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Operator: Hello, everyone, and welcome to Burlington Stores, Inc. Third Quarter 2025 Earnings Webcast. Please note that this call is being recorded. [Operator Instructions] I'd now like to hand the call over to Mr. David Glick, Group Senior Vice President, Investor Relations. Please go ahead. David Glick: Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2025 third quarter operating results. Our presenters today are Michael O'Sullivan, our Chief Executive Officer; and Kristin Wolfe, our EVP and Chief Financial Officer. Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. A replay of the call will be available until December 2, 2025. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follows are copyrighted today by Burlington Stores. Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company's 10-K and in our other filings with the SEC, all of which are expressly incorporated herein by reference. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release. As a reminder, as indicated in this morning's press release, all profitability metrics discussed on this call exclude costs associated with bankruptcy acquired leases. These pretax costs amounted to $11 million and $0 million, respectively, during the fiscal third quarters of 2025 and 2024 and $28 million and $9 million, respectively, for the first 9 months of 2025 and 2024. Now here's Michael. Michael O'Sullivan: Thank you, David. Good morning, everyone, and thank you for joining us. I would like to cover 4 topics this morning. Firstly, I will discuss our third quarter results. Secondly, I will review our updated fourth quarter and full year guidance. Thirdly, I will provide some early thinking on the outlook for 2026. And lastly, I will comment on the progress we are making towards our longer-range financial goals. Then I will turn the call over to Kristin to provide additional details. Okay. Let's start with our Q3 results. Total sales increased 7% in the third quarter at the high end of our guidance. This was on top of 11% sales growth last year. This means that year-to-date, total sales have increased 8% on top of 11% year-to-date growth last year. Comp store sales for the third quarter increased 1%. We started the quarter well with a strong back-to-school trend, but in September, we saw a significant drop-off in traffic to our stores, driven by warmer-than-usual weather. As we have discussed previously, we have very strong brand equity in outerwear. Many shoppers still think of us as Burlington Coat Factory. Outerwear is a great business and a source of competitive strength. But this means that in Q3, our comp trend is very sensitive to weather, much more so than competitors. In some years, the impact is positive. In some years, it is negative. This year, it was negative. That said, in mid-October, once the weather turned cooler, our comp trend picked up to the mid-single digits. And that momentum of mid-single-digit comp growth continued through the first 3 weeks of November. Finishing up on Q3, I would like to comment on earnings. Despite the weather-driven slowdown in our sales trend in Q3, we still delivered margin expansion that was well ahead of last year and earnings growth that significantly beat our guidance. It's worth calling out that this was despite the considerable headwind that we faced from tariffs. Moving on to the fourth quarter. We are maintaining our previously issued comp store sales guidance of 0% to 2%. We feel good about our recent trend, but it is still early in the quarter. And in the coming weeks, we'll be up against very strong comparisons from last year. So it makes sense to remain cautious. That said, given the strong margin and expense trends that we are seeing, we are increasing our Q4 margin and EPS guidance. To be clear, we are adjusting our full year 2025 earnings guidance, passing along all of our beat to earnings in Q3 and factoring in our higher Q4 earnings outlook. I would like to call out that we started this fiscal year with EBIT margin guidance of flat to up 30 basis points. Our updated full year 2025 guidance now calls for expansion of 60 to 70 basis points. This is despite pressure from tariffs, and it is on top of 100 basis points of margin improvement in 2024. We are excited about the progress we are making on margin expansion. I will return to this topic in a few moments when I talk about our longer-range financial goals. But first, I would like to share our initial thoughts on the outlook for 2026. We are early in the budget process, but as a starting point, we are planning for total sales growth in the high single digits. We now expect to open 110 net new stores in 2026. This is higher than previously discussed, and it reflects the strength of our new store pipeline and the performance we are seeing from new stores. We are excited for these new store openings. For comp sales, we are assuming growth of flat to 2% in 2026. This should sound familiar. It is our typical off-price playbook. There is significant economic uncertainty, and we do not know how this might affect our business in 2026. So we will plan our business conservatively at 0% to 2% comp sales growth and then be ready to chase if the trend is stronger. In terms of operating margin expansion, for budgeting purposes, we are assuming that at 2% comp growth, our operating margin would be flat versus this year, then 10 to 15 basis points higher for each point of comp above 2%. Before I turn the call over to Kristin, there is one more topic that I would like to talk about. I would like to provide an update on our longer-range financial goals. As a reminder, 2 years ago, we shared our objective of getting to approximately $1.6 billion in operating income in 2028. The headline is that we feel good about the progress that we are making toward this goal. We are tracking in line with where we thought we would be at this point. We are especially pleased with the progress we have made in driving operating margin. This means that at the high end of our updated 2025 margin guidance, we will have achieved 170 basis points of the 400 basis points of opportunity that we identified 2 years ago. And of course, we will have achieved this despite the negative headwind from tariffs. Apart from margin expansion, the other drivers of our long-range financial model are new store sales and comp store sales growth. On new store sales, we are even more bullish now about our new store opening program than we were 2 years ago. Originally, we had assumed that we would open 100 net new stores a year in the period 2024 to 2028. In fact, this year, we will open 104. And in 2026, we are now planning to open 110 net new stores. Based on our new store pipeline, there is a possibility that we could sustain or even exceed this stronger pace of new store openings. The other major driver of our long-range model is comp sales growth. As I discussed in the context of our Q3 results, leaving weather aside, we feel good about the underlying comp trends that we are seeing. We believe that we can achieve average annual comp sales growth in the range of 4% to 5% over the remaining years of the long-range plan, in other words, between now and 2028. Of course, we recognize there are a lot of external variables that can affect comp growth. So in the nearer term, as we always do, we will plan our business conservatively and then chase. Now I would like to turn the call over to Kristin to review our Q3 results, updated 2025 guidance and high-level outlook for 2026 in more detail. Kristin? Kristin Wolfe: Thank you, Michael, and good morning, everyone. I will start with some additional color on Q3, then I will talk about our updated guidance. Lastly, I will comment on our initial outlook for 2026. Starting with the third quarter, total sales grew 7%, while comp store sales increased 1%, both within our guidance range. As Michael described, our comp trend in the third quarter fell off significantly after the back-to-school period, driven by warmer weather, but then picked up to mid-single digits in mid-October. The gross margin rate for the third quarter was 44.2%, an increase of 30 basis points versus last year. This was driven by a 10 basis point increase in merchandise margin and a 20 basis point decrease in freight expenses. Moving down the P&L. Our Q3 product sourcing costs were $214 million versus $209 million in the third quarter of last year. Product sourcing costs decreased 40 basis points compared to last year. This was primarily driven by leverage in supply chain through continued cost savings and efficiency initiatives. Adjusted SG&A costs in Q3 levered 20 basis points versus last year. This leverage was primarily achieved in store-related costs. Our store teams drove significant leverage in store payroll through numerous efficiency and productivity initiatives. Q3 adjusted EBIT margin was 6.2%, 60 basis points higher than last year. This was well above our guidance range of down 20 basis points to flat. Our Q3 adjusted earnings per share was $1.80, which came in well above our guidance range. This represents a 16% increase versus the prior year. At the end of the quarter, comparable store inventories were down 2% versus the end of the third quarter of 2024. Let me provide a little more context here. In Q3, we saw a significant slowdown in our comp trends, a weather-driven slowdown. But using our merchandising 2.0 tools, our planners and merchants were able to react very quickly to adjust receipts, especially in cold weather categories. So despite the slowdown, our store inventories are well balanced, current and very clean going into the fourth quarter. Moving on to our reserve inventory. Reserve inventory was 35% of our total inventory versus 32% of our inventory last year. In dollar terms, reserve inventory was up 26% compared to last year. We are pleased with the quality of the merchandise and the values and brands that we have in reserve. And as a reminder, we use reserve inventory as ammunition to chase the sales trend. For example, our reserve includes great outerwear buys that we made earlier this year that we've been pulling out over the last few weeks to fuel the trend since the weather turned cold in mid-October. We ended the third quarter with approximately $1.5 billion in liquidity. This consisted of $584 million in cash and $948 million in availability on our ABL. We had no outstanding borrowings on the ABL at the end of the quarter. During the third quarter, we repurchased $61 million in stock. And at the end of the quarter, we had $444 million remaining on our repurchase authorization. In Q3, we opened 73 net new stores, bringing our store count at the end of the quarter to 1,211 stores. This included 85 new store openings, 10 relocations and 2 closings. We now expect to open 104 net new stores in fiscal 2025, up from our original estimate of 100 net new stores. Now I will turn to our outlook for the fourth quarter and full year for fiscal 2025. We are maintaining our fourth quarter fiscal 2025 guidance for comp sales and total sales. We are guiding comparable store sales to be flat to up 2%, with total sales to increase 7% to 9% for the fourth quarter. We are raising our adjusted EBIT margin and adjusted earnings per share guidance for the fourth quarter. We now expect our adjusted EBIT margin to increase by 30 to 50 basis points. This margin outlook now translates to an adjusted earnings per share range of $4.50 to $4.70, an increase of 9% to 14% versus the fourth quarter of last year. For full year fiscal 2025, after factoring in our actual Q3 results and our improved outlook for Q4, we expect comp store sales growth of 1% to 2%, total sales to increase approximately 8% and EBIT margins to range from an increase of 60 to 70 basis points. As Michael noted earlier, this fiscal 2025 EBIT margin guidance is 40 basis points higher than our original full year guidance at the high end, and this is despite the significant pressure from tariffs. Finally, factoring in Q3 actuals and updated Q4 guidance, adjusted earnings per share are now expected to be in the range of $9.69 to $9.89, an increase of 16% to 18% for the full year 2025. Finally, I would like to touch on our preliminary FY '26 outlook. We are in the early stages of the budgeting process, so this could change. But at this point, we are planning on total sales growth in the high single digits. We are assuming at least 110 net new stores, and we're planning comp store sales in the range of flat to up 2%. For operating margin, as Michael said, we are assuming that at a 2% comp growth, our operating margin will be flat to this year, and we expect leverage of 10 to 15 basis points for each additional point of comp. And now I will turn the call back over to Michael. Michael O'Sullivan: Thank you, Kristin. Before I turn the call over to the operator for your questions, I would like to summarize a few of the key points from today's call. Firstly, Q3 was impacted by warmer weather in September through early October. Once the weather normalized, our trend improved to mid-single-digit comp growth. And we are off to a strong start to Q4 with comps up mid-single digits for the first 3 weeks of November. Secondly, we are pleased with our margin trends. We are updating our full year 2025 guidance to reflect the earnings beat in Q3 as well as our improved earnings outlook for Q4. At this point, we are maintaining our previously issued Q4 comp guidance of 0% to 2%. Thirdly, we are pleased with how we are tracking towards our long-range financial goals, especially the pace of margin expansion. And within this long-range financial plan, we think there may be additional upside in terms of our new store opening program. Now I would like to turn the call over for your questions. Operator: [Operator Instructions] Your first question comes from the line of Matthew Boss of JPMorgan. Matthew Boss: So on relative performance, your comp this quarter came in below both of your off-price peers. This is a clear reversal from results in the second quarter and over the last year. Clearly, you cited weather was a factor, but how concerned are you by this change in your relative comp versus peers? Michael O'Sullivan: Thank you for the question. You're right. Just to lay out the facts, we ran a 1% comp in Q3. Our peers were 6% and 7%, very impressive. That's a very significant difference. I can't give you a complete bridge, but at a high level, let me try and dissect that gap. I'll start with the obvious. We know that weather was the biggest driver of our slowdown in Q3. That's not an excuse, but it is a partial explanation. We changed our name some years ago, but shoppers still call us Burlington Coat Factory. So mild weather in September and October has a huge impact on our business. This is a real thing, and it is unique to us, I think, versus our peers. Now in September and October, cold weather merchandise balloons to more than 20% of our assortment. In the third quarter, our comp sales for ladies and men's coats, jackets, boots and cold weather accessories, all these important categories were down double digits. Now they bounced back in mid-October once it turned cold. But by then, it was too late to really drive the quarter. Let me go a little further and try to quantify the weather impact on our comp in Q3. If you strip out the drag on our overall comp from cold weather categories, the categories I just listed, and if I make an adjustment for the impact that lower weather-related traffic had on the rest of the store, then I can get to the low end of a mid-single-digit comp. In other words, I do not get to 6% or 7% comp. So in my view, weather only explains half of the gap versus peers. Now usually, in off-price, when your comp is lower than your peers, it's just the customer telling you that they preferred the value and the assortment that they found elsewhere. In the second quarter, when we ran a 5% comp growth ahead of our peers, the customer was voting for us. But in Q3, that changed. And we have some hypotheses on why, but we have more work to do to really tear that apart and then aggressively go after that performance difference. But before I leave the question, let me just call out a silver lining. The comp numbers that our peers have just reported reaffirm that the off-price shopper at all income levels is alive and well. Leaving aside the weather, the major implication for us is that we need to take better advantage of that than we did in the third quarter. Matthew Boss: Great. And then, Kristin, as a follow-up, could you provide more color on the 60 basis points of operating margin expansion in the quarter, particularly just given as we think about the pressures that you faced from tariffs and the 1% comp? Kristin Wolfe: Matt, thanks for the question. Yes, first, it's worth reiterating that we really are pleased with the 6.2% operating margin in the quarter, up 60 basis points versus last year on a 1% comp, as you noted in your question. Let me provide the major puts and takes. Starting with gross margin. First, our merchandise margin increased 10 basis points. And within merchandise margin, there was a lot going on. Tariffs had a negative impact on markup, but we were able to offset this impact through numerous actions such as negotiating with our vendors, adjusting the mix and driving a faster turn. The net impact of all this was much more favorable than we originally guided back in August. This was really driven by our tariff mitigation strategies. Now staying in gross margin, freight levered by 20 basis points. This was due to greater efficiencies and cost savings initiatives, particularly in transportation. So our overall gross margin increased 30 basis points versus the third quarter of last year, all this despite the impact from tariffs. On product sourcing costs moving down the P&L, we drove 40 basis points of leverage here. This was driven by supply chain and efficiency initiatives in our DCs. We're excited about the consistent progress we've made in streamlining our supply chain costs. And moving on to SG&A, we showed about 20 basis points of leverage here on a 1% comp, and this was driven by efficiency initiatives in stores such as speeding up checkout times at point of sale. Offsetting this leverage was higher depreciation, which delevered about 20 basis points, driven by increased CapEx in supply chain and new stores. So taken all together, this drove the 60 basis points of EBIT expansion in the quarter. Operator: Next question comes from the line of Ike Boruchow of Wells Fargo. Irwin Boruchow: I guess my question kind of piggybacking off of Matt's. So the comp growth in Q3 was lower than peers, but the margin and earnings were actually pretty much better. How should we reconcile that? And then really more importantly, are there choices that you made during the quarter that may have driven the higher margin in Q3 at the expense of sales? Michael O'Sullivan: Well, I'll take that, Ike. Thank you for the question. It's a good question. I think the direct answer is yes. There were decisions or choices that we made that helped drive our margin in Q3, but may have had a negative impact on our sales. And I'll give you a couple of examples, but maybe I should just preface what I'm going to say with a couple of points. Firstly, our margin and earnings performance in Q3 was very strong. Margins were up 60 basis points and adjusted EPS grew 16%. We've also taken up full year earnings guidance. In other words, we've rolled right over tariffs. Secondly, on comp sales, to reiterate, the biggest driver of the slowdown that we saw was weather. If I adjust our comp for weather, we probably would have been pretty happy with the outcome. But as I explained a moment ago, that only explains half of the gap between our 1% comp growth and our peers' 6% and 7% comp. So if I come back to your question, yes, there were choices that we made that might explain our relatively strong margin and earnings performance and our weaker comp growth in Q3. Now these were choices that we made as part of our tariff mitigation strategies. And let me describe two specific examples. When -- firstly, when tariffs were introduced -- first introduced, we reduced our sales and receipt plans for categories where the margin impact was too significant. We did not feel like we could raise retails in those categories, and we did not want to accept the margin compression. That meant that in some businesses, especially some categories in home, our inventory levels and assortments were -- they were very light in Q3. And we saw that in terms of the sales in those categories. The sales were lower. Now that wasn't an error. It was a deliberate decision. I would say it was an economically rational decision, and it worked. It may have hurt sales, but it drove our earnings in Q3. Now I should add that as tariff rates have come down, we've gone back and we've taken up sales and receipt plans in most of the categories that were affected. So I would expect this impact to be less significant in Q4. A second example, as Kristin described a moment ago, another step that we took to help offset tariffs was to trim inventory levels in many businesses across the store and force a faster turn. Again, this helped to offset the margin pressure from tariffs. Now we only really took that step in Q3, not in Q4. We already turned very fast in Q4. So we didn't want to try and force a faster turn going into holiday. But again, in Q3, that approach drove earnings, but it may have hurt sales. So -- for both of the examples I've just given, at a high level, those decisions worked. We fully absorbed tariff pressure on our margin, and we drove very strong margin and earnings growth in Q3. And all this happened actually despite a slowdown in comp sales due to weather. Normally, a slowdown like that would drive deleverage. Anyway, with that said, we really need to do a full after-action assessment on Q3. Now that we have our competitors' comp results, we need to go back and hindsight our performance and identify anything we could have done or should have done differently. Irwin Boruchow: Got it. And then maybe, Kristin, just to elaborate maybe a little more on the 2026 initial outlook, key risk opportunities in the outlook, anything else you could share? Kristin Wolfe: Yes. Great. Thanks, Ike. We're still -- it's still somewhat early in the process. We're actively working through the budget for 2026. But let me give some headlines or how we're thinking about it. The outlook for next year is pretty hard to predict with significant economic and political uncertainty that could absolutely affect consumers' discretionary spending. There are potential tailwinds like the possibility of higher tax refunds in the early part of next year. And then there are potential headwinds like tariff-driven price increases, which could put additional inflationary pressure on our core customer. Michael spoke to this earlier, but given this uncertainty, we're planning to stick with our off-price playbook. That really means planning comps at flat to 2% and positioning us to chase the trend if it's stronger. In terms of new stores, we mentioned this in the prepared remarks, but it's worth reiterating, we feel very good about the new store pipeline. We are planning to open at least 110 net new stores in 2026. So combined with our comp guidance, this should drive a high single-digit increase in total sales. On the operating margin side, as we said, we're modeling operating margin flat to last year at the 2% comp. We do expect 10 to 15 basis points of leverage for every point above a 2% comp. And then there's a couple of things in the margin, a couple of puts and takes. We are planning for slightly higher merch margin as we look to offset any impact of tariffs, particularly as we lap the fall season next year. We're planning for continued supply chain productivity gains next year, but there will be offsets here due to the start-up costs and the initial ramp-up of our new Southeastern distribution center, which we plan to open in the first half of 2026. And finally, we do expect fixed cost leverage on the high single-digit total sales growth, but we also are expecting higher depreciation, which creates deleverage. The higher depreciation is really due to the higher CapEx spend in supply chain and our increased number of new stores. Those are really the main call-outs for 2026 at this point. Operator: Your next question comes from the line of Lorraine Hutchinson of Bank of America. Lorraine Maikis: Michael, one of your off-price peers is accelerating comps with more focus on marketing, more in-store inventory and a store refresh. Do you see any risk that Burlington will lose market share? Michael O'Sullivan: Lorraine, thank you for the question. It's a good question. I'm going to avoid talking about any specific competitor, but I think I can still try to answer your question maybe in more general terms. I'll start by saying that actually, we like innovation and fresh ideas. We believe in off-price retail. And anything that drives off-price awareness and excitement is a good thing. In fact, I'd go further and say that a strong off-price sector is important for us. So it's good that our off-price peers are achieving very strong results. But your question was more about potential risks to Burlington. So let me come at it from that angle. I think there are 2 important points that I would make here. Firstly, when we talk among each other -- to each other and when we talk to analysts and when we talk to investors, I think we sometimes talk about off-price as if it were a separate isolated ring-fenced segment of retail. But the customer does not think of it that way. The customer does not respect the boundaries of off-price. If she needs a pair of pants or a dress, she might shop Burlington or one of our off-price peers. But we know from our own research that she also cross-shops department stores, specialty retailers. In fact, any retailer where she likes the assortment, she doesn't care about our off-price business definition. She just cares about finding a great deal and great value in the categories, brands and styles that she's looking for. Now if you're an off-price -- if you're an investor in off-price, I think it's very important that you understand this. This is not like the retail market for office supplies. We aren't 3 companies just scrapping it out for market share in a limited space called off-price. It's bigger than that. We compete in a very large and competitively fragmented market for apparel, accessories, shoes, home, beauty and so on. Off-price is really just a small part of that overall market. Our opportunity is to take share from non-off-price retailers. That's what has been happening over a long period of time. So I mean, just to bring it up to -- just to throw in some numbers, today, we announced 7% total sales growth in Q3 on top of 11% growth last year. At those growth rates, it's self-evident that we are taking market share, but so are our off-price peers. These share gains are not coming at the expense of each other. Mathematically, that wouldn't be possible. These share gains are coming from non-off-price. And I think that the shift from traditional full-price retail to off-price is unlikely to end anytime soon. So that's the first point. The second point I would make is that despite everything I've just said, I think it's very important and useful for us to pay close attention to our off-price peers. They matter. They operate a similar business model to us. They've been very successful over the years, and we can learn a lot from them. So if our off-price peers come up with new ways of doing things, new processes in stores, new innovative marketing programs, then we need to pay close attention. Now not all of those ideas will work, of course. And certainly, not all of them will make sense for us, but we need to be open to new ideas that could help drive our business and actually drive off-price retail in general. Let me finish up. Again, your question was about risk to Burlington. Right now, I see off-price as a whole as being very healthy. For 2025, we now expect to grow total sales by 8% on top of 11% last year. And at the high end of our guidance, we now expect to achieve EPS growth of 18% on top of 38 -- sorry, 34% last year. Those are -- by any metric, those are very healthy numbers. I anticipate that our off-price peers are going to be successful, too. But I don't see that as a risk. In fact, it's better for us if the off-price segment as a whole continues to perform well. Lorraine Maikis: And I wanted to follow up on pricing. Did you take price in 3Q? And what impact did that have on your comp? And then what's your strategy on pricing for the fourth quarter? Michael O'Sullivan: Yes. That's a good question. I would sum up our pricing strategy in 3 words. Be very careful. We recognize that because of tariffs, prices are going up across the retail industry, but we will not raise prices unless we've seen them go up elsewhere. And even then, we will test and monitor the impact of those price increases. We've said this many times before, we have a very price-sensitive customer. We know that the reason that they shop at Burlington is that they're looking for a great deal. Our core strategy is to offer great value. And of course, that means keeping prices low. Now our approach to tariffs this year has been to avoid retail price increases and to focus instead on finding other margin and expense offsets. Kristin described those actions earlier. We're very pleased with how that approach has worked. It's allowed us to avoid price increases, but still to grow margin and earnings this year. Now of course, we have tested some things. We've tried some higher prices. And in Q3, when we saw other retailers take prices up, we tested higher retails in some categories. But I would say that those pricing tests were in a very limited number of areas. And mostly the higher retails worked. We saw very little resistance from customers. So going forward, I would say that we will probably get more aggressive, but we kind of have to see what happens in Q4. And also, of course, we need to see what happens with tariff rates going forward. Operator: Your next question comes from the line of John Kernan of TD Cowen. John Kernan: Michael, sounds like you see an opportunity to take up the number of new store openings and the cadence of growth. Can you expand a bit upon this? What are you seeing in terms of the new store pipeline, both from a real estate perspective and also potential new store productivity? Kristin Wolfe: John, it's Kristin. I'll take this one. We're really pleased with the performance of our new stores across the board, they've been delivering results that are in line or better than expectations as well as our financial hurdles. It really reinforces the strength of our site selection process and the appeal of Burlington really across markets. And it's worth pointing out just some data. Our Q3 comp, of course, was at the midpoint of our guidance, but our total sales growth in Q3 was at the high end of our guidance, up 7%, and this was driven by new stores. And based on our Q4 guidance, our total sales increase is planned at 9% at the high end as we benefit from the slew of new stores we just opened in the third quarter, 73 net new. Now as I mentioned in the prepared remarks, we now expect to open 104 net new stores this year. This is a modest step-up from our original plan of 100 net new. And this increase reflects really two things. First, the ability to pull forward some openings that were originally slated for 2026; and secondly, the strength of our real estate pipeline. Looking ahead to 2026, we're raising that new store target to at least 110 net new stores. This is supported by this robust pipeline, but also by 45 leases we secured from the Joann Fabrics bankruptcy. These incremental sites really give us confidence in sustaining the high level of growth next year. And as for the pipeline for 2027 and beyond, it's still early to provide specific numbers, but I will say we feel very good about the long-term opportunity. Our real estate team continues to identify attractive locations, and we already have a very healthy pipeline for new stores beyond 2026. John Kernan: Got it. Maybe as a follow-up, obviously, all 3 off-price retailers are resonating strongly with consumers. I liked how Michael framed the industry's opportunity. You're clearly feeling more bullish on the number of stores, maybe a little bit more cautious on comp sales, but more bullish on the potential margin expansion potential for the business. Is that the right way to think about it? Kristin Wolfe: Great. Yes. John, thanks for that question. It's a good question. So 2 years ago, we shared our objective of getting to approximately $1.6 billion in operating income by 2028. The headline is that we feel very good about the progress we're making toward this goal. We're tracking in line with where we thought we would be at this point. And we're especially pleased with the progress we made in driving operating margin at the high end, Michael said this earlier, but it's worth repeating, at the high end of our updated 2025 margin guidance, we will have achieved 170 basis points of the 400 basis points of opportunity that we identified 2 years ago. And we will have achieved this despite the negative headwind from tariffs. So really, to sum up, we're pleased with the progress. But the way you characterized the long-range model and your question is about right. It's true, we're more bullish on new stores, and we are more bullish on margin expansion. On the comp, we still believe we can drive an average annual comp growth of 4% to 5% over the remaining 3 years of the long-range plan, but we recognize that there is external uncertainty, so we are slightly more cautious here. Operator: Question comes from the line of Brooke Roach of Goldman Sachs. Brooke Roach: Michael, I'd like to ask you about the trends that you're seeing with the lower income customer. How did these customers perform in the third quarter? And are there any other callouts in terms of customer demographics that are worth sharing? Michael O'Sullivan: Brooke, thank you for the question. The headline is that we feel very good about the lower-income customer. We've been -- and the trends that we're seeing with that demographic. We've been watching this particular demographic segment very closely all year. This is a critical customer for us. Given the economic uncertainty and the cost of living issues, we've been concerned about lower-income customers. But the good news is that this customer has been very resilient. When we look at our stores in lower-income trade areas, they continue to outperform the chain. This has been true for several quarters now. I should say, as we listen to other retailers, it seems like this is a consistent pattern. Many retailers are reporting strength with lower-income consumers. There is -- in terms of other demographic call-outs, there's one other call out, specifically relating to Hispanic customers. Again, we've been watching this demographic very closely all year. It's an important customer for us. We have many stores across the country that are in trade areas with a high proportion of Hispanic households. You may recall that in previous quarters, we've said that our stores that are in trade areas with a high proportion of Hispanic households have been slightly outperforming the chain in terms of comp growth. While in Q3, the trend in those stores slipped. They've gone from slightly outperforming the chain to trailing the chain. Now the change in trend for those stores varies a lot depending on the specific market and even the specific or the particular location of the store. In other words, it's very localized to what's happening in those particular cities. And of course, it's difficult for us to say how long those localized slowdowns might last. Brooke Roach: Great. And then my follow-up would be for Kristin. Kristin, can you give us more color about your guidance for the fourth quarter, both in terms of comp sales and for earnings? Kristin Wolfe: Brooke, thanks for the question. Sure. Let me repeat a little bit. I think it's worth reiterating some of what we described earlier. On comp store sales and total store sales, we're maintaining our Q4 previously issued guidance. So comp of flat to 2% and total sales growth of 7% to 9%. We do, as we said, feel really good about our recent trend in Q4, but it's still early in the quarter. The critical weeks are ahead of us. And in those coming weeks, we'll be up against very strong comparisons from last year. So we'll continue to take a cautious approach on sales. On the margin side, we are increasing our margin and EPS guidance for Q4. We now expect our Q4 adjusted EBIT margin to increase by 30 to 50 basis points. We do anticipate some tariff-driven pressure on merch margin in Q4 but we expect to more than fully offset that pressure and drive overall operating margin expansion in Q4 versus last year. And the drivers of the margin leverage should largely be similar to what we saw in Q3. We expect continued cost savings in freight and supply chain and in store-related initiatives. And finally, we should also see additional leverage in SG&A given the higher incentive comp accrual in the fourth quarter of last year. Operator: The question comes from the line of Alex Straton of Morgan Stanley. Alexandra Straton: Michael, can you talk about the availability of off-price merchandise as you're heading into the fourth quarter? And then I have a quick follow-up. Michael O'Sullivan: Yes. Alex, thank you for the question. I would characterize the buying environment for off-price as very, very strong. Earlier in the year, when tariffs were first introduced, there were some concerns, a lot of concerns about whether vendors would be reluctant to bring potentially excess merchandise into the country. But frankly, those concerns have just not materialized. Even some of the categories where supply was tighter in the summer, categories like housewares and home also housewares and toys have come back. I think that's probably pretty consistent with what you've heard from our off-price peers. There's a lot of great merchandise at great values, and we're taking advantage of it, both to flow to stores and to build up reserve. Alexandra Straton: Perfect. And then just on the cold weather merchandise in the quarter. Is there any just additional detail you can provide on that dynamic, the impact on the overall comp for the chain? I know you've given a lot of details, but anything else worth highlighting there? Michael O'Sullivan: Sure. Yes. Yes. So after back-to-school, the cold weather merchandise becomes very important to our mix. As I said earlier, it expands to more than 20% of our total assortment during the quarter. Now cold weather merchandise, just to define it, includes categories like coats, jackets, boots and accessories like gloves and scarves. So it's only stuff you need if it's cold outside. And our customer is very need-driven. For September through mid-October, our comp sales in those businesses were down in the negative mid-teens. Then in the last 2 weeks of October, once the weather turned cold, they grew up double-digit comp. Maybe if I step back for a moment, there are 2 ways in which milder weather in September and October affects our business. There is the direct drag on our overall comp growth from lower sales in the cold weather categories that I just mentioned. That's one impact. But there is also an impact on our non-cold weather businesses because if you think about it, if the customer comes in to buy a coat, she's probably going to put some other things in the basket, too. So if -- because the weather is mild, she doesn't come into the store to buy that coat, then this doesn't just hurt our coat sales, it impacts other businesses as well. Now mathematically, the drag on our overall comp from cold weather categories alone was worth about 200 basis points in Q3. If you then add the impact that lower traffic had on other non-cold weather categories, you can easily get up to a few points of comp. And I think that's somewhat consistent with the fact that we saw a bounce back to mid-single-digit comp growth in the second half of October once the weather had turned cold. Operator: Your last question comes from the line of Mark Altschwager of Baird. Mark Altschwager: Kristin, could you give us some more detail on regional trends, category trends as well as any of the detailed comp metrics for Q3? Kristin Wolfe: Mark, yes, absolutely. In terms of regional performance, the Southeast was our strongest region in the quarter. The West, Northeast and Midwest were in line with the chain, while the Southwest trailed the chain. On category performance, we saw the strongest performance in beauty, accessories and shoes. Apparel comp slightly above the chain, while home was softer, comping below the chain in Q3. In terms of the comp metrics, our traffic was down in the third quarter. That was largely driven by September and early October when weather was unseasonably warm. And this lower traffic was offset by a higher average basket size. So for the quarter, we were pleased to see that both conversion and basket size or average transaction size were higher than last year. So this tells us that once she's in the store, she liked what she saw. Mark Altschwager: Excellent. And then, Michael, as we look at the Q4 comp guidance, do you view that as conservative just given typically less weather sensitivity in the fourth quarter? Michael O'Sullivan: Mark, sometimes when we give comp guidance, we'll also sort of signal, if you like, if we think there may be upside. I don't think -- I don't see a lot of upside in our Q4 comp guidance. The reason I say that is that we're up against 6% comp growth from Q4 last year, so 6%. If you take our 0% to 2% guidance, that gets you to a 2-year stack of 6% to 8%. Now we exceeded that in Q2 of this year, but we were well below it in Q3. I should also add that when I look at our off-price peers, the way I'm interpreting their guidance, it looks like they are slightly below us on a 2-year stack basis. So even though we're happy with our recent trends and with how we started the quarter, and we're excited for our holiday assortments. We're not anticipating significant upside to our Q4 comp sales guidance at this point. Operator: I'd now like to hand the call back to Mr. Michael O'Sullivan for final remarks. Michael O'Sullivan: Let me close by thanking everyone on this call for your interest in Burlington Stores. We would like to wish you all a very happy Thanksgiving. We look forward to talking to you again in March to discuss our fourth quarter and full year 2025 results. Thank you for your time today. Operator: Thank you for attending today's call. You may now disconnect. Goodbye.
Operator: Good afternoon, everyone, and welcome to PriceSmart, Inc.'s Earnings Release Conference Call for the First Quarter of Fiscal Year 2026, which ended on November 30, and 2025. After remarks from our company's representatives, David Price, Chief Executive Officer; and Gualberto Hernandez, Chief Financial Officer; you will be given an opportunity to ask questions as time permits. As a reminder, this conference call is limited to 1 hour and is being recorded today, Thursday, January 8, and 2026. A digital replay will be available shortly following the conclusion of the call through January 15, 2026, by dialing 1 (800) 770-2030 for domestic callers or 1 (647) 362-9199 for international callers and entering replay access code 5898084#. For opening remarks, I would like to turn the call over to PriceSmart's Chief Financial Officer, Gualberto Hernandez. Please proceed, sir. Gualberto Hernandez: Thank you, operator, and welcome to PriceSmart Inc.'s earnings call for the first quarter of fiscal year 2026, which ended on November 30, 2025. We will be discussing the information that we provided in our earnings press release and our 10-Q, which were both released yesterday on January 7, 2026. Also in these remarks, we refer to non-GAAP financial measures. You can find a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP measures in our earnings press release and our 10-Q. These documents are available on our Investor Relations website at investors.pricesmart.com, where you can also sign up for e-mail alerts. As a reminder, all statements made on this conference call other than statements of historical fact are forward-looking statements concerning the company's anticipated plans, revenues and related matters. Forward-looking statements include, but are not limited to, statements containing the words expect, believe, plan, will, may, should, estimate and similar expressions. All forward-looking statements are based on current expectations and assumptions as of today, January 8, 2026. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the risks detailed in the company's most recent Annual Report on Form 10-K, the quarterly report on Form 10-Q filed yesterday and other filings with the SEC, which are accessible on the SEC's website at www.sec.gov. These risks may be updated from time to time. The company undertakes no obligation to update forward-looking statements made during this call. Now I will turn the call over to David Price, PriceSmart's Chief Executive Officer. David Price: Thank you, Gualberto, and good morning, everyone. Thank you for joining us today. I want to begin by expressing my gratitude to our employees across all the regions where we operate. This first quarter through December represents our peak season, our most demanding period, and our teams rose to the challenge. From our clubs to our distribution centers to our offices across all of our countries, every part of our organization contributed to our success. Their execution was outstanding, and their dedication and commitment to serving our members continues to be the foundation of our success. It's a pleasure to be back with you for my second earnings call as CEO. I'm now about 128 days into the role, and I've spent this time visiting clubs, distribution centers and offices across our markets. What strikes me most is the strength of our culture, teams across 13 countries united by a commitment to doing the right thing for our members and their communities. This foundation, combined with the opportunities ahead, gives me great confidence in our future. I'm energized by what we can accomplish together. I'm pleased to share that we delivered strong results across our key performance areas. Our membership growth, solid sales performance and continued operational discipline reflects both resilient consumer demand and the outstanding execution by our teams. Now I'd like to highlight some of our sales results for the first quarter. Net merchandise sales and total revenue reached almost $1.4 billion during the first quarter. Net merchandise sales increased by 10.6% or 9.5% in constant currency. Comparable net merchandise sales increased by 8% or 6.9% in constant currency. During the first quarter, our average sales ticket grew by 2.1% and transactions grew 8.4% versus the same prior year period. The average price per item increased 1.8% year-over-year while average items per basket remained relatively flat. First, in Central America, where we had 32 clubs at quarter end, net merchandise sales increased 9.6% or 9.2% in constant currency. Comparable net merchandise sales increased 5.4% or 5.1% in constant currency. All of our markets in Central America had positive comparable net merchandise sales growth. Our Central America segment contributed approximately 320 basis points of positive impact to the growth in total consolidated comparable net merchandise sales for the first quarter. Second, in the Caribbean, where we had 14 clubs at quarter end. Net merchandise sales increased 5.7% or 7.8% in constant currency. Comparable net merchandise sales increased 5.6% or 7.7% in constant currency. All of our markets in the Caribbean had positive comparable net merchandise sales growth. Our Caribbean region contributed approximately 160 basis points of positive impact to the growth in total consolidated comparable net merchandise sales for the first quarter. Last, in Colombia, where we had 10 clubs opened at the end of our first quarter, net merchandise sales increased 27.8% or 15% in constant currency. Comparable net merchandise sales increased 27.9% or 14.7% in constant currency. Colombia contributed approximately 320 basis points of positive impact to the growth in total consolidated comparable net merchandise sales for the quarter. In terms of merchandise categories, when comparing our first quarter sales to the same period in the prior year, our foods category grew approximately 11.3%. Our non-foods category increased approximately 7.2% and our food service and bakery category increased approximately 10.1% and our health services, including optical, audiology and pharmacy, increased approximately 17.8%. Membership accounts grew 6.7% year-over-year to over 2 million accounts with a strong 12-month renewal rate of 89.3% as of November 30. A key focus of our membership strategy is growing Platinum memberships. Platinum is our premium tier designed for our most engaged members. These members receive an annual cash back reward on eligible purchases which drive loyalty, increases purchasing frequency and rewards their continued business with us. By focusing on Platinum growth, we are investing in our highest value member relationships. As of November 30, Platinum accounts represented 19.3% of our total membership base, up from 14% in the same period last year. This growth reflects our targeted promotional campaigns and increased focus on the segment. Membership income as a percentage of revenue increased to 1.7% compared to 1.6% in the prior year period, driven in part by the shift towards Platinum membership. These strong results reflect our team's execution and the strategic initiatives we have underway. Let me walk you through the progress we're making across real estate expansion, supply chain transformation and technology investments that are enhancing our ability to serve our members. In the third quarter of fiscal year 2025, we purchased land for our sixth warehouse club in the Dominican Republic in La Romana. That's about 73 miles east of our nearest club in Santo Domingo. The club will be built on a 5-acre property and is expected to open in spring 2026. In Jamaica, we're expanding from 2 clubs to 4, in the first quarter of fiscal year 2026, we purchased land in Montego Bay for our third club, and that's about 100 miles west of Kingston. This will also be a 5-acre site anticipated to open in fall 2026. Also in the first quarter of fiscal year 2026, we finalized the land lease for our fourth Jamaica Club on South Camp Road. That's about 6 miles from our existing Kingston Club. This will be a 3-acre property also anticipated to open in winter 2026. The opening time line for our Jamaica clubs has been adjusted as we address operational disruptions caused by Hurricane Melissa and support recovery efforts across the island. I'm pleased to report that our existing clubs in Kingston and Portmore weathered the storm well, and we're back serving members almost immediately. We do not anticipate any further delays to our new club openings at this time. In addition, in the second quarter of fiscal year 2026, we purchased land for our 10th warehouse club in Costa Rica, Ciudad Quesada. That's approximately 47 miles north from our nearest club in Costa Rica. The club will be built on a 6-acre property and is anticipated to open in fall of 2026. Once these 4 new clubs are open, we will operate 60 warehouse clubs in total. We are advancing on our plans to enter Chile, a market that we believe offers strong potential for multiple PriceSmart warehouse clubs. As part of this initiative, as you know, we've hired a country general manager and signed executory agreements for 2 prospective club sites. While we haven't announced target opening dates, we're moving quickly in managing key factors that influence timing, such as permitting and construction. In addition to opening new clubs in existing markets and Chile, we're continuing to optimize our current footprint, increasing club size, improving efficiency and expanding parking spaces at high-volume locations remains some of the most effective ways to drive sales and enhance the member experience. To support this strategy, we will begin warehouse club and parking lot expansion and remodels in fiscal year 2026 in Portmore, Jamaica and Barbados. Now turning to our supply chain transformation strategy. One of the key drivers in keeping prices low is improving how we move and distribute merchandise to our clubs. Today, we operate major distribution centers in Miami, Costa Rica, Panama and Guatemala. During the first quarter, we successfully adapted our Panama facility to handle cold merchandise and began operations at our new distribution center in Guatemala. We now plan to open distribution centers in Trinidad, Colombia and the Dominican Republic during fiscal year 2026. Our goals with these distribution centers are to improve product availability, reduced lead times and lower landed costs, among other efficiency gains. Alongside these new distribution centers, we've begun implementing third-party distribution centers in China to consolidate merchandise source in the country, driving greater efficiency and lowering costs. In select countries, we've also introduced our own fleet of trucks to deliver merchandise directly to our clubs and capitalize on backhaul opportunities. We continue to advance our migration to the RELEX forecasting and replenishment platform, and we remain on track to complete the full implementation in fiscal year 2026. This upgrade is a critical part of our supply chain strategy and is expected to boost productivity, improve inventory management and increased in-stock availability, ultimately driving sales growth and operational efficiency. During the first quarter, we advanced our multiphase implementation of the e2open global trade management platform designed to enhance automation, compliance and controls across global import and export operations. We believe this platform will strengthen trade compliance, improve data visibility and support scalable international growth once fully implemented. Turning now to other ways we're enhancing membership. For the first 3 months of fiscal year 2026, private label sales represented 27% of total merchandise sales, down 70 basis points from the same period last year. This was impacted by a reclassification of the produce category. And on a comparable basis, we would have had a 70 basis point increase in penetration of our private label. Our private label brand, member selection is a cornerstone of our strategy. What makes our private label program unique is that we develop products both centrally through our U.S. buying team and locally through our country-based buyers. This development approach enables us to source private label products globally, regionally and locally providing flexibility to deliver the best quality and value. Together, this allows us to offer member selection products that combine global scale and quality with local relevance. Private label serves multiple strategic purposes. It allows us to offer high-quality products at lower prices than national brands, driving member loyalty. It improves our margins. and it gives us leverage with national brand suppliers by providing a trusted alternative that keeps them competitive. We're committed to growing this penetration through strategic product development, for example, recent additions like Organic Maple Syrup, Aged Scotch Whiskey and premium deli meats demonstrate our focus on delivering exceptional value across key categories. In the Dominican Republic, we've enhanced our co-branded consumer credit card with our new partner, Banco Santa Cruz, which launched in November 2025. This new agreement offers 6% cash back at PriceSmart Clubs, adding even more value for our members in that market. We continue to invest in omnichannel capabilities to meet our members where they are. In the first quarter, digital channel sales reached $89.8 million, up 29.4% year-over-year, representing 6.6% of total net merchandise sales. This marks our highest digital contribution to date. Orders placed directly through our website or app grew 18.1% with average transaction value up 10.1%. As of November 30, 73% of our members had created an online profile and 27.1% of our membership base has made a purchase on pricesmart.com or our app. We see continued opportunity in this space and we'll keep investing to enhance the digital experience we offer our members. During the first quarter, we began migrating our mobile application to fully native iOS and Android architectures to enhance speed reliability and accessibility. This foundation will allow faster deployment of new features and help us deliver an outstanding member experience in our digital channels. Turning to technology investments that enhance both member and employee experience and operational efficiency. In the first quarter, we completed implementation of our new point-of-sale system, ELERA a Toshiba product in all English-speaking Caribbean markets. Later in fiscal year 2026, we will begin rolling out this system in our Spanish-speaking markets. ELERA will help us achieve faster checkout times, improve productivity and expand payment options among other benefits. Also, in the first quarter, we began implementing Workday's human capital management system to replace legacy HR applications. This upgrade is designed to enhance the employee experience with modern, user-friendly tools while improving processes and strengthening compliance. Additionally, the platform will provide scalable, integrated data to support our future growth. Before I turn it over to Gualberto, I want to address a few additional topics. First, regarding U.S. tariffs. Approximately half of the merchandise we sell is sourced locally and regionally within Latin America. The other half is sourced from the U.S., Europe, China and globally. While we consolidate many of these products through our Miami distribution center, they are shipped in bond and are not nationalized in the United States. We also take advantage of free trade agreements where we can. Additionally, we've been leveraging our expanding distribution center network and China consolidation capabilities to shift direct to market where feasible, further optimizing our supply chain. As a result, U.S. import tariffs do not apply to most of our merchandise. We continue to monitor the evolving trade policy environment, but to date, current U.S. tariff policy has not impacted our cost structure or business operations. We are also monitoring remittance flows to Latin America and the Caribbean. Remittances represent a significant portion of GDP in several of our markets. including Jamaica, Honduras, El Salvador, Guatemala and Nicaragua. While there has been reporting on changing remittance patterns from the U.S. to the region, to date, we have not seen changes in consumer demand or purchasing behavior in our clubs. We continue to watch this factory closely given its importance to the economies we serve. In addition, over the weekend, there was major news out of Venezuela. We are alert and monitoring the situation closely. It's still very early to understand how this will evolve or what the implications might be for our business or for U.S. companies operating in the region. And lastly, I want to provide a preview of our holiday season performance. Comparable net merchandise sales for the 9-week period ended December 28, 2025, grew 7.1% in U.S. dollars and 5.4% in constant currency. This represents solid performance as we continue to comp against increasingly strong prior year periods, though it does reflect the deceleration from our first quarter's growth rate. December specifically was impacted by several transitory factors. Government elections in Honduras created consumer uncertainty. Panama's extended rainy season disrupted both traffic and logistics and supply chain timing issues created out of stocks in several high-volume food items, a situation we identified and are addressing. Looking forward, we are encouraged by what we are seeing. Colombia continues to deliver strong momentum, and we are seeing positive trends across many of our markets as we enter calendar 2026. With that, I'll turn it over to Gualberto to walk you through the financial details. Gualberto Hernandez: Thank you, David. Continuing with the income statement. Total gross margin for the quarter as a percentage of net merchandise sales remained strong and unchanged at 15.9% versus Q1 last year. Total revenue margins improved 30 basis points to 17.7% of total revenue from 17.4% in the same period last year. This was mainly driven by the good results in membership renewals and Platinum growth, as mentioned before, by David. On overhead costs, Total SG&A expenses increased to 13.1% of total revenues for the first quarter of fiscal year 2026 compared to 12.8% for the first quarter of fiscal year 2025. The 30 basis point increase is primarily related to our continued investments in technology and to the compensation of our Chief Executive Officer. During his tenure as our interim Chief Executive Officer from February 2023 to August 2025, Robert Price declined any compensation for his services. Operating income for the first quarter of fiscal year 2026 increased 8% from the same period last year to $62.9 million. Below the operating income line, in the first quarter of fiscal year 2026 we recorded a $7.2 million net loss in total other expense, almost unchanged from $7.3 million net loss in total other expense in the same period last year. The primary cause of our net loss in total other expense is due to foreign currency-related losses. In terms of income tax, our effective tax rate for the first quarter of fiscal year 2026 came in at 27.9% versus 26.5% a year ago. Primarily, due to nonrecurring items such as the tax contingency approval and foreign exchange rate fluctuations. Finally, net income for the first quarter of fiscal year 2026 was $40.2 million or $1.29 per diluted share, up from $37.4 million or $1.21 per diluted share in the first quarter of fiscal year 2025. Adjusted EBITDA for the first quarter of fiscal year 2026 was $86.9 million, compared to $79.1 million in the same period last year, a growth of 9.8%. Moving on to our balance sheet. We ended the quarter with cash, cash equivalents and restricted cash totaling $249.6 million, plus approximately $114.2 million of short-term investments, typically held in certificates of deposit. When reviewing our cash balances, it is important to note that as of November 30, 2025, we had $80.2 million of cash, cash equivalents and short-term investments denominated in local currency in Trinidad which we could not really convert into U.S. dollars. Turning to cash flow. Net cash provided by operating activities reached $71.2 million for the first 3 months of fiscal year 2026, an increase of $32.7 million versus the prior year period. The increase is primarily due to $18.7 million of overall net positive changes in our previous operating assets and liabilities mainly due to recoveries in our VAT receivables and increases in accrued Platinum rewards as well as improvements in working capital that contributed $10 million to the overall increase. Net cash used in investing activities increased by $61 million for the first 3 months of fiscal year 2026 compared to the prior year, primarily due to a net increase in purchases less proceeds of short-term investments of $39.8 million, an $11.9 million increase in purchases of long-term investments and a $10.4 million increase in property and equipment expenditures to support growth of our real estate footprint compared to the same 3-month period a year ago. Net cash used in financing activities in the first 3 months of fiscal year 2026 remained relatively flat compared to the same period a year ago. In closing, we're pleased with our start to fiscal year 2026 and the momentum we're building. The investments we're making in real estate, supply chain infrastructure and technology are positioning us for sustained growth. Combined with our team's exceptional execution, we're confident in our ability to continue delivering value to our members and driving long-term performance. I will now turn the call over to the operator to take your questions. Operator, you may now start taking our callers' questions. Operator: [Operator Instructions] Your first question comes from the line of Jon Braatz with Oppenheimer. Jonathan Braatz: A couple of questions. David, when you spoke a little bit about the December comps. You mentioned some issues in Honduras and Panama in the supply chain. Specifically, when you look at Honduras and Panama, were the comps positive despite these issues in the month of December? David Price: We usually don't share that level of detail, Jon, in terms of country by country, so I want to make sure I'm consistent. But in Honduras with the election, there was some front-loading of purchasing in November leading up to the election, and we've seen a good recovery now that there's been an outcome of the election and a definitive President. And in Panama, we're well into the dry season and seeing okay results there as well. But I can't share that level of granularity with you. Jonathan Braatz: Okay. So those -- basically, those issues that you saw are behind you at this point? David Price: Yes. Jonathan Braatz: Okay. Okay. Good. And can you speak a little bit about Colombia. Colombia has been very strong for the last year, maybe even more than a year, comps have been well into the double-digit area. Anything you can put your finger on as to the strength there? David Price: Sure. Thanks for the question. So a couple of different things. I mean, both kind of internal and external factors, starting with the external, I think that the strength of the peso certainly helps. The merchandise mix there, we have more local items than in other markets. But the -- when things are -- when we're under COP 4,000 to $1 on the peso, that definitely helps not only purchasing power but also consumer sentiment. I think confidence in the market from the consumer standpoint. In addition, I have to just give credit to the team. We have an excellent team, both in buying and operations there, and it's really -- there's some great items coming out of Colombia, even some that we're starting to export to other markets. So the item development, both locally and then in terms of the imports also is driving nice differentiation. Jonathan Braatz: I know it's -- you spoke a little bit about the issues in Venezuela. And are there -- what kind of problems might Colombia face if there is sort of a migration and from Venezuela -- additional migrations from Venezuela to Colombia, does that put economic pressure? What kind of economic pressure might that place on Colombia? David? Operator: Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold, and the call will resume momentarily. Thank you for your patience. [Technical Difficulty] Mr. Braatz , your line is open. Jonathan Braatz: David, I was just going to ask you all the issues that we're seeing in Venezuela. Could some of -- could there be pressure on the Colombian economy if there's more migration of people from Venezuela to Colombia. Can that put any pressure on the economy?. David Price: It's -- I don't want to speculate, Jon. The diaspora has been going on for a long time. And there's been Venezuelan migration all over the region. And so I want to be careful not to speculate on something I really don't have any data to share on. But from what we're seeing, consumer demand is strong in Colombia, and we have a good brand position. Jonathan Braatz: Okay. And 1 last question. If I saw it correctly, at the end of fiscal 2025 you had about USD 60 million in Colombia -- in Trinidad. And at the end of the first quarter, you have $80 million. why the increase from $60 million to $80 million in the first quarter? Gualberto Hernandez: Jon, this is Gualberto. Thank you for the question. Trinidad, as you know, is something we're looking careful and there is a lot of fluctuations in the availability of U.S. dollars. There is no specific reason. It's a little bit of high season now after Christmas. So there is more cash on our side. And it's a bit more difficult to cover everything. But we don't see any material changes in the conditions there. It continues to be difficult, I wouldn't say it's more difficult than before, and it just fluctuates depending on the availability of dollars, as you know, in the market in every month. Nothing in particular to highlight there. Operator: Your next question comes from the line of Hector Maya with Scotiabank. Héctor Maya López: On Chile, very quick, it is really nice to hear that you are moving quick on certain important steps, usually, permits tend to be -- tend to take a bit of time. So that is nice to hear. But what have you learned so far from the market or potential competition, and are there any surprises or takeaways or things that you are not expecting maybe in Chile? And on Colombia, with a good momentum there, how sustainable do you think is the revenue growth that we are seeing in the country? And how concerned are you about the minimum wage hikes in the country? Or what effect do you expect from that? David Price: Okay. Let me take the first 1 with Chile. I wouldn't say there's anything necessarily that has surprised us. But I will say, Chile, of course, is a very competitive market and highly digitalized with a high expectation from the consumer. It's also very open from the standpoint of free trade agreements. And so there are a lot of imports as well. There are no club models in Chile. There are Mayorista models, as you know, that are kind of more like the Atacadao kind of Brazil type wholesale model, but nobody doing what we do. So we operate in other competitive markets, and so we feel optimistic. And in terms of Colombia, in terms of minimum wage. I don't want to comment on -- in terms of -- there's a sovereign country making its own policy decisions, but we don't have any sort of issue there because we aim to pay a living wage in every market and pay above minimum wage, where that doesn't align with the living wage. And so that's kind of our approach, and we want to be -- have our pay and compensation benefits be 1 of the differentiators from the standpoint of who we employ. I mean that's a really important part of our philosophy as a business being an employer of choice. And so I don't anticipate any issue in Colombia as a result of that. And in terms of future looking, I can't comment on future growth. But as I mentioned to John, we're feeling confident in terms of our results in Colombia and the brand position in the market as well as our product mix and what we're able to offer. Gualberto Hernandez: Absolutely. I mean to complement that, our operations in Colombia and growing more and more efficient. So we're confident on our abilities to be successful and to have the right to win in the market. But as you, of course, understand there are a lot of macroeconomic and political elements that we don't control. Héctor Maya López: Excellent, excellent to hear. Also on warehouse and parking expansions and remodeling just how much opportunity or boost in operations are you expecting from this by country or by region? And where do you see the most potential here? David Price: Well, I can't share by region or by country or club, but I can tell you that when we do warehouse expansions, remodels or parking expansions, it helps on several fronts. I mean, first and foremost, it's helping our members. In the case of the parking, we have the good problem of having busy locations. And so when we offer more parking, it helps our members get in and out quicker, but also enables us if there's better flow to turn spaces a little faster, which can help. And then in terms of the sales floor, it helps from an efficiency standpoint, and then, of course, also in terms of selling pilot positions, which is helpful as well, both in terms of items, but also in terms of show stock and availability on the floor. So I can't mention beyond that but there are various factors that drive where we select to do this and also how it impacts. And so far, we've been happy with the results where we pursued remodels and the parking lot expansions Héctor Maya López: Perfect. Congratulations. Operator: That concludes our question-and-answer session. I will now turn the call back over to Gualberto Hernandez for closing remarks. Gualberto Hernandez: Thank you, operator, and thank you, everybody, for joining the call today. Happy New Year to everybody, and looking forward to our next call. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Hello, and welcome to the Greenbrier Companies First Quarter 2026 Earnings Conference Call. Following today's presentation, we will conduct a question and answer session. Until that time, all lines will be in a listen only mode. At the request of the Greenbrier Companies, this conference call is being recorded for instant replay purposes. At this time, I would like to turn the conference over to Mr. Justin Roberts, Vice President of Financial Operations, the Americas. Mr. Roberts, you may begin. Justin Roberts: Thank you, Gary. Good afternoon, everyone, and welcome to our first quarter of fiscal 2026 conference call. Today, I am joined by Lorie Tekorius, Greenbrier's CEO and President; Brian Comstock, Executive Vice President and President of the Americas; and Michael Donfris, Senior Vice President and CFO. Following our update on Greenbrier's Q1 performance and our outlook for fiscal '26, we will open the call for questions. Our earnings release and supplemental slide presentation can be found on the IR section of our website. Matters discussed on today's conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2026 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier. We will refer to recurring revenue throughout our comments today. Recurring revenue is defined as leasing and fleet management revenue, excluding the impact of syndication transactions. Before I turn the call over to Lorie, I would like to take a moment and introduce Travis Williams, Greenbrier's new Head of Investor Relations. Travis joined Greenbrier this week to lead the IR function. His background includes buy-side and sell-side analyst experience and most recently he led the IR function in-house at a publicly traded industrial tool manufacturing company. Please join me in welcoming him. Travis Williams: Thanks, Justin. Excited to be on board. Lorie Leeson: Welcome, Travis, and thank you, Justin, and good afternoon, everyone. Appreciate you guys joining us today. Greenbrier delivered good first quarter performance, exhibiting our disciplined execution and the resilience of our business. Our results demonstrate the strength of our integrated manufacturing and leasing model, continued progress on operating efficiency initiatives and determined action on the things we can control. As a result, meaningful earnings, strong liquidity and progress on our long-term strategic priorities were highlights in Q1. Our model is designed to outperform during a business environment like the current one, and our model delivered, producing what we describe as higher lows through the cycle and as reflected in our 15% aggregate gross margin this quarter. Customers across North America and Europe are circumspect about capital investments as they evaluate current freight volumes, ongoing trade policy considerations and improving rail service that has increased railroad velocity, reducing the near-term pressure for new rolling stock. These conditions impact the timing of new railcar orders, but do not change the underlying long-term replacement demand. In this environment, execution matters and Greenbrier's commercial team continues to perform well. We are competing effectively and securing high-quality orders despite intense competition. As the quarter progressed, order momentum improved, reinforcing our confidence in the durability of customer demand. Brian will provide more details in a few minutes. Trade and tariff policy remains an important consideration for our customers and the industry. While policy considerations influence the timing of customer decisions, it does not change the long-term fundamentals of the railcar replacement cycle or Greenbrier's competitive position. We stay engaged with customers and industry stakeholders and are winning business in this evolving landscape. Operationally, we're taking proactive steps to align our manufacturing footprint with current demand levels while continuing to invest in efficiency, cost discipline and process improvement. Production rates moderated slightly, and we adjusted headcount accordingly, primarily in Mexico, which allowed us to intensify our focus on overhead optimization and operational excellence. These actions are structural and position Greenbrier to respond quickly and profitably as the market evolves. In Europe, market conditions remain complex and performance was affected by operating inefficiencies as we continue to execute restructuring and rightsizing initiatives. We're confident that these actions will strengthen our European platform over time and drive improved competitiveness and profitability. Brazil continues to provide diversification within our portfolio. Economic conditions there remain relatively stable, customer engagement is steady and our operations delivered consistent performance. Our leasing and fleet management business continues to provide stability and growth. As we continue disciplined fleet construction and management, this business remains an important source of recurring earnings and through-cycle resilience. Turning briefly to capital allocation. Our priorities remain unchanged. We continue to deploy capital where returns are strongest maintain balance sheet strength and liquidity and return capital to shareholders. We opportunistically sold railcars from the fleet at attractive values, recycling capital, while contributing meaningfully to earnings and cash flow. Looking ahead, we are reiterating our fiscal 2026 guidance. And while near-term market conditions remain varied, our outlook reflects the improved foundation of our business, disciplined execution and the flexibility built into our operating model. We remain confident in our ability to navigate current conditions and position Greenbrier for long-term value creation. In closing, I want to recognize our employees for their continued focus, flexibility and commitment. Periods like this demand discipline and teamwork, and I'm proud of how the Greenbrier team continues to execute. Our integrated model, strong liquidity position and experienced leadership team position us well to manage the current environment and to capitalize as markets recover. And with that, I'll turn the call over to Brian, who will walk through our operational performance in more detail. Brian Comstock: Thank you, Lorie, and good afternoon, everyone. I'll briefly cover our operating performance for Q1, including orders and business activity in our manufacturing, leasing and management services units. Commercial activity strengthened late in the quarter, and we converted that into diversified high-quality orders in a competitive market. We remain focused on order quality and backlog mix prioritizing opportunities, where we offer differentiated value and can achieve attractive returns. We received global orders for approximately 3,700 railcars valued at roughly $550 million. Orders were diversified across regions and car types, led by tank cars and covered hoppers. Included in this figure were several specialty railcar orders with higher average selling prices, reflecting our ability to support complex and unique customer requirements. Backlog value was relatively unchanged. And we ended the quarter with a backlog of approximately 16,300 units valued at about $2.2 billion. As always, we remain focused on order quality and mix to support efficient production scheduling and attractive margins. Turning to manufacturing. We continue to proactively align production levels with current demand conditions and expect to modestly adjust rates further in the second quarter. Headcount reductions continued across North American manufacturing, primarily in Mexico, reflecting disciplined workforce alignment. Our management team is experienced and agile, and we continue to manage the business to efficiently navigate the current demand environment. At the same time, we are using this period to achieve greater structural efficiency and cost discipline. Overhead optimization initiatives continue to gain traction with teams identifying opportunities to streamline processes, reduce fixed costs and improve productivity. These efforts position our manufacturing platform to scale efficiently as demand recovers. The lease fleet performed at a high level with utilization nearly 98% strong retention and improving economics on renewals. The size of the fleet remained relatively stable as we recycled capital through opportunistic asset sales in a strong secondary market. We also optimized fleet mix, both in terms of credit quality and car tech composition. We expanded the use of Greenbrier's maintenance network for our lease fleet and drove other enhancements to the customer experience. Combined, these efforts support consistent execution and position the leasing business to continue contributing meaningfully through the cycle. In summary, our teams executed well in Q1. We aligned production with demand advanced efficiency initiatives, strengthened our backlog and continue to grow and optimize our leasing platform. These actions reinforce the durability of our operating model and position Greenbrier to navigate current conditions, while remaining well prepared for future market expansion. And with that, I'll turn the call over to Michael to discuss our financial results. Michael Donfris: Thank you, Brian. Revenue for Q1 was $706 million, essentially in line with expectations. Aggregate gross margin of 15% reflects lower production rates and deliveries in Q4, partially offset by continued strong margins in leasing and fleet management and disciplined execution across the broader manufacturing platform. Selling and administrative expenses were $11 million less than Q4 totaling $60 million. This was driven primarily by lower employee-related expenses. And in addition, Q4 included $3.1 million in European footprint rationalization costs. Operating income was $61 million, approximately 9% of revenue. Diluted EPS was $1.14 and EBITDA for the quarter was $98 million or 14% of revenue, representing a strong result and reflecting the benefits of disciplined execution, selectively recycling capital through fleet sales in a strong used equipment market and growing contribution from our leasing platform. For the 12 months ending November 30, 2025, our return on invested capital was 10% and continues to be within our 2026 target of 10% to 14%. As noted in our earnings release, effective September 1, 2025, we changed the methodology for allocating syndication activity, resulting in syndication activity being reflected in the manufacturing segment instead of leasing and fleet management segment. This change has no impact on consolidated results. Turning to the balance sheet. Greenbrier's Q1 liquidity has -- was the highest in the 20 quarters at over $895 million, consisting of more than $300 million in cash on hand and $535 million in available borrowing capacity. We generated $76 million in operating cash flow for the quarter, supported by solid earnings, proceeds from fleet sales and favorable working capital movements. Liquidity remains robust, reflecting disciplined execution, ongoing working capital management and a well-structured capital base. Now switching to capital allocation. We remain committed to responsibly returning capital to our shareholders through a combination of dividends and stock buybacks. Greenbrier's Board of Directors declared a dividend of $0.32 per share, this is our 47th consecutive quarterly dividend and reflects our confidence in the business. Additionally, during the first quarter, we repurchased about $13 million of common stock under our existing authorization. As of quarter end, approximately $65 million is available for future repurchases. We will continue to access this capacity opportunistically consistent with marketing conditions and our broader capital allocation framework. Now turning to guidance. We are reiterating our operating guidance and updating capital expenditure guidance for fiscal 2026. Our focus remains on driving profitability through operational efficiency increased recurring revenue and disciplined capital use. With our resilient business model and strong balance sheet, we are well positioned for continued performance and long-term value creation. Our guidance for fiscal 2026 is as follows: new railcar deliveries of 17,500 to 20,500 units, including approximately 1,500 units in our Greenbrier-Maxion Brazil. Revenue between $2.7 billion to $3.2 billion. Aggregate gross margin of 16% to 16.5%, operating margin between 9% and 9.5% and earnings per share of $3.75 to $4.75. Greenbrier's capital expenditures and manufacturing are projected to be approximately $80 million. And gross investment in leasing and fleet management will be roughly $205 million. Proceeds from equipment sales are expected to be around $165 million. I will point out, we are pursuing assets in the used equipment market in an opportunistic, disciplined manner and may end up at a higher investment level. Greenbrier delivered good financial performance in the first quarter and maintained a strong balance sheet and liquidity position. Our integrated business model, disciplined capital allocation and focus on execution position us well to navigate throughout the cycle and create long-term shareholder value. With that, we'll open the call for questions. Operator: [Operator Instructions] Our first question is from Andrzej Tomczyk with Goldman Sachs. Andrzej Tomczyk: Happy New Year. I wanted to start on the manufacturing deliveries and maybe we're just curious, if you could talk a little bit more detail on what visibility you currently have into the second half of this year as far as year-over-year delivery growth and when you might expect to see that? And then maybe just what's driving that between Europe and North America? Justin Roberts: Yes, Andrzej, it's good to hear from me. Hope you had a good holiday. This is Justin. Yes, we've got pretty good visibility with, I would say, most of our open space, as historically, we see it as in the summertime, so kind of the June, July, August time period. But leading into that, we do have pretty good visibility. And I think, I would say that we do see some opportunities for year-over-year growth in that time period, since we were kind of ramping down production last summer, and we'll be increasing production heading into our next fiscal year. Andrzej Tomczyk: Got it. That's helpful. And I know it's very early here, but I was just curious, given the recent news and events Greenbrier's thinking on maybe the potential medium- to longer-term impacts related to Venezuela any indirect or direct impacts on your manufacturing business that we should consider maybe that you guys have thought through? Brian Comstock: Andrzej, this is Brian. We don't see any impacts at all at this point from Venezuela. There's no -- there's no lap between what we do in Brazil or other areas. And so quite frankly, we don't think for our business, it will be impactful. Justin Roberts: And maybe longer term, Andrzej? I would say, broadly, a lot of -- if there is going to be additional kind of oil activity, it will be typically handled via pipeline typically. And any oil over -- via tank cars is going to be more of a short-term phenomenon. Andrzej Tomczyk: Okay. That's helpful. Maybe 1 more for me on manufacturing and then delivery environment. I'm curious as we sit here today, if you're seeing any incremental improvement or changes in the tenor of customer ordering behavior into December and January? And maybe in that same context, would you expect sequentially or what would you expect, I guess, sequentially in terms of deliveries 1Q to 2Q as well as the margin expectations throughout the year relative to the 11% you guys just did? Brian Comstock: Yes. I'll take the first part of that, and I think, Michael, you take the second part. From a customer perspective, I think in our scripts, we talked about how the order activity towards the end of Q3 had picked up and we're continuing to see that our Q4, and we're continuing to see that activity into Q1. December was unusually high for that period. It's typically a slower month. And we had a nice number of diverse deliveries come in, in December. So we're seeing it continue to tick up. Justin Roberts: Right. And I'll take the margin question. As we look across the year, we continued our guidance in aggregate gross margin. And we do see some variability quarter-to-quarter in margin, but we are looking at a stronger back half of the year versus the first half of the year. Andrzej Tomczyk: Got it. That's helpful. Maybe just shifting a little bit to the leasing side of your business. Are you able to share how lease rates trended sequentially 4Q to 1Q? And maybe also just remind us how much of your lease book is up for renewal this year? Justin Roberts: Yes. So I would say for the lease rates they've been, especially for more of the, I would say, specialty cars like tank cars lease rates on an absolute basis have been relatively stable. We continue to see strong renewal activity. And then on the more commoditized cars, lease rates have been pressured some for us, it's about maintaining our focus on discipline around pricing and returns focused. Then with regard -- go ahead. Brian Comstock: Yes. And I would add -- this is Brian, Andrzej. I would add that year-over-year renewals, we're still seeing double-digit increases on the renewal side. Justin is correct that we're seeing rates hold. But keep in mind, some of these renewals were done 4 or 5 years ago. And so we continue to see nice uplift in our renewals that are coming up as well. Lorie Leeson: And I'll just jump in as well to say that when we see more moderated demand for new builds, current market, that means the existing equipment becomes more valuable, more desire. So that's another thing that's adding to those renewal rates. Justin Roberts: And then on the kind of the cars in the fleet to be kind of renewed overall, we had about 1,500, 1,800 up for renewal as we entered the fiscal year in September, and we've successfully renewed kind of around 35% of that. So we're continuing to trend in the right direction there and feel pretty positive about the rest of the fiscal year. Andrzej Tomczyk: Understood. And then I guess just on the first quarter, there was the large gain, I think, $18 million roughly was more than you did in the entire year last year. Was curious what we should be thinking in terms of full year gains this year or maybe relative to the first quarter levels, if you could provide that? Brian Comstock: Yes. We did have an opportunistic gain in the first quarter, looking at the market. And we continue to look at that as the year progresses, we're really excited in terms of what that could do for us this year. Lorie Leeson: I guess, I'd just throw in that we're active in the secondary market, whether it's from trying to look for assets to add to our owned lease fleet that we want to grow, but also to take advantage, if there's something that's very accretive to our return on those investments. Justin Roberts: And Andrew, maybe just to take a step back and you think about, as you are managing a leasing business. Part of this is you're always taking a look at your portfolio concentrations, your build-out and things like that and really taking a look at, okay, so where do we maybe have a little exposure, what do we have in our backlog that we're building out and bringing it into the fleet. And so there's kind of this constant active management of the portfolio itself. And than when you're able to decide to sell assets and generate gains, you have an assumption around that. But sometimes markets give you a little more than what you expect. And sometimes, they don't give you as much as what you expect. But this quarter, we were pleased with where that laid out. Andrzej Tomczyk: Very clear. And maybe just as a follow-up on the leasing fleet itself and growth expectations. Should we expect maybe like high single digits? Or can you comment on the type of fleet growth that you guys expect this year in terms of the lease fleet? I think you did close to double-digit growth in 2025 and mid-teens in 2024 as you guys have pushed more into leasing. So I'm just curious what trajectory we should be thinking about over the near term, would be very helpful. Justin Roberts: Yes. I mean I think we would say that we're not going to give an explicit number because this is still a very active environment. But we do believe that we will grow this year probably in the single-digit range, maybe a little higher. It kind of depends on how a few different opportunities manifest. But ultimately, we are committed to growing the leasing business and kind of thinking about this from the long-term shareholder value perspective. Andrzej Tomczyk: Understood. And maybe just to close out for me to sort of higher level questions. On the tariff front, would you say that those are ultimately an incremental positive or negative to your business? And then the same question also goes for the potential for Class 1 rail consolidation. With Greenbrier be a proponent of rail mergers? Or would you rather sort of the merger not go through? Lorie Leeson: Sure. And I'll launch into these, and I'm sure that my colleagues will jump in and help out. When it comes to tariffs, I will say that thus far, it's been neutral to our financial performance, although the uncertainty created by the changing landscape in tariffs definitely has been a headwind or has our customers take a pause on committing additional capital for new railcars. So that has been an impact as well where there are tariffs on foreign sourced materials, it allows U.S. sourced materials to have higher prices. So that also has resulted in, I would say, a bit higher prices right now for railcars, which are primarily utilizing steel. So that can also be a consideration when you're thinking about an investment. So overall, I would say the dollar or percentage amount of tariffs has not had a tremendous impact. It's more the uncertainty to try to understand the operating environment and what those tariffs might do to supply chains and logistics as our customers are looking at where they're sourcing their materials and where their finished goods going to go and how are they going to be transported. That said, and Brian is shaking his head, so I'm saying I'm going to get this right. I think that most of our customers are coming to terms with the fact that we're just going to all have to live in a slightly more uncertain world. And we just have to get after running our business, and that's what we do day in and day out as deal with whatever is coming up and deal with that. Anything that you would change... Brian Comstock: No, I think you nailed it, Lorie, it's really at the end of the day, we've had no financial impact from tariffs, but it does continue to weigh on customers' minds and has been a little seized up, although pent-up demand. We're starting to see that release as we said, towards the end of the last Q and end of the first part of this Q. We're already seeing that start to release a little bit. So we're starting to find that equilibrium, I believe, between that pent-up demand and the tariff challenges. Lorie Leeson: Super. And then when it comes to railroad mergers, I try to stay really consistent with my message, which is anything that makes our industry stronger I am a proponent of. Anything that helps to increase the shift of transportation of goods off of highways and on to the rails. I think, is good for our business. So whatever it takes to make our industry a more efficient circulatory system for the U.S. economy. I am in favor of. I've been in this business long enough. I've seen a few of these mergers. They can be bumpy at times. And I'm sure the STB will go through an appropriate process to review it, and we will all just take it 1 day at a time. Operator: The next question is from Bascome Majors with Susquehanna. Bascome Majors: Maybe just to follow-up on some of the geopolitical angles that we closed with in the prior session here. The USMCA, how engaged are your people or industry organizations or internal or external obvious in that effort as that review comes closer and what are you hearing as far as how that may play out? And how do you feel about the exemptions that have been favorable for the no tariff impact on the railcars existing into 2027 and beyond. Lorie Leeson: Bascome, thank you for that question. I strongly am supportive of USMCA. I do believe, as I was saying that the rail network is a circulatory system of the U.S. economy, and I think the free flow of railcars across our border to the north and south is very critical, not just for the rail industry, but for the overall economy. So just like with everything and maybe as we each get a little bit older, we can look back in the past and say there might be opportunities to refine things and do things a little bit better. I think that we could all try to have continuous improvement as part of our vocabulary. But I don't think it needs to be totally upside down and redone. I think it's been working really nicely for a very long time, and I hope that, that's the conclusion that we come to on that. Bascome Majors: And maybe back to the guidance. Just want to follow some of the pacing comments on deliveries earlier. You talked about, I think, 4,500 or so deliveries for this quarter if you include roughly the run rate on Brazil, that would be kind of annualized to the lower end of your guidance. But I think you also talked about maybe taking production down a little bit in the second quarter and then raising it into next year and also mentioned some white space in the summer. So how do I bring all that together? Where do you have visibility to get kind of closer to the midpoint of the production guidance for the year, where do you need orders to come in and fill some of that white space? And how do you feel about inquiry levels and the level of certainty you need to get there? Brian Comstock: Yes. I think I can start out with that, Justin, and then maybe Michael can fill in. From the order perspective, Bascome, that white space is getting filled as we speak. And -- in fact, we're already making plans to ramp the back half of the year to some degree. So some of these head count reductions are temporary in nature, just as we get through the order book and we get to the more robust part of the cycle. So the white space itself is very limited at this stage. And in fact, in some of our more specialty type of cars, we are indeed going through the planning exercise of bringing people back. Justin Roberts: Yes. And I think Bascome, I mean, if you kind of look at basically kind of how Michael laid out the guidance, we do have a more of a ramp in the back half of the year. And I think at this point, we would say we have pretty good visibility on that. It's just a matter of assuming that the inquiries we have continue to translate into orders, which we have seen an improvement in that over the last few months. And then also barring any unforeseen events in the geopolitical front, which I'm not ready to place a bet on, but we do feel pretty good about the trajectory we're on right now. Lorie Leeson: And I'll just throw in on there. As they both said, of having additional order activity that means we're going to be bringing people back. We want to do that in a mindful way. We don't -- we've learned from the past that it's not good to bring back and try to ramp up too quickly, but we try to do that in a very, very mindful way. And I realized Bascome that I didn't answer the second half of your earlier question about engagement in U.S. MCA. And I will say that we at Greenbrier have been very engaged in submitting comments back on the review for USMCA. And I would be -- I will be encouraging all of the rest of the industry participants to get more engaged because it is very important. Bascome Majors: And last 1 for me, and then I'll pass it on. But if we think about the production cadence and rising visibility and to be able to ramp that back up in the second half of the year if the order conversions continue at the pace that's improved recently, is the manufacturing gross margin largely a function of the volume you're pushing through? Are there some issues with mix and pricing where that may not be sort of linear? Justin Roberts: Yes. And I think you've got it, Bascome. I think it's really a combination. It's not necessarily linear. And so there is a mix component to it. But there's also a production component and absorption of fixed costs and all those things combined as we look at the remainder of the year. Bascome Majors: As you do more volume, if you get to that increase in the back half of the year that you're shooting for, do you think that will be a lift on margins? Or is it really just more of a revenue story? Justin Roberts: Yes. No, I do think it will be a lift on margin from where we are right now. Operator: The next question is from Ken Hoexter with Bank of America. Ken Hoexter: So you kept your EPS outlook $3.75 to $4.25, but it looks like you have a $0.55 gain on sale this quarter, the $17.7 million which sounds like, Lorie, you said you're being opportunistic on some asset sales. So are you decreasing your EPS guide for the rest of the year given the gain on sale presumably to this scale was not in your outlook? Or is there something else adjusting in those numbers? Brian Comstock: Yes. Yes. And thank you for the question. Really, that was about a $0.30 impact to our earnings per share as we looked at it. And it is impacted by just when we're looking at the market and how opportunistic it is. So that shifted possibly between quarters as we look at it and that's why we didn't really affect our guidance. Justin Roberts: And 1 thing, just to clarify, I may have misheard Ken, but our EPS guidance is $3.75 to $4.75, which implies a midpoint of $4.25. Ken Hoexter: All right. That's what I meant, I might misread. But the -- so no change to that $3.75, $4.75, $4.25 midpoint despite the gain, does that -- I'm sorry, from that last answer, does that mean you were expecting these gains in your original target? Or is this -- I'm just trying to misinterpret or interpret the commentary. Lorie Leeson: Yes. Yes. So Dan, as we have a growing owned lease fleet and just like you see with other operating lessors, we will take advantage of opportunities within the market. And as we put together our guidance for FY '26, we did assume that we would be doing some transactions that would benefit EPS. Ken Hoexter: Okay. So can we presume then, Lorie, on that answer, then you've pulled forward all that opportunity? Or are there still a lot of opportunity going forward with these large game potential? Lorie Leeson: I would say that timing is difficult to predict. When we have a good transaction as much as we would like to perfectly slot things into each quarter in a lovely even smooth peanut butter way, it doesn't always work that way. And we will close on transactions as they present themselves and as our customers need to close on the transactions. That said, it's a strong market out there. So I'm not saying that we're done on doing transactions. We're looking at stuff that we might sell. We're looking at stuff that we might buy. So it's just going to be part of our business going forward. Ken Hoexter: Okay. And then -- you mentioned in the -- given the backlog, right, if I look at the new -- the cars out of the backlog, the 3,700, $550 million added, that's about $150,000 average ASP, which is up significantly from the [ $125,000 ], but even kind of going back the last few years, I don't know if we've seen a number that high. I think there was commentary in the prepared remarks that there was some higher value cars in there. Can -- is that a couple of cars that are just so highly valued. Can you just maybe walk through, I know, you never break out number of whatever it might be a specific type of tank car or whatever it is. But can you just kind of give us an idea what would drive something so high? Brian Comstock: Yes. Ken, it's Brian. At the end of the day, I don't want to give away too much sensitive information for our competitors. But we do have a number of units that have I'd say, fairly high ASPs. They're specialty cars for specialty type of service. It's 1 of the things that's unique to Greenbrier that we spent a lot of money in the innovation and R&D side of the house to perfect so that we could be in a position like this as markets come to us. And it's a market, I would say that's a growing market that we're looking forward to continuing to build into. Ken Hoexter: Do they have outsized margins? Or just given the components and specialty kind of similar margins to others despite the higher ASP? Brian Comstock: Yes. I prefer not to go into that level of detail. Ken Hoexter: Okay. SG&A jumped up to 8.5% or somewhere around 8%, 8.5%, which was similar to 4Q, but kind of above, I think, the guidance was somewhere in the 7.5ish type range, so maybe an extra $10 million. Is there -- are we -- were there costs added back in? Maybe just walk us through kind of what's going on in SG&A? Justin Roberts: As we set the guidance at the beginning of the year, we did say we're going to take about $30 million out year-over-year and so if I look at sequentially where we ended in the fourth quarter, we came down about $11 million. There's really nothing significant in that as a percent of revenue on calculation that I would look at. We're still targeting taking $30 million out year-over-year. Ken Hoexter: Okay. So was that higher than you would have expected? Justin Roberts: I think we would say the G&A was -- is trending in line with what we expected for the year. Maybe it's up a little bit in the quarter by a few million dollars, but not significantly. Ken Hoexter: So is that -- I'm trying to understand the impact on margins, right? So we're talking about 11% on manufacturing, but then higher SG&A. Was that timed because you added more people or to get more sales just walk us through what's driving that? Justin Roberts: I think the big piece is there's some additional translation and currency adjustments out of Mexico -- or not out of Mexico out of Europe. That, I would say, artificially changed kind of how G&A was tracking. We're not adding people. There's not G&A that is being grown. In fact, I think, if you looked at last year, we tracked -- we ended around $260 million and this year, we're going to be in the kind of $2.25 to $2.30 range is what we're guiding to. So pretty substantial reductions year-over-year. Ken Hoexter: Helpful. And last 1 for me, just is always the below-line stuff, Justin, if you can be any helpful in terms of how we should think about going forward. The minority was a positive versus a negative equity in loss of unconsolidated was negative versus a positive. I don't know, is there any ballpark how we should think about that below the line? Justin Roberts: I think -- probably our activity is -- well, I don't know, maybe we can take that kind of touch base on our follow-up calls. I think broadly, we're expecting to track where we were at in the prior year and kind of based on our preliminary guidance, earnings from unconsolidated affiliates, which is primarily Brazil, is going to be modestly positive throughout the year that would be accretive to earnings. And I'm not saying that to you, I have to say it out loud to myself to make sure I don't get myself confused. The earnings or loss attributable to noncontrolling interest is our partner's share of earnings in Mexico and in Europe, a negative of about -- or an earnings deduction of about $1 million. We do see that fluctuating throughout the year based on cadence of activity in Mexico, in Northern Mexico and in Europe. And that's -- I guess that's about kind of as far as we're going to go at this point. Lorie Leeson: Yes. I would say that if you were to think about where we're doing our operations and not what I still call minority interest piece, it's going to -- if our earnings are and margin are back half weighted, you're going to have a little bit more of that that's going to be going to our partners in the back half of the year. And yes, I think based on our comments, we expect Brazil to remain stable. We're having good performance down there right now. Ken Hoexter: Wonderful. All right. I think that's it for me. It looks like reiterating all your targets, right? So you're -- even with this 4,400, are you still looking for second quarter to decelerate from this fourth quarter? Or do you think we kind of hold -- is this your minimum value in terms of delivery -- quarterly deliveries. Brian Comstock: Yes. We really, really don't really give quarterly guidance. What we are saying though is we do expect the back half of the year to be a little bit stronger than what we're seeing in the first half of the year. So... Lorie Leeson: You can do the math. Brian Comstock: Yes. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Lorie Tekorius for any closing remarks. Lorie Leeson: Thank you, everyone, for your attention and your interest in Greenbrier. We appreciate it. And as always, if you have follow-on questions, I know you can reach out to Justin, but you'll quickly come to know Travis Williams. So we're excited to have and be part of the team. Happy New Year, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings. Welcome to Simply Good Foods Company's First Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. At this time, I'll turn the conference over to Joshua Levine, Vice President, Investor Relations and Treasury. Thank you. You may now begin. Joshua Levine: Thank you, operator. Good morning, and welcome to The Simply Good Foods Company's First Quarter Fiscal Year 2026 Earnings Call for the period ended November 29, 2025. Today, Geoff Tanner, President and CEO; and Chris Bealer, CFO, will provide you with an overview of our results, which were provided in our earnings release issued earlier this morning. Our prepared remarks will then be followed by a Q&A session. A copy of the release and accompanying presentation are available on the Investors section of the company's website at thesimplygoodfoodscompany.com. This call is being webcast, and an archive of today's remarks will be made available. During the course of today's call, management will make forward-looking statements, which are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. On today's call, we will refer to certain non-GAAP financial measures that we believe provide useful information for investors. Due to the company's asset-light business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Please refer to today's press release for a reconciliation of our non-GAAP financial measures to their most comparable measures prepared in accordance with GAAP. Finally, all retail takeaway data included in our discussion today, unless otherwise noted, reflects a combination of Sircana's MULO++C (sic) [ MULO+C ] measured channel data, and the company estimates for unmeasured channels for the 13 weeks ended November 30, 2025, as compared to the prior year. I will now turn the call over to Geoff Tanner, President and CEO. Geoff Tanner: Thank you, Josh, and thank you for joining us for our call. I'm pleased with our Q1 performance, and I want to reiterate our confidence in our plan for the balance of the year. As a result, we are reaffirming our full year outlook for net sales and adjusted EBITDA. Consumption in Q1 grew 2%, led by double-digit growth from Quest and OWYN, which combined to generate 71% of our net sales. This was offset by expected declines on Atkins. Quest and OWYN continue to benefit from expanded distribution and marketing with added contribution from recent innovation. Growth was also supported by another robust quarter of the nutritional snacking category, which grew 10%. We are executing well on initiatives to drive the top line and to rebuild our gross margin. Specifically, with respect to our margin, recent pricing actions are now reflected on shelf with elasticities to date, in line with our expectations, albeit data remains limited. Our robust productivity program, which we started 18 months ago is delivering results taking cost out of the system and ensuring we have a multiyear pipeline of initiatives for the future. These gains, which will be easier to see in the second half once we're past the peak levels of inflation, is a testament to the hard work from everyone in our organization, particularly the supply chain and operations team. Finally, we took advantage of the opportunity to extend supply coverage at attractive year-over-year prices on several key inputs, most notably cocoa, where we have now locked in incremental supply at sequentially more favorable level, which will begin to flow into the P&L late in Q4 and into fiscal 2027. We know our results for the first half of this fiscal year for reasons we've discussed previously, are below our longer-term expectations. However, we remain confident that our top and bottom line performance will improve once we get beyond Q2. And as mentioned, we are reaffirming our full year outlook. With this in mind, and with our stock at levels that we believe discounts our long-term growth opportunity, we borrowed an incremental $150 million during the quarter that allowed us to accelerate our share buyback program. Since the start of the year, we have repurchased over 7% of our common stock. And as you saw in our press release today, the Board authorized a $200 million increase to our existing share repurchase program. Our decision to repurchase our stock reflects our continued confidence in our long-term runway, and we expect to continue with this program as long as the opportunity remains attractive. Simply Good Foods is well positioned as a leader in the nutritional snacking category. The growth is being propelled by the mainstreaming of consumer demand for high-protein, low-sugar and low carb product. We have a strong foundation for sustainable top line growth, which coupled with our history of strong margin and a proven track record of successfully converting a significant percentage of adjusted EBITDA into free cash flow, I believe will create shareholder value for the long term. Turning to our brand. Quest had another solid quarter, delivering 12% consumption growth and nearly 10% growth in net sales. Key brand metrics are up nicely. Household penetration reached nearly 20% this quarter, up 200 basis points year-over-year and up 50 basis points versus last quarter, a continuation of sequential momentum we've observed for some time. Our salty snacks business once again performed very well in the quarter, with consumption up 40%, reflecting underlying distribution gains and velocity growth as well as somewhat easier year-ago comp when we were supply constrained. As a result, household penetration for Quest Salty surpassed 10% this quarter, up 220 basis points over the last 12 months. Our Salty innovation strategy has been focused on developing and launching a full suite of exciting flavors, which continue to prove highly incremental. This is enabling us to build a highly visible brand block on shelf that enhances our leadership position. We're also introducing channel-specific packs, helping us attract new households and expand product usage occasions. To put this into perspective, ACV was up nearly 5 points in the quarter versus the prior year, and average items per store were up 34%. With visibility to further distribution gains and strong merchandising ahead, we remain confident and sustained growth for our Salty business. Quest Bars consumption was flat versus the prior year in Q1 with solid results from our Taste Forward Crispy line and new Overload platform. As I've said in the past, reaccelerating growth in our Bar business is a critical imperative with Overload the first step. Beginning in the second half, we expect to benefit from several additional initiatives, which are already underway, including further platform innovation and improved in-store activations and merchandising to drive trial. We are hyper-focused on ensuring strong execution of these initiatives and improving performance in this important segment. Lastly, we continue to see solid performance of our new 45-gram Protein Milkshake, which during the quarter gained an additional 8 ACV points. We are gaining trial-focused placements across the store including a number of new opportunities we've secured at several retailers this winter and spring. In addition, our high protein donut launched this quarter, initially on e-commerce and more recently with a large mass retailer. We expect ACV to ramp in the coming months as more retailers reset their shelves, which will provide us with a better read on performance. As we look ahead in the short term, we have a robust new year new merchandising program in place, including significant off shop displays, both in and outside our aisle. I want to remind you, as we said last quarter, the consumption growth in Q2, will be below the full year outlook in large part due to business with a key club customer shifting from Q2 focus last year to more balanced across the rest of the year. However, we remain confident that the strong in-store activation and trial driving activity will deliver continued household penetration gains, positioning the brand for a strong second half. As a result, Quest remains on track to deliver high single-digit consumption growth consistent with our outlook from last quarter. The brand is our largest and highest-margin business, Retailers view us as the innovation leader in the category, which is why we are benefiting from significant distribution and merchandising gains today with line of sight for further expansion in the spring. Finally, we continue to invest heavily in marketing, brand building and new capacity and production capabilities to support ongoing demand. Shifting to Atkins. Consumption declined 19%, consistent with our outlook. Declines were largely driven by lost distribution at several key retailers, which accounted for 2/3 of the headwind. As we've said previously, we continue to work strategically with our retail partners to find the proper breadth and assortment for the brand and to repurpose space from Atkins tail in favor of incremental gains to more productive Quest and OWYN SKUs, all in an effort to get a core assortment with a clear differentiated position in the category focused around weight. These actions are consistent with our fiscal year outlook for the brand, which continues to call for consumption declines around 20%, driven mostly by distribution losses. Over the last few months, many of our initiatives to modernize the Atkins brand have begun to hit the market. These include introducing a 4-pack within our meal bar portfolio, offering consumers a more attractive entry price point, new packaging across nearly every SKU and updated website and refreshed marketing. Our shift to sharpen our opening price points with a 4-pack and meal bars is doing what was intended with unit velocities on average up high single digits year-over-year, building trial and repeat rates and a 300 basis point increase in the percentage of new buyers added to the brand. As we are only 1 quarter into this initiative, we will continue to assess the benefits of the lower price point versus the overall revenue that the business generates over time. I would highlight that improved brand health, including new buyers and repeat rates is an important series of KPIs we will monitor and consider as we work to stabilize the business. The core promise of Atkins has always been to help consumers reach and maintain their weight goals backed by science and proven results. As we continue to see a segment of consumers turn to GLP-1 drugs to help them with their weight loss, we recently concluded a pilot clinical study to assess the effectiveness of Atkins for consumers using GLP-1 drugs. The study showed several encouraging results, including positive data around muscle mass retention, digestive comfort and certain metabolic markers important to consumers with diabetes. GLP-1 drugs are clearly a game changer for many people and how they lose weight, and we're excited in the coming months to share more information about our research into how Atkins nutritional approach can help these consumers achieve their goals. Moving on. We were pleased to see OWYN's performance in market this quarter with consumption up 18%, benefiting from distribution-led growth for RTDs and powders and an ongoing test in some club stores. Household penetration was up 100 basis points to 4.5%. In the near term, consistent with our outlook from last quarter, we expect Q2 consumption growth to slow somewhat due to the impact of initial elasticities following the recent pricing actions, lapping elevated prior year promotional levels and a lingering impact on velocity from the product issues we talked about on our last call. I'm pleased with our team's effort to address the product quality issues. We've seen our ratings level improve versus the summer, helped by our new and improved formula, which has been shipping since August. But we also know we have work to do to rebuild the quality perception with some consumers. As we look ahead, we remain confident in the brand and we will leverage the full scale and capabilities of Simply Goods to drive growth of the business. This includes leveraging our sales force to fill ACV opportunities, narrowing the gap for leading peers increasing marketing double digits this year with marketing as a percentage of sales expected to exceed 10%. Household penetration is only 4.5% and brand awareness is only 20%, pointing to a significant opportunity for more consumers to discover the brand. And lastly, launching both close-in and platform innovation, building upon the brand's strong position and authenticity in the fast-growing clean label movement. To summarize, with only 1 quarter of the year completed, we are reiterating our full year outlook. We are on track and remain confident in our plan. I want to close by thanking our team. They have attacked marketplace challenges head on with resilience and agility. Our nimble and flexible operating model, short- and long-term growth opportunities for Quest and OWYN and strong margins and balance sheet position us well. We are taking the right actions for the business to enhance our growth vectors and to position the company to win for the long term. I'll now hand the call over to Chris. Christopher Bealer: Thanks, Geoff. Good morning, everyone. Thank you for joining us. Overall, we delivered a solid start to the year relative to our plan with net sales and adjusted EBITDA modestly ahead of our expectations. Quest continued to be the engine of growth on the top and bottom line, most notably in salty snacks with solid execution across the organization as we position the company for improved results in the second half. First quarter reported net sales of $340.2 million were essentially flat versus a year ago. Quest net sales grew nearly 10%, driven by robust consumption growth of 12%, while Atkins and OWYN declined 17% and 3%, respectively. For Atkins, while challenged versus prior year, net sales paced slightly ahead of the expectations we provided last quarter as retailer reductions in trade inventory proved less of a headwind than we had expected. On OWYN, Q1 net sales lagged consumption meaningfully, driven by lingering product quality issues and the related impact on retailer inventory levels, which began the quarter in an elevated position. As we enter New Year New You, inventory balances are now more aligned for shipments to match consumption. Gross profit of $109.9 million declined 15.8% on a reported basis from the year ago period, driven primarily by an elevated inflationary costs, most notably cocoa and our first full quarter of tariffs, which were approximately $4 million. Gross margin was 32.3% on a GAAP basis, a decline of 590 basis points versus prior year, largely reflecting higher input costs and about 120 basis points impact from tariffs, which were only partially offset by productivity and mix. Excluding approximately $2.6 million of onetime OWYN integration expenses in the current period and $1 million of noncash purchase accounting inventory step-up expenses in Q1 of fiscal 2025, gross margin declined 540 basis points to 33.1%. Selling and marketing expenses of $29.7 million declined 10.1% versus prior year, primarily the result of planned pullback in Atkins marketing. Quest and OWYN marketing in aggregate increased nearly 10%. G&A expenses of $38 million were flat year-over-year. Excluding stock-based compensation, onetime integration and other costs, including $2.8 million related to the extension and upsizing of our term loan and revolving credit facilities, G&A declined 4.4% to $28.3 million, driven by cost synergies related to the OWYN acquisition and cost management across the organization. As a result, adjusted EBITDA was $55.6 million, down 20.6% due to the margin pressures I spoke about a moment ago. Net interest expense of $3.8 million was down nearly 50% versus the prior year as a result of lower average debt balances, while the effective tax rate was 25.3%. Net income was $25.3 million, a decline of 34% versus last year due primarily to the aforementioned margin challenges and onetime costs. Diluted earnings per share was $0.26 versus $0.38 in the year ago period. Adjusted diluted earnings per share was $0.39 versus $0.49 in the year ago period. Please note that we calculate adjusted diluted EPS as adjusted EBITDA less interest income, interest expense and income taxes divided by diluted shares outstanding. Moving to the balance sheet and cash flow. As of the end of Q1, the company had cash of $194.1 million and an outstanding principal balance on its term loan of $400 million, bringing our net debt to trailing 12-month adjusted EBITDA to approximately 0.8x. Cash flow from operations of $50.1 million represented an increase from approximately $32 million last year due to improved working capital. Capital expenditures were approximately $2.1 million. Higher cash and debt balances at quarter end reflected the company's strategic decision to borrow an additional $150 million as part of the refinancing and extension of our credit facilities, which closed in November. I would highlight that despite upsizing our credit facility, we were able to maintain a consistent spread over SOFR of our Term Loan B, reflecting the credit market's confidence in our long-term story, our cash flow and our balance sheet today. With the additional liquidity and our stock trading at attractive levels, we aggressively increased our rate of share repurchases since we last spoke with you in October. For Q1, we repurchased 5 million shares for $100 million. And on a fiscal year-to-date basis through January 6, the company has spent nearly $150 million to repurchase more than 7% of the shares outstanding at the beginning of this fiscal year. Finally, as Geoff mentioned, with our prior authorization nearly exhausted and our stock remaining at attractive levels, the Board of Directors recently approved an additional $200 million increase to the company's existing stock repurchase program, building on the $150 million incremental authorization announced last quarter. As of today, the company has approximately $224 million remaining under its current stock repurchase program. At current prices, we see share repurchases as a very attractive use of cash. Moving on to our discussion of our outlook. Reflecting our Q1 results and continued confidence in the return to growth on the top and bottom line in the second half, we are reaffirming our outlook for fiscal year 2026. Specifically, we continue to expect the following: net sales growth is expected to be in the range of negative 2% to positive 2%, with growth from Quest and OWYN offset by Atkins. Gross margins are expected to decline in the range of 100 to 150 basis points and adjusted EBITDA year-over-year is expected to be in the range of negative 4% to positive 1%. This includes increased marketing spend on Quest and OWYN to support growth while focusing on profitability for Atkins. Management is focused on the long-term growth of the total company and we'll look to provide more fuel should we find the opportunities to do so. Following the increase in the company's borrowings and accelerated rate of share repurchases, we are updating our outlook for certain below-the-line items. Net interest expense is now expected to be in the range of $19 million to $21 million, while the weighted average diluted share count is expected to be approximately 96 million shares. Our expected full year effective tax rate remains 25%. As we look at the shape of fiscal year 2026, consistent with what we laid out last quarter, we continue to expect that the second half will be stronger on both the top and bottom line than our first half. Specifically, consistent with our prior outlook, we assume Q2 will be the weakest quarter for consumption and net sales growth versus prior year. While we will see the underlying benefit of recent distribution gains on Quest and OWYN, growth will be muted by a combination of initial price elasticities, lingering impacts from the product quality issues on OWYN and challenging laps for Quest and OWYN, both of which benefited in the prior year from stronger New Year New You merchandising programs. All in, we expect Q2 net sales to decline in the range of 3.5% to 4.5%. Below net sales, we expect to deliver sequential improvement in year-over-year gross margin declines as compared to Q1, with Q2 gross margins down approximately 300 basis points versus prior year, helped by the contribution from pricing and productivity, which we expect will begin to offset headwinds from historically high cocoa prices, recent increases in whey and tariffs. As a result, adjusted EBITDA is now expected to decline double digits, slightly below our previous outlook given the impact of more elevated weight costs than we had previously expected. By the second half, we expect growth to improve meaningfully on both the top and bottom line. Specifically, net sales growth is expected at the higher end of our full year range, benefiting from distribution growth, including some recent wins, normalizing elasticities, lapping the initial impacts from OWYN's product issues and an exciting slate of innovation launches across our brands. On the gross margin line, consistent with our outlook from last quarter, we expect second half levels to be roughly in line with or slightly better than our full year fiscal 2025 gross margin on a GAAP basis. This implies flattish year-over-year gross margins in Q3 before Q4 expansion of nearly 200 basis points on a year-over-year basis. I would also highlight that this reaffirmed outlook includes modest tailwinds towards the end of the year from lower expectations for cocoa costs and tariffs given recently secured supply commitments and announced trade agreements and exemptions. These new benefits will be offset by higher assumptions for why across the year. For adjusted EBITDA, consistent with what we have said last quarter, phasing should generally track the shape of our expectations for gross margins with much stronger results by Q4, which we expect will be our strongest period of profit growth, up double digits year-over-year. We continue to expect capital expenditures to be in the $30 million to $40 million range due mainly to the ongoing previously discussed co-investment with a key co-man partner to support additional capacity in our fast-growing salty snacks business. Finally, I would note that our outlook assumes current economic conditions, consumer purchasing behavior and prevailing tariff rates will remain generally consistent across the company's fiscal year. While our outlook includes a number of important assumptions, there remains several uncertain swing factors outside of our control that could represent risk to our outlook. For a comprehensive summary of our full year outlook, please see Slide 15 in our presentation. Thank you for your time and interest in our company. We are now available to take your questions. Operator: [Operator Instructions] Our first question will come from the line of Peter Grom with UBS. Peter Grom: Happy New Year. So Geoff, I appreciate the commentary on the path forward. But can you maybe just elaborate on the confidence in the back half inflection that's embedded in the guidance and just what remains an uncertain volatile environment for the industry? Maybe where do you have the highest degree of confidence or visibility? Conversely, where -- what do you see as some key risks or launch points? And I guess, as we think about the shape of the year, just given the 1Q and the Q2 guidance, is it playing out as you anticipated? Geoff Tanner: Yes. So it's playing out very much as expected and as we previously communicated, our plan from the start has known about certain first half headwinds, for example, some shifted promotional activity out of first half and second and known about some second half tailwinds, which we communicated on our last call. If I break that down on the top line, as we look to the second half, we have line of sight to new distribution, some wins there, some merchandising gains, particularly on Quest. I'm very pleased with our innovation pipeline that we have that will start shipping in the spring and then through the summer. Atkins will start moving past some of its larger distribution laps, for example, at Club. And we expect, as we normally see, elasticities to burn off from pricing. So on the top line, just listing a few drivers there that underpin our confidence in the second half. On the bottom line, we have line of sight to improved gross margin, underlying profit growth because we mentioned in the script, the -- we'll have the full benefit of pricing. We'll have the full benefit of productivity. I'm very pleased with the productivity progress we've made as an organization, setting us up for a strong second half, but also into '27. And as mentioned, we've taken more favorable positions in cocoa, which has come down materially. So on the top and on the bottom, we certainly have a lot of confidence that we will -- the business will start to inflect through the second half and into '27. Christopher Bealer: And then Peter, it's Chris. I'll just build on Geoff's answer. Consistent with our prior outlook, our EBITDA is generally going to track pretty closely to the gross margin trajectory. Q3 gross margins, for example, will be flattish year-over-year. And Q4 will be the strongest position for us in both gross margin and EBITDA. And EBITDA as an example, we expect it to be up about double digits. And I think importantly, for me, that sets us up nicely for FY '27 on a margin standpoint. Operator: Our next question is from the line of Brian Holland with D.A. Davidson. Brian Holland: I wanted to ask about Quest Bars flat, obviously underperforming vis-a-vis the broader category there. Innovation is contributing nicely. Overload is off to a good start, as you mentioned, et cetera. But obviously also implies then that the core or the legacy SKUs sort of in aggregate are declining. So maybe first question there, just innovation is obviously important. The category thrives off that new product news. So that's important and obviously encouraging that you guys have accelerated that pipeline. But what do we -- what needs to be done on the legacy bar business just given the sheer size and scale, I mean, is this merchandising that we need to increasingly focus on, which I know you've talked about before? Or does there need to be some sort of rightsizing on some of these tail SKUs in that brand? Geoff Tanner: Yes. If you look at Quest Bars in the quarter, Q1, they were flat, but we started a little bit more recently, more recent weeks, which we expected. As we mentioned, lapping some prior year promotional events through New Year, New Year, some shift in timing. And we always see a higher initial impact from pricing, which we took on Quest Bar. So what we're seeing on Quest bar right now is very consistent with what we expected and what we said on the last call. But to your question, we're obviously not happy with flat. That doesn't work. It's unacceptable. We are the leader in the bar segment, and we should be driving it. I think I've talked about this in the past. Over the past year, in response to that, we have developed a comprehensive plan to reaccelerate our bar business, and that includes platform innovation, which you'll see in the spring. It includes additional merchandising and new distribution that we have line of sight to. And additional marketing that we're going to put behind bars. So right now, we're flat. That's unacceptable. To your point, it's a multipronged plan to reaccelerate bars, inclusive of innovation, but also driving our core bar business through merchandising, through distribution and through marketing. Obviously, this is a multiyear plan. It will take time, but I'm very confident in the plan, and you should start to see the impact of that in the results in the second half. Brian Holland: Appreciate the color. And then pivoting over to OWYN briefly. Obviously, there's a lot of noise right now between the increase in marketing spend, working through the product quality issues and that old inventory. But as we start to move forward, you're giving us metrics around brand awareness, household penetration. So maybe a 2-part question here. If I look at the relationship between household penetration, I think, 4.5% branded awareness at -- or aided or I know the awareness at like 20%. Is that the right delta today? Or does that imply better or worse conversion of that awareness than if you compare that against other brands that you've managed? And as we go forward, how should we be judging the step-up in marketing investment and your ability to convert? Is it watching the relationship between household penetration and brand awareness that you're building over time? Geoff Tanner: Yes. That relationship between 20% aided awareness and 4-ish, 4.5% household penetration pretty standard. So what it does point to is the significant upside opportunity we have on this brand. So while the relationship is pretty standard, those numbers are very low. And that really is a key opportunity for us to drive awareness, which is why we've increased marketing substantially, which then should translate into increased household penetration. One of the ways in which we plan to accelerate that in addition to marketing is to expand the footprint of OWYN. So right now, we've got a really good shakes business. We'll continue to drive that. We've got distribution upside. We've got a smallish powders business that's growing 50% plus that we plan to put more effort behind. And then you should expect us to bring platform innovation that will expand the footprint of the brand further. So the key ways to expand household penetration, marketing, which we've increased more than double, innovation to expand the footprint and then continuing to drive our distribution. We see this brand having a tremendous runway where we acquired it's on the leading edge of the clean movement, and we plan to pull all of those levers to drive awareness and drive household penetration. Operator: The next question is from the line of Megan Clapp with Morgan Stanley. Megan Christine Alexander: I wanted to stick with OWYN, if we could. So underlying consumption in the quarter clearly strong, I think a bit better than you had actually laid out when we talked last quarter, talked about kind of the gap and the destock related to some of the quality issues in inventory. I wondered if you could just give a little bit more color on how that kind of came up during the quarter, whether it was driven by one or multiple customers? And then just, Chris, I think you said as you move into the New Year and New You period, you'd expect shipments to better align with consumption. Should we interpret that as there was still maybe a gap at the start of this quarter and it should close as we move through the second quarter? Just trying to kind of understand your level of confidence in consumption, which is clearly strong kind of matching shipments as we move through the balance of the quarter. Geoff Tanner: Yes, I'll start and turn it over to Chris. To your point, we were pleased with how consumption came in, in Q1, led by some distribution gains at mass test and a club customer. RTDs were solid, as I mentioned earlier, previous question. powders growing 50%. And this does underscore the leadership position we have in plant-based and clean label, which grew 20%. In terms of bridging the gap to sales, as Chris mentioned, the primary driver of Q1 was we came in heavier on inventory, and we had some lingering impact from the quality issue. Christopher Bealer: And then Megan, just to build on that, we do believe we're in a better position now in terms of shipping to consumption. As you mentioned in the remarks, the ERP cutover was a big piece of why we were slightly heavy on inventory coming into Q1. We thought that was a prudent action to take to make sure we didn't have any supply disruption. And then obviously, as Jeff mentioned, the lingering effects of the product issues also had an impact on the quarter. So overall, though, in the long run, we do think consumption is the best measure of brand health. And as I said, we think we're set up now in Q2 to be much more -- much closer in terms of shipment to consumption. Megan Christine Alexander: Okay. That's helpful. And then, Chris, just a follow-up, if I could, on the margin. I think you said at the end of your response to Pete's question that you'll be set up nicely in fiscal '27 from a margin standpoint. I guess when we look at the shape of this year, I think you'll end the year and exit kind of in that mid-36% range on the gross margin and understand there can be kind of seasonality and you probably don't want to give fiscal '27 guidance right now, but is that a good jumping off point as we think about fiscal '27, just that exit rate on 4Q, particularly as you talked about some of the favorability you expect from cocoa? Christopher Bealer: Yes. As I talked about, I think, last quarter as well, we do have good line of sight with our supply coverage. And we do obviously know what we paid last year for cocoa and for other commodities, we can see where the prices are. So we feel very confident about our overall gross margin. I think the mid-36s range that you mentioned on Q4 is directionally right. And I think that is, as you said, a good jumping off point for F '27. But clearly, at this point, I'm not going to be guiding on F '27. But all else equal, probably a decent assumption in terms of the starting point for the year. Operator: Our next questions are from the line of Alexia Howard with Bernstein. Alexia Howard: Can I ask about margins? I seem to remember that when you first bought OWYN, it was a pretty low-margin business, but you're obviously in the middle of extracting a lot of cost synergy from that. And I also seem to remember that you commented recently on quite a wide discrepancy between where the Quest margins are and the lower margins for Atkins. And if we look out over the next 18 months, do we see sort of a major ramp on the margin side, both on the gross margin side and on the operating margin side, driven by things like cutting off the tail of unprofitable SKUs and the ongoing cost synergy realization at OWYN, other drivers that you anticipate? I'm really thinking about the gross margin getting back to that sort of 37% territory is there line of sight into that? Christopher Bealer: Thanks, Alexia. Yes, from a margin standpoint, -- in terms of getting back and rebuilding our margins up into that sort of 37-plus range, the biggest drivers really are the pricing and productivity. We know there's a lag. We talked about it last time, pricing productivity lag versus inflation. That lag is going to start to overlap in half 2 of this year. We also, as I said, have good line of sight to cost visibility, both on cocoa and our other commodities. And we do have a nice tailwind coming from cocoa, which will start to kick in, in Q4 of this year, will flow more into F '27. Obviously, as we talked about in the prepared remarks, we do have -- we do see inflation on whey, which is going to offset that to some extent. But those are some pretty big drivers on margin and certainly very much in our control, which makes me very confident on rebuilding our margins. In addition to that, there is the mix impact as we mix out of Atkins, we mix into Quest, that is also obviously going to have a more long-term structural benefit on margins. And then as you mentioned, I think in the question, yes, we did drive some very nice synergies on OWYN as we integrated it. Those are building through this fiscal year. So those are kind of already embedded in that 3 -- mid-36% range for Q4. That's already sort of fully loaded from an OWYN margin standpoint. And then I guess the final piece I would just put on OWYN, as we talked about, as we build scale and we build, as Jeff mentioned, platform innovation, I would hope certainly that those would certainly be accretive to the OWYN margin as a brand. Geoff Tanner: The only build I would have on that is Alexia about 18 months ago, we did put in place a very robust and enhanced productivity program. That took 6 or so months to ramp. But as we sit here today, we have strong visibility based on terrific work from this team and our supply chain team, the R&D team, and that will enable us to continue to support our margin that will allow us to continue to support investment in the business. Operator: Our next question is from the line of Jon Andersen with William Blair. Jon Andersen: Just a couple here. On sales overall flat for the quarter, can you help us a little bit with the composition? How much did pricing help in the first quarter? And how much will pricing -- how much will flow through as we move into the second quarter and second half? And then I had a question -- a second question on Atkins. I think last quarter, you talked about 10% to 15% of the Atkins business being kind of tail, meaning in the bottom quartile of velocities. Is there an update on that? And what I'm really trying to get at is where you think you are kind of in the process of getting to that optimal assortment for that rightsized assortment on Atkins? Christopher Bealer: Jon, I'll take the top line question and maybe Geoff wants to take the Atkins one. Look, for Q1, I think what's important to keep in mind is we had -- yes, we were roughly flat year-over-year, but slightly better than we had anticipated and certainly a little bit better than we guided at the start of the year. Quest and Atkins, we're quite happy with where Q1 landed. Both of them were ahead of expectations. And OWYN, as we talked about, obviously behind for the reasons we've already stated. In terms of composition of that, pricing really was almost 0 benefit in Q1. The effective date on shelf was really towards the very, very end of October. So we had a very small amount flowing into Q1. So really minimal impact in Q1. And it will be closer to sort of low single-digit benefit for balance to grow, which is consistent with what we said last quarter. Geoff Tanner: Yes, I'll take the Atkins question. I think it's important to point out that the majority, 2/3 of the declines we're seeing on Atkins today are driven by lost distribution, particular impact at club, which will be almost fully passed in April. But to your question, Atkins, if you look at the business today, as we said in the past, 75% of Atkins sales today come from SKUs in the top half of category velocity, which, in my experience, is generally considered safe. If you look at just the lowest quartile, 10% to 15%, which typically would be at risk. So no change there. I hope that helps dimensionalize the risk. And we'll say that rather than just lose those SKUs, we believe the right thing to do for the brand, the category and the company is to partner with retailers to drive to an assortment that would include replacing those SKUs with Quest and with OWYN, faster turning SKUs. I think that's the benefit of the category and the company. What I would say is I have been pleased that we've seen more flowback than we had forecasted on Atkins in Q1 where we've lost distribution. So early days there, but the level of flowback we are seeing into the business, I think partially explains why Atkins had a better than forecasted quarter. Operator: The next question come from the line of Matt Smith with Stifel. Matthew Smith: Chris, just a follow-up question on cost visibility and tariff expense. You called out a $4 million headwind from tariffs in the quarter. When would you expect to start to see relief given the revised trade agreements? Should you start to see tariff favorability relative to your previous guidance in the second half of the year? Or does that really start to flow through in fiscal '27? Christopher Bealer: Yes. Thanks, Matt. I think importantly, again, as we look at total cost, and we see that we have good visibility out. We did get a little bit of relief since we set guidance on tariffs with the especially Annex 3 exemptions. And that will start to flow through. It's going to be flowing through really starting in the second half of the year. Again, when you think about cost of inventory and as it flows through our inventory and we ultimately ship it, there is a timing lag. So that will be more of a second half benefit and into next year. Again, I'll just refer back to, yes, we have some tariff benefit coming in, in the second half. We have cocoa benefit that's going to start flowing in Q4. But we do have a new sort of headwind that's come in, which is the way inflation. So all in, not concerned overall on cost, and that's why we haven't changed our gross margin guidance for the year. And actually pretty much right on the same number for Q4 in terms of what we were thinking. But yes, from a tariff standpoint, benefit will start playing in the second half. Matthew Smith: And Geoff, as a follow-up to your commentary on capital allocation, the company has been running as a portfolio of brands for some time, and you've been open to adding brands. But are you seeing a change in the category given the insurgent brand dynamics and competitive activity? Is that impacting your M&A view? And when we think about the share repurchase year-to-date has been fairly aggressive. Are you confident in the current brands that you own supporting your long-term algorithm? Geoff Tanner: That's a good question. So obviously, we haven't changed our framework for capital allocation. Certainly, M&A is something we look at. I think we've got a pretty decent track record with M&A. Right now, as we look at our stock price, which we think is significantly undervalued, we think the right use of cash is to be in there and buying the stock back, given our confidence in the long-term health of the business. But M&A is something that we're always looking at. There are -- as you mentioned, there are targets out there. Obviously, we want to get it at the right price. So we haven't -- that hasn't changed. Our buyback position is opportunistic in a sense and that we view our stock is significantly undervalued, and we think the best use is to go in there and buy it back at these cheap levels. Christopher Bealer: And I would just -- Matt, I'll just build on Geoff's answer that we have a very strong balance sheet. Obviously, we took, I think, advantage of the stock price, and we also took advantage of our refinancing window to increase our debt level a little bit like modestly, still less than a turn at this present time. We project that to still be around a turn by the end of the year. And we use that extra -- those extra funds to accelerate our stock buyback while our stock is cheap. And I think the authorization increase from our Board recently of another $200 million, I think it's just in my mind, reflects our confidence in the long-term strength of our business and long-term strength of our balance sheet. And while we still have attractive share prices, we'll continue to use our cash accordingly. Operator: The next question is from the line of Robert Moskow with TD Cowen. Robert Moskow: I wanted to dig a little deeper into the clinical study that you're conducting on GLP-1 users and you say these are users who are following the Atkins nutritional approach. Can I assume that this means that you followed users who are on the Atkins diet? And if so, what's the next step, Geoff? Like what would you do with the results of this study to help you market the brand? How would you use it to help you retain distribution with retailers? Just a little bit more info on like what you intend to do with the results. Geoff Tanner: Yes. So the role of Atkins has always been to help people lose or maintain weight. And as we saw -- continue to see consumers turn to GLP-1 drugs to help them with this, 2 years ago, so a couple of years ago, we undertook a pilot clinical study to test whether Atkins could be a valuable tool or companion to people on the drug. So we had 2 groups of patients on -- who were taking the drug, one group using the Atkins diet and the other using a more traditional low fat diet. We just got the results back in last month. So it's still very early, but those results were very encouraging. Patients on the Atkins diet have taken the drug, tended to retain more muscle mass, which is a critical issue for people on the drug, tended to experience fewer side effects, few headaches, nausea with gas, and there were some other significant differences on metabolic outcomes, particularly for those with diabetes. But it was a pilot study, but nonetheless, very, very encouraging that Atkins can play an important role with a lot more to learn. What you will start to see, to your point, is us leveraging the study results and our New Year New You media, so starting in the next few weeks, you'll see us start to message around this, start to target around this. And literally, as we speak, because these results are very fresh, our teams are in front of retailers who are also trying to figure out how to meet the needs of GLP-1 patients. So over the next few months, our selling team will be out in front of the trade in front of retailers, talking to them about the results, talking to them about the importance of action. So it's early. It's a pilot study. With that being said, we're very encouraged and you'll start to see us execute against this over the coming months. Operator: The next question is from the line of Steve Powers with Deutsche Bank. Stephen Robert Powers: A couple of questions around planning assumptions, just going back to Quest Salty. The first one is maybe just give us an update. You talked about distribution gains generally in the forecast. Curious as to what your distribution outlook is on Quest Salty specifically? And if there are any gains embedded in the full year outlook, number one. Number two is just more generally on forecasting in that business. I think as I think about it, there are kind of competing factors on the one hand, favorably. I think there's a greater consumer awareness and consumer acceptance of kind of protein-based salty snacks, which is part of credit to your success. On the other hand, that has brought with it increasing competition from other smaller independent brands as well as increasingly from conventional brands looking at the category. So just curious if you step back and think about the -- those dynamics, whether that has changed your approach to forecasting in the salty business. Geoff Tanner: Steve, we could not be more pleased with our salty business, plus 40% in the quarter. Admittedly, we had some easier laps a year ago, but could not be more pleased. The core drivers are innovation. We've got new flavors, new forms, pack sizes, exclusives retailers, which are performing extremely well. We continue to build distribution, gain merchandising, displays across the store, away from home, gym, airports, hotels. And I'm not sure if you've seen our new campaign, but it's pretty heavily weighted towards salty. So those are the key drivers. As we look to the second half, we're very confident in the continued momentum of Salty. We have line of sight to new distribution. We have line of sight to significant merchandising gains. And part of this is because retailers view Salty as highly incremental to the category. And as a result, they're rewarding us with new distribution and new merchandising. So a lot of confidence in the momentum. As we think long term, I do want to remind that Quest is the pioneer of this segment. We built it from the ground up. It's been growing for a year at a high clip, and that reflects that we know we have a superior product. And really importantly, consumers trust Quest and trust our salty business has tremendous authenticity in the space. Salty is a $50 billion category. We only have 10% household penetration. Awareness is still relatively low. I've seen the multiyear pipeline. You should expect us to be looking at other forms of salty. We have no intention of taking our foot off the gas. Obviously, we've been operating under the assumption that competition is coming. The growth, the demand for this product just makes it obvious. But we're highly confident in the strength of our brand, strength of our product, our competitive moat from a supply chain perspective. And both near term and long term, we have tremendous confidence in this business. Christopher Bealer: Just want to add, Steve, to what Geoff said. Look, if you think about Quest as a brand and look at the areas that we're already building strong businesses, I think it's very important for me that Quest as a brand can absolutely play across the entire salty universe. Today, we have a business that's really an enormous chips business, but there's a lot of other areas in salty across the store where I strongly believe that Quest can build a meaningful business. And for that reason, that's one of the reasons we've been resourcing against that, both internally and with our co-manufacturers. Stephen Robert Powers: Yes, very clear. And I know we're late in the call. Just a quick last question for me, if I could. Apologies if I missed it, but just going back to OWYN. You mentioned in the remarks in the slides that if you think about the long-term path to growth that innovation in new categories will play an important role. I'm curious if fiscal '26 is too early to see some of that or if we should expect that as the year progresses? Geoff Tanner: It's a big opportunity for us. One of the -- if you remember, Steve, it's one of the reasons that we cited why we're so excited about OWYN was to be able to combine our very talented R&D organization and let them loose on OWYN. So there's a very strong pipeline. What I'll say is you should expect to see probably the first foray from us, I'd say, certainly this fiscal, we probably put the timing around that. I'm really excited about the opportunity here, yes, significant. Operator: Our final question is from the line of Tyler Prause with Stephens. Tyler Prause: RTD is becoming an increasingly competitive space. How should we think about growth within this part of your portfolio? And is this a unique subcategory where we could see consumption for Quest, OWYN and Atkins all positive this year? Geoff Tanner: No RTD is certainly competitive. It's not surprising. For a while, the category was somewhat supply constrained, I think that limited the extent of competition. Unsurprisingly, you're seeing some new entrants into the category. What I'd point out is the category is still growing 10% plus in RTDs, which is significant. When it comes to our brands, I'll start with OWYN, very uniquely positioned within that category. It's not just another RTD milk shake or chocolate, a strawberry flavor. It is positioned as the leading clean and plant-based proposition in the market, very differentiated and retailers see that, consumers see that. So I feel very confident. This clean movement, I think, is in the early innings, and we intend to write it as the leader. So I think from a perspective, OWYN is very differentiated. We've been very pleased with how Quest has performed in the space. Quest has the highest protein level at 45 grams, phenomenal tasting, which you'd expect from Quest. So a differentiated position there. And Atkins plays a very different job in the category. Atkins is about helping consumers maintain their weight. It's a different job, and I think a differentiated job, particularly when we start to leverage the GLP-1 findings where shakes could be a very important tool to consumers on the drug. So we believe that we have 3 very differentiated position -- differentially positioned brands inside a category that's still robust, still growing double digit. So we have a lot of confidence in the future growth here. Operator: At this time, we've reached the end of our question-and-answer session. I'll hand the floor back to management for closing remarks. Geoff Tanner: I just want to thank everyone for their participation today on today's call. If you have any follow-ups, please feel free to reach out to Josh, and we look forward to speaking with you again on our Q2 call in April. Have a good day. Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation. Have a wonderful day.
Operator: Thank you for joining today's conference call to discuss Tilray Brands' financial results for the second quarter fiscal year 2026 ended November 30, 2025. [Operator Instructions] Now I'll turn over the call to Ms. Berrin Noorata, Tilray Brands' Chief Corporate Affairs and Communications Officer. Thank you. You may begin. Berrin Noorata: Thank you, operator, and good afternoon, everyone. By now, you should have access to the earnings press release, which is available on the Investors section of the Tilray Brands website at tilray.com and has been filed with the SEC and SEDAR. Please note that during today's call, we will be referring to various non-GAAP financial measures that can provide useful information for investors. However, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. The earnings press release contains a reconciliation of each non-GAAP financial measure to the most comparable measure prepared in accordance with GAAP. In addition, we will be making numerous forward-looking statements during our remarks and in response to your questions. These statements are based on our current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect. Actual results could differ materially from those described in those forward-looking statements. The text in our earnings press release includes many of the risks and uncertainties associated with such forward-looking statements. Today, we will be hearing from key members of our senior leadership team, beginning with Irwin Simon, Chairman and Chief Executive Officer who will provide opening remarks and commentary, followed by Carl Merton, Chief Financial Officer, who will review our financial results for the second quarter of fiscal year 2026. And now I'd like to turn the call over to Tilray Brands' Chairman and CEO, Irwin Simon. Irwin Simon: Thank you very much, Berrin, and good afternoon, everyone, and happy new year. Thank you so much for joining us today. We delivered a strong second quarter marked by record results and a beat against analyst expectations in the face of strong headwinds. We recorded our highest ever Q2 net revenue of $218 million, achieved an adjusted EBITDA of $8.4 million, and a reported reverse stocks with adjusted EPS loss of $0.02, all while generating an adjusted cash operating income of $6 million. More importantly, the quality of our performance continues to improve. Highlights this quarter include a 51% sequential growth in the international cannabis revenue and a meaningful year-over-year improvement in both net income and free cash flow. We also continue to strengthen our balance sheet. We ended the quarter with approximately $292 million in cash and marketable securities and reduced our debt by approximately $4 million during Q2, leading to a strong net cash position exceeding our debt by almost $30 million. In a rapidly evolving global cannabis regulatory environment, particularly in the U.S., our liquidity and balance sheet strength remains a clear strategic advantage. Today, Tilray operates more than 40 brands in more than 20 countries. We are a global leader in cannabis trusted by patients, health care professionals and regulators worldwide. We are the #1 cannabis producer in Canada by revenue, the fourth largest craft beer brewer in the United States and a market leader in branded hemp wellness products across North America, where our high-protein hemp food portfolio holds a nearly 60% market share. Our Q2 results reinforces the momentum we discussed last quarter, improving fundamentals, sharper execution and increasing leverage from our diversified global platform across cannabis, beverage and wellness. Let's turn to our cannabis business, which is strategically positioned for its next phase of growth. While global cannabis markets continue to evolve, we believe the industry remains early in its long-term development cycle. The decision by President Trump to federally reschedule cannabis in the U.S. represents one of the most consequential regulatory shifts that the industry has seen in decades. Thank you, President Trump, if you're listening today. This is a moment Tilray has been preparing for methodically for years. And guess what, we are ready to go. We believe that cannabis rescheduling for Schedule III will lead the U.S. towards a federally compliant medical cannabis brainwork consistent with our other developed international markets, Tilray is positioned to act immediately. We already have the platform, regulatory experience, operating capabilities and leadership team in place with Tilray Medical U.S. to execute responsibly and to scale. Globally, Tilray Medical is expected to generate approximately $150 million in revenue on an annual run rate. We offer over 200 medical cannabis products, serving more than 500,000 registered patients worldwide. We have participated more than 25 medical cannabis studies and clinical trials conducted in the U.S., Canada, Australia, Argentina and across Europe with leading hospitals, physicians addressing conditions such as pediatric epilepsy, cancer-related nausea, PTSD, chronic pain, anxiety, essential tremors, alcohol use disorders, glioblastomas, cannabinoid impairment and driving performance. These initiatives reinforce Tilray's reputation as a science-driven evident-based medical cannabis company and they underscore the trust placed in us by health care professionals, patients and regulators globally. We also possess one of the largest banks of cannabis genetics, which we intend to study in order to support research on the endocannabinoid system and advance medical cannabis science further. Now let's turn to Q2 cannabis performance. Global cannabis revenue increased to $68 million, our high-margin international cannabis business led the growth, increasing 36% year-over-year and 51% substantially to $20 million, marking one of our strongest international quarters to date, and we fully expect this momentum to continue as we expand our global footprint. This performance is particularly notable given ongoing permit challenges, regular transitions in Portugal and Germany and continued price compression, especially in flower. I'd like to acknowledge and thank the international team for their focused execution under these circumstances. I also want to recognize our Canadian cannabis team for their expertise, support and supply contribution. Additionally, I appreciate the cooperation of Infarmed and the Portuguese regulators to facilitating improvements to permitting approval time lines. Looking ahead, Europe, particularly Germany, the U.K. and Poland represents a significant growth opportunity for us. Execution will be driven by operational disciplines, including process improvement, automation, cross-functional coordination and increased utilization at our cultivation facilities in Portugal and Germany and utilizing our Canadian facilities. Tilray operates one of the largest cannabis footprints in Europe which we're continuing to expand and our advantage lies in scale, speed to market data-driven decisions making and experience gained from our Canadian operation. Moving on to Tilray Pharma and our distribution business. As discussed last quarter, we're expanding our pharmacy reach in Germany, utilizing Tilray's Pharma expansive pharmacy network and salespeople and expect to triple our medical cannabis distribution footprint in fiscal 2026. We remain on track to achieve these objectives. In terms of Q2 performance, revenue grew by 26% year-over-year and 15% sequentially to $85 million, making it our biggest quarter ever, while improving our gross margins. The increase in distribution revenue in the period was driven by competitive pricing, portfolio optimization and increased focus on medical device sales. Looking ahead, Tilray Pharma is laser focused on enhancing operational efficiency to support its commercial expansion into 3,000 additional pharmacies through strategic partnerships. As medical cannabis continues to expand globally, Tilray Pharma is positioned to play a significant role in our overall growth by utilizing insights gaining through integrating our medical operations Tilray Pharma aims to strengthen its business value and create new growth opportunities within both the European medical market and the U.S. International markets remain one of Tilray's most compelling long-term growth drivers as we expect market opportunities, revenue, profitability continues to grow. In Canada, our cannabis business continues to reinforce its leadership position. During Q2, our adult-use medical sales channel, net of excise tax, grew to $46 million with recreational cannabis growing 6% in the quarter. Tilray continues to hold a leading market position in dried flower, non-infused pre-rolls, beverages, oils and chocolate edibles. Our disciplined approach to product mix, margin management and premium pricing has supported our strategic reentry into the high-growth segments as vapes and infused pre-rolls with a focus on accretive margins. In Q2, we advanced our innovation pipeline with the launch of Redecan Amped Live Resin Liquid Diamond vapes, addressing consumers' demand for the full spectrum of cannabinoids strain-specific terpenes that deliver an authentic plant profile. This product combines 80% of live resin with 20% of liquid diamonds, maximizing potency while maintaining natural flavor integrity. In addition, we entered the Quebec market with vapes with a Good Supply brand, rapidly achieving that top 3 SKU positions in the province while underscoring effective execution and strong consumer update. Operationally, we hit our highest quarterly volume in 2 years with over 5.5 million units shipped in Canada in Q2. We also completed our first harvest from our restarted outdoor cannabis grow in Cayuga, Ontario, exceeding expectations on the THC content. With this extra biomass, our cannabis cultivation capacity rises to 200 metric tons annually but this boost not only allows us to provide high-quality products at reduced costs and improve our profit margin, but also helps us expand into fast-growing markets, supplying both Canadian and international customers, including those in Europe to meet increasing global demand. The positive momentum of the past two quarters reflect the trajectory of Canadian cannabis business With the right product mix, healthy margins, we're well positioned to elevate this business in the second half of 2026 and beyond. With the reschedule of cannabis in the U.S. now is the time for Canada to modernize its regulation and secure its position as a global cannabis leader, including excise tax reform, marketing flexibility, health care integration and on-premise consumption. Without modernization, Canada risks becoming an exporter of raw products while value creation, intellectual property and long-term economic growth moves elsewhere. As a global policy accelerates, the choice is clear, modernized Canada's cannabis regulation to support economic competitiveness, consumer education, sustainable growth or risk being left behind in an industry Canada helped to create. Prime Minister Carney, I hope you're listening to this call, the Canadian cannabis industry has generated a significant amount of jobs, contribute billions of dollars in tax revenues of both federal and provincial governments. However, the lack of regulatory reform is resulting in Canadian producers redirecting their investments and attention towards international markets where excise tax can be circumvented. Given the declining spirits industry in Canada, excise tax should be reduced, cannabis drinks should be permitted in liquor stores and on-premise location, medical cannabis sales in drug stores with lower excise tax burden while boosting overall tax revenues as the industry grows. Turning to our beverage business in Q2. Beverage revenue totaled $50 million. We continue to make progress executing our integration and optimization strategy. We delivered $27 million in annualized cost savings in the first half of the year and remain on track towards our $33 million target. We're making meaningful progress in improving performance. However, there is more to be done as we continue to integrate our brands, streamline operations and optimize processes. We acquired brands with the understanding that significant improvements and comprehensive turnaround would be necessary. A process that is currently underway through our integration plan, we recognize this transformation will take time. And while we have not achieved all our objectives. We are on track and encouraged by the positive momentum gained so far. We look forward to the up-and-coming spring product resets with our retail partners and the introduction of some of the new innovations in the market. These changes are anticipated to have a positive impact on revenue in the fourth quarter. Our outlook may seem bullish but conviction is essential for success, which remains our primary focus revitalizing the craft beer category, making beer fun again, bringing people together, fostering meaningful connections and generating long-term value for our shareholders. We've established brands, breweries, a major distribution system. Tilray is here to stay and not going anywhere. Tilray aims to expand its regional national and global presence through strategic partnerships with leading U.S. and international brands. We expect to share more about this in the future but we believe these partnerships validate the strength of our platform and our strategic vision. This approach also position us for future opportunities, should cannabis THC drinks become federally legal in the U.S. We're ready to produce and sell as we're currently operating a leading THC beverage operation across Canada with over 45% of the THC beverage market share. Regarding our U.S. hemp-derived THC business, we continue to offer Fizzy Jane's, Happy Flower hemp-derived THC beverages with 5-milligram and 10-milligram formats through nationwide retailer partnership. Distribution includes, nature wine liquor grocery outlets across the country. While regulatory changes may affect HDD9 products after 2026, we anticipate compliant participation under new federal laws, if it happens. We're also pursuing international growth by expanding our beverage business into new markets worldwide, we're expect to leverage our future strategic partnerships. Our strategy for beverage abroad is evolving with an emphasis on craft beer and nonalcoholic drinks, including energy beverages that meet the demands of consumers in this expanding sector where brands such as HiBall, our clean energy drink, Liquid Love, our sparkling water brand. HiBall is set to launch in the U.K. in Q4, with the expansion plans also underway for the Middle East and Africa. Beyond nonalcoholic beverages and the energy drinks, we continue to explore opportunities to build on our global craft beer segment. Tilray recently participated in the American Craft Beer Expo in Japan and gain valuable insight which the team will pursue in the future. Rounding out our beverage strategy, we're also focused on expanding our nonalcoholic beverages in the U.S. and across international markets. our recent innovations, including non-alc beers under Montauk, 10 Barrel and our non-alc ready-to-drink canned beverages and distilled spirits, including Mock One. Within the spirits category, despite market challenges in Q2, we focus on enhancing our commercial strategy, resulting in a 9.2% increase in depletions across vodka, bourbon and gin with vodka leading by double digit for the quarter. While the Broncos seasonal release sold out rapidly, our ongoing efforts to remain focused on expanding product distribution to additional states and beyond. With 5 years experience in the beverage alcohol industry, we remain confident in our future trajectory as we continue to enhance operational efficiency. Now turning to our wellness business. We generated revenue of $14.6 million, driven by a strategic focus on value-added innovation including high-protein, superseeds, better-for-you breakfast products, better-for-you snacking and the continued success of our HiBall clean energy drinks. Within our ingredient sales business, we've expanded our range of offerings in hemp protein, hemp oil, helping us further develop our business in North America and Asia. Our hemp food business remains fully insulated from proposed hemp THC regulation as these products contain zero THC and are broadly distributed across mainstream retail. In closing, we are confident in Tilray's trajectories for the second half of fiscal 2026 and beyond with a diversified, scalable platform, improving fundamentals strong liquidity, regulatory tailwinds developing globally, Tilray is well positioned to capitalize on the next phase of growth across cannabis, beverage and wellness products. Thank you to our shareholders for your continued support and confidence in Tilray's long-term strategy. I will now turn the call over to Carl to walk through our financial results in more detail. Carl, are you ready? Carl Merton: Thank you, Irwin. Before I begin, please note that we present our financials in accordance with U.S. GAAP and in U.S. dollars. Throughout our discussions, we will be referring to both GAAP and non-GAAP adjusted results and we encourage you to review the reconciliation contained within the press release of our reported results under GAAP with the corresponding non-GAAP measures. This quarter, we are reporting record second quarter net revenue and strong year-over-year improvements in profitability, and we are reaffirming our full year 2026 adjusted EBITDA guidance. Net revenue for the quarter was a record $217.5 million. Revenue growth was primarily driven by strong results in our international operations, both international cannabis and Tilray Pharma. Additionally, Canadian adult-use revenue grew year-over-year. Cannabis net revenue increased year-over-year to $67.5 million during the quarter driven by a strong 36% increase in revenue from international cannabis and a 6% increase in Canadian adult-use cannabis. The continued year-over-year growth in our international cannabis business reinforces our view that Q1 results were temporarily affected by the timing of import and export permits. As a result, Q4 2025 and Q2 of this year provide a more accurate reflection of our ongoing performance expectations for the duration of the fiscal year. With the continued growth of international cannabis, we deliberately chose to scale back supply into the Canadian wholesale market in the quarter and redeploy that supply, along with new growth into the higher-margin international cannabis markets over the remainder of the year. Beverage net revenue for the quarter was $50.1 million. Beverage revenue was impacted by category-wide headwinds in the craft beer segment and our own portfolio optimization efforts under Project 420 where SKU rationalization and margin-focused initiatives continue to impact revenue. However, we expect spring retailer product resets to help mitigate industry trends. These upcoming changes should improve brand visibility and align product mix with consumer preferences, which we expect to benefit better revenue and gross margins in the fourth fiscal quarter. Wellness net revenue was flat year-over-year at $14.6 million based on our strategic focus on value-added innovation and continued growth in HiBall and the ingredient channel. Results were offset by challenges in the club retail channel, which we are addressing through targeted initiatives. Distribution net revenue increased 26% year-over-year to $85.3 million based on our focus on competitive pricing, the prioritization of high-margin SKUs and favorable impacts from foreign exchange. We believe our distribution business will continue to complement and strengthen our international cannabis segment as we grow both in tandem. In terms of contribution, cannabis revenue accounted for 31% of revenue, beverage revenue was 23%, distribution was 39%, and wellness accounted for the final 7%. Gross profit during the quarter was $57.5 million, and gross margin for the quarter was 26%, while margins increased in cannabis, distribution and wellness. Margin construction in the beverage segment negatively impacted the gross margin for the quarter. By segment, beverage gross margin reached 31% this quarter. While this represents a temporary decrease from last year, we are confident that the ongoing implementation of Project 420 will deliver significant improvements while also actively working on additional cost savings to improve overhead utilization as well as SG&A. As these initiatives progress and sales volumes recover, we anticipate stronger overhead utilization and a return to higher margins. Importantly, we remain on track to achieve $33 million in annualized cost savings from Project 420 by the fourth quarter of 2026, positioning our beverage segment for long-term success. Cannabis gross margin increased to 39% compared to 35% last year. The increase was due to a greater proportion of sales being generated in the higher-margin international markets but was offset by increased sales in lower margin price competitive categories in the Canadian adult-use market like vapes and pre-rolls. Distribution gross margin increased to 13%, up from 12% last year, while continuing to grow top line revenue. In wellness, gross margin rose to 32% from 31% as we successfully managed input costs and enhanced operational efficiencies. Our adjusted cash operating income for the quarter was positive $6 million which excludes the noncash impacts of amortization and stock-based compensation. Net loss for the quarter was $43.5 million, a 49% improvement year-over-year compared to $85.3 million or $0.41 per share compared to $0.99 per share. It should be noted that EPS was impacted tenfold by the reverse stock split and has been reflected in both periods. Adjusted EBITDA for the quarter was $8.4 million compared to $9 million last year. Cash flow used in operations was down to $8.5 million compared to $40.7 million last year. The $32.2 million improvement in cash used in operations was almost entirely related to reductions in working capital. We ended the quarter with cash and cash equivalents and marketable securities of $291.6 million, $0.8 million in digital assets and improved from a net debt position of approximately $4 million in the prior quarter to a net cash position of almost $30 million at the end of the period. Additionally, during the quarter, we also completed our ATM program in the market. Our strong cash position provides us with the flexibility we need to execute on strategic opportunities and take advantage of the changing regulatory landscape and we intend to work to further strengthen our balance sheet throughout the remainder of the year. Finally, we remain confident in our business, our strategy, and our opportunity, and we are reaffirming our 2026 adjusted EBITDA guidance of $62 million to $72 million. We can now open the call for Q&A. Operator: [Operator Instructions] The first question comes from the line of Bill Kirk with ROTH Capital Partners. William Kirk: On the intoxicating hemp bans for November implementation, is there anything Irwin that the industry can do to try to help improve the regulatory outcome? Is there any way to kind of extend the grace period, reverse the ban, carve-out particular categories? Like what can you do or what can the industry do to get a better outcome there? Irwin Simon: Thank you, Bill. Great question. As you know, this, for us, was a growing business and there is a lot of demand for these products. And we are working with some congressmen, senators, lobbyists to either extend the deadline or to change some of the regulatory that would have a regulated amount of milligrams, whether it's 5 or 10 milligrams and to be sold on a national basis. And I'll tell you, so far, I have a really good feeling because we're talking to the different associations other than Senator McConnell and whoever backed him, there's no one out here against this and thinks this is something that should be banned. The other thing, Bill, just the other thing, I mean, there's a lot of jobs that will be lost if this happens which is something very important too. William Kirk: For sure. Carl, you had some comments about holding back supply and shifting it into international markets. Am I hearing that right that, that would mean sales that could have been in this quarter simply come later? And is there a way to quantify how much was held back? Carl Merton: So what I said was that we held back from the Canadian wholesale market at lower pricing than what we did in the prior year. And so last year, we did about $5 million. We obviously have the inventory levels that we have that are on the balance sheet that we could have -- that we can redeploy into European markets over the next 6 months of this year. Irwin Simon: So it's just redeploying better margin sales, Bill, where we can sell it into Europe and get much higher margin for it than selling it into the wholesale market where we don't get the margins and in some cases, we're even selling to a competitor. So that's what it is. Operator: Our next question comes from the line of Robert Moskow with TD Securities. Xin Ma: This is Victor Ma on for Rob Moskow. Two for me, please. First, I wanted to ask about Canadian adult-use cannabis. Growth in the quarter was about 6%. How much of that was volume growth versus price mix? Did you gain market share in the quarter? And then second, can you give a little more color on what drove the substantial increase in distribution sales? Was there any timing benefit that was realized in the quarter? Irwin Simon: So number one, absolutely, there was not price. Some of it came from new distribution, if anything. It was a strike in British Columbia that ultimately hurt us. And we did gain a little bit of share, not a lot in the quarter. So it's demand. I think there's a lot we did in different markets. A lot of our new products started to roll out. And -- so that was the big reason from our growth, having supply. And I think just the team has done a great job. This is the highest quarter in us, in selling the units 5.5 million units that we sold in the quarter. So again, if anything, throughout the rest of the prior years, we saw lots of price compression. I think the good news is we're not seeing that price compression right now. But we're seeing demand continuously growing and we're seeing all the Tilray different brands growing in the marketplace. And again, what I'm talking about is all our products, it's our flowers, our pre-rolls, our edibles, our vapes, our infused vapes and our drinks. Sorry, in regards to CC Pharma, listen, I think CC Pharma has been part of Tilray since 2019, and trying to figure out what is the right position is one of our largest business. And we have the European team and with the growth and the opportunities in Germany have realized a couple of things. Number one, they're selling into pharmacies today. We're using the CC Pharma team to sell cannabis also into the pharmacy and also to deliver. The other thing is here, we're able, from our buying power and get better margins and demand for regular medicines, and we're seeing some great growth. It's the biggest quarter we've ever had with CC Pharma and some of the most profitable quarters we've ever had. So we're looking at how we really take this business for online. We're looking at how we're going to expand this business and take this model into other countries. And again, it's how we utilize the sales organization of CC Pharma or now named Tilray Pharma and using that organization to sell more and more cannabis into the drugstores that it sells into. Operator: Our next question comes from the line of Aaron Grey with Alliance Global Partners. Aaron Grey: First one for me. You mentioned the expectation for Tilray Global Medical to approach $150 million, I believe. So just any color you could provide maybe on the timing of that expectation. And then you also mentioned some commentary briefly regarding potential regulatory changes in Germany as well as pricing pressure. So could you help to maybe quantify how big a risk you're seeing from each of those potentially for 2026? Irwin Simon: So in regards to -- listen, I think from an annualized basis, right now, we're on a run rate for that $150 million, and that is both Canada and international markets, okay? And the majority of that is coming from international markets. In regards to regulatory change, I'm not seeing and not concerned with regulatory changes in Europe and Germany. And I think if anything, we like what has ultimately come out of the German government. And in regards to demand, we see more and more demand. As far as price compression, and you heard what I said before. And this is where Canada better watch out. When you look at a lot of the Canadian LPs, there's a lot more the Canadian LPs, there's Israeli companies. There's a lot more companies selling product today into Germany. But Tilray has been in Germany since 2019, 2020 with Tilray Medical. We are the only one or one of the only ones with a grow facility there. And we work very, very closely with the doctors in Germany. You heard what I said before about having Tilray Pharma, where we are vertically integrated from our grow with our salespeople and have our own distribution piece there. So yes, a lot of product coming into Germany, which forces price compression. But what they're going to realize is the quality of product, you get what you pay for. And I think that's what important is they recognize that the Tilray Medical products stand for quality. Aaron Grey: I appreciate that. Second question for me, just turning back to the Canadian market, we had some commentary. More broadly, I just wanted -- to give some color in terms of what are your expectations for growth within the Canadian market? Looks like we finished about mid-single-digit growth for 2025. So what's your expectation now for 2026? You talked about some of the strong volumes there. But it does seem like volume growth has tempered a bit despite pricing pressure stabilizing for the Canadian market. So I wanted to hear more about your expectations for growth in the Canadian market and if a slowdown in growth also led to your decision to shift some of that product international? Irwin Simon: Well, first of all, this slowdown of growth. I had a 6% growth, and I had the highest quarter ever in selling units, okay? I think one of the things we're looking -- continuously looking at is how we grow this to more and more profitable business, and we can sell tons of wholesale product, that's considered growth, but we're not going to do that. But what we're looking continuously at is how we're coming out with added value products and premium products. And today, we have a 50% share on our drinks, which continuously is growing and the demand in that marketplace. We also have the highest share of flower in the marketplace. We sell over 80 million pre-rolls. We sort of backed away from the vape category because of the margins and we're not making money on it. So I see the categories from us, if I get mid- to high single-digit growth, I'll be very, very happy in the Canadian market. Now with that, I got to tell you, Blair is on the phone, and he can jump in here any time. I have seen some of the best lineup of new products coming out that this company has ever had. And I think that's going to help, new products are key. The other thing is, listen, the quarter and that -- British Colombia had a strike and I think if other Canadian LPs decide they want to sell product in Europe is just going to be supply. Tilray today has close to 7 million square feet of grow in Canada and has the ability to grow 270 metric tons. I think the number in the quarter as we grew close to 200 metric tons. So we have plenty of supply. And not only that is we have supply an ample product available to ship internationally which is -- we're not paying excise tax and much higher margins for us. So the opportunities are there for us. Canada is a small country, but it's a country where cannabis is legal from a recreational -- from a federal standpoint, is the only country in the world. And there's more and more users are seeing the benefit of buying cannabis by going into federally legal cannabis stores. Operator: Our next question comes from the line of Pablo Zuanic with Zuanic & Associates. Pablo Zuanic: Look, let me start with CC Pharma. Maybe you can give more color on that business. I think in the past, you said that you reached 13,000 pharmacies. Now you're talking about tripling your distribution reach. I'm trying to understand that better. And also, if the new regulations in Germany, top delivery your CC Pharma reach could be a big asset in terms of pharmacy reach? Would you be willing to also sell other people's products besides Tilray Brands through CC Pharma? Irwin Simon: So number one, as I said, we've owned CC Pharma for -- since 2019, Pablo, and it was finding the right way to operate this business. And originally, we acquired it as part of tenders for Germany. And we've been a part of the German drugstore business in Germany since then. We have now changed a lot within CC Pharma where we've ultimately modernized, we've put money into technology there. We've taken labor costs out of there. We've been able to buy medicines and -- regular medicines from some of the pharmaceutical companies at much better prices and made some big investments. And I'll tell you, that is a big -- is where they're buying medicines and making sure we're buying them at the right price and selling them at less higher margins. So we have focused on that business. But back to your point, is today, we have the ability to win to more and more pharmacies. The CC Pharma or Tilray Pharma has its own sales organization. And you don't see today cannabis -- medical cannabis sales go through CC Pharma, it goes through our medical cannabis business internationally. So there is a big focus to use that sales organization to sell more and more cannabis -- medical cannabis in Germany. And with that, with the regulations and everybody has to go direct to a pharmacy, it can't buy online, there's bigger opportunities for us because more patients have to visit the pharmacy. The second question is would I sell other company's product? Great question. We're in the business to sell and make profit. But again, why would we want to sell someone else's products that we can deliver what the needs are for patients. But again, some patients may want some other competitors' products, and it's something we should look at from a standpoint, does it make sense for us to carry some other products, I don't know. And that's not something we've looked at, but it's something we definitely should look at. Pablo Zuanic: Okay. And then just a follow-up in terms of beverages. Obviously, this quarter, you had very strong performance in cannabis but a steep decline in sales in beer and profit margins. Maybe just give more color in terms of what is it that has not worked there? You talked about positive momentum, but the numbers don't show that momentum and why put so much hope on just the spring resets? I mean is it just about that? I mean more color would help. And then just long term, a reminder about your confidence that the beer business really fits your cannabis strategy longer term or they just play together, and we should think of them as a diversified portfolio anyway. Irwin Simon: So number one, there's many, many companies out there that have diversified business portfolios. And if you look at most companies, some have food, some have personal care, some have beverages. You look at Pepsi, they have snacks, they have food, they have drinks. If you look at other companies, they have personal care, they have food. So I think it's important to be a diversified consumer packaged goods company, which we are, and we're Tilray Brands. I come back and look at -- we got in the beer business in late 2020, COVID came along where our first acquisition of SweetWater and then multiple acquisitions. It's taken us time to integrate these businesses. We went from only 1 plant to 10 plants now we're down to 8. We went from only 1 brand to 18 brands. We went from probably being the 10th or 11th largest craft brewer now down to the fourth largest craft brewer. So there's a lot that's happened over the last 4 to 5 years. And with that, there's been a lot of integrations. And these brands that we bought from ABI and from Molsons, they were not some of the best-performing brands at the time, and it took some time to turn them around. So yes, I have a lot of confidence. Listen, beer is not going away. Beverages is not going away. And just like CC Pharma, here we are from a vertically integrated business, we have manufacturing, we have brands, we have a distribution. We have an infrastructure, salespeople. And it is taking probably some more time. And the other thing is at the same time, the industry has had its decline. But I'll tell you what, as you come back and see a lot potentially will happen in regards to Delta-9 and hemp infused drinks, and who are they looking at to be the leader in that, is Tilray because of our beverage business and our cannabis business. I say this, and I'm not making projections, but if I could sell cannabis infused drinks, in the U.S. tomorrow. If I look what I have a 50% share in Canada, and I multiply that from a 10x what I would have here it's $0.5 billion business for us here. And someday, we're going to be able to sell drinks in the U.S. infused with something and whether it's CBD and cannabis, in regards to President Trump new rescheduling, in regards to drinks that will get approved by the FDA for -- whether it's for anxiety, for pain, for sleep et cetera. So the infrastructure is there for future opportunities, which is important. But to the point, we're in the beverage business today. We're in the beer business. We're in the energy drink business. We're in the water business, we're in vodka seltzers business. And I'll tell you what. The other thing is this here, there's a lot of companies talking to us involved -- to get us involved with different aspects of beverages because of what we have and how we're vertically integrated. So yes, am I totally doing the dance with our results today, coming out of there? No. But do I feel good about what we will do with this business? And what we'll do with these brands? Absolutely, and what our strategy is. Unfortunately, it just is taking a little more time. And if you go back and look at the big companies, Molsons, ABI, Constellation Brands. They weren't created within 5 years. And it's basically 5 years and we're #4 within the craft beer business. A lot of brands have gone away in the craft beer business which gives more and more opportunities. So I am really bullish on the beverage business. And if you look at the supermarkets today and you look elsewhere, Beverage is the biggest category out there. And I think, Pablo, the big thing, we are not just depending upon the resets that are happening in the next 2 months, gaining share in C-stores, gaining share on premise, gaining share in general. And that's what I'm excited about. Pablo Zuanic: That's great color. Look, if I may, I want to squeeze one more if you don't mind. In your -- and just a short answer. In your press release, you talk about U.S. federally rescheduling cannabis. But I think my understanding and most people's understanding would be that if they reschedule, it will still be a state-by-state program. It will not be federally rescheduled. But I guess your interpretation that it will be federally rescheduled. And I think that's a big distinction. Do you want to just share some color on that, but just briefly? Irwin Simon: Our plan is what I've said, if a reschedule -- what we're focused on, and I think a lot of other companies are focused on recreation, we are focused on medical cannabis. And our plan is to leverage the infrastructure and expertise and know-how that we've developed that we got a $150 million business in Tilray today. And with that, our $300 million distribution platform is something that we utilize in Europe and how do we ultimately do that here. And again, engage with the outreach of the government, with the FDA and with our -- working with hospitals, working with research, doing clinical studies. And that's what we're looking to do there in regards to our U.S. entry into Tilray U.S. not looking at it today of how we do state-by-state from a recreational standpoint. And ultimately, what are we going to do. And we have so much research in pain, anxiety, cancer-related drugs, cancer anti-vomiting drugs, PTSD and taking that science and taking those -- and taking our genetics and strains and working with hospitals and potentially strategically aligning with a pharma company to execute that within the U.S. is what we're looking to do. Operator: The last question comes from Frederico Gomes with ATB Capital Markets. Frederico Yokota Gomes: Just the first question, just going back to the rescheduling comment there with potential rescheduling in the U.S. I'm just curious, does that change the way you see potential investments in the state legal cannabis businesses like you've done in the past with MedMen. Irwin Simon: Yes. It doesn't anything with the state. But again, as I said, Tilray is committed to invest in research. Tilray is committed to invest in clinicals, Tilray is committed to working with the FDA, DEA, is coming up with approved cannabis drugs that can be used and sold for some of the conditions that I mentioned before. But it's not state-by-state where we're looking at recreational. We are totally looking at this from a total medical standpoint. Frederico Yokota Gomes: Got it. And then second question, international cannabis. Could you help us understand outside of Germany, what are the main international markets you have right now? And do you anticipate any other international markets where we could see some sort of regulatory change near term this year that could lead to growth like we saw in Germany since April 2024. Irwin Simon: So listen, whether it's Poland, there's today Italy markets. There's the U.K. markets. We're looking at oils for France and Spain. And I will tell you this here, without going into names, and countries, there's a lot of stuff happening in the Middle East in regards to working with CBD and THC from a Middle East standpoint, there are some stuff and testing going on in India in regards to hemp and hemp infused THC products. So again, and I will say this here, and that's why I thanked President Trump from a rescheduling standpoint. Rescheduling cannabis from the Schedule I to a Schedule III has opened up the eyes and the legality a lot of other countries here. And I think that's what was important, too. Once the U.S. did it, there's a lot of other companies now are saying this stuff is not taboo. It's something that's really benefit and this can be really helpful in a lot of different diseases, and it can be very helpful as a medicine. Operator: Thank you. I'd like to pass the call back over to management for any closing remarks. Irwin Simon: Thank you very much, operator, and thank you very much for everybody joining us today. As you can see, there is a lot happening at Tilray. And as a diversified consumer packaged goods company that today sells products into the recreational cannabis market in Canada, sells medical cannabis in Canada, sells drinks in Canada, sells beverages in the U.S. spirits and our hemp-infused -- our hemp foods, our wellness products and then our international products with -- our international medical products and our Tilray Pharma. So there's a lot within Tilray today, there's a lot of science, there's a lot of research, there's a lot of genetics that we're doing. And as a 5-, 6-year-old company today that's really pulling this all together, and there's no one out there today that is diversified like us. One of our strengths is our balance sheet. It's -- we're in a net cash position. So we're able to invest in research. We're able to invest in trial. We're able to invest in clinicals today. So you can't look at us today as a recreational cannabis company. You can't look at us as just a beer company. And you've got to look at us today as a consumer company that looks at products and looks at different ways to help bring consumers together, help bring people together. And that is some of the stuff we're doing. At the end of the day, as you can see what we've done this quarter in regards to our profitability for our shareholders. And again, it's been 5 years and putting this together piece by piece, and there's a lot to do. The question asked by Pablo in regards to our beverage business. Yes, there's a lot to do in the acquisitions that we've done. And one of the proofs is here, look at the acquisitions we've done on cannabis as we put these cannabis facilities and brands together took out costs, integrated the businesses, and we're seeing the performance of that today. It's no different. We've really only got into the international cannabis business over the last year or so, and that's on the run rate to be a $100 million business. So there's a lot to do within Tilray. There's a lot of great assets within Tilray, whether it's facilities, whether it's brands, whether it's distribution, whether it's know-how. And there's a lot of AI coming into Tilray today to help us implement a lot of what's happening. I appreciate those that have stayed with us as shareholders, I know there's times you're frustrated and there's times probably I'm frustrated more than you are. But I do see a good path with a lot that's happening coming together. I got to tell you, we deal with a tough regulatory environment out there. We pay some of the highest excise tax in Canada and I hope Prime Minister Carney heard me how important this industry is for the Canadian market, the jobs that created the tax dollars, and we don't want to see this run away from Canada. I commend President Trump for rescheduling. He was the first President that really took this on. Everybody else sort of ran away from it. And it's up to us now to show what this really can do. So thank you very much for getting on our call today, and happy New Year to everybody. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Richardson Electronics Earnings Call for the Second Quarter Fiscal Year 2026. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand it over to your speaker, Ed Richardson, CEO. Please go ahead. Edward Richardson: Good morning, and thank you all for joining Richardson Electronics conference call for the second quarter of fiscal year 2026. We appreciate your continued support and interest in Richardson Electronics. Joining me today are Bob Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer; Greg Peloquin, General Manager of our Power & Microwave Technologies and Green Energy Solutions Group and Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for playback. I would also like to remind you that we're making forward-looking statements that are based on current expectations and involve risks and uncertainties. Therefore, our actual results could be materially different. Please refer to our press release and SEC filings for an explanation of our risk factors. I'm pleased to report that Richardson Electronics has achieved 6 consecutive quarters of year-over-year growth. underscoring the progress we're making in executing our multiyear strategy. This growth reflects our continued repositioning toward higher growth end markets, and the expanding contribution from our engineered solutions. Equally important, these results are driven by the strength of our people. While investors are familiar with our senior leadership team, we've been intentionally investing across the organization to build depth, diversity and technical expertise throughout our ranks. I believe we have assembled one of the strongest and most motivated teams in the company's history, positioning Richardson Electronics for long-term sustainable value creation. Looking at our Q2 FY '26 results. Total sales were $52.3 million, up from $49.5 million in Q2 of last year driven by sales growth in our Green Energy and Canvys businesses. Operating income improved to $132,000 versus a loss of $667,000 last year. Within our GES business unit, we're very pleased with the year-over-year growth as well as sequential quarter-over-quarter growth. Both onshore wind and EV sales were up over the prior year in Green Energy segment, reflecting higher sales from existing customers as well as sales from new products and expanded customer base. Canvys revenue exceeded the prior year by 28% on improved demand from our medical OEMs. It's important to note that the sales growth was partially offset by the inclusion of our health care business in both the current year and the prior quarters. As a reminder, we sold the majority of our health care business in Q3 of FY '25. So this will impact our year-over-year comparisons through the end of Q3 this year. We also remain focused on managing expenses and improving inventory turns. Our cash position remains strong at $33.1 million providing us with flexibility to support both our ongoing operations and strategic growth opportunities. I'll now turn the call over to Bob Ben, our Chief Financial Officer; who will provide a detailed review of our second quarter results and capital positions. Following Bob's remarks, Greg and Jens will provide updates on our business units and then Wendy will follow up with the progress we are making executing again on our multiyear growth strategies. Robert Ben: Thank you, Ed, and good morning. I will review our financial results for our second quarter and first 6 months of fiscal year 2026 followed by a review of our cash position. Consolidated net sales increased 5.7% to $52.3 million compared to net sales of $49.5 million in the prior year second quarter. When excluding health care, for which the majority of assets were sold in January 2025, net sales increased by 9.0%. Please note that health care results, including prior periods are consolidated into the PMT segment beginning in fiscal 2026. This was our sixth consecutive quarterly year-over-year increase in sales. Second quarter net sales growth was led by a 39.0% increase in GES sales, driven by an increase in power management products. Canvys sales increased 28.1% and which primarily reflected higher sales in North America. Sales for PMT were 4.0% below the second quarter of fiscal 2025. Excluding health care, PMT sales were approximately flat. Consolidated gross margin for the second quarter was 30.8% of net sales compared to 31.0% during the second quarter of fiscal 2025. The slight decrease in consolidated gross margin was primarily due to lower margin in PMT and GES, partially offset by higher margin in Canvys. Operating expenses as a percentage of net sales improved to 30.5% for the second quarter of fiscal 2026 compared to 32.3% in the second quarter of fiscal 2025. Operating income improved to $0.1 million for the second quarter of fiscal 2026 from an operating loss of $0.7 million in the prior year second quarter. Net loss was $0.1 million for the second quarter of fiscal 2026 compared to $0.8 million in the second quarter of fiscal 2025. Net loss per common share diluted was $0.01 in the second quarter of fiscal 2026 compared to $0.05 in the second quarter of fiscal 2025. EBITDA for the second quarter of fiscal 2026 improved to $0.7 million versus breakeven in the prior year second quarter. Please note that EBITDA is a non-GAAP financial measure and a reconciliation of the non-GAAP item to the comparable GAAP measure is available in our second quarter fiscal year 2026 press release that was issued yesterday after the market closed. Turning to a review of the results for the first 6 months of fiscal year 2026. Net sales were $106.9 million, an increase of $3.6 million from $103.2 million in the first 6 months of fiscal year 2025, which reflected higher sales across our business segments, except for PMT. When excluding health care, consolidated net sales increased by 7.8% and PMT net sales increased by 5.2%. Gross margin was 30.9% of net sales which was a slight increase from the first 6 months of fiscal 2025. As a percentage of net sales, operating expenses for the first 6 months of the fiscal year improved to 29.8% from 31.1% for the first 6 months of the prior fiscal year. Operating income for the first 6 months of fiscal year 2026 was $1.1 million as compared to an operating loss of $0.4 million for the first 6 months of fiscal year 2025. The company reported net income of $1.8 million or $0.12 per diluted common share for the first 6 months of fiscal year 2026 versus a net loss of $0.2 million or $0.01 per diluted common share for the first 6 months of fiscal year 2025. EBITDA for the first 6 months of fiscal 2026 was $4.0 million versus $1.7 million in the prior year's first 6 months. Turning to a review of our cash position. Cash and cash equivalents at the end of the second quarter of fiscal 2026 were $33.1 million compared to $35.7 million at the end of the first quarter of fiscal 2026. Capital expenditures of $1.6 million in the second quarter of fiscal 2026 were primarily related to our manufacturing business, facilities improvements and IT systems versus $0.5 million in the second quarter of fiscal year 2025. We paid $0.9 million in the second quarter for cash dividends. In addition, based on our current financial position, our Board of Directors declared a regular quarterly cash dividend of $0.06 per common share, which will be paid in the third quarter of fiscal 2026. As of the end of the second quarter of fiscal 2026, the company had no outstanding debt on its revolving line of credit with PNC Bank. Now I will turn the call over to Greg, who will provide more details for our PMT and GES business groups. Gregory Peloquin: Thank you, Bob, and good morning, everyone. GES and PMT are key components of our multiyear growth plan. Coming out of FY '25, we had strong backlog. We launched several new products, expanded our customer base and advanced multiple development programs from beta testing to preproduction. This momentum continued into Q1 and into Q2. Building on this progress in Q2 of fiscal year 2026, GES grew to $8.3 million, a 39% increase over prior year and 14% increase over this year's first quarter. As we continue to see the amazing adoption of our Pitch Energy Modules for various wind turbine platforms with owner operators and other related power management products throughout the world. PMT sales were $35.2 million in the quarter a 4% decrease over prior year. This reflects a slight slowdown in the electronic device MRO business, offset by growth in the RF and Wireless Components business unit. Our GES strategy centered on power management applications. We've rapidly designed multiple products, secured patents and built a strong base of customers and partners. Our success is evident in our growing sales pipeline as we capitalize on numerous growth opportunities to support new power management requirements and significant energy transformation opportunities. Our Pitch Energy Modules and related wind energy products led GES quarter-over-quarter growth. We continue to gain market share by developing new products and solutions that are accepted by our customers, and the team is doing a great job expanding this program globally. We serve dozens of wind turbine owners operators including exclusive partnerships with the top 4 owner operators of GE wind turbines such as RWE, Invenergy, Enel and NextEra. We also saw growth from our new multi-brand PEM turbine platforms. We continue to grow this program internationally, expanding into Europe and Asia with new products for other turbine platforms such as Suzlon, Senvion, Nordex and SSB. We have now received orders from customers in Brazil, Australia, India, France and Italy in addition to our strong rollout in North America. We are entering the back half of FY '26 with solid momentum. We recently added key technology partners such as KEBA, Goshen and Wulong, who play critical roles in both wind power management and energy storage systems. Key initiatives include faster design to production cycles supported by a new design center in Sweetwater, Texas. Sweetwater has one of the largest concentrations of wind turbine and power management engineers in North America. Expanding our design team to accelerate and enhance design cycles prior to transitioning work to our world-class manufacturing and test group in LaFox, Illinois. This is one of our most critical strategic priorities underway. We expect to have the Sweetwater design center fully operational in Q3 of FY '26. We are also adding key people from the industry to help expedite growth. We are on schedule to complete our Illinois-based demo center in Q4 FY '26. This demo site will allow us to showcase our active BES solutions to potential customers. We are currently collaborating with numerous customers on BES systems that we can support with our current technology partners. In fact, we booked our first system at the end of December. Our GES products and technology partners support our niche product strategies as it appears federal subsidies will be harder to get under the current administration. Looking at our new ESS project and strategies, we are focused on sales in key states, and we'll continue to offer large subsidies such as Illinois, Massachusetts and California. We are also expediting our efforts to expand global market penetration of our power management products for Green Energy applications focusing on Europe and Asia. Currently, about 70% of our GES sales are in North America. Turning to Power & Microwave Technologies Group or PMT, which includes our Electron Device Group, EDG, and our legacy tube semiconductor wafer fab equipment business and the RF and Microwave Components Group, or PMG. In the quarter, we did see some sales growth, led by increased demand in our RF and Microwave Components business as we see growth in RF and wireless applications such as SATCOM and military applications, including radar and drone technology. While semi fab sales were flat in the quarter, we are encouraged by our customers' forecast indicating growth for the rest of the fiscal year. Looking ahead, we are excited about the strategic initiatives across PMT and GES, including our ESS program, global expansion of our key products and new technology partnerships. While we are navigating a higher degree of uncertainty associated with the impact of tariffs and market conditions, we are pursuing opportunities that may come from these disruptions. We are investing in infrastructure, expanding our design and field engineering teams and enhancing our in-house design and manufacturing capabilities. To support growing demand and innovation, our engineering teams continue to identify new customers and opportunities. Our global capabilities and global go-to-market strategy set us apart from our competition in power management, RF and microwave and green energy markets. We have developed a business model that combines legacy products with new technology partners and solutions allowing our growth strategy to deliver engineered solutions to a global customer base. This model differentiates us from our competition. We are working on these initiatives alongside marketing, our manufacturing design services to companies who need partners in the U.S. to manufacture, test and support products currently made in other countries. We acknowledge there are a lot of moving parts but we have successfully used our global resources, infrastructure and capabilities to mitigate the effect of these situations like this in the past. So in summary, we remain optimistic about our growing project-based business, even though it remains hard to forecast. We continue to increase our technology partners, design opportunities and engineering staff. We have a new technology partnerships that fill technology gaps. We have proven strategy of identifying opportunities in the multibillion-dollar markets we serve. As a result, we continue to feel FY '26 will be another growth year for both PMT and GES. And with that, I'll turn it over to Jens to discuss Canvys. Jens Ruppert: Thanks, Greg, and good morning, everyone. Canvys engineers, manufacturers and sells custom displays to original equipment manufacturers across global industrial and medical markets. It is our mission to deliver high-quality display solutions tailored to our customers' needs. Canvys reported revenues of $8.8 million in the second quarter of fiscal year 2026 an increase of 28.1% from $6.8 million in the same quarter of the previous year. Our gross margin as a percentage of net sales increased to 32.6% from 31.7% in the second quarter of fiscal '25, primarily due to product mix. The backlog at the end of the second quarter of fiscal 2026 remained strong at $38.0 million, providing a robust foundation for future business. During this most recent quarter, Canvys secured orders from both repeat and new medical OEM customers for a range of applications. Our primary focus remains on robotic-assisted surgery, navigation endoscopy and human machine interface HMI solutions for the control of medical devices. Furthermore, our solutions are widely utilized in various commercial and industrial applications. For instance, our products enhance passenger information systems in trains and buses and improve HMI technologies used in printing, vending, billing and packaging equipment. Our initiatives focus on increasing Canvys' visibility and market leadership by seeking new opportunities, building customer relationships and collaborating within the industry to drive growth. Looking ahead, while the business is still project focused and can therefore vary quarter by quarter, we are cautiously optimistic about improving demand in our markets. Positive indicators such as increasing request for quotes and encouraging customer feedback suggest steady growth. Our dedicated sales team continues to explore new opportunities while are focused on implementing strategic plans to ensure sustainable growth and deliver long-term value for our shareholders. I will now turn the call over to Wendy. Wendy Diddell: Thank you, Jens, and good morning, everyone. While the remainder of our health care business, including the manufacturer and repair of certain CT tubes is included in PMT, I want to continue providing key highlights as we go through this transition period over the remaining quarters of FY '26. As a reminder, we sell CT tubes exclusively to DirectMed as part of the January 2025 sale and distribution agreements. Over the last quarter, we continued to make excellent progress finishing production of our ALTA tubes. We should wrap this up by the end of third quarter of this fiscal year. We've also made good strides during the recent quarter repairing Siemens Straton Z tubes. We are preparing to launch the repaired Siemens MX series as early as the fourth quarter of this fiscal year. Given the health care transaction occurred in Q3 FY '25, Q2 and Q3 of FY '26 will continue to show unfavorable comparisons. However, the combination of completing the production of the ALTA tubes and expanding our Siemens program for DirectMed will result in an improvement to our bottom line beginning in FY '27. Switching to an overview of our multiyear strategy. We continue to focus on accelerating growth and improving efficiency. In the second quarter, we had significant growth in our Green Energy business unit, reflecting our ongoing investment in this sector and the benefit of new products generating revenue. Today, we are shipping our Pitch Energy Modules for nearly all GE manufactured turbines to an expanded customer and geographic mix. There are several additional products in development and test that should start contributing to revenue growth in calendar year 2027. We also continue to make progress developing a world-class battery energy storage design center at our LaFox facility. As we've mentioned before, the demand for battery energy storage continues to accelerate and our turnkey solutions and technology partners position us to capitalize on that growth. In the quarter, we added several projects to our pipeline, including one that closed end of December. Our made in America activities are also generating interest. We are utilizing existing customer and supplier relationships to promote our engineering and manufacturing capabilities here in the U.S. We've reached the quoting and prototype stage on several programs, primarily taking advantage of our PCB facility as well as our battery knowledge. This isn't a fast process but the upside of new programs will play a key role in fully utilizing our factory and resources. Finally, we are expecting stronger demand for our engineered solutions within the semiconductor wafer fab equipment market, well into calendar year 2026 and beyond. This growth is tied to the ongoing benefit of AI on equipment demand throughout the world. We are well positioned to benefit from growth in memory-related applications. This growth takes advantage of our existing resources and manufacturing facilities as well. We remain focused on efficiency and cash generation. The period of elevated inventory investment relating to a single critical supplier is nearing completion as that supplier prepares to exit production of powergrid tubes. We expect final inventory receipts of approximately EUR 1.5 million in the first quarter of calendar year 2026, after which inventory levels should normalize and cash conversion improve. This inventory provides product coverage through 2030. We have identified alternative supply sources with sufficient time to ensure continuity, quality and fulfillment of customer demand. Outside this area of growth, we continue to focus on controlling inventory and improving turns. We have also initiated a disciplined cost-controlled effort to explore the benefits of AI by creating an enterprise-wide AI steering committee. This effort is expected to create a road map focused on practical high ROI applications across our global operations. The goal is to drive efficiencies, improve decision-making and reduce manual workload while maintaining strong governance around security, data privacy and responsible AI use. Importantly, this initiative is designed to leverage our internal teams with clear milestones and tight scope controls, ensuring we capture meaningful benefits without significant incremental cost. Longer term, we remain focused on driving growth through a combination of organic initiatives and a disciplined approach to acquisitions. We continue to evaluate opportunities thoughtfully with an emphasis on leveraging our existing capabilities and global infrastructure to support sustainable growth. We believe our current strategic initiatives position us well to drive revenue and profitability over time while we remain patient and selective as we consider potential longer-term acquisition opportunities. I'll now turn the call back over to Ed. Edward Richardson: Thanks, Wendy. In closing, our results this quarter demonstrate the strength of our strategy and the resilience of our business model. It also reflects the talent of this management team to adjust to constantly changing market conditions. By sharpening our focus on repeatable sales, driving strong cash flow and building on our scale across power management and alternative energy solutions, we're positioning the company for long-term success. At the same time, we remain disciplined in our commitment to improving profitability. These priorities give us the confidence in our ability to deliver sustainable value for our shareholders, customers and employees as we move forward. We'll now open the call for questions. Operator: [Operator Instructions] Our first question will come from the line of Bobby Brooks from Northland. Robert Brooks: You mentioned how overall GES backlog declined, but that core backlog grew. Could you just discuss what would be considered core backlog versus noncore? Gregory Peloquin: Sure, Bobby. This is Greg. So the backlog -- so sales were up 39% and backlog was down $57,000. That's not too bad. You grow 39% your backlog only decreases $57,000. So when I talk about core backlog, we have the products that you and I have talked about, the Pitch Energy Modules and everything else. We also have a group of customers that are -- we're selling components into that are building Green Energy products. It's a much smaller portion of GES, but that's what we call the noncore and that book-to-bill was down. But if you look at the core business, which is 95% of it, the book-to-bill was 1.10 on 39% growth and of course, 15% above that. So we're very excited about the business -- core business that we talked to you about that you know about. Those are the products that are growing. Robert Brooks: Got it. That's helpful and really good to hear. And then maybe what's -- what's the right way to think about cadence of orders turning to backlog and then revenues within GES? Like are there certain product lines that can be booked and shipped inter-quarter? And that maybe was a dynamic that spurred the strong GES sales in the quarter? Gregory Peloquin: Exactly, Bobby. So as these products come out, they go from alpha beta to production, and then once that happens, you see we have new customers every quarter, new sales. And so that business is what led to the growth. And as you know, we're expanding that model, which is about 85% North America, expanding it into Europe. So we had wins in Europe that we booked and then wins in Asia that we booked. So that core business that we talk about that's growing quite heavily, and we continue to get new customers and backlog. So we're starting to understand what the annual usage is. And so we're trying to get ahead of the game and build products for stock. It's a guessing game. They do give us a forecast, but they're terrible forecast. So in Q2, we did ship a lot of product from stock. So that's a book-to-bill of 1. That's flat bookings or backlog, and that's where you saw it. So the team has done a great job working with these key customers, trying to develop their annual needs. And then when they come in for 1,000 units, just kind of out of the blue Bobby, I know a couple of those were able to ship from stock. So that's how it's working. And we're continuing to try to make sure we have inventories so we can ship from stock. But in a very positive way, we're seeing higher demand than what we're building. Operator: Our next question will come from the line of Anja Soderstrom from Sidoti. Anja Soderstrom: So I'm just curious with the GE approval list for the [ ULTRA1000 ], where do you -- and what kind of opportunity could that present? Gregory Peloquin: Say it again, Anja. For the what product? Anja Soderstrom: The [ ULTRA1000 ] for the GE approval list. Wendy Diddell: I think Anja is asking about the GE, where do we stand with GE getting approval for the -- for your ULTRA3000. Gregory Peloquin: Okay, yes. So... Anja Soderstrom: Okay. I am sorry, just mixed up. Gregory Peloquin: So Anja, we have GE approval. We're the featured product on their Internet site or their marketplace product. What -- we're not driving this. This is being driven by their customers. So NextEra and Invenergy has been pushing GE because they have a handful of sites where they're using GE services to do maintenance and service. And so all we need to do is have GE. We're going to send them some product, and they're going to try to literally blow it up. I mean it's all about what this product will do so they can improve it from a safety point of view. From a performance point of view and working in their turbines, that's already been approved, that's already done. So we've been going back and forth with an NDA. I've worked for a $30 billion big company -- for the $30 billion company before, and it just -- it takes time. So we have an agreed NDA. We signed it. We sent it back to them. We're expecting it back. But I will tell you, Anja, these people aren't waiting. In fact, we booked a large number of business that they said, you know what, will outsource this ourselves. We won't use GE services to install these Ultra3000s, which we've been buying for other sites for 3 or 4 years. So it really right now, I don't see it being a slowdown of any sort. We have more than enough business right now. It will be an upside. But I wouldn't doubt if they just say, you know what, we're not going to use your services to do our Pitch Energy Modules because these things are such a cost savings to these owner operators and they eliminate a huge problem that they have, I don't think they're going to wait for this. So this is being driven by GE's customers. We're just supporting it. But again, we finally have an agreed NDA because I'm not sending them any product without an NDA. We're going to send them products here this quarter, they'll test them, and then they'll say, okay, their service group can install these into the turbines. But it's interesting, some of these owner operators aren't waiting for them. They're just doing it themselves and installing it themselves or outsourcing it. Anja Soderstrom: Okay. That was helpful. And then what's kind of margin impact does the medical have. What kind of opportunity do you see there as you conclude that supply agreement? Wendy Diddell: Okay. So this is Wendy. Year-to-date, the overall hit to the gross margin in PMT has been almost negligible. It's about a 0% gross margin, so we're not experiencing a huge hit there. It's the addition of the SG&A. And on a year-to-date basis, while we're doing better than we anticipated with that, we still are losing money. As we mentioned in the call, we anticipate finishing up the ALTA tube production in the third quarter. And when we conclude that, and we're focusing then strictly on the repair of the Siemens tubes. We expect that to turn to a profitable bottom line contribution. So I'm estimating, we're estimating at this point that, that will begin in Q1 of FY '27, but we're going to do everything we can to pull that into Q4. Anja Soderstrom: And then you're sitting on some cash, and we expect cash flow to improve as you are finishing building up the inventory for the powergrid tubes. What do you plan to do with all the cash? Wendy Diddell: Well, I'll jump in first and then Ed and Bob can also contribute. The first thing we always remind everybody, Anja, the cash is spread out throughout the world. And I believe today, about 70% of it sits outside the United States in various legal entities. And that cash has to stay there. So while it looks like -- I mean, $33 million is a great number, and we're going to continue to focus on growing that. Please do remember that some of that is not in the United States. So we're going to continue investing in the growth initiatives primarily in the alternative or green energy solutions part of the business. We -- Greg mentioned the Sweetwater, Texas facility and improving our new product development cycle. We're looking at some additional both sales and engineering resources that support that business. So we really want to hold that money that we have in the United States for those type of investments. We are continuing to be very opportunistic and open-minded about small acquisitions. Those would be ones that would be easily bolted on. Again, focused primarily in alternative or power management and focused in areas where they bring in engineering or some type of product that is unique or exclusive to the market. So those are the areas where we're really holding our cash. Ed and Bob may want to add to that. Robert Ben: I can add to that. Anja, it's Bob Ben. Just to let you know, we do -- the cash that we have on hand that we're not necessarily using on a daily basis. We have invested in various money markets, and we're getting an average yield of about 4% right now, just under $10 million of our total cash is invested in that. And so we are doing that and that's what you see on the income statement as investment income, which is located in the other income section of our income statement. Anja Soderstrom: And then a last question in terms of the semiconductor. What do you see there? And do you still expect that to pick up in the second half of '26? Wendy Diddell: In the semi fab equipment market. Is that your question Anja? Anja Soderstrom: Yes. Wendy Diddell: Yes, absolutely. From all of our customers in that market segment, they are anticipating solid growth through the rest of calendar year 2026 and beyond. And we're starting to see some of that in our more near-term forecast. Operator: Our next question will come from the line of [ Chip Rui from Rui Asset Management ]. Unknown Analyst: I want to follow up on the semi question that was just asked. I mean it seems memory has gone from dead on arrival to the hottest thing out there. I know you've not exclusively memory on your both sides. But has there been a cadence shift with what your customers have talked about. I know last quarter, Ed said you would finally kind of work through kind of end customer inventory. Can you just give us a little bit more visibility on perhaps a cyclical recovery there? It seems you're still a little low from a revenue and earnings point of view, but historically a large contributor for the company. So kind of when you say there's a better outlook, is it inflected positively? Or are you still hoping it will inflect positively? A little more color on that would be great. Wendy Diddell: So I'll start on that, [ Chip ]. So as I mentioned, we're starting to see stronger forecast for our Q3 and Q4. Bear in mind that the forecasting is not always the best and it tends to bounce around a lot as we've been discussing really for the last couple of years. But we do see, again, across multiple customers within that channel their input to us is get ready. We are ready. We have the resources. We have the space. It's not going to cost us a lot of money in terms of realizing upside. I also want to point out that on a year-to-date basis, Q1, Q2, we're still up considerably over prior year's first 2 quarters. So we are cautiously to more than cautiously optimistic about Q3 and Q4, and we're ready. So I don't know if that answers your question, maybe you could follow up if you have anything more you want to know. Unknown Analyst: No, that's helpful. It's just -- I know it's up a little bit, but we're still -- it seems like the industry is gearing for a pretty big upcycle. And even though you're up, you're still nowhere near where you were a couple of years ago. So hopefully, it's some upside. And then I'll just make a comment on the buyback. I've never pushed you guys your buyback. I understand where your cash is globally. But everybody on the call was bullish across the board this morning from pitch energy, not only with GE to global, it seems semi is getting better. You've got new product development. It seems to me the enterprise is inflecting positively on multiple levels, yet your stock is once again down and the analysts are focused on backlog and sequential margin. I know you don't have a lot of cash, but $3 million or $4 million of that cash could be a couple of percent of your market cap. You also have an undrawn revolver, which would be in the U.S. My recommendation is carpe diem. I mean if there's a time to buy stock, it's when it's down and when people don't see the vision that you guys see. It seems to me if what you're saying comes to fruition, this is just an incredible opportunity. So I'll leave that as a comment. Wendy Diddell: Thanks, [ Chip ]. We appreciate the input. Operator: [Operator Instructions] Our next question will come as a follow-up from Bobby Brooks from Northland Capital. Robert Brooks: Could we maybe just discuss the growth initiatives that you guys launched a couple of quarters ago and kind of how those are progressing in a little bit more detail? Just curious to hear more on that. Wendy Diddell: Are you referring specifically to the made in America program or specific products under Green Energy? Robert Brooks: Just kind of broadly any growth initiatives that came -- that kind of step from the cash that you got from some of the health care business. Gregory Peloquin: I can talk a little bit about the PMG and the PMT and GES business. So as you know, Bobby, the growth initiatives were: one, to expand internationally, the product; two, implement our energy storage system program and continue to add new products. And all of those were successful in the past 2 quarters. So on the global expansion, as I think we've talked about, we now have orders and have shipped orders into Asia and Europe. We are coming out 3 new product -- I'm sorry, 2 new products in Q2 from our new Sweetwater design center that are already in beta testing with a couple of very large owner operators. So we'll introduce those and we fully expect to start receiving bookings for that. And on the ESS side, we rolled it out. We have technology partners. And in December, we booked our first order for energy storage system with the town or the city or city of Goleta, California for their water waste treatment facility. We will also be supplying the solar panels for that and the energy storage system. Through that process, it kind of confirmed that our niche approach going after utility and small -- comparatively small, very large to us, 2-megawatt type systems. That was booked in December. And we have a list of other ones that we're pursuing in quoting. These quotes are 10 to 15 pages a piece. But we're still very excited about our strategy in terms of technology partners that component business grew. Our Engineered Solutions business grew. We've added new products. And then the BES thing as we grow it, we really feel strongly, especially for the State of Illinois, once that demo center is in place and people can see it. See how it works and see we would train them and educate them on how to get all these rebates that the State of Illinois gives the best in the nation, even better than California. So those are our main initiatives, and we have traction. I'm not a patient person. It's never been one of my attributes of the few I have. But we continue to push, and we continue to every month, get some sort of success and a handful of indications that we have the right strategy, the right technology partners and a real niche that we found in these multibillion-dollar markets. Wendy Diddell: And Bobby, I would just add to that -- okay, go ahead. Robert Brooks: No, you go. You go. Wendy Diddell: I was just going to add in terms of other investment areas. When you look at our SG&A, you're going to see that's relatively flat. Our headcount is flat. What we're doing there is as we have normal turnover, we are reallocating those resources to the high-growth areas that Greg just went through. So you're not -- no one should expect a huge pop in the SG&A as a result of these investments. We've talked about the spend on the Thales inventory, and that should be ramping up. So that's one area where we've continued to spend some money. On CapEx, Bob mentioned in his script that we've made some necessary facility and IT improvements. We also added a second PC board layout facility here, which is playing in nicely with the made in America initiative that we launched a couple of quarters ago. So in general, I think what you're going to see is us moving some things around, again, rationalizing and gaining efficiency from a lot of the people and the resources that we already have. Robert Brooks: That's great to hear. And then just one clarification, Greg, in your opening remarks, you kind of mentioned some tailwinds in the PMT business and some -- and what seemed to be some headwinds in the business as well, like that occurred intra-quarter. Could you just expand or talk about that again and maybe expand on it a little bit more? Or -- and maybe I was missing the ball, too. Gregory Peloquin: Yes. I mean I don't know of any substantial tailwinds in PMT. We obviously have a good grasp on the semiconductor market. We have seen some strong revenue and bookings on the RF and wireless side. We're seeing -- and just a reminder, Bobby, at one time before we sold it, that group was up to $0.5 billion. So we know that market very well, and we have a lot of relationships, and we have probably some of the best RF and wireless suppliers in the world. And we're really seeing some traction again in the quarter from a tailwind point of view in the SATCOM and actually drone markets. And so that was a nice pickup for PMT anyway in terms of sales. It's lower-margin business. It's demand creation, but it's components are made by our technology partners. So that maybe is somewhat of a tailwind in terms of where we saw some upside in PMT and where we will see some upside going forward. Wendy, I'm at Mayo Clinic, everybody. I got -- I have to go a -- meet with my surgeon. However, the last time I was here it was 3.5 years ago with a hip replacement and a half hour after that surgery, I got a call from NextEra with a $10 million order. So I might stay here the weekend and see if I can pick something else up. All right, Wendy. Wendy Diddell: Thanks, Greg. Operator: Our next question will come from the line of Ross Taylor from ARS Investment Partners. Porter Taylor: A couple of quick questions. One, with regard to the semi-cap equipment space, have you guys built prebuilt product for that, it's something on your work in progress or your finished goods inventory line there that you've been -- because you've been preparing for this for some time. It seems that they have been a little slow getting the pull-through. Wendy Diddell: Ross, yes, we do that where we can. I think we've described the business before as being very high mix, low volume. So it's not the type -- it's not like the ULTRA PEMs or the ULTRA3000s where we can build them. It's all the same products. So we don't have the kind of inventory that maybe you envision of having thousands on the shelf ready to go. But we have good exposure and good track record in terms of what the demand is. And we are certainly doing everything we can to make sure that when those orders come in, they go out almost instantaneously. So little bit of a mixed answer there for you. Porter Taylor: Okay. And that's still should be -- historically, it's been -- think about your highest margin business. And I would assume that should you get back to more aggressive run rates, that would return. Wendy Diddell: It's a good business for us. Porter Taylor: Okay. Another quick question. Can you talk about -- give more color on the battery storage opportunities? And what kind of magnitude, what kind of time line are we looking at in that space because it's a fairly -- I mean, it seems to be a very important area we're seeing, whether it's AI data centers or quite honestly, just even factors or others given the nature of the grid. Wendy Diddell: So Greg, just dropped off, Ross, that would be an area for him to address. But what we can tell you is that his list of opportunities continues to grow. They range right now in size, magnitude anywhere between maybe $0.5 million on the small end to a couple of million or more on the large end. He is focused and the team is focused heavily in the industrial and commercial market, more of the let's look at it as kind of Tier 2, not the data AI centers per se. Those might be a little bit bigger than what we're planning to build. But it's an area where we've seen a lot of strong interest particularly in the states that Greg mentioned where the states are still providing a lot of incentives. But I don't think anybody can pick up anything and read anything without seeing the growth in energy storage requirements. So we fully plan to take advantage of that. And we'll try to bring some more color to that in the next call. Porter Taylor: Okay. And do you think -- one like philosophical, you and I've had this question, one of the things that this company has struggled with is it's historically been more of a project-based business. Do you see some of these things we're talking about here, becoming basically run rate businesses where we can kind of see a more steady annual flow through in top and bottom line? Wendy Diddell: I think you see that already. Certainly, you see that in EDG. We've talked about that. I think you're seeing it in the green energy piece with the wind. And I would expect that not only to continue to grow as we expand both the customer base and the geographic area that we cover. I think those -- I call those bread-and-butter items. I love them because to your point, they're going out on a regular cadence. Some of the train, the EV rail, the -- for example, the starter modules those will be more steady run rate. But we always are focusing on and trying to focus on products that will apply to a much broader market, not simply one customer or one program. Porter Taylor: And obviously, success there would be, I think, important. It would take away a lot of the volatility in earnings. And I will offer my comment on buyback. I think my position on it is well known. It's been voiced many times on these calls in the past. What I would say is, I can't believe that your Board doesn't think this company is worth substantially more than book value and you're currently trading at or under book with a substantial 20% of that being cash here or overseas? And so I know what I'd be saying if I sat on your Board, I'd be arguing that this company is worth a lot more than book, and you should be quite comfortable buying it back at under and even around book. So that's coming from, I think, from a long-term shareholder, but someone who really would love to see you guys start to actually become a little more proactive. Don't be so afraid of a tiny little level of debt. So I support the earlier comment that even going into your revolver to buy back $4 million or $5 million worth of stock would be, I think, greatly appreciated by the market and would be reflected in the share price. Operator: And our last question for today will come from the line of [ Brett Davidson ] as a private investor now. Unknown Attendee: I realize Greg has dropped off the line, but I'm hoping somebody can provide some level of update on the electric locomotive product lines and the manufactured diamond product lines. Wendy Diddell: All right. I'll start with that. So let's take the latter one first on the diamond. What we've seen there in that market, and I think again, everybody has read about is that, that market became very quickly saturated, oversaturated the synthetic diamond market. And as a result of that, we've seen a slowdown in the demand for those magnetrons that are used in the equipment that manufactures the diamond. When Greg referred earlier to some of the other elements of Green Energy Solution being down, that's one of them. So in that area, it's still out there. We're still selling them. It's just again, an overcapacity of equipment already on the market and certainly an overcapacity of the synthetic diamonds. All right, in terms of the EV rail market, I think Progress Rail recently put out some of its own press that they have recently shipped 2 of the large trains to Australia. So we're pleased to see that. You may recall in FY '23, we shipped a significant amount of batteries that are used in those trains. So we're going to sit back on the sidelines and see how those 2 trains perform in Australia and what that means for the future. On a more steady cadence basis, as I just referred to in my answer to Ross Taylor, is that we are now shipping on a regular run rate, the starter modules, and we expect to see some upside there. So in general, I would say that the EV rail market certainly is favoring more of a hybrid approach. This is outside of Richardson. This is the general market. More of a hybrid approach, but our starter modules, they are used in any train, whether it's diesel, electric or hybrid. So we remain optimistic about growth in that segment of the business as well. Operator: Thank you. And I'm not showing any further questions in the queue. I would now like to turn the call back over to Ed Richardson for closing remarks. Edward Richardson: Thanks, Victor. Well, thanks again for joining us today and for your questions during Q&A. We look forward to discussing our performance with you in April. And until then, please don't hesitate to call us at any time. Thank you very much. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Good afternoon, and welcome to the Petco Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tina Romani, Head of Investor Relations and Treasury. Please go ahead. Tina Romani: Good afternoon, and thank you for joining Petco's Third Quarter 2025 Earnings Conference Call. In addition to the earnings release, there is a presentation available to download on our website at ir.petco.com. On the call with me today are Joel Anderson, Petco's Chief Executive Officer; and Sabrina Simmons, Petco's Chief Financial Officer. Before we begin, I'd like to remind everyone that on this call, we will make certain forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include those set out in our earnings materials and SEC filings. In addition, on today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these measures can be found in our earnings release, presentation and SEC filings. With that, let me turn it over to Joel. Joel Anderson: Thanks, Tina, and good afternoon, everyone. Thank you for joining us to discuss our third quarter results, where I'm pleased to share that we delivered another profitable quarter in line with our plan. We've continued to strengthen the foundation of our operating model, improved retail fundamentals and position Petco for sustainable, profitable growth over the long term. We delivered sales in line with our outlook and meaningfully improved our profitability, increasing operating income over the last year by over $25 million, generating $99 million in adjusted EBITDA and more than $60 million in free cash flow. I want to thank our teams across the organization for their dedication, focus and execution on our transformation initiatives that are continuing to gain traction as reflected in our improvement in profitability and cash flow in Q3 and year-to-date. You've heard me talk about the importance of culture, and you will continue to hear that as a key theme of our transformation. When I joined Petco, we had a strong culture centered around pets first. The passion of our 30,000 partners was one of the many things that attracted me to joining. Over the last 9 months as a collective leadership team, we've been building on that culture in 2 ways. First, through reinstilling retail fundamental discipline, which is driving increased financial rigor and accountability, this is a testament to how the organization has embraced new ways of working with strengthened operating principles and was a large contributor to our results. Second, creating a culture that is playing to win. We are fostering a culture equally focused on operating discipline and a winning mindset. Last month, I had the opportunity to spend time with our support center and store leaders at our Leadership Summit. Together, we aligned on what our go-forward values will be for a reimagined Petco and what that means for our customers and our plans to execute on our [ One Petco Way ] vision. We are squarely in Phase 2 of our transformation which is centered on improving profitability and strengthening our foundation from which to grow. The success to date has fundamentally changed the way we think and work to continuously identify future areas of opportunity that will further unlock long-term value. At the same time, we are now strategically shifting resources towards Phase 3, a return to growth now that our bottom line has meaningfully been improved. Last quarter, I outlined the 4 pillars that support Petco's return to growth. First, delivering compelling product and merchandise differentiation; second, delivering a trusted store experience; third, winning with integrated services at scale; and finally, serving our customer with a seamless omni experience. Let me now provide you more specific color on each pillar. Starting with compelling product and merchandise differentiation. I view this in 2 categories. On the consumable side, we have improved shopability with higher in-stock availability, our customers rely on us to have everyday go-to product, better integrated assortment planning and merchandising teams have been created an improved in-store experience as well as online. On the discretionary side, we are focused on infusing a steady stream of newness in 2026 that complements our evergreen product assortment with more seasonal and trend-driven buys. Previously, there has been a said-it-and-forget-it mentality, which is not a very aspirational shopping experience and one that we are changing. As we look forward, we see significant opportunity to change our collective merchandise mindset from solely a needs-based business to also a wants-based business by overhauling our product offering and surprising our customers with unexpected ideas for their pets. A great example with the success of our online pilot, our new My Human product line was expanded into over 200 stores. This is a small milestone but exemplifies our team's focus and ability to lean into trend forward impulse purchases. Next, moving to a trusted store experience. Joe Venezia, our Chief Revenue Officer, who joined us just about a year ago, leads our operations and services team. Since joining, he has been focused on store simplification, standardizing processes across our fleet and taking costs out of our operations. He is now shifting his focus to additionally include revenue-driving KPIs like increasing transaction size, driving sales contests and increasing customer interactions. With our passionate partners, strong customer engagement and a full suite of services, we can create both a fun and convenient experience that pet parents are unable to get anywhere else. Our store partners are a unique differentiator for Petco. We benefit from having long time, passionate and knowledgeable partners that serve our pets and our pet parents. Our opportunity today is around making it easier to run our stores, freeing up our store associates to interact with customers and use what we call their superpowers of pet knowledge, improving these areas will make it easier for us to drive sales growth in 2026. Moving now to services at scale. Our nationwide wholly owned and operated services business continues to be our fastest-growing category and is our competitive moat, given its in-person nature, high barriers of entry and difficulty to replicate, a holistic ecosystem between grooming, owned hospitals, clinics and center of store can only be found at Petco. What especially excites me here is the opportunity we have with our existing assets. I think about it in 3 ways: one, improving utilization through increased staffing and appointment availability; two, improving engagement to enhance digital capabilities; and three, improving integration of services and center of store. With regards to veterinarian staffing, I'm pleased to share that we are ahead of our doctor hiring goals that we set at the start of the year with record high doctor retention. During the quarter, we also promoted 2 of our long-time leaders to chief veterinarians, reinforcing our commitment to growing our veterinary business. Simultaneously, we are fostering a culture of team development, top talent recruitment and execution of our strategic veterinary initiatives. All of this is foundational and is critical to increasing the utilization of our hospitals. Additionally, we are increasing access to care by strategically adding hours back on peak client demand and making appointments easier to book. We are standardizing processes across our fleet to secure in-store follow-up bookings. We are increasing efficiency for our refined grooming apprenticeship model, freeing up both appointment availability and increasing volume. And finally, we are enhancing online appointment scheduling to ensure we have better coverage and better flexibility for our customers. Clearly, Q3 has been a busy yet productive time for our services businesses. Let me spend a moment on improving integration between services, and center of store as the opportunity here may not be well understood. Historically, Petco stores and services operations were run relatively siloed which was a missed opportunity. There is a tremendous value unlock when better integrating our stores and services experience. I'll give you a simple example. Previously, our veterinarians did not have access to customer purchase data. We are in the process of fixing that. And in 2026, our veterinarians will be able to see purchase history and make more informed diet recommendations based on overall pet health and specific needs. Taking that a step further, the veterinarian will be able to direct the customer to the recommended product in store, or recommend a store associate to assist. This is a simple example but illustrates how increased integration of services in stores can create a better outcome for pets and improved experiences for our customers. Now moving on to our fourth and final pillar, seamless omni integration. Layered on to everything I just discussed are enhanced digital capabilities, a more compelling membership offering, and a frictionless digital to store experience to customers wherever they choose to engage. I'm happy to report we are on plan with our improvements -- and in fact, we are starting to implement some of these changes in Q4 of this year. For example, we are transitioning the way we buy media, beginning with better targeting and bidding strategies which we expect to drive efficiencies in our marketing spend as we continue to strengthen Petco's reintroduction of our tagline, Where the Pets Go. I'm pleased with the progress of the membership program, and we will begin live testing and pilot the program this quarter in a small handful of districts. Our focus on these 4 pillars will fuel our growth, which we still expect to see in 2026. In closing, as you can hear in my voice, this has been a productive quarter at Petco, and I'm pleased with the progress we continue to make on the commitments I outlined at the beginning of the year. As each quarter passes, we get better at celebrating amazing pet experiences, executing our strategies and delivering on our promises internally and externally. The initiatives planned for the fourth quarter will advance the Petco transformation, and I look forward to sharing updates with you in March. Ahead of the Thanksgiving holiday, I want to personally express my gratitude for our partners who puts pets first every day and boldly reflect who we are and what we stand for. Our Petco Love foundation has demonstrated our long-standing commitment to saving lives, finding loving homes for over 7 million pets to improve the welfare of animals. With that, I'll hand the call over to Sabrina to take you through the specifics of our third quarter results and outlook for the remainder of the year. Sabrina? Sabrina Simmons: Thank you, Joel. Good afternoon, everyone. In the third quarter, Petco once again delivered against our commitments while building a stronger foundation from which to grow. As we've discussed all year, strengthening the health of Petco's economic model has been our top priority. I'm pleased with our progress, as demonstrated in our expanding gross margin, expense leverage and operating margin expansion, not only in the quarter but year-to-date. In line with our outlook, which reflects our decision to move away from unprofitable sales. Net sales were down 3.1%, with comp sales down 2.2%. As a reminder, the difference between total sales and comp is driven by the 25 net store closures in 2024 and the additional 9 net store closures year-to-date. We ended the quarter with 1,389 stores in the U.S. Gross margin expanded approximately 75 basis points to 38.9%. Similar to the first half, gross margin expansion was primarily driven by a more disciplined approach to average unit retail and average unit cost, including stronger guardrails and more disciplined processes to effectively manage our pricing and promotional strategies. It's important to note that in this quarter, tariffs began to more meaningfully impact our cost of goods sold. Moving to SG&A. For the quarter, SG&A decreased $32 million below last year and leveraged 97 basis points. As we've discussed previously, our shift in mindset an increase in rigor around expense management is evident in our results. Savings were achieved across the board and especially in G&A areas. Notably, marketing spend was about flat year-over-year. Our expanded gross margin and expense leverage resulted in operating margin expansion of over 170 basis points. Adjusted EBITDA increased 21% or $17 million (sic) [ $17.3 million ] to $99 million (sic) [ $98.6 million ] and adjusted EBITDA margin expanded nearly 140 basis points to 6.7% of sales. Moving to the balance sheet and cash flow. Q3 ending inventory was down 10.5% while achieving higher in-stocks for our customers. We continue to manage inventory with discipline, which is one of the drivers of our improving cash profile. Free cash flow for the quarter was $61 million, and year-to-date was $71 million. Both the quarter and year-to-date were significantly above the prior year. Notably, year-to-date cash flow from operations has nearly doubled versus the prior year to $161 million. We ended the quarter with a cash balance of $237 million and total liquidity of $733 million including the availability on our undrawn revolver. And now turning to our outlook for the full year. We are once again raising our adjusted EBITDA outlook for 2025. We now expect adjusted EBITDA to be between $395 million and $397 million, an increase of roughly 18% year-over-year at the midpoint. For the full year, given we are entering the last quarter, we are narrowing our range for net sales and now expect net sales to be down between 2.5% and 2.8%. For the fourth quarter, we expect net sales to be down low single digits versus the prior year as we continue to execute on the initiatives we've outlined. We expect adjusted EBITDA to be between $93 million and $95 million. It's important to note that the impact of tariffs is sequentially more meaningful in Q4. Additionally, the significant progress we've made year-to-date against strengthening our economic model and improving our earnings profile has provided us the option to begin selectively investing behind the business where it may make sense as part of our ongoing efforts to set the stage for Phase 3, a return to profitable sales growth. With regard to other guidance items. For the full year, we expect depreciation to be about $200 million, net interest expense of approximately $125 million, about 20 net store closures and $125 million to $130 million of capital expenditures with a greater focus on ROIC. In closing, as Joel discussed, we're in a period of significant change, and I want to extend my deepest appreciation to all of our teams for embracing that change to deliver better outcomes for all of our stakeholders. With that, we welcome your questions. Operator: [Operator Instructions] The first question will come from Simeon Gutman with Morgan Stanley. Simeon Gutman: Let me -- I was intrigued by something you talked about some of the wants. Can you talk about -- can you frame what mix of the business is wants versus needs today and it may be far out there but what's the vision? And my guess is the wants aren't truly wants. I think it's -- given your background, there's probably some unique merchandising that's partially wants but curious how you can frame that and maybe tease it out a little. Joel Anderson: Thanks, Simeon. It's a great question. And yes, if you think about it in the traditional sense, consumables is traditionally a needs business. And it's the overwhelming majority of our business but even that business, Simeon, I think, has some elements to it that can be more of a want in principle. And what I mean by that, and I alluded to it in my prepared remarks, we've just had this said-it-and-forget-it mentality for our entire business. And if I just focus on consumables for a second, for example, in 2025, we our dog food business was largely all surrounded around 1 big episodic reset in the middle of the year. And we're really going to change that in '25, and as our big vendor partners come out with innovation, newness, different types of product, new flavors, cat extensions, we're going to roll that out in line with their timing, not our timing. So that's going to make more of a perception of wants rather than just needs in the sense that somebody walks in and -- is a sense of discovery and we just haven't been good at that in the past, Simeon. So I think the whole business has an opportunity to create more of a exploration throughout our store, not just our supplies business which is traditionally probably the way you were thinking there's an element to it in consumables as well. And certainly, when we get on the call in March, we'll go through that in more detail. I cut you off, Simeon. Simeon Gutman: No, I cut you off. My follow-up, it's related. You talked about integrating the store functions. You talked about wants versus need, and then there was a little bit of maybe forward investing, I think, Sabrina just mentioned. So if you -- and by the way, the business itself is getting close to lapping like whatever tough compares. It seems like it's naturally getting back to positive territory. So what kind of clicks or what's the priority among the things we heard where the top line starts to move or? Is it something we haven't heard yet? Joel Anderson: No, I don't think it's something you heard. I think, look, we're going to approach 2026 from the top line, the same way we approached 2025 from the bottom line. In 2024, we came out with the strategies that would fix the bottom line, and then we executed them in 2026 -- in 2025. We're doing the same thing for top line growth. I outlined 4 pillars. We backed it up with building blocks which I talked about many of them today. And then we're going to execute against those with the same rigor and discipline. And so it's not just to cross your fingers and hope. We've got plans around 4 pillars with a lot of building blocks for each 1 of them. And I'm really excited about all 4 of them. I alluded to some of them that we're already testing here in Q4 but all of them are making traction and some just take longer to implement than others but teams are all focused and we got a good plan. Operator: Next question will come from Oliver Wintermantel with Evercore ISI. Oliver Wintermantel: Joel, what is the realistic time line for comp stabilization? And which categories or customer behaviors would represent the biggest swing factors there? Joel Anderson: Yes. Look, I'm not going to get into 2026 today on this call and the timing of it. But certainly, what you should expect from me in March is to not only give you guidance for Q1 but we'll give you an outlook on the full year. But specifically, I can tell you all 4 of the pillars I went through today are getting traction. And -- so I would expect all 4 of them to contribute towards comp in 2026, and then we'll just outline the timing for you on the March call. Oliver Wintermantel: Got it. That makes sense. And then just on the free cash flow side, strong improvements there year-to-date and in the quarter. But how much of the Q3 working capital improvement is sustainable, and what financial or operational levels continue to support the cash generation for next year? Sabrina Simmons: Yes. I mean, I think we view cash flow and all of its levers as continuous improvement. So we certainly are focused on continuing on this path of generating strong free cash. The principal lever of core solver is net earnings. So we're going to continue to focus on our bottom line and growing net earnings. We'll continue to focus on inventory discipline. We're not done. We've made huge strides this year. in terms of rationalizing our SKUs and reducing our inventory compared to our sales which is fantastic. But I wouldn't say we're best-in-class in turns yet. We still have a lot of opportunity, so we'll be looking at that lever as well as all of our other levers to continue delivering on strong cash generation. Operator: Question will come from Michael Lasser with UBS. Michael Lasser: Can you size the magnitude of the potential investments that you would make in what form those are going to come in, whether it's labor, marketing or promotions? And are those investments necessary as you look to 2026 in order to drive top line growth. Sabrina Simmons: Well, maybe I'll just start, Michael, with the framework, and then Joel can chime in on how he feels -- he's looking at each one. What we've tried to do, and we're really pleased that we banked so much profit improvement through Q3. And this has afforded us, as I said, the option, and it's only an option to consider investing in areas that we think can drive improvements both in Q4, but also for our future. So everything you mentioned is on our plate of options certainly, marketing, certainly looking at labor. And sure, we'll always continue to look at promos to see if we can do them effectively in a way that brings value to our customer but also in a way that's very responsible as we continue to manage our margin expansion. Joel, do you want to... Joel Anderson: Yes. Yes, Sabrina, I think you nailed that pretty good. And when Michael, I look at the 4 pillars, we outlined. I don't think any of them as it relates to 2026 require any substantial step change from what we're doing today in terms of cash investment or a change in OpEx investment or something. It's really -- you take merchandise, like we're selling through our existing merchandise and we're buying into new. So that's really just a steady flow change and really don't see any episodic change in 2026 from an investment standpoint from the run rate we're already on today. Michael Lasser: I guess the question and the critical point is can Petco experience the same magnitude of the improvement in the profitability while reversing what seems like some market share losses this year and be on that path next year? Sabrina Simmons: Yes. If I'm hearing you, Michael, and I might want you to repeat the question, but we for sure, believe that investments are going to be necessary. Our whole focus and what I talked about all year long in terms of the economic model we're pursuing is delivering leverage on expenses. But as you know, if sales improve, you increase operating expenses and still deliver leverage. So we're very aware that we need to make some investments. That's why we're talking about in Q4, we may make some of those investments in advance of entering the new year because we've been able to bank so much profitability and leverage. And we will measure our success in meeting our goals and expanding margin and delivering expense leverage on a full year basis. That's another thing we always said, we never said every single quarter in the same way. It's on a full year basis. So that's why we've given ourselves the option because we know that the next phase will require investment and we are prepared to stand behind that in a responsible way that still delivers on our full year goal to deliver the model. Michael Lasser: Sabrina, could I just clarify? If we look at what the embedded EBITDA margin is in the fourth quarter versus what Petco has experienced over the last couple of quarters. It looks like the pace of improvement is going to moderate. Should we think about the magnitude of the potential investment, the option for investing would be the difference between what Petco has achieved over the last couple of quarters and what's implied in the fourth quarter? Is that how we should think about quantifying that potential investment? Sabrina Simmons: I think that's a fair framework, Michael. I would add to that, as we look to Q4, as I stated, remember, when we think about gross margin, there's more tariff impact. So that's just 1 factor. It's not enormous as we said all year. It's -- we're pleased that we're in a retail sector that doesn't have mountains of tariffs but it is an impact. So that's 1 factor. The second impact is that investment that we're talking about, and how much we will choose to do and how we'll manage through that in the fourth quarter. So yes, I think your statement, broadly speaking, is fair. Operator: Next question will come from Kendall Toscano with Bank of America Global Research. Kendall Toscano: Hopefully, you can hear me okay. I was just wondering if you could talk more about the impact of tariffs during the quarter. I know you mentioned they became more meaningful in 3Q but maybe not as much as you're expecting for the fourth quarter. But just curious what you saw in terms of COGS impact, if any, and then in maybe some categories where there was tariff impact on price? What did you see in terms of consumer elasticity? Sabrina Simmons: Yes. Thanks, Kendall. Just to go back to your statement. So the first time we saw a tariff impact flow through our P&L through cost of goods sold in any meaningful way is the third quarter because the second quarter has like, let's call it, de minimis, amounts of that. We had it on our balance sheet, we had an inventory buys but it wasn't flowing through COGS yet. The third quarter is the first quarter of that. And my only point was, in the fourth quarter, it becomes a bit more meaningful. So it's just a reminder that sequentially the tariff headwind is a bit more meaningful. But again, in the broad spectrum of things, it's a very manageable number which we've managed all year and have been revising guidance upward in the face of it. So I think that hopefully helps frame it up. We also know that it's mostly in the private label supplies area, as we've said in the past. So hopefully, that helps frame it up, too. Kendall Toscano: Got it. That's helpful. And then my other question was just in terms of some self-inflicted headwinds in the Services segment as you've deprioritized that program ahead of the planned relaunch. Just curious, as you're now getting closer to relaunching that in 2026, and it sounds like maybe starting to pilot it in the fourth quarter, what kind of tailwind would you expect to see on same-store sales growth or, I guess, just services growth? Sabrina Simmons: I think you mean our membership program? Kendall Toscano: Yes, that's what's I meant. Sabrina Simmons: Yes, that's what combined with services in the way we report services and others. So probably, Joel, if you want to start with the membership program and... Joel Anderson: Yes, because our paid membership rolls into there. But I think the more important thing to take away from that is -- and I alluded to it in my prepared remarks that we are on track with our new membership program. And in fact, here in the fourth quarter, we have begun live end-to-end testing in several markets. And so -- we really haven't seen any major glitches in fact, minor at best. And so that's a really good sign for us. We'll then take that to a few more markets and to roll out the new marketing attached to it and are still on track then for a rollout sometime in 2026 with the rest of the fleet. But membership so far has really come together nicely, and it's a really important element to our growth that's going to begin in 2026. Sabrina Simmons: Yes. And since you raised it, Kendall, on the services piece, I think you can see that, that continues to be not only a strategically important area for us but it's also an area of nice growth and continues to be. Operator: Next question will come from Kate McShane with Goldman Sachs. Katharine McShane: We wanted to ask a little bit more of a higher level question. Just your view on where you think the industry is now from a digestion standpoint where you think the industry can grow in 2026 if we do return to growth in '26 for the industry? And just what you may have been seeing out of the competitive set this most recent quarter as some of these higher tariff costs and prices have come through? Joel Anderson: Yes. Thanks, Kate. Look, overall, the competitive set really hasn't changed much from the last quarter. I would say, the -- what's changed is the consumer has been probably a little bit more cautious. I mean, obviously, with tariffs and political tensions and interest rates still high that's really been bogging down their outlook on the economy a little bit. But as far as the pet industry goes, it's been pretty stable, flattish in terms of growth I think the progress we've made on our digital side has really been promising and that will be very important to us as we turn to growth next year. But overall, we're positioned nicely. Our services business is -- Sabrina just talked about is already growing, and that is an area of growth in the pet industry, and then we'll layer in the focus we've made and the progress we've made on our digital improvements. But overall, it's pretty stable. Operator: Question will come from Chris Bottiglieri with BNP Paribas. Christopher Bottiglieri: The first 1 I had was just hoping to -- now the cash -- free cash flow profile has improved. How do you think about prioritizing the usage of cash? Is it continued debt paydown. Do you think about reaccelerate veterinary practices? Just curious how you think about that over the next few years. Sabrina Simmons: Yes. Our first priority would always be to invest in our business to sustain growth going forward. So that's definitely the priority. That said, we go back to our statement that we have a lot of assets on our books already that really are ramping up now, vet hospitals predominantly the #1 on the list that are already on our books that we are ramping up for better returns. So we don't have to make big capital investments in those, and we, in fact, you'll hear us talk about more in the Q4 call, Chris, we have a set of those that where we're going to focus on bringing utilization up in 2026 as well without any large capital investments. So I view this as really great news because it provides a nice path for return improvement while not having to invest a lot of capital in it. So of course, though, we'll be looking at pockets and areas as we move forward and we finalize what kind of remodel prototype we want to land on how we'll start to bring those into our system. But there's no huge big capital spend necessary in the horizon, likely to increase some in '26, but no big, enormous dramatic change overall in profile because we have these assets in our books where we're increasing utilization. Now beyond that, beyond that priority to first invest in our business, the second, of course, is we are always looking, as I stated, on the first call when I talk to you guys, we want to bring down our leverage on an absolute basis. We also want to bring down our ratio. We're doing a terrific job with the growth and profitability of bringing down the ratio. So it's quite remarkable. We started the year at over 4x debt to EBITDA. And if we hit the midpoint of our new guidance, we should be below 3.5x net debt to EBITDA. So quite a bit of progress. And indeed, we'll look to opportunities to even potentially do some opportunistic debt pay down. Christopher Bottiglieri: Got you. That's really helpful. And then your gross margins were, I think, down 20 basis points on the product line. Is that primarily that tariff headwind you're referring to? Or is it also somehow -- or is like -- is the elasticity offsetting the ticket increase and there's also a headwind on top. Just curious by like tariff headwinds that you're referring to there where it's manifesting? Sabrina Simmons: I have our merch margins expanded both in our products and services. Christopher Bottiglieri: Sorry, I meant quarter-on-quarter, not year-on-year. Sabrina Simmons: Oh, quarter-on-quarter, sure. Yes, I would say that is primarily a little bit of tariff headwind coming in. Year-on-year, though, we are up in both products and services. Operator: Next question will come from Steve Forbes with Guggenheim Securities. Steven Forbes: Joel, you spoke about services in stores coming together. And I guess my question is, can you help us frame up sort of how you guys see that opportunity internally, whether it be how spending per customer sort of evolves as they engage in services, if they're a store-only customer or vice versa? Like any way to sort of talk about how like the net sales per customer evolves as they broaden their engagement across the store? Joel Anderson: Yes. Look, look, I think any great bricks-and-mortar retailer has to define their moat, has to define what differentiates them from anybody else. And services is definitely 1 of our moats, right? It's 1 of our key elements that is really hard for any other pet retailer to replicate in the way we built out grooming, hospitals, vet clinics, dog walking, dog training, all those elements. And so that's obviously an area there for we've leaned in the most, and we've made incredible progress with our existing assets, utilization we've improved, engagement improved. And then what you're getting at is the integration with the center of store with product. And so -- what's key to all that, Steve, as I look to '26 is layering that in with a membership program that really helps us better understand the profile of each 1 of our customers, how many are you using services? How many use services and merchandise, how many are buying in-store and online. And you put all those elements together, it starts to create profiles of different customers. And we really see -- honestly, the better we get at services, the halo effect that has on the overall business just gets stronger because it's something that's hard for anyone else to replicate. So service is probably the area that we made the most amount of progress, pleased with the results we're seeing there. And you'll continue to see us talk about that and -- but that gives you a little color on how I see it playing out turning into 2026. Steven Forbes: And then maybe if I just do a quick follow-up on that. Is there any way to set the baseline here on just sort of what percentage of your customers today actually buy services or any sort of baseline KPI that we can sort of begin to track as we think about your progression in the business? Joel Anderson: Yes. Look, I think at this point in time, I'm not going to get into the specifics on it at that level of detail. I mean, I think the baseline KPI to track as we look into the future, it will be transactions overall and then let us manage it at the different elements we have to serve up to the customer. But services will definitely be a key component to it, Steve, as we keep growing. Operator: Last question will come from Zack Fadem with Wells Fargo. Zachary Fadem: Is there a way to quantify the impact of moving away from less profitable sales and deemphasizing the member program in Q3. As it seems like you expect your Q4 comp to step down a bit more. I'm curious to what extent you're expecting those items to also impact Q4? Sabrina Simmons: Yes. I mean I'll just start by -- it's a pretty broad range, Zack, the implied Q4, so we can land anywhere in that range. Clearly, what we've stated all year very consistently is our primary focus this year was around expanding our margins, walking those unprofitable sales and building this very strong foundation upon which to start sales growth in 2026. But Joel, I'll let you take it from there, if you want to... Joel Anderson: Yes. I think -- Sabrina, I think you nailed it. And I think I'd add to that, like you asked what's the impact? Well, the impact you're seeing quite clearly is we're growing pet EBITDA market share. And so while sales are down, EBITDA is up. So clearly, we -- I think we've done a really nice job of identifying which sales are really onetime transactions and our empty calorie as I call them, versus which customers we want to grow lifetime value and be with us for the long term. And so you've seen that play out quarter after quarter for us as sales have been down consistently low single digits but bottom lines continue to improve. So as each quarter goes by, we get better at identifying those, largely, getting them out of our base. And you layer in a membership program, more strategic media buying aspect and all that will start to lead towards improvement in the top line with the bottom line as well. Zachary Fadem: Thanks, Joel. And then just to level set as we look ahead to 2026, I mean the expectation is to return to sales growth. I'm curious how generally you would frame broader category performance in dog and cat food, supplies, services, et cetera, and then how you would layer in the impact of both your initiatives? And then net store opening and closings to kind of get to that total sales growth? Joel Anderson: Yes. Look, I think it's too early now to spell that out specifically for 2026. I mean, clearly, if you look at what we published, you can see the consumables and supplies are negative this year and we're getting growth in services. We expect a return to growth in consumables and supplies going forward. And what I've got to just outline for you or translate for you is what I laid out today in terms of 4 pillars, how does that translate into growth at what time and what period next year. But a lot -- what you guys can't see is all the progress we're making here internally. And then we just got to put the pieces together for you so you can help you think about your model. But we haven't -- I think I answered on a few questions before. We're approaching '26 the same way we approached '25, outline the strategies and then execute. And the team is just getting better at that as every passing quarter goes by. Sabrina Simmons: Yes. And Zack, just to emphasize what Joel is saying, for sure, I think your thinking is in line with ours, where you always look at what's your base sales build, then we layer on all the many initiatives, which Joel has been outlining and we'll continue to get more granular as we go into '26 but we have all of those building blocks on top of that base, and they layer on throughout the year. So what you can count on is it's a gradual ramp. And then the last thing I'll say as a little bit of a preview is we would expect fewer net closures in 2026 than we had in 2025. And again, the 2025 expectation is about 20 net store closures. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Tina Romani for any closing remarks. Tina Romani: Perfect. Thanks so much, Joel and Sabrina, and thanks, everyone, for your time. That concludes our call, and we hope everyone has a wonderful holiday. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and welcome to BJ's Wholesale Holdings, Inc. Third Quarter Fiscal 2024-'25 Earnings Conference Call. [Operator Instructions]. I now pass the call over to our host, Anj Singh, VP of FP&A. Please go ahead. Anjaneya Singh: Good morning, and welcome to BJ's Third Quarter Fiscal 2025 Earnings Call. Joining me today are Bob Eddy, Chairman and Chief Executive Officer; Laura Felice, Chief Financial Officer; and Bill Werner, Executive Vice President, Strategy and Development. Please remember that we may make forward-looking statements on this call that are based on our current expectations. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from what we say on this call. Please see the Risk Factors sections of our most recent SEC filings for a description of these risks and uncertainties. Please also refer to today's press release and latest investor presentation posted in our Investor Relations website for a cautionary statement regarding forward-looking statements and non-GAAP reconciliations. And now I'll turn the call over to Bob. Robert Eddy: Good morning. Thank you for joining us to discuss our third quarter results. Our business delivered strong results in Q3 and performed well in an incredibly dynamic environment. Once again, we gained share and grew traffic, marking the 12th consecutive quarter of market share growth and the 15th consecutive quarter of traffic growth. These consistent results are a testament to the value that we provide to our members each day as we are guided by our purpose of taking care of the families who depend on us. This purpose has never been more relevant as many of our members are dealing with a considerable level of unpredictability in their everyday lives. This has impacted consumer confidence, which has been at low levels for much of this year. And we are taking these conditions as a call to action to lean even further into value for our members' everyday needs. Some of our actions include incremental offers to those members that may need a little bit more help in the current environment. In addition, we're rolling out reduced delivery fees to make our most convenient shopping channel even more accessible. The combination of value and convenience is a powerful unlock for us, and this will help our members realize even more value from their BJ's membership. We've also launched a 10% discount for our team members as a way of thanking those who are on the frontlines living our purpose every day. For the quarter, we delivered merchandise comparable comp sales growth of 1.8% and adjusted earnings per share of $1.16. It's helpful to evaluate the performance on a 2-year stack basis to normalize for the impact of last year's port strike and hurricane activity. Our 2-year stack comp was 5.5%, an acceleration of nearly 1 point versus the first half. Our Q3 comp performance was evenly balanced across our 2 reportable divisions. Our perishables, grocery and sundries division grew comp sales by 1.8% with a 2-year stack that accelerated sequentially of 6%. The investments we've made in both Fresh 2.0 and our category management process have driven continued share gains across our consumables franchise. We saw the most strength in perishable categories such as fresh meat, dairy and produce, aided by our Fresh 2.0 investments. We also saw strength in nonalcoholic beverages and candy and snacking, driven by enhanced assortment and more prominent placement in our clubs. Our general merchandise and services business also grew by 1.8% on a comp basis in the quarter. Consumer electronics comped in the high single digits on success in computer equipment and tablets. Apparel, which we've highlighted on several recent calls, continues to grow, comping in the low single digits. The offsets we saw this quarter were in home and seasonal, which continued to be impacted by lower discretionary demand and consumer confidence, as well as some of the decisions we made earlier this year to tighten our inventories in light of the anticipated impact of tariffs. Our services business also contributed to the improved performance in this division during the quarter. Looking at the behavior of our membership base this quarter, we continue to see members across all income levels remain cautious, which tracks with what we broadly see in the consumer confidence data. We saw members exhibiting value-seeking behavior, including higher sensitivity to promotions, increasing purchasing of private label items and some trade down. For example, given the high price of beef, we saw higher purchasing of ground beef versus more expensive cuts. Despite this type of behavior, member trends exhibited stability quarter-over-quarter across all cohorts when adjusting for the noise from the port strike. While value-sensitive members remain more exposed to the macro backdrop, we did not see any incremental pullback from them. That resilience reinforces BJ's position as a trusted destination for strong value and convenience when it matters most. The environment continues to move quickly, but our teams haven't lost sight of the fundamentals. By zeroing in on our controllables, they're advancing our strategic agenda, increasing member stickiness, making our clubs better places to shop, expanding convenience and growing our physical footprint. These elements are central to creating value over time, and we built further momentum in each this quarter. I'll now provide an update on how those pieces are evolving. Our membership results continue to be robust, and we grew membership fee income by nearly 10% this quarter, driven by strong member counts, mix benefits and the effects of our recent fee increase. We expect the growth rate to show further improvement into the fourth quarter and to once again deliver a 90% tenured renewal rate for the full year. The core of our membership health is driven by growing the number of members as well as improving the mix of those members. In the third quarter, our higher tier membership penetration reached another new record, improving by 50 basis points sequentially. And we continue to see more opportunity to push here. We would not be able to deliver sustainable membership growth without parallel improvements in our merchandise. We are launching many new owned brands products, which are aimed at improving the member experience by offering excellent quality at an unbeatable price. Some of the products we are excited about include Wellsley Farms branded tortilla and potato chips, protein shakes, frozen poultry and coffee pods. This is just a small list of many new high-quality products that we plan to launch at amazing price points. Owned brands products have a multitude of benefits as they are typically priced at about 30% below national brands while offering comparable quality of national branded items. This gives our members even more compelling value for their hard-earned dollars, which in turn drives loyalty and higher lifetime value. Owned brands products also deliver higher penny profit for us, which we can use to invest back into the member experience, further propelling the flywheel that drives our business. We're excited to see how our customers respond to our improved offerings. Our efforts to continue to improve the convenience of shopping our clubs can be seen in the digital growth of 30% this quarter and 61% on a 2-year stack basis, driven by strength in BOPIC, same-day delivery and ExpressPay. We're looking to further drive innovation by utilizing AI to deliver enhanced content highlights and attributes, making shopping even easier for our members. We also recently beta launched an AI shopping assistant and personalized member shopping lists, and we're looking forward to taking these live to our members soon. Last but not least, our new club footprint expansion. We opened our club in Warner Robins, Georgia during Q3. And just last week, we opened our fifth Tennessee club in Sevierville. I'm pleased to report that both clubs are off to a great start, joining the class of 2025 clubs that have outperformed expectations, with membership counts 25% ahead of plan. The community reaction at all of our recent openings has been nothing short of phenomenal, and we are proud to serve these communities. Our expansion strategy has been a sustained and accelerating success, with clubs opened over the last 5 years delivering comp performance about 3x the chain average. On deck for new club openings, our Springfield, Massachusetts; Sumter, South Carolina; Casselberry, Florida; Chattanooga, Tennessee; Soma, North Carolina and Delray, Florida. That will make 14 new clubs for the year, the most we've had in many years. We remain on track to add 25 to 30 new clubs in 2 years, and our pipeline of new clubs is as large as it has ever been. Speaking of our pipeline, we are excited to announce 2 more 2026 openings in Foley, Alabama and Mesquite, Texas as well as a relocation of our club in Rotterdam, New York. Mesquite will be our fifth Dallas-Fort Worth Club opening in 2026. We've been impressed with the warm welcome we've received as we've introduced the BJ's brand to the market over the past few months, including our Friday night life sponsorships, which was capped off with South Grand Prairie taking home the trophy and the [ Prairie Bowl ] sponsored by BJ's Wholesale Club. The enthusiasm we've seen in these new markets has been awesome, and we can't wait to bring the value of BJ's Wholesale Club to Texas families early next year. As I look at our business, I see improving momentum. Our membership is growing in size and quality. We are making improvements in merchandising and continue to capitalize on the convenience of our digital offerings. And as I just said, our footprint expansion is accelerating and successful. While the short term may be somewhat unpredictable, I'm confident that our company is in an excellent position to deliver value to our members and make good on our commitments to shareholders. We will continue to act with purpose in building our structurally advantaged business for the long term, and you should continue to expect that we will run the business with lifetime value at the core of our actions. Before I turn it over to Laura, I want to thank our team members. Your dedication to serving the families who depend on us and your commitment to supporting one another make BJ's a great place to shop and a truly special place to work. I'm proud of all that we are accomplishing together. Laura Felice: Thank you, Bob. I'd like to start by recognizing the outstanding efforts of our team members in our clubs, at our club support center and throughout our distribution network. Your hard work and commitment to serving our members and communities are instrumental in delivering a solid quarter and advancing our long-term growth agenda. Let's look at our third quarter results. Net sales for the quarter were approximately $5.2 billion, growing 4.8% over the prior year. Total comparable club sales in the third quarter, including gas sales, increased 1.1% year-over-year as the average price of gas declined mid-single digits year-over-year. Merchandise comp sales, which exclude gas sales, increased by 1.8% year-over-year and by 5.5% on a 2-year stack. We are pleased to grow traffic and units in the quarter. This quarter, we lapped the surge of business brought by last year's port strike. At this time last year, we estimated it to have contributed about 1 point of comp in September. Moving to this year, September was by far the weakest month as we comped the strike, with August and October generally performing in line with our expectations. We believe it may be helpful to evaluate trends on a 2-year stack basis to assess the business, and I'll reference this metric in my overview. Our third quarter comp in our grocery, perishables and sundries division grew 1.8% year-over-year with a 2-year stack of 6%, showing slight acceleration versus the first half. Our general merchandise and services division comp also increased by 1.8% in the third quarter with a 2-year stack of about 2%, an improvement versus the declines seen in the first half. As Bob noted earlier, traffic and market share grew again in this quarter, and we experienced approximately 1 point of inflation. Digitally enabled comp sales for the third quarter grew 30% year-over-year and 61% on a 2-year stack. Our digital businesses performance is an affirmation of the values our members find in the improved and dramatically more convenient shopping experience. We find that the members that engage with us the most digitally and utilize all of our offerings, end up being the most valuable members with the highest lifetime value. We will continue to invest in our digital capabilities to gain even more wallet share of our members. Membership fee income, or MFI, grew 9.8% to approximately $126.3 million in the third quarter on strong membership acquisition and retention across the chain. We also continued to benefit from the fee increase that went into effect at the beginning of the year. Our underlying member growth remains healthy, and we continue to improve the member mix. Moving on to gross margins, excluding the gasoline business, our merchandise gross margin rate was flat on a year-over-year basis as we continue to invest in our business and in our members, along with execution towards our longer-term objectives. We expect to continue to invest in Q4 and beyond as we lean into our purpose and do the right thing for our members, which will be the right thing for us in the long term. SG&A expenses for the quarter were approximately $788.2 million and deleveraged slightly as a percentage of net sales year-over-year. Adjusting for the legal settlement benefit that we realized last year, SG&A as a percentage of net sales was about flat year-over-year. We continue to grow comp gallons and gain share in our gas business. Our comp gallons in the quarter grew 2% year-over-year, a nice improvement versus Q2's flat performance and again significantly outpaced the industry, which declined low single digits on a comp basis over the same time frame. We have been in a much less volatile gas margin environment this year with profitability just modestly ahead of our expectations in Q3. Our third quarter adjusted EBITDA was down about 2% year-over-year to $301.4 million, owing largely to lapping the benefit of a legal sentiment last year. Adjusting for the settlement, adjusted EBITDA grew approximately 5% year-over-year on higher top line and strong cost discipline. Our third quarter effective tax rate was 26.9%, slightly lower than our statutory rate of approximately 28%. All in, our third quarter adjusted earnings per share of $1.16 decreased approximately 2% year-over-year due to the legal settlement. Adjusted earnings per share grew approximately 8% year-over-year, normalizing for the settlement benefit last year. Moving to our balance sheet, we ended the third quarter with total and per club inventory levels down 1.5% and 5% year-over-year, respectively, while our in-stock levels increased by 90 basis points. Note that we are operating 9 more clubs in our chain compared to a year ago. The favorability in our inventory investment continues to be related to reduced inventory buys. I am proud of our team's hard work to stock even more of our merchandise our members want while improving the operating efficiency of our business. This is yet another driver of the flywheel, with which we can pass along even more savings to our loyal members. Our capital allocation strategy remains consistent. We believe profitably growing the business is our best use of cash and investments to support membership, merchandising, digital and real estate initiatives will continue to be funded by our cash flows. We ended the third quarter with net leverage of 0.5x. Share buybacks are a key component of our capital allocation framework. And in Q3, we took advantage of the lower share price and repurchased approximately 905,000 shares for $87.3 million. As of quarter end, we have approximately $866 million remaining under our recently renewed repurchase authorization. We will continue to take a disciplined and balanced approach to deploying our capital to maximize shareholder value. Looking ahead to the remainder of the year, we are confident in the momentum of our business and our ability to deliver sustained growth, especially in an uncertain economic backdrop. Our teams are focused on controlling the controllables while executing towards our long-term objectives. With regards to guidance and as we have been speaking to on this call, the macro environment is challenging. We have made decisions to be prudent with inventories in the face of this environment, challenging our ability to grow general merchandise sales. We made that choice in order to allow continued investment in member value in the rest of the business. While it will hamper sales in the short term, we remain confident that this was the right decision. With that in mind, we are narrowing our guidance for the full year merchandise comp sales to a range of 2% to 3% for the full year. We are also increasing our range of expected adjusted earnings per share to be $4.30 to $4.40. The actions we've taken to support stronger, more sustainable growth are working, and our long-term roadmap is solid. With a resilient business model and clear strategic direction, we're well equipped to keep building on our success and deliver substantial value to our shareholders in the years ahead. Bob, back over to you. Robert Eddy: Thanks, Laura. As I noted earlier, we are making progress in building momentum. We're elevating the quality of our membership base while it grows. We're curating a stronger, more relevant assortment at prices that reinforce our value promise. Our digital tools are improving member experience, and our expansion strategy is bringing the BJ's model to new high-potential markets. Looking forward, our commitment doesn't change. We will keep living our purpose and focusing on the people and communities who rely on us every day while executing on the long-term priorities that drive our growth. Thanks again for joining us today and for your support of BJ's Wholesale Club. We will now take your questions. Operator: [Operator Instructions] Our first question comes from Peter Benedict of Baird. Peter Benedict: I wanted to ask about some of the income demographics and the behavior. It sounded like it was relatively stable. And I think we're hearing a lot this week about kind of that lower and facing some struggles. Can you remind us maybe your exposure to maybe the SNAP program, talk about the renewal rates you're seeing maybe across these income demographics, just anything further below the surface in terms of behavior across income demographics, both in the third quarter and then as you're kind of entering here into the holiday season? Robert Eddy: Pete, maybe I'll kick this one off, and Laura can add to it if she sees fit. Our prepared remarks tried to tackle this question because we knew it would be out there. Certainly, everybody is concerned about the low-income consumer. The continued inflation provides clear pressure on that segment of all consumers and certainly that segment of our members. With that said, removing the noise from the port strike and the hurricanes and stuff last year, we saw their performance in Q3 as being pretty resilient. The purchasing habits were very stable, and we're pleased to see that. There certainly was a lot of noise at the end of the quarter and the beginning of the fourth quarter around the SNAP program and the government shutdown. I guess, I would say there was a slight disruption in the end of Q3, a more meaningful disruption in the opening days of Q4. But now that, that program is back on track, we're recovering. Those participants as they get access to their benefits are choosing to come to see us and -- as they have more opportunity to spend. So we're encouraged by that showing from those members and from the members in the medium- and high-income cohorts that we saw during the quarter as well. And maybe one final point. We're also encouraged, going forward, by the administration's help recently on the tariff front and reducing the cost of things that are not made or grown in the United States. And so that should be helpful to all consumers, but most pressingly, the low-end consumers that you referenced. Laura Felice: Yes, I think I'd just add on top of it from a membership perspective, we're really proud of our member -- our continued membership results throughout the year. We are acquiring members in our existing clubs, so comp clubs in our new markets and our new clubs that we've opened at the beginning of this year. And there isn't anything, when we look at the details of membership to your question about kind of cohorts, that looks different. We're acquiring members across all the cohorts. And so we're really happy with our continued strength from a membership perspective. Operator: Next question comes from Kate McShane from Goldman Sachs. Katharine McShane: We wanted to ask if you believe that the right long-term same-store sales growth for this business is in the 3% to 4% range. If so, why? And what do you think is holding you back from achieving this comp over the last several quarters? Robert Eddy: Kate, as you know, we've been transforming our business over the last several years with the idea of really four things: one, growing and maintaining a stickier membership; two, improving our merchandising; three, improving our convenience through digital; and then finally, increasing our footprint through real estate expansion. And as we talked about in the prepared remarks, all those things are heading in the right direction. Certainly, the things that we're doing sometimes conflict with what happens in the outside world. We certainly have the luxury of competing against great competition, and it's certainly been a choppy economic backdrop out there. So we have tremendous confidence in our long-term ability to grow this business from a top line perspective. We're showing signs of that in all four of those pillars. And we'll continue to work on each of those to get to that point. The thing that we try hardest to do, obviously, is put the right products on the shelf at the right value. And we made tremendous strides, I think, during Q3 to do that. Our merchandising team has put a lot of effort this year into that idea of greater products, greater values. And we made considerable investments in Q3 with that in mind. We'll continue to do that because that's what we believe wins. Value and convenience are really what we're after for our members. And we'll keep plugging. We're very optimistic in our long-term aspirations. Katharine McShane: And if I could just follow up with one question, you just mentioned the competitive environment. We were curious about what the competitive response has been when you open in some of these new markets, particularly Dallas, which has a really strong grocery offering and other club offering already. It sounds like things are going well there, but I wondered if you had any more details with the fifth store opening? Robert Eddy: Sure. The real estate growth story, and I'll let Bill talk about it since he is the architect of it, is a great one. It's certainly a continuing, sustained success and getting even faster with 14 clubs this year in lots of great markets. Those clubs are doing really well. And so we're very enthusiastic about this ability to grow our company. And we've been received well in the markets that we've entered. So why don't I let Bill talk a little bit more about it? William Werner: Kate, I think as Bob mentioned, we're really proud and excited about the success of the new clubs this year thus far and what's left to come for this year. And then as we look forward into Dallas next year, the prospect of going in and winning in that market is really important to the team. We've talked about it a couple of times on these calls that the culture that we've built around new clubs is really important. And the team is actually at a high level. As we look back at this year so far, I think 2025 will go down as the best class of new clubs. As far back as I can remember, with the success we've had with our 8 openings to date now and 6 more to go for the rest of the year, what we're seeing so far in those new clubs that haven't opened yet with preopening membership and the engagement of the community, we know that they're going to be outperformers as well. And so as we take that momentum from this best class of openings into next year into Dallas, combined with the work that we've done in the market of raising awareness for our brand and engaging with the community, we have a ton of confidence that not only will we compete, but we'll be in a position to have great success there. Operator: Our next question comes from Robby Ohmes from Bank of America. Robert Ohmes: I wanted to follow up on the inventory positioning that Laura talked about. I just wanted to understand how you're thinking about that for the fourth quarter. Is it the positioning that sort of limits sales upside, but supports margins? Just how -- what's the pluses and minuses of the tight inventory and semi-related Fresh 2.0 was like a great tailwind in comp driver, the benefit, the tailwind has slowed here. Is there anything that can reaccelerate? Is there a Fresh 3.0 or something like that, that's in the work here to kind of get that to reaccelerate? Robert Eddy: Robby, maybe I'll take a shot at starting off, and Laura can fill in. I think what you're referencing is Laura's comments around proactively managing our general merchandise inventory. When we were in the beginning part of the year, I'm trying to understand where prices would go and costs would go as a result of tariffs, we made some proactive decisions to manage potential markdowns to allow us to fund greater investment in overall value for our members. And I think that was the right decision. I think you want us to do that every day. That is really why we're here. We've taken those dollars and in fact, invested them across the rest of the business. In Q3, significantly reduced pricing on own brands water, on several other beverages, on some paper products across our produce assortment. So we are really trying to balance those two things. And so we do have a more conservative inventory position from a general merchandise perspective, that was true in Q3. It remains true for the fourth quarter. And I do think it will limit the upside of the general merchandise business, but again, allow us to continue investing for the overall value for our members. I think the other story within inventory is really an absolutely terrific performance in managing the overall inventory levels of the company. The team has done a really masterful job in the whole business to have our in-stock rates go up 90 basis points into inventories that are down. We are doing a much better job allocating inventory throughout our chain, making sure that things are where they need to be, when they need to be there and to be in stock for our members every day. We need to keep turning that handle and get better and better every day, but I couldn't be more proud of the team to make a performance like that happen. Anything else, Laura, on inventory? No? Fresh 2.0, I think it was another terrific program, continues to yield benefits. You know that started out in our produce business. We had terrific produce results during the quarter again. And what you're seeing from the perishables business overall is some of the reduced benefits from egg inflation and things that are offsetting some of that great performance. So with that said, we've talked about the next iteration of Fresh 2.0 and call it what you want, 2.1 or 3.0. We have made another set of considerable improvements in meat and seafood. And we're looking to doing the same in bakery and other categories as we go forward. The mission there is the same, right? Our best members interact with us in these categories. If we can show them the greatest product, the freshest product at compelling value, is displayed in a way that is compelling, freeing our team members so that they are experts in all these disciplines; we can provide a better experience for our members, get more people into those categories and grow the overall traffic of the business. That is certainly the result that we saw from Fresh 2.0 in the produce segment. The early returns on meat and seafood are good as well. And so we're very optimistic about that program and its ability to drive sales within those categories, but also to get to that further bigger goal of driving traffic in the whole business, which obviously drives lifetime value. So some of these investments are expensive, but they're very much worth it in terms of driving the top line and the overall value of membership to BJ's. Operator: [Operator Instructions] Our next question comes from Steven Zaccone from Citi. Steven Zaccone: I wanted to ask about the implied fourth quarter same-store sales because you referenced in the release that you've also seen some holiday momentum -- or excuse me, momentum to start the holiday season. Can you just talk through your category assumptions in the fourth quarter? And then, how you think about low end versus high end of the range? Robert Eddy: Sure. Again, maybe I'll start, and Laura can fill in, Steve. We certainly, I think, had a good performance in the third quarter. I keep using that word resilient. But into the face of the port strike and the hurricane activity and all that stuff, our sales were a bit higher than we thought they might be in the range of outcomes. And the team's preparation for the holiday season, I think, has been fantastic. We've been investing in value, we've got incremental promotions out there, we're continuing our really successful Free Turkey promotion, where if you spend $150 in 1 basket, you can get a free turkey for your family for Christmas. We're doing a lot of these things to really build on the momentum we saw in Q3 and get our members in our clubs and make them happy. With that said, it's a choppy economic backdrop out there, right? We talked about the low-end consumer at this point. And we certainly have a little bit of a harder hill to climb from a comparative perspective, we had a good Q4 last year. But net-net, while it's a wide range of outcomes that can happen in any quarter, most notably the fourth quarter, we are cautiously optimistic about our ability to put up some good numbers in the fourth quarter. Laura Felice: Steve, the only thing I might add to all the commentary Bob just said is I'd remind you about our inventory positioning that would be already talked about for general merchandise. So we've factored that into the range of outcomes. That doesn't mean that we will be out of stock in general merchandise. It just means that we've tightened up the buys and we've picked the best of the best assortment. So we're ready for Thanksgiving, like Bob talked about. And we're ready for our members for holiday kind of as we roll into December. Steven Zaccone: Okay. The follow-up I have then is on that general merchandise. So when we think about the inventory planning assumptions and maybe just talk about the buying environment, how does that look for the first half of next year, right? Because you made changes to the second half, presumably based on tariff uncertainty. But how does that apply to general merchandise plan as we kind of glance into 2026? Robert Eddy: Yes. Look, it's -- I don't want to get too far over skis and talk about next year. But obviously, the fourth quarter seasonal merchandise was bought in the spring when there was considerably more uncertainty around what the tariff exposures might be and what the consumer's response might be to any increase in prices. Every quarter we go through, we get more and more clarity and we get more information from our members as well. And so we obviously alter our buys accordingly. I guess the other thing I would say is Q4 typically is a higher general merchandise penetration and obviously lower in the first quarter. And so this question becomes a little bit less important as we get into the beginning of the year. Operator: Our next question comes from Mike Baker from D.A. Davidson. Michael Baker: I hate to focus on the short term so myopically. But the guidance, your fourth quarter implied guidance, to me, I'm calculating around 2, 2.5 or something in that range. Correct me if I'm wrong on that, at least at the midpoint of the outlook. But if you are in that range, that's a pretty big pickup on a 2-year basis against the 4.6% last year. So given all the caution you're talking about, can you square that? Or is it more reasonable to think about maybe the low end of the implied fourth quarter guidance, in other words, consistent on a 2-year basis? Robert Eddy: Mike. Look, let's just focus on the fact that we're cautiously optimistic, as I said earlier. We've done a lot of planning, a lot of action around providing our members the right products at the right value. We talked about incremental promotion and building into that. We're certainly where we need to be from a digital perspective. People are loving interacting with our digital properties to get what they need from a convenience perspective. And we just -- we are trying to act within our purpose and take care of the families that depend on us. And that is all those things, right, getting those -- getting the products on the shelf. We're doing a fantastic job doing that in an improved way, putting sharper prices on things, which we, again, had considerable improvements in during the quarter. And really trying to take care of all the different communities within our membership. And we talked a little bit in our prepared remarks about our team members, maybe I'd take one minute to thank those team members out there every day, taking care of our members. They have the hardest job in our company. And guys, I'd really like to thank you for all your efforts. We initiated for the first time in our company's history, a 10% discount for our team members to really say thank you, to acknowledge that it's tough out there for everybody and to help our team members through their holiday season purchasing as well. So I think we have a lot to be proud of. I think we have some momentum coming out of the quarter. The early days of Q4 have been reflective of that momentum. But we understand that there's a lot of road to go throughout the quarter. We're only a couple of weeks in. Next week -- this weekend and next week are huge for the quarter as are the remaining weeks in December. So we feel like we're in a good spot, but it's very, very early. And so that thought process really is what drove us to have the guidance that we put out there. Operator: Our next question comes from Ed Kelly from Wells Fargo. John Park: This is John Park on for Ed. It sounds like the messaging is that you've been investing in price, but I guess merchant margins were flat. So I guess, what are some of the offsets in gross margin that helps you get there? And then anything on Q4 merch margins and how we should think about that? Robert Eddy: John, we certainly have invested -- we widened our price gaps in Q3 considerably with those investments versus competition. So I'd like to say thanks to our merchandising team for making those moves. It's important to our company, important to our members, for sure. And we have many different levers to offset that throughout the business, not just within the margin construct. We will try and be as efficient as possible throughout the business to fund investments in member value. Certainly, some of the offsets that you might think about within the merchandising world would be being more efficient in the distribution centers, trying to be more efficient from a trends perspective, growing our retail media program, which has been growing very, very nicely, the team is doing a great job there. There are many different things that we've tried to do so we can pass more value back to our members, and we'll continue to do that. Operator: [Operator Instructions] Our next question comes from Simeon Gutman from Morgan Stanley. Pedro Gil: This is Pedro Gil on for Simeon. Nice job continuing to grow your digital business, really impressive. Could you comment on the work you're doing in retail media there? And also more broadly, we've heard some of your peers recently announcing partnerships in agentic commerce. Could you give us an update how you're thinking about the AI opportunity in e-commerce? Robert Eddy: Sure. As we've talked about, our digital business is an important part of our strategy. It has been growing by leaps and bounds for years now. So 30% during the quarter, over 60% on a 2-year stack. It is approaching 17% of our sales at this point. We are at a point that, frankly, a few of us didn't think we'd ever get to. And so we have a lot to be proud of there. It all comes on the back of convenience. We have an incredibly talented digital team that builds these capabilities for our members to help them get access to tremendous value in a more convenient way than they otherwise might. Most of our business, as you know, is in what we call BOPIC, Buy Online, Pickup In Club; as well as same-day delivery, as well as ExpressPay, where you check out in the club using your phone. Well over 90% of our total digital sales are fulfilled by our clubs. So we are efficiently building this business. It is certainly a moneymaking opportunity for us. We are really pleased with the way that it's growing. Included in there is our retail media program that you referenced, and I talked a bit about it a few seconds ago. While still small, our team has been growing that quite nicely as well as we improve our website, as we improve the way that we partner out there with our advertisers, the way that we really coordinate between our different properties, whether it's our website or our app. We are coming up with more ways to engage our members and allow our advertising partners to reach our members with compelling values that first and foremost, to help our members but also help us and our advertising partners. So we will continue to invest in that business in the future. Again, it's still small, but is growing quite nicely and allows us to make other investments in member value as we go forward. Everyone talks about AI, we are no different. AI is a big part of our future. It is most notably used in our digital group at this point. And the use cases would not surprise you. They were on the vanguard of using it to make coding more efficient, making testing code more efficient. And they will continue to use AI in consumer-facing avenues as well. And so I'll give you a couple of examples. As we talked about in the prepared remarks, we've got beta-launched AI shopping assistants and are using AI to do predictive shopping lists for folks. Probably the thing that's most well along, however, is partnering AI with the robotics that we have in our stores. We have a robot that roams our stores named Tally. And initially, Tally was just helping us with inventory accuracy and price line accuracy. And now we have taken that much farther where Tally's imagery creates a digital twin of each of our buildings, something that we've never had before because our buildings don't have warehouse management systems. And that has enabled really cool things from an operational perspective where not only are we getting better inventories and better pricing accuracy, but we are efficiently spotting problems for our team members to take care of, we are efficiently generating to-do list for our team members in the clubs find inventory and what needs more inventory, what should they be doing first within the building. We are using it to make help us spot quality issues in our Fresh businesses as well, so we can make sure that our standards there are tiptop every day. We're finding new ways to use Tally and the data that provides every day. I think the thing that's been most effective so far has been using those digital twins to predict the most efficient pick path for our team members to pick orders for BOPIC or curbside or same day, where they are about 40% more efficient today than they were before. So we'll continue to build on the use of AI. We'll continue to focus on long-term investments that really will allow us to continue our mission, which is to offer our folks the best products at the best prices. Probably the next thing up from a robotics and AI perspective will be our automated distribution center in Ohio that will go live next year. That will be when it gets going far more efficient than a traditional distribution center and will operate almost entirely in a robotic fashion. So it will be fun to see that. I've been out there to see it recently, and I can't wait to see it with all the machinery going in there to see how it works. But it's all in the same spirit of providing even greater value for our members. Laura Felice: Pedro, I'd just add all that commentary that Bob just said about Tally and the robotics we have in our club, there is a closed tie to that with the work that our planning and allocation teams are doing that we already spoke about in our prepared remarks. And that is producing our in-stock levels that have improved kind of year-over-year. So there is a tie beyond some of the digital efforts into how we're putting product on our shelves and how our teams internally are using the data from Tally as well. Pedro Gil: Awesome. Fantastic. And as a follow-up, if I could ask you, if you could comment on the competitive environment. You had a nice improvement in merch margin in the first half, a little more even this quarter. To the extent that you can comment, and I totally get it, it's still early; how should we think about the level of investments next year? Are there any particular areas within grocery or gen merch that you're looking to prioritize? Robert Eddy: Look, I don't want to talk too much about next year, but I would just echo the comments that I've already made around the fact that our job is to provide our members great value every day. We've made considerable investments all year in doing so and have been pretty creative to find ways to fund it, having the merch margin results that we had in Q3, while making the investments that we made was a good result. I would anticipate further investment going forward. As the competitive environment out there is, I think, consistent, but it's consistently competitive, and we need to continue to do our jobs to reward our members for their faith in us and the membership fees that they pay. So we will continue to try and ride that balance between margin and value, but we will always err on the side of value to try and operate the business for the long term. Operator: [Operator Instructions] Our next question comes from Chuck Grom from Gordon Haskett. Charles Grom: On the margin front, just to move down the P&L a little bit, your SG&A per square foot levels have been really tight, which is good. But your peers are up a lot, suggesting maybe some investment in technology and other areas. So I guess my question is, how sustainable do you think maintaining that SG&A per square foot at that level over the next couple of years, particularly as you move into Texas? Robert Eddy: Yes, it's a good question, Chuck. Our teams have done a good job over time being very efficient with our buildings, making sure that, that they're in good shape. They're in far better shape today than they were 5 years ago. With that said, we need to continue to do that and maybe even accelerate it. I think one of the things that we're seeing out there is our competitors getting sharper with their boxes. And so we will have to continue to do that, not just because of the competitive environment, but we want to show our members the best box we can every day. And so I would imagine we'll spend some capital going forward, remodeling our boxes. We will obviously continue to spend into our new club pipeline as well. And we'll do that as efficiently as we can, but obviously, with an eye for the long term. William Werner: Chuck, it's Bill. I'll just tack on to that as well. In addition to our existing clubs for the first time ever, we've really started to build a relocation program for some of our older clubs as well. So we had great success with our recent relocation in Mechanicsburg, PA. We announced this morning that we're going to relocate Rotterdam next year. And so it's not just an eye to our existing clubs, but also to the long-term future of these strong markets where we may have buildings out a little bit on the older side. We're taking the opportunity to invest into the future there as well. Charles Grom: Got you. Great. And then on general merchandise, right, like up 1.8% on the stacks much better than front half of the year, even with limiting inventory. You talked a little bit about the category improvement. I guess what do you think it's going to take to get home and seasonal to catch up to CE and apparel and other areas? And then I guess anything that you guys are excited about as we walk stores over the next couple of months into the holidays? Robert Eddy: Yes, sure. Maybe I'll start, and you guys can pick up. Look, I think we've -- we've done some great things from a general merchandise perspective. As we talked about, we had a strong showing in Q3 from a consumer electronics perspective and from an apparel perspective. Consumer electronics has been a hallmark of GM for a while. It's always been a pretty good business for us, and it gets better. We have very talented merchants in that group. Our apparel team has done a great job over the past few years really making sure that we simplify our assortment and bring in better brands, put great value out in front of our members every day. We need to continue to do those things, right? We might need to simplify our assortment a bit more. We need to continue to put great brands out there and put fantastic values on there as well. We need to apply those same lessons to the rest of the business. And we are actively at work on those things. We've seen some green shoots in previous quarters, we've talked about those with you like toys and some of our gifting in previous quarters. I like our toy assortment this year as well. And I'm excited about the way our gifting looks in the front of our clubs as well. But we need to have more sustained transformation in home and then seasonal going forward. These are probably the toughest categories, particularly the seasonal categories, maybe in the building. But certainly, among the GM categories, these are really tough categories. You need to be right on trend, you need to be right on style and color, on price point, all sorts of different things. And while we've made strides, we're not done. We're not satisfied with where we are. We need to continue to turn the crank and get better going forward. So we were under no illusions that renovating general merchandise would be easy or short in tenure. We've had nice success in the past, and we need to keep investing in that business because it is such an important part of the wholesale club model, where provides that treasure hunt, that emotional connection, those cool wow items that are so important to driving incremental trips. And quite honestly, that question around membership renewal is not only tightly linked with the grocery business, but it's really tightly linked with our general merchandise business when you can have more opportunity to save your entire membership fee in one purchase rather than stacking up just good values on smaller ring items. You can save a couple of hundred bucks on a television or a mattress or a great seasonal item. That becomes a really important part of our overall long-term growth of our company. So let me see if the guys want to file on, no? All right? So we're happy with our GM so far. We've got to get better and we'll continue to work at it. Operator: Our next question comes from Rupesh Parikh from Oppenheimer. Rupesh Parikh: Just going back to your commentary about 2025 clubs, the membership count is 25% ahead of plan. What do you think is contributing to that significant outperformance? William Werner: Rupesh, it's Bill. I always come back to the success with the new club program comes back to the culture that the team has built. I think I've mentioned this a couple of times on previous calls that everyone that has evolved within new club program internally is fully engaged and fully bought in and want to see us be successful. So we started this program way back in 2016 and the reps that we've built along the way. We talked about the goal of making the next opening, the best opening in the history of the company. Opening a new club where you have to build up, especially in the new market, membership base entirely from scratch is not easy to do, and it takes a lot of practice and a lot of learnings to do it right. And we're executing at a higher level than we've ever executed. And as we think about going into the Dallas-Fort Worth market next year as well as all the other markets, a market like Foley, Alabama that we announced this morning is a really cool, unique market, and we're going to be really excited to be there. And we wouldn't be able to do that, we wouldn't have the confidence to do that without all the success that we've built up to this point. So like I said, we're really pleased with what we've done here in 2025. It really has been probably the best class that we've ever opened in at least as far as I've been here. And it gives us a lot of confidence going forward. So more to come, but excited about what we've accomplished. Operator: Thank you very much. This marks the end of the Q&A session. I'd like to hand back to Bob Eddy for any closing remarks. Robert Eddy: Thanks, Carl. Thanks, everybody, for your attention this morning, for your thoughtful questions, for your interaction, your support of our company. I wish you all a happy Thanksgiving, and we'll talk to you at the end of the fourth quarter. Thanks so much. Operator: As we conclude today's call, we'd like to thank everyone for joining. You may now disconnect your lines.
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: Good morning. Thank you for standing by, and welcome to Buckle's Third Quarter Earnings Release Webcast. [Operator Instructions]. Members of Buckle's management on the call today are Dennis Nelson, President and CEO; Tom Heacock, Senior Vice President of Finance, Treasurer and CFO; Adam Akerson, Vice President of Finance and Corporate Controller; and Brady Fritz, Senior Vice President, General Counsel and Corporate Secretary. Before beginning, the company would like to reiterate its policy of not providing future sales or earnings guidance. All forward-looking statements made on the call are pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially due to risks and uncertainties described in the company's SEC filings. The company undertakes no obligation to publicly update or revise these statements, except as required by law. Additionally, the company does not authorize the reproduction or dissemination of transcripts or audio recordings of the company's quarterly conference calls without its expressed written consent. Any unauthorized reproductions or recordings of the calls should not be relied upon as the information may be inaccurate. As a reminder, today's webcast is being recorded. And I'd now like to turn the conference over to your host, Tom Heacock. Thomas Heacock: Good morning, and thanks for being with us this morning. Our November 21, 2025, press release reported that net income for the 13-week third quarter ended November 1, 2025, was $48.7 million or $0.96 per share on a diluted basis compared to net income of $44.2 million or $0.88 per share on a diluted basis for the prior year 13-week third quarter, which ended November 2, 2024. Year-to-date net income for the 39-week period ended November 1, 2025, was $128.9 million or $2.55 per share on a diluted basis, compared to net income of $118.3 million or $2.35 per share on a diluted basis for the prior year 39-week period ended November 2, 2024. Net sales for the 13-week third quarter increased 9.3% to $320.8 million compared to net sales of $293.6 million for the prior year 13-week third quarter. Comparable store sales for the quarter increased 8.3% in comparison to the same 13-week period in the prior year, and our online sales increased 13.6% to $53 million. Year-to-date net sales increased 7.2% to $898.7 million compared to net sales of $838.5 million for the prior year 39-week fiscal period. Comparable store sales for the year-to-date period increased 6.3% in comparison to the same 39-week period in the prior year, and our online sales increased 11.6% to $142.9 million. For the quarter, UPTs decreased approximately 1.5%, the average unit retail increased approximately 4% and the average transaction value increased about 2.5%. Year-to-date, UPTs decreased approximately 1%, the average unit retail increased approximately 3% and the average transaction value increased approximately 2%. Our gross margin for the quarter was 48%, a 30 basis point increase from 47.7% in the third quarter of 2024. The current quarter margin expansion was a result of 40 basis points of leverage buying, distribution and occupancy expenses, partially offset by a 10 basis point reduction in merchandise margins. Our year-to-date gross margin was 47.4%, up 50 basis points from 46.9% for the same period last year. The year-to-date increase was the result of a 20 basis point increase in merchandise margin, along with 30 basis points of leverage buying, distribution and occupancy expenses. Selling, general and administrative expenses for the quarter were 29% of net sales compared to 29.1% for the third quarter last year. And year-to-date, SG&A was 29.5% of net sales compared to 29.6% for the same period in the prior year. The third quarter decrease was due to a 35 basis point reduction related to nonrecurring digital commerce investments made a year ago, a 35 basis point decrease in store labor-related expenses and a 5 basis point decrease in certain other SG&A expense categories. These decreases were partially offset by a 50 basis point increase in incentive compensation accruals and a 15 basis point increase in G&A compensation-related expenses. Our operating margin for the quarter was 19% compared to 18.6% for the third quarter of fiscal 2024. And for the year-to-date period, our operating margin was 17.9% compared to 17.3% for the same period last year. Income tax expense as a percentage of pretax net income for both the current and prior year fiscal quarter was 24.5%, bringing third quarter net income to $48.7 million for fiscal 2025 compared to 44.2% -- $44.2 million for fiscal 2024. Income tax expense as a percentage of pretax net income for both the current and prior year, year-to-date periods was also 24.5% bringing year-to-date net income to $128.9 million for fiscal 2025 compared to $118.3 million in fiscal 2024. Our press release also included a balance sheet as of November 1, 2025, which included the following: Inventory of $165.8 million, which was up 11% from the same time a year ago and $371.3 million of total cash and investments. We ended the quarter with $162.3 million in fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $11.1 million and depreciation expense was $6.2 million. For the year-to-date period, capital expenditures were $34.5 million and depreciation expense was $18.2 million. Year-to-date capital spending is broken down as follows: $30.4 million for new store construction, store remodels and technology upgrades and $4.1 million for capital spending at the corporate headquarters and distribution center. During the quarter, we opened 2 new stores and completed 6 full store remodels, 3 of which were relocations in new outdoor shopping centers. Additionally, post quarter end and during November, we have opened 2 new stores and completed 2 store relocation projects in advance of the holiday selling season, which brings our year-to-date count through today to 6 new stores, 17 full remodels and 3 store closures. For the remainder of the year, we anticipate completing 4 additional full remodeling projects. Buckle ended the quarter with 442 retail stores in 42 states compared to 445 stores in 42 states as of the end of the third quarter last year. And now I'll turn it over to Adam Akerson, Vice President of Finance. Adam Akerson: Thanks, Tom, and good morning. Our women's business continued its acceleration in year-over-year growth rate during the quarter, with merchandise sales increasing about 19%, which was on top of 3% same week growth a year ago. For the quarter, our women's business represented approximately 51% of sales, which compares to 47% last year. This growth continued to be led by the performance of our denim category with women's denim increasing approximately 17.5% and average denim price points increasing from $81.15 in the third quarter of fiscal 2024 to $86.95 in the third quarter of fiscal '25. This AUR increase continues to be primarily the result of strong growth in our Buckle Black Label, which has outperformed the total denim business, along with strong growth of other higher price point national brands. Complementing our strong women's denim selection, our team continued delivering compelling trends and fashions for our guests, for the quarter, we achieved growth across all women's merchandise categories with the most notable growth in knits and sweaters, casual and fashion bottoms and accessories. In total, average women's price points increased about 6% from $49.95 to $53.05. On the men's side, we were pleased to see growth for the second consecutive quarter with men's merchandise sales up about 1% against the prior year, representing approximately 49% of total sales compared to 53% in the prior year. This growth was also led by our men's denim category, which was up about 1% for the quarter. Average denim price points increased from $88.10 in the third quarter of fiscal '24 to $88.15 in the third quarter of fiscal '25. In other categories, we saw nice performance in both our short and long sleeve tees business in a variety of lifestyles as well as strong selling of our vests, jackets and accessories. For the quarter, overall average men's price points increased approximately 2.5% from $54.30 to $55.70. On a combined basis, accessory sales for the quarter increased approximately 7.5% against the prior year, while footwear sales were essentially flat. These 2 categories accounted for approximately 10% and 4.5%, respectively, of third quarter net sales, which compares to 10% and 5% for each in the third quarter of fiscal '24. For the quarter, average accessory price points were up approximately 3.5% and average footwear price points were up 4.5%. Also on a combined basis, our kids business continued its strong growth trend, increasing approximately 22% year-over-year. This continues to be a category where our teams are excited to keep building the business and selection for our guests. For the quarter, denim accounted for approximately 46% of sales and tops accounted for approximately 29%, which compares to 46% and 29.5% for each in the third quarter of fiscal '24. As previously mentioned, with strong selling and trends in many of our brand styles, our private label business decreased as a percentage of our total mix for the quarter. For the quarter, private label represented 47.5% of sales versus 48.5% for the third quarter of fiscal 2024. And with that, we welcome your questions. Operator: [Operator Instructions]. Our first question comes from Mauricio. Mauricio Serna Vega: This is Mauricio Serna from UBS Research. First, maybe could you speak on a high level what you're seeing on the health of the U.S. consumer coming into the holiday season. There's been some talks about maybe some pressure on the lower income consumer. So I was interested in hearing from your side, what have you been seeing? And then also, could you speak about the denim business? I think you talked about the momentum in women's being up 17%. What do you -- how do you -- how are you thinking about the sustainability of this growth? And maybe could you talk about what you saw in men's denim demand over the quarter? Dennis Nelson: Thank you for the question. On the consumer, we haven't seen a big change in our stores. I mean the team and guests seem excited about our product response. There's probably a slight caution in some as our units per sale are off very slightly. But overall, we feel good about it. And if the guest is excited about the product and the quality we have, it's been going pretty well. The ladies denim business continues to be excellent. There's still a lot of variety of styles and fits. We've added some of our branded sources to the mix, which has added some higher price points, have been good for the business. And our fashion brands and our private brands continue to sell well. So we're optimistic about the gal's denim business throughout the rest of the year. On the men's denim, our private label brands are consistent and doing well, having good sell-throughs. We haven't seen as much from other brands adding to the private brands mix, but feel our denim business is solid in men's as well. Operator: There are no further questions in queue. [Operator Instructions]. Okay. It looks like we have another question from Mauricio. Mauricio Serna Vega: Great. Just on the other thing that I wanted to ask was the merchandise margin. It was down 10 basis points. Maybe could you elaborate on what were the puts and takes behind the merchandise margin trend in this quarter? Thomas Heacock: Thank you, Mauricio. This is Tom. Yes, merchandise margins were down 10 basis points for Q3 and up 10 basis points for Q2. So I think if you look year-to-date with everything going on with tariffs, we feel really strong about where we're at from a merchandise margin perspective. And we've been operating at a high level of merchandise margins for a long time and have continued to improve that. So both Q1 and Q2 were all-time highs merchandise margins and we were off just a little bit in Q3. So I feel really good about where we're at. The biggest drivers are really -- Adam called out the decrease slightly in private label business with some of the brands performing really well, especially in women's denim. That's the biggest driver probably of the shift this year and especially Q2 compared to Q3 and then a slight increase in costs with tariffs and other flow-throughs. Operator: There are no further questions in queue. [Operator Instructions]. Okay. It looks like there are no further questions. I will now turn the call back over to Buckle for any closing remarks. Thomas Heacock: Thank you for your participation today. It will be a quick call, but I wish everyone a wonderful weekend and a wonderful holiday season. So thank you for joining us today.
Operator: Hello. Welcome everyone to the 2026 First Quarter Earnings Call for Commercial Metals Company. Joining me on today's call are Peter Matt, Commercial Metals Company's President and Chief Executive Officer, and Paul Lawrence, Senior Vice President and Chief Financial Officer. Today's materials, including the press release and supplemental slides that accompany this call, can be found on Commercial Metals Company's Investor Relations website. Today's call is being recorded. After the company's remarks, we will have a question and answer session, and we'll have a few instructions at that time. I would like to remind all participants that today's discussion will contain forward-looking statements, including with respect to economic conditions, effects of legislation and trade actions, U.S. Steel import levels, construction activity, demand for finished steel products and precast concrete products, the expected capabilities, benefits, costs, and timeline for construction of new facilities, the expected benefits of recent acquisitions, the company's operations, the company's strategic growth plan and its anticipated benefits, legal proceedings, the company's future results of operations, financial measures, and capital spending. These statements reflect the company's beliefs based on current conditions but are subject to risks and uncertainties. The company's earnings release, most recent annual report on Form 10-Ks, and other filings with the U.S. Securities and Exchange Commission contain additional information concerning factors that could cause actual results to differ materially from those projected in forward-looking statements. Except as required by law, Commercial Metals Company does not assume any obligation to update, amend, or clarify these statements. Some numbers presented will be non-GAAP financial measures, and reconciliations for such numbers can be found in the company's earnings release, supplemental slide presentation, or on the company's website. Unless stated otherwise, all references made to year or quarter end are references to the company's fiscal year or fiscal quarter. And now for opening remarks and introductions, I will turn the call over to Peter. Peter Matt: Good morning, everyone, and thank you for joining Commercial Metals Company's first quarter earnings conference call. I hope each of you had a wonderful holiday season and a Happy New Year. Commercial Metals Company had an exceptional start to our fiscal year as we built on the strategic foundation laid in fiscal 2025, continuing to meaningfully and sustainably enhance our financial profile. The first quarter was one of the best in our company's history, serving as validation that our ambitious strategy is bearing fruit. Strategic actions taken over the last twelve to eighteen months, including the launch of TAG, organizational realignment in critical areas, and the onboarding of key talent and resources to support growth areas, are directly driving bottom-line improvement. We are confident there is much more to come, particularly with the addition of Commercial Metals Company's large-scale precast platform. Our strategic focus remains on transforming Commercial Metals Company into an even stronger organization with higher, more stable margins, earnings, cash flows, and returns on capital. Now let's jump into the first quarter results. For the quarter, Commercial Metals Company reported net earnings of $1.773 billion or $1.58 per diluted share. Paul Lawrence: Excluding certain charges, which I will take you through in more detail, adjusted earnings were $206.2 million or $1.84 per diluted share. Our consolidated core EBITDA of $316.9 million grew by over 50% from a year ago and nearly 9% sequentially, reaching its highest level in two years. Our core EBITDA margin of 14.9% likewise expanded both year over year and compared to the prior quarter. As outlined on Slide five, this occurred against a good market backdrop with stable demand, limited imports, rising long steel metal margins, and attractive project opportunities within certain construction segments. Though Commercial Metals Company certainly benefited from these constructive conditions, our results were meaningfully enhanced by solid execution that allowed us to capitalize on the opportunities we are seeing across our North American footprint. Let's review some highlights, starting with our North America Steel Group. Commercial Metals Company's mill network had a strong operational performance, which was critical to supporting customers in a relatively tight domestic supply environment and maintaining high levels of customer service. CAG initiative efforts, including the scrap optimization initiatives launched in fiscal 2025, contributed nicely to metal margin expansion. With the program now rolled out across all domestic mills, we are using less scrap per ton of steel produced and utilizing lower-cost scrap blends, increasing the metal margin on each ton. Last quarter, I discussed new commercial rigor in the way Commercial Metals Company approaches opportunities within its downstream fabrication business. The positive impact of this change is only just beginning to be reflected in our financial results, but we are seeing it more significantly benefit our average price in backlog, which represents the work that will be shipped in future quarters. Encouragingly, despite enhanced selectivity in the projects we accept, the volume in Commercial Metals Company's downstream backlog increased modestly year over year and sequentially. We believe this is at least in part related to Commercial Metals Company's ability to leverage its unique and comprehensive portfolio of capabilities to win projects, particularly those that require specialized reinforcing solutions or large-scale resource deployment. A recent example has been the success we have had in the LNG space, which requires highly specialized cryogenics, the reliability of a large fabrication and logistics network, and expertise in project management, all of which we provide. Strong execution helped our Construction Solutions business, formerly known as our Emerging Businesses Group, achieve a record first quarter adjusted EBITDA. Similar to our North America Steel Group, underlying market conditions were supportive, but our efforts to capitalize on these drove results to new heights. At Tenthar specifically, we are seeing several important commercial and operational initiatives gain traction. Our team has moved to deepen relationships with key customers, improving our visibility into their upcoming product demand. We have also positioned ourselves to better address market demand across a full spectrum of GeoGrid solutions. Our highest value products are experiencing strong demand from mega projects such as LNG investments, but we are also capturing more opportunities in mid and lower-tier portions of the market. Operationally, the Tenthar team is doing an exceptional job managing costs and increasing production reliability, ensuring that we have the product available where and when needed at a cost that optimizes margins. Our Commercial Metals Company Construction Services business achieved strong results during the quarter, with revenue growth outpacing the broader market due to several impactful initiatives to acquire new customers, gain share of wallet through more productive proactive outreach, and standardized pricing and service levels across the footprint. This is just a sampling of the initiatives that we are undertaking to drive our business from good to great. Our success reflects the strategic efforts of Commercial Metals Company's leaders to push their businesses to new levels of performance. I mentioned earlier that we capitalized on the supportive environment in the quarter. Let me provide a bit more color on what we saw. In North America, we experienced healthy, stable underlying demand for our major products. This, in combination with a well-balanced supply landscape, supported volumes and margins during the quarter. Shipments of finished steel were virtually unchanged year over year and down less than a percentage point from fiscal Q4, compared to a more typical 4% to 5% seasonal sequential decline. Consistent with our guidance, metal margins increased sequentially as we were able to capitalize on the summer price announcements. Downstream bid volumes, our best gauge of the construction pipeline, remained healthy and were consistent with recent quarters, with continued strength across key market segments, including public works, data centers, institutional buildings, and energy projects. We continue to see substantial pent-up demand, particularly within non-residential markets, a view supported by historic strength in the Dodge Momentum Index or DMI, as well as recent conversations with many of our largest customers who are increasingly bullish as they experience a large inflow of project inquiries related to energy generation, reshoring, advanced manufacturing, and LNG infrastructure. The DMI leads construction activity by twelve to eighteen months and increased by approximately 50% on a year-over-year basis in November, with the Commercial segment growing by 57% and Institutional by 37%. Even excluding data centers, a hotbed of growth in North America, commercial showed solid expansion, rising 36% from a year ago. Peter Matt: We remain confident that emerging structural drivers, including investment in U.S. Infrastructure, reshoring industrial capacity, growth in energy generation and transmission, the build-out of AI infrastructure, as well as addressing a U.S. Housing shortage, will support construction activity over the long term. As noted on Slide 10 of the earnings presentation, nearly $3 trillion of corporate investments were announced across related areas in calendar 2025. Commencement of even a handful of these related mega projects could provide a meaningful demand catalyst for Commercial Metals Company in the quarters ahead. Before I move on to our other segments, I would like to briefly update you on the status of the rebar trade case filed with the International Trade Commission or ITC back in June, alleging exporters located in Algeria, Bulgaria, Egypt, and Vietnam are guilty of dumping material into the U.S. Market. In December, the Department of Commerce provided a preliminary ruling against Algeria, finding that producers based in that country are guilty of dumping and subjected them to the maximum duty sought by the domestic rebar industry, which is 127%. While this margin rate could change once the Department of Commerce finalizes its investigation on Algeria in March, we are encouraged by the preliminary results and applaud the department's defense of fair trade. Preliminary rulings are expected in March for antidumping duty investigations covering Egypt, Vietnam, and Bulgaria. Turning to our Construction Solutions Group, current conditions are similar to those just described, with steady activity across most construction segments punctuated by a few hot areas like data centers and large energy projects. Our commercial teams continue to see encouraging signals regarding future activity, including healthy quoting levels and improved velocity of quote conversion to backlog. In addition to these broad indicators of potential demand, we are seeing an increase in attractive individual opportunities that require specialized reinforcement solutions, particularly among bridge and energy projects. Conditions for our Europe Steel Group softened modestly from the fourth quarter. Demand remained resilient on solid Polish economic growth, providing an outlet for healthy shipping volumes, but average price and margin levels were negatively impacted by the import flows. A portion of the price pressure experienced during the quarter may have been related to buyers of foreign material seeking to import product ahead of the European Union's carbon border adjustment mechanism or CBAM taking effect on 01/01/2026. We view this as a temporary overhang and expect prices in our primary markets to benefit from the launch of CBAM, which should increase the cost of some imports, particularly those that have historically been most aggressively priced. The green shoots we have noted in recent earnings calls continue to mature with more emerging. Recent market developments include signals of a coming recovery in residential construction activity driven by declining mortgage interest rates and a need for new housing stock. We are also more optimistic about the prospect of CBAM benefiting long steel pricing. Paul Lawrence: With greater clarity regarding the terms and implementation now available, our team in Poland believes the program could increase the cost of some imported long products by at least $50 per ton and help support overall market price levels. Wrapping up my comments on the quarter, let me dive more deeply into TAG. This is our enterprise-wide operational and commercial excellence program aiming to drive a permanent step-change improvement to our margins, earnings, cash flows, and ROIC. Fiscal 2026 will be a pivotal year as execution further permeates the organization and as the expected level of EBITDA benefit increases meaningfully. During fiscal 2025, TAG initiatives were primarily focused on domestic mill operations and logistics. This year, we are focused on operational initiatives in every line of business across each segment and are increasing our emphasis on key commercial opportunities. We are also targeting meaningful efficiencies in our SG&A expenses while maintaining our high level of performance. We are pleased with the execution on new initiatives so far in fiscal 2026 and have maintained solid momentum on programs launched in fiscal 2025, including the scrap optimization, mill yield, alloy usage, and logistics benefits that delivered approximately $50 million of EBITDA last fiscal year. Looking at fiscal 2026 and beyond, commercial excellence is a major opportunity where we see significant upside potential through achieving better margins and fuller value realization for Commercial Metals Company's industry-leading capabilities and service levels. For the mills, this comes in a variety of forms, including enforcing grade and size extras, applying appropriate premiums to pricing on special orders, and addressing areas of margin leakage such as delayed price implementation and freight recovery. It will also mean more definitive segmentation of our customer base with clear value propositions to the different customer segments and related commercial terms to ensure that all accounts generate acceptable margins. In our downstream fabrication business, we are pursuing enhancements to our margin structure through increased price discipline, a willingness to decline work that does not reach a suitable profit threshold, and improved terms and enforcement mechanisms in contracts. At the heart of our efforts is the ability to leverage Commercial Metals Company's unique capabilities and scale to achieve better margin outcomes on complex jobs that only a few fabricators can perform. Based on progress we are making across commercial and SG&A initiatives, I am confident that we will reach or exceed our ambitious goal of exiting fiscal 2026 with an annualized run rate EBITDA benefit of $150 million. In December, subsequent to the end of the first quarter, Commercial Metals Company closed on the acquisitions of CP&P and Foley, which is transformational for us, broadening Commercial Metals Company's commercial portfolio in a way that increases our value proposition to customers, meaningfully enhancing our financial profile and extending our growth runway. Based on our initial observations over the last few weeks of owning these businesses, I am even more confident regarding their potential to strengthen Commercial Metals Company and create meaningful value for shareholders. Both CP&P and Foley are excellent cultural fits for our company and have talented teams in place at every level of their organization, including very strong leadership groups that will remain in place and are fully aligned in executing Commercial Metals Company's strategic vision and delivering meaningful synergies. Discussions with Precast leadership regarding the business outlook for fiscal 2026 have been positive. Backlogs are at good levels, featuring solid volumes and attractive average pricing, which should support healthy shipment levels as we enter the spring construction season. The outlook for underlying demand is positive for our core Mid-Atlantic and Southeastern geographies, bolstered by the expected growth in data centers, manufacturing facilities, and stormwater management systems. We look forward to providing further details on our second quarter earnings call, which will include financial results for our Precast business within Commercial Metals Company's Construction Solutions segment. Having mentioned our Construction Solutions group a few times, I would like to highlight the reasons for renaming the segment. First, we believe that the title Construction Solutions better reflects the business composition of the segment, as more than 95% of the EBITDA will be derived from providing high-margin solutions to the construction market. Additionally, the new name more closely aligns with the strategic priorities of Commercial Metals Company, in particular, the aim to profitably grow our role in early-stage construction and build a commercial portfolio that makes us the preferred partner by our customers. Before turning the call over to Paul, I would like to recognize the efforts of our world-class employees. We have asked a lot of the team as we execute our ambitious vision for the future, and I am truly inspired by all that they have accomplished so far. Their efforts have been instrumental in laying the groundwork for years of success ahead, and I look forward to maintaining that momentum. With that, I'll turn the call over to Paul. Paul Lawrence: Thank you, Peter, and good morning. And Happy New Year to everyone on the call. As noted earlier, we reported fiscal first quarter 2026 net earnings of $177.3 million or $1.58 per diluted share compared to a net loss of $175.7 million and a net loss per diluted share of $1.54 in the prior year period. During the quarter, we incurred approximately $36.7 million in pretax expenses, with $24.9 million related to the acquisitions of CP&P and Foley, $3.7 million for interest on the judgment amount associated with the previously disclosed litigation, as well as an $8.1 million unrealized loss on undesignated commodity hedges. Excluding these expenses, which amounted to $28.9 million on an after-tax basis, adjusted earnings for the quarter totaled $206.2 million or $1.84 per diluted share, compared to $86.9 million and $0.76 per diluted share, respectively, in the prior year period. As a reminder, the prior year period included an adjustment for an estimated net after-tax charge of $265 million to reflect an adverse litigation verdict accrual. During the 2026, Commercial Metals Company generated consolidated core EBITDA of $316.9 million, representing a 52% increase from $208.7 million in the prior year period. Commercial Metals Company's North American Steel Group generated adjusted EBITDA of $293.9 million for the quarter, equal to $257 per ton of finished steel shipped. Segment adjusted EBITDA increased 58% compared to the prior year period, driven primarily by higher margin over scrap cost on steel products, resulting in an EBITDA margin of 17.7% compared to 12.3% in the prior year period. Financial results also benefited from continued improved operational performance at Arizona 2, as well as contributions from our TAG efforts. As Peter mentioned, we are driving continued gains from TAG initiatives launched during fiscal 2025 and have more recently rolled out commercial initiatives to improve margin capture. The Construction Solutions Group's first quarter net sales of $198.3 million grew by 17% on a year-over-year basis. Adjusted EBITDA of $39.6 million significantly increased by 75% year over year, driven by strong results from TENSAR and Commercial Metals Company Construction Services, as well as some improvement at Commercial Metals Company Impact Metals from the depressed levels of a year ago. TENSAR achieved its best first quarter financial performance under Commercial Metals Company ownership, benefiting from solid project demand, the positive impact of the sales initiatives mentioned by Peter, and strong cost management efforts. Commercial Metals Company Construction Services likewise profited from self-help measures that drove EBITDA improvement on both a year-over-year and sequential basis. Contributions from our Performance Reinforcing Steel division remained historically strong but declined modestly from recent elevated levels. Construction Solutions Group adjusted EBITDA margin of 20% improved by 6.6 percentage points compared to the prior year period. Our Europe Steel Group reported adjusted EBITDA of $10.9 million for the 2026, down from $25.8 million in the prior year period. The decline was driven by lower CO2 credit, which amounted to $15.6 million during the 2026 compared to $44.1 million received during the year-ago period. The reduction in the CO2 credit was a result of the credit generated for calendar 2024 being separated into two tranches, one of which was received during the 2025, the remaining amount was received in the 2026. By comparison, results for last year's first quarter reflected the entirety of the 2023 annual CO2 credit. Excluding the impact of energy cost rebates, adjusted EBITDA improved on a year-over-year basis on stronger shipping volumes and higher metal margins. Shipments grew by approximately 16% from the 2025 as a result of continued Polish economic expansion and reduced import flows from Germany. Metal margins expanded by $37 per tonne, largely driven by the same factors. During the quarter, our Polish mill underwent an annual maintenance outage, which incurred approximately $10 million of costs. The team did an excellent job starting up efficiently following the planned downtime and, similar to recent quarters, continues to effectively manage costs across the organization. I will now discuss Commercial Metals Company's balance sheet liquidity position as outlined on Slide 13 of the supplemental presentation. As of November 30, cash, cash equivalents, and restricted cash totaled $3 billion. This amount included approximately $2 billion in proceeds raised through a senior notes offering in November, most of which was earmarked to fund the company's purchase of Foley products. In December, we closed both the CP&P and Foley acquisitions, and payments of approximately $2.5 billion were made. The table on the left-hand side of Slide 13 provides an illustrative view of Commercial Metals Company's cash balance, net debt, and net debt to EBITDA, assuming both transactions had closed on November 30. As you can see, net leverage stands at approximately 2.5 times using combined adjusted EBITDA for legacy Commercial Metals Company and our newly acquired precast business. This is lower than the 2.7 times pro forma figure shared at the time of the Foley acquisition, with the reduction resulting from the increased EBITDA generation of our business. We continue to be confident in our ability to return to our net leverage target of below two times within eighteen months and will prioritize delevering in the quarters ahead. This effort will be aided by strong cash flow generation from the Precast platform itself, the wind-down of capital expenditures for the construction of Steel West Virginia, and the significant cash tax savings generated by the 48 program in the One Big Beautiful Bill. Additionally, we have reduced our share repurchases during the period of leverage reduction to amounts approximating our annual share issuance under our compensation programs. Subsequent to quarter-end, Commercial Metals Company increased the capacity of our revolving credit facility from $600 million to $1 billion. This will ensure a strong liquidity position to support the execution of strategic goals going forward. Using the same adjustments to our November 30 balance sheet to give effect to the precast acquisitions, also giving effect to the upsized revolver, estimated available liquidity would have been slightly over $1.7 billion. Commercial Metals Company's effective tax rate was 3.1% in the first quarter. Peter Matt: Looking ahead, we anticipate a full-year effective tax rate between 5% and 10% for fiscal 2026. As a result of several factors, including our 48C tax credit, bonus depreciation on our West Virginia mill investment, as well as accelerated depreciation on the assets of the acquisitions of Foley and CP&P, we do not anticipate paying any significant U.S. Federal cash taxes in fiscal 2026 or for much of fiscal 2027. Turning to Commercial Metals Company's fiscal 2026 capital spending outlook, we anticipate spending approximately $625 million in total. Of this amount, approximately $300 million is associated with completing the construction of our Steel West Virginia micro mill, as well as a handful of high-return growth investments within our Construction Solutions group, and approximately $25 million in our newly acquired Precast businesses. This concludes my remarks, and I'll turn it back to Peter for additional comments on Commercial Metals Company's financial outlook. Thank you, Paul. Turning to our outlook, we expect consolidated core EBITDA in the 2026 to decline modestly from first-quarter levels due to a normal level of slowdown within our key markets. This will be partially offset by the addition of Commercial Metals Company's recently acquired Precast businesses. The company will recognize several acquisition-related expenses during the second quarter, including transaction fees, debt issuance costs, and customary purchase accounting adjustments, each of which will be excluded from core EBITDA. Segment adjusted EBITDA for our North America Steel Group is anticipated to be lower sequentially due to normal seasonal volume trends and the impact of planned maintenance outages, while steel product metal margin is expected to remain relatively stable. Financial results for the Construction Solutions Group should improve compared to the 2026, with the contribution of the Precast business more than offsetting seasonal weakness across the segment's other divisions. Europe Steel Group adjusted EBITDA is expected to be approximately breakeven, with margin growth potential later in fiscal 2026 when the carbon border adjustment mechanism takes full effect. The first quarter marked an excellent start to fiscal 2026, and Commercial Metals Company is well-positioned to deliver strong results for the remainder of the year. Solid market dynamics, benefits of our TAG program, and effective operational execution are generating momentum in Commercial Metals Company's existing businesses. This will be supplemented by $165 million to $175 million of EBITDA contributions from approximately eight and a half months of ownership of the Precast businesses in fiscal 2026. Looking out longer term, I am confident that Commercial Metals Company will continue to create value for our shareholders as we remain focused on executing against our strategic initiatives, which we expect to deliver meaningful and sustained enhancements to our margins, earnings, cash flow generation, and return on capital. I would like to conclude by thanking our customers for their trust and confidence in Commercial Metals Company and all of our employees for delivering yet another quarter of very solid safety and operational performance. Thank you. And at this time, we will open the call for questions. Operator: Thank you. We will now begin the question and answer session. The first question will come from Satish Kasinathan with Bank of America. Please go ahead. Satish Kasinathan: Yes, hi, good morning and congrats on the strong quarter and as well as the closing of CP&P and Foley acquisitions. Based on what you have seen in the past three to five weeks since the closing of these acquisitions, can you maybe talk about some of the positive or negative surprises you have seen so far? And do you see any potential for acceleration of the three-year timeline to realize the announced $30 to $40 million in synergies? Peter Matt: Yeah. Thanks, Satish. Great question. Again, with the preface of this is early days, our ownership of this business, I would say that we have been really, very pleasantly surprised with everything that we've seen. And I wouldn't say there's anything that's really come up that we weren't expecting on the negative side. And I'd say there are a number of things that are on the positive side that we've seen. And let me just give you a little story from one of my trips. I went to a CP&P off-site, and it was a gathering of probably 100 folks from CP&P and then a couple of product experts from Commercial Metals Company. And two remarks I'd make that were, I think, super gratifying as a, you know, kind of new owner of the business. First is, in the room, you could have been in a room with Commercial Metals Company folks. The cultural affinity is outstanding. And that was super helpful to see because I think it's gonna make our integration efforts go well. Second was I noted that we brought a couple of Commercial Metals Company product experts and there was a tremendous amount of discussion around, you know, kind of different opportunities that we and CP&P have together and a lot of excitement around that. So that was also super encouraging because it kind of validates the part of our investment thesis. In terms of the synergies, we are, I would say, the work we've done so far leads us to believe that we're very confident that we can get the synergies. What I would say is that it's early to speculate on the timing, and I wouldn't want to accelerate what we've said in the past. But we're very confident that the synergies are there, if not more. Operator: Okay. Thank you for that. Satish Kasinathan: Maybe my second question is on the North American metal margins, which are currently at three-year highs. Can you maybe talk about how you see those margins sustain or improve in the coming quarters given the context that we have some new supply to come into the market? Peter Matt: Yes. Maybe I'll start on this going backwards and commenting on the new supply. So there's been a lot of talk about the new supply and yes, there is new supply coming into the market. I think we've been consistent in saying that we're not overly concerned by the new supply. And that's particularly true in the current context where you've got much lower imports than we've had in previous years. So based on the level of demand as it is today, we feel comfortable that the marketplace can absorb the new supply as it comes in. And if demand gets stronger, which we believe it will, then, I think it's fair to say that there's to be plenty of demand to absorb any new supply that comes into the market. So we feel good about that. Getting to your question on margins, so in Q2, we would expect mill margins, so our steel product margins to be flattish. And that is taking into account the fact that we do expect to realize all of the November $30 price increase. But we also have seasonally stronger scrap in this period and that will offset some of that. And in our downstream, we could see, I think we think it's going to be flat to could be slightly down given the kind of the raw material path through to the fabrication business. But as we go forward, I think the shape of the margins is really going to depend on a couple of factors. One is obviously the supply-demand that emerges in the marketplace. And the second is really our TAG initiative. And I think this is an important point to make on TAG because, you know, TAG is all about growing margins in a sustainable way across our business. And we expect that some of that TAG contribution is gonna come in the form of benefiting metal margins as we go forward. So we're very excited about that. And I think as we go into the back half, there has been a merchant price increase of $50 a ton, we should see a little bit of that in the second quarter, but really most of it is going to be in the back two quarters and any other pricing actions will really set us up for a strong back half of 2026. Satish Kasinathan: Okay. Thank you. I appreciate the color. Peter Matt: Thank you. Operator: The next question will come from Katja Jankic with BMO Capital Markets. Please go ahead. Katja Jankic: Hi, and a Happy New Year to everyone. Maybe staying on the more near term, so you expect seasonally volumes to be impacted by seasonality. But can you talk a little bit about what that means? Because it seems that so far we haven't really seen a material impact from seasonality. Peter Matt: Yes. It's a great point. We did have stronger volumes than we honestly than we expected in the first quarter. But going into the second quarter, we are expecting kind of typical seasonality. And remember, in the second quarter, we've got the winter conditions, construction slows down, and typically there's been going Q1 to Q2, there's a 5% to 10% decline, and we'd expect to be in that range. But I will acknowledge that, you know, the volumes have been stronger heretofore. Katja Jankic: And then maybe on the West Virginia mill, can you update us on what the ramp-up plan there is? Peter Matt: Yeah. We're super excited about that. You start one of these projects and it seems like a long way off and now kind of we're within six months of the startup. So we've actually started some of the cold commissioning already. The hot commissioning, which is, you know, the official startup is, as Paul noted, likely to begin or will begin in June. And we feel really good about it. And just to comment on West Virginia, you know, given the market conditions, we couldn't be bringing that on at a better time. But the other thing I think that really bears note is the fact that we are bringing this project in on budget. And I have to say hats off to the whole West Virginia team for the incredible capital discipline that they've shown in this project. You know, these are big dollar expenditures. We're spending over $600 million on this project. And there is a lot of examples of projects that are kind of over budget. And thanks to the discipline that everyone's shown, we've managed to bring it in and ultimately that helps us from an ROIC perspective, which is a critical objective for us to improve. Paul Lawrence: Got you. The only thing I would add to Peter's comments is just recall from a startup perspective, this is a rebar-only mill different from Arizona 2. And so typically, based on our other rebar-only mills and the fact that this is not near the degree of new technology being introduced as we did with AZ2, we would expect to ramp the operation up over the following twelve months once we meet that hot commissioning startup. Katja Jankic: Perfect. Thank you. Peter Matt: Thank you, Katja. Operator: The next question will come from Tristan Gresser with BNP Paribas. Please go ahead. Tristan Gresser: Yes. Thank you for taking my questions. The first one is on the old EBG division. If you can talk a little bit about the outlook for fiscal Q2, also, more specifically, what kind of seasonality usually do you see on the precast business? Is it fair to assume a normalized EBITDA quarterly run rate for Precast? And add a bit of, I mean, because TENSAR has been pretty strong as well. So I would assume maybe a bit stronger on that division, but yeah, we'd love to have your thoughts on that. Peter Matt: Yes. So thank you for the question, Tristan. So EBG, typically, there is, as we've said before, there is absolutely seasonality in that business. As we noted in the prepared remarks, a substantial portion of that, most of the lion's share of that is going into the construction market. So seasonality is definitely a factor in our Q2. It is the weakest period. And I should note that TENSAR in particular with ground stabilization is kind of the most seasonal as we look at that business from year to year. So I think you can expect normal Q2 seasonality in that. Precast, so in our Precast business, we think that will largely follow the seasonality that we have in our business overall. And what I mean by that is our steel business overall. Typically, you've got in the winter months, you've got a reduction in the amount of activity that you see, and we expect that to be the case too. So this is maybe not part of your question, but I'll go to it directly to say, we expect in the second quarter the Precast business to contribute about $30 million of EBITDA roughly speaking. Which will seem lighter and that goes entirely to seasonality. And as Paul noted in his comments, the backlogs that we're seeing are very strong. They're stronger than last year. And so we feel very good about the prospects for that business going into our ownership in 2026. Tristan Gresser: Alright. No, that's very clear. Going back to your prepared remarks on scrap sorting, how much of a benefit it's been, can you give us some numbers? And what you've been doing and how has it changed today versus what you used to do in the past? In terms of using less scrap and varying the quality of the scrap, any color there would be great. Peter Matt: Yeah. I'll start and then Paul can jump in with any additional comments. But I guess what I'd start by first saying is that in the past, we talked about the scrap optimization being, I think it was a $5 million to $10 million opportunity. And that has grown substantially. And I think the key point is that we started out in a couple of mills and now we're pushing it to other mills. So we're getting the benefit across our broader footprint. And there are two points, as you said, one is in the quality of the scrap. We've done a tremendous amount of work in the quality of the scrap and we've identified places where, for example, we're using a lot more shred than we need to use. So we can cut back on the shred and that obviously kind of reduces scrap costs and so forth. We've also done a tremendous amount of work on yield, and that has helped us a lot in terms of obviously using less scrap to produce the tons and sell the tons that we want to produce and sell. Paul Lawrence: The only thing I would add, Tristan, is, you know, as we've noted, what we achieved last year was approximately $50 million from TAG. And I would say those two initiatives, just given the dollars involved, Peter outlined, probably were near half of the realization that we had last year. And as Peter said, those were on, you know, piloting the initiatives in a few locations and growing throughout '25 and '26 and an incremental number of mills to get it across the entire platform. And so we are very excited about the opportunity of those initiatives to continue to contribute well to our business. Peter Matt: One thing that's maybe worthy of an additional comment vis-a-vis TAG is, and this goes for a lot of our TAG initiatives. What we found is that on something like scrap optimization, it started out in one mill. And then you start to see these real benefits in the mill. And, of course, every mill manager wants to run their mill as well as they possibly can. So there's been this kind of compounding effect as more of the mills take it on and bring it into full bloom. So and that's, I think, a characteristic of the TAG program in general. And one of the things that we're super excited about, we see a new initiative coming in and sizable new initiatives coming in. And we got to build charters and plans around these different initiatives. But you can see how this can be really a game-changer. And as we've talked about in the past, again, the goal is long-term sustainable margin improvement over what we would be otherwise, right? So if x was our historical margin, we want to be at x plus Y. And we're working internally on some tools to help you all define that, but we believe that there is through TAG the opportunity to make our business durably better. And I think that'll be a really important contributor to value. Tristan Gresser: Alright. That's very helpful and interesting. Thank you. Operator: Thank you. The next question will come from Alex Hacking with Citi. Please go ahead. Alex Hacking: Yes. Hi, thanks. Good morning. Happy New Year, everyone. I guess the first question, you mentioned increased commercial selectivity in rebar fab and part of that was about reducing risk. Has counterparty risk been rising and is there a reason why? Thanks. Peter Matt: Why reduce, so let me just make sure I understand your question. Why were addressing that point? Sorry, the question was, has counterparty risk been rising and why has counterparty risk been rising if it has been rising? Alex Hacking: Yeah. I wouldn't say it's been rising. I would say this is a risk that we have taken historically that we are looking to reduce in the portfolio. And where it manifests itself is, Alex, in our fabrication business and some of the contracts will be asked to do longer-term jobs. And a lot of times, those longer-term jobs can be at a fixed price. And of course, our raw material inputs can change. So you can get out two years or three years and there have been some instances with this company in the past and I'm sure others where you can get upside down on a project. And what we're trying to do is to reduce that risk by making sure either through proper escalators, proper indexing, that we are being compensated for that risk. So that again, it goes back to the ROIC point that in any environment, we are generating a good return on the capital that we've put in, which is substantial on a business like this. Paul Lawrence: And I just to reiterate, and make sure it's clear, you know, counterparty risk, we have historically never had an experience of significant counterparty risk and nor do we see that really going forward with the structure of how the construction contracts are written. This is all about reducing the risk, Peter said, around margin preservation and ensuring we're getting a good margin on the job. Alex Hacking: Oh, I get it. Thanks for the clarification. I guess I misinterpreted. And then on Europe, as you mentioned, the importance of getting ahead of CBAM. How do you have any idea, like, how long it could take for prices in Europe to stop benefiting from CBAM? Thanks. Peter Matt: Yeah. So again, it took effect January 1. And our read on the situation is for certain importers, the average impact on them could be €50 a ton. And for many of them, it could be higher initially because they have to be qualified to get to the €50 a ton. And before they're qualified, there's a default rate that's even higher. So this is going to play out over the course of calendar 2026. I think it's fair to say you've probably noted in the import numbers that there was a large pre-buy of incremental tons coming into Europe that probably before CBAM, excuse me, that will probably delay the impact of the CBAM credit that we should be getting. But I do believe by the time we get to the, we'll get a little bit of it in our second quarter and in our third and fourth quarters, we should see a substantial portion. And certainly, over the course of the year, the calendar year, it will roll in. The other thing to note is that in addition to the CBAM, there is also this safeguard mechanism that was renegotiated by the EU. And the safeguard mechanism, remember, that's effectively a quota system. And in the revised safeguards, the quotas are reduced by 50% and the tariffs for being above the quotas are increased by 50%. That should come into effect in the middle of the year and that should be only additive to the situation in Europe. And just to frame it a little bit for you, if you think about our production capability in Poland, and you think about the $45 million of CO2 credits we get, that's about $30 a ton above our breakeven operational performance today. And then add €50 to that, all of a sudden, start to get to numbers where we are running at levels at or above our through-the-cycle performance. So again, this is not something that's going to happen overnight, but in addition to all the other catalysts in Poland, I think it's reason for some real optimism. Alex Hacking: Thanks and best of luck. Peter Matt: Thank you. Operator: The next question will come from Timna Tanners with Wells Fargo. Please go ahead. Timna Tanners: Yes. Hey, good morning and Happy New Year. I wanted to tailor my questions to trade. So you talked about the CBAM implications helping pricing, but I think another aspect of CBAM is that it helps domestic producers in Europe perhaps take some market share. So curious about, you know, what volume impact you might see there? And then I have a follow-up on the U.S. Trade side. Peter Matt: Yep. I think that's a fair point that you're making. And I think there are some volume opportunities. We have been running at, I would say, a relatively good rate of production recently. So I think there is some volume opportunity for us. But I wouldn't say it's huge at this point. Timna Tanners: Okay, great. Second question on the U.S. Side, I know you mentioned, of course, Algeria, Bulgaria, Egypt, Vietnam. But if you look at the latest trade data, actually, imports are coming again from Turkey and from what I think Portugal and Spain. So just any thoughts on the Turkish side and also maybe Portugal and Spain keep more production domestic in that falls off. But it does seem like the other countries before you mentioned are already shrunk in terms of importance probably because of the filing of the case even before any decision. Peter Matt: Yeah. No. It's a great point. We've definitely seen some pullback in the imports from those countries. And I'll just remind you, and others that those countries in 2005, the trade case countries imported about 500,000 tons of steel into the U.S. So if there was an outcome that's anything like what we have on the Algeria case and a preliminary ruling, I think that's going to be really helpful in terms of keeping those imports out of the country. And remember on those trade cases, these are five-year terms before the sunset review. So it's quite a durable point. I think to your question on Turkey, we have noticed that Turkey has increased their shipments. We'll have to watch that. Again, in the context of overall imports today, not overly concerned about that. But again, we'll be watching that carefully to see to make sure that it to make sure that what they're importing, they're importing as a fair trader. Timna Tanners: Got it. Yes, seems like imports could take yet another leg down. But thanks for the color and all the best. Appreciate it. Peter Matt: Thank you, Timna. Operator: The next question will come from Bill Peterson with JPMorgan. Please go ahead. Bill Peterson: Yes. Thanks, everyone. Happy New Year, and thanks for all the color on the call thus far. I wanted to ask about AZ2, how the ramp has progressed during the prior quarter and what utilization you're running at? And then how should we think about operations and utilization ahead? Peter Matt: Yeah. AZ2, we've said in the past that this has been a challenging one. And my comments will cover that a little bit. But I think the important point is we reached profitability on EBITDA in the fourth quarter and we were nicely profitable in the first quarter too. And we expect to be nicely profitable throughout the year there. In terms of utilization rates, we exited last year at about 60%. We expect to demonstrate full run rate during our fiscal year 2026. But we don't expect to be at full run rate in 2026. And that is because we still have a number of merchant specs that we've got to perfect and that's going to take some time and it'll force us to run at, you know, kind of suboptimal utilization. But we feel good about where we are. There's still some challenges there to be clear. But the team has done an incredible job. And this is where I think the Commercial Metals Company team really shines because we have drawn people and expertise from all across our network to help us with this operation. And remember, the challenge is this isn't your grandfather's steel mill, so to speak, right? This is a very innovative steel mill. It will be a workforce in our portfolio, but there's a lot of new technology to make work. And the other challenge that we've had there, Bill, is just with kind of the people not from the vantage point of the people good, the people are great, but it takes some training to learn this. And so we've done a lot of work around training, and I think that's enhancing our reliability substantially and it will continue to do so as we go through the year. So hopefully that helps you. Bill Peterson: Yes, it does. Thanks for that. And then my second question, can you speak a bit more to the pricing profile of your downstream backlog and whether new order entry continues to be priced higher? What's in the backlog? And I guess to what extent is the commercial discipline TAG initiatives you spoke of earlier playing a role? Peter Matt: Yes. Absolutely. So we do continue to see prices improve in our downstream. So we have been really for the last couple of quarters putting new orders into the backlog at higher prices. So that continues and we feel good about that progression and actually kind of starting out the year, we've had a couple of new orders that have come in a really nice place. So I think we feel good about that. And again, demand in that business remains very solid. And so there's a lot of project activity and a lot on the drawing board. So we're optimistic about where things go there. Bill Peterson: Thanks again. Peter Matt: Yes. Thank you. Operator: The next question will come from Carlos De Alba with Morgan Stanley. Please go ahead. Carlos De Alba: Yes. Thank you very much. Happy New Year, everyone. So maybe just adding to the discussion on the new commercial approach in the fabrication business. How much of your business is already in this indexed format where you are able to maybe better protect your margins? And how do you see that evolving in the coming quarters in still not a big percentage of the overall business? Peter Matt: Yes, it's not a big percentage today. And the openness to it among the customers can vary. Right? So there are some DOTs, for example, that are more inclined to it than others. So we're working from a relatively low base on that, but we do see the opportunity to increase it and to open the dialogue with customers on indexation. And indexation is just one of the strategies, right? The other obvious strategy there is just proper escalation. And when you talk about commercial excellence, one of the things that we've been, I think, showing the team's done an amazing job on being more disciplined about this is in making sure that number one, we have proper escalators in place. And then number two, that we're actually enforcing those escalators as we go through, you know, kind of go through the period. So this is a journey, but the way we think about it internally is that over time, it doesn't make sense for companies like Commercial Metals Company to take this type of risk in the way that we've been taking it. And over time, we will work towards reducing that. And that will again contribute to higher margins through the cycle, higher returns, more consistent returns, all the things that we're pointing towards. Paul Lawrence: And Carlos, I would just add, you know, what we've spoken of is really around protecting the risk from a duration perspective. There's also recognizing the value that Commercial Metals Company brings from a reliability perspective. And I think that is also critical in terms of our capabilities and ensuring we get value for the service we bring. There's a tremendous amount of risk to a construction project that comes with all the subcontractors. Having a reliable partner as Commercial Metals Company is drives a higher value recognition. And we got to make sure we capture that. Carlos De Alba: That makes sense. And then what is the EBITDA margin that your $160 million to $170 million EBITDA guidance for CSG represent? And would you say that this guidance, this EBITDA guidance is somewhat conservative given that you're just starting to take over those assets? Peter Matt: Yeah. I mean, Paul, you can comment on the margin, but I would say, look, it's early days, right? And we're doing a lot of work on integration. As I said at the very beginning, we feel kind of good about what we've seen. But there's some adjustment that has to happen as you bring a new company into our company and so maybe we're being a little bit conservative, I think it's appropriate to be cautious and again, our goal with all of you and with all of our investors is to be in a situation where we are under-promising and over-delivering and that's what we're shooting to do here. Paul Lawrence: And as far as the margins are concerned, it'll be made up of the two buckets. Our existing business typically is in the high teens, call that 18% to 20% margin. We would expect that to remain there. And the Precast business to come up, the combination of the two entities to be in the 30% to 35% range from a margin perspective. So no change. Obviously, it's just a different mix going forward than what we've had historically. Carlos De Alba: Yeah. Great. Thank you, Paul. Yeah. I misspoke. A period $165 million to $175 million EBITDA guidance is not for CSG. It's for the Precast unit. Thank you very much. Good luck. Operator: Thank you. The next question will come from Mike Harris with Goldman Sachs. Please go ahead. Mike Harris: Yes. Good morning. Thanks for squeezing me in. Just one quick question on my part. When I look at the TAG program, I think last quarter, the expectation for the expected run rate annualized EBITDA benefit at the '6 was greater than 150. And now you're saying 150. So does that change just a function of timing? Or did you adjust your initiative list? Or just being conservative? Peter Matt: No. I don't think it was greater than 150. I think we have moved towards 150 as we've gotten more clarity on the opportunities in TAG. And by the way, as we've said in many other forums, this is just the beginning. Right? So it's not like 150 is the end. As we get more fidelity around this, we will share more. What we're really doing in TAG is we're trying to build durable margin improvement. So rather than throw lots of programs in that we haven't fully vetted or we haven't done the work to make sure that they deliver and they deliver in a sustainable way, we're proceeding a little bit more slowly. But I think the outcome will be something that's more lasting. Mike Harris: Okay. Thanks a lot for that clarification. Peter Matt: Thank you. Operator: The next question will come from Phil Gibbs with KeyBanc Capital Markets. Please go ahead. Phil Gibbs: Hey, good morning. Sorry if this question was asked earlier, but what is the typical seasonality of the North American business from a volume standpoint relative to Q1? Paul Lawrence: Typically, Phil, it's in the 5% to 10% range that we expect. Obviously, it's very much weather dependent and we've seen some inclement weather on the West Coast. Certainly, nationally, it's been pretty good so far, but we were only in the early innings of the winter. So typical is 5% to 10% and that's what we're guiding towards. Phil Gibbs: Thank you. And then in terms of integrating just baseline depreciation, I'm assuming you're going to have some write-ups associated with the Precast deals. I think your baseline for D&A was like $70 million or $75 million in Q1. So what should we be anticipating for Q2? Paul Lawrence: Yes, it's a great question, Phil. And as we have owned these businesses just for a short period of time and the complexity of some of the purchase accounting, we're not in a place from a D&A perspective, well, really, amortization perspective to provide guidance. There's a lot of intangibles associated with the businesses and they all have different valuation approaches and durations. And so what we know is cash flow, the cash flow of these businesses will be certainly very attractive as we outlined at the acquisition. We were able to achieve the financing at very attractive rates in November and excited about the conclusion of the financing. But as far as the accounting, we are not yet in a position to really provide much outline in terms of what the amortization will be. Phil Gibbs: Thank you. Paul Lawrence: Thank you. Operator: At this time, there appear to be no further questions. Mr. Matt, I'll now turn the call back over to you. Peter Matt: Thank you, Nick. At Commercial Metals Company, we remain confident that our best days are ahead. The combination of structural demand trends, operational and commercial excellence initiatives to strengthen our through-the-cycle performance, and value-accretive growth opportunities create an exciting future for our company. Thank you for joining us on today's conference call. We look forward to speaking with many of you during our investor calls in the coming days and weeks. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. My name is Jeannie, and I will be your conference operator today. I would like to welcome everyone to the TD SYNNEX Fourth Quarter and Full Year Fiscal 2025 Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to remove your question, press 1 again. We request that you limit yourself to one question to allow time for other participants to ask their questions. Thank you. At this time, for opening remarks, I would like to pass the call over to Nate Friedel, Head of Investor Relations at TD SYNNEX. Nate, you may begin. Thank you. Good morning, everyone, and thank you for joining us for today's call. Nate Friedel: With me today is Patrick Zammit, our CEO, and David Jordan, our CFO. Before we continue, let me remind you that today's discussion contains forward-looking statements within the meaning of the federal securities laws, including predictions, estimates, projections, or other statements about future events, including statements about our strategy, demand, plans and positioning, growth, cash flow, capital allocation, stockholder return, as well as our financial expectations for future fiscal periods. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties discussed in today's earnings release, in the Form 8-Ks we filed today, in the risk factors section of our Form 10-K, and our other reports and filings with the SEC. We do not intend to update any forward-looking statements. Also, during this call, we will reference certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP results are included in our earnings press release and the related Form 8-K, available on our Investor Relations website, ir.tdsynex.com. This conference call is the property of TD SYNNEX and may not be recorded or rebroadcast without our permission. I will now turn the call over to Patrick. Patrick? Patrick Zammit: Thank you, Nate. Good morning, everyone, thank you for joining us today. We are pleased to report another set of record results that complete an outstanding year for our organization. Over the full year, our business excluding HIVE increased its gross billings in the high single digits year over year, while improving both its gross margin and operating margin profile. Additionally, Hive grew its gross billings double digits, and well above our expectations, and has made further progress expanding its set of offerings and diversifying its customer base. Turning to the fourth quarter, our non-GAAP gross billings of $24.3 billion represented an increase of 15% year over year, or 13% in constant currency, and non-GAAP diluted earnings per share of $3.83 represented an increase of 24% year over year. Both of these established new records for our company, demonstrating the value of our diversified business model, the successful execution of our long-term strategy. Within TD SYNNEX, excluding HIVE, our momentum continued with gross billings increasing 10% year over year, and gross profit and operating income each also increasing by double digits. Hive experienced another strong quarter, with gross billings increasing by more than 50% year over year, and ODM Centimeters gross billings increasing 39% year over year, driven by sustained broad-based demand in cloud data center infrastructure from our hyperscaler customers. HIVE's operating income also grew meaningfully year over year, and continues to become a larger portion of our overall mix. Our results reflect its strength across all regions and key technologies. North America continued to grow steadily supported by demand across each of our key customer segments, prioritization of increased security requirements, and ongoing shifts towards complex, multi-cloud architectures. Europe grew faster than we anticipated, as customers prioritized infrastructure software, PC device upgrades, modernization of aging infrastructure, despite the slower macroeconomic backdrop. We've seen over the last few quarters, Asia Pacific and Japan remain a key growth engine, driven by rapid cloud expansion, PC device upgrades, accelerating AI development, and strong demand from fast digitizing economies across the region. Lastly, our growth story in Latin America remains encouraging, delivering double-digit top-line momentum with strong engagement across our and customer base. Our performance is a direct outcome of executing on the strategy we outlined at investor day. As we enter 2026, we are sharpening execution around four focus areas that will define what we want to be known for. We will start with omnichannel engagement. Through disciplined investments in our partner-first digital portal, we've built a frictionless interface that meets customers wherever they transact, and simplifies the experience end to end. By pairing seamless digital engagement with our personalized relationship-driven support, our highly skilled teams help customers navigate complexity, and move beyond transactions, earning the role of trusted adviser and forging long-term partnerships. We enhanced our partner-first digital bridge functionality in Q4, with a new AI assistant that enables customers to transact in a self-service mode 24 by 7 in their working environment. This enhancement transforms how our customer sales teams access and act on information to support their end customers in real time. Our customers have already tested that the new capability has saved employees in sales and product procurement operations multiple hours per day. The industry is also recognizing our strength in this area. During the quarter, we were awarded UK iCloud Marketplace of the Year by CRN. We received this honor due to the differentiated quality of our platform, along with our leadership in customer enablement, and technical training. Helping our customers navigate what has been a transformative year in this space and ultimately accelerating growth throughout our cloud portfolio. The next strategic pillar is specialized go-to-market. Our collection of specialist approach combines deep technical expertise with a deep understanding of our customers' go-to-market strategy and needs. This dual competency accelerates technology adoption, and positions us as a growth catalyst for vendors and customers. It's a differentiated capability that strengthens stickiness and expands our wallet share in high-growth segments. Our Q4 accomplishments within this pillar include winning a global security RFP, that will enable us to expand our portfolio in existing geographies with large enterprise customers, is a segment that has not historically purchased through TD SYNNEX. We have chosen due to our global presence and deep security specialization as well as for our ability to unlock substantial cost savings for the vendor while still improving customer experience. Expect these customers will increasingly leverage our broader product and service portfolio over time, enabling them to consolidate spend, and capture additional growth in the market. Our emphasis on specialization has been recognized by our vendors as well. In Q4, Cisco named TD SYNNEX as distributor of the year globally, as well as regionally in The Americas and EMEA. These awards reflect how our specialization deep alignment with Cisco, and innovation across markets consistently deliver real business outcomes for our customers. Our next pillar is focused on delivering best-in-class enablement. We accelerate time to market by equipping our customers with advanced training certification programs, enablement tools, and precise resources and expertise tailored by technology, and customer segments. This approach reduces ramp-up time strengthens customer capabilities, and drives faster adoption of high-value solutions. Which ultimately improves productivity and expands our share of wallet. During Q4, we announced AI game plan, a new customer-led workshop experience designed to help their sales teams translate AI opportunities into real-world business outcomes for their end customers. Are just at the beginning, and we continue turning our vast data lake and algorithms into industry-leading scalable digital services that enhance experiences lower costs, and unlock new revenue and efficiency opportunities for our existing customers. These strategies work in concert to support and substantiate our final strategic pillar, expanding our brand visibility. Our brand promise making IT personal, describes our role as an indispensable partner in the technology channel. We aim to be visible, personal, and influential at every stage of the customer journey. Reinforcing trust and driving loyalty. This sustained presence amplifies our market relevance and underpins long-term growth. By bringing our strategy to life every day, across these four pillars, we are continuing to strengthen our competitive position as the strategic business partner that our partners can rely on to create more opportunities that deliver sustainable long-term growth. Moving to HIVE. We continue to experience sizable growth benefiting from broad-based demand for cloud data center infrastructure, across our hyperscaler customers. And we believe that we are very well positioned to continue to get more opportunities that showcase our ability to support a wide breadth of programs for our customers. Our customers are turning to us for, among other things, our production flexibility, favorable US footprint, ability to co-develop complex solutions, and secure supply chain. These differentiators position us to continue to be a trusted partner in the assembly and deployment of complete rack-level systems across all market environments, through time. Looking ahead, I am bullish on the long-term value proposition of HIVE and IT distribution. We believe the untapped market opportunities in front of us in both businesses remain substantial as we aim to service a greater portion of the overall IT market through time. Now I will pass it to David to go over the financial performance and outlook in more detail. David? David Jordan: Thanks, Patrick, and good morning, everyone. We're pleased to report a strong close to our fiscal year with fourth quarter results that exceeded the midpoint of our guidance across all key metrics. Gross billings increased 15% year over year reflecting broad-based strength across both distribution and highs. Our gross operating margins expanded year over year driven by a combination of operational efficiencies favorable mix, and disciplined margin management. Non-GAAP earnings per share increased 24% year over year delivering meaningful value for shareholders and underscoring the strength and value of our business model. Moving into the details. Our endpoint solutions portfolio increased gross billings 12% year over year due to continued demand for PCs driven by the ongoing Windows 11 refresh and sustained demand for premium devices. Which has continued to be a tailwind. Globally, PCs have now increased double digits for four consecutive quarters, and we expect continued momentum heading into the initial months of 2026. Our advanced solutions portfolio increased gross billings by 17% year over year and 8% year over year when excluding the impact of HIVE. Driven by meaningful growth in cloud, security, software, and other strategic technologies. Hive, which is reported within the advanced solutions portfolio, increased more than 50% year over year primarily due to strength in programs associated with server and networking rack builds. In the quarter, there was approximately 29% reduction from gross billings to net revenue, which was in line with expectations. Our net treatment as a percentage of billings continues to remain elevated versus the prior year, primarily driven by a higher mix of software within distribution and increases in certain hive programs. As a result, net revenue was $17.4 billion up 10% year over year and above the high end of our guidance range. Gross profit increased 15% year over year to $1.2 billion. Gross margin as a percentage of gross billings was 5%. Which was flat year over year. Non-GAAP SG and A expense was $698 million or 3% of gross billings, Our cost to gross profit percentage, which we define as the ratio of non-GAAP SG and A expense to gross profit was 58% in Q4. An improvement of approximately 100 basis points year over year, demonstrating our progress toward managing costs as a percentage of gross profit down over time. Non-GAAP operating income increased 18% year over year to $497 million Non-GAAP operating margin as a percentage of gross billings was 2.04%, representing a five basis point improvement year over year. Interest expense and finance charges was $88 million, an increase of $1 million year over year. Our non-GAAP effective tax rate was approximately 24% compared to 21% in the prior year. Total non-GAAP net income was $313 million and non-GAAP diluted earnings per share was $3.83. An increase of 24% year over year and another all-time high. For TD SYNNEX. Free cash flow was $1.4 billion driven by strong earnings growth and meaningful improvements in our cash conversion cycle quarter over quarter. This also brings our annual free cash flow to $1.4 billion which was well ahead of our expectations. FY '25 marks the third consecutive year that we have generated annual free cash flow of over $1 billion demonstrating our commitment to sustainable cash generation. Within the quarter, we returned $209 million to shareholders with $173 million in share repurchases and $36 million in dividend payments. In total, we returned $742 million to shareholders this fiscal year bringing our cumulative return to shareholders over the last three years to over $2.2 billion This is approximately 61% of our free cash flow during that same time period within the medium-term range of 50% to 75% outlined at our Investor Day. Underscoring our belief in the strength of our business and the commitment to creating long-term shareholder value. As of November 30, we have $1.2 billion remaining on our share repurchase authorization. Net working capital was $2.9 billion down approximately $300 million from the prior year. Our gross cash days were twelve days, a two-day improvement from the prior year which I'll talk more about shortly. We ended the quarter with $2.4 billion in cash and cash equivalents and debt of $4.6 billion Our gross leverage ratio was 2.4 times and our net leverage ratio was 1.1 times. You'll note that our cash position was elevated at year-end. This is the result of two primary factors. First, we successfully completed a new debt issuance during the quarter which will be used to pay off $700 million of debt that matures in August 2026. Additionally, as you'll see in our working capital, our teams across both distribution and Hive did an outstanding job driving cash flow and made meaningful improvements toward optimizing the return on capital for both businesses. At the same time, it's important to remember that the balance sheet is a snapshot at a single point in time. At year-end, we had a few large receipts come in just before period end that would have normally fallen into the next quarter. We estimate Q4 benefited a few $100 million, which will normalize in FY 2026. Going forward, we continue to be laser-focused on generating sustainable free cash flow and improving our return on invested capital. For the current quarter, our Board of Directors has approved a cash dividend of $0.48 per common share. Will be payable on 01/30/2026. To shareholders of record as of the close of business on 01/16/2026. Moving on to our outlook. For the '6, we expect non-GAAP gross billings in the range of $22.7 billion to $23.7 billion representing an increase of approximately 12% at the midpoint. Our outlook is based on a euro to dollar exchange rate of 1.16. Net revenue in the range of $15.1 billion to $15.9 billion which translates to an anticipated gross to net adjustment of 33%. Non-GAAP net income in the range of 243 to $283 million non-GAAP diluted earnings per share in the range of $3 to $3.5 per diluted share based on a weighted average shares outstanding of approximately 80.1 million. We are anticipating a cash outflow in Q1 in part due to typical seasonality of the business and due to the timing impact that benefited Q4, which we described earlier. We expect that our cumulative free cash flow over fiscal '25 and fiscal '26 will be in line with our medium-term framework, of 95% non-GAAP net income to free cash flow conversion. While we are not providing full-year guidance today, our long-term outlook remains consistent with the multiyear compounded annual growth rates that we outlined at our Investor Day earlier this year. We'll remain focused on delivering against that financial framework we've shared with you which includes stable growth, margin expansion over time, consistent cash generation, and deploying capital where it maximizes long-term value creation within our capital allocation framework. To close, we're proud of what we've achieved this year, strong financial performance, disciplined execution, and continued progress against our strategy. We're entering fiscal twenty-six with solid momentum, a healthy balance sheet, and a clear set of priorities that support durable growth. We'll remain focused on operational excellence and delivering long-term value to shareholders. With that, we'll open up the call for questions. Operator? Operator: Press star, then the number one on your telephone keypad. We request that you limit yourself to one question to allow time for other participants to ask their questions. If there is remaining time, you are welcome to re-queue with additional questions. Your first question comes from the line of Keith Housum with Northcoast Research. Please go ahead. Keith Housum: Good morning, gentlemen, and thanks for the opportunity here. Obviously, outstanding growth in Europe and Asia Pacific, especially Asia Pacific and Japan there. As we think about that growth here that's happening, guess, you talk about perhaps how much of it is market growth versus your ability to take market share and then second, how sustainable are some of these growth rates that we're seeing going forward? Patrick Zammit: Okay. Thanks, and good morning. So in FPGA, we for sure, we've experienced very nice, high double-digit growth. As you know, our share in the region is relatively low. So we are investing significantly in the region to gain share and grow of a market. So when you look at, the results, for sure, we gained significant share. We're also positioned in countries, especially India, where, as you know, the growth of the market is significantly above the average of the region. And the team is focused on product segments, vendors, and customer segments which should make the growth sustainable for the long run. So very, very pleased, very proud of the team. And very confident for the future. The only thing I would add is that it's not only the growth in sales. We're also experiencing an over-proportional growth in operating income in the region as the team is investing, but also keeping a good cost discipline. David Jordan: Great. And how about for Europe? Because Europe, obviously, was better than we would expect. You can say the macro conditions you have there. Patrick Zammit: So just, so we got some market data. Europe, the European market grew let's say, mid, mid-single digit, slightly better even than North America. But for sure, we had, our outstanding performance. We continue to gain significant share in the region. Have a strategy which is very well executed. Again, we are going after technologies, vendors, and customer segments. Where we can enjoy higher growth in the market. And that's what you are seeing in the results. David Jordan: Great. Thank you. I'll get back in queue. Nate Friedel: Good luck. Keith Housum: Bye. Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Please go ahead. Ruplu Bhattacharya: Hi. Thanks for taking my questions. Patrick, you reported strong 15% growth in billings for 4Q and are guiding 12% billings growth for 1Q. How are you handicapping any end market demand destruction from higher component costs like DRAM and NAND And one for David, can you just update us on the CapEx spend for year as well as any investments planned for HIVE for 2026? Thank you. Patrick Zammit: Yes. So good morning. Thanks a lot for the question. So again, the guidance for Q1 reflects what we see from the regions, from the BUs, I can confirm that the memory price have increased dramatically, and what we are seeing already is an increase in ASP on a series of product families, especially PCs, servers, storage, So the ASP increase is on one hand, the tailwind in the short term. What would be interesting to see is what will be the impact on the volume going forward But again, specifically for Q1, the guidance reflects the result of the bottom-up exercise with the regions and the forecast is done by technology by country. So David Jordan: And, Ruplu, the only thing I would add is when you think about total CapEx, for TD SYNNEX, we're probably planning for a similar level of CapEx in '26 relative to '25. And that would include the investments needed to support Hive's continued growth. Ruplu Bhattacharya: Can I just clarify, have you actually seen any demand destruction from higher component cost and is that factored into your guidance? Patrick Zammit: So specifically, I haven't seen it. And, again, what is reflected in the guidance is the outcome of our bottom-up exercise. Ruplu Bhattacharya: Okay. Thank you for the details. Operator: Your next question comes from the line of Eric Woodring with Morgan Stanley. Please go ahead. Eric Woodring: Hey, guys. Good morning. Thank you very much for taking my question. And Patrick, I'm going to stay on the same line questioning there as Ruplu, which is just, can you maybe ask it a different way? Can you maybe help us understand what you're seeing in terms of any potential pull forward in either the November or the January just with customers wanting to get ahead of future pricing increases for any of those kind of memory exposed products you just mentioned, PC servers, storage, smartphones, and just how you might think more broadly. I know you're not guiding to fiscal twenty-six, but just how you think that this dynamic could have an impact on either revenue or profit seasonality for the year? Thanks so much. Patrick Zammit: Okay. So let me start with the broad forwards. So it's difficult to assess, but very pretty confident that we haven't had any I would say, material brought forward in the last quarter. Now, again, what's going so the Q1 guidance reflects the what the countries are seeing in the read in their region, and, again, for PC servers, and storage, If I look at the overall year, so the tailwind for us is clearly the increase. As you know, I mean, when, the vendors increase, their prices, we usually pass it through to the market. So no concerns, on the margin quality. On the demand, tailwind related to the ASP increase, And then what's going to be interesting to watch is what will be the impact on the volume. And, as you know, the elasticity will be different by product category. And probably the category which is going to be the most sensitive is PCs, But we have a very, very low position on consumer PCs. We primarily focus on commercial PC So I'm relatively confident that here, the elasticity should be, relatively low So I continue to be relatively optimistic about the prospects of the PC market. Let's not forget that the refresh is not over. There is I mean, it started a little bit later than expected, so we should continue to benefit from it. In the next quarter. And then when you look at storage and server, I think here, again, the elasticity related to the price increase should be relatively low. So again, on the demand, I think the demand is going to be driven by other considerations, the need for customers to, embrace AI, upgrade their servers. I mean, there's a server refresh happening as we speak, and it's not over. Again, I think on the demand, relatively, I should say, cautiously optimistic. And then the ASP increase should, should help. Operator: Your next question comes from the line of David Voigt with UBS. Please go ahead. David Voigt: Great. Thanks, guys. Maybe 1.5 for David. So David, you mentioned in your prepared remarks free cash flow cumulatively for 2025 and 2026 is going to be consistent with the long-term framework. Of 95% of net income. Given kind of the mix of business going into fiscal twenty twenty-six, it sounds like netted down is going to be a bigger portion of that based on the guide at least for Q1. Can you talk through kind of the mix of the revenue that drives that netted down effect? And then what sounds like a decline in free cash flow, even million of payments in Q4 that was pulled forward in '20 versus '25. David Jordan: Sure. So good morning, David. When we in our prepared remarks, we said we expect cumulative free cash flow across '25 and '26 to be within the 95% Got it. Historically, our business consumes cash in the first half and generates cash in the second half. What you saw in Q4 is we had a really, really strong cash flow quarter. And so some of that will normalize as we go into Q1. So we still feel really good about generating cash for the full year, but we do expect an outflow in Q1 that will ultimately, be recouped as we work through the balance of the year. And it's not it's not as much mix driven per se as it's just the additional cash that we generated in Q1 that will be Normalized or sorry, that we generated in Q4 that will be normalized in Q1. Operator: Your next question comes from the line of Adam Tindle with Raymond James. Please go ahead. Adam Tindle: Okay, thanks. Good morning. I wanna just acknowledge, Patrick, the strong return on capital, primarily great working capital management. But if I looked at the margin side of things, it does look like some of that is being a little bit suppressed, and you talk about investments in Hive. I wanted to ask about that. This has been an ongoing theme. I wonder if you could maybe just recap some of the prior investment decisions that you made in Hive and the outcomes that lead you to invest further, in Hive including, you know, any potential further new customers, for example. And for David, as we kind of, you know, look at this in the model, if you could maybe help us quantify or break out the investments in Hive. Is it you know, gonna increase throughout the year? Are we sort of at the right run rate? You know, what does this look like, you know, throughout, fiscal twenty-six? Thanks. David Jordan: So maybe I can start, and Patrick, chime in. So in the prepared remarks, we talked about HIVE grew meaningfully both billings and profit. And so I wouldn't impute that there's a margin issue. In terms of investments in we continue to invest in HIVE. So Patrick talked about we've invested in leadership. We've invested in the engineering team. We've invested in some additional capabilities within the site. We have enough capacity to support our current demand. And we'll continue to make investments to ensure Hive can truly be an end-to-end go-to player for tier one hyperscalers and others. And so we feel very good about how the business is performing, the investments we've made, and the prospects going forward. Operator: Your next question comes from the line of David Paige with RBC Capital Markets. Please go ahead. David Paige: Congrats on some really nice results here. Just a quick follow-up on Hive. The 50% growth. Is that come evenly split between ODM and Centimeters or both the customers? Or maybe just a little bit more details around the growth there? Thank you. Patrick Zammit: Yes. So good morning. So we had so as you know, we have our ODM Centimeters business. That one, grew very nicely. In line, if not slightly better than the pace of the market. And then we had a very strong, also quarter with, let's call it, supply chain, cut by division. As you know, this is a more lumpy opportunistic business. It's a service we render, so it highly dependent on what the customers are asking for. And in Q4, we had a very strong quarter. And, better than expected. So that's how I would summarize the sales growth for the quarter for Hive. Thank you. Operator: Your next question comes from the line of Joseph Cardoso with JPMorgan. Please go ahead. Joseph Cardoso: Maybe another follow-up on the Hive business. I just wanted to touch on, like, the progress that you're making with Hive relative to capturing additional share with your existing large customers there and perhaps what you're seeing from a portfolio or kind of the products that you're shipping there towards mix moving more towards AI servers networking racks, storage racks, and the opportunity to onboard potentially a new large customer beyond the two that you have today. Thank you. Patrick Zammit: Yes. Good morning. So again, I mean, we mentioned it at, in the prior calls. We continue to invest to expand the capabilities and capacity of Hive. And so we are very active in bidding on new programs, with our existing customers and potential new customers. I would say that, thanks to the investments we've made, especially in engineering, and some of the differentiators of HIVE in the market. Mean, we are seeing, we are making very good progress on, on winning some new programs and potentially new customers. I would say that, those programs take some time to ramp. So, again, when you look back at the our Q1 guidance, it reflects what we have as forecast for the next quarter. But going forward, yes, I would say we continue to make good progress and are confident about the prospects. Operator: Your next question comes from the line of Austin Baker with Loop Capital. Please go ahead. Austin Baker: Hey, guys. Thanks for taking the question. Just really quick, I guess, would love to understand how margins you view margins for Hive kind of going forward. Are they improving, normalizing as volume scales? And then lastly, how do you feel about the visibility for high programs today versus maybe this time last year? David Jordan: So I can take that one. We feel pretty good about the overall margin profile of TD SYNNEX. When you think about what we laid out at Investor Day was a couple of things. We want to grow operating profit faster than billings, and so we're constantly looking for ways both within Hive and within our distribution business to focus where we can make additional margin. And so, again, we feel very good about that business. Patrick? Patrick Zammit: Yeah. I would just add that, when I look at the pipeline and I compare it to where we were last year, I think we are in very healthy position. And, again, that's what is reflected in, in our Q1 guidance. Operator: Your next question comes from the line of Vincent Colicchio with Barrington Research. Please go ahead. Vincent Colicchio: Yeah, Patrick. Another good quarter on PCs. Just could you give us an update on your thinking in terms of what inning we're in here? Patrick Zammit: Yeah. So good morning. Thanks a lot. Yes. So as far as the game Q4, for PCs, broad-based, primarily driven, from commercial, So going forward, as I mentioned, I think that the refresh is not over. So, that tailwind should continue again in 2026. And we have also the weight of AIPCs who have a slightly higher ASP that should continue to be so there's still a lot of potential for upgrading the PCs and make them AI compatible in the market. So that should be a tailwind. We talked about the memory price increase impacting the ASP of the PCs, that should be gained a tailwind. And then you have the uncertainty related to the price on the demand. But, again, the fact that we are primarily focused on the commercial PCs, I mean, I think we are in a slightly better position than we would have a high weight of consumer PCs. So I would say for next year, I'm continuing to be confident about the prospects of the PC market. again, back to the guidance for Q1, I mean, the various assumptions have been taken into account. And are reflected in the guidance. Vincent Colicchio: And did AIPCs perform incrementally better this quarter? Patrick Zammit: to nicely increase. Yeah. It continues to the weight of AIPC continues So that's a positive. Vincent Colicchio: Thank you. Operator: Your next question comes from the line of David Voigt with UBS. Please go ahead. David Voigt: Hey guys, I just wanted to ask a follow-up, David. On the netted down impact, it looks like there's a big tick up in Q1. That's what I was trying to understand also. Is it mix driven? That's gonna be a bigger headwind to your revenue conversion, kind of can you talk about what's going on there from a netted down effect in the guide? David Jordan: Yep. And sorry. I missed that part of your question. That's my fault. No worries. So all good. Gross to net gross to net increased in Q4, and we've got an increase in to Q1. There's a couple of dynamics. One, strategic technologies continues to become a bigger portion of our business. A lot of that business is software, which, as you know, is netted. Additionally, within Hive, there are a number of programs that are also net. And as the mix changes, that does influence that metric. And so if you think about how we set Q1, that's probably an assumption of kind of the run rate gross to net that we expect for FY '26. Hopefully, that helps. David Voigt: And that would suggest that software and Hive continues to grow as a portion the overall billings pie. That a reasonable takeaway? David Jordan: Exactly right. You're right. David Voigt: Great. Thank you. Operator: There are no further questions at this time. I will now turn the call back over to Patrick for closing remarks. Patrick Zammit: So thank you, everyone, for joining us. I want to close by emphasizing that we'll remain committed to profitable growth and free cash flow generation. Our strategy is designed to ensure that every step forward strengthens our business and supports greater long-term value creation. With our reach, our people, our unique capabilities, and our momentum, we are confident in our ability to continue to succeed. Thank you, and have a great day. Operator: That concludes today's conference call. You may now disconnect. Have a nice day.
Operator: Good day, and welcome to the Lindsay Corporation Fiscal First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Randy Wood, President and CEO. Please go ahead. Randy Wood: Thank you, and good morning, everyone. Welcome to our fiscal 2026 first quarter earnings call. With me today is Sam Hinrichsen, our Chief Financial Officer. Once again, I'm very proud of our team's execution in the quarter despite external headwinds impacting our business. While ongoing trade uncertainty, low commodity prices and high input costs have negatively impacted customer profitability and sentiment, our team's focus on price and cost management and operational efficiencies gained through our diversified global footprint helped us deliver solid profitability and maintain earnings quality in the quarter. In our domestic U.S. irrigation business, customers continue to delay large capital purchases due to high input costs and low profitability. In our international business, we're encouraged by the strength and opportunities in the project market, including the Middle East and North Africa. Our ability to help growers globally improve productivity and optimize resources remains a key differentiator for Lindsay and has supported performance amid a challenging macroeconomic environment. Subsequent to the end of our fiscal first quarter, we announced a supply agreement to provide Zimmatic irrigation systems and FieldNET remote management and scheduling technology in the MENA region. This project is valued at approximately $80 million in total revenue with approximately $70 million of revenue realization this fiscal year. This announcement reflects our ability to compete and win large-scale projects globally, but also demonstrates Lindsay's role as a trusted partner in advancing sustainable agriculture while supporting localized production and enhancing food security. We're very proud of our team's commitment to delivering transformative projects in our international markets and look forward to executing this important project in the region. Our Infrastructure segment delivered solid performance in the first quarter with total revenues up 17% year-over-year. Increased road construction activity supported segment performance in the quarter, and we continue to see solid interest in our Road Zipper solutions product. Moving forward, we expect further momentum as infrastructure funding and road project activity advance. Turning to our market outlook. As we mentioned last quarter, in North America, we expect softer market conditions to persist in the near term. Market indicators suggest the current trough environment will persist until there's greater clarity around international trade impacts and an improvement in customer profitability. The U.S. administration has announced a $12 billion Farmer Bridge Assistance package designed to offset trade-related pressures on U.S. farmers. The program includes onetime payments of approximately $44 per acre for corn and $31 per acre for soybeans. While this support will be appreciated by growers, we don't expect it to drive significant incremental demand in the short term. Within our international markets, we remain encouraged by the overall outlook for future growth and market fundamentals in Latin America, including Brazil. Elevated interest rates and ongoing constraints on credit access for growers continue to weigh on near-term equipment investment in the region, tempering what otherwise remains an attractive long-term growth opportunity. Within our infrastructure segment, we continue to see opportunities develop across system sales, leasing and road safety products, and our sales funnel remains strong. As previously communicated, we do not see a large Road Zipper project exiting the funnel in fiscal year '26. This creates a difficult comparison, particularly in Q2, where we shipped a large $20 million project last year. We do have incremental opportunities for smaller projects and other segment growth to offset half of that total with the majority coming in the second half of the fiscal year. Road safety funding in the United States remains steady, and we remain very excited by the long-term potential of our Road Zipper leasing model, which continues to gain traction and supports a more stable and balanced margin profile over time. With that, I'd like to now turn the call over to Sam to discuss our fiscal first quarter financial results. Sam? Samuel Hinrichsen: Thank you, Randy, and good morning, everyone. It is a privilege to join you today for my first earnings call as Chief Financial Officer at Lindsay Corporation. I'm excited to continue partnering with this talented team as we drive our strategy forward, deliver on key initiatives, and create meaningful long-term value for our shareholders. I look forward to building on the strong foundation already in place. Now let me walk you through our financial results for the quarter. Total revenues for the first quarter of fiscal 2026 were $155.8 million, a decrease of 6% compared to revenues of $166.3 million in the same quarter last year. The decline in revenue was driven by lower volumes in our irrigation segment as continued uncertainty around trade, lower commodity prices, and higher input costs continue to weigh on farmer sentiment. Lower volume in irrigation was partially offset by year-over-year growth in our infrastructure segment. Operating income for the quarter was $19.6 million, a decrease of 6% compared to $20.9 million in the prior year period. Operating margin for the quarter was 12.6%, consistent with the prior year. Despite a lower revenue base, our solid operating margin performance for the quarter reflects continued execution of our operational strategy, coupled with effective cost and pricing management. While near-term irrigation market conditions in North America are expected to remain soft, we anticipate that our business will continue to show resilience. Net earnings results for the quarter were $16.5 million or $1.54 of net earnings per diluted share, marking a slight decline compared to net earnings of $17.2 million or $1.57 per diluted share in the first quarter of last year. The difference in net earnings when compared to the prior year period was largely attributable to lower operating income and a slightly higher effective tax rate. These were partially offset by an increase in other income. Turning to our segment results. Irrigation segment revenue for the first quarter were $133.4 million, a decrease of 9% compared to segment revenues of $147.1 million in the prior year. North America irrigation revenues of $74.3 million decreased by 4% compared to $77.7 million in the prior year. Within our North American markets, the impact of lower overall unit sales volume was partially offset by higher average selling prices compared to prior year. In international irrigation markets, we delivered revenues of $59.1 million compared to $69.4 million in the first quarter last year. The decrease was primarily attributable to 2 factors. First, the timing of project revenues in the MENA region is difficult to predict. First quarter results were impacted by the timing gap between last year's project and the recently awarded new project in the region. Secondly, sales volumes in Brazil were lower than anticipated as this key market continues to be constrained by elevated interest rates and an unfavorable credit environment, which is weighing on investor activity for growers in the region. These declines were partially offset by approximately $1.5 million of favorable effects of foreign currency translation compared to the prior year. Total Irrigation segment operating income for the first quarter was $23 million, a decrease of $1.8 million compared to $24.7 million in the first quarter last year. Segment operating margins of 17.2% of sales grew compared to 16.8% of sales in the first quarter of last year. Despite lower segment revenues, our irrigation margin profile continues to reflect resilience in a down cycle market. In our infrastructure segment, revenues for the first quarter increased 17% to $22.4 million compared to $19.2 million in the prior year. The increase was driven by higher sales of road safety products, while Road Zipper System revenues were similar compared to the prior year. Infrastructure segment operating income for the first quarter increased 9% to $4.5 million compared to $4.1 million in the prior year. Infrastructure segment operating margin for the quarter was 20.1% of sales compared to 21.5% of sales last year as revenue growth was offset by higher operating expenses. Turning to the balance sheet and liquidity. Our total available liquidity at the end of the first quarter was $249.6 million, which includes $199.6 million in cash and cash equivalents and $50 million available under our revolving credit facility. Free cash flow for the quarter was impacted by an increase in working capital to support business growth and elevated capital expenditure levels. We also utilized our strong free cash flow conversion to opportunistically buy back shares in the open market. In the first quarter, we deployed $30.3 million into share repurchases, exhausting our original authorization. During the quarter, we were pleased to announce the authorization of a new share repurchase program of up to $150 million. Our team have strategically maintained a very robust balance sheet, and this authorization provides us with the ongoing flexibility to continue returning capital to our shareholders. We are pleased with our strong financial position and balance sheet, which enable us to deliver shareholder returns while continuing to invest in future growth opportunities and innovation. This concludes my remarks. And at this time, I will turn the call over to the operator to take your questions. Operator: [Operator Instructions] Our first question comes from Nathan Jones with Stifel. Nathan Jones: I guess I'll start with North America irrigation, still down a little bit, but it seems to be bottoming out here. Does it feel to you like we're getting to the trough of the market here? Are there risks that we could take another leg down here? Or I know Valmont's commented that they kind of think we're at replacement level. Is that kind of your feeling about the market where -- I mean, obviously, there's a lot of external headwinds that you can't control, but they seem to all be lining up about as bad as they could get at the moment, which is probably a good thing in itself that if it can't get any worse. Just any commentary you might have about how you're thinking about the domestic irrigation market here? Randy Wood: Yes. Nathan, this is Randy. I'll take that one. And we would agree that we are bouncing along the trough here. And there's been some announcements on incremental funding. That's always good news, not enough to move the needle. And I don't think when we talk to customers that they see a lot of upside until there's more certainty on profitability. So in the near, near term, we don't see it getting progressively better, but I would say also we don't see it get progressively worse. So I do believe bouncing along the bottom of the trough here is how we'd characterize it. Nathan Jones: I guess the pipeline on international projects here, nice to see the $80 million one. Can you talk about opportunities for other projects? Could we see some more of those come through this year? I think they've been -- most of the ones you've done over the last few years have been with one customer. Are there opportunities outside of that? Are there things in the funnel that are coming from outside of that? Just any commentary around that, please. Randy Wood: Yes. I would say in the region, we have had some repeat business, which we view as a good thing. If you execute well, you get the opportunity for that repeat business. But we've also attracted new clients in the region. So it's a combination of recurring business with repeat customers and some new customers that we've pulled in as well. And I think the language around projects is the same as it's been for the past couple of years. We do see a robust funnel. We see a multiyear runway on projects like this one in this part of the world. And not all of them are in the same country or the same part of the country. We see a broad spectrum of opportunities across the MENA region for the same drivers around food security and stability for those countries in that part of the world. So we do see a good runway here, Nathan. And whether there's another one in 2026 is up in the air. I think the same caveat always applies. These are complex, large, difficult negotiations. Even when you have a deal, you move into credit. logistics. So it's never easy. It's never quick, but I would say there are more opportunities in the market. And again, our track record is a good one. So we'll fight and win for the ones that we want to pull across the finish line. And when we are in a position that the project is locked in, credit secured, that's when you'll hear us talk more about it. Until that time, we'll continue to comment on the positive elements of the funnel and the long-term growth potential in that part of the world. Nathan Jones: And I guess one more for me. You guys have had elevated CapEx in fiscal '25 and planned again in fiscal '26 as you're doing a lot of upgrades in Lindsay and around some of your plants. Can you talk about how that's gone, where you are in that process, what contribution that's already generating to profitability, and how we should think about the improved throughput, improved efficiency that you'll gain from that, this year and as we head into next fiscal year as well? Randy Wood: Yes. I'll start on kind of the narrative on what we're doing and where we are and then Sam can comment more specifically on how that might impact some of your models, Nathan. But we, in Lindsay, Nebraska right now have activated our large tube mill investment. This is a world-class tube mill, improving safety, efficiency, productivity. Testing has gone extremely well. And I expect in the next 30 days, we'll turn that over to full production once we get certification from our vendors. That project has gone extremely well and will change the way that we produce tubing and really decrease our reliance on labor, which was a key part of some of these investments. We have a second investment in our galvanizing facility that will completely reengineer that process for us, make it safer, more efficient, more environmentally friendly. And that investment will continue to make throughout this calendar year, and we would expect around the end of calendar 2026, we would see that operation potentially kicking off and going into production. I turn it over to Sam for a little more narrative on the numbers. Samuel Hinrichsen: Yes. So if you think about margins, this is an ongoing project. It's not been finalized. So there's no impact from a margin perspective in the first quarter. And as Randy alluded, in the short term, once completed, incremental depreciation will offset productivity gains at the current demand level. We expect to see improvements in margins from operating leverage once demand picks up following the completion of the project. And then following, again, the installation, we also expect to get back to more normalized capital spending levels. Operator: Our next question comes from Brian Drab with William Blair. Brian Drab: I wanted to ask maybe a similar question to what Nathan was getting at. But can I ask if this new $80 million MENA project is with the same customer in the same country as the June 2024 $100 million project announcement? Randy Wood: We would acknowledge, Brian, that this is a repeat customer in the same part of the world. Brian Drab: Okay. And then can you comment, Randy, at all on the margin that you're expecting with this new $80 million order? Randy Wood: I would say, overall, we would acknowledge project margins generally are going to be dilutive to the overall business. It does create a lot of operational efficiencies and absorption through the facility. So if we characterize it, the margin profile in this project will be as good as or better than the prior project. I think that's about as directional as we'd want to get, Brian. Brian Drab: Okay. But a little bit below segment average or overall irrigation margin? Randy Wood: Slightly below, correct. Brian Drab: Got it. Got it. Okay. Randy Wood: And that's consistent with the projects of this size. Brian Drab: Yes. Understood. Just wanted to check on this one specifically. Okay. And then just -- I'm curious if The Big Beautiful Bill, I think you mentioned in the slides, I'm not sure there was a lot of commentary in the prepared remarks, but I'm just wondering, did you see any demand related to accelerated depreciation? Is that a narrative that you're hearing from the customer base? And do you expect that to drive any demand going forward? Randy Wood: We -- I would say we didn't see a lot of significant impact, and we didn't anticipate it. I think some of the negative macro market drivers just overwhelmed a little bit of potential incremental benefit from the bill and accelerated depreciation. So not a significant contributor. Operator: Our next question comes from Ryan Connors with Northcoast Research. Ryan Connors: I wanted to -- you talked about the cycle earlier in North America in the first question there from Nathan. But I wanted to kind of come back to that and look at it from a bit of a different angle. So we were down 4% irrigation in North America in the first fiscal quarter here. Is that kind of reflective of how we should maybe be thinking of a reasonable run rate for the balance of the year? Or do things get better or worse? Just kind of curious how you think that the 1Q print on North America, what that tells us about the balance of the year specifically? And then also, if you could maybe unpack that on a price versus volume basis as well, that might be helpful. Randy Wood: You bet, Ryan. I'll cover the first part and kind of turn it over to Sam for the second part. And I think we'd characterize North America as flat to down on a full year basis. And whether that 4% carries forward or degrades slightly, improves slightly, as you know, the tricky part for us in Q4 is going to be storm volume. And last year was a relatively light storm volume year. The year before that was relatively high. So if we kind of split the difference, I think the run rate that we saw through Q1 could be pretty consistent with what we see the rest of the year. So we're planning for flat to down in our spending, our inventory, our supply chain, and we'll react up or down if we have to. But I think that's probably a good starting point. I'll let Sam cover. Ryan Connors: And then -- yes, on the price versus volume. Samuel Hinrichsen: Yes. So again, if you think about pricing, we called out that average selling prices in North America were up during the first quarter. We have a history of price stewardship, and we expect to be able to continue maintaining solid margins. Pricing is one key contributor. In addition, of course, there's cost management, there's productivity gains across the organization that are contributing to maintaining this margin profile despite the current top end situation. Ryan Connors: Yes. Okay. And then kind of -- maybe while I have you there, Sam, a bit of a below-the-line item. Pretty nice contribution from the interest, other income line, as you mentioned. Is there any color you can give us around what drove that, and how we should think about modeling that line over the balance of the year? Is that something that should continue? Or are we going to kind of revert back to normal there? Samuel Hinrichsen: So I can't go into the very specific details, but I would say interest income, of course, is driven by the regional mix of funds at the interest rates in various regions. And that's why we have seen an increase year-over-year in Q1. I'm not going to speculate on the interest rate environment, but that's what's the key driver for this improvement in Q1. Ryan Connors: Got it. Okay. And then lastly, we haven't really talked much about infrastructure here in the Q&A. And I wondered, Randy, if you can kind of unpack for us this lull in Road Zipper. I mean, obviously, it's a lumpy business and there are lulls from time to time. But is there anything we should read into that in terms of are we -- is the low-hanging fruit plucked to any degree in terms of the TAM there? Or just any color you can give us on how you're thinking about the fact that we're into a pretty light year it looks like on Road Zipper? Randy Wood: Yes. And I don't think we're anywhere near plucking all of the easy to pick fruit or addressing the cap on the TAM. This is a lumpy project-oriented business. And I think just like the irrigation business, the good news for us is we're at the table. We're engaged with our sales funnel. We're talking to specific customers about specific bridges, about specific project sites where Road Zipper is going to allow them to solve their problem better than any other option in the market. It just takes time. So this is a very different type of business. And I think as you model it out, you look at the historical lumpiness, some of the big projects that we've dumped in prior fiscal periods, we love them. When they hit it, it just creates a really difficult comp the next year because they're not -- we can't calendarize one every second quarter, every fiscal year. So this is us being transparent, I believe, in what we think we see in the market. And as we start to get better clarity on fiscal '27, fiscal '28, that's where we see more of these Road Zipper projects landing right now. And if that changes, where we see some accelerating because incremental funding is available, we'll certainly be transparent and clear with you. But I think the narrative we've shared indicates what we see this year, but it's not an indication that the market is any better, any worse, any softer than it has been. It has been lumpy project business. It's going to continue to be lumpy project business. Again, the good news is with our shift-left strategy, we've got better visibility, both short and long term. And I think that's where we're willing to be more transparent and open with you guys, so you can kind of work that into your models as well. But we see long-term growth opportunities for Road Zipper well into the future. Operator: Our next question comes from Brett Kearney with American Rebirth Opportunity. Brett Kearney: I know the most recent project win you have, Middle East North Africa includes your FieldNET capabilities. Obviously, I think those are incorporating all the Pivot sales you make in North America at this point. But just curious what you're seeing as you look to the international irrigation project funnel today, what kind of adoption appetite there is an opportunity for you all with some of your technology offerings in some of these regions? Randy Wood: I'd characterize it this way that when you're making these significant investments. These are huge agro operations where there has been basically nothing. And in the Mid East, it's essentially desert that they're converting to be these highly productive, highly efficient farms. And with the size of investments they're making, they want every piece of technology that's available to them. And this isn't a normal technology adoption curve where you start with small equipment and you migrate towards large equipment. They're starting with the biggest tractors, the biggest planters, the biggest combines, and they want every technological advantage that they can find to be as efficient as they can be in their production, in their consumption of water and energy. So I think this has really been a shift in the last 5 to 10 years where the technology has proven itself, where it brings real value to our customers. And again, at these investment levels, I think the customers are intelligent. They're smart, and they want every advantage that they can bring to the table. And certainly, FieldNET, FieldNET Advisor and the advantage that it creates for our growers is an important part of that mix. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Randy Wood for any closing remarks. Randy Wood: Thank you all again for joining us today. We appreciate your ongoing support, and we look forward to updating you on our second quarter earnings call. Thanks for joining us. Operator: Thank you for attending today's presentation. The conference has now concluded. You may now disconnect.
Operator: Hello, and welcome to the First Quarter 2026 Earnings Conference Call and Webcast. As part of the discussion today, the representatives from NTIC will be making certain forward-looking statements regarding NTIC's future financial and operating results as well as their business plans, objectives and expectations. Please be advised that these forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and that NTIC desires to avail itself of the protections of the safe harbor for these statements. Please also be advised that these actual results could differ materially from those stated or implied by the forward-looking statements due to the certain risks and uncertainties, including those described in the NTIC's most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q and recent press releases. Please read these reports and other future filings that NTIC will make with the SEC. NTIC disclaims any duty to update or revise its forward-looking statements. I would now like to hand the call over to Patrick Lynch, President and CEO. Please go ahead. G. Lynch: Good morning. I'm Patrick Lynch, NTIC's CEO, and I'm here with Matt Wolsfeld, NTIC's CFO. Please note that a press release regarding our first quarter fiscal 2026 financial results was issued earlier this morning and is available at ntic.com. During today's call, we will review various key aspects of our fiscal 2026 first quarter financial results provide a brief business update and then conclude with a question-and-answer session. Please note that when we discuss year-over-year performance, we are referring to the first quarter of our fiscal 2026 in comparison to the first quarter of last fiscal year. I'm very pleased that for first quarter, we were able to deliver record consolidated net sales, driven by the strongest year-over-year growth rate we've had since fiscal 2024. Our performance was further augmented by higher sales across key sectors, including ZERUST Oil & Gas, NTIC China and North American Natur-Tec sales. ZERUST Oil & Gas achieved record first quarter sales marking the second consecutive quarter with more than $2 million in revenue, demonstrating improving demand from both new and existing customers. Improving profitability is a top priority for NTIC in fiscal 2026 and we expect to begin to realize the benefits from the strategic investments we made over the past 3 years towards upgrading our global operations and supporting future growth. We are also focused on flattening our operating expenses and driving sales in the higher-margin segments of our business, which we expect will improve our profitability and strengthen our balance sheet this fiscal year. Overall, the start of fiscal 2026 is encouraging, and we expect these trends to support anticipated higher year-over-year sales and profitability as the year progresses. So with this overview, let's examine the drivers for the first quarter in more detail. For the first quarter ended November 30, 2025, our total consolidated net sales increased 9.2% to a quarterly record of $23.3 million as compared to the first quarter ended November 30, 2024. Broken down by business unit, this included a 58.1% increase in ZERUST Oil & Gas net sales a 6.9% increase in ZERUST Industrial net sales and a 2.2% increase in Natur-Tec product net sales. Turning to our joint venture sales, which we do not consolidate in our financial statements. Total net sales for the fiscal 2026 1st quarter by our joint ventures increased year-over-year by 2.9% to $24.5 million, reflecting improved demand across many of our joint ventures partially offset by a mid-single-digit decline at our German joint venture. We continue to closely monitor trends across our European markets for signs of stabilization following years of subdued demand as governments begin to implement targeted economic stimulus packages. We expect that any economic recovery from these stimulus packages will lead to a positive impact on our joint venture operating income in future periods, especially in Germany. Improving sales trends continued at our wholly owned NTIC China subsidiary fiscal 2026 first quarter net sales at NTIC China increased by 23.5% year-over-year to $4.9 million, demonstrating a strong demand in this geography. Furthermore, given that the majority of NTIC China sales are for domestic Chinese consumption, we believe NTIC China's exposure to U.S. tariffs is limited. We expect demand in China will continue to grow and improve in fiscal 2026 helping to support anticipated higher incremental sales and profitability in this market. We believe that China is on its way to becoming a significant market for our industrial and bioplastic segments. So we plan to continue to take steps to enhance our operations in this geography. Now moving on to ZERUST Oil & Gas. First quarter of fiscal 2026 ZERUST Oil & Gas sales were $2.4 million, a first quarter's record and an increase of 58.1% from the same period last year. This growth rate demonstrates the wider adoption of our VCI solutions by new and existing customers across the global oil and gas industry as well as at our Brazil subsidiary. As discussed on our prior call in November 2025, we announced that our 85% owned subsidiary, ZERUST Brazil, secured a 3-year contract for a major offshore project with a leading global engineering, procurement and construction, or EPC company. Under this agreement, ZERUST Brazil will be providing advanced corrosion protection solutions for Floating Production Storage and Offloading Units or FPSOs, with an estimated total value of approximately $13 million over the next 3 to 4 years based on current foreign exchange rates. We expect this project to ramp up throughout the current fiscal year and continue through calendar 2028. We believe this is a significant validation of our engineering capabilities, the scalability of our ZERUST Oil & Gas business and the reputation we've built as a trusted partner to leading offshore operators. Brazil represents one of the fastest-growing deepwater markets globally, and we believe this win provides a strong foundation for continued growth and expansion across international oil and gas markets. As indicated in prior calls, we have continually invested in our ZERUST Oil & Gas business to enhance our sales team and add resources to support anticipated future growth. This has improved our ZERUST Oil & Gas sales pipeline as the size and number of opportunities have expanded among both new and existing customers. Our pipeline includes global opportunities to protect above-ground oil storage tanks, pipeline casings and offshore oil rigs from corrosion. While the nature of this industry will always cause certain fluctuations in our ZERUST Oil & Gas sales, we still expect to see ZERUST Oil & Gas sales and profitability improved significantly in fiscal 2026 as we plan to leverage these investments and rein in operating expenses. Turning to our Natur-Tec bioplastics business. First quarter Natur-Tec sales were a quarterly record of $6 million, representing a 2.2% year-over-year increase and a 16.5% increase from the fourth quarter driven primarily by higher sales in North America. We continue to pursue several larger opportunities in North America and India for our Natur-Tec solutions that we believe holds significant promise to benefit our Natur-Tec sales in coming quarters, including advancing the compostable food packaging solution we mentioned on prior calls. Overall, we believe Natur-Tec is a best-in-class compostable plastic business that is well positioned for significant future growth in the U.S. and abroad, and we expect sales to continue to expand throughout the year. Before I turn the call over to Matt, I want to acknowledge the hard work and dedication of our global team of both employees and joint venture partners. Our success and our ability to navigate more complex economic periods are a direct result of their efforts. With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2026 first quarter. Matthew Wolsfeld: Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 9.2% in fiscal 2026 first quarter, driven by the strongest year-over-year growth rate we have achieved since fiscal 2024 because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures increased 2.9% in the first quarter. Joint venture operating income in the first quarter decreased 5.1% compared to the prior fiscal year period. Primarily due to a slight increase in operating expenses at the joint ventures. Total operating expenses in fiscal 2026 first quarter increased to $9.7 million, a 2.9% increase compared to the prior fiscal year period, primarily due to higher selling and general and administrative expenses, partially offset by a reduction in research and development expenses. We expect quarterly sales to grow faster than operating expenses as we continue to leverage recent investments and upgrades across our global operations. Gross profit as a percentage of net sales was 36% during the first 3 months ended November 30, 2025, compared to 38.3% during the prior fiscal year period. Lower gross margin for the first quarter was primarily due to a temporary supplier lead time issue. We expect gross margin to improve sequentially during fiscal 2026. NTIC reported net income of $238,000 or $0.03 per diluted share for the fiscal 2026 first quarter compared to net income of $561,000 or $0.06 per diluted share for the fiscal 2025 first quarter. For the fiscal 2026 first quarter, NTIC's non-GAAP adjusted income was $344,000 or $0.04 per diluted share compared to non-GAAP adjusted net income of $667,000 or $0.07 per diluted share for the fiscal 2025 first quarter. A reconciliation of GAAP to non-GAAP financial measures are available in our first quarter fiscal year 2026 earnings press release that was issued this morning. As of November 30, 2025, working capital was $19.4 million, including $6.4 million in cash and cash equivalents, compared to $20.4 million, including $7.3 million in cash and cash equivalents as of August 31, 2025. As of November 30, 2025, we had outstanding debt of $12 million, including $9.1 million in borrowings under our revolving line of credit. This is down slightly from outstanding debt of $12.2 million as of August 31, 2025. Reducing debt through anticipated positive operating cash flow and improving working capital efficiencies is a strategic focus in fiscal 2026. On November 30, 2025, the company had $29.3 million of investments in joint ventures, of which 53.4% or $15.6 million was in cash, with the remaining balance primarily invested in other working capital. In October 2025, NTIC's Board of Directors declared a quarterly cash dividend of $0.01 per common share that was payable on November 12, 2025, to stockholders of record on October 29, 2025. To conclude our prepared remarks, we believe our first quarter results demonstrate positive momentum building across many parts of our business. We expect higher year-over-year sales combined with improving gross margins and controlled operating expense growth through the year, which we expect to benefit our profitability in fiscal 2026. We believe we're well positioned for a strong fiscal 2026 and I look forward to sharing the progress we're making in future calls. With this overview, Patrick and I are happy to take your questions. Operator: [Operator Instructions] And our first question will be coming from Tim Clarkson of Van Clemens. Timothy Clarkson: Patrick, Matt, great quarter revenues-wise. Earnings not quite there, but obviously, sharply improved from the fourth quarter. So just getting into some of the color, what are some of the levers you guys can do to improve profitability? Matthew Wolsfeld: I think from an overall profitability standpoint, it still kind of comes back to the key fundamentals of driving sales growth, which is going to obviously increase gross margin, which is going to push money down to the operating profit line. We certainly have an expectation during the current fiscal year and what you saw from an operating expense standpoint of keeping relatively flat operating expenses and still achieving significant growth. I think the majority of the growth, typically our second quarter is one of our lower quarters. We expect it to be pretty consistent with what we saw in the first quarter with a significant amount of growth coming in the third and fourth quarter, which is pretty historically consistent. So as we see that happen, I would expect the profitability is going to stem from the gross margin dollars that are flowing through to the bottom line. The other key contributor here isn't associated with revenue is the joint venture operating profits. And kind of the expectation is that we are going to see certain growth from a joint venture level through the remainder of the year as well. So those should be the key drivers to get us back up to profitability levels that we saw 6 to 8 quarters ago, which is kind of where we expect to be towards the end of the year. Timothy Clarkson: Are there anything you could do on the expense end that would be where you can eliminate some expenses? I know you want to basically keep expenses flat, but are there any opportunities in terms of cost cutting? Matthew Wolsfeld: There are some opportunities, but there's also -- the main situation that we're up against is that we have made specific strategic investments in the oil and gas business around the world and the Natur-Tec business around the world. And additionally, we've made investments in North America from a -- both from a manufacturing investment standpoint and from a new CRM system, things like that. So I don't know that it's necessarily a matter of cutting expenses. It's more a matter of letting the revenues catch up to the increases in expenses that we saw over the past 2 years. So I think that's ultimately how we're going to get long-term profits. We don't want to cut expenses to potentially increase quarterly profits by a few cents and then ultimately hinder what would be long-term growth or the stability that we need and the people that we need for the long-term success of the business as we see Natur-Tec and oil and gas ramp up over the coming 2, 3 years. Timothy Clarkson: Now are you guys pleased with the work the sales team on the oil and gas hires from last year are doing? G. Lynch: Well, they're getting -- they're starting to put business on the books. The biggest increase you saw this year, obviously, was from ZERUST Brazil and that was a 1-year contract. The rest is now starting to pick up that [indiscernible] where they're getting business out of India and Middle East. And we hope to see Europe starting to contribute in the coming months. Operator: And our next question will be coming from Don Hall. Unknown Analyst: Did I hear my name, Don Hall? G. Lynch: Yes. We're happy to take your question. Unknown Analyst: Okay. I believe in previous calls, you mentioned the oil and gas opportunity in Brazil, plus another -- a couple of other major opportunities. Are there still other major ones that you can discuss? G. Lynch: In what business? Unknown Analyst: I am sorry, what? G. Lynch: What you're talking about oil and gas? Unknown Analyst: I can't pick you up. It's kind of fog. G. Lynch: Well, I mean, the biggest contract we have in place right now is the one in Brazil, but obviously, we're talking to other oil companies around the world and starting to make inroads. So we expect to see the business growing all over. Operator: And I'm showing no further questions. I'd now like to hand the call back to Patrick for closing remarks. G. Lynch: Thank you all for joining us this morning, and have a nice week. Operator: And this concludes today's program. Thank you for participating. You may now disconnect.
Operator: Greetings, and welcome to Oxford Industries Third Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Brian Smith from Oxford. Thank you, and you may begin. Brian Smith: Thank you, and good afternoon. Before we begin, I would like to remind participants that certain statements made on today's call and in the Q&A session may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees, and actual results may differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results of operations or our financial condition to differ are discussed in our press release issued earlier today and in documents filed by us with the SEC including the risk factors contained in our Form 10-K. We undertake no duty to update any forward-looking statements. During this call, we'll be discussing certain non-GAAP financial measures. You can find a reconciliation of non-GAAP to GAAP financial measures in our press release issued earlier today, which is posted under the Investor Relations tab of our website at oxfordinc.com. And now I'd like to introduce today's call participants. With me today are Tom Chubb, Chairman and CEO; and Scott Grassmyer, CFO and COO. Thank you for your attention. And now I'd like to turn the call over to Tom Chubb. Thomas Chubb: Good afternoon, and thank you for joining us today. As is typical for our third quarter, I'll keep my comments on Q3 relatively brief before turning to what we're seeing in the early weeks of the fourth quarter and how we are approaching the holiday season and the rest of the year. We are pleased with what we were able to accomplish during the third quarter with our financial results broadly in line with the expectations we set earlier in the year. The environment remained highly competitive and promotional, and the consumer continued to be selective with their discretionary spending, often requiring new and innovative product to catch our attention. Against that backdrop, our team stayed focused on our long-term priorities and executed well on the fundamentals of our strategy. Strong sales growth in both the Emerging Brands Group and Lilly Pulitzer offset declines at Tommy Bahama and Johnny Was. Total company comp sales were slightly positive. And while gross margins continue to reflect the pressures we've discussed in prior quarters related to tariffs, our underlying adjusted gross margin, absent that pressure, improved over last year's even in a highly promotional environment. In addition to the financial results, we made important progress on a number of key initiatives across the enterprise, starting with people, we were pleased to have realigned and strengthened our teams in Johnny Was and the Emerging Brands Group through a combination of internal promotions and hiring key executive talent from outside the company. Also at Johnny Was, we made significant progress with the business improvement plan we discussed last quarter. In Tommy Bahama, our bars and restaurants are a distinct competitive advantage, and we were pleased to have added 2 important restaurant openings during the quarter. In Lilly Pulitzer, we anniversaried last year's very successful Palm Beach Fashion show with a fashion show in Key West. Last year's event has helped fuel creative content and commercial success throughout 2025, and we expect this year's event to do the same for 2026. We also completed the renovation of our Worth Avenue Lilly Pulitzer flagship location in Palm Beach. Finally, we are in the final stages of construction of the new state-of-the-art fulfillment center that will be such an important asset to our direct-to-consumer businesses. None of these items will have immediate impact on our financial results, but are critical parts of the foundation of future success. As I previously mentioned, across the portfolio, performance varied by brand as it has for much of this year. The bright spot continued to be Lilly Pulitzer, where the brand again demonstrated a deep connection with its core consumer and delivered healthy growth in the quarter. Our Emerging Brands business also posted strong year-over-year sales gains, reflecting growing recognition, relevance, customer engagement and growth potential. Moving to Tommy Bahama. While our third quarter results did not meet our goals for the brand, we did see encouraging progress. Comps improved sequentially to down low single digits from down high single digits earlier in the year. We believe we've made meaningful headway in addressing key areas that contributed to softness early in the year, particularly around color assortment and completeness of the line, which led to disparate regional performance and softness in Florida, our most important market. There is still work to do, but we feel good about the adjustments made so far. At the same time, we continue to invest in the long-term health of the brand through thoughtful expansion of our retail and hospitality footprint. During the quarter, we reentered the important St. Armands Circle outside of Sarasota with a beautiful new full-service restaurant and retail store, which replaced our previous restaurant that was damaged and closed in 2024 due to a hurricane. This new location reinforces the strength of our hospitality model in one of our most important markets. We also opened a new Marlin Bar in the Big Island of Hawaii, further deepening our connection to a region that has been central to the Tommy Bahama brand for decades. Both locations are off to encouraging starts, and we believe they will be long-term assets for the brand. Turning to Johnny Was. We made several important changes during the quarter to strengthen the foundation of the brand and position it for long-term success. As we discussed last quarter, Johnny Was is an incredible brand with beautiful product, a loyal and engaged customer base and a hard-working, deeply dedicated team. To ensure the brand can fully capitalize on that potential, we have refreshed key leadership roles, including the promotion of Lisa Caser, our formal Chief Commercial Officer at Johnny Was, to lead the brand as President of Johnny Was. Lisa is an experienced business leader with over 25 years of leadership roles at Neiman Marcus, including 10 years as SVP, General Merchandising Manager of Women's ready-to-wear. We also made changes to the lead designer and Head of retail positions to bring sharper creative focus, strong merchandising discipline and more consistent execution across the business. Earlier in the year, we also engaged an outside specialist to help us assess the Johnny Was business and identify the actions needed to meaningfully improve profitability. That comprehensive project has now been largely completed, and we have begun executing against its recommendations with clear priorities around creative direction, merchandising and planning, marketing efficiency and retail performance. While we are still early in the process, we're encouraged by the focus, energy and alignment we are seeing across the team. We believe that the combination of refreshed leadership with a very capable incumbent team and a clear actionable plan will allow us to reinforce the fundamentals of the brand and unlock the substantial long-term opportunity we continue to see in Johnny Was. With that backdrop, let me turn to the fourth quarter and our early read on the holiday. As a reminder, our comps in the fourth quarter last year were flat and benefited from a post-election bounce. When evaluating the early results of the fourth quarter this year, it is clear that the softer start to the holiday season reflects a combination of tariff-related product limitations and a holiday period that has been more promotional across the industry compared with last year that made for a difficult environment, along with the more challenging comps than earlier in the year. Most significantly, our brands have experienced challenges in our product assortments that trace back to the tariff-related sourcing decisions made earlier in the year. When our brands were building their holiday and resort lines last spring, the tariff landscape was highly uncertain with the potential for substantial increases on certain China origin categories. As a result, we made difficult but prudent choices to reduce our exposure in categories heavily reliant on China, for example, sweaters and other cold weather product that are important at this time of year. Those decisions were appropriate given the information available at the time. However, they left us with assortments that were not as complete or as comprehensive as we would like for the holiday season. Sweaters in particular have historically been strong drivers of fourth quarter demand across our portfolio and our reduced presence in this category has been a meaningful headwind. At the same time, the holiday selling period has been more promotional than last year with consumers showing heightened sensitivity to value and a willingness to wait for deeper discounts. While our promotional cadence and depth were consistent with our brand-appropriate approach, many competitors entered the season earlier and more aggressively. That dynamic contributed to a slower start for us in the opening weeks of the quarter. At Lilly Pulitzer, our holiday promotions included curated gift with purchase events and a broader seasonal sale, both of which resonated well with our core consumer, and we saw strong engagement with many of our most giftable styles and capsules. Unfortunately, our successful gift with purchase events were somewhat limited due to high Chinese tariffs and the difficulty of shifting the production of these items elsewhere. Similarly, we identified that there were gaps in our assortments related to the tariff environment, particularly in novelty items and certain other seasonal products that could not be quickly moved out of China, which limited our ability to fully serve demand. We also leaned into our core programs to mitigate tariff exposure, which reduced the level of newness we might have otherwise offered. At Tommy Bahama, we built on themes introduced earlier in the year, offering a compelling mix of gift-ready items and cold weather seasonal product. But as with Lilly, many of the categories that historically carry momentum for us during holiday, especially sweaters and other cold weather essentials that are heavily China reliant were reduced as a result of the tariff uncertainty earlier in the year. Those gaps, coupled with a promotional marketplace that moved earlier and deeper than usual, created incremental pressure. Despite these challenges, we have seen continued encouraging response in our Tommy Bahama Boracay pants that we discussed last quarter. While the price point increased from $138 to $158, new product innovation has led to significant sell-throughs and the Boracay pant has played meaningfully into the holiday gifting mindset. This success also highlights some of the trends we have seen in the market where consumers are gravitating to versatile products that can be worn to work and casual events and are less discretionary than some other categories. At Johnny Was, the customer continues to connect most strongly with the unique artful product that defines the brand. Elevated embellished pieces, rich textures and vibrant color stories, again resonated with loyalists. But similar to our other brands, limitations in certain seasonal categories due to tariff-driven sourcing adjustments, along with heightened promotional intensity across the marketplace created a more challenging backdrop for converting that interest at the levels we had anticipated early in the season. While still small in absolute terms, our emerging brand group continues to be a meaningful source of energy and growth within the portfolio. Southern Tide, The Beaufort Bonnet Company and Duck Head have each built strong momentum this year, and we are seeing that momentum carry into the holiday season with a stronger start than what we have seen in our 3 larger brands. These brands benefit from exceptionally loyal customer bases, focused product stories and highly engaged teams and their performance is a testament to the opportunity we believe exists in each of them. As we continue to invest in their capabilities, particularly in product, marketing and retail expansion, we remain very encouraged by the role of the Emerging Brands Group can play in our long-term growth algorithm. Taken together, these early holiday trends reinforce what we observed throughout the year when we deliver fresh, differentiated product that aligns with our brand heritage, the customer responds. However, given today's promotional climate, achieving that response requires a more competitive value proposition. As a result. And as Scott will detail in a few minutes, we now expect our fourth quarter performance to land below our previous guidance, and we are revising our outlook for the remainder of the year. And that is our focus across the portfolio, concentrating on what makes each brand special and ensuring that what we put in front of the consumer inspires confidence, joy and a sense of possibility. That same focus has guided our product development and marketing plans throughout the year. It's why we have leaned into newness and innovation across our brands, and it's why we continue refining our offerings to match the customers' mindset heading into resort in the early spring period. While the environment remains dynamic, we are approaching the remainder of the year with clear-eyed realism. We recognize that the consumer continues to navigate uncertainty and that promotional intensity remains high, but our teams are executing with discipline, and we believe we are well positioned to meet the consumer where she is today while investing in the long-term strength and potential of our business through initiatives such as those I outlined at the beginning of the call. As we look ahead to fiscal 2026, we are approaching the year with a clear focus on improving profitability and with confidence in the levers we have already begun to put in place. We expect to begin realizing the benefit of cost reduction initiatives that we started during fiscal 2025, including efforts around indirect spend and other SG&A-related efficiencies across the enterprise. At Johnny Was, the significant merchandising and marketing work we undertook this year should begin to bear fruit, and we also expect to extend the merchandising efficiency project we piloted at Johnny Was to the other brands in our portfolio. In addition, we will continue to focus on input cost reductions and tariff mitigation as we refine our sourcing strategies. Capital expenditures will decline significantly as we complete our new fulfillment center in Lyon, Georgia, which will allow us to meaningfully reduce our debt levels. All of these actions position us well to make tangible progress on profitability while continuing to invest with discipline in the long-term strength of our brands. As always, I want to express my deep appreciation for our people across the enterprise. Their resilience, creativity and focus on our customer continue to be the foundation of everything we do. With that, I'll turn the call over to Scott for more detailed commentary on our updated financial outlook. K. Grassmyer: Thank you, Tom. As Tom mentioned, our teams have shown great discipline and resilience in executing our plan against the backdrop of a challenging consumer and macro environment. In the third quarter, our teams were able to deliver top and bottom line results within our previously issued guidance range. In the third quarter of fiscal 2025, consolidated net sales were $307 million compared to sales of $308 million in the third quarter of fiscal 2024 and within our guidance range of $295 million to $310 million. Our direct-to-consumer channels were up in total with a total company comp increase of 2%, which was in line with our guidance for the quarter. The direct-to-consumer increase was led by increased e-commerce sales of 5% and increased sales in our food and beverage and full-price brick-and-mortar locations of 3% and 1%, respectively. The increases in full-price brick-and-mortar were driven primarily by the addition of noncomp locations, with comps in our restaurant and full-price brick-and-mortar locations down slightly at 2% and 1%, respectively. Sales in our outlet locations were comparable to the prior year. Our increased direct-to-consumer sales were offset by decreased sales in the wholesale channel of 11%, driven primarily by decreases in off-price business. By brand, Lilly Pulitzer delivered another strong quarter with total sales increasing year-over-year, driven by double-digit growth in retail and high single-digit growth in e-commerce, partially offset by a decline in the wholesale channel. The positive comp sales at Lilly Pulitzer, along with positive comp sales and overall sales growth in our emerging brands businesses helped to offset the low single-digit negative comp at Tommy Bahama and high single-digit negative comp at Johnny Was that led to sales decreases in both businesses. Adjusted gross margin contracted 200 basis points to 61%, driven by approximately $8 million or 260 basis points of increased cost of goods sold from additional tariffs implemented in fiscal 2025, net of mitigation efforts and a change in sales mix with a higher proportion of net sales occurring during promotional and clearance events at Tommy Bahama and Lilly Pulitzer. These decreases were partially offset by lower freight cost to consumers due to improved carrier rates from contract renegotiations, a change in sales mix with wholesale sales representing a lower proportion of net sales and decreased freight rates associated with shipping our products from our vendors. Adjusted SG&A expenses increased 4% to $209 million compared to $201 million last year, with approximately 5% or approximately 70% of the increase due to increases in employment costs, occupancy costs and depreciation expenses due to the opening of 16 net new brick-and-mortar locations since the third quarter of fiscal 2024. This includes the 13 net new stores, including 3 Tommy Bahama Marlin Bars and 1 full-service restaurant opened in the first 9 months of 2025. We also incurred preopening expenses related to some planned new stores scheduled to open in the fourth quarter. The result of this yielded an $18 million adjusted operating loss or negative 5.8% operating margin compared to a 3% operating loss or negative 1.1% in the prior year. The decrease in adjusted operating income reflects the impact of our investments in a challenging consumer and macro environment. Moving beyond operating income. Our adjusted effective tax rate was 30.3% was higher than we anticipated due to certain discrete items that were amplified by our operating loss. Interest expense was $1 million higher compared to the third quarter of fiscal 2024, resulting from higher average debt levels. With all this, we ended with $0.92 of adjusted net loss per share. As a result of interim impairment assessments performed in the third quarter of fiscal 2025, the company recognized noncash impairment charges totaling $61 million, primarily related to the Johnny Was trademark. The impairment charges for Johnny Was reflect the impact of organizational realignment activities in the third quarter of 2025, including changes to the Johnny Was executive team that Tom discussed. Revised future projections based on Johnny Was recent negative trends in net sales and operating results and challenges in mitigating elevated tariffs. I'll now move on to our balance sheet, beginning with inventory. During the third quarter of fiscal 2025, inventory increased $1 million or 1% on a LIFO basis and $6 million or 3% on a FIFO basis compared to the third quarter of 2024, with inventory increasing primarily as a result of $4 million of additional costs capitalized into inventory related to the U.S. tariff implemented in 2025. We ended the quarter with long-term debt of $140 million compared to $81 million at the end of the second quarter and $31 million at the end of fiscal 2024. Our debt historically increases during the third quarter, primarily due to seasonal fluctuations in cash flow with lower earnings during the third quarter, resulting in increased cash needs. Cash flow from operations provided $70 million in the first 9 months of fiscal 2025 compared to $104 million in the first 9 months of fiscal 2024, driven primarily by lower net earnings and changes in working capital needs. We also had $55 million of share repurchases, capital expenditures of $93 million, primarily related to Lyons, Georgia distribution center project, which remains on track for completion and go live in early 2026 and the addition of new brick-and-mortar locations and $32 million of dividends that led to an increase in our long-term debt balance since the beginning of the year. I'll now spend some time on our updated outlook for 2025. Comp sales figures in the fourth quarter to date are negative in the mid-single-digit range, which is lower than our previous expectations of flat to low single-digit positive comps. While our average order value has increased nicely, traffic has been mixed, but mostly down, and conversion has been very challenging across our portfolio. Due to the slow start to the holiday season, we are revising our guidance for the remainder of the year with the expectation that the mid-single-digit comp will continue for the remainder of the year. For the full year, net sales are expected to be between $1.47 billion and $1.49 billion, reflecting a decline of 2% to 3% compared to sales of $1.52 billion in fiscal 2024. Our revised sales plan for the full year of '25 includes decreases in our Tommy Bahama and Johnny West segments, driven primarily by negative comps, partially offset by growth in our Lilly Pulitzer and Emerging Brands segments, driven by positive comps and new store locations. By distribution channel, the sales plan consists of a low single-digit decrease in most channels, including wholesale, full-price retail, e-commerce and outlets, partially offset by a low to mid-single-digit increase in our food and beverage channel that is benefiting from the addition of 3 new Marlin Bar locations and 1 new full-service restaurant opened during the year. For fiscal 2025, our current annual guidance reflects a net tariff impact of approximately $25 million to $30 million or approximately $1.25 to $1.50 per share. While tariffs represent the primary driver of margin contraction this year, we also expect continued promotional activity across our brands to weigh on margins as consumers remain highly responsive to value and deal-oriented shopping in the current macroeconomic environment. We expect our gross margins for the year to contract by approximately 200 basis points. In addition to lower sales and gross margins, we expect SG&A to grow in the mid-single-digit range, primarily due to the impact of our recent continued investments in our businesses, including the annualization of incremental SG&A from the 30 net new locations added during fiscal 2024, incremental SG&A related to the addition of approximately 15 net new locations this year, including 3 new Tommy Bahama Marlin bars and a new full-service restaurant. Also within operating income, we expect lower royalties and other income of approximately $3 million in fiscal 2025. Additionally, our fiscal 2025 guidance includes the unfavorable impact of nonoperating items, including $7 million of interest expense compared to $2 million in 2024 or an approximate $0.20 to $0.25 incremental EPS impact. Increased debt levels in fiscal 2025 are due to our continued capital expenditures on the Lyons, Georgia distribution center, technology investments and return of capital to shareholders exceeding cash flow from operations. We also expect a higher adjusted effective tax rate of approximately 25% compared to 20.9% in 2024. The higher tax rate is primarily a result of a significant change in the impact that our annual stock vesting had on income tax expense in 2025 compared to 2024. We anticipate the higher tax rate will result in an approximate $0.15 to $0.20 per share impact. Considering all these items, including the $1.25 to $1.50 per share impact from tariffs, higher interest expense and a higher tax rate, we have revised our guidance and expect 2025 adjusted EPS to be between $2.20 and $2.40 versus adjusted EPS of $6.68 last year. The biggest drivers of the decrease in EPS guidance includes a reduction of our fourth quarter comp assumption from low single-digit positive comps to a mid-single-digit negative comp. A decrease in royalty and other income from lower order expectations from key licensing partners who customers have elevated inventory levels that will lead to a shift in orders from Q4 to Q1 of next year; an increase in SG&A, primarily resulting from increased consulting costs related to our ongoing projects to improve operating results and some additional costs related to our new Lyons, Georgia distribution center. In the fourth quarter of 2025, we expect sales of $365 million to $385 million compared to sales of $391 million in the fourth quarter of 2024. This primarily reflects our mid-single-digit negative comp assumption and decreased wholesale sales in the low single-digit range, partially offset by the impact from noncomp stores. We also expect gross margin to contract approximately 300 basis points, primarily driven by increased tariffs and a higher proportion of net sales occurring during promotional and clearance events. SG&A to grow in the low to mid-single-digit range, primarily related to the new store locations, increased interest expense of $1 million, decreased royalty and other income of $1 million and an effective tax rate of approximately 26%. We expect this to result in fourth quarter adjusted EPS between $0 and $0.20 compared to $1.37 last year. I will now discuss our CapEx outlook for the remainder of the year. Consistent with our prior guidance, we expect capital expenditures for the year to be approximately $120 million compared to a total of $134 million in fiscal 2024. The remaining capital expenditures relate to completing the new distribution center and the execution of our current pipeline of new stores at Tommy Bahama and Lilly Pulitzer. We expect this elevated capital expenditure level to moderate significantly in 2026 and beyond after the completion of the Lions Georgia project. Consistent with the seasonal nature of our business, we expect a modest decrease in outstanding borrowings in the fourth quarter. Thank you for your time today, and we will now turn the call over for questions. Bond? Operator: [Operator Instructions] Our first question comes from Ashley Owens with KeyBanc Capital Markets. Ashley Owens: So just first and foremost, I appreciate all the color on what was exactly a gap within each of the banners in terms of assortment for the holiday. But just moving forward as we navigate the quarter, just how meaningful would you expect this to be for the upcoming season? Is it something that's been corrected? Or are you observing some disruption still? Just want to understand how much of holiday is now fully aligned versus where you originally planned? And then maybe on that, I know China is complex right now and that it might be ironing out a little bit, but would ask if this gap -- is this shifting your viewpoint or sourcing strategy moving forward? Would you try to diversify further, place orders further in advance? Just any color there. Thomas Chubb: Yes. I think the big thing and while we did give a lot of detail, one thing that we didn't really call out specifically was that it's really what's on the floor right now that most impacted some of our sourcing decisions. And the reason is at the time that we were placing the buys for what's on the floor right now corresponded with that brief period of time where the duty or the tariff on China was going to be 145%. When it's been 20% or 27% or whatever, that's something that we could make a conscious decision to just stay in China with a particular product if we needed to and just try to take various routes to mitigate that tariff. When we were looking at 145%, which that's off the table at this point, but that was right when we were placing the buys for what's on the floor now. lots of stuff we were able to move out of China. Tommy and Lilly are mostly out of China, if not completely. But sweaters are the one category, and there are a couple of other ones. Sweater is the big one, but there are just not a lot of -- haven't historically been great resources that we could go to outside of China. So what we decided to do, Ashley, and at the time, I think it was the right call. We knew we couldn't bear that much tariff. So we really cut back the sweater assortment and tried to fill it in with other products. You look at our assortment right now, and you wish you had the sweaters. And that's really what we were talking about. So by the time you get to spring, that had settled down a lot. The tariff stuff is still a little bit up in the air, but it settled down a lot, and we were able to either move the stuff or know that it was going to come in at a tariff rate that we could deal with otherwise. So for spring, I don't think we have the same kind of impacts. We still have tariff issues that we have to deal with, but they're not going to impact the assortment the way that they have for this season. Does that help? Ashley Owens: Yes, that's super helpful. Just a couple of other questions really quickly. So I think you mentioned earlier that competitors were more aggressive with promotions for holiday and also earlier, which created that tougher backdrop. Any insight as to what you're seeing in the marketplace now in terms of that and if the intensity has moderated, but also how that's helping to inform your promo strategy for the balance of the year? And then additionally, just following your leadership refresh and then the external assessment on Johnny Was. Would be curious as to what emerged as the key priorities you're now focused on? And then also as you look out to 2026, key objectives for the brand? And should we be thinking of this as another period of stabilization? Or any color you could provide us on some of the road map or some of the key building blocks for stabilizing Johnny? Thomas Chubb: Okay. So with respect to the promotional sort of intensity out there, I would say right now, it still feels quite high, but we're a little bit in that in between time between the Black Friday, Cyber Monday weekend and the final stretch, and those are usually the most promotional times. I don't think it's really retracted, but I'm not sure it's taken another step up yet but wouldn't be surprised to see that happen. And we're going to try to be responsive to that in brand-appropriate ways. I think the catchword in all the brands is to stay nimble. We do want to make sure that we're not totally selling out our brands, but we're also thinking about things that we can do to respond to the marketplace. The one other thing I'll point out, and this is this calendar that we have this year where there are 27 days between Thanksgiving and Christmas and Christmas falls on a Thursday. The last time we had that calendar was in 2014. And that year, the business sort of came very late. If you looked at the sales build through the Thanksgiving to Christmas selling period, it really came on late. Last year, if you remember, you had Christmas on Wednesday. So this year, they got an additional weekday to shop, which could be meaningful. And also, it allows us to cut off e-com shipments probably on Saturday or in some cases, even Sunday and still have people feeling good that they're going to get them by Christmas, while last year, that was mostly on Friday that we were cutting off. So there are some things there that we kind of built the current trajectory into our forecast, but I think there's some reason to hope that it could -- the season could rally a bit. I don't think it's going to be a great one, but there are some differences there that are worth noting. And then on the Johnny Was plan, the -- I will say a couple of things that the game plan was developed by the team at Johnny Was with some outside assistance, but it's very much the team's plan. Lisa Kaiser, who's now the President of Johnny Was, was part of that team. She's relatively new to Johnny Was, but she's been with us for several months. She was the Chief Commercial Officer before, and she was very, very much central to the development of that plan. So the refreshment of the leadership does not entail, I would say, any change in the direction of the plan that we've been working on. And as we talked about last quarter, the keys to that are merchandising effectiveness, which is about having better assortments that hit -- have the right level of investment in the right price points, the right product categories, getting that to the stores at the right time and in the right store level assortments. And all of that will drive, we believe, some incremental sales versus what we would have otherwise had and also improve the margins, improve full price sell-through and ultimately gross margin. And then the other -- 2 other big areas of focus by the team, and again, it's the team's plan, really the same team. We've just added a few more people and elevated a few people, including Lisa, who we're very excited about. But the second element is about marketing efficiency. And that's really just more effectively spending the dollars that we spend to drive better results. And some of that, we've already started to kick in. And I will say what we're seeing to date is encouraging in that we're actually getting, I would call it, better efficiency out of the spend that we've done in the last month or so, maybe a little longer than that. And then the last thing is about improving the go-to-market process and calendar, and that's something that the whole team led by Lisa is they're very bought into that. Lisa is a big believer in that kind of discipline. So I think this -- the refreshment of the leadership team and the elevation doesn't change the plan because they all developed the plan, but it enhances our ability to execute it well. Ashley Owens: Great. Appreciate all the information, and I'll pass it along, but best of luck. Operator: Our next question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: I wanted to dig into wholesale a little bit. I know it's a relatively smaller piece of the business, but just curious if you can share what's going on there. It sounds like your wholesale partners are being a bit more cautious with orders, but there's maybe a little bit more inventory in the channel. And then I think you mentioned that off-price was going to be down. Is that a strategic plan? And maybe just elaborate on what's going on there. Thomas Chubb: I think on the -- overall on the wholesale, I think it is a level of concern and caution by the retailers. And I would say most, especially the specialty retailers that are a big part of our wholesale base. And during uncertain times, they tend to pull back a bit, and I think we're seeing that now. And Scott, I don't know if you want to elaborate on the off-price situation a bit. K. Grassmyer: Yes. Yes, we did have less inventory that needed to be liquidated through those channels. So we are trying to keep our owner inventory and hopefully, we'll continue to have less that we have to put through those channels. Janine Hoffman Stichter: Got it. And then just thinking through the tariffs, as you're just now seeing the impact of the products that you were planning, I guess, in April or May when the China tariffs were 145%, is the Q4 what we should think of as a peak headwind from tariffs? Or how much should we think about continuing into the first quarter of next year? Thomas Chubb: Well, I think in terms of it -- the impact it had on our product assortment, I think it is peak. I think as we get into spring, we were able to make the product that we wanted to make it somewhere that was a manageable level of tariff. In terms of the impact, the financial impact of tariffs, remember, we didn't have them during the first quarter of last year. really, they didn't really kick in until later in the year. So first quarter, you're not going apples-to-apples. And then as you get later in the year, you start to lap the tariffs. I don't know if you want to add. K. Grassmyer: Yes, yes. We accelerated a lot of products early in the year, knowing that tariffs were going to be coming or fearful they are going to be coming. So we were able to most of the first quarter had very, very minimal. Now we go into first quarter of next year, everything will have some tariff on it, but we will have some price increases to at least help mitigate that impact. As we get later in the year, we'll be going apples-to-apples with tariffs and hopefully have a little bit more mitigation price-wise as the year moves on. Operator: Our next question comes from Joseph Civello with Truist Securities. Joseph Civello: Following up on wholesale a bit, I understand the general cautious tone from retail partners. But can you give any incremental color on your sort of competitive positioning within the channel and maybe as we get past the tariff pressures on inventory and stuff like that, that you're facing right now? Thomas Chubb: Well, I think through third quarter, our relative performance to the extent we know, and we don't always have perfect information, but I think we performed well, and I don't think we -- for the -- overall, I would say, well, there were small pockets where maybe that was not the case. But I would say, overall, our performance was quite good on the retail floor. For the fourth quarter and the holiday, I think it's too early to know for sure. We don't have enough data, but my hunch is that we're going to continue to perform well relative to the rest of the floor, and it's more about the general caution. Joseph Civello: Got it. Makes sense. And then if we could also just get a little bit more color on thoughts around price increases as we go through the spring, which I believe is like the original trajectory you're looking at? K. Grassmyer: Yes. We do have some price increases in for the fall holiday. period, but there will be more in the spring. But again, we'll have the full tariff load coming in that inventory. And then we're looking at next fall pricing on are there any adjustments we -- additional adjustments we need to make. So I think there will be -- once we get out the early part of next year, the pricing should -- the goal is to have it mitigate the tariff dollars. I don't think we'll get the percentage quite mitigated, but the dollars once we get out of the early part of the year. The goal is to have the pricing mitigate the tariff dollars. Operator: Our next question comes from Paul Lejuez with Citigroup. Tracy Kogan: It's Tracy Kogan filling in for Paul. I had a question about what you're seeing quarter-to-date. And outside of the key sweater category, can you talk about the trends there in some of those other categories and also talk about trends by brand quarter-to-date. Is it pretty broad-based weakness you're seeing across the brands? Or is there a big deviation of one brand or the other? Thomas Chubb: Sure. Thank you, Tracy. Well, I would say that -- and we talked about this in the prepared remarks, but the big 3 brands are all relatively weak at the moment. And the smaller brands are still sort of humming along. They were plus 17% in the third quarter, and they're continuing to have a strong fourth quarter, while the big brands are where we're really seeing the softness. And then in terms of product, we also talked about that a little bit. And I think in Lilly, we're -- because of the China tariff situation and the threat of 145%, China is where we make a lot of our more embellished kind of novelty type stuff, things with sparkles and [indiscernible] and bows and that kind of stuff. And so we've just got less of that stuff. And so the consumer is almost being forced into some things that -- I mean, Lilly is never basic product that within the Lilly spectrum are a little more tame. And then in Tommy Bahama, we've actually seen very good performance in things like the Boracay pant which is basically a Chino. It's a really great one, really nice one, but it's a chino pant. And that, as we talked about third quarter and again this quarter, we introduced a new one or I say third quarter, second quarter. We introduced it earlier in the year. It's at 158 versus 138. It does have some new features and benefits, but it's sold just incredibly well. And actually, we're selling a lot more of them than we sold the old one last year. And then also things like long sweet sleeve wovens are performing well, some of the second layer knits. And I think the kind of theme to a lot of those things is versatility, things that can be worn on a lot of different use occasions. But we'll see more as the season develops, Tracy. Operator: Our next question comes from Mauricio Serna with UBS. Mauricio Serna Vega: I guess I understand now in this fourth quarter, you're experiencing some assortment issues that's related to the sweaters and the move out of China for that -- for this particular season. But as you think about the spring 2026 season, how are you thinking about your assortment, how ready you are in terms of different -- the 3 big brands, I guess, and the potential for maybe after getting through this bit of a hiccup in Q4, maybe having stronger results in the first half of next year? Thomas Chubb: I think the challenges to the assortment were really mostly for what's on the floor right now. I think as we get into spring, by the time we were placing those buys the 145% tariff was off the table and/or we had found other places to make things. So I don't think we'll have that challenge so much in the spring. As Scott mentioned a minute ago, the tariff issue for the spring will just be that this year we will have tariffs, whereas in spring of last year, we didn't really have them yet because that been implemented and/or we were pulled in inventory ahead of them. Mauricio Serna Vega: Got it. And just a reminder, what kind of price increase are you planning for Spring '26 to offset the tariffs? K. Grassmyer: Yes. It's kind of varying, but it's ranging from 4 to say 8%, but some of it, the ones that are more in the 8% or more of the -- it's more a little more elevated in mix. So I think for the tariff piece of it around 4 which kind of offsets the dollar impact. Yes. Yes, not quite the margin impact, but the dollar impact. Operator: This now concludes our question-and-answer session. I would like to turn the call back over to Tom Chubb for closing comments. Thomas Chubb: Thanks to all of you very much for your interest. We look forward to talking to you again in March. And until then, I hope you have a happy holiday season. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.
Operator: Greetings, and welcome to Torrid Holdings Third Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Chinwe Abaelu, Chief Accounting Officer and Senior Vice President. Thank you. You may begin. Chinwe Abaelu: Good afternoon, everyone, and thank you for joining Torrid's call today to discuss our financial results for the third quarter of fiscal 2025, which we released this afternoon and can be found on our website at investors.torrid.com. With me on the call today are Lisa Harper, Chief Executive Officer of Torrid; and Paula Dempsey, the Chief Financial Officer. Ashlee Wheeler, our Chief Strategy and Planning Officer, is also present and will be participating in the Q&A session. Before we get started, I would like to remind you of the company's safe harbor language, which I'm sure you're familiar with. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements may include, but are not limited to, statements containing the words expect, believe, plan, anticipate, will, may, should, estimate and other words and terms of similar meaning. All forward-looking statements are based on current expectations and assumptions as of today, December 3, 2025. These statements are subject to risks and uncertainties that could cause actual results to differ materially. For further discussion of risks related to our business, see our filings with the SEC. With that, I'll turn it over to Lisa. Lisa Harper: Thank you, Chinwe. Hello, everyone, and thank you for joining us today. I'll review our third quarter performance and provide an update on our strategic initiatives, including the enhancement of our product assortment, our commitment to the growth of our sub-brands, the expansion of opening price point strategy and execution on our store optimization plan. Then I'll turn the call over to Paula to discuss the financials. We are clearly disappointed with our overall performance this quarter. Despite some areas of strength, it was more than offset by missteps in our overall assortment mix that we are addressing head on with decisive corrective actions, and I'll discuss that shortly. For the quarter, while sales came in at the low end of our guidance, profitability was dampened by deeper promotional activity than we had planned, impacting our adjusted EBITDA. We delivered third quarter sales of $235 million and adjusted EBITDA of $9.8 million. I want to be clear, these results largely reflected execution issues that are within our control. Let me walk you through the factors that influenced our results. This quarter delivered strong performance in several key categories with denim, non-denim, dresses and intimates meeting our expectations, all generating positive comparable growth. However, this improvement was more than offset by missteps in our tops and jackets category. Tops represented approximately half of the year-over-year sales miss this quarter. Specifically, we shifted too heavily towards fashion-forward designs at the expense of our core assortments and established franchises. While innovation is important, the shift moved us too far from the functional replenishable items. Our customer feedback has been invaluable in guiding our course correction. We are successfully attracting and reactivating consumers who embrace our elevated fashion and lifestyle offerings across our sub-brands. However, our loyal long-standing customers continue to rely on us for their core ward drove essentials and their solution-oriented products and trusted fabrics with evolutionary rather than revolutionary style updates. Our denim category exemplifies the balanced approach we're implementing going forward. In Q3, we successfully integrated fashion elements while preserving our core franchise DNA, delivering mid-single-digit growth on top of last year's double-digit performance. This demonstrates our ability to innovate within our customers' expectations, and we're applying those learnings across all categories moving forward. We are taking decisive action to address these challenges with clear time lines and measurable outcomes. First, we've strengthened our merchandising foundation by implementing enhanced guardrails in our merchandising process and building a more robust assortment planning function. I'm personally overseeing both initiatives to ensure rapid execution and accountability. Secondly, we're actively addressing near-term assortment gaps. We've initiated chase orders for our key franchises, focusing on the core fabrications and silhouettes our customers expect in both knits and woven tops. These products will begin arriving in January, positioning us to see sequential improvement in knit and woven performance by the end of Q4 with accelerating momentum into Q1 2026. Looking ahead, we've completed a comprehensive review of our spring/summer 2026 buying strategy. We're rebalancing our investments to deliver the right mix across categories, fits, fabrics and end users, ensuring we meet our customers where they are while maintaining our innovative edge. These actions reflect our commitment to operational excellence and customer centricity. We have clear visibility into the path forward and confidence in our ability to return these categories to growth. Shifting to footwear. Our strategic decision to pause the footwall category in response to tariff-driven cost pressures was sound, but we underestimated the attachment rate impact. The loss of this anchor category resulted in lower overall basket sizes and transaction frequency, leading to what we estimate as an approximate $12.5 million in lost sales this quarter, of which $10 million was contemplated. The timing amplified the impact as October represents our peak boot selling season, which historically drives some of our highest attachment rates of the year. We've taken decisive action to quickly course correct. We reintroduced a carefully curated footwear assortment in mid-November and early performance has been encouraging. We've restructured our sourcing and SKU mix to mitigate tariff exposure while maintaining the category's ability to drive attachment. Based on what we're seeing, we expect to scale footwear back to historical sale levels of approximately $40 million in 2026, but importantly, an improved profitability given our more disciplined approach to the category. This positions us to recapture both the direct footwear revenue and the attachment-driven sales we lost during the temporary pause. Now turning to our strategic initiatives. We are focused on enhancing our product offering by expanding sub-brands and strategically introducing an opening price point strategy designed to increase market share through customer acquisition and increase frequency among our loyal customers. Our sub-brand strategy is working and is on track to deliver approximately $80 million in sales this year, attracting new, reactivating lapsed and increasing spend among our high-value customers. These lifestyle concepts offer unique collections that provide newness and excitement while broadening our customer base. Importantly, sub-brands create a halo effect, driving attachment rates to core categories and supporting customer reactivation through targeted community and influencer marketing. Looking ahead to 2026, we're implementing a more strategically balanced assortment architecture. Approximately 30% of our assortment offering will be opening price points, developed in close partnership with our merchandising design and product development teams to ensure we maintain our quality standards while delivering accessible value to customers. We are excited about momentum in our intimates business with 3 new bra launches planned for 2026, our first substantive bra introduction since 2019, representing significant innovation in this important category. Bras as a category drives strong customer acquisition and loyalty and engagement, and we believe there is significant runway in this business. On the marketing front, we are committed to a balanced approach with emphasis on both mid- and upper funnel awareness and acquisition as well as lower funnel conversion and retention. This includes increased digital media investment, a robust influencer strategy and several in-person activation. In 2026, you will see even greater expansion of these community and brand-building engagement efforts. Our popular model search campaign ran from September to November this year and was done through our digital channels, supporting a broader reach. We had an incredible response again this year, so much so that we selected 5 top models, one from each age demographic ranging from 18 to 50-plus, showcasing the range and relevance of our brand and community. Additionally, we have improved the value proposition of our loyalty program and our private label credit card, which drives significant expansion in customer lifetime value. We remain committed to our store optimization strategy, and I'm pleased to report we're executing exceptionally well against our plan. As consumer preferences continue to shift toward digital channels, we're proactively rightsizing our physical footprint to deploy capital more efficiently and enhance shareholder returns. Our execution remains on track. We closed 15 stores in Q3, bringing our year-to-date total to 74 stores, and we continue to expect approximately 180 closures for the full year. Importantly, we're seeing strong retention metrics aligned with our expectations that validate our approach. Customer retention from this year's closures is running in line with our expectations, demonstrating the strength of our omnichannel ecosystem, the success of our enhanced retention strategies, including multi-touch communication plans and our ability to successfully migrate customers to nearby locations and digital channels. With 95% of customers engaged in our loyalty program, we remain well positioned to effectively migrate customers to nearby stores and digital channels. The financial benefits are substantial and will accelerate as we move through this optimization. These closures are expected to contribute significant adjusted EBITDA margin benefit in 2026, while also generating significant free cash flow improvement that will provide increased flexibility for future strategic investments. Now I'll turn the call over to Paula to discuss the financials. Paula Dempsey: Thank you, Lisa. Good afternoon, everyone, and thank you for joining us today. I'll begin with a review of our third quarter financial performance and then provide our outlook for the remainder of fiscal 2025. While sales landed at the low end of our guidance, softer demand in our digital channel required higher-than-planned promotional activity, which has pressured adjusted EBITDA. At the same time, we continue to realize meaningful benefits from our store optimization initiatives, resulting in 11.5% year-over-year reduction in SG&A. We remain committed to disciplined inventory management and ended the quarter with inventory down 6.8% compared to last year. Net sales for the third quarter were $235.2 million compared to $263.8 million in the prior year. Comparable sales declined 8.3% and our tariff-related pause in the shoe category drove approximately 400 basis points to this overall decline as we temporarily scaled back while navigating elevated import costs in the category. Gross profit was $82.2 million versus $95.2 million last year. Gross margin was 34.9% compared to 36.1% in the prior year, reflecting higher promotions and deleverage on the lower sales base. SG&A expenses continue to reflect the disciplined cost structure we're building across the enterprise. SG&A was favorable by $8.6 million, resulting in $66.3 million for the quarter compared to $74.9 million a year ago. As a percentage of net sales, SG&A leveraged 30 basis points to 28.2%. This year-over-year improvement is a direct result of our multiyear transformation to structurally reduce operating expenses. Benefits from our store optimization initiatives and our focused approach to organizational prioritization are enabling us to reduce fixed costs. These gains reflect more than store closures alone. They represent a broader shift towards a more efficient, more variable cost structure designed to flex with demand, strengthen margin resilience and enhance free cash flow. As store optimization progresses, we expect further SG&A leverage and incremental liquidity benefits in fiscal '26. Marketing investment increased by $2.7 million to $15.7 million as we leaned intentionally into customer acquisition and brand visibility during the quarter. These investments support our long-term plan to strengthen top of the funnel, improve brand relevance and drive traffic. We continue to refine our marketing mix towards higher return channels with more personalized targeting and improved attribution. The timing shift of our model search event from Q2 to Q3 also drove this increase. This event continues to deliver high engagement and long-term customer loyalty. Net loss for the quarter was $6.4 million or $0.06 per share compared to a net loss of $1.2 million or $0.01 per share last year. Adjusted EBITDA was $9.8 million, representing a 4.2% margin versus $19.6 million and a 7.4% margin a year ago. We ended the quarter with $17.2 million in cash compared to $44 million last year. As of November 1, we had $14.9 million drawn on our revolving credit facility with approximately $86.2 million of remaining availability. Inventory totaled $128.8 million, down 6.8% from last year, reflecting both lower receipts and our reduced store base. Turning to store optimization, which remains a cornerstone of our multiyear transformation. During the quarter, we closed 15 stores and remain on track to close up to 180 stores in fiscal 2025. Customer retention from these closures continue to perform consistently with historical levels. The stores we're exiting are structurally unproductive and closures are aligned with natural lease expirations, minimizing exit costs. On a Q3 year-to-date basis, we have realized approximately $18 million in lower operating expenses from closing 74 stores this year and 35 total stores in the prior year, and these savings are already reflected in our performance. As we move through Q4 and complete the planned closures for fiscal '25, we expect even greater savings in fiscal '26, which will enhance our liquidity position. This initiative is both a structural realignment, reflecting where our customers increasingly choose to shop with about 70% of demand originating online and a proactive liquidity strategy designed to protect the business, strengthen our balance sheet and enhance the resilience of our operating model. Overall, we believe store optimization will deliver substantial adjusted EBITDA margin expansion in fiscal '26. We are updating our outlook for the remainder of the year to reflect third quarter performance and current trends. We now expect full year net sales in the range of $995 million to $1.002 billion and adjusted EBITDA in the range of $59 million to $62 million for the full year. Capital expenditure is expected in the range of $13 million to $15 million. In closing, we're executing a disciplined and deliberate transformation of our retail footprint. By taking advantage of natural lease expirations to rightsize our store fleet, we're structurally improving our cost base and strengthening the long-term health of the business. The combination of lower fixed costs, enhanced digital capabilities and a more productive store base is expected to drive sustainable margin expansion and generate meaningful incremental liquidity as we move into fiscal 2026. Now we will open the call to your questions. Operator? Operator: [Operator Instructions] Our first question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: Could you elaborate a bit on some of the product missteps that you talked about? What cues are you getting from the consumer to tell you that this is where the challenge is and this is what needs to be fixed? And then you talked about the promotions being higher on the digital channel. Maybe elaborate on why that is or why you think that is and what you saw in the stores during the period. Lisa Harper: Thanks, Janine. It's Lisa. The merchandising missteps were very focused on tops, as we mentioned. So tops were about half of the total revenue miss for the quarter. Shoes were about 40% and then jackets because of their seasonal importance were about 10% for the quarter. So it's pretty -- we've talked through the shoe situation, which is a pause based on the tariffs. We've reintroduced shoes and boots recently are having a great response to them. We'll continue to build that business back up and recapture that revenue as we move into 2026. But for the quarter, the biggest miss and the biggest action was really focused around the tops category. What I would say from a merchandising miss perspective was the advocation of a couple of our core fabrications and core kind of entry point solution-based products for the customer. And so we've been able to chase that product very quickly. It's longer tops, more tunics, brushed waffles, super soft knits and Sally in the woven category. So it's very focused on a few fabrications, very focused on a few end uses. And because we are able to platform that fabric, we're being -- we're back into some of those businesses in the fifth week of December and throughout January and February in terms of receipts. So we expect to see improvement in those categories as we move into early first quarter as we'll have, I think, chased the bulk of what we feel is missing in the assortment right now. So what we've done to avoid that in the future is really enhance, although we have pretty substantive guardrails to this, this was a merchandising this was obviously very disappointing and frustrating for the organization for the quarter. And so we put enhanced guardrails around the process. We've put in a robust assortment planning, multifunctional approach to the categories, particularly. And we are just increasing oversight, and I'm involved in every step of that. I would say that as an organization, they were able to effectively kind of innovate and balance product assortments in all areas except for tops. So I would say that -- I would -- all areas except for tops and jackets. The benefits of that innovation and expansion to the core product is present in denim, non-denim dresses and intimates. And so those areas were able to positive comp. As we mentioned in the prepared remarks, they weren't able to offset the detriment of the tops miss. So if you think about the total miss for the quarter, I'll restate it, it's about 50% tops, about 40% shoes and related transactions with shoes and then about 10% in jackets for the quarter. And I'll turn it over to Ashlee to answer the promotional conversation. Ashlee Wheeler: Janine, I'd say that the accelerated promotional activity was in large part correlated to the miss in the top space. So as Lisa noted, in the absence of some of those core franchises, entry price point solution-based items and a swing into more highly novel or more fashion-oriented assortment. It put a little more pressure on promotional activity, AUR, for example, in the absence of those entry price point categories. That said, I think we've done a really nice job making sure that we're coming out of the season clean. So there are no inventory issues to speak of related to some of these missteps in assortment. Janine Hoffman Stichter: Perfect. And then maybe just one more for me. The full year guidance implies, I think, a mid-teens revenue decline in Q4. Anything you can share about where you're tracking quarter-to-date versus that guidance? Lisa Harper: Obviously, we are able to incorporate current performance into that guidance. We don't anticipate a recovery, substantive recovery in either tops or shoes for the balance of this quarter. We'll start to see some improvement in tops in first quarter. We'll still be -- have a drag in shoes as we go through the fourth quarter and the first half of next year. So contemplate -- all of that is contemplated into that guidance. Operator: Our next question comes from Brooke Roach with Goldman Sachs. Brooke Roach: Lisa, for a couple of years now, the balance of fashion versus basics and opening price point versus stretched product has been something that the business has been chasing. What's changing in the processes to ensure that you have both those opening price points and balance items in your assortment and planning architectures? And other than oversight, how do we ensure that this is something that's more systematic on a go-forward basis as we look into 2026 and beyond? Lisa Harper: Thanks, Brooke. I just called you by your last, I apologize. Thanks, Brooke. So I would say that the issue -- the overall issue and opportunity in this business was -- is about innovation and remaining relevant and commercial. That is balanced against the need of the customer and the request of the customer -- the focus of the customer on price point. And so as we go into first quarter of next year, we will be in terms of opening price point, close to 30% of sales and assortment associated with those categories of businesses that service our customer in terms of core products, solution-oriented, high quality at a price that she has shown us that she reacts to and values. That is built into the architecture, the assortment architecture as we move forward. It is something that we are -- have embedded in that process. Both sides of this are important. First of all, we have to move forward and remain relevant. I think that we've been able to do that with sub-brands. We've been able to do that in the categories that I mentioned before, denim, non-denim dresses and intimates. And the miss really is in the tops area, which had advocated and exited through merchandising direction to many of the core programs. Those core programs are bought and will be -- already have been planned to receive as we get into January receipts going into 2026 sales, and it's part of the assortment architecture. So the need for the business to move forward and innovate with product was important as our customer feedback had been that -- our styling was not keeping up with their demand. We've balanced that, I think, in every area, except for the misstep in tops, where we will be going into first quarter with a much stronger opening price point strategy across the board, but primarily the highest level of opening price point will be in tops as we move forward. It's built into the assortment architecture of the business. I don't know, Ashlee, do you want to add anything? Ashlee Wheeler: Brooke, I might add, if we take a look at the categories where we executed well in the third quarter, so denim as a proxy is a place where we stayed committed to the franchises that the customer knows us for, the Bombshell franchise, for example. We stayed very committed, but we expanded upon that, gave her more innovation through leg shape, wash treatment, finish. And that system has worked very, very well. It's worked well for us in dresses where we've stayed committed to end use covering every aspect of her life and been very focused on multi-end use, it's worked well. Tops where we misstepped in the third quarter, we did not do that, and we walked away from very critical end use and solutions. We have to get back and stay focused on the same balance that we applied in denim and in dresses to our tops category, which is the largest category of the business. Brooke Roach: That's really helpful. As a follow-up, have you seen any larger or outsized shifts in engagement among any specific income demographic or age cohort of your consumer? Maybe said another way, are you seeing any changes in the demographic makeup of your businesses which customers are engaging with you the best? Lisa Harper: In terms of customer demographics or income cohorts, performance has stayed consistent across all of those. What we observed in the third quarter, very different from previous quarters is our most loyal, our most engaged customers pulled back, and we saw that come through reduced frequency and fewer purchases in the tops departments in particular. Operator: Our next question comes from Corey Tarlowe with Jefferies. Corey Tarlowe: Leslie, can we just talk a little bit about the sub-brand momentum and any updates there as that's continued to build in the assortment and how you think about this quarter's results may alter or change the approach in the sub-brand strategy? Lisa Harper: Thanks, Corey. No change in the sub-brand strategy. I think that we have a clear winner in the [indiscernible] brand and think that, that will expand. Nightfall and retro are continuing to perform very, very well. Belle Isle is more -- we've identified it more as a first half brand than a back half brand. And so we'll be adjusting kind of the sales momentum associated with Belle Isle to be probably more 60% first half, 40% back half. And then we've introduced Tru in our active business, which we're very happy with the results there. And Lovesick is still kind of, I would say, in test mode. We don't have a lot of revenue associated with that as we move into next year as we're able to refine that assortment moving forward. I think in general, very, very pleased with the sub-brand momentum and expect it to continue to grow dramatically as we go into 2026. Corey Tarlowe: Great. That's really helpful. And then just a follow-up. Can we talk about the leverage profile and how that changes with all the store closures and what the perhaps new leverage profile might be as we think about easier lapse in 2026 and what that could mean from a margin perspective? Paula Dempsey: Corey, this is Paula. So as we think about 2026 with the store closures, what's going to happen is our profile will be more flexible from an expenses standpoint. So of course, less fixed expenses, and we'll have the ability to be more dynamic from that standpoint. I think from a gross margin, the profile may be staying closely the same to where that total enterprise is today. But what you're going to see is a substantial EBITDA margin expansion in 2026 with the store closures. So currently, we are seeing the store closure optimization work really well. We have delivered over $18 million of cost reductions this year alone. We expect that number to be much greater mid 2026 when we annualize 180 stores. And so that will also strengthen our liquidity substantially for 2026. Operator: Our next question comes from Alex Straton with Morgan Stanley. Alexandra Straton: Maybe for Paula, I think you said you expect significant EBITDA margin expansion next year. I'm not sure if I heard that right. But if so, can you just elaborate more on that and what type of level is in reach? And then just on -- as a follow-up to the sales guidance for the fourth quarter, worse pressure than the third quarter is what's implied. So is that reflecting what you've seen quarter-to-date? And what areas is that are getting worse from a quarter-over-quarter perspective? Paula Dempsey: So going to Q4 guidance, we are all in for Q4 guidance. So what you're seeing is essentially accounting for what Lisa had mentioned before, the miss in tops along with shoes. There is also a seasonality impact in our business typically in Q4. So it goes along with that seasonality impact. As we moved into fiscal '26 with store closures and EBITDA margin growth, what you're going to see there is, if you recall, a lot of these stores that we're closing, actually, most of them are very highly unproductive stores. So by closing them, we're essentially giving money back to the business through reductions in many items in the P&L, right? So such as store payroll or store occupancy, et cetera, et cetera, et cetera. So we're going to see a greater amount of savings from that standpoint. And just to touch base again, we're seeing retention, customer retention, sales retention from these store closures to be well aligned with our historical rates, which is a great sign for us. So everything is going really well from that standpoint. I would say as we are on track to closing up to 180 this year. And I think that's all we have from a store optimization at this point. Operator: Our next question comes from Dana Telsey with Telsey Advisory Group. Dana Telsey: As you think about the current merchandising adjustments that are being made, what are you seeing in the competitive landscape? Do you think of this more as an internal issue that Torrid needs to fix? Or is there changes in the competitive landscape and whether it's product assortment, price point or where your customer is going? Lisa Harper: Thanks, Dana. I do think there's a seasonal aspect to it. I think, obviously, a lot of this is self-inflicted driven by really advocating core products in the knit and woven top categories. I do think seasonally, there are a lot of options that other brands have extended sizes, and it's more sweat shirt-oriented, sweater oriented that are not as fit specific. We certainly didn't see this impact in the tops business in the first half of this year. So it really did accelerate as we go into third quarter. I think we have a real opportunity to build back with the opening price point strategies that we discussed and keep fabrications that our customer really values. More tunics in the mix, more kind of figure flattering solution-oriented products in the knit category and then more kind of wear-to-work and blouse business in the woven categories. But I do think that in the third quarter, there is an ability to choose tops among a broader range of retailers because just the seasonal impact of being less fit specific and more oversized. I don't -- while we -- to that end, we didn't see the degradation in any of our bottoms businesses, which are more fit specific or our dress business, which also we were able to have great representation of end uses and fit solutions. So I feel like it's isolated, very clearly isolated. I do think it could be -- could have been -- I don't have any data to really support it, but just broadly from a mindset, it could have had a larger impact because of the seasonal nature of the products in the knit and woven categories during the time. So again, quickly move to address it. When I think Ashlee mentioned earlier about our less frequency in terms of tops purchases in the third quarter, tops really are a frequency driver for us so that they don't buy denim as often or dresses as often, but they do buy tops more often. And I think that opportunity to by tops other places might have been enhanced by that timing. I do think anything that we've seen in terms of surveying with our customers, they're still very dedicated to Torrid. They're very interested in shopping at Torrid. They're still maintaining their strong relationship and our loyalty program continues to be very highly penetrated. So we have a lot of opportunity to communicate and connect with this customer and understand exactly what's missing. And as I mentioned, the one thing that continues to come up is opening price point that I would say we did have fits and starts with over the last several years, but very deeply invested and committed to based on the analysis and of our previous OPP programs and the expansion related to that. So I think we're going to be able to recapture her tops purchase in addition to maintaining the denim and dress purchase from her as we introduce -- reintroduce these core businesses at an opening price point. Did I answer the question, Dana? Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to Lisa Harper for closing comments. Lisa Harper: Thank you for joining us today. We look forward to sharing the progress on the store optimization program and the remerchandising of our tops area as we join you for the fourth quarter and fiscal '25 conference call. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.
Operator: Good morning. My name is Elliot, and I'll be your conference operator today. At this time, I would like to welcome everyone to Root's third quarter earnings conference call for fiscal 2025. [Operator Instructions] On the call today, we have Meghan Roach, President and Chief Executive Officer; and Leon Wu, Chief Financial Officer. Before the conference call begins, the company would like to remind listeners that the call, including the Q&A portion, may include forward-looking statements concerning its current and future plans, expectations and intentions, results, level of activities, performance, goals or achievements or any other future events or developments. This information is based on management's reasonable assumptions and beliefs in light of information currently available to Roots, and listeners are cautioned not to place undue reliance on such information. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected. Company refers listeners to its third quarter management's discussion and analysis dated December 9, 2025 and/or its annual information form for a summary of the significant assumptions underlying forward-looking statements and certain risks and factors that could affect the company's future performance and ability to deliver on these statements. Roots undertakes no obligation to update or revise any forward-looking statements made on this call. The third quarter earnings release, the related financial statements and the management's discussion and analysis are available on SEDAR as well as on Root's Investor Relations website at www.investors.roots.com. A supplementary presentation for the Q3 2025 conference call is also available on the Roots Investor Relations site. Finally, please note that all figures discussed on this conference call are in Canadian dollars, unless otherwise stated. Thank you. You may now begin your conference. Meghan Roach: Good morning, and thank you for joining us. I will begin with a summary of our results for the third quarter of fiscal 2025. For the quarter, revenue was $71.5 million, representing a 6.8% increase compared to the same period last year. Direct-to-consumer sales rose 4.8% to $56.8 million, and comparable sales were 6.3%, driven by strong traffic online and conversion in stores. On a 2-year stack basis, comparable sales growth stands at 12.1%. Partners and others also reported a robust quarter with sales increasing 15.3% due partially to earlier orders from our Taiwanese partner and strong growth in our B2B channel. Our direct-to-consumer gross margin was 65.4% and improved 140 basis points, reflecting continued progress in reducing markdowns, improving product mix and strengthening our supply chain discipline. Our adjusted EBITDA was $7.5 million compared to $7.1 million last year. And excluding the impact of the DSU revaluation, adjusted EBITDA was $7.6 million compared to $7 million last year, an increase of 7.3%. Overall, our Q3 demonstrates that our strategy is working. We delivered improved execution across merchandising, marketing and operations. We'll continue to invest in long-term health of the brand. The broader retail environment remained dynamic during the quarter, and we experienced unusually warm fall. Despite these conditions, our brand continues to resonate as evidenced by our strong sales and strong new customer acquisition during the quarter. Our performance reinforces the importance of Root's brand strength, heritage and commitment to high quality comfortable clothing that serves as differentiators in this market environment. Over the last year, we continue to strengthen our go-to-market process and our merchandising strategy has gained momentum. During the quarter, we delivered strong results across multiple collections, including our new Roam travel capsule, which features modern basics with technical product attributes and Cloud, our ultra-plush, minimal logo, sweatshirts and sweatpants. Style productivity has also improved this year, reflecting tighter assortments and more disciplined buys as well as our investments in AI-driven allocations. Each year, we are making measurable progress in enhancing our product architecture and elevating our offering. However, we continue to believe meaningful opportunities remain. Our brand building efforts remain a core driver of our long-term value and an important part of our multifaceted growth strategy. Q3 marketing efforts centered on new store openings in Vancouver and Toronto, our fall/winter product launches and our enhanced campus presence with the University of Toronto. These activations exceeded our expectations on engagement and traffic. In the third quarter, we also continued our testing in paid media with increased spending across the full marketing funnel. As we enter the fourth quarter and look to 2026, these earnings will help further fine-tune our marketing efforts and create more disciplined creative testing. We are looking closely at the impact of agentic AI and customer product discovery, and continuing to adapt to this changing landscape. We also saw strong storytelling for our brand ambassadors, reinforcing Roots as a brand that connects people to nature, community and a sense of belonging. Our omnichannel strategy continues to strengthen our connection with our customers with the goal of enabling customers to shop Roots wherever, however and whenever they choose. The 6.3% increase in comparable store sales in the quarter which is 12.1% on a 2-year stack basis, reflects the positive impact in the strategy and performance. In our retail channel, we saw strong conversion wins driven by improved product storytelling, disciplined inventory management, and refreshed visual merchandising, combined with enhanced sales associate training schedules. Our paid media efforts have also driven substantial traffic to the e-commerce channel, which we are focused on converting in the fourth quarter. In addition, increased personalization and search and product merchandising, the integration of wish list, more functionality such as filters and improvements in the shopability of our [ landing ] pages will support both revenue and the customer experience in the fourth quarter and beyond online. As our results highlights, our strategy remains consistent and focused. We are strengthening our core franchises, expanding into complementary categories and increasing the clarity and differentiation within our assortment. We are also elevating the brand to collaboration, heritage storytelling and more targeted marketing. We are also enhancing our omnichannel experience with a focus on convenience, speed and personalization, and we are driving operational excellence across the business. I would now like to comment on early Black Friday trends in the fourth quarter. We've seen good engagement with our products and marketing efforts with consumers responding positively to curated offers in our core franchises in different categories. Early in the holiday season, we continue to experience positive trends. Our Seth Rogan partnership has been resonating well with consumers who understand the strong alignment between our brands and have enjoyed the witty, light, holiday approach to the campaign. Before I conclude, I would like to thank Root's employees across Canada for their commitment and hard work and our customers for their ongoing loyalty to the brand. Roots is a brand with strong heritage, a clear purpose and significant long-term potential. We remain focused on disciplined execution and on creating long-term sustainable value for all stakeholders. With that, I will now turn the call over to our Chief Financial Officer, Leon Wu, for a deeper review of our financial results. Leon Wu: Thank you, Meghan, and good morning, everyone. The past quarter marks the fifth consecutive quarter of growth in top line sales, gross margin and profitability, while we continue to reduce our year-over-year net debt. The ongoing momentum reflects the collective efforts of our multipronged product, channel and marketing functions, working in lockstep to offer the best Roots experience to our global customers. I will now share some more details on the key elements of our results. Sales in Q3 were $71.5 million, increasing 6.8% as compared to $66.9 million in Q3 2024. The growth in our total sales was driven by both our direct-to-consumer and partners and other segments. Our DTC segment sales were $56.8 million in the quarter, growing 4.8% relative to $54.2 million last year. Our comparable same-store sales grew 6.3% in the quarter and 12.1% on a 2-year stack basis. The continued DTC sales growth reflects a strong omnichannel experience offered to our customers. We have seen a strong response to the investments made into our store renovations and data-enabled technology that offers an elevated and more personalized brand experience. This was further supported by the curation of new seasonal styles that amplified and complemented our core product offerings, an authentic marketing moment. As Meghan mentioned, these initiatives have contributed positively towards our traffic, conversion and customer account metrics underpinning our ongoing DTC sales growth. Our partner and other sales were $14.6 million in Q3 2025, up 15.3% compared to last year's sales of $12.7 million. The growth in this segment was driven by earlier orders by our wholesale operating partner in Taiwan for the upcoming holiday and spring selling season, a portion of which was fulfilled in the fourth quarter last year, as well as higher domestic wholesale sales of custom Roots branded products. Total gross profit was $43.4 million in Q3 2025, up 8.1% as compared to $48.2 million last year. The growth in gross profit dollars was driven across both segments and highlighted by the gross margin expansion in the DTC segment. Total gross margin was 60.8%, up 80 basis points compared to last year. Our Q3 2025 DTC gross margin was 65.4%, up 140 basis points compared to 64% last year. The DTC gross margin expansion was driven by growth in our product margins resulting from continued improvements to our product costing and lower discounting. The unfavorable year-over-year foreign exchange on U.S. dollar purchases in this quarter was offset by improvements in freight costs. SG&A expenses were $38.2 million in Q3 2025 as compared to $34.5 million last year, an increase of 10.6%. The largest increases in our SG&A expenses were driven by a combination of increased investments in marketing and higher personnel-related costs, along with higher variable selling costs resulting from stronger sales. As referenced over the last few quarters, we have increased our marketing investments in 2025 with the goal of supporting both in-year sales growth and long-term multiyear brand uplift. Proportionate to the size of the fourth quarter, which represents our largest selling period, we are expecting to invest an incremental $2 million to $3 million in marketing dollars in Q4 2025. The incremental spend will be across a range of initiatives across the full marketing funnel, balanced between top of funnel investments to build long-term brand equity with benefits through the future years and more immediate bottom funnel sales driving activities. We have seen great results thus far in how our marketing contributes towards brand momentum over the last few quarters. As we look forward, we are constantly reflecting on the results of each initiative, and we'll leverage the learnings from this year to refine our marketing strategy with the goal of maintaining momentum while focusing on the most effective and efficient initiatives. Additionally, SG&A increased by $0.7 million of higher noncash stock option expenses and costs related to changes in key personnel, $0.3 million as a result of higher U.S. tariffs on sales to U.S. customers as the U.S. duty-free de minimis exemption was eliminated in August and $0.1 million from the unfavorable revaluation of cash settled instruments under our share-based compensation plan, which is directly tied to increases in our share price. During Q3 2025, we generated $2.3 million of net income, down 4.5% as compared to $2.4 million last year. This equates to $0.06 per share in both years. Excluding the impact of our DSU revaluation expense headwinds resulting from our share price appreciation, our net income would have been $2.4 million, improving 1.5% compared to last year. Our adjusted EBITDA was $7.5 million, increasing $0.4 million or 5.3% compared to $7.1 million last year. Adjusted EBITDA would have grown by 7.4% without the aforementioned DSU revaluation impacts. The strong improvement in our profitability reflects the sales growth and margin expansion achieved during the quarter. Now turning to our balance sheet and cash flow metrics, which also reflects the strong results for the quarter. Our Q3 ending inventory was $66.6 million, increasing 10.3% as compared to $60.4 million last year. Approximately $0.7 million of the increase was driven by the higher U.S. dollar foreign exchange paid on our inventory. The remaining year-over-year increase in inventory was driven by improved inventory position ahead of the peak holiday selling period and higher in-transit inventory to support sales for the next year. Our Q3 free cash outflow was $4.6 million, improving from an outflow of $6 million last year. The year-over-year improvements in free cash flow were driven by sales growth and ongoing management of working capital, partially offset by higher capital investments during the quarter. Due to the seasonality of our business, we typically see cash outflows as we build up our working capital ahead of our peak season. Before generating larger cash inflows through the upcoming holiday selling period. During Q3, we repurchased 415,000 common shares for $1.3 million under our normal course issuer bid. As of the end of the quarter, we were eligible to repurchase up to 325,000 common shares under the current NCIB program, which is in effect until April 10, 2026. Net debt was $44.1 million at the end of Q3 2025, down 5.9% as compared to $46.9 million at the same time last year. Our net leverage ratio measured as net debt over trailing 12-month adjusted EBITDA was approximately 1.9x. With that, operator, you may now open the call for questions. Operator: [Operator Instructions] First question comes from Brian Morrison with TD Cowen. Brian Morrison: Meghan, you commented, you said in the transcript that you continue to experience positive trends. Maybe just -- I know you don't want to go into detail, but maybe just talk about the consumer behavior you've seen going into Black Friday and relative -- as you approach the holidays? Are you seeing any change in maybe the basket size or the AUR? And then lastly, is there any bifurcation of consumer you're seeing with respect to income demographics or by region? Meghan Roach: Thanks, Brian. Nice to hear from you. I would say, overall, the trends from a Black Friday perspective, I think, are really reflecting the overall economy that we see today, right? So I would say that from a consumer perspective, we're definitely seeing people shop earlier. So I think that Black Friday for a lot of people is pulled forward into early November. And I think we've seen a continuation of some of the discounting trends kind of post Black Friday, which reflects changes in the economic environment as we see today. Our consumer continues to be strong, and so we were happy to see those positive trends overall. I would say, fundamentally, the consumer continues during this time period to look for both uniqueness as well as deals and not something we've seen kind of year-over-year, that trend continues. And that's been a trend we've seen for the last number of years also. So I think fundamentally, the consumer is, as you've seen broadly from a market perspective, continuing to reflect the current economic reality and our consumer has continued to be positive, which is good for us. I think our product categories are unique positioned from a heritage perspective, comfort perspective. I think the fact that we have sustainability in our products now is very unique to us also. So we've been happy to see the positive reaction that the consumers have had to our overall product selection. And I think getting in front of those consumers also early as well as the right type of marketing has been helpful to us. Brian Morrison: Right. And you can see in store the uniqueness and expansion of the product breadth. I guess in terms of marketing, you addressed this on the call, but I think you said $2 million to $3 million additional in Q4. Maybe can you just talk about when you look forward to next year, I think you're still in the assessment phase, but is there -- maybe talk about the options? Is the plan to wean off marketing a little bit? Or do you maintain full steam ahead to further stimulate top line growth in order to drive operating leverage? Maybe just talk about how you're looking at that for next year. Meghan Roach: Yes, absolutely. So what I would say is I think we want to continue to trade through December. We still have quite a lot of the month left to go. Typically, at this point in time, we have kind of almost half of the quarter left. There's still a lot of time to go from that perspective. And I think the marketing efforts that we have put into the fourth quarter, we want to continue to evaluate those on a full year basis. That being said, I think when we look holistically at what we're trying to accomplish, obviously, this year, doing a bit more of a mix between top-of-funnel awareness building brand growth perspective, which will help us over a multiyear basis and then that short-term conversion driving activity. So that blend has obviously shifted a bit this year to have a little bit more of that top of funnel approach to it. So when we look into next year, really, what we're looking at is really making sure that we go through all the marketing spend this year, have a fantastic understanding of what generated return -- immediate return to us and what we think is important to drive longer-term value from a brand perspective. Roots is in a unique position because we do have significant awareness across the country. We have been 80% plus, in some cases, we see 90%-plus awareness, depending on the survey you look like from a brand perspective. So a lot of what we're attempting to do from a marketing perspective is really not to drive awareness to the brand, but it's really about making them aware of the things that we have today, how the brand has changed, the broad collection that we have and also, we're also looking at different channels. So if you think about the changes that are happening with the ChatGPT, the Gemini, the AIs of the world, obviously, making sure that we have the right investments put behind. Making sure our website, our brand broadly is searchable and findable on those platforms. It's really important to us. And so I think those are -- our marketing investments as a whole are continuing to reflect the changing reality of how you act in front of consumers. So I won't give you a direction in terms of what the marketing dollars look like overall for next year. But I would say that this year was definitely a year we were testing and learning across a multitude of different things. And so we will be tweaking our marketing overall from a mix perspective next year as we take those earnings and apply those to -- thinking about both short-term and long-term growth. Brian Morrison: Okay. That's helpful. And then last one, maybe, Leon, the gross margin, product cost, and it seems to be an ongoing strength here. I get the lower promo contribution to gross margin. But how are you achieving ongoing product cost? Is it sourcing? Is there more room to go? Maybe just comment on that. Leon Wu: Yes. I mean for the sourcing, we've really built out a robust process over the last few years in terms of understanding how we procure our products from overseas. And one of the main drivers of it is understanding with our vendors how we continue to maintain the quality of our products, but then source it with buying deeper. We're buying earlier to bring the product at a better cost. Another area that we have achieved a lot of the sourcing gains recently has been shifting where the manufacturer is coming from. So where there's more duty favorable countries to source from to bring into Canada. That is also helping us gain a lot of the margins. Brian Morrison: And is that a function of tariffs in the U.S. on to China as well? Leon Wu: No. So the tariffs for the U.S. that we referenced is just related to the U.S. e-commerce part of our business, which is a smaller part of our overall business. In Canada, we pay import duties to bring goods from overseas and that have slightly different tariff structures or duty structures than the U.S. But on the U.S. side, again, it's a small part of our business. Brian Morrison: Yes, no, I'll take it off-line. I think I was going somewhere else with that, but I appreciate it and look forward to seeing strength in the Q4 results and wish you both a prosperous holiday season. Operator: [Operator Instructions] We have no further questions. I'll now hand back to Meghan Roach for any final remarks. Meghan Roach: Thank you, everyone, for joining the call today. For those of you celebrating, we wish you a wonderful holiday season, and we look forward to updating you on our fourth quarter results in the new year. Operator: Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.
Operator: Welcome to the AEO Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Judy Meehan, Head of Investor Relations and Corporate Communications. Please go ahead. Judy Meehan: Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer; Jen Foyle, President, Executive Creative Director for American Eagle and Aerie; and Mike Mathias, Chief Financial Officer. Before we begin today's call, I need to remind you that we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results actually realized may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at www.aeo-inc.com in the Investor Relations section. Here, you can also find our third quarter investor presentation. And now I'll turn the call over to Jay. Jay Schottenstein: Thanks, Judy, and good afternoon. I hope everyone had an enjoyable Thanksgiving weekend. I'm extremely pleased with the trend change we've seen across brands, reflecting a number of decisive steps we've taken from merchandising to marketing to operations. These deliberate actions are having a positive impact on our near-term results and also serve us well for the long run. We delivered record revenue in the third quarter and very strong momentum has carried into the fourth quarter. We're seeing an encouraging response to the newness the teams are delivering with each new collection gaining steam, most notably, Aerie and Offline are generating exceptional growth across categories. As discussed last quarter, we have made incremental investments in advertising, which is contributing to stronger demand while better positioning our business for enhanced long-term brand awareness and overall customer engagement. At the same time, we are focused on operational improvements and cost efficiencies to drive higher profitability in what continues to be a dynamic macro environment. Turning to the quarter. Total revenue increased 6% to $1.4 billion, a third quarter record. Operating income of $113 million exceeded our guidance of $95 million to $100 million, fueled by higher-than-expected demand and well-controlled costs. As previously noted, our results also included about $20 million of net impact from tariffs. Diluted EPS for the quarter of $0.53 increased 10% compared to the adjusted EPS last year. The strong top line reflected a return to positive comps, which increased 4%. This was a meaningful acceleration from the 1% decrease last quarter. Improvement was made across both brands and channels, all posting positive comps. Aerie's 11% comp in the third quarter was a real standout where strong demand was broad-based across all categories. Growth accelerated throughout the period, which has continued into the fourth quarter, where we are seeing exceptional demand so far. As we look to the future, we continue to see untapped opportunities within Aerie and Offline, which are rapidly emerging as important customer destinations. At just under $2 billion in revenue and less than 5% market share, this indicates a significant runway for future expansion, underscoring our ability to capture a much larger piece of the market as we execute our strategic initiatives. American Eagle's comp growth of 1% marked a sequential improvement from last quarter. Strength in jeans, coupled with better results in men's were among the drivers. As Jen will review, AE's business strengthened with greater in-stocks in our strongest sellers and new product flows. Positive trends have continued so far in the fourth quarter, including a terrific Thanksgiving weekend. Beyond product, our results have benefited from the success of our recent marketing campaigns, which have driven engagement and attracted new customers. We are encouraged by the impact of the campaigns and collaborations with Sydney Sweeney and Travis Kelce and now holiday gifting with Martha Stewart. We see measurable benefits, especially across our digital channels. Looking forward, we will build on this momentum with more exciting campaigns ahead. All in all, I'm very pleased with the progress and meaningful turnaround from the first half of this year. Now the holiday season is upon us, and the fourth quarter is off to an excellent start. We are seeing a clear acceleration from the third quarter, including a record Thanksgiving weekend with strong performance across brands and channels. As a result, we are raising our fourth quarter outlook. We remain well positioned with exciting new collections centered on gift-giving and events planned throughout the season to continue to delight our customers. Before I turn it over to Jen, I want to take a moment to acknowledge our incredible team for all their hard work and tremendous dedication. Their efforts have fueled a meaningful trend change across our leading brands. Great work continues, and I couldn't be more optimistic about the long-term outlook for our business. We look forward to driving more success as we head into 2026 and beyond, driving profitable growth and enhanced value for AEO. Let me turn it over to Jen. Jennifer Foyle: Thank you, Jay, and good afternoon, everyone. I am very encouraged by the stronger performance across our brands, marking a significant turnaround from the first half of the year. This demonstrates the resilience and product leadership of our portfolio of iconic brands. The increasing customer demand, which has accelerated in the fourth quarter, is spanning new and existing customers, fueled by a well-coordinated effort across both merchandising and marketing. Compelling product collections, combined with higher engagement and expanding brand awareness are driving our performance. And the teams are executing very well, leveraging our expertise in key categories and most importantly, by listening to our customers. Let me walk you through a few highlights in the third quarter, beginning with Aerie. The Aerie brand continues to exceed expectations. We achieved record revenue with the third quarter comps up 11%, fueled by strength across all categories, including intimates, apparel, sleep and Offline. Aerie and Offline's performance has been especially impressive with a meaningful acceleration in demand since the spring season. In fact, comps have strengthened with each new delivery. The resurgence in intimates has been very encouraging with solid growth in both bras and undies. Greater depth and breadth of our signature fabrications, strength in new fashion across bralettes and bra tops and fun prints with matchbacks to apparel are just a few highlights fueling the brand's double-digit growth. Aerie apparel remained consistently strong, driven by bottoms, fleece, tees and sleep, which has emerged as a powerful growth category. Offline by Aerie also continues to gain meaningful mind share as we expand awareness and move into newer markets. We remain highly focused on growing the Activewear segment. We are building on our signature fabrics and franchises such as our core leggings while also launching newness with updated fashion silhouettes. Needless to say, we are very excited about our future for both Aerie and Offline. We are well positioned for the remainder of the holiday season and continue to believe in the substantial long-term opportunities ahead. Now moving to American Eagle, which posted a positive 1% third quarter comp, demonstrating a meaningful improvement from the spring season. Positive demand was fueled by trend right new fall collection combined with bold marketing and exciting product collaborations. Underpinned by our dominance in denim, our strategies to reset the brand and firmly position American Eagle at the center of culture are beginning to yield results. The quarter marked an improvement in our men's business, where we saw nice wins across tops, sweaters, fleece, graphics and knits, all areas we have been working to recapture. Bottoms provided a stable foundation with jeans and non-denim pants trending positive. And favorable trends have continued into the fourth quarter, reflecting the positive reception of our new product. In women's, although we had a very good back-to-school season, the quarter in total was not as strong. Robust demand early in the period led to a number of out of stocks in some of our best-selling items. Non-denim bottoms, shirts and dresses proved more challenging, while knit and fleece tops as well as jeans were positive highlights where we continue to see strong demand. And importantly, better in-stocks late in the quarter drove positive results, which have continued into the fourth quarter. AE is a true holiday destination with amazing gift-giving focus combined with fun fashion and party dressing. The response to date has been highly encouraging. Now shifting gears to marketing. This fall season, American Eagle launched its largest, most impactful advertising campaigns ever, which are delivering results. By collaborating with high-profile partners who are defining culture, we are attracting more customers and have more eyes on the brand than ever before. Combined, the Sydney Sweeney and Travis Kelce partnerships have garnered more than 44 billion impressions. Total customer counts are up across brands and customer loyalty grew 4% in the quarter. AE is clearly building long-term awareness and desirability and has captured the attention of both new and existing customers. Traffic has also increased consistently throughout the quarter, which is most evident within our digital selling channels that include both AE and Aerie. Although it's still early days of our renewed marketing strategy, we know that having the right talent amplifies our brand and product at key moments. We are very encouraged by our progress and expect to continue fueling brand excitement into 2026 and beyond. Our recent holiday campaign with Martha Stewart is yet another example of how we are creating fun moments to delight our customers while reinforcing our position as the go-to gifting destination. The holiday season is in full swing. And as Jay mentioned, we are encouraged with the results so far. We are heads down and focused on the rest of the year to deliver long-term sales and bottom line growth. Thanks to our amazing teams, and thanks to all of you for your ongoing support. I wish everyone a happy and healthy holiday season. And with that, I'll turn the call over to Mike. Mike Mathias: Thanks, and good afternoon, everyone. I'm pleased to see the steady progress throughout our business, which led to strong revenue and profit above our expectations in the third quarter. In addition to generating a meaningful top line improvement, we successfully controlled costs, created efficiencies, managed promotions and navigated through a highly dynamic sourcing environment, minimizing the impact of tariffs. Consolidated revenue of $1.36 billion increased 6% to last year, fueled by comparable sales growth of 4%, with Aerie up 11% and AE up 1%. We saw growth in transactions across brands driven by higher traffic. The average unit retail price was flat to last year. Gross profit dollars of $552 million increased 5%, reflecting higher demand. The gross margin declined 40 basis points to 40.5% compared to 40.9% last year. Net tariff pressure was as expected at $20 million or 150 basis points. Higher markdowns were largely offset by positive sales growth and lower non-tariff costs, including favorability in freight. Buying, occupancy and warehousing leveraged 20 basis points due to higher sales and a continued focus on operational improvements. For example, we drove lower cost per shipment within our direct business, which has been an area of ongoing focus. SG&A increased 10% due to investment in advertising as previously discussed. With our focus on long-term brand benefits, the campaigns are already delivering results and helping to advance our goal of expanding our reach and generating growth across brands. The balance of expense is leveraged, reflecting our ongoing cost management program. Operating income of $113 million was above our guidance of $95 million to $100 million, driven by stronger-than-expected demand. The operating margin of 8.3% declined from an adjusted margin of 9.6% last year. Consolidated ending inventory cost was up 11% with units up 8%. Inventory is balanced across brands, reflecting better in-stocks for American Eagle jeans, new store openings and the demand acceleration at Aerie and Offline. The increase in cost includes the impact of tariffs. Third quarter CapEx totaled $70 million, bringing year-to-date spend to $202 million. We continue to expect CapEx of approximately $275 million for the year. As a reminder, this includes a onetime spend of about $40 million to relocate our New York design center as we previously disclosed. We're on track to open 22 Aerie and 26 Offline stores, which are coming out of the gate quite strong. We'll complete about 50 AE store remodels with full upgrades to our modern design. A few great examples of recent store upgrades are the Aventura Mall and Sawgrass Mills in Miami and our new SoHo location in New York City. All of these A+ stores are among our best, and we want to ensure the customer experience is unmatched. The upgraded footprints have allowed us to showcase our signature brands, AE Aerie and Offline. We're utilizing new technologies to elevate the shopping journey and create a cohesive and modern retail experience. Overall, our remodeling program is generating comps nicely above the average. As we continue to position our fleet for profitable growth, we're also on track to close about 35 lower productivity AE stores. Our capital allocation priorities remain unchanged, and we're focused on prudently investing in growth to continue to build our brands while returning excess cash to shareholders through dividends and share repurchases. As a reminder, during the first half of this year, share repurchases totaled $231 million and year-to-date dividend payments have totaled $64 million. We have a strong balance sheet and ended the period with cash of $113 million and total liquidity of approximately $560 million. Now turning to our outlook. The fourth quarter is off to an excellent start. As the team noted, we're encouraged by the broad-based strength across brands and channels with particular strength in Aerie and Offline. Our inventory and product offerings are well positioned to deliver a successful holiday season, and we're all focused on achieving a strong fourth quarter result. Based on quarter-to-date sales trends and the recognition that we have important selling weeks still ahead, we are raising our fourth quarter operating income guidance to a range of $155 million to $160 million based on comp sales growth of 8% to 9% with similar growth in total revenue. Guidance includes approximately $50 million of incremental tariff costs. Buying, occupancy and warehousing costs are expected to increase due to new store growth for Aerie and Offline and increased digital penetration. SG&A is expected to increase in the low to mid-single digits, driven by investments in advertising. Given the top line strength, we expect both BOW and SG&A to leverage in the fourth quarter. The tax rate is estimated to be approximately 28% and the weighted average share count will be roughly 173 million. To wrap up our prepared remarks, clearly, we're very encouraged by the progress made across our brands. We're highly focused on delivering the remainder of the year, driving strong profit flow-through and sustaining this momentum into 2026. Now we'll open up the call for questions. Operator: [Operator Instructions] The first question comes from Jay Sole with UBS. Jay Sole: My first question, I think, it's for Mike. You talked about the acceleration of fourth quarter to date, and you raised the guidance, the comp guidance, I think you said 8% to 9%. That's pretty significant from where you ended Q3. Can you just talk about where you're trending quarter-to-date to be able to guide to that level? And what's driving the acceleration. And then maybe for Jen, you mentioned strength in denim. If you could elaborate a little bit if people aren't wearing skinny denim like they were, like what are the new silhouettes that are working? And how durable are those trends? Do you think the trends that you're seeing can last well into 2026 or beyond? And if you can help us on that, that would be great. Mike Mathias: Yes. Thanks, Jay. I can talk you through the guidance. So the 8% to 9% comp increase includes a nice improvement or acceleration for both brands quarter-to-date from what we just reported in Q3. I would say if you want to break it down by brand, we'd be looking for the AE brand to be in the low to mid-single digits and Aerie in the high teens, mixing to that 8% to 9% comp. And both brands are ahead of that quarter-to-date, but we know we've got some big weeks ahead of us, only about half the quarter in, but definitely pleased with how November turned out and where we are quarter-to-date through the Thanksgiving weekend. Jennifer Foyle: Yes. And Denim has been very strong. In fact, particularly in women's, we saw acceleration throughout the quarter, getting into the back half of Q3 and into black. It's been our #1 Black Friday as far as denim is concerned. The jeans are certainly winning for us. And as you know, that's our key competency business. Look, silhouettes are changing faster than ever. And I always reemphasize that our teams strategically do just extensive testing and scaling. And we did have some out of stocks, particularly in women's in Q3. Sydney Sweeney certainly accelerated some of that, and we needed to move swiftly to get back into business. And I like what we're seeing at the end of Q3 and headed into Q4 with the denim business. So we're excited. Operator: And the next question comes from Matthew Boss with JPMorgan. Matthew Boss: Congrats on the improvement. So Jen, at Aerie, maybe if we could dig a little deeper. Could you speak to the drivers of the same-store sales improvement over the past two straight quarters? And with that, I guess maybe could you break into customer acquisition trends that you're seeing and initiatives in place to sustain double-digit comp growth in your view? Jennifer Foyle: Yes. It's certainly exciting to see Aerie back on track. Coming off of Q1, we definitely needed to pivot as a team, and we really hunkered down and really thought about our strategy and what we needed to get back to win, not only coming from our core competency businesses, which all accelerated and have been accelerating starting in Q3 into Q4, but also there's new businesses in town. Sleep is doing quite well for us, and it's proving to be a year-round business for us. So a new category there. So obviously, we have Offline too, which is our secondary business coming off of Aerie and that business has proven where you're hearing some decel in the athletic apparel areas. We're holding our own and our leggings are still tried and true and winning for us. The customer acquisition has been strong. Our customers are spending more. We're seeing even so. So coming off of Q3, as we head into Q4, they're actually -- our acquisition has been accelerating. Last week was an incredible week for Aerie, where we saw a huge amount of customer acquisition. So we are taking advantage of our traffic. We're winning our customers. I think we're showing up really proudly. We launched our new 100% real campaign, which is tied to our core competency of how we launch this business, what our platform is. And it's talking to our community, it's speaking towards-- it's playing off of no air brushing our models. And now we've leveraged some of that into the AI world and thinking about how we approach that differently. So Aerie does things differently. We always think into the white space that sometimes can be scary, but we're so proud of what we do in this brand. And I think the team is doing an incredible job leveraging our community, amplifying marketing, but also it's 100% about our product. What we do every day is about our product and winning our customer. Matthew Boss: That's great. And then Mike, could you speak to expectations for markdown in the fourth quarter relative to the third quarter just overall health of your inventory? And how best to think about gross margin levers remaining into next year? Mike Mathias: I can start with inventory, Matt. I mean we're very pleased and comfortable with the plus 11 in total dollars, plus 8 in units, is positioned well to continue to fuel this Aerie and Offline trend. We definitely, as Jen talked about in her remarks, kind of resetting some denim inventory to make sure we're continuing to be in stock and don't miss a sale within the AE jeans category. And again, that plus 11% cost includes the impact of tariffs along with just supporting those businesses. On the markdown front, look, we competed in the third quarter. Markdowns are up a little bit in terms of the total impact to the quarter. We expect Q4 to be similar. We're just be ready to compete in these big days. We competed over the weekend. This November trend that we've seen or the quarter-to-date trend includes a little uptick in markdowns to compete. But definitely winning in terms of the top line growth and the overall margin dollar growth attached to that. And it is in a couple of places. I mean, Aerie is similar markdown rate to last year. So we're driving this trend on markdown rates similar to history. We're not driving it through promotion. And then it really is competing in jeans more than anything from a category perspective that's adding to the markdowns a bit. But we're -- we think that's the right strategy from here. Gross margin then in total, really pleased with the third quarter results. We talked -- we disclosed or we hit the $20 million guidance roughly on the tariff impact. That's about 150 basis points. But as you can see, gross margin only deleveraged by 40 baiss points on four comp. So the team is doing a great job, not only just mitigating tariffs on the front end, but then finding kind of opportunities and efficiencies on other non-tariff impacted line items within our costs. We highlighted freight but there's more work than just on the freight line. So Q4 is similar. I mean, we're guiding to a $50 million impact and kind of the net absolute value or the net impact of that -- absolute impact of that would be about 300 basis points. But we're obviously not guiding gross margin down that much. So we expect to see the same opportunities in terms of offsets and other line items. And then just on an 8% to 9% comp, obviously, we're leveraging a lot of expense lines that are up in gross margin, including and BOW, so including rent, digital delivery, distribution costs, compensation up there as well. But other cost line items within our product costs are being leveraged, too. So we continue to expect to do that going forward. Operator: And the next question comes from Paul Lejuez with Citi. Kelly Crago: This is Kelly on for Paul. I guess first question for you guys. Just could you talk about why -- given you've had these very splashy and high-profile marketing campaigns that were more kind of -- more based on American Eagle marketing campaigns, like why you didn't see that accrue more to AE versus what you're seeing in Aerie, where it seems like you're benefiting a lot from whether that's the product assortment or maybe some of the marketing campaigns. Just help us kind of understand what's happening there. And then just secondly, on the tariff impact, I think you said $50 million impact in the fourth quarter. Is that the right net tariff impact that we should be thinking about for the first half of '26? Jennifer Foyle: Sure. As a company, we're leaning into advertising, we need to compete. When we see what our competition is doing, there was definitely opportunity for us to lean in. And certainly, Sydney Sweeney and Travis, I mean, with the 44 billion impressions, really it was something that we did not expect. And certainly, I mentioned some of the out-of-stocks in women's particularly, but men's certainly turned around in the mid-single-digit comp zone. And that was really -- we are so pleased to see that. And I just wanted to say sometimes there's a halo effect in marketing, right? So as we saw -- as we got into -- as denim, we got our stock in stocks back to more normalized levels towards the end of the quarter. We saw acceleration, particularly in women's and into black. As I mentioned, it was an incredible week for us, Thanksgiving week and Friday was amazing. So we're seeing the results now. And look, this is important for our future. We need to remain strong and competitive, and we need to amplify our product. The teams have been working tirelessly on this price value equation that I think American Eagle does better than anyone, and we're leaning in, and this marketing will certainly amplify. Jay Schottenstein: Jen, I'd like to also add -- we've also seen a significant increase in our loyalty members, too. We saw over 1 million more loyalty members join us in these past few months. And as Jen said, you don't see it right away. As you also pointed out that it's interesting with Sydney Sweeney, the jeans that we have made specifically for Sydney Sweeney, they sold out like within 2 days. They boomed right out right away. Mike Mathias: Then I can take the tariff question. I think maybe the best way to provide some color is just to give the quarterly impact. So we'd expect to go forward, if tariffs hold as is in terms of the impact, we'll see how that continues to progress, about a $25 million to $30 million impact in each of the first and second quarter. So call it, somewhere between 200, maybe 200 to 225 basis points of impact in Q1, same impact in Q2, $40 million to $60 million, call it, in the first half. Next Q3 on the $20 million we just incurred in Q3, we expect Q3 on a full basis to be about a $35 million to $40 million, so call it, $15 million to $20 million impact incrementally next year. And then with the anniversary roughly the $50 million that we're guiding to this fourth quarter. So it's about a 200 to 225 basis point impact on a full year basis. And -- but again, with continued offsets in work, we'd expect the gross margin to not be impacted to that level just like we've seen here in Q3 and Q4. Jay Schottenstein: And Mike, there may be like as Supreme Court ruling coming on shortly, too. It may have changed everything right away. Kelly Crago: So the assumption then would be that you would be taking some like-for-like pricing into next year? Mike Mathias: Yes. I think, I mean, on the pricing front, we definitely do not have a specific strategy to pass through the impact of tariffs to our customers. We continue to take shots where we know we can, where we're making price moves that we still fit within our price value equation that the customer expects, and we don't see any resistance to those price changes from the customer. And just ticket changes that allow us to create a little more room on the promotional front, too, to make some decisions within our lease lines. So we'll continue to do that. I think we're seeing success doing or approaching it that way in the back half right now. We'll continue to do that in next year. Operator: And the next question comes from Jungwon Kim with TD Cowen. Jungwon Kim: You mentioned strong customer acquisition across both brands. Maybe you can give us a little bit more detail around who those customers are and if you're gaining more higher income cohorts. Just curious on who you are gaining share from as you acquire new customers? And then another question, just a follow-up to that is, what are your strategies around retaining those customers you gained in the last 2 quarters? Jennifer Foyle: Look, both brands have -- our customer file is stronger than ever. And -- we certainly have seen acceleration, as I mentioned, going into even leaving Q3 -- exiting Q3 and going into Q4 with some really high -- it's really high-end problems here that we're seeing. Look, it's what we do every day. Our teams need to certainly focus on the retention. And we've been all year long, that's what we've been up to. Our retention is not even -- we're winning on retention. We are winning on customer acquisition. The teams have strategies. Those I tend to not share publicly, but the strategies are already paying off. You can see it in the news that we're just reporting today. We're getting talent. We're working on our influencer programs, but we're also working on our communities. And that is the most important thing. We have powerful brand platforms that we stand for something, and it wears the test of time. And when that works and we have the great product attached to it, we can win and show up in a new way. And the teams have very many strategies, whether it's upper funnel, getting out there and bringing in new customers or working on our performance marketing spend and our influencer strategies. So it's not only -- it's never about one part of the strategy. It's about getting the product right first and making sure that our tactics will amplify that strategy. Certainly, Sydney -- an example, Sydney and Travis, but even the more recent Martha, I mean, that is talent, that's upper funnel. That is us getting our brands out there in new ways. But if you lean into Aerie and how they're working, their marketing strategy, they're leveraging our community in a new way and showing up with how do we go from not air brushing our models I just mentioned into what does AI mean to such a pure brand as Aerie with such an amazing platform. So it is about -- we have two different brands. We have a portfolio of brands in the same token that we leverage our brands. Certainly, we share a platform, but it is about making sure that we play up each brand DNA in the right way, and it's working. That strategy is working. I can just -- I can say that now, and there's work to do always. As we look ahead, we have exciting collaborations, new talent and just new ideas. We're constantly thinking of new ideas. Operator: The next question comes from Rick Patel with Raymond James. Rakesh Patel: I wanted to double-click on your expectations for AUR in Q4. As we think about the company remaining competitive with promotions, but also factoring in some product and perhaps some pricing wins, where do you see AUR landing in the fourth quarter? And then second, what are your expectations for where inventory will end the year, both in terms of dollars and units? Mike Mathias: Hey, Rick, yes, the AUR for the third quarter was relatively flat even with a bit of a markdown increase, just the mix of the businesses between the brands, category mix, our AUR was relatively flat at the company level. We're expecting a similar thing in Q4. November to date here, we saw it play out that way. Aerie is actually driving these comps on some uptick in AUR. We know we're spending a little more markdowns in the jeans category in AEs to drive the business. So the mix for the quarter, we'd expect right now to be similar around a relatively flat AUR for the fourth quarter. And I think it's the way we really expect to plan the business go forward. Rakesh Patel: Great. Any thoughts on inventory? Mike Mathias: Q4, we're not providing specific guidance, but at the end of the day here with the uptick in the trend exceeding plans, we're definitely in chase mode here, which is a good thing when we make -- we have -- we see a lot of profit flow-through when we're doing that, especially on the Aerie side of the house. So we expect inventory in line with sales. We're guiding to the plus 8% to 9% comp. And as of now, I'd expect similar kind of inventory in line with sales or at least units in line with the sales growth, knowing there will be a tariff impact ongoing. But we're not providing specific guidance at this point, but that's what we'd expect to see. Operator: And the next question comes from Chris Nardone with Bank of America. Christopher Nardone: So first, can you just refresh us on how we should think about plans for both the Eagle and Aerie store fleets heading into next year? And if the recent results of both businesses has changed how you're thinking about that versus maybe 90 days ago? Mike Mathias: Yes, Chris, I think for the AE brand, we talked about closing roughly 35 stores at the end of this year. We're looking forward into plans next year, and I expect that to slow down as we've largely closed, I think, over the last 3, 4 years, kind of the lower productivity stores in the fleet in the mainline AE fleet. So 35 at the end of this year here in January, maybe something lower than that, I would expect next year. On the Aerie and OFFLINE growth front, we talked about 22 Aerie, 26 OFFLINE openings this year in 2025. We're looking at a similar 40 to 50 store count at the moment, probably similar weighting offline, a little more -- a little higher count in OFFLINE than in Aerie. But we are looking at this tremendous growth, and we'll -- if we did anything, we'd maybe accelerate some openings on the Aerie and OFFLINE side, but those plans are still in work. Right now, a similar 40 to 50 count is what's in the plan. Christopher Nardone: Okay. Got it. And then just a quick follow-up. I think you alluded Aerie comps are running above the high teens for the quarter, quarter-to-date. And if AUR is roughly flattish, can you just unpack a little bit further? It sounds like you're seeing inflections across the product suite, but are there particular channels, whether that's digital versus retail or certain categories where you're seeing the biggest inflection? We're just trying to understand a little bit better what has changed so drastically over the last 6 months. Mike Mathias: Yes. Look, correct. The guidance we're giving at the 8% to 9% comp, I'll just reiterate, American Eagle low to mid-single expectations, Aerie high teens. Both brands are running ahead of that trend November to date or through the Thanksgiving weekend. Digital ahead of stores. And I think the marketing campaigns that Jen and Jay are talking about, the traffic we're seeing digitally off of those campaigns is significant, and that's where we're seeing a lot of the gains from those efforts and from the effectiveness of those campaigns. So digital was -- both channels were positive in Q3, but digital was on the high end or the high single-digit level for Q3. And we'd expect for Q4 at a plus 8% to 9%, same kind of outcome that digital would really outpace stores, and we've seen that through November and especially over the holiday weekend here where both channels were positive, and we're happy with the success in both channels, but digital is where we're seeing the outpaced growth at the moment. Jennifer Foyle: And in Aerie specifically, I mean, as I mentioned before, men's, we saw an incredible turnaround. And Aerie specifically, all categories are working. Look, the team -- when you have to pivot coming off of Q1, we focused on our product and winning that customer back and ensuring that we could get that momentum that we deserve again. This brand is incredible. And I did want to say, I need to remind everyone on this call that Aerie's brand awareness is only at 55% to 60%. So when I think about our opportunity as we build into 2026, we have an incredible runway in front of us. So we're pulling in product as we speak. We're chasing and the team is working fast and furiously so that we can continue this momentum into next year. Jay Schottenstein: And also, Jen, I think our merchandise is better, too, which help. Jennifer Foyle: I'd like to say that, yes. Operator: And the next question comes from Alex Straton with Morgan Stanley. Alexandra Straton: Congrats on a nice quarter. On these big campaigns that you guys have pursued, can you just give us some context on where you think you'll end the year on marketing expense as a percentage of sales versus typical? Like are you investing more than history? And then as we think about next year, should that line item continue to move higher? Or how do you think about kind of that flywheel between the marketing investment and growth? Mike Mathias: For this year, yes, we're -- I mean, obviously, we made a significant investment in Q3. Q4 is up as well within our guidance, not anywhere near the increase on a percentage basis that Q3 was. Really pleased with the SG&A leverage we'll see in Q4 off of this comp guide. Advertising is still deleveraging a bit, but we're leveraging all other expense categories as intended pretty significantly in the fourth quarter. For the year, we're going to wind up somewhere in the mid-4s as a percentage. And historically, we've been more in the -- I think last year, for example, around 4%. So we're definitely resetting a baseline for advertising spend at the moment. It's working. We're continuing to monitor it. Jen and I and our teams are working very closely and cross-functionally on really on a week-to-week basis, how we're pulsing the spend in advertising on top of the campaigns that are obviously planned well ahead of time. I'd expect -- we expect in our initial plans here for next year is to continue this in the first half, possibly passing more toward a 5% type of rate to reset ourselves and then leverage all our expense lines, funnel some expense or some investment toward advertising and anniversary this come next year around this time in the third quarter. I think that 5% is a good sweet spot that we'd like to maintain over time. So as we're kind of resetting the baseline, we're pathing towards 5%, like the top line growth we're seeing from it. Again, just to reiterate, anniversary it come next year and start to just maintain that type of rate, and we'll evaluate things from there. Jay Schottenstein: And Mike, and trips in the bank, too. We're not saying we have more trips in the bank. Mike Mathias: Yes. More to come. We'll talk -- we have some things on our fourth quarter call in March probably to talk about more exciting things to come. Alexandra Straton: That's great. Maybe one follow-up for you, Mike. Just kind of zooming out here. I know there's been some wrenches in your medium-term outlook since you provided it a couple of years ago. But maybe as we move into the final year of that plan and excluding some of the noncontrollable headwinds like tariffs, can you just like, big picture, talk about where you've made the most progress versus that plan and where there's still more work to be done in this final year here? Mike Mathias: Yes. I'll start on the top line. I know we obviously had a few missteps here in the first half of the year in the first quarter, but the net result of this year with this guide is actually going to wind up kind of in that low to mid-single or within the algorithm we've talked about wanting to achieve every year. So we'll be at a kind of low single-digit trajectory on the full year with this back half being kind of the mid- to high single-digit range. So I think that's the continued focus. I'd also say we made a lot of headway in just the culture change around expenses in total. So we continue to control costs across the P&L. I think the leverage that we're seeing here in BOW, this back half of the year and then SG&A in this fourth quarter is a testament to that. Even with the significant increase in advertising this year that you just asked about and I just provided the calendar on all the other SG&A line items are leveraging in this year. And SG&A in total will be relatively flat on the year at the kind of the low single-digit total year outcome. So I think that's a big change for us over the last several years. It's been a massive focus to have a different mentality around controlling expense. It's allowing us to funnel some of these dollars toward advertising. And so we'll continue to do that. And yes, to your point, the tariff headwind is something we can't control. But I mean, our goal is still this 10% aspiration. Tariffs are going to set that back a little bit. But we're going to continue down the path that we're on, on controlling all other costs, investing some dollars in advertising, fueling Aerie and OFFLINE, hitting that kind of low single plus trajectory in AE and passing back toward that 10% that is still our ultimate goal. Jay Schottenstein: Yes. And Mike, as a general thing, this team after the first quarter, and Jen couldn't emphasize it enough, really took a hard look at everything. We went through all the different areas of the business, every single area, every opportunity the merchandise to the operations, looking where -- what's important, what's not important to the company. The dedication of the associates have been amazing in the last few months, and I'm so proud of this team because that first quarter, we got kicked very hard and nobody quit. Nobody cried about it. Nobody quit. Everybody went to figure out how can we do things better, transformational, looking for where the real opportunities are, looking for where we should go in the future, where the opportunities are and what's it going to take to be the best. And one thing I'm very proud of, if you go into our stores, we have the best-looking stores, the best maintained stores in the mall. If you walk in the mall, our stores look the best. If you go look at our new stores, you go to down to SoHo and you look at our new store we just opened in SoHo, you go to Aventura down in Miami, you'll be very impressed by the stores. They're very, very impressive stores. They're very functional stores. And so I think that we're very excited. I know what we have planned for marketing next year. I know where the merchants are focused. I know the excitement that everybody has in this company, and it's going to be great. Operator: And the next question comes from Janet Kloppenburg with JJK Research Associates. Janet Kloppenburg: Congratulations. And I agree the stores look terrific. Aerie in particular, but American Eagle as well. I just wanted to ask about -- I think you had to chase product earlier in the year as well, Jen. And I'm wondering what's going on there and if that situation is resolved now with the comps being as healthy as they are. And then for Mike, on a 4% comp, you weren't able -- did you leverage buying an occupancy? I think you may have. And what is the target point on that? And in terms of price increases, are they all behind you now? Have you taken them all? Or are there more to come? Jennifer Foyle: Yes, for sure. Thanks, by the way, Janet. We -- it's -- primarily, it's been in women's denim, to be frank. We've been sort of in chase mode since Q1. And quite frankly, we haven't been able to keep up with the demands. And as you know, we have a huge short business, and that business never really turned on. We expect shorts to turn on as we enter Q2, back half of Q1 into Q2, and that never happened. So then we continue to see this demand in long legs, and we really couldn't keep up with that demand. So moving into Q3, we felt like we were in a better position, but we wanted to be prudent as well with our inventories. As you know, denim is probably our higher cost of goods as well, but it's our biggest business. So it's always an art, managing that business. And with the launch of the Sydney Sweeney and actually Travis, we couldn't really keep up with that demand. The teams worked swiftly. We were definitely in the right businesses. We definitely had the right silhouette and the right investment in silhouettes, which led to some of that out of stock, good news there. Bad news, we needed a little bit more inventory to carry and to get that business -- to get women's in total because of the penetration of denim. So good news is certainly in the back half of Q3, we saw nice levels of inventory getting back into our key silhouettes. The top 5 jeans, just to give you some perspective, we planned at -- this is just top 5 jeans styles in women's. We planned up 25% they were up 50% on demand. So we had a lot of work to do. We feel better as we head into Q4. And nodding to what Mike mentioned, we're going to look at denim a little bit differently so that we're maintaining that business while we grow new categories. Mike Mathias: And Janet, on BOW, yes, we did leverage BOW by 20 basis points in the third quarter on the 4 comp. And then that's a good target for us that low to mid-single-digit result to leverage expense really across the board other than this advertising reset we're talking about. And then the fourth quarter on the 8% to 9% comp, we obviously definitely expect to leverage BOW at that kind of result as well. And SG&A will leverage significantly on that kind of result for the fourth quarter. Janet Kloppenburg: Okay. And then just on pricing? Mike Mathias: Yes. We talked about a little earlier. We're not -- I mean the AUR is flat for Q3. We're expecting similar AUR in Q4. We're not pathing through the impact of tariffs to the consumer purposely. We are taking our shots on price moves where, as Jen has said, keeping -- maintaining that price value equation that our customer expects and making sure we're not impacting conversion and give ourselves a little room on the promotional side when we do that as well. So we'll continue to kind of optimize that, take our shots, but net AUR similar to last year is the intent. Operator: And the next question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: Congrats on the great quarter. With this quarter-to-date acceleration, it sounds like a lot of it's been driven by traffic and new customer acquisition. Just wondering what you're seeing on conversion, particularly with some of the product improvements you've made. And then maybe if you can just share your thoughts on the Gen Z consumer. We've certainly heard a lot about that consumer potentially being pressured and pulling back, but it doesn't seem like you're seeing that at all in your business. So I would just love to hear your thoughts on kind of where the consumer is and how they're spending? Mike Mathias: Yes. I think on the metric side of things, traffic was definitely a driver in Q3. We continue to see that here in the fourth quarter through November. With AUR flat, it's been a mix of sort of traffic and then ADS or the UPT, part of the ADS equation, AUR flat, some uptick in UPTs and then traffic with conversion being relatively flat with AUR being relatively flat. That's sort of your mix of metrics that we saw in the third quarter and early days here in Q4, obviously, a big traffic uptick that we've capitalized on through November and through Thanksgiving, and we'll see how that continues to play out. But with AUR relatively flat, we would assume a similar kind of mix of metrics, traffic being a driver, ADS being a driver with AUR flat, conversion relatively flat, and we'll see how it pans out through December. Jennifer Foyle: Yes, we're not feeling that -- we're entertaining Gen Z in all of our brands. So even when you look at Martha Stewart, that might be a question mark, right, why Martha Stewart, but Martha Stewart resonates with Gen Z. That's a perfect example of what we're up to. We're seeing momentum in all age groups. We do have still some opportunity on the lower age scale in AE women's in particular, and we're up to invigorating some product to entertain that age bracket. But honestly, we're not seeing it. And also, this is a critical time to for gift giving, too. So we see mom and dad out there purchasing as well. Judy Meehan: Okay. We have time for one more question. Operator: And the last question comes from Corey Tarlowe with Jefferies. Corey Tarlowe: Mike, I just wanted to ask on SG&A for Q3 and Q4 and just kind of how to think about it next year from a dollar perspective. Is there anything that either comes in or goes out, whether it's marketing? I think you talked -- maybe you talked about incentive comp in prior years, how to think about that just structurally, understanding on a rate basis, obviously, with Q4 sales being so strong, there's going to be a bit of a delta there, but curious what you could unpack for us. Mike Mathias: Sure. Yes. I think, as I said, we'd expect to see some continued investment in advertising through the first half of next year, incremental to where we've been intention to pass toward, call it, that 5% rate annually. So we'll anniversary things in the back half that we're doing currently. Incentive comp is a bit of a TBD. We're still setting plans for 2026. Those annual plans are based on our EBIT target is the success metric. So we'll probably -- we'll give more color in March around 2026 SG&A and how we think that will pan out by quarter with advertising and possibly a bit of more incentive comp in the mix, but more to come in March. Corey Tarlowe: Great. And then just a quick follow-up on Aerie. The momentum has been very, very strong. Curious what you think is specifically working there versus the competition when you either walk the mall or view kind of the competitive set, how you think about your market share gains and the opportunity there? Jennifer Foyle: Yes. I did mention the brand awareness still is -- we have opportunity there. We're still only at 55% to 60%. So as we gain and look towards the future, we have a lot of opportunity there. It's never about one thing. Certainly, we doubled down on the product, the design team and merchant teams really came together and thought about our future strategies and where we were seeing some losses and how we recalibrated all of our categories. And the team did an excellent job from launching new ideas to rebuilding old franchises, i.e., undies. Undies is a fire starter for any order, any basket. And our undies tables have never looked better. So it's all about the product. But strategically, we built into promotions that makes sense, but we pulled back in other areas where it doesn't make sense. And then you layer on this great marketing campaign that we've had in Aerie, which it's been really resonating, 100% real. It's what we're all about. And the team has doubled down and our influencer campaign, getting our clothes on our influencers has been a real win. And there's more to come. We have so many great new ideas, innovations for the future. The team is 100% locked and loaded on thinking about each category, new fabrications, new ideas, new launches. newness in general has been a win for Aerie with our new drops, and that's been really working. So we have a lot in store for 2026. But in the meantime, we're pulling goods in for -- to pull out Q4. We're excited about what's happening right now.
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp's Fiscal Third Quarter 2026 Financial Results Conference Call. Please note that today's call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Saratoga Investment Corp's Chief Financial and Chief Compliance Officer, Mr. Henri Steenkamp. Please go ahead, sir. Henri Steenkamp: Thank you. I would like to welcome everyone to Saratoga Investment Corp's Fiscal Third Quarter 2026 Earnings Conference Call. Today's conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required to do so by law. Today, we will be referencing a presentation during our call. You can find our fiscal third quarter 2026 shareholder presentation in the Events and Presentations section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last night. For everyone new to our story, please note that our fiscal year-end is February 28. So any reference to Q3 results reflects our November 30 quarter end period. A replay of this conference call will also be available. Please refer to our earnings press release for details. I would now like to turn the call over to our Chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks. Christian Oberbeck: Thank you, Henri, and welcome, everyone. Saratoga Investment Corp highlights this quarter include continued NAV growth from the previous quarter and year with stable NAV per share, an increase in NII of $0.03 per share from the previous quarter, a strong 13.5% return on equity, beating the industry, net originations of $17.2 million, including 3 new portfolio companies, and importantly, continued solid performance from the core BDC portfolio in a volatile macro environment. Continuing our historical strong dividend distribution history, we announced a monthly base dividend of $0.25 per share or $0.75 per share in aggregate for the fourth quarter of fiscal 2026, which when annualized, represents a 12.9% yield based on the stock price of $23.19 as of January 6, 2026, offering strong current income from an investment value standpoint. Though we did see an increase in adjusted NII of $0.03 per share from the previous quarter, our third quarter NII of $0.61 per share continues to reflect the impact of the last 12 months trend in decreasing levels of short-term interest rates and spreads on Saratoga investments largely floating rate assets as well as continued high levels of repayments. Strong originations outpaced repayments during the third quarter, which when coupled with the repayment of a $12 million baby bond resulted in our cash position at quarter end decreasing to $169.6 million, though we still have significant cash available to be deployed accretively in investments or to repay existing debt. During the quarter, we began to see an increase in M&A activity despite continued competitive market dynamics. While our portfolio again saw multiple debt repayments in Q3, we had strong new originations, resulting in net originations of $17.2 million for the quarter. Specifically, we originated $72.1 million in 3 new investments and 9 follow-ons as well as closing on new investments in multiple BB and BBB structured credit securities. Our strong reputation and differentiated market positioning, combined with our ongoing development of sponsor relationships, continues to create an attractive investment opportunities from high-quality sponsors, which is continuing post quarter end with 4 new portfolio company investments, either closed or closing in Q4 so far, which further improves our run rate earnings. We continue to remain prudent and discerning in terms of new commitments in the current volatile environment. We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges. At the foundation of our strong operating performance is the high-quality nature and resilience of our 1.016 billion portfolio with all 4 historically challenged portfolio company situations resolved. Our current noncore CLO portfolio was marked up, including realized gains by $2.9 million this quarter, more than offsetting the CLO and JV markdown of $0.4 million, resulting in the fair value of the portfolio increasing by $2.5 million during the quarter. As of quarter end, our total portfolio fair value was 1.7% above cost, while our core non-CLO portfolio remains 2.1% above cost. The overall financial performance and solid earnings power of our current portfolio reflect strong underwriting in our growing portfolio companies and sponsors in well-selected industry segments. During the third quarter, our net interest margin increased from $13.1 million last quarter to $13.5 million driven primarily by a $0.5 million decrease in interest expense, reflecting the recent $12 million baby bond repayments. This quarter's interest income remained relatively unchanged, benefiting from first average non-CLO assets increasing by approximately 0.9% to $962 million. And second, this quarter's repayments resulting in various accelerated OID recognitions. This was largely offset by 2 factors: First, the absolute yields of the core non-CLO BDC portfolio reducing from 11.3% to 10.6% due to SOFR rates resetting from earlier reductions, combined with the impact of lower yielding new originations during the quarter. And second, the timing of new originations and repayments in Q3. In addition, the full period impact of the 0.5 million shares issued through the ATM program in Q2 and the partial impact of the additional 0.1 million shares issued in Q3, resulted in a $0.01 per share dilution to NII per share. Our overall credit quality for this quarter continued to improve to 99.8% of credits rated in our highest category. There's just one investment remaining on nonaccrual status, Pepper Palace, which has been successfully restructured, representing only 0.2% of fair value and 0.4% of cost. With 83.9% of our investments at quarter-end in first lien debt and generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations, we believe our portfolio and company leverage is well structured for future economic conditions and uncertainty. As we continue to navigate the challenges posed by the current geopolitical tensions and volatility in the broader underwriting, M&A and macro environment, we remain confident in our experienced management team, robust pipeline, strong leverage structure and disciplined underwriting standards to continue steadily increase the size, quality and investment performance of our portfolio over the long term and deliver compelling risk-adjusted returns to shareholders. As always, and particularly in the current uncertain environment, balance sheet strength, liquidity and NAV preservation remain paramount for us. At quarter end, we maintained a substantial $396 million of investment capacity to support our portfolio companies, with $136 million available through our existing SBIC III license, $90 million from our 2 revolving credit facilities and $169.6 million in cash. This level of cash improves our current regulatory leverage of 168.4% to 183.7% net leverage, netting available cash against outstanding debt. Moving on to Saratoga Investments fiscal 2026 third quarter, key performance indicators as compared to the quarters ended November 30, 2024, and August 31, 2025. Our quarter end NAV was $413 million, up 10.2% from $375 million last year and up 0.7% from $410.5 million last quarter. Our NAV per share was $25.59, down from $26.95 last year and $25.61 last quarter. Our adjusted NII was $9.8 million this quarter, down 21.3% from last year and up 7.8% from last quarter. Our adjusted NII per share was $0.61 this quarter, down 32.2% from last year and up 5.2% from last quarter. Adjusted NII yield was 9.5% this quarter, down from 13.3% last year and up from 9% last quarter. And latest 12 months return on equity was 9.7%, up from 9.2% last year and 9.1% last quarter and above the industry average of 6.6%. While last year, saw markdowns to a small number of credits in our core BDC -- our core BDC, Slide 3 illustrates how our recent results have delivered an ROE of 9.7% for the last 12 months above the industry average of 6.6%. Additionally, our long-term average return on equity over the past 12 years of 10.1% is well above the BDC industry average of 6.9%. Our long-term return on equity has remained strong over the past decade plus, beating the industry 9 in the past 12 years and consistently positive every year. As you can see on Slide 4, our assets under management have steadily and consistently risen since we took over the BDC 15 years ago, despite a slight pullback recently, reflecting significant repayments. This quarter saw originations again outpacing repayments, resulting in an increase in AUM as compared to the previous quarter, and we continue to expect long-term AUM growth. The quality of our credits remains strong with just 1 recently restructured investment remaining on nonaccrual Pepper Palace. Our management team is working diligently to continue this positive long-term trend as we deploy our significant levels of available capital into our pipeline while at the same time being appropriately cautious in this evolving and volatile credit and economic environment. With that, I would like to now turn the call over to Henri to review our financial results as well as the composition and performance of our portfolio. Henri Steenkamp: Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal third quarter ended November 30, 2025, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q3 was 16.1 million, increasing from 15.8 million and 13.8 million shares for last quarter and last year's third quarter, respectively. Adjusted NII was $9.8 million this quarter, down 21.3% from last year and up 7.8% from last quarter. This quarter's increase in adjusted NII as compared to the prior quarter was largely due to the net interest margin changes that Chris mentioned earlier. The decrease from the prior year reflects lower AUM and base interest rates, along with the recent repayment of certain well-performing investments. The weighted average interest rate on the core BDC portfolio of 10.6% this quarter, compares to 11.8% as of last year and 11.3% as of last quarter. The yield reduction from last year primarily reflects the SOFR base rate decreases over the past year, but is also indicative of recent tighter spreads experienced on new originations versus historically higher spreads on repaid assets. Total expenses for Q3, excluding interest and debt financing expenses, base management and incentive fees and income and excise taxes increased by $0.5 million to $3.3 million as compared to $2.8 million last year, and increased by $0.8 million from $2.5 million last quarter. This represented 0.8% of average total assets on an annualized basis, unchanged from last quarter and down from 0.9% last year. Also, for investors interested in digging deeper into the income statement and balance sheet metrics for the past 2 years, we have again added the KPI Slides 26 through 29 in the appendix at the end of the presentation. Slide 50 is a new slide that we recently added comparing our nonaccruals to the BDC industry. You will see that our nonaccrual rate of 0.4% of cost is 8x lower than the industry average of 3.2%. This highlights the current strength and credit quality of our core BDC portfolio. Moving on to Slide 6. NAV was $413.2 million as of fiscal quarter end, a $2.7 million increase from last quarter and a $38.3 million increase from the same quarter last year. In Q3, $1.5 million of new equity was raised at or above net asset value through our ATM program. This chart also includes our historical NAV per share, which highlights how this important metric has increased 23 of the past 53 quarters. Over the long term, this metric has increased since 2011 and grown by $3.62 per share or 16.5% over the past 8.5 years. On Slide 7, you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis. Starting at the top, adjusted NII per share was up $0.03 in Q3. This is due to an increase in non-CLO net interest income during the quarter of $0.02, primarily driven by accelerated OID on repayments. The increase in BB investments interest income of $0.02 from higher assets and the increase in other income of $0.03 from both higher advisory fees on originations and prepayment penalties on redemptions. This was partially offset by an increase in operating expenses of $0.03, reflecting expenses related to the recent annual meeting and increased deal expenses and dilution from the increased DRIP and ATM program share count of $0.01. On the lower half of the slide, NAV per share decreased by $0.02 with the $0.14 under earning of the dividend, fully offset by net realized gains and unrealized depreciation of $0.14, including deferred tax benefit. This leaves a $0.02 net dilution from the ATM and DRIP programs. Slide 8 outlines the dry powder available to us as of quarter end, which totaled $395.6 million. This was spread between our available cash, undrawn SBA debentures and undrawn secured credit facilities. This quarter end level of available liquidity allows us to grow our assets by an additional 39% without the need for external financing, with $170 million of quarter end cash available, and that's fully accretive to NII when deployed, and $136 million of available SBA debentures with its low-cost pricing, also very accretive. In addition, all $269 million of our baby bonds, effectively all of our 6% plus debt is callable now, providing us the option to refinance them, creating a natural protection against potential continuing future decreasing interest rates, which should allow us to protect our net interest margin, if needed. These calls are also available to be used prospectively to reduce current debt. This quarter, we also repaid our $65 million in senior credit facility, refinancing it with the issuance of an upside $85 million credit facility with a group of banks led by Valley Bank. The terms of this facility are substantially the same while cutting the spread cost by approximately 150 basis points and extending the maturity to 3 years. We do have our $175 million, 4.375% 2026 notes maturing at the end of February 2026. We are currently assessing our existing liquidity and cash in addition to various capital markets options in determining the most optimal source to use to repay this. We remain pleased with our available liquidity and leverage position, including our access to diverse sources of both public and private liquidity and especially taking into account the overall conservative nature of our balance sheet and that most of our debt is long term in nature. Also, our debt is structured in such a way that we have no BDC covenants that can be stressed during volatile times, especially important in the current economic environment. Now I would like to move on to Slides 9 through 12 and review the composition and yield of our investment portfolio. Slide 9 highlights that we have $1.016 billion of AUM at fair value and this is invested in 46 portfolio companies, 1 CLO fund, 1 joint venture and numerous new BB and BBB CLO debt investments. Our first lien percentage is 83.9% of our total investments, of which 29.7% is in first lien last-out positions. On Slide 10, you can see how the yield on our core BDC assets, excluding our CLO investments has changed over time, especially this past year, reflecting the recent decreases to interest rates. This quarter, our core BDC yield decreased to 10.6% from last quarter's 11.3%, with 3/5 of the decrease, reflecting further core base rate reductions and the rest due to recent tight spreads experienced on new originations versus historically higher spreads on repaid assets. The CLO yield decreased to 10.0% from 11.8% last quarter, reflecting the inclusion of the new BB and BBB CLO debt investments to this category that have a yield of approximately 8% to 10%. Slide 11 shows how our investments are diversified through primarily the United States. And on Slide 12, you can see the industry breadth and diversity that our portfolio represents, spread over 41 distinct industries in addition to our investments in the CLO, JV and BB and BBB CLO debt securities, which are included as structured finance securities. And finally, moving on to Slide 13. 8.3% of our investment portfolio consists of equity interest, which remain an important part of our overall investment strategy. This slide shows that for the past 13-plus fiscal years, we had a combined $45.6 million of net realized gains from the sale of equity interests. This year alone, we have generated $6 million in net realized gains. This long-term realized gain performance highlights our portfolio credit quality, has helped grow our NAV and is reflected in our healthy long-term ROE. That concludes my financial and portfolio review. Our Chief Investment Officer, Michael Grisius, will now provide an overview of the investment market. Michael Grisius: Thank you, Henri. I'll give an update on the market since we last spoke in October and then comment on our current portfolio performance and investment strategy. We are starting to see a pickup in M&A activity in the market we participate in. But the biggest driver of our increased production is the success we are seeing in our own business development efforts. As seen by the fact that 5 of the 7 most recent new platform companies we have closed or are in process of closing are with new relationships. The combination of historically low M&A volume in the lower middle market for an extended time and an abundant supply of capital has kept spreads tight and leverage full as lenders compete to win deals, especially premium ones. Market dynamics remain at their most competitive level since the pandemic. We've also experienced repayment activity from some of our lower leveraged loans being refinanced on more favorable terms. Although we are seeing some signs of a pickup in M&A volume, historically low deal volumes have made it more difficult to find quality new platform investments than in prior periods. Since we can't control M&A activity, we focus on the things that we can control. In summary, to first stay disciplined on asset selection; second, invest in and generally expand our business development efforts in a market that is still largely underpenetrated by us; and third, continue to support our existing healthy portfolio companies as they pursue growth. The relationships and overall presence we've built in the marketplace, combined with our ramped up business development initiatives, give us confidence in our ability to achieve healthy portfolio growth in a manner that we expect to be accretive to our shareholders in the long run. Now before leaving this topic, I'd like to reiterate that we continue to believe that the lower middle market is the best place to be in terms of capital deployment. As compared to the larger end of the middle market, the due diligence we're able to perform when evaluating an investment is much more robust. The capital structures are generally more conservative with less leverage and more equity, the legal protections and covenant features in our documents are considerably stronger and our ability to actively manage our portfolio through ongoing interaction with management and ownership is greater. As a result, we continue to believe that the lower middle market offers the best risk-adjusted returns, and our track record of realized returns reflects this. Our underwriting bar remains high as usual, in a very tough market, yet we continue to find opportunities to deploy capital. As seen on Slide 14, providing additional capital to existing portfolio companies continues to be an asset deployment means for us with 25 follow-ons in calendar year 2025. Notably, we have also invested in 7 new platform investments this calendar year, reversing the decline we experienced in the prior calendar year. Overall, our deal flow is increasing as our business development efforts continue to ramp up. Our consistent ability to generate new investments over the long term despite ever-changing and increasingly competitive market dynamics is a strength of ours. Portfolio management is critically important, and we remain actively engaged with our portfolio companies and in close contact with our management teams. We ended the quarter with just 1 investment still on nonaccrual status, Pepper Palace and now only 0.2% of the portfolio at fair value and 0.4% at cost are on nonaccrual status. In general, our portfolio companies are healthy and the fair value of our core BDC portfolio is 2.1% above its cost. 84% of our portfolio is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in stressed situations. We have no direct energy or commodities exposure. In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention. Now looking at leverage on the same slide, you can see that industry debt multiples move closer to 6x with unitranche in the mid-5s. Total leverage for our overall portfolio is down to 5.05x, excluding Pepper Palace. Slide 15 provides more data on our deal flow. As you can see, the top of our deal pipeline is significantly up from the end of calendar year 2024. This recent increase of deal sourced is as a result of our recent business development initiatives, with 25 of the 79 term sheets issued over the last 12 months being for deals that came from new relationships. Overall, the significant progress we've made in building broader and deeper relationships in the marketplace is noteworthy because it strengthens the dependability of our deal flow and reinforces our ability to remain highly selective as we rigorously screen opportunities to execute on the best investments. Our originations this fiscal quarter totaled $72.1 million, consisting of 3 new investments totaling $40.5 million, 9 follow-ons totaling $25.6 million, and BB and BBB CLO debt investments of $6 million. Two of the 3 new portfolio companies closed in the quarter are with new relationships. Subsequent to quarter end, we closed or currently have been closing in our core BDC portfolio, approximately $89.3 million of new originations in 4 new portfolio companies and 6 follow-ons, including delayed draws, offset by $30.5 million of repayments. Three of these 4 new portfolio companies are with new relationships. As you can see on Slide 16, our overall portfolio credit quality and returns remain solid. As demonstrated by the actions taken and outcomes achieved on the nonaccrual and watch list credits we had over the past year, our team remains focused on deploying capital and strong business models where we are confident that under all reasonable scenarios, the enterprise values of the businesses will sustainably exceed the last dollar of our investment. Our approach and underwriting strategy has always been focused on being thorough and cautious. Since our management team began working together 15 years ago, we've invested $2.4 billion in 125 portfolio companies and have had just 3 realized economic losses on these investments. Over that same time frame, we've successfully exited 85 of those investments, achieving gross unlevered realized returns of 14.9% on $1.34 billion of realizations. The weighted average returns on our exits this quarter were consistent or even slightly higher than our overall track record at around 15.6%. Even taking into account the recent write-downs of a few discrete credits, our combined realized and unrealized returns on all capital invested equal 13.5%. Total realized gains within the quarter were $3.1 million across 2 portfolio companies and year-to-date were $6 million. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien senior debt. As mentioned, we now have only 1 investment on nonaccrual, although Pepper Palace has been restructured, we are still classifying it as red with a fair value of $2 million. Pepper Palace continues to be managed actively with several initiatives underway. In addition, during the quarter, our overall core non-CLO portfolio was marked up by $2.9 million, including realized gains, reflecting the strength of our overall portfolio. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital and our long-term performance remains strong as seen by our track record on this slide. Moving on to Slide 17, you can see our second SBIC license is fully funded and deployed, although there is cash available there to invest in follow-ons, and we are currently ramping up our new SBIC III license with $136 million of lower cost, undrawn debentures available, allowing us to continue to support U.S. small businesses, both new and existing. This concludes my review of the market, and I'd like to turn the call back over to our CEO. Chris? Christian Oberbeck: Thank you, Mike. As outlined on Slide 18, our latest dividend of $0.75 per share in aggregate for the quarter ended November 30, 2025 was paid in 3 monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended February 28, 2025, marking the fourth quarter of our new dividend payment structure. We also distributed a $0.25 per share special dividend, which was paid in December. Board of Directors will continue to evaluate the dividend level on at least a quarterly basis, considering both the company and general economic factors, including the current interest rate and macro environment's impact on our earnings. Moving to Slide 19. Our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 11%, vastly beating out the BDC indexes negative 4%. This places us in the top 6 of all BDCs for calendar 2025. Our longer-term performance is outlined on the next slide, Slide 20, which shows that our 5-year total return places us above the BDC index, and our 3-year return is in line with the industry. Additionally, since Saratoga took over management of the BDC in 2010, our total return of 851%, has been almost 3x the industry's 283%. On Slide 21, you can further see our last 12 months performance placed in the context of the broader industry and specific to certain key performance metrics. We continue to focus on our long-term metrics such as return on equity, NAV per share, NII yield and dividend growth and coverage, all of which reflect the value our shareholders are receiving. While NAV per share growth has lagged this past year, this is largely due to last year's 2 discrete nonaccrual investments previously discussed. With regards to NII yield and dividend coverage, the recent repayments of successful investments have reduced this fiscal year's NII, leaving a healthy level of cash available for future deployments. In this volatile macro environment, we will be prudent in deploying our significant available capital into strong credit opportunities that meet our high underwriting standards. Our focus remains long term. We also continue to be 1 of the few BDCs to have grown NAV accretively over the long term and have a consistent, healthy return on equity with our long-term return on equity at roughly 1.5x the industry average, and latest 12 months return on equity also beating the industry by 310 basis points. Moving on to Slide 22. All of our initiatives discussed on this call are designed to make Saratoga investment a leading BDC that is attractive to the capital markets community. We believe that our differentiated performance characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions. These differentiating characteristics, many previously discussed, include maintaining 1 of the highest levels of management ownership in the industry at 10.8%, ensuring that we are strongly aligned with our shareholders. Looking ahead on Slide 23, while geopolitical tensions and macroeconomic uncertainty remain ongoing factors, we began seeing renewed momentum in the M&A activity across the market, and we continue to focus on expanding deal sourcing relationships. At the same time, our portfolio continues to perform, and we remain encouraged by the resilience and strength of our pipeline. While broader sentiment towards private credit market has become increasingly cautious due to a few high-profile bankruptcies, we believe these issues are largely idiosyncratic and not indicative of the broader credit market fundamentals. In addition to these companies not being representative of the lower end of the middle market that we participate in. Supported by our experienced management team, disciplined underwriting and strong balance sheet, we believe we are well positioned to responsibly grow the size and quality of our portfolio, generate consistent investment performance and deliver compelling risk-adjusted returns for our shareholders over the long term. In closing, I would again like to thank all of our shareholders for their ongoing support. I would like to now open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Erik Zwick with Lucid Capital Markets. Erik Zwick: I wanted to start first, Chris, in your prepared comments, you mentioned that you saw an increase in M&A activity in the most recent quarter. And I'm curious if maybe you could just provide a little more color there in terms of whether that was fairly broad-based or has it been concentrated in a few industries. And do you expect that to continue into '26 here? Christian Oberbeck: Well, I guess we're not really equipped to talk about the entire M&A marketplace. But I think, clearly, just take the large end of some mega, mega deals done last year, and that are fairly new to the market recently. So large M&A has picked up substantially. And then in the world that we're focused on, we're just seeing more deals, more -- more people are getting ready to transact on both sides, sellers and buyers. And I think as Mike mentioned in his remarks, and I'll turn it over to Mike to talk more -- more specifically, I think we're also seeing, even though the M&A is up, we're seeing a lot more competition. So there's just a lot of interest in all these M&A transactions. So we are hopeful that this is the beginning of a -- sort of back to more of a normalization of the level of M&A that we've seen in general that has been missing over the last couple of years. Mike? Michael Grisius: Yes. Let me expound on that. So when we look at the deal flow that we're getting from our relationships that we've had for years, we view that as kind of more of an indicator of the M&A market moving because we're already seeing deal flow from that group. And if their deal flow is picking up, we view that as a good sign and probably reflective of M&A activity growing. It's a little too early to say with certainty, but certainly, we do see a pickup there, and we're seeing more change of control transactions there and getting involved in more processes, which is great. One of the things that we like so much about being at our end of the market is that, we're not just beholden to the M&A market and having to just kind of wait for the tide to come in, if you will. At the lower end of the middle market, there's just thousands upon thousands of companies. And so if you put effort into getting deep into the various markets throughout the country and getting to know the different deal dealers and investors in these small end of the market, you can drive a lot more deal flow. And that deal flow doesn't necessarily move 1 to 1 with the larger M&A activity. Some of these businesses get -- involved in a change of control transaction because there's somebody is retiring and moving on and deciding to sell their business. It might be baby boomer activity, things of that nature. And so we're in a position where certainly we're affected by M&A activity, and we are seeing a pickup there. But we also feel like our destinies in our own hands, which you see in the origination activity that we've been successful with. Recently, a lot of that's just based on us, doubling down on our outreach in the marketplace. Erik Zwick: That's great color. And then moving to Slide 13, where you've outlaid kind of the historical trends for realized gains. It's nice to see over the past 3 quarters, you've returned to your longer-term trend of positive gains there. And I know it's hard to have too much of a forward-looking view there. But anything expected in the near term, either in the current quarter or maybe a quarter out where you might see some more realizations there? Christian Oberbeck: As you can appreciate, we're not in control of that. And so it's hard for us to make a prediction. I mean there are some processes underway in some of our portfolio companies, but how they wind up is not something we're in a position to predict at this moment. Henri Steenkamp: Yes, Erik, I would say just timing is hard to say, but what we are really happy about is that on the noncore -- sorry, our core non-CLO BDC business, our fair value is about 2% above our costs. So that's just from an overall perspective, which obviously we're happy to see. Erik Zwick: Got it. And last one for me. Just thinking about the impact of lower short-term interest rates. You noted that several times during your comments, you've got a slide addressing that. I think that November cut probably has not been fully realized in the portfolio and not the December cut as well, and the futures market is looking at another 50 as well as spreads remaining tight. Henri, you mentioned the opportunity on the liability side to maybe bring out some cost savings there. So just trying to think about the earnings power from kind of the current level that you just reported, is holding the line there, would you consider that success kind of given the headwinds there? Or is the opportunity to put some of that liquidity to work that you've mentioned provides you the opportunity to potentially grow NII dollars over the next few quarters? Christian Oberbeck: Well, I think you laid out pretty much a number of our considerations. One thing to add perhaps is capital deployment. I mean we've got a lot of capital that hasn't been deployed yet. We have a growing pipeline. And so I think the mix of all those things you've described, including incremental deployment, those are all the factors that we're looking at and working on them. I think our quarterly progression this year, we think this is very positive and sort of on all fronts. And so we're hopeful that, that will continue. We obviously can't predict it. We do have those headwinds, but we've had those headwinds all year and we're still to continue to make progress. And we hope to -- again, I think that capital deployment is probably the place to look for. And I think also as the M&A market expands, we're hopeful that maybe the spread compression will go in other direction. I mean there's lots of -- there's AI, there's mega deals. There's all sorts of things happening in the M&A marketplace that hopefully are going to result in. And then maybe the private credit, the bloom is off the rose a little bit. There's a bad press out there. So maybe the flow of money into it that isn't quite the magnitude that was before. So hopefully, the whole thing settles out to a much more normalized place. I mean we personally -- I think in our opinion, we think spreads are tighter than they should be relative to all the factors out there. And we think that's more of a temporary thing. And so -- as interest rates go down, spreads may widen as they have generally historically. So I think putting all that mix together, we feel are well equipped and well positioned to make the best of the opportunities ahead. Operator: Our next question comes from the line of Casey Alexander with Compass Point Research & Trading. Casey Alexander: Mike, this is for you. I probably heard 5 or 6 times during the prepared remarks about tighter spreads on new investments. And I'm interested, what's the trade-off to make sure that you're receiving an adequate risk-adjusted rate of return, right? Are you -- is the spreads allowing you to still capture the covenants? Is that a competitive aspect? Is it being the spread allowing you to capture a new relationship? Or is the spread allowing you to capture a little additional equity on the deal? How do we get comfortable with that you're still earning an adequate risk-adjusted rate of return when spreads get tight like this as they have been? Michael Grisius: Well, I think the way I'd answer that question is that we don't necessarily look at it as a trade-off. The spreads are tightening. And the way we look at every deal is do we feel like the fundamental risks of the investment that we're making are level set. That is, are we getting a return where we feel like it's appropriate from a risk-adjusted standpoint. Do we feel like under almost all reasonable circumstances, we're going to get our capital back and we're going to earn a good return over time. And is that going to be accretive to our shareholders relative to our cost of capital. So we enjoy the benefit of the SBIC license, which gives us very favorable cost of capital. We certainly evaluate which deals fit in the SBIC and price those accordingly. But all the deals that we're doing, we're looking at as being from a standpoint of being accretive to our shareholders, for sure. I would also point out one of the things that's really nice about being in our end of the market, which you don't see in the middle market so much is we referenced the 7 deals that we closed or have in closing right now, 6 of the 7 of those deals, we have an equity co-investment. And you also heard us reference the return that we've got on some of the exits this quarter, which were about 15%. Most of that delta between the current rate and that ultimate IRR are achieved through the equity co-investments, which is pretty core to our strategy and not something that the middle market or upper middle market enjoys. Casey Alexander: Okay. My last question is, it seems like over the last 2 or 3 years that the majority of the new portfolio companies have come from new relationships. And while I understand that you want to broaden the platform, at the same point in time, there's value to the deals that you have from the existing relationships because you tend to know how they act when things get sideways. And so I just want to hear how you're balancing that risk because new relationships sometimes can surprise you when things go wrong, and so I want to get a feel for how you feel about that effort? Michael Grisius: Yes. And that's a very fair question and something that we spend a lot of time thinking about as well. I would remind you that for us, what's so neat about our business model and our investment approach is that most quarters our follow-on activity exceeds our new origination new platform activity. So most of the investments that we're making, we're sort of coming in with a relatively small bite-size, and then we're watching the performance of the asset and then we're supporting their growth over time, and it gives us sort of option value, if you will. And most of that historically has really been candidly with existing relationships. This progress that we've been making with new relationships is relatively new thing, and it's been a result of a lot of the business development efforts that the whole team has embarked upon, I'll call it, in the last year to 18 months. That -- the gestation period of getting a deal done with a new relationship is quite long. In a lot of ways, we wish it were shorter. But ultimately, it's quite long, and it's one of the reasons you have some pretty healthy barriers to entry in developing new relationships. But typically, when we're cultivating a new relationship, we have a really good sense of the sponsorship's reputation in the marketplace. We have a really good sense of the portfolio that they've constructed, how it's performed. We have a really good sense of the key team members. We generally have been in the market for a long time. We do a lot of work trying to get comfortable that the ownership group is the right one for the asset that they're investing in and that we're supporting. So it is something that we take a lot of take into account. And I would tell you, the bar is a bit higher as you correctly pointed out, when you know a group and you know exactly how they behave and what -- where they're really good, and maybe where they don't have as strong an investment perspective, it can make it easier to make investment decisions. When you don't have that history, you've got to do a lot more work, which is something that we have done and we'll continue to do. Christian Oberbeck: The other thing I would add, Casey, is that is the opportunity side of this, which is these are -- these are new relationships for doing a deal. We've been courting these people for a long time. And so in many instances, we've been tracking them. So it's not like they're brand new parties. And if you look at how we grow and our market opportunity across the smaller middle market, each one of these new relationships can all of a sudden lead to, as Mike was describing, a series of investments with follow-ons and sort of a compounding growth effect in terms of the opportunity flow. And relatively, I'm not going to say proprietary because that might be too strong a word, but certainly preferred flow in our direction with us having a lot more control over our participation in the follow-ons and the new deals. Operator: Our next question comes from the line of Heli Sheth with Raymond James. Heli Sheth: So obviously, in the same tune as Erik and Casey, originations and repayments were elevated this quarter, and there seems to be a pickup in the M&A market. Any sort of shift in the mix of the kind of deals you're seeing in the pipeline in terms of sponsor versus nonsponsor, incumbent versus new borrowers or LTVs? Michael Grisius: Really, really good question. Not a significant difference in that respect. We have developed a really strong expertise in SaaS lending. We continue to see, therefore, a lot of deals in that space and think that it's still a rich market for us to lend to and invest in. But I would say that we've also grown our relationships outside of that space, and we are seeing probably more deals outside of the software space than we have historically. So the majority of the deals that we've done or have been closing are non-software deals that are kind of core lower middle-market businesses generally. Outside of that, I think the flavor is what it typically is, a mix of mostly sponsored deals, but also some deals where they're an independent sponsor or we're backing a management team directly. And that's been a core part of our business as well and has been an area where we've invested very successfully. Heli Sheth: Alright. That's helpful. And you mentioned kind of also investing outside SaaS and tech. I know AI has been a concern when it comes to lending. So any ideas of what industries you would say are vulnerable to AI outside of tech? Michael Grisius: That could be a much, much longer answer than I could give on this call. But I would say when we're looking at any business, we're always evaluating it from a perspective of what is it that AI brings to the table. And could AI change the business in a very significant way where it could get disrupted. And if the conclusion is that it's hard to say how the impact is going to be, we're going to steer away from those deals. So it's -- I think the AI development is relatively new, but it's something that we're highly attuned to and evaluating for every single deal that we look at. I would say there's also some portfolio companies that we have, where they're incorporating AI and they're using it to improve their business in a way that is improving the credit profile of some of our portfolio companies as well. So it's -- it's a double-edged sword, but it's something that we're very much focused on. Christian Oberbeck: And we're definitely staying away from taxi medallions. Heli Sheth: Perfect. And then 1 last quick one. Could I get the spillover balance as of the end of the quarter? Henri Steenkamp: Yes. And per share, Heli, it's probably around approximately $2 per share at the moment. Operator: And I'm showing no further questions at this time, and I would like to hand the conference back over to Christian Oberbeck for closing remarks. Christian Oberbeck: Well, I would like to thank everyone for their time and interest and support of our Saratoga Investment Corp., and we look forward to speaking with you next quarter. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.
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.