Q2 2024 Earnings Roundup: DuPont, TTM Technologies, Alphatec Holdings, Littelfuse, and Lincoln Electric

Earnings call: DuPont reports a 17% increase in operating EBITDA By Investing.com

DuPont (ticker: NYSE:DD) has reported strong financial results for the second quarter of 2024, surpassing its previous guidance. The company announced a 17% increase in operating EBITDA over the first quarter, citing growth in advanced technology applications, including AI, and a recovery in the consumer electronics market. DuPont also revealed the acquisition of Donatelle to bolster its position in the medical device sector. Looking ahead, the company has raised its full-year guidance for net sales, operating EBITDA, and adjusted EPS, reflecting confidence in continued growth. DuPont's solid performance in Q2 2024 demonstrates the company's ability to navigate market challenges and capitalize on growth opportunities, particularly in technology-driven sectors. With strategic acquisitions and investments, DuPont is positioning itself for future success while managing its liabilities responsibly. The company's raised guidance indicates confidence in its operational strategy and market position. DuPont's recent financial performance and strategic moves, including the acquisition of Donatelle and the rise in operating EBITDA, underscore the company's robust position in the market. InvestingPro metrics and tips provide further context to DuPont's current valuation and future outlook. InvestingPro Data highlights a substantial market capitalization of $34.97 billion, indicating a significant presence in the industry. The Price/Earnings (P/E) ratio, standing at 104.16, suggests a premium valuation of the company's earnings. However, when adjusted for the last twelve months as of Q1 2024, the P/E ratio becomes more moderate at 27.25. This adjusted figure may reflect the market's expectations for DuPont's earnings growth and its strategic initiatives, such as the expansion into the medical device sector. InvestingPro Tips reveal that management's aggressive share buybacks and the high shareholder yield are signals of confidence in the company's value and future performance. Additionally, the consistent dividend payments over 54 consecutive years demonstrate DuPont's commitment to returning value to shareholders and its financial stability. For readers looking to delve deeper into DuPont's prospects, InvestingPro offers numerous additional tips, including insights on earnings revisions by analysts and the company's trading patterns. In particular, the five analysts who have revised their earnings upward for the upcoming period could indicate a positive shift in the company's growth trajectory. To explore further analysis and tips that could guide investment decisions, readers can access the full suite of insights available on InvestingPro for DuPont at https://www.investing.com/pro/DD. Operator: Thank you for standing by. My name is Pam [ph] and I will be your operator today. At this time, I would like to welcome everyone to the DuPont Second Quarter 2024 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Chris Mecray. You may begin. Chris Mecray: Good morning and thank you for joining us for DuPont's second quarter 2024 financial results conference call. Joining me today are Ed Breen, Executive Chairman; Lori Koch, Chief Executive Officer; and Antonella Franzen, Chief Financial Officer. We've prepared slides to supplement our remarks which are posted on DuPont's website under the Investor Relations tab and through the webcast link. Please read the forward-looking statement disclaimer contained in the slides. During this call, we'll make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance or results may differ materially from our forward-looking statements. Our Form 10-K, as updated by our current periodic reports, includes detailed discussion of principal risks and uncertainties which may cause such differences. Unless otherwise specified, all historical financial measures presented today are on a continuing operations basis and exclude significant items. We will also refer to other non-GAAP measures. A reconciliation to the most directly comparable GAAP financial measure is included in our press release and presentation materials that have been posted on DuPont's Investor Relations website. I'll now turn the call over to Lori. Lori Koch: Good morning and thank you for joining. I'm excited to be here today for my first quarterly call as CEO and to be joined by Antonella, our newly appointed CFO. We both look forward to partnering with Ed and our global teams to continue to drive value creation for all stakeholders. We remain focused on driving results and demonstrating the performance potential of our combined portfolio while furthering the plans to unlock value through our previously announced separation. This morning, we reported second quarter financial results ahead of our previous guidance, reflecting continued positive momentum led by broad-based electronics recovery as well as sequential improvement from all W&P lines of business. We were very pleased with this outcome and by the continued focus and strong execution of our global team. On a consolidated basis for the quarter, we saw improvement across all key financial metrics. Net sales and operating EBITDA were both up year-over-year and sequentially, including a 17% pickup in operating EBITDA versus the first quarter. We saw strength in the semi business driven by growth in advanced technology applications, including AI. We also realized continued recovery and new wins within consumer electronics market to drive both year-over-year and sequential growth for interconnect solutions. We did see some favorable timing benefits within each of these businesses during second quarter relative to our expectations. In the W&P segment, we were pleased to see a better-than-anticipated sequential step-up in our water business in China as well as improvement in Tyvek medical packaging within Safety Solutions which was in line with our expectations. Our year-over-year growth in operating EBITDA reflects solid margin expansion with operating EBITDA margin improvement of 130 basis points, driven by favorable business mix, stronger production rates in our electronics businesses and realization of restructuring-related cost savings, partially offset by higher variable compensation expense. Second quarter adjusted earnings per share increased 14% year-over-year. Strong cash generation and related conversion of over 100% was another bright spot for the quarter, highlighting disciplined working capital management and made a sequential sales ramp. For the full year 2024, we are raising our guidance for net sales, operating EBITDA and adjusted EPS which Antonella will detail shortly. I also wanted to highlight that earlier this week; we closed our acquisition of Donatelle, a manufacturer of sophisticated medical devices. We are delighted to welcome the Donatelle team to DuPont and are excited about this transaction which will deepen and complement our expertise in medical device market alongside Spectrum which we acquired last year. Donatelle will be managed within our E&I Industrial Solutions line of business alongside the Spectrum team. Together, these offerings are expected to enhance our position as a partner of choice for customers in the high-growth medical device field. I'll now turn the call over to Ed, who will provide a progress update on our planned separation. Edward Breen: Thanks and good morning, everyone. As seen in our second quarter results, we are well into the recovery phase from last year's inventory corrections in most key end markets and electronics may be setting up for a prolonged positive cycle. Turning to the separations; we've received very encouraging feedback since our May announcement of our intent to separate the electronics and water businesses and the formation of 3 independent companies. We believe our investors broadly appreciate the value creation opportunity of having 3 industry-leading global companies with compelling growth opportunities and distinct investment propositions. As we shift gears to ramp up our separation activities, we have also worked to ensure our teams internally are highly motivated to remain focused on serving customers and driving business performance. That remains the top priority and I'm confident our operating teams will continue to execute. As you can see on Slide 4, we have already begun working on the rigorous project management processes necessary to ensure the separation work is executed smoothly. Our teams have plenty of experience to rely on to ensure we stay within the 18- to 24-month time line from our May announcement with all 3 companies well positioned for day 1. One key short-term milestone that has already been completed is the establishment of key work stream leaders as part of our integrated project management team under Lori and Antonella's leadership, along with myself. Key separation work streams underway include legal entity standup, IT separation and stand, our financials and talent selection. A current priority, along with our Board, is to complete executive leadership appointments for electronics and water along with corporate governance aspects including board appointments. We currently anticipate announcements in early 2025. We are also making progress towards the future capital structures of the 3 intended companies. Specifically, during June, we redeemed $650 million of our 2038 bonds and entered into new interest rate swaps that hedged the rate risk on our longer-dated maturities. To the extent that it becomes necessary to repay these bonds, the new swaps hedge the risk of higher debt repayment costs that would occur in a lower interest rate environment. So while it is still early in the process, you can see that the separation work is progressing along and we look forward to updating you as we move forward. Before I turn it over to Antonella, I'd like to mention 1 of the updates detailed in our 10-Q which will be filed later today, specifically around the South Carolina MDL. Now that the water district settlement has become final, the court has indicated a focus on the personal injury cases. Earlier this year, the court ordered cases not involving 1 of the 8 medical patients to be dismissed by August 22 unless certain evidence is presented. About half of the 6,000 cases depending on June 30 are expected to be dismissed on that basis. They can be refiled over the next 4 years if those evidence requirements are later met. We do not, however, expect any trials in 2024 in the South Carolina MDL. With that, let me turn it over to Antonella, who will provide additional details on our financial results and outlook. Antonella Franzen: Thanks, Ed and good morning, everyone. I'm excited to be here today and honored to serve as CFO of DuPont. Turning to Slide 5; I will cover our second quarter financial highlights in further detail. Our second quarter results were clearly encouraging. Volume recovery is a key driver of our improved Q2 financial performance. Additionally, our ongoing commitment to drive productivity and operational excellence as well as continued savings from restructuring actions announced last November are also contributing to top line growth, margin expansion and cash flow improvement. Net sales of $3.2 billion increased 2% versus the year ago period, as a favorable portfolio benefit of 4%, reflecting the Spectrum acquisition was partially offset by a 2% currency headwind. Organic sales were flat as a 2% increase in volume was offset by a 2% decrease in price. Higher volume was driven by broad-based growth in electronics markets within semi and interconnect solutions with year-over-year reported volumes up more than 20% and mid-teens, respectively. These gains were partially offset by year-over-year declines in China within Water Solutions as well as Tyvek Medical packaging. However, we did see sequential improvement in these areas, as Lori mentioned. On a segment view, E&I organic sales inflected to grow 8% while W&P organic sales decline moderated to 6%. Organic sales in corporate decreased 5% versus the year ago period. From a regional perspective, Asia Pacific delivered 3% organic sales growth versus the year ago period with growth driven by China, where organic sales were up 8%, led by strong growth in E&I. In other regions, the North America was down 2% and Europe was down 7%. Second quarter operating EBITDA of $798 million increased 8% versus the year ago period as volume gains, lower product costs, Savings from restructuring actions and the earnings contribution from Spectrum were partially offset by higher variable compensation. Operating EBITDA margin during the quarter was 25.2%, up 130 basis points versus the year ago period and up 190 basis points sequentially from first quarter. Additionally, I am very pleased with our cash flow performance as we reported another quarter of strong cash generation and conversion. On a continuing operations basis, cash from operations of $527 million, less capital expenditures of $102 million, resulted in adjusted free cash flow of $425 million. Adjusted free cash flow conversion during the quarter was 104%. Turning to Slide 6; adjusted EPS for the quarter of $0.97 per share increased 14% from $0.85 in the year-ago period. Higher segment earnings of $0.10 and the benefit of a lower share count of $0.09 were partially offset by lower interest income of $0.05, resulting from a reduction in cash on hand versus the prior year. Other below-the-line items totaled a net $0.02 headwind as a higher tax rate and depreciation were partially offset by lower exchange losses versus the year ago period. Our base tax rate for the quarter was 26.4%, up from 23.7% in the year ago period, driven by certain discrete tax expenses as well as geographic mix and earnings. Our full year 2024 base tax rate is now estimated to be at the high end of our prior range or approximately 24%. Turning to segment results, beginning with E&I on Slide 7. E&I second quarter net sales of $1.5 billion increased 15% versus the year ago period, as the Spectrum sales contribution of 9% and organic sales growth of 8% were partially offset by a currency headwind of 2%. Organic sales growth of 8% reflects a 10% increase in volume, partially offset by a 2% decrease in price. At the line of business level, organic sales for semi were up more than 20%, driven by continued semi demand recovery, including AI-driven technology ramps as well as higher volumes for OLED materials led by new product launches. A resurgence of demand for leading-edge materials requiring higher content and accelerated buying in support of new fab capacity, primarily in China, also contributed to the volume increase in the second quarter. Overall, semi fab utilization improved from the first quarter, with average utilization in the mid-70s. Within Interconnect Solutions, organic sales were up low teens, driven by mid-teens volume gains, reflecting continued broad-based consumer electronics recovery, incremental share gains and a demand benefit from AI-driven technology ramps. We also saw earlier-than-expected timing of orders within certain consumer electronics markets that helped volumes in the second quarter. As expected, organic sales for Industrial Solutions were down low double digits, due primarily to ongoing destocking for Kalrez and biopharma markets. On a sequential basis, sales for Industrial Solutions increased 9% during the second quarter, including an improvement in Kalrez and biopharma. Operating EBITDA for E&I of $419 million was up 20% versus the year ago period, driven by volume growth and the impact of increased production rates in both semi and interconnect solutions, savings from restructuring actions and the earnings contribution from Spectrum. These gains were partially offset by lower volume in Industrial Solutions and higher variable compensation. Operating EBITDA margin of 27.8% increased 120 basis points versus the year ago period. Turning to Slide 8; W&P second quarter net sales of $1.4 billion, declined 7% versus the year ago period due to a 6% organic sales decline, of which 4% related to volume and 2% related to price, as well as a 1% currency headwind. Within Safety Solutions, organic sales were down high single digits versus the year ago period on lower volumes, driven mainly by channel inventory destocking for Tyvek Medical Packaging (NYSE:PKG). However, we did see a sequential increase of more than 20% in this end market, confirming a recovery is in process. Within Water Solutions, organic sales were down high single digits versus the year ago period, driven primarily by lower volumes resulting from distributor inventory destocking. Market conditions in Water Solutions also improved during the second quarter with net sales up 12% sequentially which was ahead of our expectations and driven primarily by an initial recovery in China. Shelter Solutions sales increased low single digits on an organic basis due to demand improvement in construction markets compared to the prior year period. Operating EBITDA for W&P during the quarter of $344 million was down 7% due to lower volumes and higher variable compensation, partially offset by the impact of lower product costs and savings from restructuring actions. W&P saw a nice step-up sequentially from the first quarter in both the top and bottom line with nearly 50% incremental margin. Moving to our outlook on Slide 9; for the third quarter, we expect net sales, operating EBITDA and adjusted EPS to increase sequentially to approximately $3.2 billion, $815 million and $1.03 per share, respectively. For the full year 2024, we are raising our guidance for net sales, operating EBITDA and adjusted EPS. At the midpoint of the revised ranges provided, we now expect full year net sales of about $12.45 billion, operating EBITDA of about $3.085 billion and adjusted EPS of $3.75 per share. Our full year net sales guide reflects about $50 million of incremental foreign currency headwinds in the second half of the year versus prior guidance assumptions which are expected to be partly offset by a sales contribution from the Donatelle acquisition which closed earlier this week. With that, we are pleased to take your questions and let me turn it back to the operator to open the Q&A. Operator: [Operator Instructions] And your first question comes from the line of Jeff Sprague of Vertical Research Partners. Jeff Sprague: Congrats. Whoever would like to take it. I'd just love to drill a little bit more into electronics. A couple of things you said were quite interesting. First, maybe, is there any kind of inventory rebuild that's going on in that market? Or is this growth you think clearly indicative of what end demand is. And I wonder if you could just elaborate a little bit for us what in the context of DuPont AI-driven demand really means how significant it might be content per chip or anything that you could give to provide some perspective on that question. Lori Koch: Yes. Jeff, maybe to your first question. So yes, the majority of the growth that we saw within the semi and ICS business was just market recovery but there was probably about $30 million of pre-buy, especially within Asia Pacific, as some of the new fabs come online. So that drove the Q2 performance up a little bit and then it will mute a little bit the ramp into Q3 and the back half of the year. But overall, still really nice recovery in the electronic space. As we have noted, a lot of it is coming from the AI acceleration that's felt in both the semi and the ICS business. In total, AI is about $250 million of sales for us today; so a lot of improvement to be able to drive growth there. Like I had mentioned, it's felt across the board in semi as well as ICS on the packaging and the thermal management side. Jeff Sprague: And also on the consumer side of electronics, I think there was a comment about orders being stronger. Is there just some timing issues there. There's certainly some hope that there's a stronger iPhone cycle here into the holidays? Is that what you're starting to see? Any other color there would be helpful. Lori Koch: Yes. So the $30 million of pre-buy was probably about $20 million in semi and about $10 million of Interconnect. So on the Interconnect side, it would be a little bit of a timing shift for some of the premium smartphone deliveries. Operator: The next question comes from the line of Scott Davis of Melius Research. Scott Davis: Lori and Antonella, it's good to have you guys leading the call here. I wanted just to dig in a little bit on price. I was expecting price to be down in E&I but maybe not necessarily in W&P. Is it mostly kind of a pass-through in like tieback? What are the -- I'm trying to picture why price would come down in Water, I guess but perhaps it's just kind of the comps and how you had to raise price into that big inflation pickup at the beginning last year? Maybe just some color there would be helpful. Antonella Franzen: Sure, Scott. It's Antonella. So just a couple of quick things that I would mention. I think it's important to keep in mind, particularly in W&P, we had some really strong pricing over the last couple of years. And I would say, particularly, there's a few businesses where our pricing over the last 2 years was about in the mid-teens that more than compensated for any of the cost increases that we saw. So it's not unlikely that we would see a couple of points that we would kind of give back really more just so to maintain share. So to your point, it's really the timing of the price increases that we had. Scott Davis: Okay. That's what I thought. And just going back to Jeff's question and this is just -- I'm not an expert in electronic chemicals at all. But is it the same product mix going into AI applications? I assume it's higher volumes per purchase, et cetera but is it the same product? Or are there variations of that? Lori Koch: Yes. It's the same product. It's just more content into the space because of the advanced nodes. And so the advanced nodes have more stacks and/or thermal management requirements that require more of our material. So 1 rule of thumb that we point out is in the semi space. MSI is a typical indicator of market growth and we would be 200 to 300 basis points above market growth because of the advanced node exposure that we have. So they need more material to be able to produce the higher-end chips. Scott Davis: Okay, that makes sense. That's what I thought. So thank you. Best of luck. Operator: Your next question comes from the line of Steve Tusa of JPMorgan (NYSE:JPM). Steve Tusa: Congrats everyone in the room there. Just on the guidance, what is kind of normal seasonality now for EBITDA? It looks like it should be up mid-single digits quarter-to-quarter, at least that's kind of what it did last year but you're more in recovery mode, it feels like. So unclear to me why it would only be up a couple of percent like you haven't guided. Lori Koch: Yes. I think to your point, we haven't -- yes, so I think you have to go back a couple of years to kind of see the more normal seasonality pattern that would exist. And so if you go back, it's probably more about $50 million to $100 million lift from Q2 to Q3 and then normally about a $100 million decline from Q3 to Q4. So this year's recovery is muting that. And also the pre-buy in Q2 is muting that a bit from Q2 to Q3, so rising about $30 million. But our decline Q3 to Q4 is muted down to about $50 million in the guide, because that's the continued recovery that we see across the board. So seasonality is a bit challenging, to your point, whenever you're having market inflections but that's what's into our number. Like if you take away the pre-buy, then you would see more the normal seasonality. Steve Tusa: Okay, that makes sense. And then, Ed, you mentioned the change in the PFAS item there. Where do we stand on like State AG as well as just remind us what the other major moving items around PFAS actually are and how significant this South Carolina News is in the context of what's remaining here. Edward Breen: Yes. Steve, there's really 2 buckets left. Obviously, we sell the big 1 on the water district cases. The 2 buckets left in the state AG cases and the personal injury cases. And I think the comment we made this morning on the PI basis, I think, is fairly significant because it reduces the cases from about 6,000 down to about 3,000. And remember, this is not like some of the other settlements we did where we had a location and we settled because we used PFAS. In this case, this is because of firefighting phone again. So only 3,000 cases and this goes back to what the plaintiffs also said in our settlement that we are probably responsible for 3% to 7% as a consortium group and we're only 1/3 of the 3% to 7%. So I think you can wrap your head around a number that's pretty reasonable here. Steve Tusa: And I guess for PFAS more broadly though, does that -- I mean for the other guys that are involved, the ones with the larger exposures, I mean, is there any -- I would assume that it's kind of a similar impact to those guys as well. Now -- is there any reason why judging how injured somebody actually is, is different from company to company when it just comes to the basic injury [ph], if you will? Edward Breen: No. I think the difference is just to distinguish that we didn't make firefight [ph]. So, if you made it, you're in a different little bit of a category but we did not make it. So -- which is I think why our percent is just 3% to 7% and we're 1/3 of that. Edward Breen: I don't expect Steve any settlement this year but we are working hard to settle as much to the rest of the PFAS as we can by the time of the spin to get them out clean. So we're working hard at it. Steve Tusa: Yes. You're always working hard. So we appreciate that. Thanks a lot. Operator: Your next question comes from the line of Josh Spector of UBS. Please go ahead. Josh Spector: I wanted to ask on W&P. Just within the guidance in the context the year-on-year comps get easier, so you're clearly expecting some growth there in the second half. But it kind of seems like you're guiding things somewhat flattish from a sales and EBITDA perspective. So I'd be curious, are you seeing continued improvement from destocking? Are you not? And what are your assumptions around that? Antonella Franzen: Yes. So this is Antonella. Just a couple of comments there. So as we mentioned, we did see a nice lift off of Q1 in both medical packaging in Tyvek as well as in our Water business, where we saw the biggest impact of destocking. A we move forward, we do continue to expect that we will see a little bit more lift in medical package as we go through the year. For water, as we mentioned, we actually saw a bigger lift headed into Q2 than we were originally expecting. So that will be pretty consistent. As we head into the third quarter, we'll see a little bit more of a lift in the fourth quarter as well. So overall, revenue is relatively flattish as we go into the second half of the year for W&P. And I would just keep in mind, there's probably a little bit of muted seasonality that we built in, in the shelter business, just given the soft resi market and just we're keeping a close eye on the macros out there. And so that's a little bit of a cautious view, I would say that we have built into our guidance currently. Josh Spector: And I guess what about margins? Kind of the same line of thought there. I mean that was a bright spot in the quarter here, getting back to kind of a year ago margins and volumes still down. Is there something incremental negative on the margin sequentially? It seems like you're assuming that's a little bit lower versus what you did in 2Q. Antonella Franzen: No. Actually the margins in W&P are expected to be flattish to up a little bit actually as we head into the third quarter and expect it to continue to improve as we head into the fourth quarter as well. Operator: Your next question comes from the line of John McNulty of BMO Capital Markets. John McNulty: This 1 regarding the split. So you've had the big announcement this past quarter. I guess can you speak to interest that you may be seeing in some of those assets, sometimes there's not a lot of interest until announcements get made and then all of a sudden, people start lining up. So maybe you can help us to think about that, especially around maybe the water business? And if not, I guess I'd also ask, it does look like the M&A markets are heating up in a couple of areas, especially in water. Would you consider bolting on businesses ahead of the split to any of the other assets? Or is that just too much to deal with for the organization at this point? How should we be thinking about that? Edward Breen: Yes. Yes. So your last point, no, we wouldn't do anything where we bolt something on the asset. I don't want to get out in front of ourselves on any speculation of what's going on. But as I said on the last earnings call, John, if there is interest in the water business, we obviously will look at it and study it hard if there's a better path to creating value for our shareholders, we would clearly do that. And I'll just leave it at that for now. John McNulty: Okay. Fair enough. And then I guess just a question on the PFAS issue. So look, you guys have been doing a pretty good job of cleaning up the liability so far. Earlier this quarter, we had the Chevron (NYSE:CVX) decision kind of get overruled by the Supreme Court. I guess I'm wondering, what does that do in terms of how you think about the liability and the ability to put that to rest. Does it change kind of the strategy or how you're thinking about that, what that liability might mean going forward? Edward Breen: Yes. So it kind of goes back to the whole superfund circle issue. And to make it very clear, manufacturers of products are not responsible under circle. There's kind of 4 key categories, if you don't mind me telling you these for a minute just to clarify this issue. The responsible parties are current owners and operators of facilities where substances are located, [indiscernible] owners of facilities where hazardous substances were disposed, aggregators and generators, persons who arrange for disposal has a substance at a site and transporters who transported it to those sites. So by the way, there's a Supreme Court case on this, just to clarify it more. An entity will not be held liable as an arranger merely for selling a new and useful product if the purchaser of that product later and unbent to the seller dispose of the product in a way that led to contaminate it. So I think it's pretty darn clear, as we've said all along that we don't have responsibility under this John Roberts: On the spin-off, will we have to wait until the SEC filings for the income statements and debt allocations to the spin co -- or do you think DuPont will begin reporting more like a holding company and give us electronics and water, at least summary income statement, summary balance sheets before the SEC filings. Lori Koch: Yes. We intend to report in the new structure prior to the Form 10 detailed filings would go out. So we're targeting sometime early next year to have leadership appointments and then ultimately report on the new segments would be the future spin. John Roberts: Okay. And then will new DuPont pen report medical or health as a separate segment? Or is it going to continue to be split across industrial and safety? I think it's going to be over 25% of new DuPont but it's a little hard to see in the current reporting. Lori Koch: Yes. So we will most likely have three reportable segments for Remainco, one of which is health care which would be the combination of Tyvek, Spectrum, the Liveo Biopharma business and now Donatelle given that acquisition closed. And the other two reportable segments would be a next-gen mobility which would help all of our EV automotive exposure. And then the remaining would be generally the safety business and the shelter business and the rest of the printing businesses and industrial businesses, industrial solutions that aren't semi related. Operator: Your next question comes from the line of Chris Parkinson of Wolfe Research. Chris Parkinson: Just two quick questions on E&I. The first is, do you mind just kind -- as we enter into the second half, can you just offer a little bit more color on Semi tech just given some of your commentary around the broader strokes. But if we dig in to pad slurries, you mentioned older materials in your PR as well as the PowerPoint. Can you just help us conceptualize how we are trending into '25, '26 and perhaps into a larger upcycle? Lori Koch: Yes. So we expect nice high single-digit growth in the current construct of E&I as we head into 2025, a lot of that coming from the growth acceleration from AI as well as overall continued pickup within the consumer electronics space. So we think we'll be from a utilization perspective on the semi front more in the high 70s as we exit 2024 overall. It's more like in the low 80s in the advanced nodes in DRAM and then lower than that in the legacy nodes and some of the more legacy memory applications. Chris Parkinson: Got it. And Lori, I have to bring it back a couple of years, because the follow-up is on ICS and specifically, Laird. When you originally did that transaction, you kind of mentioned AI as an optionality. And obviously, you're kind of -- at the time talking about the shielding the thermal management portfolio there. Can you just kind of help us think about the ICS business as it stands today versus kind of the legacy way of thinking around handsets. It seems like there's perhaps a lot more going on under the hood there in terms of how we should be thinking about sustainable growth rates? Lori Koch: Yes. So ICS, I kind of think about it in 2 big buckets as far as market opportunity is concerned. One is like a powerhouse with respect to interconnect solutions and 1 is a powerhouse with respect to thermal management and you see opportunity on the 3 lines of business underneath across both of those segments. And so the Laird acquisition has continued to play out nicely for us to drive opportunity across the ICS portfolio. It's been really timely with the AI boost and the ADAS boost that's coming to have that thermal management business within our portfolio. Operator: Your next question comes from the line of David Begleiter of Deutsche Bank (ETR:DBKGn). Please go ahead. All right. Our next question comes from the line of Mike Leithead of Barclays (LON:BARC). Mike Leithead: One on E&I, just strong results mostly across the board with the exception of maybe industrial and you called out the 1 headwind around kind of ongoing Kalrez destocking. I just wanted to dig into that. So your volumes in your sense really consistent with end market trends for the product? Or is there any competitive dynamics impacting Kalrez specifically there? Lori Koch: No. No, there's no competitive dynamics. It's really just the destock from the 2023 high volumes that went on. So there's nothing competitively. We did see sequential improvement in Kalrez as we had expected. We actually do forecast of return to volume growth in Industrial Solutions in total in the back half. So it was really just getting through the destock in Kalrez and also in the biopharma which are both in Industrial Solutions. Mike Leithead: Okay, great. And then just as a quick follow-up, maybe a question for Antonella on the cash flow statement this quarter. It looks like cash flow from operations for discontinued operations was a $400 million use of cash in the quarter. Can you just help us understand that? Antonella Franzen: Yes. So keep in mind, as Ed mentioned earlier, we did have the settlements. So really, that's predominantly all the cash out of about $408 million related to the MOU settlement. Operator: Your next question comes from the line of Frank Mitsch of Fermium Research. Frank Mitsch: Nice result. If I could stay on the cash flow side of things, Laurie, when you were wearing your prior hat, as CFO. There was an expectation that the second quarter cash flow conversion might be lower than the first quarter in part with interest payments. And obviously, it came in materially above or nicely above, I should say. So can you speak to the factors behind that as well as what the outlook is in terms of cash flow generation? Lori Koch: Yes, so good memory. I had signaled that usually, Q2 is a little muted because of the interest payment which we did pay. It was really a reflection of better working capital performance for the most part. So we had sequential revenue but we're really able to keep the working capital headwind. So we've done a really nice job primarily on the inventory front around driving productivity across our businesses to get better at cash. So we're still in that 90% target range for the year, we're at about 96% quarter-to-date. So we're in good shape to be able to deliver against the targets that we have out there. Frank Mitsch: All right. Terrific. And then maybe just a second or two in terms of the corporate line. Sales were relatively flat sequentially, yet EBITDA picked up materially. Can you talk about the factors there and what your outlook is? Lori Koch: Yes, really, that was driven by a bit of our corporate expenses. So there's always a little bit of timing from quarter-to-quarter. So I would say when you take a look at kind of corporate expenses, we're probably a little heavy in Q1, a little light in Q2 and on average, kind of expected where we would typically be. As you kind of look into the second half of the year, as you look at corporate as a segment, we did point out in the materials that we do expect overall less income coming from corporate in the second half of the year than we had in the first half of the year. Operator: Your next question comes from the line of David Begleiter of Deutsche Bank. Unidentified Analyst: This is David Hwang [ph] here for Dave. I guess, first, on Industrial Solutions, when do you expect volumes to recover and turn positive here? Lori Koch: Yes. We expect volumes to be up low single digits in the third quarter year-over-year for Industrial Solutions and then more in the low double-digit range for the fourth quarter. So we saw a nice inflection sequentially and then we'll see a return to year-over-year volume growth in the second half. Unidentified Analyst: And I guess just on the potential water sale. I guess there is some interested parties there. And it sounds like PFAS continue to progress positively. As when you talk to potential interested parties, what's the initial thoughts from them taking over some of the PFAS liabilities? And I guess is there a threshold there willing to accept? Or is it, in general, still a big hurdle for them? And you think if that scenario were to play out, it will not involve any PFAS liability allocation at all? Lori Koch: Yes. So we haven't had any conversations on selling the water business. So our intent is still to spend. Each of the 3 spins will pick up their pro rata share of the of the PFAS liability per the trailing 12-month EBITDA underneath the sharing agreement with Corteva. Operator: Your next question comes from the line of Laurence Alexander of Jefferies. Laurence Alexander: Can you give a little bit more detail on the sequential momentum in Water & Safety Solutions sort of into Q3 and how much visibility here is the visibility improving in those 2 businesses or lead times improving? Lori Koch: For the water business, as we mentioned from Q2 to Q3, we do expect it to be relatively flat as we get into the fourth quarter we do expect a sequential increase in terms of the top line. And some of that is just driven by some project-related activity that we have there. In terms of safety, we did talk about that's where our medical packaging business is within Tyvek, we do expect to see some sequential improvement there as well. I think there, the growth will be a little less muted as we go through the course of the year because there's just a couple of little other puts and takes within that business. Operator: Your next question comes from the line of Mike Sison of Wells Fargo (NYSE:WFC). Mike Sison: Nice quarter outlook. Ed, just 1 question. How do you expect the agencies to assign sort of industry codes for each of the entities of the spin maybe that would help investors assign the right multiple or comps longer term? And I assume you don't expect the entities to get assigned materials or chemicals. But any color on how you think you can help them sort of make that right decision. Edward Breen: I'll just say it this way. We are going to work at for. The electronics is very clear where that should be and we will work that issue. I mean there are pure-play comps in those industries that there's only a couple of key competitors against some that have their marking in the water business is the same way; so that will be worked. Lori Koch: Yes. And we'll work to get the Remainco SIC code changed as well. So we've been trying for since we spun out of to get a change more to the multi-industrial diversified SIC code. And so I think we continue to make our case that we should not have the chemicals SIC code anymore. And so we'll work with that one as well. Operator: Your next question comes from the line of Arun Viswanathan of RBC Capital Markets. Arun Viswanathan: I guess just kind of curious on the guidance. So you're raising it by looks like around $110 million or so on the EBITDA line for the full year. The Q2 beat was around $80-something million, so $88 million. So that remaining kind of $22 million, it seems like there could be a little bit of seasonal drop off and maybe some moderation in growth. I know you mentioned the pre-buy $30 million but anything else you'd call out there as to why you're not raising guidance maybe by a little bit more? Antonella Franzen: Actually, I would say, our ways in our guidance, when we kind of take a look at it is not only adding in the Q2 beat but actually a bit more than that as well. So kind of the way to look at it is if you look where our previous guidance was and to your point, kind of at the beat that we had in the second quarter of around $150 million on the top and $90 million on the bottom, I think you need to keep in mind that incremental headwind from when we previously gave guidance to the tune of $75 million. And clearly, there's an EBITDA impact associated with that as well. That is only partially offset by the Donatelle acquisition that's going in. So on a true underlying basis, if you put FX and acquisitions aside, in addition to the Q2 beat, we are raising the top line close to $100 million in the bottom line, around $30 million or so. Arun Viswanathan: Okay, perfect. And then, I guess just as a quick follow-up. As you look into '25, where are you kind of in that recovery maybe on E&I would you say like where do you expect fab rates to kind of utilization rates to end the year? And do you see those kind of continuing to move up as you move into '25? Lori Koch: Yes. I think we'll end the year overall in utilization in the high 70s that will be different between advanced nodes and more legacy nodes. So the advanced node should be in the low 8s and the more mature notes with would not quite be at the average. So it sets up well for 2025 to get back to the more normal utilization patterns that exist in the semi space. As I had noted earlier, we overall probably see high single-digit growth in E&I in total in 2025 with a lot of growth coming from continued acceleration with AI on both the data center side as well as on the ICS side. Operator: Your next question comes from Aleksey Yefremov. Next question comes from the line of Patrick Cunningham of Citi. Patrick Cunningham: Just on the Donatelle acquisition, first, maybe talk about the strategic fit there and even potential cross-selling opportunities where it's complementary in the portfolio? And then can you also help us size the transaction and how much earnings contribution we should expect in the second half? Lori Koch: Yes. So we closed Spectrum earlier this week -- or Donatelle earlier this week. We get up Donatelle nicely with our Spectrum acquisition that we're actually lapping a year on here, August 1. And so they've got nice exposure to some of the large medical device OEMs that Spectrum did not have. So there's a lot of cross-selling opportunity to come in there as they've also got some really nice machining and tooling competencies that will add to the portfolio. In total, the revenue is about $75 million from Donatelle. It's got slightly better margins than what the Spectrum acquisition did. So a nice addition there. Antonella Franzen: Yes. The only thing I would add is the $75 million is a full year number, just to clarify. Patrick Cunningham: Yes. And then, maybe just a clarification on corporate earnings. I think there was a sizable step-up into 2Q. I know you mentioned there were some expenses that moved around but were there any areas of strength on the underlying retained businesses that helped 2Q? And how much lower should back half earnings be on the corporate line? Lori Koch: Yes. So I would say in the second quarter, in addition to the timing of expenses, we did have a good strong margin performance in terms of the retained businesses as well. As we shift into the second half of the year, as I mentioned earlier, we do expect the overall earnings in corporate to come down there is a little bit of pressure that we have in terms of our solar business that we have within the retained businesses. So we have a little bit of earnings headwind related to there. And I mentioned earlier, a little bit of timing related to actual corporate expense. Operator: Your next question comes from the line of Vincent Andrews of Morgan Stanley (NYSE:MS). Vincent Andrews: Could I ask quickly on electronics. The timing differences that you called out in the quarter that were favorable to the quarter, are you seeing in your 3Q order book that those are indeed shifted to 2Q? Are you just assuming that? And then we'll see how the quarter plays out. And then separately, Ed, if I could ask you on the PFAS on the personal injury cases, just a little bit of clarification in terms of it sounds like we'll go from 6,000 to 3,000 cases. But has that case count been increasing? Or has it been static around those levels, firstly? And then secondly, on your comments that DuPont is sort of, I think you said 3% to 6% or 3% to 7% sort of the assumed liability. Is that to mean that, that would be your sort of exposure to any payout should there be any? Or is that your exposure to the amount of cases? And lastly on that, how do you expect this to proceed in terms of will something actually go to trial? Will it be the typical MDL where you pick 1 and they pick 1 and you see what the outcomes are and then maybe you try to settle? Or is there a path to settling ahead of time? Or just sort of what you think the process is going to be? Edward Breen: Yes. So the cases have crept up over time but the slope has obviously changed, come down. And remember, it's predominantly firefighters. It's not other individuals. So the drop will be at least down to 3,000 of cases. And I'd just say, overall, because it's firefighting foam, it goes back to the last settlement we did where we never made the firefighting foam but we had 1 surfactant that went in for 10 or 11 years. So net-net was determined that the exposure of Corteva [ph] us was in the 3% to 7% range. And so I think you can do the math like we were able to do when we settled the water cases and kind of get this into a certain box. And remember, we're only 1/3 of 3% to 7%, as I mentioned earlier. And Mike, just to your -- kind of one of your last points. Obviously, we always try to settle these as a class, like we did the water cases and we'll work hard to do that. And I said we would love to clean a lot of this up before the actual separations occur. Lori Koch: Yes. And maybe on your order question. So our order book is trending alongside the guide that we had given. So we feel like we're in good shape there. Operator: And our last question comes from the line of Steve Byrne of Bank of America (NYSE:BAC). Steve Byrne: Yes. Your cost of goods were down 2% in the quarter. Can you provide a little more detail on that, such as were raws down more than that? Your volumes being a little higher might suggest that raws were down more than that. But more importantly, where do you think that cost of goods year-over-year is likely to go as we move forward? Antonella Franzen: This is Antonella. So a couple of things that I would mention there to keep in mind. So one, obviously, we are seeing a bit of an impact from deflation of cost that's in there. Secondly, I would also mention in terms of restructuring, we took a lot of actions as we announced the program last year towards late November; some of those actions have actually been accelerated. So we are seeing even more of a benefit this year than we were originally anticipating. So as you may recall, we were first expected we'd have about $100 million of restructuring savings in 2024. We now expect that to be closer to $115 million or so for the year. So that's also helping from a COGS perspective and kind of bringing our costs down. Steve Byrne: And then you mentioned on Slide 14, a lot of products in development. And you mentioned your water business has some DLE opportunity. Just a question on that. Is this 1 lithium project at a temperate later to that could be many, many years from now? Or is there some breadth to this opportunity that you see in lithium? Lori Koch: We continue to see a nice opportunity. We're actually investing in a facility in Europe to be able to take advantage as well from a production perspective. So it's still a little early. I mean, the potential market opportunity on the low end is probably in the $250 million range as we position ourselves as a component supplier into the space. Operator: I will now turn the call back over to Chris for closing remarks. Chris Mecray: Thank you for joining the call today. As a reminder, our materials are posted on the website, including the transcript from today's call. Thank you for joining. Good day. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

TTM Technologies, Inc. (TTMI) Q2 2024 Earnings Call Transcript

TTM Technologies, Inc. (NASDAQ:TTMI) Q2 2024 Earnings Conference Call July 31, 2024 1:00 PM ET Company Participants Sameer Desai - IR Thomas Edman - CEO Daniel Boehle - CFO Conference Call Participants Jim Ricchiuti - Needham & Co Matt Sheerin - Stifel Mike Crawford - B. Riley Securities William Stein - Truist Securities Operator Good afternoon, thank you for standing by. Welcome to the TTM Technologies Inc. Second Quarter 2024 Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. [Operator Instructions]. As a reminder, this conference is being recorded today July 31, 2024. Sameer Desai, TTM's Vice President of Corporate Development and Investor Relations will now review TTM'S disclosure statement. Sameer Desai Thank you. Before we get started, I would like to remind everyone that today's call contains forward-looking statements, including statements related to TTM's future business outlook. Actual results could differ materially from these forward-looking statements due to one or more risk and uncertainties, including the risk factors that we provide in our filings with the Securities and Exchange Commission, which we encourage you to review. These forward-looking statements represent management's expectations and assumptions based on currently available information. TTM does not undertake any obligation to publicly update or revise any of these forward-looking statements whether as a result of new information, future events or other circumstances, except as required by law. We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA. Such measures should not be considered as a substitute for measures prepared and presented in accordance with GAAP and we direct you to the reconciliation between GAAP and non-GAAP measures included in the company's earnings release, which is available on the Investor Relations section of TTM's website at investors.ttm.com. We've also posted on that website a slide deck that we will refer to during our call. I will now turn the call over to Tom Edman, TTM's Chief Executive Officer. Please go ahead, Tom. Thomas Edman Thank you, Sameer. Good afternoon and thank you for joining us for our second quarter 2024 conference call. I'll begin with a review of our business highlights from the quarter and a discussion of our second quarter results, followed by a summary of our business strategy. Dan Boehle, our CFO will follow with an overview of our Q2 2024 financial performance and our Q3 2024 guidance. We will then open the call to your questions. Highlights of the quarter's financial results are summarized on Slide 3 of the earnings presentation posted on TTMs website. We delivered a strong quarter and I would like to thank our employees for their hard work and contributions in support of these results. In the second quarter of 2024, non-GAAP earnings per share were above the guided range and demonstrated solid year-on-year growth due to higher revenues and improved operating execution. Revenues were above the guided range, representing the second consecutive quarter of year-on-year growth due to demand strength from our aerospace and defense and data center computing end markets, the latter being driven by generative AI. The growth in revenues was partially offset by year-over-year declines from our medical, industrial and instrumentation, automotive and networking end markets. Though these markets did see sequential improvements. Overall, the company book-to-bill was 1.11 with the A&D book to bill at 1.26. Demand in our aerospace and defense market, which was 45% of revenues for the quarter continues to be strong, and we now have a record program backlog of approximately $1.45 billion. I would now like to provide a strategic update. TTM is on a journey to transform our business to be less cyclical and more differentiated. Over the past several years, TTM has consistently demonstrated that a key part of our strategy is to add value to the product solutions that we deliver to our customers, particularly in the aerospace and defense market. As a result of strategic transactions in the aerospace and defense end market through the acquisitions of Anaren and Telephonics. Over 50% of our revenues in aerospace and defense are now generated from engineered and integrated electronic products, with PCBs contributing less than 50% overall. Another important element of our differentiation strategy is our investment in a new state-of-the-art, highly automated PCB manufacturing facility in Penang, Malaysia to service customers in our commercial end markets. This new facility in Malaysia is supporting customers in markets such as data center computing, networking and medical industrial and instrumentation. We continue to make progress ramping volume production as we manage through ongoing customer audits and qualifications. In several cases, customer qualifications are taking longer than originally expected, though we are making steady progress. We expect our Malaysia facility to register limited revenues in the third quarter, as we continue our production ramp. I'd also like to update you on the consolidation of our manufacturing footprint. We previously announced our plan to close three small manufacturing facilities in order to improve total plant utilization, operational performance, customer focus and profitability. During the course of 2023, PCB manufacturing operations in Anaheim and Santa Clara, California and Hong Kong were closed and consolidated into TTMs remaining facilities. During the second quarter, we sold the Anaheim facility and one of the small buildings we owned in Santa Clara, and we continued to ramp production for the transferred parts at receiving facilities. Finally, I would like to update you on the previous announcement of our intent to expand our advanced technology capability for the aerospace and defense market through the construction of a new facility immediately adjacent to our existing Syracuse New York campus. This new facility will focus on specialized high technology PCB production, providing customers with reduced lead times and a significant increase in domestic capacity for ultra-high HDI PCBs in support of increasing national security requirements for high technology PCBs. We have broken ground for the new building and expect initial low-rate production within 18 to 24 months. As previously announced, we expect the investment for Phase 1 of the proposed project, including capital for campus wide improvements to be in the range of between $100 million to $130 million. Final capital investment commitments will be determined after finalizing terms with various stakeholders. Now, I'd like to review our end markets which are referenced on Page 4 of the earnings presentation on our website. The aerospace and defense end market represented 45% of total second quarter sales compared to 47% of Q2 2023 sales and 46% of sales in Q1 2024. The solid demand in the defense market is a result of a positive tailwind in previous defense budgets, including supplemental funding related to conflicts in Ukraine and Israel. Our strong strategic program alignment and key bookings for ongoing franchise programs. We had a strong booking score with a book-to-bill ratio of 1.26 leading to a record A&D program backlog of approximately $1.45 billion at the end of the second quarter. During the quarter, we saw significant bookings for TPS-80 G/ATOR, MH-60R and a key restricted program. We expect sales in Q3 from this end market to represent about 45% of our total sales. Bookings in the aerospace and defense market ship over a longer period of time than in our commercial markets, and provide good visibility into future revenue growth. Sales in the data center computing end market represented 21% of total sales in the second quarter compared to 12% in Q2 of 2023 and 21% and the first quarter of 2024. This end market performed better than expected, and saw 93% year-on-year growth to reach an all-time high due to strength from our data center customers, building products for generative AI applications. We expect revenues in this end market to represent 21% of third quarter sales. The medical industrial instrumentation end market contributed 14% of our total sales in the second quarter compared to 16% in the year ago quarter, and 14% in the first quarter of 2024. The year-over-year decline was generally the result of lower demand and ongoing inventory normalization, particularly in the industrial area. However, the industrial market did improve sequentially. In addition, the medical market remained stable and we saw pockets of improved demand from our semiconductor testing customers as generative AI drove growth in the DRAM market, leading to increased purchases of automated test equipment. For the third quarter, we expect the medical industrial instrumentation end market to be 14% of revenues. Automotive sales represented 14% of total sales during the second quarter of 2024 compared to 17% in the year ago quarter, and 13% during the first quarter of 2024. The year-over-year decline for automotive was due primarily to continued inventory adjustments and soft demand at several customers. However, we experienced solid sequential growth in Q2 tied to inventory normalization and improved demand for internal combustion engine and ADAS applications. We expect our automotive business to contribute 14% of total sales in Q3. Networking accounted for 6% of revenue during the second quarter of 2024. This compares to 8% in the second quarter of 2023 and 6% of revenue in the first quarter of 2024. We saw sequential growth due to recovering demand from certain networking customers. On a year-on-year basis, demand was softer as customers continue to focus on inventory digestion and experience weak end market demand. In Q3, we expect this end market to be 6% of revenues. Next, I'll cover some details from the second quarter. This information is also available on Page 5 of our earnings presentation. During the quarter, our advanced technology and engineered products business, which includes HDI, Rigid-Flex, RF Subsystems and Components and engineered systems, accounted for approximately 45% of our revenue. This compares to approximately 43% in the year ago quarter, and 48% in Q1. We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology and engineered products capabilities in new programs and new markets. PCV capacity utilization in Asia Pacific was 64% in Q2 compared to 46% in the year ago quarter, and 52% in Q1. Utilization rates improved as data center demand continues to be strong and other commercial markets started to rebound. Our overall PCV capacity utilization in North America was 39% in Q2 compared to 38% in the year ago quarter and 38% in Q1. As a reminder, North America utilization figures are not as meaningful as Asia Pacific, because bottlenecks in these high mix low volume facilities tend to occur in areas outside of plating, which is the core process that we use for calculating utilization rates. Our top five customers contributed 42% of total sales in the second quarter of 2024 compared to 40% in the second quarter of 2023. We had one customer with over 10% of our total sales in the quarter. At the end of Q2, our 90-day backlog which is subject to cancellations was $633.5 million compared to $556.2 million at the end of the second quarter last year. And as I mentioned earlier, our aerospace and defense backlog increased from $1.39 billion at the end of Q2 last year to a record of $1.45 billion at the end of Q2 this year. Our overall book-to-bill ratio was 1.11 for the three months ended July 1st. Now, Dan will review our financial performance for the second quarter. Dan? Daniel Boehle Thanks, Tom, and good afternoon, everyone. I will review our financial results for the second quarter that were included in the press release distributed today and are summarize on Slide 6 of the earnings presentation posted on our website. For the second quarter, net sales were $605.1 million compared to $546.5 million in the second quarter of 2023. The year-over-year increase was due to growth in our data center computing and aerospace and defense end markets, partially offset by declines in our automotive, medical, industrial, and instrumentation and networking end markets. GAAP operating income for the second quarter of 2024 was $39 million as compared with GAAP operating income of $21.4 million for the second quarter of 2023. On a GAAP basis, net income in the second quarter of 2024 was $26.4 million or $0.25 per loaded share. This compares to GAAP net income of $6.8 million or $0.07 per diluted share in the second quarter of last year. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes M&A related costs, restructuring costs, certain non-cash expense items such as amortization of intangibles, impairment of goodwill, and stock compensation, gains on the sale of property and other, other usual or infrequent items. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to facilitate comparisons with expectations and prior periods. Gross margin in the second quarter was 20% and compares to 19.2% in the second quarter of 2023. The year-on-year increase was due to higher sales volume, particularly in the data center computing end market and improved operational execution. Selling and marketing expense was $19 million in the second quarter or 3.1% of net sales versus $17.5 million or 3.2% of net sales a year ago. Second quarter G&A expense was $39.4 million or 6.5% of net sales compared to $35.1 million or 6.4% of net sales in the same quarter a year ago. In the second quarter of 2024, research and development was $8.2 million or 1.4% of net sales compared with the $6.2 million or 1.1% of net sales in the same quarter last year. Our operating margin in the second quarter of 2024 was 9% or 60 basis points increase from 8.4% in the same quarter of last year. Interest expense was $11.7 million in the second quarter of 2024 compared to $11.3 million in the same quarter last year. During the current year quarter, there was a positive $0.5 million foreign exchange impact below the operating income line. Government incentives and interest income totaling $3.4 million resulted in a net $3.9 million gain or a $0.03 positive impact to EPS. This compares to a net gain of $5.1 million or a $0.04 positive impact on EPS in the same quarter of last year. Our effective tax rate was 14% in the second quarter, resulting in tax expense of $6.5 million. This compares to a rate of 17% or a tax expense of $6.8 million in this end quarter last year. Second quarter 2024 net income was $40.1 million or $0.39 per share. This compares to second quarter 2023 net income of $33 million or $0.32 per diluted share. Adjusted EBITDA for the second quarter of 2024 was $84.6 million or 14% of net sales compared with second quarter 2023 adjusted EBITDA of $74.7 million or 13.7% of net sales. Depreciation for the quarter was $26.2 million. Net capital spending for the quarter was $10 million, reflecting cash inflows of $29.3 million from the sale of two buildings vacated by the closure of our Anaheim and Santa Clara facilities in 2023. Cash flow from operations in the second quarter of 2024 was #41.9 million. We purchased 1.39 million shares of common stock for $25.1 million at an average price of $18.09 per share. Cash and cash equivalents at the end of the second quarter of 2024 total $446.2 million. Our net debt divided by last 12 months EBITDA was 1.4x, below the low end of our targeted range of 1.5x to 2x. Finally, we anticipate that tomorrow, August 1st, we will close the refinancing of $346.5 million of a new term loan facility at an interest rate of SOFR plus 2.25%, 50 basis points lower than our previous Term B loans issued in May, 2023. Upon closing, the new Term B loans will be issued at par and maintain the same maturity of May, 2030. We anticipate using the proceeds from the new term loan Facility to refinance $346.5 million of such outstanding indebtedness. We have used cash on hand to pay fees and expenses of approximately $1 million related to the refinancing activity. Once finalized, the new financing is expected to generate annual interest savings of approximately $1.7 million. And now I will turn to our guidance for the third quarter. We project next sales for the third quarter of 2024 to be in the range of $580 million to $620 million and non-GAAP earnings to be in the range of $0.37, $0.43 per diluted share, which is inclusive of operating costs associated with starting up our Penang facility. The EPS forecast is based on a diluted share count of approximately 103 million shares, which includes the dilutive effect of outstanding stock options and other stock awards. We expect SG&A expense to be about 9.8% of net sales in the third quarter, and R&D to be about 1.4% of net sales. We expect interest expense of approximately 11.3 million and interest income of approximately 2.6 million. We estimate our effective tax rate to be between 10% and 14%. Further, we expect to record depreciation of approximately $26.2 million, amortization of intangibles of approximately $9.3 million, stock base compensation expense of approximately $8.4 million, a non-cash interest expense of approximately $0.4 million. And finally, I'd like to announce that we'll be participating in the Needham Virtual Industrial Technology Conference August 19 through 20, the Jefferies Semiconductor IT Hardware and Communications Technology Conference in Chicago on August 27, and the Jefferies Industrials Conference in New York on September 4th. That concludes our prepared remarks. Now, we'd like to open the line for questions. Operator? Question-and-Answer Session Operator [Operator Instructions] Our first question will come from the line of Jim Ricchiuti with Needham & Co. Jim Ricchiuti I wanted to go back to the commentary around the utilization in APAC, which it increased fairly meaningfully at least from Q1. And I was hoping you could elaborate on what drove that, how much the contributor that was to the margin improvement, or to the extent it offsets some of the headwinds from Penang. Maybe if you could just give a little bit more color on what you're seeing there. Thomas Edman Sure, Jim. You are absolutely right. If you look at the sequential growth in our commercial end markets that was really what was driving the utilization up. And we had pretty much across the board, sequential improvement, but particularly automotive MII and networking. So, whereas last quarter, most of the facilities were really outside of the data center facility. Most our other facilities were relatively low on utilization. We saw the utilization rates climb a bit this last quarter. Certainly, contributor or operating margin in a positive way and helped versus Penang. But Dan any further comments? Daniel Boehle Yes, I agree with those comments. Penang was still consistent with last quarter about 180 basis points headwinds to the operating profit this quarter. So to Tom's point, that utilization did offset that which is what we'd expected. But yes, we'll continue to have that headwind, and it's just nice to be able to have the other business offsetting that. Jim Ricchiuti And follow up question, I know you guys don't typically guide beyond the quarter, but I wanted to ask about the two areas of the business where I think you have a line of sight, and that's the A&D business and the data center computing business. As you think about Q4, is there any reason are there, that you wouldn't see continued strength in those areas and on data center, how much customer concentration is there in that sector? Thomas Edman Sure. The A&D side, as you said, Jim that that's where we have the best visibility and that program backlog number is a good indicator of the kind of support out there from a booking standpoint. So we have, certainly a good confidence in terms of strength and in defense as we go into the Q4 and really into next year given the program backlog. When it comes to our commercial markets, a little less so, we have -- we book programs in. I'd say that the second most visibility we usually get is out of auto where we have at least a six month strong forecast that we're working from, and that's supplemented by purchase orders that are placed within the quarter. Data center computing comes after that. Certainly, program visibility, but programs do shift around. And so in that market, as we look into Q4, I think if you look at certainly the momentum behind generative AI that is a strong indicator for the balance of the year certainly what we hear from our customer base is positive around their expectations. So, I think we remain optimistic in terms of certainly through the course of this year. I would just to comment on the other end markets, MII networking expected a bit more of an uptick to occur in Q3 heading into the back half of the year that hasn't happened to the extent we expected. So Q4 we'll see certainly inventory situations have improved. That's a positive indicator that we'll at least be seeing real demand there. So that's what we're seeing out there in the markets. Jim Ricchiuti Tom, just customer concentration data center, has it changed? Thomas Edman Thank you for the reminder on that. The customer concentration does in AI and data center overall remains fairly high. I mean, you really have the hyperscalers and direct chip folks that are driving that demand. So it is a relatively concentrated market remains. So, we have seen a better spread there in terms of customers, but you do still have three, four major customers driving the demand there. Operator And now will come from the line of Matt Sheerin with Stifel. Matt Sheerin Question regarding a gross margin, you've had two quarters in a row of sequential margin improvement, and it looks like backing into that for a Q3, you're going to have another up quarter. And I know one headwind is the ramping of the production in Penang. And it sounds like that might be pushed out a little bit because of the you're saying qualifications are taking a bit longer. But is that still -- I think you said it was 150 basis point headwind to gross margin. So I'm just trying to figure out, how should we think about gross margins heading into Q4 and next year, once this starts to ramp this starts to ramp or is fully ramped? Thomas Edman So this is Tom. Let me start on the Penang status, and then I'll hand over to Dan to talk about the gross margin. In terms of Penang, there are a few things going on there. The facility continues to ramp steadily ramp. We will have revenue in the third quarter. What's happened there in terms of the delay and you're right we are seeing a delay in terms of our breakeven point. We thought that that would come in early Q1. Next year, we're probably going to see about a two quarter delay to get to breakeven there. What is happening is that a couple things our customers' audits are taking longer than expected, particularly the anchor customer audits. That's just a -- that's sort of a outcome of customers now dealing, seeing a greenfield facility. They are not too familiar with greenfield facilities for high layer count production, and so audit requirements have shifted a bit there. So that's one piece. The other is related to sample qualification and then sample qualification intersection with program ramp. So, always tricky to get that timing right, and so we're working with our customers to synchronize that timing. So that's what's really going on there overall in Penang, good steady progress though in terms of the facility preparation and ramp. Dan, gross margin. Daniel Boehle Thanks, Tom. You mentioned the headwind from Penang. Currently, at the gross profit margin level, it's about 170 basis points in this period. Going forward in the next quarter, we do start seeing some revenue, so it'll decrease to about 160 basis points headwind to gross margin in the third quarter. But yes, we do see still some sequential improvements or at least staying at the level that we're at right now in gross margin in Q3. And that's as we discussed on Jim's question, increased utilization throughout Asia Pacific on the commercial side of the business as well as North America factories have been running at very good utilization rates as well. As Tom mentioned in his prepared remarks, the way that we measure utilization North America is not as meaningful as it is in Asia Pacific, because it's lower mix or lower volume, higher mix. However, we are doing quite well in our North America factories as far as utilization and efficiency rates. So that's more than offsetting the Penang headwind right now. Matt Sheerin And then another question on the data center. One, in terms of visibility there, I know some of the EMS players in that space say they have about six months of visibility, but beyond that is tough. And I know you have multiple customers, so love to get your take there, because we've had several, like strong quarters or are we going to be entering sort of a digestion period at some point? And then second, if you could talk about the competitive landscape. I know there are just a handful of players with the global abilities to do big volume PCBs for customers. I'm just wondering if you can maybe give us a little bit more color on that competitive environment Thomas Edman Sure. On data center, what we're seeing right now, and as you know, when we talk about data center computing, it really is semiconductor demand and data center demand. But what we're seeing right now driven by generative AI is the data center demand, which historically has been about 60% or so of that demand right now is upwards of 87%. So we really are seeing momentum there on the generative AI side. I think your comment about visibility is very good, Matt, that's approximately what we see as well, is that we can look into Q4, what we're hearing from EMS partners as well as from the OEM. So similar kind of visibility into the six months. Hard to say when and if there'll be a digestive period there. Right now, it is still a really nice demand environment. In terms of competition, not a lot of changes. We're still seeing major competition out of Taiwan and Korea. A few of the players there whose gold circuits out of Taiwan Unimicron out of Taiwan and then in Korea, [Isoo] continues to be a competitor out of Korea. So those are just some representative names of folks that have the same kind of high layer count and HDI position that that we have in the marketplace. Operator One moment for our next question and that will come from the line of Mike Crawford with B. Riley Securities. Mike Crawford Now, correct me if I'm wrong, but I believe most of that data center business now is coming out of China, and you don't necessarily expect much of that to move to Panang or is that something that could drive further growth in Panang from what you initially envisioned with that facility? Thomas Edman So, a slight distinction there, Mike. You're right. The generative AI demand, which really looks at higher layer count demand, that remains out of our China -- principle China facility in Dongguan, where we have been cross qualifying another facility in China, our Guangzhou facility as well. When it comes to Penang, particularly in the first stages of ramp, the primary customer demand will be coming out of data center computing. But it'll be more of the traditional data center requirements. So you'll be looking at layer counts in the 16 to 18 kind of layer count as the sweet spot that tends towards what we think of as more standard technology versus the advanced technology that's required for the generative AI applications. So at least in this initial stage, that's going to be the case. Of course, as we look longer term at the Penang facility, and particularly as we get into Phase 2 expansion plans, we'll be planning to continue that grading capacity there that would allow efficient production of that higher layer count and HDI production as well. Mike Crawford And then just shifting gears, I know that last year, at least for the first three quarters, you had extremely high automotive program. Lifetime value wins slowed down a little bit in Q4, really slow in March. And that overall vertical does not seem to have improved very much. Does that still remain weak? And what was the win number in 2Q? Thomas Edman Yes, so our win number did improve. We were up to about $61 million in this most recent quarter that compares to about $95 million last year. So we are seeing low a lower program win number there. And what's really happening is the customers are not releasing programs. And much of this is related to the shift that we're seeing in that market from EV and a strong emphasis in terms of programs being let for EV. And now customers recalibrating, as they're starting to see more demand for traditional internal combustion engine, less demand than expected -- less demand growth than expected coming out of EV. And so they're looking at their own portfolios, their own designs and sort of taking a step back to reevaluate, as they look at what designs to go forward with. So that's what's been going on there. Mike, I think you're right to call it out as a relatively weak environment in terms of program lease. Mike Crawford And then final questions on capital allocation. So you're below targeted leverage. You have $41 million remaining on your buyback. You have these investments in Malaysia and Syracuse, yet still excess capital deploy. What are the priorities without excess? Thomas Edman Sure. We will continue to look at the share buyback. As you mentioned, we have $41 million remaining there. We did do quite a bit of buy back in Q2 to offset the dilution from our insider vestings of stock. And then we'll continue as well, always looking at the market at opportunities for M&A, as well as whether there's an opportunity to buy back some of our debt. Now we did just as I mentioned in my prepared remarks, we are hoping to close tomorrow on a repricing to decrease the interest expense on that current debt. But as you've mentioned before, there is some benefit to potentially paying net down, but that's not a priority. As you mentioned, we're at the low end of our leverage range, so really we're keeping the powder dry for potential. If there's an opportunity in the M&A market, we're continuing to look at that opportunistically. Operator One moment for our next question and that will come from the line of William Stein with Truist Securities. William Stein Tom, can you hear me? Thomas Edman Sure, can Will. William Stein I thought it might be appropriate to take a second and recognize what a great job you guys did in the quarter. It was a very good result both revenue and margins. And we deserve some recognition for that. I wanted to ask about two topics. First, can you remind us with Penang, which end markets are ramping there and whether it still sort of have a vague memory of whether or not this is revenue that's going to transition from another geo that you already have, or whether this is more going to be new incremental revenue. Can you refresh my memory on that, please? Thomas Edman Sure can, Will. And thank you for your comment. So when it comes to Penang, our anchor customers there come from, as I mentioned earlier, data center computing. That's one critical end market. The other is medical industrial instrumentation and really the industrial and instrumentation space. And so that's where the end market mix is predominantly coming from. And again, that's 16 to 18 layer sweet spot in terms of layer count. From a geographic standpoint in the first phase looking at approximately 20% coming out of China that's standard technology that we would be moving out of our predominantly the facility that is extremely busy right now with higher layer count requirements for generative AI. That's been the plan. Will, it's about 20% coming out of China on the balance in new programs. And that balance where you really need to you have a number of programs that are starting up. Customers need to make sure that the intersection between our approval for a program and the program ramp make sure that that timing works. And so that's a very delicate situation for our customers and trying to make sure that they can get the forecast right for these programs as they ramp. And so, a little bit of a moving target there. But again, a lot of really good cooperation with our customers as we look at programs. William Stein But Tom, the 80% that's new that's worth lingering on from moment, is that new in the sense of new customers or new programs that you never had? Or should we instead be more conservative when we think about modeling and think, well, this is new, but displacing something that you had in the past, like a new program version, but maybe something that you are already building? Or is this truly new like growth revenue team? Thomas Edman The bulk of that 80% is new program positioning coming from our customers and these are existing customers. And what's happening there Will, is, in agreement particularly again with our anchor customers. We didn't do much standard technology, if you will in China. So, this is for us, a market share gain opportunity. As they look at standard technology requirements and looking at non-China sourcing for those. So that's where that 80% is coming from. We are working, by the way on new customers as well. And so I don't want to neglect that, but in terms of the base business plan and as it's associated with anchor customers, it's predominantly that standard technology opportunity and really a market share gain opportunity for TTM. William Stein And one other topic I'd like to hit on. In the past, the aerospace and defense business has been challenged by supply chain issues, labor shortages in, I think, upstate New York, if I recall, maybe supply shortages from semis, there've been a bunch of challenges. Can you remind me where we are in terms of addressing those? Thomas Edman Sure. You are absolutely right. If you step back to, let's just say early last year, we were in the midst of some tremendous supply chain challenges over $20 million in terms of revenue impact from those supply chain challenges to TTM and causing real customer pain. And that was a real critical area of focus for us. We stood up a supply chain organization for our non PCV area, what we call integrated electronics. That was a critical step for us. It's a different supply chain entirely from the printed circuit board area. Really helped those folks have been tremendous working with our vendors. We've also seen, of course, an overall improvement in the supply chain. So we're most recent quarter, we still have issues but we're down to about $5 million. And our most prior quarter Q1, we were at about $8 million to give you a feel for that. So good improvement there. We're still like everyone challenged by labor shortages and that's particularly when we look at incremental labor. Not a huge issue. We're able to source labor, it takes a little while, but we're able to source labor when we're ramping. That's a bit more of a challenge. And if you think about these receiving facilities from our shutdowns, last year as we're bringing labor now into those receiving facilities, that's been more of a challenge with facilities are ramping. So still making progress there. But when you're looking at hiring of let's just say more than 20 operators in a facility, that's when it takes a little bit more time than I'd like to see. But we are making progress there and supply chain. Certainly, still an area of focus but good solid improvements. Operator Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Thomas Edman for any closing remarks. Thomas Edman Yes, I just wanted to thank everyone, again for joining the call. I wanted to summarize a few of the critical points that we made. First, we delivered non-GAAP EPS and revenues above the guided range. We had solid growth and improved operational performance on a year-on-year basis. We generated healthy cash flow from operations of $41.9 million. We continued to repurchase stock and maintain a solid balance sheet with a net debt to EBITDA ratio of 1.4, which is below our target range. Finally, we refinanced our term loan resulting and that will close as Dan mentioned, hopefully in the next few days, and will result in a lower interest rate expense for the company going forward. In closing, I would really like to thank our employees' significant efforts in the quarter there. I also want to thank our customers and certainly all of you, our investors for supporting TTM. Thank you very much for joining this call. Goodbye. Operator This concludes today's program. Thank you all for participating. You may now disconnect.

Alphatec Holdings, Inc. (ATEC) Q2 2024 Earnings Call Transcript

Good afternoon, everyone, and welcome to the webcast of ATEC's Second Quarter Financial Results. We would like to remind everyone that participants on the call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. During this call, you may hear the company refer to non-GAAP or adjusted measures. Reconciliations of these measures to U.S. GAAP can be found in the supplemental financial table included in today's press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors. Leading today's call will be ATEC's Chairman and CEO, Pat Miles and CFO, Todd Koning. Thanks much, Danica, and thanks everybody for your interest in engaging in the call. So, I will jump right into the Q2 2024 highlights. And I would say it's another deliberate step in fulfilling the commitment to profitable long-term sales growth. And so, finished the quarter at a total of $146 million in total revenue. The total revenue percent growth was 25%, 27% surgical revenue growth, which I expect to be best in class, 20% growth in new users, which I would say is, speaks to the expansion metrics, 15% surgical volume growth. I think that's a metric that reflects kind of the non-linear ramp as we continue to upgrade our sales force. One that I love is the 10% growth in average surgical revenue per case that speaks to the convoyed elements of our procedural strategy and the buy into that, which is really good. We inflected to profitability with an adjusted EBITDA of $5.6 million. We had 244 surgeon training engagements fueled by our footprint expansion. So, there's a lot going on there. I think the $50 million invested is a confidence proxy for our route forward and so expanding just the footprint to support growth. And then last but not least, and I think the thing that I'm going to spend a bunch of time on during this call really is the EOS Insight launch on time. And I will explain the relevance of that, but it reflects the work of really hundreds of people over a multiyear period. And so, it's, it was audacious, and I'm exceedingly proud of it. And when we acquired EOS, our vision was to translate, the most coveted image in spine, into an informatics. And I would tell you, we've done it. So, if you look back or think back, we came to ATEC to create a spine juggernaut. And, we wanted to do it creating value by advancing the field of spine. And we are committed to a deliberate spine-focused long walk. And I think that the revenue reflection of this strategy I think is undeniable. We have created clinical distinction. So, we are distinguishing ATEC technologically through really two really core means. We've architect architected, procedures, which is reflected in the assembly of products, and then concentrated on what informatics creates predictability in spine. And I think that it's highly relevant for this time of year in this call. The second thing that we've been able to do is compel adoption, and that just means increasing surgeon users by improving surgery. So, if the clinical distinction is what we know it to be, the likelihood for somebody to be inspired to use our stuff is high. And clearly, what else is required is an elevated expanded distribution network and so doing our best to attract talent with distinction-driven surgeon demand. And so, I would tell you that those are foundational to our success, and we love to revisit them because it's what's driving the company. So, when we talk about procedural architecture, I will tell you that we are steeped in a history of value creation via informatics integration. What that means is there information where we could mitigate clinical variables to improve surgery. And when you start to think about the ascension and the prowess that's been created in lateral, it is our growth driver. What's done that is a key piece of information that enables surgeons to really know things that they wouldn't have known otherwise. And so, when you think about lateral surgery and you go from skin to spine, the most relevant anatomy of concern is neurologic. And so, to have a tool to be able to say, hey. I know where the nerve is, and I know what the health of the nerve is, is really kind of foundational information that drives surgeon decision-making. I hope that what this does is really kind of serves as an example or a proxy for how informatics influences the predictability of spine surgery. Because from this, what we've done is -- I would say that we've learned. And what we've learned is that, really, what, precludes, predictability oftentimes is information, and so measurable information that mitigates variables. It is the why behind our investment thesis into the most comprehensive, integrated, end to end automated information ecosystem in spine. Most importantly, it'll drive improved spine care, spine's yearning for improvement. Spine is hugely complex, and when you think about it as compared to other orthopedic surgery, it is less durable. And the revision rates in both short and long-segment surgery are unacceptably high. And if our job as a spine provider is not to make that better, I don't know what our responsibility is. There's a bad joke in spine, and it talks about there's two kind of surgeons. There's the ones that create deformity and the ones that fix them. I got to tell you, we want to be in the latter category. And the last thing a prospective patient needs in contemplating spine surgical intervention is the double-digit likelihood that there's going to be future surgery. And so, our ability to delve into how we minimize that potential is a value creator. We have demonstrated how using information to mitigate variables furthers predictability. We have done this with EOS Insight through focus on pre, intra and the post-op experience. This is what we mean by end-to-end. It starts at the pre-op and ends at the post-op. EOS Insight is just the beginning of a fully integrated tool that improves spine care. Let's start with an explanation around really the preoperative experience. And so, the reason most surgeons do not plan surgery is that it is onerous. It often takes a very long time and it's imprecise. You're dealing with non-standard imaging modalities where magnification and other challenges undermine accuracy. In short, it is a lot of work for little precision and objective value. So, it's just not done often. The beauty of EOS insight is it provides AI automated alignment measures that inform the surgical plan. It is a computer-generated assessment that precisely measures a patient's spinal alignment parameters. If alignment is the greatest correlative to durability or a successful long-term outcome, we believe this to be a requirement of surgery. So, EOS Insight automates this task with precise computer-generated alignment measures that inform a 3D model and subsequently a surgical plan. The surgical plan illustrates the optimal contract that maximizes the highest likelihood for plan achievement. Then the 3D plan contemplates what implants are most applicable to achieve a normative age-related restoration of spine alignment. Once this is determined, as expected, EOS Insight provides for the option of a custom implant. And so, the preoperative sophistication is efficient, it's expedient, it's automated. And so, the work required is little to none. And so, I think that that's an exceedingly attractive part of the preoperative effort. So when you start to move it to the interoperative phase and once the plan is complete and imported into the interoperative experience, then what you'd you start to do is you say, if the plan calls for lateral surgery, our ecosystem will have Valence, which is the navigation robotic system, assembled to SafeOp, which enables you to look, where the nerve is and the health of the nerve. So, it assembles those pieces of technology, and really, that's the start of kind of integrated tools that reflect innovation. So, the EOS, operative plan is automatically loaded into our EOS interoperative alignment system, IOA. And so, what that system does is it takes intraoperative images and measures them compared to the preoperative surgical plan. It enables information like reciprocal change. Do I understand how I've effectuated the spine? And it enables them to achieve the operative experience prior to leading the operating room. So, these informatics tools ultimately combine best-in-class informatics with best-in-class procedural-specific tools. And so, it is no coincidence that the most coveted understanding of the lateral requirements are here at ATEC. And I would tell you, they are integrated with a informatics system and a procedural specific set of tools that ultimately creates predictability. A driver of our growth has included an increase in average selling price. And when you look at average selling price, what you do is you say, did we assemble tools to also reflect in the requirements of surgery, so an assembled procedure? The other, reflection is in surgical complexity. And so, we believe that our ecosystem will be a key driver to continue to drive surgeon confidence, availing more and more complex surgery, which really can lead you to the realm of deformity. And so, the ecosystem that we've created will be highly relevant in deformity surgery, not only in the navigation robotics piece and what we've done is added what's called facilitated MEPs for spinal cord monitoring. If realignment is a key driver of deformity surgery, interoperative reconciliation to a surgical plan fulfillment is a must. Deformative surgery is intended to provide a restorative impact. Our influence in both adult and AIS surgery, in essence adolescence, is in the earliest of phase. Our work on patient specific implants, positioners, derotation tools, and the like is really just getting going. So, in my mind, a ton of tailwind in the work that we're doing. I would say that another extremely relevant reflection of just the automation, of EOS Insight is the data collection element. Collecting data from an automated source requires no special activity. So, again, the work requirement is very limited. The beauty is that it provides, insights that future that improves, future surgery. Some call that predictive analytics. But in simple speak, it is a way to ultimately improve future surgery. Mitigating variables through patient and practice insights driven from automated data collection at the very least makes for more informed surgery. We believe the data collection aspect of the EOS Insight tool to be a significant driver of future value. I think so often people are introduced to things and they're introduced to them, more theoretically than practically. And what we want to do is really kind of show you the plan in action and would love, a quick shout out to Dr. Craig McMain and Dr. Dave Schwartz at OrthoIndy. They ultimately completed the first -- initial case of EOS Insight, and the first patient was scanned in the EOS Edge. So, you see the automated alignment measures. So, as I said, scan in the EOS Edge, generated an AI automated alignment report, which is opened in the portal. The automated alignment then informed the 3D surgical plan. The plan provides for normative values, for the specific patient and generates a patient specific custom surgical plan. That plan then informs the patient specific rod. So, you could see down at the bottom is a patient specific pre-bent rod. All of this is done preoperatively in a highly automated efficient manner. So, the expedience of this is very strong. At that point, what we do is we take the plan and we, port it into the operating room. By importing it, we import it to the tool that enables an interoperative reconciliation against the preoperative planning measures. So, all of this is a very expedient, exercise that takes the pre-op, integrates into the interop, and enables the surgeon to understand exactly where they are in real-time in the operating room. And then the beauty is the post-operative phase, there's an opportunity to compare the objective data from the preoperative alignment to the plan to the result. This is the result of a company that is committed to moving spine surgery forward. The complexity of this effort and the on-time launch is something for which we are, extraordinarily proud. Creating clinical distinction or the fulfillment of our clinical vision is really coming to fruition right before our eyes. And so, now, the effort becomes in compelling more converts. And so that's happening. As you could see, it's happening. We are compelling surgeon adoption in Q2, we had a record-breaking surgeon training, that reflects adoption where we are investing in long-term momentum building. So, we had 244 surgeons and as stated, 20% growth in surgeon users. So, I think clearly that we're making progress as it relates to compelling surgeon adoption. I think-- that was my friend, Siri. I think the other element that I think is highly important is, are we putting the right people around the company from a field perspective? And so, recruitment continues and expands our ability to meet surgeon demand. Market disruption continues to be our friend and is industry wide. We will continue to capitalize on that market disruption. We have a strong funnel of experienced talent to expand and upgrade our sales footprint, and we believe again that the disruption is a multiyear tailwind. As you'd expect, however, it's a non-linear walk. I think another interesting thing is if you look at the demographics of the recruitment class of our year-to-date recruiting efforts in the class of 2024, there's a lot of activity going on. What provides people confidence, however, is the 23% growth in established territories. It's one of those things where it's like many of us who have been here for a long period of time have started from nothing and created again monstrosity of growth. And I think that it gives people a lot of confidence when they join the family that they're able to do the same. So, as you would expect, we are executing well, against our long-term commitments and are excited about how we will continue to walk toward our 2027 commitments of $1 billion in revenue, in 2027 and adjusted EBITDA of $180 million adjusted EBITDA margin of 18% and free cash flow of $65 million. And so I think that we have a heck of a lot of momentum. There are so many things going on clinically. That is the cornerstone of who we are as an organization. And, I'm thrilled with where we are, at this point in 2024. Well, Thank you, Pat, and good afternoon everyone. We appreciate you joining us on the call today. I'll begin with revenue. Second quarter total revenue was $145.6 million reflecting 25% growth compared to the prior year and up 5% sequentially. The $145.6 million in revenue was comprised of $130 million in surgical revenue and $115.5 million -- excuse me, and $15.5 million of EOS revenue. Second quarter surgical revenue of $130 million increased 27% year-over-year against a strong comparable of 41% growth in the prior year period. Surgical revenue growth was robust across the entire portfolio, particularly in lateral and expandable implants. We drove procedural volume per procedure growth of 10% compared to the prior year. Both metrics have shifted slightly relative to recent trends due to the meaningful sales force upgrades and additions that we are executing. We are upgrading some existing territories with new sales agencies to more strategically reflect the ATEC brand and align with the surgeons who are compelled by our procedural thesis. That generally increases average revenue per procedure in the territory. Yet, as new coverage ramps up, volumes related to the incumbent coverage wind down. As a result, there may be quarter-to-quarter lumpiness in the underlying dynamics of revenue growth as the upgraded tariff ramps. And specific to the second quarter, case volume growth was not as strong, while average revenue per procedure growth exceeded recent trends. Adjusting for this dynamic in the quarter, volume growth would have been about 300 basis points higher at 18%. Our long-term expectation is that the upgraded agencies will grow the territories contributing over time to sustainable improvements in territory revenue. The 20% growth in Q2 surgeon adoption corresponds well with this. Surgical revenue growth in the second quarter was also impacted by an additional more transient dynamic. We grew we outgrew supply of one of our biologic's offerings and one of our expandable implants. We have addressed both constraints and not have full supply available. EOS revenue in the second quarter was $15.5 million up 6% compared to last year. Next, I'll turn to results for the remainder of the P&L. Second quarter non-GAAP gross margin was 71.2%, up 190 basis points compared to the prior year. The year-over-year increase continues to be driven by improved EOS gross margin and volume-driven leverage of our Memphis distribution facility. Second quarter non-GAAP R&D was $13.5 million and approximately 9% of sales compared to $13.1 million and 11% of sales in the prior year. We delivered 190 basis points of R&D leverage while continuing to invest in innovation and the future growth of the business. Non-GAAP R&D spending was roughly flat sequentially. Non-GAAP SG&A was $100 million and approximately 68.9% of sales in the second quarter, compared to $81 million and 69.1% of sales in the prior year period, an improvement of 20 basis points. Included in SG&A is expected step up in depreciation related to the purchase of instrument sets. As a percent of sales, depreciation increased about 250 basis points year-over-year. Excluding that impact, SG&A improved by 270 basis points. Two thirds of the improvement was driven by variable selling expense with the balance driven by infrastructure leverage. Total non-GAAP operating expenses amounted to $114 million and approximately 78% of sales in the second quarter compared to $94 million and 80% of sales in the prior year period, demonstrating 210 basis points of operating leverage year-over-year. Total non-GAAP operating expense was down $1 million sequentially. In the second quarter, we inflected a positive adjusted EBITDA of $5.6 million and 3.8% of sales. This is compared to a loss of $3.1 million and 3% of sales in the prior year, 650 basis points of improvement. Drop through of the year-over-year growth and revenue dollars to adjusted EBITDA was strong at 30%. That improvement was driven by 270 basis points of SG&A leverage followed by 190 basis points of R&D leverage and 190 basis points of gross margin leverage. The consistent adjusted EBITDA margin expansion that we are driving is aligning solidly with our expectations. This gives us confidence that profitability will continue to expand in future quarters and fuel self-funded growth as we execute to our long-range plan commitments. Turning to the balance sheet, we ended the second quarter with $100 million in cash. Debt at carrying value was $531 million. Free cash use totaled $45 million with over $50 million deployed into inventory and instrument that support the expansion of our distribution footprint and new product launches. Managing the efficiency of those assets being deployed is proving to be slightly less linear than anticipated. As a result, working capital needs have been higher than we initially forecasted. Adopting more conservative working capital assumptions for the balance of the year will result in expected full-year cash use ranging between $125 million $135 million. This is $25 million higher than the $100 million to $110 million previously expected. Approximately $10 million of the change relates to elevated day sales outstanding, while the remaining $15 million relates to inventory inefficiencies. We expect Q3 cash use of approximately $25 million to $30 million with Q4 inflecting cash generation of $5 million to $15 million. With a fully drawn revolver, we expect to end the year with approximately $100 million in cash on our balance sheet, which as we've communicated is sufficient for us to run the business. We continue to expect to achieve free cash flow breakeven in 2025. Turning to our updated outlook for the full year 2024. As Pat mentioned, the leading indicators of future revenue growth were exceptional in the second quarter with record surgeon training engagements and growth in new surgeon adoption of 20%. Both are testament to the surgeon demand that ATEC clinical distinction is earning in the field. We expect that to fuel total revenue growth of 25% to approximately $602 million. That includes 2024 surgical revenue growth of approximately 27% to $537 million and EOS revenue of approximately $65 million. Calibrating for the impact of territory upgrades that I mentioned earlier, we expect surgical volume growth to continue to be the greatest contributor to surgical revenue growth, increasing at a high-teens percent rate for the full year. Territory upgrades will also drive increased growth in revenue per surgery. So, we now expect a high single digit percent growth rate for the full year. Sales growth continues to fuel leverage across our business and with the second quarter outperformance we now expect full year adjusted EBITDA of approximately $25.5 million which equates to 610 basis points of margin expansion. That implies an approximately 29% drop through of the year-over-year growth in revenue dollars, a significant acceleration compared to the 22% drop through in 2023. I'll close my comments with this view. This chart depicts the deliberate and substantial profitability expansion that we have demonstrated over the last two and a half years. Over that time, adjusted EBITDA has increased substantially from a loss of $13 million and 18% of sales to a contribution of $6 million and 4% sales over 2,000 basis points of improvement. Importantly, we are not done. We recognize that profitability and cash generation are crucial to value creation. The progress that we have delivered along with the drivers of that progress contributing the way in which we intended give us confidence in our future commitments. There's a lot of work left to do and a lot to be excited about. As usual, we have an active IR calendar in the next few months and are looking forward to connecting with you. Thanks much, Todd. I would just conclude the call by saying prior to Q&A of saying we have a track record of execution. This has been a deliberate spine focused long game. And so, we're executing unique ecosystem in all of spine to, inform better spine surgery. And I think it's unquestionable that we are advancing the field. Great. We will now open the floor for questions. [Operator Instructions]. The first question comes from Vik Chopra with Wells Fargo. Please go ahead. Vik Chopra Hey, good afternoon Danica and thanks for taking the questions. So just on the cash burn, obviously higher than we were expecting. So just wanted to confirm, you're now expecting $125 million to $135 million cash burn for 2024. Is that right? Okay. And just I guess to follow-up to that, will we need to raise cash against the portfolio in cash flow breakeven in 2025? And then I had a follow-up. Todd Koning Yeah, Vik. I think as we look at it and if you look at the growth next year, I think if you take where the Street is at, that's about $123 million of year-over-year revenue growth. Take about 35% of that, you get about $45 million of growth in adjusted EBITDA year-over-year. So, if you exit this year at $25.5 million, you add $45 million to that, you get about $70 million of adjusted EBITDA next year. That ultimately funds our working capital and our growth needs and our cash needs for next year. And so, I think going into next year, we feel very good about achieving our cash flow breakeven with our existing liquidity where we're at today. Because ultimately as we look at our current second half cash burn, thinking that we'll exit the year with a fully drawn revolver at about $100 million going into next year then with the dynamics that I just laid out in terms of increased adjusted EBITDA on the basis of drop through year-over-year revenue growth. Vik Chopra Okay. And then just a follow-up. Can you just talk about some of the expected hiring trends for 2024? And any color on the cadence of competitive rep recruitment? Thank you. Patrick Miles Yeah. Vik, thanks for the question. I would tell you that it's robust and kind of the approach that we've taken has been as geographic dependent as our needs are. And so, try to provide a little bit of color with the pie chart that just shows you clearly a fair amount from Globus, Nuva, but also Medtronic, J&J, and the rest. And so, it's been as we could take on as many people as I feel like we want to. The question becomes is what makes most sense in what geographies at what time? And so, as you appreciate, these things take significant investment. We got to make sure that all the instruments and implants are available to them so that they could start the process of turning on their business. And it's a lumpy exercise, but it's happening at the rate that we desire. All right. I think we're going to go to the next caller. The next caller is Caitlin [Indiscernible] with Canaccord Genuity -- sorry about that. Please go ahead. Unidentified Analyst Hello, everyone. Thanks for taking the questions. Just starting with the territory upgrades, where are you in implementing these, and how many territories have you upgraded or expect to upgrade? Patrick Miles Yeah. It's interesting question just from the standpoint of where we are as a company. And so, I look at us as having 94% of the market to go. It means we're about a 6% market shareholder. And I would say that, let's just say, we're, probably, well less than a third of the size of, say, a Medtronic sales force. We have opportunities for the next, I'd say, eight years. And so, again, I think what is mistaken is that the disruption in the marketplace is a several year tailwind. And the great part is that what sales reps want is they want surgeons who are compelled by new and exciting technology. And so, our opportunity to compel sales reps to come along with their surgeons who are inspired by our technology is available to us in space. What we're trying to do is march toward a operating company. And so, we're doing that in a very methodical way. And that means what we're doing is prioritizing those territories that are most opportune for significant expedient profitable growth. Unidentified Analyst Okay. Great. Thanks. And then just a follow-up on the competitive hires. Thanks for noting the breakdown of the hires. But, what's the most up-to-date, number of the hires? I think the last that you mentioned was 50 reps. Patrick Miles Yeah. We're not going to share the quarter to quarter hiring practices. And our desire is to get a rep toward a $2 million a year type of a cadence. And so, you could probably do the math and get to a place to where you feel reasonably well about kind of where we're heading. And so just from a pure volumetric perspective. But again, I would tell you that the people that make up our sales training classes are reflective of the pie chart that we had delivered and the volume of reps will continue to grow as we run toward a $1 billion. Todd Koning And Caitlin, I think the greatest indicator for future sales growth ultimately becomes the surge in adoption that grew at 20% again in the second quarter and then clearly the surgeon engagements at 244, which was just a very significant quarter's worth. Patrick Miles Yeah. I would say just to add to Todd's point, which is a great one, which is you don't get near 250 surgeons to engage in your surgeon training event if there's not interest in what you're doing clinically. And to me, it's such an apparent, dynamic and I feel like we're just trying to be as thoughtful and appropriate as we can with regard to who's coming through. Todd Koning And I guess reflective of the territory upgrades and additions that we've been making. All right. Our next question comes from Josh Jennings with TD Cowen. Please go ahead. Eric Anderson Hi, guys. This is Eric on for Josh. Thanks for taking the question. I was hoping to just put a finer point on expectations for cash burn through the end of the year. I appreciate the color you gave around cash use through 3Q and 4Q. But if you could just talk through the drivers of that flip into positive cash use in 4Q that would be great. And then what risk do you see to that pathway? Todd Koning Thank you, Eric. As we look at the cash use and maybe I'll just take a minute to talk about the incremental 25 that we're assuming for the second half relative to previous experience or previous communications. That is really due to about $10 million of that due to day sales outstanding. So, if you think about where we exited last year, which is kind of in the high 40s, Q2 was in the low 50s. We're about five days different than frankly I expected us to be at this point in time. So, five days times $2 million a day gets you about $10 million. The remaining 15 of that has to do with inventory inefficiencies and really the confluence of growing a business at 25% to 30% a year, bringing the size and the volume of new sales agencies on ensuring that they have what they need when they need it. All of that is a lot of variables in that experience. And so, when you're growing at a rate that we've been growing, there's definitely been some variability there. We've been less efficient in that than I expected. And so that's the drivers behind this. Ultimately, I think we get through that over time and we improve in those metrics. But I'm now assuming that we don't improve at the end of the year. And so that's really the dynamic that we're going through here. Ultimately, when you think about the inflection to cash, part of that is, we have invested significantly in the sets and the inventory in the first part of this year as you know. And so that obviously is a trend downwards through the second half of the year. And then as we inflect the profitability, that ultimately drives cash generation. And so, it's really the inflection of those two variables going in opposite directions that really inflect you from cash burn to cash generation. I mean, this is really all about sales growth and profitability growth flowing into cash flow here the rest of the year and into the future. Eric Anderson Okay. Appreciate that. And then on EOS, with the launch of Insight now in play, I was hoping to just get your thoughts on some of the inbound interest that you and the team have been fielding with that now up and out in the field. And just as a technical question on EOS, I believe it's a software-based platform. So, is upgrading existing EOS systems as simple as just pushing that software out to customers? Or is there something more involved required to get adapters up and running? Thanks for the questions. Patrick Miles Thanks, Eric. So just I guess the straightforward one first is at this point, we go out and it's a software upgrade on the machine. We don't push it yet. There will be there's work going on right now that will enable us to push all software upgrades out. This is kind of our first real significant type of software solution. It's -- the reason I spent so much time on it is the reflection of a the most coveted image in all of spine being integrated into a informatic tool. And, it is very significant and maybe much like the narrowness of the way we think of safe up to our lateral portfolio, the whole EOS into spine care, I think, is a is a monumental achievement. And so, it'll play out over time. We have great confidence it'll play out over time. Right now, it's a software solution that is really kind of just the beginning of a very long run. But if maybe next time I could show the faces of the surgeons who come through here for visits when they seek the tools that, are provided through EOS Insight. Probably the best reflection of enthusiasm around the platform. Our next question comes from Matt Blackman with Stifel. Please go ahead. Great. So, Todd, I wanted to go back to the 15% volume growth. So, if I'm hearing you correctly, it sounds like there was some dislocation as you sort of switch territories around. I guess, why is it manifesting now, versus maybe a couple of quarters ago? Maybe it has something to do with the timing of instrument set deployments. But how long does this persist? I mean, Salesforce dislocation can be tricky to work your way through. It does seem like as I think about your guide, your updated guide for volume growth that you sort of baked it in for the remainder of the year. Is that how we should be thinking about it? Does it potentially bleed into 2025? And then I have one actual follow-up question. Todd Koning Yeah. And I thank you for the question. I don't want to communicate that there is unexpected dislocation. This is a phenomenon where we added sales coverage, sales agents in a territory where we have new surgeon interest. That surgeon interest is in our most distinct portfolio, which is really the lateral portfolio. And ultimately, we are upgrading that territory sales agency, and ultimately the existing sales agents wind down. So that's the normal. They always wind down when the new guys wind up and come on. What was a little bit unexpected this time was the pace at which the existing guys wound their business down. Now the reality is the ASP of the business that has come on in that territories, is lateral. So, it's 2x our average. That's a $15 million to $20 million procedural price. What walked away was, $3,000 to $5,000 procedural price. And so, when we attract surgeons who are most interested in our most distinct portfolio, ultimately, you drive a higher level of revenue per procedure. And you always do expect the existing business to ramp down at some point in time. I would just tell you that it happened a little bit faster than we anticipated this quarter. And so that's the dynamic that went on. So, does that make sense? Matt Blackman Yeah. No, it doesn't. Does that persist? It does seem like you're baking it in for the remainder of the year with the updated guidance. Does that persist for a quarter or two quarters? Obviously, I would expect it improves, but when do you think you'd get back on to that sort of typical trajectory of whether it's surgeon, productivity or rep productivity in terms of volume growth as opposed to ASP growth? Todd Koning Yeah. So, I think at the now we're assuming essentially kind of high-teens volume growth in the second half, which is really what we saw here. I guess we saw mid-teens in the second quarter. So, you're starting to see that tick up a little bit in the second half. So, we see a little bit of that recovery in the second half. So that's kind of how we see that playing out. And ultimately, the revenue per procedure that's implied in that Q3 the implication there is kind of high single digits, Q4 it gets back to mid-single digits. So, I think that's how that effectively gets modeled in the remainder of the year between price and revenue per -- and volume. Matt Blackman Got it. And I guess to counter that, would be obviously we're thinking bigger picture here, particularly given the amount of investment in new distributors, new reps, instrument sets, sort of hoping to see potentially some uptick in growth. Is the point and maybe it comes, maybe it doesn't, but maybe the point would be if we just look at in particular, maybe we're not seeing it in the actual dollars yet here in the first and the second quarter of '24, but we should be comforted by the fact that, particularly here in the first half of the year, your surgeon training numbers are pretty substantial. And it then therefore, that's an indication that these reps are in fact bringing in new surgeons. And so, that is the real metric we should be sort of leaning on as we think about the outlook for growth from here. Is that fair? Todd Koning Exactly the point, Matt. And as you look at that, the guide implies probably a $2 million sequential step up in our surgical revenue, I think. And so, when you look at that, I think that reflects the underlying confidence that we have in the growth of the business looking forward. Patrick Miles Yeah. It is a non-linear walk and I never thought that we'd be apologizing for 27% top line or surgical growth. But totally understand your questions, but it is a put and take at every turn. Matt Blackman And maybe I'm just going to sneak in one more question, apologies to everyone else here. But just on EOS, I guess the simple question is, is EOS now at a point where it is a workhorse imaging system with all the enhancements? Or is there something else perhaps that we're waiting for in the near-term pipeline that really sort of moves this to, again, a workhorse imaging system that a physician can use across 70% of their procedures? Patrick Miles Yeah. I would say it's a workhorse imaging system that has no competitor. The problematic dynamic of imaging is that it is profoundly inconsistent with different magnification. It's imprecise. And just the ability to have a standard image out of EOS provides for opportunity of grand scale. I cannot communicate my enthusiasm more with regard to how we translate that image into an informatic tool that improves surgical care. We're well down the way of identifying the diagnostic platform whereby we can do is pull in different tools again to drive more clarity with regard to what patients require what surgery informed by a set of data that's derived in an automated way. It's like, these are things that have evaded spine in the 30 years I've been part of it. And so, to be able to be part of this and to support the architecture of it through the many, luminary surgeons who have kind of advised us is phenomenal. So, again, the proof's in the pudding, and we're going to be around it to show the pudding. It's an exciting time. Matt Blackman All right. Thanks, Pat. And apologies for the more than one question. All right. Our next question comes from Drew Ranieri from Morgan Stanley. Please go ahead. Drew Ranieri Hi. Thanks for taking the questions. Just maybe a couple from me that I'll ask together. So, Todd, I think you called out some supply constraints that you maybe now resolved in biologics and expandables. Just curious if you can quantify maybe how much that might have cost you in revenue upside potentially for the quarter? And I'll just ask my second here as well. But we've been getting more investor imbalance just kind of questioning the overall utilization environment specifically when it comes to orthopedic and spine names. So, I mean, you're with 5%, 6% market share in the U. S, Pat or Todd -- and or Todd. Just hoping to get your perspective on maybe what you're seeing in the market and maybe what you're seeing specifically for surgeons that you have longer established relationships with? Thanks for taking the questions. Todd Koning I'll take the first one and then Pat can take the second one on the utilization. So, Drew, relative to supply constraints, I did call out two items where we really outgrew our supply. Ultimately, that's now resolved. We're not going to quantify all of that, but suffice it to say, as we think about our sequential Q2 to Q3 in surgical revenue, I think our expectation would be to go from $130 million to $132 million sequentially. So, I think that should give you a sense for our level of confidence going into the third quarter and kind of sizing up and quantifying the overall impact of the dynamics we saw in the second quarter. Patrick Miles And with regard to utilization, there's really been like it's always tough. Like we're a 6% market share holder. We're a proxy for nothing. I always like to say just because it's like we don't have as wide of a visibility on the market per se. But I would say it's been pretty typical. And so at least kind of what we've seen exiting Q1 and through Q2, it's been a relatively typical time. Okay. We'll go to the next caller, Brooks O'Neil with Lake Street Capital Markets. Please go ahead. Aaron Wukmir Hey, guys. This is Aaron on the line for Brooks. Thanks for taking the questions. I was wondering if you could just give us an update on Japan and maybe how you're thinking about that market timing wise? I appreciate any existing penetration in Australia and New Zealand, but if you just could have any specific time horizons that you're thinking about either in the short or long term? Thank you. Pat Miles Yeah. Super excited about Japan. A lot of the regulatory stuff is coming through. We hope to like at least say, hey, we've done a surgery in Japan in the fourth quarter. And so, if so much of I think who we are as an organization is making commitments on timetables. And that was a commitment that we made and we said, Q3 to Q4 of '24 for our first experience, and I like our chances. And so, that will be a market that we're going to expect a lot out of over a long period of time. We're going to give it the necessary tools and time to create the very market that we expect out of Japan. So anyway, super excited about Japan. All right. Our next caller is David Saxon with Needham. Please go ahead. David Saxon Great. Good afternoon Pat and Todd. Thanks for taking my questions. Todd, I just wanted to follow-up on the free cash flow guidance change. So, what specifically is causing the DSOs, to go up? How confident are you that the DSOs and inventory dynamics won't get worse? And I guess, do you still have confidence in the 2025 breakeven target? And I have just one quick follow-up. Todd Koning Thanks David. On the DSO, I would say they have not improved to the extent that we expected them to. So, we were I think 40 -- like mid to high 40s exiting last year, stepped up significantly in Q1. And I think that also had to do with some customer dynamics out there. I think there were there were some cybersecurity items that had hit different customers that delayed payments. Ultimately, we saw a significant improvement from we saw an improvement from Q1 to Q2, and we just have not seen as much of it. And so, I think some of that may be also associated with just some of our general customer mix in terms of where we're growing. So, my expectation is that we're not going to improve to where we've been exiting last year. And so fundamentally, we saw a step up Q4 to Q1. We stepped down Q1 to Q2, just not as much as I expected to. And so, I'm expecting no further improvement on that front. On the DI or on the inventory, the DOH, rank we're about little over 400 here in the second quarter. Ultimately, as we're growing, think this has been a dynamic of just how efficient, how much needs to go to each different sales agent as they ramp up. And so, I think as we've looked at it, we're assuming no further improvements. We're putting a lot of effort and energy in the organization to get better at that and to improve it. I'm just assuming that we don't see those improvements. And so, it's really, we did not see the improvements that we expected to see through our activities in the first half of the year. So, I'm assuming that we don't see them in the second half of the year. So, as I think as we've said before, the belief in the cash flow and the cash breakeven is a function of the belief in the top line growth. The top line growth creates the opportunity then for us to expand profitability. The expansion of the profitability ultimately funds and feeds our cash flow. And so, if you think that we can look at consensus that's about $120 million $25 million of growth next year, 35% of that you get $45 million of adjusted EBITDA on the year-over-year drop through. So, if we enter this year at 25.5 and you add 45, you get $70 million. So that would be $7 million to essentially invest in sets of inventory and what you need next year. And so ultimately, we've got a lot of adjusted EBITDA that ultimately funds the working capital needs of the business in 2025. And so, my confidence in achieving cash flow was a function of my confidence in the top line growth, which is predicated on the surge in adoption that we're seeing and the strong competitive sales reps and hiring that we're seeing. My confidence in our ability to continue to expand profitability is founded in the fact that we've demonstrated it for the last eight quarters and it's happened in the way we expected it to. And I know the walk forward is consistent with what we've the way we've built the company. And so that's the confidence that I have. And then also knowing that we have invested significantly this year in sets of inventory, you also get a bit of a tailwind next year in the higher utilization of those assets next year, meaning you don't have to buy as much to meet your revenue target. So ultimately, that's how I sit here and feel comfortable with 2025. David Saxon Okay, great. So, if I could just quickly summarize. So even if these dynamics don't improve, maybe they do, but even if they don't, you guys have confidence in the top line growth and that'll drive profitability, which drives free cash flow to breakeven next year, still looks achievable. And then, maybe just confirm that that was a good summary. And then my follow-up, you kind of walked into, the $70 million you kind of talked through for 2025. I mean, should we kind of be thinking of that as late/early guidance or is that just an illustration? Thanks so much. Todd Koning Yes. So, I can confirm your understanding. And the math I walked through, I think it's consistent with our long-range plan expectations. I think consensus is like $66 million based on those numbers. So, I feel like that's a reasonable place to be. We're not giving guidance at this point, but I think the logic and we've laid out the framework in the long-range plan and you're applying that framework. All right. Our next question comes from Jason Wittes with ROTH Capital. Please go ahead. Jason Wittes Hi. Thanks for taking the questions. So, congratulations on the launch of EOS Insight. I assume that's going to have a lot of relevance in deformity. And I'm curious kind of where are your deformity business is right now and what else should we expect from the launch? Or you think you're fully prepared to go after that segment as with the EOS Insight launch? Patrick Miles Yeah. It's kind of the strategic question. It's one of the things that's very apparent is that alignment and measures are relevant in short segment as well as long segment surgery. Clearly, when you think of deformity, you think of long segment surgery. Our relevance there has been muted. We've been just, I would say, somewhat, when you create a company that was broken from nothing to something, you go to the place that, in essence reflects the most immediate influence, and that was lateral surgery. And so, our ability to apply lateral in relatively short segment surgery was kind of the initial kickoff of the company. That's driven much of the growth. We've used that, that growth in essence to continue to expand the complexity of tools that ultimately accommodate the lateral approach, but also say, how do we become a relevant participant in deformity? And candidly, there hasn't been a ton of innovation in deformity. And the opportunity that we have in terms of bringing a relative innovation package to deformity is very apparent. And so, I think that EOS has an entree into our adult deformity and subsequently our idiopathic deformity and then early onset is such the right walk. And so right now, we have kind of the automated alignment measures. Next year, Q2 '25, we're sprinting at a bone quality measure through the same image acquisition as the automated alignment measures. And so, again, I think that these things give us a very relevant, informatic package that will drive a relevant in deformity surgery. Jason Wittes And in terms of just hardware in general, do you think you have a full offering, to put out in the field at this point or is it lacking in some places? Patrick Miles Yes. I would say in terms of adult and idiopathic, I would say we have a great offering. Really, we're in the very, very early phases some of the small stature stuff. Jason Wittes So, what milestones should we be looking for to see how you're progressing with deformity, because it's obviously a pretty it seems like what's going to double the revenue opportunity for the company? Patrick Miles Yeah. Really, what we've modeled is kind of the growth of the company requisite to the technological advancement of the field. And so, I think that the route to a $1 billion requires 20% or north growth and I think that it's contemplated in that number. Jason Wittes So, and, I mean, is this sort of you're just launching now. I assume this is a multiyear, process to really start to see I guess, real numbers being starting to be posted there. So, I know you've given you've kind of given 2 year or 3 year out at this point, I guess, it's about a two and a half year out your outlook. Does that have much deformity in it, or is that pretty much all prefaced on, the current state of business? Patrick Miles Yes. It has a growing reflection of deformity in it. But It's interesting, I think, that if anybody questions our long-term commitment to this field, I think EOS is a proxy for a long-term commitment. And I think that where spine surgery needs to go, it clearly needs to evolve. The revision rates are clearly way too high. And so, as we mitigate variables through informatic tools, it improves surgery and it will expand our footprint. And so, what we've done is we've contemplated that through the growth profile of the company. And so, this is a multiyear walk and an opportunity that is again unique to us because we've been willing to commit the effort, the resources and the work to innovating in this space. All right. Our last question comes from Sean Lee with H. C. Wainwright. Please go ahead. Sean Lee Hey, good afternoon, guys, and thanks for taking my questions. I just have two quick ones. One for EOS Insight and the move towards deformity. Do you feel the company's goal is more towards getting enrolled with existing deformity surgeons or converting surgeons who don't do deformity yet into doing deformity surgery? And if it's the latter, have you seen any examples so far? Patrick Miles Yes. I would say that we're early in the experience. Just in terms of the way that the spine community evolves, I think there's going to be a focal assembly of surgeons who do the most complex of deformity surgery. So, we're focusing on the young surgeons that are very technically and technology savvy, that are coming out of deformity programs. And so, I would tell you that that's a big part of our efforts and focus as well as I think the kind of the historically famous, deformity surgeons have always been hugely pro EOS, and, candidly, they've been extraordinarily supportive of us acquiring it because they know that we're committed to evolving the information package. And so, I would say that my presumption is that what's going to happen is there's just going to be a narrowing of the volume of surgeons who ultimately take on the majority of the deformity, and those people will be extraordinarily relevant to our focus and efforts. Sean Lee I see. That's very helpful. My second question is on -- I think Todd mentioned that there was a supply shortage with one-year Biologics. I was wondering whether that's such a one-off event or do you see a trend of Biologics becoming a more material contributors to your overall portfolio? Thanks. That's all my questions. Todd Koning Thanks, Sean. I think as you know, biologics has been an area of growth for us really probably over the last certainly last 12 months, maybe last 18 months. And so, as we've continued to grow and drive a higher attach rate, we just outgrew our supply. And so, at the end of the day, it was a demand created situation for us, which we've now recognized. And so, I wouldn't say that that's a trend per se, but clearly biologics has been a big growth driver for us over the last certainly last 12 months to 18 months. All right. I will now turn the call back over to Pat Miles for closing remarks. Patrick Miles Thanks, Danica. Greatly appreciate everybody's support, and I hope shared enthusiasm over the whole EOS Insight launch. It is a significant one and one that we'll look back on with great pride. So anyway, I appreciate everybody's interest. Look forward to catching up. Thanks. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Littelfuse Inc (LFUS) Q2 2024 Earnings Call Transcript

Littelfuse Inc (NASDAQ:LFUS) Q2 2024 Results Conference Call July 31, 2024 10:00 AM ET Company Participants David Kelley - Head of Investor Relations Dave Heinzmann - President, CEO & Director Meenal Sethna - Executive VP & CFO Conference Call Participants Luke Junk - Baird Matt Sheerin - Stifel Christopher Glynn - Oppenheimer Grant Smith - Jefferies Josh Buchalter - TD Cowen David Williams - The Benchmark William Kerwin - Morningstar David Silver - CLK Operator Good day, everyone, and welcome to the Littelfuse Second Quarter 2024 Earnings Conference Call. Today's call is being recorded. And at this time, I would like to turn the call over to the Head of Investor Relations, David Kelley. Please proceed. . David Kelley Good morning, and welcome to the Littelfuse second quarter 2024 earnings conference call. With me today are Dave Heinzmann, President and CEO; and Meenal Sethna, Executive Vice President and CFO. Yesterday, we reported results for our second quarter, and a copy of our earnings release and slide presentation is available on the Investor Relations section of our website. A webcast of today's conference call will also be available on our website. Please advance to Slide 2 for our disclaimers. Our discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review yesterday's press release and our Form 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations. We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available in the Investor Relations section of our website. I will now turn the call over to Dave. Dave Heinzmann Thank you, David. Good morning, and thanks for joining us today. Let's start with highlights on Slide 4. Our second quarter results exceeded our expectations, reflecting our resilient business model, diverse and balanced technology offering and broad customer reach. Our seasoned global teams navigated through a continued dynamic environment and delivered solid results, while we saw a solid design-in activity and secured significant new business across sustainability, connectivity and safety megatrends. We again delivered strong free cash flow, a testament to our proven operating model while our balance sheet and significant financial capacity positions us to enhance our long-term growth strategy. We will continue to prioritize capital allocation towards thoughtful M&A while maintaining our commitment of returning capital to shareholders. Our second quarter results exceeded the high end of both our sales and earnings guidance ranges. Meenal will provide additional color on our financial performance and outlook. I want to thank our global team for their hard work, dedication and meaningful achievements through the first half of 2024. Turning to Slide 5. We highlight several of our key accomplishments from our recently published 2023 sustainability report, which is available on our website. Sustainability is core to Littelfuse as our history is deeply rooted in providing solutions to our broad customer base and across our diverse set of end markets that ultimately drive an increasingly sustainable world. Whether advancing on electrification and transportation, providing robust solutions for renewable energy or enabling safety critical medical technology, sustainability is incorporated into our daily actions across our businesses. I am proud of the efforts of our global teams. We strive to deliver internal progress and external enhancements for the betterment of our communities, employees, customers and investors. Ultimately, we view sustainability as an integral part of our long-term growth strategy highlighted on Slide 6. Before diving into our end markets and design activity, I wanted to highlight a few key market channel and OEM inventory trends. We believe the passive electronics channel destocking that negatively impacted 2023 and the first half of 2024 results is largely behind us. Our passive electronic book-to-bill remains above one as passive electronics channel inventory levels have normalized. We expect to return to more normalized order rates as typical following a destocking period. However, thus far into Q3, we are seeing some ongoing signs of cautiousness from customers and hesitancy to restock passive electronics inventory following what ultimately has been a historic and elongated destocking cycle. We're also seeing moderating inventory reductions across our protection semiconductor product lines and we expect more stable order trends in the second half of the year. Finally, we observed further industrial OEM destocking in the quarter, which had a more pronounced impact on our power semiconductor exposure. As we see continued soft industrial demand, which I will provide more detail on shortly, we expect these conditions will impact us through the second half of the year. Now let's turn to our end markets and design activity, starting with the electronics on Slide 7. Second quarter electronics markets remained soft, although we are seeing initial signs of demand recovery. Consumer products, appliances and building technologies demand was again soft in the quarter, although customers are increasingly optimistic in a nearing recovery led by AI applications. Demand for data center and especially AI-driven data center applications was robust in the second quarter. Taking a step back, we believe customers are increasingly upbeat in subset of regions such as Taiwan, while design-in activity continues to be healthy and encouraging across our global exposures. Regardless of our near-term trends, we remain well positioned to enable ongoing innovation and drive long-term through-cycle growth across our diverse electronic market exposures. We believe this is evidenced by our strong design win cadence in the quarter. We delivered numerous wins ranging from innovative data center solutions to safety critical medical applications. Specifically, in the quarter, we secured several data center wins, including Fuse's business for a customer in Asia and for liquid cooling application in North America. We also secured business for a data center customer in Asia that will utilize our switch technology. We delivered multi-technology and safety-critical wins for medical customers in Europe and South Korea for defibrillator applications as well as medical switch technology for a customer in North America. Finally, we secured appliance business with customers in Europe and multiple regions in Asia that will utilize our diverse set of technologies, including our sensor and circuit protection capabilities. Moving on to transportation end markets and design wins on Slide 8. Our passenger vehicle exposure, again, benefited from our balanced product capabilities, broad technology leadership and global customer reach. We continue to see strong interest in our core products as customers delay EV launches and pivot to internal combustion and hybrid vehicles in North America and Europe markets. In China, we again delivered strong results in low voltage applications which support local OEMs that continue to experience robust growth. Second quarter global passenger vehicle production was modestly lower versus the prior year, and we expect a modest decline in the full year 2024. We remain well positioned to deliver on long-term passenger vehicle growth drivers as we continue to enable electronification as well as next-generation electrification advancements across hybrid and electric vehicle architectures for a diverse and global customer base. Regarding our commercial vehicle exposure, our ongoing profitability initiatives led by our pruning and pricing actions continue to bear fruit while we remain encouraged by design-in activity and traction with our broad customer base. We are seeing continued soft market conditions driven by our ag, construction exposures. However, on-road truck and bus demand was more resilient than expected in the second quarter. Looking forward, we see continued soft demand led by Europe and China regions, extending into the second half of the year. Long term, we remain well positioned to deliver electronification and electrification innovations across our broad commercial vehicle exposures, including material handling, agriculture, construction equipment and heavy-duty truck and bus markets. In the quarter, we secured meaningful new transportation business across both passenger and commercial vehicle end markets. In passenger vehicles, we secured a high-voltage fuse opportunity with the customer in South Korea. We also delivered multiple low-voltage fuse wins across our global customer base, including for customers in the Americas, Europe and in China. We also secured a win within a battery management system for a customer in South Korea as well as for a key customer in China. Finally, we continue to gain traction with our broad switch portfolio as we secured meaningful business in North America during the quarter. In commercial vehicles, we secured several wins highlighted by construction equipment business for customers in North America, Japan and South Korea. We also delivered on-road truck win for a customer in Brazil and a bus win in Mexico. Turning to Slide 9. Industrial markets and design activity. In the quarter, we saw ongoing demand weakness led by industrial equipment and factory automation, construction and charging infrastructure applications. Demand remains mixed for renewable applications with energy storage robust, while the solar market was again soft in the second quarter. And industrial safety applications continue to show further signs of growth, and we are benefiting from residential HVAC volume recovery, although at a modest pace to date. Broadly, power semiconductor customers continue to work down inventories and push out orders. Looking forward, we believe soft end demand conditions will persist through year-end with a more pronounced impact where we have semiconductor exposure. Taking a step back, long-term industrial growth trends remain attractive, supported by ongoing infrastructure spend, increasing electrical efficiency requirements, advancements in automation and global commitments to decarbonization. Industrial design activity remains strong across our exposures as customers seek to drive ongoing innovations. In the second quarter, we had success in the North America HVAC market where we won business with multiple customers across a variety of product categories. We continued our recent industrial safety momentum doing meaningful business with a North America customer. In renewables, we secured business for residential solar application and for a wind turbine application in Asia. We also delivered multiple EV charging wins in the quarter across several regions. Finally, we secured business within an industrial smart meter application in North America customer. Across our businesses, we continue to deliver innovative solutions to our broad customer base for our diverse end market exposures. We remain well positioned to deliver on our long-term double-digit annual revenue growth target as evidenced by our continued design win momentum supporting sustainability, connectivity and safety megatrends. I will now turn the call over to Meenal to provide additional color on our financial performance and outlook. Meenal Sethna Thanks, Dave. Good morning, everyone, and thank you for joining us today. Please turn to Slide 11 to start with details on our second quarter results. Revenue in the quarter was $558 million, down 9% versus last year and down 8% organically. The product line pruning actions we discussed reduced sales 2%, in line with our expectations in the prior quarter. GAAP operating margins were 11.7% and adjusted operating margin of 12.7%. Adjusted EBITDA margins finished at 18.6%. Foreign exchange and commodities had an 80 basis point unfavorable impact to margins, largely due to commodity inflation and primarily driven by copper and silver exposure. Second quarter GAAP diluted earnings per share was $1.82 and adjusted diluted EPS was $1.97. Our second quarter GAAP effective tax rate was 26% and adjusted effective tax rate was 25%. Our adjusted effective tax rate was slightly higher than expected due to income shifts across jurisdictions. Please turn to Slide 12 for updates on capital allocation. We continue to deliver strong cash generation year-to-date. Operating cash flow in the quarter was $69 million, and we generated $50 million in free cash flow. Year-to-date, we generated $92 million in free cash flow, yielding a 98% conversion rate. We've continued to reduce both inventory days and dollars this year, contributing to our solid cash flow performance. We expect to deliver on our targeted 100% free cash flow conversion for the full year aligned with our long-term goals. We ended the quarter with $562 million of cash on hand and net debt-to-EBITDA leverage of 1.6 times. Given the strength of our balance sheet, we'll continue to prioritize our free cash flow for thoughtful acquisitions, and we will continue to return capital to our shareholders through our dividend and periodic share buybacks. In the quarter, we returned $41 million of capital to shareholders, including $25 million via share repurchases and $16 million via a cash dividend. Through the first half of 2024, we've returned $73 million of capital to shareholders. Our Board of Directors approved an 8% increase in our quarterly cash dividend, equating to $2.80 annual rate. We've grown our dividend 12% on a compounded annual basis since inception, a testament to our long-term earnings and cash generation power. We'll remain disciplined in our capital allocation strategy as we strive to maximize long-term shareholder value. Please turn to Slide 13 for our product segment highlights, starting with the Electronics Products segment. Sales were down 13% versus last year and 12% organically. Sales across passive products were down 4% versus last year, while semiconductor products declined 19%. The passive products were impacted by ongoing but moderating inventory declines, and we're starting to see similar trends across our protection semiconductor products. The continued weakness we saw in industrial markets, particularly impacted our power semiconductor product sales in the quarter. Operating margins in the quarter were 15.1%, while EBITDA margins finished at 21.6%. Margins improved 210 basis points and 180 basis points sequentially reflecting our portfolio diversification efforts and strong execution. We're proud of the margin resiliency of our Electronics Products segment through this extended destocking cycle and are confident in the team's ability to drive continued expansion. Moving to our Transportation Products segment on Slide 14. Segment sales were down 2% and down 1% organically. Sales were negatively impacted 4% versus last year from pruning actions we've been undertaking, largely within our commercial vehicle business. Across our passenger vehicle business, sales grew 2% organically. We saw continued strength in China and weaker trends across Europe with some partial offsets due to ongoing sensor product line pruning. Within commercial vehicles, sales for the quarter were down 3% organically as pruning actions and ongoing end market softness were in part offset by continued favorable pricing momentum. For the segment, operating margins were 9% and EBITDA margins finished at 14.4% in the quarter. We believe our pricing and pruning initiatives as well as structural cost actions are bearing fruit as margins were in line with our expectations. On Slide 15, industrial products segment sales were down 7% and 6% organically. We continue to see soft industrial end market conditions across our broad and diverse exposures as well as a continuation of inventory reductions at some OEMs. However, we again benefited from solid, industrial safety growth while we also observed early signs of residential HVAC volume recovery in the quarter. Operating margins finished at 11.4% and EBITDA margins were 16%. These represented positive improvements of 490 basis points and 410 basis points sequentially, reflecting strong execution following our capacity additions and footprint actions noted in the first quarter. Please turn to Slide 16 for the forecast. Summarizing Dave's earlier comments, while we believe the passive electronics inventory destocking is largely behind us, we are seeing some ongoing cautious order patterns from customers. We also expect continued weakness across our semiconductor products due to ongoing market softness and inventory destocking, and we expect some persistent commodity headwinds. With these assumptions, we expect third quarter sales in the range of $540 million to $570 million. This includes about a 3% headwind from FX and expected product pruning versus last year. Across our segments, we expect sales to be largely flat relative to the second quarter. We're projecting third quarter EPS to be in the range of $1.95 to $2.15 and includes a tax rate of 26%. This incorporates about $0.25 in headwinds from FX and commodity rates as well as a higher tax rate versus the prior year. Please turn to Slide 17 for our full year 2024 expectations. For the full year, we expect our product line pruning actions to reduce total sales about 2% and reduce transportation sales growth about 6% versus last year. We are seeing mitigating currency movements but increasing commodity costs. At current rates, we expect those to be a headwind of 1% to sales and about $0.40 to EPS for the year. We demonstrated the resiliency of our electronics segment margins through cycles. We've also delivered solid transportation and industrial segment margin traction reflecting operational execution and structural initiatives. However, we do expect a more gradual margin ramp, reflecting continued subdued end market demand and cautious order patterns across our customers and channels. With these market undercurrent, we expect company operating margins to finish in the range of 12% to 14% for the full year. Across our segments, we expect electronics operating margins to average in the mid-teens and industrial operating margins in the low teens. We continue to expect transportation to exit the year with high single-digit operating margins. On other modeling items, we're assuming $63 million in amortization expense and $39 million in interest expense, about two-thirds of which we expect to offset through interest income from our cash investment strategies. We are estimating a full year tax rate of about 23%, slightly higher than our prior estimate due to income shifts across jurisdictions, and we expect to invest about $100 million in capital expenditures. We continue to execute well through a dynamic environment and remained well positioned to support our broad customer base and diverse market exposures. We are confident in our positioning, reflecting our diverse technology offering, strong relationships across a global customer base and ongoing profitability improvements. We will continue our path forward and best-in-class profitability and cash generation, driving value creation for our stakeholders. Thank you to our Littelfuse colleagues worldwide in their unwavering commitment in steering our company forward every day. And with that, I'll turn it back to Dave for some final comments. Dave Heinzmann Thanks, Meenal. Our solid second quarter results reflect our strong execution through an ongoing dynamic environment. We also believe our portfolio diversification efforts and relentless focus on providing innovative solutions to our customers bolstered our second quarter performance. Our strong balance sheet and first half cash generation provide us with considerable flexibility as we continue to prioritize thoughtful but disciplined acquisitions in attractive end markets. We remain confident we are on the path to continued double-digit annual revenue growth through cycles and leveraged earnings expansion, which we believe will translate to top-tier value creation for our stakeholders. I want to again thank our global Littlefuse team for their persistent hard work and commitment to our customers and supplier partners through the first half of 2024. And with that, I will now turn the call back to the operator for Q&A. Question-and-Answer Session Operator [Operator Instructions] And your first question comes from the line of Luke Junk with Baird. Your line is open. Mr. Junk, please check your mute button. Luke Junk Dave, maybe if we could start with delineating electronics book-to-bill between passive and on the semi side. Maybe just how much above 1.0 on the passive side? And are you seeing any sequential progress in semis? And within all of that, you mentioned AI is a driver in the quarter as well. Just curious how that might be impacting orders. Dave Heinzmann And so we've talked about overall electronics book-to-bill at being over 1.0. So it's slightly above one, we're seeing there. And there is a little bit of a delineation between the semiconductor portion of it in the passives. We've also talked about kind of cautiousness in order patterns. So if you look at our passives business, we were above one last quarter. We continue to be slightly above one this quarter. And our -- so the book-to-bill are reasonably stable, but we're not seeing as much of a pickup as we would typically see. And I think that's really cautiousness driven by the OEM customers in placing orders. So it remains healthy and sell-through remains healthy. However, we're just not seeing that pick up yet. On the semiconductor side, as we've talked about, because we've intentionally in the semiconductor, particular power semiconductor side kind of invested into the industrial space as we think it creates a better balance for our business over time. Industrial is soft. So book-to-bill have been below one in the industrial or in the power semi portion of the business. However, we've seen through July actually those order rates begin to stabilize. So they're approaching one again, even in the power semi side. But just to keep in mind that if you think about lead times in the power semi are longer, so even if we reach book-to-bills that are above that's really going to be 4, 5 months out before we see sales starting to pick up there. So that's why we talk about, really, kind of expecting to see that kind of going into next year. AI data centers in general is the second part of your question. We broadly participate across several different technologies into the data center space. And while we don't get a specific uptick related to AI from a technology shift, the build out of the data centers and the more power consumption and data centers that we see we get a linear pickup in our business there. And data centers have been pretty robust, and we've seen orders be pretty strong in that space during the second quarter and then into the third quarter. Q - Luke Junk Also hoping to touch on something that you mentioned in the prepared remarks in terms of channel dynamics beyond passive distribution, I'm thinking of the kind of protective portion of the semiconductor business that's distributed and inventory end customers as well, just given what you're seeing there? Could we see one or both of those inflect maybe late in the 3Q range or maybe more likely in the fourth quarter, Dave? Dave Heinzmann Yes. I think our protection semiconductor business behaves a little more like our passive business, if you will. It has a slightly higher index to automotive electronics as a higher portion of that business. So what we saw is, actually, the protection semiconductor business went into correction mode later than our passives did by a couple of quarters. And what we've typically seen is, when we begin to see an inflection point and a correction, coming to the other direction in passives, the protection portion of our semiconductor tends to follow a quarter or two behind that. So it's difficult to say exactly when we see that turning back up in the protection side, but it's probably a quarter or two behind our passive business. Luke Junk And then if I could sneak one final question in Meenal, this is a margin-related question. And just looking at the full year guidance for 12% to 14% operating margins that's applying step-up in the back half at the midpoint, but at the high end, it would be pushing above the mid-teens in the second half versus 12% in the first. Can you just unpack that upside risk, if you will, I assume that would be mostly electronics related and ultimately, what could drive that sort of incremental exiting the year? I guess I'm really trying to reconcile that with what seems like some more conservatism in the third quarter guide from a margin standpoint where at the midpoint, maybe you're even picking up pretty flat EBIT if we strip out [Indiscernible] comp stepping down sequentially. Meenal Sethna Sure. I would say, in general, just stepping back on margins overall, we've done a lot of work in the past several years around. We talked about portfolio diversification, execution, really improving that foundation and have expected that, that's going to continue to look the floor, which it has done for the margin floor. With the cycle that we're in, we're really trying to look and predict out on where things are going, and you heard some of Dave's commentary on sales. For us, given all the foundational work we've done, now it's really the volumes coming back. And so based on the general view that we've given on, starting to see recovery in various places, little bit of improvement across the transportation segment, which is more on the operational side. That's really where we ended up with the 12% to 14% guide range as we think about the full year for full year margins. Operator And your next question comes from the line of Matt Sheerin with Stifel. Your line is open. Matt Sheerin Another question regarding the guidance for the year and expectations for a year-over-year growth net of that product pruning, typically, your electronics business is down sequentially. And given, as you say, a very cautious order patterns from customers, should we expect that again? And are you expecting year-over-year growth in electronics despite that? And then thoughts around the auto business, sequentially, in the next couple of quarters given that we've seen the S&P auto numbers got cut recently? Dave Heinzmann Sure, Matt. I'll take that one and Meenal feel free to jump in. So if we look at kind of the return to growth in the fourth quarter, which is our current view of when we expect to begin to see things turn, absolutely, if you look at normal calendarization. In a normal environment, we would see electronics sequentially down in the fourth quarter. However, we are seeing the inventory position. Weeks of inventory for our passive products are back to pre-COVID levels. So they are very normalized sorts of weeks of inventory in the channel. And as we do begin to see that impact the fact that POS is reasonably stable that lack of inventory burn in the back end of the year, we'll begin to show some growth. So we think that growth offsets kind of the normal calendarization that perhaps we see there. And on the automotive side, while car build will likely be down in the back half of the year compared to the previous year, we still have outgrowth that creates opportunities for us to drive growth in that area. So with those kind of pieces, we do feel confident that we're going to begin to turn the corner and see a return to growth in the back end of the year. Meenal Sethna Sure. And I'll add on your question on margins related to that, right, going back to the first question I answered for us, given all the work that we've done, it's really now volumes coming back that we feel will really drive the margins. And historically, as we have seen growth coming out of cycles that growth coming back tends to come back at very, very strong incrementals. So with this, maybe atypical pattern on sales that we're seeing with -- as the market recovers, I think that would also be a little bit of an atypical margin and margin recovery third going into the fourth quarter as the sales start to improve. Matt Sheerin And just related to your margin commentary, you did talk about some headwinds for input costs like copper and silver. And I know typically in the past, when we've seen significant increases in those costs you've been able to, at some point, pass them along. But given the tough demand environment, is that more difficult? And how should we think about pricing in channel? Meenal Sethna Yes. So in general, when we talk about metals and metal pricing, I think I've mentioned in the past that, that's much heavier weighted towards our transportation segment. So yes, we are seeing some higher input costs there. Yes, not all, but many of our contracts do include clauses where we do have a copper pass back. The timing may not exactly be aligned quarter-to-quarter, but yes, there is a pass back included there. What I would also say is, the other dynamic going on is we're working even with the metals pricing, et cetera, we're working on pricing independently. We've been doing that. So beyond in metals and the metals cost increases, we've been both on the automotive side as well as in the commercial vehicle side. Working on pricing. So that's part of the -- I'll say the balance in our margin progression as we think about the transportation segment. Operator And your next question comes from the line of Christopher Glynn with Oppenheimer. Your line is open. Christopher Glynn I had a couple on industrial. Had a really strong sequential lift there. And just curious, what got better. I think the revenues were pretty significant proportion above expectations. Dave Heinzmann Yes. I think generally, the industrial markets are soft, for sure. And we kind of have a mix of different markets that we're serving and you're looking specifically at the industrial reporting segment, where we saw softness there is in pockets that are kind of broad-based. So EV charging as an example continues to be soft. Within renewables, it's a bit of a mix between the solar types of installation, which has been a really strong driver for us in history that is soft but energy storage has been quite strong. So we've got kind of moving pieces in both directions there. Keeping in mind also from a financial performance there, we talked about in the first quarter, where we're in the midst of moving into a new factory that we were building out. So always, when you're in transition, between that, we also transitioned some operations from China to Mexico that creates a fair amount of noise and costs associated with that. We've got the bulk of that behind us as we went into the second quarter and certainly almost all of it behind us going into the third quarter. So that kind of helped to uplift the bottom line performance of the Industrial business. Christopher Glynn And then on the initial signs of HVAC recovery, could you put a little bit more color on that? Are the OEMs, anyone, actually kind of building inventory there? And how much is kind of market for new designs because you put some emphasis on new designs. Dave Heinzmann Yes, we did. And so in our exposure to HVAC, particularly in North America, we have a heavier tie to residentially HVAC. And that, of course, well documented, including in your reports, has been an area where there's been over inventory from our customers' perspective. As they're pushing into the field, we've seen our customers take rate from us, improving as they've kind of pushed through some of that inventory in their channels. So their takes from us are starting kind of early signs of uptick there as their inventories have begun to stabilize. From a design-in perspective, we had really good robust activity there across many customers, many of our product technologies, particularly with a lot of focus on industrial HVAC areas where we need to improve our position there. So we saw a lot of design-in activity there, and the teams are very active. So we think long term, that will play out well for us in the industrial exposure to HVAC. Operator And your next question comes from the line of Saree Boroditsky with Jefferies. Your line is open. Grant Smith This is Grant Smith on for Saree. You talked a lot about the cautious order patterns in passives. But I was hoping you could elaborate a bit on what these customers are kind of telling you and what would increase their confidence to maybe start more of the restocking and increasing orders? Dave Heinzmann Yes. our visibility to the end customers are a bit more challenging than they are distribution partners, and what we're seeing is in our discussions with our distribution partners, they're seeing order patterns from end customers be a bit muted considering where we're at in the cycle. And I think some of that comes from the fact that OEMs, EMS certainly carried a lot of excess inventory over the last couple of years, and they've been working to burn that down. They've made meaningful progress in burning down their excess inventories, carrying cost of inventory are pretty high these days. And so I think as lead times have shrunk, they'll look at that. And our sense is they're saying, "Hey, lead times are pretty short. Capacities are not being pushed." So if I hold off a little bit and drop orders in a little later, the odds, I'm going to get support for that are pretty high. So I think they're just kind of playing it pretty cautious on their order patterns to place them. These are the situations that drive capacity constraints in the future, which is a kind of a typical pattern in electronics. But that's our sense in general is there that kind of general cautiousness. And we don't sense there's some massive problem in the end market, it's more just being very cautious on coming off of excessive inventories that they've been carrying. Grant Smith And you mentioned thoughtful M&A in attractive end markets. Can you just expand a little bit on those end markets and maybe on the M&A focus going forward? And kind of what does the environment look like out there as far as the pipeline and valuations Dave Heinzmann And clearly, we work our funnel very aggressively over time, and we have a very active funnel that we continue to work. What I would say is we look at M&A using our M&A capabilities and our capital that we can deploy in that way to thoughtfully continue to diversify the markets that we serve. So you've seen that over the last 3 or 4 years where our M&A has increased our exposure as an example, to the industrial market. That's been intentional. So we look at things that will help to offset the balance in our businesses and create a good balance across the industries that we see attractive. We look for margin profiles and long term that are going to be attractive and supportive of where we are as a company. And ultimately, it plays into the megatrends that we define our business around. So what are these trends that are going to drive growth over the long term. And with those things, those are the criteria we look to kind of create our search in those areas. So certainly, things that are going to continue to build out our industrial markets. That's an area of attractiveness for us. While we're still doing some work to turn around the profitability of our commercial vehicle business, we still think that over time is going to be an attractive place to be. We always look at potential kind of bolt-on consolidation opportunities that come along occasionally. At the end of the day, we want to do M&A into an area that will enable us to continue to support an outsized organic growth model into attractive spaces. As far as what multiples look like and how that's coming along, I would say as much as we would expect and hope that multiples start dropping off, we haven't seen that so much. The multiples continue to be pretty solid out there, pretty strong. So that's an area we've got to be thoughtful about and make sure that the second order screen for us is are we going to get the return profile we want out of the acquisition. And it may meet some of the other criteria, but if we're pushing too far on the return profile, we'll step back from it. Operator And your next question comes from the line of Josh Buchalter with TD Cowen. Your line is open. Josh Buchalter Maybe I want to start with a bigger picture one. So if I look at where second quarter came in versus your guidance, it was above the high end, I believe, and clearly surprised you to the upside within the quarter, but then the commentary on the third quarter sounds a bit more cautious. If I think about it and step back, was this a function of you got inventory cleared. Now it's just -- you're shipping closer to end demand, but end demand is tepid. I'd just be curious to hear big picture how you're seeing the business environment given your breadth and scale. Dave Heinzmann Yes. So we had a little more positivity in the second quarter than we anticipated and our ability to execute to that. I talked a little bit about order patterns in the electronics side and the cautiousness in ordering often leads to people dropping orders in very late. And sometimes that reduces our visibility and our chance to kind of see that. So we saw some upside in the electronics side, where orders kind of dropped in late and that's been a positive and on the industrial side as well. However, the offset to that and a bit of our cautiousness in the third quarter is particularly light industrial and the broader industrial markets, while we're seeing our inventories have come down to where they ought to be in the passives and electronics side of things on our products, particularly the power semiconductor products that are selling into kind of light industrial types of applications. Those markets are softer. And so therefore, we are seeing on that portion of the business some OEM and channel destocking as they're bringing down their inventories to match up to these softer markets. So I think that offset of -- we've seen stabilization in the electronics. But on the industrial kind of centric power semiconductor business, we've actually seen order pushouts a bit and delays from our customers there as their end markets have been a bit soft. So that's where the cautiousness, maybe a little bit in the third quarter is coming from. Meenal Sethna Maybe I would add one more, David, on the transportation side, especially on the automotive side, right? Starting to see a little bit of a down guide through IHS and car builds coming down also, so there's a little bit of caution also on the automotive side, especially in some of the Western area, a little bit more in North America, Europe, et cetera. Josh Buchalter Dave, I appreciate all the color there. Maybe one for Meenal. If I look at the shape of your CapEx, they hit the $100 million, you got to step up spending pretty meaningfully in the back half of the year. Maybe you could walk through some of the priorities there. And then also, it's been good to see the repurchase the last couple of quarters. Should we expect that to step down correspondingly in the back half of the year? Or do you think you can maintain the current level of repurchases until you get something you're more excited about from a valuation or strategic perspective in M&A? Meenal Sethna Sure. So on your first question as it relates to CapEx, we monitor that closely. The great news for us is that we generate the cash that we want to reinvest back in the business. And Dave talked a lot about organic growth, and we want to make sure we're building the capacity and focusing on the organic growth. At the same time, our businesses watch the markets closely. And if they find that as they look out a few quarters, things are maybe not picking up at the same way, we'll delay capacity investments. And you may see us as we approach the end of the year, we may not quite get to that $100 million, if that's what we're seeing in there, but it's not a -- we're not trying to manage the CapEx for our cash number, but more trying to be prudent and when and how we're spending our capital. The other thing, I would say is, as you recall, we had signed an agreement last year to acquire fab from Elmos Semiconductor we call it the Dortmund fab as it's located in Germany. And we are doing some spending in advance of taking over that fab in the beginning of 2025. So that $100 million includes some investments that we're making for capacity that we're building out in advance. That's the first part. The second part in terms of your questions around share buyback in general. What I would say is our philosophy has always been, as we think about capital allocation, first, it's around prioritizing organic growth, as I just talked about in investing, making the right investments for organic growth. Dave spent a lot of time talking about thoughtful acquisitions. What that means for us and how we consider the acquisition space then we've got a dividend that we've had since 2010, double-digit growth there on the dividend. As you look over the years. We just increased that again this past quarter. And for us, share buyback tends to be a more periodic event. And we feel like the market is not recognizing our growth strategy and really incorporated that into the share prices. That's when we look at buying back shares. That was really the view that we took in the first half of the year on that. And at the same time, we balance that with what's in the horizon, what's pretty close in the funnel when it comes to M&A. And we make those determinations of holding back in some cases or looking at share buybacks. So we're not a continuous one of share buyback, and we're a little bit more periodic about it. Operator And your next question comes from the line of David Williams with The Benchmark. Your line is open. David Williams I guess, first, I wanted to ask just kind of around the data center applications and AI that you talked about. I understand that's around a lot of the build-out that's ongoing. But just kind of curious if you could help understand or help us understand maybe where -- what type of applications you talked about liquid cooling earlier. But where else are you seeing that? And is there a way to think about maybe the magnitude of that contribution, overall, when you think about data centers and just how many are being built out today? Dave Heinzmann Yes. From a data center perspective, we get involved kind of in two aspects of it. One is the infrastructure for the data center building and power system itself. So within that, you've got power backup systems and power distribution within the building. That creates opportunities for us. That typically show up in our industrial segment of types of products and technologies that sell into that. And then you get -- and every data center owner has a slightly different architecture and approach to these things. But at the rack level, then you start getting more of our electronic components that are being sold into the rack level. And it can be primarily circuit protection, but we'll see some semiconductor business in those spaces. We'll even see now that we've kind of moved into switches, some switches that are used in that application. And then even in the servers themselves, we'll have content that shows up there. So whereas I know there's some others in our space where on the semiconductor side or on the back plane side, there's a technology shift that's pretty big with latency concerns and things like that, that drives both kind of the volume of data center increase but the technology shift. For us, it's more really the volume creation that drives by the data center build-out that drives our business up there. David Williams Certainly, some great color there. And then secondly, just from a geographic perspective, you talked about a lot of design wins across all your regions. But are you seeing anything from maybe demand or even a design-in perspective that's changed over the last maybe 60 to 90 days over the last, maybe, even half year. Just kind of curious, if the design activities are staying fairly stable geographically. Dave Heinzmann Yes. I think in general, from a revenue perspective, what I would say and order patterns and things, I think we're seeing kind of modest improvements in Asia which has been kind of a tough space for us over the last several quarters, and we're beginning to see that improve a bit. Europe, if anything, Europe from an order pattern is down meaningfully. So that's probably the bigger shift is Europe being softer. North America has continued to be our most stable and our most solid business and that continues to be the case. So if you think about regionally, that's more orders and revenue related. From a design perspective, design from a regional perspective, sometimes does not line up, first of all, with where we actually ship to and the regions where it's bought. It's really where the design activity is. I'm not sure we're seeing a heavy shift there. We're seeing pretty solid, consistent design activity across the board. It varies by automotive versus electronics and things like that. But we haven't seen any kind of meaningful shift in that that's been noticed. Operator And your next question comes from the line of William Kerwin with Morningstar. Your line is open. William Kerwin Maybe to start, I was hoping if you could elaborate on some of the weakness that you're seeing in commercial transportation. It sounds like there's some softness in Europe and also China, but maybe some positive offsetting there from the agriculture. Just wondering, if you could unpack kind of that softness, geographically, by end product and then how you are thinking about a rebound eventually for that part of the business? Davie Heinzmann Yes, a bit of a correction there. Actually, construction and agriculture is probably the weakest spot for us that we're seeing from a market perspective, where we've seen, actually, for us, our exposure and on-road heavy truck has been a bit more resilient than we anticipated, and that's been positive for us. ConAg, certainly, has been challenged, and we see, certainly, Europe and China specifically where it's the softest. So we don't see that shifting too much in the foreseeable future. We kind of see that pattern now. We continue to look for it. The good news is for us as we've worked to kind of rebalance our portfolio there, and we've done some pruning in the commercial vehicle space, which has kind of pulled back our organic growth, if you will. But we think there's still meaningful opportunity for us in content improvement and designing for our technologies into our customer base in the commercial vehicle side. So while we think the markets are going to continue to be a bit challenging, we think there's meaningful opportunity for us to go after design wins and activities there. William Kerwin And then maybe that's a good tie-in with a longer one here or longer-term one. Curious if you could talk through how you're seeing the competitive landscape evolve with electric vehicles, both across pass car and commercial transportation and just rising competition as that high-voltage market rises and how you feel about defending your position there? Dave Heinzmann Sure. So certainly, the EV space is a pretty dynamic space these days. And with our -- particularly the Western pass car OEMs as we've seen, we have good -- great design-in activity in the EV space. We've seen that. We continue to see that. However, a lot of programs are getting pushed out as they're shifting focus to hybrids, plug-in hybrids, those types of things. The good news is, we have a good balance of our technologies that serve regardless of the powertrain. We have good content opportunity there. But it's shifting a little bit in the West on where we're seeing launches and volumes and things there that's pulled back a little bit. From a competitive landscape, what I would say is, in China, specifically, the competitive landscape on the high-voltage side is tough. That has been kind of -- we've seen that, talked about that for the last 1.5 years or so. So that continues to be challenging there. Competition-wise, on the rest of the world on EV, we have not seen that get tougher. In fact, we've seen a few players maybe pull back a little bit from that space. So we've seen that to be pretty stable the Western world, if you will, on the EV competition. On commercial vehicle, electrification it's all over the map. Each customer has a very different view and where there's a lot of energy around kind of last mile sort of vehicles there that continues to be good. On the construction and agriculture, there's progress, but volumes really aren't taking off yet in electrification. So it's a bit of a mixed bag. Operator And your next question comes from the line of David Silver with CLK. Your line is open. David Silver The question I wanted to ask was really about the status of the wafer fab purchase in Germany. And Meenal, certainly, touched on it a little bit. But I was just wondering, a couple of things. I think with the original announcement, there was a time line where regulatory approvals and then final closing were supposed to be targeted for the end of this year. And so first thing is, I'm wondering if that's still on track. And then maybe more to the point, I mean, with all of the turmoil in the transportation -- or I shouldn't say turmoil, uncertainty, in the transportation sector right now. My understanding was that, that facility, the legacy owner was using the wafers there for transportation-oriented end markets. And it's been about a year since the deal was announced. I'm just wondering from your perspective, is there any change in your thinking about how you would use your capacity allocation in the early years and then maybe longer term, you're thinking about the highest and best use of that asset. Dave Heinzmann Sure. Very happy to give some color on that. First of all, everything is on track. We do expect to close at the kind of end of this year, beginning of next year on that, where we'll take ownership of the fab. But the nature of the contract, and you're correct, LMOS uses that fab and its supporting automotive applications and things like that, that's key part of their business. The reason we acquired this fab and the manner we did, this is a long-term play for us. But candidly for us, it's more oriented towards industrial, not automotive. But there's a multiyear, like a 4-, 5-year contract agreement with the seller where we will continue to produce product for them out of this fab as they begin to export out of this fab into different fabs, which takes time, it could take years to do that. We support them during that as they begin to ramp down and will begin to ramp up our industrial products in that fab over that same time frame. So the goal is to try to keep the fab fairly well loaded through the transition, and it's really a long-term play for us for our power semiconductor products with a heavy focus on the industrial application side. Operator Thanks, David. And we will take a follow-up question from Matt Sheerin with Stifel. Your line is open. Matt Sheerin I just had a quick modeling question, Meenal, regarding OpEx. I know that was up sequentially because of the stock comp, which is seasonal. So how should we think about OpEx in Q3, in Q4? Meenal Sethna Yes. I would say you can look at it the continued trends that we've had. I think I talked about the fact that in the second quarter the long-term incentive was about $0.30. Think of it as, let's call it, $10 million or so rounded, et cetera. So from there, you can expect sort of back to a normalized run rate or so. I would put it into, what I'd say, is for something like an SG&A, think about it in the mid-80 range and for R&D think about it in the upper 20s million dollars. Operator We will take a follow-up question from David Williams with Benchmark. Your line is open. David Williams As follow-up real quick. Just wanted to ask David or Meenal, maybe on the -- thinking about the fab and that transition over 4 to 5 years, as you load your industrial products but you're still manufacturing the automotive products, there typically is quite a large margin differential there as you're making for others. How should we think about the margin impact from either a gross or operating margin as you load that fab over time? Meenal Sethna So with the arrangement that Dave mentioned that we've worked out, we will have a modest margin that, to your point, will be lower than our typical margin as we're really performing a service, almost like a foundry partner is really what we are. So really, the goal was, as Dave mentioned, to really level load the fab and not -- that's been the main point. So we will have a margin that will look like it's dilutive, but that's fully the arrangement. So as we get into talking about 2025, we'll provide some further details on that and what that does to the overall segment margin Operator And that concludes our question-and-answer session. I will now turn the conference back over to Mr. David Kelly for closing remarks. David Kelley Yes. Thank you, Abbie. We look forward to speaking with everyone at the August 28 Evercore ISI Semiconductor IT Hardware and Networking Conference in Chicago as well as the September 5 Jefferies Industrials Conference in New York. We hope everyone has a great rest of their day. Thanks again. Operator Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.

Lincoln Electric Holdings, Inc. (LECO) Q2 2024 Earnings Call Transcript

Amanda Butler - Vice President of Investor Relations & Communications Steve Hedlund - President & Chief Executive Officer Gabe Bruno - Chief Financial Officer Greetings, and welcome to the Lincoln Electric 2024 Second Quarter Financial Results Conference Call. [Operator Instructions] And this call is being recorded. It is my pleasure to introduce your host, Amanda Butler, Vice President of Investor Relations and Communications. Thank you. You may begin. Amanda Butler Thank you, Greg, and good morning, everyone. Welcome to Legal Electric's second quarter 2024 conference call. We released our financial results earlier today, and you can find our release and this call slide presentation at lincolnelectric.com in the Investor Relations section. Joining me on the call today is Steve Hedlund, President and Chief Executive Officer; and Gabe Bruno, our Chief Financial Officer. Following our prepared remarks, we're happy to take your questions. But before we start our discussion, please note that certain statements made during this call may be forward-looking, and actual results may differ materially from our expectations due to a number of risk factors and uncertainties, which are provided in our press release and in our SEC filings on Forms 10-K and 10-Q. In addition, we discussed financial measures that do not conform to US GAAP. A reconciliation of non-GAAP measures to the most comparable GAAP measures found in the financial tables in our earnings release, which again is available in the Investor Relations section of our website at lincolnelectric.com. And with that, I'll turn the call over to Steve Hedlund. Steve? Steve Hedlund Thank you, Amanda. Good morning, everyone. Turning to slide 3. I am pleased to report solid second quarter results, demonstrating the team's strong execution of our higher standard strategy initiatives, structural improvements in the business and diligent management of costs, which has enabled us to successfully navigate through a more challenging portion of the cycle. Despite an organic sales decline of 4% in the quarter, we held our operating income margin steady at last year's record 17.4% rate. I would like to thank the global team for staying focused on our customers and executing our commercial and operational initiatives in a dynamic environment. We also reported solid earnings performance, cash flow generation and cash conversion at 110%. We continue to invest not only in growth via internal CapEx and two acquisitions, but also returned $91 million in cash to shareholders in the quarter through our dividend and share repurchases. We did this while maintaining top quartile ROIC performance, highlighting strong capital stewardship in the business. Turning to slide 4 to discuss organic sales trends in the quarter. We experienced lower demand in our two welding segments due to lower production levels among heavy industry OEM customers, moderating automotive production and weak macroeconomic conditions impacting our customers in the general industry sector. We also saw a pause in capital spending for automation projects as the automotive OEMs rebalance future product plans between EVs, hybrids and internal combustion powertrain platforms and as small and medium-sized fabricators moderate their capital investment in the face of increasing economic uncertainty. These factors, along with challenging prior year comparisons in equipment resulted in a 4% organic sales decline. Looking at our end markets, two of our five end markets or approximately 30% of our end sector sales mix grew in the quarter, led by strong international growth and construction infrastructure and global energy projects. General industries declined modestly, while heavy industry and automotive sectors were more challenged. Moving to slide 5 and investments for long-term growth. I am pleased to report that we have added approximately $175 million of annualized sales from three acquisitions year-to-date. This generates 400-plus basis points of sales growth versus prior year, which is in line with our strategy. We previously highlighted our RedViking Automation acquisition in April and I'm pleased to discuss two new acquisitions, including Vanair, which we announced earlier today. First, Inrotech is a small but impressive automation integrator in Denmark that has developed a proprietary AI-based solution that automatically programs a welding robot with minimal human intervention. This technology enables customers to reduce the time it takes to program a robot to make complex repetitive welds from days to minutes. Initially designed for shipbuilding applications, we believe this technology is a game changer that can be deployed across a broad range of solutions. Earlier today, we announced the acquisition of Vanair, which is a leading player in mobile power solutions for the service truck industry. This acquisition extends our channel reach to sell our existing welding products to this customer segment while expanding portfolio of mobile and battery-powered solutions. We have been working with Vanair on several co-development projects and have seen very strong customer response to the products we have launched to date. We estimate that our three acquisitions will generate an initial full year earnings run rate of $0.14 to $0.16 per share pre synergies as we work to integrate their operations. Moving to Slide 6 and an update on our EV fast charger initiative. I am proud to report that we successfully launched our initial 150-kilowatt Velion fast charger that was designed specifically to meet the US NEVI requirements. We have achieved several key milestones and have received very encouraging feedback from prospective customers and continue to pursue a number of sales opportunities tied to NEVI program and private fleets. However, the EV charger market has evolved significantly in the last six months. The deployment of NEVI funds has been very slow. And with new vehicles able to accept much higher charging levels, the market has begun to question how to future-proof investments in charging hardware. As a result, several leading EV charging hardware manufacturers have become insolvent, exited the industry or announced significant layoffs. While response to our technology manufacturing capabilities and value proposition has been overwhelmingly positive, many customers now want products that differ materially from NEVI's specifications. In response, we are leveraging the modular nature of our product architecture to accelerate the introduction of new products to enable us to better serve evolving customer needs. We expect this will extend the start of any meaningful revenue ramp to late 2025. We remain confident that the long-term market potential is attractive and that we will continue to pursue this opportunity without the need for significant further investments. The incremental operating expenses associated with the EV charger initiative are almost fully offset by the improved performance of our additive manufacturing business, which is reaching an inflection point in commercial adoption. The maturation of additive manufacturing after several years of technology development and incubation is evidence of our ability to leverage our core competencies to create value outside of our legacy welding business. I am pleased with the team's execution of our strategy in a challenging environment while we continue to invest in long-term growth and operational efficiency. These efforts position us to capitalize on the many opportunities ahead deliver superior value through the cycle. And now I'll pass the call to Gabe Bruno to cover second quarter financials in more detail. Gabe Bruno Thank you, Steve. Moving to Slide 7. Our second quarter sales declined 4% to $1.22 billion primarily from 5.4% lower volumes. We achieved 1% higher price and benefited 1.2% from acquisitions, which were partially offset by 40 basis points of unfavorable foreign exchange. Gross profit dollars increased approximately 3% and to $384 million to a record 37.6% gross profit margin, which increased 240 basis points versus the prior year. Effective cost management and operational improvements generated strong profit performance. We recognized a $2.2 million LIFO benefit in the quarter. Our SG&A expense increased 8% or approximately $16 million from a combination of acquisitions, higher employee-related costs and incremental unallocated corporate overhead costs. SG&A as a percent of sales increased 220 basis points to 20.4% versus prior year on lower sales, but was relatively steady sequentially. We expect corporate expenses to be closer to $3 million per quarter in the back half of the year. Reported operating income declined 16% to $149 million, primarily due to $29 million in special item charges including a $23 million non-cash rationalization charge from the final liquidation of our Russian business. We also incurred a $5 million loss from an asset disposal related to a small international divestiture, which helps shape our model and $2 million in acquisition-related transaction costs. Excluding special items, adjusted operating income declined approximately 4% to $178 million, while our adjusted operating income margin held steady versus prior year at 17.4%. Interest expense net in the quarter declined 9% to $10.7 million. We expect our interest expense net for the full year 2024 to be relatively flat versus prior year. This reflects our recent refinancing announced in late June, where we issued $550 million of senior unsecured notes and used the proceeds to repay our $400 million term loan and fund acquisitions. Once these new note transactions completed in August, we will have $1.25 billion in total debt with a weighted average interest rate, including the impact of interest rate swaps of 4.08%. We also entered into a new 5-year $1 billion revolving credit facility to increase liquidity and align with our higher EBITDA performance. At June 30, we did not have any borrowings against the revolver. Moving further down the income statement, we reported a $1.6 million other expense in the quarter. This reflects the net impact of a $2.4 million gain from the termination of interest rate swaps offset by the $5 million loss on asset disposal, which I previously discussed. Excluding special items, other income was $3.4 million and was $6.7 million in the prior year period. Our second quarter effective tax rate effective tax rate was 25.6% on lower reported income. On an adjusted basis, our tax rate was 21.2%. We continue to expect our full year 2024 adjusted to be in the low to mid-20% range subject to the mix of earnings and anticipated extent of discrete tax items. Second quarter diluted earnings per diluted earnings per share was $1.77. Excluding special items, adjusted share was $2.34. Moving to our reportable segments on slide 8. Americas Welding sales decreased 4% in the quarter, primarily due to 6.7% lower volumes with compression across all three product areas, reflecting factors Steve previously discussed, and a challenging prior year comparison in automation and equipment systems. Price and the benefits of our RedViking and Power MIG acquisitions contributed approximately 3% sales growth. We expect price benefits of 50 to 100 basis points in the third quarter. Americas Welding Segment second quarter adjusted EBIT declined approximately 2% to $137 million. The adjusted EBIT margin increased 10 basis points versus prior year to 19.9% on effective cost management. We expect Americas Welding to operate in the 19% to 20% EBIT margin range for the remainder of year. Moving to Slide 9. The International Welding Segment sales declined approximately 6% on 4% lower volumes. Strong automation sales and project activity in portions of the Middle East and Asia Pacific regions continued to be offset by weak European macros. Price declined 1.2%, but did not impact underlying margin performance as lower price was offset by disciplined cost management, which helped mitigate lower volumes. A 10.4% adjusted EBIT margin performance, reflects quarter-specific operating inefficiencies, which we do not expect to repeat. We continue to expect the segment to perform in the 11% to 12% EBIT margin range, for the full year 2024. Moving to, The Harris Products Group, on Slide 10. Second quarter sales increased approximately 3%, led by 5% higher price on rising metal costs, which was partially offset by 2% lower volumes. Volume declines continued to narrow in Harris, as retail and specialty gas grew, but were offset by the challenged HVAC market. Adjusted EBIT increased approximately 28% to $25 million. The adjusted EBIT margin increased 350 basis points to a record 18.2%, reflecting a seasonally high quarter, structural improvements in their operations and effective cost management. We expect the team to generate EBIT margins in the 16% to 17% range for the balance of the year. Moving to Slide 11. We generated $171 million in cash flows from operations in the quarter, resulting in 110% cash conversion. Our average operating working capital decreased 90 basis points to 18%, versus the comparable year period on improved inventory levels. Moving to Slide 12. We invested $176 million in growth in the quarter from $23 million in CapEx and $153 million in acquisitions. We returned $91 million to shareholders through our higher dividend payout and approximately $50 million of share repurchases. We maintained a solid adjusted return on invested capital of 23.7%. For the balance of the year, we will continue to focus on growth and opportunistic share repurchases. Turning to Slide 13 and our Full Year 2024 Operating Assumptions, we are maintaining the assumptions we provided in late-May that reflect slowing end market trends in a more challenged portion of the industrial cycle. Our sales in June and July have tracked to these lower assumptions. As we progress through the second half of the year, we are focused on heavy industries demand trends and the timing of automotive OEMs capital expenditure plans, as these two factors present added risk to our operating assumptions. As stated in May, we expect a mid-single digit percent decline in organic sales in 2024, likely at the higher end of the range with typical seasonality. We expect price to contribute 50 to 100 basis points of growth with volume headwinds from weak industrial activity and slower capital spending, which will be most notable in our welding segments. Acquisitions are expected to contribute $75 million to $85 million of sales in the second half of the year, primarily in Americas welding. We anticipate acquisition sales will be weighted to the fourth quarter based on the timing of revenue recognition. In the third quarter, we expect an approximate 300 basis point contribution to consolidated sales growth with the addition of Vanair. We expect acquisitions to contribute between $0.05 to $0.07 of adjusted EPS in the second half of the year with high integration activity. Excluding acquisitions, we continue to anticipate solid operating income margin performance at approximately 17.5% on a full year basis. This reflects the benefits of diligent cost management structural improvements in both Harris and Automation's operating model as well as the early benefits from cost-saving initiatives. We estimate that the acquisitions may unfavorably impact our estimated full year average operating income margin by up to 30 basis points, but we are working to minimize impact. Before I pass the call for questions, would like to summarize that while we are managing through a challenging portion of the cycle, we remain focused on growth. whether through innovation by driving new solutions into the market from our core businesses as well as through our adjacent new technology initiatives and by accelerating the top line with acquisitions. We're also operating a more efficient business as demonstrated by our ability to mitigate weakness in demand with stable margins, strong cash flows and 100-plus percent cash conversion. And now I would like to turn the call over for questions. Thanks, Gabe. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] And it looks like our first question today comes from the line of Angel Castillo from Morgan Stanley. Angel, please go ahead. Angel Castillo Hi. Good morning. Thanks for taking my question. I was hoping we could unpack a little bit more just what you're seeing at the kind of from an end market demand perspective. It looked like there were some buckets where maybe we saw a little bit of kind of sequential improvement but others where we're hearing under production or just continued deterioration into the second half. So just based on kind of your order books that you see today, just where kind of conditions to date and kind of evolving? Gabe Bruno Yeah. So Angel, thanks for that question. Just to emphasize, as we adjusted our assumptions at the end of May, we saw the progression of those same demand patterns in June and July. And as we noted, we saw an acceleration of softness in certain areas within heavy industry, particularly in the ag side of our business. And so we see more of that progressively into the second half. When we think about demand within our automation business, we've talked about some pause between how the market is considering its next steps between EV investment, ICE and even hybrid. And so we see that air pocket or pause continuing. And so as we look at end market progression, we see more of the same in what we have seen in our business to date. And that's why we maintained the assumptions as we have. Angel Castillo And could you maybe help us quantify just degree of coverage you now have within automation. I think historically, you've had kind of six month visibility within that. Is that still kind of the case? Or just given some of the pause that we've seen in orders, how is that kind of coverage level evolving? Gabe Bruno Yes. And I think that's a fair assumption still on average in that six-month type of outlook. But we did point to in the short cycle sign, which is about 15% of our automation business we saw some pullback, particularly in the small to midsized fabricators. So that continues to be a challenge for us. But in general, I mean we look at projects, I mean they do extend between three, six months on the shorter end and some of the longer projects for, for example, or beyond that. But six months is a fair representation of our mix. And question comes from the line of Bryan Blair with Oppenheimer. Bryan, please go ahead. Hi. In terms of bailing commercialization, I'm not surprising that, that time line has been pushed back a bit. Has your team's view on the medium-term revenue potential shifted given all the moving parts of the competitive landscape? And similarly, it's still the expectation that DC Fast Charger revenue fully mix accretive as it ramps up? Steve Hedlund Yes. Bryan, take that in reverse order. Yes, we still expect EV revenue to be accretive to the business. We still believe the market is there. The US needs more robust DC fast charging infrastructure in order to drive the adoption of electric vehicles. The real question is on the timing of how the money is going to be invested to do that. And as I mentioned in the prepared remarks, the NEVI program rollout of the funds has been much slower than anyone anticipated, which has had two effects. One, people aren't buying the hardware at the rate that we and everyone else in the market thought they were going to be buying at. And second is, I think the US has missed the opportunity to drive standardization around a common platform of 150-kilowatt charger, which spending the $7 billion or $8 billion relatively quickly would have driven everybody to adopt that as the main standard in the industry. Now what you're seeing is a lot of people looking at the vehicles that can take higher charging levels, looking at the finite capacity they have in terms of electrical service to a site and trying to figure out how to best optimize that. And so you've got a lot of different customers with a lot of different ideas about how to do that. They typically involve the idea of power sharing, dynamic power sharing between two different charge dispensers, which was something we had on our road map anyway. And so we're accelerating the work on that so that we'd be in a position to be able to offer that capability to customers. But it's still anyone's guess as to when and how quickly this is going to mature but we believe in the long-term potential, and I think the team has been doing a great job of getting us to where we are now in a very short period of time. Q - Bryan Blair Understood. Very helpful color. Your comments on additives were quite encouraging, at least directionally. So we've always found that to be a very intriguing technology and initiative for your team. I guess just to level set, what's the run rate revenue now of additive, what's current profitability? And how does your team think about the medium-term potential of platform or initiative scale? Steve Hedlund Yes. So Bryan, the run rate of the business now on a revenue basis is on the order of $10 million, which I can appreciate doesn't necessarily sound all that exciting to outside observers, but we've progressed from the position of printing blocks and test coupons and things of that nature to be able to validate that the technology works to prospective customers to we're now actually printing parts that would go into production, doing destructive testing on those, passing all those tests with flying colors. And so we're seeing a real groundswell of enthusiasm among the targeted customer base to use additive manufacturing to replace large castings for which there's a very long supply chain and for which the quality of those parts is not particularly good. The customer typically has to do a lot of weld repairs on them before they can put them into service. So our technology gives them a higher quality product and a much shorter lead time. So we're seeing just a tremendous uptick in the activity level from our customers around trying to move this from a validation stage into actually using additive parts and production. The more exciting part about this, at least from a financial standpoint is while the revenues are not that large at this point, we're getting the brackets off business. We've been investing about $5 million to $6 million of operating expense for several years to develop this technology and to be able to get that to flip from the red to the black is a great -- very significant milestone for us and very encouraging. And our next question comes from the line of Nathan Jones with Stifel. Nathan, please go ahead. I guess, I'll start off following up to Bryan's question on additive there. Run rate revenue, $10 million today, what do you think the, I don't know, growth rate for that potential addressable market size for that would be? Is it still very early in the commercialization of that as well. And it would seem like a relatively small addressable market, but with extremely high value to the customer. Steve Hedlund Yes. So Nate, let me piggyback on your comments that we're very early in the commercialization of this. And we have customers that are talking really big numbers and are very excited about it, but yet we don't have all the POs justify those really big numbers we're talking about. So we view this as a long-term play for the business with great upside and optionality, but we're not yet at a point where we're ready to give you projections or guidance around revenue and the like. Gabe Bruno And Nate, the dynamics that Steve shared in terms of investment, both capital and operating, just gives us the patience to navigate how we create value in both these areas, DC fast chargers additive, and that just gives us a very promising outlook long-term, while we're navigating the development of these commercial strategies. Nathan Jones Okay. I'm going to -- my second question, I'm going to ask on the Vanair acquisition. It took a little bit of a departure from your recent acquisitions that are focused in automation. Can you talk about the strategic value you think that brings to LECO? How you can leverage the your own portfolio to grow that business faster or leverage than to grow your own portfolio? What kind of cost synergies and if you're willing to purchase multiple? Steve Hedlund Sure. Nate, I'll talk about the strategy, and then I'll let Gabe handle the purchase multiple. So we're really excited about this acquisition. We have been selling products into the work truck industry for several years. One of our leading competitors is actually much stronger in this market than we are, and we've found that our ability to reach the customers and penetrate the market through our traditional channels of distribution has been fairly limited. We think this acquisition will significantly accelerate ability to sell existing welding-based products to the work truck industry. And then both we and Vanair have been working on Battery-Powered Solutions that provide customers with a lot of environmental and operating benefits to be able to use, a battery instead of a diesel or gasoline powered engine. So we see that as the future of this part of the industry. And we bring some strength to that. They bring some strength to that. And we think, together, we're going to be able to, to really expand and accelerate the product portfolio. So I see that there's, a lot of reasons for us to be excited about this transaction. Gabe Bruno Nate, just to, add a couple of comments on the financials. So you saw that we pointed to a low-double digit type EBIT profile. Our objectives, as you know, are to drive to that corporate average on these acquisitions, and we think about it like in a three-year type of cycle. So we're excited about what we can do in shaping the operating model of this business. This business has been in the double-digit growth trajectory. So we see maintaining that kind of growth as the potential here. So that's very exciting for us. And then when you think about the multiple, if you exclude some of the real estate components that we're talking about a high-single digit type of purchase price multiples. So we're pretty excited about how this fits within our business. And I'll just reinforce one of the comments you made we have had a larger percentage of automation type of transactions, acquisitions. But you have seen us in a very steady way emphasize growth through acquisitions also within our core Welding business. So we look at all parts of our business in driving growth and using acquisitions as a way to accelerate growth. Nathan Jones Awesome. Thanks very much for taking my questions. And our next question comes from the line of Mig Dobre with Baird. Mig, please go ahead. Joe Grabowski Hey. Good morning guys. It's Joe Grabowski on for Mig this morning. Hey. Good morning. I guess I wanted to drill in a little further on the trends you saw in June and July. Were they steady? Were they choppy? Does it seem like we've kind of settled out at this new level and your -- I guess, your confidence on the visibility of the final five months of the year based on what you saw in June and July? Gabe Bruno Joe, just in general, the environment has been relatively choppy. I just -- for example, I'd point to first General Industry. So you saw that we were down low single digits in general fab. But on balance, I mean, what we've seen in June and July are in line to what that mid-single-digit profile looks like we're largely a short cycle business still. Obviously, the automation components do extend in our longer cycle type of business. But that's what gives us confidence in maintaining our assumptions. So there are areas of risk that we pointed to, how heavy industry progresses, particularly in ag, you've seen some of the announcements there. It's an area we're monitoring closely. How the market responds on the automotive side, to some of the capital decision making long-term those are pretty important for us. But in general, I mean, we saw that June, July follow the patterns that we've seen and that's what gives us confidence in maintaining the assumptions. I will add an interesting point, Joe, on the automotive side, obviously, we're staying very close to that. We are hearing that industry, in general, has not pushed out production schedules out from 2026 and 2027. So that gives us a little bit of optimism and seeing how this pause or air pocket progresses in the coming months. So, that's what gives us confidence inherently in maintaining our assumptions. Steve Hedlund Joe, this is Steve. I'll just add a little bit of color to Gabe's comments. So when we look at heavy industries, in particular, the production cuts in the ag portion of that business have really grabbed most of the headlines, but when we look at that business, so far through the second quarter, we did see a step down in the construction and mining subsectors of heavy industries, not quite as significant as the ag portion, but still down materially. So we believe that we've already seen step down in all of heavy industries. We're assuming that we're going to remain flat at these production levels through the balance of the year. There could be some recovery from that, and there also could be potentially some downside depending on what our customers decide do with their production levels. So we're watching that very closely. And then as Gabe mentioned, we saw a pause in the automation side of the automotive business as OEMs were rethinking their product plans. They have not pushed out the start-up production dates for a lot of the products they're going to launch in 2025, 2026 and 2027. So we believe that we're to get answers very quickly on, okay, you didn't want me to do product A, do I have the business for product B. And there's some indication that the OEMs have made those decisions and the projects are starting to flow again. But the next 30 to 60 days will be really critical for us to be able to assess how long that air pocket will continue and whether we've seen the backside of that. Joe Grabowski That's very helpful color. Thank you very much. And then maybe just a quick follow-up on international. You mentioned a challenging macro in Europe, maybe additional color on that and maybe kind of your thoughts on where pricing in the International segment will trend in the second half of the year? Gabe Bruno So I would just say, we should see more of the same. I mean we've seen some strength in areas of Middle East and Asia. Europe continues to be challenged. I did point to some improvement in our expectations in the EBIT profile. But from an overall volume perspective, pricing what you saw first half of the year, we expect to see more of those types of trends in the second half, being very disciplined in managing costs in pricing with some improvement in the EBIT profile. All right. Thanks Joe. And our next question comes from the line of Saree Boroditsky with Jefferies. Saree, please go ahead. You talked about auto OEMs positive investments to reconsider EVs versus ICE. I guess, one, when would you expect the air pocket to end? And then what would a recovery look like if they back away from EV investments? Does that mean less equipment needed for model changeovers? Or how do we think about that? Steve Hedlund Yes. So Saree, we're expecting to get answers on a lot of these projects in the next 30 to 60 days. So hopefully, by the time we're at the next quarterly earnings call, we'll have much better visibility to how that's played out. We're relatively indifferent whether the automakers make an EV, a hybrid or an ICE vehicle based on the type of work that we do for them, we're relatively agnostic. We just need them to decide to make something so that they will invest in the automation to make that production more efficient. And so we fully expect, since they haven't been canceling programs outright. They haven't been pushing back the start of production that they need release the orders here pretty quickly in order to hold those dates. So that's why we say it's a 30- to 60-day window. Saree Boroditsky Great. That's helpful. And then just going back to the risk to guidance, you talked a little bit about the auto investment and heavy industries. But could you just explain what are the assumptions built into the guide? And then what would drive weakness to that? Thank you so much. Gabe Bruno Saree, just those risk factors are just highlighted to be watchful of and how we're progressing within our business. But the assumptions entail what we're seeing in our business to date. The activity in June, July, the mix of business, Steve highlighted some of the components of heavy industries, a construction that that we've already seen -- mining. So it's more of the same that we've seen in our business through the current second quarter into July. But we just highlight those risks of areas that we're watchful of that could have an impact on the progression of demand patterns. Our next question is from the line of Chris Dankert with Loop Capital. Chris, please go ahead. I guess, maybe just to round out the discussion end markets here, construction and infrastructure up low teens, that's a pretty impressive growth rate. Maybe just can you level set us on where you're seeing the growth geographically and just kind of how that has trended kind of through July here? Gabe Bruno Yeah. So Chris, we have seen generally a choppy environment, as you've noted. Some areas of infrastructure construction into the international markets have been positive. But just to give you a perspective, we're up mid-teens in this quarter, we were down mid-single digits last quarter. We were up high teens, Q4. So it's been very choppy. So we haven't seen consistency after we had a pretty strong run at throughout 2022 and just a lot of choppiness. And that's more of what we would expect to see. So a little bit more continued choppiness we're hopeful to see a little bit more infrastructure investment in the US that could drive more demand, but it's been relatively a choppy environment. Chris Dankert Got it. Thanks for the color there. And then you highlighted your expectation for some improvement in the EBIT margin for the back half in international. Can you just kind of maybe give a little bit of detail there? Is it -- again, you're expecting better -- it doesn't sound like it's volume related. So is there cost action specifically? Is it mix driven? Just any comments on what's kind of helping drive that improvement in the back half? Gabe Bruno Yeah. So Chris, in my comments, you may have picked up that during the second quarter, we had some isolated operational efficiencies, adjustments that were specific to the quarter. So that gives us confidence that as you pull those out, we're actually in line to our 11% to 12% type of range. So it's just highlighting that there's some operational costs that are more onetime in nature that should reverse itself and we should see more of our expected range of performance in that 11%, 12%. Thanks, Chris. [Operator Instructions] And it looks like our next question comes from the line of Walt Liptak with Seaport Research. Walt, please go ahead. Hi. I want to ask -- wanted to ask one about the macro. It just sounds like the heavy industry, we got that slowing. But for general industrial, we've kind of paused here, like you said, in May, what do you think is going on with your customers for this pause? Like have you gotten any feedback from them on why some of the demand has slowed? Gabe Bruno Well, in general, when you think Walt, the general industry, you'd like to point to the small, midsize fabricators and the uncertainties -- the broad uncertainty in the market is going to drive the level of activity. So the choppiness in PMI and the mix of new orders and production and inventories, all of that has just been inconsistent. And so I think that just drives some uncertainty in the progression in general industry. So we're hopeful of the trend that we saw Q1 to Q2, but the choppiness in PMI indices and industrial production inherently just don't point to a consistent outlook. So that's why we're a little bit more choppy in our perspective of how the general industry progresses. Wal Liptak Okay. Great. And I guess, as we think about the future and where sort of those of those -- some macro trends could go, in the past, I think, especially in North America, you guys don't -- like when things step down, you guys in just automatically, I think the program that Lincoln has just addressed automatically. But is anything changing in the way that you think you'll deal with things either ramping down or the other way around, like you know what I mean, like do like do you have to cut costs or something that, if things start ramping down? How you look at your cost structure? Gabe Bruno So Walt, as you know, we're very disciplined in looking at discretionary type spending. You're referring to the profit sharing, the larger component being in the Americas. So that does move with profitability. So we're -- our posture is consistent and pulling the levers where needed. So what you're seeing, though, is a mix of softness in demand and yet our ability to maintain margins. And a lot of what we're doing in our enterprise-wide initiatives are very much focused on cost and reduction and efficiency. And so you're seeing improvements within our business. At the same time, we'll continue to be very disciplined in managing costs. And all the levers we have still exists and that playbook is still in play. So we're managing it two ways. You have all the cost dynamics short-term, but then all the enterprise-wide cost initiatives and profit improvement initiatives that are driven by our enterprise-wide initiatives. Walt, this is Steve. I'll just add. If we look at the gen fab portion of the business, and we focus particularly in the Americas region, what we're seeing is that weakness in the equipment and small automation portion of that segment, right, which really reflects their confidence in the future direction of the economy and their willingness to then spend capital. And as you can, I'm sure, appreciate there's a tremendous amount of uncertainty around where interest rates are headed. There's just a tremendous amount of uncertainty around who will win the election and what policies will they put in place. And so what we're seeing is that impact on the CapEx side of the business. The OpEx side, the consumables, not doing too bad. Just to give you that perspective on it. Wal Liptak Okay. Great. Great. Thanks for that Steve. And then maybe a final one for me, just around the commodities part of the business. I wonder if you could talk a little bit just about channel inventory levels and pricing. And we've seen some commodities prices come down recently. I mean, does -- can you maintain pricing within the consumables part of your business? Gabe Bruno So what you see what we've done to-date, right? So we expect pricing -- you may have picked up in my comments of 50 basis points to 100 basis points of pricing progressively now into this third quarter. So our posture is to hold price. With the exception of the Harris metals impact, they have more of an adjustment depending on how things move with silver and copper. But our posture is to manage pricing in a very disciplined way. We walked into the second quarter with some inflationary pressures, wage and otherwise. And so we've taken those actions to protect our model and maintain that posture progressively. Walt Liptak Okay, great. Okay. Thanks. Good luck in the second half. And our final question today comes from the line of Steve Barger with KeyBanc. Steve, please go ahead. Steve Barger Thanks. The automation strategy has always been concentrated in the Americas. But given the breadth of the product line now, is there opportunity to increase automation exposure in international or sales focus in international even if conversion is delayed until markets firm up. Steve Hedlund Yes, Steve. We've always had a very keen interest in expanding the automation business globally. The question really comes down to where is the industry structure and market dynamics attractive to us. And just based on some historical evolution of where and how the robot manufacturers decided to participate or not an integration really impacts the attractiveness of some of the markets to us. So just for example, in Europe, most of the robot manufacturers have chosen to be in the automation integration business, which means we're competing with our suppliers, and there's a lot more pressure on price and margins there. So you've seen our strategy in Europe has been to focus on very high technology plays with Zeman and now with Inrotech, automation integrators that have a very specialized, very proprietary, high-value solution as opposed to just being a general integrator. We continue to look for opportunities around the world. We continue to test our hypothesis around what markets we think will be attractive for us to enter and we'll continue to execute that strategy. Steve Barger Yeah. To the point on Inrotech, it seems super interesting. Is the AI programming vision-based -- and with $10 million in sales, is this technology still working out the kinks? Or is this a finished product that just needed a bigger platform to scale? Steve Hedlund Yeah, you're correct, Steve. It is vision-based. One of the great attributes of it is it does not require a CAD file that it's comparing what it sees to decide what to do. It's just looking at the parts and then making decisions on its own, which don't ask me to explain how it does it because I don't really understand it myself being a little bit large major but I've seen the demonstrations of it, and it's really quite impressive. So I think the technology is fairly robust. There'll be some work to integrate it into our platforms, but it's really a -- the investment is around giving them a bigger platform to scale the business and to access the market. Steve Barger How do you think about TAM or addressable market for an application like that? And can that technology translate to Harris as well? Steve Hedlund When we think about the TAM for automation in general, I mean, it is much, much larger than our current business. So we're a very a relatively small share player in a $35-plus billion market, right? When you look at the Inrotech technology, in particular, I mean, that's new to the world technology, and it really remains to be seen how many different places we can take it. But based on what we know about it and what we know about our customers' pain points, we're really excited about it. Thanks Steve. And that does conclude our question-and-answer session. I would like to turn the call back to Gabe Bruno for closing remarks. Gabe, the floor is yours. Gabe Bruno I would like to thank everyone for joining us on the call today and for your continued interest in Lincoln Electric. We look forward to discussing the progression of our strategic initiatives in the future and showcasing new technologies at the upcoming FABTECH trade show in October. Thank you very much. And ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.

Zebra Technologies (ZBRA) Q2 2024 Earnings Call Transcript | The Motley Fool

Good day, and welcome to the second quarter 2024 Zebra Technologies earnings conference call. All participants will be in a listen-only mode. [Operator instructions]. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Mike Steele, vice president, investor relations. Please go ahead. Michael Steele -- Vice President, Investor Relations Good morning, and welcome to Zebra's second quarter earnings conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year. Our forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially and we refer you to the factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of this slide presentation and in today's earnings press release. Throughout this presentation, unless otherwise indicated, our references to sales performance are year-on-year and on a constant currency basis. This presentation will include prepared remarks from Bill Burns, our chief executive officer; and Nathan Winters, our chief financial officer. Bill will begin with a discussion of our second quarter results. Nathan will then provide additional detail on the financials and discuss our third quarter and revised full year outlook. Bill will conclude with progress on advancing our strategic priorities. Following the prepared remarks, Bill and Nathan will take your questions. Thank you, Mike. Good morning and thank you for joining us. Our teams executed well in the second quarter delivering sales and earnings results above the high end of our outlook. For the quarter, we realized sales of $1.2 billion approximately flat to the prior year. An adjusted EBITDA margin of 20.5%, a 70 basis point decrease, and non-GAAP diluted earnings per share of $3.18, a 3% decrease from the prior year. As we discussed in our last earnings call, during the first quarter, we began to see modest recovery in retail and e-commerce. In the second quarter, we saw signs of momentum across other end markets, including healthcare, where we realized double-digit growth. Mobile computing returned to growth across each of our vertical end markets led by healthcare and retail. The growth in mobile computing was offset by declines across our other major product categories where year-on-year comparisons are more challenging and we were in earlier stages of recovery. Services and software saw modest growth in the quarter. While we are encouraged by early momentum and demand, we continue to see cautious spending behavior from our customers on large deployments which have not yet returned to historical levels. Another highlight was our sequential improvement in profitability due to improved gross margin and the benefits of our restructuring actions. Our plan to deliver $120 million of net annualized operating savings is on track and substantially complete. Given our second quarter performance, progress in our cost actions, and early signs of momentum and demand, we are raising our full year outlook for sales and profitability. I will now turn the call over to Nathan to review our Q2 financial results and discuss our revised 2024 outlook. Nathan Andrew Winters -- Chief Financial Officer Thank you, Bill. Let's start with the P&L on Slide 6. In Q2, total company sales were approximately flat, reflecting early signs of momentum demand beyond retail and e-commerce. Our Asset Intelligence & Tracking segment declined 14.4%, primarily driven by printing and RFID on challenging prior year comparisons. Enterprise Visibility & Mobility segment sales increased 8.2% with double-digit growth in mobile computing partially offset by a decline in data capture solutions. We saw modest growth in services and software. Performance was mixed across our regions. In North America, sales decreased 7% with fewer large orders in retail and transportation and logistics, partially offset by strong growth in healthcare. In EMEA, sales increased 10%, driven by mobile computing. In Asia-Pacific, sales declined 3% with continued weakness in China and challenging compares in Australia and Japan, partially offset by growth in Southeast Asia. And sales increased 7% in Latin America led by Brazil. From a sequential perspective, total Q2 sales were slightly higher than Q1, with growth in nearly all product categories as we realized modest improvement in demand throughout the quarter in manufacturing, healthcare, and transportation and logistics. Adjusted gross margin increased 60 basis points to 48.6% as we benefited from cycling premium supply chain costs in the prior year in favorable effects. Adjusted operating expenses as a percent of sales increased 110 basis points. This was driven by normalized incentive compensation expense partially offset by approximately $25 million of incremental net savings from our restructuring actions. This resulted in second quarter adjusted EBITDA margin of 20.5%, a 70 basis point decrease versus the prior year, and a 60 basis point sequential improvement from Q1. Non-GAAP diluted earnings per share was $3.18, a 3.3% year-over-year decrease. Turning now to the balance sheet and cash flow on Slide 7. In the first half of 2024, we generated $389 million of free cash flow as we drove improvements in working capital. We ended the quarter at a 2.4 times net debt to adjusted EBITDA leverage ratio, which is within our target range and we had approximately $1.5 billion of capacity on a revolving credit facility as of quarter end. We diversified our capital structure during the second quarter by issuing $500 million of senior unsecured notes, while retiring a receivable financing facility that matured in May. We also terminated our remaining interest rate swap agreements for $77 million of cash proceeds. We have been prioritizing debt pay down and now have increased flexibility given our lower debt balance and improved cash flow. Let's now turn to our outlook. For Q3, we expect sales growth between 25% and 28% compared to the prior year. This outlook assumes continued stability of demand trends across our major product categories with broad-based growth as we cycle easier compares across the business, including significant destocking activity by our distributors during the second half of last year. We entered the third quarter with a solid backlog and pipeline of opportunities. That said, we are not anticipating an increase in large order activity considering the conversion rates on our pipeline remain lower than historical levels as customers continue to be cautious in what remains an uncertain environment. We would like to see additional momentum in large orders before factoring in a stronger recovery. Q3 adjusted EBITDA margin is now expected to be between 20% and 21%, driven by expense leveraging from higher sales volume with benefits from restructuring actions partially offset by normalized incentive compensation expense. Non-GAAP diluted earnings per share are expected to be in the range of $3 to $3.30. We have raised our guide for the full year, reflecting our second quarter performance and early signs of momentum and demand. We now expect sales growth between 4% and 7% for the year and adjusted EBITDA margin to be in the range of 20% to 21%. Non-GAAP diluted earnings per share are now expected to be in the range of $12.30 to $12.90. Free cash flow for the year is now expected to be at least $700 million. We have been making progress rightsizing inventory in our balance sheet and improving cash conversion. Please reference additional modeling assumptions shown on Slide 8. With that, I will turn the call back to Bill. Bill Burns -- Chief Executive Officer Thank you, Nathan. Zebra is well-positioned to benefit from secular trends that support our long-term growth. These include labor and resource constraints, track and trace mandates, increased consumer expectations, and the need for real time supply chain visibility. We help our customers digitize their environments and automate their workflows through our comprehensive portfolio of innovative solutions, including purpose-built hardware, software, and services. We empower frontline workers to execute tasks more effectively by navigating constant change in real-time through advanced capabilities including automation, prescriptive analytics, machine learning, and artificial intelligence. At our innovation day event in May, we demonstrated how we transform workflows across the supply chain to drive positive outcomes for enterprises across our end market. Our products and solutions are mission critical to enable visibility that consumers and enterprises now expect throughout the entire supply chain. On Slide 11, you will see Zebra solutions can touch a product 30 times from its origination to the point of last mile delivery. Let's briefly walk through the journey with a few high level exams. In manufacturing, our machine vision solutions provide quality inspection and track and trace visibility throughout the process. In a warehouse, our wearable mobile computers, autonomous mobile robots and comprehensive RFID portfolio transform receiving, picking and shipping. As the product arrives at a store, associates are equipped with Zebra software running on our mobile computers to assist customers' stock inventory and fulfill online orders. And when an item is delivered to your home, you receive a notification and picture from Zebra's handheld device verifying on time quality delivery. As you'll see on Slide 12, our customers leverage our solutions to optimize workflows across a broad range of end markets. We empower enterprises to drive productivity and better serve their customers, shoppers, and patients. We are seeing Zebra's competitive differentiation in mobile computing solutions drive wins across our vertical end markets. Customers value the capabilities we embed in the software layer of our devices that they leverage to transform workflows and improve outcome. For example, we secured a mobile computing win with the commercial airline utilizing our mobile package dimensioning solution enabled through AI. Also, a North American retailer will leverage Zebra's work cloud collaboration software on their new wearable mobile computers, connecting their associates to drive better outcomes in their stores. Additionally, we are able to displace consumer cellphones at a European retailer with our mobile computers and Zebra's Identity Guardian solution. It provides multifactor authentication for a shared device environment that brings security, productivity, and convenience to the front line. It is also notable that mobile computing contributed to double-digit sales growth in healthcare. Over the past year, our teams have been successfully selling the benefits of our solutions and clinical mobility that empower caregivers while delivering lower total cost of ownership for hospital systems. We have been displacing consumer cellphones with our devices and there continues to be a long runway of opportunity for equipping more clinicians with mobile computers. In closing, we expect to see broad-based growth in the second half as we cycle much easier comparisons and benefit from momentum beyond retail. We maintain strong conviction in our long-term opportunity for Zebra as we elevate our strategic role with our customers through our innovative portfolio of solutions. Our sales and cost initiatives have positioned us well for profitable growth as our end markets continue to recover. I will now hand it back to Mike. Michael Steele -- Vice President, Investor Relations Thanks, Bill. We'll now open the call to Q&A. We ask that you limit yourself to one question and one follow-up to give everyone a chance to participate. Operator [Operator instructions] Our first question comes from Damian Karas with UBS. Please go ahead. Damian Karas -- Analyst Hey, good morning, everyone. Congrats on the quarter. Bill, I wanted to get your thoughts on what you suspect it's going to take to bring some of the larger project activity back into the fold, and maybe you could just give us a sense on, it sounds like you're not expecting much this year. How much upside to your guidance do you think there would be if you do in fact start to see a return sooner rather than later? Bill Burns -- Chief Executive Officer Yes, Damian, I think that if we look back to Q1, we saw early signs of recovery, as we talked about last quarter in retail and e-commerce. We're certainly encouraged by the better than expected sales results in Q2, which really, we saw momentum, as we said around beyond retail really. And really, it was driven by mid-tier and run rate business. So large deal activity was pretty consistent in Q2 coming off of Q1, but still well below historic levels. So I think that we see customers overall continue to cite uncertainty to us in the market, their markets, their end markets, which really is reflecting in their purchasing behavior. I'd say that large deployments overall are being spread more to these mid-size deals or smaller deals, and being spread out over a longer period of time because of this, and I think ultimately, when they're placing small orders, they're placing those to add to their installed base or for new applications or expansion opportunities to-date. So I think that the pipeline of opportunities remains strong. I think there's optimism on the part of our partners and customers. I think we'd like to see more momentum in large orders. So we saw the first uptick in large orders in the first quarter kind of flat the second quarter. So we feel OK about that. We saw growth in mid-tier and run rate. I just think we'd like to see more large order activity to call a broader base recovery. So I think now we're seeing strength in mobile computing, strength across kind of large orders, medium and small. But we just want to see more large orders really from our customers. And I think it's just driven by their caution of what's happening in macro today. Damian Karas -- Analyst Great. That makes sense. And I just want to ask you on the cost front, it seems like there's been a pick back up in shipping rates, and I know that was a little bit of a headwind for you guys in past years. To what extent have you been maybe experiencing some of that cost inflation and maybe just talk through what's kind of in your guidance for the rest of the year? Thanks. Nathan Andrew Winters -- Chief Financial Officer Yes. Damian, so we have seen a modest increase in rates due to whether that's some of the Red Sea issues or now with the stronger demand, particularly on the ocean rates. I'd say it's a modest impact in terms of incremental costs that we've included in our full year guide. But the team's again working several actions in terms of the different air modes, how we leverage cost off to improve transit time, as well as again working with our partners around the forecast for the remainder of year to get ahead of that, the second half demand and mitigate as much of that as possible. So there is absolutely seeing some increase, but I'd say it's pretty modest at this point and within our second half guide. Operator The next question comes from Jamie Cook with Truist Securities. Please go ahead. Jamie Cook -- Analyst Hi. Good morning and congratulations on a nice quarter. I guess, just my first question, I guess, what struck me in the quarter, your EVM margins were much better than I thought, and I think even better than your expectations. I think you were guiding to down margin sequentially. So can you just speak to the drivers behind that? I guess, that's my first question. And then, I'll stop there and then I'll give you my second question after, I guess. Nathan Andrew Winters -- Chief Financial Officer Good morning, Jamie. So, yes, if you look at overall gross margins at 48.6%, this is our highest gross margin quarter in three years, benefiting from the level of large deals. So the strength in run rate and mid-tier is a positive for gross margin in particular within the EVM segment. We're also seeing continued strength in our service and software margins again, which is heavily less more weighted toward EVM, as well as now fully rolling over all the premium supply chain costs. So again, I think it was part of that was just the strength in the quarter and really seeing the incremental volume fall through to the bottom line, driving the sequential improvement in gross margin both within EVM particularly. Jamie Cook -- Analyst OK. And then, I guess, just given the strength in the margin this quarter, and I mean, I don't think your EBITDA margin guide is now, what 20% to 21%, I think before it was about 20%. I'm just wondering why we wouldn't see better pull-through in the back half of the year, in particular with the top-line growth that you would see relative to declines or flat revenues in the second quarter. Nathan Andrew Winters -- Chief Financial Officer Yes. If you look at our EBITDA guide for the third quarter of 20% to 21% again year-on-year, that's up primarily due to volume leverage, nearly nine points. And I think we expect similar deal, as well as business mix Q2 to Q3 such that you get a similar margin profile from Q2 to Q3. So if you look at the Q3 guide, effectively flat to Q2 based on that assumption of kind of the underlying mix of deals, as well as the business unit mix gives us that similar profile. And I'd say the other really don't expect the same level of incremental benefits sequentially as we were able to realize some of the incremental benefits in Q2 from the restructuring actions. And then, you do see that modest uptick implied in the guide for the fourth quarter on the incremental volume. Operator The next question comes from Tommy Moll with Stephens. Please go ahead. Tommy Moll -- Stephens Inc. -- Analyst Good morning and thank you for taking my questions. First question on the large order activity. At this point where we're nearly through July, how fully baked are your customer budgets for this year? And at what point does the large deal conversation really start to become one centered around 2025, when a lot of the customer budgets are refreshed? Bill Burns -- Chief Executive Officer I think that, Tommy, I'd say that customers continue to scrutinize their budgets even as we're well into the year, right? And I think that some of those have to do with, in the past, we've seen kind of year-end spending from our customers, but I think that the uncertainty around the economy is still kind of weighing on them in large deployments and what will happen in kind of second half of year here. So I think that we typically not have visibility quite yet into whether there'll be year-end spending by our customers. We're talking about certainly a pipeline of opportunities that they see. And then, the question is, do they move ahead with those in late 2024 or into 2025. I think that from a macro perspective, whether it's interest rates or presidential election or manufacturing production, all those shipping parcel, parcels, shipments have just started to inch up and turn to more positive volumes or growth in volume. So I think all those kind of weighing on their business, and I think there's even though they've got budgets, it's kind of the reluctance to move ahead with those, really because of the macro factors overall. And I think that we'd expect those to continue to kind of stabilize. They can get more confidence in their business and then abate as we get into kind of second half year and into 2025. But I'd say, overall, many discussions with our customers regarding projects; it's really about just taking longer to kind of move those forward still. Now, again, we saw a large order activity about flat Q1 to Q2 overall, and we saw this pickup in mid-tier run rates. So these are all positive signs. Growth outside of retail, which we really saw in first quarter into a broader segment. Mobile computing was the first to decline and the first to return to growth we expected that. So I think everything's moving in the right direction. So I think that -- I think our customers just don't know for kind of year-end 2024 and into 2025, but we're optimistic, I would say, that everything's moving in the right direction. Tommy Moll -- Stephens Inc. -- Analyst And Bill, just from a competitive standpoint, is there anything that you've sensed having changed particularly in a large deal context where you've seen other market participants perhaps become more aggressive on price or whatever other factor? Bill Burns -- Chief Executive Officer Yes. No, I would say that really the competitive environment hasn't changed a lot. Overall, we're certainly continuing to maintain share in the marketplace. We feel good about our differentiation that we bring to the marketplace with the depth and breadth of our solutions, our competitive advantages, scale, technology, leadership, our partner community, our go-to-market, our relationships with our customers. So the large deal, phenomenon not coming, not returned to historic levels is not really about Zebra. It's truly about the market. And we don't really see any mark change from a competitive perspective. We're always going to have competitors out there, large and small, and then that continues to be the case. So nothing there. And we feel good about our market position and continue to win in the market. Operator And the next question comes from Joe Giordano with TD Cowen. Please go ahead. Bill, you had mentioned, I guess, it was last quarter that distributors were asking for more product than you were willing to sell because, but you were hesitant because you wanted to make sure you understood where it was going and try to prevent a future buildup of inventory that then needs to get liquidated again. Like, what's the update on that? Have you kind of started to give them what they're requesting? Nathan Andrew Winters -- Chief Financial Officer Yes, Joe. This is Nathan. I can take that. I'd say overall, the global channel inventory as we look at it from days on hand is still at a normalized level. I think you have pockets around the world, where there's still a little bit of rebalancing both driving down inventory in the channel, as well as where there's incremental needs. And I think similar to where we were last quarter, it's working with each one of those partners across the region to ensure that they have the appropriate level of inventory for the demand they're expecting and that we see in the pipeline. So again, it remains very collaborative. I'd say similar position where we were in Q1, where there's always some that want a little bit more. And again, just trying to make sure we have the right amount in the channel to support our end users, but not getting ahead of ourselves, given some of the uncertainty that we've talked about. Joseph Giordano -- Analyst Fair enough. And then, just if I could ask on some of your smaller businesses, can you give us an update on trends within like RFID and with Matrox and Fetch and maybe how you see those businesses in terms of like growth in size exiting this year? Bill Burns -- Chief Executive Officer Yes. I can take that, Joe. I'd say, RFID challenging kind of second quarter on compares from cycling large opportunities a year ago. I would say that overall would expect return to growth in second half year. We're continue to -- we move into the second half really with strong backlog and pipeline of opportunities across not just retail but transportation, logistics, manufacturing. So we're seeing continued use cases across RFID, including moving beyond apparel to general merchandise inside retail. Clearly track and trace across the supply chain, parcel tracking within T&L, baggage tracking within airlines, so lots of opportunities across RFID. I would say machine vision. We continue to be excited about the opportunity within machine vision, challenging market at the moment. And our Matrox acquisition, when we acquired that asset, we knew was heavily weighted toward semiconductor equipment manufacturing, which is still a challenge segment as well. So decline in the quarter in machine vision, but we feel good about it overall. We saw strength in our Adaptive Vision acquisition. So software -- machine vision software in the quarter that was a bright spot. I'd say that the diversification of that business, which was our focus all along with the Matrox business diversify into areas like automotive and logistics into new areas. We also had our organic investment in machine vision, which really applies more to logistics area. That diversification is going well. Ultimately, we're calling on more customers. We're seeing more opportunities. We're continuing to invest in go-to-market across the globe in just seeing more opportunities is across machine vision. So we feel good about that in a great opportunity for Zebra overall. I'd say software -- our software assets, we're seeing the combination of our mobile devices, especially in the wearable space now with some of our assets in software that we're pretty excited about. So the word cloud solutions really focus on retail and then leveraging our mobile device in the hands of retail associates. And we continue to advance and bring those solutions together and combine that with things like wearable mobile computing. We've seen some early wins there. So we feel good about the portfolio. They're a smaller segment of the market, right, or, sorry, our not market, meaning smaller segment of our business overall or piece of our business. So really mobile computing returning to growth, other segments being more challenged. These are areas that we see as driving the future growth of Zebra. Operator The next question comes from Andrew Buscaglia with BNP. Please go ahead. Yes. So I want to get your thoughts on potential upgrades of devices, especially in 2025. Do you have any data you can share around the age of your installed base? Because presumably a lot of these devices were sold during COVID and we should start to see a natural need to upgrade these in the next year, I would think. Bill Burns -- Chief Executive Officer I'd say overall we're, from a mobile computing perspective, I'd say that our customers have really been absorbing the capacity that they've built out during the pandemic more than anything else. So I think there's clearly continued upgrade cycles across all of our customers. But from the idea that they built out so much capacity during the pandemic that they're using that capacity today, and then as the economy slowed, that created even more capacity, so they're ever using that capacity off, I think we're seeing customers move into the idea that they've absorbed some of the capacity and are beginning to buy again. But that's kind of early signs of what we're seeing. I'd say that there's a solid pipeline of opportunities for mobile computing overall, both in kind of refresh new use cases continue to add to the number of devices inside our customer base. And we continue to see competitive wins across the portfolio. So I think the upgrades are out there, the refreshers are out there, and ultimately some customers are sweating assets a bit more, others are leveraging what they have today. And I think that we're confident that as the macro environment gets better, our customers will continue to upgrade our devices and we'll see an uptick in large orders within our business, which will marry with what we're seeing as kind of medium in run rate business growing in second quarter. Andrew Buscaglia -- Analyst Yes. OK. OK. And then, you're raising your free cash flow expectations again and just kind of given where we are things looking to start to improve, and you probably have some confidence here. Where do you see capital allocation going into the year-end? Is M&A -- will see some M&A come to fruition before year-end? Or is there a focus more on share repurchase? Or how are you thinking about things? Nathan Andrew Winters -- Chief Financial Officer Yes. So I think on the first part, again, please raise the guide for free cash flow to over $700 million, including the final settlement, as well as the swap sale in the second quarter. So -- and the improvement overall in working capital to get us above the 100% free cash flow conversion. And as you say, the -- really the prior -- we've prioritized debt paydown as well working on our capital structure in the first half of the year. So ending the second quarter just under our below the target range of two and a half times debt leverage, and that will sequentially improve as we move through the year. I think in terms of overall priority, they remain unchanged. The first is organic growth getting the business back to the growth trajectory we need it to be and want it to be along with the right profitability levels. M&A continues to be a lever. And I think now with the improved cash flow, as well as our overall capital structure, we have additional flexibility for share repurchases as we move through the year. So Bill, you want to touch on the M&A brochure? Bill Burns -- Chief Executive Officer Yes. I guess, I'd say that our M&A philosophy really remains unchanged. I think we continue to leverage M&A where it makes sense to advance our vision and our overall strategy. I'd say in the short-term, the bar is probably higher based on kind of macro uncertainty and then higher interest rates. But I would say that we continue to target select assets that ultimately are closely adjacent and synergistic to our business today. As Nate said, we've got a strong balance sheet and flexibility to continue to look at companies and we continue to be inquisitive. But the bar is higher at the moment. Operator And the next question comes from Meta Marshall with Morgan Stanley. Please go ahead. Meta Marshall -- Analyst Great. Thanks. Maybe a couple of questions, just on the healthcare strength that you saw. I know that that had been a relatively they had been in a more challenged spend environment. So just wondering, how broad-based that is. Is that kind of new project based or just any detail there? And then, second question, EMEA looked like a source of strength for you guys. I think we've seen that across some other companies. And so, is that a matter of, they're just coming from a very depressed environment. And so, we're coming off of a lower base and that's where some of the EMEA strength is. Are you -- are there any trends in EMEA that you think are worth calling out? Thanks. Bill Burns -- Chief Executive Officer Yes. So I'll start with healthcare and then jump to EMEA. Healthcare, I'd say overall, mobile computing drove the growth in healthcare. It really is our team's focus on clinical mobility and really total cost of ownership. We've seen in the past a significant number of consumer devices used in that space. And I think that we're seeing healthcare systems realize that the total cost of ownership of Zebra devices is well-positioned for them in an environment of tighter budgets and thinner margins overall within healthcare. And we add a lot of value, ultimately by improving productivity of healthcare workers, getting data into electronic medical record systems, and then ultimately enhancing patient safety overall. So I think the automating of workflows, the digitizing the information around assets and patients and staff is of value that our healthcare customers are seeing. I think a medium to longer-term opportunity we're now seeing is things like home healthcare that remains an opportunity for us. So things like tablets in that area, in home healthcare. So we're excited about that. Healthcare has always been a smaller piece of our business, but in one of the faster growing areas, and certainly that happened in Q2. I would say, if we move to EMEA, say overall strength in EMEA was relatively easy compare in Q2 compared to the other regions. Overall, the positive, I'd say in EMEA is that we saw some larger projects move ahead outside of retail. So this is one of the places where we've seen some growth in P&L outside of retail, and some competitive wins in EMEA. So we feel good about that. Manufacturing remains challenging in EMEA today. So I think that kind of mixed overall feel good about some P&L orders, large P&L orders, easier to compare where manufacturing makes challenging. So I think overall, I think we want to see North American EMEA, we'd expect to come out of this first, but we saw some strength in Latin America too. So I think mixed results across the region. Operator And the next question comes from Brad Hewitt with Wells Fargo. Please go ahead. Brad Hewitt -- Wells Fargo Securities -- Analyst Hey, good morning, guys. Wolfe Research, not sure what happened there. Bill Burns -- Chief Executive Officer Sorry, Brad. We missed the question. You broke up there during the question. Brad Hewitt -- Wells Fargo Securities -- Analyst Yes, sorry. So, just curious if you could elaborate a little more on what you're assuming in the second half from the top-line perspective. So at the mid-point of your full year guidance, it implies revenue in the second half, essentially flat with the Q2 run rate. So can you help me reconcile that versus kind of the early signs of momentum in mobile computing and also given the typical positive seasonality in Q4? Nathan Andrew Winters -- Chief Financial Officer Yes. So if you look at our full year guide of four to seven with a mid-point of five and a half, I think from a year-on-year perspective, really driven by what we see is double-digit growth in the second half demand, it's about five points for the year where again, if you look at the full year, a lot of moving parts where the destocking from last year accounts for about five points of growth. But then we had the challenging comps in the first half that offset that. So again, really the full year growth is driven by underlying strength in the business in the second half. As we said, we see modest demand increases across each of our vertical markets. That's inclusive of the Q2 beat. So I think we look at it as really the strength we saw in Q2 continuing into the third quarter. I think similar to how we structured the guide over the last several quarters of not anticipating or expecting sequential improvement. But what have we seen here in the most recent weeks and months? We see that continuing here in July in terms of that stability in the business, albeit at a bit higher level than we saw as we entered the second quarter with modest increase as we go into the fourth quarter. So as Bill highlighted before, typically a lot of the year-end spend that we see from our customers has leaned toward large orders in the past, and again, being thoughtful about how we embed those in the guide until we have more certainty and commitments from our customers on moving forward with those projects before including it for our full year guide. So I think, we think it's grounded in what we see today, given that visibility into the large deployments and appropriate. Brad Hewitt -- Wells Fargo Securities -- Analyst OK. That's helpful. And then, you guys have talked in recent quarters about your expectation for seasonally lower opex spend in the second half of the year. Just curious if you could kind of shine some more light on that. And then, if we look at the implied Q4 EBITDA margins about 21%, can you talk about some of the puts and takes there on a sequential basis? Nathan Andrew Winters -- Chief Financial Officer Yes. So if you look just historically, sometimes it is hard to see. But typically, as we go throughout the year, just based on when a lot of our trade shows, sales, kickoff meetings, timing of benefits, etc., tend to be more weighted toward the first half of the year. Then as you get into the back half of the year, you get into holiday seasons around the world, as well as some of the lower benefit costs as you go sequentially through the year. So I'd say a lot of the sequential improvement is timing-related now that we've kind of flushed through all of the restructuring benefits, or the vast majority of restructuring benefits through the P&L. And then, look at the sequential improvement in profitability from Q3 to Q4 is really based on that slight improvement in opex, as well as the higher volume leverage flowing to the bottom line. Operator And the next question comes from Keith Housum with Northcoast Research. Please go ahead. Keith Housum -- Analyst Good morning, guys. Question for you on the software and services. With mobile computing being up double-digits, I guess, I would have expected a little bit of that flowing through more in software and services design as people sign up for their warranty contracts and things of that nature. Can you pass a little bit of light on the connection between the two and the modest growth that you had and that's in that line item this quarter? Bill Burns -- Chief Executive Officer Yes. Keith, this is Bill. I would say that overall, we've seen consistent growth in software and services over the last several quarters. So we feel good about that. I'd say we continue to see strong attach rates with mobile devices. So the revenue lags that, of course, right? So ultimately, the strong attach rates continue with uptick in mobile computers. So no real change there. It's just not tied directly to revenue in the exact quarter depending on when the mobile devices are sold. So I wouldn't take anything away from that. We're continuing to see strong attach rates, really driven by things like upgrades around OS and security patches and so forth continue to be an important aspect of our customers buying service from us. I can say that we've seen in the past some customers extend their support agreements, and I think we're seeing a little bit less of that now, which is again a good sign for ultimately our customers looking to upgrade the mobile devices in the future. So maybe a little bit of less of that, if anything else. Overall, I'd say software and services, an important piece of our business, recurring revenue that we and others like. So I think all good there, nothing really to read into it, Keith. Keith Housum -- Analyst OK. I appreciate that. And then, just a follow-up, in terms of like, as most people are starting with here toward the refresh cycle of all the devices bought four or five years ago. How should we think about pricing today versus where it was, say, four years ago? Are people trading down to a lower mobile computer? Or as you think about most customers, is it relatively similar? But how do you think about pricing, what people are buying today versus four years ago? Bill Burns -- Chief Executive Officer Yes. I think we're -- obviously, there's customers are making choices on the type of device they need in their environment. So I think that we continue to see that. So if somebody needs a more rugged device, and their experience was they had a lower tier device and they beat those devices up, they'll move to a higher tier device and you'll see the reverse. If they had a good experience with a more rugged device, could they go to a more mid-tier type device? I think that happens all the time. I think we continue to focus on value that the devices bring to our customers to keep ASPs as high as we can, and then if we can't, to make sure that we're getting the same gross margin out of each tier of the portfolio. In the past, we've tiered the portfolio kind of good, better, best, or all the way down to kind of value tier. And I think that's allowed us to keep our pricing and margins higher. So if you want a higher spec device, you pay us a higher price for it. In the early days, call it, eight, nine years ago of -- eight years ago, nine years ago on Android, we didn't have as many flavors of devices. So you're discounting higher end devices to meet value to your players. We don't do that today. We're really tearing the portfolio has allowed us to kind of have conviction around our prices at the higher end, and we feel good about our customers and working closely with them to select the right device for the right use case. Operator And the next question comes from Brian Drab with William Blair. Please go ahead. Brian Drab -- Analyst Hi. Thanks. You mentioned that you're seeing sequential improvement in all the end markets, including T&L and manufacturing. There have been some signs of further softness across the manufacturing industry in recent weeks, and I'm just wondering if you are seeing any of that show up in your customers buying patterns or if it really does feel like a pretty stable sequential improvement environment now. Bill Burns -- Chief Executive Officer Yes. I'd say that, as we talked about before, I think in Q1 we saw kind of retail and e-commerce first, and now we've seen mobile computer -- mobile computing kind of grow across each of the vertical end markets. So retail, manufacturing, healthcare, I'd say that, we're still seeing challenges in manufacturing and overall, demand, especially in a large deal isn't back to the historical levels that it's been in the past. But in manufacturing specifically, we saw sequential improvement from Q1 and Q2. But I still think EMEA, for instance, we're clearly seeing a challenge in manufacturing where I would say overall, I wouldn't call manufacturing back to normalized levels in any way. But I think we just saw some sequential improvement, which I think was good. Manufacturing is an important segment for us. We see we've got lesser -- we're lesser penetrated in through manufacturing. Our relationship with manufacturing, many times are more in the warehouse or the finished production and moving that through the supply chain and some of our new solutions around machine vision, rugged tablets, our demand planning solutions for CPG manufacturers, all play into having a broader portfolio for manufacturing. So we ultimately see that a segment for growth for us, but I think still challenging the short-term. We would say, we're seeing probably about the same as you're seeing. Brian Drab -- Analyst OK. Thank you. And then, for follow-up, are you seeing opportunities potentially to gain share when we come out of this tougher environment? I mean, you obviously have a great balance sheet. You're not letting up in terms of investment in technology and customer service. Can you comment on how you might be potentially better positioned in both AIT and EVM ultimately? Bill Burns -- Chief Executive Officer I'd say that overall, we feel good about where we're at in our customer relationships. We continue to stay very close to our customers as we're a trusted partner to them. And I think that as the macro environment gets better, I think we would say that they will begin to buy again, especially, and we'll see large orders improve as we continue to solve growth in medium and run rate in second quarter. The installed base continues to grow. And I think that from that perspective, I think that we're seeing increased use cases across our customer environment. So some are still sweating their assets that will shift. They can't do that forever. So I think overall, we see the momentum in demand continuing and then continue to broaden both by vertical market to your first question, and then by size of order and order activity across small, medium and large type orders. Operator And the next question comes from Rob Mason with Baird. Please go ahead. Rob Mason -- Analyst Yes. Good morning, Bill and Nathan. The strength in the gross margin, I think has already been commented on. But as you think about when large orders do come back, how should we be thinking or how are you thinking about sensitivity in the gross margin profile today versus, say, maybe 2018, 2019? Have you done anything different structurally around either your supply agreements or just as you mentioned, Bill, tiering the portfolio that would suggest the gross margin holds up better? Or does it have that kind of return to maybe 2018, 2019 levels when large orders come back? Nathan Andrew Winters -- Chief Financial Officer Yes. Rob, I'd say just if you look, I would say, no structural difference in terms of maybe the differential between the margin we'd expect on a large yield versus kind of the run rate business. So that hasn't structurally changed. The one thing, if you go back, I think the one aspect, particularly if you go from 2019 -- since 2019, whether that's tariffs, the supply chain, challenges the rapid growth. So it's pretty challenging to find what's the right baseline. And if you go back to 2018, right, so I'm just the lower rev -- lower base. So I think, if you look at the business today, I think the strength across the portfolio is -- we have strength across the portfolio in terms of the underlying gross margin and being able to leverage the scale and leverage our distribution network as we've grown to inherently build a higher gross margin profile company. But again, I think it will be somewhat decremental as we in gross margin once large deals recover, but still incremental, as you think about it from a EBITDA rates. So I think there's the balance of -- there's still incremental margin to the total -- to the bottom line, but slightly dilutive in gross margin. Rob Mason -- Analyst I see. And just to go back on the regional discussions, my math, and maybe this is not totally right, but it did look like North America stepped down a little bit sequentially. If that is the case, just any color that you could provide on what you saw there. Bill Burns -- Chief Executive Officer Yes, Rob, North America was down year-on-year. I'm not sure it's sequentially -- down sequentially as well. Nate's warning to me, I would say, overall mobile computing return to growth in North America, again, just like we saw across the other regions. So that clearly was positive. The other product categories were down, as a year ago, in first and second quarter, we saw supply chain challenges abate from a print and a scanning perspective. So the compares were pretty challenging for both those businesses. They had really good Q1 and Q2s of last year. So I think that impacted North America. In North America typically has an overweight on large deals as well. So growth in North America, we really like to see kind of run rate, mid-tier and large deals because the large deals are overweight typically in North America. So we saw kind of flat sequentially, as we said before, large deal activity, Q1 to Q2. And really, North America would like to see more large deal activity come back here in kind of second half, and then hopefully some year-end spend and then growth into 2025. And the next question comes from Jim Ricchiuti with Needham. Please go ahead. Chris Grenga -- Needham and Company -- Analyst Hi. Good morning. This is Chris Grenga on for Jim. Most of my questions have been addressed, but maybe just one for me. The chart with the touchpoints is very helpful. Just wondering, as you look ahead to seeing larger projects return, are you preparing for large project activity to be in any one of these particular nodes, whether it's factory, warehouse store, or last mile, etc., or do large projects generally entail a broad coverage of one or many of those nodes, or just how you're thinking about that? Thank you. Bill Burns -- Chief Executive Officer Yes. I think we see large deals typically across the portfolio, so that it's all about kind of size and scale of customers. So in retail, it'd be larger -- the larger retailers that would refresh and have refresh cycles or upgrades or larger orders across the portfolio that we do a multiple store upgrade, refreshing to a new device for instance. In transportation logistics, you'd see things like the fleet of last mile delivery drivers as an example. Upgrade across transportation logistics, or postal workers around the globe would be examples of large opportunities. So I think we see them across each one, they're a bit different. In manufacturing, it's more location by location or plant by plant, as opposed to large deal activities, would see in retail where they do multiple stores at once, or T&L, where they do an entire fleet of drivers or postal. So it's a bit different by nodes. So manufacturing more broken down by site, retail more, multiple stores at once, T&L more larger deployments, I would say, healthcare more, more like manufacturing, not as large a hospital systems more kind of hospital at a time or multiple hospitals at a time, but not those large refreshes. So I'd say large refreshes and upgrades more tied to retail and T&L. Operator And the next question comes from Guy Hardwick with Freedom Capital Markets. Please go ahead. Good morning. Good morning, all. Zebra issued some very interesting press releases regarding working with Qualcomm to run LLMs on Zebra mobile computers, but without the requirements to kind of regular uploads to the cloud. So I was just wondering, Bill, just how close is Zebra to kind of a broad-based introduction of these kind of AI digital system products in mobile computing? Bill Burns -- Chief Executive Officer Yes. So we think of AI across the portfolio in several different ways. First is that just our core business really is about collecting real-time data, and that's used as kind of intelligence to feed AI models overall. So whether that's a barcode reading a printed label with the information on it back into the cloud, whether that's an RFID tag being read. So the idea of digitizing a customers' environment, getting real time data to AI models, and ultimately to generate insights in AI is a fundamental thing we do in our -- the value of our data that we collect feeds these models. So I think that's kind of the baseline of when we think about AI. Second is traditional, more traditional AI is used about probably in 50 different solutions across the portfolio today, whether that's optical character recognition or product recognition, navigation for autonomous mobile robots, package dimensioning inside our software around workforce planning and demand forecasting. So traditional AI is kind of the second piece that we think of across the portfolio. The third is what you're kind of referring to is the idea that it's AI assistant, right? Is that empowering the frontline worker through more information, leveraging a large language model on the device without connectivity to the cloud? Working closely with Qualcomm and Google, as you mentioned, to go do that. We've demonstrated that it -- at our National Retail Federation Trade Show in January. We demonstrated again at our innovation day. We also demonstrated at Google's Trade Show earlier this year as well. So I think we're excited about that opportunity. Today, it's not commercialized yet. We're continuing to work closely with our customers to really understand all the use cases, what's required around that. How do we best leverage which model in that case, how do we keep the model up to date? So a lot of different discussions with our customers about what that offering will look like. But we're excited to work with Google and Qualcomm on it. Our customers excited about having a digital assistant within retail or manufacturing. You think of all the use cases of making your newest worker as good as your most experienced worker, having all of your standard operating procedures at the hands of the associate or the frontline worker, being able to tie that back to what's the source of the data being restricted to the individual customer. So we think it's a driver long-term for our mobile devices and a differentiator for us. But today, still early days, more pilots and demonstrating and working with customers than commercialization. Guy Hardwick -- Freedom Capital Markets -- Analyst If you don't mind just me pushing a little bit on that. I mean, in terms of commercialization, is it a 2025 timeframe or beyond that? Bill Burns -- Chief Executive Officer Yes, no, likely -- like we're going to have more demonstrations around it that we're planning today with some of our customers at the National Retail show as we go the next step along with it next year in 2025, and then probably commercialization in likely in 2025 as I would see it today. And the final question comes from Rob Jamieson with Vertical Research. Please go ahead. Rob Jamieson -- Vertical Research Partners -- Analyst Hey. Good morning, Bill and Nathan. Congrats on the quarter. Just wanted to kind of ask more of a high-level question around and go back and revisit M&A and add an adjacencies. I mean, you all have a great installed base and a lot of market share across your various verticals. As we think about you adding adjacencies and what you've done recently, adding things like Fetch and Matrox and other markets, given the comfort that your customers have with you, do you think that as we return to like a more normal environment that will kind of, you can leverage that and your customers be more comfortable maybe deploying a new solution, something more kind of like advanced like Fetch or Matrox in their operations. Bill Burns -- Chief Executive Officer I think that clearly are strategic relationships with our customer creates an opportunity for us to deploy a broader set of solutions within those customers. That that trusted partnership allows us to go do that. I think the backdrop of the environment hasn't been all that great. So machine vision is a good example of that. It's been kind of a challenging market and then our diversification just takes time where we were centered really around more semiconductor manufacturing and moving outside of that. So -- but that is -- our customers are giving us an opportunity to sell solutions in that space because we have a relationship with them already. I think we're seeing the same thing across retail software and robotics, as you mentioned. So clearly it matters. Our breadth and depth of our current portfolio, the relationship we have with them, the fact that we're a trusted partner to them; it's not always the same persona. So it's not -- I wouldn't say it's easy. Meaning we've got to get from our current buyer of our solutions and the person who deploys our solutions today to someone else within the organization. So if we're working with somebody inside a manufacturer more on the distribution of products at the end of the manufacturing line, we now need to form a relationship with somebody on the manufacturing line for things like machine vision solutions to stick with that example. So it's not easy, but it's certainly doable. And our -- because of our trusted relationship, they're willing to make that introduction. And then, we've got to earn our way in and prove our solutions into that manufacturing space. But we're given that opportunity because of those relationships. Rob Jamieson -- Vertical Research Partners -- Analyst That's helpful. And I appreciate it. And then, to the extent that you're willing to share, just as you talked about adjacencies and things you're looking at in the portfolio, is there anything either high level or specific that you're looking at the moment, just especially as your leverage is getting to an attractive point here. Thank you. Bill Burns -- Chief Executive Officer No, I think that again, it's -- we think of assets that are closely adjacent to the portfolio overall, and really synergistic to what we do today. We'd like to do things in the similar vertical markets for the reasons we just talked about. So all that comes into play. And then, ultimately, as I said before, a little bit higher hurdles at the moment, given the macro uncertainty to make sure that if we were going to acquire something, or the certainty of revenue, and then ultimately higher risk interest rates weigh down on that a little bit. So I think overall, we continue to be inquisitive. It's got to be the right asset and the right fit for Zebra. Operator This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Burns for any closing remarks. Bill Burns -- Chief Executive Officer Yes. I'd like just to wrap up by saying thank you to our employees and partners for continued support of Zebra and execution in the second quarter. We're now positioned for growth in the second half year. So have a great day everyone.

Trane Technologies plc (TT) Q2 2024 Earnings Call Transcript

Trane Technologies plc (NYSE:TT) Q2 2024 Earnings Conference Call July 31, 2024 10:00 AM ET Company Participants Zac Nagle - Vice President, Investor Relations David Regnery - Chair and CEO Chris Kuehn - Executive Vice President and CFO Conference Call Participants Julian Mitchell - Barclays Scott Davis - Melius Research Andy Kaplowitz - Citigroup Gautam Khanna - TD Cowen Damian Karas - UBS Joe Ritchie - Goldman Sachs Steve Tusa - JPMorgan Jeff Sprague - Vertical Research Partners Nigel Coe - Wolfe Research Deane Dray - RBC Noah Kaye - Oppenheimer Operator Good morning. Welcome to the Trane Technologies Q2 2024 Earnings Conference Call. My name is Adam, and I'll be your operator for the call. The call will begin in a few moments with the speaker remarks and Q&A session. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the call over to Zac Nagle, Vice President of Investor Relations. Zac Nagle Thanks, Operator. Good morning. And thank you for joining us for Trane Technologies' second quarter 2024 earnings conference call. This call is being webcast on our website at tranetechnologies.com, where you'll find the accompanying presentation. We're also recording and archiving this call on our website. Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results. This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. Joining me on today's call are David Regnery, Chair and CEO; and Chris Kuehn, Executive Vice President and CFO. With that, I'll turn the call over to Dave. Dave? David Regnery Thanks, Zach, and everyone for joining today's call. As we begin, I'd like to spend a few minutes on our purpose-driven strategy, which enables our differentiated financial results over time. Our purpose is centered on creating a more sustainable world and our strategy is aligned to powerful megatrends like energy efficiency, decarbonization and digital transformation. We're all seeing the dire effects of climate change, and governments, NGOs and companies around the world are increasingly taking action. We're hearing a lot about the need to invest in renewables and green the grid. What we're not talking enough about is demand-side management. That's where Trane Technologies comes in. Most buildings operate up to 30% inefficiently. Through our leading-edge technical solutions and sophisticated controls in AI, we can help our customers significantly reduce energy demand and emissions. Our relentless innovation, proven business operating system and uplifting culture enable us to consistently deliver a leading growth profile, strong margins and powerful free cash flow. The end result is strong value creation across the Board for our customers, our shareholders, our employees and for the planet. Please turn to Slide #4. In the second quarter, we extended our track record of strong execution. Our global team delivered robust performance across the Board, not only bolstering our outlook for 2024, but strengthening our visibility to another year of leading performance in 2025. Bookings continue to be exceptional, with healthy momentum into the back half of 2024, as our pipeline of projects continues to grow. Q2 bookings of $5.3 billion rose to an all-time high, up 5% from our prior high in the first quarter and up 19% versus the prior year. Organic revenues were up 13%, with strong execution through the P&L, delivering 23% adjusted EPS growth. Notably, we continued to reinvest heavily in our business and accelerated key strategic investments, further strengthening our competitive positioning for continued market outgrowth. Booking strength continued to be led by our commercial HVAC businesses, where we're seeing broad-based growth. In top growth verticals, such as data centers, market projections call for an exceptionally strong multiyear CapEx cycle and high levels of project complexity play to our unique strengths. The power of our elite direct sales force, deep customer relationships and leading innovation will enable us to capitalize on the tremendous opportunities ahead. As the leading applied solution provider, we are driving significant market outgrowth in the most attractive high-growth verticals in commercial HVAC. As an example, Q2 revenues of our Americas applied solution are up approximately 90% on the three-year stack. We estimate that our applied systems carry an 8 times to 10 times multiple of higher margin service revenue over the life of the equipment. So, we're also excited about the service opportunities that lie ahead. Our robust bookings momentum and exceptional backlog of $7.5 billion provides strong visibility into the remainder of 2024 and increasing visibility into 2025. Our backlog includes $2.8 billion for 2025 and beyond, which is the level of backlog we would historically see entering a new year and we're only halfway through 2024. All in, we're confident in raising our full year revenue and EPS guidance, which would deliver our fourth consecutive year of 20% or greater adjusted EPS growth. Chris will cover guidance in more detail in a few minutes. Please go to Slide #5. In our Americas segment, our commercial HVAC business delivered industry-leading performance. Bookings were up more than 20% in the quarter. Revenue was up mid-20s and broad base across vertical markets, with equipment up more than 30% and services up high-teens. In residential, the team delivered very strong results, with bookings up more than 30% and revenues up low-teens. Turning to transport, the business performed as expected. Revenues were down high-teens against a tough comp of more than 30% growth in the prior year. The two-year stack growth was more than 10% and well ahead of the market, which was down mid-teens. Bookings were solid, up low-single digits. In EMEA, commercial HVAC strength continues, with bookings up 20%. Revenues were also strong, up high-single digits in the quarter and up over 25% on a two-year stack. Our transport business performed in line with our expectations, with bookings and revenue both down modestly. Turning to Asia, results were in line with our expectations for the second quarter. Asia-Pacific bookings were flat, while China bookings were up mid-single digits. Revenues were down low single digits on a tough prior year comp of 40% growth. We're pleased with our performance through the first half and expect Asia-Pacific to have another solid year overall. Now, I'd like to turn the call over to Chris. Chris? Chris Kuehn Thanks, Dave. Please turn to Slide #6. This slide provides a snapshot of our performance in the second quarter and highlights continued strong execution, top to bottom. Organic revenues were up 13%, adjusted EBITDA and operating margins were both up 140 basis points, and adjusted EPS was up 23%. At an enterprise level, we delivered strong organic revenue growth in both equipment and services, up low-teens and mid-teens, respectively. Our high-performance flywheel continues to pay dividends, with relentless investments and innovation driving strong topline growth, margin expansion and EPS growth. Please turn to Slide #7. At the enterprise level, we delivered robust volume growth with strong incrementals, positive price realization and productivity that more than offset inflation and continued high levels of business reinvestment. In our Americas segment, we delivered about 14 points of volume and about 2 points of price. Our Americas commercial HVAC business again outperformed the markets and delivered very strong volume growth of more than 20 points. Adjusted operating margin expansion of 130 basis points was driven by volume growth, productivity and price realization, more than offsetting inflation and high levels of business reinvestment. In our EMEA segment, we delivered about 4 points of volume and 1 point of price, with strong volume in our commercial HVAC business. Adjusted operating margin expansion of 130 basis points was driven by volume growth, productivity and price realization, more than offsetting inflation and high levels of business reinvestment. In our Asia-Pacific segment, the team delivered 310 basis points of adjusted operating margin expansion, despite a mid-single-digit volume decline. Strong productivity and positive price realization more than offset inflation and high levels of business reinvestment. Now I'd like to turn the call back over to Dave. Dave? David Regnery Thanks, Chris. Please turn to Slide #8. Our end market segment and business unit outlook is largely unchanged, with some notable exceptions in the Americas segment. First, our Americas commercial HVAC business delivered another very strong quarter of market outgrowth. While we've highlighted particular strength and key verticals, growth was again broad-based. Revenue growth on a three-year stack was extremely strong, up approximately 45% to 50% in both Q1 and Q2. With our continued positive outlook and exceptional backlog position, we expect three-year stack revenue growth to remain at this high range in the second half of the year. Second, our Americas residential business delivered stronger-than-expected growth in the second quarter, in part driven by three factors. The EPA clarification on the refrigerant transition, the normalization of channel inventories and a strong start to the cooling season. We now expect full-year revenue growth to be up mid-single digits. Third, in our Americas transport business, ACT has lowered their outlook for the 2024 transport markets to down mid-teens. Their expectation is for a much softer second half, which they project to be down more than 25%. We expect to outperform the transport markets in 2024. Looking to 2025, ACT projects approximately 15% growth as freight rates improve. Overall, the changes to our outlook in the Americas segment represent a significant net positive to our enterprise outlook for 2024 and gives us confidence in raising our full year guidance. All other businesses performed largely as expected in the first half and the outlooks for the year are unchanged. We provided additional details on the slide for your reference. Now, I'd like to turn the call back over to Chris. Chris? Chris Kuehn Thanks, Dave. Please turn to Slide #9. Our initial 2024 guidance reflected targets that we believed would deliver top quartile performance on organic revenue and adjusted EPS growth for the full year. Halfway through, we're exceeding those objectives. Given our strong performance, positive outlook and exceptional backlog, we're raising our organic revenue guidance to approximately 10%, 1.5 percentage points above the midpoint of our prior range of 8% to 9%. We're also raising our full year adjusted earnings per share guidance by $0.35 at the midpoint to approximately $10.80, up from a range of $10.40 to $10.50 prior. With this updated guidance, we're poised to deliver our fourth consecutive year of 20% or greater adjusted earnings per share growth. We continue to expect about one point of growth from M&A in 2024, with a negative impact of approximately $30 million to adjusted operating income for the full year, for a negative impact of about 5 points to reported leverage versus organic leverage. We also expect about 1 point of negative FX impact in 2024, effectively offsetting the point of growth from M&A. Net, organic, and reported revenue growth guidance for 2024 are the same, at approximately 10%. There's no change to our organic leverage target of 25% plus for the year, consistent with our stated long-term target and we continue to expect free cash flow conversion to adjusted net earnings of 100% or greater. For the third quarter, we expect revenue growth of approximately 8.5% and adjusted EPS of approximately $3.15 to $3.20. Please see Page 17 for additional information that may be helpful for modeling purposes. Please go to Slide #10. We remain committed to our balanced capital allocation strategy, focused on consistently deploying excess cash to opportunities with the highest returns for shareholders. First, we continue to strengthen our core business through relentless business reinvestment. Second, we're committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve. Third, we expect to consistently deploy 100% of excess cash over time. Our balanced approach includes strategic M&A that further improves long-term shareholder returns and share repurchases as the stock trades below our calculated intrinsic value. Please turn to Slide 11 and I'll provide an update on our 2024 capital deployment. Year-to-date through July, we've deployed $1.1 billion in cash, with $379 million to dividends, approximately $100 million to M&A and $650 million to share repurchases. We have $1.8 billion remaining under the current share repurchase authorization, providing us with strong optionality as our shares remain attractive, trading below our calculated intrinsic value. We continue to have an active M&A pipeline, with potential value accretive opportunities to further improve long-term shareholder returns. For 2024, we expect to deploy approximately $2.5 billion in cash. Our strong free cash flow, liquidity and balance sheet give us excellent capital allocation optionality moving forward. Now I'd like to turn the call back over to Dave. Dave? David Regnery Thanks, Chris. Please go to Slide #13. We discussed the transport markets in our outlook discussion on Slide #8, so I won't cover them again here. However, we've continued to provide this slide for your reference. Please turn to Slide #14. We operate our transport business for the long-term and while we're moving through a down cycle in 2024, this is a great business with a bright future. ACT projects a trailer market rebound in 2025, up mid-teens and forecasts continued growth through their 2029 forecast horizon. We have a diversified transport business globally, with opportunities to grow across the portfolio. With leading innovation, strong execution through our business operating system, and a world-class dealer network, we're well-positioned to outperform in any market environment. Please go to Slide #15. In summary, we are well-positioned to drive differentiated growth over time. Our leading innovation, proven business operating system and unmatched culture enable us to consistently deliver top quartile financial performance over the long-term, while continuing to reinvest in our business and we believe our best days are ahead. We have the team, the strategy and the track record to deliver leading performance and differentiated shareholder returns in 2024 and beyond. And now, we'd be happy to take your questions. Operator? Question-and-Answer Session Operator [Operator Instructions] And our first question comes from the line of Julian Mitchell with Barclays. Your line is open. Julian Mitchell Hi. Good morning. Maybe just wanted to start with the organic sales growth guidance. Understand sort of some of the year-on-year dynamics. It can depend, if we're looking at one-year, two-year, three-year stacks and so forth. So maybe it's easier to look sequentially. And I think the guidance implies sort of flat sales in Q3 sequentially, normally, they're up the last few years, sort of mid-single digits, and then the fourth quarter, I think, is implied down double digits sequentially, and recently, it's been down high singles. So, just wondered sort of from a sequential standpoint, anything in particular you're seeing or it's more of just a sort of conservative kind of construct based off the multi-year stacks? Chris Kuehn Hey. Good morning, Julian. This is Chris. I'll start. Yeah. Look, we're happy with the guidance we just put forth and raised full year organic revenue growth target to 10%, up 1.5 points from our prior guide. Think about the second half of the year as I'll start with commercial HVAC Americas. They're going to have a great year on a full year basis. As I've talked about in prior calls, the comps versus 2023 are just tougher as you go into the second half of the year. As a reminder, a year ago, that business grew mid-teens in Q1, high-teens Q2, and the second half of 2023, it grew in the low-20s to mid-20s Q3 and Q4, respectively. So it's going to have a great year. Think of that second half range. It's probably in the 10% to 12% range in growth. And what's interesting, and we did the math on this, when you think about the first half of 2024 in that business, the three-year revenue stack is a 45% to 50% growth, and it's actually the same when you look at the second half of the year in 2024 as well. It's a 45% to 50% revenue growth over the last three years. So, it looks really consistent when you think about it over the last several years with a lot of dynamic markets, so to speak, and dealing with supply chain. But they're going to have a great year. Think of transport second half of the year, as Dave called out in his comments. I mean, those markets are expected to be down further than what we even thought three months ago. ACT has called those markets down in the mid-20s in the second half of the year. So we expect that business to be down, but we expect to outperform on the full year. And then residential, I'll leave it within the Americas, mid-single-digit growth plan for the second half of the year. And could it be better? Yeah, maybe it could be better. It is a bit of a step down from the second quarter, but we're cautiously optimistic about that space. We're very much in the middle of the cooling season right now. We want to really see where it plays out. But maybe I'll end there, that we're confident in the full year guide and could things get a little bit better in the second half? Maybe. But we'll update you as we get to the call next quarter. Julian Mitchell Thanks very much, Chris. And just my second question on the operating margin outlook. So you've got the higher investments that are sort of pushing the full year up leverage into that mid-20s plus framework after a 30s number in the first half. Anything else we should be aware of for the second half in terms of that margin element? Maybe flesh out anything around mix, perhaps? I suppose if resi and transport are a bit softer, there's a mix negative. Anything else to highlight in terms of, say, price, cost, tailwinds, and also within commercial HVAC mix, anything moving around on applied versus the light side in the back half? Chris Kuehn Yeah. Good question. I think it's really less about mix of the businesses. When you think about performance last year and EBITDA margins across EMEA, Asia and the Americas, very different mix of businesses. EBITDA margins were fairly consistent across all three of the businesses, actually Asia leading. But if I think about the second half, this is really where Dave has continued to challenge all of our business units with advancing investments, right? We see it as, and I've seen it for a very long time, with accelerating investments, and as we see high returns on them, that's where I would call it maybe second half of the year. There's a bit of compounding effect of the investments that we began to ramp in the first quarter of this year. Those wind up being a little bit more costly in the second half, but all of them have really strong returns. So we like the full year guidance and confidence in 25% or better organic leverage. Let's see where the year plays out. But the focus here is making sure we continuously and relentlessly invest in the business to keep driving this market outgrowth in the next several years and Dave's keeping the pressure on. David Regnery I'm sitting here smiling at Chris as he's saying that, Julian. So thanks for the questions, but we love investing in our business and we've been able to demonstrate the results of the investments we've been able to make and expect more of that in the future. Julian Mitchell That's great. Thank you. David Regnery Thanks, Julian. Chris Kuehn Thank you. Operator Our next question comes from the line of Scott Davis with Melius Research. Your line is open. Scott Davis Hey. Good morning, guys. Dave and Chris, is that? David Regnery Hey, Scott. How are you doing? Scott Davis I'm good. Thank you. And today's results have been good. So it's been a good day. So I wanted to just dig in a little bit of backlog. It's kind of your comments about 2 times normal. I'm trying to just tease out what's changed here. Obviously, demand is solid. But are these backlogs 2 times normal largely because lead times have gone up substantially because these projects have gotten bigger and more complex and folks want to get in front of the line? I'm thinking data centers and semi-fabs and things like that. But perhaps I'm overstating that a bit? David Regnery Yeah. It's a great question, Scott. I would say that we should maybe challenge ourselves as to what's normal, okay. We're a lot bigger business than we were four years ago, obviously. Lead times, that's not -- I would say that's -- I would say lead times are back to what I would call a normal rate. For data centers, for sure. We have data center customers that are providing us visibility to their needs well in advance than, say, maybe some of the other verticals. So that's a part of it. But look, we're seeing tremendous strength, really, in almost all verticals. As we looked in the Americas in our commercial HVAC business in the quarter, I think we spoke before, we tracked 14 different verticals. It was hard for us to find a vertical that was down. So we just have broad-based strength. We certainly are seeing a lot of demand in the high growth verticals like data centers, but we're also seeing nice demand in other verticals as well. Scott Davis Okay. Helpful. And then China, the bookings are up and I know it can be a little bit lumpy, for sure. But is there an indication that China is bottomed? I think kind of -- I guess my question is kind of A, on the macro side, but B, you guys are probably getting some outgrowth, I would imagine there. So if you have some color around that, B. David Regnery Yeah. I'd say it's a good question, Scott. I mean, Asia is less than 10% of the revenue for the enterprise. Okay. Think of it 50% China, 50% the rest of Asia. In the quarter, the region performed as we expected. Revenues were flat. I would tell you that we did see some choppiness in China towards the back half of the quarter. So we have our eyes wide open on that. But I would also tell you that we have that baked into our guide for the year. So I wouldn't say that China has bottomed. We performed well there. Our team is executing at a very high level. We were a very seasoned team there. A lot of innovations in their pipeline there that they're rolling out into the marketplace. But just to be clear, getting orders in China are pretty dynamic right now. Scott Davis Okay. Congrats, Dave. Thanks. I'll pass it on. David Regnery Thanks. Appreciate it, Scott. Operator Our next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open. Andy Kaplowitz Good morning, everyone. Nice quarter. David Regnery Thanks, Andy. Chris Kuehn Thanks, Andy. David Regnery Appreciate it. Andy Kaplowitz Dave, just a little bit more about bookings and backlog momentum going forward. We know you've more difficult order comparisons coming up, but could you maintain book-to-bill ladder over 1 times? And then the renewed momentum in Americas commercial HVAC, I know you just said it was relatively broad-based, including data centers, but how long do you think this elevated bookings environment could last and at what point do strong orders give you confidence that 2025 should be another strong earnings growth year or even a double-digit growth year? David Regnery Yeah. I'm not going to forecast our incoming order rates for the rest of the year. I will tell you that we're going to have a backlog that'll be very strong going into 2025, much like you saw us at the beginning of 2024. We already have 2.8 billion booked for 2025 and I mean, that's a number that we haven't talked about that size of a number in the past. So we're very confident there. As far as the demand that we're seeing, look, we're seeing a lot of demand and I emphasize it's broad-based, right? It's not just in the high growth verticals because we're very strong there, but it's broad-based and it really has to do with a lot of our innovation and our ability to execute. And with our direct sales force, we go to where the opportunities are. Our teams are highly technical and we're winning in the marketplace. It's that simple. And I couldn't be prouder of what that team's been able to execute. And by the way, we're talking a lot about the Americas, but I would tell you that our commercial HVAC business in Europe also performed extremely well. Their order rates were up 20%. So you could see that investing in the business, always having that long-term vision as to where you want to go and the payback that you get for that, this is a flywheel, as Chris would say, and we're seeing the impacts of that and that flywheel is going to continue to spin for us. Andy Kaplowitz Thanks for that. Yeah. I tried there to get to the forecast bookings. Oh, well. So let me then ask you a follow-up. Chris, you kind of alluded to resi and the strength that you're seeing. It looks like revenues in the first half were already up mid-single digits plus. Orders accelerate obviously in Q2 up 30%. I know you said you want to be conservative, but really is mid-single-digit growth the minimum for the year and what did you -- what have you seen so far during the cooling season? Chris Kuehn Andy, good question. Yeah. I think mid-singles is probably the floor for the business. Could it be better? Yeah, we think it could be better. But as you know, bookings in that business, it's less important. It's really around seeing through the entire cooling season. As you know, there's a refrigerant transition that's happening later into this year, into next year, and we're ready for that. We can certainly answer any questions there as well. But we've got a lot of confidence in that team. It's been a challenging market leading into this cooling season for about a year, year and a half. But yeah, we feel like could that be better? It could be better. But let's see how the year kind of plays itself out. David Regnery Yeah. Andy, as I said in our prepared remarks, look, three reasons why we did so much better in resi in the second quarter. One is the clarification on the refrigerant transition. The second is certainly the inventory is at what we would call a normal level in the channel list through our independent wholesale distributors. And the third is not that I like to talk about the weather, but it's been a very, very warm start to the cooling season, which should have us all concerned for a different reason that we could talk about if you'd like. But it's been a very, very strong start. So as Chris said, we're cautiously optimistic in this business, the team performed very well in the second quarter and it's a great start for that team. Andy Kaplowitz Appreciate it, guys. David Regnery Okay. Thank you. Chris Kuehn Thank you, Andy. Operator Our next question comes from the line of Gautam Khanna with TD Cowen. Your line is open. Gautam Khanna Yes. Thank you. I was wondering if you could talk about your expectations of any pre-buy given the A2L transition and just, yeah, have you already introduced the product, et cetera? David Regnery Yeah. Gautam, good question. We've introduced -- in our commercial business we've introduced about half of the products that would be affected. And think about any product that uses a scroll compressor as a target for a refrigerant change, okay. So just in a broad brush. So in our commercial sites, about half of it we've introduced. We're actually selling both. So we're selling 454B, the new refrigerant, as well as still 410. In our resi business, not yet. We haven't introduced it. That'll be rolling out in the back half of the year. As far as pre-buys go, look, we're not anticipating in our residential business a large pre-buy towards the end of the year. We'll see how that rolls out. But right now, we're not forecasting that. There's just too much timing that you have to work on to make sure that you could sell through all your products in the year and our focus really is on helping our independent wholesale distributors transition their inventory properly. So we'll be working with them as the year progresses here to make sure that they're ready for the cooling season in 2025 and then that's really where our focus is right now. So answer to your question, not a large pre-buy. At least we don't have one baked in. But I would tell you that the way we designed our operations, we're able to manufacture both products. So we have mixed model lines, which it was a little bit more upfront cost, but we believe that investment will pay, because as you know, in the resi area, you'll be providing components of 410 for some time into the future to make sure that we could service our product over the useful life of that product. Gautam Khanna Great. Thank you. David Regnery Thanks, Gotham. Appreciate it. Chris Kuehn Thanks. Operator Our next question comes from the line of Damian Karas with UBS. Your line is open. Damian Karas Hey. Good morning, everyone. Congrats on the quarter. David Regnery Good morning, Damian. How are you? Damian Karas Doing well, thank you. I was wondering if you could maybe help us unpack the 13% organic growth a little bit. Just give us a sense for how much of this topline being driven by volumes versus some price and mixed benefits and just maybe kind of walk us through how you're thinking about that for the full year now? Chris Kuehn Hey, Damian. It's Chris. I'll start. Yeah. For the quarter, think of it as a little bit over 2 points of price. You'll see this in the 10-Q that gets filed later today, about 11 points of volume. So as we anticipated coming into the year, we knew that price was going to be a contributor, but less of a contributor than what we saw in 2022 and 2023. That's been dovetailing. And the offset to that, and a nice offset to that, has been improved productivity. And so as kind of came out at the end of last year, middle last year with supply chain challenges largely resolved, we're continuing to see improvements on the productivity side. So if I step back, we're getting the right combination of price, dollars and margin above inflation. It is inflationary out there, to be fair. If I think about tier one costs with copper up, aluminum up to somewhat flat, steel down, refrigerants up, and ultimately, wage inflation really being up, all of that is still going to be a bit inflationary on us for this year. But I like where we are, price versus inflation, the productivity is getting stronger and making sure that we're funding the business with investments. It was another quarter of a high investment and continued high investment quarter with projects we think that are very, very strong. That volume growth, the 13 points, sorry, 11 points of volume on the 13 points of revenue growth, think of that as 20 points of volume in commercial HVAC Americas. On price that where we were in the second quarter, we're confident that gives us a lot of view into the full year. Price should be around 2 points as well. And that'll look a little bit lower in the second half of the year versus the first half, ultimately landing around 2 points on the full year. So hopefully that gives you a little bit of color. David Regnery A lot of volume, Damian. Damian Karas Yeah. Not a bad thing. That was helpful. Thanks. And then I wanted to see if you might be able to share some color on how things are progressing with some of your kind of early stage, emerging growth opportunities, if you will, investment immersion cooling, your AI partnership. Would you envision these being potential capital deployment opportunities down the road? Chris Kuehn I'll answer the first question. Emerging cooling, as I've said in the past, that's sort of -- that's got some hurdles it still needs to work through and we're working through some of that with our partner there. So that's not what I would call mainstream. As far as the AI tools, like the Nuvolo acquisition we did, it's early days, but we really like what we see there and this is going to really help us excel our connected asset solutions. And in my opening remarks, I talked about demand side management and we're not talking a lot about that. But a lot of people are talking right now about the generation side of power. A lot of people are talking about all the demand that's coming. What people don't realize is that, in a building, 30% of the energy that's consumed is wasted, right? So if you're connected to the asset, if you're connected to the building, you're able to ensure that that asset or that building is going to perform the way it was designed. And this 30% number, right, I'd love to show you some of our stats, but this is a massive amount of energy that can be saved. So we're really happy. We're really bullish on Nuvolo. We're really bullish on what we're doing with our connected solutions. And I think you're going hear a lot more about demand side management in the coming years, because it's not just about generation, it's not just about forecasting all the demand that's going to be coming and you see a lot about data centers right now. It's like, how do we use what we're generating today in a more efficient way and that's what we know at Trane Technology we could help our customers with. Damian Karas Great. Thanks, guys. Best of luck. David Regnery Thank you, Damian. Thank you. Chris Kuehn Thanks. Operator Next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is open. David Regnery Hey, Joe. Joe Ritchie Hey, guys. Good morning. David Regnery Good morning. Joe Ritchie So I'm going to touch on data centers again just quickly. I know that it's both broad-based growth across commercial HVAC in the Americas. I'm just curious, though, are you seeing any constraints on your bookings for data centers, I know that that's been a hot topic of late. And then also, can you just maybe tell us a little bit about the margin profile of the business that you're booking in that vertical? David Regnery I'll start. I'll let Chris talk about margins. But constraints from a capacity standpoint, no. I mean, we've made capacity expansions over the last several years. So we feel as though we're in good shape there. It's more about working with the customers. It's more about working with the system level within the data center. We're not just a component supplier within a data center. We look at the entire cooling system, whether you're cooling at the building level, the server or the servers themselves. This is something that we're really good at and we're very strong in this vertical. And we've been very strong in this vertical for a long time. I'll steal a bit of Chris's thunder here, but the margins in this space are very attractive and we really like our service tail that this provides. Chris, you want to add anything? Chris Kuehn That's where I was going to go, Dave. I think, again, these are generally highly customized applied systems when you're talking about data centers for the most part. And so while we're pricing for innovation, we're also making sure we've got customers for life. These are customers that are putting in multiple locations, multiple data centers, and we want to make sure we have not only a solution for today's order, but what that order can be a year, two years, five years from now. As all market projections would suggest that this is going to be a multiyear growth factor with the growth of data centers. And with that, to Dave's ending point, the opportunity still in front of us is to think about services here, and with typical applied systems generating 8 times to 10 times of the revenue and services from a dollar of equipment, that's still an opportunity well in front of us as we deploy products into this space and you're starting to see that a bit in the revenues, but more of that in 2025 and 2026, that's a nice opportunity still in front of us. Joe Ritchie Got it. That's helpful, guys. And then just my quick follow-up, resi HVAC growth this quarter was much better than what some of your other public peers have reported so far. So it looks like you took some share. I was just wondering, was there any disruption that you noticed with any of your public or non-public comps in the quarter? And I know, Dave, you referenced some of the reasons why you grew this quarter, but the growth was surprisingly good? David Regnery Yeah. I mean, the team executed very well. Look, I've been saying for a long time, Joe, you got to look at the share in residential over a longer period than just a quarter. So did you do better in a quarter? Tell me what you've done over the long-term. So I can't comment on if there was any one of our other competitors that didn't do well, I don't know that. But I am very pleased with our results. But look, we're cautiously optimistic here. Look at share over the long-term. Don't just look at it on a quarter. There's different sell-in models and you could get the wrong answer if you just look at a particular quarter. But I am very happy with the results that we've been able to demonstrate. Joe Ritchie Okay, guys. Thank you. Operator Our next question comes from the line of Steve Tusa with JPMorgan. Your line is open. Steve Tusa Hey. Good morning. David Regnery Hey, Steve. How are you? Chris Kuehn Good morning. Steve Tusa Are you guys getting bored yet of putting up these kind of results? David Regnery Steve, I never get bored of putting up great results. It's the flywheel that this talks about, right? Steve Tusa Yeah. Congrats on great execution and very strong results. Could we just get a breakdown of the difference between applied and unitary equipment in the quarter and then what you're expecting for the second half in those two? Chris Kuehn Yeah. Steve, I'll start. I'm happy with performance in both of those businesses with applied and unitary. I'd say both up strong. We talked about commercial HVAC revenues up over 20% in the quarter and both contributing to that. Equipment was up 30%, maybe unitary a bit stronger than applied, but not by much. Second half of the year, think of our -- I'll start with commercial HVAC Americas, think of that all in about up 10% to 12% in the second half. I described earlier great performance last year in terms of tougher comps with the growth in revenue from call it mid-teens in the first quarter of last year to mid-20s by the fourth quarter of last year. That team's going to have a great year this year. We're even more excited about 90% of the backlog is commercial HVAC, the $2.8 billion that Dave spoke about that we already have for 2025 and beyond. That's all equipment, we don't have service in that backlog and that's all commercial HVAC. So, it's going to be a really strong follow-on to this year and it's giving us a lot of confidence for growth going into next year. Hopefully, that kind of answers the question. Steve Tusa And any -- will these diverge in the second half? I mean, it seems like, obviously, with the data center stuff, the applied business and the backlog-related businesses continue to grow really strongly, but the more short-cycle stuff maybe slows a bit given the tougher comps. Is that how we should think about it? Will they diverge a bit, unitary and applied? Chris Kuehn I don't know if they'll diverge a bit. I mean, with unitary maybe being up a second quarter, I think they're going to be somewhat close to each other here in the second half. Services is going to be strong for the second half as well. We're tracking, as we saw in the second quarter, in Americas business was up high-teens, enterprise was up mid-teens. That's going to be a nice contributor to the second half as well, but I wouldn't say that there's going to be a big divergence in the second half. David Regnery Yeah. I would agree. Steve Tusa And then... David Regnery ... because I think that... Steve Tusa Go ahead. Sorry. David Regnery Yeah. Steve, I think that, again, when you talk about broad-based growth, right, different verticals are satisfied with different types of products. And if -- in this broad base that we continue to demonstrate results in, you could see that we're growing both applied and unitary. Not that we look at the business that way because we're really selling systems. But so our unitary, as Chris said, we were actually stronger in unitary in the second quarter than we were applied, despite the fact that we have very large backlogs in applied. Steve Tusa One last question for you on the services growth. I mean, I usually think of services as being pretty solid growth, but more stable. These types of growth rates in services are obviously very strong. Credit to you guys. What is the key driver here? It seems like it's more than just a run rate of recurring break, repair, stuff like that. Is there anything that's standing out, because it just seems these types of growth rates, they're not lumpy, but they're just seemingly way higher than what you would consider to be a nice, steady services business? David Regnery Yeah. It's a great question, Steve, and appreciate you noticing our high growth rates there. Just to remind everyone, we've had a compound annual growth rate over the last six years of high-single digits. In the second quarter, we were up mid-teens, right? And I -- I'll just go back to our operating system, right? It's a system of things that makes our service business great. For sure, it helps when you keep growing your applied installed base because our service business is really built around our applied installed base. But I would also tell you that the mindset that we have of an asset is not performing when it's not heating or cooling properly and/or it's using too much energy is a different way to think about it and there's a lot of growth potential when you start thinking that way. So think about... Steve Tusa Okay. Thanks. Yeah. Thanks a lot. David Regnery Okay, Steve. Thanks. Operator Our next question comes in the line of Jeff Sprague with Vertical Research Partners. Your line is open. Jeff Sprague Thanks. Good morning, everyone. David Regnery Hi, Jeff. Good morning. Jeff Sprague Hey. I hope everybody's well. I want to come back to data centers too, maybe a little bit bigger picture, just competitive and customer behavior question. Obviously, you and your peers are talking about very strong growth. It seems like there's plenty to go around. It also does look like you're probably outgrowing them, but it's hard to tell. The nature of my question is, are your customers in general and maybe the hyperscalers in particular standardizing on OEMs? You end up dominating hyperscaler A and carrier as hyperscaler B, or are we looking at mixed fleets based on what people can deliver at a point in time? Just give us a sense kind of in this almost gold rush to stand this stuff up, just how the competitive landscape and customer behavior is unfolding? David Regnery Yeah. I'd say hyperscales, first of all, they like technology and they like always pushing the envelope and trying to increase the efficiency of the system. So, they're always working with us and they may be working with our competitors as well as to make sure that we can have a more efficient system tomorrow. And we have a lot of cool things that we're working on there with them. Some of it includes some things that are maybe a little bit outside of that, which is the heat recovery side of things, which I've talked about in the past. Look, at the end of the day, these hyperscale customers, they like resiliency as well. So, they'll typically pick a prime and then they'll pick a secondary and that's just prudent behavior on their behalf and we've seen that before, but I would tell you they really, really, really like innovative technologies. Jeff Sprague And Dave, is there a way to think about just your available serve market here, dollars per megawatt deployed or some other metric as you try to really game plan for the capacity you need and the revenue trajectory you might be looking at? Any way you could help us frame that? David Regnery We have some internal models that I won't share with you the results, but look, it's allowed us to be able to help forecast based on talking to our customers, understanding what their demands are, okay. And then kind of pushing that back into what would it mean for us. I would tell you that think of units getting bigger, think of units getting more complex, and think of added features on units like heat recovery. That's certainly a trend that we're seeing and that's certainly something that we're working with our customers' kind of pushing into the marketplace. Jeff Sprague Okay. Great. I'll leave it there. Thanks. David Regnery Thanks, Jeff. Operator Our next question comes from the line of Nigel Coe with Wolfe Research. Your line is open. Nigel Coe Thanks. Good morning, everyone. Great quarter... David Regnery Good morning, Nigel. How are you? Nigel Coe ... obviously. Yeah. Good. Thanks. Look, everything's really good. I'm going to focus on a couple areas that aren't so great right now. So, Dave, in a world of down 15% trailer declines this year in NAFTA, how does TK Americas perform? And maybe just on top of that, to add in how the other verticals are performing, your bus rail, et cetera, and spare parts? David Regnery Yeah. It's a fair question. Look, the Americas transport business is going to be down in 2014. It's a more cyclical business than our commercial HVAC business. ACT is projecting the back half of the year to be down 25%. To be fair, our internal models say it could be down even a little bit more than that and that's what we have baked into our full year guide. Look, I had the opportunity early in my career, Nigel, to run this business. And I would tell you that I've seen these downturns in the past. And I would tell you that these markets will come back. And right now it's projected they'll come back in 2015. We'll stay tuned on that. But this is a very strong business. And when these markets come back, they're going to come back strong. And the key is to continue to invest in the business when you're in this down cycle. And when you do that, when the markets come back, you're able to delight your customers with a portfolio of innovation that really allows you to win through that cycle and that's what our plan is right now. As Chris said, we've been investing heavily in the business. We're not stopping that. And TK is a big part of those investments that we're making. And I'm excited about the innovation pipeline that's going to come out in the Thermo King business and when the markets come back, we're going to be ready. As far as the other businesses, I mean, they tend to follow a trailer, I mean, and the trailer is the big one, but they tend to follow that same cycle. We start to get freight rates to improve. If we start to get capacity coming out of the channel, we'll see the market start to rebound and I know they will. Nigel Coe Okay. They certainly will. Absolutely. So, would down mid- to high-teens be reasonable for TK Americas in the back half of the year? Chris Kuehn Nigel, this is Chris. Yeah. I mean, I think they could be down mid-single to high-single in the second half of the year. I mean, we expect it to be down probably in a range of low doubles, double digits on the year. If trailer markets are down mid-teens, we expect to outperform. And again, that's the innovation and the investments we've had in this business for many, many years. And the key here is to make sure that while it is a down year and we're going to manage the decrementals as so far we have, and we expect to do that for the balance of the year, it's making sure that we've got the investment pipeline that continues to run the business. Just in June, we finished our long range plans for each of our business units, thinking about capacity and not only in commercial HVAC, but all of our businesses. And this is one that we like these markets to Dave's point, want to make sure we're still investing so that when the markets do recover, we're ready. Could the market be down more than mid-teens? I mean, that's what we've called it right now. To be fair, I know ACT's had multiple revisions here over the last several months. I think it's four or five this year already. Our internal models would suggest maybe it's down a little more than that. So we're making sure we bake that into our guide at this point. Second half of the year, we expect it to be down on down comps from a year prior, but we do expect to outperform the market. Nigel Coe Okay. Guys, I had a follow-up question, but that was a great answer. So I'll leave it there. Thanks a lots, guys. David Regnery Okay. Thanks, Nigel. Chris Kuehn Thanks. Operator Our next question comes from the line of Deane Dray with RBC. Your line is open. Deane Dray Thank you. Good morning, everyone. David Regnery Hey, Deane. How are you? Deane Dray I'm doing real well. Thank you. I just want to circle back on unitary. One of your competitors this quarter talked about making a push into the emergency replacement of unitary into that market where they said they really don't have any share. How might the competitive dynamics change here and the economic returns? Just any comments from you would be helpful. Thanks. David Regnery That's a tough one for me to answer. I'm not sure what they're planning on doing. I would tell you that we're very strong in unitary as far as the replacement market goes. Yeah, in the heat of the summer, if the unit stops working, it needs to be replaced and having the available unit on hand is very, very important. And we carry a lot of inventory stock and we also have, with our lean thinking in manufacturing, quick ship programs, which allows us to really win in this space. Deane Dray Is it fair to say that the emergency replacement market is basically half of the business today or is that overstated? David Regnery Yeah. I can't comment on that and I think it would be -- it would really -- it would depend on the time of year, okay. You also have a planned replacement market as well. So there's a lot of things that are part of that statement that you just made. So it really depends. Deane Dray All right. I understand. That's helpful. And then second question, any updates on all of the megaprojects? Are you seeing any bidding coming through? Any updates would be helpful. Thanks. David Regnery Yeah. I mean, we continue to track megaprojects. And as I've said in the past, megaprojects tend to be in verticals that we were always strong in. So it's hard to say what's incremental in that space. But right now, our teams are tracking over 300 projects and some of them have been closed, but many of them are still in the pipeline. And one of the things about these megaprojects is they tend to have lots of different decision makers, especially if any of the semiconductor space that, I mean, I'll give you an example. We had a project that the decision maker was in Asia, the engineer was in Seattle, Washington, and the mechanical was in Austin, Texas. And one of the advantages that we have with our direct sales force is we could really help the customer triage all the information that's required. And it allows us to really be focused on the customer needs, but also all the different individuals that are part of that process. So we really like our positioning with these megaprojects. And a lot of these megaprojects are very sophisticated, engineered products, which actually plays to our strength as well. Deane Dray Great. Thank you. David Regnery Sure, Deane. Operator Our final question comes from the line of Noah Kaye with Oppenheimer. Your line is open. Noah Kaye Yeah. Thanks. I'll just ask one question. And David, goes back to your opening comments around demand-side management as an underappreciated lever here. You're sitting on one of the largest flexible capacity assets on the grid and you're expanding your ability to play in distributed resource management and virtual power plants, district heating. I was hoping you could maybe connect the dots for us a bit more and just frame up how meaningful this is becoming in terms of some of the commercial HVAC bookings and revenue trends, how much they expand your wallet share, anything you can do to help quantify for us some of these additional facets of the business? David Regnery Well, I appreciate the question, Noah. I think we're still in the early innings on this. I know we're in the early innings. It's more about an education process. We were working with a customer, a large customer in New York City and we created a digital twin for their particular building. And we were connected and we were watching the energy consumption. And we saved that particular customer, it may not sound like a lot, but it was like $120,000, right, in energy that they would have wasted if we weren't connected to their solution. So, and you think about the universe, okay? If you think about the commercial space at 400 billion square feet, I mean, it's crazy the opportunity that exists. So, look, this is a massive opportunity. Demand-side management, you're going to hear a lot more about it. And the neat thing about it is you don't have to wait for new technology to be developed, right? This is technology that's readily... Noah Kaye Right. David Regnery ... available and being connected from a structured data standpoint, which we've been for a while, but now we're adding in unstructured data with our AI tools. We're able to really dial in algorithms to really help our customers save energy, which is saving carbon, which is good for the planet as well. Noah Kaye Okay. Thank you. We'll look forward to hearing more. David Regnery All right. Thanks, Noah. Operator I will now turn the call back over to Zac Nagle for closing remarks. Zac Nagle We'd like to thank everyone for joining on today's call. As always, we'll be around for any questions that you may have. So, feel free to bring us up. And then in the coming months, we'll be on the conference circuit, obviously, and we'll hope to see some of you on the conference as well. So, thanks for joining, and have a great day. Operator Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Earnings call: Qorvo reports mixed Q1 results, eyes long-term growth By Investing.com

Qorvo, Inc. (NASDAQ:QRVO), a leading provider of core technologies and RF solutions for mobile, infrastructure, and aerospace/defense applications, reported mixed first-quarter results for fiscal year 2025. The company saw a 6% sequential decline in revenue to $887 million but achieved a 36% increase compared to the same period last year. Non-GAAP gross margin stood at 40.9%, with a non-GAAP diluted EPS of $0.87. Despite the mixed results, Qorvo is optimistic about its long-term growth prospects, underpinned by diversification and strong R&D investments. Qorvo's performance this quarter reflects its strategic focus on diversification across its six primary end markets, which include automotive, consumer, defense and aerospace, industrial and enterprise, infrastructure, and mobile. The company's achievements, such as supplying V2X FEMs for automotive OEMs, expanding power management solutions for consumer products, and securing design wins in defense and aerospace, demonstrate its commitment to innovation and market expansion. The company's R&D investments are aimed at capturing large opportunities in automotive connectivity, advanced Wi-Fi RF solutions, and Ultra-Wideband SoCs, positioning Qorvo for long-term growth. The successful migration to 8-inch BAW technology is indicative of Qorvo's efforts to enhance manufacturing efficiency and gross margins. While Qorvo's smartphone revenues showed a slight decline year-over-year, the company is optimistic about its performance in the mid-tier smartphone market, as evidenced by its win with Motorola (NYSE:MSI)'s Moto X50 Ultra, which features Qorvo's Ultra-Wideband SoC. Qorvo's financial health remains stable with $1.1 billion in cash and equivalents, and management's proactive steps in retiring $27 million of their 2024 notes reflect a strategic approach to debt management. The company's stock repurchase program, which saw $125 million of stock bought back this quarter, underscores its confidence in its own financial prospects. Overall, Qorvo's mixed first-quarter results are balanced by a positive outlook for future growth, driven by strategic investments and market diversification. The company's management team remains focused on leveraging its core strengths to deliver enhanced profitability and shareholder value in the long term. Operator: Good day and welcome to the Qorvo, Inc. First Quarter 2025 Earning Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Douglas DeLieto, Vice President of Investor Relations. Please go ahead. Douglas DeLieto: Thanks very much. Hello, everyone, and welcome to Qorvo's fiscal 2025 first quarter earnings call. This call will include forward-looking statements that involve risk factors that could cause our actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in the earnings release published today, as well as the risk factors associated with our business in our Annual Report on form 10-K filed with the SEC because these risk factors may affect our operations and financial results. In today's release and on today's call, we provide both GAAP and non-GAAP financial results. We provide this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain non-cash expenses or other items that may obscure trends in our underlying performance. During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today, available on our Investor Relations website at ir.qorvo.com under Financial Releases. Joining us today are Bob Bruggeworth, President and CEO; Grant Brown, CFO; Dave Fullwood, Senior Vice President of Sales & Marketing and other members of Qorvo's management team. And with that, I'll turn the call over to Bob. Robert Bruggeworth: Thanks, Doug, and welcome, everyone, to our call. I want to begin by thanking everyone who attended our Investor Day, both in person and online. We appreciated the opportunity to share with you our strategic positioning and our enthusiasm for the future. The investor slides and a replay of the webcast are available on our IR website under Events and Presentations. Some of the investor feedback we've received is that it would be helpful to discuss our business by end market. We highlighted our end markets in our Investor Day presentation and our formal remarks today will also highlight our opportunities and achievements by end market. Qorvo's six primary end markets are automotive, consumer, defense and aerospace, industrial and enterprise, infrastructure and mobile. They are underpinned by global megatrends, including electrification, connectivity, mobility, sustainability, datafication, and AI. These trends support new applications and new user experiences that are made accessible to end users by customers we serve and the products we enable. Our markets are characterized by multiyear upgrade cycles, including 5G Advanced, Non-Terrestrial Networks, Wi-Fi 6 and Wi-Fi 7, DOCSIS 4.0, Matter, Ultra-Wideband and others. They are also undergoing technology upgrades such as AESA radars, Advanced Power Management, RF MEMS and highly integrated system level solutions, and they are seeing upgrades in the user experience like indoor navigation and force-sensing touch sensors. There are also continuous drivers that are common across markets. These include the continuously increasing requirements for bandwidth, speed and latency, a sharp focus on power efficiency and power management and the need for system level solutions and greater functional density. Customers demand improvements and performance, whether it's in measured, in power out, current consumed, talk time or battery life. They require higher levels of performance with greater efficiency and a reduced form factor to create the differentiation that drives their position in the markets they serve. Qorvo is critical in enabling these capabilities. Now turning to quarterly highlights. In the automotive market, we were selected to supply V2X FEMs for a leading China-based automotive V2X reference chipset platform set to ramp at multiple automotive OEMs in calendar '25. To expand automotive engagements, we are leveraging our Ultra-Wideband portfolio across range of applications, including secure access, digital key, kick sensors, child presence detection and detection of intrusion. We are also expanding our opportunities in EVs to include solid-state circuit breakers. Given the smaller size, enhanced reliability and better thermals of our silicon carbide solutions, we enable solid-state circuit breakers that can disconnect electrical overloads in case of failure to maintain safe and efficient power distribution. For consumer markets, we secured a new engagement to supply a switch mode DC-to-DC charger for a wearable accessory for an Android OEM. We continue to expand our power management portfolio and we are engaged to supply our newest battery management solution for power tools, scooters, e-bikes and other consumer products. We are also supporting a range of applicants with our Matter and Ultra-Wideband technologies, including door locks, smart lighting and indoor navigation. We are combining Matter with Ultra-Wideband to support the emerging Aliro standard for controlling digital access to smart homes and offices. To support global broadband deployments Qorvo's Wi-Fi solutions enable cellular, cable and satellite backhaul applications in developed and emerging markets. Of note, we recently surpassed 75 million Wi-Fi 6 FEMs shift into the India Wi-Fi market. We continue to expand our Wi-Fi portfolio and we are seeing increasing customer interest in our 2, 5 and 6 gigahertz BAW filters for Wi-Fi CPE applications. In other consumer applications, we are expanding our customer engagements with four sensing touch sensors primarily for laptop track pads as well as other consumer applications. Turning to defense and aerospace. We secured design wins across segments, including AESA radars, large defense programs and SATCOM deployments where Qorvo participates in both the low earth orbit satellite and the ground-based consumer terminal. In D&A markets, Qorvo is the beneficiary of underlying drivers, including the trend of one-to-many, the transition of mechanical systems to active electronic scanning systems, increasing system-level functionality and size constraints requiring advanced multi-chip packaging. During the quarter, we fully integrated the Anokiwave team into Qorvo. Our added capabilities in silicon beam-forming ICs and IF to RF conversion are complementary to our transmit and receive RF front ends as well as our power management IC portfolio. We are developing more highly integrated placements that combine our capabilities to bring greater value add to our customers. New product launches during the quarter included three new highly integrated RF multichip modules for X-band, S-band and L-band advanced radar applications. The new modules integrate filters, switches, and amplifiers to simplify design and enable a superior performance, low noise, reduced power consumption and smaller form factor required for phased array and multifunction radar systems. For infrastructure markets, we launched a single-chip inverse cable equalizer that is programmable in the field and electronically simulates signal loss at various cable lengths. For operators, this eliminates the additional parts and tech time required to accommodate short runs during DOCSIS 4.0 field installations. Our single-chip solution also features a switched bypass mode that allows operators to utilize our solution in every line amplifier and field extender regardless of distance. For massive MIMO 5G base stations, we introduced a best-in-class transmit pre-driver. It is engineered specifically for 32-node massive MIMO systems and is scalable up to 64-nodes. For industrial and enterprise markets, we are seeing continued demand for new orders for AC-to-DC high-density server power supplies. During the quarter, we began sampling the industry's first 4 milliohms silicon carbide JFET. Its RDS(ON) performance of 4 milliohms is best-in-class on resistance among 650 to 750 volt power devices. This is especially important for applications such as circuit protection that are migrating from traditional switch mode static switches that are on for longer durations. This is a significant milestone for solid-state circuit breakers and it highlights the trend we are seeing from mechanical to semiconductor-based electrical systems for residential, commercial and industrial applications. For Wi-Fi enterprise access points, we are engaged to supply Ultra-Wideband to enable indoor navigation in office buildings, shopping malls and factories. By adding Ultra-Wideband to Wi-Fi access points, the access points become the anchor or reference point, enabling precision navigation for Ultra-Wideband enabled devices. As an added benefit, Ultra-Wideband can reduce costs by identifying the optimal location for access point placement during Wi-Fi installation. Lastly, we're leveraging our force-sensing touch sensor technology in new industrial markets, including handheld medical devices that measure oxygen levels. Turning to mobile, which is primarily smartphones and tablets, our largest opportunity remains at our largest customer. We are investing in multiple multiyear programs to increase our content and continue to grow revenue with this customer. Our R&D investments for future programs include products we currently supply to this customer as well as new products we are not currently supplying. Within the Android ecosystem, Qorvo remains the primary RF supplier. We collaborate with Android OEMs on their product road maps over multiple years and we are positioned to drive growth as 4G devices move to 5G and enter our SAM. In calendar '24, we expect Android 5G unit volumes to grow greater than 10%. We are also positioned to grow with 5G Advanced, which occurs with new releases of the 5G standard. Content drivers in 5G events include an additional transmit path, nonterrestrial network connectivity and requirements for Power Class 2 amplifiers to increase output power improve data throughput and extend cell site coverage. During the quarter, we ramped multiple new products, leveraging our newest BAW and LRT SAW processes. For an Android OEM, we commenced shipments of the most functionally dense mid-high band pad on the market. This new MHB pad integrates the diversity receive content that was historically offered in a separate SAW-based module. It is a highly complex multi-chip module that features Qorvo's internal BAW, LRT SAW and GaAs HBT as well as CMOS and Silicon on Insulator that we source from our foundry network. It improves efficiency and reduces power consumption while shrinking board space requirements by approximately 35%. Within mass-market smartphones, we secured multiple design wins with our recently launched portfolio of low, mid, high band pad. Each LMH pad integrates the low, mid and high band main path content that previously required two placements. This saves approximately 40% in board space, simplifies design and helps customers accelerate their time to market. In mobile Wi-Fi, MediaTek selected Qorvo as the exclusive supplier of Wi-Fi 7 FEMs for customers of their DX4 Wi-Fi chipset. MediaTek's DX4 chipset and Qorvo's Wi-Fi 7 FEMs are optimized to deliver superior performance for flagship and mass-market smartphones. We also expanded our Ultra-Wideband wins in the Android ecosystem to include an additional handset customer. Motorola's Moto X50 Ultra, which launched in the June quarter, features Qorvo's Ultra-Wideband SoC. This is our first win in a mid-tier smartphone and is an early indicator of Ultra-Widebands proliferating across mass-market smartphone portfolios. At a high level, the Qorvo team continues to deliver operational excellence. We are investing in core strengths to differentiate our products while executing on cost initiatives and productivity improvements to reduce our capital intensity to structurally enhance our gross margin. As we committed to, during our Investor Day in June, we are migrating to larger wafer diameters. During the June quarter, we successfully completed our migration to 8-inch BAW and our BAW lines are now exclusively 8-inch. We're also committed to a model of long-term growth in each operating segment with R&D investments focused on large opportunities. In ACG, our investments are focused on growing and our largest customer. In HPA, our investments are focused on defense and aerospace, along with power management. In CSG, our investments are focused on automotive connectivity, advanced Wi-Fi RF solutions and Matter and Ultra-Wideband SoCs. Qorvo's technologies are critical in solving our customers' most complex RF and power challenges related to efficiency, performance, and size and we are confident in our long-term growth and diversification. And with that I'll turn the call over to Grant. Grant Brown: Thanks, Bob, and good afternoon, everyone. Revenue for the quarter was $887 million, representing a decrease of 6% sequentially and an increase of approximately 36% year-over-year. Non-GAAP gross margin of 40.9% in the June quarter came in at the high end of our guidance range of 40% to 41%, benefiting from product mix on higher revenue. Non-GAAP operating expenses in the quarter were $265 million, which included $4 million of spend associated with our digital transformation. As we progress through this multiyear effort, the spend will be included in the other operating expense line on our non-GAAP P&L and we will provide expense guidance related to this initiative on a quarterly basis. Non-GAAP diluted EPS was $0.87, which was also above the high end of our guidance range due to higher revenue and gross margin, offset by slightly higher operating expense. On the balance sheet, as of quarter-end, we had $1.1 billion of cash and equivalents and approximately $1.5 billion of long-term debt outstanding. During the quarter, we retired $27 million of our 2024 notes and have approximately $412 million remaining. These notes are classified as current and will mature in mid-December. Subject to changes in the interest rate environment and other factors, we currently expect to retire these short-term notes later this year. We ended the quarter with a net inventory balance of $727 million representing a sequential increase of $16 million, composed primarily of WIP and raw material as we support the seasonal ramp at our largest customer. Turning to the cash flow statement. In fiscal Q1, we generated operating cash flow of $81 million and capital expenditures of $38 million, leading to free cash flow of $43 million. As a reminder, our CapEx spend will vary quarter-to-quarter and reflects the timing of cash disbursements for capital purchase. Consequently, CapEx as a percentage of sales in any given quarter may be above or below our annual target of approximately 5% of sales. We repurchased $125 million of stock at $101 per share in the quarter. The rate and pace of our share repurchase considers several key factors including our long-term financial outlook, free cash flow, debt maturities, alternative uses of cash and other relevant strategic considerations. This approach ensures that our capital allocation strategy balances future growth with return of capital and aligns our underlying goal of delivering long-term shareholder value. Turning to our current quarter outlook. We expect revenue of approximately $1.025 billion plus or minus $25 million. Non-GAAP gross margin between 46% and 47% and non-GAAP diluted EPS between $1.75 and $1.95. As communicated at our Investor Day in June, gross margin is expected to improve as we execute on key objectives. Progress will be driven by business and product mix, internal factory utilization and productivity initiatives, volume of production outsourced to external partners and other factors. Throughout the fiscal year, gross margin will vary on a quarterly basis due to these factors. Given anticipated product mix and production schedules, we currently believe fiscal Q1 will mark the low point of gross margin in fiscal '25. We project non-GAAP operating expenses in the September quarter will be approximately $275 million, with variability related to the timing of product development spend and other factors. The sequential increase is comprised primarily of other operating expense driven by our digital transformation, which is expected to be approximately $10 million this quarter. During fiscal '25, we continue to expect approximately $40 million of expense related to this project with quarterly variability related to the achievement of progress-based milestones. Below the operating income line, our non-GAAP expense is expected to be between $8 million to $10 million, reflecting interest paid on our fixed rate debt offset by interest income earned on our cash balances, FX gains or losses, along with other items. Presuming we retire our 2024 notes in mid-December, we expect non-operating expense to increase in the March quarter by $3 million to $4 million over the current run rate. This is due to the differential in the interest rate we pay on the 1.75% 2024 notes versus the interest rate that we currently earn on our cash balances of approximately 5%. Our non-GAAP tax rate for fiscal '25 is expected to be within a range of 10% to 12%. We project this will increase over time due to changes in tax legislation such as the global minimum tax and other factors. Looking at operations, the Qorvo team continues to execute exceptionally well. As Bob mentioned, we completed the transition of our BAW lines to exclusively 8-inch and we are seamlessly running product through the Beijing and Dezhou facilities now owned by Luxshare. We are leveraging internal factories and advanced packaging facilities that are critical differentiators for each of our operating segments, while outsourcing to our robust foundry and OSAT partners where we benefit from their scale and R&D investments. Our three operating segments serve a broad set of markets that are underpinned by multiyear growth drivers. We are critical to solving our customers' most complex challenges related to RF and Power and we are confident in our ability to deliver long-term revenue growth, increasing diversification and improved profitability. At this time, please open the line for questions. Thank you. Operator: We will now begin the question and answer session. [Operator Instructions] Our first question comes from Quinn Bolton with Needham & Company. Please go ahead. Quinn Bolton: Hey, guys. Congratulations on the nice results and outlook. I just wanted to start with kind of a big picture question. Your largest customer, I think, got the market pretty excited about the possibility of AI smartphones. I'm just wondering if you've started to see any impact, any increase in demand driven by the AI smartphone trend, whether it's your largest customer or within the Android channel? And then I've got a follow-up for Grant. Robert Bruggeworth: Hey, Quinn. Thanks again for your comments. And as far as AI goes, I think, we're taking more of a conservative approach. I mean, clearly, we saw that in what Samsung (KS:005930) released in the S24. And just to remind the group, we've got excellent dollar content in that and they had a pretty nice ramp. It wasn't tremendous above what expectations were, but they did a good job this year with the S24. Whether it was due to AI or not clearly sure. And as far as our largest customer goes, since they haven't released their next-generation phones, we're not going to comment. But I think as an industry, it would be wonderful if that AI came out, it was very useful for users and reduce the replacement cycle time so that we would see an uplift. That would be fantastic. But that's not what we're modeling at this time. Quinn Bolton: Got it. Thank you. And then for Grant, just wondering if you could give us an update on your thoughts sort of as you move into the back half of the calendar year, thoughts on utilization rates? And any update on the flush of the high-cost Android inventory? Is that now mostly out of the model as we move into the September quarter. Thank you. Grant Brown: Thanks, Quinn. In the September guide, we expect a substantial sequential increase in gross margin and that's primarily related to mix the September quarter and to a lesser degree, December quarter will benefit from higher mix of customized solutions for flagship tier phones. That product mix generally includes a higher amount of externally sourced silicon and SOI content. It's not impacted by internal utilization levels. So that's one dynamic that's occurring. And that compares to our prior two quarters where revenue was comprised of a larger mix of high-cost standard products that were burdened by prior periods of underutilization. In the quarter just concluded, we saw approximately 200 basis points of headwind associated with underutilization. And in the quarter, the September quarter, we should see it falling to around or slightly less than 100 basis points and then negligible for the back half of the year. Quinn Bolton: Perfect. Thank you. Operator: The next question comes from Tim Arcuri with UBS. Please go ahead. Aman Gulani: Hi. This is Aman on for Tim. I just wanted to get some feel for your China mobile market. Sell-through data has been getting a little bit better recently. But trying to get a sense for what you might be seeing there and how that might be progressing as we move forward throughout the calendar year? Dave Fullwood: Hi, Aman. This is Dave. Yes, I think, it's -- we're seeing the same data you're seeing, it's a little bit better year-over-year. I mean, right now, based on the numbers we're tracking, we expect it to be up low single-digit percent kind of similar to the overall smartphone market and how we're calling that. So the 6/18 holiday was a little better year-over-year. But overall if you look at the cumulative smartphone sales to date, it's pretty flat to up slightly from what we see. Aman Gulani: Thank you. Operator: And the next question comes from Christopher Rolland with Susquehanna. Please go ahead. Christopher Rolland: Hey, guys. Thanks for the question. I guess, maybe getting back to the September quarter. Just a question I keep getting asked from investors is around revenue still being down year-over-year. And I think the assumption is you have content growth at your largest customer. So and perhaps we have an AI refresh cycle. I know you're conservative there. I appreciate that conservatism. But still why not growth or at least flat year-over-year particularly in mobile? Thank you. Grant Brown: Thanks for the question, Chris. At least in terms of the September guide year-over-year, the slight decline is principally related to smartphone revenues. We've talked in the past about significant gains at our largest customers and maybe Dave can follow up for me and comment there. But those assumptions in the guide contemplate total smartphone market. SKUs, unit volumes, timing, mix and all of that may prove conservative or vice versa, but we'll have to see how things play out. But overall we feel very, very, very comfortable with our assumptions. Dave, I don't know if you want to add on that concept. Dave Fullwood: Sure. And you guys know we've talked about some of these more key models that ramped in the first half and our content there. So the S24, we had over $5 a content, and we're on the other side of that ramp now. The pixel we had about $15 a content. So we're also on the other side of that ramp as well. So we had some strong ramps in the first half that we're now on the other side of. And then Bob mentioned our low, mid-high and some design wins we have there. We actually have purchase orders on the books now and that will just start to ramp at the very end of this quarter. So that will ramp up as we go through the balance of this year and into next year. So we're -- it's kind of a timing situation happening there in the Android ecosystem. And so that's probably a little bit of a pocket there that you're seeing in September. Christopher Rolland: That's very helpful. Thank you. Just a quick follow-up. Bob, sometimes you give us some new products to look out for like that low, mid, high. You've talked about that before. Is there something else on the horizon some new cool products that might be needle moving for you that we should be on the lookout for? Robert Bruggeworth: Yes, the low, mid, high is actually an interesting one because we're actually tiering it for the different product segments in the Android ecosystem. So for the mass tier and typically in the entry area, we're coming out with a lower cost that's not, excuse me, a lower cost LMH that we're starting to release to the market. So we're actually expecting that to begin to ramp all of our low, mid, high starting a little bit this quarter, bigger obviously in December and then carrying on in a much bigger way in the March quarter. So I think that's a little bit different. A lot of times people think when we talk little bit high, it's all the same product. It's not we're tiering it for the different various entry tier, mass tier to the high tier. So I think that's pretty exciting. And of course, we're working on some others and don't necessarily need to telegraph those at this time. But also that mid, high band pad, where we integrated in the diversity receive functions is doing extremely well and we saw a really great ramp at one of our larger Android customers there as well. Dave Fullwood: Yes, I would just add to that, Bob. I mean I appreciate the question, but these products just ramped. And our customers and ourselves, we like to get some scale off these products. So they generally run for a couple of years. And so the product Bob has mentioned, we'll have that same content next year. So the $15 or so of content we had this past year, we'll get that again next year. And the low, mid, high, our customers are really excited about that. Very strong engagements across all of our customers in China. And they plan to use that for several generations across their product portfolio. So we're certainly in those discussions for the longer term with all of our customers. We engage in this roadmap discussion several years out. But nothing to report yet, give us a little time to get some volume under our belt on these current products. Robert Bruggeworth: Nothing in [indiscernible] but plenty for other markets. Dave Fullwood: Oh, plenty for other markets, yes. Christopher Rolland: Awesome. Thank you, guys. Cool new products. Appreciate it. Karl Ackerman: Yes, thank you. You spoke about the transition to 8-inch BAW wafers for internal manufacturing, which is great. But you've also discussed today and in the past that you have worked with third-party foundries for external silicon. I guess how do you think about the optimal trade-off between internal production versus using external foundries over time that might help support margin expansion. Thanks. Grant Brown: Sure. So thanks for the question, Karl. Generally, it's technology dependent. So things like silicon or SOI we have not done in-house and wouldn't consider doing in-house more efficiently than our partners can. Other areas where we can differentiate ourselves especially like BAW where there's not a foundry network available. We'll continue to produce those products that contain that internally as it differentiates us. And then from an OSAT perspective, in terms of assembly and test and other services, we can go out to a large partner network and benefit from their scale and their continued R&D investments. Dave Fullwood: Yeah, maybe one caveat to that Grant is like in the defense market, we see that assembly capability has something that differentiates us. So that's something that we do internally. Karl Ackerman: Got it. Maybe one more, if I may. Just how to think about content growth, just more broadly I guess you spoke about at your Analyst Day how 5G enhanced will create more placements for antenna tuning and perhaps another placement for Ultra-Highband pad. Could you talk I suppose, generally, in terms of how to think about the adoption for 5G and premium to your handsets over the next year or two? Thank you. Dave Fullwood: Sure. Yes, and I think for those of you that were at the Investor Day, I think, Frank did a good job of laying out all the opportunities that we see coming in 5G Advanced and unlicensed spectrum, in foldable phones and different form factors that are driving lots of challenges for our customers. And so that's all coming. I mean, those trends, those discussions are ongoing with all of our customers in terms of the new products that we're developing and how they plan to integrate those into their phones. And then you've got trends like AI, right? That's going to drive higher data rates, lower latency. And that's all going to hopefully accelerate those trends that we talked about for 5G Advanced and some of those other features and increased power levels. And so as Bob mentioned earlier, it's still in very early innings for AI. But as that accelerates, it should drive the RF content faster and it will just accelerate the adoption of 5G Advanced. Karl Ackerman: Thank you. Operator: And the final question comes from Edward Snyder with Charter Equity Research. Please go ahead. Jack Egan: Thanks for taking the question. This is Jack Egan on for Ed Snyder. So you've mentioned your content should grow pretty strongly in the second half of this calendar year. And I know you haven't guided to it, but I was hoping you could just give us kind of a general ballpark idea of your expected content growth or at least how it compares to prior years? And then I just had a quick follow-up. Robert Bruggeworth: Sorry, Jack, when you said content, I don't know what market you're talking about, customers, which one of our business units, I need a little more color to help answer your question. Jack Egan: Sure. Sorry about that. I was talking about mobile content at your large customer. Robert Bruggeworth: Okay. What I can say is what I've said probably the last couple of quarters is I'm confident in our ability to grow at our largest customer, gain share this year as well as I think we're in a great position to be able to gain share again next year at our largest customer. Jack Egan: Got it. Okay. And then so I guess on the non-mobile side, we've seen quite a few reports in the analog space so far, call out some particular strengths in China in the second quarter. And of course, it's a very different market from cellular, but so far that demand has -- it seems pretty broad-based and strength. And so have you seen the same rebound in China maybe in the HPA or CSG or in the cellular business as well? And were there any areas of specific strength to call out? Dave Fullwood: Yes. I wouldn't necessarily maybe focus on China specifically. I mean when we look at the markets that we serve, it's pretty broad-based across HPA and CSG. I mean if you look in China for automotive, for example, I mean, definitely, the Ultra-Wideband adoption that we have been seeing is starting to pick up there and accelerate for things like presence detection and kick sensors and other advanced radar features. On the power side, certainly, when it comes to AI and data center, we're seeing increasing requirements for improved efficiency in the power supply. So that's driving the adoption of silicon carbide. So that's been a great trend for us. Another new area of growth for us, both inside the car and outside the car, as Bob mentioned, is circuit protection. And so that's a really interesting opportunity for us because circuit protection today is pretty much exclusively done with electromechanical solutions. And so that's all new SAM entering into our markets that will be a solid-state and silicon carbide is the leading technology for that, especially the silicon carbide that we have to offer that. So there's a lot of there's great new growth trends. And those things have just accelerated really since we talked about on our Investor Day. Robert Bruggeworth: The thing I'd like to add to that, Dave, is the V2X that I talked about in my prepared remarks, in China is actually China's leading all the regions as far as adopting V2X. And that's pretty exciting for us. Again, that's going to be ramping next calendar year. But it's good to see that there and then we'll expect it obviously to flow into Europe and then obviously into US. Jack Egan: Got it. Thanks. That's helpful. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Robert Bruggeworth: We want to thank everyone for joining us on tonight's call. We appreciate your interest. We look forward to speaking with many of you at upcoming investor events. Thanks again. Have a great evening. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Howmet Aerospace Inc. (HWM) Q2 2024 Earnings Call Transcript

Paul Luther - Vice President of Investor Relations John Plant - Executive Chairman and Chief Executive Officer Ken Giacobbe - Executive Vice President and Chief Financial Officer Good day, and welcome to the Howmet Aerospace Second Quarter of 2024 Earnings Call. Please note that today's event is being recorded and all participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] On today's call we ask that you please limit yourself to only one question during Q&A. Also, please be aware that today's call is being recorded. I would like to now turn the call over to Paul Luther, Vice President of Investor Relations. Please go ahead. Paul Luther Thank you, Joe. Good morning, and welcome to the Howmet Aerospace second quarter 2024 results conference call. I'm joined by John Plant, Executive Chairman and Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John and Ken, we will have a question-and-answer session. I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the Company's actual results to differ materially from these projections listed in today's presentation and earnings press release and in our most recent SEC filings. In today's presentation references to EBITDA, operating income and EPS mean adjusted EBITDA, excluding special items, adjusted operating income, excluding special items and adjusted EPS, excluding special items. These measures are among the non-GAAP financial measures that we've included in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix in today's presentation. Thank you, PT, and welcome, everyone to the Howmet's second quarter earnings call. Q2 is a strong quarter for the company with metrics exceeding both guidance and prior year results. Year-over-year revenue growth was 14%, building on the 14% growth in the first quarter. Within this number, commercial aerospace growth was an outstanding 27% continuing a strong trend. Other revenue markets will be covered later in the call. EBITDA was $483 million, with a margin rate of 25.7%, while operating income was $414 million with a margin of 22%. Operating income was up 38% year-over-year and increased 370 basis points with engines and fasteners performing at the high level supported by an increasingly strong set of results in our structures business. Wheels was essentially flat despite the market declines. Earnings per share were $0.67, an increase of 52% year-on-year. Free cash flow was also strong at $342 million, resulting in a quarter end cash balance of $752 million, after share buybacks of $60 million and furthermore, a $23 million bond repurchases of the 2025 bonds and also dividends of $21 million. The strong cash balance for an early retirement at par of the remaining $205 million of the 2024 bonds on July 1, one day after the quarter end. These actions will reduce annual interest costs by some $12 million and continue the march to reduce interest rate drag, which is now well below $200 million with its increase in free cash flow yield. I'll provide commentary on the future dividend actions in the outlook section. You'll also note later in the - the increase in the capital expenditures in 2024 of a $30 million level. This takes the level towards $320 million for the year. And these expenditures are mainly the deposits on future new machine tools, which are required to support even further new capacity growth for our engines business. This is necessary as we have now secured additional market share at the second engine manufacturer. These revenues will also commence during 2026, albeit at a quarter or so later than the previous discussions on this topic. I'll now pass the call across to Ken to provide additional details by end market and by business segment. Ken Giacobbe Thank you, John. Good morning, everyone. Let's move to Slide 5. So markets continued to be healthy in the second quarter. On a year-over-year basis, performance was as follows: Total revenue was up 14%, driven by strong growth in commercial aerospace, which was up 27%. For the first half, commercial aerospace was up a healthy 25%. Growth continues to be robust this year on top of the 28% growth rate in 2022 and the 24% growth rate in 2023. Moving to our other markets. First, defense aerospace was also strong, up 11%, driven by fighter programs and engine spares demand. Next is commercial transportation. As expected, the market has weakened with revenue down 4%, although Howmet continues to gain share from Steel Wheels with Howmet's lighter and more fuel-efficient aluminum wheels. Finally, the industrial and other markets were up 4%, driven by oil and gas, up 14%, IGT up 6%; and general industrial down 6%. In summary, continued strong performance in commercial aerospace, defense and industrial, partially offset by commercial transportation. Now let's move to Slide 6. So first, the P&L. For the second consecutive quarter, Q2 revenue, EBITDA, EBITDA margin and earnings per share were all records and exceeded the high end of guidance. On a year-over-year basis, revenue was up 14%, and EBITDA outpaced the revenue growth by being up 31%, while absorbing the addition of approximately 190 net new employees in the quarter. Incremental flow-through of revenue to EBITDA was excellent at 50%. Moreover, the team delivered records for both EBITDA margin of 25.7% and earnings per share of $0.67, which was up a healthy 52% year-over-year. Now let's cover the balance sheet and cash flow. The balance sheet and liquidity have never been stronger. Cash at the end of the quarter was $752 million, and free cash flow was a record for Q2 at $342 million. The healthy cash balance at the quarter end was used to repay the remaining balance on the 2024 bonds of $205 million. Payment was at par and was made three months early on July 1. Moreover, in Q2, we opportunistically repurchased $23 million of the 2025 bonds. The combination of these actions will reduce annual interest expense by $12 million annually, further improving free cash flow yield. Finally, net debt to EBITDA improved to a record low of 1.7x. All long-term debt is unsecured and at fixed rates, which will provide stability of interest rate expense into the future. Liquidity is strong with a healthy cash balance and $1 billion undrawn revolver complemented by the flexibility of a $1 billion commercial paper program. Finally, capital deployment. We deployed approximately $104 million of cash in the quarter to shareholders, of which $60 million was used to repurchase common stock. This was the 13th consecutive quarter of common stock repurchases. The average diluted share count improved to a record low Q2 exit rate of 410 million shares. Finally, we continue to be confident in free cash flow. In the first quarter, we deployed $21 million for the quarterly common stock dividend of $0.05 per share. John will discuss the increase in the Q3 dividend as well as our 2025 dividend policy. Now let's move to Slide 7 to cover the segment results for the second quarter. Engine Products delivered another record performance. Revenue increased 14% in the quarter to $933 million. Commercial aerospace was up 18% and defense aerospace was up 10%. Both markets realized higher OE build rates and spares. Oil and gas was up 14% and IGT was up 6%. Demand continues to be strong across all of our engine markets driven by our differentiated products. EBITDA increased 31% year-over-year to a record $292 million. EBITDA margin increased 410 basis points year-over-year to a record 31.3%, while absorbing approximately 315 net new employees in the quarter to support future growth. The engines team delivered a record quarter for revenue, EBITDA and EBITDA margin. Now let's go to Slide 8. Fastening Systems also had another strong quarter. Revenue increased 20% year-over-year to $394 million. Commercial aerospace was up 36%, including the impact of the wide-body recovery. Commercial transportation was up 10%. General industrial was up 3% and defense aerospace, which represents about 9% of Fasteners revenue was down 20%. Year-over-year, EBITDA outpaced revenue growth with an increase of 58% to just over $100 million. EBITDA margin increased 610 basis points year-over-year to a healthy 25.6%. The team has progressively improved results for four consecutive quarters through commercial and operational improvements, complemented by the wide-body recovery. Now let's move to Slide 9. Although engineered structures had a favorable comp year-over-year, performance continued to improve sequentially. Revenue increased 38% year-over-year to $275 million. Commercial aerospace was up 42%, driven by build rates in the wide-body recovery. Defense aerospace was up 45% year-over-year, driven primarily by the F-35 program. EBITDA doubled year-over-year, while EBITDA margin improved to 14.5%. Sequentially, revenue, EBITDA and EBITDA margin increased for the fourth consecutive quarter. Incrementals continue to improve sequentially at 23%. We continue to optimize the structures manufacturing footprint, and we expect to exit two small plants in the UK this year. The team continues to make progress, and we expect continued improvements throughout 2024. Finally, let's move to Slide 10. Forged Wheels revenue was down 7% year-over-year, as expected, in a challenging market. EBITDA also decreased by 7%, driven by volume and regional mix. EBITDA margin continues to be healthy at 27%, which is essentially flat year-over-year. With that, let me turn it back over to John for the outlook. John Plant Thanks, Ken, and let's now move to Slide 11, and I'll talk you through the end markets and provide some overview. Firstly, regarding commercial aerospace. Our prior comments regarding strong demand for air travel throughout the world continues to apply. Air traffic growth in Asia-Pacific has strengthened in particular, for international travel. In fact, international travel globally has been increasing in the 20% range, plus or minus. Freight volumes have also been robust with increases of 10% plus recorded. Domestic travel continues to go gradually in all markets. This travel demand, combined with an aging aircraft fleet is leading to significant orders and an extremely high backlog of total aircraft, or it is leading to a position where aircraft orders placed now cannot be fulfilled until the end of the decade and beyond in certain cases. However, the issue being faced by Howmet is not the demand, but rather that sales are currently constrained to some degree by the ability of aircraft manufacturers to build and deliver aircraft on a consistent basis. These facts are the subject of many press articles and this little point in repeating those facts here. While Airbus is steadily increasing requirements while building below desired levels and slowing its volume run, the larger concern is Boeing. While parts orders directly from Boeing shows some trimming, they continue to be at levels above the actual 737 and 787 build rates. Engine orders have also been trimmed, albeit by a large percentage. Given the situation, the question surrounding Boeing and its affiliates inventory positions and liquidation of such inventory remains. We've tried to derisk this to a large extent in our guidance. And notably, update our assumed 737 build rate to 22 aircraft per month in 2024 versus the previous view of 20 per month. Naturally, we hope for a higher build on this and also the future rates increases. In the case of defense, the outlook continues to be a double-digit increase for the year. Strength is seen in engine spares for the F-35 and for spares and newbuilds for legacy fighters. New orders are also being received for structural parts for Howitzers. IGT demand is for a significant single-digit growth. It's worth noting there is a potential for increasing demand in the future for new IGT turbines as a result of increased requirements emanating farm electricity demand for data centers and AI needs. This potential demand increase is being studied and is worthy of further commentary in the future. Howmet is well placed in the IGT market being the largest supplier of turbine blades in the world to our customers of Siemens, GE Vernova, Mitsubishi Heavy and Salto. Indeed, further production capacity will be added by Howmet into the IGT market in 2025 to support this increased demand. Oil and gas continues to be strong with double-digit increases. Spares for commercial aerospace, defense and IGT to continue to grow in aggregate at a pace of approximately 17% year-to-date, with further rate increase expected in the balance of the year. Commercial truck builds are beginning to abate and the long predicted slowdown, particularly in Europe, has started and will lay on the second half at maybe a 10% reduction in addition to the more normal European summer vacation seasonality. This normal seasonality is also noted in our European aerospace operations and is fully baked into our third quarter guidance. Before I talk to specific financial numbers, I'd like to cover three topics. First, the capital expenditure required for 2024 has been increased by a further $30 million to the midpoint of $320 million. This is reflective of additional customer contracts achieved with share gain for our engines business. A further exposee will be provided on this topic in our next call. Despite the additional capital expenditure, the free cash flow guide has been increased by $70 million, having taken account of this expenditure and also the increase for working capital in the revenue guide. The conversion of net income is maintained at the prior guide of approximately 85%. And ultimately, this expenditure leads to further future revenue growth. It's a great outcome, with revenue starting to accrete in late 2025. The guide for capital expenditures for 2024, 2025 is approximately 4% of revenue. The next topic is the dividend. We will increase the common stock dividend starting with the August payment to $0.08 per share. This is an increase of 60% and a further increase from our expectations discussed during our call in May. Moreover, for 2025, common stock dividends are expected to be in the 15% of net income, excluding special items, plus or minus 5%. Finally, share buyback authorization has also been addressed by the Board and increased by $2 billion to approximately a total of $2.5 billion. Now moving to specific numbers. In Q3, we expect revenues of $1.855 billion, plus or minus $10 million, EBITDA of $465 million, plus or minus $5 million, and earnings per share of $0.64 plus or minus $0.01. It should also be noted that we have increased revenue guidance for the year both incorporating the Q2 beat and a further additional uplift to the previous assumed second half revenues. For the year, we now expect revenues to be at $7.44 billion, plus or minus $40 million, which is an increase of $140 million from the prior guide. EBITDA is guided to $1.865 billion, plus or minus $10 million, which is an increase of $115 million from the prior guide. Earnings per share increased to $2.55, plus or minus $0.02, an increase of 39% year-over-year. And free cash flow is guided to $870 million, plus or minus $30 million an increase of $70 million from the prior guide. And that's after increasing that CapEx requirements by $30 million and the revenue of $140 million. You can see from the numbers shown revenue, profit and free cash flow have lifted again for 2024, and that total annual revenue has increased to a 12% growth rate year-over-year. Now I'll move to provide a summary. First statement is, we are pleased with our second quarter results. The guide for the year has been raised again on all fronts. We believe we've taken account of the commercial aircraft build rigs and the inventory positions, which is centered on Boeing. And thank you very much, and now I'll move to the questions. We will now begin the question-and-answer session. [Operator Instructions] At this time, we will take our first question, which will come from Doug Harned with Bernstein. Please go ahead. John, I wanted to see if you could help a little bit in understanding what's been happening at Airbus on the LEAP-1A. They talked about slowing engine deliveries. It's our understanding that relates to airfoils in the hot section at GE, and it's a supplier issue. Howmet's obviously a - the lead supplier for airfoils in the hot section. Has this - have you had any issues on delivery to GE? And if not, does a shortfall by others provide any kind of an opportunity to capture share? John Plant Well, Doug, I expect that to be the hot topic of today given the comments on the, I'll say, opening evening of the Farnborough Air Show last week and then followed up by an article in Bloomberg this weekend. And I guess my first reaction to it as an investor in the company. So that's really good news. Because here, we are pumping in a 27% increase in commercial aerospace revenues, and if that exactly is true, then we need to make more. And therefore, this is a really good condition for us. So just getting a little bit more specific than that. You've heard on the call that over the last three years, we've put in a 28% increase in commercial aerospace revenues followed by 24% year-to-date this year of 25%. And if you were to track those increases compared to any form of aircraft build or schedules then you can see that we are increasing significantly above any aircraft production rates. And therefore, it's unlikely that we are providing such constraints. And then just to peel it a little bit further is that we have significantly increased our production of turbine blade and hot section. And if you look at it six months ago and over the last few months, we've probably put a 40% increase through in terms of production. And therefore, that's really good in terms of a rate increase for anybody in the aerospace industry. And probably effectively operating at capacity or possibly even above it on the current set of yields that we have. So the way I look at it is that we are producing well above engine build rates. And then we don't know, first of all, the outcome of what the subsequent processing is for our [indiscernible] and nor do we get to have any view about where do they go in terms of how we build versus MRO, so you'd be - sort of sales. And so I guess the way I look at it is, for Howmet, the opportunity appears to be there to sell even more if we're able to make a few more. But at the same time, there are adverse consequences upon us because if engine build is down, and you heard it in our guidance, that we've taken the engine build assumptions down to be in line with what we've heard from the engine manufacturers in recent times. And you've seen that those have been significant rate reduction, whereas previously, we've been prepared to meet those. And so when you get that, even though we have the demand opportunity to supply into the MRO market through our customer. We also suffer because if a lack of an engine build, then obviously, we're not able to supply any structural castings that we indeed manufacture. Nor are we able to supply parts in the low-pressure part of the turbine. And so given the recent, I'll say, build restrictions, we actually have some excess label short-term working in some of our French plants because of the LPT demand. So we're not unaffected. And clearly, we would like to make even more because there is the outlet into the service area which is not into the OE build. So it's a long way of saying to you, we are increasing. We have been - had a massive increase in the last few months and doing our best to satisfy everybody. And that's about as far as I can take it. And don't know what else to say to you to provide any further color. And our next question will come from Kristine Liwag with Morgan Stanley. Please go ahead. Kristine Liwag Hey, thank you for the question. John, very helpful color regarding the LEAP engine blades as you spelled out. I mean, I guess, if we take a step back with the new engine technology, both for the GTF and for the LEAP. It's clear that the hot section is getting a lot more, it's getting used more, it's hotter, higher performance. And from our visit at Whitehall, you've clearly invested in this space. Can you quantify how much more market share you could potentially get? It seems like you're not the bottleneck for production and you've got content. And then also as a follow-up, in terms of the newbuild, you said you're not seeing the reduction there. Does that mean that one for one, you're seeing spares pick up to? Or are the OEs maintaining the rate at a higher level? John Plant Again, at the moment, nothing is that easy to explain. And so what I did want to present to you, complex pictures, it probably becomes necessary to do so. Clearly, the investment that I've talked about, both in the last two calls and then today, a third time. But today, introducing the fact that we are further increasing our capital expenditure to meet demand for a second engine manufacturer. Then that was previously mentioned and then mentioned as a result of additional contract and share that we are able to fulfill in the future - fulfilled with the introduction of that new capacity. When we bring that new capacity online, then we're going to take the next plant, so we're building out footprint in two particular plants at the moment. And that when we finish that footprint, the level of, I'll say, sophistication, automation and quality and use of, for example, AI and our tests [indiscernible] are going to be taken to another level because to achieve the levels of production that we see, the only way to do it with the consistency in yields that we do is automation because you can't easily do it using a lot of labor. And so yes, we are taking the technology to another level in terms of manufacturing. And we're also able to help our customers in meeting what they would like to see by way of elevated temperature performance and increased pressures. So when the original developments and uplifts for the two most recent engines, they move from being more focused on from fuel efficiency to more robustness, and that's something that we're able to work with them to try to achieve. So all of that is in play. And you've read articles that some of those upgrades will be available subject to the certification requirements later in 2025. And then progressively, I'll say, launched with each of the aircraft manufacturers over the next couple of years. And it doesn't matter whether it's a LEAP-based engine or a GTF engine, and we're working on the upgrades for all of those. And again, we'll be providing those new products into the service market as well. So as an example, included or maybe it's over and above the increases in volumes that I've talked about, we've built already some tens of thousands of parts ready for the new improvements for engine manufacturers and those are currently sitting in inventory awaiting certification signoff, and then they'll be assembled into engines. And our next question will come from Seth Seifman with JPMorgan. Please go ahead. Seth Seifman Hey. Thanks very much and good morning. I wonder, John, if you could talk a little bit about 787. We've seen some mixed messages here. It seems like some of the Japanese structure suppliers may be preparing to increase their rates. Boeing deliveries are low, one of the European suppliers shutting down for a little while. When you think about the trajectory in the fasteners and structures business. How are you thinking about 787? John Plant On the structure side. So far, we've been seeing our deliveries from Howmet in line with the previous guidance. At the same time, we do note that one of the European manufacturers is now saying they're going to cut back over the summer. And we've taken account of that in our - in the guide that we provided to you in the same way, as I said, that we covered out the reduction in LPT turbine blades and also substructural castings. In the case of Fasteners, again, we note that Boeing are not building 787 that they stated rates, that they wanted to have in their skyline. And so in the same way as we've done with the 737 in using Fasteners, which are on a Min/Max system rather than, I'll say, directly schedule part is that we've taken those inventory levels down to the minimum such that we're in accordance with our contract with Boeing, but not seeking to put inventories above that level, such that we get caught with in, but you take out later in the year or next year should that happen. And our next question will come from David Strauss with Barclays. Please go ahead. Hey, John. So in the past, John, I think you've talked about targeting a 30% or so incremental margin, plus or minus 5%. It looks like this year, your revised guidance implies something in the 40% to 45% range. So just wanted to get some updated comments about how to think about incremental margins for the business? Thanks. John Plant Yes. We've have increased the balance of year. I think it's just fractionally over 40% in Q3, and that takes account of both the seasonality plus the reduction in our Wheels business that we envisage at the moment, principally coming from Europe, but also affecting Class 8 trucks in the U.S. as well. So that's how we've put that incremental into Q3. And essentially in Q4, Wheels should be rather stronger than that to end up the year at a higher level. Continuing the theme from our last earnings call, David, is that, if you look at the rate of increase in employee headcount, which I think last quarter, we said it's about a net - just over 400, which in itself was a slightly reduced rate. While we've still been hiring, it's now down to just fractioning below 200. And yet, if you look at the increase in revenue, and it's significantly above that in terms of percentage. So you can assume that productivity is being achieved and in the case of our Fasteners business on top of it, I think there's a 28% increase in revenue in Q1, 20% in Q2. We've actually taken zero incremental headcount. So, here we are pumping out 20%-plus revenues with no incremental peak, which obviously helps a lot towards the, I'll say, bottom line and the efficiency within the business. And so at the half year, on a net basis, we're up probably 600 people in the company, and all of that is in our Engine business. And that's because of both the demand level that we have, plus also we do need to begin to prepare for the increased capacity because headcount is going to be required or go through all the recruitment and training that we've talked about in the past, because it takes a lot of efforts to gain the skills that are requisite for it to be an employee in our engines business. So we're pleased with where we've got to, by way of efficiency. We're seeing it on the people side. We're seeing it also a slight calming in the inflation. And so in fact, in Q2, we had a tiny deflation in our metals input, which was good for the aerospace business, but it was not worth talking about in terms of probably wasn't even - I'll say we didn't even get to 10 basis points. And so - but it was good that we didn't have a headwind. And then the only area we have a current headwind is the increase in price of aluminum which obviously affects our Wheels business. And so we'll see that small drag getting $1 recover for $1 of cost that always provides a margin drag, and we'll add that margin drag to the reduced sales affecting our Wheels business. So really signaling that Wheels revenues will be down and the margin will be down a little bit more in the third quarter because of seasonality and the demand factor plus the aluminum. But if you put together as a company, we are seeing, I was saying, good stability across the piece in terms of input metals and increase in labor productivity and good demand of parts with giving us I'd say, fairly, I'd say, good mix, which are reflected in the guidance where we're guiding at about 25% EBITDA margin in the second half as well. And our next question will come from Myles Walton with Wolfe Research. Please go ahead. Hey, John, you stopped specifying pricing but I have to imagine, given the sort of breakaway moment here in the quarter pricing must be accelerating. Can you give any comment on that front? And also, just to take it at a higher level, you talked about the Airbus and Boeing not being able to achieve their production objectives. But it did seem like GE had more of a material shortfall on their own. And I'm curious, do you see this as a blip in their ability to get production up and maybe the risks are shifting to the engine as opposed to the airframe? Thanks. John Plant Okay. So rate changes, the aircraft manager, manufacturers are well publicized. So in the case of Airbus, I think they've taken the annual expectations of deliveries down by 30 aircraft, which I assume the majority are narrow bodies. And they did talk about some engine availability issues on their discussions at Farnborough last week. In the case of Boeing, again, it's all well publicized and we took a little bit of encouragement from what the Head of Boeing Commercial Aerospace said by way of increased stability within the manufacturing plant in Seattle. So with expectation of them achieving rates 38 by the end of the year, which is great. And clearly, we haven't assumed that they get that far, but we did feel bold enough to go from our previous assumption of 22 production, 20 production to a 22 rate albeit probably still significantly below where the majority are expecting that to be. In the case of engine manufacturer, those rates are far less, really discussed. And from what I saw and read is that the expectation is that the LEAP engine output will increase significantly in the second half of the year, which is really good. And so that will ramp up some of our current RC inventory in, say, structural casting and the low-pressure turbine, combined with obviously still the very high rates of production in the high-pressure turbine. So I think that covers that part of the question adequately. In terms of price, we haven't given any further guidance to the price topic and from what we gave at the end of last year, which was that instead of 2024 being of a similar level, plus or minus 2023 and that level has reached, I think at just about a $100 million across the whole of the company. Then we said it would be that or a little bit more. And no change from that guidance at all that we have given. And so you can assume it's exactly as we previously indicated, but really not commenting further on the topic. And our next question will come from Sheila Kahyaoglu Jefferies. Please go ahead. Sheila Kahyaoglu Thank you. Congrats guys on a great quarter and securing the second engine win. So John, maybe you could help elaborate on the terms there. And what Ken agreed on that. So if you could just talk about how we think about that second engine OEM. I think you said the volumes start up a quarter later than the first OEM in 2026. So how do we think about that incremental volume that comes through the return profile with the additional CapEx? And I'm guessing it's better than the 31% engine margins you have today? And any thoughts on the first versus the second deal? John Plant Yes. It's obviously good business, otherwise we wouldn't take it. At the same time, whenever you put down new engine capacity. As you know, engine manufacturing is very capital-intensive. And so we will be facing elevated depreciation charges because the average you'll get on, I'll say, your written down asset base compared to putting in new capital is very different. And in an earlier part of this call, I talked about, in fact, the extraordinary levels of automation to which we're having to go to basics to achieve this consistency of quality and yields that are so vital to being able to produce effectively for the, I'll say, new special requirements for these turbine types of products. And so I didn't really want to get into specifically pinpointing any particular margin. We can assume that it's satisfactory. Otherwise, we're going to achieve an adequate return on capital. And sufficient that I think will make our investors very satisfied. At the same time, the margin rates will be adequate. But I'll say, we'll be pumping them through with adding as little fixed cost as possible but at the same time, we recognize that we'll be adding depreciation costs. But it's a long way of saying it's okay Sheila. Clearly, volumes are up because we said we'd be taking additional share as part of this. I don't really want to comment on specific market shares that we have on any particular customer. I don't think that's an appropriate thing to be talking about publicly. But the important thing is the share gain is pretty healthy. And it is similarly in line with the previous increase that in share that we talked about for the earlier investments. So basically, this one is the investments are about six months - kicking off them six months later than the previous investment. And now clearly, our job is to try to place all of those new machine tools, get that as quickly as possible and place them and commission them as soon as possible because the demand is clearly there for them. And so our customers would like to see them come on as early as possible. And it's all going to be tied up with not just what they want for them, what they see is volumes today. But also the certification of the changes going on in the engine world, which the FAA and the EASA will have to sign off both for Airbus and Boeing where these new engine upgrades are - as they have to be certified as well. So we await that. It could be different for each of the manufacturers we feel. And our next question will come from Robert Spingarn with Melius Research. Please go ahead. Scott Mikus Hi. This is Scott Mikus on for Rob Spingarn. John, I hate to put you on the spot and ask for a long-term margin target here, but your operating margins were quite strong in the quarter. They're in the low-20s now and precision cash parts, there is always noise in the numbers due to metal pricing and LIFO reserves, but it's operating margins before it was acquired, we're in the high-20s. Do you think Howmet has the potential to eventually get there long-term? John Plant Well, first of all, I wasn't quite sure whether those cash parts were operating margins or EBITDA margins, but it doesn't really matter because I don't really comment on margin at all. Aerospace is a cyclical industry and anybody who has the absolute knowledge and precedence to know exactly what volumes will be next year and the year after and the year after that and what the rate of increase will be is something that I don't have. And therefore, I've never been comfortable talking about what I think margin rates will be in the future. I think all we can do is to say this is what we're doing - these are the changes we're trying to make to improve our company. And I don't follow some I'll say false guard of whatever happened over a decade ago, one company, whether those were real or not real margins at the time and what type of margin rate was covered. So I choose not to do it, Scott. So I don't think I ever have, and I don't think I ever will comment on margin rates. It's something which like how do you know? And so I recognize that some companies do say what their margins are going to be two or three years from now. Whether they're achieved or not seems to get lost, but you won't find me doing it. And our next question will come from Noah Poponak with Goldman Sachs. Please go ahead. John, you had explained that the incrementals were strong in the first half because you didn't have to higher as fast while the revenue growth is still pretty good. I guess that begs the question of when you suspect you'll be back to hiring. And then I guess when I look through how the segments have evolved, Engine is up like 1,000 basis points versus pre-pandemic. Fastening is still lower than pre-pandemic. Obviously, that's - we know why that has a lagged revenue recovery. I guess does Fastening have as much potential as engine as it continues to get its revenue recovery? John Plant As you know, Noah, in commercial aero, nothing is ever exactly the same. Pre-pandemic, we were at time, I think, producing something like nine A350s a month and 13 or 14 787s a month. And as you know, we produce a completely different set of Fasteners for a composite-based aircraft than a metallic-based aircraft. And to some degree, you saw that when the 787 was halted at one point, we moved down to zero because of the clearing out of inventories, and we've been climbing back from there, both in terms of a favorable mix, but also the effects of trying to drive productivity in that business and also being probably a little bit better commercially. At this point, I don't know what eventual rate Wide Body will get to. And therefore, the future mix is going to be different. I note the increase in A350. And I suspect that the A350 would be the higher rating - wasn't for some also supply constraints, particularly in the structures area. And that's slated to go to, I think, is it 12 a month by 2027, which would be great because that will be above the previous rate. On 787, the only ambitious number I've heard is rate 10, which was slightly plus 2025, 2026, but then the thing is being modified now to 2026. But I think we've got to wait and see what happens in 2025 first. And getting up from where I think our current production is maybe three a month, four a month levels, what I've read. And it would be great to get back to five and then seven next year. And I think that's tied up with maybe a few particular parts I've read about probably also the same thing as we had previously. I mean, supply chain is often quoted, but often, there's also issues within the assembly processes for some of these aircraft. And so that all needs picking apart in much greater detail. And let's see the rates progress during obviously, balance of 2024 into 2025 before we get to what's the real rate going to be in 2026 and 2027. But should we get back to, let's say, 14 a month of 787s and if it gets 12 a month, stated for the A350. And I guess it depends on - then what the volume of the metallic-based narrow bodies will be but that would be a very positive factor for us. But I don't feel like saying that we move back to any particular previous margin level. I think the most important thing is if you just look at the track of our margin for the fastener business during the recent quarters. I think it's been truly impressive in terms of sequential improvement and that's as far as I'll go. And our next question will come from Gautam Khanna with TD Cowen. Please go head. Hey. Just, John, maybe to put a finer point on it, where, if anywhere, do you see excess inventory in the channel of your products? Has there been any deferral requests or anything incrementally that is weakening some of the outlook beyond maybe 2024. Obviously, you've raised 2024, but anything that gives you pause in 2025? And then lastly - relatedly I just wanted to ask that Asheville RTX facility, has that had any negative impact on the longer-term outlook for - after 135 or any other programs you service? Thanks. John Plant Okay. So maybe I'll deal with the Asheville question first. I haven't heard any commentary coming out of RTX in the last 30 years or so on that facility. I believe it's coming up to rate on machining work, and that's probably necessary to get through the disc inspection and recall. On the investment castings process, I haven't really heard anything that's material in that area. And so I'm still all of my previous comments about that facility, you just stand there on the record as is. The moment we're not seeing that reflected in any change of our requirements over the next few years. And at this point, don't expect it to - I mean what happens, let's say, after, I don't know, 2030 compared to the $650 million that was the announced investment, which doesn't go far across coating and machining and building online on investment castings. I think you've got a few more billion, several billions to go yet to - for that to become sufficiently equipped at scale to be cost effective. And it's not clear to me that Pratt & Whitney are emphasizing that investment compared to getting through the, I'll say, current GTF issues and servicing the cash costs of that provision that was made last year of I think it's $6 billion, obviously shared between them and some partners. But that's a big nugget to absorb. So I don't know more than that. And just because I've been spending so much time focused on that question. What was the first part of it? Sorry, was it excess inventory in the channel? Not really. I mean it's a bit superior. So as I said, we were a little bit surprised when we got cut back recently on the low-pressure turbine parts because those LEAP engines weren't assembled. And so we've probably got more than we would like and therefore, trying to manage that through the next quarter or so. And according to what we can do by way of changing the employment, I'll say, ours facilities into one plant in France. But its nothing of great note. And because I said earlier, if you think about it, there's so many moving parts going on at the moment in the industry, like what's - we see what aircraft manufacturers delivery rates are, how much comes out of production compared to how much comes out of inventory? What's the state of how many aircraft have started to [indiscernible] roll out plans, that's pretty opaque? And we don't really have and you don't have good production level information. And then you get from that, all of the engines, you've got all the image they got. So there's so many different aspects to it, and it must be really difficult for you to model because it's difficult for us. And so what I would advise you to do is just take our guide in the way we've tried to set it out. We've been cautious where we need to. We've called out reductions, for example, in the Wheels business, where we see now that reduction in market activity very clearly started in Q2 and it's going to be significant in Q3, exacerbated by the seasonality because, as you know, the European plants tend to go [indiscernible] for several weeks in July and August. And so we've got all of that. And the best I think we can do is to say, look at the guide, it takes account to the best level of knowledge. It keeps pace with all of the previous production quantities we talked about on the first quarter earnings call and adjusted for the Boeing rates only. And we've taken engine right down to match what we've been advised in the case of the engine manufacturers. And our next question will come from Ron Epstein with Bank of America. Please go ahead. Ron, your line is unmuted. Hi, Ron. I thought that was the best question all day because I thought I haven't going to answer it. The ones that don't show up. So just a quick, just a broad one. A lot of stuff has been asked, but what are the feedback we picked up over at Farnborough and probably every meeting we went into was just a shortage of castings kind of across the industry. So maybe more broadly, I mean, you do casting, right? I mean, what kind of opportunity is that for Howmet to pick up share or more business because of what's going on in the casting world? I mean is there an opportunity? Is it not? Do you see it resolving itself? If you could talk on that? John Plant Yes. Again, you got to pick it apart between that which is the casting for structural castings, compare to high pressure turbine castings and low-pressure turbines. And the case of where we've seen OE engine cutbacks, and that's, I'll say, negatively affected to a small degree, our structural casting and the LPT castings we do. And so I guess that just goes to the territory. The capacity isn't fungible. So you can't just say I'll now make high-pressure turbine castings and with that because there's different dyes, different I'll say, different casting techniques, et cetera. And so it's not immediately transferable at all. So the key to, let's say, is can we produce any further high-pressure turbine castings because the service demand seems to be high and possibly higher than certainly that we have been advised six months or a year ago. And so we put all our shoulders to wheel and trying everything we can to increase that while also stating that we know we're well above engine rates. I'm not giving you any specific quantities, but you can assume that, that seems absolutely correct, we're well above engine rate. And then it's - what goes to service at the MRO shops and what goes to the, I'll say, OE production, that's not our decision. So we're going to try to improve once again, and it will go to yield in the short-term that will go to fresh capital expenditure in that medium term. And so we've been clear that for us to put down fresh capital because of its high capital intensity, and you got to have a surety return is that's why we've struck agreements which lock in market share commensurate with those investment requirements for future. So we're positioned well for the future. But if you said to us, can we produce another 30% high-pressure turbine casting during the next two months? The answer would be, no, we can't. We'll be well above engine rate. And then that's about all we can say. And it's going to go, can we improve our internal yields, and obviously, we'll be talking to our customers about how they can help with that. And we've got some really good collaboration with our customers at the moment trying to achieve improvements over and above the improvements in volumes that we've already achieved. So I'm feeling pretty positive about it. I like the dynamic. I like the fact that we've got significant demand. But I've also got to be realistic. I just don't have a knob I can turn and say, I'll go and produce another 30%, it doesn't work like that. We've got new tools to put down. We've got new casting machines. We've got new presses, new everything to fundamentally change that. That's what I said. We'll bring that capacity on and we'll see the fruits of that in 2026. Ronald Epstein Got it. And if I may, just on that along that same question. How much better could you get in yields? Because my understanding already is you guys are pretty good. John Plant It's going to be at the margin. Where we are - from where we are today, the only way is to where - sometimes this may be excessive requirements on drawing whether those can be relaxed anyway, which don't go to performance. But it's those sort of tiny things, which matter, but don't matter that to your product performance. There's possibly something in that, and call it, clearly, we will study that. But while always protecting the quality of the product that we produce. That is all the time we have today for questions. Thank you all for attending and participating in today's conference call. You may now disconnect your lines, and have a great day.

Schneider Electric S.E (SBGSF) Half Year 2024 Earnings Call Transcript

Schneider Electric S.E (OTCPK:SBGSF) H1 2024 Earnings Conference Call July 31, 2024 2:30 AM ET Company Participants Peter Herweck - Chief Executive Officer Hilary Maxson - Chief Financial Officer Amit Bhalla - Senior VP and Head of Investor Relations Conference Call Participants Philip Buller - Berenberg Andrew Wilson - JP Morgan Simon Toennessen - Jefferies Alasdair Leslie - Bernstein Andre Kukhnin - UBS Jonathan Mounsey - Exane BNP Paribas Gael de-Bray - Deutsche Bank James Moore - Redburn Max Yates - Morgan Stanley William Mackie - Kepler Cheuvreux Operator Welcome to the Schneider Electric's Half Year results. Thank you for standing by. At this time, participants are in a listen-only mode until the dedicated question-and-answer session of today's conference. [Operator Instructions] I would like to inform all parties that today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now hand you over to Amit Bhalla, Head of Investor Relations. Please go ahead, sir. Amit Bhalla All right, thank you, operator. Good morning, everybody, delighted to be with you today to report on our half year 2024 results. I'm joined by our CEO, Peter Herweck, and our CFO, Hilary Maxson. We come to you from London today. The slides and the press release are both with you. We will go through the presentation and make sure to try to keep enough time for the Q&A. So with that, without any further ado, I hand it over to Peter. Peter Herweck Thank you very much, Amit, and good morning, everybody, from London. We've left Paris for the 33rd Olympic Games, and we're here at the AVEVA office. Very proud, actually, in H1, we've been named the most sustainable company in the world by the Time magazine and Statista. It goes in line with our stringent execution on our purpose and our mission to create impact by empowering all to make the most out of energy and resources, bridging progress and sustainability for all. As you know, at Schneider, we call this Life Is On. Well, this also translates into record revenues and accelerating in Q2, as you can see here. It was an all-time high for any quarters that we've delivered with €9.6 billion of revenue and organic growth of 7.1% for Q2, bringing us to H1 at €18.2 billion of revenue and the growth rate organic at 6.2%. Now, for the businesses, you can see the acceleration that we have in Energy Management going from 8.9% organic growth in Q1 to now almost 10% in Q2. Now, in Industrial Automation, you can also see a sequential improvement here from Q1 to Q2 with roughly minus 3.5%. But let me dive a little bit deeper where you can see the execution that we've done to deliver these strong results and strong growth metrics that you see. Gross profit also up 8.8% organic to €7.9 billion at a stellar gross margin of 43.4%, up a100 basis points, and also up a 100 basis points our adjusted EBITA margin at 18.6%. Now, the adjusted EBITA at €3.4 billion, up 12.2% organic, and the adjusted net income at €2.2 billion, also up 10%. That leaves us with an operating cash flow of €3.1 billion for H1, up 15%. Strong results, strong execution as we go ahead and on track to deliver what we've said at the Capital Markets Day for our mid-term ambition 2027, where we've set 7% to 10% CAGR over the period with a margin improvement of circa 50 bps CAGR over the period of time of the adjusted EBITA margin. Now, the megatrends really work for us and they deliver structural growth as we see. We sure talk about Data Center and what it means to the company. It's been a very dynamic end market for us. Also the geographies that we've been focusing on, you can see in the U.S., in the Middle East and in Africa and India, these are all perfect growth markets for us and leading the growth for the company. Now, we'll be talking about the targeted capacity investments that are ongoing and what that means to us to meet the unprecedented demand that we're seeing. So, strong progress also on our software business here at AVEVA, and all the software businesses that we've put together that are independent of our hardware business, if you will. So continuous innovation, we're also driving, you see how we're going to be doing that at the end of the day and of course, Artificial Intelligence everywhere in the company, in our products and also with our clients. Now, we've been aligning many of our activities to those megatrends that are driving growth. If you look at Digitization & AI, we've been all over the place in forums and talking with our clients and thought leaders in driving architectures forward to deliver on the AI. Climate Change & Energy Transition, very, very important for us. Also in Europe, where we've built a new factory in Hungary, to drive and be ready for the energy performance and building directive that is enacted at the moment. Now, in respect to the Evolution of Wealth & New Global Equilibrium, you have seen how active we've been in the Kingdom of Saudi Arabia in the Middle East and also in India. We've just inaugurated the largest campus for our people globally with 8,000 people in Bangalore. Now, let me remind you a little bit of the end-markets where we're active and we see good development across all end-markets supporting the medium growth expectations that we have in the four end-markets where we are. And as you would expect, and I start off with the Industrial market, there is of course a little bit of weakness in the market as we've said and seen before and it moves also as we expect and we'll talk about this a little bit more. The growth is of course carried by the investment that goes into infrastructure, into the Grid and then also into Data Center & Networks where we continue to believe that there is a strong growth momentum and we can actually see it in the numbers. Now, in buildings, and I've talked about the Energy Performance and Buildings Directive that is coming in Europe and will accelerate the renewal of buildings. We've done a logic investment into Planon and where we've been owning minority before which we've now ramped up to 80% as the majority owner of that business. And it will help us to be ideally positioned in Buildings not only from a Building Management perspective, from an Energy Management perspective, but now also Workplace and Asset Management, so an ideal addition for the group. Now, if you look at the global footprint and our unique positioning there and the unique business model with multi-hub, it really gives us a competitive advantage. I'm not going to go through the geographies that we've mentioned at the Capital Markets Day and how we want to materialize on it. Just give you our view in H1 and as I said, U.S., India, Middle East, Africa, they're all growing double digit for us, so it's fabulous in H1. Now, the capacity investment and resource deployment is of course linked to those growth markets and I'll be talking about that on this slide here. So we've carefully looked at where our investment ought to go and we said at the Capital Markets Day that throughout the period, we're going to be investing €2 billion in key geographies to be able to deliver to the growth. And we've talked about some of the supply chain issues that we've had in North America and we've started to enhance capacity quite rigidly there and spend very responsibly to be able to deliver to this unprecedented growth opportunity. You see some of the factories where we've been investing and as you would expect, there are of course some growth pains that come with it as we're hiring new people, as we're ramping up new machinery, as we're building inventory and work with our suppliers to be able to deliver to this unprecedented positive situation that we have. Now we've also said at the Capital Markets Day that until 2027, we want to drive up our R&D intensity to 7%. Now we've reached 5.9% or 6% as you can see on the slide and it is showing in a lot of new offers that are coming into growth markets with software-defined automation, the Energy Management products that will go into infrastructure, that go into data centers and that will also go into the buildings that are coming back. The grid build-out is very important, overall grid, micro-grid, mini-grids where we've done quite a few new packages and then also move into a Systems business where we're showing new offers all the way into Service. Also all of our top new offers that have come out in the market, 50% of those have AI built-in to be able to help our customers respectively. So you can see that the money is in action and new products coming to fuel the growth. Now our dedicated AI team that we've put together in a hub and also in our supply chain across the geographies and across the hubs where we're active, we're ramping up the number of projects, 195 AI-powered use cases in the company and with clients to help us drive productivity, to help us drive customer satisfaction, to help us drive serving our clients in a better way. And then also AI-powered features that we've incorporated for our clients and an example here with ST with whom we've worked together respectively. Moving onto the software side, so Digitization & AI. On the Digitization side, the software remains of course core to our digital journey and as you can see here, we're in AVEVA today where we've been driving forward the platform CONNECT an industrial platform to connect clients, to bring data to the cloud, to bring our offers to the cloud, to bring third-party software to the cloud, to drive One Platform, one experience for our client to deliver on the digital twin. And of course it pays off and you can see the growth that we have in AVEVA where we, further progressing very well on the journey to subscription with an ARR growth of 16% for the last 12 months, so quite excellent. And also if you see a little bit the momentum that we have in the cloud with our revenues up 140% in H1 for the cloud offers that are of course sold as a service. A very strong cash conversion rate in the software as you would expect as you come out of the valley that we've talked about many, many times. And I have a couple of clients here with whom we've had great wins in the last quarter with voestalpine with the African Rainbow Mining company and then also with the Cooper company. So in total excellent results on the software side and of course you know we're not named the most sustainable company by accident. It is also rigid execution on our SSI metrics and we're well on track to reach our targets for 2024. A couple of examples here that we're very proud of, driving decarbonization at our clients with 605 million tons CO2 that we've been driving down or avoided. Then the trust where we work with our strategic suppliers in making a better environment plus 12 points and then the idea of bringing one million people into electricity where we're making very, very good progress respectively and is something that is deeply embedded in the company respectively. Couple of customer examples, of course as we have the Olympics start off, with how we've helped to decarbonize the Olympic Games with the acquisition that we've done last year, EcoAct, where we help to drive down the hard to abate areas with CO2 certificates respectively. BlackRock in the Buildings market in the U.S. and we've named them the sustainability impact maker. Their new building is well below the energy usage of the average glass tower that's out there in New York and it is another example of how you can create impact while you build or renew respectively, fully digitized all our EcoStruxure offers in that high-rise are quite nice to see respectively. The Data Centers, of course we need to talk about, and we see projects in geographies that we haven't seen before here in the Kingdom of Saudi Arabia, I was able to visit that data center during my last trip. It's just of Riyadh, built in a sustainable and future-proof way and rapidly expanding also in the Kingdom, respectively. And then in Industry, here an example out of China where we're helping the WANT WANT Holdings Group that is focused on food and beverage to drive their digitization and dual climate goal that they have, more than 30 sites that they have in China and we're progressing in building those out. As you would expect, also quite a few external recognitions that we've had in H1, we've talked about the Time magazine. It's also good to see that there are recognitions in respect to our drive for diversity in respect to designing our product in a way that the clients have a great experience with them in the industrial design and many more of them respectively. Now let me spend a second here on the summary. I think we're well equipped for value creation while promoting a sustainable future for all. At the Capital Markets Day I've been speaking for the first time of the powerhouse of Energy Management and Automation. And we've talked about the mega trends that will structurally drive growth for the company 7% to 10% in the respective time frame until 2027. And we're on a good track with those and we're executing according to our management priorities with a growth culture, the sustainability that will drive forward, Software and our Prosumer business, of course the AI everywhere, and then of course the organic growth and expansion that we want to drive respectively of our franchise. Now this goes of course coupled with an agile operating model, then of course respective deployment of capital in a very reasonable and responsible way, disciplined as you would expect from us and then of course a strong governance respectively. The idea is of course to create total shareholder return and with that also a clear view on the ROCE that has also moved in the direction where we want to see it. So with that, I think a great H1 with a record performance in Q2 and many more details to it. Hilary, if you help me, guide us through the numbers here? Hilary Maxson Thanks very much, Peter, and happy to be here together at AVEVA speaking with all of you as well today. I'll start by reminding some of our key financial highlights for the first half. As Peter said, we finished with first half revenues of €18 billion, up 6% organic with strong sequential improvement between Q1 and Q2. We hit record quarterly revenues in Q2, up 7% organic. We also hit record high gross margins of 43.4% at the end of H1, up 100 basis points organic which drove our adjusted EBITA to a margin of 18.6%. Our net income was impacted by a non-cash impairment with our adjusted net income better reflecting our strong operating results at plus 10%. Operating cash flow and free cash flow are also tracking to our strong operating results at plus 15% and plus 8% respectively. And I'll speak in more detail on each of these in the next slides. Starting with H1 revenues, in Energy Management we continue to see strong demand and strong growth across most geographies, supported by the megatrends we introduced at our Capital Markets Day. In Industrial Automation, we continue to see weakness in Discrete automation partly offset by continued strength in Process Automation and relatively stronger results in software. Overall we were up 6.2% organic in sales reflecting the strong positioning of our portfolio and the benefits we have from diversification across geographies and our business models. The negative Scope impacts are primarily driven by the sale of our Sensors business in Q4 2023 and FX translation also adversely impacted our revenues by around €300 million mainly due to the weakening of the Chinese Yuan and a number of more volatile currencies against the euro. And as you can see in the footnotes to this slide, based on current rates which are fairly volatile in a few places, we'd expect FX impacts of minus €550 million to minus €650 million in revenues in 2024 and minus around 40 basis points impact on adjusted EBITA for the full year. Looking at our revenues in the context of our digital flywheel, our Digital and digital enabling revenues remain at 56% of our total group revenues with continued double digit growth in connectable products and Field Services partially offset by the transition to subscription in our Software businesses which adversely impacts our revenues there and due to the softness in Discrete automation. In Software, you can better see past the accounting impacts of the transition to subscription by following the annual recurring revenues or ARR at AVEVA where we're quite pleased, Peter mentioned, to see we're at plus 16% ARR at the end of H1 well aligned with the 15% plus medium-term ambition we shared at our Capital Markets Day. Turning now to our second quarter revenues, we were up 7% organic to €9.6 billion in revenue with strong contributions from both Systems and Software. North America and Rest of World continued to be strong contributors with continued growth also in Asia Pacific against a strong Q2 2023 baseline. Western Europe continues negative impacted by Discrete automation and some continued weakness in residential particularly in Germany. In Scope, similar to the Q1 you can see the impacts from our portfolio disposal program and in FX we have negative impacts from the Chinese Yuan and a number of more volatile currencies starting to be partially offset by the strengthening of the U.S. dollar. Turning to our diverse mix of business models. In Q2 Products grew at plus 1% with overall positive volumes and with single digit growth in Energy Management products driven by continued growth across most end-markets and continued stability in consumer linked offers partially offset by weakness in products for Discrete automation. Our Systems business where we sell directly to the end user, continued with particularly high demand translating into sales of plus 16% driven by strength in Data Center and Grid. Software & Services was back to double digit growth at plus 13% after the shift in fiscal year at AVEVA impacting last quarter. And Field Services continued with strong double digit growth driven by the execution of our strategic growth plans. Specifically in Energy Management, we were up 10% organic for the quarter. North America was up 15% organic against a high base of comparison with double digit growth in the U.S. and single digit growth in Mexico and Canada. Across North America we continue to see particularly strong growth in Systems with continued demand across end-markets particularly Data Center and Infrastructure. Product growth also remains solid including in residential. Due to this demand, as mentioned by Peter, we're continuing to stabilize and invest in our supply chain in North America through the H2 and beyond. Western Europe was up 3% organic with growth in Italy, France, Nordics and the UK driven primarily by demand in Data Centers and Infrastructure. Demand for Products across the region was more muted particularly in Germany. Asia Pacific was up 5% with China down low single digit against a particularly high base of comparison and where we see continued weakness in construction markets partially offset by demand for Data Center and new energy. The Rest of Asia Pacific was up double digit with particularly strong growth in India where we see strong growth across end-markets including residential. Rest of World was up 16% including some strong pricing actions in economies with significant devaluations. Middle East and Africa and South America were both up double digit even excluding those price impacts due to strong demand across end-markets including residential. Turning to Industrial Automation, sales were down 3.5% for the quarter with single digit growth in Process Automation and strong growth in Software offset by Discrete automation. North America was flat with growth in Process and Software offset by Discrete as stock levels at our channel partners continue to normalize. Western Europe was down 15% for the quarter against a high base of comparison with strong growth in Process and in Software offset by weakness in Discrete particularly in Germany, Italy and France. Asia Pacific was down 1% for the quarter with strong growth in Software. China was down mid-single digit while the Rest of Asia Pacific was up low single digit with double digit growth in India and Australia driven by Software offset by weakness in Discrete automation across the rest of Asia. Rest of World was up 10% including some strong pricing actions in economies with significant devaluations. Excluding these impacts, Africa was up double digit driven by strong growth in Process and Software while Middle East showed strong growth in Discrete. Turning now to our H1 P&L. We finished the half with adjusted EBITA of €3.4 billion, an organic growth of 12.2%. This was driven by our top line growth as well as an expansion in our adjusted EBITA margin of plus 100 basis points organic to finish the half at 18.6% supported by strong progression in our gross margin. We stepped up our R&D to sales ratio including our capitalized R&D to 5.9% around 6% edging closer to the around 7% we mentioned at our Capital Markets Day to support key innovations to drive our strategy. And despite this step up, our SFC to sales ratio remained flat for the half on an organic basis. Our adjusted EBITA margin in Energy Management was up 170 basis points supported by strong demand and strong systems pricing whereas adjusted EBITA margin in Industrial Automation was down 300 basis points impacted by the lower volumes and negative mix impacts from the decline in Discrete automation. Getting into a bit more detail on our adjusted EBITA progression, we finished the half with record gross margin of 43.4% or plus 100 basis points organic. This was driven by some continued positive net pricing albeit at much more moderated levels than 2023, as expected, a strong acceleration in industrial productivity and strong pricing in our Systems business. In H2, we would expect the contribution from productivity to moderate versus the H1 due to the actions we're taking in our supply chain to support growth particularly in North America. In terms of our OpEx or as we call it our support function costs we continue to drive some structural savings this year helping to offset inflation and we continue to make investments to support our strategic priorities of innovation, support to our commercial footprint and our digital transformation including investments in AI. Turning now to net income. Including Scope and FX our adjusted EBITA is up 7%. Below the line, our other income and expense was negatively impacted by a small adjustment in a legal provision this half versus last year's recognition of a disposal gain. Restructuring costs were €59 million for the half and we have a positive evolution in financial costs year-over-year due to interest income and FX gains. Our effective tax rate was 23.5% and we anticipate our ETR will remain within the range of 22% to 24% for 2024. We did take a non-cash impairment at Uplight, a minority investment we made in 2021 and where we own around 44%. We continue to believe in the strong opportunities for Uplight's market leading software platform for utilities however customer adoption is a bit slower than anticipated. And these all results in a net income of €1.9 billion, down 7%; and adjusted net income of €2.2 billion, up 10% reported or 15% organic. These strong operating results translated into record cash flow from operations up 15% to €3.1 billion. Free cash flow is at €889 million for the half, up 8% year-over-year, impacted by some normal seasonal working capital movements particularly in inventory. In the second half, we would expect the cash conversion ratio to step up as usual and we'd expect to approach a cash conversion ratio of around 100% for the full year including some impacts from the supply chain actions I already mentioned. Our debt ratios remain strong with a small impact in H1 from the payment of our dividend, as normal. And I'm pleased to highlight that during the quarter we received an upgrade by S&P on our rating and an upgrade from Moody's on our outlook. Our capital allocation priorities remain unchanged since our Capital Markets Day with the credit ratings actions and our payment of our 14th progressive dividend in Q2 well reflective of our top two priorities. Our current focus and priority remain organic growth, and the financial targets we gave at our Capital Market Day are tied to our current portfolio. And in terms of portfolio, as mentioned by Peter, we did exercise a call option to acquire a controlling stake in Planon this quarter, reinforcing our position in the building end market with its facility and workplace management software. With that, I'll turn back to Peter to give an update on our full year expectations. Peter Herweck Thank you very much, Hilary, for this eloquent description of where we are at H1. Now let's talk about the expected trends and also what we see in respect to the targets. In the coming month, we expect many of the trends to continue with a strong and dynamic market demand which will continue on the back of the structural megatrends that we've been laying out. Now strong demand for System offers, notably driven in the trends by Data Center and Grid Infrastructure as we've been talking how capital is deployed there, and increased investment across Process Industries served by both businesses respectively. Now there's a continued focus on the subscription transition in software and the growth in services that you see in our digital flywheel, nothing new in that regard. So a gradual demand recovery for Product offers, consumer-linked segments and Discrete automation, as we've said before. All four regions should be contributing to growth led by the U.S., India, and the Middle East, as we've said before. And you would expect that we continue to execute capacity investments to support our unprecedented high demand that we have specifically in North America. Now taking all of this into consideration, we are talking about our targets for 2024 and the 2024 adjusted EBITA growth is going to be between 9% to 13%, organically. Previously it's been between 8% to 12% organic and the target would be achieved through a continuation of organic growth and margin improvement currently expected to be a revenue growth of 6% to 8% organic which is unchanged and an adjusted EBITA margin up 60 bps to 80 bps organic plus of course which has previously been at plus 40 basis points to 60 basis point organically. This implies an adjusted EBITA margin of around 18.1% to 18.3% including Scope based on transactions completed to date and FX based on a current estimation. So I think a good upgrade that we see for the rest of the year. With that, I hand over back to Amit. Amit Bhalla All right. Thank you, Peter, and thank you, Hilary. I think we're in good time. We have about 25 minutes left for questions and answers. And as always, we'll go with one question per analyst and hopefully we'll have time to accommodate them all. So I move it over to the operator for the first question, please. Question-and-Answer Session Operator Thank you, sir. The first question is from Phil Buller of Berenberg. Phil Buller Hi, thank you, good morning. The question is on everyone's favorite topic of Data Centers. I was hoping you could add a bit more meat around what you're seeing here please. What should we infer in terms of the current growth rate you're seeing? I assume it's accretive to the growth rate you're reporting in Systems. And you say you're on track for the 10% plus medium term CAGR offered at the CMD or do you say you are actually quite a way ahead of that. Is that fair? And how should we think about margins in Systems? It feels as though it used to be very diluted and perhaps that's no longer the case. So really just as much further insight as you can please on the demand growth and pricing dynamics I guess in Data Centers would be helpful? Peter Herweck Thank you very much for the question. I'll take a first stab at it and then Hilary can complement. Now the data center space indeed is dynamic. Now if you look at the mid-term growth that we've set out for our C&SP business and data networks, so it's a combination of several markets. You would expect that data centers are a little bit more dynamic to that one and we feel very good and well positioned with the portfolio that we have to participate in the growth that is there and in the increased investment that you've also heard from some of the folks that just reported over the last couple of days. This business also comes of course largely as a Systems business and you see it in the growth numbers respectively and is a very excellent contributor to it with the respective margins. There's also quite some services attached to it which we really like and I think I missed out on maybe one or two points that you've asked Hilary. Hilary Maxson Yeah I think, Peter, just suffice to say as you mentioned certainly Data Center was a great contributor to the Systems number that we saw. We won't confirm the exact growth rate but you can see what others are reporting in that space. We're the market leader there and I think we would expect that to continue to be the case. In terms of margins we mentioned at our Capital Markets Day that the Systems business is already actually closed quite a bit in terms of -- Operator Ms. Maxson, could you please speak a little closer to the microphone, we can't hear you very well. Hilary Maxson Sorry for that. I guess you're not hearing me very well. So indeed actually we -- hopefully you can hear me a bit better now. But indeed we confirmed at the Capital Markets Day that we'd already closed a decent level of that differential between the margins between Systems and Products. We wouldn't expect that to close in entirety. But suffice to say in the Systems business where we have great demand as you can see we also have good pricing power and we're working with our customers to have the right level of margins for ourselves but also to have the right level of relationships with those customers over what we would expect a fairly lengthy period of good demand. Amit Bhalla All right, thank you Phil. We'll go to the next question please. Operator Next question sir is from Andrew Wilson of JP Morgan. Andrew Wilson Hi, good morning, everyone. Hopefully you can hear me okay. I wanted to ask around the backlog development. I think in previous resource [indiscernible] you've helped us a little bit with at least some commentary on kind of backlog development and book-to-bill type I guess metrics, so hoping you can kind of give us an update on that as well, please. Peter Herweck Yeah, hi Andrew, thanks very much for the question. You know as I said, we've -- I think we have an unprecedented demand environment and as you would expect a positive backlog. Andrew Wilson All right. Thank you. Peter Herweck For the full question, short answer. Amit Bhalla All right. Thanks, Andy. Next question please. Operator The next question is from Simon Toennessen of Jefferies. Simon Toennessen Yes good morning Peter, Hilary and Amit. I've got one question on the margin that's implied in the second half. Looks very conservative on a first look basis. I think Hilary you mentioned the low productivity in North America but maybe you can just talk a little bit around this in a bit more detail. I think if I take the midpoint of your guidance it implies 90 basis points roughly down on the H2. Obviously last year was down I think 30 bps but last five, six years you've always had more than 100 basis points higher margin in the second half. So just a bit more of a clarification on that please? Thank you. Peter Herweck Maybe I start off Simon with some of the elements that we're seeing and then Hilary can go further into detail. As I've said we really have an unprecedented demand environment at the moment and we did have some issues in the supply chain in North America. So we've been investing and continue to invest in a very responsible way to address this unprecedented demand. From that perspective, as we're hiring and bringing in more people they won't be as productive as people that are there for a long time. As you would expect we're ramping up some new machinery and new lines and we're fitting out factories to serve our clients. And the priority number one is to bring the service levels up to where the clients would believe them in respect to delivery time, in respect to on-time delivery. That's going to be priority one as we want to follow the market demand that we have there. Hilary Maxson Indeed Peter. So we do expect industrial productivity like I mentioned would moderate in the H2 versus the H1 because of all the actions we're taking in North America. We also expect continued strong growth in Systems with a more gradual improvement in Products. So it's possible that mix could be a bit less positive between the H1 and the H2. And of course you can see we're investing in various areas with R&D, Digital and we'll continue to do that not just in the H2 but over the course of the Capital Markets Day like we shared with you in November. Amit Bhalla All right. Thank you, Simon. Next question please. Operator The next question is from Alasdair Leslie of Bernstein. Alasdair Leslie Hi, good morning. Thank you. I suppose a follow-up a little bit on the subject of capacity additions, obviously more emphasis on that now. Just in terms of those comments around productivity and I guess we can understand the impact on margins but is this kind of also a limiting sort of factor now potentially on growth or could it disrupt growth in the short-term strictly North America, obviously that's the core growth driver. I'm just wondering if that's the message here or we can kind of rule that out. I just wonder if that's maybe one of the reasons behind the top-line guide remaining unchanged? Thank you. Peter Herweck No, Alasdair, as you've seen, we have had a good dynamic from Q1 to Q2 and that sets the stage for the following quarters to come and the guidance fully remains intact with 6% to 8% as all our facilities are running at full speed and we're bringing in new people and new capacity to be able to fuel the growth that's there. So nothing to be concerned about both the guidance that we've given and also the midterm target remain fully intact. Alasdair Leslie Yeah. Amit Bhalla Thank you, Alistair. Next question. Operator The next question, sir, is from Andre Kukhnin of UBS. Andre Kukhnin Good morning, thank you very much for taking my question. I just wanted to pick up on the capacity addition as well given that it features very heavily through the presentation. How much capacity are you adding in North America versus the current capacity that you have there? And to the point of the [damping] the margin in second half, completely understandable in the ramp-up stage, but also wouldn't it be right for us to think that this would be a brand-new capacity designed and engineered to the latest state-of-the-art technology and hence will become a productivity driver in 2025? Peter Herweck Andre, let me start off. I only understood the first part of the question. I don't know whether the others understood the second part, so then I'll give it to them. Listen, the demand environment is very good with also many, many long-term contracts that we have with our clients, and we're going to be adding capacity, as I said, in a responsible way to be able to serve that demand and also be able to live with fluctuations if they were ever coming in that regard. We have a solid understanding how market will develop, and we've talked about our medium target, and we're going to be set up respectively to serve that growth that is in front of us. Hilary Maxson And maybe I can address a bit the second part of the question. So, first, probably it's not new. We've been talking about the issues that we've had in capacity in North America for the last few quarters. So nothing new in terms of growth. Actually, like Peter said, you can see between the Q1 and Q2, we actually have some sequential even more improvement in North America. So we would expect that that would continue. And, of course, to the second piece of your question, indeed, what we would put in new capacity would be the latest state-of-the-art. We would expect that these are sort of temporary ramp-ups as we put and bring new capacity online, and, therefore, that would drive future productivity in the future, absolutely. Andre Kukhnin Yeah. Amit Bhalla Thank you. Next question, please. Operator The next question is from Jonathan Mounsey of BNP Paribas Exane. Jonathan Mounsey Thank you, and good morning. Maybe if we touch on regional dynamics, so India versus China, I think China down low single-digit in Q2. Just want to know how does that look in the end versus IA, and what do you see as the likely path for China in H2? Can it return to growth that soon? And then on India, obviously the third largest territory by revenue now and double-digit growth in the quarter, continuation of trends really from last year. How do you see sales in that country growing over the coming few years, meaning the second half? Can this kind of double-digit rate be maintained? Peter Herweck Thanks, Jonathan. Now, let me start off with China, and I go back to 2023 where we've said we will be growing. Nobody believed us at the time. You know, the dynamic continued in Q1 with both businesses at growth. And then if you look at H1, again, both businesses are growing. Q2 was a very tough comparison for us. And unfortunately, we still need to look at the aftermath of COVID respectively. But in H1, we've had both businesses growing while IA was, one could also say flattish. And we see good movement there. And from what we see today is also going to be growing in 2024. What we've said earlier, of course, we'll see what all the messages that came out just recently from the Politburo are going to mean for us and at what speed they're going to be implemented. And we'll keep you updated on that one. India has become a fabulous growth market for us. And I want to reiterate the invitation for our Capital Markets Day that we're going to be having in December in India. So I invite you to join. It's been a double-digit grower for us. In June 1st, we introduced the new brands that would basically change all the Larsen & Toubro EA brands to what we call Lauritz Knudsen, publicly named LK in India. All products have been available on day one in the new look and feel, new design and so forth. They have landed extremely well with our clients. And it's been a super demand environment. And we see that, even with the newly formed government, we see extremely good demand to continue. More on that in December, I'll invite you to join us there. It's going to be exciting. December, sorry, December. Amit Bhalla All right. And the invites already out there. We'll have an India-specific investor event on December 3rd. Thanks, Jon. Next question, please. Operator The next question is from Gael de-Bray of Deutsche Bank. Gael de-Bray Thank you very much. Good morning, everybody. Can I ask about M&A, please? Acquisition effects have been negative for three consecutive years now. So is it because you've been concentrated on one or two very large potential deals that have not materialized? Or is it rather because the pipeline of the small and mid-sized transactions is rather small? And while you're talking about this, I mean, could you also discuss how the M&A decisions are taken and how all of this is being managed internally? To what extent is it centralized or is it a decentralized approach? Thank you very much. Peter Herweck Let me take the second part of the question first and then Hillary can get into some of the numbers that you're quoting. Now, as we've lined out, we have very stringent capital allocation rules that we follow. And in respect to M&A, what we're looking at is, is it fitting exactly into the strategy that we've lined out and we go respectively in execution. We've also said that we will be focusing on organic growth. That doesn't mean that we shouldn't be agile and so forth. Now, the Planon investment that we just talked about is just basically a call option to what has been negotiated in three years back. And we're very happy with that investment because it goes straight into our digital energy environment where we worry about building management, energy management and also workplace management. So these three positions are ideally in that regard. And the businesses where we integrate those units are in charge of driving the synergies respectively and the performance. So they all follow a very stringent governance model that we have in the company. Hillary? Hilary Maxson In terms of the M&A and integration costs, what we have in there, it's not just associated with M&A fees, for example. So it's not just impacted by the pipeline or the amount of M&A that we look at. Quite a bit of that we've done, as you know, a number of large acquisitions over the past few years. The acquisition in India from L&T, OSIsoft through AVEVA. AVEVA itself, we did the privatization. So large and I think fairly successful. And actually, we considered the integration costs for these types of acquisitions in the M&A integration costs for a number of years after the transaction as we're doing things like bringing them into the digital backbone of Schneider. So that's remained fairly steady because of those larger acquisitions. Not super impacted probably by the M&A pipeline that we've looked at aside from transactions that you might already know like the one that we talked about earlier this year, nothing there to be call out there that would be associated with small pipeline or anything like that. And like Peter said, we have a centralized process. So we look at everything through the governance model. Everything is looked at in that aspect from an accounting standpoint, too. Amit Bhalla All right, thanks, Gael. We have about nine minutes left. So we try to accommodate as many questions as we can. Next question, please. Operator The next question is from James Moore of Redburn. James Moore Yes. Good morning, everyone. And really thanks for the time. I'd like to ask about Energy Management margin versus the competition. Over the last five years, your margin has gone up from 90% to 400 basis points, ABB up 1,000 basis points. [Technical Difficulty] Operator Mr. Moore, excuse me, sir, could you speak without the headset? We can't hear you very well. James Moore I don't have a headset. Peter Herweck James, I'm sorry, we don't hear you very well. James Moore Can you hear this now? Amit Bhalla Yeah, this is better now. James Moore Okay, just a relative versus competition margin question. In the last five years, Schneider EM is up 300, 400 bps. ABB, a 1,000 basis points, Eaton, 700 basis points. The others have gone from behind you to ahead of you. Yet you have the biggest data center mix which should be premium margin. And your cumulative price over the period is the highest. When you look at that equation, what is it you see as to why your margin hasn't moved further and is it that these expansions in capacity are dragging it to explain all of the gap and can that drop out going forward? Peter Herweck You want to take this one? Hilary Maxson So a couple of things I would say there. In terms of our margin, well, first, we started from a bit different starting places, I would say. I can't really comment on competitors but there were certainly some portfolio actions and differing portfolio actions, I think, that took place over that time frame whereas I think our portfolio actions perhaps were a bit earlier in the cycle. We started with, for example, stabilizing our medium voltage business even as I was joining Schneider maybe seven and a half years ago. So I think the comparison is not exact. In terms of industrial productivity, I think we've been actually pretty good over the cycle with --and you saw that that was a big driver for us. However, you're right that we've made some capacity additions recently. I think that's only good, we want to maintain our market leadership but like I mentioned earlier, we would expect those capacity additions would be strong drivers of industrial productivity in the future without any doubt. The only other thing that I would mention as well is that we've been quite clear that we want to make investments particularly in R&D. So I think our gross margin has been tracking actually very, very well and in terms of investments, we've chosen to make investments particularly in innovation and a few other areas that we think position ourselves for that longer term growth over this cycle and who knows, hopefully beyond. Amit Bhalla Yeah, thanks, James. And just to remind everybody, we do have the margin guidance all the way through to 2027 which already incorporates all of the capacity investments as well. Next question, please. Operator The next question is from Max Yates from Morgan Stanley. Max Yates Thank you very much and good morning. I just wanted to ask on the Industrial Automation Division and obviously you referenced inventory destocking at your distributors. I just wanted to sort of understand what is your latest thinking on a sort of timing of recovery when you look at the inventory levels? How long do you expect that destocking to go on for? And I guess into the second half, is there anything to really change the margin profile of that division or is it really just about waiting for that destocking period to come to an end and volume start to normalize? Thank you. Peter Herweck Thanks very much, Max. Now, if you look at the performance of IA, I think one needs to, you know, look a little bit at the sequential improvement that's there and if you compare H2 to H1, this year also from a margin perspective you see somewhat of a recovery. We were expecting that, of course, with more demand coming up in H2 and we continue to say that's going to be there. It probably is going to hit the top line in the second half of H2, but there is good tendency. I'm not worried about the inventory levels that we have at our OEM customers or at our distributors, at least from our perspective. Again, I cannot talk about others in that regard. And, as we see recovery, we would expect also margin to come back, all of which is built into our guidance for the year and then also into our medium-term targets that we've put forward. We do like the portfolio of IA very much. It's very complementary to the other stuff that we have in Energy Management as it goes to the same client groups to a large extent anyway. Amit Bhalla Right. And also incorporating the impact of the subscription transition in software, which is also there. Peter Herweck Absolutely, absolutely. Amit Bhalla Next question, please. Operator The next question is from William Mackie of Kepler Cheuvreux. William Mackie Yeah, good morning. Thank you. The question relates to your Product business outside the tight supply-demand environments. You're mentioning in Data Centers & Infrastructure and particularly to the broader markets in building or industrial. Can you discuss how you see the pricing trends evolving across that large swathe of your business and how we should expect the pricing to evolve across much of that going into the second half of the year, please? Thank you. Peter Herweck Oh, thank you very much, William. I'll start and then Hilary can complement. Now, we've said as we started 2024 that there is no carryover in respect to pricing and that we would go back to normal 1% to 2% for the group. And also in H1, our product portfolio was a contributor to that. So while also the volume was positive, that gives you a little bit of a window on where we see this to be. Traditionally, we've been quite resilient and able to price up. And there are some movements in material and freight that we need to consider and other stuff that goes down and we'll be agile to it for H2. Hilary, I'll leave that to you. Hilary Maxson Yeah, not much to add. I think in this environment, we still think that we have good pricing power generally. It tends to be a somewhat inflationary environment, there's ups and downs. So we'd expect some continued pricing on products. Peter mentioned the one to two points, that's really across all of our business models. So some pricing on products, when and where it makes sense. Of course, we're looking at inflation consistently. At the same time, we always look at deciding pricing from a competitiveness standpoint. So we may choose to invest a little bit in pricing in certain areas like we have in the past in order to gain market share. And of course, we'll continue pricing on Systems and Services and again across Products, where and when it makes sense. So nothing new probably versus what we'd said in the full year in the Q1, that one to two points on an overall group and across the business models level. Amit Bhalla All right. I think we're coming to time. And in case there are a couple of questions we couldn't take, we'll get back to you soon after the call. I just want to remind everyone of the -- of course, we have the Road Shows coming up after the summer break and also another reminder of the event in India for which seats actually are limited. So we've already sent out some e-mails, if you're interested reach out to us in case you are and then we take it on from there. But with that, I just want to thank everybody for your time this morning and wish you a good rest of the day. Peter Herweck Thank you very much. Hilary Maxson Thank you. Operator Ladies and gentlemen, that concludes the [conference], and you may disconnect.

United Microelectronics Corporation (UMC) Q2 2024 Earnings Call Transcript

United Microelectronics Corporation (NYSE:UMC) Q2 2024 Earnings Conference Call July 31, 2024 5:00 AM ET Company Participants Michael Lin - Head of IR Chi-Tung Liu - CFO Jason Wang - President Conference Call Participants Sunny Lin - UBS Gokul Hariharan - JPMorgan Bruce Lu - Goldman Sachs Charlie Chan - Morgan Stanley Laura Chen - Citi Brad Lin - Bank of America Merrill Lynch Operator Welcome everyone to UMC's 2024 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question-and-answer session. Please follow the instructions given at that time if you would like to ask a question. For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within two hours after the conference is finished. Please visit our website www.umc.com under the Investor Relations, Investors Events section. And now I would like to introduce Mr. Michael Lin, head of Investor Relations at UMC. Mr. Lin, please begin. Michael Lin Thank you and welcome to UMC's conference call for the second quarter of 2024. I'm joined by Mr. Jason Wang, President of UMC; and Mr. Chi-Tung Liu, the CFO of UMC. In a moment, you will hear our CFO present the second quarter financial results, followed by our President's key message to address UMC's focus and third quarter 2024 guidance. Once our President and CFO complete their remarks, there will be a Q&A session. UMC's quarterly financial reports are available at our website www.umc.com under the Investors Financial section. During this conference, we may make forward-looking statements based on management's current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risk that may be beyond the company's control. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC and the ROC Security Authorities. During this conference, you may view our financial presentation material, which is being broadcast live through the internet. Now, I would like to introduce UMC's CFO, Mr. Chi-Tung Liu, to discuss UMC's second quarter 2024 financial results. Chi-Tung Liu Thank you, Michael. I would like to go through the 2Q24 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on Page 4, the second quarter of 2024, consolidated revenue was NT$56.8 billion, with a gross margin at 35.2%. The net income attributable to the stockholder of the parent was NT$13.8 billion, and earnings per ordinary share were NT$1.1120. In the second quarter, our wafer shipment increased 2.5%, quarter-over-quarter, to NT$831,000, 12-inch wafer equivalent in the second quarter. Utilization rate in the second quarter was 58%, compared to 65% in the previous quarter. Revenue grew by 4%, quarter-over-quarter, to NT$56.8 billion. Other than the 2.5% Q-o-Q wafer shipment increase, the other was helped by the weaker NT dollar exchange rate. In the gross margin, as we mentioned earlier, was 35.2%, or nearly NT$20 billion. With the help, minor help from the non-operating income, the total net income reached NT$13.77 billion, and the net income attributable to the shareholder of the parent was NT$13.78 billion, or NT$1.11 EPS in the second quarter. For the first half of 2024, our revenue was almost flat, compared to the same period of last year, which was NT$111 billion for the first six months of the year. Gross margin was around 33.1%, or NT$36.8 billion. And net income margin is around 21.8%, or NT$24.2 billion. EPS in the first half was NT$1.95 per share. Our cash level is around NT$121 billion, and our total equity at the end of the second quarter of 2024 was NT$356 billion. ASP remained flat in Q2 of 2024. In terms of revenue breakdown, Asia gained about 1% of the revenue distribution to 64%, when North America stayed unchanged at 25%. IDM declined notably from 18% in the previous quarter to 13% in Q2 2024. Communication also declined from 48% in the previous quarter to 39% in quarter two. Consumer and computer both grow by single digit percentage respectively. 20 to 29 revenue continue to be around 33% and 40-nanometer declined from 14% in the previous quarter to 12% in this quarter. Capacity at the 12A continue to increase and in the third quarter of 2024, our 12A capacity will reach 400 above 1000 12-inch equivalent wafers in the third quarter. Currently, the estimate for 2024 CapEx remain unchanged around $3.3 billion. The above is a summary of UMC results for Q2 2024. More details are available in the report which has been posted on our website. I will now turn the call over to President of UMC, Mr. Jason Wang. Jason Wang Thank you, Chi-Tung. Good evening, everyone. Here, I would like to share UMC's second quarter results. In the second quarter, wafer shipment increased 2.6% quarter-over-quarter and fab utilization rate improved to 68% as we saw notable demand momentum in the consumer segment. Contribution from our 20 to 28 nanometer business rose sequentially on healthy demand of Wi-Fi and digital TV applications. Together with a favorable exchange rate and improved product mix, second quarter growth margin was better than what we previously guided to. During the quarter, we announced the technology updates, including a 3D IC solution to stack RFSOI wafers, which is the first of its kind in the industry, and a 22-nanometer embedded high voltage platform, currently the most advanced display driver foundry solution in the market. They reflect UMC's commitment to building on our leadership across a number of specialty technologies that are crucial for the development of AI, 5G, and automotive. Looking to the third quarter, we expect to see end market dynamics improve further, particularly in the communication and computing segment, which will drive higher fab utilization. Our 20 to 28 nanometer business remains a promising growth driver with a number of take-offs taking place in the second half for applications including display drivers, connectivity, and networking. At the same time, we do expect to face some margin pressure going into the second half, due to pick-up in depreciation expense related to capacity expansion, as well as higher utility rates. Despite these cost challenges, we believe we will continue to demonstrate our resilience as we did during the recent market downturn and deliver on our strategy of providing differentiated technology solutions and a diversified manufacturing footprint to help our customers to strengthen their supply chain management. Now, let's move on to the third quarter 2024 guidance. Our wafer shipments will increase by a mid single-digit percentage. ASP in U.S. dollars will remain firm. Gross margin will be in the mean 30% range. Capacity utilization rate will be approximately 70%. Our 2024 cash-based CapEx will be budgeted at $3.3 billion. That concludes my comments. Thank you all for your attention. And now we are ready for questions. Question-and-Answer Session Operator Yes, thank you, President Wang. And ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] And our first question is from Sunny Lin, UBS. Go ahead, please. Sunny Lin Thank you very much for taking my questions. Really glad to see improving growth margin in Q2. And so my first question is on the utilization rate outlook. You are seeing some improvement going to Q3 to about 70%. But if we look at in the past through cycle, your utilization rate were around 85% to 90%. In a bear up cycle, it could be over 90%. And so now with the improving cycle, but still considering some oversupply issues, what would be a reasonable estimate for your utilization rate going to 2025? Jason Wang Well, I mean, I think we will focus on our 2024 first. And for 2024, we are confident on our promising Q3 wafer demand as they continue to increase. However, we foresee that UMC's customer demand forecast has started to reflect more of a seasonal pattern where the second half of 2024 wafer shipment relative to the first half. That's supported by healthier inventory level with a consumer communication and computing segment where the demand in auto remains soft. And we expect to see the mild pickup in communication consumer in the competing segment. However, despite the mild recovery in the '24, we have not seen signs of strong rebound of the customer remain prudent in managing their inventory level. So customer continues to be prudent their inventory management which that will lead likely lead to a seasonal Q4. And then starting from Q1, 2025 when the outsourced inventory get to a healthier level, we believe that 2025 will get back to normalcy of the inventory demand outlook. Sunny Lin Got it. Thank you very much. Also, my second question is how should we think about the structural growth margin? There are some puts and takes. One is on pricing. A couple of your peers mentioned stabilizing dynamics from Q3. Is that what you are expecting for the next couple of quarters? And then second, on depreciations, you have guided depreciation should increase in second half of this year. But any sense about 2025, should we still expect like 20% type of increase for your depreciation? I will assume it could be less because you are delaying the Singapore expansion. And then the third, maybe on the cost inflation, any view on the potential impact going to 2025? Chi-Tung Liu In terms of the depreciation, this year we still estimate around 20% year-over-year increase for 2024 over 2023. As for 2025, we don't have the final numbers yet. We will report that in the next quarter earnings call. But the magnitude should be similar to that of this year. In terms of the cost item, we are looking at higher seasonal utility cost in the third quarter. And our quarterly depreciation is likely, in terms of the increase rate, third quarter will be the highest, around 10% Q-o-Q increase. So we will continue to work diligently in terms of controlling our cost item. Hopefully through the better efficiency and some of the automation, we will be able to offset the pressures from the increasing cost item. So one way to look at this, we will remain a solid EBITDA margin and will improve along with higher utilization rate. And we will continue to strengthen our competitiveness and improve product mix to maintain our structural profitability. Jason Wang If we go back to the ASP question, UMC's pricing in 2024 has remained consistent and well aligned to our strategy, as you can see. We expect pricing will stay competitive as we continue working with the customer to ensure their product offering remains competitive in the marketplace as well. It's our belief that elevating our customers' product competitiveness will help customers to win more market share. So our pricing strategy has remained consistent and aligned to the value proposition that UMC offers, which includes the stay competitive and resilience against the market dynamic, such as the capacity situation, technology solution, customer partnership and manufacturing performance. So we were constantly managing our pricing strategy, but we remain fairly consistent with our current strategy. Sunny Lin Thank you. One quick follow-up on your Singapore 12-inch expansion. Any update you could share with us in terms of the ramp-up schedule? Jason Wang For the P3, the schedule has not changed. We expect the P3 RAM will reflect in our -- one, we project the 12-P3 production will start in January 26, and the ramp-up to high volume starting from the second half of 2026. Sunny Lin Got it. Thank you very much. Operator Thank you, Sunny. Next one, Gokul Hariharan, JPMorgan. Go ahead, please. Gokul Hariharan Yeah, hi, thanks for taking my question. So first of all, I just wanted to get into the gross margins, which have come in slightly better than or significantly better than your original guidance in Q2. And Q3 also looks like -- you're kind of holding a mid-30s level, even with the cost increases. So just wanted to understand what is going into this gross margin, kind of getting back from the, let's say, 30% levels to 35% levels recently, even with a lot of the cost pressures. Just wanted to understand anything specific that you're doing to kind of get the gross margins moving up. And should we expect that as the depreciation ramp continues, we can hold this level? Or we think that this level can just kind of drop back to the early 30s levels that we had in Q4 last year and Q1 of this year? Jason Wang I mean, yeah, Chi-Tung kind of touch that little bit earlier. For the Q2 gross margin, I have to say it's mainly coming from the favorable foreign exchange rate movement that contributed to a better than guidance gross margin result. For the Q3, while the utilization has increased a little bit, but the gross margin actually remains at the mid-30% range, it's really because in Q3 the right depreciation expense from the capacity expansion of the 12A P6 and the 12I P3, along with some seasonality utility rates. And that will be considered for our Q3 gross margin guidance. And however, like Chi-Tung mentioned earlier, we foresee our EBITDA margin will remain firm relative to the Q2 2024. Gokul Hariharan Got it. And Jason, on the pricing side, just looking at it, 12-inch versus 8-inch, are you seeing any noticeable differences in terms of pricing tendencies? And also for your 8-inch business, do you feel that 8-inch can ever get back to the 90%, 95% utilizations that we used to have? Or you see that this is a point in time where 8-inch eventually has to migrate to something else, and a lot of the core logic kind of business and even some of the analog power management business eventually migrates down to 12-inch, given that there's a lot of capacity coming online. Jason Wang Okay. Well, I mean, on the ASP, while our ASP remains firm, from the light to light pricing will remain unchanged. And however, the blended ASP will reflect the change in product mix as well as the 8-inch and 12-inch composition. So I think that's on the ASP front. So at this point, for the second half we will remain firm on our pricing. For the 8-inch business outlook, the 8-inch loading in Q2 actually improved a little bit because the power management IC, we mentioned in the completing application. We foresee that the Q3 will further increase a little bit, driven by the embedded non-biotype memory demand for auto server-related application. However, like you said, can it ever get back to 95% level? We certainly hope so. However, we anticipate continuous pressure from some of the 12-inch maternal fab, like you said, and that has impacted 8-inch supply chain. While the certain mainstream application will remain on the 8-inch node, what we currently do is we have identified a number of additional projects and opportunities with our key customers to gradually lift our 8-inch loading. So I think from a goal-wise, we are not giving up yet. I think the 95% is still our goal. But from the timing-wise, it will probably take some time to gradually lift to that level. And so we're going to continue our efforts by doing so, and we can update you accordingly. Gokul Hariharan Okay. Thanks, Jason. Maybe one last question from me. You're the interposer for some of the AI-related 2.5D packaging products. What percentage of the revenues are they, given that you called it out in your prepared remarks? And is there any further capacity expansion plan for you beyond, I think, the 6K that you mentioned a few quarters back? Jason Wang First of all, we have already doubled our interposer capacity to 6K as we reported previously. In response to incremental demand at the beginning of 2024, for any additional interposer capacity will be assessed based on customer alignment. So we following up our customer closely and its initial requirements for the company. But at this point, with alignment, it's at 6K. Yeah. Gokul Hariharan And any thoughts on the revenue contribution from this business? Is it like 4%-5% of your revenue already, or is it much smaller than that? Jason Wang I don't think we have a breakdown that with me right now. But it's not a significant revenue from that. But I think your estimate is about right. Chi-Tung Liu It's actually less than 4%-5%. Gokul Hariharan Okay. Thank you very much. Operator Thank you, Gokul. Next, we'll have Bruce Lu, Goldman Sachs. Go ahead, please. Bruce Lu Hi, Jason. This is Bruce. I want to ask about, regarding to the Vanguard, who has built a capacity with their customer for 12-inch in Singapore. Seems to me that they have a lot of customers who are signing up for the capacity in the future. So I want to know what do we miss here? I mean, what's the reason why UMC didn't get this business? UMC has the legacy capacity in Singapore. UMC has the TSMC-like process. And obviously, you have the existing capacity, which doesn't really require a customer to prepay or any additional wafer price hike. I mean, what do we miss here? I mean, any possibility we can win back the business or get the future business away from our competition? Jason Wang Well, I mean, thank you, Bruce. I think there is a few things. One is, obviously we don't comment on our competitors. And they did not have fair reason by doing the capacity reason. We actually feel fairly comfortable with our capacity situations in terms of 12-inch mature node, which is that what you're referring to. Despite in the recent quarters, the 40 and 65 revenue has declined a little bit quarter-over-quarter due to the customer ongoing correction. We think the automotive industry semi, but we do expect the 40 and 65 nanometer business will grow then surely in Q3 driven by higher demand in outdoor and computing application. Longer term, we expect growing our 40 and 65 product pipeline, based on the specialty and margin technology, such as [indiscernible] memory, RFSOI, PCD, OLED display and ISP. So our offering is very broad, and I think our solutions are competitive. So if we come back to look at this thing fundamentally, we'll not commenting about our competitors' customer base. I think beside who have mentioned, we have seeing more regional mature capacity buildup driven by increasing importance of the semiconductor industry, in addition to the geopolitical tension. It's our view that this is a change in the competitive landscape. So, there's three things that I'd like to say in order to stay competitive. And, first of all, we need to stay competitive so that we're working closely with our customers to provide competitive and comprehensive specialty technology with a continuous and no-migration path. That's coming from our existing customer, as well as a new customer. Secondly, we are one of a few foundries that have an economic scale and highly efficient operations across in all our fabs, whether it's in Singapore, Japan, Taiwan, or China, with a technology offering that could pose a cross-fab to serve our, according to our, a cross-fab to serve our customers' sourcing needs. Going forward, we'll continue to invest where we have strength and differentiation through capacity expansion, at 12I Singapore, as well as our development leader cooperation with the U.S. and China to fuel our future growth. So, I don't think we're missing anything. I think there's -- within our addressable market, we focus on our customer engagement and continue delivering our solution and make sure that we can grow with our customer together. So, in a way I won't comment that there's something that we're missing here. I think we have an adequate solution to serve our customer right, yeah. Bruce Lu Okay, I'm not trying to be critical, but the thing is that your customer seems the choice to choose the competition, while we believe, actually, as far as we can see, that you can have a better cost structure, you have a better process, you have, it seems to me, you have pretty much everything you need. So, I'm just wondering that, what does the customer think. I mean how can we prevent that? Jason Wang I mean, I agree with you. I do think we have a much complete and comprehensive solution, and I think we have a much cost-effective solution as well. And the operation is a lot more efficient and with scale as well. And so, I agree with you. But there are multiple considerations for customer engagement, and there's reason beyond that we both look at it, and that's what we just discussed. So, I think there's a different reason behind it. And I really can't comment about our competitor as well as our customer, but I can assure you that we'll continue to strive to improve and enhance our competitiveness. And then we'll continue maintaining and gaining our market share in those space. Bruce Lu Okay, so my second question is regarding to the technology requirement for the display driver IC, which is an important part for your 28 nanometers. Do we really need to migrate to 14 or 12 nanometers, and when do we expect to see that? Is the partnership with Intel the timing is available or it's ready, it's good enough to catch up the trend? Jason Wang Well, there's a couple questions you have. Actually, the 12 nanometer cooperation is not only limited with the high voltage solution. So, if on a technology development standpoint, our technology advancement into a next generation node has never slowed down, and we are considering a disciplined ROI capacity deployment. However, from a technology development standpoint, we will continue. For the high voltage, in fact, we already have a delivered 22 nanometer solution to help our customer migrating from 28 nanometer for high-end OLED display in the premium smartphone space. The 22 nanometer has already entered production now, and we are expected to reach high-volume production in 2025. And we are very confident that we'll maintain high shares in this market. Now, UMC is the only technology provider on the 22, which offer more competitive side area and unmatched power saving around 30%, and so the UMC's 22 high-voltage platform extends battery life and offers superior visual experience, so we also provide sizable capacity offering in 22. And that has aimed to all our fab, like I said earlier, this will actually strengthen our customer supply chain. We see it beyond 22, into your question about the FinFab. Our engineering development team are working on further expanding our high-voltage platform portfolio to the FinFab in anticipating the AI smartphone. Now, is there a benefit to the FinFab? We certainly think so, and at this point, I think the 22 is the best in the class right now, and the 14 is under development. I mean, the FinFab is under development. Now, if we decide a high voltage on a 12 nanometer, the 12 nanometer program, we can serve many different applications, and after our announcement of the cooperation, we have received numerous inquiries from various industry-leading players. And according to the earlier evaluation feedback from those customers, our 12 nanometers performance will be very competitive in the industry to serve different applications, so it's not only limited at the high-voltage space. Bruce Lu A very quick follow-up. Do you expect the discrete driver IC to adopt FinFab in 2026? Jason Wang 2026? I think that's a bit early. I think the 22 will probably still remain as the mainstream. Bruce Lu I see. Thank you. Operator Thank you, Bruce. Next question, Charlie Chan, Morgan Stanley. Go ahead, please. Charlie Chan Thanks. Jason, Chi-Tung. Good afternoon, and congrats for a very good result, both margin and revenue suppressed to the upside, especially I think most of your peers commented that outside of AI, the cycle recovery remains to be very slow, so a very, very good execution. And I still want to follow a little bit on the gross margin question, so maybe first to Chi-Tung, because according to my calculation, the NT dollars depreciation may be 3 percent points over the past quarter, so contribution to gross margin could be 1% points, but you were saying that 2Q gross margin beats mainly coming from the FX, so do we miss anything on that comment? Chi-Tung Liu Roughly every 1% of NT dollar depreciation will lead to about 0.4% of the margin increase, so 3% Forex movement translate into about 1.2, 1.3 percentage points for quarter two. And of course there's some minor items including the utility increase, our previous forecast was slightly higher than the actual adjustment rate, but I think again Forex is still the main factor for the 35.2% gross margin versus our guidance of 30%-ish gross margin. Charlie Chan Okay, okay, thanks. Yeah, that's clear. So maybe next question to Jason, I mean we heard you about you can be flexible on pricing, you want customers to stay competitive, so I was assuming that probably there would be some ASP erosion, but in return you can get some business opportunity, but it turns out that your pricing is firm, but your revenue still grows nicely in the quarter. So again, what did we miss? Are we too conservative on end demand, or what are we missing? Thank you. Jason Wang Well, I mean, first of all, like you said, like for like pricing remains unchanged, but the blended ASP reflected change of product mix, between 8 and 12-inch as well mainly because that's aligned to the end market. We do see some assessment test, assessing the inventory correction cycle. So some of the restocking, demand actually coming back, while we actually stay away from commodity market segment, so I think, we've try to manage it as, try to balance this portfolio as well as the product mix diligently. I think that's more of a result. In addition to that, I also believe, you have to say fundamentally competitive is my offering that differentiate us from technology solutions. We're going to continue to advance that and continue to expanding our specialty technology space and hopefully that we can continue maintaining that. Now, if it comes down to if we do need to elevating our customer for their product to be competitor in their market space and helping them to win more market share, we certainly will address that. And our angle is we try to creating a win-win scenario to benefit both sides in the long run. Charlie Chan I see. Thank you. Yeah, and maybe on that interposer side because my understanding is that the end customer is probably migrating to the next generation AI GPU and the interposer design may change. So I'm a little bit concerned whether you stand about whether you can maintain the interposer capacity. I'm concerned that interposer basis may go away, maybe one or two years. Is that a fair concern? Jason Wang Sure. Absolutely. I mean, just like any other technology, the product will continue migrating into the next generation. But at the same time, like any other capacity on different technology nodes, there also another product pipeline is coming into that. So the product pipeline management is a key. We continue engaging a new product coming into the existing capacity and while some of the existing product may migrating to the next generation. However, our 3D IC roadmap, in addition to interposer that which will engage in the pipeline, we're also developing the wafer to wafer hyper bonding, which that we have announced in the past quarter. So the way we view this is the 3D IC solution offers the advantage including a form factor reduction, higher bandwidth and lower power consumptions. So not only on interposer, we also are expanding our offering in that front. We are the first foundry that with the wafer to wafer bonding solution for the RFSOI that are production ready today. And our second RFSOI wafer solution is able to achieve an impressive 45% form factor reduction. And even beyond the form factor reduction, our high bandwidth hybrid bonding solution can also cover memory and AC with our qualified IP foundations that will make our offering well positioned to address the increasing needs of the inference engine of the various edge AI applications in the future. At the moment, we are working closely with AI focused customer on tailored solution to meet their specific needs and in a various combination of our hybrid funding technologies. In summary, we are confident that the interposer hybrid funding has a great potential and we are committed to continue to invest in R&D to ensure we can serve our customers the best we can. Charlie Chan Understood. Thank you. And last one, I'm not sure if I missed it, but about your 12 nanometer partnership with Intel. One is that I wanted to know about the progress and maybe whether the timing can be ahead. And as you also see that Intel is changing their foundry business leadership, do you think that will change or service your ownership with Intel? Jason Wang I mean, first, the 12 nanometer cooperation with Intel has been on track for mass production in 2027. And that project is very much on track and progressing well. And from a schedule wise, right now, we are working diligently with our partner and as well as the key customers to further accelerate the schedule. Overall, we are cautiously optimistic about the progress and we'll update accordingly. So I actually feel very good about the current progress. Now the in terms of leadership question and the project itself is, I consider progressing well and I think the leadership will continue to view that as a sand. So I think the objective of this cooperation has not changed. The goal remains the same. And our current focus is to deliver a very competitive solution for the mass production in the 12 nanometer, so this cooperation. Charlie Chan Thank you, Jason. So very, very last one because I'm still a little bit surprised by to the upside by your third quarter revenue guidance, right. Because you're one of your major customer Media Tech, their second quarter inventory days actually went up to 72 days, 1Q was 66 days. So first of all inventory days have started to go up again and they are guiding their second quarter revenue to be flat, right. So I'm just wondering why you can outgrow the market especially customers inventory data go out again. So, sorry for keep coming back to this inventory or cycle question. Jason Wang I mean, first of all, I mean, we see a continuous inventory improvement across all segments. And some of the customer may have seen a little bit of hiring up and basically all customers have improved their inventory level and we have seen that. And we expect to see the inventory will reach relatively healthy by end of this year. And so that's also we guided that the customer was still cautious of -- have a cautious approach to their inventory management based on the current market outlook. However, for the automotive segment, the end market demand outlook for the automotive still remains very soft compared to other segments. And the inventory level has improved, but the basic inventory is still above the seasonal level. So I think the beside the auto, the rest of the market segment, it will probably start experiencing some of the seasonality patterns. So I feel from an inventory correction point, we should have already exited for those communication consumer and computing. Charlie Chan So in that case, do you change your industry assumption this time for ex memory and also foundry? Jason Wang All addressable market outlook? Charlie Chan Yes, yes, yes. Did you do you realize update this time? Jason Wang Last time we talked about our UMC addressable market will remain flattish and our outlook has not changed. And our projection still shows the UMC addressable market will remain flattish in 2024. And our goal is we expect to outperform our addressable market in 2024. As a sound our customer have adapt our solution and ramping and gaining market share for the second half. Charlie Chan I see. Thank you. It's super helpful. Thanks guys. Operator Thank you, Charlie. Next one, Laura Chen, Citi. Go ahead please. Laura Chen Thank you very much for taking my questions. I also have a follow-up questions in terms of the end demand. As Jason, you mentioned that you see the relatively strong order for computing and also communication. But some of your competitors, they mentioned that they just kind of rush order. So I'm wondering that is the order visibility can be sustainable into Q4 from your perspective? Jason Wang Well, I hope if I mislead you, I'm sorry about that, but Laura. What I said is we expect to see a mild pickup in Communication, Consumer and Computing segment. And despite the -- however, despite a mild recovery in Q3, we have not seen the sign of a strong rebound as the customer remain prudent on managing their inventory level. So I think on the some of the market segments such as communication consumer and computing area, I think we are in the process of accessing the inventory correction cycle by end of this year. And while the automotive will probably exiting by Q1 next year. And while we're exiting this and I think the customers remain prudent. And I think right now the phenomenon is more showing, we are going back to the traditional seasonal pattern on the annually, the seasonal pattern that aligns to the market outlook. Laura Chen Okay. Thank you. That's very clear. And also I noted that for our IDMs, that's fine, the revenue declined quite substantially since the peak in Q4 last year. Can we assume that is mainly because of the automotive related or also we are seeing the same trend that for the consumer computing part that gradually improved, while automotive, industrial, how far the IDMs that could still relatively muted for the next few months? Jason Wang Well, first of all, you're right. Our so our IDM customer were also impacted by the global semiconductor downturn across not only communication automotive, across the consumer, communication, computer and automotive segment. And some of the IDMs and their customer have a pile up inventory, which result in a decline in wafer demand at their foundry supplier. So I think that 2024 is a year with a complication of inventory correction as well as end market soft. However, we anticipate the inventory level will improve and so although at a slower pace again and so longer term, we once the inventory corrections over and on the longer term we foresee IDM will continue to rely on foundry partner and their contribution will gradually recover. Laura Chen Okay. Also a follow-up on that because we see some of the IDM our clients like Texas Instruments, they think they're also aggressively expanding their internal capacity. But once their demand getting stabilizing, are we still assuming that they will continue to do like outsourcing before or they will tend to insource more internally on your perspective? Jason Wang I think after the COVID, after the capacity constraint, there's many different companies that look at their supply chain resilience question. So having internal capacity is one of the solution to address that supply chain resilience question, a concern they have. And from the foundry partner standpoint, I think that remains very important. I think that will be considered one of the entire supply chain ecosystem. And I think the IDM will continue rely on the foundry partners to an extent. However, they will probably balance that a little bit to ensure their supply chain resilience is improved. Laura Chen Okay. Thank you. And also, hopefully you can give me more understanding about the PDIC business model. We know that a lot of advanced packaging or wafer base done by on the wafer foundry side. But since we are also expanding the PDICs, the hyper bonding type of design. Can you elaborate more on how is that business model going with the OSAT and also our competitors or potentially customers? Thank you. Jason Wang It's in our view, the semiconductor foundry OSAT ecosystem remains very important. So I think that's our view. So the 3D IC roadmap that we have that require us to working closely with our ecosystem partners and not only on the OSAT also as well as the memory or ASIC on the qualified IP supplier as well. So I think the landscape will require us to expanding our ecosystem and to strengthen our partnership with our back end partner as well. So I think this in our view, this still consider us an ecosystem to serve our customers. Laura Chen Okay. Thank you. Operator Thank you, Laura. Next we'll have Brad Lin, Bank of America. Go ahead please. Brad Lin Thank you for taking my questions. So my first question is I want to follow-up on the interposer capacity thing as we recognize some potential downside eyeing on the well potential well, [Indiscernible] adoption in the future. So we explained that we are well, UMC is developing the wafer to wafer hybrid bonding, Does that mean that this inter poster capacity can be fungible and then apply to this kind of 3D IC in the future? Jason Wang No, they are different offering and the interposer capacity will continue serving as the interposer needs. And while we have a continued roadmap for the interposer going to the next generation as well. And so that technology advancement is not going to stop. And at the same time, we'll see more interest coming for the interposer thing. And I think that we actually engage different application of the continued pipeline for this in the future. 3D IC wafer to wafer, hyper bonding is extension of our advanced packaging offering. So we'll continue expanding that and we think from our addressable -- for our addressable market the wafer to wafer hybrid bonding will provide us the expansion of the addressable market and I think we are well fitted with our solutions. Brad Lin Got it. And so we see we are pretty good potential there on the HAI from this wafer to wafer technology. So, what time does UMC expect this contribution to rise and which are the -- well, maybe potential key clients? Jason Wang In the near term, we already announced for the RFSOI stacking, it's already ready for production. So on the RF front end, that's already started to production. And from being related to future AI exposure, I think we kind of touched that last quarter as well. The AI expense on the cloud to edge, I think it will still take some time. But it's our belief, the new use cases will inevitably emerge along with the value chain. Right now, we only see in the growing number from existing AI, PC, notebook or smartphone that requires Silicon content to handle this case. But furthermore, the real opportunity that we believe lies beyond the existing edge device, which is in the new emergent application under the AI megatrends such as the ADAS, autonomous driving, robotics, Industrial 4.0, future breakthroughs, which will drive significant increase of silicon content accordingly. And those the technology solution that we offer would definitely be beneficial to that. And I think the offering that we have not only on interposer 3D IC, wafer to wafer also for the other low power BCD number that will also very well suited to meeting those demands in those AI related market. Brad Lin Got it, got it. So that actually quite related to the second question that I want to try to ask here is that well, for the utilization rate, yeah, even though we see pretty well good recovery in the second half of the year with more than 70% of the UTR, but we are eyeing on the future. We are definitely not, I mean, the company is definitely not satisfied with only this level. So we totally believe that well, UMC already well foresee some of the long term drivers to kind of potentially leave the UTR meaningfully back to a sustained 80% or 90% in the future? So I think you also mentioned that some of new device or application might be the ones like robots. So would you please share with us your visibility on that and also how would that bring you in the well, mid to long run? Thank you. Jason Wang Well, first of all, we're very, very optimistic about the future semiconductor market. The AI is going to be a very big driver. And however, I think so not some of the new use cases will still have -- we have to see them to come. And I think this is still a bit early right now. However, we have very, very high expectation in the longer term. Meanwhile, while we ascertain the inventory correction cycle between end of this year to early next year, I think the market will go back to normalcy. So that means that we're very much is subject to the end market demand. And so I think for the next year, we have to wait and see how the end market demand goes, because there's still macroeconomics inflation concerns. And at this point maybe too early to say how much of a utilization improvement utilization rate improvement we will expect. However, going longer term, I have no doubt the utilization rate will increase. While we don't have the clear projection on when. So our focus now is we want to continue to sustain our strong financial performance like what we did in the down cycle and as a result of our company resilience. This is manifesting patient of our continuous effort in developing a competitive specialty technology offering as well as optimizing our customer base and product portfolio. I hope that the current performance shows that. Going forward, we will continue to focus on specialty technology development and our ROI driven capacity expansion to capture the market upturn once they come. On the specialty technology development, our industrial leading offers, which will broaden our addressable market and enhance our customers' competitiveness like what we have recently announced. And the customers are currently migrating their 28 nanometer products to our 22 nanometer technology. Customer will also adopting our 12 nanometer thin fab. For high voltage product, we expect the 40 28 high voltage customer will adopting a 22 high. Emerging memory application will transition to 28 and 22. We are very confident about the 28 and 22 for the longer term. We also expect to see more interest in the 55-40 mature area such as RFSOI. And while we talk about all those from the future capacity expansion plan with our geographically diverse manufacturing footprint, we'll strive for growth through our P3 expansion in Singapore, 12 nanometer partnership in U.S. I think we're well positioned for the capture, the future growth of semiconductor needs. And the utilization rate will increase. And meanwhile, I think we just have to wait and navigate through this cycle. And I think that's how I feel about the utilization rate projection. Brad Lin Got it. Thank you very much. And maybe one last question will be on the -- well, so given the product design lead time, we believe definitely limited visibility into next year, but we believe we are totally engaging with the clients on the potential design or specialty technology adoption or the new node technology that are used in the next year and then well, do we have a confidence -- do we have a good confidence level that ASP will remain well resilient at least in terms of the spend ASP wise? Jason Wang I mean, from a pricing strategy point, I mean, we on a higher level, like I said, we believe we have to elevate our customers' competitiveness, right. And by doing so, that's you have to provide your value proposition, including the technology offering, including the partnership and added with a scale capacity support so on and so forth and the manufacturing performance. So the certainly that will help with the ASP, but the bottom line is we want to stay competitive and we will. And I think that's been all along our pricing position as well strategy for the past year and as well as going forward. Brad Lin Got it. Thank you very much. Operator Thank you, Brad. And Brett was our last question for today's conference. We thank you for all your questions. This concludes today's Q&A session. I'll turn things over to UMC, Head of IR for closing remarks. Michael Lin Thank you for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at [email protected]. Have a good day. Operator Thank you. And ladies and gentlemen, that concludes our conference for second quarter 2024. Thank you for your participation in UMC's conference. There will be a webcast replay within two hours. Please visit www.umc.com under the Investors Events section. You may now disconnect. Thank you and goodbye.

AGCO Corporation (AGCO) Q2 2024 Earnings Call Transcript

Good day. And welcome to the AGCO Second Quarter 2024 Earnings Call. All participants will be in a listen only mode [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Greg Peterson, AGCO Head of Investor Relations. Please go ahead. Greg Peterson Thanks, and good morning. Welcome to those of you joining us for AGCO's second quarter 2024 earnings call. This morning, we'll refer to a slide presentation that's posted on our Web site at www.agcocorp.com. The non-GAAP measures used in that slide presentation are reconciled to GAAP measures in the appendix of the presentation. We'll also make forward-looking statements this morning about our strategic plans and initiatives as well as their financial impacts. We'll discuss demand, product development and capital expenditure plans and timing of those plans and our expectations concerning the costs and benefits of those plans and timing of those benefits. Future revenue, crop production and farm income will also be discussed as well as production levels, price levels, margins, earnings, operating income, cash flow, engineering expense, tax rates and other financial metrics. Our expectation with respect to the sale of our Grain & Protein business will be discussed. All of these are subject to risks that could cause the actual results to differ materially from those suggested by those statements. These include but are not limited to; adverse developments in the agricultural industry; supply chain disruption; inflation; weather; commodity prices; changes in product demand; interruptions in the supply of parts and products; the possible failure to develop new and improved products on time, including premium technology and smart farming solutions within budget and with the expected performance and price benefits; difficulties in integrating the PTx Trimble business in a manner that produces the expected financial results; reactions by customers and competitors to the transactions, including the rate at which PTx Trimble's largest OEM customer reduces purchases of PTx Trimble equipment and the rate of replacement by the joint venture of those sales; introduction of new or improved products by our competitors and reductions in pricing by them; the war in the Ukraine; difficulties in integrating acquired businesses; and in completing expansion and modernization plans on time and in a manner that produces the expected financial results; the need to fulfill closing conditions, including obtaining required governmental approvals in connection with the sale of our Grain & Protein business; and adverse changes in the financial and foreign exchange markets. Actual results could differ materially from those suggested in these statements. Further information concerning these and other risks is included in AGCO's filings with the SEC, including its Form 10-K for the year ended December 31, 2023 and subsequent Form 10-Q filings. AGCO disclaims any obligation to update any forward-looking statements as except as required by law. We will make a replay of this call available on our corporate Web site. On the call with me this morning is Eric Hansotia, our Chairman, President and Chief Executive Officer; and Damon Audia, Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead. Eric Hansotia Thanks, Greg, and good morning. Before I go into the quarterly details and the exciting things happening at AGCO, I wanted to take a moment to reflect on how I'm feeling about the industry and the things that we are doing to position AGCO for success. As in prior cycle downturns, there's always a big correction year where the industry slows rapidly as farmers reduce their spend on new equipment. We've known 2024 was going to be that big transitional year. After the transitional year, industry demand tends to float around trough levels for a period of time before ramping back up. The duration and the severity of the decline are influenced by many things like commodity prices, weather and stock-to-use ratios, which will make every downturn a little different. For AGCO, we understand the industry dynamics and are working aggressively to address the challenges and position ourselves for success. We are rapidly cutting production this year faster than in the past to rightsize dealer inventory levels this year in hopes that production and retail demand are more balanced in 2025. We have been actively addressing costs for several quarters. In the second quarter, we made the decision to further restructure our workforce due to the weakening market demand. We also challenged our teams to think differently with technologies and other sustainable lower cost operating alternatives. Much of these savings are still to come in 2025 and beyond, helping to further improve our ability to deliver higher operating margins throughout the cycle. In addition, we are doubling down on being the most farmer focused company in the industry. With our continued role at our FarmerCore, we are helping better serve farmers how they want to be served. In addition to our unique mixed fleet retrofit mindset, we are helping farmers improve their productivity and profitability despite the industry backdrop. With this mindset and focus, we are a different company that is more farmer focused, more resilient and more profitable. Now Damon will cover the financials and the outlook later, but even in a big correction year where we are dropping well below mid-cycle, we are still planning on delivering one of the best operating margins in our history and well above historical levels at these industry levels. With that as a backdrop, let's jump into the second quarter, Slide 3, where you can see that AGCO's sales were down approximately 15%. Our results reflect the impacts from both softer industry wide demand and our resulting production cuts. Our team is analyzing all aspects of the business to identify cost savings and better align our operations with the current market environment. We are balancing the need for cost reduction with our commitment to farmer focused customer support and innovation, as well as our desire to continue our market share growth ambitions. Last week, we announced a definitive agreement to divest the Grain & Protein business. The divestiture of this business supports our strategic transformation, recently accelerated by the PTx Trimble joint venture and is an inflection point for AGCO. Divesting this business allows us to streamline and sharpen our focus on AGCO's portfolio of award winning agricultural machinery and precision ag technology products. We believe this sale will better position us for the long term growth in our higher margin and higher free cash flow generating businesses. Simultaneously, it will raise our profitability through the cycle as Grain & Protein has historically been a below average margin business. I do want to take a moment to thank the Grain & Protein teams around the world who have done an excellent job staying focused on serving the customers and delivering on their commitments while we work through the strategic review of the business. Now getting back to our second quarter results. Consolidated operating margin was 10.3% on an adjusted basis. Lower sales, production cuts and operating leverage were the major factors in our reduced margins. South America remains our most challenged region as the industry continues to contract. In that region, we saw operating margins of approximately 3.6% in the second quarter of 2024 compared to more than 20% in the second quarter of 2023. Due to falling demand, we cut production by around 57% in the second quarter compared to the second quarter of 2023 with additional cuts planned for the balance of 2024. We remain confident that long term agricultural fundamentals remain positive despite the downturn in commodity markets. Our optimism for the long term demand for our products is driving continued investment in premium technology, smart farming solutions and enhanced digital capabilities to support our farmer first strategy while helping to sustainably feed the world. Slide 4 details industry unit retail sales by region for the first half of 2024. Global industry retail sales of farm equipment in the second quarter were lower in all of AGCO's key markets. North American industry retail sales decreased 8% for the first six months of 2024 compared to the first six months of 2023. Sales declines in smaller equipment were more significant than most of the larger equipment categories. In Western Europe, industry retail sales dropped 5% during the first six months of 2024. South American industry tractor retail sales decreased 14% during the first six months of 2024 compared to the same period of 2023. Strong declines were consistent across Brazil, Argentina and the smaller South American markets. The weakening demand in Brazil was negatively magnified by the floods in Rio Grande do Sul while also continuing to be affected by funding shortfalls of the government subsidized loan program and a challenging first half harvest in the Cerrado region. Similar to tractors, the combined industry was down significantly in all regions through the first six months of 2024. Although market conditions continue to soften from the extremely strong conditions over the last few years, we remain positive about the underlying ag fundamentals, supporting long term industry demand. Population growth and the increase in middle class will drive the need for additional grain. Stocks-to-use levels are higher than the recent lows but are still below prior downturn levels. As the demand for clean energy grows, the need for solutions like sustainable aviation fuel and vegetable oil based diesel will grow strongly, driving demand for our farmers that will further support commodity prices. Also, input costs such as fertilizer and fuel are down from their peaks in 2022, which has helped dampen the effect of lower commodity prices are having on farmers' profitability. AGCO's 2024 factory production hours are shown on Slide 5. Our production decreased in the second quarter by approximately 23%. Significant reductions were made in all regions with the biggest reductions being in South America and Asia Pacific. The unit company inventory management remains a key priority for us as the market continues to soften and we pushed to rightsize inventory levels this year. As a result, we expect further production cuts through 2024 with all regions targeting to align to retail demand for 2025. Currently, we are expecting 20% to 25% lower production in 2024 versus 2023 on a full year basis, which is a more significant reduction than our prior outlook, given our current 2024 market forecasts, market share growth assumptions and targeted reductions to dealer inventory. In general, our order board is in good position and relatively consistent with last quarter. However, there are pockets of dealer inventory that we will need to focus on rightsizing in the balance of the year. In Europe, tractors have between four to five months of orders. Dealer inventories of approximately four months of supply are in line with our targeted levels. Massey Ferguson and Valtra dealer inventories are a bit higher and Fendt a bit lower than the average in part due to strong share gains on Fendt. In South America, we have order coverage through September 2024 where we continue to limit our orders to one quarter in advance due to inflationary pressures. Despite our aggressive production cuts, we still have approximately four months of dealer inventory across all products as the industry conditions continue to weaken. Our goal is to further reduce it by year end. In North America, we currently have approximately four months of order coverage depending on the product. Smaller rural lifestyle equipment has the lowest order coverage while bigger equipment is higher. Our dealer inventory increased by just over one month compared to last quarter as industry conditions weakened further and is now approximately eight months of supply. Our North America targets for dealer inventory range from four to six months depending on the product. We will continue to focus on underproducing retail demand coupled with retail market share execution to bring dealer inventories in line with our targeted range. Moving to Slide 6 where you'll see our three high margin growth levers aimed at improving our mid-cycle operating margins to 12% and outgrowing the industry by 4% to 5% annually. Now to reiterate, these three growth levers are; the globalization and full line product rollout of our Fendt brand; focusing on accelerating our global parts business and increasing the market share of genuine AGCO parts; and growing our Precision Ag business. Our Precision Ag business is where we'll focus today. We recently held our 2024 Technology Days in Westminster, Colorado and near Salina, Kansas. Our growing technology stack and Precision Ag products were on full display to those in attendance. Slide 7 recaps some of the key messages from that event and how AGCO is committed to differentiated farmer focused solutions for the mixed fleet. In Westminster, the home of our PTx Trimble joint venture, we discussed our go-to-market strategy for our aftermarket and retrofit side of the business and our PTx OEM solutions side of the business. Our aftermarket and retrofit dealers focus on adding new capabilities to existing machines of almost any make and vintage. Our PTx OEM solutions provide technology and services to over 100 OEMs from the factory, in addition to AGCO's Fendt, Massey Ferguson, and Valtra brands. AGCO is unique as the only major OEM in the world with a separate independent retrofit dealer channel. We can take on-farm approach to sales and act as consultants for farmers, recommending the best PTx products for their specific use cases. These retrofit dealers are primarily focused on selling incremental solutions to address farmer pain points, to improve productivity and profitability, leveraging the farmer's existing machines. This is in contrast with the traditional dealer whose focus would tend to be in selling a completely new, more expensive piece of equipment. Now both types of dealers are critical to ensuring farmer satisfaction. Because AGCO has both, it allows us to be the most farmer focused company in the industry and the farmers' most trusted partner for industry leading smart farming solutions. As I touched on in my opening comments, we also discussed how we're bringing the dealer to the farmer through our FarmerCore initiative. This revolutionary approach in our industry blends brick-and-mortar presence with mobile trucks capable of performing most services right on the farm. This mobile model will help us further grow our parts penetration by utilizing the telemetry data coming off the machines and proactively performing maintenance before it becomes a problem. Just like the shift to e-commerce and people's daily lives, we strongly believe that FarmerCore will help improve the AGCO customer experience by taking business to the farm where many of them want to be served. Lastly, we saw product demonstrations from across the PTx portfolio that illustrated how our technology stack has taken a big leap forward with our new PTx Trimble joint venture. We showed how AGCO is able to optimize farms better than ever with the advanced products like guidance, water management, the connected carbon exchange platform and Precision Planting's radical agronomic soil testing solution. All these solutions help make the farmer more productive and profitable. Slide 8 covers some of the key milestones AGCO has committed to in terms of smart solutions, targeted spring will launch later in 2024 on a retrofit basis with an OEM solution in 2026. Also in 2024, we will be launching our autonomous retrofit solutions for grain cut applications with more autonomy across the crop cycle to come. We anticipate having autonomous solutions for all parts of the crop cycle by 2030. We also showed our advancements in connectivity and cloud data management, allowing farmers more actionable insights and control over their operations. Our farm office highlighted the agronomic and machine data management benefits at the farm level across numerous makes and models of machinery. Utilizing ag tech requires data. AGCO's solutions allow farmers to manage, collect and make data available to maximize their investments in Precision Ag technology. We aim to deliver the most agnostic data platform across the crop cycle and for mixed fleets. Furthermore, our technology stack will allow customers to participate in almost any sustainability program like the PTx Connected Carbon Exchange. We highlighted the next evolution of our autonomous grain cart, which now enables two grain carts to partner with one combine to ensure maximum output and the utilization of the combine. An autonomous grain cart helps farmers get their crop harvested earlier, preserving substantial yields. Additionally, it can enable the flexible deployment of labor by freeing up a driver from the grain cart. The easily installed retrofit autonomy kit was shown in two different brands of equipment, highlighting our farmer focused mindset and the ease of adaptability across the mixed fleet of brands. Autonomous tillage is the next phase of the crop cycle we are tackling. Autonomous tillage enhances productivity across diverse farm sizes and locations by ensuring timely crop planting within ideal windows, extending operational hours for increased throughput and boosting operational efficiency through flexible labor management. A major benefit of AGCO's retrofit kit is that the same hardware and sensors can be used as we enable more phases of autonomy across the crop cycle, making it more convenient and less costly for farmers. Our automated planter and fertilizer options were also shown on a Momentum planter. Controlling fertilizer usage is a big opportunity for Precision Ag and fertilizer placement and timing has an impact on farmers' profitability. Momentum's dry fertilizer system offers farmers flexibility and accuracy. Momentum's agronomic features also solve compaction problems and offer accurate seed placements, leading to more dollars in the pockets of farmers. Lastly, we showed our targeted spray solutions. PTx Trimble offers WeedSeeker 2. This is a proven retrofit solution already in the market today, which detects weeds with infrared sensors and applies herbicide only where needed. We also showed our Precision Planting Symphony Vision system, which utilizes cameras to detect and spray only weeds and allows scouting of farmers' fields to identify where weed pressure is the highest. There's never been a more exciting time to be in the ag space. With these and several other technologies, we remain committed to our goal of achieving $2 billion in annual Precision Ag sales by 2028. For those of you that were with us, we want to thank you for your attendance at the event and your interest in AGCO. We hope that you saw how we are driving innovative solutions that are focused on helping improve farmers' profitability. For those of you who did not attend, we hope we piqued your interest and that you'll attend in our future events. With that, I'll hand it over to Damon. Damon Audia Thank you, Eric. And good morning, everyone. Slide 9 provides an overview of regional net sales performance for the second quarter. Net sales were down approximately 16% in the second quarter compared to the second quarter of 2023 when excluding the negative effect of currency translation and the positive impact of acquisitions. By region, the Europe/Middle East segment reported sales down roughly 5% in the quarter compared to the same period of 2023, excluding the impact of unfavorable currency translation and favorable impact of acquisitions. Growth in Germany, France and Spain was offset by lower sales across nearly all other European markets. Increased sales of high horsepower tractors, especially Fendt products, was offset by declines in other products. South American net sales decreased approximately 40% in the quarter, excluding the impact of unfavorable currency translation and favorable impact of acquisitions. Significantly softer industry sales and underproduction of retail demand drove most of the decrease. Lower sales of tractors and combines accounted for most of the decline. The substantial sales decrease in Brazil was slightly offset by modestly higher sales in Argentina and other South American markets. Net sales in North American region decreased approximately 18% in the quarter, excluding the impact of unfavorable currency translation and favorable impact of acquisitions. Softer industry sales and lower end market demand all contributed to lower sales. The most significant sales declines occurred in the high horsepower and mid range tractor categories. Net sales in the second quarter in Asia/Pacific/Africa decreased 35%, excluding the negative currency translation impacts and favorable impacts of acquisitions due to weaker end market demand and lower production volumes. Lower sales in China and Australia drove most of the decline. Finally, consolidated replacement part sales were approximately $488 million for the second quarter, down approximately 1% year-over-year or flat excluding the effects of negative currency translation. Turning to Slide 10. The second quarter adjusted operating margin declined by 280 basis points versus a very strong second quarter of 2023. Margins in the quarter were mainly affected by the significant decline in production, reflective of the increasingly weak industry conditions along with higher discounts. By region, the Europe/Middle East segment income from operations decreased just under $7 million while operating margins improved 40 basis points in the quarter compared to the same period of 2023. The improvement in margin was driven by favorable product mix related primarily to the sales of Fendt high horsepower tractors. North American income from operations for Q2 of 2024 decreased approximately $60 million year-over-year and operating margins were 9.2%. The decrease resulted from lower sales and production as well as increased warranty expenses. Operating margins in South America decreased by approximately $109 million in Q2 versus the prior year. The decrease was primarily a result of lower sales and significantly lower production volumes as well as increased discounts year-over-year. Finally, in our Asia/Pacific/Africa segment, income from operations decreased by $8.5 million in Q2 of 2024 due to lower sales and production volumes. Slide 11 details our June year-to-date free cash flow for 2023 and 2024. As a reminder, free cash flow represents cash used in or provided by operating activities less purchases of property, plant and equipment, and free cash flow conversion is defined as free cash flow divided by adjusted net income. We used $328 million of cash through June of 2024, approximately 45% less than the same period of 2023, primarily related to improved working capital and lower capital expenditures. For the full year, we continue to expect our free cash flow to be in the upper half of our long term targeted range of 75% to 100% of adjusted net income. We also remain focused on rewarding investors with direct returns. In addition to the regular quarterly dividend of $0.29 per share, we also paid a special variable dividend of $2.50 per share in the second quarter. This is now the fourth consecutive year of us paying the special variable dividend. Even with the increased debt associated with the closing of the PTx Trimble joint venture, the special variable dividend is another sign of our confidence in how we have transformed our long term profitability and remain focused on deploying capital in the most effective ways for our shareholders. Slide 12 highlights our 2024 market forecast for our three major regions. For North America, the market has continued to weaken and we now expect demand to be 10% to 15% lower compared to the levels in 2023. The high horsepower row crop equipment segment is expected to decrease after several years of strong growth that was fueled by high levels of farm income. The smaller tractor segment is also expected to decrease in 2024, although the rate of decline is slowing compared to prior years. For Western Europe, we continue to expect the industry to be down 5% to 10% compared to 2023. Farmer settlement and other indices have been hovering near trough levels for a few months now due to reduced commodity prices and higher input costs. We are updating our guidance for South America to reflect the increasing weakness and now expect industry sales down approximately 25% to 30% in 2024 compared to our previous estimate of a 20% reduction. The industry for tractors greater than 340 horsepower combines and planters continue to deteriorate even more than we had anticipated. Farmers are holding onto their grain longer in the region, awaiting higher prices, and shortfalls in the subsidized financing program caused farmers to postpone purchases. Flooding in Rio Grande do Sul have also weighed on sentiment. Although this may affect demand in the short term, South America remains one of the more long term attractive end markets, especially in Brazil where the farm footprint is increasing. While farm income is expected to decline from elevated levels in 2023, AGCO's brand agnostic retrofit approach to Precision Ag and our strong parts business should help dampen the cycle, making our margins less volatile. Slide 13 highlights a few key assumptions underlying our 2024 outlook, which is still inclusive of the Grain & Protein business and also includes the consolidated results of the PTx Trimble joint venture. Despite the weakening market conditions, our sales plan include market share gains. In addition, full year pricing is now expected to be effectively 0% year-on-year. As our raw material costs have stabilized and we pursue further cost savings actions, we still expect this level of pricing will allow us to be approximately breakeven on a net pricing basis. We expect currency translation to have a 1% adverse effect year-over-year primarily due to a weakening of the euro. Engineering expenses are expected to be flat in 2024 compared to 2023, including PTx Trimble. Excluding PTx Trimble, engineering expense would have been down around 7% as we look to moderate some investments given the softening industry outlook. With expectations of our industry declining around 15% from approximately 105% of mid cycle in 2023 to near 90% in 2024, we would expect our adjusted operating margins to come down from the record 12% in 2023 to around 9% in 2024. Given the significant levels of under absorption reflected in our financials as we cut production, coupled with the operating margin enhancements associated with the pending sale of the Grain & Protein business and the additional run rate savings associated with our restructuring announcements, we believe the current forecast 9% adjusted operating margin should be near our trough margin, assuming traditional downturn patterns, which demonstrate the significant improvements we have made to our business over the last several years. We'll provide an updated long term mid cycle operating margin target at our December 2024 Analyst Meeting to account for the performance of PTx Trimble and announced divestiture of our Grain & Protein business. Our effective tax rate is now anticipated to be approximately 30% for 2024, which is roughly 1.5 percentage points higher than our previous guidance. The reason for the increase is due to a higher proportion of income in higher tax jurisdictions. On Slide 14, we highlight a few details in terms of the restructuring plan we announced in late June along with the details of the recently signed agreement to divest our Grain & Protein business. Our restructuring plan was announced in response to continued weakening demand in the agriculture industry and long term efforts to structurally change AGCO's operations. The objective of the program is to reduce structural costs, streamline our workforce and enhance global efficiencies by better leveraging technology and global centers of excellence. As part of the plan, we announced a planned reduction of approximately 6% of our salaried workforce. As a result of the restructuring actions, we will incur between $150 million and $200 million in expenses, mainly related to onetime termination benefits. This expense is anticipated to be incurred in 2024 and the first half of 2025 with $28 million recorded in the second quarter. More importantly, the program will result in between $100 million to $125 million in annual run rate savings, the majority of which will start in 2025, which will help year-over-year profitability. As mentioned earlier, we have entered into a definitive agreement to sell our Grain & Protein business. As of June 30, 2024, the business met the criteria to be classified as held for sale. The company determined the intended sale of the Grain & Protein business does not represent a strategic shift that will have a major effect on the consolidated results of operations, and therefore, results of this business were not classified as discontinued operations. The results of the Grain & Protein business are included within our regional reported segments. We expect to receive proceeds of approximately $700 million from the sale, subject to customary working capital and other adjustments. Upon the classification of held for sale, the company recognized a projected loss of approximately $495 million in the company's consolidated statement of operations based on the current estimate that will be adjusted at the time of closing. The closing of the transaction is subject to regulatory approvals and customary closing conditions and is expected to be completed before the end of the year. Turning to Slide 15 for our 2024 outlook. Our full year net sales outlook is $12.5 billion, down from the record levels seen in '23 and down from our previous outlook. Adjusted earnings per share forecast is now approximately $8. We continue to expect capital expenditures to be approximately $475 million, slightly lower than what we spent in 2023. Our free cash flow conversion should be at the upper end of our range of 75% to 100% of adjusted net income, consistent with our long term target. With continued underproduction relative to retail demand in the third quarter, we project sales in the $2.9 billion range, adjusted operating margins of approximately 7% and adjusted earnings per share of about $1.05. With that, I'll turn it back over to the operator for Q&A. [Operator Instructions] The first question comes from Jerry Revich of Goldman Sachs. Jerry Revich I'm wondering if you could just talk about the decremental margin outlook that's implied for the back half of the year. What's the impact to that of the inventory reduction that you folks are delivering? In prior cycles decremental margins for you folks have been closer to 20%. So I'm wondering as we think about '25 after company inventories have come down, should we be thinking that decremental margins in the first half of '25 being closer to the low 20s that you folks have posted historically? Damon Audia I think, Jerry, as you saw with the production cuts here in the back half of 2024, doing a significant level of reduction, again, the 20% to 25% reductions this year is the highest level we've cut in over a decade, really trying to rightsize dealer inventories as we go through this year. So as we think about 2025 and you listen to Eric's comments about the industry likely floating at this trough level, we would expect, assuming not a significant reduction but we would expect that our decrementals next year should be closer to that mid to high 20s that you would have seen. And again, I think if you factor in the effect of pricing is having here in the back half of the year, you would see that the decrementals from an operational standpoint are in that high 20%, 30% range as well as just being magnified because of the decrease in pricing as well. Jerry Revich And then can I ask on your Precision Ag business, can you talk about developments that you're seeing in the market? How is the aftermarket Precision Ag business performing in the back half of the year versus what you're seeing on the whole goods side? Can you just double click on the near term performance, if you don't mind? Eric Hansotia So our -- what we call our business now is PTx, Precision Technologies multiplied, that's the combination of PTx Trimble, the JV we created and Precision Planting. Both of them have a mix of OEM sales and retrofit sales. The OEM sales are down much like the industry, maybe even a little bit more because there's some channel destocking with some of the key OEMs. But we haven't lost any OEM customers, it's just they're moving with the industry. Retrofit has been up but it's cooling. And so we're seeing areas now where even some of the retrofit is going down. But again, we've got our AGCO ramp-up right on track, maybe even a little bit ahead of plan. The CNH dealer sign ups are on track, maybe even little bit ahead of plan. And we've not lost any OEM customers, not lost any talent from our organization in terms of engineers and things like that. So the business is performing like we would expect, it's just being hit by the industry movements. Next question comes from Tami Zakaria with JPMorgan. Tami Zakaria So I was hoping you could help me with some numbers. So the implied back half production outlook, how much is that versus your expectation of retail sales? I'm trying to understand production versus retail sales growth expectation as we exit this year. Damon Audia So Tami, the production in the back half is going to be down, call it, mid to upper 20s -- mid-20s, more pronounced here in the third quarter. I would say on a quarterly basis, a little bit above the annual guidance. And then in the fourth quarter, sort of, I'd say, in the range of that 20% to 25%, mainly because we're lapping the easier comp in South America in the fourth quarter. So you're going to be seeing production levels down in the sort of low to mid-20s here in Q3 and Q4 as we go into 2025. Tami Zakaria So then as you exit this year, how much is your production going to be versus your expectation of the mid cycle volume? Damon Audia So I guess the way I would look at the mid cycle volume, Tami is, last year, we were at about 105% of mid cycle. If you remember last year, there was also a fairly strong channel replacement or filling of that channel as we started 2023 with a very low dealer inventory level. So you would sort of view that at 105% plus some incremental production, it's a little bit of incremental production for that dealer fill, now coming down to an industry of around 90%. So you can see that we're sort of -- production levels are down 15%-plus to get back to sort of, I would say, this mid cycle when you factor in the overproduction, so call it 10% to 15% is probably the range to think about the delta between where we are and getting back to mid cycle. The pricing down to 0%, what drove that? Was that higher incentives to make trades happen, was it reductions in actual pricing? And how do we think about sort of the regional spread of where that change happened from the prior pricing expectations for the year? Damon Audia Steve, I think the -- generally speaking, the incremental price -- the reduction in our outlook is reflective of the incremental discounts really trying to spur more retail sales. As we've seen the industries weaken here, South America, North America and even to a certain degree, in the non-Fendt branded products in Europe, we've definitely seen the incentives picking up. I think relative to our prior outlook, I would say that the declines or the change has really been focused South America, Europe, and to a lesser degree North America. But I would say Europe and South America were probably the two biggest changes that we saw relative to the last quarter. Steven Fisher And then you're undertaking this restructuring. I'm curious kind of where you think that will leave you relative to the ideal manufacturing structure that you see for the future of the business. Do you think this will get you there or are there still other steps that you think you might be taking over the next couple of years to kind of put the business and the manufacturing structure in place for the next 10 years? Damon Audia So maybe I'll start and then Eric may want to add a few more comments longer term. But the restructuring activities that we alluded to, I would say, we're more SG&A back office orientated. So that 6% reduction in the workforce we've talked about is really reflective of the industry cooling and us trying to shrink our overall cost here. But at the same time, as I may have mentioned during the Technology Day, this is really challenging our teams to look deeper at leveraging technologies, generative AI, and trying to do things in a much more efficient manner. And at the same time, trying to commonize things where we can centralize them potentially in lower cost areas or have centers of excellence versus how AGCO had been built up in the history of a group of acquisitions really not creating that common skeleton. So as we looked at the industry it sort of gave us that opportunity to shrink the workforce to stay where we needed to be, but at the same time, take down or further reduce it through simplicity. So again, I think there's probably opportunities when we look as we learn more about our operations, we learn more about technology. But if you look at what we're talking about that $100 million to $125 million, as Eric alluded to and I alluded to, that's run rate savings, that's not reflective in these numbers that we'll start to see that build in '25 and hopefully more to come as we better leverage technology. But I think on the footprint, Eric, anything else you want to add? Eric Hansotia No, that's exactly right. We're taking fast action on getting ourselves rightsized for the industry that we're seeing. The 6% is a net number so we're actually cutting deeper in some of our high cost countries, hiring back in some low cost countries, but that's really about rightsizing and reflecting the demand we're facing. Then there's a chapter two about thinking differently about how we run the business. And Damon already covered that so I don't need to repeat, but it's largely using artificial intelligence and automating much of the routine tasks that we have and higher leverage of lower cost locations. The next question comes from Mig Dobre with RW Baird. Mig Dobre I want to go back to the discussion on production and dealer inventories. I just want to make sure that I properly understand it. So you talked about your industry forecast being down 15% for this year and production for the full year down 20% to 25%. Is it fair to understand the gap between the two is the amount of underproduction or destocking that is happening in the channel? And if so, can you give us a sense from a unit perspective where you think your channel, your dealer inventories are going to be relative to where they exited in 2022? So before we had that kind of like stocking dynamic of last year. Damon Audia So maybe we'll have to go back and look at the 2022 so I don't think we have that handy right now, but maybe on a follow-up, Greg can get you that. But I think your comment about the industry decline versus the production decline, that's spot on. That's the destocking that we're talking about here to try to better rightsize the inventory. And again, I think as we said on some of my comments, there is still more work to do here in North America. We do want to take that inventory levels down. Right now, we're sitting at around eight months of inventory so we want to get that down a couple more months, and that's part of the large production cuts we have planned in the back half of the year. Europe has been staying flat the last couple of quarters at around four months of inventory. And again, we probably have a little bit of access in our more volume orientated brands of Massey and Valtra. Fendt's doing quite well from a share capture standpoint, which is keeping the dealer inventory levels at probably the optimal level. And then South America, as that industry continues to decline despite the production cuts we're taking in last quarter, in the second quarter, we cut production in South America 57%. And so a significant cut there. As we see that industry cool, the dealer inventory, though, stayed relatively flat. So again, we now have more production cuts in the back half of the year, trying to get that four months down to probably more around three months by the end of the year as we hope we see some improvement going into 2025 in that market. Eric Hansotia And as we said in our comments, this is the big correction year. And most cycles, they go through one big year where there's a big correction, and this one is going from $105 million down to $90 million. And we're being very aggressive, much more aggressive than we would have in other -- in historical cycles to cut production, get it out of the system so that we can be much closer to retail demand in '25. Mig Dobre My follow-up is on the mid cycle comment that you had. Maybe a reminder here in terms of how you guys frame mid cycle. And I guess I am wondering, given the fact that machines have become so much more productive, could that actually have an impact on where mid cycle demand from a volume standpoint truly is these days? Eric Hansotia Well, it's a 10 year average and we watch for trends in certain markets. So like for example, Brazil is an increasing marketplace. It still has a cyclicality to it but the long term trend is increasing because they're putting more acres into production. So we watch overall trends and we've got that factored into our model. And the intention is that 100% is the average industry that we should expect through the business cycle on a global basis. And so the numbers we're talking about are global perspective. And so we're believing we're about 90%. We believe this is the big correction year. And like I said earlier, oftentimes, there's one big correction year then the industry hovers around that for a little while. But it doesn't move so dramatically like it did this year and then it starts working its way back up again that's what we expect to happen. The next question comes from Kyle Menges with Citigroup. Kyle Menges I'd love to follow up on that last question and just dive deeper into mid cycle. So if you're at 90% of mid cycle, could you kind of parse out where you think you are as a percent of mid cycle by region like North America, is that actually closer to 100% than maybe South America and Europe are more in the 80% range? Damon Audia I think -- so Kyle, the way I would look at it, Europe tends to be the least volatile of our major regions. Usually fluctuates in the 105% to 95% range, given the level of subsidies that the EU provides for the farmers. So I would tell you it's probably a little bit below, call it, in the high 90s. And then as you move further down, North America is coming closer to the mids, so it's the 90%-ish range that we're talking about. And then right now with the steep correction in South America, I'd put it a little bit below that. But again, remember, South America's corrections, it's coming off of what were some exceptionally strong years and go back to '22. I think it was about 130% of mid cycle. And so your -- again, percent-wise, the change over the last couple of years is quite significant but I would put Europe sort of right below 100% Europe or -- North America around the 90% in South America, maybe a little bit below that right now. Eric Hansotia It's interesting, we're starting to see some early signs of recovery already in our Australia and New Zealand market. They are the first ones to go down. We're starting to see them finding bottom and maybe even recovering a little bit. So each region is in its own different place based on where they've come from and the farmer dynamics there. But they're all behaving like we would normally see in prior cycles. Kyle Menges And then I was curious, could you talk a little bit about the Trimble margin performance in the quarter? And is there any change to that full year outlook for Trimble margins in the high 20s? Damon Audia The Trimble sales in the quarter were a little bit more challenged. Again, I think what you're seeing with Trimble is a reflection of the overall industry, Kyle. As our industry levels are dropping, as we've talked in the past, there was a significant amount of purchases pre-acquisition from us, putting a lot of inventory in the channel. As the industry has slowed, obviously, that inventory in the channel is now moving out slower than maybe what we had thought a quarter ago and you're seeing that reflected in our industry outlook. And so the sales were a little bit below our expectations. Obviously, that translates to the margin issue given the high margin of that business. Our outlook when we gave you last quarter was the PTx Trimble business was going to be $300 million-plus. As I think about the lower OE sales, a little bit lower industry outlook right now, I would tell you that's probably a little bit below $300 million, so down a little bit, not materially different. So instead of $300 million-plus, maybe $300 million negative would be the way to look at that. But again, it's more a reflection of the industry levels dropping and what was in the channel moving out slower as the industry has slowed. But I think what we would tell you is all of the operational aspects of PTx Trimble, signing up the CNH dealers, connecting with the customers themselves about the value proposition, all of that is in line with our plan, feeling very good about the growth prospects. It's just working through this industry decline and letting this churn, which we knew 2024 was going to be a churn coming off of what CNH was selling to their dealers, moving from Trimble into the AGCO family, all of that was going to create churn in 2024. So again, nothing is changing in the long term prospects, it's just sort of working itself out quarter-to-quarter here. The next question comes from Kristen Owen with Oppenheimer. Kristen Owen I wanted to ask about the assumption for market share gains. I mean, that's something that you've consistently held through the last three guidance cycles. You talked a little bit about Fendt in Europe but just wanted to see if you could unpack the market share assumptions maybe by product line or by geography, help us understand where that share gain is coming from. Damon Audia I think, Kristen, I mean, not going into a lot of specifics. But as we've said for the last couple of quarters, Fendt has been doing exceptionally well in Europe, whether that's a result of the new 600 we've launched, the new -- the Gen7 700, all of those are driving great market share performance. Fendt, as an overall product portfolio, just to put that in perspective, is actually up year-to-date. So when you look at Fendt globally and despite this market environment, the sales are actually up 1% or so, give or take. So strong performance driven by Europe. If I think about some of the other regions, we are seeing share growth in South America, not to the extent that we were hoping as part of our original plan, given the competitive environment there but we are seeing some share growth there. And then again, depending on the pockets, whether you're looking at the combines or different horsepower, we're seeing some share growth in other markets. But it's more selective in areas, again, like lower horsepower, for example, here in North America. The team is doing quite well. So it's a little bit of a mix and match beyond those two South America and the Fendt Europe that I touched on. Kristen Owen And my follow-up is a little bit longer term. I recall during the up cycle, your goal of getting to a more balanced margin portfolio across the regions, some of those efforts were kind of prolonged in South America just given how strong the up cycle was there. Now that we are in this environment of resetting production, particularly in Brazil, are there things that you can do during this downtime to sustainably support the margin improvement in that region? Damon Audia So I think there's a couple of things that you're seeing here, Kristen. I mean, again, I wouldn't lose too much sleep on South America. Production was down 57% in the quarter, that has a tremendous burden on the P&L here. But if you think about South America and you think about those professional growers in the Cerrado region, that caters to the Fendt portfolio. And so Fendt's still a relatively low share there. We've opened up several stores, growing share there. Hopefully, those professional growers are more consistent with their buying behaviors versus some of the smaller growers who are going to be more influenced by the subsidized funding. So that should hopefully help as we grow the Fendt market share. The second one is the Precision, the PTx businesses in total. And again, that's both the Precision Planting business, which as you know, is growing in South America, still a relatively small footprint there, but we see that growing. Then you layer on PTx Trimble, which again had a good business there with significant growth potential in that market. So we see those being more stable, high margin, higher growth businesses. And then as Fendt grows in penetration, coupled with Massey and Valtra down there, the parts business. Again, we've increased the penetration in the fill rate down there. And again, as that specialty spend grows, the amount of parts business growing there hopefully will again stabilize and bolster the underlying margins and improving the bottom end margins in South America over the next several years. Eric Hansotia And just a couple of comments, everything Damon said is spot-on. We've moved from a company that was focused on small, low tech tractors in the south of Brazil to one that's got a full crop cycle set of solutions of industry leading products that's focused on the whole region. We probably have more channel change in South America than any other region in terms of improving our dealer capability. So it's a big shift in product, big shift in channel. Both of those we think are good for the long term prospects and health of that business. Our next question comes from Stephen Volkmann with Jefferies. Stephen Volkmann Most of my questions have been answered, but I wanted to ask about the cadence of the cost cutting program that you've done, the $125 million, I think it was. Do we get sort of the full $125 million in '25, is that the right way to think about it or does it sort of end the year at that run rate and we maybe don't get the full amount? Damon Audia Steve, we won't likely get the full amount. As you know, given our large European footprint, we will go into consultation with workers' councils in Europe, that will take some time. I don't know exactly when we'll be able to wrap that up. But I would like to think -- again, I can't predict the exact timing but hopefully, in the first half of the year, first quarter, maybe first half as we work through, those consultations in sort of the second half. If all goes well, we start to see that run rate then maybe a little bit sooner. But I would have sort of assumed the exit is in that $100 million to $125 million, but definitely getting some of it through the -- as it moves through the course of the year. Eric Hansotia But some of those actions have already been taken. In the non-works council areas, some of those actions have already been taken. So it's a mixture. Stephen Volkmann And what about on the direct labor side, what are you doing there? How should we think about what sort of benefits might come on that side? Damon Audia Steve, we've been reducing our direct labor as a result of the overall industry environment. I think year-to-date, we've taken out probably around 3,000 direct labor associates -- or of course, funding hours over time, flex time, things of that nature. I mean, let me use that as a base when we talk about 2024 and rightsizing the inventory levels, taking the production down, trying to position ourselves for '25. And I think you heard Eric and I both talk about generally feeling this 9% is near the trough level. And again, for us to look into 2025, there are several catalysts that we see should be more positive for us as we go into 2025. You touched on that restructuring, $100 million to $125 million of run rate savings that's not embedded in my numbers. My production is coming down somewhere in the range of 20% to 25%. We look back over the last decade, 25% would be more than we've ever cut in the last decade plus. And any time that we have cut in a big production down year, the subsequent years have been significantly less. And so again, if you think about that retail versus the absorption this year that should be a positive next year if the industry follows, as Eric said, sort of trending in the similar areas. So better restructuring savings, better retail versus production absorption. PTx Trimble, again, we said this is a year of churn. We know it's not at the margins we want it to be. As it works through the dealer inventories, we expect to see that margin accretive in 2025. And then you layer on the Grain & Protein business, which has been margin dilutive this year. As we eliminate that or sell that business, that should be margin accretive next year as well. So if the industry does historical patterns, we feel very good that there's an opportunity that the margins next year could be higher than they were this year, even if we don't see a significant uplift or material change in the industry. Eric Hansotia And our last time, our trough margins were more in the 4% to 5% range. This time, we're -- right now, we're reporting 9% for this period. So we've got a lot of structural changes that have been embedded into the company, not even hitting the upcoming ones that Damon just mentioned. Our last question today comes from Chad Dillard with Bernstein. Chad Dillard So my question is on price cost. Just trying to understand what that data point looked like in the first half of the year and then what are you embedding for the second half of '24? Damon Audia So for the full year, net zero, Chad, price versus cost was slightly positive. Price was slightly positive here in the first half of the year. When you include all the discounts, it will be maybe a little bit on the zero to slightly negative, the net. The material costs are coming down as well in the back half of the year sort of what closes the gap to keep us sort of at a net neutral here. Chad Dillard And then just a second question is about South America. So like given you guys are down plus 50% in terms of production in the second quarter, where does that compare versus prior production troughs? And then I guess the second part is just like thinking about if we do get to that, I guess, absolute trough in terms of production, how should we think about like the operating margins of the business? Do you think you can actually maintain positive operating margins there? Damon Audia I think, again, Chad, for us, we'll have to pull the historical production levels. But I think if -- again, look at the numbers of South America that we're -- we cut production 57% in the quarter and still delivered positive operating margin. I think as Eric alluded to, the structural changes to that business of moving from what were low to medium horsepower tractors into expanding around the crop cycle here with the IDEAL combine, with the Momentum planter, with the Fendt tractors, bringing in our PTx Trimble group now on top of the Precision Planting business there, we have structurally changed the business there. Ideally, we would expect that to be a double digit margin business. Again, this year happens to have two factors going against us. One is the speed at which we're cutting that production. And second, remember, we've been trying to communicate this now for a year. The pricing that South America was delivering a year ago we knew was unsustainable and so we weren't giving really any discounts given the strength of that market. And so we knew that was coming down. So when you put that discounting on top of the absorption, it's really driving the margins down, putting the team in a challenged situation. And despite that what they are delivering is still good margins, positive margins here, which again was a sentiment or a statement of really the way we've structurally changed the business long term there. This concludes our question-and-answer session. I would like to turn the conference back over to Eric Hansotia for any closing remarks. Eric Hansotia Thank you. I'll close today by just saying in the short term, we're focused on executing our plan to reduce inventory and aggressively control costs, to better align our operations with the current weak market environment. The key to our long term success is the continued execution of our farmer first strategy. Our focus is on growing our margin rich businesses like Fendt and parts and service and our Precision Ag business, which we've been investing in heavily over the last few years to become an innovation leader. The strategic actions we've taken over the last six months like launching FarmerCore, forming the PTx Trimble joint venture and divesting the Grain & Protein business should enhance and accelerate the benefits of our farmer first strategy. Over the last few quarters, we've touched on many factors supporting our markets, including growing populations, changing diets, low stocks-to-use levels, increased demand for biofuels and relatively healthy commodity prices. All of these trends give us confidence in the long term health of our industry. And while cycles are typical in the ag industry, how we react and weather them will illustrate how we are structurally changing AGCO to be a better, high performing business regardless of market conditions. And we recognize that we're surely closer to the bottom of the cycle than we are at the top of the cycle. We look forward to seeing you at our upcoming meeting at Farm Progress Show late in August, and thanks for your participation today. Thank you for joining the AGCO second quarter 2024 earnings call. The call has now concluded. Have a nice day.

Earnings call: Zebra Technologies raises full-year outlook amid mixed results By Investing.com

Zebra Technologies Corporation (NASDAQ: ZBRA), a leading company in enterprise asset intelligence, reported a steady performance in its second quarter earnings with sales holding at $1.2 billion, mirroring the figures from the previous year. The company witnessed growth in specific sectors like healthcare and mobile computing, while other product categories saw declines. Despite the mixed results, Zebra Technologies is optimistic about its future, having raised its full-year outlook for sales and profitability based on the strength of its business and early signs of demand recovery. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights Zebra Technologies remains confident in its market position despite some challenges faced in the quarter. The company's plan to deliver significant operating savings is nearly complete, which contributes to its improved financial outlook. With a strong free cash flow and reduced net debt, Zebra is in a flexible position to navigate the current market conditions. The company is cautious yet hopeful about the recovery of large deal activity and is prepared to capitalize on growth opportunities in the second half of the year. Zebra's commitment to innovation, particularly in mobile computing and AI digital systems, is expected to fuel its growth into 2025 and beyond. InvestingPro Insights Zebra Technologies Corporation (NASDAQ: ZBRA) has demonstrated resilience in its latest financial performance, and an examination of real-time data from InvestingPro further elucidates the company's standing in the market. As of the last twelve months as of Q1 2024, Zebra Technologies boasts a market capitalization of $17.23 billion. This valuation is underscored by a Price/Earnings (P/E) ratio of 50.8, indicating a premium that investors are willing to pay for its earnings, potentially due to expected future growth or the company's market leadership. Investors should note that the company's stock has been quite dynamic, with a 38.74% price uptick over the last six months, reflecting a strong return that aligns with the company's optimistic outlook. This momentum is further supported by a significant 12.69% price total return over the past month. However, it's important to consider that the stock is trading near its 52-week high at 93.35% of the peak price, which could suggest a need for caution among potential investors. Adding to the financial picture, Zebra Technologies has achieved a gross profit margin of 46.37%, highlighting the efficiency of its operations and its ability to retain earnings against revenue. Despite these robust metrics, the company has experienced a revenue decline of 24.33% over the last twelve months as of Q1 2024, signaling potential headwinds that may need to be navigated in the upcoming periods. For investors looking to delve deeper into Zebra Technologies' performance metrics and gain additional insights, there are more InvestingPro Tips available, including analysis on the stock's low price volatility and its high EBITDA valuation multiple. For those considering an investment, utilizing the InvestingPro platform could offer a strategic advantage, and by using the coupon code PRONEWS24, users can get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. There are 13 additional InvestingPro Tips listed for Zebra Technologies, which can provide a more nuanced understanding of the stock's potential and help inform investment decisions. Full transcript - Zebra Tech (NASDAQ:ZBRA) Q2 2024: Operator: Good day, and welcome to the Second Quarter 2024 Zebra Technologies Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Mike Steele, Vice President, Investor Relations. Please go ahead. Mike Steele: Good morning, and welcome to Zebra's second quarter earnings conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year. Our forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially and we refer you to the factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of this slide presentation and in today's earnings press release. Throughout this presentation, unless otherwise indicated, our references to sales performance are year-on-year and on a constant currency basis. This presentation will include prepared remarks from Bill Burns, our Chief Executive Officer; and Nathan Winters, our Chief Financial Officer. Bill will begin with a discussion of our second quarter results. Nathan will then provide additional detail on the financials and discuss our third quarter and revised full year outlook. Bill will conclude with progress on advancing our strategic priorities. Following the prepared remarks, Bill and Nathan will take your questions. Now, let's turn to Slide 4, as I hand it over to Bill. Bill Burns: Thank you, Mike. Good morning and thank you for joining us. Our teams executed well in the second quarter delivering sales and earnings results above the high end of our outlook. For the quarter, we realized sales of $1.2 billion approximately flat to the prior year. An adjusted EBITDA margin of 20.5%, a 70 basis point decrease, and non-GAAP diluted earnings per share of $3.18, a 3% decrease from the prior year. As we discussed in our last earnings call, during the first quarter, we began to see modest recovery in retail and e-commerce. In the second quarter, we saw signs of momentum across other end markets, including healthcare, where we realized double-digit growth. Mobile computing returned to growth across each of our vertical end markets led by healthcare and retail. The growth in mobile computing was offset by declines across our other major product categories where year-on-year comparisons are more challenging and we were in earlier stages of recovery. Services and software saw modest growth in the quarter. While we are encouraged by early momentum and demand, we continue to see cautious spending behavior from our customers on large deployments which have not yet returned to historical levels. Another highlight was our sequential improvement in profitability due to improved gross margin and the benefits of our restructuring actions. Our plan to deliver $120 million of net annualized operating savings is on track and substantially complete. Given our second quarter performance, progress in our cost actions, and early signs of momentum and demand, we are raising our full year outlook for sales and profitability. I will now turn the call over to Nathan to review our Q2 financial results and discuss our revised 2024 outlook. Nathan Winters: Thank you, Bill. Let's start with the P&L on Slide 6. In Q2, total company sales were approximately flat, reflecting early signs of momentum demand beyond retail and e-commerce. Our Asset Intelligence & Tracking segment declined 14.4%, primarily driven by printing and RFID on challenging prior year comparisons. Enterprise Visibility & Mobility segment sales increased 8.2% with double-digit growth in mobile computing partially offset by a decline in data capture solutions. We saw modest growth in services and software. Performance was mixed across our regions. In North America, sales decreased 7% with fewer large orders in retail and transportation and logistics, partially offset by strong growth in healthcare. In EMEA, sales increased 10%, driven by mobile computing. In Asia-Pacific, sales declined 3% with continued weakness in China and challenging compares in Australia and Japan, partially offset by growth in Southeast Asia. And sales increased 7% in Latin America led by Brazil. From a sequential perspective, total Q2 sales were slightly higher than Q1, with growth in nearly all product categories as we realized modest improvement in demand throughout the quarter in manufacturing, healthcare, and transportation and logistics. Adjusted gross margin increased 60 basis points to 48.6% as we benefited from cycling premium supply chain costs in the prior year in favorable effects. Adjusted operating expenses as a percent of sales increased 110 basis points. This was driven by normalized incentive compensation expense partially offset by approximately $25 million of incremental net savings from our restructuring actions. This resulted in second quarter adjusted EBITDA margin of 20.5%, a 70 basis point decrease versus the prior year, and a 60 basis point sequential improvement from Q1. Non-GAAP diluted earnings per share was $3.18, a 3.3% year-over-year decrease. Turning now to the balance sheet and cash flow on Slide 7. In the first half of 2024, we generated $389 million of free cash flow as we drove improvements in working capital. We ended the quarter at a 2.4x net debt to adjusted EBITDA leverage ratio, which is within our target range and we had approximately $1.5 billion of capacity on a revolving credit facility as of quarter end. We diversified our capital structure during the second quarter by issuing $500 million of senior unsecured notes, while retiring a receivable financing facility that matured in May. We also terminated our remaining interest rate swap agreements for $77 million of cash proceeds. We have been prioritizing debt pay down and now have increased flexibility given our lower debt balance and improved cash flow. Let's now turn to our outlook. For Q3, we expect sales growth between 25% and 28% compared to the prior year. This outlook assumes continued stability of demand trends across our major product categories with broad-based growth as we cycle easier compares across the business, including significant destocking activity by our distributors during the second half of last year. We entered the third quarter with a solid backlog and pipeline of opportunities. That said, we are not anticipating an increase in large order activity considering the conversion rates on our pipeline remain lower than historical levels as customers continue to be cautious in what remains an uncertain environment. We would like to see additional momentum in large orders before factoring in a stronger recovery. Q3 adjusted EBITDA margin is now expected to be between 20% and 21%, driven by expense leveraging from higher sales volume with benefits from restructuring actions partially offset by normalized incentive compensation expense. Non-GAAP diluted earnings per share are expected to be in the range of $3 to $3.30. We have raised our guide for the full year, reflecting our second quarter performance and early signs of momentum and demand. We now expect sales growth between 4% and 7% for the year and adjusted EBITDA margin to be in the range of 20% to 21%. Non-GAAP diluted earnings per share are now expected to be in the range of $12.30 to $12.90. Free cash flow for the year is now expected to be at least $700 million. We have been making progress rightsizing inventory in our balance sheet and improving cash conversion. Please reference additional modeling assumptions shown on Slide 8. With that, I will turn the call back to Bill. Bill Burns: Thank you, Nathan. Zebra is well-positioned to benefit from secular trends that support our long-term growth. These include labor and resource constraints, track and trace mandates, increased consumer expectations, and the need for real time supply chain visibility. We help our customers digitize their environments and automate their workflows through our comprehensive portfolio of innovative solutions, including purpose-built hardware, software, and services. We empower frontline workers to execute tasks more effectively by navigating constant change in real-time through advanced capabilities including automation, prescriptive analytics, machine learning, and artificial intelligence. At our Innovation Day event in May, we demonstrated how we transform workflows across the supply chain to drive positive outcomes for enterprises across our end market. Our products and solutions are mission critical to enable visibility that consumers and enterprises now expect throughout the entire supply chain. On Slide 11, you will see Zebra solutions can touch a product 30x from its origination to the point of last mile delivery. Let's briefly walk through the journey with a few high level exams. In manufacturing, our machine vision solutions provide quality inspection and track and trace visibility throughout the process. In a warehouse, our wearable mobile computers, autonomous mobile robots and comprehensive RFID portfolio transform receiving, picking and shipping. As the product arrives at a store, associates are equipped with Zebra software running on our mobile computers to assist customers' stock inventory and fulfill online orders. And when an item is delivered to your home, you receive a notification and picture from Zebra's handheld device verifying on time quality delivery. As you'll see on Slide 12, our customers leverage our solutions to optimize workflows across a broad range of end markets. We empower enterprises to drive productivity and better serve their customers, shoppers, and patients. We are seeing Zebra's competitive differentiation in mobile computing solutions drive wins across our vertical end markets. Customers value the capabilities we embed in the software layer of our devices that they leverage to transform workflows and improve outcome. For example, we secured a mobile computing win with the commercial airline utilizing our mobile package dimensioning solution enabled through AI. Also, a North American retailer will leverage Zebra's work cloud collaboration software on their new wearable mobile computers, connecting their associates to drive better outcomes in their stores. Additionally, we are able to displace consumer cell phones at a European retailer with our mobile computers and Zebra's Identity Guardian solution. It provides multifactor authentication for a shared device environment that brings security, productivity, and convenience to the front line. It is also notable that mobile computing contributed to double-digit sales growth in healthcare. Over the past year, our teams have been successfully selling the benefits of our solutions and clinical mobility that empower caregivers while delivering lower total cost of ownership for hospital systems. We have been displacing consumer cell phones with our devices and there continues to be a long runway of opportunity for equipping more clinicians with mobile computers. In closing, we expect to see broad-based growth in the second half as we cycle much easier comparisons and benefit from momentum beyond retail. We maintain strong conviction in our long-term opportunity for Zebra as we elevate our strategic role with our customers through our innovative portfolio of solutions. Our sales and cost initiatives have positioned us well for profitable growth as our end markets continue to recover. I will now hand it back to Mike. Mike Steele: Thanks, Bill. We'll now open the call to Q&A. We ask that you limit yourself to one question and one follow-up to give everyone a chance to participate. Operator: We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Damian Karas with UBS. Please go ahead. Damian Karas: Bill, I wanted to get your thoughts on what you suspect it's going to take to bring some of the larger project activity back into the fold, and maybe you could just give us a sense on, it sounds like you're not expecting much this year. How much upside to your guidance do you think there would be if you do in fact start to see a return sooner rather than later? Bill Burns: Yes, Damian, I think that if we look back to Q1, we saw early signs of recovery, as we talked about last quarter in retail and e-commerce. We're certainly encouraged by the better than expected sales results in Q2, which really, we saw momentum, as we said around beyond retail really. And really, it was driven by mid-tier and run rate business. So large deal activity was pretty consistent in Q2 coming off of Q1, but still well below historic levels. So I think that we see customers overall continue to cite uncertainty to us in the market, their markets, their end markets, which really is reflecting in their purchasing behavior. I'd say that large deployments overall are being spread more to these mid-size deals or smaller deals, and being spread out over a longer period of time because of this, and I think ultimately, when they're placing small orders, they're placing those to add to their installed base or for new applications or expansion opportunities to-date. So I think that the pipeline of opportunities remains strong. I think there's optimism on the part of our partners and customers. I think we'd like to see more momentum in large orders. So we saw the first uptick in large orders in the first quarter kind of flat the second quarter. So we feel okay about that. We saw growth in mid-tier and run rate. I just think we'd like to see more large order activity to call a broader base recovery. So I think now we're seeing strength in mobile computing, strength across kind of large orders, medium and small. But we just want to see more large orders really from our customers. And I think it's just driven by their caution of what's happening in macro today. Damian Karas: Great. That makes sense. And I just want to ask you on the cost front, it seems like there's been a pick back up in shipping rates, and I know that was a little bit of a headwind for you guys in past years. To what extent have you been maybe experiencing some of that cost inflation and maybe just talk through what's kind of in your guidance for the rest of the year? Thanks. Nathan Winters: Yes. Damian, so we have seen a modest increase in rates due to whether that's some of the Red Sea issues or now with the stronger demand, particularly on the ocean rates. I'd say it's a modest impact in terms of incremental costs that we've included in our full year guide. But the team's again working several actions in terms of the different air modes, how we leverage cost off to improve transit time, as well as again working with our partners around the forecast for the remainder of year to get ahead of that, the second half demand and mitigate as much of that as possible. So there is absolutely seeing some increase, but I'd say it's pretty modest at this point and within our second half guide. Operator: The next question comes from Jamie Cook with Truist Securities. Please go ahead. Jamie Cook: Hi, good morning, and congratulations on a nice quarter. I guess, just my first question, I guess, what struck me in the quarter, your EVM margins were much better than I thought, and I think even better than your expectations. I think you were guiding to down margin sequentially. So can you just speak to the drivers behind that? I guess, that's my first question. And then I'll stop there and then I'll give you my second question after, I guess. Nathan Winters: Good morning, Jamie. So, yes, if you look at overall gross margins at 48.6%, this is our highest gross margin quarter in three years, benefiting from the level of large deals. So the strength in run rate and mid-tier is a positive for gross margin in particular within the EVM segment. We're also seeing continued strength in our service and software margins again, which is heavily less more weighted towards EVM, as well as now fully rolling over all the premium supply chain costs. So again, I think it was part of that was just the strength in the quarter and really seeing the incremental volume fall through to the bottom line, driving the sequential improvement in gross margin both within EVM particularly. Jamie Cook: Okay. And then I guess, just given the strength in the margin this quarter, and I mean, I don't think your EBITDA margin guide is now, what 20% to 21%, I think before it was about 20%. I'm just wondering why we wouldn't see better pull-through in the back half of the year, in particular with the top-line growth that you would see relative to declines or flat revenues in the second quarter. Nathan Winters: Yes. If you look at our EBITDA guide for the third quarter of 20% to 21% again year-on-year, that's up primarily due to volume leverage, nearly 9 points. And I think we expect similar deal as well as business mix Q2 to Q3 such that you get a similar margin profile from Q2 to Q3. So if you look at the Q3 guide, effectively flat to Q2 based on that assumption of kind of the underlying mix of deals as well as the business unit mix gives us that similar profile. And I'd say the other really don't expect the same level of incremental benefits sequentially as we were able to realize some of the incremental benefits in Q2 from the restructuring actions. And then you do see that modest uptick implied in the guide for the fourth quarter on the incremental volume. Operator: The next question comes from Tommy Moll with Stephens. Please go ahead. Tommy Moll: First question on the large order activity. At this point where we're nearly through July, how fully baked are your customer budgets for this year? And at what point does the large deal conversation really start to become one centered around 2025, when a lot of the customer budgets are refreshed? Bill Burns: I think that, Tommy, I'd say that customers continue to scrutinize their budgets even as we're well into the year, right? And I think that some of those have to do with, in the past, we've seen kind of year-end spending from our customers, but I think that the uncertainty around the economy is still kind of weighing on them in large deployments and what will happen in kind of second half of year here. So I think that we typically not have visibility quite yet into whether there'll be year-end spending by our customers. We're talking about certainly a pipeline of opportunities that they see. And then the question is, do they move ahead with those in late 2024 or into 2025. I think that from a macro perspective, whether it's interest rates or presidential election or manufacturing production, all those shipping parcel, parcels, shipments have just started to inch up and turn to more positive volumes or growth in volume. So I think all those kind of weighing on their business, and I think there's even though they've got budgets, it's kind of the reluctance to move ahead with those, really because of the macro factors overall. And I think that we'd expect those to continue to kind of stabilize. They can get more confidence in their business and then abate as we get into kind of second half year and into 2025. But I'd say, overall, many discussions with our customers regarding projects; it's really about just taking longer to kind of move those forward still. Now, again, we saw a large order activity about flat Q1 to Q2 overall, and we saw this pickup in mid-tier run rates. So these are all positive signs. Growth outside of retail, which we really saw in first quarter into a broader segment. Mobile computing was the first to decline and the first to return to growth we expected that. So I think everything's moving in the right direction. So I think that -- I think our customers just don't know for kind of year-end 2024 and into 2025, but we're optimistic, I would say, that everything's moving in the right direction. Tommy Moll: And Bill, just from a competitive standpoint, is there anything that you've sensed having changed particularly in a large deal context where you've seen other market participants perhaps become more aggressive on price or whatever other factor? Bill Burns: Yes. No, I would say that really the competitive environment hasn't changed a lot. Overall, we're certainly continuing to maintain share in the marketplace. We feel good about our differentiation that we bring to the marketplace with the depth and breadth of our solutions, our competitive advantages, scale, technology, leadership, our partner community, our go-to-market, our relationships with our customers. So the large deal, phenomenon not coming, not returned to historic levels is not really about Zebra. It's truly about the market. And we don't really see any mark change from a competitive perspective. We're always going to have competitors out there, large and small, and then that continues to be the case. So nothing there. And we feel good about our market position and continue to win in the market. Operator: And the next question comes from Joe Giordano with TD Cowen. Please go ahead. Joe Giordano: Bill, you had mentioned, I guess, it was last quarter that distributors were asking for more product than you were willing to sell because, but you were hesitant because you wanted to make sure you understood where it was going and try to prevent a future buildup of inventory that then needs to get liquidated again. Like, what's the update on that? Have you kind of started to give them what they're requesting? Nathan Winters: Yes, Joe. This is Nathan. I can take that. I'd say overall, the global channel inventory as we look at it from days on hand is still at a normalized level. I think you have pockets around the world, where there's still a little bit of rebalancing both driving down inventory in the channel as well as where there's incremental needs. And I think similar to where we were last quarter, it's working with each one of those partners across the region to ensure that they have the appropriate level of inventory for the demand they're expecting and that we see in the pipeline. So again, it remains very collaborative. I'd say similar position where we were in Q1, where there's always some that want a little bit more. And again, just trying to make sure we have the right amount in the channel to support our end users, but not getting ahead of ourselves, given some of the uncertainty that we've talked about. Joe Giordano: Fair enough. And then just if I could ask on some of your smaller businesses, can you give us an update on trends within like RFID and with Matrox and Fetch and maybe how you see those businesses in terms of like growth in size exiting this year? Bill Burns: Yes. I can take that, Joe. I'd say, RFID challenging kind of second quarter on compares from cycling large opportunities a year ago. I would say that overall would expect return to growth in second half year. We're continue to -- we move into the second half really with strong backlog and pipeline of opportunities across not just retail but transportation, logistics, manufacturing. So we're seeing continued use cases across RFID, including moving beyond apparel to general merchandise inside retail. Clearly track and trace across the supply chain, parcel tracking within T&L, baggage tracking within airlines, so lots of opportunities across RFID. I would say machine vision. We continue to be excited about the opportunity within machine vision, challenging market at the moment. And our Matrox acquisition, when we acquired that asset, we knew was heavily weighted towards semiconductor equipment manufacturing, which is still a challenge segment as well. So decline in the quarter in machine vision, but we feel good about it overall. We saw strength in our Adaptive Vision acquisition. So software -- machine vision software in the quarter that was a bright spot. I'd say that the diversification of that business, which was our focus all along with the Matrox business diversify into areas like automotive and logistics into new areas. We also had our organic investment in machine vision, which really applies more to logistics area. That diversification is going well. Ultimately, we're calling on more customers. We're seeing more opportunities. We're continuing to invest in go-to-market across the globe in just seeing more opportunities is across machine vision. So we feel good about that in a great opportunity for Zebra overall. I'd say software -- our software assets, we're seeing the combination of our mobile devices, especially in the wearable space now with some of our assets in software that we're pretty excited about. So the word cloud solutions really focus on retail and then leveraging our mobile device in the hands of retail associates. And we continue to advance and bring those solutions together and combine that with things like wearable mobile computing. We've seen some early wins there. So we feel good about the portfolio. They're a smaller segment of the market, right, or, sorry, our not market, meaning smaller segment of our business overall or piece of our business. So really mobile computing returning to growth, other segments being more challenged. These are areas that we see as driving the future growth of Zebra. Operator: The next question comes from Andrew Buscaglia with BNP. Please go ahead. Andrew Buscaglia: Yes. So I want to get your thoughts on potential upgrades of devices, especially in 2025. Do you have any data you can share around the age of your installed base? Because presumably a lot of these devices were sold during COVID and we should start to see a natural need to upgrade these in the next year, I would think. Bill Burns: I'd say overall we're, from a mobile computing perspective, I'd say that our customers have really been absorbing the capacity that they've built out during the pandemic more than anything else. So I think there's clearly continued upgrade cycles across all of our customers. But from the idea that they built out so much capacity during the pandemic that they're using that capacity today, and then as the economy slowed, that created even more capacity, so they're ever using that capacity off, I think we're seeing customers move into the idea that they've absorbed some of the capacity and are beginning to buy again. But that's kind of early signs of what we're seeing. I'd say that there's a solid pipeline of opportunities for mobile computing overall, both in kind of refresh new use cases continue to add to the number of devices inside our customer base. And we continue to see competitive wins across the portfolio. So I think the upgrades are out there, the refreshers are out there, and ultimately some customers are sweating assets a bit more, others are leveraging what they have today. And I think that we're confident that as the macro environment gets better, our customers will continue to upgrade our devices and we'll see an uptick in large orders within our business, which will marry with what we're seeing as kind of medium in run rate business growing in second quarter. Andrew Buscaglia: Yes. Okay. Okay. And then you're raising your free cash flow expectations again and just kind of given where we are things looking to start to improve, and you probably have some confidence here. Where do you see capital allocation going into the year-end? Is M&A -- will see some M&A come to fruition before year-end? Or is there a focus more on share repurchase? Or how are you thinking about things? Nathan Winters: Yes. So I think on the first part, again, please raise the guide for free cash flow to over $700 million, including the final settlement, as well as the swap sale in the second quarter. So -- and the improvement overall in working capital to get us above the 100% free cash flow conversion. And as you say, the -- really the prior -- we've prioritized debt paydown as well working on our capital structure in the first half of the year. So ending the second quarter just under our below the target range of 2.5x debt leverage, and that will sequentially improve as we move through the year. I think in terms of overall priority, they remain unchanged. The first is organic growth getting the business back to the growth trajectory we need it to be and want it to be along with the right profitability levels. M&A continues to be a lever. And I think now with the improved cash flow as well as our overall capital structure, we have additional flexibility for share repurchases as we move through the year. So Bill, you want to touch on the M&A brochure? Bill Burns: Yes. I guess, I'd say that our M&A philosophy really remains unchanged. I think we continue to leverage M&A where it makes sense to advance our vision and our overall strategy. I'd say in the short-term, the bar is probably higher based on kind of macro uncertainty and then higher interest rates. But I would say that we continue to target select assets that ultimately are closely adjacent and synergistic to our business today. As Nate said, we've got a strong balance sheet and flexibility to continue to look at companies and we continue to be inquisitive. But the bar is higher at the moment. Operator: And the next question comes from Meta (NASDAQ:META) Marshall with Morgan Stanley (NYSE:MS). Please go ahead. Meta Marshall: Great. Thanks. Maybe a couple of questions, just on the healthcare strength that you saw. I know that that had been a relatively they had been in a more challenged spend environment. So just wondering, how broad-based that is. Is that kind of new project based or just any detail there? And then second question, EMEA looked like a source of strength for you guys. I think we've seen that across some other companies. And so is that a matter of, they're just coming from a very depressed environment. And so we're coming off of a lower base and that's where some of the EMEA strength is. Are you -- are there any trends in EMEA that you think are worth calling out? Thanks. Bill Burns: Yes. So I'll start with healthcare and then jump to EMEA. Healthcare, I'd say overall, mobile computing drove the growth in healthcare. It really is our team's focus on clinical mobility and really total cost of ownership. We've seen in the past a significant number of consumer devices used in that space. And I think that we're seeing healthcare systems realize that the total cost of ownership of Zebra devices is well-positioned for them in an environment of tighter budgets and thinner margins overall within healthcare. And we add a lot of value, ultimately by improving productivity of healthcare workers, getting data into electronic medical record systems, and then ultimately enhancing patient safety overall. So I think the automating of workflows, the digitizing the information around assets and patients and staff is of value that our healthcare customers are seeing. I think a medium to longer-term opportunity we're now seeing is things like home healthcare that remains an opportunity for us. So things like tablets in that area, in home healthcare. So we're excited about that. Healthcare has always been a smaller piece of our business, but in one of the faster growing areas, and certainly that happened in Q2. I would say, if we move to EMEA, say overall strength in EMEA was relatively easy compare in Q2 compared to the other regions. Overall, the positive, I'd say in EMEA is that we saw some larger projects move ahead outside of retail. So this is one of the places where we've seen some growth in P&L outside of retail, and some competitive wins in EMEA. So we feel good about that. Manufacturing remains challenging in EMEA today. So I think that kind of mixed overall feel good about some P&L orders, large P&L orders, easier to compare where manufacturing makes challenging. So I think overall, I think we want to see North American EMEA, we'd expect to come out of this first, but we saw some strength in Latin America too. So I think mixed results across the region. Operator: And the next question comes from Brad Hewitt with Wells Fargo (NYSE:WFC). Please go ahead. Brad Hewitt: Hey, good morning, guys. Wolfe Research, not sure what happened there. Bill Burns: Sorry, Brad. We missed the question. You broke up there during the question. Brad Hewitt: Yes, sorry. So, just curious if you could elaborate a little more on what you're assuming in the second half from the top-line perspective. So at the mid-point of your full year guidance, it implies revenue in the second half, essentially flat with the Q2 run rate. So can you help me reconcile that versus kind of the early signs of momentum in mobile computing and also given the typical positive seasonality in Q4? Nathan Winters: Yes. So if you look at our full year guide of 4 to 7 with a mid-point of 5.5, I think from a year-on-year perspective, really driven by what we see is double-digit growth in the second half demand, it's about 5 points for the year where again, if you look at the full year, a lot of moving parts where the destocking from last year accounts for about 7 points of growth. But then we had the challenging comps in the first half that offset that. So again, really the full year growth is driven by underlying strength in the business in the second half. As we said, we see modest demand increases across each of our vertical markets. That's inclusive of the Q2 beat. So I think we look at it as really the strength we saw in Q2 continuing into the third quarter. I think similar to how we structured the guide over the last several quarters of not anticipating or expecting sequential improvement. But what have we seen here in the most recent weeks and months? We see that continuing here in July in terms of that stability in the business, albeit at a bit higher level than we saw as we entered the second quarter with modest increase as we go into the fourth quarter. So as Bill highlighted before, typically a lot of the year-end spend that we see from our customers has leaned towards large orders in the past, and again, being thoughtful about how we embed those in the guide until we have more certainty and commitments from our customers on moving forward with those projects before including it for our full year guide. So I think, we think it's grounded in what we see today, given that visibility into the large deployments and appropriate. Brad Hewitt: Okay. That's helpful. And then you guys have talked in recent quarters about your expectation for seasonally lower OpEx spend in the second half of the year. Just curious if you could kind of shine some more light on that. And then if we look at the implied Q4 EBITDA margins about 21%, can you talk about some of the puts and takes there on a sequential basis? Nathan Winters: Yes. So if you look just historically, sometimes it is hard to see. But typically, as we go throughout the year, just based on when a lot of our trade shows, sales, kickoff meetings, timing of benefits, et cetera, tend to be more weighted towards the first half of the year. Then as you get into the back half of the year, you get into holiday seasons around the world, as well as some of the lower benefit costs as you go sequentially through the year. So I'd say a lot of the sequential improvement is timing-related now that we've kind of flushed through all of the restructuring benefits, or the vast majority of restructuring benefits through the P&L. And then look at the sequential improvement in profitability from Q3 to Q4 is really based on that slight improvement in OpEx, as well as the higher volume leverage flowing to the bottom line. Operator: And the next question comes from Keith Housum with Northcoast Research. Please go ahead. Keith Housum: Good morning, guys. Question for you on the software and services. With mobile computing being up double-digits, I guess, I would have expected a little bit of that flowing through more in software and services design as people sign up for their warranty contracts and things of that nature. Can you pass a little bit of light on the connection between the two and the modest growth that you had and that's in that line item this quarter? Bill Burns: Yes. Keith, this is Bill. I would say that overall, we've seen consistent growth in software and services over the last several quarters. So we feel good about that. I'd say we continue to see strong attach rates with mobile devices. So the revenue lags that, of course, right? So ultimately, the strong attach rates continue with uptick in mobile computers. So no real change there. It's just not tied directly to revenue in the exact quarter depending on when the mobile devices are sold. So I wouldn't take anything away from that. We're continuing to see strong attach rates, really driven by things like upgrades around OS and security patches and so forth continue to be an important aspect of our customers buying service from us. I can say that we've seen in the past some customers extend their support agreements, and I think we're seeing a little bit less of that now, which is again a good sign for ultimately our customers looking to upgrade the mobile devices in the future. So maybe a little bit of less of that, if anything else. Overall, I'd say software and services, an important piece of our business, recurring revenue that we and others like. So I think all good there, nothing really to read into it, Keith. Keith Housum: Okay. I appreciate that. And then just a follow-up, in terms of like, as most people are starting with here toward the refresh cycle of all the devices bought four or five years ago. How should we think about pricing today versus where it was, say, four years ago? Are people trading down to a lower mobile computer? Or as you think about most customers, is it relatively similar? But how do you think about pricing, what people are buying today versus four years ago? Bill Burns: Yes. I think we're -- obviously, there's customers are making choices on the type of device they need in their environment. So I think that we continue to see that. So if somebody needs a more rugged device, and their experience was they had a lower tier device and they beat those devices up, they'll move to a higher tier device and you'll see the reverse. If they had a good experience with a more rugged device, could they go to a more mid-tier type device? I think that happens all the time. I think we continue to focus on value that the devices bring to our customers to keep ASPs as high as we can, and then if we can't, to make sure that we're getting the same gross margin out of each tier of the portfolio. In the past, we've tiered the portfolio kind of good, better, best, or all the way down to kind of value tier. And I think that's allowed us to keep our pricing and margins higher. So if you want a higher spec device, you pay us a higher price for it. In the early days, call it, eight, nine years ago of -- eight years ago, nine years ago on Android, we didn't have as many flavors of devices. So you're discounting higher end devices to meet value to your players. We don't do that today. We're really tearing the portfolio has allowed us to kind of have conviction around our prices at the higher end, and we feel good about our customers and working closely with them to select the right device for the right use case. Operator: And the next question comes from Brian Drab with William Blair. Please go ahead. Brian Drab: Hi, thanks. You mentioned that you're seeing sequential improvement in all the end markets, including T&L and manufacturing. There have been some signs of further softness across the manufacturing industry in recent weeks, and I'm just wondering if you are seeing any of that show up in your customers buying patterns or if it really does feel like a pretty stable sequential improvement environment now. Bill Burns: Yes. I'd say that, as we talked about before, I think in Q1 we saw kind of retail and e-commerce first, and now we've seen mobile computer -- mobile computing kind of grow across each of the vertical end markets. So retail, manufacturing, healthcare, I'd say that, we're still seeing challenges in manufacturing and overall, demand, especially in a large deal isn't back to the historical levels that it's been in the past. But in manufacturing specifically, we saw sequential improvement from Q1 and Q2. But I still think EMEA, for instance, we're clearly seeing a challenge in manufacturing where I would say overall, I wouldn't call manufacturing back to normalized levels in any way. But I think we just saw some sequential improvement, which I think was good. Manufacturing is an important segment for us. We see we've got lesser -- we're lesser penetrated in through manufacturing. Our relationship with manufacturing, many times are more in the warehouse or the finished production and moving that through the supply chain and some of our new solutions around machine vision, rugged tablets, our demand planning solutions for CPG manufacturers, all play into having a broader portfolio for manufacturing. So we ultimately see that a segment for growth for us, but I think still challenging the short-term. We would say, we're seeing probably about the same as you're seeing. Brian Drab: Okay. Thank you. And then for follow-up, are you seeing opportunities potentially to gain share when we come out of this tougher environment? I mean, you obviously have a great balance sheet. You're not letting up in terms of investment in technology and customer service. Can you comment on how you might be potentially better positioned in both AIT and EVM ultimately? Bill Burns: I'd say that overall, we feel good about where we're at in our customer relationships. We continue to stay very close to our customers as we're a trusted partner to them. And I think that as the macro environment gets better, I think we would say that they will begin to buy again, especially, and we'll see large orders improve as we continue to solve growth in medium and run rate in second quarter. The installed base continues to grow. And I think that from that perspective, I think that we're seeing increased use cases across our customer environment. So some are still sweating their assets that will shift. They can't do that forever. So I think overall, we see the momentum in demand continuing and then continue to broaden both by vertical market to your first question, and then by size of order and order activity across small, medium and large type orders. Operator: And the next question comes from Rob Mason with Baird. Please go ahead. Rob Mason: Yes. Good morning, Bill and Nathan. The strength in the gross margin, I think has already been commented on. But as you think about when large orders do come back, how should we be thinking or how are you thinking about sensitivity in the gross margin profile today versus, say, maybe 2018, 2019? Have you done anything different structurally around either your supply agreements or just as you mentioned, Bill, tiering the portfolio that would suggest the gross margin holds up better? Or does it have that kind of return to maybe 2018, 2019 levels when large orders come back? Nathan Winters: Yes. Rob, I'd say just if you look, I would say, no structural difference in terms of maybe the differential between the margin we'd expect on a large yield versus kind of the run rate business. So that hasn't structurally changed. The one thing, if you go back, I think the one aspect, particularly if you go from 2019 -- since 2019, whether that's tariffs, the supply chain, challenges the rapid growth. So it's pretty challenging to find what's the right baseline. And if you go back to 2018, right, so I'm just the lower rev -- lower base. So I think, if you look at the business today, I think the strength across the portfolio is -- we have strength across the portfolio in terms of the underlying gross margin and being able to leverage the scale and leverage our distribution network as we've grown to inherently build a higher gross margin profile company. But again, I think it will be somewhat decremental as we in gross margin once large deals recover, but still incremental, as you think about it from a EBITDA rates. So I think there's the balance of -- there's still incremental margin to the total -- to the bottom line, but slightly dilutive in gross margin. Rob Mason: I see. And just to go back on the regional discussions, my math, and maybe this is not totally right, but it did look like North America stepped down a little bit sequentially. If that is the case, just any color that you could provide on what you saw there. Bill Burns: Yes, Rob, North America was down year-on-year. I'm not sure it's sequentially -- down sequentially as well. Nate's warning to me, I would say, overall mobile computing return to growth in North America, again, just like we saw across the other regions. So that clearly was positive. The other product categories were down, as a year ago, in first and second quarter, we saw supply chain challenges abate from a print and a scanning perspective. So the compares were pretty challenging for both those businesses. They had really good Q1 and Q2s of last year. So I think that impacted North America. In North America typically has an overweight on large deals as well. So growth in North America, we really like to see kind of run rate, mid-tier and large deals because the large deals are overweight typically in North America. So we saw kind of flat sequentially, as we said before, large deal activity, Q1 to Q2. And really, North America would like to see more large deal activity come back here in kind of second half, and then hopefully some year-end spend and then growth into 2025. So that's really the story of North America. Operator: And the next question comes from Jim Ricchiuti with Needham. Please go ahead. Chris Grenga: Hi, good morning. This is Chris Grenga on for Jim. Most of my questions have been addressed, but maybe just one for me. The chart with the touchpoints is very helpful. Just wondering, as you look ahead to seeing larger projects return, are you preparing for large project activity to be in any one of these particular nodes, whether it's factory, warehouse store, or last mile, et cetera, or do large projects generally entail a broad coverage of one or many of those nodes, or just how you're thinking about that? Thank you. Bill Burns: Yes. I think we see large deals typically across the portfolio, so that it's all about kind of size and scale of customers. So in retail, it'd be larger -- the larger retailers that would refresh and have refresh cycles or upgrades or larger orders across the portfolio that we do a multiple store upgrade, refreshing to a new device for instance. In transportation logistics, you'd see things like the fleet of last mile delivery drivers as an example. Upgrade across transportation logistics, or postal workers around the globe would be examples of large opportunities. So I think we see them across each one, they're a bit different. In manufacturing, it's more location by location or plant by plant, as opposed to large deal activities, would see in retail where they do multiple stores at once, or T&L, where they do an entire fleet of drivers or postal. So it's a bit different by nodes. So manufacturing more broken down by site, retail more, multiple stores at once, T&L more larger deployments, I would say, healthcare more, more like manufacturing, not as large a hospital systems more kind of hospital at a time or multiple hospitals at a time, but not those large refreshes. So I'd say large refreshes and upgrades more tied to retail and T&L. Operator: And the next question comes from Guy Hardwick with Freedom Capital Markets. Please go ahead. Guy Hardwick: Good morning. Good morning, all. Zebra issued some very interesting press releases regarding working with Qualcomm (NASDAQ:QCOM) to run LLMs on Zebra mobile computers, but without the requirements to kind of regular uploads to the cloud. So I was just wondering, Bill, just how close is Zebra to kind of a broad-based introduction of these kind of AI digital system products in mobile computing? Bill Burns: Yes. So we think of AI across the portfolio in several different ways. First is that just our core business really is about collecting real-time data, and that's used as kind of intelligence to feed AI models overall. So whether that's a barcode reading a printed label with the information on it back into the cloud, whether that's an RFID tag being read. So the idea of digitizing a customers' environment, getting real time data to AI models, and ultimately to generate insights in AI is a fundamental thing we do in our -- the value of our data that we collect feeds these models. So I think that's kind of the baseline of when we think about AI. Second is traditional, more traditional AI is used about probably in 50 different solutions across the portfolio today, whether that's optical character recognition or product recognition, navigation for autonomous mobile robots, package dimensioning inside our software around workforce planning and demand forecasting. So traditional AI is kind of the second piece that we think of across the portfolio. The third is what you're kind of referring to is the idea that it's AI assistant, right? Is that empowering the frontline worker through more information, leveraging a large language model on the device without connectivity to the cloud? Working closely with Qualcomm and Google (NASDAQ:GOOGL), as you mentioned, to go do that. We've demonstrated that it -- at our National Retail Federation Trade Show in January. We demonstrated again at our Innovation Day. We also demonstrated at Google's Trade Show earlier this year as well. So I think we're excited about that opportunity. Today, it's not commercialized yet. We're continuing to work closely with our customers to really understand all the use cases, what's required around that. How do we best leverage which model in that case, how do we keep the model up to date? So a lot of different discussions with our customers about what that offering will look like. But we're excited to work with Google and Qualcomm on it. Our customers excited about having a digital assistant within retail or manufacturing. You think of all the use cases of making your newest worker as good as your most experienced worker, having all of your standard operating procedures at the hands of the associate or the frontline worker, being able to tie that back to what's the source of the data being restricted to the individual customer. So we think it's a driver long-term for our mobile devices and a differentiator for us. But today, still early days, more pilots and demonstrating and working with customers than commercialization. Guy Hardwick: If you don't mind just me pushing a little bit on that. I mean, in terms of commercialization, is it a 2025 timeframe or beyond that? Bill Burns: Yes, no, likely -- like we're going to have more demonstrations around it that we're planning today with some of our customers at the National Retail show as we go the next step along with it next year in 2025, and then probably commercialization in likely in 2025 as I would see it today. Guy Hardwick: Okay. Thank you. Operator: And the final question comes from Rob Jamieson with Vertical Research. Please go ahead. Rob Jamieson: Just wanted to kind of ask more of a high level question around and go back and revisit M&A and add an adjacencies. I mean, you all have a great installed base and a lot of market share across your various verticals. As we think about you adding adjacencies and what you've done recently, adding things like Fetch and Matrox and other markets, given the comfort that your customers have with you, do you think that as we return to like a more normal environment that will kind of, you can leverage that and your customers be more comfortable maybe deploying a new solution, something more kind of like advanced like Fetch or Matrox in their operations. Bill Burns: I think that clearly are strategic relationships with our customer creates an opportunity for us to deploy a broader set of solutions within those customers. That, that trusted partnership allows us to go do that. I think the backdrop of the environment hasn't been all that great. So machine vision is a good example of that. It's been kind of a challenging market and then our diversification just takes time where we were centered really around more semiconductor manufacturing and moving outside of that. So -- but that is -- our customers are giving us an opportunity to sell solutions in that space because we have a relationship with them already. I think we're seeing the same thing across retail software and robotics, as you mentioned. So clearly it matters. Our breadth and depth of our current portfolio, the relationship we have with them, the fact that we're a trusted partner to them; it's not always the same persona. So it's not -- I wouldn't say it's easy. Meaning we've got to get from our current buyer of our solutions and the person who deploys our solutions today to someone else within the organization. So if we're working with somebody inside a manufacturer more on the distribution of products at the end of the manufacturing line, we now need to form a relationship with somebody on the manufacturing line for things like machine vision solutions to stick with that example. So it's not easy, but it's certainly doable. And our -- because of our trusted relationship, they're willing to make that introduction. And then we've got to earn our way in and prove our solutions into that manufacturing space. But we're given that opportunity because of those relationships. Rob Jamieson: That's helpful. And I appreciate it. And then to the extent that you're willing to share, just as you talked about adjacencies and things you're looking at in the portfolio, is there anything either high level or specific that you're looking at the moment, just especially as your leverage is getting to an attractive point here. Thank you. Bill Burns: No, I think that again, it's -- we think of assets that are closely adjacent to the portfolio overall, and really synergistic to what we do today. We'd like to do things in the similar vertical markets for the reasons we just talked about. So all that comes into play. And then ultimately, as I said before, a little bit higher hurdles at the moment, given the macro uncertainty to make sure that if we were going to acquire something, or the certainty of revenue, and then ultimately higher risk interest rates weigh down on that a little bit. So I think overall, we continue to be inquisitive. It's got to be the right asset and the right fit for Zebra. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Burns for any closing remarks. Bill Burns: Yes. I'd like just to wrap up by saying thank you to our employees and partners for continued support of Zebra and execution in the second quarter. We're now positioned for growth in the second half year. So have a great day everyone. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.