Public Policy Holding Company, Inc. (PPHC) Earnings Call Transcript & Summary

Thank you. I'm going to go ahead and start the fire. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. And to withdraw your question, please press star 11. again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Matthew Mazzanti, Chief Administrator Officer. Please go ahead.

Thank you operator and good afternoon with me today are Stuart Hall, our chief executive officer, rule Smith, our chief financial officer and Thomas, our chief strategy officer. Before we begin, please note that the following remarks and presentation include forward-looking statements and non-GAAP financial data. Forward-looking statements about the company, including those related to earnings guidance, are subject to uncertainties and risks, factors addressed in the company's SEC filings. For further details of the non-GAAP financial figures discussed in this presentation, including reconciliations to the nearest GAAP figures, please refer to the financial appendix in the investor presentation available on our website, investors.pphcompany.com. With that, I'll now turn the call over to Stuart.

Thanks Matthew. Thanks to everyone who's joining us this afternoon. The first half of the year developed broadly as we expected and we're pleased with both the performance of the business and the progress we've made against our overall strategy. At the highest level, revenue in the first half increased 16.3% over year over year to 102.3 million. That was organic growth included in that of 4.4%. Adjusted EBITDA increased to 23.4 million, up 9.3%, representing a margin toward the top end of the that we previously had communicated. Just as importantly, the business strengthened as it has progressed as it usually does. In the second quarter, we delivered revenue of 52.1 million, continued organic growth and an adjusted EBITDA margin of 23.5%, an improvement from the first quarter and consistent with the season adjusted numbers that we discussed on our last call. Following this performance in our recent acquisitions, we're raising our full year revenue and adjusted EBITDA guidance. Roland will take you through that more thoroughly in our quarterly results, our revised outlook, and the underlying drivers in greater detail shortly. Halfway through the year, We're delivering how we said we would. The outlook for the business has strengthened and we retain the balance sheet capacity to continue executing our strategy. Additionally, on results, we reported a gap loss of 3.7 million in the quarter, a nearly 35 percent improvement year over year. But I want to take a moment and really discuss that number because the direction of travel is significant here, and especially as we enter the second half of 2026 and the beginning of 2027. The story behind it hasn't changed, but it's worth repeating plainly. The largest difference between our GAAP and our management P&L is the approximately $30 million a year non-cash share-based comp charge that resulted from our 2021 London listing subjecting shares issued at that time to employee owners to a five-year vesting schedule. This charge will fully amortize at the end of this year, and we are looking forward to it dropping off and the positive effect we believe it'll have on our GAAP financials. We'll, again, we'll jump into this in a bit more detail. On M&A, we continue to execute a discipline strategy. We closed on three deals this year, including our long desired presence in Florida with the addition of the advocacy partners on August 1st. All three transactions followed the same principles we stick to in M&A. We added a differentiated capability with each acquisition. They were margin accretive. They extended our reach where clients need us, and they link future purchase consideration to future performance. Thomas will go ahead and wrap up. into these in more detail as well toward the end of the call before we go into the financials award on ai it's a question that we hear from investors often and it deserves a very direct answer from us We believe PPHC is very well positioned for the continued adoption of AI across industries for three main reasons. One is our business structure. Two is the demand that AI clients and AI issues are generating for our services. And three, the operating leverage that AI itself provides for our senior heavy workforce. First, let's talk about the PPHC. talk about structure. We don't do hourly billing, but in a very, very small percentage of our engagements. By default, firms that bill by the hour are built on a pyramid of junior staff that sell output that any capable model can reproduce now in seconds and they are in an existential period and they need reinvention. That's not our model. Roughly 90% of our revenue is retainer based and our annual client retention of that revenue is 80 to 85%. That remaining revenue that we do take in on top of that is project based. And, but what that just means is that it's a short-term engagement by design tied to deliverables, but it's not billed against ours. Our clients by senior council that drives outcomes and on issues that are vital to their businesses, not billable time, not consumer oriented campaigns and not Not mark up on entry level hours. There's no pyramid at for a to compress. Unlike sectors where the fear is shrinking the people, our core markets, expanding federal lobbying spending set a record last year, roughly 5Billion dollars and grew at its fastest pace since 2008. 2nd demand. When we look at AI, we don't see a threat to defend against. We actually see a tailwind driving our growth. AI is now one of the most active policy issues in the country at every level of government. At state level, we've tracked over 1,800 AI-related bills in 47 states, and that's a 12-fold increase over three years. Since 2025. Our firms have been engaged by roughly 60 new clients whose core business itself is AI. That's everyone from model developers and AI native companies to the chip designers, hyperscalers, and data center builders behind them. Companies that need some subset of our services often very early in their journey and also It's important to note clients across energy, technology, healthcare, and financial services are retaining us to work on the same issues because AI now touches their regulatory agenda, whether they build the technology or simply deploy it. And third is operating leverage. We're deploying AI workflows inside our own business. So our senior spend less time assembling research and more time on judgment strategy and the advocacy services clients hire us for. Virtually none of our revenue depends on reselling the hours that AI eliminates for other firms. Commodity work gets automated. The work we do, senior led, built on client trust, is work more as AI proliferates. And that's where PPHC sits. In conclusion, we think the environment remains favorable for our business. Federal lobbying continues at record levels. State level activity remains intense. And the 2026 midterm cycle is adding the client demand for intelligence, advocacy, and strategic communication support following the selection cycle. This is exactly the operating backdrop the company was constructed for and we continue to execute against quarter after quarter. With that, I'll hand it over to Roel for a closer look at the numbers. Roel.

Thank you, Stuart. I'm going to focus on four areas, on overall growth and profitability, on our results by segments, on our cash generation. But today I'm going to start with our guidance. We are very pleased to update our financial guidance for the full year 2026, following the several M&A transactions that we've announced. And then I'm really referring to WPI on April 1st, 10CREDI on July 1st, and as of last week, the acquisition of the advocacy partners in Florida as of August 1st. Based on our ongoing expectation that we will deliver approximately 5% organic growth in combination with the aforementioned acquisitions, we're now anticipating reported revenue to come out in the range of $213 to $216 million and adjusted EBITDA in the range of $48.5 to $50.5 million, We had a margin between 22 and 22 and a half and 23 and a half percent. Compared to our previous guidance, this represents approximately an additional $8 million in revenue, $2.5 million in adjusted EBITDA, and a margin range that is 50 basis points higher than our previous guidance. And what has not changed is that we continue to expect strong free cash flow conversion in the balance of the year, consistent with our normal second half weighting. First, to set things up, a quick overview emphasizing that we're really pleased with how the year has been progressing so far. We've grown revenues by 16.3%, including a healthy dose of organic growth. Alongside, our profit has gone up and we've controlled our margin in a way that we're able to reiterate and straighten and the guidance that I just gave you. So let's look at the financial highlights. Here's a chart that captures our primary KPIs, both for the three months and the six months. Revenue in the second quarter was 52 million, up 7% year over year, of which 3.9% was organic, and the balance came from acquisitions, primarily WPI in London. That was acquired in Q2. We were pleased with the organic growth of 3.9%, especially because this was up against a very strong comparable of 10% organic growth in last year's Q2. So for the first half, revenue was 102 million, up 16% with organic growth of 4.4, consistent with the approximately 5% average organic growth that underpins our outlook. Then, when we go to adjusted EVDA, after six months, it was at 23.4 million at a 22.9% margin, which is indeed at the top end of the range of 22 to 23% that we previously communicated for the full year. When comparing ourselves to last year for the six months, we were up 9%, and for the three months we were down 4.4%. I want to be really very explicit about the three factors that drive the relatively modest level of Q2 year-on-year adjusted EBDA growth or decline. First, there is this already aforementioned relatively strong comparable from Q2 2025 when we delivered a 10% organic growth at a 26% margin. That's what we were battling against this quarter. Second, we saw the predicted increase of our corporate costs come through as a direct result of US public company costs that we are incurring due to our NASDAQ listing. And also the continued build out of our central platform and all the associated advisory costs. Finally, as a third factor, there's also the relative change in business mix between our three segments, although I would say that the impact thereof is relatively light this year. You will see in a later chart that I'll bring up that the underlying operating business actually remained very resilient with the blended margin of performance. the three operating segments broadly stable. So that means that the reduction in our adjusted EBITDA margin really reflected the higher holding company costs rather than changes in our operating companies. And such was also anticipated in our March guidance. Now let's move to adjusted net income. For the first six months, adjusted net income was 17.9 million, up 15%. That was a good result. It was positively impacted by a reduction in our interest charges, because our cash and debt positions have both improved due to debt repayments and of course, the IPO money on our balance sheet. Now this was partially outweighed, not visible here, by one of M&A expenses being heavier this year, to the tune of $800,000 year-on-year increase. The final explaining factor for adjusted net income is the tax rate. But for the six months, the effective tax rate was approximately even to last year. However, on a quarter-by-quarter basis, there was a significant swing. Now, as I explained last, quarter, the phasing of a tax provision across the quarters is heavily impacted by our gap results and the forecast thereof. And therefore, the quarterly rates are typically not really indicative of where we will land for the full year. Now let's go to EPS. A gap loss per share for the six months improved from a year ago to a negative 68 cents per share. adjusted fully diluted EPS, which is the measure most of us will look at, worth 34 cents per share for the quarter and 59 cents per share for the first half, which is down one and a half cents for the prior year. That's a modest result on EPS, but it really is actually a very good result. If one realizes that the good result in the numerator, i.e. the movement in adjusted net income, was getting offset by an increase in the denominator, i.e. in the share count. Reminder, our weighted average share count increased by 70% year over year, principally as a result of the NASDAQ IPO in January. That dilution provided us the capital that reduced our net debt almost to a net cash position, and it is also funding acquisition agenda that Thomas will describe. Then there's dividends. As a reminder, in Q2, we paid our customary final dividends of 24 cents per share this year, which equaled to approximately $7 million cash outflow. Then adjusted free cash flow for the first half was 4.1 million compared to 11.7 million in the first half of last year. This is a step down that clearly not aligned with the growth we're posting elsewhere in our P&L. So let me be very precise about what's driving it and why we're not so concerned about the trajectory as a company with a historically very high adjusted free cash flow conversion. So the two factors. The first. There's the lower cash flow in H1, which is an expected outcome of the fact that our free cash flow generation is structurally weighted towards the second half, given that in the first half we paid annual bonuses to our staff. Secondly, we had in this first half relatively high investment in working capital in 2026, primarily in accounts receivable. We already mentioned this factor in Q1, and I will admit it has taken us longer to regain ground on it. But right now we see the impact of various actions that we put on the way, and we expect that working capital investment will lessen as the year progresses further. Taken all together, we're confident that adjusted free cash flow will accelerate in the second half and will convert in line with our normal pattern. And that brings me to the balance sheet. We ended the quarter with 36.9 million of cash against a total debt of 42 million, This results in a net debt position of 5.2 million, which you can compare against the 42.2 million at this point last year. And this is after the 7 million dividend payment in May and after the cash consideration for the acquisition of WPI. But obviously it does not yet reflect the closing payments we made early Q3 for the acquisitions of 10 credit and advocacy partners, which totaled 28 million. Overall, we remain in a position of real balance sheet strength with ample flexibility for continued earnings-recruitive M&A. Now let's look at the segments, starting with organic growth, organic revenue growth. In this chart at the top you see the organic growth for the past four years, and at the bottom you see a quarterly breakout for the past two years. So going from left to right, One can see that government relations here depicted in dark blue and always remaining our anchor activity, 58% of our total business, it accelerated its growth. 6% organic growth for the half year, with 5% organic growth in the first quarter being followed by 7.4% in the second quarter. Now, then corporate communication and public affairs has shown relatively muted growth this first half year, minus 1%, with the quarter so far being plus 3% in Q1 and minus 3% in Q2. However, it's important to also look back and see the strong comparable of last year especially in this last segment, i.e., in corporate communications and public affairs. As you can see here, last year we recorded 22% organic growth in Q2 due to an exceptional flow of post-election project work. That puts this year's muted growth in a different spotlight. And finally, compliance and insight services, which represent 7% of our business, keeps growing at double digits this year in the low to mid teens. Now, we go to margin performance, and we are introducing this new chart as it does a very clear job of showing the reason of our year-on-year margin decline, in this case depicted for Q2. One can see that the segments keep scoring margins at approximately the same levels as last year, leading to a blended segment margin before bonus of 39.5%, only half a point down from last year. But below that blended segment margin, one can see the impact that the whole cost have on the margin. The whole cost went from 6% of revenue last year to 8.2% of revenue this year. As previously mentioned, that was primarily as a result of the IPO costs and the associated investments we had to make in staff, tech stack and advisors. And finally, the bonus pool remained actually steady at 7.8%. And together, these factors lead us to the adjusted EBITDA margin we're presenting today. We believe this picture shows very clearly that the margin erosion that we currently experience is not so much a function of our business results, but merely of our whole So as I did last quarter, I'm going to skip the charts covering the full management P&L, cash flow and net debt position, but they're in this deck and the appendix for your later After having reviewed these financials, I would like to make one more observation that reinforces the point that Stuart made earlier on the GAAP results. In this chart, one sees our gap results for a number of periods. Then at the bottom, we also show what the gap results would have looked like had it not been for the share-based accounting charge. As we have explained in each of our filings since 2021, this share-based accounting charge is a remnant of our 2021 London listing and has no cash impact or share diluted impact. Stuart noted this amortization charge will fully roll off at the end of this fiscal year. As of 2027, that single expiring item will greatly affect our GAAP profitability. And in many periods, we're going to likely present positive GAAP profits. As of that time, the primary remaining non-cache item, sitting in between our management results and our gap results, are the going to be our non-cash M&A related charges, which all relate to the specific fact that in our M&A model, the way we structure our deals, we make significant portions of the purchase price subject to vesting and continuing deployment. That in itself results in P&L charges, and they're here to stay, and they'll to suppress the gap results. However, with the disappearance of the share-based accounting charge, we believe the gap results will look a whole lot better.

And with that, I'm going to hand it over to Thomas. Thomas? Thanks, Roel. I'd like to focus my remarks on a few threads Stuart opened, because the quarter gave us important examples of each, starting with talent, because our growth strategy remains fundamentally talent-focused, recruiting and retaining the best people for our markets. First is talent via M&A. And I want to give you the strategist version of the three deals Stuart covered earlier, because both are precise examples of our stated criteria. We invest against capability and geography in that order. WPI brings economics-grounded capability and bolstered our scale in London. A win-win. On this, the early cross-sell is telling. Here's a timely example. WPI, now part of our Pagefield group, just sold an important piece of work to one of California's base clients via KP Public Affairs. their economic expertise is globally applicable. In fact, their chief economist, Martin Beck, has started getting media attention in the US for his work, including recently in Dow Jones and in Reuters, as he broadens his visibility via PPHC. Similarly, Tancredi, which closed in July, is a powerhouse addition by way of its advisory capabilities. They add geographic depth to Trailrunner and deepen our collective strength in the highest value area of communications work, crisis, litigation, and financial special situations. Another win-win. Most recently, just in fact last week, the advocacy partners gave us a strong entry into the state of Florida. We have said that we need to be in Florida for years now, given its significance politically and economically. And we finally found the right team to bring into the group. Keep in mind, Florida's economy would rank 14th in the world. Like California, a very critical market for us. In addition to being an excellent team, they have all the features of a standout government relations firm, superb margins and highly recurring retained revenue from a blue chip client base. You heard me say last quarter as we expand our base in key US states in Europe and beyond, we are definitely not putting dots on the map for the purposes of coverage. Indeed, we are seeking and convincing world-class entrepreneurs and market leading practitioners who seek to join a different kind of global platform. Our unique multi branded operating model also appeals to leading individual talents outside of an M and a situation to our operating brands represent distinct political relevance in their jurisdictions. They have unique firm cultures and diverse leadership, which is attractive to professionals looking for entrepreneurial issue, rich career opportunities. our public company makes PPHC a unique career opportunity in the sector. And finally, portfolio integration and client diversification because the model keeps proving itself in the numbers. Our top 10 clients now represent 7.5% of revenue. from 9.4 a year ago that's with integration and collaboration increasingly meaningful it's Extrapolating further, my favorite step to boast, no single client is more than 2% of the business. We ended the half of approximately 1,500 clients, including roughly half of the Fortune 100, and the revenue mix continues to diversify as well. There remains no meaningful client concentration risk in our business. A quick update on our post-M&A integrations. Trailrunner is now past its first year and performing above expectations. Pine Cove continues to deliver on the Texas state-based theory, and WPI's first quarter with Page Field is tracking to plan. Finally, the M&A pipeline, it remains very active. Dozens of firms at various stages with the same mix of capability in North America, UK, mainland Europe, Middle East, and Asia. Our sweet spot is unchanged. Businesses in the 10 to $30 million revenue range, which can contribute to our premium margin profile with a clear cross-sector selling capability into the existing portfolio. Competition for these assets remain dominated by private equity platforms and our differentiation is the same it's always been. The market leading scale of our government relations business, the policy expertise across the platform, and our public company status. So with that I'll hand it back to Stuart.

Thanks so much, Thomas. Let me pull it together with the same framing we used last quarter because a quarter on, it still holds up. First, stability, the retainer base, the client retention, and the lack of meaningful revenue concentration, all as Thomas spoke of just now. Second, profitability. First half adjusted EBITDA up year over year. with margins holding steady and well inside of our full-year guidance range. The gap picture is improving on schedule, as we noted twice, with the approximately 30 million share-based comp charge from the London listing fully amortizing at the end of this year and putting us on a path to have gap results more closely reflect our management P&L. Third, growth. Our base delivered 4.4% organic growth in the first half against a very tough comparable, and our discipline M&A continues with three deals closed year-to-date and a robust pipeline that remains under active consideration. Fourth and most important, and I always mention this, is our people. The reason any of this works, 2%. 200 plus of our 476 employees have some form of equity instrument, including more than 150 with outright stock ownership. This model is built around keeping our best talent as employee owners, bringing the next generation into ownership, and aligning the interest of our employees with the overall success of the business. The first half played out the way we told you it would and the way we expected it to, with steady organic growth, disciplined M&A, margins at the high end of our previous guidance, and a balance sheet that gives us room to keep executing on our strategy. So, as always, I appreciate your time and your continued interest in DPHC, and we'll turn it over to the operator for questions.

Thank you and as a reminder to ask a question please press star 11 on your telephone and wait for your name to be announced and to withdraw your question please press star 11 again. And our first question is going to come from Jason Tilchen with CG. Your line is open.

Good afternoon, everyone, and thanks for taking my questions. To start, with the three deals you've completed so far this year, can you now give us a refreshed look at your top priorities in terms of an M&A checklist and how the sort of most active part of your current pipeline aligns with that checklist?.

Jason, I'll let Thomas add any flavor he wants, but this is Stuart. I'll take that first. Thank you for being here with us today. In short, you know, it remains as we've repeatedly laid it out, which is, you know, as Thomas said, again, geography capability along with the people in the margin profile that, you know, make it fit the overall mix of the company properly. So is it complimentary in one way or another or not? I think, you know, obviously, you know, we still maintain a very healthy pipeline. We continue to evaluate opportunities regularly. And I think that, again, you know, we will continue to look at geographic expansion as well as, again, capability ads. I would probably say, you know, in terms of our our actual business mix. You know, we like where we sit now. I think adding, you know, our first lobbying property in quite a while and the advocacy partners last week, was significant, you know, and I think, you know, again, it shows and I hope it demonstrates to people that we're committed to, you know, our base of government relations is our highest margin business. And we're going to continue to pursue those along with other, you know, selected communications assets, which either enhance the corporate comm side of the.

equation or again are additive to our public affairs comps. Thomas, you got anything you want to add to that? Yes, I mean, I'd only add that we, to emphasize Stuart's point, that we really like the lobbying anchor because, because of just the nature of the client relationship and the fact that where we started from where the differentiation versus our sort of peer set is without giving too much away, sort of there are some key geographies that we still see both immediate client need and positive growth. And we've managed so far to do the international thing without, you know, without margin decretion. All the margin decretion we've seen has just been at the whole company level based on the listings. And so London into Europe, into other places where we can still maintain this premium and unlock new client wallets is really important. They also are small sized enough that they could be acqui-hires, they could be outright hires or in the case of the Florida or the Tancredi, they were sweet spot sized partnerships. of a relatively small set of people. So we'll continue to deploy the firepower and the hiring around key talent when it comes available.

Okay, that was very, very helpful. I guess the follow-up there, understanding that because of sort of, you know, business secrets and whatnot, you may not be able to share full details, but in terms of geography, when we spoke sort of six months ago, you know, the UK, um, and Florida were both on that sort of priority list. But those being checked off, is it fair to say that maybe New York, the Middle East, Southeast Asia are all sort of have shifted up that list? And similarly, on the tech side, is there anything with the evolving sort of AI landscape? Is there anything from a capability standpoint that you're certainly looking at adding via M&A rather than doing organically? Yes.

On the second question, you're sharp on the list. That's sort of right, and the reshuffling only sort of broader points of Europe, I continue to sort of emphasize the need of Brussels as to our operating companies and clients. On the AI side, You know, there's so much innovation happening there. We're getting something or more every day about platforms that are targeting our space or adjacencies. So we feel comfortable having been, you know, really promoting the usage of a mix of tools across the different operating companies and holding our powder a little bit because there's still a lot to be sorted in how you know, this will be. We've invested in some tools for our group group for users and promoted some work cases and are watching how clients are demanding and restricting usage. So it's super interesting. Nothing to invest in yet but for that.

Okay, great, very helpful. And then one last quick one for Ruhl. I know there was a lockup that was set to unlock, I should say, around six months after the U.S. listing. Can you just provide some additional detail on the exact timing of when that happened or when that is going to happen in the near future here and the magnitude of that as well? Sure.

Yes, that half year lock up actually started at the time for IPO end of January. So that's now over because it expired at the end of July. We have, of course, since being still in a blackout period, our employees are not being able to trade. We'll need to see to what extent people are looking to sell right now. Our expectation as management is that we're not going to see a whole lot of selling, but okay, we will need to see how that develops now in these days after the announcement of the results when we're out of our blackouts.

Great. Thank you very much. Thank you. And our next question will come from Scott Schneeberger with Oppenheimer. Your line is open.

Thanks, Gary. Hey, Stuart. Good afternoon, all. And, Stuart, great overview on AI. I thought that that was very well laid out. I think I'll start, this sounds like a question for Roel, but Stuart, I'd like to hear your thoughts too. With the new guidance and obviously unannounced acquisitions aside, what are some drivers that would put you feeling good at the high end? What are some things out there that make you nervous maybe toward the low end?.