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Operator: Good day, and thank you for standing by. Welcome to the Global Mofy AI Limited Fiscal Year 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Celine Meng. Please go ahead. Celine Meng: Thank you, operator. Welcome, everyone, to Global Mofy's Fiscal 2025 Financial Results Conference Call. Covering the period between September 30, 2024 and September 30, 2025. Thank you all for joining us on such short notice. My name is Celine, and I am the company's Securities Affairs representative. Today, I'll be presenting our prepared comments and then followed by a Q&A session with our CTO, Ms. Wenjun Jiang; and CFO, Mr. Chen Chen. Fiscal year 2025 marks a pivotal year of strategic transformation for Global Mofy. Beyond strong financial performance, this year represents our transition from AI-driven tools to AI native production workflows, laying the foundation for scalable, defensible and margin accretive growth. During today's call, we will review our financial results, strategic milestones, core technologies and growth outlook. Before we begin, I would like to remind everyone that today's discussion contains forward-looking statements, which involve risks and uncertainties that may cause actual results to differ materially from those indicated. These forward-looking statements are subject to risks described in our filings with the U.S. Securities and Exchange Commission. We encourage you to review our Form 20-F and other SEC filings for additional information. Today's conference call is being recorded, and a replay will be made available on the company's website. Fiscal year 2025 delivered record financial performance while also marking a strategic inflection point for Global Mofy. Highlights include total revenue of $55.9 million, representing 35.3% year-over-year growth, a gross profit of $22.5 million [Technical Difficulty] entered into a digital cultural tourism cooperation framework with Lianyungang’s Haizhou High-Tech District. We completed a total of $10.3 million in strategic private placement financings, established Gauss AI Lab and end-to-end AI-powered content framework, expanded our global AI data and training capabilities through Eaglepoint AI Inc. These milestones reflect not incremental optimization but fundamental transformation and how digital content is produced. For those who are new to Global Mofy, let me briefly introduce the company. Global Mofy is an AI-driven technology solutions provider focused on virtual content production and 3D digital asset development for partners across the digital content and value chain. Advanced AI and 3D reconstruction technologies, we create high-precision digital representations of characters, scenes and props, enabling deployments across film, television, gaming, XR and emerging AI native workflows. We operate across Beijing and Zhejiang China. And since our NASDAQ listing in October 10, 2023, under the ticker GMM.US. We've continued to scale both our technology platform and asset base. According to the Frost & Sullivan report, Global Mofy is now recognized as one of China's leading digital asset banks with more than 150,000 high-precision 3D digital assets. This slide highlights Global Mofy's evolution from a traditional digital content provider into an AI native production platform. Key milestones include early leadership in virtual production and software IP accumulation, strategic partnerships with Alibaba DAMO Academy and leading industry players, NASDAQ listing in 2023 and establishment of our Zhejiang headquarters, launch of [indiscernible] flagship AIGC platform built on NVIDIA Omniverse, expansion into global AI training and data engineering through Eaglepoint AI. Our road map reflects a deliberate multiyear transition towards AI-native infrastructure rather than short-term experimentation. [Technical Difficulty] leadership in technology and innovation. Highlights include National High-tech Enterprise designation, multiple most valuable investment Chinese Concept stop and Innovation Awards, membership and leadership roles in MIIT, Metaverse and digital economy organizations, recognization as a specialized and new SME in Beijing. These honors reinforce our credibility with enterprise customers, government partners and institutional investors. Innovation remains at the core of Global Mofy's long-term strategy. In FY 2025, R&D spending reached $7.5 million, representing 14.1% of revenue. Our R&D to revenue ratio significantly exceeds industry average of 5% to 8%. We hold 45 independent intellectual properties with over 10 new IPs added annually. Beginning in fiscal year 2025, we intensified development of generative AI production tools, AI native workflows, AI agent-driven data governance frameworks. We believe that our scale advantage in 3D digital assets, combined with deep production expertise, positions us uniquely for the next generation of AI-driven content creation. Now let's turn to our mission, vision and values, which define who we are as a company and guide us in everything we do. Starting with our mission, we aim to empower creativity through the innovative use of AI and digital technology. This mission drives our efforts to push boundaries and redefine what's possible in the digital content industry. Our vision is clear: to drive technological advancements while cultivating a culturally rich corporate environment. Our values, first, foster innovation, encouraging both ideas and groundbreaking solutions. Second, we prioritize and exceed customer expectations, delivering value that goes beyond the ordinary. Ultimately, our ambition is to build the world's leading digital asset bank, serving as a foundational infrastructure for AI native content industries. The Gausspeed platform is a flagship AIGC platform designed for industrial-grade cinematic production. Built on NVIDIA Omniverse, Gausspeed enables professional-grade visual generation. Gausspeed creates stunning realistic visuals with advanced AI technology, ensuring top quality results for virtual projects. Storyboard and shot design. It provides intuitive tools for detailed storyboard and shot design, allowing creators to visualize and plan each theme precisely, reducing the need for costly revision. A precise preproduction planning. Gausspeed offers advanced [indiscernible] capabilities for accurate preproduction planning, helping clients define service needs and minimizing trial costs. Editable assets, the video scenes and 3D digital assets generated by Gausspeed can be reedited to meet more customized demands, providing flexibility and adaptability for various project needs. We are confident in Gausspeed's ability to transform the filmmaking industry by providing a powerful AI-driven tool that enhances creativity and efficiency. Our 150,000-plus high-precision 4K 3D digital assets form the backbone of our AI capabilities. These assets span characters, scenes and props, natural environments, science depiction, historical errors and architecture. This asset bank enables faster production cycles, higher visual fidelity, scalable AI training and inference. It is a foundational competitive moat for Global Mofy. Mofy Lab integrates over 40 proprietary software systems into a one-stop content generation platform. Key capabilities include high-precision 3D reconstruction technology, digital content editing middleware, low-code and no-code production tools after reuse invocation and workflow optimization. Global Mofy allows us to deliver systematic, repeatable and scalable production outcomes. This slide summarizes several defining moments of Global Mofy in the past few years. NASDAQ listing and increased global visibility, launch of our Zhenjiang headquarters, entry into the AIGC field through strategic partnerships, completion of a major strategic transformation. Each milestone reflects progress towards an AI native operating model. Our management team brings deep expertise across technology, finance and operations, led by our CEO, Mr. Haogang Yang; and supported by CFO, Mr. Chen Chen; CTO, Ms. WenJun Jiang; and CMO, Mr. Nan Zhang, the team continues to execute our strategy with discipline and a long-term focus. Financial data-wise, now let me talk -- walk you through our financial performance for the fiscal year ended September 30, 2025, and provide some additional context around the key drivers behind these results. As of September 30, 2025, the company's total assets increased to $78 million compared to $59.2 million as of September 30, 2024, representing a 31.9% year-over-year increase. This growth was primarily driven by our continued investment in intangible assets, particularly those related to 3D digital assets and AI-related technologies. These investments reflect our deliberate strategy to strengthen Global Mofy's long-term technology foundation, expand our digital asset bank and support the transition towards AI native production workflows. Revenue for fiscal year 2025 increased to $55.9 million, representing a 35.3% increase from $41.4 million in fiscal year-end 2024. This growth was driven by sustained demand for virtual content production and 3D digital assets licensing business across multiple end markets, including film, television, advertising, game and digital tourism and et cetera. Demand remained resilient throughout the year, reflecting both the recovery of content production activity and increasing adoption of digital and AI-enabled production solutions. In addition, during fiscal year 2025, the company proactively responded to the active expansion of the short-form drama market by adopting an innovative cooperation model to participate in short-form drama investments and production projects. While still at a very early stage, we believe the continued expansion of this business line will further diversify our revenue streams and provide incremental revenue support over time, complementing our core virtual technology services. Gross profit and gross margin. Gross profit for fiscal year 2025 was at $22.5 million compared to $20.8 million in fiscal year 2024. Gross margin was 40.2% for the year. The year-over-year margin profile reflects a period of intentional investment as we continue to scale our AI native production infrastructure, expanded R&D initiatives and deployed AI agent-based workflows designed to support long-term automation and efficiency. While these investments weighed modestly on near-term margins, we believe they are critical to unlocking structural margin expansion in future periods, particularly as AI workflow mature and production efficiency continues to improve. Research and development expenses for the fiscal year of 2025 totaled to around $7.9 million compared to $7.4 million in fiscal year 2024, representing a 6.7% year-over-year increase. These investments were primarily focused on expanding and enhancing our 3D digital asset library to support growing AI-driven demand, advancing the development of AI-based generative tools and initiating AI-native production workflow research through the launch of Gauss AI Lab. We believe that these R&D efforts are essential to support long-term efficiency, scalability and intelligence production capabilities and position Global Mofy for sustained growth as AI native adoption accelerates across the digital content industry. Global Mofy is transitioning from using AI tools to embedding AI natively across production, data and workflows. Our growth strategy focused on international market expansion, especially in June 2025, Global Mofy made a strategic investment in Wetruck AI, a digital freight platform headquartered in Ethiopia, marking the company's first direct market entry into Africa and represents an important step in expanding the application of our AI capabilities beyond digital content into real-world infrastructure and logistics scenarios in emerging markets. Building on this foundation, in January 2026, the company recently established Eaglepoint AI, Inc., a Delaware-based AI infrastructure company, majority owned through our wholly owned U.S. subsidiary, GMM Discovery, LLC. Eaglepoint AI focused on AI data engineering, data governance and AI model training support, serving as a critical component of our global AI infrastructure plan out. Additional growth strategies also include strategic alliance and selective acquisitions, brand positioning as an AI-native content infrastructure provider, continued R&D investment in AIGC and asset expansion, enhanced customer experience through intelligent workflows, these strategies together underpin our long-term margin expansion and scalability. Thank you for your attention. And before we open the floor for questions, please note that the management team will be answering in Chinese for any discrepancies between the translated responses and the original answers. The original answers should be considered accurate. Please feel free to ask any questions you may have about our financial performance, strategic initiatives, our market outlook. Operator, please open the line now for questions. Operator: [Operator Instructions] We going to proceed with our first question. Question come from the line of [ Dona Young ] from Red Dragon. Unknown Analyst: Okay. Here's my first question. Could you explain how the company maintains a stable and strong revenue growth trajectory? Chen Chen: [Foreign Language] Unknown Executive: [Interpreted] Okay. So I will now translate the question for our CFO, Mr. Chen Chen, for answer. I will now translate the answers from Mr. Chen Chen. In fiscal year 2025, the company achieved a revenue of USD 55.94 million, representing a 35.3% year-over-year increase and marking a record high in our history. Mr. Chen Chen emphasized that this growth was primarily driven by 3 factors: First, continued demand growth for 3D digital assets and models across multiple application areas, including film, vision, advertising and virtual cultural tourism. Second, the overall expansion of the film, TV and short drama market, which increased demand for high-quality virtual content production services. Third, in response to the rapid growing short drama market, the company adopted innovative cooperation models to enter short drama investment and production, further diversifying our revenue sources. Mr. Chen Chen emphasized that we believe the continued development of the short drama business will provide additional revenue support and diversification going forward. Unknown Analyst: I have the second question -- can you provide an outlook of future performance? Chen Chen: [Foreign Language] Thank you for your question. And I will now translate the question for Mr. Chen answer. Unknown Executive: [Interpreted] Thank you, Mr. Chen Chen, and I will now translate Mr. Chen Chen's answer for your question. Mr. Chen Chen answered that building on the stable growth of our existing core business lines, the company expanded into short drama production in fiscal year 2025 as part of our virtual technology services and continue to advance our strategic planning in the AI agent space, which together strengthen our growth foundation. Looking ahead to fiscal year 2026, we expect to maintain strong growth momentum and further expand our market presence across key application areas through ongoing technological innovation, supporting sustainable and steady revenue growth over the long term. Operator: [Operator Instructions] [Technical Difficulty] I am showing no further questions. So I'll now turn back to Celine Meng for closing remarks. Unknown Analyst: Operator, can you repeat one more time the directions to join the call. Operator: [Operator Instructions] The next questions come from the line of Jason Liu from [indiscernible]. Unknown Analyst: Can you hear me? Operator: Yes, we can hear you. Unknown Analyst: I've got two questions. And the first one is over the next 3 to 5 years, will the company prioritize technical or ecosystem expansion? And how will resource be allocated? Wenjun Jiang: [Foreign Language] And then I will now translate the question for our CTO, Ms. Wenjun Jiang, for answers. Unknown Executive: [Interpreted] Thank you, Ms. Wenjun Jiang and I will now translate the answers from Ms. Wenjun Jiang. As CTO, Ms. Wenjun Jiang have just answered that we believe the technological depth and ecosystem expansion are complementary other than conflicting. Deepening our technology enables us to respond effectively to evolution market dynamics. While ecosystem expansion allows us to leverage existing technological strengths to attract more digital content, cultural tourism and entertainment projects, our resource allocation philosophy can be summarized as technology first and service-driven. Technology priority includes continued investment in AIGC and 3D reconstruction technologies, both of which form our core competitive advantages, serve expansion, including leveraging these technologies to broaden application scenarios and deliver more comprehensive solutions to clients. The company, Global Mofy will remain technology-driven while steadily expanding its ecosystem to achieve balanced growth and innovation. Thank you. We hope we have answered your question well. And if you have further questions, you may ask now. Unknown Analyst: Yes. I got one more question. The second one is, is short drama investment a long-term strategy or short-term monetization approach. Wenjun Jiang: [Foreign Language] Unknown Executive: [Interpreted] And I will now translate the question for our CTO, Ms. Wenjun Jiang for answers. Thank you, Ms. Wenjun Jiang, and I will now translate your answers in English. First of all, short drama investment is not merely a short-term monetization tool, but rather than an integral part of the company's long-term strategic planning. Driven by technology ecosystem expansion, as mentioned before, and user experience optimization, short dramas enhance brand visibility while serving as a strategic entry point for a broader market and technology application. We build the segment as a platform for aligning technical capabilities with sustainable commercial value. Thank you. We hope that we have answered your questions. And if you have any more questions, you may raise them now. If not, you may hang up. Operator: I am showing no further questions at this time. So I'll turn the call back to management for closing remarks. Celine Meng: Thank you. Thank you all for your insightful questions and for joining us today. On behalf of the entire Global Mofy team, we thank you for your continued support and interest in our journey. We look forward to reconnecting with you again soon. If you have any further questions, please do not hesitate to reach out to our Investor Relations team through e-mail. Have a great day. Operator: This does conclude the program. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Thank you for standing by. This is the conference operator. Welcome to the AGI Third Quarter 2025 Results Conference Call and Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions] Before we begin, we caution listeners that this call contains forward-looking information and that actual results could differ materially from such forecasts or projections. Further, in preparing the forward-looking information, certain material factors and assumptions were used by management. Additional information about the material factors that could cause actual results to differ materially from the forecast or projections and the material factors and assumptions used by management in preparing the forward-looking information are contained in our third quarter MD&A and press release, which are available on the AGI website. I would now like to turn the conference over to Paul Householder, President and CEO of AGI. Please go ahead, sir. Paul Householder: Good morning, and thank you for joining AGI's Third Quarter 2025 Results Call. Today, I'll review our Q3 performance and how the execution of our strategy is driving results. After my remarks, I'll turn the call over to Jim for additional commentary on the quarter. I'll begin with safety, which remains a top priority at AGI. Our recordable incident rate decreased 15% year-over-year to a new all-time low. In addition, more than half of our production facilities have now surpassed 1 year without a lost time accident. Clear evidence of our progress on safety and the benefits of embracing a zero-harm culture. We continue to invest in proactive measures, including enhanced training, digital monitoring and near-miss reporting. Safety isn't a stand-alone metric. It's embedded in how we plan, operate and make decisions each and every day across the entire company from our facilities to our corporate offices. To begin our prepared remarks this quarter, I would like to first address the delay in filing our results. This quarter, we experienced a delay in our third quarter filings, and we're unable to meet the prescribed timelines for releasing financial results and related disclosures. We concluded that further time was required to confirm and finalize the accounting treatment of operations in Brazil, as we have become aware through our internal channels of various financial reporting and internal control matters that required additional time to evaluate. Additionally, over a relatively short period of time, we created and launched a new business model, secured several large and comprehensive projects and formed an investment fund to support current and future projects. These measures, while delivering favorable profitable growth, added significant complexity to our business, which contributed to our auditors needing to fully review. Additionally, our audit committee performed an independent and comprehensive review of various matters relating to our financial reporting and internal controls with respect to operations in Brazil. Through this comprehensive review, we identified specific opportunities to improve our financial reporting processes and internal controls related to Brazil. These findings were determined to constitute a material weakness in our internal control over financial reporting. We are actively addressing this material weakness and have initiated remediation measures, which are further detailed in the disclosure controls and procedures and internal control over financial reporting section of the MD&A. Turning to a recap of our Q3 results, as well as a broader discussion on our key corporate strategies. AGI delivered a solid quarter with growth in both revenue and adjusted EBITDA despite a challenging market segment backdrop. Consolidated revenue reached $389 million, which represents 9% growth year-over-year. Importantly, this is consistent with our prior commentary on realizing second half revenue growth. Adjusted EBITDA came in at $71 million, up 4% versus prior year. Our third quarter results reflect both the strength of our strategy and the realities of our markets. While the North America farm market navigates challenging Ag equipment dynamics, our Commercial segment, in particular, within the international regions of our business are quite strong and continue to demonstrate a steady growth profile. Our third quarter results are perhaps the clearest example yet of the benefits we're realizing from the successful execution of the key strategies and tactics put into place over the last few years. AGI is now better positioned to capitalize on market opportunities across diverse geographies. As a reminder, we've organized our corporate strategies into 3 areas: profitable organic growth, operational excellence and balance sheet discipline. As we get into our third quarter results, I'd like to use this framework to provide updates across all 3 of these areas, including where these strategies have been implemented over recent years and how they are delivering value and supporting growth potential. I'll begin with profitable organic growth. Recall this strategy included 3 areas: product transfers, emerging markets and growth platforms. An inherent strength of our strategy is that each of these areas are interrelated, which serves to reinforce their effectiveness. I will address each in order. Undoubtedly, product transfers have been a growth driver for AGI. As a reminder, product transfers involve taking highly successful products from one region within AGI and running an internal transfer program to migrate the sales through to manufacturing capabilities to other attractive regional markets. Product transfers often include some local market product customization to ensure it will fit the requirements of a new customer base within that new region. Similar to the first half of the year, International Commercial segments benefited from our efforts on executing product transfers. Customer demand for complete solutions is high in Brazil, and our team is actively advancing several major projects secured in both 2024 and 2025 across food, feed and fertilizer in addition to our long-standing presence in the grain market. All these elements have come together to deliver strong customer engagement and a high pace of activity. Our comprehensive offering is a competitive advantage, which has enabled us to rapidly grow market share in one of the most strategically important and high-growth agriculture markets in the world. We are encouraged by the highly active pipeline and note that significant opportunities remain as we move into 2026. Product transfers have also been a key part of our success in areas outside of Brazil. In India, our storage bins, permanent material handling and portable material handling solutions have added important capabilities, which are providing top line stability and serving as a catalyst to access large and rapidly growing markets within India and across Asia Pacific. As a relatively early entrant into this emerging market, we remain optimistic about the potential of these new in-country capabilities to provide long-term profitable growth. Food, feed and fertilizer product transfers are the next areas of focus for India as we look towards 2026 and beyond, building on our success in Brazil. The second pillar of our profitable organic growth strategy is a focus on emerging markets, particularly within our EMEA business. A strategic deployment of business development resources into the Middle East has yielded several large project wins. Activity has also been steady in Africa and Southeast Asia with a consistent stream of new project wins. Preliminary visibility into potential new projects in Ukraine has begun to emerge. In aggregate, we have expanded our presence in many areas of the world, which supports the overall diversification and resilience of our business. Finally, the third pillar of our profitable organic growth strategy is our growth platforms. These include food and feed equipment businesses, as well as our digital products. These businesses have a focus on enhancing processing capabilities, which naturally complement our core storage and handling expertise. In addition, these areas all participate in very large and growing addressable markets. So far, our efforts have been mostly on enhancing and developing solution offerings. Leveraging capabilities within AGI and pulling them together into comprehensive stand-alone global business units. With that process largely complete, we are now gaining momentum and making positive contributions to our financial results. The feed business has a large pipeline with numerous opportunities in advanced quoting stages. The food platform is benefiting from concentrated efforts to develop new customer relationships and diversify across global end markets. And finally, the digital business, which has primarily been a North America offering is now being taken to new regions around the world, most notably into Brazil. Overall, these 3 strategies implemented just a few years ago have generated favorable financial and strategic results for AGI. These strategies are collectively driving the above-market growth we are delivering in the Commercial segment. As conditions in the farm market eventually stabilize, our strategy provides upside potential to our results, which fundamentally did not exist just a few years ago. A few further comments on the other 2 core elements of our corporate strategy, operational excellence and balance sheet discipline. Our operational excellence program continues to progress and is designed to optimize the business and deliver margin-enhancing efficiencies. Two significant facility consolidations within North America are nearing completion, enabling us to streamline production and remove costs, helping to create a more agile manufacturing network that can quickly and efficiently respond to market shifts and customer needs. In addition, towards the end of 2025, we also divested one of our smaller non-core Canadian facilities to a new owner, further streamlining our footprint within North America. Building on these consolidations, we've advanced several initiatives to optimize manufacturing throughput and streamline our supply chain. Our teams have implemented process improvements across key sites, rationalized product lines and enhanced logistics coordination. These efforts are already delivering benefits in cost structure and working capital efficiency and set the stage for improved profitability as volatile market conditions stabilize and demand rebounds in the North America farm market. Finally, our ERP implementation remains a cornerstone of our overall transformation. This enterprise-wide initiative is now progressing through a series of deployment phases. Once fully implemented, our new ERP platform will unify our systems, accelerate quoting and engineering workflows, and unlock significant efficiencies across finance, operations and supply chain, among other areas, which all ultimately serve to enhance the customer experience. This expanded organizational capability will deliver cost savings in addition to the potential for additional revenue through a more effective and integrated information system. While we are encouraged by the progress we've made in managing what is in our control by streamlining costs and finding more efficient ways to operate the business, as we look towards 2026, we expect to take additional steps to improve our operating efficiency across North America. These actions are designed to both optimize our operating cost structure while enhancing the customer experience. The measure of success of these actions will be to strengthen our North America operating margins across 2026. Finally, an update on our balance sheet discipline strategy. We continue to make meaningful progress on working capital, advancing the deployment of upgraded and consistent processes, tools and capabilities to each of our facilities and improving overall working capital visibility and control across the organization. In September, we launched a new commercial investment fund in Brazil, complementing the existing farm structure. This innovative investment vehicle allows us to bring differentiated offerings to the market, while monetizing AGI's long-term financing receivables tied to large commercial projects. With the fund now in place, future cycles of project financing and receivables monetization will be more streamlined, creating structural competitive advantages for our Brazil business. The first monetization of financing receivables occurred shortly after Q3. We expect additional inflows in early 2026, providing both liquidity and support for debt reduction. Finally, through a partnership with a leading Canadian financing institution, we have initiated a payables optimization program aimed at improving terms and increasing our average length of payables with certain high-volume suppliers. This will help maximize cash flow and incrementally further reduce overall working capital. Moving on to our order book. Our current order book remains healthy, supported by momentum in the Commercial segment. At the end of the quarter, our order book stood at approximately $667 million, up slightly year-over-year. Consistent with the first half of the year, the order book is heavily weighted towards commercial, given ongoing industry-wide challenges in the Farm Ag equipment segment. With over 90% of the order book allocated to Commercial, our order book is more impacted by the timing of successfully winning large commercial projects. The overall composition of our order book reflects a strategic shift towards higher-value projects with longer execution time lines. This approach enhances revenue visibility, strengthens customer relationships, while partially mitigating the impact from the slow Farm segment activity. A few comments on tariffs and recent developments. Tariff dynamics remain fluid and our internal teams are actively monitoring developments across key markets. New regulations and increased tariff rates were introduced in the third quarter. Our teams continue to explore available avenues to mitigate the effect of tariffs, including modifying and redesigning our supply chain. Overall, our agile organization, global sourcing strategies and flexible supply chain enable us to manage these uncertainties effectively, minimizing disruption and margin impacts. We will continue to closely monitor the situation for new developments. Progressing through the fourth quarter, activity and quoting pipeline across our international commercial segment remained steady. However, soft sentiment across the North American agriculture sector, particularly in our Canadian farm business continues to weigh on our overall performance with unclear timing for our meaningful for market recovery. The near-term focus for our North America farm business is order intake and a successful execution of our early order program. In addition, business activity in India and North America Commercial historically strong market for AGI began to slow through the end of the year with expectations to remain subdued into early 2026. Despite these headwinds, the strength of our order book within certain areas of the Commercial segment highlight the resiliency of our diversified business model, helping to partially offset the challenges across certain markets. Overall, Q4 expectations are for lower adjusted EBITDA sequentially and versus prior year, largely from challenging market conditions, negative mix and notably higher SG&A costs from a comparatively lower prior year. We remain excited about the potential of the company with the compounding impact of our strategy, delivering international commercial momentum combined with an eventual rebound in the North America Ag Equipment segment. I'll now turn the call over to Jim. James Rudyk: Thank you, Paul, and good morning, everyone. Today, I'll touch on a few areas that includes an overview of our third quarter results, an update on key balance sheet metrics, some comments on cash flow and a quick recap of our capital allocation priorities. Total revenue for Q3 was $389 million, up 9% year-over-year while adjusted EBITDA reached $71 million, an increase of 4%. Adjusted EBITDA margin came in at 18.2%, down about 100 basis points from last year, primarily reflecting the mix shift toward commercial projects. Our Commercial segment continues to deliver strong year-over-year revenue growth. This performance reflects our execution of large-scale projects across multiple international markets. Brazil remains a standout contributor. Customer demand for comprehensive solutions is high, and our team is actively advancing several major projects secured in both 2024 and 2025. Thanks to our product transfer program, technical support from strategic third-party partners and customized financing options, we are able to maintain a high pace of activity. Elsewhere, our EMEA region continues to make meaningful contributions driven by the execution of several major projects in the Middle East and Africa. Strong third quarter revenue growth was coupled with excellent cost control initiatives to enable an outsized capture of incremental adjusted EBITDA contribution from this region. As a result of execution of large-scale projects, increased volume and disciplined cost containment, our Commercial segment's adjusted EBITDA margin expanded to 19.5%, up from 17.9% year-over-year. It's worth clarifying that we did have some commercial revenue, which was anticipated in Q4, moved into Q3 based on project timing and accelerated achievement of certain milestones. Though this doesn't impact our overall outlook for second half revenue growth on a fully consolidated basis, which also includes expectations for a strong Q4 result for our Commercial segment. Turning to our Farm segment, while overall revenue declined this quarter, performance varied across regions. Brazil showed improvement with revenue and order book up quarter-over-quarter, the U.S. saw only a slight revenue decline and early signs of order book stabilization and Canada softened after a strong 2024, with conditions now broadly in line with the U.S. Low commodity prices continued to pressure farmer income and while dealer inventory for portable equipment declined through Q3, it's still above historic levels. As a result, our Farm segment adjusted EBITDA margin remains compressed due to lower volumes and an unfavorable product mix. We recently launched our annual early order program for portable grain handling equipment, a category hit hard by current market conditions. Adjustments have been made to better align with today's environment, but early feedback suggests purchasing trends may mirror last year's weak performance. While the program offers insight into sentiment, it's too early to call a trough in the overall market. Conditions remain challenging, and we're focused on cost control and preparing for a recovery. The simple reality is that industry conditions within our farm market have not changed. Crop prices are still low, dealer inventories are still high, and tariffs and subsidy support remain uncertain. We expect the near-term uncertainty in the North American farm market to persist into early 2026. One final comment on some of the details of our adjusted EBITDA in the quarter, it's worth calling out the transactional transitional and other line item in our adjusted EBITDA reconciliation. We have diligently worked to reduce this figure, as we have now progressed through several onetime expenses and projects related to streamlining the business. As a percentage of total adjusted EBITDA, this line item is largely immaterial this quarter. While certain transient projects and onetime expenses can come up on occasion, we believe we are now in a place where this line item should be smaller and less variable than prior quarters, enhancing our overall earnings quality. Moving on to our balance sheet and cash flow. Our net debt leverage ratio held steady at 3.9x on a quarter-over-quarter basis. This was primarily due to the sizable, but temporary working capital investments required to support large-scale projects, particularly in Brazil. Importantly, operating cash flow in the quarter remained strong, demonstrating the underlying strength of our business, though free cash flow was impacted by the requirement for some additional project financing in Brazil. We anticipate this cash flow dynamic will shift in the coming months and quarters as the previously announced investment fund setup in Brazil steadily monetizes these long-term receivables. This increases our cash flow, while decreasing our overall working capital investment. The process of monetizing these receivables through the investment fund has already started with AGI collecting some initial inflows in Q4. As we proceed into 2026, further monetization actions are expected. Strategically, with the investment fund in place, further projects and related transactions will be able to more rapidly move through our balance sheet and produce cash inflows, a unique advantage for AGI in the Brazilian market. And finally, a few comments about our capital spending plans for 2025. We remain on pace for total CapEx of approximately $30 million for the full year 2025 with about $21 million incurred through the third quarter. The expenses for our ERP implementation are not included in these figures. We're continuing to evaluate larger, more strategic capital investment opportunities and are advancing planning efforts in parallel. In closing, I would like to reiterate the importance of AGI delivering a solid Q3 amid varied market conditions. This is a tangible signal that our strategic initiatives are working and delivering real value to the business. Thank you for your continued support, and we look forward to updating you on our progress in the quarters ahead. Now back over to you, operator, to open up the call for questions. Operator: [Operator Instructions] The first question today comes from Gary Ho with Desjardins. Gary Ho: Just maybe just start off with respect to the reporting delay. There's a lot of accounting and legal jargon in the release. So maybe just can you walk us through kind of what the weakness in internal controls were related to? Was that uncertainty with revenue recognition, segregation of duties, maybe just high level, like what did the accountants get comfort with? And I'm assuming that's all been resolved and working through the remediation, we shouldn't experience any delays looking out. James Rudyk: Gary, thanks for the question. Yes, and so we did -- a lot of business opportunities in Brazil happened throughout the year, large projects, complex projects, new stuff to us. And we felt it necessary to do a deeper dive in our operations in Brazil. And really, it was great to do, make sure that we establish the right foundation and structure because these opportunities are quite large, and we expect them to continue for quite some time. So we took the time, and you could probably appreciate new businesses, new things going on and studied how we were doing anything. And the areas of focus that came out of it centered around a few areas related to things that you probably expect, segregation of duties. So in new businesses, typically, you have fewer people involved running with them and doing things. And so we have an opportunity to have more people involved, spread that responsibilities around, improve our segregation of duties. From a technical accounting perspective, these deals are and the legal agreements are quite complex. And so there's an opportunity there. I mean, we rely on third parties, but there's an opportunity there to enhance our specific accounting knowledge in these complicated areas and help with training people, providing more information for people and having more people internally be involved in the process. And then the last thing, too, that we've -- we're establishing is really just extra review processes and making sure that all the right sets of eyes are involved, scrub it and make sure that everyone is comfortable going forward. I think this is something that happens inevitably whenever a business gets involved in a new area, and so fortunately, we were able to do all the work and it's quite exhaustive work and come out of it with a very good remediation plan. Paul Householder: Yes. And maybe, Gary, just building on that to the second half of your question, building on Jim's comments, yes, that remediation plan, which is outlined in the MD&A, we've obviously internally built that out into a pretty comprehensive plan that our teams are focused on executing and implementing. And then the whole intention there, obviously, Gary, is to better position us to handle these projects in the future and avoid any type of delays in the future, again, to the second half of your question. Gary Ho: Great. Okay. And then my second question, just on the -- maybe for Jim, just on the long-term receivables that moved up $127 million in Q2, $169 million in Q3, I know you talked a little bit about the Brazil financing vehicle. Maybe just walk us through how quickly you can monetize these receivables and bring cash in and deleverage throughout 2026. James Rudyk: Yes. So we talked -- we did an announcement a little while ago about we put the fund in place. The fund is quite sizable and allows us to fund. It's now increased actually, but we announced a $1.2 billion [indiscernible] of availability. That structure is put in place. It's a unique solution. So part of the challenges of taking some time is this isn't an off-the-shelf solution. We've been working with our partners to get that put in place properly. It's in place. We have the investors lined up, the money is committed. And so now it's a matter of administratively for each of our deals, making sure all the steps are followed. And so that's what's taking a bit of time. That the administrative process for some of these tasks in Brazil is onerous and so we expect to have those completed through the early part of 2026. And no risk on the funding, no risk on things being done. It's really more procedural administrative. You've got a lot of -- from a legal perspective, part of the great feature of what we put in place is that we have lower cost of funding. And the reason for that is because we've got -- we're not just selling receivables, there's still collateral involved, and that collateral needs to be registered and that requirement is just administratively takes a bit longer in Brazil. Gary Ho: Okay. Maybe just a finer point. As we end next year, how -- like from now until end of '26, how much would do you think you can monetize through that or a range? James Rudyk: Well, it depends on the opportunities that we continue to take on. So we expect of the current opportunities that we have, we would monetize a good percentage of it. So we've talked about in the past, monetizing 60% to 80% of the amount of the sales at a minimum. And so we expect to continue to -- that would be our expectation of the percentage. We do keep some of the financing ourselves, but our intention, the way we're setting this up, Gary, is to make sure that all of our costs are funded through this monetization vehicle so that effectively, we're not dipping into our working capital or to our own cash to fund these deals or the cost of these deals. Operator: The next question comes from Steve Hansen with Raymond James. Steven Hansen: Yes. Look, real mixed emotions over this filing delay and the outcome, frankly. I mean, I don't know. I don't think anything about it was normal, really from an external standpoint. I think it's best to be said. I can appreciate the need for all the deep dives that sends the reason, but the delay was nothing normal course. But maybe just a question about it all. Were you surprised by the outcome at all? And why does it take so long ultimately is the question. And again, the complexity I can understand, but the timing and the delay, I don't think I really understand. So just, maybe when you got into this -- was it a surprise to you that it would take so long to go through all this review with the auditors? Or maybe just give us a sense for how the outcome reflected your initial expectations. Paul Householder: Yes. Thanks, Steve. Appreciate the question. And certainly appreciate the sentiment as well, one shared by us. As Jim commented, the activity that we undertook in Brazil was quite complex. It was -- the complexity was related to both the projects as well as the fund that was set up that Jim just outlined. As we started to understand that it was going to take more time to complete the audit and complete the internal reviews compounded by some concerns and questions that were raised internally. Steve, the focus quickly went to making sure that we got this right. So we were patient. We worked through it diligently. We wanted to make sure that we got it right. We wanted to make sure that we flushed out all of the opportunities for improvement so that we were better set up to handle this type of activity in the future. Net-net, it did take a while. That was certainly unfortunate. It was compounded a bit by some of the holiday seasons that we ran into. But to get to your question on the outcome, as Jim outlined and as written in the MD&A, some very valuable opportunities for us to enhance the structure of our finance and accounting procedures related to these, which again, as we implement those changes will better position us in the future. Steven Hansen: Okay. Appreciate that. Just turning back to the fundamentals then for a minute. Can you maybe just describe where you think we're at on the inventory side for portable in North America? I know you described it as above average, but it has been coming down, I think, by most accounts. The question is, when do we start to get to sort of that -- sort of basement level or normalization level where we can start to move off the floor because it's all -- integrates back into your own production profile, of course. Where do you think we're at? Are we 10% above average, 50% above average? Just give us a sense for that. And then how you think the front half of the selling season is going to play out here? And can we get back into sort of a higher operating rate in the back half? Paul Householder: Yes. Terrific question, Steve. And obviously, our portable product line fundamental to our farm business, very important across North America, as well certain pockets internationally. As you rightfully point out and as we've been commenting on the past, one of the headwinds that we have had with our portable equipment is a high level of inventory that's been maintained at our dealers that inventory levels really spiked at the tail end of 2024. The teams have really done a nice job partnering with our dealers across North America to implement various incentives to work that dealer inventory down. I would say, Steve, across the first half of 2025, those inventory levels were a bit slow to move that certainly accelerated across the second half of the year, we end 2025 in a much better inventory position than we started. As you noted, it's still above historical levels, but we're getting much closer. There's not a holistic answer to that question. And what I mean by that, Steve, is in the U.S., our inventory levels are actually in a bit of a better position. That's likely because the challenges that we saw in the market started first in the U.S. And so that cycle is just a little bit more progressed and you see that in our portable inventory levels being in a little bit of a better shape. We're confident that we're going to see the same result up in Canada, certainly across the first half of 2026. Jim did comment that our early order program continues to progress. At this point in time, we see it slightly ahead of where we were last year. And again, that's predominantly on the strength in the U.S. and that improved dealer inventory levels. Operator: The next question comes from Andrew Wong with RBC Capital Markets. Andrew Wong: So maybe let's just start with -- in the Commercial segment. The large-scale projects in Brazil. They've been a big success in terms of driving revenue. And they account for a lot of that year-over-year revenue growth in 2025. So maybe just 2 questions. One is, how long do you anticipate these projects run for? And is there enough momentum to kind of sustain that, that level of revenue or even grow that level of revenue in the coming years? Or should we expect maybe some more variability in the contribution year-to-year, just given how large these projects are? And then secondly, could other competitors also implement a similar receivables monetization type of solution like you have? Paul Householder: Andrew, terrific question. Thanks for that. We are encouraged. We are excited about these large-scale projects that we've done. The team has done an excellent job. Really building very valuable customer relationships in this area that position us very well to look at future projects. Our pipeline here is attractive. It is -- the opportunities do exist going forward. We'll continue evaluating those opportunities, looking to make the best decisions to deliver value to the company. So the opportunities do exist. We enter 2026 with some projects still in our order book that we will execute across 2026. So those will contribute to our 2026 results. In addition to that, there are opportunities for us to sign new deals within the year that could also further contribute. But again, we'll look to evaluate each of those on a case-by-case basis. You do, Andrew, raised a very valid point in terms of the variability because these are large projects, right? The signing of them comes in chunks. So if and as you sign one or two projects in a certain quarter, you see the impact initially in the order book and then translates later into our revenue. So you are right, this does create a bit of a lumpiness and variability in our order book. Obviously, the revenue recognition and the percentage of completion helps steady that out a bit from a financial results standpoint. Your final point there, Andrew, from a competition element, I mean, it's certainly possible for competitors to implement similar programs as we have. That being said, it's a heavy lift, and we would say that we have a significant head start that would form a level of differentiation for some time yet before any competitor is in a position to mirror what we've been able to put in place, both from a financial structure standpoint as well as partnership execution capabilities in other areas. Andrew Wong: Okay. Great. And then maybe just on other parts of the Commercial segment. It sounds -- obviously, Brazil has been strong, but it sounds like there maybe was some headwinds or a little bit of slowdown in India and North America. Can you just maybe comment on that and provide a little bit more details? And then just looking at the order book, it's up about 1% in Q3, is that a reasonable growth expectation for 2026? Like I'm just trying to help -- maybe just help us frame like how to think about Commercial in 2026, just given how much of a big revenue driver it was in 2025. Paul Householder: Yes. terrific, Andrew. All good points there, all good questions. Let me take them individually. We'll start out in India. We really like our India business, our India position that's been focused traditionally on rice milling for the past 4, 5 years, really up to 2025, we experienced tremendous growth, very strong market conditions. We have seen those market conditions shift across 2025, particularly in the second half of the year, we expect those market conditions to remain soft entering 2026. Andrew, at a very high level, it's a similar dynamic as we're seeing in North America, but at a different magnitude, obviously, not at the same magnitude. But basically, it's supply demand. The supply of rice is quite high. The demand is lower. That puts pressure on pricing, it puts pressure on the overall supply chain and ultimately leads to a softening of demand and we expect it to take a couple of quarters for that to work through. So that's our position on India, specifically on the rice milling. Fortunately, we've been very successful in product transfers. In our grain handling and storage area, the bins, the material handling, that gives us another avenue to explore market growth, which we expect can partially offset some of that headwind in India. To your next part of your question, North America Commercial, yes, we have seen some softening of that market activity really coming on here in just the latter part of 2025, we expect that softening conditions to continue in 2026, would suggest that this is consistent with some of the difficult farm ag market conditions that we have been experiencing over the past 18 to 24 months now translating a bit over to the Commercial segment impacting investment decisions. So the same kind of dynamics, lower commodity prices, trade uncertainty, volatility in tariffs likely impacting investment decisions around the commercial business in North America. Another dynamic is we have seen that investment by a large grain trader shipped from North America into -- out to the international and into emerging markets, where they see a lot of growth potential. Fortunately, our business positions in these markets enable us to capitalize on that. Finally, the order book, yes, we're pleased with where the order book is right now. We still have Q4 to work through, Andrew, before we have visibility into 2026. As we've commented, we remain cautious on the outlook for 2026. We are now saying that the trough in North America was not 2025. We expect those trough conditions to persist into 2026. We also anticipate, because our order book is weighted so heavily to commercial, that the timing of signing large commercial projects will impact our order book. If we don't sign a large project in 1 quarter and then we do a next, obviously, you'll get swings in the order book. So we're looking forward to 2026, the challenges of 2026. We do anticipate that the challenging market conditions will persist. Operator: The next question comes from Michael Tupholme with TD Cowen. Michael Tupholme: Just regarding the filing delay and the review that was completed by the Audit Committee, I guess I'm just wondering if you can talk a little bit about whether or not this was -- I mean, it seems clearly like it was focused on Brazil, but was there any consideration given to possibly needing to look at any other areas? And then as it relates to the remediation plan, can you sort of lay out a bit of a road map as to how that's going to unfold and at what point you would expect for all of the measures to be implemented? Paul Householder: Yes. Thanks, Michael. But 2 good questions there. And again, I think we've been -- we've covered a good bit of this in our MD&A. But just a further, yes, the focus of the audit was specifically on Brazil. We did not have any reasons nor do we have any concerns to look into any of our other regions. So yes, just to be clear on that, the focus of it was specifically on Brazil. In terms of the remediation plan that is outlined in the MD&A, obviously, we have built that out into further details here internally. We are signing accountabilities on the specific actions, we're putting a project plan in place that has specific timing around it. This is obviously a top priority for us and we will work through it diligently. Our plan is to get this implemented as quickly as possible. We don't yet have a specific timing in which all of these items will be completed. It will probably vary. Some of the things will get done and put in order pretty quickly. Others when you talk about training, knowledge transfer and learning across the organization, that could take a little bit more time. But nonetheless, this is a top priority for us, and we'll get it done quite quickly. Michael Tupholme: Okay. That's helpful. And good to understand. Regarding the commentary you provided around the fourth quarter specifically, you're talking about a sequential decline in adjusted EBITDA. I'm wondering if you can provide any more detail on that outlook, particularly given the fact that we're in early January here? And also maybe to what extent this is reflected in sort of dynamics in Farm versus Commercial? I mean, I think we -- it's clear that commercials were even seen most of the strength and farm more challenged. But any kind of commentary at the segmented level? And then I'm also curious about the SG&A cost that you're suggesting are going to be higher in the fourth quarter. Is that specifically related to some of this review process? Or is there something else going on? And will these remain elevated? Or is this more of a Q4 specific dynamic that ceases to be sort of higher cost when you get beyond Q4? Paul Householder: Yes. It's terrific, Michael. I'll address the first half of your question, and then I'm going to turn it over to Jim on the SG&A side. But you're absolutely right. We do expect Q4, as we commented on, to be down sequentially and down versus prior year. A good portion of this is market related and some of the challenges that we're seeing both in North America, specifically Canada Farm and a bit North America Commercial as well as in India. Those are 2 business drivers -- market drivers that are a headwind to our Q4 results and are impacting EBITDA consistent with what we've outlined in our prepared remarks. SG&A Is also a variable when you look to prior year, and I'll let Jim comment on that. James Rudyk: Yes. So Michael, SG&A is more of a Q4 dynamic. Last year, as we entered Q4 and then got caught a bit off guard with the lower-than-expected U.S. farm or farm results. That required us to do an adjustment to our bonuses primarily across the company. That adjustment was done in Q4 last year. So SG&A last year was slightly lower. This year, we've been on top of the bonus recordings and expectations throughout the year. So you don't have that adjustment as you did in Q4. So really just a onetime dynamic for Q4. Paul Householder: Yes. So just to pick up on, Michael, we wouldn't expect this to be something that continues going forward. SG&A remains a focus for us. We understand the importance of ensuring that our cost structures align with our market and revenue reality. Operator: The next question comes from Tim Monachello with ATB Capital Markets. Tim Monachello: Most of my questions have been answered. But could you just remind us, I guess, how much was monetized under the [indiscernible] structure in Q4? James Rudyk: Well, so we did monetize some in Q4, a smaller amount. So we'll get into those details as we report our Q4 results. So that's good. So the first -- one of the first deals went through the fund. So the fund structure works. We know how that all flows through. And now we're focused on monetizing the other ones as quickly as possible, which will be done in early 2026. Tim Monachello: Okay. And then in terms of some of the efficiency initiatives that you're implementing in 2026, so I'm wondering if you could provide a little bit more detail on the facility closures and facility consolidations that are ongoing and the impact that you see to margins due to these initiatives and potentially any operational impacts that you see? Paul Householder: Yes. Tim, thanks. Terrific questions. I mean, obviously, as we've noted, the accounting ag equipment market dynamics have continued in North America across 2025. This does give us an opportunity to continue to review what I'll call our integrated supply chain to ensure that we've got the right and the optimized cost structure. And when I say integrated supply chain, you can think of manufacturing in the middle, but obviously, our suppliers, as well as our inventory, working capital, all of those things fall within that integrated supply chain review. So there is opportunity given the softness for us to optimize our cost structure, make sure that we do are running an efficient operations. We actually kicked off this initiative just at the onset of Q4, we expect actions to take place across Q4 as well as Q1, which should put us in a better position to run a more efficient operations across 2026. As we've noted, the measure of our progress in this area will be gross margins. When you look at our gross margins across our farm business, they are depressed in 2025. A number of factors are contributing to that. We obviously had tariffs as a headwind. We had a bit of mix within our farm business as a headwind. And then the third one is the point that you brought out, just the opportunity to improve the efficiency of our operations. So we expect to get that in a pretty good shape at the tail end of Q1, which then should be something that is a bit favorable from a margin standpoint in the second half of 2026. Tim Monachello: Can you say any specifics around which facilities are being consolidated? And any commentary around maybe proceeds from the facility divestiture received in Q4? Paul Householder: Yes. Yes, for sure, Tim. So we had 2 facility consolidations that we initiated throughout 2025. One of those was a facility in North America that we commented on really at the tail end of 2024, as we consolidated our bin manufacturing to our facility in Canada. The second one that we implemented more towards the middle of 2025 was the smaller operations in Canada that we also consolidated within one of our other Canada manufacturing facility. So I'll note both the consolidations increased our activity within Canada, but ultimately improved our manufacturing footprint. In terms of the small facility non-core that we moved to a new owner, that was -- that did not have any significant impact. I would categorize that, Tim, as less than $10 million. Tim Monachello: Okay. And do you expect any onetime costs or increase in transaction, transition and other costs in Q4, Q1 related to some of the initiatives that are being implemented today? James Rudyk: Yes, there will be some additional costs, some legal costs that will run through there, not significant. Not anywhere near the magnitude of what you've seen in the past. A lot of our -- as we commented in the script, a lot of those large unusual items that have happened in the past are behind us. And so going forward, you'll only have a smaller amount of costs that we'll identify out for you to be able to do what you want with in terms of how you view them. But they'll be related to nonoperational, just more restructuring type costs or unusual legal costs. So we did have this work done in Q4. So we'd expect to see a small amount going through there in Q4. Tim Monachello: Okay. And then I just want to talk a little bit about, I guess, signals that you're seeing on the demand side in North American farm. You've talked about sort of historical cadence of demand and sort of the troughs and how long they last. And it would suggest -- or seem that you're probably reaching a sort of new record time line for a dearth of portable demand. And -- while you see inventories declining at the dealer, do you have any commentary or feedback from your dealers related to, I guess, demand that they're seeing coming in their doors? Like is that changing at all? Is it weakening or strengthening in any way? James Rudyk: Yes. Thanks, Tim. Obviously, the North America farm market is one that we're paying extremely close attention to. We're looking at various macro level indicators that could go -- provide us insights into where we are in this cycle as well, Tim, as you've noted, specific feedback from our dealers and insights on market activity. As we sum all of those insights up, it does lead us to the conclusion, consistent with what some of the other players in the market have articulated that 2025 is not expected to be the trough, likely more 2026 is the trough. That's not significantly different from the look back at historical ag market cycles that we've commented previously, where peak to peak can be in a 6-year time frame. So if you put that into context, '26, as a trough is not unreasonable. Getting to the second half of your question, what are we hearing from dealers? What are we hearing about their inventory levels? As we've commented on from the portable equipment, inventory levels are certainly coming down. That is encouraging. We are in a much better place in aggregate than we were entering 2025. That is also encouraging, a little bit more strength in the U.S. than in Canada, likely from a timing standpoint. So our dealers -- I would say, have remained cautious. I think that's probably the best description. Our dealers remain cautious heading into 2026, as do we recognize the importance of that relationship with dealers. We're partnering with them. We're very close to them on navigating this market cycle. And we'll continue to work forward or work with them going forward. Operator: The next question comes from Maxim Sytchev with National Bank Financial. Maxim Sytchev: Maybe the first question for you, if I may. Just circling back to accounts receivables. And maybe qualifying -- sort of like, should we be concerned around the aging of these receivables, sort of -- I mean, that's the first part of the question. And the second part, when you use the fund to monetize what you already have, so can you just utilize these 4 new projects? Or can you use that sort of like in the bucket of overall projects as those are cycling through the percentage of completion dynamic? So can you provide a bit more color there. And I mean, I guess, ultimately, it's also sort of linking to how should we be thinking about the free cash flow generation on a prospective basis. James Rudyk: So okay. So the first part of your question, Max, in terms of concerns on the aging. So our receivables, overall, generally, the aging has not deteriorated. It remains consistent across our company. We've got extremely, extremely low write-offs historically in terms of concerns with customers not paying. So the aging is not a concern. However, for these new deals, and as you get through and go through the financial statements, you'll see commentary. Terms offered for some of these deals are typically 5 years, a large one, though is at 15 years. And so that's -- offering that length of financing is why what's exciting about this fund that we've created helps us with. And so we can monetize and reduce our risk of all those finance -- the length of that financing time and by having these investors provide us with the cash upfront. In your question in terms of -- your second part was about which -- what can I use the fund for? These are, I mean, it's not just for any type of receivables. It's for certain these larger projects -- certain types of customers where the investors like the profile, they like the dynamics of it. They like the areas of the industry that they're focused on. And we have a governance structure set up, whereby there's an approval required at the fund level to determine on which projects will get funded. That said, how we set it up was based on the projects that we have in our pipeline and the customers and what we see coming down the pipe. So we expect to be able to fully utilize the entire amount of that fund over the coming year. Maxim Sytchev: Okay. And I guess, do you mind maybe commenting about the inflection dynamic around free cash flow, how we should be thinking about this? Paul Householder: Yes. So the timing it's the free cash flow for this year. If you look at the LTM in our MD&A, it's a negative, negative $61 million. Initial expectations were for that funding to happen in Q4, which would flip that into a positive that will be stretched out into early part of 2026. And the funding is significant. And when that does happen, we will not be impacted by doing these types of deals from a free cash flow perspective. So said differently, we expect positive free cash flow through in 2026, and we'll be able to continue to take on these larger deals and not have an impact our free cash flow going forward once this fund is up and running and moving very smoothly through the process. Maxim Sytchev: Okay. Understood. And then, Paul, if I may, just 2 quick ones. In terms of -- I mean, obviously, there was speculation that Kepler Weber could be potentially acquired in Brazil? Just I was wondering if you have any initial thoughts on that in terms of the competitive dynamic? And if you can also provide a bit of an update on ERP implementation just in terms of milestones, et cetera? And that's it for me. Paul Householder: Yes. Thanks, Max. We're aware of some of the conversations around Kepler Weber that have surfaced publicly. Obviously, we're not going to speculate on how that could play out. As I've noted in prior commentary, Kepler Weber is a good competitor, long-standing competitor down in Brazil. Traditionally have had the #1 market share. We like the competition. We've learned a lot from Kepler Weber. And we expect, regardless of what transpires down there that they will continue to be a good competitor for us in the market. Regarding ERP, we're now fully in the -- what we would call the deployment phase of ERP. We've completed the global design. We are now deploying it across our facilities. An important milestone. We completed our first deployment at a Canada facility this year. That was a great learning for the team, fantastic participation by that facility. Great work by our ERP implementation team. 2026 will be specifically focused on implementations. Our next one is planned for India, which we are targeting to get done somewhere around the first half of this year. And then after India, expectation is that we will move to North America Farm. We're excited to get into the deployment phase. We're focused on having a very efficient ERP implementation, but also one that we quickly work through so that we can start to realize the benefits that the new ERP system is going to deliver. Operator: The next question comes from Steve Hansen with Raymond James. Steven Hansen: Just one quick follow-up. Just notwithstanding all of the accounting review stuff that we've already talked about. Jim, do you feel like you've got the people and the team in place in Brazil to manage all of these big projects? I'm thinking more on the operational and the engineering side, the upfront side and then even as it dovetails into that into the downstream manufacturing side, like what else you need to do to really capitalize on this opportunity? It sounds like it's not 12 months. It sounds like it's a multiyear. So just trying to understand what else where you need to invest, if at all, to take advantage of the opportunity? Paul Householder: Steve, excellent question, and that is absolutely one of the areas that we're going to look on and address as part of our comprehensive remediation plan. As we've outlined in the MD&A, specific around the training and development of that team as we look at these large complex projects as well as the complexities of the fund transfer that Jim has outlined. We do expect that there could be additional resources that we would look to add to complement the capabilities that we already have in Brazil. As you've noted, Steve, that would be very appropriate given the opportunities that exist in front of us. We want to make sure that we are well set up. We got the capabilities. We've got the knowledge to efficiently handle these. So yes, adding resources, adding capabilities down into Brazil is absolutely something that we're going to take a look at. Operator: The next question comes from Krista Friesen with CIBC. Krista Friesen: I was just wondering if there's any other levers you're able to pull on in 2026, like previously, you've talked about a rebate program to try and help stimulate some demand. I'm just wondering if there's anything else that could be done at this point. Paul Householder: Yes. It's a terrific question, Krista. And just based on your question, as you're referencing levers, I assume that's related to the North America farm market and what we can do to stimulate demand. What I would say is that we're looking across all available levers. So that is a very appropriate question. We have used rebates and we continue to use rebates in very targeted areas, and those rebates are around driving down inventory levels, which certainly helps to stimulate demand. We are also looking at a number of different areas, how we can continue to improve our cost structure for our portable equipment so that we can further improve the competitiveness of our products. We actually launched a number of new products on our portable product line. We introduced those new products, Krista, and some of these large farm shows across 2025. Those new product lines were very well received. We've now introduced those out into the market. That is a significant lever for us to pull to stimulate demand. So our product development, product enhancement initiatives along with cost, along with rebates are all levers that we would look to pull. So it's a spot-on question and the team is doing a lot of great work in that area. Krista Friesen: Okay. Great. And then, maybe just to think about margins on that front. You spoke to a previous question that the length of this downturn maybe isn't too different than previous ones. Using history as a guide, how are you thinking about margins in 2026? Yes, any color there would be great. Paul Householder: Yes, for sure. Krista, we didn't comment on margins. We commented on the opportunity for us to enhance our operational efficiencies in 2026, a measure of which would be improved margins. If you look specifically at North America Farm, our portable team has done an outstanding job in managing the business and maintaining margins. Really, our focus is more on the permanent side as well as complementing into North America commercial. So it's in those areas that we want to make sure that we've got the right cost structure in place. We got the right capabilities built out from a customer service, customer engagement standpoint. And in those areas, we would expect to make improvements in the early part of 2026 that support margins in the second half. Operator: Next question comes from Kyle McPhee with Cormark Securities. Kyle McPhee: I'd like one final clarification on the Brazil accounting issues. The very back of your MD&A does state that the material weakness cannot be considered remediated yet. And you've defined material weakness as leaving potential for finding or incurring reporting misstatements. So is it fair to say that we can't yet rule out the need for a restatement or a change to how you account with the operations in Brazil? Or is that risk fully gone? James Rudyk: Well, the work has stopped in terms of the review, and there was no restatement. So, I mean, that's stayed in the MD&A. In terms of the timing of getting everything remediated, as Paul talked to earlier in his response, some of these things and activity just take time. And that's -- it's really just that simple. It's just a number of initiatives being done to put in place, and there's no expectation of any issues of no material adjustments, as you noted. And so it's really just a few of the activities will take some time to put in place. Kyle McPhee: Okay. And then the last one, just can you provide any color on the terms you expect as you monetize these long-term accounts receivable related to Brazil, like pennies on the dollars you're expecting to get, notably given we now see these are 5- to 10-year receivables, and you do have that first little case study looks like you monetized $8 million in Q4. So any color there, if you can. James Rudyk: So when you say the terms, what do you mean the terms? The amount? Kyle McPhee: You're presumably not selling the receivables at full face value. So I mean anything you can tell us from what you learned about the first $8 million at the very least? And how much of a discount? James Rudyk: So well, so the rate that we're being charged for the monetization is similar to the rates that we're using to discount what we record. One of the unique features about this whole monetization is the way we set it up. The collateral that's provided, the percentage of receivable that we're monetizing is very different than your traditional factoring of receivable approach. So the cost to us is significantly lower and fully reflected in our financials. Paul Householder: Thanks for the question, Kyle. And we really appreciate all the questions and participation that we've had in the call this morning. We look forward to further discussions on the quarter over the next week. So thanks, everybody, for dialing into the call this morning. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the Acuity Brands, Inc. Fiscal 2026 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, the company will conduct a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Charlotte McLaughlin, Vice President of Investor Relations. Charlotte, please go ahead. Charlotte McLaughlin: Good morning, and welcome to the Acuity Brands, Inc. Fiscal 2026 First Quarter Earnings Call. On the call with me this morning are Neil Ashe, our Chairman, President, and Chief Executive Officer, and Karen Holcom, our Senior Vice President and Chief Financial Officer. Today's call will include updates on our strategic progress and on our fiscal 2026 first quarter performance. There will be an opportunity for Q&A at the end of this call. As a reminder, some of our comments today may be forward-looking statements. We intend these forward-looking statements to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, as detailed on slide two of the accompanying presentation. Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP measures are available in our 2026 first quarter earnings release and supplemental presentation, both of which are available on our Investor Relations website, www.investors.acuityinc.com. Thank you for your interest in Acuity Brands, Inc. I will now turn the call over to Neil Ashe. Neil Ashe: Thank you, Charlotte, and thank you all for joining us today. We delivered strong performance in our 2026. We grew net sales, expanded our adjusted operating profit and adjusted operating profit margin, and increased our adjusted diluted earnings per share. We generated strong cash flow and allocated capital effectively. Acuity Brands Lighting performed well in a tepid lighting market. This is the result of the cumulative effect of our strategy to increase product vitality, elevate service levels, use technology to improve and differentiate both our products and how we operate the business, and to drive productivity. Our product vitality efforts continue to deliver value for our customers and for us. This quarter, we launched our new EAX area luminaire product family by Lithonia, an outdoor luminaire that can be used in any environment, from walkways to large parking spaces. EAX is available in our design select portfolio and has over 60 configurable options, including an option to embed RN-like controls. This makes it easier for our agents to choose the right option for our customers and ensures flexibility for multiple types of projects. ABL is winning in new markets through the combination of our luminaires and electronics. Interestingly, our Nightingale brand won several 2025 Nightingale Awards by Healthcare Design Magazine because of our patient-centric approach to product design. Our Nightingale solutions are engineered with the entire patient journey in mind, creating an environment that supports medical teams while ensuring patient and visitor comfort. For example, the Attend sconce and the Asure Nightlight deliver functional low-level illumination that supports patient sleep while enabling caregivers to perform essential duties. In the Refuel segment, we continued to expand and upgrade our lighting solutions. We initially entered the market with the development of our canopy lighting products. In this quarter, we began delivering a comprehensive offering by incorporating AIS products, including our Atrius software and Distech controls, into the refuel solution. By addressing the canopy lights outside, to refrigeration controls in the back of the convenience store, and everything in between, we are creating value throughout the location. The industry continues to recognize the strength of our products. This quarter, several products in our portfolio were awarded Grand Prix de Design Awards and Lit Lighting Design Awards. Two products recognized by both include the Cyclone Lupa, a contemporary outdoor luminaire that focuses on pedestrian safety and security in public spaces like campuses, parks, and city streets. The Eureka segment, a slim minimalist linear LED pendant light designed for a variety of indoor commercial and hospitality environments. Now switching to Acuity Intelligence Spaces, which continues to deliver strong performance. Through Atrius, Distech, and QSC, we have unique and disruptive technologies that are driving productivity for people experiencing spaces and for the people who are providing those spaces. Spaces that range from amusement parks to theaters, university campuses to healthcare facilities, sports stadiums to your office. Atrius and Distech control the management of the space, and QSC manages the experiences in the space. Over time, we will use data from both to enhance productivity outcomes through data interoperability. Taken together, this is how we can make spaces autonomous. This quarter, we began to change customer outcomes by combining our Distech Resets Move, our Q SYS platform. RESETsmove is a multisensor device that uses thermal, light, sound, air quality, temperature, and humidity sensors with AI at the edge, helping users understand how their space is being used. Data collected by the resets move drives changes in the room, including the ability to adjust the screens, cameras, and microphones from our Q SYS platform. Q SYS Reflect is then able to monitor outcomes and performances of the devices within the room. We are then able to further layer lighting controls and shade controls into the solution for an autonomous room experience. We demonstrated this solution to a large multinational technology company in our experience center, and they chose to implement it throughout their headquarters. AIS is also being recognized for the strength of their product portfolios. During the quarter, Atrius Facilities was named a winner in the smart buildings category of the 2025 Facilities Net Vision Awards. Our Q SYS full stack AV platform, the National Systems Contractors Association's Excellence in Product Innovation Award in the category of best centralized AV platform for command and control. And our Q SYS Core 24F processor was recognized with a ProAV Best in Market 2025 award. Before I turn the call over to Karen, I want to reiterate that both ABL and AIS are performing well in a challenging market. In Acuity Brands Lighting, we continue to experience a tepid lighting market. The market appears to be waiting for clarity around interest rates, inflation, and policy. In Acuity Intelligent Spaces, Atrius, Distech, and QSC are working well together, both from a customer perspective and an operational perspective. Our AIS business is strategically differentiated and positioned for value creation. We continue to control what we can control, and we are confident in the long-term performance of both the lighting and spaces businesses. Now I'll turn the call over to Karen who will update you on our first quarter performance. Karen Holcom: Thank you, Neil, and good morning, everyone. We had a strong start to fiscal 2026. We grew net sales, improved adjusted operating profit and adjusted operating profit margin, and increased our adjusted diluted earnings per share. For total Acuity Brands, Inc., we generated net sales of $1.1 billion, which was $192 million or 20% above the prior year. This was driven by growth in both business segments and includes three months of QSC sales. During the quarter, our adjusted operating profit was $196 million, up $38 million or 24% from last year. Adjusted operating profit margin during the quarter expanded to 17.2%, an increase of 50 basis points from the prior year. Our adjusted diluted earnings per share was $4.69, which was an increase of $0.72 or 18% over the prior year. ABL delivered sales of $895 million, an increase of $9 million or 1% versus the prior year, primarily as a result of growth in the independent sales network. As we mentioned last quarter, the independent sales network benefited from an elevated backlog that resulted from orders that were accelerated in advance of price increases in 2025. The higher backlog favorably impacted the fourth quarter of last year and the first quarter of this year. Adjusted operating profit increased $6 million to $160 million. This improvement was driven by our efforts to lower operating expenses. We delivered an adjusted operating profit margin of 17.9%, which was up 60 basis points compared to the prior year. Now moving to Acuity Intelligent Spaces. Sales for the first quarter were $257 million, an increase of $184 million with the inclusion of three months of QSC. Both Atrius and Distech combined and QSC grew in the mid-teens this quarter. Our AIS business also benefited from an elevated backlog that resulted from orders that were accelerated in advance of price increases in the back half of fiscal 2025. The higher backlog favorably impacted the fourth quarter of last year and the first quarter of this year. Adjusted operating profit in Intelligent Spaces was $57 million, with an adjusted operating profit margin of 22%, which was up 100 basis points compared to the prior year. Now turning to our cash flow performance. In the first three months of fiscal 2026, we generated $141 million of cash flow from operations, which was $9 million higher than the same period in fiscal 2025, primarily due to higher profitability. During the quarter, we allocated $28 million to repurchase over 77,000 shares at an average price of around $357. We additionally repaid another $100 million of our term loan during the quarter and have now repaid half of the $600 million of debt used to finance the QSC acquisition. In summary, we started the year with strong performance. We grew net sales, improved margins, and increased adjusted diluted earnings per share. We generated strong cash flow from operations and allocated capital effectively. Thank you for joining us today. I will now pass you over to the operator to take your questions. Thank you. Operator: Our first question comes from Christopher Snyder with Morgan Stanley. Your line is now open. Christopher Snyder: Thank you. I wanted to ask on gross margin. Typically, every year, I think gross margin peaks in Q3 and then down in Q4 and again sequentially into Q1 on the volume declines. The last couple, those step downs have been more significant, I guess, on a six-month basis than typical, which I assume is the result of tariffs coming in and pressuring that margin rate. But I guess, as we look forward and it seems like that's now in the base, do you think the business is, you know, positioned to kind of deliver typical gross margin seasonality, including the step up into the back half of the year? Any color on that would be helpful. Thank you. Neil Ashe: Yeah. Good morning, Chris. I'll start, and then Karen please fill in. So first of all, I think you're really referring to ABL when you talk about that kind of gross margin profile. There is so much noise, I think, in the last call it, nine months, and that'll work its way through the system over the next several. So I think a couple things are going on. First of all, obviously, the tariffs, as you mentioned, those have been inconsistent. So I think the headline is they all happened on April 2, but that's not really what's happened. So there's been a series of different the two thirty-two tariffs to steal, those sorts of things. Have come in and out at different times. So we have then reacted to that by driving and accelerating productivity efforts, number one. And then number two, taking price strategically in different parts of the portfolio. That's the bay that's what you see kind of cascading through the income statement today. As we look forward, and I say this, you know, not on a quarter basis, but on a longer-term basis, we're confident in our ability to continue to drive the margins at ABL. So, you know, as we've said, we're targeting 50 to 100 basis points of operating profit margin improvement per year. We're kind of right in that range now. It just so happened this quarter that was the benefit benefited more from OpEx than we did from gross profit margin. But we feel really good about where we're going. It doesn't mean that everything's gonna go up every quarter, but we feel good about where we are. Christopher Snyder: Thank you. I appreciate that. And then maybe just to follow-up on some of the ABL commentary. You know, I think, typically, we would see a pretty material step down in ABL SDNA from Q4 to Q1, you know, as the volumes drop. You know, I know the OpEx there did come down, but it was pretty muted. Step down Q4 to Q1. Was that a function of some of these productivity investments you just referenced? Or are there other things that are kind of going on on that, the OpEx line, line within SD and A? Thank you. Karen Holcom: Yeah. I think, Chris, overall, when we look at OpEx and you see what ABL did in the third quarter of last year, we started to take costs out. So when you look at the fourth quarter and the third quarter, that really is reflective a lot of those realigning the work and taking some of costs out of the business. So that's probably why it was a little bit more muted as we had already taken a good chunk of those costs out. But overall, you know, we were focused on driving that operating profit margin improvement year over year, and they improved by 60 basis points despite the decline in gross profit that we talked about. So we feel really good about their performance this quarter. Christopher Snyder: Thank you. I appreciate that. Operator: Our next question comes from Tim Wojs with Baird. Your line is now open. Timothy Wojs: Maybe just my first question, Neil. You know, you talked about some if you want to call them, sell deployments between ABL and AIS. And both the fueling market and in some office markets. As you're, you know, kind of going through, you know, those types of, you know, those types of sales and those types of, you know, RFPs and things, are there any sort of gaps in terms of the product portfolio that you're kind of finding that you need? Or do you feel like, you know, the products that you have in both of those spaces is kind of, you know, good for what you're trying to do in those verticals? Neil Ashe: Yeah. Great question, Tim. And let me start philosophically first, which is that it's our view, it's my view that cross-sell opportunities should be driven by customer. So, if the customer realizes the benefit that we're providing across an entire solution, then that will get pulled through the channel as opposed to us, you know, trying to push it. So that's our philosophy. So by as a result, when we start to talk about these things, it'll be because customers have pulled them through, not because we're aggressively pushing them. Net net, it might take a little bit longer, but we'll have a much more durable relationship with those customers. We chose to highlight the two, the two that we highlighted. So first, within AIS, the cross-sell opportunity between the Distech portfolio and the CUSYS portfolio, because it really was the first coming together of the basically inside the space and the management of the space. So that for the benefit of, for the benefit of autonomous room experience. So, there are things we can add to that experience for sure, but they're not required to provide the solution that we provided. I think the refuel is even at least as interesting in that that now spans the entire company. So, obviously, the refuel effort was one that was started in the lighting business. But quickly you realize that the two most important things for the convenience store are to get people into the store, and then from a management perspective inside the store to manage the refrigeration inside the store. So this tech can provide that, I am super pleased by how our teams have worked together to provide those solutions. So we there are other things in the, in that store, for example, that we don't provide, like digital signage, but, basically, they're coming together. Timothy Wojs: Organic and inorganic opportunities to add to the portfolio of AIS over the, you know, the next, you know, two years or so. So, we're pretty enthusiastic about what those opportunities are. Okay. Okay. Super. Thank you. And then I guess just a modeling question. Karen, I guess, in both of the segments, talked about kind of executing on an elevated backlog over the last two quarters. I guess, is the insinuation that, that is kind of behind you and maybe there's a little bit of slower over the next couple of quarters as you kind of the market the company kind of grows closer to the market versus the market plus backlog? Karen Holcom: Yes, Tim, I think that's right. Historically, seasonality is going to be a little bit skewed as we look ahead to Q2 based on those accelerated orders and coming into the first quarter with a little bit of a higher backlog. So as we said in the prepared remarks, both ABL and AIS were favorably impacted from that higher backlog. And so the first half, I would say, is going to be more representative of normal seasonality, but Q2 could be down a little bit more than normal. Timothy Wojs: Okay. Okay. Sounds good. Thank you, guys. Operator: Our next question comes from Christopher Glynn with Oppenheimer. Your line is now open. Christopher Glynn: Just wanted to talk about some of the divergence with ISN and DSN. They kind of diverged a little more than normal in the quarter. I know you called out the backlog strength really impacting the ISN space. But, maybe some other factors beyond that. It was pretty wide divergence. Neil Ashe: Yeah, Chris. I think that that's a good call out, and thanks for the opportunity to talk about them. When I look at the business, I tend to combine them. So if you look at them on a combined basis, that basically exactly where we expect it to be. Accounts move between the two of them, so that's a little bit of the noise that exists there. But, if you take them together, we're kind of exactly where we expected to be. Christopher Glynn: Okay. I'll think about that and follow-up later. But appreciate that. And then, you know, a lot of talk about the gas station under Canopy. Being in-store opportunity there today and combining Q SYS. You also acknowledged some things you don't have, like the signage. And you know, there's a player there that's pretty established with that broad channel strategy. So is it interesting you called out, you know, some of the differentiating factors and some of the lack. Where are you in terms of, you know, meeting your penetration goals there? Is this, you know, a bit of a dog site, or are you availing some clear runway? Neil Ashe: I would say that we're really pleased with our entrance into the market. And taking a step back, this is what I wanted our company to demonstrate. Demonstrate to itself first and to everyone else second is that we can identify an organic opportunity that has some size, and we can develop product portfolio, the go-to-market strategy, and the entrepreneurial spirit to go attack a new vertical like that. So, by all metrics, we're succeeding in that effort. So, we're not the only player in that market, and that market is a comparatively small part of our company. It's decidedly not our whole company. So, but this is a muscle that we want to build so that we can apply it here where we're doing really, really well. And in other areas like healthcare where we're doing well, like sport lighting where we're starting to come in, and others as we go along. So I think the real read here is our ability to attack an area that was not initially in our purview or not historically in our purview and to build both the business model, the product portfolio, the go-to-market that's necessary to be successful there. And that's kind of what's happening. Christopher Glynn: Great color. Thanks, Neil. Neil Ashe: Thanks, Chris. Operator: Our next question comes from Michael Francis with William Blair. Your line is now open. Michael Francis: Hey. Hi, everyone. This is Mike on for Ryan. Wanted to start with just a cleanup. I saw there wasn't the guidance in the PowerPoint. Is there anything that's changed in the outlook? Karen Holcom: Yeah. In the Michael, in the presentation that Charlotte will post after the call, you will see just the same slide with the sales and EPS guidance that we provided in the fourth quarter. So no, nothing changed there. Michael Francis: Okay. Understood. And then one of the talk about gross margins on the AI side. 60% be considered a ceiling, and you think there's more you could do there? Neil Ashe: I think we're good, Mike. We're I think we feel good about 60%. So as we continue to grow, we will focus on two things. One is that the level of margin in that business demonstrates the strategic value of the controls that we provide. So, that's a recognition, I think, of the strategic importance of the business there. As we add products to that portfolio, we may choose to add some additional business models that maybe are slightly lower margin, which will balance it out a little bit. But net net, we feel really good about kind of where that is. Michael Francis: Okay. And then wanted to hear seems like end markets haven't changed at all. Wanted to hear if anything has changed in the quoting environment with that backlog or that backdrop, and any color from the channel would be helpful. Neil Ashe: Yeah. On first, on the lighting side, I would say that as we've said for, what, the last Karen three quarters, it's kind of a tepid lighting environment. We would like the lighting market to be a little bit stronger. All indications we have are that we are at least holding, if not accelerating, our position in the market. So it is where it is. And as I'll point out, I like to point out, you can't build a space or touch a space without touching the lighting. So kind of lighting is all spaces at this point, and we are obviously the best performing player in those spaces. So, yeah, would we like the lighting market to be a little bit stronger? We would. And at some point, it will, and we'll benefit from that. On the AIS side, we've got, you know, disruptive businesses there that are effectively growing through market environments because of their ability to take share from others. So they continue to perform, despite the environment. And it doesn't mean they're gonna be up as much as they are this quarter, every quarter, but we feel good about kind of the trajectory that we're on in AIS. Michael Francis: Thank you. Pass it on. Operator: Our next question comes from Jeffrey Sprague with Vertical Research. Your line is now open. Jeffrey Sprague: Hello. Good morning, everyone. Hope everyone's feeling well. You know, I wanted to get your thought on tariffs. We have the Supreme Court ruling coming up on Friday. Who knows what we get? But, if tariffs would somehow ruled illegal, you know, do you think you'd have to roll back price as tariffs came back? How do you think the channel would respond to that? Or is there, you know, a possibility to sort of pocket some spread there if we have a dramatic change in tariff regime? Neil Ashe: Yeah. Good question, Jeff. So let's take a step back, and I'll tell you what our working hypothesis is and then what I think the practical implications of that are. Our working hypothesis is that things will stay mostly the same. So, however it plays out, I'm not a legal expert, so I can't predict what the ruling will be or how they will rule. But it just feels like if there were a completely adverse ruling that there would be some counterbalance that would keep things roughly the same. The administration would have an alternative or that would be written in some way that things are mostly the same. But let's go down the path of their rules they are disavowed in some way, and then we're there. The question then becomes, okay. So we as the practical matter, we sell our product to a distributor. The distributor sells that product to the contractor. The contractor effectively sells that to the owner of the project. That is that's not the sales process, but that is the flow of revenue. So, if we were to somehow kind of realize the benefit from a tariff, like, you know, refund, who would we give it to? So as you push that down the slide, then the distributor we would have to assume that if we did the distributor would give it to the contractor and that the contractor would give it to the building owner. I just don't think that seems reasonable. So now if you look forward, then our second the second half of our expectation is that there would be a new market that everyone was adapting to, and we would need to adapt to that market from that point forward, just like everybody else was. And we feel good about the dexterity we've demonstrated in our ability to respond to that versus the rest of the industry. Jeffrey Sprague: Mhmm. Yeah. No. Could be quite interesting if that happens. And then just the sort of a quick one back on sort of the backlog normalization. Obviously, a big backlog business in the grand scheme of things. But our backlog is sort of in a normal spot now relative to what your top line guide is? Are we below normal around kind of tepid outlook that you're talking about? Neil Ashe: Yeah. I think we're Jeff now, like, you and I have been having this conversation for now five years. And when I five years ago, I wasn't, you know, what was normal was not normal. And then we've changed through that. I would say that we the industry and we got accustomed to higher backlog levels through the post-COVID period, through kind of tariffs, price increases, and whatnot. So we're now at backlog levels which are more consistent with what they were before all of those things happened, and therefore, our order rate is more consistent with our quarterly performance. And that's what Karen was indicating. So there's still some noise from the price markets in the third quarter and the fourth quarter, which affected this. Is why she said we probably will see more seasonality in the second quarter, especially in the lighting business than we have historically. We're comfortable operating in both environments. But we would like the lighting market to be a little bit stronger. Jeffrey Sprague: Yeah. Understood. No. Thanks for all that color. Thank you. Operator: And I'm showing no further questions in queue at this time. I'd like to turn the call back to Neil Ashe for any closing remarks. Neil Ashe: So I think we had a really good first quarter. So both of our businesses continue to perform. ABL is clearly the best performing lighting business in the world. We've demonstrated through our growth algorithm that we can separate ourselves from the market. And we feel good about kind of the long-term opportunity there to a, continue to grow and, b, continue to improve margins. With AIS at both Atrius, Distech, and QSC, we have disruptive technologies which are taking share in their marketplaces. Over the long term, we have great organic and inorganic opportunities there. So, we are excited about those. So, thank you for spending time with us this morning, and we'll look forward to talking to you again in another quarter. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Ken Murphy: Good morning, everyone, and a very happy New Year. Thank you for joining us today for our quarter 3 and Christmas trading update. As usual, I'm here in Welwyn with Imran, and I'll start with a brief overview of our performance before opening the line for your questions. We are delighted with the way the customers have responded to our continued investments in value, quality and service. Group like-for-like sales grew by 2.9% over the 19 weeks, including 3.7% growth in the U.K. Customer satisfaction improved, and our U.K. market share is at its highest level in more than a decade, following 32 consecutive periods of gains. We set ourselves a challenging plan for Christmas, and we delivered in line with that plan. With over 2 billion products going through our tills and more than GBP 6 billion of sales in the 4 weeks to Christmas Eve, our teams right across the group worked hard to deliver the outstanding service that customers have come to expect from Tesco. I would like to start the call today by saying a huge thank you to them for delivering a Christmas we can all be proud of. Our performance builds on last year's successful results and reflects the strength of our core food offer. In a highly competitive market and with customers looking to make their money go further, we saw particularly strong growth in fresh food with like-for-like sales up 6.6% in the U.K. Running alongside familiar festive favorites, we launched 340 new and improved own brand Christmas products, including 180 in Finest. We recognize that for many families, the cost of Christmas can be a stretch. We did everything possible to make sure our customers got the best value from us. Starting with our fresh Christmas dinner for a family of 6 for under GBP 10, and just GBP 1.59 per person, it was even better value than last year. More broadly, our rate of inflation eased through the Christmas period and continues to be materially behind the market. We also invested in making the Christmas shop even easier for customers, including hiring over 28,000 additional colleagues. And with support from AI-powered scheduling tools, we offered more than 100,000 extra online delivery slots in the week before Christmas. Through better forecasting and planning, AI also helped us to deliver best-in-class availability and to optimize deliveries across our network. Customers continue to embrace Finest with sales growth of 13% in the U.K., including a 22% increase in our Finest party food range. Highlights included Christmas center pieces such as our Finest Turkey Crowns and Chef's Collection Beef Wellington as well as our curated Finest gifting range and a long list of award-winning products. We sold around 21 million Finest pigs in blankets, along with 2.5 million bottles of Finest Prosecco. We also saw strong demand for low alcohol options, including selling almost 0.25 million bottles of Nozeco. While Turkey retained its popularity, some customers opted for other meats this Christmas with sales of beef joints up 29%, making it the most popular alternative. Online remains our fastest-growing channel with growth of 11% across the 19 weeks. It was our biggest online Christmas, including our 2 busiest days ever. In the week leading up to Christmas, we delivered on average 2 orders every second. Whoosh also performed strongly with sales up 47% and more than 0.25 million customers trying it for the first time. Both in-store and online, customers benefited from additional value through Clubcard. Alongside thousands of Clubcard prices per week across a broad range of family favorites, we offered customers more personalized rewards, including gamified experiences with Clubcard challenges. Our retail media offering continues to engage customers and brands, including the return of sponsored Christmas Gratis now in their third year. The Tesco Media team continued to make great progress, and we were delighted to be named Media Brand of the Year at the Media Week Awards. In Ireland, we built on last year's strong performance and are now in our fourth year of market share gains with fresh food continuing to lead the way. With 5 openings in the period, including 2 large stores, we now have 190 stores in Ireland. We continue to roll out Whoosh, which is now available in Dublin, Galway and Cork. Booker performed well despite challenging market conditions, with increased customer satisfaction scores in both core catering and retail. Our wine and spirits specialist, Venus, continued to win new business. And in our symbol brands, Premier opened its 5,000th store. In Central Europe, our targeted price investments contributed to growth in both food and nonfood across the period despite a backdrop of subdued consumer confidence and increased competition. Value continues to be a key priority as customers seek to make their money go further, and we're determined to do everything we can to help. Earlier this week, we launched a new commitment to Everyday Low Prices on over 3,000 branded products, alongside our existing Aldi Price Match on more than 650 lines and thousands of Clubcard prices. Our strong performance this Christmas gives us the confidence that group adjusted operating profit will now be at the upper end of the GBP 2.9 billion to GBP 3.1 billion guidance range that we issued in October. We continue to expect free cash flow within our medium-term guidance range of GBP 1.4 billion to GBP 1.8 billion. So as we move to your questions, I just want to say another big thank you to all our colleagues for everything they did to help our customers to have a brilliant Christmas. Thank you all for listening, and I'll now hand back to Sergei. Operator: [Operator Instructions] Our first question is from Rob Joyce from BNP Paribas. Robert Joyce: So the first one, Ken, you referenced the easing food inflation over Christmas. Was that the entire driver of the slowdown versus 3Q? Are we seeing any sort of broader volume slowdown in the market? And do you think the overall market stepped down over Christmas? That would be the first one. And then the second one is probably a bigger question, but clearly guiding to a broadly flat EBIT this year after strong top line performance. What do you think needs to change for you or the market for you to be able to return to profit growth? Ken Murphy: Thanks, Rob. Happy New Year. Two great questions. Look, I think definitely, the very strong trading plan we put together contributed to the drop in the kind of overall market growth. And therefore, the easing of inflation was a material factor. There was also a step down in volume, even though we outperformed the market in terms of our volume growth, and we're really pleased with that consequentially. So I would say that our performance was pitched exactly right. It was an aggressive trading plan, but it was complemented with a fantastic product innovation pipeline and really consistent execution, both online and in stores. So for us, it's been a really pleasing performance. In terms of -- you're right, the guidance is broadly flat year-on-year. I think that's an exceptional performance if you think about where we started this year and some of the competitive activity that we responded to. What I'm really pleased about is how decisively we acted and how we got on the front foot and delivered very strong market share performance consistently across the year. And what's particularly pleasing, Rob, is that we didn't stop investing in the future. So we've been making substantial investments in our store estate, substantial investments in automation to keep our savings programs going, and even more importantly, making substantial innovation, investments in technology for the future. And so we've got a very clear strategy. We believe in the long-term possibilities for this business, and we're quite confident for the future. Imran Nawaz: And maybe if I could just add maybe 2 bullets from my end as well, Rob. Two things on the ability to upgrade the outcome for this year and continue to invest to continue the momentum and continue to protect the position of strength that we have, I think, is not a bad place to be. The second thing to your sort of longer-term question, it's important to go back to the performance framework that we did set out almost 5 years, and we really stick to, which is we are very clear that we want to continue to drive up customer perception, to drive up market share, which in turn drives up profit and drives up cash. And I think you've seen us do that year in, year out. I think this year was an exceptional year with an exceptional reaction to a competitor, but I think we stuck to our guns. We invested into the proposition. We invested into price and truthfully, being able to upgrade is a nice feeling, because it demonstrated that everything we've done really worked out well. Robert Joyce: And just a quick follow-up on that inflation point. Do you think -- is the inflation then more -- the slowdown more driven by your own investment in price relative to your sort of input costs? Or are you seeing input costs falling more broadly? And does the kind of -- I'm just looking at next year and thinking people have got -- markets got Estimates U.K. growing above 3%. Does that look a bit ambitious given the Christmas exit rate? Imran Nawaz: Look, let me take first the Christmas specific question. Look, Kantar calls around an inflation of around 4% or so, slightly north of 4% over the Christmas period. As Ken just said, we made conscious choices to invest. There's no other time when you've got so many customers in your stores and you build momentum. And if you look at our market share gains, our volume market share gains were even stronger than our value market share gains over 12-year records. And I think you get -- that pays back as you then go into Jan, Feb, March and April into the next year. So I'd say to you, it was a conscious decision to invest into value, which we saw pay off in the market share. Then in terms of next year's outlook, you know as well as I do that inflation is a driver of commodities as much as it is of stickier costs on payroll. All of those things are still to be worked out, and we'll see where we land when we talk to you in April. Operator: Our next question comes from Xavier Le Mené from Bank of America. Xavier Le Mené: A quick one actually on the market share. As you said, you've got the strongest market share ever for the last 10 years. But where potentially do you see your peers? Do you still think that you've got opportunity to grow your market share? Or are you more in a position to defend what you've got right now? Ken Murphy: So Xavier, we are always thinking offensively rather than defensively. That's our mindset. And we see it less about the market share per se and more about are we doing the right things for all our stakeholders and particularly our customers. So are we getting our value right? Are we getting the quality of the proposition right from a product point of view? Are we getting our execution right? And are we innovating and thinking about the future in ways that customers' trends and needs are adapting. And that's really where we focus all our energy. And then we look to market share as a measure of how successfully are we executing against that strategy. So we don't see any limits in terms of where we can take market share, but it is not a given. It's something that we have to work very hard to achieve. Xavier Le Mené: Right. And just one follow-up on actually Rob's question. Sequentially, you said you've seen a bit of a slowdown. It sounds like it's also market driven, but do you expect the slowdown to continue heading to '26, or do you think that potentially it's more a question of consumer confidence and hopefully, U.K. consumers getting a bit better going forward? Imran Nawaz: Look, I mean, I think when I look at consumer confidence this year, I would say it's mixed. But it's been mixed throughout the entire year, right? What you saw was people that are -- there's a cohort of groups that are, frankly, in a good place and feeling comfortable with their savings and their spending, and there's a group of people looking for value. I feel we saw that reflected. When you look at Finest's performance, in a way it's a reflection of the fact that people looking for value and quality at the same time were able to hit that. So I think our Everyday Low Price campaign that we're launching, again, hits the bull's eye on that. I think addressing all of those opportunities for those customers looking for value is the right way to go forward. Fair to say that as you -- the question behind the question is, was the market overall a bit softer over Christmas? I'd say yes, on a volume basis. The reality, though, also is because we really outperformed every single month over the last 19 weeks on a volume share basis, we were not really affected by that. And I think one proof point for me is the way we exited the year was very clean on stock. Then how it plays out next year, we'll obviously talk to you again in April. But look, one of the things that we do feel good about in this business is, and I think we've demonstrated that over the last 5 years is, we are very good at adapting ourselves to whatever the environment throws at us. And it's one of the reasons why we've put value at front and center of everything we're doing. Operator: We'll now take our next question from Manjari Dhar from RBC. Manjari Dhar: Just 2 questions from me, please. My first question is on supplier-funded promotions. We've seen them picking up over recent months. Just wondering how much higher could this go? And if it does continue to drift higher, does that change your approach for the Tesco business, maybe for your private label business? And then my second question is on the digital data opportunity. I guess how much further is there to go with Clubcard personalization and AI? And what sort of things should we be expecting this year? Ken Murphy: Thanks, Manjari. So I would start off by saying that kind of supplier-funded promotional penetration or participation is actually only returning to what it was pre-COVID. So it's not like it's wildly out of kilter with historical norms. That's the first thing to say. The second thing is that actually, as you saw from our announcement this week, we have reinvested a lot of promotional funding back into everyday low pricing through the extension of our low-price campaign from 1,000 to 3,000 lines. And that really is based on an insight from customers that say they need reliable low pricing during these months where money is tight and they're watching every penny. And so that is the first signal, by the way, that we are kind of -- we are responding to customers' needs in the moment. So I'm kind of relaxed about that, if you like. I think it's a normal... Imran Nawaz: And maybe to give you a number on that, just to give you a sense to underpin Ken's point, last year's promo percentage was around 33%, and this year was 34% over that 19-week period, which gives you a sense. There was a slight creep up, but not massive. Ken Murphy: Yes. It was artificially depressed during COVID, Manjari. So it was very hard to compare apples with apples. If I go to your second question, which is a very exciting question. It's a question we're really excited about. We don't see any limits to the opportunity around data and particularly the opportunity to serve customers better through data, getting to understand their needs better, responding much more dynamically, using AI to help us be there for customers whenever they need us. And we're investing behind that, and we'll continue to do so. And I think it will be something that you'll see continuous improvement from us over the next number of years. I think there's infinite possibilities. Manjari Dhar: Great. Maybe just a quick follow-up. Should we be expecting investment levels behind that overall group CapEx to slightly step up now as a result? Ken Murphy: Well, we've always been quite clear about our kind of breakdown of CapEx being kind of a 3-part logic, which is part 1 is where we're investing in our core estate renewal and the shopping experience. Part 2 is where we're investing in automation to support our Save to Invest programs, and Phase 3, which is all about innovation, technology investment for optimizing our proposition. And probably the greatest -- we've seen step-up investments across the board actually in all 3 areas. And that's been what's been behind our progressive increase in capital. And actually, as we've gone, we've kept a very close eye on return on capital employed, and that has also been improving over time. So we're very disciplined in how we spend our money. Imran Nawaz: Yes. And also what's really nice is, in the base, we've also reflected already increases year-on-year into our tech organization, because we know that this is an area of opportunity for both on the growth side, but also on the efficiency and savings side. Operator: We'll now move to our next question from Sreedhar Mahamkali from UBS. Sreedhar Mahamkali: Maybe 3 for me, if you don't mind. First one, in terms of improving price position versus the market statement and the comment in the statement, can you talk to us if it's been the case versus all operators as you see it, especially given one of your big competitors reset and continuing investment? That's the first one. Secondly, just trying to understand the new or renewed push on everyday low prices. A couple of questions there. Is this reallocating the promotional funding more to be fully behind Everyday Low Prices versus Clubcard Prices? How do you see the offer to the consumer changing in the round as a result of what you've been executing really well on Clubcard Prices already? And second one, sticking with Everyday Low Prices, is this first signal to us that 2026 is likely to be as big a year of investment as it was in 2025? Is that how we should read this? Ken Murphy: Okay. Thank you very much, Sreedhar. I think I'd start off by saying that our price position has strengthened over the year versus the market generally. And that I think more importantly, the sophistication of our pricing investment has improved through the technology investments we've made such that we focus on the lines that matter most to customers. So we're investing in value, but we're investing wisely and quite judiciously. And I think that is what has helped us to outperform the market. On your point around Everyday Low Pricing, I think that was a response to customer insight, which said they wanted more reliable pricing on everyday essentials in these key periods in January, February. And so we made a long-term commitment to, as you say, invest principally promotional funding back into Everyday Low Pricing. And you shouldn't read it as any more than us responding to a customer insight to give customers the best possible value in these early months of the year. And I don't think it's a signal of anything other than our intent to stay on the front foot from a value for money point of view in 2026. Imran Nawaz: Yes. I think one aspect, Sreedhar, that's important is we already have Everyday Low Prices on 1,000 SKUs. And what we're doing is because it worked so well, we're giving it more visibility, more color, and it's been expanded to 3,000 of people's favorite brands in the country. So from that level, it's also a confirmation of something working really well that we want to double down on -- or triple down on, I should say. Sreedhar Mahamkali: And in the round, I guess what I'm trying to understand is Clubcard Prices have been incredibly successful for you. Is this a recognition, to Ken's point, I guess, some of that needs to be more upfront shelf prices rather than Clubcard Prices. Is that how I should see it? Imran Nawaz: I mean, I think it's a continuous conversation depending on what customers are looking for, but I'd be very comfortable to say to you that as opposed to having only exclusive deals on Clubcard prices, we want to have more, as Ken said, more longer-term price fixes as we've been doing on Low Everyday Prices now rebranded. Operator: We'll now move to our next question from Clive Black from Shore Capital Markets. Clive Black: Also, very happy New Year. Very well done, by the way. Not an easy thing to deliver. The question I have is really around volume. First of all, why do you think volume in the Christmas period was a bit slower than you and maybe the industry expected? And in particular, do you think there are features around alcohol consumption and maybe diet suppressant drugs that are starting to kick in more noticeably in that respect? And then in terms of that volume, is that a key factor why you expect working capital -- or sorry, your free cash generation to come in with the existing guidance, which might mean that working capital is a bit of a flatter benefit year-on-year? Would that make sense? Ken Murphy: Clive, Happy New Year to you too, and thank you for your comments. I'll speak to the volume comment, and then I'll pass over to Imran maybe to talk about working capital. So I'd start off by saying that what was particularly pleasing about our performance is we outperformed the market on volume. I think it's fair to say that the market overall was a little bit softer on volume, but our outperformance was particularly important. And within that, I was particularly pleased with our fresh food performance. So speaking to your point about is there a little bit less alcohol consumption, is there an impact? I think there's a general impact from people wanting to eat and live more healthily. And for sure, within that, GLP-1 will be having an impact. But our fresh food sales at plus 0.6% were particularly strong. So my feeling is that whatever way this trend evolves, we're really well set up to take advantage of it. And we've been investing very heavily in our fresh food proposition over the last couple of years, and it has been the principal driver of our business, which we feel really pleased about. There's no doubt, as you saw from some of the stats that I shared on the call earlier that you are seeing a significant rise in low and no alcohol sales, but we respond to that as well. We have the products and the range to address it. And within our food range, we have a high number of high-protein products that are really well-suited to anybody looking to pursue that kind of diet. So we feel really well set for whatever trends are coming our way. But for sure, trends are emerging and we are keeping a very close eye on them. Clive Black: Sorry Ken. Just in that respect, Ken, are you therefore seeing -- sorry, are you seeing notable step back, therefore, in areas that are more exposed to change in ambient carbohydrates and the like? Ken Murphy: No, not really. I mean, we shifted an extraordinary amount of chocolate tubs over the Christmas period. So I think -- and I was a material contributor to that personally. So no -- the short answer is no, it's been really strong. Clive Black: Sorry, Imran? Imran Nawaz: Yes. No, absolutely. Just on your second question, I mean, just to reiterate what Ken just said, I mean, we -- and how it impacts cash, I mean, obviously, we were less affected by the market slowdown because if I look at Q3 and the Christmas period, we were growing volume every single month and outperforming on market share every single month. So that gives you a sense of it not being a real driver on working capital, because ultimately, volumes are positive. And more pleasingly, I could say that we're exiting very, very cleanly. Actually, I was very happy about that. I mean, we set up a very ambitious Christmas, and we delivered in line with that. And when you exit cleanly, it just helps you get momentum also into January, which is nice. In terms of cash flow, look, we had a very, very strong first half, over GBP 1.6 billion. As you know, typically, our cash flow is skewed towards the first half. And in the second half, you've got the payments out the door from all the supply you bring in for Christmas. So that phasing will play itself out as per normal. And as you know, our guidance on cash is that consistent range we've been giving, GBP 1.4 billion to GBP 1.8 billion. I know we've delivered always to the upside on that one. And so it's never stopped us from doing a good job, and the plan is to continue to do so. But as you also know, the working capital balances at Tesco are enormous. So just to give us a bit of flex in terms of any last-minute payments or receivables or anything like that, it gives us a bit of space to do that. But obviously, cash is important, and the plan is absolutely to continue to deliver within that range. Operator: Our next question is from Monique Pollard from Citi. Monique Pollard: Two from me, if I can. The first one, obviously, good market share gain, U.K. market share gains of 31 bps over Christmas. And from what I understand from the commentary from Imran, the volume market share gains over that period are even stronger than that. What I'd like to understand from customer feedback, the surveys you do, et cetera, are you able to give us some sense of how much of that you think is due to strong price positioning? And you mentioned your price position has strengthened versus the market this year, and you were aggressive in terms of inflation over the Christmas period. So how much of that is price positioning? And how much is things like investment in availability over Christmas, which is probably particularly strong versus particularly some competitors over the period and things like the store estate, staff in stores, et cetera, over that period? And then the second question is just me trying to understand that level of price investment that you've put in, whether some of that was seasonally specific to the Christmas period. As you mentioned, you never get that volume of customers in store and therefore, important to be on the front foot on price, or whether that is sort of something we should expect to be a bit ongoing? Ken Murphy: Right. Monique, so I think the short answer to your first question is that delivering the kind of market share performance we've delivered, not only over Christmas but right across the year, is actually a composite of great value, great quality, great execution. I think you'll have seen amongst some of our competitors that even if you drive a very strong value message, if you don't have the quality and the supply chain precision and the in-store execution to go with it, it's very hard to deliver the performance. So I would say that our market share performance has been a composite performance of everybody in Tesco across all the functions and departments doing their job really well and executing against the plan. So I think that would be the answer to the first question. The second question around price investment is that clearly, Christmas is the FA Cup final for retailers. So we all lean in very heavily to a very strong trade plan over Christmas. And it's also a chance for customers to reappraise your proposition, shop [ B2B ] for the first time and really like and appreciate what they see. So we work very hard from everything from product innovation through to hiring of nearly 30,000 extra people through to the very strong trade plan that we delivered. And that is quite a specific event. It doesn't necessarily mean anything for the rest of the year per se other than the fact that we will continue to invest appropriately. And I think as you saw from our announcement earlier this week, we acted against a specific customer insight for January, February, which said we needed to provide more reliable Everyday Low Pricing on a wider range of products. And so we've traveled our Everyday Low Pricing range to 3,000. And so what you can expect from us is that we will adapt constantly to insights from customers and react, so that we're giving them the best value and that's appropriate for the moment. Imran Nawaz: Another angle, Monique, as well to keep in mind is the perspective on channels. So when you look at where the market share gain came from over the Christmas period, we got it in large stores, which is great, because that's the key estate. But at the same time, that 11% growth we saw in online also led us to continue to gain market share in our online business, which was also great to see. And given the fact that we are over 36% market share in online, that gave us an extra benefit on market share as well. Operator: We'll now take our next question from Matt Clements from Barclays. Matthew Clements: First question was, you often give a very useful insight into the health of the U.K. consumer at your update. I was wondering if you could just talk us through how sentiment and spending evolved through the period, particularly around maybe November with the budget? And how do you think we're set up on consumer health into '26, government policy, et cetera? And then the second question was around Finest, which is compounding exceptional growth now. Any views on Finest into next year? I mean, particularly around the dining-out to dining-in trend? Do you expect that to continue? What's the innovation pipeline like? Anything on that would be helpful. Ken Murphy: Great. Thanks, Matt. So I think the first thing to say on consumer sentiment is that we've definitely seen that consumer sentiment is mixed. I think we have a section of the community that is in pretty good shape from a household budget perspective. And then we have a section of the community that is really struggling to make ends meet. And I think that is playing out overall in terms of how customers are shopping. They're very value conscious. At the same time, though, there is a significant proportion of households that are in decent shape financially, and they are looking for good value for money. And that, I think, is a big factor in what's driving our Finest sales. I think there is that trend towards eating in more and eating well, and that's driving our fresh food sales. And I think the consumer has shown great resilience in a lot of uncertainty. I think the budget is just one factor in a number of factors that's driving uncertainty. But we have seen a pretty resilient consumer in terms of their spending pattern and habits. And we continue to monitor it very closely. But we, to a certain extent, as long as employment remains strong, expect that resilience to continue. And Finest really is a subset of that. I think Finest, for us, is delivering on 2 fronts. It's responding to that trend of wanting to eat restaurant quality food in your home, but it's also responding to the fact that historically, Tesco would have undertraded in that particular meal occasion or mission. And I think what you've seen for us in terms of the amount of product innovation, the bravery to go deeper into distribution, to go into more and more different categories and cuisines has given us the confidence to really fight for fair share in that meal occasion. And so we still believe there's a lot of room for growth in Finest in the coming years. Operator: We'll now take our next question from William Woods from Bernstein. William Woods: Happy New Year. When you look at your success over the last 5 years, you've had great success with things like Aldi Price Match, Clubcard Prices, Finest, et cetera, and your peers have played catch-up. What do you think are the next levers that you can pull over the next 5 years to continue to innovate, continue to lead the market and gain market share? Ken Murphy: Thanks very much, Will. I think first and foremost, we would say that our strategy of focusing on the core basics and executing them brilliantly and consistently remains a fundamental pillar and foundation stone of our strategy going forward. The second thing I would say is that the building out of our proximity to customers in terms of their food needs is equally important. So what we've done in terms of extending our grocery home shopping, slot availability, the work we've done to build Whoosh into a really market-leading from a value point of view quick commerce model. The launch of F&F online are all contributing factors to getting closer to customers and making life more convenient. And then on top of that, we're working very hard to get really close from a data point of view to our customer base. And that is really starting to deliver results for us. And that, I think, is where the greatest opportunity lies is using data and insight to really get closer and closer to customers and anticipate and serve their needs, both digitally and physically. And we see clearly Clubcard at the very heart of that. And we also see dunnhumby as a clear source of competitive advantage to help us deliver that as well. And probably I should finish by saying something that's not necessarily the sexiest thing, but is absolutely critical, which is that we have an incredibly strong Save to Invest program. Imran has led this since he's joined the business. The step-up in our savings has been extraordinary from GBP 300 million a year to nearly over GBP 0.5 billion a year. And that shouldn't be underestimated in what it has allowed us to do in terms of stepping up capital investment, stepping up our investment in value without ever compromising on the customer journey. So they'd be the key pillars of what underpin our future growth opportunity. Operator: Our next question comes from Ben Zoega from Deutsche Bank. Benjamin Yokyong-Zoega: Just a couple of questions, follow-ups from my side. Firstly, on inflation, and secondly, on supply funding. So firstly, you say you've improved your price position against the market. I just wanted to ask, is this broad-based across competitors, or were there particular competitors that you'd call out as closing that gap against? And are there any particular product areas where you focused your price investments such as fresh foods? Secondly, on supplier funding, is it fair to say that the elevated levels of supplier funding in H1 has continued into Q3 and Christmas, particularly as the market turned more promotional? And are you able to comment on the levels of brand support behind the expansion of Everyday Low Prices? Imran Nawaz: Look, I mean, in terms of inflation and strengthening price position, I mean, we take a view, and we obviously have our own pricing strategy, and we have stuck to that since over the last 5 years. And look, we take a broad view that we want to continue to strengthen versus everyone. I mean, ultimately, the ultimate judge of how strong your price really is, is the customer. And the combination of Aldi Price Match, Clubcard Prices and now Low Everyday Prices, in our view, is the right combination, and it's made us stronger and stronger, and it's working well for us. And I would say to you, it's a broad-based strengthening across most of our competitors, which is good to see. Then in terms of promo intensity and supplier funding, look, the truth is, promo funding has gone up a bit. You saw that from the brands wanting to regain volume growth, which is good for us, because it comes under the banner of Tesco and Clubcard Prices. So we like to see that. That's a good thing. You will have noticed that the Low Everyday Prices is -- or Everyday Low Prices is brand oriented, which is good. Brands like to grow, and they can see that they have grown with Tesco online and in-store, and they want to continue to grow, and we have a great partnership with them. As ever, any campaign or events we run, there are always some investments from our side, some investments from the brand side, but you wouldn't expect me to give you some commercial details on the call here in terms of how we execute these. But suffice it to say, they are customer-centric and data-led. And clearly, the idea behind them is to continue to grow and gain share. Operator: And we'll now take our last question today from Karine Elias from Barclays. Karine Elias: Most of them have been answered, but just one final one. In the release, you mentioned, obviously, the competitive environment being as competitive as ever. Just broadly speaking, I think historically, you've called it more rational. Do you feel that that's still the case? Or perhaps there was some intensity going into Christmas? Ken Murphy: So the definition of rational is always a broad one when you're dealing with 10 to 12 different competitors who are all looking to win the basket from you. But I would say that the market intensity in terms of competition, pricing, et cetera, has remained strong since February last year. It didn't really change over Christmas. But I think what, and hopefully, you will have observed is that our response has been really decisive and really quick, and we have maintained that intensity throughout the year. And that's what really helped us underpin the very strong market share performance that you saw over Christmas. Operator: Thank you. That was the last question today. With this, I'd like to hand the call back over to Ken Murphy for closing remarks. Over to you, sir. Ken Murphy: Thank you so much, everyone, who's joined the call, took the time out. I know it's an incredibly busy day with a lot of announcements from various different companies. So we really appreciate you taking the time to join us. Thank you all for the excellent questions. I wish everybody a really happy New Year and a prosperous 2026, and I'm looking forward to seeing you all in April. Thank you. Goodbye.
Operator: We'll now begin the LY Corporation financial results briefing for the second quarter of fiscal year 2025. Thank you very much for joining us today. We will be referring to the financial results presentation available on the LINE and Yahoo! LY Corporation website. During today's session, we kindly ask you to follow along with the material. Joining us today from LY Corporation are Mr. Takeshi Idezawa, President and CEO; Mr. Ryosuke Sakaue, Executive Corporate Officer, CFO; Mr. Yuki Ikehata, Corporate -- Executive Corporate Officer, Corporate Business Domain Lead; Mr. Makoto Hide, Executive Corporate Officer, Commerce Domain lead; Mr. Hiroshi Kataoka, Executive Corporate Officer, Media and Search Domain lead. First, Mr. Idezawa will provide an overview of our financial results for the second quarter of fiscal year 2025. Following his presentation, we will hold a Q&A session. The entire briefing is scheduled to take approximately 1 hour. We will be live and streaming this session. If there is any distortion or inconvenience in the video or audio, please try alternate server link. Takeshi Idezawa: This is Idezawa of LY Corporation. First, before explaining our financial results, I would like to comment on the system failure caused by a ransomware attack that occurred at our group company, ASKUL Corporation on October 19 and the partial leakage of information held by the company. We sincerely apologize for the significant concern and inconvenience caused to our customers who use our services as well as to our business partners. The details regarding the damage potential information leakage and recovery status have already been communicated by ASKUL. The company is continuing to work closely with external experts prioritizing a safe and prompt restoration of systems while investigating the cause and confirming the scope of impact including any personal data. LY Corporation is fully cooperating with all recovery and investigation efforts. As the parent company, we take this matter seriously, and are committed to restoring the situation and preventing recurrence and strengthen the information security framework across the entire group. Now let me explain our second quarter financial results. Please turn to the next page. First, here is an overview of the second quarter results. Consolidated revenue was JPY 505.7 billion, up 9.4% Y-o-Y. Consolidated adjusted EBITDA grew 11.3% Y-o-Y to JPY 125.4 billion showing solid profit growth. Additionally, progress in AI agentization and the expansion of LINE Official Account and Mini apps are progressing smoothly, preparations for the LINE renew are also steadily progressing. Home tab refresh scheduled within the year. We will now proceed with the explanations in the order of the agenda you see here. First, the consolidated company-wide results. Next page, please. These are the results for the second quarter. Although consolidated revenue was slightly behind the guidance due to the decline in search advertising revenue, adjusted EBITDA and EPS are on track with the guidance. Next page, please. These are the consolidated performance trends, driven by the growth of PayPay consolidated and progress in efficiency improvements at LY Corporation, adjusted EBITDA grew 11.3% Y-o-Y, achieving double-digit profit growth. The margin also improved year-on-year. Next page, please. These are factors of change in consolidated adjusted EBITDA. Although expenses increased, revenue growth in the Strategic Business and Commerce Business outpaced the expense increase, resulting in a year-on-year increase of JPY 11.7 billion in adjusted EBITDA. BEENOS and LINE Bank Taiwan have been fully consolidated since the second quarter with the 2 companies contributing JPY 900 million to adjusted EBITDA. Next page, please. This is consolidated total advertising-related revenue. This quarter, commerce advertising achieved double-digit growth driven by increased transaction value and the total ad revenue grew by 2.4%. Next page, please. This is consolidated e-commerce transaction value. Domestic shopping transaction value grew 13.1% year-over-year, supported by last-minute demand ahead of the discontinuation for awarding points for hometown tax donation program. Reuse saw year-on-year growth of 15.7%, driven by Yahoo!'s lead market growth and BEENOS contribution. Next page, please. Regarding the upward revision of the dividend forecast, we conducted share repurchase during the first half of the current fiscal year and the cancellation of these shares was completed on September 3. Consequently, as the number of shares eligible for dividends has decreased, the annual dividend has been revised upward from JPY 7 to JPY 7.3. Next page, please. This is on progress on the LINE app revamp. The renewals of the talk, shopping and wallet tabs have been rolled out in phases since September. Home tab renewal is scheduled to make a test release this year. Next page, please. This is on optimization of management resources. Firstly, on human resources, we are reallocating to growth areas such as AI agents, which will be explained later, Official Accounts and MINI Apps. We will reallocate our human resources so that by FY 2028, 50% will be allocated to growth areas. We will reduce the fixed cost by JPY 15 billion by the end of fiscal year by 2026 and build a leaner financial structure. Next page, please. From here, I will explain the financial results by segment. Next page, please. First, the Media Business. Although both revenue and adjusted EBITDA declined, continuous cost-saving efforts are yielding results, leading to improvement of adjusted EBITDA margin on Q-on-Q basis. This is performance analysis of the Media Business. While search advertising revenue contracted, growth in account advertising drove an increase in total advertising revenue. Next page, please. Account advertising continues to perform strongly in both the number of paid LINE Official Accounts and pay-as-you-go revenue. As this is an area we are strengthening alongside MINI Apps, we will provide a more detailed explanation of future strategies and initiatives later. Next page, please. Next, the performance trends for the Commerce Business. Second quarter revenue reached JPY 216.6 billion, a year-on-year increase of 7.2%. Adjusted EBITDA was JPY 33.3 billion, although profit declined due to increased promotional expenses related to the hometown tax donation program, the decline narrowed compared to the previous quarter. Next page, please. Performance analysis of the Commerce Business. The business as a whole is expanding steadily. In addition to the full consolidation of BEENOS, Yahoo! Shopping and subsidiary growth contributed to increased revenue. Next page, please. performance trends for strategic businesses such as payment and financial services. Revenue continued to be driven by PayPay consolidated, reaching JPY 109.7 billion, a year-on-year increase of 35%. Adjusted EBITDA also continued to grow, reaching JPY 22.9 billion, an year-on-year increase of 52.1% with margin remaining at a high level. Next page, please. Performance analysis of strategic businesses. Payments and financial services are both growing steadily. Furthermore, the full consolidation of LINE Bank Taiwan contributed to increased revenue. PayPay consolidated business overview. Each service is growing smoothly. Our number of payment per user and unit price, those KPIs are progressing smoothly. As a result, consolidated sales has increased Y-o-Y, plus 30.4%. Consolidated EBITDA was more than doubled. So the second quarter showed a significant strong growth. Next, from here, I will explain our key strategy going forward. Next page, please. As our company-wide key strategy, we will advance as 2 wheels that agentization of all services and the enhancement of Official Account and MINI Apps. In agentization for the 100 million users using our services, we will provide services like search, media, finance and commerce more conveniently via AI agents. And for corporate clients such as businesses, companies, stores and brands, we will provide customer contact points and business support function through our function enhances Official Accounts and MINI Apps by improving the value provided to both users and clients and by seamlessly connecting both via AI agents, we will realize new service experiences and expansion of revenue opportunities. Please turn to the next page. First, regarding our initiatives for AI agentization. First, our goal is daily AI agent used by our 100 million users in Japan, aiming for 100 million DAU. Currently, in October, DAU for AI services is 8.6 million, especially AI answers on Yahoo! JAPAN search and LINE AI Talk Suggestions are used frequently and user numbers have begun to expand. Also for AI Talk Suggest, user billing has started and monetization efforts has also begun. Going forward, we will promote AI agentization of each service and aim to expand users. Next page, please. Next, regarding the enhancement of OA, Official Account and MINI Apps. But before talking about the specific initiatives, I'd like to explain the structural transformation of the Media Business. Earlier, I explained the revenue decline in search advertisement in the Media Business, while steadily bolstering the conventional search and display advertising businesses, we will achieve sales and profit growth by further growing OA and MINI Apps where we can provide our original value. Over the next 3 years, we will increase the share of high gross margin OA and MINI Apps to about 40% and aim for an adjusted EBITDA margin of 40% to 45%. First, regarding the performance of OA, Official Accounts in Japan over the last 3 years, our track record, the number of paid OAs improved by a CAGR of 14% and ARPA also improved. And as a result, OA revenue also grew 16% annually on average and sales have grown to the scale of JPY 100 billion in Japan and JPY 140 billion, including global. Please turn to the next page. On top of this OA growth foundation by further building a MINI App platform and adding a SaaS-like store support solutions, will create a multilayered revenue structure and aim to double sales in 3 years. This fiscal year, as I mentioned, doubling the JPY 140 billion to JPY 280 billion. In this fiscal year, we will first focus on expanding MINI Apps based on OA and launching the SaaS business. Important KPIs for the revenue models of each areas are shown in the lower section of this page. MINI Apps are -- our scale expansion is very important for KPIs in the growth phase. In OA SaaS, we set ARPA improvement as KPIs. But we think these KPIs as leading indicators to monitor our business goals. Next page. Let me explain structurally. First, there is an OA, Official Account as a base. Currently, there are 1.3 million active Official Accounts used in Japan, in which number of paid Official Accounts are 310,000. We see the target accounts for future expansion such as businesses, companies, stores and brands at about 5 million. So we can still grow the number of OA accounts, and we will also further increase the ratio of paid accounts. The second layer, MINI Apps to OA using companies and stores, we will propose a customer contact point via MINI Apps, expanding MINI Apps numbers, growing users and creating businesses like payments and ads within them. The third layer is SaaS solutions, developing specialized support for high affinity industries like Store DX or reservations, aiming to raise ARPA. Service launch planned for 2026 first half. And we'll have more new solutions at the right timing when we can introduce them to you, we will. We will provide services more broadly and deeply and provide a deeper solution via SaaS by industry to expand our sales. Finally, regarding the recent growth of MINI Apps, as you can see on the left-hand side graph, number of apps has increased by 1.5x and the number of users has increased by 1.6x, steady growth. And we are strengthening our sales structures. We are enhancing proposal to bigger companies and installation at large enterprises like these are beginning. As you can see, and as a measure to strengthen inflow, we are leveraging LINE touch, which allows users to instantly launch MINI Apps at stores and the LINE apps revamp focusing MINI Apps will also begin. So we will further expand both the number of apps and the users and build a situation where businesses like advertising payments that can be provided. Let's turn to the next page. And finally, a summary of the Q2 financial results. Sales and profit expanded steadily. Our company performance was -- experienced a solid growth. Going forward, centered on AI agentization and Official Accounts and MINI Apps, we will accelerate the growth. We will promote AI agentization across all services, offer AI services to 100 million users and create new value. Also, we will enhance OA and MINI Apps. And while transforming the media portfolio, we will achieve growth and improved profitability. This concludes our Q2 financial results explanation. Thank you very much. Operator: We would like to now begin the Q&A session. [Operator Instructions] First from Goldman Sachs Securities, Munakata-san. Minami Munakata: I'm Munakata from Goldman Sachs. I have 2 questions. My first question is on search ads. In the first quarter and also in the second quarter, the impression I got is this business is quite tough. The degree of toughness, is it correct to understand that it's the extension of the first quarter? Or are there any additional reasons? And on search ad, what would be the realistic guidance towards the second half? That's my first question. Ryosuke Sakaue: Thank you for the question. I am Sakaue. I'm the CFO. Let me reply to your question. Second quarter year-on-year is worse compared to Q1. One of the factor is one major client budget allocation was weak, and that continued into the second quarter. And in addition, in other clients, the budget reduction happened. This I'm referring to large EC companies in Japan and vertical companies declined, and that can be called additional from Q1. So that was the additional factor for Q-on-Q deterioration. And Q3, Q4, I think the degree of negative -- negativity is same as Q2. For Q3 and Q4 as well, that is our forecast. Minami Munakata: I have a follow-up question. There are other clients with quite reduction. Is there any structural reason such as shifting in-house or revisiting ROI of advertising? Is it more of an economic trend? What is the nuance? Yuki Ikehata: This is Ikehata. Let me reply to your question. This is Ikehata. I would like to add some more comments. In addition, there were some industry -- well, in addition to prior quarter's reduction trend in other industry, partially, that is -- there was a reduction in ad spend for search ad. The concept of ad placement, I don't think that is such a reason. But overall, LINE Yahoo! search ad performance is being monitored and the advertisers operate. So based on that, there is -- there was a decline in ad placement. We will continue to work on the performance improvement of search ad, and that would lead to getting these customers back. So rather than any unique circumstances, we are to continuously work on performance improvement of search ad. Minami Munakata: I understood fully. Another question is on MINI App. This time, various figures were presented and outline was explained, and I was able to learn. Thank you very much for that. The portfolio shift -- this chart has been shown. Just to reconfirm display and search, basically, it's very difficult to grow these areas. Is that the assumption you are setting? And JPY 140 billion to be expanded to JPY 280 billion, that has been rather difficult. And what is the pathway you envision? For example, from the first half of 2026, you're going to start SaaS service. So from the second half of next year, do you expect the sales to accelerate? Takeshi Idezawa: This is Idezawa. Let me answer your question. Display, search, naturally, the measures to revamp or to boost them, we are taking measures. And also thanks to the organizational change that we have implemented, we are able to implement activities to work on recovery. But structurally speaking, I don't think this is an area where we can expect high growth rate. So from that perspective, we will support the baseline for the display, search. And then apps will drive the growth. And we have the target of Official Account doubling and CAGR-wise, it has been 16%. And so we have this growth of OA, Official Account as a basis. And to add on top of that, we are going to provide MINI Apps and SaaS services. So we will be pursuing the target by having breakdowns or compositions in mind. On MINI App, it's not a linear growth, but when we have a certain number of clients, then we can expect a significant activation. So the MINI App platform will be stronger in the later half. And then that would be the overall picture. Operator: Next question from SMBC Nikko, Mr. Maeda, please. Eiji Maeda: This is Maeda from SMBC Nikko. I have 2 questions as well, please. I'll be recapping the previous comments regarding search linked ad. Together with popularization of GenAI, the negative impact to queries. And when I look at the performance, some of the clients looks like ad placements are declining in numbers. So because of this GenAI, the performance is having a negative hit on the flip side. If you could please share more on the recent trend? And also for the market, we -- there is still a concern that GenAI rise can be a negative for a search-linked ad. If you could please share your outlook, that would be great. Ryosuke Sakaue: Thank you, Mr. Maeda. Sakaue, I will start, then possibly Kataoka will follow up. At the moment, Yahoo! Search, 10% of query comes from AI search. And at the same time, the answers from AI search are business query where there is no opportunity for search-linked ad, like questions and answers. Those are the search keywords that we get. So it doesn't have much impact to our revenue and profit making. But at the same time, mid- to long term, regarding those business query, I would think that the there will be more use on use of GenAI. So media and search, we expect the next 3 years to be flat plus extra. Hiroshi Kataoka: This is Kataoka speaking. As Sakaue mentioned, number of queries for search have not resulted in significant decline in the number of queries. There is no major time shift in the search trend. And ad performance itself hasn't deteriorated. So within this big global trend, there's more use cases from GenAI are increasing. And I'm sure more of our clients companies are considering to further use GenAI. We believe that there will be opportunity, the monetization business opportunity when it comes to GenAI-led search as well. So we are considering various different means to monetize. Eiji Maeda: Second question, regarding Commerce Business. In second quarter, each services growth on the Page 8. Regarding Yahoo! Shopping, the hometown tax, I wonder how much of that impact is included. I wonder in the second half, there can be a significant decline in the growth as a reversal factor. And if you exclude the BEENOS impact, what is your true growth opportunity? So the growth in the cruising pace and growth from a one-off reason, if you could please share for the results in the first half and what you expect for the second half, please? Unknown Executive: Okay. Sakaue would share some figurative indication then -- and I'll have my colleague, Hide to provide additional information. And regarding Yahoo! Search -- sorry, Yahoo! Shopping, for second quarter, the growth was about 19%, 1-9, so quite significant. And hometown tax, late high single digits, mid-single digit to high single-digit growth. And for Reuse, this includes Yahoo! Auction, Yahoo! Flea Market and BEENOS as to be about 15% growth. So excluding BEENOS, we do have mid-single-digit growth. Second quarter has this last-minute demands for hometown tax. So that led to this significant growth rate. Makoto Hide: This is Hide to provide additional information. Regarding Yahoo! Shopping, a significant impact from hometown tax. This is something that was happening at the end of the year in December time. So it's a front-loading of that demand now. Compared to the last year, Q3 growth rate will be stagnant, will slow down. For Reuse, excluding BEENOS, I do see the trend continuing. In other words, Yahoo! Auction growth is quite steady and Flea Market is growing significantly. So when you take the weighted average, our growth is mid-single digit. I would think that for the second half, we can expect a similar growth, and we'll have a synergy, as you can see on the right-hand side, to have a more significant growth in the midterm. Operator: Next, Okumura-san from Okasan Securities. Yusuke Okumura: This is Okumura from Okasan Securities. Can you hear my voice? Unknown Executive: Yes. Yusuke Okumura: I have 2 questions. On Page 26, you have been explaining on the account ad and MINI App expansion and double the sales from this, I would like to reconfirm Official Account, the platform part based part, the assumption is the current growth rate. And through MINI App several dozen billion will be added on top. Is that the assumption? If this becomes a reality, it's wonderful. But what is the background for being so bullish at the time of launch, the assumption of the MINI App or MAU in order to achieve your assumption, what kind of measures and scale of investment you're going to make in order to achieve your strategy? That is my first question. Unknown Executive: Firstly, the growth image of official apps, I would like to explain and the strategy to grow will be replied by Idezawa-san and Ikehata-san. The existing OA part, the current level of growth can be maintained. To be more specific, 10% to 15%. Currently, it is growing at nearly 15%. So maintaining the same growth level. The paid accounts can be expanded in this pace, but that will not bring us to double. So the gap will be compensated by MINI App and SaaS. The strategy will be explained by Ikehata. Yuki Ikehata: Thank you for your question. Let me just add some more comments. In your question, you said that it's still the starting phase and this forecast may be bullish at the starting phase. But right now, we already have Official Accounts and MINI Apps, although partially we are not monetizing yet to many customers, similar solutions are offered and being used, and it's been -- the customers are satisfied. So for MINI Apps, we will increase the number. And at the same time, we will focus on monetization. That is for next year and beyond. Official Account SaaS solution already, including third-party solutions, we are collaborating with various companies and various solutions are already being utilized. So our strategy is to monetize them from next year and onward. We haven't been able to try or something that does not fit the market to start from scratch. Well, that is not the case. We already have existing foundation of Official Accounts, and we are offering various services, and we will expand and further monetize. So that is the basis of our assumption to achieve these targets. Yusuke Okumura: What about the scale of investment? JPY 10 billion was the media investment for this year. What about the investment going forward? Unknown Executive: The details will be discussed, but we are working on the awareness strengthening through advertising for MINI Apps and we are going to focus on promotion and PR. And regarding manufacturing or production, as shown on the slide, we are to reassign human resources to these growth domains to speed up the launch of products. Yusuke Okumura: My second question, on LINE, you are going to implement AI agents. I would like to ask about that. ChatGPT has instant checkout and strengthening the functionalities, and they are expanding partners, the user side rather than ChatGPT, why do they use LINE's chat or AI agents? What is the value that you offer in the future? The relationship is that parent company is -- has strong ties with OpenAI. And what kind of positive influence will that relationship with OpenAI has with your company? Takeshi Idezawa: This is Idezawa. Let me reply to your question. Our company does not have our own LLM. So we use OpenAI solutions or other solutions. We pick and choose. It's not just LINE, but within our company, we have a variety of services, news, commerce, finance, auto, so each service will be agentized. That is what we are working on right now. And like Yahoo! and LINE or integrated agent will be created. So that is the perspective of our user interface. We do not have LLM ourselves. But on the other hand, we have a lot of touch points with so many users and services. So within one ID, ours can be used in a seamless manner. That is the value we offer. So that is why we are working on agentization of various services. Operator: Next from Mizuho Securities, Mr. Kishimoto, please. Akitomo Kishimoto: My name is Kishimoto from Mizuho. I have 2 questions too. Both are about LINE Ads. The first is commerce functions of LINE SHOPPING functions. I would think that it will be launched quite soon as a new platform. I know you've done some testing. So I wonder what is lacking in order to have a full launch? That's my first question. Makoto Hide: This is Hide speaking. We are providing bucket test. We have already launched the test launch for this within the LINE SHOPPING tab. We are not offering any service actively or making a big sales promotion. We are testing system stable operations. Then within this test bucket, we are trying to expand our product and services or to enhance sales promotion activities so that we'll be able to have 100% full launch. We have been working together with various internal stakeholders. The situation is a bit different from the users of shopping -- Yahoo! Shopping, where they already know what they want to buy or they want to buy certain things. LINE, we need to propose what is appropriate and right that would resonate to the LINE users. Once we know that right business model solutions, then we will be able to launch under such use case and sell products as well. So there's a great opportunity, and we've been testing at the moment. Akitomo Kishimoto: On Page 27, please, you mentioned about second tier, third tier. I'd like to ask you a question about the capability for the third tier. I understand that you have been reallocating your staff together with AI agents. I wonder whether you'll be able to run all these initiatives under the current manpower? Or are you going to strengthen your perhaps sales capabilities with more new recruits? Is this something you can do with the current resource? Unknown Executive: I'm sure it's based on the selection criteria, but thank you for your question. Your point, recently, we do have a certain amount of resource that we had to allocate that we had to secure from other departments to this department. So as mentioned on this page, we are going to have 50% of this existing business to new domain or the focus domains. So we will be shifting our business focus as well as resource allocation as well. And we also are considering more partnership, leveraging outside resources as well. We have many different ideas. Operator: Next, Nagao-san of BofA Securities. Yoshitaka Nagao: Can you hear? Unknown Executive: Yes. Yoshitaka Nagao: This is Nagao speaking. My first question is on MINI App MAU is to be increased from 25 million to 75 million and from 35,000, the KPI direction is being presented, the price charging per app or how you consider retention. What are the methods you're going to take? 60% comes from OA and 40% comes from MINI Apps. So proactive monetization will be necessary. So can you explain concrete ways you have in mind for monetization of MINI Apps. Yuki Ikehata: Thank you for the question. This is Ikehata speaking. Let me answer your question. Right now, well, MINI App numbers are to be increased, and we are to increase the number of users significantly. That is the plan. So on MINI Apps themselves from LINE application, there will be a lot of touch point from the users. So we are increasing touch points by linking with LINE app and LINE media to increase the opportunity for as many people as possible to touch MINI App. On the monetization of MINI App, the payment function and also advertising within MINI App and receive ad placement fee. So those are 2 monetization sources. The application that can generate fruits in terms of profitability is what we are planning to build. The sales force, we are strengthening right now so that as many people as possible will utilize MINI App and open Official Accounts. From next fiscal year and beyond, we expect monetization of revenue. We already are seeing the account openings by many on Official Account. So we have confidence. Yoshitaka Nagao: My second question is related to Page 24 of the material, the target of EBITDA margin, 40% to 45%. Right now, 37% or 38% is the Media Business margin. Official Account and MINI App domain overlaps SaaS domain. So when you expand the scale, the sales staff or development cost will be heavier upfront. And I have a concern that the profitability may decline. The existing search and display ad by the sales of that part decline will affect the overall margin. So what is the overall ad margin? And in achieving 40% to 45%, what would be the contribution of OA and MINI Apps? If possible, could you disclose those information? Unknown Executive: Rather than speaking on the concrete number, it's more of a guide, the search, the basis is that profitability is not that high, and we have been communicating that from before. There's a certain fee that we pay to Google. So the search margin originally is low. And adding with display, it's shown as flat, but the search will be down trend and display, we achieved certain growth in Q2. So the ratio of display will likely to expand. So the margin on the lower part will increase -- will improve. And on display, as you know, there is a commission with the agents that is included in the COGS. So it's -- that is the margin structure. OA the margin will be similar to display. The SaaS part, it will be dependent on the pricing structure, but vertical MINI App or SaaS peers, when we look at them, the profitability is quite high. Compared to ad business, it's low, but still, it's high enough to be able to support. On top of that, MINI Apps, the ad on MINI Apps and within MINI Apps, we will place ads in a network style. So that's the type of ad business that we would like to deploy within apps. So we expect that we can secure profitability on a certain extent. Yoshitaka Nagao: One quick question on Page 11, the JPY 15 billion reduction plan is shown in the medium term, the Media Business ad expense, in some part will increase, in some part it can decline, but the fixed cost of the Media Business will it be unchanged? Unknown Executive: This slide is the company-wide figure. This fiscal year, JPY 10 billion for LLM cost will be incurred. And next year and beyond, LLM expense will continue to rise. But through various programming, we can expect improvement of operational efficiency. So JPY 15 billion, even LLM commission rises next year, we intend to reduce the fixed cost, even including that JPY 15 billion, the promotion expense and advertising for commerce, it is linked with GMV. So that is not included in this figure. And on Media segment, there are subcontractors and some of the human resources cost through use of AI, we can create a leaner structure. So those are combined to set the target margin at 40%. Operator: Next, from Nomura Securities. Mr. Masuno. Daisaku Masuno: This is Masuno speaking from Nomura. Can you hear me? Unknown Executive: Yes, we can. Daisaku Masuno: I just have one question, please. Renewal of LINE apps, you are -- been talking about adding a commerce tab. And I know you have been trying various scenarios under beta. Fundamentally, are you trying to transition the info traffic to service like LINE GIFTS? Or are you going to provide a brand-new shopping experience to LINE users. So I wonder what kind of inflow -- what kind of user experience are you trying to create through this commerce tab? Unknown Executive: What we are testing right now under the current version, all the products that's on LINE tabs are LINE GIFT products. Going forward, in addition to the LINE GIFT products, the stores that are present in Yahoo! Shopping, some of their merchandises we would like to post there. So not just for gift needs, LINE SHOPPING, Commerce products, we would like to offer through that tab. So comprehensive portal shopping corner is how we like this service to grow to be. So what type of stores, what type of products from Yahoo! Shopping really has to do with the previous questions and answers that we had. What kind of products will be the right fit, best resonate to the LINE user. It really depends on that. That's what we are testing right now. So we have to have a right product mix on top of the GIFT products, we've been carefully studying what would be the type of product group that is worth promoting heavily behind it on this new effort. Daisaku Masuno: Okay. So this is not a purchase intent visit. I can understand LINE GIFT. I wonder for those users who are not thinking of purchasing anything would ever be a real customer, whether they would convert by visiting the site? Unknown Executive: Other than Yahoo! Shopping, our customers right now are searching for what they want out of tens of thousands of our products with a certain purpose, compare prices and make decision-making. We have a massive number of products on Yahoo! Shopping. It doesn't make sense to put all of that on LINE tab. I don't think it will drive sales. So out of what's available in Yahoo! Shopping, those stores, we need to focus on products with more uniqueness, originality and some product group with extremely high demand once they release, always sells out. So those will be the right products, we think to be on the LINE tab. Those will be the right products for this casual shopper. Daisaku Masuno: Are you talking about hundreds or thousands? I don't think you're talking about dozens of thousands. So I just have no idea about the scale of the products that would be available through this LINE tab. Unknown Executive: That is exactly what we are trying to get to. That's why we've been repeating the test. So it really depends on the -- we don't know. There's nothing that we can share with you regarding the size or scale of the stores or the type of products or the scale of the product. Operator: Next, Kumazawa-san of Daiwa Securities. Shingo Kumazawa: On Page 11, fixed cost reduction of JPY 15 billion. This is the topic of my question. Currently, what is the fixed cost? And how much is this JPY 15 billion? And from last year, you have been spending on security-related costs. Is that included in this reduction of JPY 15 billion? I believe it's mostly outsourcing that you can reduce. Are there any major items that you expect to reduce significantly? And I believe AI agent is contributing to reduction. So from -- compared to last year, how much reduction is this? Ryosuke Sakaue: This is Sakaue. I will answer your question. LY stand-alone fixed cost is roughly JPY 700 billion. As you stated in your question, security-related costs will come down. On the other hand, LLM commission will almost offset that increase. From April of next year, we will increase the office space to accommodate a 3-day commuting of our employees, and that means the cost increase. And by using AI, we intend to reduce JPY 15 billion in total. If we do not take any action, the fixed cost will likely to go up by JPY 2.5 billion to JPY 2.6 billion. In the areas of reduction, outsourcing part and software license from outside, the system that employees use, we can make progress in the integration of the platform. So double payment can be eliminated. So that is included as the cost reduction on software license. Shingo Kumazawa: The areas you can reduce, I understand it's difficult to name the concrete name or ServiceNow or others or Salesforce. Is it possible to cut them entirely rather than specific ones? Unknown Executive: It's an overall effort, frankly speaking. And for example, there are licenses that are given to all of the employees. But if we identify the staff that really uses, then we can reduce the number of license. And also, there may be redundant functions on the software and cut one of them. Operator: Next from [ SBR. Mr. Jose ], please. Unknown Analyst: I have a question regarding capital structure and security governance. I understand in the past, administrative [ court ] instruction was given from Ministry of Internal Affairs and Communication, administrative guidance pointing out your capital structure. Now that under new administration, any risks that you foresee or any changes to the relationship with the government regarding capital structure, please? Unknown Executive: Regarding the administrative guidance, we've been responding appropriately. And from -- for the 2026 March, we are making progress toward it. And regarding the capital movements, we've been continuing the discussions, reflecting our past track record. No major changes to or the [ FY 2026 ]. Unknown Analyst: I understand. So for 2026 March, you will conclude all the measures to meet the administrative guidance? Unknown Executive: Correct. Yes on track. Unknown Executive: Now, we would like to close because the schedule ending time has arrived. I would like to now have Idezawa to offer a final reading. Before Idezawa's final remarks, I mentioned about the fixed cost of JPY 700 billion, that was a mistake. It's roughly JPY 400 billion to JPY 500 billion. Takeshi Idezawa: This is Idezawa speaking. Thank you very much for raising a lot of questions. The environment surrounding AI is rapidly changing. And our 2 core strategy is AI agents and OA, and we will continuously grow by changing our business structure. That is the message of today's presentation. I will ensure that these plans will be executed steadily, and we would like to ask for your continued support. With this, we would like to close LY Corporation's FY 2025 second quarter earnings call. Thank you for staying with us until the end. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Lavanya Wadgaonkar: Good evening, everyone. I'm Lavanya Wadankkar, Corporate Executive for Global Communications Office. Welcome to Nissan's First Half Financial Results for Fiscal Year 2025. Along with financial year results today, we will be presenting an update on Re:Nissan. Today's session is for 45 minutes and is held on site as well as online. First, let me start with the introduction of the speakers today, Ivan Espinosa, Chief Executive Officer; Jeremy Papin, Chief Financial Officer. We will begin with the presentation. So I'll hand over to Ivan. Ivan? Ivan Espinosa: Thank you, Lavanya. Hello, everyone. Thank you all for your continued support. It was a pleasure to meet and host many of you at the Japan Mobility Show. Before we begin, I want to emphasize that Re:Nissan is on track, and I am grateful to all who have shown patience and trust during these decisive actions. Despite ongoing challenges and volatility, we remain focused on recovery. Today, Jeremy will present our first half performance, second quarter results and full year outlook. I will then update you on the Re:Nissan before the Q&A. So Jeremy, please. Jeremie Papin: Thanks, Ivan. Building on the disciplined approach, our cost control measures are showing encouraging signs amid a challenging environment. Now let's take a closer look at our retail sales results. Total unit sales reached about 1.5 million in the first half, down by 7.3% year-on-year. Second quarter sales, excluding China, were down by 3.6%, an improvement over the first quarter. We are already seeing clear acceleration in Q2 with North America delivering stronger results and China posting year-on-year growth since the month of June for the first time in 15 months. North America saw acceleration with 2% growth overall and 6.7% in Q2. U.S. sales were flat, Mexico up 8%, maintaining market share leadership. China sales declined by 17.6% in H1, but have grown year-on-year for 5 months, led by N7 demand. Japan dropped by 16.5% in H1, but our showroom traffic has been recovering from a low point reached in July, thanks to marketing and dealer program initiatives. Europe and other markets had temporary declines from model year changeovers and increased competition. First half consolidated net revenue was about JPY 5.6 trillion with an operating loss of JPY 28 billion, better than we had expected. Net loss was JPY 222 billion, largely due to lower equity method income, impairments of assets and restructuring costs. The automobile business revenue was about IDR 4.9 trillion, driven by foreign exchange effects and lower wholesale volumes impacted mainly by tariffs. R&D spending was controlled at JPY 275 billion through disciplined resource allocation, some project deferrals, thanks to a shortened development schedule and optimized hourly engineering costs. Our operating loss widened to minus JPY 177 billion. Automotive free cash flow was negative JPY 593 billion in H1, but Q2 performed better than expected at negative JPY 202 billion. At the end of the period, net cash stood close to JPY 1 trillion. Importantly, we maintained solid liquidity at IDR 2.2 trillion in automotive cash and equivalents and unused committed credit lines at IDR 2.3 trillion. This slide shows the year-on-year operating profit variance factors. Foreign exchange had a negative impact of about JPY 65 billion, driven by weaker U.S. and Canadian dollars as well as the Argentinian peso and Turkish lira. Raw material costs were slightly positive at JPY 3 billion, while tariff had a negative impact of JPY 150 billion. Sales performance contributed ID 24 billion but negative volume was offset by a favorable mix. Together, volume and mix delivered IDR 62 billion improvement. However, competitive pressures continued to weigh on incentives. Monozukuri improved by IDR 67 billion as the Re:Nissan recovery plan delivered cost savings alongside lower R&D spend and purchasing efficiencies. Inflation absorbed JPY 50 billion, moderating the overall benefit. Onetime items added JPY 65 billion, mainly due to lower warranty costs recognized in Q1 and reduced U.S. emission expenses recognized in Q2. Other items, including sales finance and remarketing expenses added JPY 45 billion. We achieved a positive impact on G&A costs through Re:Nissan initiatives. Taken together, these factors resulted in an operating loss of JPY 28 billion for the first half. I will now move to the outlook for the remainder of the fiscal year. For the second half, we anticipate a strong rebound in volume driven by new products and marketing initiatives. In China, demand for N7 is encouraging, and sales are expected to exceed previous outlook by 13%. North America is expected to sustain momentum, and we will intensify our efforts in Japan, Europe and other markets. Although the first 6 months showed a year-on-year decline, we are confident the next half will deliver growth. The markets remain challenging, but the industry volumes are stable. Our full year sales forecast remains unchanged at about 3.25 million units, representing a 2.9% decline year-on-year. We are adjusting our outlook to reflect the positive developments ongoing in China, but we are reducing our consolidated retail sales to account for the lower performance of the first half. The production is projected to remain around 3 million units as we maintained a very disciplined inventory management and actively manage supply risk. Recent launches and model enhancements will strengthen the lineup and attract customers in H2. Operational improvements, including a third shift at Nissan [ Shatai Kyushu ] will boost output. Net revenue is expected to be about JPY 11.7 trillion for the current fiscal year. As outlined in our revised outlook last month, we anticipate a full year operating loss of about JPY 275 billion, breakeven before the impact of tariffs. Our operating profit outlook includes JPY 25 billion for assumed supply risk, which we will revisit as the situation evolves. We are still evaluating the impact of Re:Nissan, so we are not of Re:Nissan initiatives, and we are not providing a net income outlook today. The forecast is based on an exchange rate assumption of JPY 146 per dollar. Let me outline the factors behind our operating profit forecast. Compared to last year's JPY 70 billion operating profit, we expect significant headwinds from tariffs and currency. On the positive side, we anticipate benefits from an improved product mix and continued support for our U.S. built models. Year-on-year, we expect cost improvements as Re:Nissan initiatives take hold even amid inflationary pressures. Tariff-related carrefour adjustment will add cost in the second half, limiting manufacturing efficiency gains, but we are expecting savings in logistics, R&D and purchasing. Onetime positives include lower warranty provisions and reduced emission penalties. Overall, we forecast an operating loss of JPY 275 billion for the year. We remain disciplined in our balance sheet management, and we are retaining sufficient liquidity. Total liquidity is about JPY 3.6 trillion with JPY 2.2 trillion in cash and JPY 2.3 trillion in unused credit lines. Year-end automotive debt is forecast at about JPY 2.1 trillion, fully in line with our initial plans, and this is following the successful refinancing of JPY 700 billion in debt maturities this year. Let me now hand over to Ivan. Ivan Espinosa: Thank you, Jeremy. I will briefly recap H1 performance and the outlook. First, on sales performance, despite volatility and competition, we stay resilient. Q2 declines narrowed signaling stability. North America showed strong Q2 growth. Retail non-EV share has risen for 3 straight quarters and continued in October. China turned positive since June, while Japan and Europe experienced some softness, but we expect recovery with upcoming launches and dealer programs. Second, on financial performance, we possessed JPY 3.6 trillion of total liquidity. Over JPY 80 billion in fixed cost savings were achieved in H1 through Re:Nissan recovery initiatives. While tariffs and currency headwinds pressured profitability, disciplined cost management and structural efficiencies continue to deliver benefits. Finally, the outlook. We anticipate a stronger second half driven by Re:Nissan product-led growth and momentum from Q2. We remain on track for operating profit breakeven, excluding the tariff impact. We target JPY 1 trillion net cash at year-end and expect positive out of free cash flow in H2. We will balance optimism with prudent risk management as we navigate challenges. In short, we are prepared for second half growth, leveraging new launches, operational improvements and disciplined execution. Building on this momentum, let's turn to the strategic update. While navigating a challenging environment, Nissan is advancing steadily through Re:Nissan, redefining our strategy, accelerating innovation and reinforcing the foundations for sustainable growth. We have been driving a transformation that goes beyond tackling current challenges to redefining our future. It rests on 3 powerful drivers: First, disciplined cost reductions to strengthen our financial base. Second, a bold redefinition of markets and products to deliver what customers truly want. And third, reinforcing partnerships that unlock scale and efficiency and with clear target, returning to positive automotive operating profit and free cash flow by fiscal year 2026, excluding tariffs. And we know what it takes to get there. That's why we're targeting JPY 500 billion in savings split between variable and fixed costs to reshape our cost structure and strengthen our competitiveness. Let me take you through how we are tracking against these targets. Over the course of this year, our variable cost reduction initiatives have gained notable momentum. As of November 2025, we have generated 4,500 ideas, identifying a potential impact of JPY 200 billion, a progressive leap from JPY 75 billion in May and JPY 150 billion in July. Over 2/3 of these ideas are technical solutions like redesigning headlamps for efficiency or optimizing seat designs to cut material costs. Major cost reductions target high-volume models like Rogue, Kicks globally, Pathfinder in North America and Serena in Japan. Every action upholds our commitment to quality with no compromise on safety, reliability or performance. We are advancing in manufacturing and logistics, including parts diversity reduction and supplier collaboration. Encouragingly, ideas are maturing with more moving from concept to implementation. This structured approach ensures credible, sustainable savings embedded in design and operations, always with quality as a top priority. We have delivered over $80 billion in fixed cost savings in H1, a strong start. We aim to exceed $150 billion by fiscal year-end and surpass $250 billion by fiscal year 2026. In manufacturing, we have completed 6 of 7 targeted site actions with Compass, the sixth plant ending production later this month. On engineering, we are progressing towards our 20% cost per hour reduction target currently running at 12%. Parts complexity reduction is delivering also strong results, complemented by Obea activities with models like the next-generation Rogue using 60% fewer parts. We are also optimizing assets to unlock value for transformation. A key step is our global headquarters in Yokohama. We will proceed with a sale and leaseback transaction under a 20-year agreement. This ensures Nissan's continued presence and commitment to Yokohama while ensuring no impact on employees or operations. Part of the proceeds will fund critical investments like accelerating AI-driven systems, digital modernization and transformation initiatives while preserving our ability to invest in innovation and growth. These steps go beyond cost. They create a leaner, more agile Nissan ready to compete and win. We have made strong progress on cost actions, and now the momentum is shifting towards the next 2 drivers of Re:Nissan, redefining our product market strategy and reinforcing partnerships. On product lineup, our product lineup tells the story. From the award-winning Leaf to the new generation [indiscernible] car, we are gaining traction. Between now and fiscal year 2027, we will be introducing 9 new models. As we look ahead, our product strategy rests on 3 pillars. Hartbeat models, icons that showcase Nissan's DNA and innovation like the globally recognized Leaf. Core models, vehicles that lead in key markets such as the Kashkai ePower with class-leading fuel economy and the Kicks recently named Best Buy 2025 in Brazil. Partnership models are collaboration that strengthen our reach, including the N7 with 40,000 units sold in China and the Ros KCar with 15,000 presales in just 6 weeks. Finally, I want to stress the importance of partnerships for our future. Many of our products, as I mentioned earlier, reflect the strong power of collaboration. Now coming to partnerships in technology. These are critical to strengthening our presence in next-generation mobility. In recent months, we have announced several initiatives, a tie-up with Boldly, Premier Aid and KQ Corporation to pilot autonomous mobility services here in Yokohama. Collaboration with WAVE, the U.K. pioneer of AI driver software to set new standards for driver assistance in our next-generation ProPilot technology. And in China, our new Tiana features advanced intelligent connectivity, becoming the first ICE vehicle equipped with Huawei's Harmony Space 5.0 smart cockpit. These partnerships are more than projects. They are strategic moves that position Nissan at the forefront of intelligent mobility. In conclusion, our first half results reflect the challenges we face, but they also confirm that Nissan is firmly on the path to recovery. We have made meaningful progress. And while there is more to do, the foundation for future success is in place. Having implemented decisive cost-saving measures to secure profitability, we are now accelerating forward, prioritizing new products, key markets and breakthrough technologies that will define our next chapter. The second half will bring challenges, but with focus, discipline and the actions we are taking, I am confident we will deliver strong results. We have the right strategy, the right products and the right team to capture growth and create value. Together, we will navigate the road ahead and with confidence, seize the opportunities and lead with innovation. Thank you for your attention. With that, we will now take your questions. Lavanya Wadgaonkar: [Operator Instructions]. I already see a lot of hands going up. [Operator Instructions]. Just so we go with maybe the first front row middle. Unknown Analyst: [Interpreted] My name is Taki. I have 2 questions. The first question is as follows. Last week, Japan Mobility Show started. And here, you have a stand, new L Grand and new Petrol were displayed in the show. Sspinosa-san, you made the presentation personally. That's what I heard. What's the reaction of the people who saw it? And what's your opinion about the overall show? This is my first question to Ivan-san. And the second one, partnership. Was it -- since last fiscal term with Honda, you have been -- well, capital tie-up is kind of went back to scratch, but you are trying to continue with the collaboration with Honda. What is the progress so far to the extent that you can disclose? These are the 2 questions. Ivan Espinosa: Okay. So thank you. Thank you for your questions. On the Japan Mobility Show, first of all, thank you for visiting. I really enjoyed the show and having the opportunity to guide many of you through the booths and show you what Nissan is capable of doing. Then as for the reaction, the reaction has been extremely positive, both for L Grand and for Petrol. The level of buzz that we are seeing, and I have some numbers for you actually. The conversations on social network spiked by 15x versus the normal average that we have. And out of that, we have 35% positive sentiment in total, which is a 25% increase versus where we were before. So clearly, the products are well received and Nissan is starting to become attractive to customers again, which was exactly the goal. It's exactly the goal of the second phase of our RNissan program. As I've mentioned before, the first step was about cost and restructuring. Now we are shifting gears into the second phase, which has to do with product, market strategy updates, innovation and technology. As for the partnership with Honda, well, we keep discussing with them, as I have said before, on several projects. There's nothing that we can disclose at the moment, but we keep discussing with them opportunities in several fields as we outlined in previous announcements. Thank you. Thank you for the question. Lavanya Wadgaonkar: Take the question from the right side. Unknown Analyst: [Interpreted], my name is [indiscernible]. There are 2 questions from me. The first one is the regional breakdown of the sales. China and U.S. are better, but how about Japan and Europe? There's a decline which is continuing in Europe and Japan. Sunderland and [indiscernible], what is the utilization rate so far? ELV and Micra, you are going to introduce new cars. You are talking about the second stage of Re-Nissan. Europe and Japan, when will it grow? The volume -- when will the volume in these 2 regions grow? This is my first question. And the second one is the objectives of the Re:Nissan. In May, when you devised the plan in fiscal year 2026, automotive profit and free cash flow will be the positive. That's what you said. But you said that you didn't talk about excluding tariffs, but now you are saying it's excluding tariffs. Does that mean that you made a downward revision on the goal for 2026? Ivan Espinosa: So let me start with the first question. So the volume, as we explained earlier in Europe and Japan was soft on the first half. Europe had some impact from the model changeover. So we were on the runout of the previous [ Cashkai ] and entering with a new Cashkai that has the third-generation e-POWER. So we expect Europe to pick up in the second half now that we are launching full blast, the third-generation ePOWR, which has been very positively received and evaluated by media. In Japan, we had a slow first half and for several reasons. One, of course, the impact of media and communications, the negative media coverage that we had in the first half, because of the situation that we went through. This had an impact on showroom traffic and customers were wary of Nissan's situations because of the financial condition. Now we are seeing change. We see, as I mentioned before, sentiment from the public is changing towards us. They are understanding that Nissan is a great company that makes great cars, and we start to see the positive sentiment changing. A lot of this, thanks to your support as well as media because you have been providing a lot of support to us. And we see that the sentiment is changing. The showroom traffic starts to improve. And the proof of that is also the very strong reception to rucks, around 15,000 orders received in only 6 weeks. So this signals that we can start bouncing back, and we expect a strong bounce back in Japan as well in the second half. As for the objectives, the objectives have not changed. The fact that we are now clarifying tariffs is because we didn't know when we announced at the beginning for how long tariffs will be remaining. We thought initially as many in the industry that it was a temporary thing. But now that this is here to stay, it's -- we are just recognizing that the tariffs will have to be managed. And this is not a downward revision. It's just a clarification of what we expect for next year. Thank you for the question. Jeremie Papin: Yes. On the FY '26 guidance, there is absolutely no change, fully in line with what we had announced in the month of May. Lavanya Wadgaonkar: Thank you. If I go to the last left side, first row. Unknown Analyst: [Interpreted]. My name is Sakamura. I also have 2 questions. First of all, Re:Nissan. So far, 20,000 people headcount reduction was talked about. In which country will you be reducing headcount in what degree? Can you substantiate that plan and give us an update on the substance of that plan? Second question, new model introduction. In China, N7 is doing very well. So in the future, China produced cars exporting to other countries. I thought that you were studying such possibility. How far has that study gone? And is there a possibility for export to Japan? Ivan Espinosa: Thank you, Sakamura-san, for the question. So on headcount, on your headcount question, what I can tell you, we are not providing a breakdown. What I can tell you is these numbers that we announced are global, and we are tracking according to our plan. So the plan is ongoing, and we are tracking according with our expectations in terms of speed and size of adjustment of the workforce. But we are not providing details on the breakdown. As for the new model, N7 and future exports, the answer is yes, we are working on export plan. You maybe heard we established already an export JV company that will help us enable and facilitate and speed up this. And we are looking at several products that we have a potential, and we are looking at different market options. But nothing specific to share today. But the answer is yes, we will be exporting cars because this is part of our strategy to defend ourselves outside of China, bring more scale to our China operations also and use the speed of China in terms of development, technology and costs to defend ourselves in markets where Chinese OEMs are being aggressive. So this is what we are set to do. Thank you for the question, Sakamura-san. Lavanya Wadgaonkar: Thank you. If I move to the second row in the middle... Unknown Analyst: The question to CEO. So in relation to the previous question, you have a commitment of achieving operating profit in the automotive business by fiscal year 2026. However, net income forecast has not been disclosed with a massive loss loss in fiscal year 2025. Can this target be met? Can it be achievable in time? I think that Mr. Papin has already answered that question partly, but I need to -- I need an answer from Mr. Espinosa and a strong message in your commitment. And the second question is very simple. So you emphasized the change of an atmosphere around Nissan. Does it mean the darkest hours of Nissan is over or still to come, the darkest time of Nissan is over or not? Ivan Espinosa: Thank you. So for me, the important thing is to have customers looking at Nissan with eyes that represent what Nissan is capable of doing. And Nissan is a company that has over 100,000 employees working very hard to create great products. And that's proof of what we saw in the Japan Mobility Show. It's evidence and proof that this company, our company is a great company that can deliver great exciting products. This is what we're focusing on, and this is what our people with a lot of love for our company are doing every day. As for your question on OP, the answer is yes. We are committed to deliver what we said. And proof of that are the numbers that we just explained to you. I think we have a couple of good examples. As we said, on the fixed side, we have achieved already more than JPY 80 billion in the first half of savings. We are on good track to achieve JPY 150 billion by the end of this year. And we are confident that we can overachieve JPY 250 billion next year that we have committed to achieve. And on the variable cost side, as mentioned, the progress is very consistent, gradually growing the impact or potential that we see, now reaching JPY 200 billion versus the JPY 75 billion that we had in May and the JPY 150 billion that we had in July. So again, this is evidence that the company efforts is bringing fruits. So this gives us confidence to achieve the objectives that we have set for ourselves next year. Thank you for the question. Unknown Analyst: Darkest hour [indiscernible]? Ivan Espinosa: Well, I don't know what you mean by the darkest hour. Again, for me, the important thing is to change the customers' minds and have them look at Nissan as a great company that it is. Thank you very much. Lavanya Wadgaonkar: Stay in the middle... Unknown Analyst: [indiscernible] newspaper. First, Expedia semiconductor manufacturer impact. [ OPamMaushu] reduction has become clarified, but how much impact are you foreseeing in terms of volume? What's the maximum reduction? And are you thinking of alternative purchasing? So what's the progress in terms of choosing an alternative? Secondly, how do we interpret volume? N7 was better than expected. So there was a hit, but the full year volume is unchanged and minus from 2024 and sales has been revised downward. So top management, how confident are you on the second half? And you will continue to introduce new models next year, but are you -- do you think that, that will really have a positive impact? What's your level of confidence? Ivan Espinosa: Thank you. So I will answer the second question and then let Jeremy elaborate on the first one. On the confidence on the H2, I think there's 2 elements to consider, not only the new car launches, but the fact that in North America as well as in China from the second quarter, we already start seeing growth. So we have seen consistent growth in North America and the U.S., particularly, I can tell you, our retail share in non-EV has quarter-over-quarter grown. If you look at the numbers, Q3 2024, we trail at 4.3% Q4 2024, we were at 4.8%, and now we're running at 5.3%. So this is proof that the performance is improving, thanks to the focus that we have put in our marketing and sales activities and the products that we are rolling out in the U.S. Then Japan, as mentioned, we had a slow H1. So that's why we believe we will not be able of recovering the full year estimate, but we expect a strong bounce back in the H2. Thanks, as we said, from the good showroom traffic improvement that we see, the positive sentiment from the consumers that they are placing again their confidence in our brand and our company. And again, proof of that is the very good reception and the preorders of the old Nissan books. So that's why we are confident on the second half performance on sales. Jeremy, do you want to elaborate on the first one? Jeremie Papin: Yes. On the supply risk that we are managing at the moment, there are actually 2. One is an aluminum supply issue in North America that is affecting many market participants following the fire at a supplier. The second one is obviously the situation with Nexperia and the chips that were being banned from export from China, but that ban in the last few days seems to have been lifted. So I would say the situation is extremely fluid, and we are, I would say, managing it extremely closely. This forecast, as I shared with you, includes a JPY 25 billion risk which we put as a placeholder last week when the situation was quite uncertain. I would say, as the situation clarifies, should this placeholder be unnecessary, we will be removing it from the forecast. Lavanya Wadgaonkar: Next question. I can move to the media, please. Unknown Analyst: [Interpreted]. My name is Matsuka. I have 2 questions. For this fiscal term, in the first half, how do you assess the first half results of this year? And the sales and leaseback of GHQ without renting it, how by going to the suburbs where you have an R&D center, it would have been more beneficial. What was the thinking behind this? Wasn't there any opposition from other executives in the company? These are the 2. Ivan Espinosa: Thank you for the question. So on the first half assessment, as mentioned, we had a result that came in better than we expected, but it was supported by external factors as well. So we had some onetime events and that are evident that we are doing well, but there's more work to do. So that's what we qualified earlier in the presentation. So the plan is on track, but we have to keep working hard in the second half to deliver the objectives that we have set for ourselves. Now as for the sale and leaseback, we discussed at length in the EC, and it's something that also we reported to the Board. And the best option was to do what we did, the decision that we made, which is trying to minimize the impact on the employees and on the suppliers and on the local economy and having a good business strategy to utilize better our assets. bring some resources in that will help us, as I said, modernize and go further into digitization, AI implementation and many other things that we have to do, while also it allows us to spend the precious R&D resources that we need for our future, especially in a year where free cash flow will be negative. So this is the -- these are the considerations that we took for the decision that we made. Thank you -- thank you for the question, Ms. Matsuka-san. Lavanya Wadgaonkar: Move to the left side, yes, please. Unknown Analyst: [Interpreted] from Bloomberg. Last time during the press conference, Papin-san, you said that net loss for this fiscal year, you said that details will be provided in November, if I remember correctly. But this time, you are not going to give a full year guidance for net income. Once again, why are you in this situation? Was there any change that took place from last time? Is there something that you didn't see last time to the degree that you can disclose? Could you elaborate why you cannot give a full year guidance of the net income? And Page 16, Global Design Studio is reorganized and Global Information System Center is relocated. That's what it says. Did you sell assets in these moves? Could you elaborate on these 2 points? Jeremie Papin: So on the net loss outlook, I think the situation is the following. We are, at the moment, considering further implementation of restructuring actions under Re:Nissan, in particular, accelerating decisions. And as we are working on those options, we just didn't have a clear enough forecast to share something that was robust enough in order to make a communication. So we want the transparency and we want to provide the guidance, but today was just not the day where we could. And so I think you just need to bear with us and understand that we're working on assessing further restructuring and implementation of Re:Nissan plans in fiscal year '25, and that will have P&L consequences that we are assessing. On -- more generally on the events that you mentioned, I would say that when we free up any assets today, there is a consideration of monetizing the asset if we own it. And so there is just a systematic review. So we will keep you informed as we progress with asset sales or any asset disposal. Unknown Analyst: [Interpreted] Hatanaka of Nippon Broadcasting. I have a question to Mr. Espinoza. During the Mobility show, your group company, Nissan Shatai Shona plant announcement was released. You will be using it for -- to manufacture service components. What's your take? And did Nissan -- was Nissan involved in that decision-making? And Mobility show was very popular. The main LGA and Petrol, Nissan Kyushu manufactures those models. So these models will continue to be manufactured in the same way? Or will the manufacturing site be transferred? Ivan Espinosa: Thank you. As for the Nissan Shatai question on Shonan, I will kindly ask you to ask the question to Shonan. We cannot comment on Nissan Shai. However, on your question on L Grand, we are -- we will be continuously assessing the industrial strategy. So for the moment, we will start producing in Nissan Shatai Kyushu together with Caravan and frame vehicles. As you have seen, the welcoming of patrol and QX80 is very good globally. So we are currently looking at what options we could have to further increase the capacity of such models because they are performing very well, and they are very profitable. Now this, as I said, we will continue to explore. But for the moment, there is no intention to move the products out from Nissan. Thank you for the question. Lavanya Wadgaonkar: We have time for 2 or 3 questions. So next question, please. Unknown Analyst: [Interpreted] My name is Togashi. Espinosa-san, this is a question for you. Nissan Stadium naming rights is the question. Yesterday, Yokohama, Mayor Yamanaka, as of the end of last month, he said that he received a new proposal. Could you elaborate on the proposal that you made to the degree that you can disclose? But once they renewed the contract at JPY 50 million in response to your proposal. But once again, there was an instruction to review the proposal. What's your approach or thinking behind this? Ivan Espinosa: So first of all, we are committed to Yokohama. This is our home base, our hometown. -- and we're going to stay here. This is why we also announced that we will continue to be the largest shareholder in the Yokohama Marinos because it's an icon of our company and a symbol of pride for many of our employees. With that in mind, we've been discussing with Yamanaka-san and the city of Yokohama because we want to continue our collaboration in the Nissan Stadium for the same reason. Now we have made an offer, as you said, we are discussing now with Yamanaka-san and the team in the city, and we will update you when this is concluded. So we will continue discussing with them based on this offer that we provided, but no detail to be shared today. Lavanya Wadgaonkar: Thank you. Come to the middle. Unknown Analyst: [Interpreted] Tokyo, my name is Abe. Nissan GHQ will be sold, you said. In reality, you are going to rent it and there will be a rent which will be booked. For 20 years, what is the annual rent that you have agreed on? This is my first question, please. Ivan Espinosa: So yes, we have agreed to do a sale and leaseback, as I said, and there will be a rent. We don't -- but we are not going to disclose the level of rent. I just tell you that it is a good financial decision. It's a good business decision that will allow us to invest resources in our future. Thank you for the question. Lavanya Wadgaonkar: I think we're right on time. Thank you very much once again for joining us. If you have any further questions, the communication team is available. Please reach to us. Have a good day. Thank you. Ivan Espinosa: Thank you.
Operator: Greetings. Welcome to Helen of Troy Limited Third Quarter Fiscal 2026 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Ann Racunis, Director of External Communications. Thank you. You may begin. Ann Racunis: Thank you, operator, and good morning, everyone. Welcome to Helen of Troy's Third Quarter Fiscal 2026 Earnings Conference Call. The agenda for the call this morning is as follows: I will begin with a brief discussion of forward-looking statements. Scott Azel, our CEO, will then share his thoughts and areas of focus. And Brian Grass, our CFO, will provide an overview of our financial performance in the third quarter and our expectations for the full year fiscal 2026. Following our prepared remarks, we will open up the call for Q&A. This conference call may contain certain forward-looking statements that are based on management's current expectations with respect to future events or financial performance. Generally, the words anticipates, believes, expects, and other similar words are words identifying forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ materially from the actual results. This conference call may also include information that may be considered non-GAAP financial information. These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by other parties. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Scott, I would like to inform all interested parties that a copy of today's earnings release can be found on the Investor Relations section of the site by scrolling to the bottom of the homepage. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. I will now turn the conference call over to Scott. Scott Azel: Thank you, Ann. Good morning, and happy New Year, everyone. I appreciate you joining our call. We delivered third quarter results in line with our outlook, reflecting disciplined execution by our global associates who have driven progress towards stabilizing the business despite a challenging external environment. While I'm encouraged by our Q3 progress, we remain fully focused on sharpening our priorities and executing as we fix the fundamentals and improve our performance trends. Recent trends reinforce our view that consumers are being selective. We continue to see a bifurcated economy. Robust spending from high-income households while lower middle-income consumers face significant inflation in essentials like rent, food, and insurance, making them increasingly cautious with discretionary purchases. Regardless, we need to win, and I know what's required. We will invest in our brands. We'll invest in innovation. And we'll invest in talent to restore this business to growth. And some of the initial steps we're taking to restore our business are reflected in the revised outlook for Q4 and the balance of the fiscal year, which Brian will outline shortly. First, I'm energized by the product innovation underway and the upcoming launches in fiscal 2027. We're investing in strengthening brand loyalty through storytelling, to deepen our connection with the consumer and advancing our commercial execution capabilities. These initiatives reflect our commitment to consumer engagement, growth, and delivering value for our stakeholders. Over the past four months, I visited offices around the globe, spoke with hundreds of associates and customers, conducted a comprehensive review of operations, technology capability, financial performance, and external benchmarks. These experiences have given us a fresh perspective, challenging the team to think more critically about long-term value drivers. My biggest takeaway, enthusiasm for our brands is strong. Partners, associates, and customers all want us to win. These conversations reinforce my commitment to improving how we operate, sharpen our priorities, and amplify our focus on consumers. Building on organizational changes put in place last summer, we've made strides to prepare for success. In October, I outlined four priorities: reenergize our brands and our people, adapting our structure to put the consumer at the center, strengthen the portfolio for predictable growth, improve asset efficiency while maintaining shareholder-friendly policies. This is informing our direction as we complete our FY '27 annual planning process and will inform our go-forward strategy. FY 2027 will be the first big step towards our future. More to come in the coming months. As a brand company, we win and lose with the consumer. And growth is our scoreboard. We will make bold choices, embrace new thinking, and learn from past decisions while minimizing disruption. Our growth priorities are clear. Staying true to our north star of the consumer, invest in brand building and editing and amplifying our focus, and execute with excellence. By fully leveraging the talent and skill sets that already exist. By keeping the consumer at the center, we sharpen priorities and move from slow and complex to fast and agile. Teams are untangling complexity to enable faster decision-making closer to the consumer as we speak. A growth priority is product innovation. I'm inspired by the passion, commitment, and expertise of our teams. I believe we can drive new product development by better understanding our consumers, allocating resources, and accelerating time to markets. Brands of our size can't do everything, but we must be focused and sharp as we drive separation from our competition. Each business will have a distinct strategy centered on two to three priorities. Making these tough choices will bring greater clarity to our brands, for employees, consumers, and investors. As we reposition the business, we plan to direct resources in a disciplined and targeted manner towards the most impactful opportunities and innovative ideas, allowing them to incubate and take hold. This will both strengthen our portfolio and drive momentum of those products and brands that have the best opportunities for growth. Not just for this quarter or next fiscal year, but for the long term as well. To fund these investments and decisions, and position us for long-term sustainable growth, we plan to stay focused on maximizing operational and balance sheet efficiency. A key ingredient of our success will also be the power of our organization to fully leverage talent and skill sets that already exist in the building. We recently welcomed back a key member of my leadership team to reignite the power of one. This is the plumbing that enables the work to be done more effectively at Helen of Troy. It's a common language of systems and processes and people. We must balance short-term performance and long-term aspiration. This work starts with my global leadership team and will be cascaded throughout the organization. We will continue to emphasize working capital efficiency and balance sheet health and productivity. A good example is the recently announced amendment to our credit agreement, which extends the leverage ratio holiday and updates the interest coverage ratio definition. These changes give us greater flexibility to navigate the evolving trade and external landscape. We look forward to sharing our fiscal 2027 outlook in April and plan to outline our long-term growth strategy in 2026. And now I'd like to briefly touch on quarterly business segment performance. Overall, net sales outperformed our expectations. Home and outdoor and beauty and wellness sales declined 6.7% and 0.5% respectively, while international sales fell 8.1%. Olive and June continues to outperform our profitability expectations delivering nearly $38 million in sales. While I am not satisfied with these overall results, I'm encouraged by some of the highlights across our portfolio. These give me confidence we can learn and replicate across our portfolio and execute. Our ability to grow and capture market share is a product of leadership choices and operational excellence. We plan to be more intentional on our agenda and sharpen our execution. Highlights include, we grew Osprey, Oxo, and Olive in June. We exceeded Olive in June internal expectations. We increased organic B2C revenue by 21%. And we delivered $29 million of free cash flow despite $58 million in tariff drag. Across our portfolio, we're delivering exciting innovation. In the home and outdoor segment, we launched Osprey and Hydro Flask cooler collaboration, combining Osprey's legendary carry technology with Hydro Flask leak-proof insulation for ultimate performance. Osprey also introduced a mountain-bound series of winter luggage, crafted with nanotube fabric for rugged, highly water-resistant protection for ski and snowboard gear. Hydro Flask delighted families with the Eric Carle collaboration, featuring the iconic Very Hungry Caterpillar in our insulated kids' bottle. OXO expanded its top baby-led weaning suite and added new tot and coffee SKUs at our top partners. This month marks the debut of OXO's Trident series cookware, which provides superior heat distribution and high-performance cooking without the hassle of cleanup. In beauty and wellness, Olive and June continued to introduce trend-right collections tied to holidays and events, including the Be Bold collection, Halloween designs, and festive holiday stickers. After quarter-end, Olive and June launched a playful collaboration with Peachy Babies, combining nails and slime for the most satisfying collab yet, along with products for kids and tweens, which is seeing strong early success at top retailers. For cold and flu season, Honeywell introduced two fresh new style Allergen Plus HEPA certified air purifiers, a three-in-one for large rooms and a tabletop for smaller spaces. These innovations, along with many more coming to market, give me increasing confidence we're focused on the right things to improve our business. I believe we can win for our consumer through innovation and marketplace execution. This allows us to return to revenue leadership, strong margins, and robust cash flow. But we know it won't be a straight line. We're making tough choices to invest in our future. We build our platform for growth and improve our financial profile through better operating leverage while we create greater competitive advantage across the portfolio. With that, I'm gonna turn it over to Brian to walk through the financial results and outlook. Brian Grass: Thank you, Scott. Good morning, everyone, and happy New Year. Today, we reported third-quarter net sales and adjusted EPS results in line with our expectations. I would like to thank our associates for their hard work in achieving our financial objectives for the quarter in what continues to be a challenging environment. Operationally, we made headway on improving our go-to-market effectiveness, leaning in on innovation for more product-driven growth, focusing on the fundamentals, and putting our brands back at the center, fully leveraging their unique strengths. Scott mentioned several new innovations in the market, and I'm excited by new launches planned for the coming year. There is renewed energy across our organization, reinforced by the culture work Scott mentioned. Our third-quarter results reflect progress towards simplifying operations, sharpening priorities, and increasing agility. But we know much more improvement is needed, and we continue to take decisive steps to position Helen of Troy for sustainable growth. On tariffs, we advanced mitigation strategies, including supplier diversification, SKU prioritization, cost reductions, and price increases. The majority of our price adjustments are now in place, but we are still navigating some parts of the market where we achieve less than full pricing realization due to stop shipments we believe are necessary to support consistent adoption of price increases by our retail partners, primarily impacting the beauty and wellness segment. We expect some residual impact from stop shipments to carry into the fourth quarter, which I will touch on later in my remarks. Year-to-date, gross unmitigated tariffs had a $31.3 million impact on gross profit, with the full-year impact expected to be in the range of $50 million to $55 million. We now expect less than a $30 million tariff impact on operating income for the full year, net of mitigation actions, up from our prior expectation of approximately $20 million, primarily driven by delayed timing of pricing realization. We remain on track to reduce our cost of goods sold subject to China tariffs to between 25% to 30% by 2026. Our diversification and dual sourcing strategies are reducing long-term supply chain risk, helping to insulate us from further policy changes or other geopolitical impacts. Turning to our results, consolidated net sales decreased 3.4%, favorable to our outlook range and a sequential improvement compared to the first and second quarters of the year. Organic net sales declined 10.8%, approximately 3.3 percentage points or $17.3 million of the organic revenue decline was driven by tariff-related revenue disruption, which includes the pause or cancellation of direct import orders from China, changing dynamics within the China market, and the impact of stop shipments referred to earlier. Home and outdoor net sales declined 6.7%. We saw strong demand for travel, technical, and lifestyle packs, strong holiday orders from brick-and-mortar retailers in the home category, and incremental revenue from tariff-related price increases, offset by softness in insulated beverageware, lower online sales in the home category, and lower overall closeout channel sales. Beauty and wellness net sales decreased 0.5%. Organic beauty and wellness sales declined 13.9%, approximately 4.5 percentage points or $12.9 million, driven by tariff-related disruption. In beauty, hair appliances and prestige liquids were impacted by soft consumer demand, competitive pressures, the cancellation of direct import orders, and lower closeout channel sales. Wellness was unfavorably impacted by lower international sales due to evolving dynamics in the China market, pricing-related stop shipments referred to earlier, and a below-average illness season. These headwinds were partially offset by a strong contribution from Olive and June of $37.7 million. Consolidated gross profit margin decreased 200 basis points to 46.9%, primarily due to the net unfavorable impact of higher tariffs and a less favorable inventory obsolescence impact year over year. These factors were partially offset by the favorable impact of Olive in June and lower commodity and product costs exclusive of tariffs. SG&A ratio increased 160 basis points, primarily due to the acquisition of Olive in June, higher outbound freight, higher annual incentive compensation expense compared to the same period last year, and unfavorable operating leverage. Lower gross profit margin and a higher SG&A ratio resulted in a consolidated adjusted operating margin decrease of 370 basis points to 12.9%, consisting of a decrease of 650 basis points for home and outdoor and 120 basis points for beauty and wellness. The declines were driven primarily by the net unfavorable impact of tariffs, higher incentive compensation expense, and unfavorable operating leverage, partially offset by margin accretion from Olive and June in the beauty and wellness segment. We incurred higher interest expense due to higher average borrowings driven by the Olive and June acquisition, higher inventory carrying costs due to tariffs, and higher CapEx spend as we make supplier transitions out of China. Higher interest expense was partially offset by lower adjusted income tax expense, resulting in adjusted EPS of $1.71. Inventory ended at $505 million, which includes $35 million in incremental tariff-related costs year over year and incremental inventory from the Olive and June acquisition, compared to $451 million at the same time last year. Debt closed at $892 million with $325 million in revolver availability. Our net leverage ratio was 3.77 times, compared to 3.54 times at the end of the second quarter. The increase in our leverage was due to lower trailing twelve-month EBITDA, driven primarily by higher tariff costs. The unfavorable cash flow and balance sheet impacts of tariffs on our outstanding debt balance. Year-to-date free cash flow was $29 million, which includes $58 million of incremental cash outflows for tariff payments and the cost of supplier transitions out of China. Now I'd like to turn to our annual outlook. We've tightened our range on the top line to $1.758 billion to $1.773 billion, with home and outdoor net sales of $812 to $819 million, compared to our previous expectation of $800 to $819 million. Beauty and wellness net sales of $946 to $954 million, compared to our previous expectation of $939 to $961 million. We lowered our adjusted EPS expectations to a range of $3.25 to $3.75, driven by less than full pricing realization, consumer trade-down behavior, and less favorable mix, higher trade and promotion expense, and the preservation of investments in our people and brands to build revenue momentum and more favorable operating leverage going forward. We expect the full-year GAAP SG&A ratio in the range of 38% to 40%. Expect a full-year adjusted effective tax rate in the range of 13.4% to 14.7%. Inventory is expected to be $475 million to $490 million at year-end, which includes an estimated $39 million of incremental costs from tariffs. Our outlook includes the ongoing impact from changing dynamics in the China market, lapping of tariff-related order pull-forward in 2025, and residual stop shipments to support consistent tariff pricing adoption. We expect modest improvements in direct import orders and select programs shifting to warehouse replenishment. Overall, we expect retailers to continue to closely manage inventories. Despite a recent uptick in flu incidents, overall incidents for the full season and upper respiratory illness in particular, are tracking well below both last year and the trailing three-season average. The retailer inventories look to be sufficiently stocked during the remainder of the fourth quarter to supply demand should illness continue to increase. Given the challenging operating environment, we expect margin pressure to persist through the fourth quarter, reflecting consumer trade-down, a more promotional environment, a delay in achieving full pricing realization, and cautious retail behavior. While we remain focused on cost control, we are preserving key strategic investments in support of our people, new product innovation, stronger brand loyalty, and better commercial execution. As we transition back to growth mode, we expect to have a bias towards revenue improvement over cost reduction in order to recapture our operating leverage. Before I conclude my remarks, I want to direct your attention to the investor presentation posted to our website, which contains additional information and perspective on our third-quarter results and our outlook for the remainder of the year. And with that, I'll turn it back to the operator for Q&A. Operator: Thank you. We will now conduct a question and answer session. If you would like to ask a question, you may press 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit to one question and one follow-up question and requeue for additional questions. Our first question is from Rupesh Parikh with Oppenheimer and Company. Please proceed. Rupesh Parikh: Thanks for taking my question. So I guess just going back to some of the top-line trends and the performance of your brands, it's helpful color in terms of the brands that are actually growing. But just curious, as you look at some of the declining categories, where there's beverageware, hair appliances, etcetera, where you are with, you know, in the progress and turning around these brands? Scott Azel: Good morning, Rupesh. Yeah. Thank you. Good question. First, yeah, we are very encouraged by our results on the brink green sheet brands like Osprey, Olive and June, OXO, Braun, and Pure. They continue to meet and exceed our internal expectations. We have work to do in the area that you identified, and we are focused on that. Everything from innovation on bringing new products to markets that are in the kitchen or kinda in the lab as we speak. Making sure we've got the right commercial triangle in place, which is a combination of marketing, operations, and commercial excellence. And then making sure that we're providing the right resources to the right opportunities that are gonna create the right value. So, that's our methodical approach. We feel very confident in the work that we're doing. As we said in kind of our pre-recorded remarks, our performance will not be a straight line. Some of our brands will move at a much faster rate. The ones that you identified, we're working on aggressively. Rupesh Parikh: Great. And then I guess my follow-up question just to help frame, you know, where we are right now. So as, you know, as you look at your earnings guidance this year, is there any way to say whether you believe that maybe that's the bottom in earnings power? I don't know if there's any insight at this point or is it helping us frame how to think about next year and whether we can take this year's guidance as maybe a baseline to build upon? Scott Azel: Yeah. What I'd say is this, and I'm definitely gonna let Brian opine on it, maybe more specifics. The bottom line is this company's done probably a pretty good job of trying to get its cost structure in place the last several years. But our focus right now needs to be around growth, and that means we gotta invest in innovation, brand building, and marketplace excellence in terms of how we execute. And that's what you're gonna see we're investing in in quarter four. As well as we talk about our long-range plan, which you'll see the first big steps in FY 2027. It will be about growing the top line responsibly but growing the top line and making sure our brands are winning. As well as managing against our earnings power. Brian, anything to add? Brian Grass: Just a little bit to say. We're shifting our focus to revenue improvement versus cost reduction. And we think the benefit of operating leverage is gonna be greater than any benefit we can get from trying to just purely cut costs. You know, that takes a little bit more time, but that's a much more effective and sustainable strategy, and it's gonna be better for the long-term health of the business. So we're making a bit of a pivot. Hopefully, you can hear that. And our focus is gonna be on revenue improvements and revenue growth first and then, you know, growth and profitability will come after that. Rupesh Parikh: Great. Thank you for all the color. I'll pass it on. Our next question is from Bob Labick with CJS Securities. Please proceed. Bob Labick: Good morning, and happy New Year. Thanks for taking our questions. Scott Azel: Hey, Bob. Hey. Bob Labick: So, you know, one of the focuses one of the key things you're focused on is the, you know, return to consumer-centric innovation and, you know, obviously, you've had that in the past. Maybe, you know, was it deemphasized? Why was it deemphasized as kind of part of the question. Then the next thing is how long does that take? And so, like, you know, when should we see, you know, that reemphasis translate into the top line? Because as you said, your scorecard's gonna be returned to revenue growth. And the shift back to consumer-centric. How does that play out? What are you actually doing more specifically now than you didn't do last year, and how long does it take to flow through? Scott Azel: Bob, this is Scott. Good question. I can only give you a headline on the past because I wasn't here. But, you know, the bottom line, you know, I've seen companies go through different transitions. Some they think that they can that brands are in a better place than they are or they can misread the market I don't know. But I know this going forward that if I've traveled the globe, and I spent time with teammates and I've analyzed our brands, that, you know, we have a 30% to 40% of our portfolio that has innovation and opportunity to grow faster, going to invest in them as we speak, and you'll see the benefits of that in quarter four as well as in FY 2027. Have a number of our brands in our portfolio that have been underinvested in, have not been organizationally set up for success, have for whatever reason missed the mark on the consumer, that we're working on the renovation steps as we speak. To get them in a position to bend the curve. Bend the curve means to stabilize the business, as we go into FY '27 and grow further in FY '28 and beyond. But the net is we would expect that you're gonna see an improvement in our business quarter four on as we go forward as we come through and talk about our FY '27 plan. But the key is, as Brian said and what I said earlier, is there is a bias towards healthy brands and growing and winning in our categories first. And also then delivering value as we do that. Bob Labick: Okay. Great. And then, you talked about a bunch of, you know, I guess, new releases and I'm looking at the investor presentation right now. Can you maybe focus us on a few of the major releases or milestones of, you know, of key brands that should, you know, be more meaningful than not. So, you know, things for us to judge on success next year and not trying to, you know, pin you to a quarter for return to growth, but just really what are the kind of, you know, big releases that you think should move the needle and we can watch in 2026, calendar '26? Scott Azel: Yep. Bob, as you know, I can't speak on, you know, a specific future, innovation that's not out in the public domain. But what I can say is brands like Osprey, Olive and June, Braun, OXO, just like the performance we've had in the most recent quarter, we expect that to continue. And as we funnel resources to these brands that I believe do a lot more now, you're gonna see a lot more acceleration against them. I don't know if I'm really getting to your question of, like, a very specific launch. That's happening in the future, but that's our focus. I don't know, Brian. Yeah. I can add a little in without getting too specific. Brian Grass: I mean, we have things teed up in Hydro Flask that allows us to play, as you and I have talked about, Bob, kind of in, you know, the areas where we wanna reach the consumer, but we believe it's right for Hydro Flask to play in. And it's not all areas, but we have a strategy there. We're excited about that. We have some category adjacency plans. It's Hydro Flask too that we're excited about, and those will be coming out soon. You know, in the brands that Scott didn't mention where, you know, we've got more green shoots, we've got exciting innovation going on there, and that includes Pure. That includes Vicks, and that includes Honeywell. So, you know, the point I'd like to make is innovation wasn't lost in all of our businesses and all of our brands. We had brands that were doing that well, Osprey, OXO. And Olive and June, some of the others, but it was a little bit lost in some of these other brands that we're talking about. And we have strong plans and strong innovation in the road map that is already in the process of being developed. And so it's not like we're starting today on those development plans. They're well underway, and they'll be coming out soon. And it's, you know, it's the accumulation of all of them. There's not, like, one big launch that really does it. It's really making sure that all your businesses have it and have a strong pipeline so that there's no gaps. Just had a little bit too much of gaps in the past. Bob Labick: Okay. Got it. Thank you very much. Operator: Our next question is from Peter Grom with UBS. Please proceed. Peter Grom: Thank you. Good morning, everyone. So two questions for me, and I'll just start with this. But I guess I was just hoping to get some perspective on what you're seeing from a category standpoint. I think there's a lot of cross currents that are driving the top-line trends that we are seeing in your results. If you strip out all of the noise, do you have a view on kind of where underlying demand in your categories is trending today? And then I guess just looking ahead, there seems to be some optimism on the U.S. consumer, tax refunds, etcetera. So just kind of curious do you think that some of these things could drive some sequential improvement in category demand following what's been, you know, very challenging few years here. Scott Azel: Well, I'll take the first stab, Peter. First of all, absolutely. When I step back, from the standpoint that, even in the most challenging times, brands that have tight brand propositions, relevant innovation, and connect with the consumer, meeting them where they are, have a way to continue to win. And like brands like Osprey, Olive and June, OXO, Braun, Pure, in our portfolio. You know, they will do well or when the consumers are in a better place. The other brands in our portfolio that have not performed over where they need to be, they have nothing but upside opportunity to bend the curve through better innovation, more focused storytelling, and an organization set up that enables them to be close to the consumer and execute with excellence. Which today we're not doing and we will do better. You'll see that a little bit in our outlook on Q4 of why we're not pulling down our revenue. But you're also gonna see that as you look at FY 2027, what we expect going forward in terms of improving our performance from a top-line standpoint on a broader range of brands beyond the ones we have today. Brian Grass: I'd just add, Peter, that I think, you know, the question you're asking is a good one, but it's hard to answer. Like, in the moment, there's a lot of things in the market related to higher pricing, price increases, and things like that. And, you know, the consumer has been resilient up until this point. I think the key is how will they respond to kind of this next phase of inflation and pricing in the market, and we'll have to wait and see. But we have plenty of category growth in some of our categories. We have some that are decreasing, but we also have plenty of them that are increasing. And so we're gonna lean into that. Peter Grom: No. That's super helpful. And then I guess just a follow-up on just kind of the 4Q outlook and just kind of the big divergence on the bottom line versus the prior outlook? Because Scott, to your point, the sales are kind of in line with your prior outlook. So can you maybe speak to the moving pieces where things are playing out differently than what you would have expected? And I guess this is maybe asking Rupesh's question differently. Know we'll get 27 guidance enabled. But I guess, would you say there's a 4Q dynamic is more one-time in nature? Or are there things investors should be extrapolating, you know, from this leisure exit rate out to next year? Scott Azel: I'll take the first part and let Brian opine on it. First of all, as you look at Q4, I think of it like kind of a wedge. This is the beginning. We want to invest in our brands for growth. I want the word growth to be a part of what we're about, and it's responsible growth. And what we're doing is we believe that we can grow the top line if we make the investment against new product innovation, better storytelling, getting our organization with the consumer at the center, we can bend the performance. And you're gonna see a little bit of that in Q4, and you'll see a lot more of that big steps forward as we go into FY 2027. But, you know, as far as outlook long term, of course, we're not ready to publish that. I don't know if Brian can share any more color or texture to that. Brian Grass: I can give you some good perspective on Q4 and then, you know, give you some dimensionality of how to feel about going forward from that. And I just say to tag on to what Scott was saying, you know, our conclusion is more of the same. It's gonna get us where we wanna go. We've been trying to cut our way to better performance over the last two to three years, and it's not sustainable. And we're at a point where it's gonna be very difficult to continue to do that. We're shifting our focus to revenue improvement versus cost reduction. To get better operating leverage. That's gonna take more time. And I think in the short term, you're gonna see more pressure on the bottom line as we look to lift the top line. And then once the top line is lifting, it makes solving the bottom line much easier and much more healthy. With respect to the fourth quarter in particular, there's a slide on Page 14 in the investor presentation, which will give you an illustration. The main driver in the change is really unfavorable pricing realization. So in the third quarter is when our pricing was really implemented. And compared to our original expectations, we did not achieve we've got basically leakage versus what our original expectations were both in realization of the price increase margin that we wanted to gain and stop shipments that we're in the process of implementing to enforce uniform pricing adoption. And we think that's crucial in getting price increases to stick. They have to be uniformly adopted. Otherwise, it doesn't work. And the other thing I'll note is that pricing leakage drops straight to the bottom line. It has so it has an outsized impact on the bottom line versus the revenue impact. And so be aware of that. We also built in the expectation of higher consumer trade-down because we are seeing that. And a less favorable mix. We and I mentioned some of this in my remarks. We also assume higher promotion expense and margin compression as we look to tighten up our balance sheet. And really get our inventory levels in the right place. And we expect that to occur in the fourth quarter. And then the last point I'd make or last two points, while we believe overall retail inventory is healthy, there were a couple areas where we had inventory that was higher than we would have liked. And so we built in the assumption that that's gonna rebalance in the fourth quarter. And then the last point is we're preserving key investments in our people, innovation, and brands. And actually want to reinstate some of what we cut in the first three quarters of the year. And so we're gonna make those choices for the fourth quarter so that we can get to this revenue improvement, you know, and better operating leverage as we go forward. So that's a little bit of and I would say, look. There's gotta be some continuation of investment back into growth as we go to fiscal 2027, but we're not prepared to give you anything specific with respect to fiscal 2027 at this time. Peter Grom: Okay. That's helpful. And lastly, maybe just quickly, you know, a lot of focus on this call around the top line getting these brands back to healthy levels of growth. And so, Scott, I'd kinda be curious as you've kinda dug in and started to study this business more over the last several months. Is portfolio optimization part of that exercise? Or do you kind of see the same opportunity across the entire brand portfolio? Scott Azel: Yeah, Bob. Great question. You know, I'd say this. We're always, you know, as we do our strategic review let me back up. You know, I've been here four months. I focused on four areas that I think about the last four months. And one of which has been job one, which is kind of what how do we get their aspiration looking out for the future? And then what are our big steps in FY '27? As a part of that process, which we kicked off in the last thirty days, which you'll see more of it in the coming months, is looking at our portfolio, but fundamentally, as I talked about earlier, we have 30% to 40% of our brands that have, you know, upside opportunity given investment and given the right focus. And we're gonna kinda step down on them, step down in a good way, push them forward, then we have a number of our brands that we have to evaluate what is the right model going forward. How do we invest, what's the right operating model. There's so much opportunity there. And then, like, any company, we're always gonna be evaluating our portfolio over the next, you know, as we look at our strategic plan, on what brands are best fit and which ones don't. But at this point, I don't have any specific answer on that. Bob Labick: Great. Thank you so much for all the color. I'll pass it on. Our next question is from Susan Anderson with Canaccord Genuity. Please proceed. Susan Anderson: Hi, good morning. Thanks for taking my question. Maybe just a follow-up on the innovation front. I guess, I was curious are there certain areas such as, you know, maybe the most underperforming areas that you're gonna touch first, or is this something where you're just kinda gonna touch all areas of the portfolio? And then in beauty, I guess, you know, that industry obviously has seen growth the entire time. So just kinda curious what you think kinda went wrong there and what you need to do to kinda turn Drybar around whole on the liquid side and fixture side. And then I'm not sure if I heard, but did you say how Pearl Smith performed in the quarter? Thanks. Scott Azel: Yeah. First of all, yep, Susan, thank you. From an innovation standpoint, we can't run at every innovation equally. So if we just cannot do that, we've gotta be really smart about it. And we have several brands that I would say today, can do a lot more, can grow a lot faster with the right level of support. And we're gonna make sure as we go in FY '27 that they get what they need. And then we have a number of brands that call that are in the post phase of renovation that need work. Any work from everything on getting sharp on the consumer, sharp on the product pipeline, sharp on the structure to support the brand in the marketplace. And we're gonna do that work. So as I expect our growth curve going forward to be not a straight line, we're gonna have parts of our portfolio growing very at a faster rate, and then some parts, we're just trying to stabilize. We go into FY '27. Specifically around beauty, we've got an opportunity. We got we got some work to do in that area. And I can tell you this, the team is on it. They've gone through a big reset moment in the last twenty-four months. FY '27, we should see some improvement, but it'll be much more around stabilization and clarity of future than being in the green bucket of high growth, which we're getting from things like Olive and June. Osprey, and Braun, etcetera. I don't know, Brian, you have anything you wanna add. Brian Grass: I just say on Pearl Smith's, I mean, we're not giving that level of detail. Pearl Smith didn't have the best quarter in terms of our shipments in the quarter, but I wouldn't say that's indicative of the health of that business. Susan Anderson: Okay. Great. And then maybe just a follow-up. I guess, if you could talk about kinda how you're thinking about your leverage. I guess, where would you like it to go longer term? And, I guess, you know, I guess, how long do you think it would take you to reach that goal? And then maybe just a follow-up on, you know, kind of the portfolio and potentially rationalizing some of it. I guess, do you think there's opportunity there maybe even to help pay down quicker some of your leverage? Thanks. Scott Azel: Yeah. I'll take the first step, and Brian can step in. You know, in addition to I know you've growth, which I fundamentally think is a job one for Helen of Troy, and we have that opportunity against our brand. In addition to that, going as you'll hear in our plan forward, getting our balance sheet healthy and driving operational efficiency will also be kind of an in tandem strategic priority for us that we're gonna be focused on. I'll let Brian talk more about the leverage ratio. But specifically around the portfolio, I mean, just I've been doing this world of kinda running portfolios of brands for many years and always reevaluating the portfolio mid, short, mid, and long term. And I'd say in the short term, you know, we're gonna be focused on how do we bend the curve and improve our performance from our green brand and through and as well as our renovation brand. I think midterm and long term, we'll be looking at what is the right portfolio for Helen of Troy, and how does that create the long-term value for the company. We're not at a position today to or I'm not I'm not holding back right now that I have a specific specific brand and I'm like, oh, it shouldn't be there because we're doing the hard work of saying, how do we drive the right strategic plan for the company? And we're just not there yet. But, it's definitely something we will be considering and that she will wrestle with as we do the work. Do you have anything you wanna add on the leverage ratio piece? Yes. Sure. Go ahead. Go ahead. Let's turn it over to Brian. Brian Grass: Yeah. I just say, look. We have a base plan that we feel really good about in terms of our leverage and our ability to bring leverage down. We've got a big opportunity to tighten our balance sheet and make it more productive. We've been working on that, and we're gonna double down on that area of focus. That's you heard some of my comments earlier about inventory. We're gonna tighten up our inventory, which will produce a lot of cash, and we're gonna put that to work to pay down the debt. We also have some longer-term assets that we can look to monetize and we can consolidate from three distribution centers to two. That's gonna take a little time, but that's on our mind. So I would say that that's the base plan and plan A that we're kinda working first. But as Scott said, we're always, you know, thinking about divestiture, and I'll tell you, we get inbound interest on some of our brands. You know, on a regular basis. I think our focus is more on the plan A at this point while we're maybe thinking about and working on the plan B of divestiture. Divestitures are very distracting. They take a lot of work, and you can put all that work in and to the end, and you don't get the value that you're looking for. And you may not be successful. We have to be very choiceful about the ones that we're going to invest that level of work and time into. And I think Scott needs time to build his growth strategy and really look at this. And then once we've done all that and done that assessment, then I think we're better prepared to say we wanna focus on, you know, x, y, or z. So that's how we think about it. Susan Anderson: Okay. Great. That was very helpful, you guys. Thanks for all the details. Good luck in the New Year. Operator: Thank you. Our next question is from Olivia Tong with Raymond James. Please proceed. Olivia Tong: Great. Thanks. Good morning, and happy New Year. Based on the innovations you're planning for next year, do you think you find a revenue rebase in FY '27 or perhaps when do you think you can omit the commentary around the recovery not being linear? I know it's unlikely you'll provide a lot of building blocks for fiscal '27, but there are quite a few exogenous issues that hit this year. Both on revenue and profitability, most notably, obviously, the tariff hit. So what are the incremental hits that we should be thinking about after tariffs begin to enter the base in the late spring? Brian Grass: Yeah. I mean, Olivia, the first part of your conversation was, you know, kinda when do you think we'll inflect on it from a revenue perspective, and I wanna address that. And I think Scott, you know, can also address a piece of it. But then I think you're also saying, look. You had some exogenous headwinds during the year that you don't have to repeat as you go into next year, and I would agree with that sentiment. We had a lot of disruption in our revenue, you know, related to tariffs and direct imports and China dynamics. That is stabilizing. We still have work to do to ensure that we can recover all of that revenue base as we go into next year, and I'm not making a commitment on that at this point. We're doing the work, and we're trying to recapture all that revenue. And I think it's definitely no matter what. It's a definite building block year over year because we already know that some of that's back in our base. But whether we can get all of it is still an open question. So I, you know, I can't tell you to what extent at this point, but it's a work in process. And, yeah, the tariff situation is better. I think the hopefully, what you're hearing from our commentary though is that benefit that we're gonna get from things like tariff stabilization and they reduce the rate, and, you know, we now have pricing in the market. They're even talking about refunds potentially with the Supreme Court. We wanna put that back into the business to make sure that we have steady, consistent, reliable revenue growth. And then I think the algorithm on the profit improvement comes in. But that's gonna take a little bit of time. We're gonna focus on revenue first. We get that strong. Everything else kinda takes care of itself. But I don't expect that immediately. We gotta get the revenue back first, and then we're gonna two-step it to the profit. Olivia Tong: Got it. Maybe if I could double click on that about what you think is a potential steady-state operating margin for the company. Do you think you can get back to double-digit EBIT margin over time? If so, what sort of needs to happen to get there and what's your view on timing of that? Brian Grass: Yeah. I do think we can get back to that. But, again, hopefully, it we're not gonna time warp back to margins from three years ago. That's not the way it's gonna work. We're going as we get to revenue improvement first, then revenue growth, then we'll use the operating leverage to have some kind of an algorithm that delivers on profit growth to a degree, but we're gonna over-index on the revenue piece of it. So I don't wanna give you a specific margin at this point, but what I will tell you is we will once we get back to revenue growth, we will have an algorithm that produces margin expansion. And, you know, if it's two points of revenue growth, then it's probably 20 bps of margin expansion. If it's five points of revenue growth, maybe it's 50 points of revenue expansion. But just to be clear, that's a couple steps away. We have to get to revenue improvement first, then consistent revenue growth, then we'll focus on margin expansion. Olivia Tong: Got it. Thank you. Operator: We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks. Scott Azel: Thank you very much, everyone. With renewed enthusiasm across the company, we're ready to leverage our portfolio and return to sustainable, profitable growth. Our path to our aspiration is becoming clear. This leadership team is determined to show sequential improvement across our business in the coming quarters. We will do this by staying focused on our North Star, which is keeping the consumer at the center of everything we do. By realigning our commercial triangle of product, sales, and marketing, we are reinvigorating brand building and strengthening retail operation execution. Our teams are energized. We're ready to fully leverage our diverse portfolio of leading brands to get us back to a path to growth. Thank you for participating today. We look forward to speaking with many of you at the ICR conference and the virtual CJS conference next week. Have a good day. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: We'll now begin the LY Corporation financial results briefing for the second quarter of fiscal year 2025. Thank you very much for joining us today. We will be referring to the financial results presentation available on the LINE and Yahoo! LY Corporation website. During today's session, we kindly ask you to follow along with the material. Joining us today from LY Corporation are Mr. Takeshi Idezawa, President and CEO; Mr. Ryosuke Sakaue, Executive Corporate Officer, CFO; Mr. Yuki Ikehata, Corporate -- Executive Corporate Officer, Corporate Business Domain Lead; Mr. Makoto Hide, Executive Corporate Officer, Commerce Domain lead; Mr. Hiroshi Kataoka, Executive Corporate Officer, Media and Search Domain lead. First, Mr. Idezawa will provide an overview of our financial results for the second quarter of fiscal year 2025. Following his presentation, we will hold a Q&A session. The entire briefing is scheduled to take approximately 1 hour. We will be live and streaming this session. If there is any distortion or inconvenience in the video or audio, please try alternate server link. Takeshi Idezawa: This is Idezawa of LY Corporation. First, before explaining our financial results, I would like to comment on the system failure caused by a ransomware attack that occurred at our group company, ASKUL Corporation on October 19 and the partial leakage of information held by the company. We sincerely apologize for the significant concern and inconvenience caused to our customers who use our services as well as to our business partners. The details regarding the damage potential information leakage and recovery status have already been communicated by ASKUL. The company is continuing to work closely with external experts prioritizing a safe and prompt restoration of systems while investigating the cause and confirming the scope of impact including any personal data. LY Corporation is fully cooperating with all recovery and investigation efforts. As the parent company, we take this matter seriously, and are committed to restoring the situation and preventing recurrence and strengthen the information security framework across the entire group. Now let me explain our second quarter financial results. Please turn to the next page. First, here is an overview of the second quarter results. Consolidated revenue was JPY 505.7 billion, up 9.4% Y-o-Y. Consolidated adjusted EBITDA grew 11.3% Y-o-Y to JPY 125.4 billion showing solid profit growth. Additionally, progress in AI agentization and the expansion of LINE Official Account and Mini apps are progressing smoothly, preparations for the LINE renew are also steadily progressing. Home tab refresh scheduled within the year. We will now proceed with the explanations in the order of the agenda you see here. First, the consolidated company-wide results. Next page, please. These are the results for the second quarter. Although consolidated revenue was slightly behind the guidance due to the decline in search advertising revenue, adjusted EBITDA and EPS are on track with the guidance. Next page, please. These are the consolidated performance trends, driven by the growth of PayPay consolidated and progress in efficiency improvements at LY Corporation, adjusted EBITDA grew 11.3% Y-o-Y, achieving double-digit profit growth. The margin also improved year-on-year. Next page, please. These are factors of change in consolidated adjusted EBITDA. Although expenses increased, revenue growth in the Strategic Business and Commerce Business outpaced the expense increase, resulting in a year-on-year increase of JPY 11.7 billion in adjusted EBITDA. BEENOS and LINE Bank Taiwan have been fully consolidated since the second quarter with the 2 companies contributing JPY 900 million to adjusted EBITDA. Next page, please. This is consolidated total advertising-related revenue. This quarter, commerce advertising achieved double-digit growth driven by increased transaction value and the total ad revenue grew by 2.4%. Next page, please. This is consolidated e-commerce transaction value. Domestic shopping transaction value grew 13.1% year-over-year, supported by last-minute demand ahead of the discontinuation for awarding points for hometown tax donation program. Reuse saw year-on-year growth of 15.7%, driven by Yahoo!'s lead market growth and BEENOS contribution. Next page, please. Regarding the upward revision of the dividend forecast, we conducted share repurchase during the first half of the current fiscal year and the cancellation of these shares was completed on September 3. Consequently, as the number of shares eligible for dividends has decreased, the annual dividend has been revised upward from JPY 7 to JPY 7.3. Next page, please. This is on progress on the LINE app revamp. The renewals of the talk, shopping and wallet tabs have been rolled out in phases since September. Home tab renewal is scheduled to make a test release this year. Next page, please. This is on optimization of management resources. Firstly, on human resources, we are reallocating to growth areas such as AI agents, which will be explained later, Official Accounts and MINI Apps. We will reallocate our human resources so that by FY 2028, 50% will be allocated to growth areas. We will reduce the fixed cost by JPY 15 billion by the end of fiscal year by 2026 and build a leaner financial structure. Next page, please. From here, I will explain the financial results by segment. Next page, please. First, the Media Business. Although both revenue and adjusted EBITDA declined, continuous cost-saving efforts are yielding results, leading to improvement of adjusted EBITDA margin on Q-on-Q basis. This is performance analysis of the Media Business. While search advertising revenue contracted, growth in account advertising drove an increase in total advertising revenue. Next page, please. Account advertising continues to perform strongly in both the number of paid LINE Official Accounts and pay-as-you-go revenue. As this is an area we are strengthening alongside MINI Apps, we will provide a more detailed explanation of future strategies and initiatives later. Next page, please. Next, the performance trends for the Commerce Business. Second quarter revenue reached JPY 216.6 billion, a year-on-year increase of 7.2%. Adjusted EBITDA was JPY 33.3 billion, although profit declined due to increased promotional expenses related to the hometown tax donation program, the decline narrowed compared to the previous quarter. Next page, please. Performance analysis of the Commerce Business. The business as a whole is expanding steadily. In addition to the full consolidation of BEENOS, Yahoo! Shopping and subsidiary growth contributed to increased revenue. Next page, please. performance trends for strategic businesses such as payment and financial services. Revenue continued to be driven by PayPay consolidated, reaching JPY 109.7 billion, a year-on-year increase of 35%. Adjusted EBITDA also continued to grow, reaching JPY 22.9 billion, an year-on-year increase of 52.1% with margin remaining at a high level. Next page, please. Performance analysis of strategic businesses. Payments and financial services are both growing steadily. Furthermore, the full consolidation of LINE Bank Taiwan contributed to increased revenue. PayPay consolidated business overview. Each service is growing smoothly. Our number of payment per user and unit price, those KPIs are progressing smoothly. As a result, consolidated sales has increased Y-o-Y, plus 30.4%. Consolidated EBITDA was more than doubled. So the second quarter showed a significant strong growth. Next, from here, I will explain our key strategy going forward. Next page, please. As our company-wide key strategy, we will advance as 2 wheels that agentization of all services and the enhancement of Official Account and MINI Apps. In agentization for the 100 million users using our services, we will provide services like search, media, finance and commerce more conveniently via AI agents. And for corporate clients such as businesses, companies, stores and brands, we will provide customer contact points and business support function through our function enhances Official Accounts and MINI Apps by improving the value provided to both users and clients and by seamlessly connecting both via AI agents, we will realize new service experiences and expansion of revenue opportunities. Please turn to the next page. First, regarding our initiatives for AI agentization. First, our goal is daily AI agent used by our 100 million users in Japan, aiming for 100 million DAU. Currently, in October, DAU for AI services is 8.6 million, especially AI answers on Yahoo! JAPAN search and LINE AI Talk Suggestions are used frequently and user numbers have begun to expand. Also for AI Talk Suggest, user billing has started and monetization efforts has also begun. Going forward, we will promote AI agentization of each service and aim to expand users. Next page, please. Next, regarding the enhancement of OA, Official Account and MINI Apps. But before talking about the specific initiatives, I'd like to explain the structural transformation of the Media Business. Earlier, I explained the revenue decline in search advertisement in the Media Business, while steadily bolstering the conventional search and display advertising businesses, we will achieve sales and profit growth by further growing OA and MINI Apps where we can provide our original value. Over the next 3 years, we will increase the share of high gross margin OA and MINI Apps to about 40% and aim for an adjusted EBITDA margin of 40% to 45%. First, regarding the performance of OA, Official Accounts in Japan over the last 3 years, our track record, the number of paid OAs improved by a CAGR of 14% and ARPA also improved. And as a result, OA revenue also grew 16% annually on average and sales have grown to the scale of JPY 100 billion in Japan and JPY 140 billion, including global. Please turn to the next page. On top of this OA growth foundation by further building a MINI App platform and adding a SaaS-like store support solutions, will create a multilayered revenue structure and aim to double sales in 3 years. This fiscal year, as I mentioned, doubling the JPY 140 billion to JPY 280 billion. In this fiscal year, we will first focus on expanding MINI Apps based on OA and launching the SaaS business. Important KPIs for the revenue models of each areas are shown in the lower section of this page. MINI Apps are -- our scale expansion is very important for KPIs in the growth phase. In OA SaaS, we set ARPA improvement as KPIs. But we think these KPIs as leading indicators to monitor our business goals. Next page. Let me explain structurally. First, there is an OA, Official Account as a base. Currently, there are 1.3 million active Official Accounts used in Japan, in which number of paid Official Accounts are 310,000. We see the target accounts for future expansion such as businesses, companies, stores and brands at about 5 million. So we can still grow the number of OA accounts, and we will also further increase the ratio of paid accounts. The second layer, MINI Apps to OA using companies and stores, we will propose a customer contact point via MINI Apps, expanding MINI Apps numbers, growing users and creating businesses like payments and ads within them. The third layer is SaaS solutions, developing specialized support for high affinity industries like Store DX or reservations, aiming to raise ARPA. Service launch planned for 2026 first half. And we'll have more new solutions at the right timing when we can introduce them to you, we will. We will provide services more broadly and deeply and provide a deeper solution via SaaS by industry to expand our sales. Finally, regarding the recent growth of MINI Apps, as you can see on the left-hand side graph, number of apps has increased by 1.5x and the number of users has increased by 1.6x, steady growth. And we are strengthening our sales structures. We are enhancing proposal to bigger companies and installation at large enterprises like these are beginning. As you can see, and as a measure to strengthen inflow, we are leveraging LINE touch, which allows users to instantly launch MINI Apps at stores and the LINE apps revamp focusing MINI Apps will also begin. So we will further expand both the number of apps and the users and build a situation where businesses like advertising payments that can be provided. Let's turn to the next page. And finally, a summary of the Q2 financial results. Sales and profit expanded steadily. Our company performance was -- experienced a solid growth. Going forward, centered on AI agentization and Official Accounts and MINI Apps, we will accelerate the growth. We will promote AI agentization across all services, offer AI services to 100 million users and create new value. Also, we will enhance OA and MINI Apps. And while transforming the media portfolio, we will achieve growth and improved profitability. This concludes our Q2 financial results explanation. Thank you very much. Operator: We would like to now begin the Q&A session. [Operator Instructions] First from Goldman Sachs Securities, Munakata-san. Minami Munakata: I'm Munakata from Goldman Sachs. I have 2 questions. My first question is on search ads. In the first quarter and also in the second quarter, the impression I got is this business is quite tough. The degree of toughness, is it correct to understand that it's the extension of the first quarter? Or are there any additional reasons? And on search ad, what would be the realistic guidance towards the second half? That's my first question. Ryosuke Sakaue: Thank you for the question. I am Sakaue. I'm the CFO. Let me reply to your question. Second quarter year-on-year is worse compared to Q1. One of the factor is one major client budget allocation was weak, and that continued into the second quarter. And in addition, in other clients, the budget reduction happened. This I'm referring to large EC companies in Japan and vertical companies declined, and that can be called additional from Q1. So that was the additional factor for Q-on-Q deterioration. And Q3, Q4, I think the degree of negative -- negativity is same as Q2. For Q3 and Q4 as well, that is our forecast. Minami Munakata: I have a follow-up question. There are other clients with quite reduction. Is there any structural reason such as shifting in-house or revisiting ROI of advertising? Is it more of an economic trend? What is the nuance? Yuki Ikehata: This is Ikehata. Let me reply to your question. This is Ikehata. I would like to add some more comments. In addition, there were some industry -- well, in addition to prior quarter's reduction trend in other industry, partially, that is -- there was a reduction in ad spend for search ad. The concept of ad placement, I don't think that is such a reason. But overall, LINE Yahoo! search ad performance is being monitored and the advertisers operate. So based on that, there is -- there was a decline in ad placement. We will continue to work on the performance improvement of search ad, and that would lead to getting these customers back. So rather than any unique circumstances, we are to continuously work on performance improvement of search ad. Minami Munakata: I understood fully. Another question is on MINI App. This time, various figures were presented and outline was explained, and I was able to learn. Thank you very much for that. The portfolio shift -- this chart has been shown. Just to reconfirm display and search, basically, it's very difficult to grow these areas. Is that the assumption you are setting? And JPY 140 billion to be expanded to JPY 280 billion, that has been rather difficult. And what is the pathway you envision? For example, from the first half of 2026, you're going to start SaaS service. So from the second half of next year, do you expect the sales to accelerate? Takeshi Idezawa: This is Idezawa. Let me answer your question. Display, search, naturally, the measures to revamp or to boost them, we are taking measures. And also thanks to the organizational change that we have implemented, we are able to implement activities to work on recovery. But structurally speaking, I don't think this is an area where we can expect high growth rate. So from that perspective, we will support the baseline for the display, search. And then apps will drive the growth. And we have the target of Official Account doubling and CAGR-wise, it has been 16%. And so we have this growth of OA, Official Account as a basis. And to add on top of that, we are going to provide MINI Apps and SaaS services. So we will be pursuing the target by having breakdowns or compositions in mind. On MINI App, it's not a linear growth, but when we have a certain number of clients, then we can expect a significant activation. So the MINI App platform will be stronger in the later half. And then that would be the overall picture. Operator: Next question from SMBC Nikko, Mr. Maeda, please. Eiji Maeda: This is Maeda from SMBC Nikko. I have 2 questions as well, please. I'll be recapping the previous comments regarding search linked ad. Together with popularization of GenAI, the negative impact to queries. And when I look at the performance, some of the clients looks like ad placements are declining in numbers. So because of this GenAI, the performance is having a negative hit on the flip side. If you could please share more on the recent trend? And also for the market, we -- there is still a concern that GenAI rise can be a negative for a search-linked ad. If you could please share your outlook, that would be great. Ryosuke Sakaue: Thank you, Mr. Maeda. Sakaue, I will start, then possibly Kataoka will follow up. At the moment, Yahoo! Search, 10% of query comes from AI search. And at the same time, the answers from AI search are business query where there is no opportunity for search-linked ad, like questions and answers. Those are the search keywords that we get. So it doesn't have much impact to our revenue and profit making. But at the same time, mid- to long term, regarding those business query, I would think that the there will be more use on use of GenAI. So media and search, we expect the next 3 years to be flat plus extra. Hiroshi Kataoka: This is Kataoka speaking. As Sakaue mentioned, number of queries for search have not resulted in significant decline in the number of queries. There is no major time shift in the search trend. And ad performance itself hasn't deteriorated. So within this big global trend, there's more use cases from GenAI are increasing. And I'm sure more of our clients companies are considering to further use GenAI. We believe that there will be opportunity, the monetization business opportunity when it comes to GenAI-led search as well. So we are considering various different means to monetize. Eiji Maeda: Second question, regarding Commerce Business. In second quarter, each services growth on the Page 8. Regarding Yahoo! Shopping, the hometown tax, I wonder how much of that impact is included. I wonder in the second half, there can be a significant decline in the growth as a reversal factor. And if you exclude the BEENOS impact, what is your true growth opportunity? So the growth in the cruising pace and growth from a one-off reason, if you could please share for the results in the first half and what you expect for the second half, please? Unknown Executive: Okay. Sakaue would share some figurative indication then -- and I'll have my colleague, Hide to provide additional information. And regarding Yahoo! Search -- sorry, Yahoo! Shopping, for second quarter, the growth was about 19%, 1-9, so quite significant. And hometown tax, late high single digits, mid-single digit to high single-digit growth. And for Reuse, this includes Yahoo! Auction, Yahoo! Flea Market and BEENOS as to be about 15% growth. So excluding BEENOS, we do have mid-single-digit growth. Second quarter has this last-minute demands for hometown tax. So that led to this significant growth rate. Makoto Hide: This is Hide to provide additional information. Regarding Yahoo! Shopping, a significant impact from hometown tax. This is something that was happening at the end of the year in December time. So it's a front-loading of that demand now. Compared to the last year, Q3 growth rate will be stagnant, will slow down. For Reuse, excluding BEENOS, I do see the trend continuing. In other words, Yahoo! Auction growth is quite steady and Flea Market is growing significantly. So when you take the weighted average, our growth is mid-single digit. I would think that for the second half, we can expect a similar growth, and we'll have a synergy, as you can see on the right-hand side, to have a more significant growth in the midterm. Operator: Next, Okumura-san from Okasan Securities. Yusuke Okumura: This is Okumura from Okasan Securities. Can you hear my voice? Unknown Executive: Yes. Yusuke Okumura: I have 2 questions. On Page 26, you have been explaining on the account ad and MINI App expansion and double the sales from this, I would like to reconfirm Official Account, the platform part based part, the assumption is the current growth rate. And through MINI App several dozen billion will be added on top. Is that the assumption? If this becomes a reality, it's wonderful. But what is the background for being so bullish at the time of launch, the assumption of the MINI App or MAU in order to achieve your assumption, what kind of measures and scale of investment you're going to make in order to achieve your strategy? That is my first question. Unknown Executive: Firstly, the growth image of official apps, I would like to explain and the strategy to grow will be replied by Idezawa-san and Ikehata-san. The existing OA part, the current level of growth can be maintained. To be more specific, 10% to 15%. Currently, it is growing at nearly 15%. So maintaining the same growth level. The paid accounts can be expanded in this pace, but that will not bring us to double. So the gap will be compensated by MINI App and SaaS. The strategy will be explained by Ikehata. Yuki Ikehata: Thank you for your question. Let me just add some more comments. In your question, you said that it's still the starting phase and this forecast may be bullish at the starting phase. But right now, we already have Official Accounts and MINI Apps, although partially we are not monetizing yet to many customers, similar solutions are offered and being used, and it's been -- the customers are satisfied. So for MINI Apps, we will increase the number. And at the same time, we will focus on monetization. That is for next year and beyond. Official Account SaaS solution already, including third-party solutions, we are collaborating with various companies and various solutions are already being utilized. So our strategy is to monetize them from next year and onward. We haven't been able to try or something that does not fit the market to start from scratch. Well, that is not the case. We already have existing foundation of Official Accounts, and we are offering various services, and we will expand and further monetize. So that is the basis of our assumption to achieve these targets. Yusuke Okumura: What about the scale of investment? JPY 10 billion was the media investment for this year. What about the investment going forward? Unknown Executive: The details will be discussed, but we are working on the awareness strengthening through advertising for MINI Apps and we are going to focus on promotion and PR. And regarding manufacturing or production, as shown on the slide, we are to reassign human resources to these growth domains to speed up the launch of products. Yusuke Okumura: My second question, on LINE, you are going to implement AI agents. I would like to ask about that. ChatGPT has instant checkout and strengthening the functionalities, and they are expanding partners, the user side rather than ChatGPT, why do they use LINE's chat or AI agents? What is the value that you offer in the future? The relationship is that parent company is -- has strong ties with OpenAI. And what kind of positive influence will that relationship with OpenAI has with your company? Takeshi Idezawa: This is Idezawa. Let me reply to your question. Our company does not have our own LLM. So we use OpenAI solutions or other solutions. We pick and choose. It's not just LINE, but within our company, we have a variety of services, news, commerce, finance, auto, so each service will be agentized. That is what we are working on right now. And like Yahoo! and LINE or integrated agent will be created. So that is the perspective of our user interface. We do not have LLM ourselves. But on the other hand, we have a lot of touch points with so many users and services. So within one ID, ours can be used in a seamless manner. That is the value we offer. So that is why we are working on agentization of various services. Operator: Next from Mizuho Securities, Mr. Kishimoto, please. Akitomo Kishimoto: My name is Kishimoto from Mizuho. I have 2 questions too. Both are about LINE Ads. The first is commerce functions of LINE SHOPPING functions. I would think that it will be launched quite soon as a new platform. I know you've done some testing. So I wonder what is lacking in order to have a full launch? That's my first question. Makoto Hide: This is Hide speaking. We are providing bucket test. We have already launched the test launch for this within the LINE SHOPPING tab. We are not offering any service actively or making a big sales promotion. We are testing system stable operations. Then within this test bucket, we are trying to expand our product and services or to enhance sales promotion activities so that we'll be able to have 100% full launch. We have been working together with various internal stakeholders. The situation is a bit different from the users of shopping -- Yahoo! Shopping, where they already know what they want to buy or they want to buy certain things. LINE, we need to propose what is appropriate and right that would resonate to the LINE users. Once we know that right business model solutions, then we will be able to launch under such use case and sell products as well. So there's a great opportunity, and we've been testing at the moment. Akitomo Kishimoto: On Page 27, please, you mentioned about second tier, third tier. I'd like to ask you a question about the capability for the third tier. I understand that you have been reallocating your staff together with AI agents. I wonder whether you'll be able to run all these initiatives under the current manpower? Or are you going to strengthen your perhaps sales capabilities with more new recruits? Is this something you can do with the current resource? Unknown Executive: I'm sure it's based on the selection criteria, but thank you for your question. Your point, recently, we do have a certain amount of resource that we had to allocate that we had to secure from other departments to this department. So as mentioned on this page, we are going to have 50% of this existing business to new domain or the focus domains. So we will be shifting our business focus as well as resource allocation as well. And we also are considering more partnership, leveraging outside resources as well. We have many different ideas. Operator: Next, Nagao-san of BofA Securities. Yoshitaka Nagao: Can you hear? Unknown Executive: Yes. Yoshitaka Nagao: This is Nagao speaking. My first question is on MINI App MAU is to be increased from 25 million to 75 million and from 35,000, the KPI direction is being presented, the price charging per app or how you consider retention. What are the methods you're going to take? 60% comes from OA and 40% comes from MINI Apps. So proactive monetization will be necessary. So can you explain concrete ways you have in mind for monetization of MINI Apps. Yuki Ikehata: Thank you for the question. This is Ikehata speaking. Let me answer your question. Right now, well, MINI App numbers are to be increased, and we are to increase the number of users significantly. That is the plan. So on MINI Apps themselves from LINE application, there will be a lot of touch point from the users. So we are increasing touch points by linking with LINE app and LINE media to increase the opportunity for as many people as possible to touch MINI App. On the monetization of MINI App, the payment function and also advertising within MINI App and receive ad placement fee. So those are 2 monetization sources. The application that can generate fruits in terms of profitability is what we are planning to build. The sales force, we are strengthening right now so that as many people as possible will utilize MINI App and open Official Accounts. From next fiscal year and beyond, we expect monetization of revenue. We already are seeing the account openings by many on Official Account. So we have confidence. Yoshitaka Nagao: My second question is related to Page 24 of the material, the target of EBITDA margin, 40% to 45%. Right now, 37% or 38% is the Media Business margin. Official Account and MINI App domain overlaps SaaS domain. So when you expand the scale, the sales staff or development cost will be heavier upfront. And I have a concern that the profitability may decline. The existing search and display ad by the sales of that part decline will affect the overall margin. So what is the overall ad margin? And in achieving 40% to 45%, what would be the contribution of OA and MINI Apps? If possible, could you disclose those information? Unknown Executive: Rather than speaking on the concrete number, it's more of a guide, the search, the basis is that profitability is not that high, and we have been communicating that from before. There's a certain fee that we pay to Google. So the search margin originally is low. And adding with display, it's shown as flat, but the search will be down trend and display, we achieved certain growth in Q2. So the ratio of display will likely to expand. So the margin on the lower part will increase -- will improve. And on display, as you know, there is a commission with the agents that is included in the COGS. So it's -- that is the margin structure. OA the margin will be similar to display. The SaaS part, it will be dependent on the pricing structure, but vertical MINI App or SaaS peers, when we look at them, the profitability is quite high. Compared to ad business, it's low, but still, it's high enough to be able to support. On top of that, MINI Apps, the ad on MINI Apps and within MINI Apps, we will place ads in a network style. So that's the type of ad business that we would like to deploy within apps. So we expect that we can secure profitability on a certain extent. Yoshitaka Nagao: One quick question on Page 11, the JPY 15 billion reduction plan is shown in the medium term, the Media Business ad expense, in some part will increase, in some part it can decline, but the fixed cost of the Media Business will it be unchanged? Unknown Executive: This slide is the company-wide figure. This fiscal year, JPY 10 billion for LLM cost will be incurred. And next year and beyond, LLM expense will continue to rise. But through various programming, we can expect improvement of operational efficiency. So JPY 15 billion, even LLM commission rises next year, we intend to reduce the fixed cost, even including that JPY 15 billion, the promotion expense and advertising for commerce, it is linked with GMV. So that is not included in this figure. And on Media segment, there are subcontractors and some of the human resources cost through use of AI, we can create a leaner structure. So those are combined to set the target margin at 40%. Operator: Next, from Nomura Securities. Mr. Masuno. Daisaku Masuno: This is Masuno speaking from Nomura. Can you hear me? Unknown Executive: Yes, we can. Daisaku Masuno: I just have one question, please. Renewal of LINE apps, you are -- been talking about adding a commerce tab. And I know you have been trying various scenarios under beta. Fundamentally, are you trying to transition the info traffic to service like LINE GIFTS? Or are you going to provide a brand-new shopping experience to LINE users. So I wonder what kind of inflow -- what kind of user experience are you trying to create through this commerce tab? Unknown Executive: What we are testing right now under the current version, all the products that's on LINE tabs are LINE GIFT products. Going forward, in addition to the LINE GIFT products, the stores that are present in Yahoo! Shopping, some of their merchandises we would like to post there. So not just for gift needs, LINE SHOPPING, Commerce products, we would like to offer through that tab. So comprehensive portal shopping corner is how we like this service to grow to be. So what type of stores, what type of products from Yahoo! Shopping really has to do with the previous questions and answers that we had. What kind of products will be the right fit, best resonate to the LINE user. It really depends on that. That's what we are testing right now. So we have to have a right product mix on top of the GIFT products, we've been carefully studying what would be the type of product group that is worth promoting heavily behind it on this new effort. Daisaku Masuno: Okay. So this is not a purchase intent visit. I can understand LINE GIFT. I wonder for those users who are not thinking of purchasing anything would ever be a real customer, whether they would convert by visiting the site? Unknown Executive: Other than Yahoo! Shopping, our customers right now are searching for what they want out of tens of thousands of our products with a certain purpose, compare prices and make decision-making. We have a massive number of products on Yahoo! Shopping. It doesn't make sense to put all of that on LINE tab. I don't think it will drive sales. So out of what's available in Yahoo! Shopping, those stores, we need to focus on products with more uniqueness, originality and some product group with extremely high demand once they release, always sells out. So those will be the right products, we think to be on the LINE tab. Those will be the right products for this casual shopper. Daisaku Masuno: Are you talking about hundreds or thousands? I don't think you're talking about dozens of thousands. So I just have no idea about the scale of the products that would be available through this LINE tab. Unknown Executive: That is exactly what we are trying to get to. That's why we've been repeating the test. So it really depends on the -- we don't know. There's nothing that we can share with you regarding the size or scale of the stores or the type of products or the scale of the product. Operator: Next, Kumazawa-san of Daiwa Securities. Shingo Kumazawa: On Page 11, fixed cost reduction of JPY 15 billion. This is the topic of my question. Currently, what is the fixed cost? And how much is this JPY 15 billion? And from last year, you have been spending on security-related costs. Is that included in this reduction of JPY 15 billion? I believe it's mostly outsourcing that you can reduce. Are there any major items that you expect to reduce significantly? And I believe AI agent is contributing to reduction. So from -- compared to last year, how much reduction is this? Ryosuke Sakaue: This is Sakaue. I will answer your question. LY stand-alone fixed cost is roughly JPY 700 billion. As you stated in your question, security-related costs will come down. On the other hand, LLM commission will almost offset that increase. From April of next year, we will increase the office space to accommodate a 3-day commuting of our employees, and that means the cost increase. And by using AI, we intend to reduce JPY 15 billion in total. If we do not take any action, the fixed cost will likely to go up by JPY 2.5 billion to JPY 2.6 billion. In the areas of reduction, outsourcing part and software license from outside, the system that employees use, we can make progress in the integration of the platform. So double payment can be eliminated. So that is included as the cost reduction on software license. Shingo Kumazawa: The areas you can reduce, I understand it's difficult to name the concrete name or ServiceNow or others or Salesforce. Is it possible to cut them entirely rather than specific ones? Unknown Executive: It's an overall effort, frankly speaking. And for example, there are licenses that are given to all of the employees. But if we identify the staff that really uses, then we can reduce the number of license. And also, there may be redundant functions on the software and cut one of them. Operator: Next from [ SBR. Mr. Jose ], please. Unknown Analyst: I have a question regarding capital structure and security governance. I understand in the past, administrative [ court ] instruction was given from Ministry of Internal Affairs and Communication, administrative guidance pointing out your capital structure. Now that under new administration, any risks that you foresee or any changes to the relationship with the government regarding capital structure, please? Unknown Executive: Regarding the administrative guidance, we've been responding appropriately. And from -- for the 2026 March, we are making progress toward it. And regarding the capital movements, we've been continuing the discussions, reflecting our past track record. No major changes to or the [ FY 2026 ]. Unknown Analyst: I understand. So for 2026 March, you will conclude all the measures to meet the administrative guidance? Unknown Executive: Correct. Yes on track. Unknown Executive: Now, we would like to close because the schedule ending time has arrived. I would like to now have Idezawa to offer a final reading. Before Idezawa's final remarks, I mentioned about the fixed cost of JPY 700 billion, that was a mistake. It's roughly JPY 400 billion to JPY 500 billion. Takeshi Idezawa: This is Idezawa speaking. Thank you very much for raising a lot of questions. The environment surrounding AI is rapidly changing. And our 2 core strategy is AI agents and OA, and we will continuously grow by changing our business structure. That is the message of today's presentation. I will ensure that these plans will be executed steadily, and we would like to ask for your continued support. With this, we would like to close LY Corporation's FY 2025 second quarter earnings call. Thank you for staying with us until the end. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Good morning or good afternoon, and welcome to the Vince Q3 2025 Earnings Conference Call. My name is Adam, and I'll be your operator today. [Operator Instructions] I will now hand the floor to Akiko Okuma to begin. So please go ahead whenever you are ready. Akiko Okuma: Thank you, and good afternoon, everyone. Welcome to Vince Holding Corp., Third Quarter Fiscal 2025 Results Conference Call. Hosting the call today is Brendan Hoffman, Chief Executive Officer; and Yuji Okumura, Chief Financial Officer. Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that the company expects. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that statements made during the call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on the call. In addition, in today's discussion, the company is presenting its financial results in conformity with GAAP and on an adjusted basis. The adjusted results that the company presents today are non-GAAP measures. Discussions of these non-GAAP measures and information on reconciliations of them to their most comparable GAAP measures are included in today's press release and related schedules, which are available in the Investors section of the company's website at investors.vince.com. Now I'll turn the call over to Brendan. Brendan Hoffman: Thank you, Akiko, and good morning, everyone. We are extremely proud of our third quarter performance as we drove healthy sales growth across all channels and exceeded our expectations for both top and bottom line. Our assortments are resonating across both our women's and men's businesses. But most encouraging is the acceptance we have seen to the strategic price increases implemented this quarter as well as in the momentum in our DTC segment, given the enhancements we have made to the customer experience. In our women's assortment, which has the highest impact from tariffs, prices increased more than our overall average increase of approximately 6%, but units were nearly flat to last year, validating the quality and value of our product in the marketplace. Beyond the pricing actions, our teams have done an exceptional job in continuing to manage the evolving tariff environment. Our goods are flowing smoothly despite significant changes in sourcing and importantly, we've maintained our quality standards throughout this transition. With respect to customer experience, following the store renovations from earlier this year, we enhanced our e-commerce site in Q3 with a strategic site refresh, increased marketing support and the launch of dropship. Our e-commerce site refresh elevated the customer experience with more modern, creative elements and enhanced site merchandising. We are now using AI-generated video content to enrich product detail pages and introduce more service elements like our Cashmere care guide. This investment in our digital platform contributed meaningfully to our strong performance, and we're seeing the benefits flow through in both conversion rates and average order values. Our e-commerce site also significantly benefited from the marketing investments we made in mid-funnel marketing this quarter. Through this work, we grow triple-digit growth in site traffic late in the quarter and supported full price new customer acquisition as well. And at the end of the quarter, we went live with a new dropship strategy, which we believe will be a significant growth opportunity for us moving forward. In the first month since launch, we have seen significant increase in volume. Our initial launch focused only on shoes, but we have plans to expand to other categories, capitalizing on our partnership with Authentic Brands and the category expansion opportunities that provides. The dropship strategy allows us to not only offer more fashion-forward products that we might typically feel comfortable procuring directly, but enables us to showcase a more diverse assortment to our customer providing learnings on customer preferences that we may incorporate into our store channel as well. In addition to these initiatives, we opened 2 new stores this quarter in Nashville and Sacramento, following our successful store opening in Marylebone, London earlier this year, which continues to exceed our expectations. Moving to our wholesale business. We delivered solid growth versus last year, with some of this reflecting the timing benefits from the Q2 shipment delays that we discussed previously, as well as ongoing performance of key partners. We were excited to recently celebrate our 2025 holiday collection, along with our continued partnership with Nordstrom with an immersive experience in L.A. with Nordstrom's top clientele, Nordstrom's VP Fashion Director; and our Creative Director, Caroline Belhumeur. It was a great event to kick off the holiday season and highlight our holiday campaign, which celebrates our brand spirit and showcases connections through stories and gift giving with a 360-degree omnichannel strategy. Thus far, we have seen a very strong start to the holiday quarter, including record sales across the Black Friday and Cyber Monday weekend in our direct-to-consumer business. Given the strength of Q3 and the momentum we are continuing to drive, I am more confident than ever in the trajectory ahead for Vince Holding Corp., and the prospects we have to leverage our platform further to drive growth. We continue to successfully navigate the tariff challenges while maintaining the quality and brand integrity we are known for. We are beginning to reinvest in the business, particularly in marketing initiatives that we had pulled back on earlier in the year and we're seeing positive returns on these investments. The underlying fundamentals of our business remain strong. We're operating with disciplined execution, while positioning for growth. With that strong foundation and the momentum we're building, I'll now turn it over to Yuji to discuss our financial results in more detail and provide our updated outlook. Yuji Okumura: Thank you, Brendan, and good morning, everyone. As Brendan reviewed, we are very pleased with our third quarter performance as we saw momentum continue across the business, enabling us to begin to reinvest in key areas of the business. Total company net sales for the third quarter increased 6.2% to $85.1 million compared to $80.2 million in the third quarter of fiscal 2024. With respect to channel performance, our wholesale channel increased 6.7% and our direct-to-consumer segment increased 5.5%. As Brendan reviewed, part of the growth in wholesale reflects the timing of shipments, given the delays we experienced earlier in the year with tariff disruption. Our teams are doing an excellent job and continuing to manage our supply chain and our goods are flowing smoothly and expect to be back in line to normal course timing by the spring. Gross profit in the third quarter was $41.9 million or 49.2% of net sales. This compares to $40.1 million or 50% of net sales in the third quarter of last year. The decrease in gross margin rate was primarily driven by approximately 260 basis points due to the unfavorable impact of higher tariffs and approximately 100 basis points due to increased freight costs partially offset by 140 basis point increase due to favorable impact of lower product costing and higher pricing and approximately 110 basis points due to favorable impact of lower discounting. As Brendan reviewed, we are very encouraged by customers' response to our strategic price changes and our team's ongoing focus on tariff mitigation efforts. Given timing and mix of sales, we experienced less of a headwind than originally expected from tariffs during the quarter but expect these costs to ramp into the Q4. Selling, general and administrative expenses in the quarter are $36.5 million or 42.8% of net sales as compared to $34.3 million or 42.8% of net sales for the third quarter of last year. The increase in SG&A dollars was primarily driven by approximately $1.1 million related to compensation and benefits and $760,000 of increase in marketing and advertising costs as we reinvested into mid-funnel activities. Operating income for the third quarter was $5.4 million compared to operating income of $5.8 million in the same period last year. Net interest expense for the quarter decreased to $1 million compared to $1.7 million in the prior year. The decrease was primarily due to lower levels of debt under our term loan credit facility. At the end of third quarter of fiscal 2025, our long-term debt balance was $36.1 million, a reduction of $14.5 million compared to $50.6 million in the prior year period. Income tax expense was $2 million compared to 0 income tax provision in the same period last year. The increase is due to the impact of applying our estimated annual effective tax rate to the year-to-date ordinary pretax income. In the prior comparative period, we had a year-to-date ordinary pretax losses for the interim period, and as such, we did not record any tax expense for the same period last year. As a reminder, following the change in controls that earlier this calendar year, we have limitations to use of the NOLs that we did not have last year also impacting the cash tax expense comparison to previous years. Net income for the third quarter was $2.7 million or income per share of $0.21 compared to net income of $4.3 million or income per share of $0.34 in the third quarter of last year. The year-over-year decline in net income was driven by the increase in tax expense. Adjusted EBITDA was $6.5 million for the third quarter compared to $7.4 million in the prior year. Moving to the balance sheet. Net inventory was $75.9 million at the end of the third quarter as compared to $63.8 million at the end of the third quarter last year. The year-over-year increase was primarily driven by approximately $4.2 million higher inventory carrying value due to tariffs. Turning to our outlook. As Brendan discussed, we have seen a very strong start to the fourth quarter with a record holiday weekend sales performance in our DTC segment. Our outlook for the period assumes that this momentum continues with the growth in DTC segment expected to outpace our total net sales growth for the period, which is expected to increase approximately 3% to 7%. This guidance also takes into account potential shift in timing with respect to wholesale shipments given end of the year seasonality. In addition, we expect adjusted operating income as a percentage of net sales for the quarter to be approximately flat to 2% and for the adjusted EBITDA as a percentage of net sales to be approximately 2% to 4% compared to 6.7% in the prior year period. Our guidance for the quarter takes into account approximately $4 million to $5 million of estimated incremental tariff costs that we continue to expect to partially offset with our mitigation strategy. Given our year-to-date performance, and our outlook for the fourth quarter, we expect full year net sales growth to be approximately 2% to 3%. Adjusted operating income as a percentage of net sales to be approximately 2% to 3%, and for the adjusted EBITDA as a percentage of net sales to be approximately 4% to 5% compared to 4.8% in the prior year period despite incurring approximately $8 million to $9 million of incremental tariff costs compared to last year. This concludes our remarks. And I'll now turn it over to the operator to open the call for questions. Operator: [Operator Instructions] And our first question comes from Eric Beder at SCC Research. Eric Beder: Congratulations on a great Q3. I want to talk a little bit about some of the potential drivers here. So you have just started to roll out some of the licensed product, we've seen handbags and suiting in our store tours. I'm curious, you mentioned it also in your comments, where do you think that goes? And I know that the tariffs kind of slowed down the rollouts. What should we be thinking about the potential for that in 2026 and beyond? Brendan Hoffman: Well, I think it's -- I'm even more bullish now after the last month based on my comments on dropship. So what we saw with dropship with Caleres and shoes in the last 4 or 5 weeks, is truly spectacular. And so the opportunity to launch that on e-commerce in the spring on these other categories and then figure out how to better utilize that within the stores, in addition to obviously showcasing the product I think it has -- it can have a real impact on our business more than I was anticipating prior to the dropship launch. Eric Beder: And when you look at -- I know that you've been also looking at putting -- you put some COH denim into some of the stores. How should we be thinking about that potential opportunity to kind of collaborate with other our key fashion brands to kind of help both of you? Brendan Hoffman: Yes. That's something that we're going to continue to explore and prioritize. Very happy with the Citizens of Humanity collab. It also highlights the opportunity we have in denim. So whether we do that in-house, although that's a long haul or continue to do partnerships in denim with Citizens and look for other categories that perhaps ABG isn't licensing at this point. And we can bring to kind of round out our assortment. So that was another good win for Vince. Eric Beder: Great. And you opened up 2 new stores in new markets. I know it's very short. Could you give us a little bit of thought process? And then kind of what should we be thinking about -- I know that we pulled back on that a little bit this year just because of all things going on this year. But given the results here, what is the store opportunity kind of back on full swing for next year and going forward? Brendan Hoffman: Yes. I mean we're pleased with the way the Nashville and Sacramento have been received within the community. It's still early days. Also, we'll be monitoring what it does to our e-commerce business. I think we have 60 stores now between the outlets and full price. And I wouldn't expect that number to move much, maybe a couple more, a couple less depending on opportunities. We continue to be really pleased with our Marylebone store in London. So I'm going to see if there's opportunities in other parts of Europe, both to do business where we can be profitable like Marylebone and also provide some visibility for us in regions where we have a wholesale business and stores can just reinforce that. So we'll continue to monitor the direct-to-consumer opportunity led by e-commerce. But as I've always said, it's not an either/or with direct-to-consumer and our wholesale business. It's both. It's an and. And I think they just reinforce each other, and we saw that in Q3 and continue to see that in Q4. Eric Beder: Great. Congrats and good luck for the rest of the holiday season. Operator: The next question comes from Michael Kupinski from Noble Capital Markets. Michael Kupinski: And I'd like to offer my congratulations as well. Sales were obviously much better than what we were looking for. Were there any particular bottlenecks or limitations that could have delivered even better sales? And I'm thinking any inventory constraints for particular items, for instance? Brendan Hoffman: I mean, there's never a crystal ball. So you always -- there are certain things you wish you had a little bit more. But I think overall, we were in a good inventory position. Really working through the first half of the year, disruption from tariffs as we discussed. So as I'm doing my store tours, I'm not getting too much pushback from the stores about where they need more inventory. I think Vince also since I was here last, is doing a much better job with our logistics and operations, refilling the stores on a timely basis. So I think we have a good handle on that. Again, not to harp on it, but I am so excited about it, this dropship opportunity, which allows us to take full advantage of Caleres' shoe inventory. I mean that's a big deal because that's where we did have some holes in our inventory assortment because it's a little bit more difficult with our third-party partners to properly procure ahead of time. So this opens up a really big opportunity for us going forward, as I've been saying. But overall, the inventories, I think we're in a good position and help fuel the growth we saw. Michael Kupinski: And how much of the strong revenue growth was driven by price versus product volume? I know that you touched on that in your comments, but I was wondering if you could just expand on that. Brendan Hoffman: Yes. Well, I mean we are really pleased that the units held steady and actually grew at the higher price points. So we had anticipated given the price changes that we would see a little bit of erosion in our unit velocity. But so far, we haven't seen that. And the customer seems to be trading up with us. I don't know if that's because they're trading down from other luxury brands. And as those prices skyrocket, but our core customer continues to see us as a value. And as I said in my comments, women's was where we had to take the largest price changes. And the units held strong. So it was a win-win, and that's continued into all of it. So we'll continue to monitor that, continue to see if there's even a little bit more opportunity to push up price where we think the customer will react positively. But definitely a driver was the strength in the units. Michael Kupinski: And then given that wholesale and direct-to-consumer looked like revenues were -- the revenue growth were pretty much similar. But I was wondering if there was any divergence between the 2 channels in terms of product sales and particularly as you go into the fourth quarter. Brendan Hoffman: No. I mean we -- our e-commerce was clearly the big winner and driver when you look across all the channels. But overall, saw strength at the register with our wholesale partners. We continue to work with Saks Global to make sure that we're able to properly service their business while they go through their transformation. So that creates a little bit of noise. But overall, as we start December, the product is checking at the register everywhere. Michael Kupinski: Got you. My final question is, can you just talk a little bit about trends in freight costs. I know that I was just wondering if you negotiate annual contracts. And if you could just talk a little bit about what you're seeing there. Yuji Okumura: Yes, certainly. So yes, we are seeing freight cost increases. That's also partially due to the fact that we are changing sources as well of where we are sourcing the product. So it's really more the product of -- depending on the shift in timing, we're airing more stuff or certain pieces are taking longer in terms of distance wise to get here. So it's not so much of the actual inherent sort of freight contracts and the pricing related to that. It's really more along the lines of the timing of when we want to bring in the product, which method we're using to bring in the product. Operator: [Operator Instructions] We have no further questions so I'll hand the call back to the management team for any closing comments. Brendan Hoffman: Okay. Well, thank you all again for your participation today, and we look forward to updating you on our year-end results in the spring, and happy holidays to all. Thank you. Operator: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.
Operator: Greetings, and welcome to the Constellation Brands Q3 Fiscal Year 2026 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Blair Veenema, Vice President, Investor Relations. Please go ahead, Blair. Blair Veenema: Thank you, Kevin. Good morning, all, and welcome to Constellation Brands' Q3 Fiscal '26 Conference Call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. We trust you had the opportunity to review the news release, CEO and CFO commentary and accompanying quarterly slides made available in the Investors section of our company's website, www.cbrands.com. On that note, as a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in the news release and website. And we encourage you to also refer to the news release and Constellation's SEC filings for risk factors that may impact forward-looking statements made on this call. Before turning the call over to Bill and Garth, please keep in mind that, as usual, answers provided today will be referencing comparable results unless otherwise specified. Lastly, in line with prior quarters, I would ask that you limit yourselves to 1 question per person, which will help us to end our call on time. Thanks in advance, and over to your questions. Operator: [Operator Instructions] Our first question today is coming from Bonnie Herzog from Goldman Sachs. Bonnie Herzog: Hope you're doing well and happy New Year. I guess I had a question on your beer op margins. They came in a lot stronger than expected in the quarter despite the volume deleverage. So hoping you could talk further on some of the puts and takes behind this strength. And then thinking about your full year guidance, which you maintain, it does imply much more modest beer op margins in the fourth quarter, which I know seasonally is a lower quarter. But is there anything else that is expected to weigh on margins in this next quarter? Maybe aluminum, or if you could just talk through that? Garth Hankinson: Thanks for the question, Bonnie, and happy New Year to you. So first starting with Q3 margins. As you indicated, volume declines certainly were a headwind in the quarter. Additional headwinds in the quarter were tariffs, as you noted, logistics and then brewery maintenance. Offsetting those headwinds, we continue to make good progress against our cost savings initiatives. We had favorable pricing from the actions we've taken in both the spring and in the fall. And then there was a depreciation timing benefit that occurred in Q3, which was favorable on a year-over-year basis. As we think about -- or move to Q4, just to underscore what you said, it is our lowest quarter from a seasonality perspective, makes up about 20% of our overall volume. So fixed overhead absorption will be most amplified in this quarter. The depreciation benefit that we saw in Q3 will actually turn into a little bit of a headwind into Q4 as additional assets come online or are put into service. And then tariffs will be a further headwind in Q4, really related to a couple of factors, one of which you mentioned, which was aluminum and the pricing of aluminum which continues to be pretty strong. There is also the ongoing and as expected shift in product mix, so more to aluminum, from glass, and we'll see that in Q4. And then there's also a timing element to tariffs as to when the tariff gets accrued and goes into inventory and then when it gets released in the P&L. And that will be a bit of a headwind in Q4 as well. Operator: Next question is coming from Nadine Sarwat from Bernstein. Nadine Sarwat: Another one on beer margins, though perhaps with a longer-term perspective. So you called out a number of the factors in your prepared release and in your answer just now about the pressures that beer margins will face in Q4. So with that in mind, how should we be thinking about the 39% to 40% beer margins for fiscal '27 and '28 that you guided to back in April of last year? Is that something you still believe you can achieve? Should we be thinking of margins closer to where we were this year? Any color would be helpful. And then if I could just squeeze in one more on depletions. Nice to see that come in, I think, ahead of some expectations. Any color on exit rate or what we're seeing in December? Is there any sequential improvement or more of the same? Garth Hankinson: Thanks, Nadine. I'll take the first question and then Bill will take the second. But as it relates to FY '27 and beyond, as we said back in our Q2 earnings call, we'll provide more color on what our expectations are for FY '27 and beyond in our April earnings call. That's our normal cadence, if you will. It allows us to see how the rest of the year unfolds from a consumer perspective and from a macroeconomic perspective as well. So more to come on that. That being said, the guidance that we provided last April was given under a different set of macroeconomic conditions, and the macroeconomic environment has worsened since that time. So that will all go into our planning process and will be reflected in the guidance that we give in April. William Newlands: And, Nadine, relative to December, December came in roughly where we expected. It was fairly consistent with our expectations. For those of you who track the Circana/IRI data, you saw there was a very strong result against our business around the Christmas holiday. Noting, of course, that that's a great reflection of the strength of our overall brands and the brand health that exists for our brands. And therefore, we were quite comfortable coming out of December as the first month of our last quarter of the year. Operator: Next question is coming from Lauren Lieberman from Barclays. Lauren Lieberman: Want to talk for a second about capacity and CapEx. So in the slide deck, you reiterated the plans for 7 million additional hectoliters of capacity through fiscal '28. I think that implies sort of heavier CapEx in 4Q tied to Veracruz. I just wanted to maybe get an update on how you're thinking about the modular capacity build-out over the next couple of years, managing that against growth projections to support kind of what are really the optimal utilization levels. And particularly, when we think about the fiscal '26 volumetric pace is going to be lower than what you kind of originally thought back in April, to your point, under a very different macro backdrop. Garth Hankinson: Yes. Lauren, thanks for the call. So the approach on the modularity of the breweries is we'll continue with that approach going forward. As we've said over the course of the last couple of quarters, the way we'll manage that really is -- when we bring assets online, and we'll manage to bring -- or we'll manage through the capacity in that manner. What we've also said, though, is that when you're building capacity in a manner which we've been building capacity with long-lead items, you are making commitments to that spend. And our plan for this year is reflective of commitments that we've made on capacity expansion. But, again, we continue to monitor this and assess where the volume is expected to be. And, again, we'll bring the assets online when we can. And to the extent we can delay or defer CapEx, we will. But there's a lot of long-lead equipment that goes into a brewery, and those commitments have been made. Operator: Next question is coming from Rob Ottenstein from Evercore ISI. Robert Ottenstein: Great. Moving more to -- over to the brand side. The Pacifico brand has been an extraordinary success. It's still relatively small, but you've been working on it very diligently for 10-plus years or so. Just wondering how -- what you've learned about the brand over this time, how incremental is it, any tweaks that you see in terms of the brand positioning and the pressure -- the marketing pressure, investment pressure behind the brand for it to kind of get to what you think is its full potential, which my understanding is, is to be a very strong #3 brand in your portfolio. William Newlands: Yes, Robert. Pacifico, obviously, has been a tremendous success to date, much in the same way that Modelo initially developed in the west of the United States and then has progressively moved east to become the #1 player by dollars in the United States. Pacifico is doing a very similar approach. It's the #2 brand in the State of California today. It skews younger relative to our overall portfolio and really has resonated well with consumers. As you know, it's the #1 social -- #1 on social media in terms of share of voice, and it has gained 1.5 points in the on-premise. So you're seeing significant gains in that arena as well. So we continue to invest behind this brand. As you point out, we think it's going to be a strong #3 in our portfolio as time goes forward. And you should expect to see us continue to put significant emphasis on this as it builds its way across the country, similar to what Modelo did several years ago. Operator: Next question is coming from Dara Mohsenian from Morgan Stanley. Dara Mohsenian: So you mentioned mid-single-digit distribution growth for the beer portfolio in the quarter. Just as we look out to calendar 2026 post the spring resets, do you think it's realistic you can drive shelf space gains for your portfolio with macros where they are? Or is that less realistic just given the weaker velocity we've seen over the last year or so? And maybe also you can just touch on the beer category itself and what you're hearing from retailers as we think about shelf space for the category in the balance of 2026. William Newlands: Sure. Let's start with the distribution side. We continue to see distribution as one of our strongest opportunities going forward. Given that our portfolio gained share in 49 of the 50 states, we continue to earn additional distribution capability and distribution positions across the country. Now those will probably change some. You've seen a radical increase in distribution around Pacifico, going back to Robert's question a moment ago, as well as Victoria, which also has grown double digits for the most recent past. So we continue to see distribution as a significant opportunity going forward. Remember, Modelo itself, despite the fact that it's the #1 beer by dollars in the U.S., it still has 20% fewer PODs than the broader domestic players who we compete against. So there remains plenty of opportunity for distribution to be an important part of the future. That has been reemphasized by our Shopper-First Shelf, which has allowed retailers to recognize the opportunity to build a stronger section. And that will be a significant part of your category question, is as more people do Shopper-First Shelf, it will be better for the category and, as you would expect, on brands that are growing their share like ours are, it will be good for us as well. Relative to the beer category overall, it still remains challenged. And it's largely around the Hispanic consumer. 75% of the Hispanic consumers are very concerned about the socioeconomic environment and they're being much more careful about their spending patterns, spending much more on what you would call consumer essentials versus other categories. So I think that's going to continue to be volatile going forward. But this is where our focus remains on controlling the controllables, and that is distribution, that's price pack architecture, that's doing the right things to set ourselves up for a successful future. Operator: [Operator Instructions] Our next question is coming from Drew Levine from JPMorgan. Drew Levine: I wanted to follow up, again, on the beer margins implied for fourth quarter given the low single-digit absolute COGS increase for the year. Implies gross margins, I think, something in the 47% range. I understand that it is lower volume as, Garth, you well mentioned. But I guess maybe if you could sort of provide a little bit more context on the expected headwind from aluminum and depreciation that you mentioned, any sort of quantification there? I'm just asking because, I guess, last year in fourth quarter, volumes were down as well and, obviously, much stronger margin performance. So just on the margins, that would be great. And then another follow-up just on the depletions in the off-premise, I think were down 2.9%, ran decently ahead of where we saw both Nielsen and Circana end up in the third quarter. It's the second quarter in a row that's happened. So wondering what you're seeing in the independent channels, if it's just sort of a function of easy comparisons, or are you seeing any sort of encouraging trends in that channel? Garth Hankinson: Yes. So just to reiterate on the margins, what the headwinds were and, again, you noted that it is our low seasonal quarter. Just for clarity, again, it's 20% of our overall volume for the fiscal year. As I mentioned, depreciation, which was a benefit for us in Q3, will be an incremental headwind in Q4 because incremental assets are being placed into service. So that will be a headwind in the quarter. And then on tariff, as expected with tariffs, aluminum pricing has gone up, so the tariff has gone up. There's been an ongoing shift in our business, in our portfolio towards aluminum. That's continued through the fiscal year, right? So we'll see the impact of that in Q4. And then there is a timing element around tariffs, which is you incur the tariff when you bring it into the U.S., but then it doesn't run through your P&L until you sell it on. And so given the way tariffs have layered in through the year, there's going to be a higher tariff impact as expected in Q4. Another minor impact, headwind in Q4 is there were some expenses that we expected to incur in Q3 that had pushed into Q4. That's just timing. So a bit of a benefit in Q3 versus a headwind in Q4. William Newlands: Relative to your question related to depletions, I think a couple of things to keep in mind that you don't always see. Some of the regions have less tracked channel coverage, and those have been stronger, on-premise. A year ago, Modelo was #5 on draft, today it's #2. I already mentioned when I was answering Robert's question on Pacifico that we picked up significant share with Pacifico in the on-premise as well. So some of those areas that are not as easily tracked have gone in our favor, and that certainly has helped the depletion layout versus what some of the expectations were. Operator: Next question is coming from Gerald Pascarelli from Needham & Company. Gerald Pascarelli: Question for Bill. Just despite the continued macro pressures, your depletions have remained relatively consistent this year, just kind of down 2.5% to 3%, so not getting materially worse. Your beer business continues to outperform the category. It looks like scanner showed a little bit of an improvement in December. So just curious how you're thinking about a potential recovery, if at all, in your beer business looking out over the next year when you just consider some of the obvious tailwinds, the easier compares, the benefit of the World Cup, those types of things. Any color there would be great. William Newlands: Sure. Obviously, we're cautiously optimistic that we're on the sort of the plateau of where the business will be. But it's been really tough to judge. The volatility has been great. What -- so it's very hard to say that you've sort of hit the bottom. When you look at our omnibus study, we continue to see Hispanic consumers being particularly concerned. There seems to have been a little bit of uptick with the broader market community. And as I alluded to earlier, Christmas week was particularly strong for our business. But I think that's more reflective of when consumers are coming out and they're buying. They continue to buy our brands because of the brand health of those brands. There are some things, as you point out, next year, World Cup is a great example, where there will be things that are beer moments. And certainly, we believe our beers will help to support those beer moments. But it's very difficult to project at this point how this is all going to go. A lot of it is going to relate to what the -- how the consumer is feeling and how they're feeling about the sort of macroeconomic issues that exist today. Operator: Next question today is coming from Robert Moskow from TD Cowen. Robert Moskow: Thanks for the question. Unfortunately, it was also Gerald's question. But maybe if there's a way to think about it just quantitatively, your Hispanic consumer really started feeling the pressure in February of last year. You kind of see it in the data. And I guess what we're all kind of wrestling with is, once we lap that initial shock of restrictions on immigration policy, is it possible that it just gets a little bit less bad? So instead of mid-single-digit declines just theoretically with this cohort, since you're lapping the initial shock, it could be a little bit better than that? William Newlands: Well, we hope -- we assume that you -- we hope you're correct. That would be a lovely outcome. The thing that we consistently see, and as you know and we've said this in prior quarters, we track it by ZIP code. And with ZIP codes that have greater than 20% Hispanic representation, it still remains very challenging. That has seen some improvement in ZIP codes with less than 20% Hispanic representation, and you see a lot of volatility state by state depending on what is going on with immigration policy in particular markets. So all of those factors have been why it's been very difficult to predict, because you do have that volatility that goes on state by state, market by market. It's why we continue to talk about controlling the controllables. It's why we continue to talk about and put ourselves in a good position to win. It's why we have focused on the things that are working in our favor, things like Pacifico and Victoria, Modelo Draft, Corona Sunbrew, Corona Non-Alcoholic, all of which are working very well against our business and are positioning us not only to have near-term success, but for the long run as well. Operator: Next question is coming from Filippo Falorni from Citi. Filippo Falorni: Happy New Year. I wanted to ask on the beer pricing environment. You had 1.5% pricing in the quarter, but you have also some negative mix from package types. Can you discuss like how you're thinking that would evolve going forward? Should we still think this dynamic continues? And then maybe if you can touch on like some of the initiatives that you did with Modelo Oro and Corona Premier in terms of the price adjustments. Are you seeing a volume uptick as a result of the price adjustment there that could we see some more -- in some more other brands to try to respond to the macro environment? William Newlands: Sure. We continue to project 1% to 2%. We still think that's an appropriate level. As you know, it will vary higher or lower within that range depending on the market conditions that we face. But to your point, we are quite pleased with the initial work. As many of you know, during this past -- or this past calendar year, we adjusted Oro and Premier pricing to be more in line with the average price point the consumer was expecting for light beers. We're very pleased with what that looks like. Our trends on Oro and Premier have both improved, and we're pleased with that positioning. It also points to price pack architecture, which is also an important part of what we have done. We have added 7-ounce in a number of forms and formats in different states to, again, meet the needs of consumers who are concerned about price points because of their socioeconomic concerns and financial concerns that exist at the moment. Again, all of those things are trying to meet the consumer where they are today, and that process will continue going forward. Operator: Next question is coming from Peter Galbo from Bank of America. Peter Galbo: I maybe just wanted to ask a clarifying comment from your prepared remarks about the fourth quarter specifically. You talked about an expectation of year-over-year volume declines in the beer business to improve, I think, in the first sentence. And I just -- I wanted to clarify whether that is a shipment comment, a depletion comment, both potentially, but that we should still be expecting kind of a negative in the fourth quarter and whether it applies to both ships and depletes in beer. William Newlands: Garth will add on to what I'm about to say, but as we've made note -- we made note in our last quarter, we expect over the course of the last 2 quarters that ships and depletes will be basically equal. As you saw, there was some minor variation in this quarter. You would expect that to probably reverse itself next quarter. But over the course of the 2, third and fourth quarters, we expect depletes and ships to basically be exactly the same. Anything you want to add to that, Garth? Garth Hankinson: Bill, that's precisely right. And the comment was specific to billings, so to your point, yes, so that the second half of the year billings and depletions are largely aligned. Operator: Next question is coming from Bill Kirk from ROTH Capital Partners. William Kirk: So a different type of question. In December, President Trump signed the executive order pushing to reschedule cannabis. I guess if that happens, how would it impact how you think about your exposures to that segment? And then on the ban on intoxicating hemp and intoxicating hemp beverages, in some states, those have become kind of a real market. Do you think you'll benefit if those products go away, those intoxicating hemp beverages go away? William Newlands: Obviously, we have shares in Canopy that we still have available to us. And I think that could ultimately be interesting as that market develops. But we don't engage on a day-to-day basis in the cannabis business today. I think -- we have not seen a significant issue related to our beer business related to hemp. It has mostly been around ready-to-drink and ready-to-serve scenarios where there seems to be interaction there, and that seems to be where most of the interaction has come. But admittedly, consumers make choices around their disposable income and what -- where they choose to spend money. And therefore, as this develops, that's certainly something that we're going to be quite aware of and keep our eye on closely. Operator: Next question is coming from Michael Lavery from Piper Sandler. Michael Lavery: I was wondering if you could maybe just elaborate a little bit on how to think about World Cup. It's, as you pointed out, just a driver of occasions. But have you -- can you give a sense of maybe what you've seen in the past in terms of maybe a positive lift, or any changes to your spending approach? I realize you're not a sponsor. So do you still plan some ways to kind of spend additionally around it or just kind of benefit from the occasion momentum? How should we think about just what impact that might have both on the top line side and maybe your spending side? William Newlands: Sure. As you would expect, this is a big sporting element for the coming year. Sporting elements tend to be big beer moments. It's also a sport that overindexes in the Hispanic community. All of those things, therefore, overindex into our business. So we would expect, as the consumer engages with that event and the various games that will attest to those, that will have some incremental benefits for us. We will remain as diligent as we always are to get the right promotions and to get the right shelf presence and floor presence around that particular time. We'll also have in-game media, TV media. As you know, Modelo is the #1 share of voice and Corona is the #3 share of voice in traditional media. All of that will be done consistent with investing against sports, which has been the focus of our attention anyway. So we believe that has an -- that creates an opportunity for a strong window of time for beer generally and more specifically to us. Operator: Thank you. We've reached end of our question-and-answer session. And that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good afternoon, everyone, and thank you for participating in today's conference call to discuss Educational Development Corporation's financial and operating results for its fiscal 2026 third quarter and year-to-date results. As a reminder, this conference is being recorded. On the call today are Craig White, President and Chief Executive Officer; Heather Cobb, Chief Sales and Marketing Officer; and Dan O'Keefe, Chief Financial Officer. After the market closed this afternoon, the company issued a press release announcing its results for the fiscal 2026 third quarter and year-to-date results. The release will be available later today on the company's website at www.edcpub.com. Before turning to the prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and are protected under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors. We refer you to Educational Development Corporation's recent filings with the SEC for a more detailed discussion of the company's financial condition. With that, I would like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig? Craig White: Thank you, Alan, and welcome, everyone, to the call. We appreciate your continued interest. I will start today's call with some general comments regarding the quarter, then I will pass the call over to Dan to run through the financials, after which Heather will provide an update on our sales and marketing, and then I will provide an update on our plans for fiscal 2027. During the third quarter, we completed the sale of our Hilti Complex, which was a big achievement for the company and our shareholders. Selling the complex saves -- paves the way for us to move forward into fiscal year 2027 with no bank restrictions, which allows us to execute our strategy to return to growth and profitability. Our plan is not an overnight change with expected immediate results, but a carefully developed strategy for long-term growth. With that, I'll now turn the call over to Dan O'Keefe to provide a brief overview of the financials. Dan O'Keefe: Thank you, Craig. Third quarter financial summary compared to the prior year third quarter, net revenues were $7 million compared to $11.1 million. Average active brand partners for the quarter totaled 5,100 compared to 12,400. Earnings before income taxes were $10.6 million compared to a loss of $1.1 million in the third quarter last year. Excluding the building gain from the sale of $12.2 million, our loss before income taxes would have been $1.6 million. Net earnings totaled $7.8 million for the quarter compared to an $800,000 loss in the third quarter last year. Earnings per share totaled $0.91 compared to a loss of $0.10 on a fully diluted basis. Year-to-date summaries compared to the prior year, net revenues of $18.7 million compared to $27.6 million. Average active brand partners totaled 6,200 compared to 13,300. Our earnings before income taxes totaled $7.4 million compared to a loss of $5.3 million last year. Excluding the building sale gain of $12.2 million, our loss before income taxes were $4.8 million. Net earnings totaled $5.4 million compared to $3.9 million loss last year. Earnings per share totaled $0.63 compared to a loss last year of $0.47 on a fully diluted basis. Now for an update on our working capital. Inventory levels decreased from $44.7 million at the beginning of fiscal year 2026 to $39.1 million at the end of November, generating $5.6 million of cash flows from inventory reductions. This cash flow has been used to pay down vendors, reduce our bank debts and fund our operational losses. In October, following the building sale, we paid off our line of credit, our term loans with our bank, Bank of Oklahoma. At the end of the quarter, we had $3.4 million of cash, $800,000 of receivables, $39.1 million of inventory and $2.0 million of accounts payable and $0 owed to our bank. That concludes the financial update. Now I'll turn the call over to Heather Cobb for a sales and marketing update. Heather? Heather Cobb: Thank you, Dan. One of the most significant milestones this quarter was the launch of Gathered Goods, our reimagined fundraising program. This program represents a meaningful shift in both strategy and execution. Unlike our previous Cards for a Cause fundraiser, Gathered Goods features custom products designed and created in-house, allowing us to better control quality, storytelling and brand alignment. From a financial perspective, this also delivers stronger margins, which is increasingly important in today's cost-sensitive environment. Equally important to this project was the online opportunity embedded within the program. Gathered Goods allows individuals and organizations to fundraise digitally, expanding reach beyond a single event or community and making participation easier for the supporters. While still early, this program positions us well for scalable, modern fundraising and opens the door for broader participation in future quarters. This quarter also included our Black Friday, which we call Book Friday promotion, a large site-wide sale that continues to be a cornerstone of our Q3 marketing strategy. Book Friday drove strong engagement across customers and brand partners, reinforcing the value of our catalog and our ability to generate excitement through well-timed broad-based promotions. While discount-driven events are not our priority or preferred strategy, this sale remains an important visibility and volume driver in the midst of the holiday season. Turning to the results themselves. While the decline in brand partner count is significant and clearly reflected in the top line, it's important to look at what the data tells us beneath the surface. First, the drop in revenue is not proportional to the decline in brand partner count. This tells us that the brand partners who remain active are, in fact, more productive and more engaged than in recent years. We are seeing fewer casual or inactive participants and a higher concentration of truly active sellers. Second, when we look specifically at our leader levels, the decline is not occurring at anywhere near the same rate as the overall field. Historically, leaders are our most loyal group. They are the ones who persevere through challenging cycles, adapt their approach and continue building even when conditions are not ideal. Just as important, leaders are also the primary drivers of new brand partner recruitment. Their relative stability gives us confidence that while the field may be smaller today, the foundation for future growth remains intact. In summary, this quarter reflects a business in transition, smaller in size, but more focused and more resilient. We are investing in programs like Gathered Goods that improve margin quality and scalability, maintaining strong seasonal promotional moments and seeing encouraging signs that our sales force is highly engaged and leader-driven. As we look to the future, the combination of a committed leader base, more productive brand partners and strategic program innovation gives us reason to be optimistic about the path ahead. Craig, I'll turn it back over to you. Craig White: Thanks, Heather and Dan. As Dan mentioned, with the closing of the building sale, we paid off all of our bank debts, which will have a positive impact on our cash flows of approximately $1 million per year. While the last couple of years have been challenging to operate our business under the restrictions from our bank, I'm excited about the position we are in today and the plan for growth in fiscal 2027 and beyond. Since fiscal 2024, we have had to prioritize cash. While we need to execute on a plan that increases sales and therefore, cash, we are putting more focus on increasing our brand partner counts. Our actions necessitated by the bank's restrictions have given red flags to our sales force, and they have been anxious and waiting to see what would happen. A major factor for the reduced activity has been the lack of new products for them to get excited about and therefore, share with their customer base. As we got closer to closing on the sale, we put together a reorder and new title purchase plan in conservative phases. We were ready to act on Phase 1 within a few days of closing and placed reprint orders on some key out-of-stock items as well as several new titles that we expect will energize our customers and sales force, giving our brand partners another item to help build momentum. We are excited about the arrival of those titles beginning in late spring and early summer. Another key component to attracting new brand partners is a refreshed marketing strategy. We know we need to adapt to what the next generation entering the workforce, Gen Z, is seeking in a business opportunity. These would be tweaks to our existing model, including language used for marketing, onboarding once they have activated their account, et cetera, but would certainly not require an overhaul. We are still working on putting the pieces in place for this to be implemented and can move quickly once that is finalized. We have continued to focus on being prepared to execute a growth plan once restrictions were lifted. You heard from Heather about one of the major enterprise initiatives being our online fundraising program, Gathered Goods. We are very excited about that program's successful launch and have a few other exciting upgrades and initiatives being implemented very soon. Also, I have recently pulled together an AI task force. Some of our employees had already begun exploring, so I formalized an opportunity for collaboration, allowing a safe space to see how we can best utilize it as part of our overall strategy. So far, we have implemented in ways that automate rote tasks, which can save money. We are excited about this starting point and continue to work together on transformational ideas that will propel us forward and allow us to compete in both retail and direct-to-consumer spaces. Lastly, I want to thank all of our shareholders for their patience, our employees for their hard work and commitment to our mission and our retail customers and brand partners for their loyalty during this challenging period. Having seen the resilience of all involved, I am confident in our collective ability to emerge stronger than ever before. I truly believe we are tackling our growth plan from a position of strength with our team of employees as well as the strategies being built and implemented with our sales and marketing and IT initiatives. Now that we have provided a summary of some recent activity, I will turn the call back over to the operator for questions and answers. Operator: [Operator Instructions] Your first question comes from Paul Carter of Capstone Asset Management. Paul Carter: Well, good afternoon, everybody, and Happy New Year. So I know you've described in the past how your sales force has kind of been sitting on the sidelines waiting for the company to, I guess, to get out of hock with your bank. And I know it's only been 2.5 months or so since you sold your building, but do you have any evidence yet that this transaction has reinvigorated your sales force for a more productive 2026? Craig White: Well, I think one of the main factors in that reinvigoration, as you mentioned, was bringing in new titles and reorders of out-of-stock bestsellers. But also what we see is the uptick or the increased activity in leader promotions. That's been very exciting. I started in the last month or two calling all brand partners that promoted to upper level leadership. And there's a lot of excitement out there. So that's my couple of points. Heather, would you like to expand? Heather Cobb: No. I mean I would echo what he said, Paul. Specifically, I think it's hard to say specifically that just the sale of the building was going to be enough for them to just immediately roll back into action. We announced just immediately after we made the purchases from that Phase 1 of new titles and reprints that they would be coming as we shared with you, late spring, early summer. We concluded our incentive trip promotion in December with just on target the anticipated number of earners that we had predicted. We launched a new incentive in January. And so while it's hard to say in the midst of the holidays, especially with Christmas and New Year, that we see specific things that are happening, we can definitely say that the energy feels slightly different in a much more positive way than it has in a while. Paul Carter: Well, that's good to hear. And then just changing gears. So obviously, it's nice to hear about the $0 debt balance. But do you have a new credit line in place? I know you've been talking about putting something small in place once this transaction was completed. Dan O'Keefe: Yes. We're talking to a few banks and also talking to some other options. We're right now in a cash position where we're, I think that we're looking for just a relationship for banking to go forward with. And so we're talking to some local banks that have some interest and hope to have something in place here in the next few months. Paul Carter: Okay. Great. Just talking about your balance sheet. So I know the value of your inventory is like I think it's more than 3x the market cap of your company. So obviously, that's pretty important to investors. And I just wanted to ask a couple of questions about that. I guess, first of all, is your inventory like fully insured against all risks like water damage or pests or anything? Because I know some of them have been sort of sitting in boxes for a while up on the shelf. But -- and is your inventory like insured at replacement cost or something else? Dan O'Keefe: It is insured at replacement cost. So what we have on the books is what it's insured for. So if we've got $39.1 million on the books at the end of November, that's what it's insured for, full replacement cost. Now we don't want to talk about any worst-case scenarios with disaster... Paul Carter: Yes. No, fair enough. Yes, I was just sort of wondering about that because I know -- and actually sort of related to that, we're not really damaged, but I'm just thinking about kind of the nature of your inventory. So I know most of your titles are things like zoo animals or whatever that don't go out of date. But like do you have a sense for what percentage of your inventory could be out of date and therefore, worthless in like 3 or 5 years if there's not a lot of sell-through in certain titles? Dan O'Keefe: So I would -- the only thing I would say in response to that is our track record has been we've carried inventory sometimes for in excess of 10 years on certain titles before we sell through them. And we've never historically written down inventory, and we've never basically offloaded the title or gone into the remainder market to sell the title. So that's kind of reflected in our reserve. Our reserve is very small on our short-term inventory and also on our long-term inventory because our history says we typically don't participate in the remainder market and don't have topics, as you mentioned earlier, that go stale or out of favor. Heather Cobb: Yes. Paul, unless you know something we don't, and they're going to change the alphabet on us, I think we're fairly safe. Paul Carter: Okay. No, that's good to hear. And I figured that was the case, but I just know that's one of the hesitations, I guess, that some investors have is that if you're sitting on so much inventory relative to current sales that maybe that inventory isn't worth a hundred cents on the dollar. But obviously, that's -- you're a little bit of a different company than a grocery store or something like that. Okay. And then just -- I know this will come out in your 10-Q, but how much of your $39.1 million of inventory is Usborne-related? Dan O'Keefe: About 50%. Paul Carter: Okay. And then can you provide an update on the status of your relationship with Usborne Publishing? I don't know that you've talked about them in a little while. Craig White: Yes. There's really been no change. Dan actually has monthly or at a minimum quarterly calls with their -- the equivalent of their, Chief Financial Officer. They're anxious for us to get back and start ordering titles again. So because of the new distribution agreement, we're not required to purchase every title they offer, which is good for us. But yes, there's been no negative change in the relationship. Paul Carter: Okay. Okay. That's great. And then just the last one here, totally random question. But just regarding that 17-acre attractive excess land beside the Hilti Complex there. What is your plan for that? Are you just going to hold on to it for the time being? Or do you have sort of longer-term plans for it? Craig White: Well, it's kind of been an ace in the hole. I kind of kept that in my back pocket for now. It's -- there's been some flurry of activity on it recently, actually, which is interesting. Some people have kind of come across it and inquired about it. We've been given a proposal to develop it, which is intriguing. But in that particular proposal, the return for us just wasn't what I thought it could be or should be. So for now, we're just kind of holding on to it. It could be something that we develop for ourselves. It could be something that we sell if need be or develop it and retain ownership of it. So there's lots of options. It hasn't been necessary to do anything with it at all, and it continues to appreciate. So I'm happy to continue to do that. Operator: [Operator Instructions] Craig White: I guess we did better than ever. Answering everyone's questions before they asked it. Operator: There are no further questions at this time. I would hand over the call to Craig White for closing remarks. Please go ahead. Craig White: Thank you. Thanks, everyone, for joining us on our call today. We appreciate your continued support and expect to provide an additional update on the -- well, not the Hilti sale progress, but our banking relationship and just moving forward our growth plan. So again, thank you for joining us, and we'll talk again in May. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good morning, ladies and gentlemen. And welcome to the Neogen Corporation Second Quarter FY 2026 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. At any time during this call you require immediate assistance, please press 0 for the operator. This call is being recorded on Thursday, 01/08/2026. I would now like to turn the conference over to Bill Waelke, Head of Investor Relations. Please go ahead. Bill Waelke: Thank you for joining us this morning for the discussion of the second quarter of our 2026 fiscal year. I'll briefly cover the non-GAAP and forward-looking language before passing the call over to our CEO, Mike Nassif, who will be followed by our new CFO, Brian Rigsby. Before the market opened today, we published our second quarter results as well as a presentation with both documents available in the Investor Relations section of our website. On our call this morning, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the presentation Slide two of which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10-Ks and in other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements. I'll now turn things over to Mike. Mike Nassif: Thank you, Bill. Good morning, everyone, and thank you for joining the call today. I continue to be energized by the significant opportunity ahead at Neogen. Working alongside our highly engaged global team as we transform the company with a clear focus on improved top-line growth and profitability. We are the scale provider in a highly attractive industry, supported by strong long-term secular trends. And I have high confidence in our ability to overcome recent macroeconomic and execution-related headwinds. Our second quarter performance represents encouraging early progress. With a return to positive core growth across the enterprise and adjusted EBITDA margins improving nearly 500 basis points sequentially. The initial phase of our transformation is centered on stabilizing and strengthening our core. Providing a solid framework for future innovation. We began with cost structure improvements implemented in the second quarter, expected to deliver approximately $20 million in annualized savings. We will continue to rigorously evaluate resource allocation opportunities and instill a culture of disciplined operational execution across the organization. Turning to our commercial teams. We are implementing a rigorous process-oriented approach to commercial excellence. Emphasizing strong, operational planning and data-driven decisions. In food safety, where our scale and breadth of offerings provide a clear competitive advantage, we see significant opportunity to shift towards solutions-based selling. This approach should increase customer stickiness and drive greater cost portfolio penetration. Globally, over 75% of our food safety customers already purchase multiple product categories from us. And we have targeted initiatives underway to increase that percentage further by delivering comprehensive solutions tailored to their needs. In animal safety, we are focused on elevating our portfolio of products through our long-standing partnerships and have made investments to enable our commercial teams to drive growth. To accelerate all these priorities, we have strengthened our leadership with highly experienced operators. Including our new CFO, Brian Rigsby and our new chief commercial officer, Joe Friels, Joe is a seasoned diagnostics executive with extensive senior commercial experience at Abbott and Cepheid. He understands what world-class sales execution looks like, and I'm confident he will help transform our sales culture. We have also added Tammy Rennelly as senior vice president and general manager of our food safety business unit, James Meadows as head of North America food safety and Jeremy Yarwood as chief scientific officer. These leaders bring proven track records from top-tier companies and will accelerate both innovation and execution excellence at Neogen. In parallel with our commercial focus, we are applying the same discipline and urgency to operational efficiency in key project execution. We saw early benefits in the second quarter from our cost actions, which attributed to the sequential adjusted EBITDA margin expansion. We have continued to make progress on our sample collection product line and expect it to become a positive contributor to gross profit in the second half of this fiscal year. While there remains room for further improvement, we're committed to fully optimizing sample collection over the long term alongside broader enhancements in inventory management and operational efficiency. Another key priority is the integration of Petrifilm. Which remains on track for the 2027 timeline previously shared. We're currently in the latter stages of the production testing process, which has gone well. In parallel, we have moved into the initial stages of product validation, which is a comprehensive internal process to validate our ability to produce each of the 17 SKUs that we expect will be completed this summer. As part of the testing and initial validation work we have done so far, we've demonstrated the ability to manufacture petrifilm plates. These plates will continue to be subjected to a wide range of internal quality and performance testing. But the early results have been encouraging. As Brian will discuss later in the call, we are making positive progress on the previously announced sale of our genomics business. The completion of which will provide an opportunity to accelerate the deleveraging of our balance sheet. As a reminder, this past summer, we divested our cleaners and disinfectants business which allowed us to pay down $100 million of debt. To wrap up my opening remarks, I'm pleased with the initial progress we've made over the past few months. Which has led us to raise our outlook for the year and represents a solid step in the right direction. We are still in the early innings of our transformation journey. And the end market backdrop is not without some challenges. However, we believe they are solvable or transitory in nature. I have every confidence in our ability to exit this fiscal year as a stronger, leaner, and more disciplined organization positioned to increasingly focus on innovation, and the next leg of growth in fiscal 2027 and beyond. I look forward to meeting with many of you at the JPMorgan conference next week, where we will provide more details on our operational strategy. With that, I'll now turn the call over to Brian to share some details on our results and our updated outlook. Brian Rigsby: Thank you, Mike. And welcome to all the investors and analysts joining us on the call today. Similar to Mike, I'm incredibly excited to be part of the team at Neogen and emboldened by the significant opportunity ahead of the company to drive shareholder value. To that end, we saw a return to positive core growth in both segments for the first time in four quarters with total second quarter revenues of $224.7 million increasing 2.9% on a core basis. Looking at the components of growth, foreign currency added 0.9% and divestitures and discontinued products were a headwind of 6.6% compared to the prior year. The impact from divestitures was attributable to the sale of the Cleaners and disinfectants business which was completed in July 2025. At the segment level, revenues in our food safety segment were $165.6 million in the quarter, including core revenue growth of 4.1%. We saw the strongest growth in our indicator testing and culture media product category, led by sample collection, which benefited from an easy prior year compare, and petri film, which saw a nice recovery from the first quarter and returned to high single-digit growth. Double-digit growth in pathogens led the and general sanitation product category while the allergens and natural toxins category saw growth in allergens offset by a decline in natural toxins. From a macro perspective, we continue to see disruption at the customer level with food production volumes estimated to generally still be down across major producers a year-over-year basis. Additionally, there have been several major plant closures and food producer bankruptcies across the industry in the last twelve months. Given the short-term fundamental backdrop that we believe is primarily driven by inflationary cost pressures, we are even more encouraged by the strong results in the second quarter. While macro trends remain negative, there are signs some of the headwinds may begin to abate as we transition into fiscal year 2027 and beyond. Quarterly revenues in the Animal Safety segment were $59.1 million including core revenue growth that was approximately flat compared to the prior year quarter. We experienced solid growth in our product category led by higher sales of insect control products due in part to market share gains. In the veterinary instruments product category, lower sales were primarily driven by needles and syringes, while lower sales in the life sciences product category were largely driven by timing of orders and fulfillment. Our global genomics business had core revenue growth accelerate to 6% in the quarter, with solid growth in the bovine market partially offset by weakness in companion animal testing. From a macro perspective, we have also seen challenges in animal safety as a part of a multiyear trend with production animal herds, declining in The US to record lows. Most forecasts have this trend reversing next year as ranchers begin to invest again given record beef prices. But we will continue to take a more cautious approach as we approach guidance until evidence of positive improvement is more apparent. From a regional perspective, core revenue growth in the second quarter was led by our LatAm region, up high single digits with strong sales of pathogen detection products and petri film. The US and Canada region had core growth in the mid-single-digit range, with food safety up mid-single digits and animal safety about flat. Strong growth in sample collection as well as in petri film pathogen detection, and allergens was partially offset by a decline in food quality and culture media. The APAC region saw low single-digit core growth that was led by pathogen detection products, sample collection, genomics, offsetting declines in culture media and allergen test kits. Our EMEA region had core growth decline low single digits with growth in sample collection food quality, genomics, and petri film offset by declines in natural toxins culture media, and general sanitation products. Gross margin in the second quarter was 47.5% a sequential improvement of two ten basis points from the first quarter. With the increase due primarily to volume and lower tariff costs Excluding the impact of integration-related and restructuring costs, the second quarter gross margin was 50.3%. Addressing the production efficiency of our sample collection product line has been a priority and we saw improvement in the quarter, which is a trend we expect to continue in the second half of fiscal year. With an increased focus on inventory across the organization, we did see an elevated level of inventory write-offs in the quarter. We have described this as a multi-quarter process to return to more normal levels of scrap and continue to expect to see improvement in the second half as this is an item of high emphasis for our operations teams. Adjusted EBITDA was $48.7 million in the quarter, representing a margin of 21.7%. An improvement of four seventy basis points from the first quarter. The margin improvement was driven primarily by the higher gross margin and the headcount reduction implemented during the second quarter. Second quarter adjusted net income and adjusted earnings per share were $22.6 million and $0.10 respectively, compared to $9.4 million and $0.04 in the prior quarter due primarily to the higher level of adjusted EBITDA. Moving to the balance sheet, we ended the quarter with gross debt of $800 million, 68% of which remains at a fixed rate and a total cash position of $145.3 million. We remain in compliance with all debt covenants and remain comfortable with our position as we look to the second half of the fiscal year. Free cash flow in Q2 was $7.8 million representing an improvement of $20.9 million from Q1. The result of lower CapEx and improved trade working capital efficiency. Importantly, we expect that routine CapEx will trend towards more normal levels of 3% to 4% of revenues starting in late fiscal year 2026 which will further improve free cash flow trends. As Mike noted earlier, we are raising our full-year guidance for fiscal 2026 to reflect the second quarter performance being ahead of our expectations. We now expect revenue to be in the range of $845 million to $855 million and adjusted EBITDA to be approximately $175 million for the fiscal year. This updated guidance reflects a cautious approach to the second half of the year given the lingering weakness in our end markets opportunities. and the fact that we have a new team on board that is still settling in and evaluating As a management team, Mike and I take very serious the commitments and guidance we provide to investors. Looking on a quarterly basis, our guidance contemplates revenue in the fourth quarter being modestly higher than the third quarter which we are assuming will step down from the second quarter due primarily to seasonality. And that adjusted EBITDA margins will follow a similar trend. We continue to expect our capital expenditures for the year will be approximately $50 million and that free cash flow will be positive. We have also previously disclosed that we have a process underway to divest our global genomics business. The process continues to move along. And while the timing of such processes is inherently difficult to predict, we anticipate being able to make an announcement in the fourth quarter of the current fiscal year given the current stage of the process. In addition to the net proceeds being prioritized for debt reduction, this divestiture will further simplify and focus the business and also position the business for enhanced incremental margins. I'll now hand the call back to Mike for some final thoughts. Mike Nassif: Thanks, Brian. When I joined Neogen, I was thrilled to lead a company with strong leadership positions and highly attractive end markets. While we have faced both macroeconomic headwinds and execution challenges, we believe these are solvable. And that Neogen's best days lie ahead. Now nearly five months into my role, I've had the privilege of meeting many of our customers and team members around the world. These interactions have only strengthened my optimism and deepened my appreciation for the power of the Neogen brand. Our customers don't see us simply as a supplier. They view us as a true partner and a trusted authority in food safety. We are committed to further strengthening these vital partnerships. Accelerating groundbreaking innovation, and delivering greater value to our customers than ever before. In my interactions with team members across the globe, I've been deeply encouraged by the passion and commitment I've witnessed firsthand. The thoughtful dialogue and sharp insights shared in these conversations reaffirm what I already knew. We have an exceptional team that is fully invested in our mission. We now have a strengthened leadership team in place. Seasoned executives with deep experience driving in global life sciences and diagnostics businesses, They bring a disciplined, fundamental focused approach centered on process excellence clear prioritization, cross-functional collaboration, transparency, and accountability. Importantly, we are already seeing strong buy-in across the organization as we implement these changes. A clear signal that we are aligning around the right strategy to unlock Neogen's potential. In closing, I want to extend my heartfelt gratitude to every employee around the world for your hard work, resilience, and unwavering dedication. It is your talent and commitment that will drive our success. And I'm more confident than ever in our ability to deliver outstanding results for both our customers and shareholders. Thank you, And now I'd like to turn things over to the operator to begin the Q and A session. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift a handset before pressing any keys. Your first question comes from Bob Lovick with CJS Securities. Your line is now open. Bob Lovick: Good morning. Congratulations on the strong results in Outlook. Thanks, Bob. People on board and and and for everyone to know, gel and make a difference and and you know, start start operating as one. Yeah. Thank you for that question. Know, the great news is we've attracted top-tier talent to this company, which speaks highly to the opportunity we have at Neogen. In turning this business around. I was recruiting for the talent, I was really looking for very experienced leaders in diagnostics or life sciences that have been part of large organizations that understand the discipline and complexity of managing global businesses But more importantly, we're operators, though they were able to zoom in and zoom out really help the organization accelerate know, the basics that I've talked about before. And I think that's extremely important because know, we've got a great workforce And in some cases, you know, we're trying to implement global processes that require a lot of hands-on initially to get everybody going in the same direction. So I'm I'm very, I'm very proud, and I think we're extremely lucky to have attracted the talent that we've attracted. As far as how long it's gonna take to get them up and running, I would say that given the talent caliber and experience of these professionals, they're already hitting the ground running. You know? And our business is not so different than the than the human diagnostics business. So from a technology and go to market, there's a lot of similarities there. So we've got a very robust onboarding plan for all of the leaders and we are starting now to meet as a full management team and really focusing on the priorities, which have not changed, which are all about driving top line, optimizing our growth, and really focusing and becoming masters in the fundamentals. Bob Lovick: Okay. That sounds great. And then maybe just one more question. I'll jump back in queue. And obviously, good quarter, strong sequential margin improvement. But you know, I think you said you'll get better improvement in sample handling in the back half. I'm trying to get a sense what was the headwind to margins maybe from sample handling? Or or maybe said another way, once you get that to the margins you want, what would be the equivalent or close EBITDA margins at current levels? And then obviously, as top line grows, you can grow that from there. Mike Nassif: Yeah. I mean, let me give you a little bit of my thoughts on sample collection. And then I'd I'd like to ask Brian to share his thoughts as well, more specifics. But listen. Sample collection is is a challenge for us. We've been pretty transparent about that. We're working it. Multiple fronts from making sure that pricing is reflective of the average price in the market We are taking all of the improvements on improving the efficiency on the line. I think the great progress that we have made in in getting back getting out of backorders means that we can reduce the temporary labor, some of the scrap, and other things that were impacting our large to kinda get it more steady state You know? And we are 100% focused on improving profitability on the product. But this continues to be a gateway product that our customers need. But it leads to other, you know, other purchases within our portfolio. And I I personally don't think the product's ever going to be as profitable as other parts in our portfolio but we're not giving up, and we're gonna continue to be focused on that. But I would say high level, we would expect this product to return to some profitability in the second half. And I'd to ask Brian to share any thoughts on that. Brian Rigsby: Yeah. Thank you, Mike. But my comment would just be, I think if you look at the at our non-GAAP reconciliation schedule where we've been excluded the negative impact of that previously. Can see that it was Q4 in Q4, it was around $10 million. In Q1, it was $6 million. Q2, it was around $3 million So the trend is favorable. And, again, to Mike's comments, we expect to turn positive as we move into the back half of the year. Bob Lovick: Okay. Super. Congrats again. Thank you. Brian Rigsby: Thank you. Thanks, Bob. Your next question comes from David Westenberg with Piper Sandler. Your line is now open. Congrats on a really good quarter here. David Westenberg: So I'll just start off with why the implied HD growth, or margin, a little bit higher falling, you know, a really good quarter. Do you think is this conservatism? Or like first quarter for both the CFO and I guess second quarter for the CEO, You just wanna make sure that every everything's right here. Mike Nassif: Yeah. Let me start. I'll I'll I'll share some thought. Thank you for the question. I think that's a very fair question. And we'll ask Brian to jump in. I mean, I think, listen. What what you see contemplated in the guide is our prudent approach approach to beginning to return the business to sustainable performance. You've heard me talk about that last time, and I'm very much focused on driving free. Predictability in this business and consistency. Listen. I'm happy with how the org is reacting to the new ways of working in the very short period time that we've been here. And Q2 is is is a great quarter, but it's one data point. We've also got a brand new team that's gonna be settling in and learning how to work together and really start to scale these things that we put in place. And I would say just as important, and Brian and I talk a lot about this, we understand the importance of our commitment to investors and building credibility. That's extremely important to us. And so with that said and the lingering macroeconomic weaknesses, tariffs, uncertainty, and what have you, you know, we feel confident with the trajectory. The early progress we've made. And taking all of that into account, we believe it's appropriate to take a conservative tact for the remainder of the fiscal year. And the last point I'd make is it's important to note that we are now forecasting a positive growth for the year given this latest update on the guide. Brian? Brian Rigsby: Yeah. I would just echo Mike's comment in terms of, you know, it's one data point. We did raise the guide to reflect the over delivery in Q2. But, you know, we we've got a new team in here I've been here for two months now. And and we just wanna make sure that we know, take the right approach that relates to how we manage the guy. David Westenberg: Perfect. And, just asking one more kind of basic blocking tackling question as we look at our models. Were there any onetime revenue tailwinds in the quarter? And we think about recurring adjustments how do we think about those cycling through for the rest of the year? I think, with the recurring adjustments, it's one of those, have limited time. But, I mean I mean, I guess, you always have new ones. So I guess anyway, anyway to think about that, like, Anyway. Brian Rigsby: Yeah. Sure. I I'll take the question. Mike can add anything you like. The the only thing I would recall, we we did have about $2 million of insecticide tailwind in Q2 in the animal safety segment. But but, really, that would be the only thing of note that I would call out as a as a onetime. Mike Nassif: Yeah. The only thing that Yep. Yeah. David, what what I would just add is that you know, we saw you know, it's it's it's crazy when, you know, the simplicity sometimes is you get what you measure. So know, driving the commercial excellence, focusing on key products, when you think about you know, petri film, pathogen, allergens, which have been a focus for us in that quarter, you see very healthy returns on those when you drive the right focus. And so you know, we were we were very pleased with how the organization's responding to the additional focus. And we feel that a lot of this growth was due to driving the specificity and commercial excellence. So the organic growth is is great, and now we're looking to you know, scale that and accelerate it. David Westenberg: Got it. I'll just give it a two knowing that, know, you still have a few more analysts to ask for questions on. Okay. Mike Nassif: Thanks, David. David Westenberg: Your next question comes from Brandon Vazquez with William Blair. Your line is now open. Brandon Vazquez: Hey, good morning, guys. Thanks for taking the question and congrats on a nice quarter as well. Mike, maybe as you sit, you know, you're maybe about six months into the seat now. You guys have had a a strong quarter here. Talk to us a little bit about specifically what in the commercial organization has changed that is working. This is probably the first time in several quarters, if not a couple of years, where you've been able to kinda accurately forecast the business and actually give improving expectations for the business on a go forward basis. So what is working and what's giving you the confidence to raise guidance already less than a a year into the c in the CEO seat? Mike Nassif: Yeah. Thanks, Brandon. And listen. I wish I can tell you something that makes me look really smart. Reality is it's just focusing on the basics and driving simplicity. You know, I think that, you know, last quarter when we were talking about know, in in the quarter, discussion, but also on the one on ones, You know, specifically, the organization was very comfortable doing monthly forecasts for example. And very early on, that didn't seem like the right approach given our history of missing our forecasts. So we instituted a weekly latest best estimate process where we bring in all of the sales leaders and all of the supporting functions on a weekly basis reviewing the forecast, reviewing the risks and opportunities, reviewing the targeted accounts, discussing what needs to be, what do we need to do to enable the sales team to deliver on the commitments to the customers, And, you know, I would say in the first couple weeks, it was a little bit rough. But now you see the leaders running the calls and the whole organization is really focused on enabling the commercial team. And and one of the things that I think I've shared and I've been trying to instill in the organization is our commercial team needs to be very customer centric. The rest of the organization needs to be in service of the commercial team. And that is how we're driving this. And so early signs is that this is really resonating with the organization, and I think we can kinda see that the in the Q2 performance. Now that said, we don't wanna get ahead of our skis. We're gonna continue to do the same thing this quarter that we did last quarter. Get the new leaders on board, drive more com you know, drive more specificity making sure we're really looking at the opportunities, addressing the concerns, you know, that we have and the headwinds in the market. And I think, really, that is the the formula for success. Brandon Vazquez: Got it. Great. That's that's helpful. Then of the other big questions I get a lot with investors now, and and I'm sure you're aware, is just the feature film manufacturing process. You made a couple of comments in your prepared remarks. On some confidence there. Can you maybe just spend another minute on, like, what is it that's giving you confidence that this is continuing on time And Yeah. Know, what are you seeing in the early ramp of that facility? Mike Nassif: Yeah. Absolutely. And this is a super important project for us. In Q1, I shared that early on, I knew this was a priority, and I spent a lot of time with Jim Walters, our head of operations and the manufacturing team really looking at the at this plan. You know, having been in biopharma businesses and med tech businesses, any tech transfer has a lot of challenges. In this case, we're doing 17. On 17 SKUs. And I was very proud and, and happy, pleasantly surprised, I guess, happy of how the team has thought about all of the potential factors and things that can come to play in in making sure that this transition is is extremely successful. And I think that since then, we have executed that plan. That plan remains the same. We remain, extremely focused, and the process of doing that is starting to you know, demonstrate some results. And so we're we're still on track for the November 2027 timeline. We're in the late stages of production testing, which has gone very well so far. In parallel, we've begun initial phases of product validation. Which we expect to continue into the summer. You know, as I mentioned, in the opening remarks, throughout the course of production testing and the initial product validation work, we've demonstrated that we can manufacture petrifilm. On the new equipment, which is a very important milestone. You know? And so gonna continue to execute the plan. We've got the right talent, the right resources. This is the top focus for us. We are not sparing any any any focus or resource required. And, that's what gives me confidence. Brandon Vazquez: Got it. Thanks a lot, guys, and congrats again. Mike Nassif: Thanks, Brandon. Your next question comes from Subbu Nambi with Guggenheim Securities. Your line is now open. Thomas DeBourcy: Hi, guys. This is Thomas on for Subbu. Thanks for taking our questions. For the growth in indicator testing and culture media, much of that was volume driven, and then how much was on price? Just trying to gauge how we should think about growth for the rest of the year and if that's sustainable. Mike Nassif: Yeah. I can share some thoughts, and and maybe wants to add a few things. I would say that most of it is organic growth. You know, these are these are product lines that we drove specific focus on. And so there are some you know, last quarter, we did share that there was a part of the decline of petri film was due to a inventory correction in our major distributor in The United States, We've seen that distributor go back to normal levels. And when you look at sellout data, it's around 9%. You know? So the the PFM market continues to be healthy. We continue to be the market leader and growing, you know, at that pace. I think pathogens is also another one where we're seeing significant growth, but organic growth. Just due to you know, all of the illnesses, the rise in illnesses and other things, you know, that you see then with allergens, know, that was, as you guys might be aware, you know, we've had some supply issues in the past. We're not through those. Working we've worked through all of the back orders. And we're regaining some lost customers. And we're really looking to get that platform back on state growth. Brian, anything you wanna share there? Brian Rigsby: Yeah. I would just say, total, you know, up 6% and and just more volume than price. Would be the only thing I would emphasize. Thomas DeBourcy: Okay. Awesome. And then maybe just to stay there on Petrie Film. What are your updated assumptions around the 2026 growth rate? And then just how should we think about this longer term, if feature film? much of the growth was volume, is there pricing power still available in the market to take for Thank you, guys. Mike Nassif: Yeah. I mean, I think the, there's always there's always pricing opportunity. And in fact, that's it. Standard language in all of our contracts. One of the things that you know, is not unique to this business is that we have different contract durations and different contract expiry. So as new contracts come on board, certainly, the inflationary pricing adjustments are are introduced. And, of course, when we launch new Petri film, tests, that we always, you know, price that accordingly. I think there continues to be an opportunity to adjust for inflationary measures as new contracts come up for renewal Yeah. I think the only thing I would add is just that you you may recall that in Q1, we had one our largest U. S. Distributor adjusting their inventory levels, which provided for a headwind in Q1 even though the end market Yeah. That's a good one. Yeah. Was still strong. And so that phenomenon wasn't there in the second quarter, so we would expect the remainder of the year for that product to look more like Q2. Operator: Your next question comes from Thomas DeBourcy with Nephron Research. Your line is now open. Thomas DeBourcy: Hi. Thanks, for taking the question. I was just wondering, like, just in terms of, you know, I guess, help me get to the CEO role, your feedback from customers, you know, the business overall. Obviously, they've had to deal with some stockouts of certain products, like a tip collection and just their willingness to kind of work with you as you you know, ramp up production to get back towards more normal inventory levels and then just overall, the business is there a rough breakout you could give in terms of volume versus price in term of the organic growth? Thanks. Mike Nassif: Thanks, Tom, for your question. You know, by now, I have visited all regions and have visited customers distributors, direct customers from around the world. And I honestly have to say, you know, I've never been in a market where customers are rooting for you. Like they are for Neogen? We are a food safety company. I can't tell you how many customers know, some more impacted than other with our supply issues. But they want us to succeed. They see us as a vital partner in their food safety quality program. If, you know, if you if you look at food safety quality program at sites, these are cost centers. You know? These are you know, they're doing the testing required and sometimes they have a lot of turnover. And when there are gaps in their competency or gaps in their training, or knowledge, They rely on Neogen to help fill that gap. And I think that is one of the one of the advantages that we have in addition to having a full food safety portfolio is that we are seen as the experts in the food safety business. And so it has been consistent around the world. Yes. Some customers are frustrated. But they very much want us and need us to succeed because that means that their food safety programs will also succeed. Brian, I don't if you have anything more to just say similar to my earlier comment. Around another product category. It was it was positive, but more volume than price. Thomas DeBourcy: Yeah. Great. Thank you. Operator: There are no further questions at this time. I will now turn the call over to Mike Nassif for closing remarks. Mike Nassif: Great. Thank you, everybody, for joining and all of the conversations and the feedback. I very much look forward to seeing many of you, next week at JPMorgan to continue the conversation. Have a great rest of your day. Operator: Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.
Wendy D. Kelley: Good day, and welcome to the WD-40 Company's first Fiscal Year 2026 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. At the end of the prepared remarks, we will conduct a question and answer session. Please press 1 on your telephone keypad. Please make sure your mute function is turned off to allow your signal to reach our equipment. If at any time during the conference, you need to reach an operator, telephone keypad. I would now like to turn the presentation over to the host for today's call, Wendy Kelley, Vice President, Stakeholder and Investor Engagement. Please proceed. Thank you. Good afternoon, and thanks to everyone for joining us today. On our call today are WD-40 Company's President and Chief Executive Officer, Steven Brass, Vice President and Chief Financial Officer, Sara Hyzer. In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings press release, and Form 10-Q for the period ending 11/30/2025. These documents will be made available on our Relations website at investor.wd40company.com. A replay and transcript of today's call will also be made available shortly after this call. On today's call, we will discuss certain non-GAAP measures. The descriptions and reconciliations of these non-GAAP measures are available in our SEC filings as well as the earnings documents posted on our Investor Relations website. As a reminder, today's call includes forward-looking statements about our expectations for the company's future performance. Actual results could differ materially. The company's expectations, beliefs, and projections are expressed in good faith but there can be no assurance that they will be achieved or accomplished. Please refer to the risk factors detailed in our SEC filings for further discussion. Finally, anyone listening to a webcast replay or reviewing a written transcript of this call, please note that all information presented is current only as of today's date, 01/08/2026. The company disclaims any duty or obligation to update any forward-looking information as a result of new information, future events, or otherwise. With that, I'd now like to turn the call over to Steve. Steven A. Brass: Thanks, Wendy, and thank you all for joining us today. Today, I'll start with an overview of our sales results for 2026 and then provide an update on the progress we've made against certain elements of our four by four strategic framework. Then Sara will dive deeper into our first quarter performance, review our business model, give a brief update on the divestiture of our home care and cleaning business, and review our outlook for fiscal year 2026. After that, we'll open the floor for your questions. Today, we reported consolidated net sales of $154.4 million, representing a 1% increase compared to last year. Let's take a closer look at these results and unpack what's driving our performance. Maintenance products remain our primary strategic focus, representing approximately 96% of total net sales for the quarter. Net sales for these products reached $148.9 million, a 2% year-over-year increase. While this performance came in below our long-term growth targets, we remain highly confident in the strength of our growth trajectory for both the fiscal year and longer term. As you know, we go to market through a combination of direct operations and marketing distributors. Our direct markets accounted for 83% of our global sales during the first quarter and maintenance products grew by 8% in those markets, in line with our long-term growth targets. The softness we saw in the first quarter was primarily due to timing-related factors within our marketing distributor network, not a decline in end-user demand. Marketing distributors represent about 17% of our global sales, and typically exhibit greater quarter-to-quarter variability. These markets offer significant long-term growth potential but can be more volatile period to period. As I shared last quarter, we anticipated the Q1 pullback, particularly in Asia Pacific, as distributors managed inventory levels. I'll provide more detail on Asia Pacific performance shortly. We remain confident in a strong rebound later this fiscal year. The second quarter is already off to an excellent start with solid growth across all three trade blocks. We have visibility into a number of upcoming initiatives, giving us confidence in delivering a solid fiscal year result. I'm also pleased to report that our gross margin continues to strengthen. In the first quarter, we reported a gross margin of 56.2%, which is an improvement of 150 basis points sequentially from the fourth quarter and 140 basis points compared to the first quarter of last fiscal year. Gross margin, excluding the impacts of the gas assets we currently have held for sale, was 56.7%. Sara will share more detail about our gross margin in just a few minutes. Now let's talk about first-quarter sales results by segments starting with The Americas. Unless otherwise noted, I'll discuss net sales on a reported basis compared to the 1st Quarter Of Last Fiscal Year. Sales In The Americas, which include The United States, Latin America, and Canada, was $71.9 million in the first quarter, an increase of 4% compared to last year. Sales of maintenance products were $68.6 million, an increase of 5% or $3.2 million compared to last year. The bulk of this growth was driven by higher sales and maintenance products in The United States and Latin America, which increased 312%, respectively. In The United States, sales of WD-40 Multi-Use Product increased following a modest price adjustment in 2026. But this was partially offset by lower volumes due to the timing of customer orders. In Latin America, higher sales of WD-40 Multi-Use Product were primarily driven by expanded distribution and successful promotion activity. In Mexico, maintenance product sales were also positively impacted by higher sales of WD-40 Specialist, which increased 14% primarily due to increased online retail sales, new distribution, and increased demand primarily in The United States. Home care and cleaning product sales declined 18%, reflecting our strategic shift toward higher-margin maintenance products alignment with our four by four strategic framework. In total, our Americas segment made up 47% of our global business in the first quarter. Now let's take a look at our sales in EMEA, which includes Europe, India, Middle East, and Africa. Excluding the impact of the home care and cleaning we divested in 2025, net sales of $58.7 million, an increase of 5% or $2.8 million compared to last year. This growth was driven primarily by a 27% increase in WD-40 Specialist sales fueled by heightened promotional activity and successful new product launches in key direct markets. Sales of WD-40 Multi-Use Product in EMEA remained relatively constant. We continue to see strong trends in many of our direct markets. However, the increased sales in our direct markets were fully offset by softer performance in EMEA distributor markets, primarily due to the timing of customer orders reflecting the inherent variability often experienced in our distributor markets. While distributor sales declined in aggregate, India was a standout delivering a $1.4 million increase. In total, our EMEA segment made up 38% of our global business in the first quarter. Now on to Asia Pacific. Sales in Asia Pacific, which includes Australia, China, and other countries in the Asia region, were $23.9 million, a decrease of 10% or $2.7 million compared to last year. Sales of WD-40 Multi-Use Product were $18.3 million in the quarter, a decrease of 12% compared to last year. Although segment sales declined in the first quarter, we achieved strong growth in China, where sales increased 8% over the prior year. This performance was driven by expanding distribution and effective promotional initiatives. These gains were fully offset by lower sales of WD-40 Multi-Use Product in Asia distributor markets, where sales decreased by GBP 3.3 million or 33%. As noted earlier, this was primarily driven by the timing of customer orders as distributors that heavily participated in promotional activities during 2025 adjusted to more typical inventory levels. This performance was anticipated and factored into our fiscal year 2026 guidance. Importantly, we continue to expect a strong rebound later in the fiscal year. In Australia, sales of maintenance products remain constant. Home care and cleaning product sales, remain a strategic focus for us in Australia, declined by 5% compared to last year, primarily due to the timing of customer orders. In Asia Pacific, sales of WD-40 Specialists were up 2% in the first quarter due to higher sales volume from successful promotions and marketing efforts in Australia and China. In total, our Asia Pacific segment made up 15% of our global business in the first quarter. Now let's talk about our Must Win Battles. Amos Win Battles focused on accelerating revenue growth in maintenance products. Starting with must-win battle number one, lead geographic expansion. In the first quarter, sales of WD-40 Multi-Use Product reached $118 million, decreasing 1% compared to last year. While this performance does not align with our long-term growth objectives, we've made excellent progress this quarter in many key markets. With strong sales growth of $1.4 million in India, $1.2 million in Mexico, $900,000 in Iberia, and $800,000 in China. At 72 years young, we captured only 25% of our global growth potential for our flagship product. We estimate the attainable market for WD-40 Multi-Use Product to be approximately $1.9 billion compared to fiscal year 2025 sales of $478 million, leaving an opportunity of roughly $1.4 billion to nearly quadruple current sales. Capturing that growth simply means continuing what works. Expanding brand awareness and distribution across 176 countries and territories. All occasional soft quarters are part of the journey, they don't change our strategy, our long-term opportunity, or our positive outlook. Next is must-win battle number two, accelerating premiumization. Our second must-win battle is to accelerate the growth of premium formats of WD-40 Multi-Use Product. Innovation drives this strategy. We design products like Smart Straw and Easy Reach, with end users at the heart of every decision. This end-user-focused approach strengthens brand loyalty, supports gross margin growth, and deepens our competitive advantage. In the first quarter, sales of WD-40 Smart Straw and EZ REACH when combined up 4% over the prior year. Premiumized products currently account for approximately 49% of WD-40 Multi-Use Product sales, leaving considerable room for continued growth. We target a compound annual growth rate for net sales of premiumized products of greater than 10%. Our third must-win battle is to drive WD-40 Specialist growth. When we introduced the WD-40 Specialist alongside the WD-40 Multi-Use Product, not just adding variety. We're strengthening our brand, capturing new segments, and offering end users more choice without diluting what makes our core brand iconic. In the first quarter, sales of WD-40 Specialist products were $22.5 million, up 18% compared to last year. We estimate the global attainable market for WD-40 Specialists to be about $665 million with only 12% of that potential realized to date with roughly $583 million in growth opportunity ahead. We target a compound annual growth rate for net sales of the WD-40 Specialist at greater than 10%. Our fourth must-win battle is to Turbocharge Digital Commerce. Our digital commerce strategy is a catalyst for growth across the business. Not merely a channel for online sales. It plays a vital role in advancing each of our must-win battles by increasing brand visibility, improving accessibility, and driving deeper engagement with end users across global markets. In the first quarter, e-commerce sales increased 22%, primarily driven by strong sales of WD-40 Specialist in The United States. Now let's move to the second element of our four by four strategic framework, strategic enablers, which emphasize operational excellence. Today, I'll provide an update on strategic enablers one and three. Our first strategic enabler is to ensure a people-first mindset. At WD-40 Company, we've long held the belief that first you build the people, and the people build the business. We strive to be an employer of choice for all employees and their best selves to work. In November 2025, we completed our latest employee engagement survey and I'm proud to share that we've been able to increase our employee engagement index score to 95%. A new record high for our organization. Additionally, 97% said they actively collaborated, shared knowledge and ideas, and drove better results. These results underscore how global collaboration accelerates our success and reflects our bold ambition to become a world-class global learning organization. Our third strategic enabler is achieving operational excellence in the supply chain. Profitable growth depends on a supply chain that's optimized, high-performing, and resilient. This enabler has been key to expanding gross margins through cost reduction initiatives such as packaging improvements, logistics efficiencies, and strategic sourcing. In the first quarter, we delivered global on-time performance of 97.6%. Even while we continue to increase production capacity to support our must-win battles. Our global supply chain team also made strong progress in engaging with key suppliers and advancing our responsible sourcing policy. With that, I'll now turn the call over to Sara. Sara K. Hyzer: Thanks, Steve. Today, I'll offer insights into our business model, highlight key takeaways from our first-quarter performance, and provide a brief update on the planned divestiture of our Home Care and Cleaning business in The Americas. Today, we are reaffirming our full-year 2026 guidance. While our guidance ranges remain unchanged, I will provide some additional color on our outlook. Let's start with the big picture. While our first-quarter results were below our long-term growth targets, we did expect to get off to a slower start this year. And we believe we are set up for a strong year. We have numerous activities scheduled in the back half of the year giving us confidence that we will be at the mid to high end of our guidance ranges. Our results can fluctuate quarter to quarter, driven by the timing of promotional activity and customer order patterns. WD-40 Company is built for durable value creation. Driven by brand strength, operational discipline, and a culture of continuous improvement. This foundation positions us for sustained growth and strong stockholder returns for decades to come. And with that, let's start with taking a closer look at our business model. Our business model is a strategic tool we use to guide our business. It is built around three core areas: gross margin, cost of doing business, and adjusted EBITDA. In the near to midterm, we continue to evaluate each component of the model within a range, allowing us to adapt while staying aligned with our long-term objectives. Because our business model is based on revenue, quarter-to-quarter variability in sales can lead to fluctuations in its performance. We will begin with gross margin performance, which continues to be strong, building off our solid recovery in fiscal year 2025. In the first quarter, our gross margin was 56.2%, up from 54.8% in the first quarter of last year, representing an improvement of 140 basis points and was most significantly impacted by the following favorable factors: a 110 basis points from lower specialty chemical costs and lower CAM costs, and 60 basis points from higher average selling prices, including the impact of premiumization. These positive impacts to gross margin were partially offset by higher filling fees, primarily in EMEA, which negatively impacted our gross margin by 50 basis points. Gross margin in The Americas rose to 90 basis points, from 50.4% to 53.3%, driven by higher average selling prices and by lower specialty chemical costs and lower can costs. Gross margin in EMEA increased 90 basis points from 57.8% to 58.7%, which was mostly driven by the favorable impact of foreign currency exchange rates partially offset by higher billing fees. While still well above our 55% target, gross margin in Asia Pacific decreased slightly by 70 basis points, from 59.6% to 58.9%, primarily due to decreases in average selling prices linked to changes in sales mix. We're very pleased with the trajectory of gross margin. But external risks like cost volatility, tariffs, and inflation remain part of the landscape. To mitigate these and strengthen margins over time, we're driving initiatives such as supply chain cost reduction, premiumization, new product introductions, geographic expansion, and asset divestitures. These levers reinforce our confidence in our gross margin's long-term potential. Now turning to our cost of doing business, which we define as total operating expenses plus adjustments for certain noncash expenses. Our cost of doing business is primarily driven by three areas: strategic investments in people, global brand-building efforts, and freight expenses associated with delivering products to our customers. Investing in our future remains a top priority. While our long-term goal is to keep the cost of doing business within a 30 to 35% range, we're making strategic investments to drive sales growth and enhance operational efficiencies. These investments strengthen our foundation and position us for sustained growth. We also need time to absorb the loss of revenue associated with the home care and cleaning divestitures. Revenue growth is a key driver of our cost of doing business ratio. With a slower start to the year and continued investments to fuel long-term growth, our cost of doing business temporarily moved above our target range. For the quarter, the cost of doing business was 40% of net sales, compared to 37% last year. Our first quarter typically carries higher expenses due to essential planning meetings and increased travel, which are critical for setting our strategic direction for the year. I view this quarter's cost of doing business as an anomaly. And as we execute our strategies to accelerate top-line performance, we expect this ratio to improve over the course of the year. In dollar terms, our cost of doing business increased $4.6 million or 8% compared to last year. Changes in foreign currency exchange rates had an unfavorable impact of $1.3 million this quarter. The majority of the remaining increase, $2.8 million, was driven by higher employee-related expenses, including additional headcount to advance initiatives in our strategic framework and strengthen our information system. In addition to higher travel and meeting expenses this quarter over the prior year. Advertising and promotional expenses decreased slightly year over year. As a percentage of net sales, A and P spend was 5.3% this quarter, compared to 5.5% last year. While we are currently tracking below our full-year guidance of around 6% of net sales, we have brand-building initiatives planned for the remainder of the fiscal year, which we expect will bring A and P investment in line with our fiscal year guidance. While we always seek cost efficiencies, scale, not cost-cutting, is what will move us toward our long-term cost of doing business target. As revenues grow, we expect the cost of doing business to trend toward 30% to 35%. With sales growth being the key driver of improvement. Turning now to adjusted EBITDA. Adjusted EBITDA as a percentage of sales is a key measure of profitability and operational efficiency. Our 20 to 25% target range for adjusted EBITDA margin is a long-term aspiration. However, we continue to believe we can move adjusted EBITDA margin back to our midterm target range of 20% to 22% once we have absorbed the loss of revenues associated with the home care and cleaning divestiture. Divestitures. In the first quarter, our adjusted EBITDA margin was 17% compared to 18% last year. Adjusted EBITDA is a critical component of our business model. With our low debt capital light structure, much of it converts to free cash flow, enabling consistent stockholder returns and long-term value. Now let's turn to other key measures of our financial performance. Operating income, net income, and earnings per share in the first quarter. Operating income declined 7% to $23.3 million in the first quarter. While net income fell 8% to $17.5 million. On a pro forma basis, which excludes the impact of the home care and cleaning products divested and those classified as held for sale, operating income and net income would have declined 45%, respectively. Declines in operating income and net income were primarily driven by softness in top-line sales, which we are expecting to bounce back over the course of the year. Decreases were also driven by higher SG and A expenses compared to the prior year. Diluted earnings per common share were $1.28 in the first quarter compared to $1.39 last year, reflecting a decrease of 8%. Our diluted EPS reflects 13.5 million weighted average shares as outstanding. On a pro forma basis, EPS would have decreased 5%. Now let's review our balance sheet and capital allocation strategy. We maintain a strong financial position and healthy liquidity, supporting a disciplined capital allocation strategy that drives long-term growth and delivers consistent cash flow and returns to our stockholders. Annual dividends will continue to be our priority and are targeted at greater than 50% of earnings. On December 10, our Board of Directors approved a quarterly cash dividend of $1.2 per share, an increase of more than 8% over the prior quarter. This reflects the board's confidence in future cash flows and underscores our commitment to returning capital to stockholders through consistent dividends. During the first quarter, we repurchased 39,500 shares of stock at a total cost of $7.8 million under our share repurchase plan. We have approximately $22 million remaining under our current repurchase plan, which expires at the end of this fiscal year. We have accelerated buybacks and plan to fully utilize the remaining authorization, reinforcing our strong conviction in the company's long-term fundamentals. Our focus remains on accretive capital returns that reflect confidence in the enduring value of our stock. Finally, before I move to guidance, I would like to provide a brief update on the household divestiture. We continue to make progress on the sale of our America's home care and cleaning product brands. Our investment bank continues active discussions with multiple potential buyers. Although there's no certainty of a deal, we remain optimistic, and I will provide further updates as appropriate. So let's turn to FY '26 guidance. As a reminder, we issued this year's guidance on a pro forma basis, excluding the financial impact of the Home Care and Cleaning brands. Currently classified as assets held for sale. While the exact timing of the transaction remains uncertain, we believe this approach will provide investors with clarity on the direction of the core business, and help minimize the noise surrounding the transaction. While first-quarter sales results were below our long-term growth targets, as we mentioned, we anticipated a slower start to fiscal 2026. The softness was driven by timing factors within our marketing distributor network, not by a decline in end-user demand. All indicators point to a strong rebound later in the fiscal year. Accordingly, we are reaffirming our guidance today. With the visibility we have into numerous activities already scheduled for the back half of fiscal year 2026, we are highly confident in delivering results at the mid to high end of our guidance ranges. For fiscal year 2026, we expect net sales to be between $630 million and $655 million after adjusting for foreign currency impacts. A growth of between 5-9% from the pro forma 2025 results. Gross margin is expected to be between 55.5-56.5%. Advertising and promotion investment is projected to be around 6% of net sales. Operating income is expected to be between $103 and $110 million, representing growth of between 5-12% from the pro forma 2025 results. The provision for income tax is expected to be between 22.5 and 23.5%. And diluted earnings per share is expected to be between $5.75 and $6.15, which is based on an estimated 13.4 million weighted average shares outstanding. This range represents growth of between 5-12% over the pro forma 2025 results. This guidance assumes no major changes to the current economic environment. Unanticipated inflationary headwinds and other unforeseen events may affect our view of fiscal year 2026. In the event we are unsuccessful in the divest of The Americas Home Care and Cleaning brands, our guidance would be positively impacted by approximately $12.5 million in net sales, $3.6 million in operating income, and 20¢ in diluted EPS on a full-year basis. That completes the financial overview. Now I would like to turn the call back to Steve. Steven A. Brass: Thank you, Sara. In summary, what did you hear from us today on this call? You heard that sales in our direct markets grew 8% in the first quarter in line with our long-term growth targets. You heard that this increase in sales was partially offset by softer sales in our marketing distributor network relating to timing-related factors, not a decline in end-user demand. You heard that sales of WD-40 Specialists were up 18% in the first quarter. You heard that sales in the e-commerce channel were up 22% in the first quarter. You heard that after seventy-two years, we've kept only about 25% of our global growth potential on our core multi-use product, leaving roughly $1.4 billion in opportunity to nearly quadruple current sales. You heard that in the first quarter, our gross margin was 56.2%, up 150 basis points from the fourth quarter and 140 basis points from the same period last year. You heard that we've been able to increase our employee engagement index score to 95%, a new record high for our organization. You heard that we've accelerated buybacks and plan to fully utilize our remaining authorization, reinforcing our strong conviction in the company's long-term fundamentals. You heard that our board approved a quarterly cash dividend of $1.02 per share, up more than 8% from last quarter, and this increase reflects strong confidence in our cash flow outlook and our ongoing commitment to stockholder returns. You heard that we are off to a strong start in the second quarter with solid growth across all three trade blocks. And you heard that reaffirmed our guidance ranges. With the visibility we have into numerous activities planned for 2026, we're highly confident in delivering results at the mid to high end of our guidance ranges. Thank you for joining our call today. We would now be pleased to answer your questions. Operator: Ladies and gentlemen, if you would like to register a question, your signal to reach our equipment. If your question has been answered and you would like to withdraw your registration, please press 1 again. One moment for please for the first question. Our first question comes from the line of Mike Baker with D. A. Davidson. Please proceed with your question. Michael Allen Baker: Okay. Thanks. I'll have a few. Let me start with Sara, you said you said let me get the exact quote. All indicators, point to strong, results. So what if you could give us more detail on what these indicators are. And then the guidance so mid to high end of the full year range, Is that more bullish than when you originally gave the guidance? I could be wrong, but I don't remember you. I remember you giving a range on the fourth quarter, but not necessarily planning to mid to high end. So can you help me on that? Thanks. Sara K. Hyzer: Yeah. Sure thing, Mike. Nice to hear from you. So yeah, as we sit here today and look forward into the back half of the year with the activities that we have locked in place, we do feel highly confident in being able to get to that mid to high end of the range. And that really is just coming from the, you know, promotional activities that we have scheduled, and that we've been able to lock in even since year-end. So we're feeling really good about where The Americas is going to be landing the year. And some of the very variability will also be driven by Asia Pac's recovery in the back half of the year. So while they had a slower start, particularly in the marketing distributor markets, you know, when we're starting to look at the recovery starting in Q2, but most mostly that recovery will come in the back half of the year. Michael Allen Baker: Okay. And to follow-up on that, the, are you sounds like second quarter is off to a good start. It it Can we say are we specifically seeing a recovery in those Asia distributor markets? Or, I guess you sort of just said it. It sounds like it's maybe starting a little bit, but it's more in the back half. But but can we are are we seeing a recovery yet? Those Asia distributor markets? Steven A. Brass: Hey, Mike. It's Steve. So, we are. We're already seeing that beginning of Q1, and that's our expectation. So, we had a relatively softish Q1 overall. Q2, you're going to see stronger results, but then the real power comes in the back half of the year. And so as Sara is alluding to, we're going to have a US year like we haven't had in quite a while, a really strong year in The US, and that's the foundation. Are you European direct markets performing very, very well and we expect that to continue. It's really about those Asia distributor markets and that kind of Q4, Q1 kind of impact with that beginning to recover beginning in Q2 and then into the back half. And also our European marketing distributor markets recovering also. Michael Allen Baker: Got it. Let me sneak in one more. The buybacks, I so last year, bought back $12 million. I think at one point, you had said you expect it to double. Be about $24 million. But now you're saying you you expect to go through the entire, 30 another another $22 million this year. That that's more than a double, I think, if if my math is correct. Yep. Yeah. So so that's a more confident moment. Is that fair to say? Sara K. Hyzer: Yes. It's fair to say, Mike. That is good math, and, yes, I think we as as as soon as the window opened up, we the buybacks and really just have it phased to utilize the entire I think, just under $30 million availability up through the end of the fiscal year. Michael Allen Baker: Got it. Awesome. Thank you. Appreciate the time. Thank you. Steven A. Brass: Thank you. Operator: Our next question comes from the line of Daniel Rizzo with Jefferies. Please proceed with your question. Daniel Rizzo: Hey, you guys mentioned taking reducing supply chain costs. I was just wondering if you can provide color on what specifically you guys are doing. I mean, are you I don't know, multi-sourcing more or or, yeah, just which is the steps you're taking? Sara K. Hyzer: Yeah. Sure. So we a couple years ago, we actually invested in not only a head of global supply chain, but also head of global sourcing. And so there's been some new thinking around how we source supply, and we started with cans. So some of the can reductions or the can reductions that you're starting to see impact the business in the back half of last year and into this year is really the result of a different way of thinking about sourcing more globally. And the next phase of that is going to be moving into to to the specialty chemicals area. So there are concrete actions that we are taking to look at how and where we are sourcing our raw materials from. In addition to that, there's a lot of activity happening on the supply chain side around how to take costs of the miles traveled for our costs out of or miles traveled for our product. Cost out of the system, along with a fresh look at the distribution network, particularly in The United States and making sure that we are the distribution center sorry. Making sure that we're taking a look at how we're where our distribution centers are situated. Again, with the idea of trying to reduce the mileage that our products are traveling. So there are structural changes that are in the works. Some of that won't impact the business until FY '27 and beyond, but we're really excited about the work that the supply chain team has really taken on in the last couple of years and starting to see that come to fruition. Daniel Rizzo: So with the increase in the distribution centers, would that suggest maybe that there's some come some CapEx spend or some sort of spend to kind of just include improve your footprint in different in various regions? That's my first question. And two, given these moves, is I I know your guidance is 55% gross margins, but it seems where we are now and maybe even a little above is is is annually achievable or sustainable for over the long term. Sara K. Hyzer: So I'll address the CapEx piece. Since it's a completely outsourced model, a lot of the investments, if we do have to make investments, are happening by our third-party providers. We may at times help supplement the cash investment that they have, but a lot of that doesn't qualify as CapEx from our perspective. So think our guidance of 1% to 2% from a maintenance CapEx standpoint is still going to be a very good target that we'll be landing within. And then secondarily, and of course, as I answer the CapEx question, I'm blanking on the second part of the question. I was just wondering given all the moves you're making with reducing costs fine. Operator: Yep. Okay. Sara K. Hyzer: Yeah. The 55%. So, I mean, we're sitting above 55% right now. I hate to commit to something over the long term as we are always subject to oil availability and just specialty chemical variability. But we are continuing to find opportunities for us to take costs out of the system. And so we believe you can see in the guidance this year, we believe that there's opportunities for us to get margin accretion even this fiscal year and some of those initiatives that we have in the pipeline. Are gonna benefit us in in in next fiscal year. So we'll we'll be able to obviously guide to next fiscal year as we get to the end of this year, but there is right now, we're fairly confident a strong gross margin. Daniel Rizzo: Alright. Thank you very much. Operator: Thank you. Ladies and gentlemen, that does conclude our allotted time for questions. We thank you for your participation on today's conference call and ask that you please disconnect your line.
Operator: Good day, and welcome to the RPM International Fiscal Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matt Schlarb, Vice President of Investor Relations and Sustainability. Please go ahead. Matthew Schlarb: Thank you, Betsy, and welcome to RPM International's conference call for the fiscal 2026 second quarter. Today's call is being recorded. Joining today's call are Frank Sullivan, RPM's Chair and CEO; Rusty Gordon, Vice President and Chief Financial Officer; and Michael Laroche, Vice President, Controller and Chief Accounting Officer. The call is also being webcast and can be accessed live or replayed on the RPM website at www.rpminc.com. Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties, which could cause actual results to be materially different. For more information on these risks and uncertainties, please review RPM's reports filed with the SEC. During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website. Also, please note that our comments are on an as-adjusted basis and all comparisons are made to the second quarter of fiscal 2025, unless otherwise indicated. We have provided a supplemental slide presentation to support our comments on this call. It can be accessed in the Presentations & Webcasts section of the RPM website at www.rpminc.com. As a reminder, certain businesses that were previously part of the Specialty Products Group have been reallocated to other segments effective June 1, 2025. As a result, all references today reflect the updated structure and prior year figures have been recast accordingly. There's no impact on consolidated results. Now I will turn the call over to Frank. Frank Sullivan: Thank you, Matt. Today, I'll begin with an overview of our results and cover some recent actions we've taken, followed by Michael Laroche, who will cover the financials in more detail. Matt will then provide an update on cash flow, the balance sheet and our recent acquisition. And then Rusty Gordon will conclude our prepared remarks with our outlook. As always, we'll be happy to answer your questions after our prepared remarks. Beginning on Slide 3, we achieved record sales during the second quarter, aided by our targeted growth investments. However, momentum slowed as the quarter progressed. We began the quarter with a solid September, actually better on the top line and bottom line than our first quarter results. Then the trend of longer construction project lead times became more pronounced, the DIY demand softened, particularly in late October and through November, resulting in sales declines for those months. The government shutdown contributed to this slowdown as we saw activity in certain construction sectors tied to government funding come to a near standstill and consumer confidence decline. All segments generated positive sales growth for the quarter. However, this was not enough to offset higher expenses, including growth investments and costs from temporary inefficiencies as we continue to consolidate plant and warehouse facilities, resulting in a decline in margins in the quarter. To better align our SG&A structure with current market demand, we are acting quickly to execute optimization actions across the organization. In many ways, this is an acceleration of the SG&A structural realignment we have been preparing as part of a new MAP 3.0 program. Importantly, we also continue to have focused investment in our highest growth opportunities. And on the following slide are some details about what we're doing. Turning to Slide 4, we estimate that once fully implemented, our optimization actions will yield an annual benefit of approximately $100 million. We have realized $5 million of the benefits in the third quarter with an incremental $20 million in the fourth quarter with the remaining $75 million in fiscal 2027. As we are currently in the process of implementing these changes, we will have an estimate of the implementation cost by the time of our next earnings call in April. We're also continuing our focused investments in areas where we have seen good returns and have opportunities for continuing growth. These include high-performance buildings, business intelligence and innovation. For high-performance buildings, we are expanding our technical sales force in areas like turnkey roofing and enhancing our system offering through acquisitions. As an example, we purchased an expansion floor joints company, HCJ in fiscal 2025, which along with our other complementary RPM products enables us to meet the demanding requirements of high-performance floors. We expect additional acquisitions to expand our system offering similar to the recently announced agreement to acquire Kalzip, which Matt will speak to in a few minutes. We're also investing in improved business intelligence. This includes capitalizing on The Pink Stuff's expertise in leveraging data to develop targeted marketing campaigns across multiple RPM businesses. Additionally, following several years of ERP integrations, we have been investing in business intelligence to better utilize data company-wide. It is helping to guide decisions and actions in areas such as marketing, pricing and operations. Finally, innovation has been a core element of RPM's historical growth and through investments in people and facilities like our Innovation Center of Excellence, we have enhanced our product offering across our segments. One example is AlphaGuard PUMA, which is leading waterproofing technology and can be installed at temperatures as low as minus 20 degrees Fahrenheit. Another example is EucoTilt WB. It is a newly introduced water-based bond breaker that provides a clean separation of panels along with other benefits in the growing tilt up construction market. In summary, we are accelerating actions to optimize SG&A levels in response to soft market conditions while remaining focused on supporting our best growth opportunities. With our growth investments and the quality of our people, we remain well positioned to continue outpacing our markets, particularly as markets rebound. Lastly, in addition to the actions we announced today, we're in the process of developing our MAP 3.0 program and expect to provide details at our Investor Day event after the conclusion of our 2026 fiscal year. I'll now turn the call over to Michael Laroche to cover the financials. Michael Laroche: Thank you, Frank. On Slide 5, consolidated sales increased 3.5% to a record driven by acquisitions and engineered solutions for high-performance buildings, partially offset by continued DIY softness and longer construction project lead times, partially due to the government shutdown. Adjusted EBIT declined as top line growth and MAP 2025 benefits were more than offset by higher SG&A expenses from growth initiatives, M&A deal costs, health care and temporary inefficiencies from plant and warehouse facility consolidations. Adjusted EPS declined driven by lower adjusted EBIT and higher interest expense resulting from higher debt levels to finance M&A activity. Geographic results are on Slide 6, with Europe the fastest-growing region, driven by M&A and FX. North America grew approximately 2% as an increase in high-performance building solutions, partially offset by soft demand in DIY and in Canada. In emerging markets, growth was led by Africa and the Middle East as they continue to have success serving high-performance building and infrastructure projects. Moving to Slide 7. Construction Products Group sales grew to a record led by solutions for high-performance buildings. Project lead times lengthened as the quarter progressed, driven by the extended government shutdown. Additionally, weak sales in the disaster restoration business due to lower storm activity this year was a drag on growth. SG&A growth investments, temporary inefficiencies from plant consolidations and lower fixed cost absorption at businesses with volume declines more than offset MAP 2025 benefits and led to a decline in adjusted EBIT. Next, on Slide 8. Performance Coatings Group achieved record sales with broad-based growth across its businesses. Acquisitions also contributed to the growth. Adjusted EBIT was approximately flat as higher sales and MAP 2025 benefits were offset by growth investments and unfavorable mix. Consumer Group results are on Slide 9. M&A and pricing to recover inflation drove the sales growth as volumes declined due to soft DIY demand, particularly in November. Additionally, some sales were delayed as a result of software system implementations and the transition to a shared distribution center in Europe. Continued product rationalization also negatively impacted sales. Adjusted EBIT declined due to lower volumes, temporary inefficiencies from footprint consolidation and start-up of the shared distribution center in Europe. Additionally, lower demand at the Color Group also weighed on margins. In our cleaners business, the integration of the Star Brands Group, the parent of The Pink Stuff remains on track. However, we reversed a $12.7 million liability associated with an earn-out for this acquisition. This earn-out liability was originally calculated based on a probability weighted sales forecast, and much of the value was driven by more aggressive sales scenarios. Current forecasts are more in line with our base case assumptions and the aggressive targets needed to achieve the earn-out are unlikely to be met, which is driving a reversal. This $12.7 million gain has been excluded from our adjusted EBIT. Now I'll turn the call over to Matt, who will cover the balance sheet and cash flow. Matthew Schlarb: Thank you, Mike. Starting with cash flow from operations on Slide 10. It was up $66.3 million in the second quarter compared to the prior year with the increase attributable to improved working capital efficiency. This is the second highest second quarter in the company's history and helped us pay down $127 million in debt in the first half of the year, and that's in addition to returning $169 million to shareholders through dividends and share repurchases and spending $162 million on acquisitions. We are proud that in October, we increased our dividend for the 52nd consecutive year. This is a testament to our steady cash flow and our strategically balanced business model and focus on maintenance and repair. Liquidity remains strong at $1.1 billion, and combined with the strong balance sheet, we have a high level of flexibility in capital allocation decisions. As an example, yesterday, we announced an agreement to acquire a company that will strengthen our systems offering for high-performance buildings that Frank discussed earlier. Turning to Slide 11, you'll see more information on the agreement to acquire Kalzip. They are a German-based leader in metal-based roofing and facades, which is a fast-growing part of the construction market because of their durability, lower maintenance and high performance. The incorporation of Kalzip products into our existing offerings will strengthen CPG's ability to provide building envelope systems that enhance efficiency, durability and aesthetics, while also meeting or exceeding demanding specifications. The company had calendar year 2024 sales of approximately EUR 75 million, and the acquisition is expected to close in the fourth -- fiscal fourth quarter of 2026. Now I'd like to turn the call over to Rusty to cover the outlook. Russell Gordon: Thank you, Matt. Our outlook for the third quarter can be found on Slide 12. Market conditions are expected to remain sluggish with soft DIY demand and continued longer lead times for construction projects. We are encouraged to see that construction pipelines remain solid, although visibility of when this pipeline converts to actual construction activity remains unclear. Despite these macro challenges, we expect to outgrow our underlying markets. Thanks to the targeted growth investments we have been making. We will also benefit from the implementation of SG&A focused optimization actions, as Frank mentioned, although in the third quarter, that will be offset by continued health care inflation and an M&A deal expenses. Overall, we expect consolidated sales to increase by mid-single digits in the quarter. By segment, Consumer is expected to grow sales moderately more than PCG and CPG due to acquisitions. We anticipate adjusted EBIT will grow mid- to high single digits during the quarter. Moving to our fourth quarter outlook on Slide 13. We expect sales to grow in the mid-single-digit range. With our solid construction project pipeline, we expect some of the projects that were recently delayed to convert into activity by the end of the year. Also, if weather delays some projects from the third quarter, as we saw last year, we expect most of these to be realized in the fourth quarter. We will continue to benefit from acquisitions and the targeted growth investments we have been making, along with our resilient repair and maintenance focus and ability to sell engineered systems and solutions to high-performance buildings. In the fourth quarter, we'll also see more of the incremental benefit from the SG&A focused actions that we are currently implementing and should more than offset higher health care and M&A deal expenses. Taking all of this into account, we anticipate adjusted EBIT in the fourth quarter will be up low to high single digits with volume growth being the key variable. This concludes our prepared remarks, and we are now happy to answer your questions. Operator: [Operator Instructions] The first question today comes from Ghansham Panjabi with Baird. Ghansham Panjabi: So I guess starting off with maybe Slide 3 where you have the organic sales breakdown during the quarter. I know it can vary quite a bit on a monthly basis depending on comps, et cetera. But could you give us a bit more color as to how the business has specifically performed? The 3 operating segments was -- just trying to get a sense as to whether the deterioration was specific to Construction and then also Consumer or the Performance also get impacted? Frank Sullivan: Sure. So if you look at -- this is kind of unique, and I don't expect us to do this very often in the future. But when we provided guidance on our last investor call, the latest information we had was in September. And the unique element is talking about months, which we are in this call. Actually, in September, we saw margin improvement and solid growth at the Construction Products Group and the Performance Coatings Group and some continued weakness, which has been pretty prevalent across the whole peer group in Consumer. Pretty much across the board as we got into the back half of October and into November, we saw a deterioration across all 3 of our segments. Ghansham Panjabi: Got you. And then in terms of the $100 million SG&A initiative that you outlined, how much of that should we assume is temporary versus permanent? And is that just a reappropriation of spending relative to the previous growth investments? I'm just trying to get a sense as to whether you've curtailed some of those growth investments as well, just given the change in the operating conditions. Frank Sullivan: Sure. As you know, we've been working on a new MAP 3.0, not sure what we're going to call it yet. And like a lot of folks have kind of put off longer-term forecasts in the midst of all the tariff disruptions and other elements. It's our expectation, regardless of where the markets are that we would provide details this summer, whether it's on our July call or perhaps an Investor Day. So we have been preparing for that with our leadership team and our Board. So to a certain extent, the disappointing kind of market downturn, which is hopefully temporary, accelerated some of our thinking there. The $100 million is roughly $70 million in personnel-related RIFs across the globe and about $30 million in discretionary expense reductions. Operator: The next question comes from Matthew DeYoe with Bank of America. Matthew DeYoe: The fiscal 3Q and 4Q guidance seems to imply much better incremental margins, maybe not great, but certainly better than where we were. Can you help provide a little bit more confidence as to the rate of change of the fixed cost absorption as we move through fiscal 3Q and into 4Q? Frank Sullivan: Sure. So a couple of things. Number one, we're rounding easier comps, and so that will certainly help us. Secondly, the structural SG&A actions that we announced today and that we are implementing as we speak, will add to that leverage in ways that we weren't seeing in the first half of the year. And then I think secondly, with some improvement in unit volume growth, which we anticipate, you'll see a reversal in absorption, which hurt us mightily in Q2 as unit volumes declined in October and November. And to the extent they improve in the third and fourth quarter, that will be a nice swing both versus Q2 and also last year. Matthew DeYoe: All right. And as I think about some of the acquisitions that are starting to layer in at a decent clip here. I mean, how should we think about EBIT accretion from this? Is this -- are these deals kind of like non-EBIT accretive given D&A write-up? Or is it at margin, above margin? How should we think about the layering in there? Frank Sullivan: Sure. It takes some time for these to get integrated into -- particularly in our Construction Products Group, where most of these have happened. One of the areas for real possible strength for us in the second half, for instance, is Pure Air. It was an HVA (sic) [ HVAC ] reconditioning and rehabilitation project or product system that we acquired a couple of years ago. It took us longer than we thought to get properly certified in every state, and we are starting to get traction there. And so I think an 18-month to 2-year cycle is the right way to think about, for instance, at Kalzip, high-margin, unique metal roofing business in Germany, both some basic core stuff that we're in, in terms of metal roofing and some high-profile projects, principally a European business. So back to that 18 to 24 months, I think that's the right time frame to think about how we can integrate that into a Tremco CPG distribution and sales effort more globally. Matthew DeYoe: I guess I appreciate that from an operating integration perspective, but would that also kind of align with earnings accretion as well? Frank Sullivan: Absolutely. So in the early years of a Pure Air, not really accretive. And I believe as we get into calendar '26, and certainly, the back half of fiscal '26, what's a relatively small acquisition will be nicely accretive. Operator: The next question comes from Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: I guess I just wanted to ask about maybe some of the transitory costs you guys incurred this quarter. How much would you attribute maybe to the government shutdown and as well as SG&A -- increased SG&A spending? And how do you see that trending as you go forward? Russell Gordon: Sure, Arun. This is Rusty here. In terms of some of the transitory costs, we did get hit hard on absorption and higher conversion costs. Part of that is due to the plant shutdowns going on and transition of facilities. We also opened up a shared distribution center in Europe with some inefficiencies at the outset, which will be resolved as we get up to speed there. So in total, we lost almost 1 percentage point in margin just on higher conversion costs. Some of that was volume driven, maybe $4 million, $5 million of that was due to transition of facilities, whether it's shutdowns or changes in distribution. So hopefully, that gives you some color. Arun Viswanathan: Great. And as you look out maybe into the second half of fiscal '26 and into '27, what would be the run rate on some of the savings? I know that you will capture a portion, as you said, maybe $5 million here in the third quarter. But when do you expect to see the full amount of that savings kind of flowing through the P&L? Frank Sullivan: Sure. I think the full amount will start to flow through in Q1 of '27. We are executing as we speak, what will be about a $25 million per quarter run rate. And we would expect most of that activity to be completed and announced internally by the end of Q3. Operator: The next question comes from John McNulty with BMO Capital Markets. John McNulty: Maybe a question on the 4Q outlook because 3Q is so seasonally light, it probably doesn't matter all that much. You've got a pretty wide range, low single-digit to high single-digit growth in EBIT. And I know in some prepared remarks, you commented that it's largely contingent on volumes. Is the high end of the range assuming the world starts to feel better again? Or is that just the recapturing of maybe some lost business around the government shutdowns? I guess maybe you can peel back the onion a little bit in terms of what gets you to the low end of that range and what gets you to the high end? Frank Sullivan: Sure. As for the lost business relative to government shutdown to the extent that's real, I would expect us to see that pick up in Q3. Q4 really is about volume. We will be rounding 2 years of challenging consumer takeaway unit volume growth in Consumer. So we'll be seeing easier comps there. Part of the changes we've made with this SG&A structural realignment in our consumer business with what we hope will be a positive effect to margin and the bottom line. And we have a really strong backlog in our industrial business in both CPG and PCG. If that becomes to be realized, again, you'll see us have a pretty good fourth quarter. But given the volatility that we're experiencing just in this quarter, a really solid by any measure September and then a really disappointing by any measure November, makes us a little hesitant to be more specific about coming months because that volatility seems to be continuing. John McNulty: Okay. Fair enough. And then I guess, just given the general weak environment that continues, if anything, maybe it got a little bit worse overall. I guess, can you speak to what you're seeing from a raw material perspective? Are you starting to see any signs of relief? I know tariffs kind of made that a little more difficult over the last few quarters. I guess, what is your outlook as you're looking forward? Frank Sullivan: Sure. I'll let Matt provide some specifics. But generally, the trends that we're seeing both in the marketplace and geopolitically suggest that, that should be a tailwind for us in the second half of the year. Matthew Schlarb: Yes. So absent tariffs, yes, we are seeing raw material inflation coming down and even turning into deflation, but you have these pockets of inflation in some of the categories we've talked about in the past, that continues. So these are really tariff-driven. So looking at metal packaging, that's up low teens. Epoxy resins are actually up high single digits. And then we have some specific categories that really can only be sourced from Asia. These are more niche products, not a huge dollar spend, but when you're facing tariffs of 20%, 30%, 50%, it can add up. And so all in all, taking all into account, we expect a little bit of inflation in the third and fourth quarter, but that's all tariff-driven. Frank Sullivan: And again, I think geopolitically, where underlying base chemicals are going, we would expect that to be a tailwind. And as we get into Q4 and certainly into fiscal '27, we will be annualizing the impact of tariffs, for instance, on steel packaging. John McNulty: Okay. Got it. Fair enough. And maybe if I could slip in one last one. Just on The Pink Stuff earn-out, I know there were kind of a wide range of outcomes in terms of how much you kind of felt like you could really drive that business. I guess what now are the base expectations since you took down that earn-out a bit? I guess, how should we be thinking about where that business can go over the next few years? Frank Sullivan: Sure. The Pink Stuff acquisition is on track for our base case as Mike alluded to. The earn-out was a relatively short 2-year earn-out, and it was based on double-digit unit volume growth. And in this environment, we are not hitting double-digit unit volume growth, and we don't expect to in calendar '26. And so that was the basis for the reversal of the earn-out. Operator: The next question comes from Patrick Cunningham with Citi. Patrick Cunningham: Just on the weakness in Consumer Group, how much would you attribute to underlying market softness versus some of the other things you called out like sales delays or targeted product rationalization? Frank Sullivan: I think most of it has been underlying consumer takeaway. And again, it got weaker. It picked up a little bit in September. We had solid results across all our businesses in that month. And then it got weaker in the quarter as it progressed, Understanding how much of that is government shutdown and other issues, it's hard to know. We're also approaching year-end for a lot of the major retailers. So there continues to be working capital inventory management levels there. As I said earlier, we will be rounding as we get into calendar '26, 2 years of easier comps. And so I think we will see better results in the second half of fiscal '26 and better results in fiscal '27 for Consumer. We don't need a roaring comeback to start seeing unit volume going in the right direction, which will accrete to our bottom line nicely. Patrick Cunningham: Understood. And then just on price realization, where did price shake out in fiscal 2Q? And has there been any tension on getting full realization in the Consumer Group given the weak demand environment and some disinflation on the raw side? Frank Sullivan: Price was less than 1% in Q2. And I would anticipate about the same in Q3, unless, of course, we see any material spikes. And we have not had a real challenge over the last couple of years in terms of getting price where needed. In Consumer, in particular, we did bump into some price elasticity issues relative to price points at retail, and we have adjusted accordingly. That was really a spring of '26 -- I'm sorry, spring of '25 phenomenon, not Q2. Operator: The next question comes from Mike Harrison with Seaport Research Partners. Michael Harrison: Was hoping that we could just dig in a little bit more on this impact from the software system implementation in Consumer sales, and it sounds like maybe EBIT, too. Is that implementation now complete? Or should we still expect maybe some delays or impacts in Q3? And I guess to the extent that sales were delayed, are you realizing those sales then in Q3? Or is it going to take longer for those sales to materialize? Russell Gordon: Yes, Mike, this is Rusty here. Yes, that was temporary. We have resolved that. It was a simple matter of new systems as well as a new warehouse in Europe. The new system was implemented in a couple of places in Consumer. But we are up and fully running. So yes, that was a temporary situation. Michael Harrison: All right. And then within the Performance Coatings business, you noted broad-based growth really across that business. I was hoping you could give a little more color on what portions of the business are particularly encouraging to you as you look out over the next few quarters. Frank Sullivan: Sure. Our Stonhard flooring business is continuing to grow nicely, really industrial capital spending and onshoring. Fiber grade is benefiting from a lot of the data center build-out. A lot of their functional systems are used in multiple areas there. And so those are 2 probably the strongest areas. And we're also picking up some market share, a little bit of expensive margin in our Carboline business. Operator: The next question comes from Frank Mitsch with Fermium Research. Frank Mitsch: I must say I am a fan of the granularity that you provided in Slide 3. Obviously, it shows a -- how the quarter started out pretty good, therefore, leading to some optimism in terms of the quarter, fiscal second quarter, but then deteriorated in October and November. That trend does not look like to be your friend. Here we are on January 8. How did December turn out? Frank Sullivan: Sure. Well, as I said earlier, it's not been our habit, and I'd like very quickly in the next earnings call to get off this habit of talking about monthly results, but December is over. And herein lies the conundrum of volatility, our December sales were up 12.1%, unit volume was up 7%. And so how much of that is a pickup of Q2 government shutdown related recovery? And how much of that is underlying strength in the areas that we're continuing to invest in, was actually across the board. So we did see a little pickup in consumer, but a significant pickup in construction products in our roofing business. So we're off to a great start in December. The challenge we have is understanding what that number means. And how much of that is really a pickup of what was a temporarily weaker Q2, how much of that indicates that things are moving in the right direction. It's anybody's guess as to whether January and February will look like December or whether they'll look like November. And so I think that's why we have the wider range that we have in our Q3 and Q4 forecast. Frank Mitsch: Wow, that's -- I did not expect that answer. And let me drill down just a little bit. I know you're not in the habit of giving monthly sales, but I'm just curious, it begs the question, is there anything with the year ago result? Was there an artificially depressed December of '24? Was there a super November of '24. Is there anything in the year ago comps or -- that would have led to the negative [ 6 ] November, positive [ 12 ] December? Or this is really the kind of underlying business as you see it right now? Frank Sullivan: You'll recall, we had a weak third quarter last year. A lot of that was winter weather related. So certainly, we're rounding some easier comps. And I think that's a part of why we're confident in the second half, albeit within a range of generating solid sales and earnings growth in Q3 and Q4. And so that's part of the answer. Operator: The next question comes from John Roberts with Mizuho. John Ezekiel Roberts: Aside from disaster restoration, would you say that weather was not a factor in either the quarter or December so far? Frank Sullivan: No. I think weather was a factor. We got hit pretty hard across the country in the Thanksgiving, kind of late November period with heavy snow and that continued into December. We're certainly seeing a relief in that right now. And so I don't expect year-over-year for that to be a big issue in Q3 because we got clobbered last year. And so year-over-year, I think the trends are moving in the right direction, both versus easier comps, how we're starting the quarter and the impact of the acceleration of our SG&A realignment, which will not necessarily impact Q3 much. It will impact Q3 in the last month but will start to be realized more fully in Q4. John Ezekiel Roberts: And do you compete at all against BASF's industrial coatings business or any of the areas of overlap between Axalta and Akzo's industrial coatings businesses. I don't perceive there's a lot of opportunities for share gain as there's maybe some disruption across those businesses. But is there -- are there any key areas of overlap? Frank Sullivan: We have a $400 million high-performance industrial coatings business that's part of our Performance Coatings Group. They're really focused on wood stains and finishes. We have a real nice market share in what's left of that business, cabinetry, doors, windows in North America. And that business is actually growing. We're picking up share in a couple of places. It incorporates our TCI Powder Coatings business as well as a small but growing OEM liquid metal business. And so that's an area where I would expect us to continue to grow. We reorganized that into a comprehensive business from about 4 or 5 different separate pieces. And that reorganization, what we're doing at the R&D center in Greensboro, which is primarily owned by our RPM OEM coatings business is actually a bright spot for us right now despite economic problems. Operator: The next question comes from Kevin McCarthy with Vertical Research Partners. Kevin McCarthy: A question on M&A. Can you talk through why you decided to pursue Kalzip? And then more broadly, if I look at the recent acquisitions, many of them are domiciled in Europe. And I was wondering if you could speak to that. Is that strategic on your part or just simply a function of where you're seeing the best value or opportunities now? Frank Sullivan: So the simple answer is yes to both, very strategic, but in M&A, it's also what's available for sale at a value that makes sense for us. We sell tens of millions of dollars of purchase for resale, metal roofing in the U.S. And we have been looking for opportunities to enhance that purchase for resale with stuff that we own and control. Kalzip is a unique asset, German-based. Their specialty is actually a lot of high-profile projects, which we're not in. And so we're pretty excited about the ability to take some of their patented technology, bring it to the U.S. and accelerate the metal roofing elements of what some of our Tremco Roofing salesmen are already selling as well as helping to expand that metal roofing capability globally. Kalzip has had projects in Europe, Middle East and Asia, areas where our Tremco Roofing business is not really present. So we're pretty excited about it. As I commented earlier, it's a real strategic play. It's going to take us some time to take that technology and bring it into the U.S. But when we do, the opportunities for us to add tens of millions of dollars or more in the U.S. market where we have an awesome sales force on top of what's about a EUR 75 million revenue business is something we're pretty excited about. Kevin McCarthy: Very good. And then secondly, if I may, I wanted to revisit the subject of pricing. I think you said in response to a prior question that the price contribution was less than 1% in the quarter. And I was somewhat surprised to hear that. My recollection was that you were targeting higher contributions and acceleration into the fiscal second quarter. So just wondering if you could just unpack that and talk a little bit about where you're seeing the most and least traction and maybe segment contributions and whether or not you might anticipate any acceleration on price in the back half of the year? Frank Sullivan: Sure. Again, it will be circumstantial. We're past the period of heavy inflation that drove price increases meaningfully across all of our businesses. And so in the quarter, less than 1%, but we got more price in Consumer because that's the place where we're having the biggest challenge. Again, it's the place where metal packaging has got the biggest impact across RPM. And then selectively, for instance, around epoxy resins and a few other places, we're getting price in selected product categories but not across the board like we were a few years ago. Operator: The next question comes from Mike Sison with Wells Fargo. Michael Sison: I guess, with your outlook for the third and fourth quarter for sales growth, how much are you expecting that to be organic sales growth and acquisitions? And I know you have a lot of acquisitions in there. So just curious if you had sort of a feel for how much organic growth is embedded in the third and fourth quarter sales outlook? Frank Sullivan: [Technical Difficulty] Okay. I think we're back on, a temporary drop there. In response to Mike Sison's question -- can you hear me? Michael Sison: Yes, I can hear you, Frank. Frank Sullivan: Okay. Thank you. So I'll just point back to the monthly information we provided. You saw what we talked about in Q1. We talked about on Slide 3, the unit volume growth month by month, September, October, November. I just provided it for December. And it's our expectation that the focused growth investments that we are talking about drive organic growth. That's how we're going to leverage to the bottom line. And we provide quarter-by-quarter, the breakout between organic growth, FX and acquisitions. But it's our expectation that we will be seeing better organic growth in the second half as a result of the comments we've made earlier, easier comps, focused growth investments and hopefully, some improvement in market dynamics. But given the volatility we're seeing, again, it's anybody's guess as to whether January and February and subsequent months, look like November or December that were starkly different and perhaps a little bit of an average given the impact of the government shutdown. It's hard for us to know what that is. But I can tell you for us in every business, the negative impact of the shutdown was greater than 0. Michael Sison: Got it. And then I guess for the third quarter, with the outlook being mid-single digits and December doing pretty strong. I mean does that imply that January and February has tough comps and might be negative? Or do you think we'll just be positive for the rest of the way? Frank Sullivan: I think we'll be positive, but I don't know. And we will learn in January, for instance, how much of the real strength in December was picking up lost business in Q2 because of the government shutdown or how much of it is a release, for instance, of some of the good backlog that we continue to build in our Construction Products Group and our Performance Coatings Group. And so if we had higher confidence, we'd be putting out maybe a better forecast. But given the volatility we're experiencing, it's hard to know as we sit here today. Operator: The next question comes from Josh Spector with UBS. Joshua Spector: I just have 2 quick follow-ups here. First, just going back to the transitory costs. I think last quarter, you guys framed it at about $30 million, and you had roughly equal buckets between health care, some of the plant consolidation and then SG&A growth. Is that the right number that was in the August quarter? And can you help us think about what that looks like over the next couple of quarters? Russell Gordon: Sure. Yes. Josh, looking at second quarter, health care was still an issue. We had probably in the $6 million, $7 million range of higher health care costs. In terms of the impact -- unfavorable impact on conversion costs, like I mentioned, that was about 1% of sales hitting our margins. So that's close to $20 million. And what was the third category you talked about? Joshua Spector: I believe you had the plant consolidation, the SG&A investment, I think, is the third one. Russell Gordon: Yes. The SG&A investment is continuing, of course, on a more selective basis given the risk activity we're talking about. Joshua Spector: Okay. I guess then just on that last point with the SG&A. I mean, someone asked earlier about your saving cost, your investing, are you then investing less in some of the savings? Is that you're moving people around there? Or are you cutting people around that? And I think just one other follow-up to sneak in there is that you said the cash costs, we won't know until April, I believe, but you think those costs are going to be ramping up over the next couple of months. So would there be like a $60 million, $70 million charge for that coming up shortly? Frank Sullivan: Yes. The details we'll provide in April, but 2/3 of that will be realized here in the next few weeks and 1/3 will play out into the spring, particularly related to notice provisions and things like that in certain countries outside of the U.S. In terms of your earlier question, some of our expense reduction activities on a gross basis will be higher than the numbers we provided. And then we are reallocating some of those dollars into our best opportunities for growth. And so certain of this is expense reduction and a structural realignment that we have been working on for some time. Given the challenging performance in October and November, we saw that as an opportunity to accelerate that. And others of it is a reallocation of growth capital in our P&L from certain areas that aren't growing to areas that are growing nicely, and we continue -- we intend to continue to support that. Operator: The next question comes from David Begleiter with Deutsche Bank. David Begleiter: Frank, staying on the cost issue. Of the MAP 3.0 savings, how much is being pulled into this program? Is it the majority? Is it a minority? Or is it a large amount? Frank Sullivan: As we've laid out, the plans that we're executing today on a net basis will have about $100 million impact, $75 million of that will be a net additional to fiscal '27, and then we will provide more detail, as I said, either in our July call or in a separate Investor Day about the details of MAP 3.0 that will incorporate manufacturing efficiency, procurement as well as a more methodical approach to SG&A. And so it will be at least $75 million, but likely higher. But again, the details will be provided this summer. David Begleiter: And of these costs you laid out today, how much are manufacturing versus SG&A? And are you closing plants? Obviously, you're firing people, but what functions are those people doing today? And how are they being replaced? Frank Sullivan: So in some instances, it's a reallocation of certain spending from one place to another. Of the $100 million, probably $10 million or $15 million will impact cost of goods sold, but the balance of it will be in SG&A. And again, in terms of more specifics, we'll provide it in April as we are in the midst of executing right now. Operator: The next question comes from Vincent Andrews with Morgan Stanley. Vincent Andrews: If I could ask on the government -- on the government shutdown, can you just talk a little bit about how much of your sales are sold directly to government contractors in the different segments versus sales to traditional customers that are working on projects might be funded by the government? Are we talking 5% plus or minus? Is that the order of magnitude? And so when that goes to 0, it's meaningful. Maybe we could start there. Frank Sullivan: Sure. We don't sell a lot direct to the federal government. A lot of it has to do with state and local spending that's tied to some government subsidies. So for instance, in schools, there are a number of state and federal programs, education, particularly impacting our Construction Products Group. Probably 20% of their revenues is tied to the education market. And so you saw both government shutdown-wise and, let's call it, Washington dysfunction-wise, some dynamics that froze the different funding elements of public education. We're starting to see that unfreeze, which is a good thing. And so it's more the follow-on effect of education funding and some infrastructure as opposed to any specific direct business. We don't do much, if any, direct GSA business, for instance. Vincent Andrews: Okay. That's helpful. And then on the $100 million, if you could just help us think about how that's going to be spread across the 3 segments, that would be helpful. Frank Sullivan: Sure. We'll provide that detail in April. We are in the midst of executing and people deserve to understand what's happening within RPM before people hear it publicly. It's pretty much that simple. Operator: The next question comes from Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: In fiscal 2025, your SG&A growth was pretty flat. And for the first 2 quarters of the year, it's up about 10%, which is about $50 million a quarter. Can you speak in general to what exactly has happened? And when you talk about a $100 million reduction in SG&A, what are you trying to accomplish with this? What's happening to the overall rate of your SG&A growth? Frank Sullivan: Sure. I would tell you, broadly speaking, in terms of expenses, I think of it as in 3 categories. One is some higher corporate expenses related to health care, insurance, and in particular, which is extraordinary M&A. We've done a lot of M&A transactions overseas, and they have a higher complete -- cost rate versus what we do in the U.S. And so that's part of it. The second one is some of the follow-on to the MAP initiatives in terms of finalizing plant consolidations and/or consolidating distribution and warehousing. I'll give you one example of what that is practically. The largest North American plant -- actually, the largest plant globally for Tremco was in Canada. We sold that plant 2 years ago and have had a window to move all that production to mostly United States. It has nothing to do with geopolitics. It was a plant that was in the sticks 30 years ago and suburban Toronto has been surrounding that plant. And so we had an opportunity to sell that for a nice price, recognizing we were getting regulatorily moved out of that space. We are incurring duplicate inventory. We are incurring duplicate production costs as we move that mostly from Toronto to Georgia and Texas and that should be completed by the end of March. So that is the type of duplicate conversion costs that we're seeing there. We're also seeing it in Europe and in parts of the U.S. as we consolidate distribution, all of which should make us more efficient in the future, but which right now is hurting us. And then the third category, Jeff, is what we've talked about, growth investments. We had a deliberate belief that we could invest in certain areas after frustrating 1.5 years of low growth, no growth or 2 years of low growth, no growth environment. And that was proving true through 5 months. We had better growth rates in most categories than our peers. September reinforced that because sales, organic growth and leverage to the bottom line was actually better than Q1. And for some reasons, we understand and some reasons, we're just guessing at that fell apart in October and November. Last comment I'll make is that the structural SG&A changes are things that we've been working on for some time. And as I commented, we made the decision to put off communications on a new long-term strategic plan until this summer. So a lot of this is work in progress as opposed to a quick reaction to a short -- hopefully, a short-term temporary downturn. Jeffrey Zekauskas: And then quickly, for your acquisition effects in fiscal '26, are they accretive to your margins? Or do they trim your margins? Frank Sullivan: So in fiscal '26 -- end of fiscal '25 and fiscal '26, they have hurt our margins. Most of that is transaction costs. We have significant transaction costs, for instance, on The Pink Stuff and Ready Seal that was at the end of last fiscal year and into the first quarter. Most of these small transactions that I've talked about have been overseas in our Construction Products Group. We're very excited about them, but they carry a relatively higher transaction cost in terms of legal fees and due diligence fees relative to the size of the revenues. Excluding transaction costs, which, of course, flow through our P&L, they're modestly accretive, and we expect them to be very nicely accretive in the coming years. But for the first half of fiscal '26, they have hurt us and been dilutive principally because of the high cost, and we referenced that as part of the higher corporate expense. Operator: [Operator Instructions] The next question comes from Aleksey Yefremov with KeyBanc Capital Markets. Aleksey Yefremov: I think you mentioned earlier, backlogs remain healthy. So should we take it as your backlogs today are same or higher than 3 months ago? Or have your backlogs declined? Frank Sullivan: So our backlogs are stable in our Performance Coatings Group and our backlogs continue to grow in the Construction Products Group. Aleksey Yefremov: Got it. And in terms of facilities consolidations, I mean you talked about first half of this fiscal year, could you give us any sense of what to expect in terms of future actions in the second half of '26 and perhaps in '27, even directionally, are facilities consolidations going to continue at about the same pace or higher or lower pace of costs related to these actions? Frank Sullivan: So we're developing that. And again, details on a broader longer-term approach are something we expect to communicate publicly this summer. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Frank Sullivan, Chairman and CEO, for any closing remarks. Frank Sullivan: Thank you, and thank you for participating on today's call. We're executing an SG&A structural realignment that we see as a down payment on our new long-term strategic plan. We look forward to providing details on a new MAP 3.0 later this year. In the meantime, we are focused on outgrowing our underlying markets and controlling what we can. This strategy will help us navigate the current economic challenges and volatility and position us for outperformance as markets recover. Thank you again for your participation on our call today, and we wish everybody a happy new year. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the AZZ Inc. quarter 3 Full Year Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Phillip Kupper with Three Part Advisors. Please go ahead. Phillip Kupper: Good morning. Thank you for joining us today to review AZZ's third quarter fiscal 2026 results for the period ended November 30, 2025. Joining the call today are Tom Ferguson, President and Chief Executive Officer; Jason Crawford, Chief Financial Officer; and David Nark, Chief Marketing Communications and Investor Relations Officer. After today's prepared remarks, we will open the call for questions. Please note the live webcast for today's call can be found at www.azz.com/investor-events. Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Either nature, forward-looking statements are uncertain and outside the company's control. Except for actual results, AZZ's comments containing forward-looking statements may involve risks and uncertainties, some of which are detailed from time to time in documents filed by AZZ with the Securities and Exchange Commission, including the latest annual report on Form 10-K. These statements are not guarantees of future performance Therefore, undue reliance should not be placed upon them. Actual results could differ materially from these expectations. In addition, today's call we'll discuss non-GAAP financial measures, which should be considered supplemental, not as a substitute for GAAP financial measures. We refer shareholders to our reconciliations from GAAP to non-GAAP measures contained in today's earnings press release. I would now like to turn the call over to Tom Fergus. Thomas Ferguson: Thank you, Phillip. Thank you all for joining us today, and Happy New Year. After I provide a brief overview of our results and an update on what we are seeing across our segments, Jason will cover AZZ's detailed financial results, and Dave will discuss industry dynamics across our end markets. First, let me share a couple of important milestones. We achieved record sales of $426 million in the third quarter, surpassing any quarter in our company's history. And we had a record high trailing 12-month adjusted EBITDA of $358 million. These financial results reflect our unwavering commitment to execute on our disciplined strategy that focuses on driving growth and creating shareholder value. This quarter, we maintained our cash dividend of $0.20 per share, marking 63 consecutive quarters of consistently returning capital to our shareholders through cash dividends. Now turning to our third quarter results. We grew total sales by 5.5% and generated a robust adjusted EBITDA of more than $91 million. Metal Coatings delivered an exceptional quarter, with sales rising 15.7% year-over-year, fueled by higher volumes and strong demand from infrastructure projects. Segment EBITDA margins of 30.3% reflect an increased mix of larger projects in electrical, solar and transmission and distribution work, which tend to be more price competitive. Precoat Metals delivered sequential improvement over the prior quarter, though sales were down 1.8% year-over-year. This was primarily the result of continued softness in construction, HVAC and transportation markets. Meanwhile, food and beverage container demand reached new record highs, driven by new customer acquisitions and market share gains. This trend further underscores the accelerated shift from plastics to aluminum, which aligns with the ongoing ramp-up at our new Washington, Missouri facility. Overall, the increase in end market demand was driven by growth in infrastructure modernization, energy transition and industrial reshoring along with data center construction, integrated LNG power generation and renewable energy projects. These market sectors depend on galvanized steel and coated materials, areas where AZZ offers unmatched scale, coating solutions expertise, and exclusive technologies to deliver exceptional value to our customers. Our diversified portfolio positions us uniquely to seize project opportunities across multiple end markets. Dave will share more details on this in a moment. We continue to emphasize AZZ's proprietary ERP platform as a core differentiator within our business model. Our Digital Galvanizing System and coil zone platforms deepen customer relationships and reinforce our competitive moat while providing durable returns on invested capital. Operationally, the systems are margin enhancing through higher throughput, improved yields, better zinc utilization, improved administrative and production efficiencies and increased customer connectivity. Importantly, these benefits are achieved with limited incremental capital, making our technology investments highly accretive to ROIC, while also reducing waste and supporting more sustainable operations. Subsequent to quarter end, AVAIL completed the sale of a majority interest in its Welding Solutions Business, which they refer to as WSI. The transaction creates value for shareholders and further simplifies AVAIL's portfolio. Our joint venture partner remains focused on completing additional divestitures with only the Rig-A-Lite and a small portion of international WSI business left. With that, I will turn it over to Jason. Jason Crawford: Thank you, Tom. For the third quarter, we reported record sales of $425.7 million, representing a 5.5% increase from $403.7 million in the prior year period. The growth was led by our Metal Coatings segment, where sales increased 15.7% year-over-year, driven by higher volumes and infrastructure-related spending across our largest verticals. Although Precoat Metals sales improved sequentially from last quarter, sales were down 1.8% from the same quarter of the prior year, due to an overall weaker end market environment. Driven by lower volumes in construction, HVAC and Transportation, partially offset by residential reroofing and stronger food and beverage container sales. Within Precoat Metals, excess imported prepainted metal has worked its way through the market. And with tariffs likely to remain in place, we anticipate Precoat Metals will start to benefit from the replacement of prepainting metal imports. The company's third quarter gross profit was $101.9 million, or 23.9% of sales, compared to $97.8 million or 24.2% of sales in the same quarter of the prior year. Selling, General and Administrative expenses totaled $32.5 million in the third quarter, or 7.6% of sales. This compares favorably to last year's third quarter, which was $39.2 million, or 9.7% of sales, which included costs associated with severance and one-off employee retirement expenses. Operating income for the quarter was $69.5 million, or 16.3% of sales, a 180 basis point improvement compared with $58.5 million, or 14.5% of sales, in the prior year third quarter, due to operational improvements this year and nonrecurring items included in last year's third quarter results. For the third quarter, we reported a net loss in equity and earnings of $1.4 million. This was after recording $0.6 million post-closing loss adjustment on the previously announced divestiture of the Electrical Products business. Losses in the quarter from our AVAIL joint venture are primarily due to the excess overhead costs resulting from this divestiture. Compared to the third quarter of last year, equity in earnings were $8.6 million lower. With the sale of WSI in December 31, 2025, and progress in resizing AVAIL's overhead costs, we are forecasting equity and earnings from unconsolidated subsidiaries to be 0 for the fourth quarter of this year. Interest expense for the third quarter was $12.2 million, representing a $7 million improvement from the prior year. Driven by a combination of actions, including debt paydown, debt repricing and the introduction of the receivable securitization facility. The current quarter income tax expense was $14.5 million, reflecting an effective tax rate of 26.1%, compared to 26.5% tax rate in the prior year's third quarter. We do not expect the One Big Beautiful Bill Act to have any material impact on our income tax expense or effective tax rate for the year. However, it will reduce our cash taxes paid in 2026. Reported net income for the third quarter was $41.1 million, compared to $33.6 million for the third quarter of the prior year. AZZ reported adjusted net income of $46 million, which excludes the amortization of intangible assets of $5.8 million and the AVAIL equity loss adjustment of $0.6 million, our adjusted diluted EPS of $1.52. This compares favorably to the prior year's adjusted net income of $41.9 million and adjusted diluted EPS of $1.39, an increase of 9.4% compared to the third quarter of the prior year. Third quarter adjusted EBITDA was $91.2 million, or 21.4% of sales, compared to $90.7 million, or 22.5% of sales, for the same period last year. Turning to our financial position and balance sheet. Our strategy for deploying cash flow includes investing in high-return organic and inorganic initiatives, paying down debt, returning capital to our shareholders through our quarterly cash dividend and buying back our stock. During the third quarter, we generated cash flow from operations of $79.7 million. Capital expenditures for the quarter were $18.5 million, which included a combination of sustaining and growth capital. Stock repurchases for the third quarter were $20 million, at an average price of $99.28 per share, while cash taxes were higher in the quarter associated with the previously mentioned AVAIL joint venture gain offset somewhat by the impact of the One Big Beautiful Bill Act. We ended the quarter with a net debt position of $534.7 million and $337.1 million in available borrowing capacity, consisting of $336.4 million in the company's revolving credit facility, and $0.6 million in cash and cash equivalents. After paying down $35 million of debt in the quarter, our credit agreement net leverage ratio was 1.6x, which is within our previously announced target range of 1.5 to 2.5x. And finally, as Tom mentioned, over the same period last year, we increased and paid our quarterly cash dividend of $0.20 per share, up from $0.17 per share. With that, I'll turn the call over to David. David Nark: Thank you, Jason. Good morning, everyone. The U.S. infrastructure investment cycle, along with an intense wave of investments in generative AI and machine learning technologies, is in the early stages of driving demand for high-power density and advanced cooling systems. These hyperscale data centers require coatings that extend well beyond just structural steel and transmission poles. For example, these projects require specialized coatings for critical applications, including corrosion protection, aesthetics, functionality, fire safety and regulatory compliance. Massive data center investments are typically paired by necessity with co-located power generation and grid upgrades, which are multiyear construction projects. We expect these private and public colocation investments will reinforce a positive long-term secular trend benefiting both AZZ Metal Coatings and AZZ Precoat Metals. We also expect solar projects to remain strong as many of our solar customers have backlogs that extend well past the expiration of the current tax credits. These projects are focused on large-scale sites, including data centers being developed commercially that provide power for continuous high load requirements. Excluding data centers, nonresidential construction remains subdued in the quarter primarily driven by interest rate and lingering tariff-related uncertainty while residential construction was also soft. Despite this, we saw positive trends in the metal residential reroofing market as it continues to gradually take share from the asphalt roofing market. This helped offset a slower-than-normal storm season as no named hurricanes made landfall in the Continental United States in the current year. Looking ahead, most forecasts point to flat to regionally selective modest growth in construction through calendar year 2026. Finally, as we progress through our fourth quarter, it's worth noting that last year's fourth quarter was impacted by unusually wet and cold weather. Prolonged temperatures below 40 degrees, and gas curtailment actions by utility providers, led to a record number of lost production days in the prior year quarter, particularly in Texas. Therefore, we anticipate our fourth quarter may present somewhat easier year-over-year comparisons to last year's December through February period. With that, I will turn the call back over to Tom. Thomas Ferguson: Thank you, Dave. Turning to our fiscal 2026 guidance update. We have narrowed the forecast ranges for total sales, EBITDA and adjusted EPS. We anticipate that our sales will be in the range of $1.625 billion to $1.7 billion. Adjusted EBITDA will be in the range of $360 million to $380 million. And adjusted diluted earnings per share will be in the range of $5.90 to $6.20. And as Dave mentioned, we believe that last year's fourth quarter weather-related impacts will be less severe. Our strong financial and market positions enable us to capitalize on strategic growth opportunities while executing on our broader capital allocation plans. We expect to release fiscal 2027 guidance in the next few weeks for our new year starting March 1. Consolidation in the industry continues to present compelling opportunities, and we are currently evaluating several strategic tuck-in acquisitions that align with our playbook and expand our market reach in Metal Coatings and Precoat Metals. We continue to take a disciplined approach to M&A, targeting opportunities to drive sustainable growth and generate meaningful value for shareholders. Finally, I want to sincerely thank our AZZ team for their unwavering dedication, disciplined focus and the pride and passion they bring every day to deliver exceptional quality, service and value creation to our customers and other stakeholders. Now operator, we would like to open the call for questions. Operator: [Operator Instructions] The first question comes from Ghansham Panjabi with Baird. Ghansham Panjabi: I guess, first off, on the Metal Coatings segment and also Precoat. Can you just give us a sense as to how your order backlogs have shaped up in context of some of the complications of the operating backdrop with the government shutdown and so on and so forth? And just specific to the government shutdown, did it have any material impact on you in either of the two segments? Thomas Ferguson: I think as we've discussed typically on the Metal Coatings side, we really don't have much backlog. We've got -- but we do have a good forward look from our sales organization in terms of what our customers are -- what their outlooks are. So we feel really good at this point as we look at finishing the year. That's why unless weather gets really, really ugly as it did last year, we think Metal Coatings has the momentum and opportunities to have a really good finish to the year. So feeling really good about that, and it's both as we've mentioned, the big projects, lot of opportunities, whether it's data centers, whether it's solar plants, transmission distribution, a lot of the pulp business and towers. It's just all really active, particularly in a lot of the areas that we've got good capacity. On the Precoat side, much more of a mixed bag. I think -- didn't feel anything from the government shutdown to speak of on either side just to get that out there. But on Precoat, yes, they're more challenged with residential, commercial construction. They are getting -- benefiting from some of the data centers, a lot of painted metals on those. But -- and then in terms of roofing, it's more than conversions as houses are putting new roofs on. They're more and more of them are moved into metal, which is good for us, but it's not enough to offset the market -- call it the market headwinds. So -- and they don't really have backlog either, but they do have a lot of bare metal, and the bare metal is lower than at this time last year. So they're chasing stuff that's going to be quicker turn to maintain their sales levels. Ghansham Panjabi: Got it. And then specific to Precoat, Tom. I mean, obviously, a lot of distortions in order patterns last year with tariffs and the adjustments in imports and so on and so forth. Is the underlying operating environment worsening as we head into fiscal year -- into calendar year '26? Or is it just at a low point and there's no recovery on a consolidated basis given the ups and downs you -- across the business as you called out? Thomas Ferguson: No. I think you got a couple of things going on, some of which is in our control, some of which isn't. But I think we believe the markets have pretty much bottomed and stabilizing. And so we're seeing opportunities. And of course, we're going after more. We're winning some market share that's out there to offset the market softness. But -- and then we've got the Washington plant ramping up, and that is one of the areas where we are seeing opportunities in the container. And as we continue to talk about plastics converting to aluminum, that's just -- we probably couldn't have opened up new capacity for the container business at any better time. So we get pretty excited looking at next year and having a full year of run rate production at the new Washington site. Not to mention we've made some investments and are going to continue making investments at the St. Louis container site. So that's where we are excited, and we're chasing all of that we can find and have a good partner on Wash, MO and then other opportunities with other customers there. So that's where our focus is and then doing everything we can to convince customers to go with us instead of the competition. Ghansham Panjabi: Okay. Just one final one on -- I know you'll give fiscal year '27 guidance formally in a few weeks. But any sneak preview you can share with us as it relates to the variances that we should keep in mind as we finalize our estimates for next year? Thomas Ferguson: No, I think -- I think as I alluded to, Metal Coatings, we look at them finishing strong for the balance of this fiscal year. And even though they don't have backlog, they're stacking up some pretty good opportunities as we kick off going into next year. So we're feeling real good about that. Obviously, we've got a budget to get approved by our Board. So we'll do that in about 3 -- well, 2 weeks at this point, and then communicate as soon as we can put something together and get new guidance out. But yes, feeling really good. I like where we're positioned. I like what our teams are doing. I like the leadership teams we've got in place. And I like what they're focusing on. So I'm pretty enthusiastic. Operator: The next question comes from Nick Giles with B. Riley Securities. Nick Giles: Congrats on the strong results. It's especially nice to see both the buybacks and the debt reduction, but I wanted to go back to M&A. And I was just curious if you could give us some additional color around what kind of opportunities you're seeing out there today? Is it Metal Coatings versus Precoat? Single site or multisite? Thomas Ferguson: Yes, that's a great question. I think the M&A pipeline is very active. It's predominantly bolt-ons onesie-twosies, which is kind of -- I'd like to say it's in our sweet spot. We acquired Canton and just ramped it right up. It's our typical integration playbook, and bring it right up to our fleet margin levels and go grow it. So those are the kind of things we've got in the pipeline. I don't see us getting anything closed by the end of this fiscal year. It's just too many things going on and not that we're not focused on it and got some good -- the teams are active. But I'll be really shocked if I'm sitting here on this call at this time next year without a couple of wins on the board in talking about those onesie-twosie bolt-ons, which just -- we'd like to get a couple of them in the camp, or in the family so to speak. Nick Giles: Got it. Well, Tom, that's good to hear. Maybe switching gears. You talked about plastics to aluminum and Washington was extremely well-timed on that front. But aluminum prices have reached all-time highs in the U.S. And I know you don't directly feel the impact of that. You have the tolling model. But your customers might feel that impact. So I was curious if you've seen any changes in demand on that basis? Or if you feel the Precoat business has a sensitivity to aluminum prices? David Nark: Yes. Thanks, Nick. This is Dave. I'll take that one. We don't think that there's going to be much sensitivity to the aluminum just because when you look at the container market, in particular, there has been the secular shift to aluminum driven largely by people's more reluctance to drink things out of plastics, in particular, and the concern around microplastics. When you look at in the quarter, in particular, I think it's underpinned by the results of the segment. Our Consumer segment in particular, was up 11%. And when you take a look at the disaggregated sales. So we feel really good about what we're seeing. Wash, MO is ramping nicely, as Tom mentioned. We've got a great partner there and a lot of long-term prospects that continue to come our way. Operator: The next question comes from Eric Boyes with Evercore. Eric Boyes: Maybe first, how impactful to Precoat segment margins might the Washington, Missouri ramp, the 75% exit rate in fiscal 4Q be? And when might we hear about remaining capacity allocation there? Jason Crawford: Yes. Eric, it's Jason here. I can take that one up. Certainly, as we've previously communicated the margins that we expect from the Washington facility just based on the math of the equation of that product that we're selling are going to be complementary. So it is going to add a lot but tailwind to the margins that we see at Precoat. In terms of the additional capacity, we're solely focused on our partner at the moment, and ramping up capacity for that partner is coming through the cycle. And we're very pleased with where we're at, but we still got a lot of work to do and certainly a lot of work to achieve here in Q4. So it's really going to be into the early part to the mid part of next year before we really start to focus on bringing additional customers to that facility. Eric Boyes: Okay. Appreciate that. And then maybe second, and Dave, I think you alluded to it in the prepared remarks, but can you help us with how we should think about kind of quantifying the benefit of the favorable weather comp in fiscal 4Q? David Nark: Yes. As we mentioned, on a high level, when you look at last year, it was unseasonably cold and wet. We had mentioned last year, I think that we lost around 200 days of production collectively in the quarter. So I don't have the specifics in front of me right now, but we do believe that we're seeing better weather so far in the fourth quarter. Today, in Texas, it's going to be 80 degrees. So a far cry better than it was last year at this time. But we can follow up maybe after the call, and I can see if I can get you more detail. Operator: The next question comes from Adam Thalhimer with Thompson, Davis. Adam Thalhimer: Congrats on the record sales quarter. Can you update us on pricing in the Metal Coatings segment? I'm curious also how price might be impacting margins in that segment? Thomas Ferguson: Yes. We talked a lot about -- we try not to talk directly about pricing, since we do have some competitors on these calls. But when we're chasing large projects and when we talk about transmission, distribution, and solar, and data centers, they tend to be bigger projects, and so it just attracts more competition. So it will -- that's when we're talking about the mix because you're going to have -- not significantly, but you're going to have marginally lower margins on those big projects. And so they formed a bigger piece of our business. And we had opened up to that because we had decided that we were pushing the top end of our margins. And so we've kind of opened up the opportunities. Let's chase some -- hate to call it chasing the volume. But let's be more open to taking some of that -- those opportunities. And I think it's been good for us because we've got capacity. That's going to help us the balance of this quarter. It definitely helped us in the third quarter. But we're not getting out of control. It's -- we got a tightly controlled process on how we price projects. A couple of things others that hasn't been talked about, but we do have zinc continuing to go up in our kettles. We tend to push price as those costs go up. And we price it 41 plants on every given day. So I think the teams have demonstrated great discipline and yet going after opportunities with customers to build sustainable momentum. And -- so we're pretty excited at this point about what that team is doing. Adam Thalhimer: And -- either Tom or David could address this. But I am curious, you guys aren't the only ones talking about the data center is getting bigger in 2026 versus 2025. Just curious if you could flesh that out a little bit for us, and why you're focused more on it today? David Nark: Yes. I think as you look at the data centers and in my remarks, I was talking about, we're really excited about the number of opportunities within a data center that we touch. So it goes just beyond structural steel that's used for building foundations, and the structure envelope of the building, and then the related power coming into it. We do believe that Precoat will see some opportunities as those projects move further along. We've got customers on the Precoat side that make insulated wall panels for instance. And then there's a lot of coat specific work that's driving the need for increased metal and coated metal, whether it's galvanized or prepainted. So that's why we're bullish on the segment. It's a big segment. It's a growing segment and our share within it is expanding as well. Adam Thalhimer: Good. And last one for me. David, you brought up the metal roofing opportunity. Do you have any idea today what the share of metal roofing is for new construction and repair and remodel versus asphalt? David Nark: Yes, we do have some data on that. When you look at sort of the breakout in residential between new construction and replacement, it's just shy of 5% of the new construction market, is now embracing metal roofing. It's gone up about a point -- a full point since 5 years ago. And so we think that trend is going to continue. And then on the replacement side, it's a larger impact there. It's about 14% of the replacement market today. And growing at a faster rate, driven by a few things. One of them is building coats. It is more resistant to storm damage over time than asphalt shingle and also HOAs, which have historically been a little reluctant to embrace different types of roofing material other than asphalt are now loosening up their standards and embracing that as well. So we're very excited about it. Operator: The next question comes from Daniel Rizzo with Jefferies. Daniel Rizzo: Just to follow up on that last comment. Is there a particular region in a country where metal reroofing is more prevalent? You mentioned HOAs, I don't know when I think HOAs, I think of where my parents live, which is a kind of retirement places in Florida and Arizona. Is there any regional mix that's relevant? David Nark: Absolutely, Daniel. Yes, we're seeing a stronger concentration of that through the south in the areas that you mentioned. So Florida, in particular, as well as here in Texas, and all the way over to Southern California and Arizona are all markets that generally have a higher concentration of metal roof than in the northern climates. Daniel Rizzo: Okay. And I may have asked this before, but -- sorry, go ahead, I'm sorry, did you say something? David Nark: No, I was just going to say yes, they do well where we got more of a corrosive environment, or you've got a lot of sun. So they tend to hold up better. Daniel Rizzo: Okay. Okay. No, that makes sense. And then for the just kind of traditional non-resi construction, and maybe I've asked this before, but what's the lag between when you start to see some easing in credit towards -- a resi starting to rebuild and it kind of translates to demand for you guys. Is it immediate? Or is it like a 6-month lag? Or how should we think about it? David Nark: Yes. When you look at it and again kind of taking a look at just some of our sales data, we have seen -- in my prepared remarks, I talked about subdued construction on the non-resi side, and then the residential being down a little more significantly. So I think that as you move forward through the end of this year and into next year, the fact that there's been some rate movement already should be a positive for the market, and we should start to see the benefit of that sometime here and as we enter into calendar 2026 and our FY 2027. Thomas Ferguson: And I'd add on the residential side, it's more tracking to mortgage rates. But it's going to -- on a lot of these capital projects, it's a 6- to 9-month lag time in general. So -- and then -- but it's looking at the forward curve. So we're hearing more optimism out there, I guess, I'd leave it at that. Operator: The next question comes from Mark Reichman with NOBLE Capital Markets. Mark La Reichman: Just focusing on the Metal Coatings business for a minute. So the second quarter, the sales growth was 10.8% relative to the prior year quarter, and 15.7% third quarter year-over-year. And we did see the gross margin go down a little bit, 30% in the second quarter versus -- what was it, 30.9% and 29.8% versus 30.9%. You mentioned chasing these bigger projects, but could you maybe get a little more specific? Are there specific large contracts that kind of drove the big sales increase, and might you expect in 2027, maybe a little more moderation in the sales growth, but maybe a tick up in the margin? Or do you think these big projects are just going to continue? Thomas Ferguson: No, I think there's a couple of things here. So if you take typical transmission distribution, big poles, towers, it's -- it depends on where it hits -- which plants the project activities act. Some of our plants are built for big poles when projects come in different sections of the -- so this is a very temporary kind of thing. And we've invested a lot in our capabilities and capacities. So yes, as we get into next year, I expect that you'll see those margins hopefully improve as we've got some operational improvement activities. We've invested in kettle capacity. We've invested in specific things that will help us run some of these kinds of projects, or the bigger projects better. And then we've added more trucking so that we can move things in between our customers and our plants. And pivot things to the plants that are going to be more capable of running certain projects. So a lot of things that we've been doing this year to -- which is one of the reasons we did open it up, and we want to want to continue with that momentum going into next year. So yes, I would not expect to see double-digit growth quarter-over-quarter going in as we get into next year. I expect growth, and also expect us to be able to handle it with the margin profile, that kind of where we're at plus. Mark La Reichman: Then so you've done a great job reducing debt and repurchasing shares. Just on the dividend policy, have you kind of announced at a precedent with the increase in the first quarter dividend? I mean, is that kind of what investors kind of expect is maybe one increase per year? Jason Crawford: It's certainly, obviously, with the realignment of our debt in the AVAIL transaction in the summer. It gives us the luxury to readdress that and whether it be an annual basis or such like. It's certainly something that's on our radar. It's certainly something that we continue to consider and continue to take a look at. So given that profile, then it's certainly something that we will look at come up for this next cycle. Thomas Ferguson: Yes. And we are committed to being more regimented about looking at it consistently each year and -- and as we -- this is the time where we are putting the budget together, the plans together and talking about these things with our Board. So the timing is good, as Jason said, but we're committed to evaluating this annually and not having to go several years like it did this last time before we have an increase. Operator: The next question comes from Gerry Sweeney with ROTH Capital. Gerard Sweeney: Most of my questions have been answered, but I just had one quick question on Precoat. You implied that you think the segment has bottomed, but we also talked about some prepayment imports that are being at surplus. Are you able to bracket out how much that surplus was a headwind for the segment, and what we should be thinking about that on a go-forward basis? Thomas Ferguson: Yes, certainly. The thought process around about the prepainted metal imports is really correlating the data that we can see internally. So we can see internally the [ beer ] imports coming in and get a feeling for that and then translate it back into what prepainted import material is out there in the pipeline. So we've seen that filter through our system and filter through our customer systems to the point where less prepainted metal imports historically, up to this point in time, have not necessarily had any impact on our business. And our anticipation going forward is we start to see some of that benefit filter through. If you think about that prepainted metal import market, it's around about 10% of the U.S. market is fulfilled through that supply chain. It's down around about 35% this year, but it's gaining momentum in terms of how much it's down, obviously, it's down more as you get to the third quarter versus the first quarter. So it creates that market opportunity. And really, if you look at that prepainted metal import market, and who can serve that market, then there's only a couple of players that can really serve that market. And obviously, AZZ Precoat is one of the names at the top of that list. So it creates a nice opportunity for us as we start to look at our opportunities for next year. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Tom Ferguson, CEO, for any closing remarks. Thomas Ferguson: Thank you, operator. And thank you for joining us this morning. As you can tell, we're pleased with our results for the Q3. Feeling good about the full year. And then it's early, but getting excited about fiscal 2027, looking forward to announce some guidance for fiscal 2027, and then announcing our results in a few months. So happy new year. Thank you for joining us. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen. I would like to welcome everyone to the Gap Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host, Whitney Notaro, Head of Investor Relations. Whitney Notaro: Good afternoon, everyone. Welcome to Gap Inc.'s Third Quarter Fiscal 2025 Earnings Conference Call. Before we begin, I'd like to remind you that the information made available on this conference call contains forward-looking statements that are subject to risks that could cause our actual results to be materially different. For information on factors that could cause our actual results to differ materially from any forward-looking statements, please refer to the cautionary statements contained in our latest earnings release, the risk factors described in the company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2025, quarterly reports on Form 10-Q filed with the Securities and Exchange Commission on May 30, 2025, and August 29, 2025, and other filings with the Securities and Exchange Commission, all of which are available on gapinc.com. These forward-looking statements are based on information as of today, November 20, 2025, and we assume no obligation to publicly update or revise our forward-looking statements. Our latest earnings release and the accompanying materials available on gapinc.com also include descriptions and reconciliations of financial measures not consistent with generally accepted accounting principles. All market share data referenced today will be from Circana's U.S. Apparel consumer service for the 12 months ending October 2025, unless otherwise stated. Joining me on the call today are Chief Executive Officer, Richard Dickson; and Chief Financial Officer, Katrina O'Connell. With that, I'll turn the call over to Richard. Richard Dickson: Thanks, Whitney, and good afternoon, everyone. We are very pleased to report third quarter results for Gap Inc. that exceeded our expectations across multiple measures, including net sales, gross margin and operating margin. We've done this by executing our strategic priorities with precision and consistency. The reinvigoration of our iconic brands continues to gain strength. Our playbook rooted in purpose, powered by creativity and executed with excellence is working. And it's bringing consistency to how we operate and clarity to how we win. The momentum in the business is clear from product design to storytelling, from store execution to digital engagement. The result is a company that's becoming more agile and performing with increasing confidence. On today's call, as usual, I'll provide an update on our third quarter performance and progress in the context of our 4 strategic priorities. Then Katrina will walk you through our detailed financial results and our financial outlook, after which we will open the call for questions. Let's start with financial and operational rigor. Gap Inc. comparable sales were up 5% versus last year, the highest quarterly comp in over 4 years. We were pleased to see our 3 largest brands, Old Navy, Gap and Banana Republic, posting strong positive comps in the third quarter, demonstrating the resilience of our portfolio despite a challenging quarter for Athleta. We delivered operating margin of 8.5%, which benefited from growth in AUR as customers responded well to our brand offerings. We continue to strengthen our balance sheet, ending the quarter with strong cash balances of approximately $2.5 billion. Turning to our next strategic priority, driving relevance and revenue by executing on our brand reinvigoration playbook. This playbook when applied with relentless repetition creates a powerful flywheel, which has resulted in 7 consecutive quarters of comp growth for our portfolio. Our largest brand, Old Navy, had an incredibly strong quarter, reflecting the brand's strength, consistency and continued momentum. Comparable sales were up 6% with the brand consistently gaining market share over the last 2 years. Customers responded to the compelling value proposition, resulting in healthy growth in average unit retail and notably across all income cohorts, which is encouraging despite widely reported macroeconomic pressure on the low-income consumer. Old Navy's consistent performance is being delivered by trend-right products, our strategic pursuit of category leadership and compelling storytelling. The quarter began with a robust back-to-school season, reinforcing its leadership position in kids and baby in the U.S. denim posted its highest third quarter volume in years with growth across the family. Women's and girls' showed particular strength driven by trend-right styles like barrel, wide leg and baggie fits. Active delivered impressive double-digit growth in the quarter with strength across the family. This demonstrates the strong customer response to the brand's distinctive value proposition in the active market and innovation, including new franchises like Bounce fleece. Today, Old Navy is the #5 active apparel brand in the U.S. and the #4 brand in the women's active space. As we begin to drive more growth through strategic partnerships that amplify our brand relevance, our latest Disney collaboration kicked off the holiday season with our Jingle Jammies collection, which is exceeding our expectations, driving excitement across the family and fueling strong performance in the broader sleep category. Another great example is our first designer collaboration with American Design Legend, Anna Sui. The collection brought high-fashion design to a broader audience, staying true to Old Navy's democratic and accessible brand promise. The campaign featured rising Gen Z artist, PinkPantheress and resonated across platforms. In September, we announced plans for a strategic expansion into the beauty category with a phased launch starting with Old Navy. As one of the fastest-growing, most resilient retail categories in the U.S. and customer insights that reinforce strong interest in the category, we see a clear and meaningful opportunity to grow in beauty. We recently expanded Old Navy's Beauty collection in 150 stores with select stores offering dedicated shop-in-shops and Beauty Associates. We intend to use this pilot to inform a thoughtful scaling strategy that will take us from seeding in 2026 to accelerating growth in the years that follow. Old Navy's third quarter performance reflects the strength of the team's work, which is clearly resonating. This brand continues to delight consumers and consistently deliver positive comps while reinforcing Old Navy's position as a brand that defines value, style and accessibility in American fashion. This gives us confidence as we move into Q4 and beyond. Now let's turn to Gap. Gap delivered another standout quarter, reinforcing the reliability of its execution and the compounded strength of our namesake brand. Comparable sales were up 7% on top of 3% comp last year, marking the eighth consecutive quarter of positive comps with growth in average unit retail, consideration, organic impressions and new customers, a clear signal that Gap's momentum is real, repeatable and resonating. The quarter was fueled by broad-based strength in denim, the centerpiece of our viral campaign, Better in Denim, featuring global group, Katseye. This campaign demonstrated the power of the playbook in action, featuring trend-right product, amplified by culturally relevant storytelling. With more than 8 billion impressions and 500 million views, Better in Denim culminated in a global cultural takeover and has become one of the brand's most successful campaigns to date, generating significant traffic and double-digit growth in denim. The results speak for themselves. Gap continues to accelerate, attracting a younger, highly engaged consumer, particularly Gen Z, who is discovering us while reinforcing loyalty with our core consumer. As Gap brand equity and relevance continues to build, the iconic Gap Arch logo hoodie is a great example of the brand reclaiming its place in the cultural conversation. During the quarter, we marked the 30th anniversary of the Gap hoodie with our first-ever Hoodie Day. It was a moment that energized our teams, drove connection with consumers and contributed to the notable strength in Fleece during the quarter. Our recent collaboration with Sandy Liang was another highlight, delivering strong results and continuing to position Gap as a platform for creative partnerships that drive relevance and new customer acquisition. For holiday, the brand is leaning into CashSoft, where you'll see continued innovation with extensions into new silhouettes, on-trend sets and vibrant colorways. Earlier this month, we launched our highly anticipated Give Your Gift Holiday campaign, a continuation of our effort to bridge the gap across generations through music, creativity and culture, featuring emerging artist, Sienna Spiro. Gap's execution of the playbook has been fantastic, and it's been exciting to see the brand building on their success quarter after quarter while continuing to drive distinction and relevance. It's a brand that knows who it is, where it's going and how to win, and we're looking forward to carrying that momentum into the holiday season. At Banana Republic, we continue to make steady progress. The work to strengthen its positioning, leaning into its heritage is paying off. Comparable sales were up 4% in the quarter, reflecting meaningful traction as the brand's reinvigoration takes hold. Growth was driven by continued progress in the harmonization between men's and women's. Men's elevated fashion designs featuring distinctive textures and fabrications continue to perform well. And we've seen notable improvement in women's as fit and product refinement are resonating, particularly in dresses and wovens. Building on the success of the brand's prior campaigns, the response to Banana Republic's fall campaign with David Corenswet was strong, breaking brand engagement records and fueling growth while expanding cultural reach and resonance. For the holiday season, Banana Republic is leaning into its distinctive position as the modern explorer brand. Our new campaign shot in the stunning landscape of Ireland, captures this essence well with our beautiful product featured in our travel-oriented storytelling brought to life through dynamic destination-rich content. This approach is driving stronger brand affinity and proving to be highly impactful with our customers. Overall, Banana Republic's third quarter results reflect meaningful progress and continued momentum. I'm optimistic the brand is well positioned as we head into the holiday season. Shifting to Athleta. Maggie Gauger, Brand President, has begun to make an impact in her first 90 days. She's taking quick and thoughtful action to begin to reorient the brand. This includes reorganizing the talent structure to align with her vision. The team is doing the right work, acting with speed and urgency to drive progress, but this reset will take time. Our focus is on positioning Athleta for long-term success and returning it to its rightful place as a premium aspirational brand. The brand is at the beginning of its reinvigoration journey. We aren't chasing quick fixes. We are taking a deliberate approach to position the brand for the long term. We're confident that the consistent application of our brand reinvigoration playbook anchored in purpose and heritage will guide Athleta forward. This is about returning to what made the brand great to begin with while reestablishing our clear and distinctive position in the active market. We're encouraged by the steps Maggie and the team have already taken, and we look forward to the continued impact of their leadership as Athleta's reinvigoration takes shape. As we head into the holiday season, our supply chain continues to power strategic advantages. The scale of our global network across sourcing, logistics and fulfillment gives us the flexibility and resilience to operate with confidence. Our long-standing vendor partnerships and diversified sourcing footprint are enabling us to move with speed and deliver newness at the pace of demand. We've introduced new automation and AI capabilities across our omni fulfillment network from robotic unloaders to advanced storage and retrieval systems, which have increased productivity by nearly 30% compared to just a few years ago. This enables us to meet peak demand with greater speed, agility and precision. With a fleet of about 2,500 stores globally and the largest specialty apparel e-commerce business in the U.S., we're positioned to serve our customers wherever and however they choose to shop this holiday season. Across Gap Inc., our teams are inspired and energized by the work we're doing, and you can feel it. The work we're doing together to drive the business continues to ignite real energy inside the company, creating a culture that's united, motivated and focused on execution. This is the culture that is carrying us into the holiday season, where our collective focus is clear: win with the consumer, deliver with excellence and keep building on the progress we've made together. In the fourth quarter, we remain focused on executing with excellence. Our Q3 and quarter-to-date performance positions us well for the holiday selling season and gives us the confidence to update our full year outlook, increasing net sales growth to the high end of our prior range and raising our operating margin. We look forward to finishing the year strong and creating a clear runway to the next phase of our transformation as we move into 2026, building momentum. I'll now turn the call to Katrina for a closer look at our financials. Katrina O'Connell: Thank you, Richard, and thanks, everyone, for joining us this afternoon. We delivered exceptional third quarter results, surpassing our expectations across multiple key metrics. Our strategy is working, growing brand relevance combined with operational and financial discipline drove our highest quarterly comparable sales performance in over 4 years, up 5%. We saw strong performance across the back-to-school and early holiday periods, underscoring the increasing resonance of our brands with consumers. With the playbook now in its second year, we're beginning to see a flywheel of growth take hold at Old Navy and Gap, with Banana Republic gaining traction. We exceeded our gross margin expectations with strong flow-through to our operating margin in the quarter, driven by rigor in the fundamentals. Average unit retail or AUR grew again this quarter, reflecting our compelling product offering and the disciplined execution across our teams. Our brand momentum, combined with our strategic supply chain actions, enabled a significant portion of the tariff impact on our margins to be mitigated. With the strength of our third quarter results and our quarter-to-date performance in mind, we are raising our full year 2025 gross margin and operating margin outlook with full year 2025 net sales growth now expected to be at the high end of our prior guidance range. I'll take you through the details of our outlook shortly. We are entering the final stages of fixing the fundamentals. Consistent progress on our strategic priorities has strengthened our position as we move into 2026, where we will focus on building momentum and creating new growth opportunities. Now turning to third quarter results. Net sales of $3.9 billion were up 3% year-over-year, exceeding our expectations with comparable sales up 5%. By brand, starting with Old Navy, net sales were $2.3 billion, up 5% versus last year, with comparable sales up 6%. It's exciting to see the brand winning in strategic categories like denim, active and kids and baby, supported by strong execution of culturally relevant marketing and partnerships. Turning to Gap brand. Net sales of $951 million were up 6% versus last year and comparable sales were up 7%. Relentless consistent execution of the reinvigoration playbook is fueling sustained momentum for the brand, clearly reflected in the Better in Denim campaign. Banana Republic net sales of $464 million were down 1% year-over-year with comparable sales up 4%. Our foundational work on the brand from elevated product to culturally relevant storytelling is resonating with consumers and drove the second consecutive quarter of solid performance. Athleta net sales of $257 million, decreased 11% versus last year and comparable sales were down 11%. We're focused on applying the playbook with rigor, beginning with the fundamentals as we work to reset the brand for the long term. And while we're eager for results, we are executing a phased plan that will take time. Let's continue to the balance of the P&L. Gross margin of 42.4% declined 30 basis points from last year, but exceeded our expectations. As anticipated, tariffs pressured overall margin levels. However, lower discounting resulted in increased AUR growth driven by the consumers' response to our relevant product and storytelling. Compared to last year, merchandise margins were down 70 basis points due to the estimated 190 basis point impact of tariffs. This implies roughly 120 basis points of underlying margin expansion. ROD leveraged 40 basis points in the quarter. SG&A increased to $1.3 billion, primarily due to the quarterly timing of incentive compensation and continued strategic investments. SG&A as a percentage of net sales was 33.9%, de-leveraging 50 basis points versus last year. Third quarter operating margin of 8.5% was down 80 basis points compared to last year, which includes an estimated 190 basis points of tariff impact. This implies roughly 110 basis points of underlying margin expansion. Earnings per share in the quarter were $0.62, a decrease of 14% versus last year's earnings per share of $0.72, primarily due to the impact of tariffs. Now turning to the balance sheet and cash flow. End of quarter inventory levels were up 5% year-over-year, primarily attributable to higher costs due to tariffs. Our disciplined inventory management resulted in slightly negative unit inventories, and we believe we ended the quarter with the right inventory composition. We continue to be rigorous in our approach to inventory for the balance of the year. As we shared on our second quarter call, we've tightened the way we purchase unit inventory to ensure maximum flexibility for various demand scenarios and to enable us to be more responsive to consumer demand. We expect to operate in line with our inventory principle of unit purchases positioned below sales. The last 2 years have been about fixing the fundamentals, which includes strengthening the balance sheet. We ended Q3 with cash, cash equivalents and short-term investments of $2.5 billion, an increase of 13% from last year. Net cash from operating activities was $607 million year-to-date, and our free cash flow of $280 million year-to-date demonstrates the rigor we have put into managing the business. Capital expenditures were $327 million year-to-date. With regard to returning cash to shareholders, in the third quarter, we paid $62 million to shareholders in the form of dividends, and the Board recently approved a fourth quarter dividend of $0.165 per share. Year-to-date, we have repurchased 7 million shares for approximately $152 million, achieving our goal of offsetting dilution. And while we've achieved our goal, as always, we remain opportunistic. Now turning to our outlook for fiscal 2025. I am pleased with the strength of our Q3 results and solid quarter-to-date performance, which are giving us the confidence to update our fiscal 2025 outlook. We've been operating against a dynamic backdrop for the last few years, and we're expecting the same for the fourth quarter. Our outlook assumes a relatively consistent macroeconomic environment, but acknowledges the potential for increasing uncertainties related to consumer behavior and global economic and geopolitical conditions. As a result, we continue to take a balanced view with our guidance and remain focused on controlling the controllables. Starting with full year 2025 net sales, we are increasing our outlook to the high end of our prior guidance range and now expect net sales growth of 1.7% to 2% year-over-year. Our outlook assumes ongoing strength at Old Navy, Gap and Banana Republic and a longer recovery at Athleta. Moving to gross margin. With our strong Q3 performance, we are raising our full year gross margin outlook. We now expect deleverage of about 50 basis points year-over-year, driven by an unchanged estimated annual net tariff impact of approximately 100 to 110 basis points. Excluding the impact of tariffs, this would imply underlying gross margin expansion of approximately 50 to 60 basis points versus last year. Turning to SG&A. We continue to expect SG&A to leverage slightly for the full year. As discussed on last quarter's call, we are driving continuous improvement in the cost structure of the company this year as we rigorously drive $150 million in cost savings in our core operations through efficiency and effectiveness. We remain committed to reinvesting a portion of the $150 million into future growth projects, including beauty and accessories as we pursue the long-term success of the company. A portion of these savings will also offset continued inflation. Now I'll turn to fiscal 2025 operating margin. We now expect an operating margin of about 7.2% for the full year, an increase from our prior guidance range of 6.7% to 7%. This continues to include the estimated net tariff impact of approximately 100 to 110 basis points. Excluding the impact of tariffs, this would imply meaningful underlying operating margin expansion of 80 to 90 basis points versus last year. Our income tax rate outlook for the year has increased to approximately 28% and primarily reflects the impact of changes in the amount and mix of our geographic earnings. This increase of 1 point versus our prior outlook of 27% represents an approximate $0.03 headwind to EPS. Looking to 2026, as we shared on our second quarter call, we do not expect the annualization of tariffs in 2026 to cause further operating income declines. And we now expect the majority of the mitigation to come from adjustments to our sourcing, manufacturing and assortments with the balance driven by targeted pricing. We continue to be mindful of price elasticity and remain focused on maintaining the overall value proposition for our customers. And while pricing is a lever to manage AUR, it's one of many we've been using to manage margin over time. Other levers include assortment mix, full price sell-through, promotions and inventory management. Our third quarter AUR performance and the momentum of our brands gives me confidence that our AUR growth plans are achievable. There will be a timing dynamic to the tariff impact on gross margin in 2026. We estimate a Q1 net tariff impact similar to Q4, followed by meaningful benefits from our mitigation efforts in Q2. The back half of 2026 should turn to a tailwind as our actions build, and we lap most of this year's tariff impact. In closing, our Q3 results reflect strong execution of our reinvigoration playbook, driving consistency and growth across our largest brands. Continued cost discipline is enabling reinvestment in strategic growth opportunities, while our scale and supply chain strength support ongoing tariff mitigation. When we perform with excellence, it builds confidence. Confidence fuels execution. Execution drives growth. This flywheel is the engine of our momentum. As we look to deliver this holiday season, we remain focused on operational excellence and advancing our ambition to become a high-performing company that delivers sustainable, profitable growth and long-term value for our shareholders. I'd like to thank the team for their commitment to excellence and delivering results in support of our transformation journey. With that, we'll open up the line for questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Alex Straton with Morgan Stanley. Alexandra Straton: Great. Congrats on a nice quarter. Maybe for Richard or Katrina, can you just dig in a little bit more on what drove such a strong comp acceleration at the Gap banner? And also how you think about sustainable comp level for that business over time? And then maybe for Katrina, just what surprised the upside versus your initial expectations on gross margin? Curious if tariffs played a role and how you think about steady state on that line item from here? Richard Dickson: Alex, thank you. First off, I think it's clear our strategy is working, and it is showing up in the momentum that we're seeing in our results. All 3 of our largest brands exceeding expectations, Navy up 6%, Banana Republic up 4% and Gap delivered another standout quarter with a strong comp of 7% and that's on top of 3% last year, and it represents the eighth consecutive quarter of positive comps for us. This consistency is setting new records for the brand, and it's reinforcing our confidence in its long-term growth trajectory, driven by compelling product assortments, partnerships and marketing have really resulted in growth across all income cohorts. We have seen more high-income consumers choosing Gap. And we really do believe that with the strong competitive position that we've taken between premium and value and the fact that we're bridging the generation gap, it's a really exciting time to see Gap continuing to accelerate. We have been attracting a younger, highly engaged consumer, particularly with Gen Z as they discover the brand. And it's reinforcing loyalty with our core consumer. So the performance in the quarter, which, as you know, was fueled by our broad-based strength in denim, the centerpiece of our viral campaign, Better in Denim featuring the global group Katseye, did incredibly well. I mean we generated more than 8 billion impressions. I think we had over 500 million views. It was the denim story everybody wanted to be part of. We increased our ranking in the denim category. Gap is now the #6 adult denim brand in the U.S., up from 8 last year. Collaborations are continuing to drive relevance and revenue with our latest collaboration this quarter with Sandy Liang, which was incredibly successful, again, attracting new younger customers to the brand. And it's exciting to see the brand just continuing to build on their success quarter after quarter, and we're looking forward to carrying that momentum into the holiday season and beyond. Katrina O'Connell: As it relates to -- sorry, I'm going to finish up, Alex, for you on gross margin. So for gross margin in the quarter, we did exceed our expectations in gross margin by over 100 basis points, and that was actually driven by an in-line expectation as it relates to tariffs. So tariffs of 190 basis points were as expected. But the out-performance in the quarter really came from standout performance, particularly at Old Navy and Gap and better-than-expected AURs as consumers really responded to our product and storytelling, which enabled us to have lower discounting in the quarter. Operator: And our next question comes from the line of Bob Drbul with BTIG. Robert Drbul: I was just wondering if you could expand a bit more on AUR trends, how you're managing AUR trends? And I guess just the growth plans that you've spoken about as you look forward maybe Q4, but even into '26. Richard Dickson: Thanks, Bob. We approach pricing as we always have. I mean we consider all the various inputs while maintaining our overall value proposition for consumers. And in Q3, as our brands continue to gain more relevance and the rigor that we put around inventory management, as that becomes more foundational, we are increasing our price elasticity, and we've been driving higher sell-through at full price. We did take select pricing in Q3 in select categories, denim, which saw double-digit growth and the strength of our execution is really resonating with customers, and we saw growth, as I mentioned, across all income cohorts. The sales were driven by both units and AUR. We had overall AUR improving versus last year. We saw particularly strength in Old Navy and Gap with customers that were really responding well to our style, the quality and the value, which we continue to advance. Banana Republic AURs also were strong. This is resulting in less discounting, better regular price sell-through, and it's giving us confidence that we can continue to drive AUR growth as we enter the fourth quarter. Operator: And our next question comes from the line of Matthew Boss with JPMorgan. Matthew Boss: Congrats on a really nice quarter. So Richard, could you speak to drivers of the top line inflection that you saw at Old Navy this quarter? Any change in momentum, early holiday? And relative to the consistency that you've now clearly shown at the Gap concept, I guess, how do you see Old Navy differentiated as it relates to the market share opportunity for that brand? And then, Katrina, just given actions that you've taken to the cost structure, how best to think about annual operating income dollar growth if low single-digit top line was the baseline multiyear moving forward? Richard Dickson: Matthew, thank you for the question, and thrilled to talk about Old Navy. We had an incredibly strong quarter, comps up were 6% with the brand consistently gaining market share over the last 2 years. It is the #1 specialty apparel brand in the U.S. And the performance this quarter really speaks to the brand's strength, consistency and continued momentum. Customers are responding to what Old Navy does best. We give great style at great value. We saw healthy growth across all income cohorts in AUR, it was driven by trend-right product, which, again, was amplified by compelling creative and better storytelling for our brands. We've been winning in the categories that we've been strategically pursuing with intent. And we've shared those along the way. Kids and baby, denim and active have all been driving the momentum. Active in particular, was a standout in the quarter. We delivered double-digit growth. And I believe it's underscoring the power of our value proposition and innovation. Differentiation as it relates to the market share opportunities that we see, we look at partnerships, Disney's partnership with us. We just presented Jingle Jammies, which was an incredible presentation across the family. It exceeded expectations. We just also introduced Anna Sui's collaboration with us, which was particularly meaningful as the first designer collaboration where we're bringing high fashion to a broader audience. All of this, while we're just beginning to expand the brand into Beauty, which, of course, is early days, but we see incredibly high potential opportunity for Old Navy for that category and the broader portfolio over time. So look, I'm thrilled with Old Navy's consistency in the quarter performance. And I actually am particularly excited about our holiday offering at giftable price points, and we are ready to execute with excellence. Katrina O'Connell: And then, Matt, as it relates to your other question, I would say, as you called out, we've done a lot of restructuring over the last few years. And then this year, we previewed that we're saving about $150 million in our cost structure. We are reinvesting a portion of that into future growth opportunities because we want to be able to seed this next phase, which we're saying is building momentum that we hope over time leads to accelerated growth. So balancing the savings with what we think are important investments for the long term. What I would say is this year, the operating margin that we've guided to of about 7.2% is really only modest deleverage compared to last year, and that's while absorbing 100 to 110 basis points of operating -- excuse me, of tariff impact, which does show the way we are managing the business with rigor, both through cost and margin improvements. As we look forward, we've also said that in 2026, we don't expect the annualization of tariffs to cause further operating income declines as we work hard to mitigate those costs. Once tariffs are fully reflected in the base, we do believe the consistency in our core, combined with top line benefit related to the high potential growth opportunities that we're seeding in '26 should provide sales growth that benefits operating income over time. So more to come on what that algorithm turns out to be, but we feel good about the work we've been doing, and we're certainly pleased with our results. Operator: Our next question comes from the line of Brooke Roach with Goldman Sachs. Brooke Roach: Richard, how do you feel about the store fleet today across brands and banners? Are there any investments that need to be made to fuel the momentum from a shopping experience perspective? And what does that mean regarding store fleet transformation, whether that's remodels or changes in store count as you look ahead into 2026? Richard Dickson: Brooke, thanks for that question. Stores are a really important way for customers to experience our brand. I mean they bring our product, storytelling and service to life in a way that digital just can't. With a company operating a fleet of about 2,500 stores, we are always optimizing our retail footprint. We're closing underperforming stores. We're repositioning some locations that are more relevant to our customers, and we evaluate new store openings. As you know, over the last several years, we've closed about 350 stores that were unprofitable. Last year, we closed about 56 stores across our portfolio. We expect to close approximately another 35 in fiscal '25 with the majority of those closures being specific to Banana Republic. I believe we're at a pivotal point right now where the fleet is really well positioned, and we've been testing new formats and experiences. Gap Flatiron in New York has been functioning for about a year with great learnings that we've started to expand across our Gap fleet with denim shops, new refresh shop here in San Francisco and a variety of others that are on plan. Banana Republic, specifically in SoHo and other locations that we've been refreshing with some great results and of course, Old Navy and Athleta up at [ bat. ] We continue to evaluate these tests and their performance and are getting more and more confidence in the revenue and relevance and the strong returns that they've been driving. We've begun to invest rationally and selectively in the areas that we think will drive the return that we're looking for. And we will continue to keep everybody posted as we look to the combination of repositioning our stores, refreshing must-win stores and again, looking to start to open up new stores where it makes sense strategically. Operator: And our next question comes from the line of Adrienne Yih with Barclays. Adrienne Yih-Tennant: Congratulations. Great to see the progress at the right time. Richard, my question for you is sort of a little bit higher level since you've come, there's such a focus on product and marketing, like the combination of the flywheel effect of those. How is the appointment of design and creative, specifically Zac Posen changed the complexion of creative thinking throughout the organization? And then the marketing piece of it, how has that kind of -- how does that complement kind of the product and creating that flywheel? Richard Dickson: Thank you, Adrienne, for the question. First off, let's just mention Zac. He's been an incredible addition to our leadership team. It's been almost 2 years ago now that he's joined and has brought significant impact on many creative aspects, I would say, both inside the company and beyond. Our objective collectively with Zac and by elevating the creative conversation across our brands, highlighting design and product as an incredibly important attribute to all of our brands has been working. I mean we've been culturally creating moments, curated moments where our brands and our products have taken center stage, not only to some extent on the runway, but on Main Street. And we're attracting talent as well to our portfolio that might not have considered a place like Gap Inc. or our brands prior. When we talk about marketing, which I also am pleased to talk about, we know marketing is a much more complex function today than it was in the past. And as you know, we've been working really hard at driving new narratives that put our brands back into the cultural conversation, and it's our job to be everywhere that our consumer is with the right creative messaging. I think it's obvious we're performing while we transform. We're driving digital dialogue messages with social media as the #1 platform for our consumers. Influencer content is among the most common product discovery methods amongst Gen Z and millennials, which we've been performing incredibly well with. We actually recently launched a cross-brand content creator and social media advocacy program last month, which you might have seen. We now also have a presence on TikTok as a shop and many more. And these methodologies are proving really impactful, but they also require higher quality accelerated amounts of creative. And lastly, we can't help but mention again, Katseye is a great example of that. I mean 8 billion impressions, 500 million views. This was a true cultural takeover. And I think it's another proof point in our playbook, and we believe we've got the means and the experiences and the brands to continue to be more effective and be more efficient in our spend as we've proven this methodology is working, and it will continue to propel us into the future. Operator: And our next question comes from the line of Dana Telsey with Telsey Group. Dana Telsey: Congratulations on the nice progress. Katrina, one for you, one for Richard. As you think about the tariff mitigation strategies, which seem to be effective, the pricing adjustments have seemed to become less and less. Is that the right impression? And how you're thinking about pricing going forward? And then, Richard, the acceleration in store sales is impressive. In your view of the consumer overall, how are you thinking about the consumer? Does it differ by brand, lower and higher income customer, whether it's Gen Z, millennial or baby boomer, how do you think the current feeling is in the attitudes towards merchandising? How do you think of consumer demand? Richard Dickson: Dana, thanks for the question. I think I'm going to jump in here and take consumer first, and then Katrina can follow up with tariff mitigation answers. First, I think it's really important to share, we're seeing consistency and strength in our customer behavior. As I mentioned, we're really proud that we're winning with all income cohorts. And you could see it with the strong differentiation within our portfolio. Together, we see equal growth across low, middle and high. And it's evidenced by our 2 largest brands, Old Navy and Gap. Now there is external data that points to, of course, the macro pressure on the low-income consumer, but our customers are finding our price value, our product, our styles. It's breaking through the competitive landscape, and we're winning. We're also doing this Dana, with less discounting. We've got better regular price sell-through, increased AUR, which is really indicating that our product is resonating. I think you could see it when you go into our stores, we're just telling better merchant-driven stories, and it is supported by incredibly relevant marketing. We're also excited to see that the high-income consumer is discovering our fashion, quality and value. And we think that is also being driven by the relevant narrative that we've been creating in the marketplace. So when I step back and I look at our portfolio competitively, I think our portfolio appeals to a wide range of consumers. It gives us greater flexibility in today's environment. When we look at our portfolio today versus even a few years ago, we are a much stronger portfolio of brands today. We're resonating with consumers. And it's our job on a day-to-day basis to create great product with great style and quality, exceptional value. And I think we will prevail in any marketplace if we stay consistent and true to that narrative. Over to you, Katrina, on tariffs. Katrina O'Connell: Sure. So as it relates to tariffs, we did do a slight amount of pricing in the quarter, but we really honestly, Dana, approach pricing as we always do. We look at all the various inputs really with an eye to maintaining the overall value proposition for our consumers. So we did take select pricing in select categories. I think denim is a really good example at Gap, where given the strength, we were able to take slight pricing and see double-digit growth in sales in spite of that. The strength of our execution, as Richard said, really is resonating with our consumers. And as Richard said, we saw sales come from both units and AUR in the quarter. I would say the bigger driver of the outperformance in the quarter and what we're seeing is less discounting and better regular price sell-through. And I think as Richard said earlier, that really gives us the confidence that we can keep driving AUR growth as we enter the holiday season. Operator: And our next question comes from the line of Lorraine Hutchinson with Bank of America. Lorraine Maikis: Just switching gears to Athleta for a minute. How do you feel about the level and content of the inventory there? And do you have a time line for when you think that sales could begin to stabilize? Richard Dickson: Lorraine, thank you for that question. We're not hiding from Athleta. It's a very important brand in our portfolio. We have been disappointed in the trend. But Maggie, our Brand President, has hit the ground running in her first 90 days, and she's balancing near-term priorities with, of course, the longer-term reinvigoration objectives that we have for the brand. As I mentioned, she's been building her leadership team to align with her vision, and she is truly setting the foundation for the brand's next chapter. A lot of work happening, editing the assortment, studying the consumer, evaluating our retail footprint and, of course, the overall customer experience. This is a reset year for Athleta, and our focus is going to be on positioning the brand for long-term success and returning it to a rightful place as a premium purpose-driven aspirational brand. We do believe Maggie and the team are taking the right steps, and we remain confident that Athleta will emerge as a brand that really does matter even more to women through product, trend and storytelling. We understand there's a lot of work to do, but we believe we've got the right leader in place to do it, and we look forward to continuing to update you as more news unfolds. Katrina O'Connell: And maybe what I'd add, Lorraine, on inventory is as we assessed Athleta in second quarter, given sort of the trend in the business, we did make some choices to lower inventory levels overall. And so we have aligned inventory for Athleta to this lower sales trend as we head in -- for Q3 and as we head into Q4. So we feel good about the levels and quality of inventory at Athleta, and we'll remain pretty prudent as it relates to Athleta until we start to see the product and the marketing get back to where we would expect it to be for this brand. Operator: And our next question comes from the line of Paul Lejuez with Citigroup. Paul Lejuez: Just to go back to the unit comments. Curious which brands you saw the greatest increases in units? And then I'm also curious on the inventory versus unit gap that you mentioned, what will that look like at the end of the year, the finish up fourth quarter and then into the first half of '26? Katrina O'Connell: Paul, I'm going to take the first one, but we had a lot of trouble hearing your second question. So apologies on that one. We're going to ask you to repeat it. As it relates to units, we were really pleased to see that as our brands are gaining relevance, combined with the rigor that we're putting into the business that we're seeing our elasticity improve, and we're getting higher sell-throughs at regular price. When we look at the units in the quarter, I would say units were aligned with where we see outperformance in the business, particularly at Old Navy and Gap, and we also saw AURs there as well. But I'm going to ask you to repeat again the second part because we couldn't hear you. Paul Lejuez: Sure. Sorry, Katrina. So the inventory dollars versus unit gap that you spoke of this quarter, curious what that looks like at the end of 4Q and then in the first half of next year. Katrina O'Connell: Oh, thanks. Sorry about that. So we continue to keep our units below sales as we try to keep within our principles of keeping inventory tight. We want to keep maximum flexibility so that we can respond in season to various demand scenarios. and be responsive to consumer demand. So as we think about end of quarter inventory, I would expect it to be similar to how we just ended Q3. Operator: And our next question comes from the line of Corey Tarlowe with Jefferies. Corey Tarlowe: Richard, I wanted to ask about the power of partnerships. And the reason being is I don't think that there's a retailer in the mall today that has done more partnerships in the time span that you've been at Gap to expand the aperture for the brand and to build, as you say, relevance in revenue. And I was curious about what you think strategically this means for the business ahead. And then the follow-up to this is how have the consumers responded to these improvements in the brand in the way that you've been able to say, remove promos on categories like denim at Gap? Richard Dickson: Okay. Corey, thank you for the question. First off, I think it has been a credit to the brands and teams that have followed the methodology that we shared with our playbook. And as part of the playbook and when we look at cultural relevance, collaborations help a brand drive relevance. It broadens its customer base and continues the drumbeat between its larger partnerships and releases. So it keeps topical in the context of the amount that we do and the timing that we do, do them. Now you have to really be authentic. It's not just a collaboration. It's a well-thought-out strategic partnership. To date, Gap brand, as you mentioned, we've launched over 13 collaborations. It continues to drive enormous excitement and attract new audiences to us. And they're very precise, and they need to be. They need to be win-win. And most importantly, they need to be authentic to the consumer. The collaborations that we've been doing, as I mentioned, are attracting new generations to Gap, but it's also, at the same time, reinforcing the brand to those who love us for years. This is, to some extent, a balance of art and science. The latest collaboration this quarter with Gap brand with Sandy Liang in the third quarter, it drove incredible engagement and overall basket. You asked about consumers responding in relation to it and how it affects our business. I mean more than 25% of the customers who shop these collaborations were new to Gap. And of those who shop the collaborations, 20% shop beyond the collab. So we see the attraction that these collaborations when done right, are generating for the brand. And then we -- by offering and showing other product, we're now establishing broader, bigger house files and more exciting relationships with our consumers. We just launched the Anna Sui collection with Old Navy, which is the first designer collaboration in Old Navy, incredible success, similar engagement, a really well thought out precise partnership, and we believe a sign of things to come. So again, laddering up. It's great credit to the teams across the brands for driving the playbook, executing it with excellence and really creating win-win collaborations for the consumer and our business. Operator: And our final question comes from the line of Michael Binetti with Evercore ISI. Unknown Analyst: It's [ Carson ] on for Michael. Katrina, probably a question for you. I appreciate the color on the wraparound effect of tariffs into 2026. But if we set tariffs aside, you had really nice underlying gross margin expansion in third quarter. The guidance implies pretty similar for fourth quarter. How much of that underlying expansion is from AUR versus other drivers? Because I think I've heard several times today, confidence in the AUR plan. So if that's a leading driver, is it safe to carry those impacts over into the next few quarters? Katrina O'Connell: Thanks for the question. So the way I would answer that is our margin strength in Q3 came from a combination of favorability in commodities, aided by some supply chain leverage that we got as well as strength in AUR. As we look to Q4, what you'll see is that the tariff impact to Q4 is similar to what we just experienced in Q3. And we're also still seeing the commodity benefits. But in Q4, we're trying to sort of stay balanced in our outlook. And so right now, what we have in is roughly similar promotions year-over-year so that we have room to compete in any environment. And so we'll obviously aspire to do better, but the upside that we saw in AUR from Q3 is not currently assumed in Q4. Operator: And ladies and gentlemen, that concludes our question-and-answer session. I will now turn the conference back over to Mr. Richard Dickson for closing remarks. Richard Dickson: Thank you, operator. This was an exceptional quarter, and I'm really proud of this talented team that continues to deliver quarter after quarter. As we look to finish the year strong, our team is fired up and our focus is clear: continue to execute with excellence and win with the customer this holiday. Thank you for joining us today. For those of you who celebrate wishing you a happy Thanksgiving, and we look forward to seeing you in our stores this holiday season. Thanks all. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Greetings. Welcome to the Aehr Test Systems Fiscal 2026 Second Quarter Financial Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Jim Byers of PondelWilkinson, Investor Relations. You may begin. Jim Byers: Thank you, operator. Good afternoon, and welcome to Aehr Test Systems Second Quarter Fiscal 2026 Financial Results Conference Call. With me on today's call are Aehr Test Systems' President and Chief Executive Officer, Gayn Erickson; and Chief Financial Officer, Chris Siu. Before I turn the call over to Gayn and Chris, I'd like to cover a few quick items. This afternoon, right after market closed, Aehr Test issued a press release announcing its second quarter fiscal 2026 results. The release is available on the company's website at aehr.com. This call is being broadcast live over the Internet for all interested parties, and the webcast will be archived on the Investor Relations page of the company's website. I'd like to remind everyone that on today's call, management will be making forward-looking statements that are based on current information and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These factors are discussed in the company's most recent periodic and current reports filed with the SEC. These forward-looking statements, including guidance provided during today's call, are only valid as of this date, and Aehr Test Systems undertakes no obligation to update the forward-looking statements. Now with that, I'd like to turn the conference call over to Gayn Erickson, President and CEO. Gayn Erickson: Thanks, Jim. Good afternoon, everyone, and welcome to our second quarter fiscal '26 earnings conference call. I'll begin with an update on the key markets we're targeting for semiconductor test and burn-in with a particular focus on the common growth drivers we're seeing across these markets, which is namely the massive explosion of AI and data center infrastructure. After that, Chris will walk through our financial performance for the quarter, and then we'll open up the call for questions. While second quarter revenue was softer than anticipated, we made significant progress in both wafer-level burn-in and packaged-part burn-in segments and are very excited about our prospects moving forward. Based on customer forecasts recently provided to Aehr, we believe our bookings in the second half of this fiscal year will be between $60 million and $80 million, which would set the stage for a very strong fiscal '27 that begins on May 30. During the quarter, we made substantial progress with wafer-level burn-in engagements and production installations across AI processors, flash memory, silicon photonics, gallium nitride and hard disk drives. We're encouraged to see that one of our key growth strategies focused on reliability solutions for the exploding demand for AI and data center infrastructure is beginning to bear fruit. In packaged-part burn-in, we secured key new device wins for our Sonoma system supporting high-temperature operating life qualifications for AI devices. These wins are expected to drive additional capacity at test houses, including at least one customer that has elected to move into production in late calendar '26, which we believe could result in meaningful volumes of Sonoma production systems. In addition, in the last month, we received a very large forecast from our lead Sonoma production customer for AI ASIC production capacity. This forecast is expected to drive very strong and potentially record bookings for the company this fiscal year and position us well for significant revenue growth next fiscal year with their requested shipments starting in the first fiscal quarter of our next fiscal year. Taken together, our increased visibility across multiple end markets gives us great confidence in our outlook. As a result, we're reinstating financial guidance in fiscal '26, which we'll touch on later in today's call. Now let's talk about our key segments. Starting with our wafer-level burn-in during the quarter, we expanded engagements and completed additional production installations across several end markets. Our lead AI wafer-level burn-in customer continues development of its next-generation processor and is currently discussing additional capacity with us. They're forecasting additional system and WaferPak capacity orders this fiscal year and plan to transition to our fully integrated automated WaferPak aligner for 300-millimeter wafers. We expect this customer to continue scaling and excited to support their growth. We also announced a strategic expansion of our partnership with ISE Labs during the quarter to deliver advanced wafer-level test and burn-in services for next-generation high-performance computing and AI applications. This partnership accelerates time to market, improves performance and gives customers the option of either packaged-part or wafer-level test and burn-in for their production volumes. ISE, together with its parent company, ASE, represents the world's leading outsourced semiconductor assembly and test or OSAT platform, serving a global roster of top-tier semiconductor customers. As part of our benchmark evaluation program with a top-tier AI processor supplier we announced last quarter, we completed development of our new fine-pitch WaferPaks for wafer-level burn-in of high-current AI processors. These are currently in test with this potential customer's processors and are designed to validate our FOX-XP production systems for wafer-level burn-in and functional test of their high-performance, high-power AI processors. We're currently completing start-up procedures such as power-up sequencing, thermal profiling, test vectors, timing and high-speed differential clocks and expect to complete data collection this quarter. While we're demonstrating our new fine-pitch high-current WaferPaks for this benchmark, many customers can utilize lower-cost WaferPak designs if certain design for test rules are incorporated upfront. These approaches reduce cost and lead time and are especially attractive to customers focused on faster time to market for wafer-level high-temp operating life qualification. We also have 2 additional AI processor companies planning wafer-level benchmark evaluations since last quarter's earnings call. These benchmarks typically take about 6 months, and we expect to make meaningful progress beginning this quarter. Both customers are evaluating wafer-level test and burn-in as an alternative to packaged-part or system-level test for large advanced AI modules that combine multiple AI accelerators and stacked high-bandwidth memory. Moving burn-in upstream to the wafer-level significantly reduces cost and yield risk by avoiding scrapping expensive substrates and memory stacks when early failures occur later in the process. We have seen estimates that show the cost of the substrate is more than a single processor and the cost of the high-bandwidth memory is even higher. Turning to flash memory. We completed our wafer-level benchmark with a global leader in NAND flash just prior to the holidays. The customer has now taken the wafers back for further processing to validate correlation with their internal process. This benchmark demonstrated our ability to test flash memory wafers with significantly higher parallelism and power than is possible using traditional probers and group probers from companies such as TEL or ACCRETECH. We've also proposed a next-generation solution enabling test of a new emerging flash memory device called High Bandwidth Flash or HBF, designed for AI workloads. This proposed solution leverages our FOX-XP platform, WaferPaks and auto-aligner technology and would support single touchdown high-power test on 300-millimeter wafers. While development of this system would take over a year following customer commitment, we believe this represents a compelling entry point into a large and evolving memory market. We look forward to sharing more details as this progresses. Turning to silicon photonics. We believe that silicon photonics is used -- we believe that silicon photonics used in data center and also chip-to-chip I/O is going to be a significant market driving production burn-in capacity for our FOX wafer-level burn-in systems and WaferPaks. Our lead customer has now firmed up its production ramp, which we expect to begin early next fiscal year. While this timing is later than previously expected, it aligns with recently announced AI processor platforms and positions us well for calendar 2026 orders and deliveries in fiscal '27. We've also finalized a forecast with another major silicon photonics customer initially targeting data center applications with a road map toward optical I/O. We expect to book their initial turnkey FOX system soon with delivery planned for May of this year. In gallium nitride power semiconductors, we continue to support our lead production customer, though we experienced delays related to unanticipated high-voltage fault conditions that required WaferPaks and protection circuit redesigns. This delayed approximately $2 million in WaferPak shipments from last quarter into this quarter, along with some in-system -- along with some system enhancements. Shipments have now resumed and lessons learned have significantly strengthened our GaN power supply burn-in capability. If anyone tells you that testing and burning-in full wafers of GaN power semiconductors with up to 600 volts or more is easy, don't listen to them. We also continue to engage with multiple new potential GaN customers and are developing WaferPaks for several new device designs that are expected to go to high-volume production for applications like data center infrastructure and power delivery, automotive electrical power distribution on both ICE and hybrid electric vehicles and even power semiconductors used for electrical breakers. Aehr has a unique solution that can deliver full turnkey, fully automated wafer handling and probing for test and burn-in of GaN wafers in sizes from 6 to 8 inches and even 12 inches or 300-millimeter wafers. Turning to silicon carbide. As we previously discussed, silicon carbide demand has been weighed toward the end of this fiscal year. Customers continue to be optimistic about this market and their capacity needs. But we've tried to take a very conservative stance that is mostly show us the orders before we believe them. Our lead customer recently transitioned from 150 millimeters to 200-millimeter wafers, nearly doubling output without adding new FOX-XP systems and supported by Aehr's proprietary WaferPaks that we developed to accommodate both 150 and 200-millimeter wafers contacting 100% of the die on each in a single touchdown. They're now seeing additional needs for WaferPaks this year, but additional capacity for systems appears to be a year out. We pushed out expected orders until next fiscal year from our near-term forecast, but have capacity of systems or WaferPaks to continue to support their surge capacity needs as well as our other silicon carbide customers. While electric vehicle-related demand has slowed industry-wide, we remain well positioned with the most competitive wafer-level burn-in solution available, and we expect to benefit when growth resumes. In semiconductors used in data center hard disk drives, we're installing the additional FOX-CP systems for a major supplier of hard disk drives for wafer-level burn-in of their special components in their drives. They've indicated plans for additional purchases later this calendar year. While their device unit volumes are very large, the overall revenue opportunity remains modest due to short stress times and the massive parallelism achieved on our FOX-CP system and proprietary high-power WaferPak wafer contactors. Now let me talk about packaged-part burn-in. We're seeing continued momentum in packaged-part qualification and production burn-in for AI processors, driving growth in our new Sonoma ultra-high-power packaged-part burn-in systems and consumables. As we announced today in a separate press release, during our fiscal third quarter to date, we have received orders from multiple customers totaling more than $5.5 million for our Sonoma ultra-high-power packaged-part burn-in systems, including initial orders from a premier Silicon Valley test lab for our newly introduced higher-power configured Sonoma system that can also support full automation. These orders already exceed the total Sonoma orders for the entire second quarter, highlighting the accelerating demand we're seeing for our package-level burn-in of high-powered AI and compute devices. This quarter, we also secured key new device wins on the Sonoma platform for high-temp operating life qualification. These wins are expected to drive additional capacity at test houses, with at least one customer planning to transition to production later this calendar year, generating significant system demand. Our lead packaged-part burn-in production customer for AI processors continues to ramp and is forecasting substantial growth in 2026 and beyond. Although we have not yet received the purchase order, we have received a substantial forecast from this customer for AI ASIC production capacity with requested Sonoma production, packaged-part burn-in system and BIM shipments beginning in the fiscal first quarter of '27. That starts May 30, which we expect to contribute to very strong bookings in fiscal '26 and generate significant revenue growth in fiscal '27. This customer also plans to introduce much higher power ASICs later this year for which we are already developing the high-temp operating life qualification burn-in modules and sockets to be used on the Sonoma systems at one of the premier Silicon Valley test services companies that have many systems installed. This AI accelerator ASIC processor is also forecasted to go to production burn-in and drive even higher volume needs for production burn-in systems downstream at the OSATs in Asia. We feel we're very well positioned with our Sonoma system for this production capacity need and believe this could drive very substantial volumes of Sonoma systems in our next fiscal year. During the quarter, we completed development of a next-generation fully automated higher-power Sonoma system, supporting up to 2,000 watts per device. This system enables continuous flow operation, improved throughput and seamless transition from qualification to high-volume production using the same fixtures and sockets. These capabilities enable customers who are focused on high-temp operating life reliability testing to have a system that is fully software and hardware compatible with the Sonoma systems they have installed, which simplifies and accelerates time to market that is critical for HTOL testing of new AI processors. This Sonoma burn-in system can also simply bolt on a fully automated handler developed and sold by Aehr Test as a turnkey solution to allow hands-free operation with less than a couple of minutes of overhead per burn-in cycle, which is amazing for production burn-in needs. We're also seeing increased demand for our lower-power Echo and Tahoe packaged-part burn-in systems, driven by our installed base of more than 100 systems across over 20 semiconductor companies worldwide. But I'll wait for another call to discuss these systems and the markets they serve in more detail. As stated last quarter, the rapid advancement of generative AI and the accelerating electrification of transportation and global infrastructure represent 2 of the most significant macro trends impacting the semiconductor industry today. These transformative forces are driving enormous growth in semiconductor demand while fundamentally increasing the performance, reliability, safety and security requirements of the devices used across computing and data infrastructure, telecommunications networks, hard disk drive and solid-state storage solutions, electric vehicles, charging systems and renewable energy generation. All these -- as these applications operate at ever higher power levels and an increasingly mission-critical environments, the need for comprehensive test and burn-in has become more essential than ever. Semiconductor manufacturers are turning to advanced wafer-level and package-level burn-in systems to screen for early life failures, validate long-term reliability and ensure consistent performance under extreme electrical and thermal stress conditions. This growing emphasis on reliability testing reflects a fundamental shift in the industry from simply achieving functionality to guaranteeing dependable operation throughout a product's lifetime. A requirement that continues to expand alongside the scale and complexity of next-generation semiconductor devices. This year, we're making significant progress expanding into additional key markets for our semiconductor test and burn-in solutions, including AI processors, gallium nitride power semiconductors, data storage devices, silicon photonics integrated circuits and flash memory. This diversification of our markets and customers is significant given our revenue concentration in silicon carbide for electric vehicles the last 2 years. This progress and key initiatives expands our total addressable market, diversifies our customer base and provides us with new products, capabilities and capacity, all aimed at driving revenue growth and increasing profitability. The progress we made this quarter with a significant number of customer engagements and production installations provides improved visibility into future demand. As a result, we're reinstating guidance for the second half of fiscal '26. For the second half of fiscal '26, which began November 29, '25 and ends this May 29, '26, Aehr expects revenue between $25 million and $30 million. As stated earlier, although we're not providing formal bookings guidance, based on customer forecast recently provided to Aehr, we believe our bookings in the second half of this fiscal year will be much higher than revenue between $60 million and $80 million in bookings, which would set the stage for a very strong fiscal '27 that begins on May 30, 2026. With that, let me turn it over to Chris, and then we'll open up the lines for questions. Chris Siu: Thank you, Gayn, and good afternoon, everyone. I'll begin with bookings and backlog, then walk through our second quarter financial performance, cash position, outlook and investor activity. The company recognized bookings of $6.2 million in the second quarter of fiscal 2026 compared to $11.4 million in the first quarter. At the end of the quarter, our backlog was $11.8 million. Importantly, during the first 6 weeks of the third quarter, we received an additional $6.5 million in bookings. This increase was driven primarily by an order from a premier Silicon Valley test lab for our newly introduced high-power configured Sonoma system, which we announced this afternoon. Including these recent bookings, our effective backlog has now grown to $18.3 million, providing increased visibility as we move through the remainder of fiscal 2026. Turning to our second quarter results. Revenue was $9.9 million, down 27% from $13.5 million in prior year period. The decline was primarily driven by lower shipments of WaferPaks, partially offset by stronger demand for our Sonoma systems from our hyperscaler customer. Contactor revenues, which include WaferPaks for our wafer-level burn-in business and BIMs and BIBs for our packaged-part burn-in business totaled $3.4 million, representing 35% of total revenue. This compares to $8.6 million or 64% of revenue in the second quarter last year. Non-GAAP gross margin for the second quarter was 29.8% compared to -- with 45.3% a year ago. The year-over-year decline reflects lower overall sales volume and a less favorable product mix as last year's quarter included a higher proportion of higher-margin WaferPak revenue. Non-GAAP operating expenses in the second quarter were $5.7 million, down 4% from $5.9 million in Q2 last year. The decrease was primarily due to lower personnel-related expenses, which were partially offset by a high research and development costs, including high project spending as we continue to invest resources in AI benchmark initiatives and memory-related programs. As previously announced, we successfully closed the Incal facility on May 30, 2025, and completed the consolidation of personnel and manufacturing into Aehr's Fremont facility at the end of fiscal 2025. During the quarter, we negotiated an early lease termination with the landlord, reducing our obligation by 5 months of rent. As a result, we recorded a reversal of $213,000 related to a previously accrued onetime restructuring charge. During the quarter, we recorded an income tax benefit of $1.2 million, resulting in an effective tax rate of 27.3%. Non-GAAP net loss for the quarter, which excludes the impact of stock-based compensation, acquisition-related adjustments and restructuring charges was $1.3 million or negative $0.04 per diluted share compared to net income of $0.7 million or $0.02 per diluted share in the second quarter of fiscal 2025. Turning to cash flow. We used $1.2 million in operating cash during the second quarter. We ended the quarter with $31 million in cash, cash equivalents and restricted cash, up from $24.7 million at the end of Q1. The increase was primarily due to proceeds from our at-the-market equity program. As a reminder, in the second quarter of fiscal 2025, we filed a new $100 million S-3 shelf-registration that was approved by the SEC for 3 years, followed by an ATM offering of up to $40 million. During the second quarter of fiscal 2026, we raised $10 million in gross proceeds through the sale of about 384,000 shares. At quarter end, $30 million remained available under the ATM. We intend to utilize the ATM selectively with a disciplined approach focused on market conditions and shareholder value. Looking ahead to the second half of fiscal 2026, which began on November 29, 2025, and ends on May 29, 2026, we expect total revenue between $25 million to $30 million and non-GAAP net loss per diluted share between negative $0.09 and negative $0.05 for the 6-month period. On the Investor Relations front, last month on December 17, 2025, Lake Street Capital initiated analyst research coverage on Aehr Test, along with equity research firm, Freedom Broker, which initiated coverage last June. There are now a total of 4 research firms covering the company. Lastly, looking at the Investor Relations calendar. We will meet with investors at the 28th Annual Needham Growth Conference in New York on Tuesday, January 13, and then return to New York in February for the 15th Annual Susquehanna Technology Conference on Thursday, February 26. We will also be participating virtually in the Oppenheimer Emerging Growth Conference on Tuesday, February 3. We hope to see you at these conferences. That concludes our prepared remarks. We're now happy to take your questions. Operator, please go ahead. Operator: [Operator Instructions] Our first question comes from Christian Schwab with Craig-Hallum. Christian Schwab: What wasn't clear to me exactly is on the booking strength -- potential booking strength of $60 million to $80 million in the second half of this fiscal year. Is that almost entirely on the AI accelerator processor line? Gayn Erickson: There's some silicon carbide, not much, like not very much at all. There is some silicon photonics for sure. But the bulk of it is across wafer-level and packaged-part burn-in for AI processors, yes. Christian Schwab: Okay. Perfect. And then given that such a material bookings from the AI processor market, can you give us any indication or idea? I know we've talked about the opportunity in that marketplace being bigger than silicon carbide. But let's narrow it down to kind of a multiyear time frame kind of including '27 and '28. Do you see that business after initial orders expanding meaningfully from there? Gayn Erickson: We do. We do. And we've been taking a pretty conservative stance on how large, particularly the AI and the wafer level side of it is. And I want -- conservative may not be fair. Candidly, we're still trying to get our arms around how big it is. What we get is visibility of a specific GPU or CPU or network processor or an ASIC. And then we hear these things from the customer and then we look externally and what are they telling the Street and try and correlate to those lookups. And I'd say pretty consistently, we hear bigger numbers from the customer than the Street. I'm not sure what that all means, okay? And then as they give us test time estimates of what the burn-in conditions are, we can start to put some numbers around it. But a single processor for some of these big guys at wafer-level burn-in is 20, 30 systems or so. And these are $4 million, $5 million machines. So you get a feel for the size of what that looks like. And the estimates of -- today, if you were to look at AI spend in test between test and burn-in, is it $8 billion, $10 billion to maybe $15 billion or so. I mean it's a really large number. So we don't want to get ahead of ourselves here. But when customers ask you things like how many can you make, right? So can the AI business be measured in hundreds of millions of dollars for Aehr Test a few years out? Yes. for sure. Now what's interesting is that we're in this -- I think it's an awesome position to be in because our -- the Sonoma system is a highly preferred system for HTOL, the high-temp operating life reliability testing for these AI processors. It has the largest installed base in all the test houses around the world. We're getting people that approach us because we are the -- we are like -- I don't want to say we're the de facto standard, that's probably bold, but we have more capacity than everybody else. And therefore, they are saying, you're kind of the go-to guy. I like those words. And so -- and we can build lots of them. So customers are using that, and we get a front row seat to actually bring them up. Then we say, "Oh, by the way, if you want, you can take this machine, add production handling to it and do production on it." In the meantime, if you come to our facility and you do a tour and you can see that production test cell for the Sonoma automation, we, of course, will walk you by a FOX wafer-level burn-in test cell and mention, "Oh, by the way, that happens to be doing a benchmark on a 300-millimeter wafer, we can't tell you who it is." And so they're like, well, what is that? So we are in a position to be able to talk about both of them. And the ASPs are actually higher on the wafer-level side of things. And -- but the value proposition way outweighs that because of the yield advantage of doing at wafer level. The yield savings [ dwarfs any of the ] costs or the cost to test the wafer-level burn-in. So as we get our arms around the market, the market data that would be out there would be packaged part because no one is doing wafer level except for us. And so we're creating our own models related to, okay, for that unit capacity, if you went to wafer-level burn-in, what would that look like? Kind of similar to what we had to go through in the original silicon carbide side of things of -- if the whole market -- and we're not seeing -- everybody including NVIDIA and Google and Microsoft and Tesla and these guys all went with us how big is that market? We haven't really tried to put our arms around that yet, but it's substantial. Christian Schwab: Great. And then I guess one last question, if I may, and follow up on your comment about capacity. How many systems do you think you're capable of manufacturing in a year for wafer level? Gayn Erickson: We have talked to customers about capacities exceeding 20 systems a month at either package or wafer level. If we had to, we could ship 20 systems a month of each during this calendar year. Now that's bigger than our forecast by a lot. But you know what, when people are saying, could you do something like this and intercept something, it's like if they gave you an order for 50 or 100 Sonomas, like how long is it going to take you to build them? Makes sense? Christian Schwab: Makes perfect sense. No other questions. Operator: The next question comes from Jed Dorsheimer with William Blair. Jonathan Dorsheimer: Yes, I guess maybe just to start, on the wafer level, I think your prior comments around the timing of the benchmark, it seems like that's taken a little bit longer. And I'm just wondering, is that a function of -- is it because it's new and what you're seeing is from the customer is that they're changing parameters that's extending that out? Because I think you had maybe talked about by February time frame, and we were almost... Gayn Erickson: Do you want me to throw my customer under the bus? Is that what you're trying to tell me, but... Jonathan Dorsheimer: No, no, no... Gayn Erickson: Let me answer that. No, I got it. I got it. No, that's totally fair, okay? What I do in all of these things is try to describe exactly what we feel, what we know, what we knew at the time. This -- one of the things that's very interesting and fun about this particular customer who is a very notable customer, okay? When they gave us, and I don't think I'm [ overstating, ] when they gave us the vectors, the test vectors, et cetera, they were giving it off of a platform from package level, okay? Package and wafer are different. We had a huge arm wrestle with them related to what they could actually do at wafer level and ultimately, we're able to demonstrate to them significant DFT, lower pin count modes, et cetera, to be able to do it at wafer level, which was a big deal because they never understood that because, of course, nobody has ever done this before with us, okay? I'll just leave it at this. They actually gave us some things that were implied based upon package that didn't really weren't totally applicable to wafer level, and we struggled with some of that. And it turns out -- so it actually did delay a little bit. I think they -- it's mutually understood. It's like, "Oh, sorry, that we were thinking in package, we forget about wafer and sort." And that's a growing thing. We've seen this with other customers. On the very first time you're doing wafer level burn-in, you just don't think about it from the challenges or the differences at what happens when you're talking about a device that shares common substrates or from a probing environment. So is it longer? Maybe a little bit, measured in weeks or a couple of months or something. But some of the things that like mechanically wafer physical contact to the device using our auto aligner to pack these new fine-pitch WaferPaks, the test plan itself, the vectors, those things were all going along pretty well. So I wish it was a little bit sooner, but I think we're still very much on track to try and get them some data over the next couple of months here or even maybe even this month. So now the question, of course, parlays into what do they do with it? What's the timing? Do you understand what device they want to cut in? We do. We're not going to share that with you guys. are we going to make it? We believe we're still -- there's lots of reasons to actually want to cut in wafer-level burn-in and the sooner, the better. So I'm actually -- we're really excited about this particular one. And then now we've got another couple of guys that are saying, "Pick me, pick me too" and are generating the information to give us so that we can actually do design reviews and walk through a WaferPak design for them as well. Jonathan Dorsheimer: Got it. That's helpful. And I just want to address the potential of cannibalization between package and wafer level. And if I read through your comments, it seems like the AI processor is what's moving along with this customer on the wafer level. You had mentioned briefly actually on the ASIC side. Do you -- are you anticipating that the ASICs basically run with package level and that AI processors are wafer level? Or are you anticipating both at wafer level? Gayn Erickson: Yes. Okay. Okay. So vocabulary for everybody that's’ listening out there, right? So there -- when you talk about processors in the AI, arguably, there's even maybe at least 2 or 3 different broad flavors of them, okay? You're going to have the actual GPU, if it's an NVIDIA or ASIC when you talk about everybody else's. In reality, the GPU is kind of an ASIC at NVIDIA too. Jensen said that at one point. These are AI accelerator platforms, okay? And then there -- and they can be used for large language models or for inference type things. There's also processors that like CPUs, like Intel or Grace or Vera-type CPUs and others that are making them that are also going through a burn-in process. And then there's -- you could argue there's even network processors and things like that. But generally, when we talk about AI processors, we're generally in the CPU and GPU type or ASIC type that are combined together in these AI processor clusters. And things like you hear at GB200 is Grace CPU and 2 Blackwell AI accelerators in 1 package, if you will, or in 1 cluster. What's happening with the road map is that devices are going from a single AI accelerator or CPU on a -- in a package to a package that includes embedded memory, like high-bandwidth memory and high-bandwidth flash over time and then to having more than 1 compute chip in it. So having 2 processors in it or 4 or 8, like you look at the Intel or the AMD road map. Everyone has a road map to 2 or 4 more AI processors on a single substrate. What's happening is that there is a -- the qualification of those are all done today in a full package. The whole device in a big substrate is done, and it can take months to even go to get the packaging and qual that. So there are people that would like to be able to qual the processor inside when it's still in wafer form, right? From a production perspective, the value proposition is you're burning in these devices and when they fail, you take out the other compute chip and all the memory plus the co-os substrate, which costs more than the silicon of the compute chip itself. So the road map is getting more intense. So there's people that are like, oh, I want to evaluate this for this device, this would make sense. But boy, the next one makes twice as much sense and the one next to that is 4x as much sense because of this evolution. So a lot of trends we discussed, okay, is there a window. Like what happens if you just missed this one device, it doesn't feel like that it's a treadmill of you can always step on. And the customers are like, okay, how do I cut you in? I've said publicly that our large package part production customer, we've talked about it as an ASIC hyperscaler. They're actually on Sonoma production. We're qualifying their next device that's going to go to production, we believe and hope it will go on Sonoma as well. okay? The third one that are giving us design files of so we can make sure that Sonoma is ready for that, but they've also said, you know what, by then maybe we want to consider FOX wafer-level burn-in. And an interesting thing is it's like, well, what will you do with all the package systems from us, who cares? It's like, what? Because if I could move it to wafer level, I don't need to do it a package anymore. Now will it cut over just like that, we'll see. I think the world is going to be both for a long time, and we're in a great position to do both. But is there cannibalization? For sure. We had a customer come in who wanted to talk about what we thought was packaged part burn-in. Alberto, our VP over the packaged part business, and I met with them and 15 minutes into the meeting, he goes, I'd like to talk about wafer level. Alberto looked over at me and I'm like, okay, new slides. So at least we got both. And we're in a great position. And actually, I would say it's all 3, we do the high-temp operating life today only at package over time at wafer level, and we do production burn-in either package or wafer level. So a great front row seat. Operator: Our next question comes from Max Michaelis with Lake Street Capital. Maxwell Michaelis: First one for me, just around the bookings guide. I know you previously shared that majority of around AI. But just given the distinction between the low end and the high end, if we just take the midpoint of around $70 million, I mean, what -- to get to that $80 million, is that all basically around AI? Or does that suggest any improvement around silicon carbide or GaN? Gayn Erickson: It's the least in that number is silicon carbide, okay? And then GaN is pretty close. Hard disk drive is a little bigger. Then silicon photonics is a chunk. I mean we've got production systems in there for our production -- our lead customer. We have a new customer that wants a system. They want a chip by May. We're suggesting to them that they really should get their order in before we ship it, joke, joke. I'm kidding, it's a challenge right now because they're like, please, please build it. we actually have a system on our floor. And if they get their PO in if you're listening, you get to get it, if not, we'll give it to the next guy, but anyhow. And then it would be wafer-level burn-in. And then I think package is the biggest. I'm sorry, wafer level burn-in AI and then packaged part AI is the biggest. Maxwell Michaelis: Okay. So -- and yes, that's just actually, the $60 million to $80 million, the $80 million suggests just greater volume orders from wafer level burn-in... Okay. And then lastly, I haven't had time to run through the entire press release, but that $5.5 million order you noted in your prepared remarks. Can you go any -- can you share some more detail on that? Is there anything new that we should be looking for? Or is just kind of standard? Gayn Erickson: You know what, it has a mix of some customers that already had Sonomas that were buying more that were AI related. It had some burn-in modules. That was important because it was for a new design of a really expected to be high runner that's going to production. It has a big order from a what we call our a premier Silicon Valley test services company, we'll leave it to that. They actually bought a number of the new Sonoma configurations, which are the very high power ones that allow them to go to 2,000 watts. We have some devices that we're going to be testing this spring that are almost 2,000 watts per device, right? And everybody is out there talking about how can you do -- what does it take to get to 1,000 watts, we're jumping right past that. And this is in a high-volume Sonoma system. So they'll be able to test a large number of devices in that system. And I'm trying -- I think the numbers I should note this number. I think it's 44 devices. But I mean it's a large number of devices to be able to test those. And it's -- by the way, it's either 22 or 44. I should know that. Sorry, folks. Go through the math on that particular application because of the number of resources and power supplies and things. But it's the biggest part we've seen that's in development, and that's going to be going to production. So that's a big deal. So it's a combination of several different orders. Every one of them is kind of sort of strategic to us. Operator: The next question comes from Larry Chlebina with Chlebina Capital. Larry Chlebina: We try to line up your ramp or at least your demand for the systems that you're working on developing for these customers on the AI processors with what's publicly disclosed in terms of the product launch. Is there a case where they may start up on packaged part wherever they have the capacity to do that. And then when they feel comfortable, maybe if it's after the products launched, would they cut over the wafer level burn-in because it's so much more efficient and saves them money? Would they do that? Or would they just do it initially on a brand-new product launch at the beginning? That's kind of -- do you have a sense of that? Gayn Erickson: Okay. So I wouldn't -- there's 2 things in there. What I definitely see happening is we know for a fact a customer was doing system level or rack test, okay? The only time they identified infant mortality or early life failures was when it's installed in the data center pretty nasty okay? That's test or not or burn-in. So they said, we'll run it for 2 weeks, and it hasn't died we'll accept it kind of thing, and then they'll actually plug it into the network, pretty expensive way of doing it. Then there are companies like AEM and Advantest and Teradyne that have talked about system-level test machines, which is a type of ATE machine, that is designed to be doing a high-speed insertion and boot up like the operating system. It's a great way to do a very high degree of test coverage for a specific application. People were saying, oh, we're going to do burn-in with that. Well, that doesn't really -- those systems are designed for high speed. They're designed to be at the user mode. They're designed to run cold. They're not really designed for burn-in, and they're quite expensive and large. But the market was pulling on that because it's sure better than doing it in a rack. And there wasn't another system available in what a lot of people refer to us as ovens, which is a large-scale system that you put lots of burn-in modules or trays with lots of devices and test all at once. Those were like from KYC or maybe 600 watts and below or something. And there really wasn't a tool out there for that. This is where Sonoma was pulled up because we were doing -- Incal was using it for the Hi-Tec operating life, but it's like, well, wait a minute, can I use that in production? Can you add automation? Can you do these things support? And can you quadruple or 50x your capacity? So that's where Sonoma is coming in. When Sonoma enters that market doing system-level test or rack test makes no sense whatsoever. So it's highly competitive as that. Now having said that, wafer-level burn-in is even better. But a lot of people may say, well, I need to think through that. Where do I put that insertion, I might need to implement some design for test modes to be able to implement it at least to take advantage of the very low cost full wafer contactors from Aehr Test and things like that. So I think it's an evolution. But I think the conversation we have with customers is they're like, I need package for burn-in, let's talk about that. But boy, wafer-level burn-in would be better, how do we engage on that? And then specifically on a per customer basis, I don't want to get too carried with our strategy. But if you have an installed base of something, a packaged part burn-in systems or I could go in and displace you with maybe Sonoma but it's probably better for me to go displace you with wafer level burn-in because it's not even a price thing in that sense. It's yield. It's so -- or capacity. So we -- it depends on the customer, and we have some customers that have some devices that want to think about wafer level, something they want to think about package, something they want to think about package and then eventually the wafer level over time. I hope that was -- as I look back, that was pretty confusing. But there's -- it's an evolution of it. And guess what we do, the customer is always right. You tell me what you want and we're in. Larry Chlebina: Well, if the -- if you -- all these evaluations, they have going on with wafer level burn-in, if it takes longer and the product ends up getting launched, would they still cut over to some portion of the production on wafer level burn-in once it's proven out for the particular product or the predictor -- would they do that midstream? Gayn Erickson: I think it depends -- I don't -- it's not a slam dunk. I mean, I think traditionally, people will start a product and do the release of that one product on one test platform or something. And then you cut in on the next one. I think that'd be fair to say, but there are certain devices we know that their intended application, there's 2 or 3 different applications for it. So for a large language model, maybe they think about it one way, but if it's going to be automotive, then that's a different thing, right? So even within a product, there might be an evolution or they get by until they can implement wafer level burn-in. That particularly comes in the fact when you think about a multichip module, right? As soon as you could do wafer-level burn-in, if I could save you 1% yield per die on a 4-die AI processor that has a $15,000 BOM. Of course, you would do that, right? Larry Chlebina: I'm not sure if they would. Gayn Erickson: Yes. So we're trying to be as open as we can. We know as much as we know, but there's definitely advantages to do wafer level. I mean ultimately, that's the most -- kind of the best place you could ever do it. And if you implement some DFT and some of the things we do, I can build you a WaferPak in 8 weeks. Have you on wafer. Larry Chlebina: I'll shift gears on the flash benchmark that you completed right a little bit ago before holidays. When do you expect the customer to get back to you and more importantly, when do you expect them to come with an order. Gayn Erickson: I was waiting for somebody. Yes, that's where my head's at, too. My guess is, Larry, in the next couple of months or so for them really to get back, depending on how they -- the wafer is going back to test, which is tested at wafer. I don't think they're going to package it up and go through some stress qualification, that might be something. But we've already had some design reviews with them on our new tester and planted the seeds, they were very impressed is how I would describe it. The big trend -- the big shift here was when we even started this thinking to do the benchmark with them, which is what like a year ago, if I get that right. Larry Chlebina: Yes, over 1.5 years ago. Gayn Erickson: Yes. Yes. Fair enough, right? When we were starting to even build up to get the design files and what wafer we are going to be testing with them, it was not aimed at high bandwidth flash because that didn't even exist, right? They were looking at it for like commodity data center SSDs. Now with the HBF, it broke their infrastructure, the power supplies, IO pins, et cetera, and parallelism, and now they have a power problem, which we love. Well, we're good at power. So people that have power problems that's music to our ears, so yes. Larry Chlebina: I recall you originally said the driver, their motivation was as the 3D NANDs got higher levels of -- they're even talking about getting the 400 level. Gayn Erickson: Layers, layers, yes. Larry Chlebina: Layers, that required more power and exceed the power in their existing systems so that they need your high power. So here we are 1.5 years later. And so how are they getting by to this point? And don't they need your high-power capability? Gayn Erickson: They're doing -- they're having to -- they can't test a whole wafer in one touch down as an example. But that -- what I described there, which people -- if you follow along with that, that was actually referred to as hybrid bonded flash same letters by the way, right? Hybrid bonded flash was a novel idea that the base substrate layer was logic done on the logic process and then you build up just the stacked memory, and you do that in a memory process and then you bond them together. The result of it is that memory stack is a taller building with a smaller footprint, so you get more die per wafer. That's good, right? But the power was much higher, HBF as in high-bandwidth flash is, in some ways, architecturally similar, except for its more power because of its speed it has additional power supplies, and it's taller, it actually is even more of a problem for them, which I guess, if you're a tester guy, the bigger the problem, you have more to solve. But we had to go back and redesign the tester because we were originally aiming it at the other device. Larry Chlebina: I would think they would need more capacity for the enterprise flash part of it before they ever start needing something for HBF. So the enterprise flash, I'm wondering when is something going to happen there? It seems like it's overdue. Gayn Erickson: Yes. I mean our goal, in this case, would be -- we had originally hoped to finish the benchmark at the end of last year, okay? So like we're 6 months later. And I think as shared with you, if you read through all of the notes, around March, it was like it felt like you're pushing a rope, something was going on. If you knew who the company was it'd be the very obvious what was going on, okay? But that what really happened is they kind of shifted from enterprise focus to HBF. And so that slowed some things down in terms of even reviewing our tester. And then they came back to us in the summer and we're like, okay, here's the new tester we'd like. So okay, maybe that's good. It's for people that you're tapping your fingers, it's taking a long time, but that's part of what happened there. But at this point, again, we walked up there actually -- they thought we were just going to take their wafer and stick it into one of like our NPs with a manual setup and we showed them a fully integrated machine. So they walked up and we put their wafer at a FOP, put the FOP onto the Sierra automated WaferPak Aligner, ran the wafer. It opened up the blade, stick the wafer -- put the wafer in the WaferPaks, put the WaferPaks in the blade, close the blade, ran the tests, gave them the results. It's pretty impressive. Larry Chlebina: So you're ready to go for production. So it seems like they need. They're going to need more capacity based on everything that's going on in the memory market. Gayn Erickson: Exactly. And right now, they're all flushed with margins. How is that, right? So I agree, you know what, we've been, Larry, you as people that follow Larry is our greatest cheer leader, along with me in memory strategy for us. We are spending money, okay? It is part of -- as Chris alludes to, we could be doing better, well, at these revenue levels, this is -- we're not happy with these revenue levels, right? We're not making money at these levels. But we would be making more money. We're spending money. We got our foot on the gas. And in fact, it's our expectation that we'll increase the R&D spend particularly in the AI wafer-level burn-in, a little bit in the package because we spent a lot of money on that in just this last year for package getting this new product out and then the memory system which will be a blade in our FOX system basically. Larry Chlebina: It should be -- it should pay off. Let's -- so hopefully soon, sooner rather later. Gayn Erickson: I vote yes, too. As a shareholder, I think it's good money to be spent. Larry Chlebina: That's all I have. Thank, Gayn. Gayn Erickson: Thank you, Larry. Operator: [Operator Instructions]. Okay. I'm showing no further questions in the queue. I would like to turn the call back to management for closing remarks. Gayn Erickson: Thank you, operator, and thank you, everybody. We really appreciate you guys taking the time to spend an hour with us. I think about that exactly again. And we'll keep you guys updated. Stay tuned. We're really excited about this and hope that the orders will come in shortly enough to be able to make this less dramatic as we go forward and set us up for a really strong year heading into next year. So I appreciate it. If you are in town, we are in Fremont, California, Silicon Valley, give us call, set something up, come by take a look at the facility. If you haven't seen our tools, they're very impressive and get a feel of the capacity because we have a lot of systems on the manufacturing line right now. So take care, and Happy New Year to everyone. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Thank you for standing by. This is the conference operator. Welcome to Aritzia's Third Quarter 2026 Earnings Conference Call. [Operator Instructions] and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Beth Reed, Vice President, Investor Relations. Please go ahead. Beth Reed: Thanks, operator, and thank you all for joining Aritzia's Third Quarter Fiscal 2026 Earnings Call. On the call today, I'm joined by Jennifer Wong, our Chief Executive Officer; and Todd Ingledew, our Chief Financial Officer. As a reminder, please note that remarks on this call may include our expectations, future plans and intentions that may constitute forward-looking information. Such forward-looking information is based on estimates and assumptions made by management regarding, among other things, general economic and geopolitical conditions as well as the competitive environment. Actual results may differ materially from the conclusions, forecasts or projections expressed by the forward-looking information. We would refer you to our most recently filed management discussion and analysis and our annual information form, which include a summary of the material assumptions as well as risks and factors that could affect our future performance and our ability to deliver on the forward-looking information. Our earnings release, the related financial statements and the MD&A are available on SEDAR as well as the Investor Relations section of our website. I'll now turn the call over to Jennifer. Jennifer Wong: Thanks, Beth, and good afternoon, everyone. I hope all of you had a wonderful holiday season. I'm pleased to share that Q3 of fiscal 2026 was another standout quarter. Our teams executed on our strategic growth levers at a high level across the entire business, and our strong momentum has continued into the fourth quarter with record-breaking results over the holiday shopping season. In Q3, we achieved for the first time ever $1 billion quarter. Total net revenue of $1.04 billion was well above the top end of our guidance range. Sales in October and November exceeded our expectations, particularly as we started to lap the exceptional top line growth beginning at the end of Q3 last year. On a 2-year stack, trends accelerated sequentially throughout the quarter. This was fueled by broad-based strength across channels and geographies. The unparalleled demand for our everyday luxury offering, combined with our digital initiatives, new boutique openings and strategic marketing investments drove a 43% top line increase over last year. We're extremely pleased with our performance across both channels, with net revenue increasing 58% in e-commerce and 35% in retail. Comparable sales grew an outstanding 34% fueled by double-digit positive growth in all channels and all geographies, led by our U.S. e-commerce business. The holiday season was off to a great start as we delivered another record-breaking Black Friday event. Retail sales in both Canada and the United States hit all-time daily highs with nearly 60% of our boutiques, achieving all-time sales record. E-commerce sales in both Canada and the U.S. also hit record daily highs. In addition, we benefited from lower markdowns compared to last year's event driven by increasing affinity for our brand, broad-based demand for our product and our strong inventory position. During the quarter, our performance in the United States continued to drive our overall results. In Q3, we generated a 54% increase in U.S. net revenue. This highlights the extraordinary demand for our product and the tremendous momentum of the Aritzia brand. Our results were fueled by accelerated growth in e-commerce, supported by the launch of our mobile app and our investments in marketing. In addition, our new and repositioned boutiques over the last 12 months continued to perform well. We also generated outstanding comparable sales growth in our existing boutiques. In Canada, we accelerated our sales growth for a fourth consecutive quarter. We achieved a 29% increase in net revenue in Q3. This was fueled by exceptional performance in e-commerce and strong comp growth in our boutiques. In our retail channel, we delivered net revenue growth of 35%. This was driven by the success of our real estate expansion strategy and strong boutique comp growth in both countries. Over the past 12 months, total retail square footage growth was in the high teens. We opened a total of 13 new and 4 repositioned boutiques. This included 5 new boutiques in the third quarter, all in the United States as well as the reposition of our Flatiron flagship. The strong comp growth in our boutiques continue to be primarily driven by traffic. This was fueled by the increasing affinity for our brand, which we supported with our strategic investments in marketing. Our real estate expansion strategy continues to yield exceptional results. This underscores the vast opportunity for growth in the United States, where we have just 72 boutiques today. The boutique we've opened in the U.S. in fiscal 2026, they are tracking to payback in less than 1 year on average. This continues to be our target of 12 to 18 months. In Q4, we expect to open 4 new boutiques in the United States. These include locations in Cincinnati, which is a new market for us as well as in Las Vegas, Los Angeles and Scottsdale. We've also already opened and repositioned boutiques in Laval, Quebec. Our immersive retail experience is truly unmatched. This includes our operational store design, passionate style advisers, incredible cafes and of course, our beautiful product. Our boutiques, particularly our flagship are the best showcase of the Aritzia everyday luxury brand ethos. In November, we opened our third New York City flagship located right in the heart of Manhattan's iconic Flatiron District. It's just a couple of blocks away from our original boutique, which opened in 2015, and now a decade later, our new space is nearly 2x larger and it includes it's very own AOK Cafe. To celebrate, we hosted a series of exclusive events, which garnered significant social and media coverage, amplifying the enthusiasm for our brand and introducing Aritzia to new audiences. Every flagship marks a major milestone for our business. With every launch, we've raised the bar, refining and perfecting our strategy along the way. Our Flatiron flagship is a testament to that progress, celebrating the passion, collaboration and drive of our team as we continue building momentum and shaping our success across the United States. In e-commerce, we delivered an increase in net revenue of 58%. This was driven by the increasing appreciation for our brand as well as the successful launch of our mobile app. Our focus on full funnel marketing continued to fuel website traffic, which increased meaningfully in both countries. We also continue to benefit from site enhancements, operational improvements and higher omnichannel engagement. The launch of our mobile app at the end of October achieved exceptional results and surpassed even our highest expectations. We drove strong adoption and excitement with elevated marketing and an exclusive product drop that sold out in just 1 day in the U.S. The Aritzia app was the most downloaded app in the entire app store on its first day. In Canada, it remains the #1 shopping app for 9 days straight. In the U.S., it was #1 for 4 days. Total downloads to date are more than 1 million, far exceeding our expectations for the entire first year and reflecting the love clients have for our brand. Clients were quick to discover the value the Aritzia app provides to them, including greater access to our product assortment, styling expertise and guidance and exclusive product and content. This is driving increased conversion and helping further fuel the momentum in our e-commerce business. We've already launched new app features and updates to elevate the client experience with many more to come. In addition, our new international e-commerce website continued to perform well. Sales in the quarter more than doubled compared to Q3 last year. This enhanced shopping experience is already fueling higher revenue growth through increased conversion. Turning now to product. Throughout the third quarter, our assortment continued to resonate with clients across both Canada and the United States. Our fall and winter launch was exceptionally strong. We saw a positive client response across our iconic franchises, new styles and new colors. We offered excitement through the launch of the app, including collabs and drops such as the Nike Aritzia collab and the multiple color [Sweatleece drop]. In addition, we remain well positioned with the right inventory in the right place to drive sales. Our rigorous focus on inventory and the exceptional demand for our brand enabled us to deliver an improvement in the year-over-year markdown rate and higher full price sell-through. We continue to refine our integrated marketing approach to help grow awareness, build brand affinity and emphasize the features behind Aritzia's unique value proposition. These include our high-quality beautiful products, our aspirational shopping environment and our engaging client service and our captivating communication, all at attainable price points. We're reaching more and more new clients while reinforcing our connection with existing clients. This is a key contributor to the outstanding momentum in our business. In the quarter, we also continued to leverage product collaborations to introduce Aritzia to new audiences. This further amplifies our brand and creates interesting moments to captivate our clients. In Q3, this included the partnership with Nike as well as our collab with Salt & Stone. Both of these created excitement and helped drive traffic online and in our boutiques. As I mentioned earlier, our strong performance has continued into the fourth quarter with another record-breaking holiday period. Excellent operational execution across our 3 strategic growth levers, geographic expansion, digital growth and increased brand awareness is driving sustained brand momentum and keeping Aritzia top of mind. This momentum, along with our proven operating model and healthy balance sheet gives me immense confidence in our long-term goals for the business. As we look to fiscal 2027, we remain steadfast in further advancing our growth levers. First, our real estate strategy has continued to perform exceptionally well. We have yet another exciting pipeline of boutiques in premier locations planned for next fiscal year. Second, we have several digital initiatives that will support continued momentum in our e-commerce channel. These include additional app features and enhancements, further digital marketing optimization and client engagement initiatives. Third, our new boutiques and marketing investments are proven multiyear strategies to help grow brand awareness in the United States. We also plan to keep making strategic investments to fuel our rapid growth. This includes investments in infrastructure, such as technology and the second distribution center in the United States. As always, we will continue with a long-term focus and balance investing for the future with driving profitable growth. In closing, I'd like to thank our people for their unwavering commitment to creativity, excellence and teamwork. Without this dedication, our incredible achievements in 2025 would not have been possible. What's even more impressive is these exceptional results came against the backdrop of significant macroeconomic challenges. Our teams have set the standard for everyday luxury, and I couldn't be more proud. With that, I'll now hand it over to Todd to discuss the details of our financial performance. Todd Ingledew: Thanks, Jennifer, and good afternoon, everyone. In the third quarter of fiscal 2026, we generated record net revenue of over $1 billion. Top line growth in both the United States and Canada was well above our expectations. We also continue to expand our margins, all combining to deliver a 55% increase in adjusted net income per diluted share. Turning to the details of our performance. Third quarter net revenue increased 43% from last year to $1.04 billion. This was above our guidance range of 20% to 24% as trends from the middle of October through the end of the quarter exceeded even our highest expectations. Comparable sales grew 34%, driven by outstanding growth in all channels and across all geographies. Here's what drove this unprecedented performance. First, we saw an exceptional response to our winter product. This was supported by our strong inventory position. Second, we generated accelerated momentum in e-commerce, fueled by the successful launch of our mobile app. Third, our performance was further driven by total retail square footage growth in the high teens. And finally, our increased investments in full funnel marketing generated substantial traffic growth and helped sustain our brand momentum. In the United States, third quarter net revenue increased 54% to $621 million. This was driven by tremendous momentum in our U.S. e-commerce business, powered by traffic growth of nearly 60%. In the U.S., we also benefited from square footage growth of approximately 30%, including a total of 15 highly productive new and repositioned boutiques over the last 12 months. In addition, we delivered outstanding comp growth in our existing boutiques. The consistent momentum we are generating gives us great confidence in our long runway for growth in the U.S. as we bring Aritzia to new markets and strengthen our presence in existing markets. In Canada, net revenue growth increased sequentially for a fourth consecutive quarter, up 29% to $419 million. This was driven by accelerated growth in e-commerce, which was supported by the launch of our mobile app and strong comparable sales growth in our boutiques. Turning to our sales channels. In e-commerce, net revenue increased 58% to $383 million. This tremendous performance was fueled by strong traffic growth driven by exceptional demand for our products, the successful launch of our mobile app, our investments in digital marketing and the halo effect from our new boutique openings. In retail, net revenue increased 35% to $657 million. This was driven by the ongoing strong performance of our new and expanded boutiques as well as outstanding comparable sales growth in our existing boutiques. Importantly, boutique openings continue to be our most predictable driver of top line growth, enhancing brand visibility and supporting client acquisition in both new and existing markets. This top line performance was instrumental in delivering gross profit of $479 million, an increase of 44% compared to the third quarter last year. Gross profit margin expanded 30 basis points to 46% despite 410 basis points of pressure related to tariffs and the elimination of the de minimis. This pressure was more than offset by leverage on fixed costs, improved markdowns and freight tailwinds. SG&A expenses for the quarter were $290 million, leveraging 170 basis points as a percentage of net revenue to 27.9%. The improvement was primarily driven by expense leverage and savings from our Smart Spending initiative. Adjusted EBITDA was $208 million, an increase of 52% compared to the third quarter last year. Adjusted EBITDA margin expanded 120 basis points to 20%. The consistent margin improvement we've now delivered for 7 consecutive quarters underscores our dedicated focus on delivering multiyear margin expansion. Excluding the nonoperational FX impact this year and last, adjusted EBITDA margin expanded 220 basis points. Turning to the balance sheet. Inventory was $508 million at the end of the third quarter, up 10% from last year. Our inventory continues to be well positioned to meet client demand and a key driver of our sales momentum. Our liquidity position is strong with $620 million in cash, no debt and 0 drawn on our $300 million revolving credit facility at the end of the third quarter. With our growing cash balance, we are reviewing our capital allocation strategy with our Board of Directors. In the meantime, we plan to continue to opportunistically repurchase shares under our NCIB. Since the implementation of our NCIB on May 7 and through the end of the third quarter, we repurchased 474,000 shares, returning $41.3 million to shareholders. Turning to our outlook. The strong momentum in our business has continued into the fourth quarter, fueled by another record-breaking holiday season. Given quarter-to-date trends, we expect net revenue in the fourth quarter to be in the range of $1.1 billion to $1.125. This represents an increase of 23% to 26%, driven by double-digit comparable sales growth and the contribution from our boutique openings. We expect gross profit margin in the fourth quarter to be approximately flat to up 50 basis points compared to the fourth quarter of fiscal 2025 as ongoing leverage on our fixed costs and lower markdowns are offset by approximately 400 basis points of pressure from tariffs and the elimination of the de minimis exemption. We forecast SG&A as a percentage of net revenue to be approximately flat to down 50 basis points compared to the fourth quarter last year as expense leverage and savings from our smart spending initiatives are offset by strategic investments in digital and technology to fuel our growth. Given our year-to-date performance and improved outlook for the fourth quarter, we are raising our net revenue forecast for the full fiscal year to the range of $3.615 billion to $3.64 billion, representing growth of 32% to 33% from last year. We are also increasing our outlook for adjusted EBITDA as a percentage of net revenue to the range of 16.5% to 17% for fiscal 2026. The strength we've generated in our business and our mitigation strategies are more than offsetting the 280 basis points of additional tariff and de minimis pressure this year. Importantly, excluding this pressure, our adjusted EBITDA margin for fiscal 2026 would be above our previous long-term target of 19%. We are extremely pleased with the sustained momentum in our business, particularly as we've begun to cycle the extremely strong revenue growth starting in November of last year. This puts us well on track to achieve our fiscal 2027 revenue target 1 year early. Our proven operating model, healthy balance sheet and long runway for growth in the United States gives us confidence in our ability to sustain strong momentum in our business. We are executing at a high level, and we continue to make strategic investments to fuel our growth. This leaves us well positioned to create long-term value for our shareholders. Thank you. Jennifer Wong: With that, operator, let's please open up the line for questions. Operator: [Operator Instructions] The first question comes from Irene Nattel with RBC Capital Markets. Irene Nattel: And congratulations on another exceptional quarter. As you noted in your commentary, boutique openings continue to be the most visible driver of growth. And you mentioned a few times the long-term sustainable runway. And I'm wondering whether we should be thinking that at this point, maybe you might be accelerating the number of new store openings as we look ahead. Jennifer Wong: Irene, thank you for your question. We certainly did have a tremendous quarter, and we have talked about the market potential in the past, particularly in the United States, where we have just 72 boutiques right now, I have mentioned that we see a long-term opportunity of anywhere from 180 to 200, possibly north of 200 boutiques in the U.S. And our focus continues to attract to be on attracting new clients and engaging our existing clients. And so right now, we're talking about opening a minimum of 12 to 14 boutiques in this year and in the next year. And as we look forward, we think that this cadence probably makes sense for us. That also includes a number of repositions, 4 to 5 repositions. And at this time, this is the cadence of store openings and repositions that we're looking at. Operator: The next question comes from Luke Hannan with Canaccord Genuity. Luke Hannan: I wanted to ask about the app. More specifically, how successful was the launch of the app and the promotion for the 20% off on the initial order? How successful was this in driving new clientele, both online and in-store. Jennifer Wong: Thanks for your question. The app launch was phenomenal. In 2 words, I'd say it was wildly successful. In my prepared remarks, I talked about downloads of over $1 million to date is at 1.4 million downloads. In the first day that we launched, we were the #1 app in the entire app store in both countries. I think we were the #1 shopping app in Canada for 18 days. we were beating out ChatGPT there for a number of days, particularly in Canada. So I mean, the app launch was beyond our wildest expectations. And we couldn't be more pleased at the results, I'm so proud of the team. Operator: The next question comes from Corey Tarlowe with Jefferies. Corey Tarlowe: I just had a couple of questions. One, on the complexion of the comp, could you just talk a little bit about the traffic versus ticket and maybe how that's trended so far throughout the year? And any color on what that's looked like quarter-to-date? And then the second one is just a follow-up for Todd. On the second DC that you're opening, are there any considerations about what that cost might look like from a margin perspective or the fact that you're comping so strongly? does it just basically get netted out? I'm curious if you could provide any color there. Jennifer Wong: So on traffic -- Corey, on traffic, we said in our prepared remarks that our business, our top line and our comps, in particular, are primarily driven by traffic. We are seeing a huge change in terms of any other indicators like ticket price or basket size. I would say our business is primarily driven by traffic. Todd Ingledew: Great. And on the new distribution center in Vancouver, which I assume is the one you're referring to, not the potential second DC in the United States. For next year, obviously, we will have incremental rent. As that DC ramps, we do expect to have savings from it, but not at the beginning. And we are still planning for increased margin or margin expansion next year, and we look forward to providing guidance in May as it relates to the distribution center and the rest of our line items. But we do anticipate margin expansion next year despite the DC starting up. Corey Tarlowe: Great. And is there any color on maybe any category specifically or anything you can provide there? That resonated really well in the quarter and then maybe quarter-to-date as well where you've seen some nice traction. Jennifer Wong: Yes. There's nothing really that we can speak of in terms of category. The demand for product was broad-based across all of our assortment. And everything -- when our business is -- we've said this before, when our business is good, and we're delivering 43% top line increase, I mean there's a lot of things working really well. And certainly, our product assortment is just fantastic. I love what I see when I walk into the stores and when I'm scrolling online. I think our product looks absolutely fantastic. And what's even more is that we are in and have been in an excellent inventory position to meet the demand. So everything is working. Operator: Next question comes from Brian Morrison with TD Cowen. Brian Morrison: I want to go back to the mobile app. Can you just talk about perhaps what the penetration rate as a percentage of e-commerce was, maybe elaborate, Jen, on you talked about additional initiatives or new features that are forthcoming. And does the initial reception make you feel in time it could represent 40% of e-commerce sales? Is that realistic? And then just as a follow-up, your international website, can you just comment on where you're seeing the greatest traction with respect to regions? Jennifer Wong: Yes, all really good questions. Thanks, Brian. It's still very, very early days for us with the app. We just launched it. It's really only been up and running for a couple of months now. And I have also said that it's going to take us a few quarters to really see where the app nets out. What we're seeing with our best-in-class peer set is that the app makes up anywhere from 20% to 40% of their overall e-commerce business. I would say we are on track to be in that best-in-class category for sure. And so I'm very encouraged to see these early results. But as I said, it's probably too early to tell. I do anticipate that a portion of that will be incremental lift to our e-commerce business. And so only time will tell. And certainly, as it relates to the new features that you're asking about? I suppose a byproduct of our success is that everyone is watching us. So keeping in mind the competitive factors, I can share probably in very broad strokes what we we're leaning into. Certainly, the digital styling is something that keeps our customer returning to the app will produce more content, more interesting content, unique content and storytelling for the app. Of course, there will always be smaller optimizations to reduce the friction in the shopping journey, looking to integrate the app with the boutique experiences in store for a truly omni experience. So things of this nature. We've got a really robust road map that the team has put together. And again, super excited for future releases of the app and upgrades. And so just, again, couldn't be more thrilled with the performance of the app so far. As it relates to international, continue -- it's almost -- I mean that was a big piece of news, too, and Todd and I were actually kind of joking that after the app news, it's almost like a secondary thought, but still a really important aspect of our overall digital business. We're already seeing higher revenue growth driven by increased conversion on the international e-com site. I realize that it's only just over 1% of our current e-commerce business, but we've stated that we see that tripling in 2 years, and we are, again, well on track to see that. And so right now, I don't know if we're sharing what the top 5 areas of the world are, but certainly, I guess I'll say in no particular order, English-speaking countries like the U.K. and Australia, which isn't a surprise. Certainly, we have interest in Central Europe, like Switzerland and Germany. And certainly, Asia, like China is a very big market for many people. And so you would expect that to be a good response there, too. What I'd say the good news is that we're getting lots of good information for future expansion of the Aritzia brand. Operator: The next question comes from Jon Keypour with Goldman Sachs. Jonathan Keypour: So I was wondering, given the momentum you guys are seeing and the seeming synergies in the word of mouth and the awareness around the brand. Are you finding any flexibility in the previously stated target of low single-digit marketing as a percent of sales? Jennifer Wong: Yes. Marketing has certainly amplified our brand and created a building greater affinity for our brand. I think it's been a huge add in the last year, 1.5 years to our overall playbook. And what we see with marketing is increasing the marketing spend in line with sales. So it will grow commensurate with our overall top line sales and remain a low single-digit percentage of sales. Jonathan Keypour: Great. If I could get a follow-up. Just curious about the progression of the sales momentum from the pre-Black Friday period to the off-sale period between Cyber Monday and Boxing Week, so like the 2 periods of nondiscounting. Just what the momentum between those 2 periods look like? Jennifer Wong: I mean as both Todd and I say, we're absolutely thrilled with the momentum going from Q3 into Q4, effectively, we -- the momentum has been tremendous. We have -- it's -- and what do I say, we've had a phenomenal season. We've had a phenomenal last quarter, couldn't be more thrilled with what's happening going into Q4. We remind you we're lapping extremely robust growth last year in Q4, and we just really see our business firing on all cylinders. Operator: The next question comes from Mark Petrie with CIBC. Mark Petrie: And I'll echo my congratulations on the stellar results. Two areas of follow-up, I guess. first, just on the app integration or introduction, where would you say that put you in terms of e-commerce 2.0? Like how far are you in terms of, I guess, execution? And then how far along do you think you are in terms of seeing the payoff from that with consumers? Jennifer Wong: Yes. We -- about 2 years ago, we embarked on e-commerce 2.0, and we had a real concerted effort and intention to accelerate our digital and omni business, with the build-out of the team and leadership there. I think we're probably 1/3 to approaching halfway through. I think we've built a lot of good fundamentals, a lot of good base infrastructure. We re-platformed our technology stack. We've restructured the team and our ways of working a little bit. We've now hit a couple of milestones with the international e-commerce side with the app. There's still a lot of runway to go and still a lot of really exciting things for us to do. And I think with it continuing to be about 1/3 of our business, while our retail business is absolutely taken off as well. I think back when we were talking about e-commerce 2.0, the retail -- we had been projecting the retail business at a certain clip. And the retail business has actually outperformed what we originally thought then, too. So considering that our penetration has stayed the same and continues to keep up with the retail base continuing to grow at the clip that it's growing. I think overall, our business in both channels is doing phenomenal. And certainly accelerating digital and the omni-experience is a big part of that. Operator: The next question comes from Joe Civello with Truist. Joseph Civello: I just wanted to ask, were there any transitory costs associated with kind of logistical process shifts due to de minimis exemption change. And then secondly, as we build through next year, can we just talk more about some of your IMU initiatives and what inning you're in there, especially as scale continues to grow so rapidly? Todd Ingledew: Yes. Thanks. 100%, there were costs in Q3 embedded related to the de minimis removal and the shift of all of our fulfillment in the United States. That makes up a portion of the 410 basis points of pressure that we experienced from the tariff and the removal of the de minimis with about 2/3 of the pressure coming from the tariffs and 1/3 coming from the removal of the de minimis. Of note, obviously, we are extremely pleased that we still leveraged 30 basis points for really a total increase of 440 basis points ex the tariff and de minimis in the quarter. So pleased with that. And there was some benefit from IMU improvement in Q3. But as we look forward, we are continuing that multiyear IMU improvement and do anticipate that it will be part of the driver of what helps us improve our margins again next year. Operator: The next question comes from Mauricio Serna with UBS. Mauricio Serna Vega: First, maybe could you talk a little bit more about the brand awareness component. You mentioned that as one of your levers. How has that progressed in the U.S.? How does that look relative to Canada? And then quick follow-up on the Q4 guidance. Is it fair to assume on sales that, that implies around like a mid-teens comp for the quarter? And what is that -- like what is the comp looking quarter-to-date? Jennifer Wong: Thanks, Mauricio. I'll take the first part of the question on our brand momentum. I mean experiencing amazing brand momentum, particularly in the last 1.5 years when we increased our marketing efforts and our strategic investments in marketing and that, coupled with the boutique openings themselves and the flagships are opening. So I think it's not any one thing. It's many things all coming together and certainly the marketing is amplifying all of the amazing things that we're doing in the business to elevate our brand and to really ensure that everyday luxury comes to life in everything that we do in every touch point with the client. And certainly, I think our business itself is showing the results of the increased brand awareness in the U.S. and not just awareness but actual affinity for the brand and love for the brand. In Canada, we're very well known and loved and that our goal was to achieve that same level in the U.S. And I think we are well on our way. And certainly, our results with the 43% top line increase, a $1 billion quarter shows that. Todd Ingledew: Great. And I'll take the comp portion of the question. In the fourth quarter, our guidance assumes comp in the high teens, which delivers the 23% to 26% revenue growth. And we are trending slightly ahead of that today. Mauricio Serna Vega: Got it. Just a very quick follow-up on that. So I guess like if I think about your commentary that you said 2-year stacks accelerated throughout Q3. That means like that acceleration has continued into December and quarter-to-date just based on this guidance and what you -- yes, what you're expecting in the comp? Todd Ingledew: Yes. Yes, 100%. It's accelerated slightly. Obviously, we're lapping 26% comp in Q4 last year. So we've got 43% to 46% approximately from a comp -- a 2-year stacked comp that we have embedded in our guidance. And we're extremely pleased with what we're seeing in the fourth quarter. And we were obviously a number of months ago, seeing great momentum in our business and knowing that we had November and the acceleration that we saw in November coming up. And obviously, we've just moved right through that and continue to see the extremely strong momentum in the business. Operator: The next question comes from Chris Li with Desjardins. Christopher Li: Congrats on the strong results. My first question is, I know that over the last couple of years, you have done a lot of work to make the inventory more productive and efficient. Are you pretty much where you need to be now? Or is there room for further optimization that will allow you to really capitalize on the strong product demand and drive further margin improvement? Jennifer Wong: Thanks for your question, Chris. We have done a lot of work in terms of how we approach our inventory. And I would say the team has done tremendous work and has taken things to the next level in terms of how they're looking at our inventory and the level of sophistication with our inventory management is just phenomenal. So I would say nothing is ever perfect around here. I mean I think that's one of the things that drives us is we're striving for perfection and we're -- we have this culture of continuous improvement and always refining right down to the last minute and finding detail of what we can be better. So we're always going to be honing our craft here and always getting better, and we always do get better. But certainly, as it relates to inventory, I would say that is a huge driver, one of the many things that we're doing very well, but it's a huge driver to these fantastic results. Certainly, we have had the inventory to meet the demand and the increase in demand that we've experienced, particularly in the last year. And again, I couldn't be more pleased with what the team has done in order to make sure that we are in that position and continue to be in that position. Christopher Li: That's very helpful. And if I may squeeze in just a follow-up. Just in terms of the comps guidance for Q4, the high teens would imply north of 45% 2-year stack. I know you guys haven't given guidance for next year. But as you start really lapping really strong comps, it's sort of that 2-year stack reasonable to expect for next year, given really the strong momentum that you guys are continuing to see? Jennifer Wong: Yes. I like your enthusiasm for what's going on here for us. I mean we're just as enthusiastic about 2027 as well, although we're not providing any guidance on this call today for 2027. What I will say is we are thrilled with the momentum. We do have to keep in mind the 2-year stack. That said, we are super well set up to succeed and have a strong year with all the elements in place to deliver in 2027 like we have in so far in 2026. And we're going to stick to our strategy and stick to our playbook and because that's proven that that's delivered, whether it be having the right product in the right place at the right time, increasing our square footage growth with the 12 to 14 boutique openings and additional repositions. We got those digital initiatives on the go. and certainly, the strategic investments in marketing that help create more demand and drive even more traffic. So all of those things remain in place, and it gives me tremendous confidence for what we have ahead. I've been with the company now for a very long time. I'm coming up on 39 years, and I've never been more excited about the business as I am right now. Operator: The next question comes from Ike Boruchow with Wells Fargo. Irwin Boruchow: Let me add my congrats. I guess 2 questions from me, maybe for Todd. I guess, I know you're not going to comment specifically on guidance for next year, but last quarter, you kind of took the 19% off the table and just went a little bit lower to high teens given the tariffs that you've meaningfully outperformed in Q3 and your implied 4Q just went up by a lot. So I mean, are you comfortable putting the 19% back on the table just because of the upside you've kind of generated this quarter and what's coming up in the fourth quarter? And then a quick follow-up to that is it's a product of your own success. You guys are going to be lapping something like 25% plus comps annually next year. You go back a couple of years ago, you guys also had a phenomenal year, and you had a little bit of trouble lapping those tough compares. It doesn't seem like that's happening at all here. But are there learnings from fiscal '24 that you kind of apply to kind of make sure that doesn't happen again? I'm just kind of curious how you can compare and contrast what's coming up in '27 versus kind of what happened back in '24? Todd Ingledew: I'll take the first question. So first off, no, we would not put the 19% back on the table at this point. And I think we're most comfortable with that high teens. We do plan to have further margin expansion next year. But I think we're more comfortable with the high teens than leaving the 19% or putting the 19% back on the table. But we look forward to providing guidance again in May. Jennifer Wong: And the second part of your question, which is kind of a broad question. My response to that is it comes down to execution. And what we're experiencing right now is an example of as close to impeccable execution as you can get. And I think we've always prided ourselves on executing in the business. And when we're executing in all areas of the business is when we see these exceptional results. So what I would say to your question is, right now, I find it immensely gratifying to see how our strategy, which has not changed and the focus of the last 3 years is coming to fruition and delivering on these results. And I think if we stick to that and continue to do what we're doing, we will see consistency in our growth and in delivering results. Operator: The next question comes from Navin Nuchem with BMO Capital Markets. Unknown Analyst: Nevin on for Steve today. I'm hoping you can provide an update on your sourcing exposure by company -- or sorry, country rather and just confirm whether you're on track for the mid-single-digit percentage or less from China by spring '26. Todd Ingledew: Yes, we're on track. That's one of the things that we're extremely pleased with what we've accomplished over the last 12 months. The team has done a remarkable job. Sitting here this time last year, we were receiving our spring inventory and approximately 30% to 35% of that was being sourced from China. And today, we are in the mid-single-digit country of origin from China. And so it's actually remarkable what the teams have done over that 12-month period. We are more weighted now to Vietnam and Cambodia as well as a number of other countries. But I think over time, the next phase of our sourcing initiative is to balance more evenly and try to get to a position where maybe we have no more than 20% to 25% sourced from any given country. Operator: The next question comes from Michael Glen with Raymond James. Michael Glen: Just 1 question for me. The 1.4 million downloads that you spoke about, Jennifer. How do we think about that in terms of a penetration rate across your overall customer base? And how does that penetration rate compare against what you see with peers. Thank you. Jennifer Wong: Yes. Great question. Obviously, the response to our app has been tremendous. And I think our clients have been very quick to recognize the value that the app offers and hence, the number of downloads. And so the majority of the customers downloading the app are our existing customers. They are a highly engaged customer. The great news is that there is a good portion of those downloads that are new customers. And what I find particularly encouraging is that we even have a few reactivated customers, customers who haven't shopped with us in quite some time. And because of the app that they renewed their relationship with us. So I think on all different points, the app is providing us tremendous benefit and certainly is allowing us to engage with a customer even more deeply. Michael Glen: And I know you're unlikely to give me a number, but is 1.4 million, how do we think about where that number could eventually get to over time? Jennifer Wong: As I said earlier in this call, it's too early to tell and you're absolutely correct, I am unlikely to tell you that number. But really, it's very early to tell. And certainly, there was a lot of marketing support around the launch of the app. So we came out with fantastic success. And we'll share more as we know more as the quarters progress. Operator: The last question comes from Martin Landry with Stifel. Martin Landry: Congrats on your results. Maybe just a quick one for me on fiscal '27. You've talked about 4 -- 12 to 14 boutiques opening and 4 to 5 relocations. What does that mean in terms of square footage growth? Todd Ingledew: Overall total square footage growth, it would be in the low teens. Martin Landry: low teens. Perfect. Okay. Thank you so much, and congrats again. Operator: This concludes the question-and-answer session and today's conference call. Thank you for joining, and have a pleasant day. You may now disconnect your lines.
Operator: Greetings, and welcome to the Citi Trends Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Nitza McKee, Senior Associate at ICR. Please go ahead, Nitza. Nitza McKee: Thank you, and good morning, everyone. Thank you for joining us on Citi Trends' Third Quarter 2025 Earnings Call. On our call today is Chief Executive Officer, Ken Seipel; and Chief Financial Officer, Heather Plutino. Our earnings release was sent out this morning at 6:45 a.m. Eastern Time. If you have not received a copy of the release, it's available on the company's website under the Investor Relations section at www.cititrends.com. You should be aware that prepared remarks today made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance. Therefore, you should not place undue reliance on these statements. We refer you to the company's most recent report on Form 10-K and other subsequent filings within the Securities and Exchange Commission for a more detailed discussion of the factors that can cause actual results to differ materially from those described in the forward-looking statements. I will now turn the call over to our Chief Executive Officer, Ken Seipel. Ken? Kenneth Seipel: Thank you, Nitza. Well, good morning, everyone, and thank you for joining us today for our third quarter earnings call. I am pleased to report another quarter of consistent performance, demonstrating disciplined execution and progress across every area of our business. Our transformation strategy is gaining significant momentum, our operational capabilities are advancing and our customer connection is strengthening. As I shared at a recent investor conference, we're in the early stages of what I believe will be a compelling transformation for Citi Trends. We've established a clear line of sight to achieve approximately $45 million of EBITDA in 2027, which represents a $60 million increase from the 2024 levels. The substantial growth trajectory will be driven by our continued focus on consistent comparable store sales performance, gross margin expansion, operating expense leverage and strategic new store expansion. Today, I'll walk you through the drivers of our third quarter results and provide additional details on how we're executing against this exciting long-range road map. Turning now to our results. In the third quarter, we delivered comparable store sales growth of 10.8%, which represents a 16.5% growth on a 2-year basis. This marks our fifth consecutive quarter and 15th straight month of strong comp growth with total sales up 10.1% as compared to last year in the quarter. Consistent with our year-to-date performance, the majority of our Q3 sales results were due to increased customer traffic. We began the quarter with a strong back-to-school season, and we finished the quarter with an equally strong late fall fashion and pre-holiday product performance with particular strength in Children's, Men's and basic apparel categories throughout the entire quarter. Our Q3 performance brings our year-to-date comp to a 10% or plus 12.3% on a 2-year basis. We're seeing positive sales increases across all store volume groups and geographies as well as across all product categories, underscoring the breadth of the top line improvement across the business. Plus, I am pleased to report that our holiday is off to a good start, and our strong 2-year stack sales momentum has accelerated into the fourth quarter where we are poised to generate our sixth consecutive quarter of year-over-year growth. Gross margin rate in Q3 was consistent with the operating plan expectations and year-to-date 2025 performance. Our merchants have done a nice job of managing product cost while delivering amazing prices in the ever-changing landscape of tariffs. Due to the macro disruptions, the off-price deal flow continues to be robust, which allows us to have confidence in continued margin performance in the foreseeable future. I should also note that we made a tactical decision to pull forward some of the product originally expected in early Q4 into late Q3, which created a purposeful shift of freight expense from Q4 to Q3 this year. And as noted in our press release, the prior year gross margin rate results in Q3 2024 were artificially high last year due to Q2 strategic inventory reset activity, actions that ultimately jump-started the company's top line turnaround last year. SG&A leveraged 130 basis points compared to last year, which includes the incremental funding of performance bonus program for our employees this year. We're making good strides in improving execution consistency in all areas of the business, which, in turn, is having a positive impact on expense control. Looking ahead, we're focused on efficient execution to enable us to continue to leverage expenses as we grow the top line. As a result, we achieved better than planned EBITDA in the quarter, giving us confidence in raising our EBITDA guidance for the year. Now turning to customer dynamics. Our turnaround is rooted in a clear, unwavering focus on the needs of our African-American customer, who is at the center of everything we do. As I mentioned on prior calls, I believe the primary reason for the quick turnaround in our business is our laser focus on the needs of our African-American customer and our highly differentiated competitive advantage of neighborhood-based locations. Our stores are embedded in communities that we've served for years in proximity combined with word-of-mouth serve as powerful traffic drivers. Citi Trends has built a truly differentiated competitive position in this high-performing off-price retail sector. We're really the only off-price retailer specifically focused on the African-American consumer, delivering styles, brands and trends at compelling prices that resonate with this underserved demographic. Our cultural relevance is a significant competitive advantage, African-American consumers are trendsetters and early adopters, and understanding this dynamic allows us to carry assortments with immediate appeal to our core customers. We also know that our customers are discerning. They understand that value is not just about price. They're willing to spend more when the style is for them, the fashion is on trend and the quality is right. Our consistent strong traffic and basket performance in the third quarter provides clear evidence, demonstrating the strength of our uniquely loyal, high-frequency customer base. We continue to strengthen this connection by elevating cultural relevance of our assortments and refreshing the shopping experience to better align with our brand voice. Our brand promise says it all: Styles that see you, prices that amaze you, and trends that tell your story. This holiday, we are launching and have launched the rebranded Citi Trends "Joy Looks Good on You" holiday campaign with updated social media presence under the @wearecititrends tagline. We've also implemented city bus wraps and shelter marketing in key markets to strengthen our local presence. All of this reflects a more refined, culturally relevant, modern brand voice. Looking forward to further enhance our customer relationships and drive deeper engagement, we're making strategic investments in our technology infrastructure, including the design and implementation of a new CRM and loyalty platform. This work will deepen our interaction with our most frequent customers and enhance long-term customer value. While we're in the early stages of this initiative, we're excited about the opportunity to create a more meaningful brand interaction with our best and most loyal consumers. Before diving into this quarter's product performance, let me briefly remind you of our 3-tiered product strategy. What's important to understand is that we're serving customers across all income levels and we have a significant portion of average and higher-income customers, which creates tremendous opportunity for our assortment of recognizable brands at exceptional prices that align with their style and trend preferences. At the opening price point, we offer value-focused basics through our Citi $core program for budget-conscious customers. The core of our business is our better tier, typically priced between $7 and $12, which offers broad selection of on-trend styles that drive loyalty and consistent performance across Women's, Men's, Kids, footwear and home categories. At the top end, we're expanding our best tier through 2 distinct approaches. First, trend-relevant fashionable styles priced well below specialty retail; and second, extreme value opportunities featuring well-known brands at steep discounts, often up to 75% off MSRP. We're targeting this extreme value segment to represent an incremental 10% of total sales as these branded treasures drive both traffic and basket growth while delivering strong margins. With this strategic framework in mind, now let me walk you through our Q3 product performance, which is broad-based and balanced in all categories. Strong results were driven by both apparel and nonapparel categories and all divisions posted increases. But first, I'd like to congratulate our Children's team on their strong double-digit growth in back-to-school and throughout the quarter. As our Children's team continues to improve style curation and product in-stocks, our customers continue to respond positively. Children's is a cornerstone of our business and a model of consistent execution this year. Equally, basic product for Kids, Men's and Women's had a strong quarter, driven by better styles and improved inventory position in store. Our Men's division had another strong quarter of growth, reflecting the team's work to increase trend for our younger male customer while also attending to the fashion sensibilities of our mature male consumer. We're excited about this more comprehensive approach to our male customer. And based on the positive initial customer reaction, we have significant growth ahead in this particular category. We also saw momentum in Women's footwear, which is an area we've been working to regain lost market share. There's still more work to be done in this category, but we're encouraged with Q3 results and customers' response to our branded product at extreme values. Looking ahead in product, we're focusing on strengthening our product offering in all categories. Our Creative Director has significantly raised the bar and is focused on curating trends to ensure our product is always trend right. From the opening price product to our best branded fashions, our merchant team is finding ways to elevate trends and styles at amazing prices. In Q4, we're repositioning the Men's store presentation to highlight increased emphasis on young Men's trend apparel while maintaining our core and classic portions of the assortment. We're in the early stages of repositioning our Women's area to better reflect the style, trend and sizing opportunity that we see for the business and plan to introduce an improved assortment to our customers in Q1 of next year. As I've mentioned before, we're continuing our focus on growing our anticipation classifications, which includes Big Men's, plus sizes and family footwear, all of which have significant upside potential in the future. Turning now to operations. As I've discussed in the past, our transformation is guided by a 3-phase framework designed to deliver sustainable, profitable growth. In the repair phase, we focused on restoring fundamental business practices to ensure a strong foundation for growth, including sharper clarity around our African-American consumer, our 3-tiered product assortment and implementation of AI-based allocation software to improve in-stocks, reduce markdowns and accelerate inventory turns. We are now firmly in the execute phase, focused on implementing best practices across all areas of the business to improve productivity and enable SG&A leverage. This includes increasing supply chain speed, reducing working capital costs and aligning our teams around KPIs and performance linked compensation to drive continuous improvement. From an operational standpoint, we made continued progress on these phased initiatives in the third quarter. I want to congratulate the entire team, specifically our senior leaders for improved business execution in Q3. One of the keys to our success was consistent execution of a detailed plan to emphasize tactical excellence to win the quarter. We continue to improve our inventory efficiency, supporting a 10.8% comp with overall 3% less inventory than the prior year. Due to speed improvements in our supply chain, we are also able to execute a 4.5% higher average in-store inventory. In the supply chain, improved work processes, productivity standards and day-to-day leadership enables us to efficiently reduce in-process inventory. This improved efficiency drives working capital optimization and provides flexibility and speed to react to sales trends while protecting gross margin. In the quarter, we finalized the implementation of our AI-based allocation system across all merchandise categories, and we remain pleased with the results. We're now turning our attention to an AI-based planning system to help streamline sales and inventory planning processes for our merchant teams. As I said before, retail is detail, and execution without measurement is just guesswork. Our use of KPIs and dashboards across all key functions provides the visibility that helps our teams stay on track and drive continual operational improvement, which is the core element of our execute phase strategy. Looking ahead, while we've made good operational progress. As I said earlier, we recognize a significant opportunity remains to improve execution in many areas of our business. As we advance through our execute phase and improve consistency, we expect continued SG&A leverage to enhance flow through of sales to profit. Now turning to our growth strategy. We remodeled 24 stores in the quarter, including 15 high-volume stores. Year-to-date, we've remodeled 62 locations and now have about 30% of our fleet in an updated format. These refreshed stores inspire our teams, elevate brand perception in the community and send a strong signal that we're investing in local neighborhoods. In the third quarter, we opened 3 new stores in Jacksonville, Florida; Columbia, South Carolina; and Bainbridge, Georgia, bringing our store count to 593 locations across 33 states. In addition, we remodeled 5 stores in Columbia, South Carolina and 4 stores in Jacksonville, Florida. And in support of these new stores and remodels, we added local marketing, which included wrapping city buses with the Citi Trends brand message. These openings are part of our pilot market backfill approach, which we are opening new stores in conjunction with remodeling existing locations to increase market share by strengthening our store presence and reinvigorating our brand. In the first few weeks of business, the new stores and markets have responded above expectations. I look forward to giving you a more thorough update on our next call after we have a full holiday season of results in these markets. These market investment tests will inform our approach as we accelerate growth in 2026, when we plan to open about 25 new stores, followed by at least 40 stores per year in 2027 and onward. This expansion strategy will take our store count to around 650 stores by the end of 2027, focusing on backfilling existing markets where our brand awareness and performance are proven while selectively entering new markets with strong demographic alignment to our customer base. Our positioning of Citi Trends for strategic new store growth is guided by a disciplined data approach. Our new store expansion combines advanced AI-driven analytics, local market expertise and strict financial criteria. Using AI tools, we have analyzed 3 years of actual transaction data from every store location, combined with comprehensive geolocation studies to understand the specific market characteristics that drive our success. This data-driven approach has demonstrated about 90% accuracy in predicting sales, helping us identify and replicate our most successful store profiles while minimizing risk. We're applying disciplined financial hurdles to every new store decision, targeting mature store averages of about $1.5 million and mid-teens 4-wall contribution. Looking ahead, we continue remodeling about 50 stores per year as a part of our ongoing fleet maintenance and market investment strategies. This disciplined approach allows us to progressively upgrade our store base while achieving planned returns on invested capital and positioning us to expand intelligently while -- excuse me, while maximizing return on investment. Longer-term growth in early October, we had a chance to share our multiyear growth plan at an investor conference. The presentation we shared is available on our Investor Relations website. But I do want to take a minute just to review some of the key objectives of our long-range plan. The first objective is to grow sales to $900 million or more in fiscal 2027 with consistent comp store sales growth plus the addition of about 25 new stores in fiscal 2026 and 40 stores in 2027. We plan to achieve a gross profit rate of 42%, a 400 basis point expansion compared to fiscal 2024, and we plan to leverage expenses by 200 basis points to a rate of approximately 37% or less. Resulting EBITDA is expected to be $45 million or more in fiscal 2027, a $60 million improvement to 2024 and an EBITDA margin rate of approximately 5%. These are not distant goals. They're achievable outcomes driven by the actions we are actively executing to drive the turnaround of this important business and with our fiscal 2025 results to date. I think it's fair to say that we're off to a pretty good start. With that, I'd like to turn the call over to Heather to discuss our financial performance for the quarter in more detail and our outlook for the fourth quarter. I'll return after Heather for some closing remarks. Heather? Heather Plutino: Thank you, Ken, and good morning, everyone. I'm pleased to walk you through the details of our third quarter performance, which demonstrates once again the consistency and effectiveness of our transformation strategy. That clear strategy plus the foundational improvements made to date have created remarkable momentum across the business, and we are delivering measurable progress across key operational metrics. Starting with the top line, Q3 total sales were $197.1 million, up 10.1% compared to Q3 2024. Comparable store sales increased 10.8%, 16.5% on a 2-year stack basis. Ken said this already, but it's so good it warrants repeating, our Q3 performance marks our fifth consecutive quarter and 15th straight month of strong comp growth, a remarkable feat, particularly in the current retail environment. We delivered strong comps in each month of the quarter and saw consistent year-over-year growth in both traffic and basket as our revised merchandise assortment, including off-price deals and more branded extreme value product continues to resonate strongly with our customers, enabling us to gain market share. We also saw positive results across all climate zones across all store volume groups and across all product categories, demonstrating the broad-based nature of our improving results. Third quarter gross margin was 38.9%. While 90 basis points lower than Q3 2024, these results were in line with our expectations. Recall that in the second quarter of last year, we incurred significant markdowns from our strategic inventory reset, allowing us to exit aged and slow-moving products while freeing up open-to-buy for our revised product strategy to fuel our top line growth. As a result, markdowns and shrink in Q3 of last year were unnaturally low, creating an unfavorable comparison for the current year period. As Ken mentioned, early in the third quarter, we decided to shift inventory and related freight expense from Q4 into Q3 to better manage freight flow for the distribution centers. Doing so drove additional freight expense in Q3, about a 40 basis point impact to margin rate while accomplishing the smoothing we wanted to achieve, protecting the holiday and delighting our customers with earlier access to holiday goods. Importantly, product margin was consistent with the results from the first half of the year due to the hard work of our merchant teams, as Ken remarked on earlier. Third quarter adjusted SG&A expense totaled $79.5 million compared to $74.6 million in the prior year period. The increase to last year was driven by $3.2 million of higher incentive compensation accrual and store and DC expenses to process higher sales. As we've shared in previous calls, we reinstated an incentive compensation accrual at the beginning of this fiscal year after incurring very minimal related expense in fiscal 2024, causing the bonus to no bonus comparison again in the third quarter. In addition, due to improved expected financial results for the year, we set the bonus accrual to the max payout, driving a catch-up accrual in the third quarter. On a rate basis, Q3 adjusted SG&A was 40.4%, 130 basis points lower than last year. Adjusted EBITDA for the quarter was a loss of $2.9 million, in line with management expectations and better than a loss of $3.3 million a year ago. Before turning to the balance sheet, let me provide a few details on our performance through the first 9 months of fiscal 2025. Comparable store sales for the first 9 months increased 10% with a 2-year comp stack of 12.3%. Comps were driven by a 6% increase in transactions. This is a metric we're most proud of as it is evidence that our loyal customers are responding positively to the changes we've made in our assortment strategy and to the in-store experience. Adjusted 9-month EBITDA was a loss of $0.1 million, an increase of more than $21 million to last year. EBITDA growth was driven by more than $47 million in incremental sales, 290 basis point margin rate expansion and 100 basis points of SG&A leverage, so improvement across the board. Now turning to the balance sheet. Total inventory dollars at quarter end decreased 3.1% compared to last year with average in-store inventory up 4.5% as we strategically positioned ourselves for holiday sales, including the pull forward of inventory receipts from Q4 into Q3. As Ken mentioned, our success in driving double-digit sales increases with a modest increase in in-store inventory reflects our work to improve inventory efficiency through higher turns and improvements in supply chain speed. As we enter the important Q4 holiday selling season, we remain pleased with our inventory level, composition and freshness. At the end of the third quarter, we remained in a healthy financial position with a strong balance sheet, including no debt, no drawings on our $75 million revolver and $51 million in cash. This financial strength continues to give us the flexibility to invest in our growth initiatives while ensuring operational stability throughout our transformation. Now turning to our fiscal 2025 outlook. Based on our results through the third quarter and our confidence that the effectiveness of our turnaround plan will continue through the fourth quarter, we are pleased to update our outlook for 2025 as follows. With sales momentum of the first 9 months of the year continuing into early Q4, we now expect full year comp store sales growth of high single digits at the high end of our previous outlook. We now expect full year gross margin expansion of approximately 230 basis points versus 2024, also at the high end of previous outlook due to continued progress on inventory efficiency and planned supply chain improvements. 2025 SG&A is expected to leverage approximately 90 basis points versus last year, reflecting continued expense control. Once again, this is at the high end of our previous outlook of 60 to 90 basis points leverage versus '24. With these updates, we now expect full year EBITDA to be in the range of $10 million to $12 million, an increase to the $7 million to $11 million range in prior guidance. The revised guidance is $24 million to $26 million above fiscal 2024 results. There is no change to our expected effective tax rate of approximately 0% for the year. For the year, we will open 3 new stores and will remodel 62 locations. Both of these targets have been achieved as of the end of the third quarter. In addition, we are planning to close 4 stores in the fiscal year, just above our previous guidance of 3 closures. And finally, full year capital expenditures are now expected to be approximately $23 million, at the lower end of our previous outlook of $22 million to $25 million. While we don't provide quarterly guidance, given where we are in the fiscal year, we want to offer our thoughts on our expectations for the fourth quarter. Q4 comps are expected to be up high single digits with a 2-year stack in the mid-teens. Q4 gross margin is expected to be in the range of 40% to 41%, up to prior year. SG&A is expected to be approximately $82 million, and Q4 EBITDA is expected to be in the range of $10 million to $12 million. Before I turn the call back to Ken, I want to emphasize that our third quarter results reflect more than just 3 months of strong execution. They demonstrate the durability of our business model, the effectiveness of our strategic initiatives and most importantly, are a continuation of the improvement we've achieved across the last several quarters. As we look towards the fourth quarter and into fiscal 2026, we remain committed to our disciplined approach while maintaining the flexibility that has served us well throughout this transformation. The foundation we've built gives us confidence in our ability to deliver sustainable, profitable growth while continuing to create shareholder value. I'm excited about the opportunities ahead as we continue to execute against our strategic plan. With that, I'll turn the call back to Ken. Ken? Kenneth Seipel: Thank you, Heather. Before I turn the call back to the operator to facilitate Q&A, I do want to emphasize that the transformation of Citi Trends is well underway. We remain guided by our 3-phase framework to deliver -- designed to deliver sustainable profit growth. The first phase, repair, is about restoring fundamentals and establishing a strong foundation for growth. The second phase, execute, focuses on hardening consistent best practices to drive reliable, predictable performance. And the final phase, optimize, leverages the work of the first 2 phases to accelerate our EBITDA growth. As a result of our efforts, in the first 2 phases of this transformation, we've made meaningful improvements, including an improved product assortment strategy, a better in-store stopping in-store shopping experience for our customer and improvements in many processes and systems. Our 5 consecutive quarters of comp store growth is a proof point that our strategy is working, our execution is getting better, and our customer connection is stronger than ever as we firmly establish ourselves as a leading off-price retailer for our customers. While we're proud of our results so far, we fully recognize there is significant opportunity ahead. I want to emphasize that we're in early stages of this transformation. There's still work to do, processes to refine, categories to optimize and systems to build, but the path forward is clear. We are confident in our ability to deliver continued transformation, drive shareholder value and expand our role as the leading neighborhood retailer for African American families. I want to thank the entire Citi Trends team for executing with discipline, driving quickly towards our stated goals and most of all, for delivering results. The team is doing the hard day-to-day work to unlock sustainable growth and shareholder value, and we are just getting started. Thank you, everyone. And now I'd like to turn it over to the operator for questions. Operator: [Operator Instructions] then return to the queue. Our first question is coming from Michael Baker from D.A. Davidson. Michael Baker: Great. Great quarter. So if I think about the 2-year plan to get to about $900 million, it probably implies another $85 million or so in sales growth in '26 and '27. You talked a lot about some merchandising opportunities and categories. But a little bit more detail on where are the biggest holes or opportunities in your merchandising right now, either by product category or buy good, better, best or however you want to articulate, where does that -- those incremental sales come from? Kenneth Seipel: Yes, for sure, Mike. Thanks. We, as I mentioned in the script, we are seeing broad-based growth throughout all the categories. And so at the top level for all categories, we've really sharpened our focus on better trend product. And we have seen good reaction to that this year and continued reaction. I mentioned briefly that we have just implemented a young Men's category, that's actually just setting in the stores right now. We're seeing good reaction to that. And as we begin to understand a little bit more about that dynamic, there's significant opportunity there. Equally across the aisle in our Women's category, we've always had a pretty strong juniors business, but we recognize that there's a missing component of that as well as plus sizes that needs to be fully matured. And then on top of that, overlay trend product and those categories as well. And so that's a little bit of a new business for us relative to those 2 categories getting reset. And then across the fleet. We're just getting -- going in shoes in our footwear category. The team, as I remarked, had a pretty good Q3 in Women's. We're off to a good start there. But we have significant opportunity, multiple millions of dollars of opportunity to grow our shoe business back to even, say, historical levels, let alone to catch up to where we are in the overall store. So there's significant opportunity there. And then I would highlight, and I don't mean to make this so broad based, but it really truly is how we're looking at it. In Kids, for example, as we continue to build that business, it gets stronger and stronger and stronger. We've been executing quite well in Kids. But as we continue to invest in inventory, we see it grow. So there's areas throughout the store that we see that they just offer tremendous opportunities for growth. And then I guess I'll put the punchline for all this. The other piece of it. Don't forget that we have the extreme value opportunity. And we're doing a fairly small percentage of our business and extreme value right now. It's working quite well, and we see significant growth there. All of that actually totals up to, in my mind, a very obtainable $900 million. Michael Baker: Great. If I could ask a follow-up, I suppose, by virtue of the 10.8% comp, your trends are probably consistent throughout the month. You talked about consistency by product category and store cohort. Can you talk about the pace through the quarter? And if there was any impact from the government shutdown, SNAP, anything during those few weeks? Kenneth Seipel: Yes. I'll make some high-level comments, and then Heather can fill in any of the specifics here. But the good news about our consumer right now, they've shown remarkable resiliency with all of the macro changes around government SNAP and different programs like that. And candidly, we've really seen no major impact as the shopping patterns have remained consistent throughout the quarter. As I mentioned, we got off to a really good start in August. August was tremendous for us, led by our Kids division. All divisions did well, but Kids really had a tremendous back-to-school period. And then I was really pleased with how we finished the quarter. October, particularly the last 3 weeks of October really accelerated quite well. I mentioned in the script that we advanced some of our freight from Q4 into Q3. When that hit our stores, we actually saw a really strong consumer reaction. Heather Plutino: Yes. Mike, the only thing I would add to that is that it was a pretty tight band. It looks a little bit like a barbell, stronger in the beginning, first month, third month, middle month was a little softer, but the range is like 9.5% to 12%. So it's not like a severe dip in the middle, or severe spike. So yes, pretty consistent. Operator: Next question today is coming from Jeremy Hamblin from Craig-Hallum. Jeremy Hamblin: Congrats on the impressive results. I wanted to just come back to the point, Ken, that you were making on some of these extreme value deals, which we saw some of those drop towards the end of the quarter, some notable deals with products like UGG, HOKA, Timberland brands, Jordan brand, et cetera. And that did seem to be a big driver of your strong traffic. But where are you in terms of extreme value as kind of a portion of the product inventory and sales today? And I think you mentioned that you're expecting over the next couple of years to get that up to about 10%. How do you expect that to progress over time? And what type of visibility do you have on continuing to drive deal flow across kind of major name brands? Kenneth Seipel: Yes. Good. Thanks, Jeremy. I appreciate it. A couple of things in our current status, extreme value deal flow, as I mentioned, continues to be very robust for the team. And we're being pretty discerning about what's being brought into the business right now. Many -- I guess we probably passed on a 3:1 ratio of adoption of deals that come across the desk, maybe even more. And as a result of that, the current sales performance of extreme value deals is probably in the 2% to 3% of business range, and that I'll just give you a broad range right now. It varies a little bit by category. And back to your point, we've seen a path to getting that closer to 10% as we continue to mature. So there's a significant opportunity there. And we're learning a lot as we're bringing some of these deals in. Many of them have really responded much better than anticipated. If you have been a little bit slower than anticipated, a lot of it has to do with consumer acceptance and reaction of it. But as we're getting better and understanding how to do extreme value deals, particularly with our supply chain processing, we see that, and I believe that remains to be a competitive weapon for us going forward. Jeremy Hamblin: And then switching gears here to talking about the store fleet. And as you are rolling out stores for '26 and seeing a nice uptick in your unit growth, what do you expect the cadence of openings to be in '26? And then you mentioned 2027, is that going to be kind of consistent in terms of store openings now that you've got visibility on the number of units that you're planning to open? Kenneth Seipel: Yes. I'll give you a little bit of color on the process going forward into 2027. Our real estate team right now is working on a number of deals in the pipeline. And our goal will be, going forward, to open up our stores really at 3 distinct times of the year. We'll be opening up stores in early spring, going into the spring period, the [indiscernible] season. We'll be opening up stores in July, going into back-to-school. And we'll open up a group of stores in October going into holiday. And so I would expect that, that fleet going forward, the 40 stores that I mentioned earlier, you can probably divide that equally by 3 into those time frames and probably have a really good view of how we're looking at the business from our side. In 2026, we'll have lighter openings in the spring. We're just getting caught up there. Most of those openings will be more in July and August, probably equally split there -- or excuse me, July and October, equally split between those 2 months, to give you an idea as we get caught up and get this engine moving forward in new store growth. Jeremy Hamblin: Great. And then just one more for me. I know that you've got a lot of initiatives that are going on, a lot of technology initiatives. But I wanted to ask about your shrink mitigation efforts. I know this is something that you've been working on very diligently. And I think you had a pretty decent gap to close of where you wanted to get that, too. But any color you can share on the progress, on those efforts? What the impact is to your gross margin? And what do you expect to pick up from that kind of in 2026? Heather Plutino: Jeremy, I'm going to grab that one. So we've rolled out new camera systems in about 1/3 of our stores in 2025. And these new camera systems not only provide what you would expect visibility into the store, but they're AI-capable and allow for our loss prevention team to use facial recognition, which you can imagine is helpful not only to protect our stores, but to engage with local law enforcement and to help the community, not just our Citi Trends stores. So we're excited about that. Those cameras also have, outside of loss prevention and shrink prevention, they have heat mapping capability, which will help us understand customer shopping patterns and they have traffic counting capability, which obviously is an important component as well. So we're excited about that. We're going to roll out to more than 2x that number of stores into 2026, so that we can leverage that very, very quickly. You and I talked about this before, but our break rate in 2025, it still remains what I understand to be in line with averages for retail. So we're not satisfied yet. And that means that it's less than 1.5% of sales, right? So still higher than we want it to be, less worried about the rate than I am about the dollars. I think we still have a few million to give back to the company on shrink mitigation over time. Now as I look at 2026, our plan assumes a decrease in both dollars and rate in 2026 based on technology, based on talent. We are upgrading and updating our talent in our loss prevention teams. And based on processes, we are training regularly our store management teams and our district managers on shrink mitigation. So all of that comes together to say that we expected a decrease in 2026 and a further decrease in 2027. Jeremy Hamblin: Fantastic. Last one for me. So you also noted the implementation of technology, improving CRM. Can you elaborate at all in terms of how you plan to use that as the company continues to gravitate to using a bit more digital marketing efforts. Are there -- is there a thought around kind of loyalty program that you're leaning into? But any more color you might be able to share on kind of the timing of when the CRM update is happening and what you expect the outcome to be from that? Kenneth Seipel: Yes, for sure, Jeremy. We are in the process, as I mentioned, of really getting it out and testing and developing the systems and the processes that go along with that. Our goal will be to launch a CRM in Q1 of this next year. And we don't have an exact date yet. We're still trying to pin down some stuff on the technology and its readiness and so forth. But think about a Phase 1 implementation in Q1. And then there will be a Phase 2 implementation in the fall of 2026. The way I want you to think about CRM and loyalty for our business is we're actually going to be calling it "The Insider's Club." We'll have a much better title I'm sure by the time we get to it. And it's effectively going to be a way for our customers to tap into emerging trends and deals. You think about the value of being a part of our loyalty club and being one of the first ones to know about some of these amazing extreme value deals that are coming down the pipeline. We have the ability to notify our best customers. They can kind of come in and shop first, invest, and be kind of in the know, if you will, around emerging deals that are coming to the store. We believe that there will be a significant interest in that. And that actually has the ability then to drive incremental traffic with some of our best and most loyal consumers. And beyond that, we're also trying to build in additional tools to make the shopping experience easier for our best customers. As an example, one of the things that they'll gain is actually the ability to have electronic receipts. And so quickly, they can have that stored and be on their phone and eventually we'll have an app on there that they can just simply access that had also a layaway programs and things of that nature will have digital access. So the goal here is to make it in Insider's Club, and then to find ways to make the shopping experience a little bit easier and more convenient for our consumer. And then as you mentioned, the intangible value for us is we're going to have a pretty significant database of consumers that are highly engaged that we can speak to with regularity via these marketing ideas. Operator: We reached the end of our question-and-answer session. I'd like to turn the floor back over for your further closing comments. Kenneth Seipel: I'd like to thank everybody for attending today's call. We look forward to talking to you next quarter. Operator: Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good day, and welcome to the Abercrombie & Fitch's Third Quarter Fiscal Year 2025 Earnings Call. [Operator Instructions]. Today's conference is being recorded. At this time, I would like to turn the conference over to Mo Gupta. Please go ahead. Mohit Gupta: Thank you. Good morning, and welcome to our third quarter 2025 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer; Scott Lipesky, Chief Operating Officer; and Robert Ball, Chief Financial Officer. Earlier this morning, we issued our third quarter earnings release, which is available on our website at corporate.abercrombie.com under the Investors section. Also available on our website is an investor presentation. Please keep in mind that we will make certain forward-looking statements on the call. These statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today. These factors and uncertainties are discussed in our reports and filings with the Securities and Exchange Commission. In addition, we will be referring to certain non-GAAP financial measures during the call. Additional details and reconciliations of GAAP to adjusted non-GAAP financial measures are included in the release and in the investor presentation issued earlier this morning. With that, I will turn the call over to Fran. Fran Horowitz-Bonadies: Thanks, Mo, and thanks, everyone, for joining as we head into the important holiday season. I am happy to report our 12th consecutive quarter of growth, with sales up 7% to a record of $1.3 billion. We again delivered on the goals we outlined for the quarter, with net sales and operating margin, both at the high end of our outlook, earnings per share above our expectations and inventory levels aligned with trend. Along with these strong financial results, we repurchased $100 million worth of shares in the quarter, bringing our total to $350 million, or 9% of shares outstanding as of the beginning of the year. Our team continues to stay close to our customers while reading and reacting to the current environment. In the quarter, we made further progress on key brand, regional and foundational investments. Based on our third quarter momentum and our fourth quarter outlook, we are narrowing our full year sales outlook towards the top end of the range we provided in August, targeting a strong finish to 2025 on top of a record 2024. Financially, in addition to record net sales, we delivered a gross margin of 62.5% and a 12% operating margin for the quarter, both of which include an adverse tariff impact of around 210 basis points. We exceeded our outlook range on earnings per share, delivering $2.36 for the third quarter. On the regions, we saw continued growth in the Americas with net sales up 7% on balanced traffic gains across channels. In EMEA, total sales increased 7% with comparable sales higher by 2%. Similar to last quarter, strong sales performance in the U.K., our largest country in the region, continued to be fueled by localized marketing, inventory distortions and strategic partnerships. Strength in the U.K. was partially offset by softness in Germany and the remainder of European markets. In APAC, net sales were down 6% with comparable sales down 12%. Across regions, we remain excited about the significant long-term global growth opportunity for our brands through a blend of go-to-market strategies, including owned and operated, franchised, wholesale and licensing. Turning to the brands. In line with our expectations, we made sequential improvement in Abercrombie brands that sales were down 2% and comparable sales down 7%. We continue to see positive cross-channel traffic to the brand and we managed inventory tightly, enabling improved AUR trends compared to the first half. The sequential improvement was led by Women's, where we had a good seasonal transition to cold weather categories across top, bottoms and outerwear. In Abercrombie, we continue to remain active in marketing, building on early fall denim and NFL campaigns with our recently announced collaboration with luxury retailer Kemo Sabe. Putting these 2 brands together with a great way to connect with new and existing customers offering authentically crafted leather apparel and accessories, highlighting the Western trend. Abercrombie has inventory in the right place and a strong marketing plan heading into holiday. We've opened 30 new stores in the third quarter, aiming for a total of 36 this year. We remain focused on bringing the brand back to growth by diligently executing the playbook that has delivered a double-digit CAGR on sales from 2019 on strong double-digit AUR improvement over that time. This holiday, you'll see a lot of Abercrombie is known for, fashion, comfort and authenticity, and you'll continue to see it expressed through newness across categories. With this combination of investment across product, voice and experience, we are aiming for Abercrombie brands to be approximately flat in the fourth quarter on net sales against a record in Q4 last year. We're excited to see that milestone within reach. In Hollister, we saw exceptional growth trends continue with 16% net sales growth in the third quarter. Comparable sales were up 15% on continued strong cross-channel traffic. Both Men's and Women's contributed to growth in the quarter, and we saw balance across categories. Consistent with our Read & React model, we've been keeping inventory tight while continuing to flow in newness allowing for AUR improvement on lower promotions. Coming off a very strong back-to-school season, I was proud of the team transition to fall and into holiday. Speaking of holidays, Hollister has some exciting campaigns and collaborations planned that will highlight some must-have for the season. We kicked off a couple of weeks ago with 6 college athletes co-designing special items in our Collegiate collection for football rivalry week. And you might have seen yesterday's announcement with Taco Bell with the brands collaborated on 90s and Y2K styles across graphics and fleece. We are just getting started. And importantly, our team has been reading and reacting and has the right product to support sales throughout the season. We're also enhancing the Hollister brand with investments in physical retail. We are on track to open 25 new stores this year while refreshing more than 35. The theme across our brand portfolio and company is consistent. We remain on offense. From both a brand and regional perspective, we are investing in marketing, stores and talent to support sustainable long-term growth. We also continue to make opportunistic investments in digital, technology and our infrastructure to improve the agility and speed needed to support our growing global business. These tech investments have the power to enhance the entire customer journey, especially when paired with AI. We recently deployed AI agents and customer service to improve the experience while driving scale and efficiency. And we're very excited about a new partnership we're kicking off this week with PayPal and SymBio, one of our technology partners in marketplace sales, that will enable agentic commerce and AI answer engines like Perplexity, where customers can seamlessly complete transactions directly within their AI conversation without even leaving the chat. As our business continues to evolve, we're making future focused investments to deliver for customers and strengthen our operating model. And for us, that's really the story of 2025. More than 3 quarters in, I am proud of how the team has worked through this year, responding to the dynamic tariff environment and evolving with our customers. We are fully prepared for the holiday season having used these past months and quarters to test and learn and build confidence in our assortment and brand positioning. We've also continued to keep inventory tight with the goal of reducing promotions and clearance selling to mitigate some portion of the tariff cost. With our holiday plans in place, we expect to deliver top-tier profitability and earnings per share, reflecting the consistency of our model. And with that, I'll hand it over to Robert. Robert Ball: Thanks, Fran, and good morning, everyone. Recapping Q3, we delivered record net sales of $1.3 billion, up 7% to last year on a reported basis at the high end of the range we provided in August. Comparable sales for the quarter were up 3%, and we saw a benefit of approximately 50 basis points from foreign currency. By region, net sales increased 7% in the Americas, 7% in EMEA, partially offset by a 6% decline in APAC. On a comparable sales basis, Americas was up 4%, EMEA was up 2% and APAC was down 12%. Across regions, the spread from net sales to comparable sales was driven by net new store openings and third-party channel performance. EMEA also benefited from favorable foreign currency. On the brands, Abercrombie Brands net sales declined 2% with comparable sales down 7%. Consistent with our third quarter outlook, the sales decline was primarily due to lower AUR, but the AUR decline was less than the first half of the year. Hollister Brands net sales grew 16% on comparable sales growth of 15% with both unit growth and AUR improvement from lower promotions. The comp to net sales spread for Abercrombie brands in the quarter was driven by third-party channel performance, along with net store openings. I'll cover the rest of our results on an adjusted non-GAAP basis. Operating margin of 12% of sales was at the top end of the outlook range we provided in August, delivering operating income of $155 million, compared to $175 (sic) [ $179 ] million last year. Adjusted EBITDA margin for the quarter was 15% of sales on adjusted EBITDA of $194 million compared to $219 million last year. The 280 basis point decline in operating margin from Q3 2024 was driven primarily by 210 basis points of tariff expense included in cost of sales. In addition, as we forecasted in August, third quarter marketing was up 100 basis points from the prior year. This was partially offset by leverage in general and administrative expense on lower payroll and incentive compensation. The tax rate for the quarter was below our outlook at 29% driven by outperformance to expectations in EMEA. Net income per diluted share was above our outlook at $2.36, compared to $2.50 last year. Moving to the balance sheet. We exited the quarter with cash and cash equivalents of $606 million and liquidity of approximately $1.06 billion. We also ended the quarter with marketable securities of approximately $25 million. For the quarter, we repurchased $100 million worth of shares, ending the quarter with $950 million remaining on our current share repurchase authorization. Year-to-date, we repurchased $350 million in shares totaling 9% of shares outstanding at the beginning of the year. We ended the third quarter in a clean current inventory position with costs up 5% and units up around 1% and have seen freight and other unit cost mix normalize. Shifting to the outlook. We entered the fourth quarter with momentum, and we are narrowing to the upper end of the full year sales expectations we provided in August. We continue to reflect tariffs and mitigation consistent with our second quarter call commentary and the team continues to find cost efficiencies through vendor discussions as we plan 2026. For the full year, we now expect net sales growth to be in the range of 6% to 7% from $4.95 billion in 2024. We've narrowed the range to reflect third quarter performance and for expected fourth quarter sales. We currently anticipate 60 basis points of favorable foreign currency in the outlook. We continue to expect full year GAAP operating margin in the range of 13% to 13.5%. As a reminder, this range includes the impact of the $38.6 million benefit from litigation settlement or around 70 basis points of sales. Also, the assumed tariffs included in the operating margin carry a cost impact of around $90 million for 2025, or 170 basis points of sales. We are forecasting a tax rate around 30%. For earnings per share, we expect diluted weighted average shares of around $48 million, which incorporates the anticipated impact of 2025 share repurchases. Combined with the tax rate, we expect net income per diluted share in the range of $10.20 to $10.50. For clarity, the $38.6 million benefit included in our outlook carries a favorable impact of $0.59 per share. For capital allocation, we continue to expect capital expenditures of approximately $225 million. On stores, we continue to expect to deliver around 100 new experiences, including 60 new stores and 40 right sizes or remodels. We also expect to be net store openers with our 60 new stores outpacing around 20 anticipated closures. At the current sales and operating margin outlook, we are targeting around $450 million in share repurchases for the year, subject to business performance, share price and market conditions. For the fourth quarter of 2025, we expect net sales to be up 4% to 6% to Q4 2024 level of $1.6 billion. We expect operating margin to be around 14%. We continue to expect lower cost of goods sold from freight at around 150 basis points of sales for the quarter. We also continue to expect $60 million of tariff impact net of mitigation efforts or around 360 basis points. Operating expense will be around last year as a percentage of sales. We see opportunities to incrementally invest in marketing, but this will be largely offset by leverage in other areas. We expect the Q4 tax rate around 30%. We expect net income per diluted share in the range of $3.40 to $3.70 with diluted weighted average shares expected to be around $47 million, including the anticipated impact of around $100 million in share repurchases for the quarter. To close things out, we entered the fourth quarter ready to compete with inventory aligned with trend and the right composition. We have great momentum having delivered against expectations these past 3 quarters on both top and bottom lines. Our brands are in great shape with Abercrombie brands making sequential improvement and Hollister brands taking share with impressive growth. We remain on the offense, investing in marketing through key brand collaborations and partnerships and with store expansion and digital enhancements that enable us to win in the long term. We look forward to a great holiday selling season. And we thank our teams around the globe for putting us in reach of record sales for fiscal 2025. And with that, operator, we are ready for questions. Operator: [Operator Instructions] First question comes from Dana Telsey with Telsey Advisory Group. Dana Telsey: So nice to see the sequential progress. Congratulations. Fran, as you think about the Abercrombie brand and the plan it's tracking to, what did you see by category, Men's and Women's? Does it differ by channel? How are you seeing the progress of the brand? And then just overall, international, any puts and takes on the different regions and countries? Fran Horowitz-Bonadies: Dana, so super excited about the results we just put up for the third quarter. I mean total company 12th consecutive quarter of growth, top line is 7%, comps at 3%. So the Abercrombie brand specifically continues to be strong. This is evidenced by a few things. Our traffic is positive. Our customer file continues to grow. We're seeing nice engagement in our digital and our stores channels, excited about where we're headed for the fourth quarter. The team has been busy at work all year testing and learning and really reacting to what's happening, heading into the fourth quarter, well inventoried and denim, fleece and sweaters very strong categories for us. As I mentioned, also 30 new stores to date, 6 more opening up this quarter. So we're fully prepared to compete for the fourth quarter. Robert Ball: Yes. Dana, I'll jump in here on the international side. So obviously, we continue to be really excited about the opportunities that we see for EMEA. We have invested in this region. We've got the infrastructure in place to take our brands to the market. This quarter, when you think about puts and takes, U.K. results were really strong. That's where we've been investing most to improve awareness and service our customers there. We're still in pretty early innings here in Germany and more broadly in the other European countries. We don't really have much of a presence or awareness. So we would anticipate seeing some shorter-term fluctuations here as we ramp those brands. But obviously, we see that as opportunity to go after. On the APAC side of the house, very similar dynamics here. The market is huge. Our business is relatively small. We're focused on building our brand awareness there and building a stronger presence. So again, not surprising for us to see some shorter-term fluctuations. But overall, really confident in the global opportunities that we see for our brands. Obviously committed to getting closer to those customers, deploying our playbook and ultimately taking these brands to market and growing this business longer term. Operator: Our next question comes from Corey Tarlowe with Jefferies. Corey Tarlowe: Fran, the Hollister momentum has been really impressive and it seemed like the back-to-school momentum is continuing into holiday based on what we're seeing in stores. So just curious on how you expect to continue to build on that momentum as we look ahead into 2026. Fran Horowitz-Bonadies: Corey, yes, wow, what a year we're having with Hollister. Congrats to that entire team, super excited to grow the business another 16% on last year's 14%, the tenth consecutive quarter of growth. We are seeing balanced growth, Corey, across genders, across categories. We're seeing our AUR growing on lower discounts. The customer file is growing. Our traffic is strong. Most importantly, we're holding our inventory tight, so we can really Read & React to the business. We've got great momentum heading into holiday seasons. Honestly, there's almost every category is working, which is super, super excited. I'm sure you saw the announcement yesterday, this Taco Bell partnership for Cyber Monday, we're excited about. So lots of good things happening as we head into the fourth quarter. Corey Tarlowe: That's great. And then just a follow-up for Robert. How best to think about traffic versus ticket as we head into holiday? And then any comments on what that could mean for next year as well? Robert Ball: Yes. I mean, Corey, so across our brands, when we think about sort of tickets, I guess touching on tickets real quick, haven't taken any sort of meaningful tickets. We've been talking about this for a couple of quarters now through the holiday season, it's a nice interplay as you think about this holiday season, the best way to drive traffic and to engage with that consumer is going to be through promotions and pricing. So our tickets are pretty stable. We have started to think through and take tickets here post-holiday. So you'll start to see some ticket increases across the assortment here with spring deliveries. But the good news is the AURs are growing. We made sequential improvement from spring into fall across actually both brands, Hollister and A&F and we're seeing nice positive traffic. So traffic is growing across both Hollister A&F and across channels, which is great to see, and AURs are headed in the right direction. So customer files are growing, customers are engaged. Our teams are locked in with those customer bases. We've got the right inventory here in our stores to compete for the holiday. So we're excited to push through into Q4. Operator: Our next question comes from Matthew Boss with JPMorgan. Matthew Boss: So Fran, at the Abercrombie brand, could you speak to the cadence of trends that you saw over the course of the third quarter and elaborate on trends that you're seeing so far in November? And then Robert, could you speak to the composition of inventory across both brands and gross margin puts and takes to consider for the fourth quarter? Robert Ball: Yes. So, I'll jump in here. So we obviously had a really strong third quarter, delivering our 12th consecutive quarter of growth, reaching the top end of our guide. Abercrombie, obviously, sequential improvement here. Hollister continues to grab share with that customer. We're excited about the momentum that we're carrying into Q4. In terms of the outlook, I think we're being reasonable, responsible here. We're happy with how the quarter has started. But as you know, Matt, all the volumes ahead of us here, and we're ready to compete. As it relates to the inventory side of the house, inventory is in good shape, up 5% year-over-year at cost with tariffs being about 3% of that. Units are pretty clean here and in control at up 1%, you know how we operate. We're going to keep units tight here and aligned with our forward growth expectations by brand. We didn't provide a brand breakout, but as you'd expect, Hollister units are up more than the A&F units. And again, both brands are positioned to chase to close out the year. So we feel good about where we sit from an inventory standpoint. On the margin front, gross margin puts and takes here, down about 260 basis points year-over-year in Q3. 210 basis points of that is tariffs. We did see a benefit from freight. It was a smallish benefit from freight and AUR. And then we had a couple of offsets from third-party channels and some inventory reserves to keep ourselves clean headed into holiday. So that's Q3. And then Q4, we'll see some of those themes continue, Matt. You'll see about 200 -- or about 360 basis points of impact from tariffs from that roughly $60 million. And then the freight tailwind, as we've been talking about for the past couple of quarters will continue here, and you'll see about 150 basis points of tailwind here for Q4. And then you know how we operate from an AUR standpoint. We've been on this great multiyear journey of AUR growth here. We had a great holiday last season, so we're going to come into the fourth quarter assuming AURs hold. So assuming AUR is flat here as we think about the go forward. Operator: Our next question comes from Marni Shapiro with the Retail Tracker. Marni Shapiro: Congratulations on another great quarter, best of luck for the holidays in case I forget. Can you talk a little bit about the collaborations you've been doing, the NFL, the NCAA, but you also have Kemo Sabe you did crocs. I'm curious, are these all global collaborations? Or are these specific to the U.S.? And if they're not global, will you do global? And as we think about the brands going forward into '26, I think these pops of excitement are fun. Are they bringing new customers into your store? And should we see an increase or similar cadence into '26? Fran Horowitz-Bonadies: Marni, the clubs are interesting. Our goal with our collaborations, honestly, is a real authentic branding moment. You know we talked about this a lot. We stay close to our customer and we listen to them, what's important to them, what's happening in their life moments. That's how we make these decisions to do these collaborations, so they are planned accordingly. . The NFL has been very exciting. Yes, it's definitely bringing in new customers. Our goal with that with the partnership was about brand awareness and customer acquisition. There's a big crossover with their fandom and our customer base, and we listened to the customer. They told us several years ago how important football fandom was to them, and we took that and tested our way into it and have seen a nice success with it. Kemo Sabe is another great example. Western was happening. Our consumer was responding to it. We went to an authority in the business and made a terrific collaboration. The Taco Bell, we're super excited about for Cyber Monday. So as far as 2026 goes, we will continue to listen to our customer. We'll look for authentic moments to make sure that we stay close to them, and we'll continue on this journey. Scott Lipesky: Marni, it's Scott. Just to add on here. It really speaks to where the brands are today. Each brand is in such a strong position, which is enabling us to partner with other strong and great brands. So like Fran said, it's a great way to authentically connect to our customers and lots more ahead and it's been fun for the brands. Operator: Our next question comes from Alex Straton with Morgan Stanley. Katherine Delahunt: This is Katy Delahunt on for Alex Straton. Just thinking about the Abercrombie banner, I know you've all talked about sales growth being about flat for the fourth quarter. But what is the time line you're thinking about for return to sales growth and then even comp as well? Robert Ball: Yes. So Katy, it's Robert. So obviously, delivering sequential improvement here in Q3, that's important for us. The team has been focused on that customer. We're seeing improved product execution. Inventory is clean. And as Fran mentioned, we're placing our bets here for the holiday here in sweaters, fleece, denim. So we're happy about where the brand sits, heading into holiday. Marketing is resonating new collaborations that we just talked about with Marni here earlier. Those are great brand moments. They're driving traffic. Our customer file is growing. We've got strong engagement across both stores and DTC platforms here. So we're excited about this holiday season. We're aiming to continue to progress here, hold that brand flat against last year's record, which sets us up well for next year. Operator: Our next question comes from Mauricio Serna with UBS. Mauricio Serna Vega: Great. First, on the marketing front, could you elaborate a little bit more about what you're doing across each brand, the plans for marketing this quarter, as you mentioned in the guidance for Q4 that assumes that there's more investment happening. And then maybe on the Abercrombie brand performance in Q3, could you break down like how the comps reflected AUR versus units or total sales? That would be very helpful. Robert Ball: Yes, Mauricio, let me jump in here real quick. Obviously, I'm not going to share a ton in terms of our specific marketing plans. We've got some exciting collaborations that we either have announced in terms of like Taco Bell and you'll see the campaigns kind of continue as we move through the holiday time period. It's been effective. Our traffic is up, as we've mentioned a couple of times. We're pretty intentional with our marketing here. We're obviously focused on our brand building, driving customer engagement and ultimately supporting both near term and long term. So it's not all just what are we going to see this quarter, but we're really building these brands for the long-term growth. Obviously, looking at performance as we work to optimize that spend and where we see value, we're going to lean in. And we have 2 strong healthy brands, both exactly where we want them to be, and so we're going to keep our foot on the gas here. As it relates to A&F, Q3 performance, you heard us talk about comps there, the down 7%. AUR was sequentially improved. So we did see improvement there. So if you think about the KPIs and the puts and takes, we've seen traffic on the positive side. AUR was still down, but sequentially improved here from the first half into the third quarter. And then we had a little bit of pressure here on conversion as well, but conversion also headed in the right direction. So nice to see improvements in conversion, improvements in AUR and continued engagement from our customers with positive traffic. Operator: Our next question comes from Rick Patel with Raymond James. Rakesh Patel: Congrats on the progress. I was hoping you could double-click on the expectations around SG&A. I know marketing is going to increase, but you touched on being able to mitigate some of that pressure through other areas. So if you can expand on that, that would be great. And then second, just on comps, wondering if there's any variability performance to flag in the U.S. due to the weather or any regional differences. Robert Ball: Yes. So quick on the SG&A side of things, yes, we'll see a little bit of increased marketing investment year-over-year. We've obviously been leaning into this throughout the first 3 quarters of the year. That will continue, but at a slightly slower clip here in Q4. Q4, obviously, with the sales growth, you're going to see some expense leverage on the G&A side of the house. We've been delivering that throughout the entire year. And given the midpoint of our guide, we wouldn't expect a ton of leverage or deleverage in total at the midpoint of that 4% to 6%. We'll see as we have the rest of the -- as we have all year, as we outperform on the top line, you might see some leverage roll through. But again, we're going to be balanced in our investment approach and where we see opportunities to continue to invest in this business for the longer term, we will. Nothing really to call out from a regional standpoint. We've got a really broad store fleet. So weather in one area, it kind of offsets across the board. Might there be a day or a week here in there that you start to see little blips based on weather events, when you think about the broader quarter, it kind of all works itself out, and it's been pretty consistent for us across the regions. Operator: Our next question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: Congrats on the progress. One more question about Abercrombie. It sounds like a lot of the improvement sequentially was led by Women. Can you just elaborate on what's going on in the Men's side. If I recall, the comparisons there maybe weren't as challenging as what you had in the first half with Abercrombie. So just help us understand what's going on with that side of the business? Fran Horowitz-Bonadies: Janine, it's Fran. Yes, led by Women's but also seeing nice sequential improvement in Men's as well. Again, inventories are clean, super excited about where we are for the fourth quarter. Team has been busy at work, testing and learning all season, so -- or all year pardon me, heading into the fourth quarter to make sure our inventories are where we want them to be, focused on categories like denim, fleece, and sweaters. So we feel good about the fourth quarter, heading into a big week, right, excited for seeing all the excitement out there for Black Friday and ready to compete. Janine Hoffman Stichter: And then maybe one for Robert, just on the tariffs, I think you said $60 million in Q4 net of mitigation. Any initial thoughts on just how to think about that in the first half of next year as you proceed with more mitigation efforts? Robert Ball: Yes. So we've talked quite a while, Janine, around our sourcing footprint. We've been obviously at work at this for quite a long time, starting way back in tariffs, 1.0. We've got a really well diversified sourcing footprint here. We source from over a dozen countries, which obviously gives us a benefit both from a cost negotiation standpoint as well as speed to market, which is obviously core to our model here. I think it's important for us to take a step back real quick and think about how we're entering this next chapter of tariffs. We're coming at this from a position of strength. We're coming off of 15% operating margins last year to go along with record net sales. The teams have obviously been active. We've got a proven playbook here. So they're leveraging the playbook. They're looking at country of origin footprint as well as finding expense efficiencies. And we've touched on this earlier. But while we haven't moved tickets broadly, through the holiday we are taking targeted price increases here for the spring. So that inventory will start delivering here post-holiday. We've done all of that as we've kind of been navigating 2025, and we've delivered record sales for the first 3 quarters of the year. We're positioned to do the same for the fourth quarter. And we've continued to invest in this business and return cash to shareholders. So bought back 350 million shares year-to-date, on track to do another $100 million here in the fourth quarter. So we're doing all this, all while delivering 13% to 13.5% operating margins despite this 170 basis points of tariff impact. So the company is strong. We feel like we're operating and executing at a high level. We'll detail a lot of the components out and the magnitude of some of the stuff for 2026 when we get into our next call. But suffice it to say that we're confident in our ability to navigate this environment. And obviously, our goal is to meaningfully offset these tariff headwinds longer term. Operator: [Operator Instructions] Our next question comes from Janet Kloppenburg with JJK Research Associates. Janet Kloppenburg: Congratulations on the upside. I wanted to ask a few questions. I'll give them to you right now. The tariff impact will be greater in the first quarter than the fourth quarter, Robert? I'm not sure on that. And the price increases, when do you expect those to be complete, like what we see a big bump in the first quarter and then you'll be done. Maybe you could talk to that cadence. And on cadence plan, I thought that the assortments that Abercrombie started to get better in mid-October and continued. And I'm wondering if you saw some response from the consumer on that unless I'm wrong. And then the fourth question is just on promo levels. What you saw in the third quarter year-over-year, what you experienced in the third quarter? And what's your thinking about for the fourth quarter? Robert Ball: All right, Janet. Fran Horowitz-Bonadies: Where do you want to start, Robert? Do you want to start to take the tariff one? Robert Ball: Yes, let's just keep the tariff conversation going here a little bit. So haven't quantified anything related to 2026. But as you think about how this is going to cadence out Janet, we would expect that a lot of our mitigation tactics, which we've been working at for the last 9 months here. Those will start to take hold heading into 2026. So the hope here and our confidence level and obviously, the pricing adjustments that we've made, which I guess is your second question. Those will start to show up here with spring deliveries. So think late December and into January, you'll start to see those tickets go up. And that will just kind of work through as the assortments and the newness flows through into the quarter. As you think about vendor negotiations and all those pieces and parts, that will also start to impact the first quarter here in 2026. So expectation would be that we would see some relief off of that Q4 tariff headwind of 360 basis points. Janet Kloppenburg: Yes, promos, and then Fran can talk to the A&F assortment. Fran Horowitz-Bonadies: Go ahead, finish the promos. Robert Ball: Yes. So from a promo standpoint, we feel good about the cadence that we've been operating under. We've obviously got a track record here of pulling back on promotions and improving AURs here wherever we can. AURs did see sequential improvements from front half into back half across the brands. Hollister is continuing to grow units on lower discounting with higher AURs. So headed into the fourth quarter, we're confident in our promotional plans. We've got the flexibility, and we've got the reactivity to adjust to demand as we see it come through. We're looking to hold those AURs flat for Q4. And like we do always, we'll come in every day. We'll see if we can pull back on a day of promos here, go a little bit shallower there. But it's been a nice formula for us with this multiyear AUR growth, and we're just going to keep -- we're going to keep executing that playbook. Fran Horowitz-Bonadies: And then just real quick on the last piece of that question. So I'm very excited to have announced that we made the progress that we committed to at the beginning of the year that we're seeing sequential improvement in Abercrombie, and that's really across the board in categories. So we're heading into the fourth quarter. We've committed to having clean inventories, and that's where we are. We feel really well positioned, Janet, for the fourth quarter. We are expecting to be -- our goal is to be approximately flat for the fourth quarter. That's on top of a record fourth quarter for last year. So we're happy with the start. The customer is resilient. Our file is growing, as I've said before, our traffic is positive, and we're ready to compete for the fourth quarter. Janet Kloppenburg: You're talking about A&F, Fran. Fran Horowitz-Bonadies: Janet, I'm talking total company, but yes, with A&F specifically, we committed to sequential improvement, and that's what we have delivered with a goal of approximately being flat for the fourth quarter. Janet Kloppenburg: Do you feel like the challenges that you faced in merchandising in the first half at A&F are now behind you? Fran Horowitz-Bonadies: Yes. We committed to getting clean. The opportunities in the first half, which we talked about on both of those calls are really the opportunity that the inventory was much more balanced between sale clearance and regular price. That was something that we didn't really have in 2024. And that's what drove the reduced AUR. As Robert mentioned, we've made sequential improvement in the AUR as we continue to see the customer responding to the newer product. Operator: There are no further questions at this time. I'd like to turn the call back over to Fran for any closing remarks. Fran Horowitz-Bonadies: All right. Thanks, everyone. Just wishing you all a happy holiday season, and we look forward to updating you soon. Operator: Thank you for your participation. You may now disconnect. Everyone, have a great day.