify additional savings opportunity. We expect to realize close to 200 million of gross cost savings in 2024 on already line of sight to nearly 100 million of savings in 2025 from project [indiscernible] currently implemented or those that will be implemented shortly. We expect to realize additional savings in 2025 from initiatives not yet implemented and will update Investor each quarter as we move projects through the stages of reimplementation. As John noted progressing the identification of structural cost reduction to date, give us confidence in our ability to grow adjusted operating income at least 300 million above 2023 levels by the end of 2026. To put the separated operating income improvement in context, assuming our adjusted operating income target is rich as planned, in 2026, we expect EPS of more than $3 per share, adjusted EBITDA done north of 900 million on cumulative free cash flow from 2024 to 2026 of more than 1.5 billion. Finally, I will address full year 2024 guidance. For revenue we now expect a decline of 5% to 6% in constant currency versus a decline of 3% to 5% previously. The entirety of the reduction in revenue guidance is attributable to intentional reduction in non-strategic revenue. Including incremental geographic simplification action, the decision to exit the manufacturing of certain production print equipment on lower than expected revenue from financing income on low margin IT hardware endpoint devices. Full year revenue guidance now include 550 basis points of effect from non-recurring headwinds associated with backlog reduction in the prior year, reduction in non-strategic revenue on order reinvention actions, including geographic on offering simplification. Excluding the cumulative effect of this item, expectation for core business revenue in 2024 is unchanged at roughly flat year-over-year. We expect revenue in the second half of the year to increase on both the core on reported basis, which reflect improvement in our print business and continued growth in digital on manage IT services. For adjusted operating income margin, we now expected margin of at least 6.5% versus our prior outlook of at least 7.5%. This reduction mainly reflects the effect of lower revenue guidance, including geographic on offering simplification action, as well as higher than expected freight on product cost. Over the course of reinvention, reduction in non-strategic revenue, such as zoos [ph] associated with geographic and offering simplification, are expected to improve total profitability on margin. However, so reduction in overhead costs associated with many geographic simplification action is expected to be implemented in 2024 will not be realized until 2025, delaying the net savings benefit associated with this action to 2025. As Steven just noted, despite the reduction to 2024 guidance, confidence in our three year adjusted operating income improvement objective has increased in recent months, leveraging a strong managerial infrastructure to support the identification on delivery of cost reduction initiative currently contemplated. We now expect free cash flow of at least 550 million versus prior guidance of at least 600 million. So reduction in free cash flow is in line with the after tax reduction in adjusted operating income expectation. As a reminder, free cash flow guidance is inclusive of around 100 million of expected restructuring payment on 50 million of incremental year-over-year pension payment. In summary recent change to our operating model growth sequential improvement in results this quarter and we expect your new product launch on growing demand for our equipment on service to support our return to top line growth in the second half of the year. So reduction in full year guidance mainly reflects the timing of incremental reinvention action taken in 2024 with the benefit of this action now expected in 2025. We remain confident in our ability to grow adjusted operating income by at least 300 million over 2023 level by the end of 2026, a view supported by observable momentum in our business, and the team on management operating system capable of delivering a successful reinvention of Xerox. We now open the line for Q&A. Operator: Certainly. And our first question for today comes from the line of Ananda Baruah from Loop Capital. Your question, please. Ananda Baruah: Yeah, thanks guys. Thanks for taking the question. A couple if I could. And Xavier just picking up right where you stopped. A moment ago, you talked about the reinvention initiatives being the catalyst for the guidance lower. Is it intra quarter, you guys moved around some of the timing of the initiatives and that's what's causing the impact or is it you're just learning more in the last 90 days about the impact of the initiatives, but the timing of the initiatives are relatively the same? And then I have a quick follow up, thanks. Xavier Heiss: Yeah, so thanks Ananda there. So yeah, we are executing the strategy as we've planned there. Ananda as you mentioned it, we go into the strategy and we assess each of the initiative individually here. As you know it we have not changed the guidance that we have for the entire program. So we stick with the three year guidance that we have there. Regarding the specific guidance for this year, if you look at the revenue guidance change it is entirely related to the way in which an action, specifically offering on view simplification here. If you exclude these the core business is behaving as we are expecting. Ananda, as we mentioned it, it is like modest decline, even like fatty situation when you look at certain lineups of revenue. From a profit point of view, operating margin point of view it is simply the timing of the action. I can give you an example, when you do or view a simplification action here, you have the impact from a revenue immediately, but you move from an indirect to direct model and then comes the action of taking the cost out of the cost base in the country that are impacted, but also in our corporate overhead. It is just a timing point, the overall program is executed as what we're expecting, although we are sticking to the three year guidance. Steve Bandrowczak: Hey Ananda, this is Steve. Just a real quick reminder, one of the things that we talked about is we had to make very large structural changes going back to early 2023. So we think about what we did with PARC, what we did with XRCC, our federal change implementing an operating model in the beginning of the year, what we did with production and manufacturing, now what we're doing in GL. It is a basket of activities that drives that end $300 million incremental operating improvement justice. And so what I want you to think about is this is not a linear, meaning that not every action drives a quarterly return, but the bucket drives what we want to do and we've got enough in that bucket that makes us confident that we're going to be able to deliver the end results. There are things that are out of our control, we talk about geo simplification, what happens with approval in a country, what happens with labor, what happens with the things that you need to do to get regulatory approval for the deal. So these are not straight where you can set up a plan, you know exactly what's going to happen in the quarter. However, with that bucket, we can feel confident that we are going deliver over the next three years, the exact financial results that we're talking about. Ananda Baruah: That's super helpful. You know, guys, I'll just leave it there given the time, and we can get it on the call back. I appreciate it. Operator: Thank you. And our next question comes from the line of Samik Chatterjee from J.P. Morgan. Your question please. Samik Chatterjee: Hi, thank you for taking my question. So if I can start off with following up on the question that Ananda had, but partly on sort of timing here. I heard you say that the 2Q revenues were largely in line if I heard you correct. So my question is, when we think about this incremental load guide for the full year, the 1.5% roughly sort of change is it primarily in the second half in terms of rebasing the second half, is that impact going to be more in the second half than the first half or rather, second half versus 2Q, how should we think about timing? Xavier Heiss: Timing wise, so just to go back to Q2, and give a little bit more detail on that, the impact in quarter two here. So if you look at our total revenue decline was 10%, including all the impacts that we mentioned. Now, to give more clarity on what we mentioned in our script there is 300 basis points of this impact come from backlog. So if you remember, year-over-year backlog last year was very strong, because we were crushing backlog. If you think about the second half, we will not have this impact anymore and this is the reason why we are thinking about [indiscernible]. The second point was related to 200 basis points. So 300 on backlog, 200 additional basis points related to what to call the end of non-strategic revenue paper endpoint devices on the sum related to the Forward Flow agreement, which has generated less interest income there. And lastly on the top 50 basis point was related to geos simplification and offering simplification. So you take all of this. So 10% from new decline, but at the same time 650 are rationally explained or driven by this section here. When you look into the second half now, you won't have the backlog flush anymore. We will still apply our decision on non-strategic revenue and the geo simplification impact will still continue. But when you look at these and this is the reason why we commented there, the backlog flush on the ability for us to drive the equipment revenues [ph] give us the confidence that will drive revenue growth during the second half of the year. Samik Chatterjee: Thank you. I mean, I guess I'll just sort of rephrase that in the sense what I'm trying to get to, is did Q2 have an incremental impact in revenues coming in below consensus on account of the changes that you decided to do in between intra quarter and is that -- is more of -- or is more of the impact really more in the second half from these incremental changes? And secondly, maybe just for my follow on like, it seems like you're waiting for the bills to be finalized before you incrementally account for them in the revenue guide, full year revenue guide. So how do we get confidence that there's no more sort of some of these deals in the pipeline in terms of which geographies you want to exit subsequently in the year? Thank you. Xavier Heiss: Yeah, so I will answer the first question. So on the consensus, I don't think the consensus was taking into account some of the action. Because as we said it, every time we will have action ready to geo offering simplification, we will invest investor on [indiscernible] this is what we're doing here with 150 basis point here. Now, we're getting to second point on the second path there, we are executing as we plan the strategy here. I won't say the vast majority, but with some of the action already at play as we describe it here and if there are additional output or major or significant action, during the second half we will inform investor during our earnings calls. John G. Bruno: I do think, it's John, I do think it's a fair point. And I think that to just kind of add something to that it is about not only the mix, the mix of the types of geographies that we're looking to exit, the timing and the pacing, the sequencing, but also the mix of the revenue types and the deals that we looked at. And some of the lower profitable deals in some of the areas and low hardware, we're just being very disciplined with regard to balanced execution across both geographic mix shift and products and offerings. And because we're at the halfway point of the year, it's not as if that there's things in the back end part of the year that we're very concerned about to answer your question directly. It's actually the opposite. It gives us -- it gave us all the information in our learnings through Q1 and Q2, gave us a good guide of what's in the pipeline and how we pace and sequence them. So that's definitely is a timing and a mix issue. Unidentified Analyst: Hi, this is Maya on for Erik. So I think just to start, if we think about let's say roughly a $6 billion revenue base, and with services being less than 10% today, that means it's maybe around 500 million to 600 million in annual revenue roughly. Do you think about that mix can more than double by 2026 but what's your assumption about your total revenue base at that point, meaning, are you telling us services revenue is going to double in two years or how should we be thinking about that, any color will help? John G. Bruno: I think it's a combination of both. So yes, you do have to think about the broad based services, big asset services as a growth business for us. We really see an opportunity, a very good one in the middle market across our IT services business, because our brand is very well recognized. Those environments are dealing with lots of issues on technological upgrades. We're in there having conversations with customers. And we think that that IP service is part of our business and has very good growth in the SMB space. We're seeing similar items in digital services, but they're not as mature. And that is absolutely offset by the declines that we've shared with you over the same period of time on print. So we want to make sure that we get the print mix, right, both in production, in the enterprise, and on the low end. So it does -- it will -- you will see a mix shift within our print portfolio, between our low end A4 or A3 and our production at the same time, you'll see an increase of our IT services and digital services. And that's the whole point of ensuring that the geographies we position these offers in and the offers themselves, and how we grow them is how we're getting to this mix shift changes over time. And the savings that we're driving through them gives us the ability to invest in them. So yes, that's why it's kind of -- it's complex by its very nature and it's a multi-year program, over a period of time, as both Steve and Xavier pointed out to. But yes, you are thinking about it correctly with regard to growing the services business and offsetting the declines in print. Xavier Heiss: Yeah, I might add, I want to also just to highlight there. So when we do the compare, when you look at Q1 or Q2 revenue, and you say, okay, this is like a double digit revenue declines. So is it like those are future trend. We should not forget that last year, we had significant backlog flush there and we know that starting Q3 and Q4, we will be no more apples to apples compare and that obviously is why we are saying for the second half, our view is that we'll be on a growth mode on both this adjusted revenue taking into account all the different strategic actions that we are doing. But also if you look at the different line of revenue that we are driving here, the outcome will be positive. So we should not forget last year the backlog had an impact in the first half. Unidentified Analyst: Got it. That's helpful to remember. And so I guess when we talk about kind of this business being a significant growth business, the digital and IT services, are you looking at breaking services out, when should we kind of expect that to become a part of your regular disclosures? Xavier Heiss: Yeah, so this is good question on the -- this is one of the most demanded question from investor here. So our plan so far is at the beginning of next year, we would like to present accompanying result in two segments. So we are working on this one, currently two businesses. One will be print or call print and the other one will be IT or Digital services. I'm not committing to this area, because it required for us to work on the reporting, so we can be compliant with the reporting requirement, but we understand that this is clearly a requirement. So we have a much better understanding of the hydraulics between these two businesses. Unidentified Analyst: Got it. Thank you. And then I just have one last question. We've heard in a few different tracks about some potential product or supply shortages potentially being caused by the reinvention and actions you're taking internally. Do you think this could have an impact on customer spending or purchase intentions or even channel partner behavior? John G. Bruno: We don't -- we've got no issues with supply internal shortages. I don't know where it's coming from. We're fine with inventory, and we are fine with supplies, not an issue. Operator: Thank you. And our next question comes from the line of Asiya Merchant from Citigroup. Your question, please. Asiya Merchant: Great, thank you for the opportunity, good morning. Just a high level, I guess I wanted to dig into the revenues that you guys are thinking about over this next three year period, how you guys are thinking about the operational improvements that you've already discussed, but what's kind of the revenue trajectory post 2024 and to what extent is that beacon whether it's print market decline, your own market share position within that? And if I can double click on the digital and IT services, areas which are -- which you present our growth opportunities, where are you seeing success in those, if you could double click on those in terms of drivers of growth there, whether it's geographical, vertical, I know you talked about the mid-market, so if you could just double click a little bit on that, that would be great? And lastly, the operational investments that you need to do in order to drive growth there, if you could double click on that as well, that would be great? Thank you. Steve Bandrowczak: Yeah, great question. Let me start with the strategy, as we've been talking about as part of the whole reinvention. First of all, we believe that the existing TAM inside of existing clients and accounts is a great opportunity for us very specifically, in mid-market and helping a lot of our mid-market clients, being able to absorb new technology, whether it's AI, RPA, intelligent document flow, looking at IP services, and how did they embed it. So we're perfectly positioned as a trusted partner in that ecosystem to be able to bring products and services. And we're seeing that across our offerings. In addition to that, if you think about what's happening today, in the world of AI, in the world of intelligent documents, you take a look at RPA, we are greatly positioned because we are already behind our clients firewall, what does that mean? That means we're embedded in their security, we're embedded in their business processes. And therefore, we can create capabilities and solutions that brings client success and client value. We talked about changing and really focusing on client outcomes about a year and a half ago. And that really means how do we bring more value to our clients through our technology, and not just bring solutions from a product standpoint. So that's where we get services and that's where you saw some of the things that we highlighted in the opening comments around the things that we're doing with our clients. John, you want to go through some specifics? John G. Bruno: Yeah, for sure, Steve. So I'd like you to think about digital services in two ways. For large enterprise clients they look at work streams like invoice processing, invoice accuracy, the types of things that are both ingested via scanning and things that are printed, PDFs and their formats, the from, the to, and all of the handling of all of that. Robotic process automation and all those types of advancements in that space is just helping clients be much more efficient. And that's kind of more of a large play, a larger play in that space. You're seeing in the graphic communications and in the marketing space, Chief Marketing Officers are trying to understand the efficacy of both print and digital ads. That's why you see barcodes embedded on so many index cards or on various different offerings and physical items or watermark. They're trying to understand what the effectiveness is on a printed page, on a digital page, on programs overall, and make better decisions in that space. These types of things are the types of current today's issues, the advancements in AI in some of the areas that both Steve talked to and Xavier talked to earlier. Gen AI is dependent upon good data and good data comes from documents, the repositories of these documents have to be scanned, have to be indexed, have to be redacted. You need to understand chain of custody across these items. So the whole digitization of a document, the origination of the documents, the ability to redact, the ability to secure all these types of digital services and they are combined. It is no -- it is very much a kind of a multi prong approach because there is no one particular area. That's why people say Omni commerce, omnichannel, that's what they mean, it's coming both physical, both digital, but the processes are the same. So we're seeing these types of things emerge in digital services and the IP services around it is managed cloud, just like our Managed Print, manage IT security, and those things. And we believe that that's an SMB opportunity for us more than the large market, because that's where we see the market need. That's where it's very highly fragmented, it's very geographically put in place really like NFL cities, if you will, in the U.S. We have an opportunity to do some consolidation in that area, and extend our services through our brand and through our distribution easily without having to invest a lot more in that space. And so that's how we're balancing those issues. Asiya Merchant: Okay, and to what extent, you know, what about just the broader print market, I mean, to what extent is your operational income improvements speaking in just challenges in the overall print market? John G. Bruno: Yeah, so in the overall print market, it's pretty simple. If you look at our -- if you look at our positions across the three main categories more broadly, it is a gain share program in a secular challenged markets, right. So that means refactoring our offers in each of those three pillars. So it's a grow our market share position on the low end in the A4 and in our offerings and expanding in that space and creating more opportunities, mostly through are indirect channels. As we look at this mix shift, and you look at our Geo strategies, these are tied together. We want to build more channel ready products, higher velocity and capabilities across our A4 portfolio and if that's a gain share program. We are the leader in A3, that's a whole share and continue to differentiate. That's why you hear all the issues we're talking about in AI and enhancements. And we focus on that. That's a reshaping and continue to be competitive in the leader in that space, because we are the leader. This is why we want to make sure that the places in which we're direct, were surrounding that A3 market of more value added services to continue to enhance and protect print. And then on the production side, those are areas if you break the production market down, there's parts that are growing in that space, you see cut sheet inkjet, we see specialty labels, and really all the productivity that surrounds the presses. All the pre-press, post press items and making the presses run more efficiently because runtime and optimization for a large production clients is critically important. Down machines aren't making money for them, these are complex ecosystems. So you're seeing advancements on our side, we want to gain share in the software and services. That's why it's services led software enabled program there. We have to bring more capabilities to our print clients to help them as the digital divide there, which is very much a laggard. A lot of that stuff are still analog processes. We want to make sure that we're bringing productivity tools, and we're making these print shops or these embedded print customers inside the large enterprises, more practical. So it's different for each of the main three categories. It's gain in the low end, it's hold and surrounded strength in the mid, and it's enter new segments by repositioning our production portfolio to where the market is moving versus where it has been and where we've been in previously. Asiya Merchant: Thank you. Operator: Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Steve Bandrowczak for any further remarks. Steve Bandrowczak: Recapping today's call, structural changes implemented in Q1 resulted in a short period of disruption but are driving notable improvements in operating efficiencies and sales effectiveness. The sequential improvement in financial results observed in Q2 and improvements in underlying processes designed to enable future cost reductions gives us confidence the reinvention strategy is working and will deliver the targeted 300 million of improvement in adjusted operating income by the end of 2026. I thank you for joining the Q2 earnings call and I wish everybody a great day. Operator: Thank you ladies and gentlemen for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.