ZEBRA-TECHNOLOGIES Earningcall Transcript Of Q2 of 2024

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

Questions & Answers: