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Operator: Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome you to the DICK'S Sporting Goods Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Nate Gilch, Investor Relations. Nate, please go ahead. Nathaniel Gilch: Good morning, everyone, and thank you for joining us to discuss our third quarter 2025 results. On today's call will be Ed Stack, our Executive Chairman; Lauren Hobart, our President and Chief Executive Officer; and Matthew Gupta, our Chief Financial Officer. A playback of today's call will be archived on our Investor Relations website located at investors.dicks.com for approximately 12 months. As a reminder, we will be making forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K and our quarterly report on Form 10-Q for the first fiscal quarter as well as cautionary statements made during this call. We assume no obligation to update any of these forward-looking statements or information. Please refer to our Investor Relations website to find the reconciliation of our non-GAAP financial measures referenced in today's call. And finally, a couple of admin items. First, a quick note on our comparable sales reporting. Foot Locker will be included in our comp base beginning in Q4 of next year, which will mark the start of their 14th full month of operations post acquisition. As such, all reported comp sales for this quarter and for the upcoming year pertains to the DICK'S business only. Second, I want to provide clarity on certain terminology we'll use throughout today's call and going forward. First, when we refer to the DICK'S business, we mean our existing DICK'S Sporting Goods operations, including the DICK'S Sporting Goods, Golf Galaxy, Going, Going, Gone! and Public Lands banners as well as GameChanger. Earnings per diluted share results for the DICK'S business excludes the dilutive effect of the 9.6 million shares issued as part of the Foot Locker acquisition. Second, the Foot Locker business refers to our newly acquired operations, including the Foot Locker, Kids Foot Locker, Champs Sports, WSS and Atmos banners. And finally, for future scheduling purposes, we are tentatively planning to publish our fourth quarter 2025 earnings results on March 10, 2026. With that, I'll now turn the call over to Ed. Edward Stack: Thanks, Nate. Good morning, everyone. Thanks for joining us today. This is an important call. It's our first earnings call as a combined company with Foot Locker. We have a lot to share. There's a lot of detail and a lot of numbers. We want to make it clear, we're doing all that our shareholders would expect us to do to make the Foot Locker business accretive in 2026. And I have to tell you, as the largest shareholder, I couldn't be more excited about the progress we're making and the opportunities ahead. As announced earlier this morning, we delivered another great quarter with comps of 5.7% for the DICK'S business and we continue to operate from a position of strength. Our momentum in the DICK'S business remains strong as we execute against the key priorities that have fueled our success: a differentiated on-trend product assortment in an industry-leading omnichannel ethlete experience. This is the flywheel of our success as a company, and it's driving consistent growth and performance. Now I will discuss the tremendous opportunity we see with Foot Locker. Completing this acquisition on September 8 marks a bold and transformative moment for DICK'S. Together, we're building a global platform that is at the intersection of sport and culture, one that we believe will redefine sports retailing. This powerful combination will allow us to serve a broader consumer base, deepen our partnerships with the world's leading sports brands and significantly expand our total addressable market. When we announced this acquisition, we knew that business was going to need work. Let me be candid. Foot Locker strayed from Retail 101 and did not execute the fundamentals. Post-COVID, Foot Locker did not react quickly enough when its largest brand pivoted toward a direct-to-consumer model, leaving Foot Locker with the wrong inventory. Too much of what didn't sell and not enough of what did sell. Consequently, as we enter this transitional phase, the Foot Locker business, as expected, comped negatively with pro forma comp sales for the full third quarter declining 4.7%, including a 10.2% decline internationally. Now after looking even deeper under the hood as the owners of Foot Locker, our conviction that we can turn this business around has only grown. We will bring our operational excellence, our supplier relationships and our merchandise expertise to return Foot Locker to its rightful place as a top player in the specialty athletic channel. Today, we're even more excited about the long-term value we believe this acquisition will deliver to our shareholders. We're committed to investing in Foot Locker's business to return it to profitable growth. We've assembled a world-class management team to lead the Foot Locker business, and I'm personally excited to guide this next chapter. As previously announced, Ann Freeman a long-time former Nike executive, is now serving as Foot Locker North America President. Ann brings deep industry expertise and leadership experience, and she is supported by a high-caliber team of senior leaders, a combination of key executives from Foot Locker, all of whom are well respected by the Stripers, Blue Shirts and our brand partners, experienced leaders from DICK'S and talent from other world-class companies. This team was handpicked to return Foot Locker to its rightful place in our industry, and we're already moving quickly in North America to build momentum. In addition, we're thrilled to have just announced that Matthew Barnes, former CEO of Aldi, will be joining our team next month as President of the Foot Locker International business. Matthew has nearly 3 decades of experience in global retail and a track record of transforming brands. We look forward to working to stabilize and ultimately accelerate that business with targeted turnaround strategies to meet the evolving needs of consumers globally. There's a lot happening to position the business for the short term and build for the long term. Our first priority is clear. We need to clean out the garage of underperforming assets. This means clearing out unproductive inventory, closing underperforming stores and rightsizing assets that don't align with our go-forward vision for the Foot Locker business. This is the groundwork for the transformation. We began this work shortly after the closing on September 8. We have identified an initial number of underperforming assets around the globe, including inventory that needs to be marked down and liquidated along with a preliminary number of stores that need to be impaired or closed. We initiated certain pricing actions in late Q3 and will be more aggressive in Q4 to clean up unproductive inventory. Our intent is to get the vast majority of the inventory charges behind us by the end of the year, so we can start 2026 fresh and position Foot Locker for an inflection point during the back-to-school season in 2026. As a result, we expect Q4 margin rates for the Foot Locker business to be down between 1,000 and 1,500 basis points with pro forma Q4 comp sales being down mid- to high single digits. We believe this aggressive purging of underperforming assets is what needs to be done to return Foot Locker to its rightful position as a key leader in this industry. Navdeep will share more details in his remarks about the charges we anticipate as part of this important cleanup effort. Importantly, we've met with all of our key vendor partners, and they are fully aligned with our vision and are eager to support a thriving growing Foot Locker. They indicated they are committed to investing alongside us to reignite the Foot Locker business. We're moving with urgency and have already kicked off an 11 store pilot to begin testing changes in product and the in-store presentation. It's early, but we're encouraged by what we're seeing and learning. Looking ahead, we expect back-to-school next year to be an inflection point as our new strategies, assortments and processes align to drive meaningful progress in the Foot Locker business. all supported by the work we're doing now by cleaning out the garage to position Foot Locker for future success. With these actions, we continue to expect Foot Locker to be accretive to our EPS in fiscal '26, excluding onetime costs. What amplifies our confidence are the talented people we found inside the Foot Locker business. Over the past 2 months, we spent time in Foot Locker stores, offices and distribution centers. Our teammates' passion is real, especially among the stripers and blue shirts along with the rest of the team members. They love sneakers, they're hungry for leadership, and they want to get back to playing offense. That energy is validating our excitement and building focus for what's ahead. In closing, at DICK'S, we've built a business that leads our industry in performance, innovation and customer loyalty. DICK'S has generated consistent growth and strong margins with a relentless focus on delivering shareholder value. While we're just getting started on Foot Locker's transformation, our deep expertise and our track record of growth and success fuel our conviction that we can turn this business around, and we are confident that Foot Locker will reemerge as a stronger, more resilient and more dynamic business. We will do this with the same grit vision and execution that got DICK'S to where it is today. Before turning it to Lauren, I want to take a moment to thank our more than 100,000 teammates across all of our banners for their passion and commitment during this exciting chapter for our company and wish everyone a happy Thanksgiving. With that, I'll turn it over to Lauren to share more on the continued momentum across the DICK'S business. Lauren Hobart: Thank you, Ed, and good morning, everyone. We're very pleased with our strong third quarter results for the DICK'S business which continue to demonstrate the strength of our operating model and our team's disciplined execution. We are entirely focused on delivering on our strategies and sustaining our strong momentum. As always, our performance is powered by our compelling omnichannel athlete experience, differentiated product assortment, best-in-class teammate experience and our ability to create deep engagement with the DICK'S brand. Today, we are raising our full year outlook for the DICK'S business. This updated guidance reflects our strong Q3 results and the ongoing confidence we have in our business, grounded in our team's execution of the 4 strategic pillars I just mentioned. We now expect comp sales growth of 3.5% to 4% for the year and EPS to be in the range of $14.25 to $14.55 for the DICK'S business. Now moving to our third quarter results for the DICK'S business. Our Q3 comps increased 5.7% with growth in average ticket and transactions. These strong comps were on top of a 4.3% increase last year and a 1.9% increase in 2023 as we continue to gain market share. Our gross margin expanded 27 basis points in line with our expectations, and we delivered non-GAAP EPS of $2.78 for the DICK'S business, up from $2.75 in the prior year's quarter. As we continue to execute through our strategic pillars, we're seeing strong momentum across the 3 growth areas for the DICK'S business that we are focused on for 2025. First, we're incredibly proud of the progress we're making in repositioning our real estate and store portfolio. In Q3, we opened 13 new House of Sport locations, the most we've ever opened in a single quarter, bringing our year-to-date total to 16 openings. This achievement reflects the outstanding work of our team whose focus and execution made this ambitious rollout a reality. We now have 35 House of Sport locations nationwide, a major milestone in the growth of this transformative concept. We also opened 6 new Field House locations in Q3 and opened another just last week, completing our 15 planned openings for the year and bringing us to a total of 42 Field House locations across the U.S. These innovative formats are delivering powerful financial results, deepening engagement with our athletes, brand partners and landlords and laying the foundation for long-term profitable growth for the DICK'S business. The second of our 3 major focus areas is driving growth across key categories. Our unparalleled access to top-tier products from both national and emerging brand partners continues to fuel athlete demand and excitement, driving strong growth across the DICK'S business. At the same time, our vertical brands are resonating incredibly well with our athletes, further contributing to this momentum. For Q3, this growth came from having more athletes purchased from us with more frequent purchases and more spending each trip. We feel great about the product pipeline from our brand partners, and our inventory is well positioned to meet athlete demand this holiday season. I also want to highlight our ongoing expansion into trading cards and collectibles. In partnership with Fanatics, we've launched the Collectors Club House in 20 Health of Sport locations with plans to include it in every new location going forward. These spaces feature trading cards, autograph memorabilia and more and the athlete response has exceeded our expectations. It's a unique and fast-growing category that's a great complement to everything we do, and we're very excited about the opportunity ahead. And our third major focus area, our multibillion-dollar, highly profitable e-commerce business continues to stand out as a growth driver, once again growing faster than the DICK'S business overall. I'd like to highlight 3 examples of ways we're building strength and differentiation in e-commerce. First, we're really leaning into our app experience, including app-exclusive reservations that are establishing us as a leader in launch culture across many key categories. Second, we're continuing to invest in capabilities to deliver more personalized experiences, content, product recommendations and search results. An example of this is how we're targeting NFL fans with personalized creative messaging and product recommendations for their favorite team. Third, for the holiday season, we're making it easier than ever to find the perfect gift with a new capability for athletes to build and share their wish list with family and friends. Lastly, as part of our broader digital strategy, we're harnessing the power of our athlete data and continue to be enthusiastic about the long-term growth opportunities we see with GameChanger and the DICK'S Media Network. Our GameChanger platform keeps expanding with new features, partnerships and content that enriches the whole youth sports experience and reinforces our leadership in the multibillion-dollar youth sports tech ecosystem. Great example is our new game insights feature, which gives coaches fast, actionable takeaways after every game, further elevating the value we provide to athletes, coaches and families. We're also seeing great momentum with our DICK'S Media Network, which is deepening engagement with consumers and key brand partners while expanding across new ad platforms. In addition to our collection of owned and our full spectrum of off-site channels, we're ramping up our in-store capabilities like our interactive digital experiences and programmable spaces that are driving impactful brand activations in our House of Sport location. In closing, we're very pleased with our strong third quarter results and remain highly confident in our long-term strategies to drive sustained sales and profit growth for the DICK'S business. We believe the power of our omnichannel athlete experience and our compelling differentiated product offering will resonate with our athletes this holiday season, supported by our fantastic holiday brand campaign, which launched a few weeks ago. I'd like to thank all of our teammates for their hard work and commitment and for their focus on delivering great experiences for our athletes throughout the season. And also a warm welcome to all Stripers, Blue Shirts and team members from the Foot Locker business. We're excited to have you as part of the DICK'S family and to achieve great things together. I share Ed's excitement about how we will bring our operational excellence, our supplier relationships and our merchandise expertise to return Foot Locker to its rightful place as a top player in the specialty athletic channel. With that, I'll turn it over to Navdeep to share more detail on our financial results and 2025 outlook. Navdeep, over to you. Navdeep Gupta: Thank you, Lauren, and good morning, everyone. Before I begin my review of our third quarter results, I would like to take a moment to provide important context for Foot Locker's performance included in our consolidated financial results. As noted in this morning's release, our acquisition of Foot Locker closed on September 8. As a result, our third quarter consolidated financials do not include the peak back-to-school selling season in August for the Foot Locker business. They reflect just 8 weeks of post-acquisition results in September and October, historically an unprofitable time period for the Foot locker business. Let's now move to a brief review of our third quarter results for the consolidated company, including continued strong performance for the DICK'S business. Consolidated net sales increased 36.3% to $4.17 billion, driven by an approximate $931 million sales contribution from a partial quarter of owning the Foot Locker business and a 5.7% comp increase for the DICK'S business as we continue to gain market share. On a 2-year and a 3-year stack basis, comps for the DICK'S business increased 10% and 11.9%, respectively. These strong comps were driven by a 4.4% increase in average ticket and a 1.3% increase in transactions. We also saw broad-based strength across our 3 primary categories of footwear, apparel and hardlines. As Nate said Foot Locker will be included in the comp base beginning in Q4 of next year, which is when they will commence their 14th full month of operation following the closing of the acquisition. For reference, pro forma comp sales for the Foot Locker business in Q3 in its entirety decreased 4.7% with the comparable sales in North America decreasing by 2.6% and the comparable sales in Foot Locker International decreasing by 10.2%, primarily driven by softness in Europe. Consolidated gross profit for the quarter was $1.38 billion or 33.13% of net sales, down 264 basis points from last year. For the DICK'S business, gross margin increased by 27 basis points and was in line with our expectations. Notably, the year-over-year decline in consolidated gross margin was driven entirely by the mix impact from the lower gross margin Foot Locker business. On a non-GAAP basis, consolidated SG&A expenses increased 40.8% or $320.9 million to $1.11 billion and deleveraged 84 basis points compared to last year's non-GAAP results. $259.9 million of this consolidated increase was driven by Foot Locker business. For the DICK'S business, expense dollar increased by 7.7% and deleveraged 45 basis points, which was in line with our expectation and driven by strategic investments digitally, in-store and in marketing to better position DICK'S business over the long term. Consolidated preopening expenses were $30.6 million, an increase of $13.8 million compared to the prior year. As Lauren mentioned, this supported the opening of 13 new House of Sport locations in Q3 our highest numbers opened in a single quarter to date, plus another 6 Field House locations we opened in the quarter. Consolidated non-GAAP operating income was $242.2 million or 5.81% of net sales compared to $289.5 million or 9.47% of net sales last year. For the DICK'S business, non-GAAP operating income was $288.6 million or 8.92% of net sales. This year's consolidated results included a $46.3 million operating loss in the quarter from the Foot Locker business which was primarily driven by the gross margin decline as we initiated certain pricing actions in late Q3. Importantly, since the acquisition of Foot Locker are closed on September 8, these results exclude a profitable back-to-school season for the Foot Locker business in August and through Labor Day. For reference, pro forma non-GAAP operating income for the Foot Locker business in Q3 in its entirety was approximately $6.8 million. On a non-GAAP basis, other income comprised primarily of interest income was $12.7 million, down $7.8 million from prior year. This decline was from lower cash on hand and a lower interest rate environment. Consolidated non-GAAP EBT was $239.9 million or 5.76% of net sales, including the Foot Locker business. This compares to an EBT of $297.1 million or 9.7% of net sales in Q3 of last year. Moving down the P&L. Consolidated non-GAAP income tax expense was $59.4 million or a rate of 24.7% -- while the income for the DICK'S business was taxed at a low 20% rate, the combined company was subject to a higher tax rate, primarily driven by the Foot Locker's EMEA business, where full valuation allowance remains in place. In total, we delivered a consolidated non-GAAP earnings per diluted share of $2.07 for the quarter. These results included non-GAAP earnings per diluted share of $2.78 for the DICK'S business based on a share count of 81.2 million, which excludes the dilutive effect of the shares issued in connection with the acquisition of Foot Locker. This is up from the earnings per diluted share of $2.75 last year. The DICK'S business results were partially offset by the effects of the partial quarter of contribution from the Foot Locker business, which include a $0.52 negative impact from Foot Locker operations, including the gross margin decline as well as the higher tax rate, a $0.19 negative impact from the increased share count, which was up $5.9 million prorated for the 8 weeks of the Foot Locker ownership. On a GAAP basis, our earnings per diluted shares were $0.86. This includes the noncash gains from our nonoperating investment in Foot Locker stock as well as $141.9 million of pretax Foot Locker acquisition-related costs. For additional details on this, you can refer to the non-GAAP reconciliation table of our press release that we issued this morning. Now turning to our balance sheet. We ended Q3 with approximately $821 million of cash and cash equivalents and no borrowings on our $2 billion unsecured credit facility. Our quarter end inventory levels increased 51% compared to Q3 of last year. Excluding the Foot Locker business, inventory levels for DICK'S business increased 2% compared to Q3 of last year. We believe the inventory in DICK'S business is well positioned to continue fueling our sales momentum. For reference, on a pro forma basis, inventory levels for the Foot Locker business increased approximately 5% as compared to the same period last year. And as Ed mentioned, the work is underway to clear out the unproductive inventory at the Foot Locker business. Turning to our third quarter capital allocation. Net capital expenditures were $218 million, which included $201 million for the DICK'S business and $17 million for the Foot Locker business. We also paid $109 million in quarterly dividends. Before I move to our outlook, I want to address a few key expectations surrounding the Foot Locker acquisition. First, as Ed discussed, our immediate priority is to clean out the garage of unproductive assets as we look to optimize the inventory assortment and store portfolio of the Foot Locker business. We expect these actions, along with other merger and integration costs to result in a future pretax charge of between $500 million and $750 million. Importantly, these future pretax charges are excluded from today's outlook. Second, we remain confident in achieving the previously announced $100 million to $125 million in cost synergies over the medium term, primarily from procurement and direct sourcing efficiencies. Third, as Ed said, we continue to expect the acquisition to be accretive to EPS in fiscal 2026, excluding onetime costs. Now moving to our outlook for 2025. Today, we are providing an updated outlook that is specific to DICK'S business and does not include the Foot Locker business, which we will address separately. We are taking this approach to ensure comparability of our performance across the quarters and to provide ongoing visibility into the DICK'S business. This outlook also excludes the investment gains as well as the merger and integration costs related to the Foot Locker acquisition. As Lauren said, we are raising our expectation for comp sales and EPS for the DICK'S business. Our updated guidance reflects our strong Q3 performance and includes the expected impact from all tariffs currently in effect. This outlook balances our confidence in the outcomes we are driving through our strategic initiatives and our operational strength against the ongoing dynamic macroeconomic environment. We now expect full year comp sales growth for the DICK'S business in the range of 3.5% to 4% compared to our prior growth expectation of 2% to 3.5%. Total sales for the DICK'S business are expected to be in the range of $13.95 billion to $14 billion compared to our prior expectation of $13.75 billion to $13.95 billion. Driven by the quality of our assortment, we continue to expect to drive gross margin expansion for the full year. We anticipate this expansion will be offset by SG&A deleverage as we are making strategic investments digitally, in-store and in marketing to better position ourselves over the long term. We still expect operating margins to be approximately 11.1% at the midpoint. At the high end of the expectations, we continue to expect to drive approximately 10 basis points of operating margin expansion. We now expect EPS for DICK'S business in the range of $14.25 to $14.55 compared to our prior expectation of $13.90 to $14.50. Our earnings guidance for DICK'S business is based on approximately 81 million average diluted shares outstanding and excludes the dilutive impact of the 9.6 million shares issued in connection with the acquisition. This outlook for DICK'S business also assumes an effective tax rate of approximately 24% compared to our prior expectation of approximately 25%. We continue to expect net capital expenditures of approximately $1 billion for the full year for the DICK'S business. Turning now to the Foot Locker business. We want to provide some perspective on our expectations for the fourth quarter. As Ed discussed, our priority is to position Foot Locker for a fresh start in 2026 and reset the business for long-term success. This includes taking strategic actions to address unproductive assets, including the optimization of inventory and the closure of underperforming stores. As a result of our actions to optimize Foot Locker's inventory, we expect Q4 gross margins for Foot Locker business will be down between 1,000 to 1,500 basis points as compared to Foot Locker's reported results in the same period last year, with the pro forma comp sales being down mid- to high single digits. Excluding the onetime costs associated with our actions to address unproductive assets, we expect Q4 operating income for the Foot Locker business to be slightly negative. Looking ahead, we expect next year's back-to-school season to be an inflection point to drive meaningful progress in the Foot Locker business. As a reminder, we continue to expect the Foot Locker acquisition to be accretive to our EPS in fiscal 2026, excluding the onetime costs. Before we wrap up, I want to provide a couple of consolidated company assumptions to provide clarity for your models. For the fourth quarter, we expect approximately 91 million average diluted shares outstanding, which includes the dilutive impact of the 9.6 million shares issued in connection with the Foot Locker acquisition. We also anticipate a consolidated company effective tax rate of approximately 29% for Q4, impacted by the expected Foot Locker losses in EMEA, where no corresponding tax benefit is anticipated. As Ed and Lauren said at the top of the call, we are proud that we continue to operate from a position of strength with robust momentum in DICK'S business and a significant effort underway to return the Foot Locker business to growth. We are doing all that our shareholders would expect to make the Foot Locker business accretive in 2026. We could not be more excited about our future together. This concludes our prepared remarks. Thank you for your interest in DICK'S Sporting Goods. Operator, you may now open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Robbie Ohmes with Bank of America. Robert Ohmes: My first question is, I know we're going to be talking a lot about Foot Locker today. But on the DICK'S business, it looked like a really, really great quarter, comps up 5.7%, et cetera, and you raised guidance. But just how are you driving that? And how are you guys thinking about your confidence going into holiday here? Lauren Hobart: Thanks, Robbie. We are so proud of the team for 5.7% comp. And importantly, we are comping strong comps, so a 2-year stack of 10%. And as you know, it's been several quarters -- 7 quarters in a row actually where we've had an over 4% comp. That really speaks to the fact that our long-term strategies are working. And I would point to the differentiated product assortment that we've been able to bring in, everything from newness from our strategic partners to emerging brands, our vertical brands, consumers, athletes are really resonating with the products that we are providing. And at the same time, our entire team is fully focused on delivering an engaging athlete experience. And that's in our stores, that's our digital environment. We are really focused on excelling and getting people the product that will give them the confidence, the excitement to do their absolute best. So our strategies are working. If you look at Q3, one of the great things we saw was that we had growth across all of our key categories. And when you think of back-to-school, you think of back-to-sport, you think of footwear and apparel and team sports, we knocked it out of the park with those categories, but also golf and as well as our license business and our trading card business really doing well. So as it flip to holiday, all of those themes are the reasons why we are so excited and confident as we look to Q4 and then we just raised our guidance. We've got an incredible product assortment for athletes. The consumer is fully focused on sport, and we are right sitting at the middle of the intersection of sport and culture. And we've got great gifts across our entire portfolio. So we're really pleased going into Q4. Robert Ohmes: That's really helpful. And then just my follow-up, just on Foot Locker, what kind of assumptions did you make about Foot Locker's cleanup of inventory in the fourth quarter having on DICK'S Sporting Goods? And also how many stores are you guys planning to close? And what would the timing be there? Edward Stack: Thanks, Robbie. As we take a look at store closings, we're still addressing that. We've got some stores that we think we're going to close. We're also looking to address just the upside that we think we have in these stores and how many really need to be closed and how many can we make more profitable. So we'll give you some more guidance on that at the end of our fourth quarter call. Navdeep Gupta: Robbie, let me quickly add on to the Foot Locker cleanup of the inventory in the fourth quarter. So what Ed said in his prepared remarks as well as what I said that we expect the gross margins in the Foot Locker business in the fourth quarter to be down between 1,000 to 1,500 basis points. As you can imagine, that is primarily driven by us quickly addressing the unproductive inventory that is in the system right now and have the room available to bring the excitement assortment that will position the business really well for 2026. Operator: Your next question comes from the line of Simeon Gutman with Morgan Stanley. Simeon Gutman: My first question on Foot Locker. So it looks like the business may have been a bit softer than -- the Street was expecting in Q3, and you're anticipating a slightly negative operating income in Q4, yet you're expecting the acquisition to be accretive to EPS in '26. Can you walk through the building blocks to achieve it? And then what gives you confidence? Edward Stack: Sure. Thanks, Simeon. I can't tell you we really couldn't be more excited about Foot Locker and the opportunity of Foot Locker. But there's some work that needs to be done to get it ready to -- for '26 and for it to be accretive to our business. So one of the things that we're doing, and we gave the Foot Locker team kind of a visual that we need to clean out the garage. So we're cleaning out the garage. We're cleaning out old unproductive inventory. We're going to be impairing underperforming assets. And from a confidence standpoint, those are all part of the building blocks that we need to put together to be ready for 2026. We have tremendous confidence in this management team that we've assembled in North America, as we talked about, it's being led by Ann Freeman, a long-time Nike executive that we've got a tremendous amount of respect for, and the brands have a tremendous amount of respect for. We just announced today that Matthew Barnes is going to run our international business, and he's a Brit, and we think that EMEA truly needs to be run by a European. We're making some real changes on how we are approaching the international business, which we think is going to be very positive. And one of the things we love about Foot Locker and one of the reasons we bought it when we went out and did our due diligence before is the men and women in the stores, the stripers and the blue shirts. These young men and women, they love sneakers. They love Foot Locker. They love to be around this product. And they're really our -- we really think they're our secret weapon as we go forward. And the other thing that gives us a tremendous amount of confidence is we've talked with every brand. And every brand has a renewed interest in being supportive to Foot Locker, and they've all talked that they want a stable and growing Foot Locker. And to be honest with you, it's great for our business, but it's also great for the brands business. And we've got complete alignment with the brands. And we are confident that in 2026, we do put all these building blocks together, we're confident that Foot Locker will be accretive to our earnings in 2026. Simeon Gutman: So my follow-up, I guess I'll make it 2 parts. First, just to that point on '26 accretion. That's Foot Locker stand-alone, including synergy. That's not, let's say, DICK'S Sporting Goods electing to buy stock back. That's Foot Locker math adding to DICK'S earnings base. That's part one of the follow-up. And then part 2, you don't tell us what your footwear gross margin is inside of core DKS. But if you look at Foot Locker, they've been on a steady decline for the last several years, and a lot of it does track with one of your major suppliers' proliferation of product. Is it feasible once you're done with your cleanup that you can get gross margins at parity with DICK'S Sporting Goods? Or is there something about the mix and the selection that you can't get it quite to that level? Meaning how much quick repair could there be once you clean up the assortment? Edward Stack: Well, we're not going to guide right now, and we'll give you some more guidance at the end of Q4. But we're not going to give you -- we're not going to tell you where it's going to be compared to DICK'S Sporting Goods, but we do know that it can be meaningfully different than it is right now. There's a huge opportunity. One of the reasons it struggled is they haven't had access to some of the key product. They haven't had allocation of some of the product. There's a number of stores that are out of stock in product that they don't have. I was just in a store in New York yesterday, as a matter of fact, and talking to the gentleman who runs the store, and he said, we're a great running store. We just got Nike's running construct in last week. And when you take a look at some things like that, there's just a huge opportunity. That product is being sold at full price. So yes, we're really confident that there'll be a meaningful increase in their gross margin. And we'll give you some more color on that at the end of the fourth quarter. Simeon Gutman: And then I don't know, Ed, sorry, it was a follow-up to the accretion comment, if you can comment any more on that, whether that included buyback or that's just core Foot Locker? Edward Stack: That's core Foot Locker. That's not to say we might not -- as we've said, we've been -- we'll be opportunistic based on what happens with the stock. We may buy back some stock. But we think from a core Foot Locker standpoint, it can be accretive to our earnings in '26. Operator: Your next question comes from the line of Kate McShane with Goldman Sachs. Katharine McShane: We were curious about how you're going to manage the markdowns at Foot Locker. I guess the concern is, is that if you do discount aggressively in the fourth quarter, do you think you'll be in a position where you can go back to full price selling and the customer be ready for that as new product comes into the store? And our second question on the discounting is, do you feel like the market is going to be heavy with discounts now in Q4? And how much do you expect that to impact the market and DICK'S own footwear sales? Edward Stack: Sure. Thanks for the -- thanks, Kate. I don't really think that that's going to be an issue with these markdowns and then going back to full price because the product that we're marking down is older product that hasn't sold product that's been sitting around for a while. So when we get the new fresh product, we'll sell -- we're confident we'll sell that at full price. And the consumer out there is looking for a new fresh product that is innovative in the marketplace. And that's what Foot Locker for the most part, doesn't have right now, and we'll be bringing that product in as we get into '26. From a discounting standpoint, right now and who knows things could change. But right now, we don't think that the discounting is going to be meaningfully different than it was last year. We do feel that we've got -- as Lauren said in her remarks, we've got different and innovative products, more premium product that you'll see product that's not as fully distributed in the marketplace, and we don't see that -- the promotional activity impacting our business a whole lot. Operator: Your next question comes from the line of Adrienne Yih with Barclays. Adrienne Yih-Tennant: Great. It's great to see the continued momentum at the DICK'S brand. I guess, Lauren and Ed, obviously, I'm going to talk a question from about Foot Locker. Is this a case of kind of just historically underperforming operations and with some closures and inventory management that you can control the controllables to kind of turn the business? Or are there more infrastructure investments and some longer-tailed structural things about the business? Secondarily, are there banners within Foot Locker that no longer perhaps make sense? And if you could talk about that. And then finally, my follow-up is on inventory. 1,000 to 1,500 basis points is quite a bit. Is there a write-off reserve within that? And -- is it just the depth of the promo? Or are you using third-party channels? Just trying to understand the magnitude of that and the quickness of trying to get through that in the next couple of months. Edward Stack: That's a lot, Adrienne. Let me start -- that's okay. So the idea of this is historically underperforming operations. I think that's a big part of this. So Foot Locker really didn't -- they kind of got away from retail 101 of trying to have the right product in the right store and having those -- I think turning this around, we don't think there's going to be some capital involved, and we're going to invest in the stores. But we've just done an 11-store test, and it was pretty capital light. And what we really did is we took the inventory -- most of the inventory out of the store, and we relaid out the wall. And one of the things that the DICK'S team is really good at, and we're bringing that expertise to Foot Locker is from a merchandising standpoint and how those visual merchandising really can help drive the store. We took the inventory out of the store and we redid the walls. And no real infrastructure back in there. But if you had walked into a Foot Locker store and still walk into a lot of Foot Locker stores other than these 11 and look at the wall, it's kind of merely a run-on sentence of shoes. And what we've done is we've taken and tried to segment it and show the consumer what's important in the stores. And we've got these 11 store test, and now it's only 11 stores, but the results have been -- we're pretty enthusiastic about the results. So we think that we can definitely turn this around. As far as the inventory being down 1,000 to 1,500 basis points, we are going to -- we're going to take markdowns to get this out of the store of older underperforming SKUs. And we do expect at the end of the year, there will be a program that we will sell some of this off to a jobber and just clean out what's left from the inventory and be able to get a fresh start in 2026. So that's why we're moving as quickly as we can to get a fresh start in 2026. Lauren Hobart: Yes. I want to just add to what Ed is saying from my perspective. If you look at the core challenges that we're facing with the business, it really is -- as you said, it's underperforming operations, it's inventory management. It's core Retail 101. And one of the things that's been so amazing to see if the team is coming together and Ed is spending a ton of time with them is that the core expertise in DICK'S, be it merchandising and the balance of art and science or the visual presentation, you can hear in his remarks, just talking about that, the fact that our -- we are a marketing-driven company and that we believe in brand. And so those plans are being worked on for next year. And the brand relationships, this is a heavy operational focus. All of those things are being transferred by osmosis coaching mentorship, all of that. And that's what gives me the confidence that we are moving in the right direction. Adrienne Yih-Tennant: Okay. And just to be very crystal clear, the markdowns of the inventory are on lifestyle and will have kind of no competitive impact with the performance -- premium performance at DKS. So there's no crossover there. Edward Stack: The product that we're marking down is not a key product at DICK'S Sporting Goods. It's an older product that quite frankly, and with the visual we used with the Foot Locker team and it is kind of caught on globally is we just got to clean out the garage. We've got to clean out all the inventory that's kind of in the corner that's not selling that we need to have out of our system. Adrienne Yih-Tennant: Fantastic. Makes 100% sense. Good luck. Operator: Your next question comes from the line of Michael Lasser with UBS. Michael Lasser: The first one is relatively straightforward. The expectation that Foot Locker will be accretive next year is based on the $14.25 million to $14.55 million for this year. Is that correct? And how dependent is the accretion expectation on inflecting the sales that you would anticipate by back-to-school for next year? Navdeep Gupta: Michael, thanks for that question. Yes, let me clarify on exactly like you said. Yes, the basis is on the $14.25 million to $14.55 million as the basis for 2025 results, and the kind of the dependency, I think it starts with what Ed said about the building blocks. It starts out with cleaning out the garage, positioning the inventory and having that excitement assortment and the newness that is resonating so well at DICK'S Sporting Goods with the gross margin expansion and the merch margin expansion that you are seeing is going to be the first and foremost priority as we look to the building blocks for how can this business be accretive. And keep in mind, we talked about as part of the cleaning out of the garage that there are other unproductive assets. We are looking into the store portfolio, where there are some unprofitable stores. But the opportunity we are looking at that is not only deciding if the store should be closed, but actually, the opportunity is the reverse to say if those stores had access to the right product and the right innovation and the newness can those stores be turned around and made profitable. So we are looking into that. We are absolutely looking into some of the unproductive assets that won't be part of the core business going forward. But to your point, it starts with sales and margin. And in addition to that, we'll look into cleaning up to the garage to position the business for a profitable growth into 2026, especially in the -- from the back-to-school season of next year. Michael Lasser: Got you. And my follow-up question is one of the key debates on the combined enterprise story right now is how do you ring-fence the core DICK'S business in order to ensure that the integration of Foot Locker does not become a distraction to slow the momentum of the core business. It does look like in the fourth quarter, you are anticipating a significant slowdown guiding to a flat to slightly positive comp for the core business. So a, what is fostering that expectation? And b, given you have owned this business for a matter of months now, give us a sense of how you anticipate that they won't be -- it won't become a distraction such as the core business can accelerate into next year and drive some growth on top of the accretion that you're anticipating for Foot Locker. Sorry, there was a lot of words in that question. Lauren Hobart: Got it. Thank you, Michael. One of the absolute prerequisites for us to do this acquisition was exactly what you're saying. We needed to ring-fence the DICK'S team and DICK'S needs to stay completely focused on driving our growth and our strategic priorities. And that is exactly what we are doing. I mean 8, 10 weeks in now, I'm even more confident that, that is how we're doing it. We've set up the team at Foot Locker. Ed is very much spending time over there. The DICK'S team is fully focused on the DICK'S priorities. And we're going to continue to just keep the teams sharing learnings, but not remotely working -- not distracting each other from what their core priorities are. When we look at Q4, you mentioned the deceleration, I want to be really clear about this. We just came off of a 5.7% comp, and we're up against a 6.4% comp last year. So the fact that you see our comp slightly moderating in Q4, we actually just raised the comp and the high end of our previous guidance now is the low end of our guidance. So we are really bullish on the holiday. We are just balancing that with an appropriate level of caution as we always do. We don't ever guide to the best possible outcome. But we are pumped and ready to go on the DICK'S side for Q4. Operator: Your next question comes from the line of Mike Baker with D.A. Davidson. Michael Baker: Great. A couple to start on. First, a little bit more detail on that 11 store test. Maybe any initial results or pop in sales? And I mean, is it just as simple as relaying a back wall or there's got to be more to what you're doing. So if you could address that, please. Edward Stack: Sure. So we're not going to lay out kind of the results. As I said, they're early, but we're really very encouraged on them. And it's not just as simple as laying out the wall as we've kind of taken some of the older product out of that -- those stores, put in some newer, fresher product that we were able to get our hands on. And one of the things we've also done is we're bringing the apparel business back to Foot Locker. They had really kind of walked away from the apparel business. And if you walk into these stores, you can see the apparel in there and the apparel is selling really quite well, too. So -- we think that there's an increase from a footwear standpoint, from an apparel standpoint going forward. And we'll -- we'll more than likely give you a little bit more color on this test at the end of the fourth quarter as we give guidance going into 2026. But there's a lot of just basic retail 101 that if Foot Locker gets back to that or when as Foot Locker gets back to it will have a meaningful impact on their business. Michael Baker: Great. Fair enough. One more follow-up, if I could. You're talking about a fresh start and getting everything cleared by the end of the fourth quarter, but back-to-school is the inflection point, not to put too much pressure on you or try to accelerate it, but why not spring as an example, as the inflection point? Why should the FERC, presumably, the first half not be as strong? Edward Stack: I think that's a really good question. And the main reason for that is our merchandising philosophy and how we're buying the product, we didn't buy that. It was bought by the previous management team. And we think that there's some -- and we're going to talk to the brands about trying to plug some holes. But the third quarter or the back-to-school time frame is the first time we will have had complete control over the assortment going forward. Operator: Your next question comes from the line of Christopher Horvers with JPMorgan. Jolie Wasserman: This is Jolie Wasserman on for Chris. Just following up with DICK's ability to affect inventory orders for Foot Locker. So just confirming that you're saying that you won't be able to fully affect it until the start of the third quarter, but are you able to have any sort of impact even if it's lighter in the first half? And just specifically on the percent of spring ordered since the acquisition, how much of that have you been able to order thus far? And how do you see that flowing into the fall? Edward Stack: We can have some impact on Q1 and Q2, probably hopefully a little bit more on Q2 than Q1, but we're working through that and working with the brands and they are being as helpful as they can to try to get product to us that we need. But it's really going to be in that third quarter that you'll see the big difference that our team will have fully bought that product and merchandise that product. Jolie Wasserman: That makes sense. And our follow-up question was just on gross margin with the third quarter. Just more broadly, if you could speak to what's going on there in terms of promotional environment -- this is all for DICK'S promotional environment tariff costs and the other inputs we discussed last quarter, like the GameChanger business? Navdeep Gupta: Yes. So we reported today a 27 basis points expansion in our gross margin. Keep in mind that, that 27 basis points of gross margin expansion is on top of 70 basis points of expansion that we saw. In terms of the promotionality within the quarter, the promotionality, as you can imagine, the overall marketplace continues to remain dynamic. We participated in select promotions, which we always do during the important back-to-school season. The tariff impact was within that quarter, our results as well within the merchandising margin. But keep in mind, we still delivered a merchandising margin expansion of 5 basis points on top of almost about 60 basis points of impact -- from a positive impact last year. And there was a slight unfavorable impact from the mix, like Lauren talked about the license business performed really well, which is a fantastic growth opportunity but has a slightly lower margin. So that -- we had a little bit of an unfavorable impact from the mix as well. And just to kind of round out that answer, I would say that if you look at it, we have guided that we expect our gross margin to expand -- on a full year basis, we expect gross margin to expand in our -- on the back half as well as within the fourth quarter. So overall, we feel great about the merchandising capability. The work that the GameChanger team is doing and the DICK'S Media network. Those ingredients continue to remain in place that drive our confidence in the gross margin expansion for this year and into the future. Operator: Your next question comes from the line of Paul Lejuez with Citi. Paul Lejuez: Can you talk about the $500 million to $750 million in charges that might be coming? How much of that is cash versus just write-offs? And how many stores are actually being reviewed when you think about that range of $500 million to $750 million? And any split that you can share in U.S., international or banner? Navdeep Gupta: Yes, Paul, we'll share much more of the detailed assumptions. As you can imagine, we are 10 weeks into this acquisition. And like I said before, we are balancing the evaluation that we are doing with the opportunity that we see in terms of driving growth and profitability expansion on a store basis. So on stores, we'll share much more of the detailed plans during our Q4 call. In terms of the makeup of the $500 million to $750 million, I would say there are 3 main buckets. The first and foremost, as Ed talked about, is the unproductive inventory, which makes up quite a decent chunk of that, that we will be addressing -- vast majority of that will be addressed here in Q4. That does include some of the store portfolio evaluation. And then we are looking deeper into the assets that we have in place, some of the technology assets, some of the legacy contracts that we will evaluate as part of the fourth quarter and clean that also have to position the business and the profitability of the business for 2026. In terms of the cash versus noncash, I would say it will be a combination of both things. Inventory definitely would be cash, but if there are some existing assets on the balance sheet that we'll be cleaning up, those will obviously be noncash. So we'll share more detailed assumptions behind all of this during our fourth quarter call. Paul Lejuez: Great. And then just on the synergy number, the $1 million to $1.25 million, how much of that are you assuming you can capture in F '26 to get to those accretion numbers? I'm curious if you're thinking that you might be actually playing for a bigger number than that $100 million to $125 million in longer term. Navdeep Gupta: Yes. Well, the $100 million to $125 million, I would say we have -- there's a lot of work that has already been done. What we are working through, as you can imagine, is just conversations with the brands, conversations with the nonmerchandising vendors, and those conversations are happening right now. So to now have a better line of sight, call it, 12 weeks from now as part of the fourth quarter. And in terms of looking for additional opportunity, you know us, we'll continue to focus on driving the top line and the bottom line results for the collective business now. So absolutely, that's a focus within the organization. Operator: Your next question comes from the line of Cristina Fernández with Telsey Advisory Group. Cristina Fernandez: I wanted to ask a question on the vision for the merchandising and Foot Locker. That business historically was heavy on basketball, sneaker culture and kids. So as you look at where there can be improvement, do you see that mix materially changing on the apparel side? Are you looking to lean more into private label? Or do you also see national brands playing a big role in their apparel expansion? Edward Stack: Yes. Foot Locker has always been steeped in basketball culture, and it will -- basketball will still be a very important part of that. The basketball construct that we see in the product coming forward from a basketball standpoint, we are really enthusiastic about across a couple of brands. And the apparel business, we do see the apparel business -- the national brands is where they had kind of stepped away from and leaned into their private brands, which we think the private brands certainly have a place there, but we feel that the national brands will have a meaningful increase in the apparel business in Foot Locker, which will help drive the AURs, and we think it will be very profitable. Cristina Fernandez: And then my second question is on Foot Locker also have been on a pretty significant remodel and refresh program. Have you continued with those Foot Locker reimagined stores? Or have you paused that program and looking to make changes in that real estate strategy that they have been on? Edward Stack: I think the Foot Locker reimagined stores has been an interesting test. As we've kind of gone through there, there's parts of the reimagined store that are very good and other parts that need to be rethought, and we're in the process of rethinking those right now. So as an example, what they characterize as the [ Kicket ] Club and the drop zone when you first walk into a Foot Locker store in the middle of the store, we're going to take that out, reimagine that, give better sight lines to the balance of the store and repurpose some of that place, which -- that area of the store, which was not very productive at all. It was more of a social place and turn that into giving the apparel presentation more space and really focusing from an apparel standpoint, which we think will drive the sales even better than they are. Operator: We have time for one more question, and that question comes from the line of Steve Forbes with Guggenheim. Steven Forbes: Ed, I was curious maybe to just explore like any demographic differences we should be aware of as we think about the performance spread between the 2 businesses. I think one of the thoughts out there is maybe more exposure to lower income, but I'd be curious to maybe just hear you summarize how we should think about the demographic exposure and how that sort of impacts your merchandising plans on a go-forward basis here? Edward Stack: Well, we'll merchandise Foot Locker for Foot Locker, which is going to be a bit more basketball inspired, a bit more trend inspired, definitely more urban than the DICK'S business. The DICK'S business will be more sport-led along with the lifestyle product. We think DICK'S is really kind of at the center of sport and culture and it's a more suburban concept. With that being said, all categories of consumer, if you will, are looking for a product that is new, innovative and different than what's out there in the marketplace right now. And Foot Locker didn't have that new and innovative product. As we get into the 2026, we'll start to have more of that product. And by the third quarter, we think we'll be fully invested in that newer -- the newer innovative product that the consumer across all income levels is looking for. Steven Forbes: And then just a quick follow-up for Navdeep. Maybe just so we're on the same page here, a slightly negative adjusted EBIT for Foot Locker on a pro forma basis, that compares to the $118 million last year. Just, I guess, confirm that. And then is there any way to sort of think through how you sort of view like a normalized 4Q or how you would speak to just where that LTM adjusted EBITDA profile is for the business relative to the $395 million that's in the presentation? Navdeep Gupta: Yes. So the comparison, you're right, it's comparing to a normalized on a non-GAAP basis, the results that the Foot Locker posted in fourth quarter of last year. And keep in mind, the connection point between the 1,000 or the 1,500 basis points of the margin decline versus the slightly negative operating income expectation for Foot Locker is the part of the cleanup of the garage inventory. And that's the piece that we have threaded between the 2, the numbers and the estimates that we gave out for the Foot Locker business. Operator: And that concludes the question-and-answer session. I will now turn the conference back over to Lauren Hobart, President and Chief Executive Officer, for closing comments. Lauren Hobart: Okay. Well, thank you all for your interest in the DICK'S story. We will see you next quarter. Have a wonderful Thanksgiving and a huge thank you to our entire teams of over 100,000 people around the globe. Thank you. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Roivant's Second Quarter 2025 Earnings Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your first speaker Stephanie Lee. You may begin. Stephanie Lee Griffin: Good morning, and thanks for joining today's call to review Roivant's financial results for the second quarter ended September 30, 2025. I'm Stephanie Lee with Roivant. Presenting today, we have Matt Gline, CEO of Roivant. For those dialing in via conference call, you can find the slides being presented today as well as the press release announcing these updates on our IR website at www.investor.roivant.com. We'll also be providing the current slide numbers as we present to help you follow along. I'd like to remind you that we will be making certain forward-looking statements during today's presentation. We strongly encourage you to review the information that we filed with the SEC for more information regarding these forward-looking statements and related risks and uncertainties. And with that, I'll turn it over to Matt. Matthew Gline: Thank you, Steph, and good morning, everybody, and thank you for listening. I appreciate all you dialing in. So not at all a quiet quarter for us and that we put out both the Graves' data and obviously, the Phase III data for brepocitinib in DM. So sort of just a tremendous moment of transformation for the business, but a relatively quiet earnings call as we're looking forward to getting everybody together in December for a more fulsome telling of where we are as a business, more about the future on our Investor Day on December 11. That registration link is live on our website. So look forward to seeing you all there. Today will be more of a review of what's happened in the recent quarter, and then we'll talk much more about the future when we get together in December. So looking forward to that. I want to start out on Slide 5, just by taking a short victory lap because it's been a pretty wild year for us. Obviously, starting with and probably most notably the VALOR data for brepocitinib in DM, which hit on all 10 ranked endpoints and just a phenomenal data set that we think is going to transform the lives of DM patients. So that NDA filing remains on track planned for the first half of next year, and it will be the first novel oral therapeutic in DM, if approved. We also put out data in this quarter from the durable remission sort of portion of the Graves' disease trial for batoclimab, which sets us up for the future there in our 1402 Graves' program. That demonstrated disease-modifying potential for 1402. And then we think earlier this year, we put out some data in MG and CIDP that we can do a pretty nice job of validating the deeper is better idea for FcRn from an IgG expression perspective. We also have initiated at Immunovant this year potentially registrational trials in Graves', myasthenia gravis, CIDP, difficult-to-treat RA and Sjögren's as well as a POC trial in CLE. So some really exciting progress there with IMVT-1402, which we hope will take us to a first-in-class in many cases and best-in-class, and we hope all -- in all indications potential. We got a favorable Markman ruling this quarter for Genevant in the Pfizer case and just overall continued progress in the LNP litigation, with the jury trial and the Moderna case scheduled for March of 2026. And our capital position remains very strong with $4.4 billion of cash, cash equivalents, which will get our current pipeline to profitability and support pipeline expansion and potential additional capital return, including the $500 million that we have currently authorized. On Slide 6, and we've been showing this slide for a while, but it just -- it feels realer and realer with each passing quarter, just a late-stage pipeline that we are really excited about with 11 potentially registrational trials and indications with blockbuster potential. Obviously, the first of those dermatomyositis now behind us, but many more to come, setting us up for a slide that we've been showing since June on Slide 7, which is just a stack 36 months ahead of us between multiple registrational data sets, first DM and NIU and brepo and then the beginnings of a long list of them in 1402, lining up for a series of launches, again, first DM and brepo and then NIU and brepo and then very shortly thereafter, 1402 across multiple blockbuster indications, including Graves'. So look, as I said, a moment of real change and transformation for the business. I think we recognize that. We're excited to talk more about it when we get together in December. It's something that the team internally is excited about. It's excitement that I hear from investigators, certainly and patients and docs in the DM landscape and from investors as well. So looking forward to the next leg of our journey here. I'm going to do just a brief recap of the 2 major data sets from the quarter. So I won't spend a ton of time on either of these because we've talked about all of them in this setting before, but they bear rementioning just because of how exciting both of them are. Starting with the brepocitinib VALOR data on Page 9. Again, we've gone through this all before, but VALOR succeeded with really highly significant, robust and consistent data across the primary and all key secondary endpoints with a nice clear dose response that sets us up for 30 milligrams to be the optimal dose here. Responses were rapid, deep, broad, clinically meaningful across the board, a statistically meaningful and clinically important delta to placebo on mean TIS with deep responses occurring quickly and across a range of endpoints, including muscle and skin. And as a reminder, on Slide 10, this is a patient population with very significant unmet need, and this is a story that has been underscored over and over again as our team has been out talking to physicians in the field after this data. This is a patient population that is significantly underserved by therapeutic options. 75% of these patients are on only either steroids or ISTs and are struggling to get well controlled. And many of them are requiring high doses of oral prednisone in order to be sort of be treated appropriately and are all looking for options or many of them are looking for options. Only a relatively small percentage, only 1/4 of the market is currently on other therapies at all. And of the ones that are, some of them are on very demanding IVIg regimens, multiple days a month, spent entirely in the infusion centers and others are on a series of off-label therapies, many or most of which have failed DM programs before, but are used simply because there are no better options. So we're getting a predictably enthusiastic response from all of the physicians we've engaged with on this data already and are obviously looking forward to continuing that as we go through the registration process in the coming year. Looking at Slide 11, again, a recap from before, but this is the primary endpoint. This is mean TIS. And this is a textbook picture from my perspective of positive clinical data, statistically significant at the high dose starting at the earliest time point, nice clear separation, nice clear dose response. And one thing that bears mentioning, and we said this we put the data originally, we had originally been focused on the steroid taper as a risk mitigant in order to make sure we saw a clear benefit from the drug against the background of not really placebo, but actually actively managed background therapy. And we did that. But the other thing we were able to show is a real dose response on steroid reduction as we were able to get a significantly greater portion of patients to lower steroid doses or off steroids on high-dose brepocitinib than on placebo. And I think that actually with the doc community has been enormously resident finding. It's something that the docs are really, really focused on DM getting these patients off high-dose steroids, and we are very excited that we were able to show this in the study, including as a part of at least one of the key secondary endpoints. On Slide 12, more than a 1/3, and this is the key secondary where we were able to really hit both the TIS improvement -- or the TIS, I should say, and a minimal or no steroid burden. More than 1/3 of brepo 30 patients were able to get to both major TIS responses and minimal or no steroid burden at week 52. So that's just a really exciting finding across the board. And more than half of patients were able to achieve a TIS40, a moderate TIS response with very low dose of oral steroids at the same time. So just a phenomenal outcome there on the combination of endpoints. On Slide 12, again, without going through them all, just a statistically robust data set, I'll say, with really low p-values across every secondary we tested benefit on muscle, benefit on skin, benefit on patient-reported outcomes like the HAQ-DI questionnaire on disability, just a terrific across-the-board outcome here. In terms of what's next year, I think everyone is clear. The NDA submission, we're moving as fast as we can. The only real gating item here was drafting, and it's ongoing right now. We expect to get a file in the first half. Data readout from that proof-of-concept study in CS that we have ongoing will be next year. And the NIU study, which is enrolling very nicely, is currently anticipated to read out or say, guided to the first half '27 around the same time as potential registration of brepo and launch in DM. And then we submit the sNDA for NIU shortly thereafter with potential further indications and so on to come. So that's brepocitinib. I'm sure we'll get some questions about it. And like I said, we'll talk more about that program and what it could represent commercially on the 11th. But suffice it to say, a tremendous quarter and something we're really excited to carry forward from here. Next up, I'll just recap the Graves' disease remission data that we put out earlier this quarter as well. Starting on Slide 16, with just a reminder, this is a very large patient population with a significant unmet need. And there's been -- I think this is an important point as people are doing their work here, a shift away from ablation over time as patients don't want to go through the surgical procedure or the radioactive iodine, but really a lack of new medical therapies that's left something like 1/4 to 30% of Graves' disease patients who are relapsed, uncontrolled on or intolerant to ATDs. It's just a very high proportion of patients who are unable to get well controlled. As a reminder, on Slide 17, this is a bad disease. These patients are at much higher risk of cardiovascular events, much higher risk of preeclampsia, 4x higher risk of preeclampsia and a 7x higher risk of thyroid cancer than the general population. So these patients are really sick or at a high risk of developing severe comorbidities. They often go on to develop thyroid eye disease, about 40% of patients go on to develop these eye symptoms, some of which get optic neuropathy and other issues that can be pretty significant for vision. And then there's a bunch of other complications here. 16% are diagnosed with thyroid storm, which has -- in patients with hospitalized for Graves' disease, 16% are diagnosed with thyroid storm, which has a 20% mortality rate. So again, potentially sort of very sick patients and again, a relatively high risk of thyroid cancer, including a high risk of progressive thyroid cancer. So disease that makes people quite sick. Again, more to come on the 11th, but just wanted to highlight that fact. And then on Page 18, in addition to being a severe disease, it's a disease affecting a lot of people. And so you've got every year, call it, 65,000 newly diagnosed patients, of which 20,000 of those wind up in that sort of refractory bucket. And then there's 880,000 diagnosed U.S. patients, of which 330,000 in the prevalent population are walking around in that intolerant or unable to get well-controlled bucket. So they're just a huge patient population with a significant unmet medical need. What we showed earlier this year in the batoclimab study is a pretty interesting result. We showed real disease-modifying benefit in these patients. Of the 25 patients who came in at baseline, as a reminder, the way the study worked, patients were treated for 12 weeks of high-dose batoclimab followed by another 12 weeks of low-dose batoclimab and were then followed for another 24 weeks off drug entirely. And what we saw is after that first 12 weeks, 20 out of 25 of those patients were responders to therapy. After dropping to low dose after another 12 weeks, 18 out of 25 of those patients were responders. And truly remarkably, after being off drug for a further 6 months, 17 out of the 21 patients we were able to follow up with at week 48 were responders to therapy. So these are patients who were uncontrolled on standard of care at the beginning of the study and 17 out of the 21 of them that we were able to follow up with remain responders to therapy, having been off drug for 6 months. So a pretty remarkable disease-modifying benefit. Of the off-drug responders on page -- of the off-drug responders on Slide 20, nearly half of them were fully off ATDs and over 75% of them were on only the lowest doses of ATDs or off ATDs. So not only were we able to deliver a disease-modifying benefit for patients who are uncontrolled on ATDs before, we were able to significantly reduce or eliminate ATD need for those patients. Now this was underscored on Slide 21, not just by the sort of clinical data on T3 and T4 and so on, which is obviously what's most important to the patients. But you can also see it in the TRAb reductions on Slide 21. And as you can see, as you'd expect for FcRn therapy, these patients showed a rapid decline, both in general IgG and in TRAb levels, especially on high dose. The IgG levels came back a little bit as you'd expect during the lower dose period. And then what is maybe unique to Graves' disease or at least unusual among FcRn indications is while IgG bounces right back when you come off therapy, the only time points on this graph are week 24 and week 48. But by week 48, these patients were effectively back at baseline from IgG. The vast majority of these patients still had basically sort of reduced or no TRAbs. And that is a pretty remarkable finding around the durability of the benefit here. On Slide 22, the next period is absolutely stacked for us in 1402 with data coming in a variety of indications, D2T RA and CLE next year, the second part of the D2T RA study as well as Graves' and MG in 2027 and then Sjögren's in CIDP after. One small update just to flag for today. The TED study remains on track to conclude this year. Our last patient last visit is very close to today. But we're going to hold off reporting the top line data from that first study in all likelihood until we see the top line data for the second study in the first half of next year. The evolving competitive landscape in TED and especially in Graves' disease has led us to take a more prudent path there. And so we're going to collect that data together and report it when we have it all. Moving on to the -- briefly to just a reminder of where we are in the LNP litigation, which I know some people are following. In the Moderna case, we are in a pretrial process around the narrowing of claims and defenses and around summary judgment, which is happening now, the judge is reviewing summary judgment briefings and there's sort of a calendar on the docket that we're hoping will take us through trial in March. The trial is scheduled for March and the first international proceedings are also expected in the first half of 2026. The Pfizer case is ongoing in discovery, and there was a favorable Markman ruling issued in September that certainly sets us up nicely for what we think we need to do from there. So I'll conclude before we go to Q&A with a brief financial update. Overall, a straightforward quarter from a financial perspective, loss from continuing operations net of tax of $166 and cash, cash equivalents of $4.4 billion with no debt on the balance sheet. And obviously, a share count reflective of the significant share buybacks we've done over the last 18 months. So a strong position overall that, as I said, is expected to carry us through profitability. We've got more of our financials in here and the catalyst sort of road map on Slide 28. But again, just a really exciting 6 months or 12 months behind us and a really exciting 12 months or 36 months ahead of us. So feeling great about where the business is, feeling great about the significant transformation in our profile that we've been through in the recent months and looking forward to carrying that forward from here. Once again, as a reminder, we have an Investor Day in New York City for those that can make it in person on December 11, 2025, that registration link is live. It's in the presentation we put up as well as on our website. I hope to see many of you there to round out the year and talk about the future. So with that, I'll say thank you again for listening. Again, a relatively quiet earnings call, but not at all a quiet quarter. And I will pass it back over to the operator for Q&A. Thank you, everybody. Operator: [Operator Instructions] Our first question coming from the line of Dave Risinger with Leerink Partners. David Risinger: Congrats on all the progress, Matt, and looking forward to the event on the 11th. So my question is, could you please comment on what we should be watching next with respect to Pfizer litigation? So specifically in international markets and then in the U.S. Matthew Gline: Thanks, Dave. I appreciate the question. And obviously, it's something that a number of people are watching. It's tough as always, to comment on ongoing litigation. I have nothing to say about any potential timing of any kind of international cases. Look, it's a busier moment coming up. I think there should be a sort of scheduling process for the Pfizer case underway, and we should learn more about the exact time line, including hopefully a trial date in the near future. And I think that's probably what I would be most watching out for in terms of what's public at this point is just getting that schedule together and progressing from here. Operator: Our next question coming from the line of Brian Cheng with JPMorgan. Lut Ming Cheng: Just 2 quick ones from us. How do you feel about argenx stepping into Graves' and whether that has any impact on your strategy of 1402? And then we have a quick follow-up. Matthew Gline: Thanks, Brian. It's a great question. And look, I think you heard my comment on the timing of the intended sort of production of the batoclimab TED data. Obviously, we're acutely aware of the competitive landscape in Graves' disease. And look, I think to make a gentle comment, whatever, imitation is the finest form of flattery. I think it's great to see others recognizing the importance of Graves' as a disease. It's great to see more people working on treatment options for these patients. Obviously, in our Phase II study, we studied both high and low-dose batoclimab, and we saw a great benefit to the higher dose batoclimab in the study. And then also, we reported in the past data breaking out the patients between that 70% cutoff below and -- above and below 70% IgG reduction. And we had 3x as many patients getting off ATDs at the above 70% group than in the below 70% group. So we think we should have quite a competitive profile there. But most importantly, to be honest, it's a big patient population. There's a lot of sick people. And I think a rising tide there will lift all boats. And like I said, argenx is a formidable company with a wide following and has done a great job of execution. And I know there's at least some people out there who find it, although it might be frustrating to us validating of our strategy that they're following in our footsteps. And so we'll always take it. Thanks, Brian. Lut Ming Cheng: Great. And just one quick one. So on the Investor Day next month, just curious if you can talk about what do you want investors to get out of the Investor Day? Is this more of a broader recap of your current strategy? Or do you think that there will be some unveiling of completely new data or a new strategic direction at Roivant? Matthew Gline: Yes. Look, it wouldn't be a fun Investor Day if I revealed all of it now. But I think most importantly, this is just -- it's a moment of huge transformation for our business. I think the type of investors who are now along for the ride are different. And obviously, a lot of other things about the business are different. So I think we want to make sure we're telling that story fully that we're helping people see the course from a commercial perspective, from a patient need perspective in these indications so they can see at least the reasons why we are so excited about these indications about the certain nature of the blockbuster opportunity. There might be some other new things we're able to share by then in terms of updates or other things, but we'll see where we're at in a few weeks here or a month. But I think it will be an exciting opportunity to get together and take stock of the business and to talk a lot about the future and the opportunities in front of us. Operator: Our next question coming from the line of Samantha Semenkow with Citi. Samantha Semenkow: Just for Graves', when thinking about the remission data, is there any way to tease out the impact of starting on the high-dose batoclimab in that study? And how much that actually contributed to the remission rates you saw? I'm just wondering if there's anything that you could share that you were able to tease out from the data when you analyzed it so as we think about the competitive landscape? Matthew Gline: Yes. Look, thanks. That's a -- it's a great question. And I do think we're going to, like I said, be a little bit careful about some of what we say here because of the evolving competitive landscape, and we're going to learn more about this from the hypothyroid TED patients and so on in that study as well. But look, I think in general, remission is about TRAbs getting normal for longer. And our view is that deeper IgG reductions are going to drive towards exactly that outcome. And so both in terms of the speed of responses that we saw in the bato trial and the depth of responses that we saw in the bato trial in terms of TRAb lowering, I think that's going to be a significant driver for us. So I think we feel good put this way about our level of IgG suppression in that program at high dose. Thanks. It's a great question. Operator: Our next question coming from the line of Yaron Werber with TD Cohen. Yaron Werber: Great. Maybe a quick question. We've been getting a few questions about the ongoing preliminary -- the summary judgment against Moderna with respect to the U.S. government involvement in the EUP -- I'm sorry, EUA and whether the government ever took "control" of the vaccines for distribution and whether that made them a commercial party and whether that impacts their involvement and as a result, would potentially provide Moderna some venue to make an argument. Any thoughts about that, if you can comment at all would be great. Matthew Gline: Yes. Thanks, Yaron. And again, as usual, it's difficult to comment in depth about an ongoing litigation, and it's ultimately going to be the judge's decision on the 1498 question. I'll point out that the 2 things that are worth keeping in mind. One is the Moderna case in the U.S. Moderna sales of COVID vaccines in the U.S. in total is a bit less than half of Moderna's total global COVID vaccine sales and Moderna's total global COVID vaccine sales are a bit less than half of the total, inclusive of Pfizer. And so -- and then what Moderna has claimed in their own briefings is that we asked for about $5 billion in damages in the U.S. case, and Moderna has claimed that a little bit less than half of those damages could be subject to 1498 in Moderna's view. And so I think you're talking about a little bit less than half of a little bit less than half of a little bit less than half of the total is the issue in summary judgment on 1498. Our position is pretty clearly laid out in our motions. And frankly, Moderna's position has also laid out in their motions. Obviously, we feel like we have a strong case to make here, but it's ultimately going to be up to the judge to determine. But I just wanted to sort of scope out the magnitude of the question as well. Operator: Our next question coming from the line of Prakhar Agrawal with Cantor Fitzgerald. Prakhar Agrawal: Congrats on the progress in the quarter. Maybe firstly, on Sjögren's disease. Recently, there has been a lot of excitement around Sjögren's market opportunity, especially with the recent data from Novartis' BAFF drug, ianalumab. Maybe you can contextualize how FcRns can differentiate on ESSDAI scores or other specific endpoints? And do you think you could be first-in-class in this indication? And secondly, just quickly on Brepo and DM, do you plan to apply for FDA's National Priority Voucher for Brepo? Matthew Gline: Thank you. Those are both great questions. Look, I think on Sjögren's, we are also excited about the market opportunity. It's a large patient population with a very significant unmet need and just a lot of people kind of going through it as it were. There have been a variety of therapeutic classes that have shown some benefit. Obviously, the in-class data was positive and the J&J data, in particular, showed that lower is better. So we think we have a real shot at best-in-class. We are working to launch as close to first-in-class as possible. I don't think we're here to commit that we'll beat our competitors. We obviously got a little bit of a head start on us, but I think we're trying to be kind of within a window small enough such that it shouldn't matter who comes first, and we can differentiate based on our profile. And I'll just say, I think, first of all, I think the Novartis data was positive, but probably left room for even better as I think have all of the Sjögren's data produced to date. And I think the FcRn data to date has sort of been competitive with other classes of drugs. And so if our deeper IgG expression yields a better benefit than other FcRns, I think we should have a truly important opportunity in the space. A lot of excitement about new therapies from KOLs and from our investigators. The unmet need is significant. The overall market is a significant number of patients. So it's a great place for us to be in our view. And then sorry, you asked about the CNPV program for brepo. We haven't said. Look, this is an orphan population with high unmet need. So I think we're thinking through all of the different ways we can get through FDA and out to patients as quickly as possible and thinking about the puts and takes of them all, but stay tuned. Operator: Our next question coming from the line of Corrine Johnson with Goldman Sachs. Corinne Jenkins: Maybe following up on an earlier question about competitive intensity in Graves' disease. I think it goes beyond argenx in terms of number of companies that have announced plans there. So how are you thinking about the kind of competitive clinical landscape that's evolving? And what do you expect to inform sequencing decisions in that space over time? And then maybe separately, just on business development. Curious if you could give an update on what you're seeing on that front. Matthew Gline: Yes. Thanks, Corinne. Look, I think the first question -- and obviously, we see the competitive landscape. Similarly, there's a number of people trying different things, which is exciting. It's exciting Graves' space. It's exciting to be there. One comment about that is, I think we've watched the myasthenia gravis landscape play out, and there's a lot of competitive intensity and a lot of new mechanisms and also that FcRn has been, a, a pretty undisputed king so far; and b, that the first FcRn to launch with the quality of that data has been a tremendous head start. And we think we've built something similar in Graves' disease, which is a market obviously a multiple of the potential size of the MG market. So we feel great about our position, both from a timing perspective as well as a mechanism. It's a well-understood mechanism, FcRn. And it's pretty exquisitely well suited to treating the biology of Graves' disease. So you think about some of the other mechanisms outside of FcRns have something in common with ATDs, which is that at high doses, they will cause patients to go hypothyroid, which is a miserable thing as well. And so I think one of the great things about FcRn biology is other than maybe for a very short period of time, because what you're really doing is getting at the root cause of the disease with these autoantibodies, you're not going to like cause the thyroid to react in the other direction sort of directly. It's not like a TSHR targeted mechanism or something like that. And so I think that will be a big benefit to FcRn. The other thing that I think is maybe underappreciated in some communities about FcRns is just how safe and well tolerated they are. And I think in a Graves' patient population, that is going to be an important fact that I think will be great for FcRns as a mechanism. So I think that those will all be sort of good guides towards FcRns being important and early line therapy for these patients who can't manage it with standard of care today. In general, as I said, I think lots of activity in the space is actually going to be good for everybody. These are docs who haven't run a lot of clinical trials. These are docs who haven't had a lot of new treatment options. And I think the more voices there are out there talking about this stuff, the better we'll be able to get out to the patient population. So thanks. It's a great question. And then you asked for BD update. Look, we remain extremely well capitalized. We remain very excited about the opportunities for pipeline expansion. We are incredibly excited about the things we currently have in our pipeline. And obviously, you hear that in our voice. You see that in the way that we're talking about our data. Obviously, we're thinking about indication expansion for those programs and then always looking in the world for programs, especially programs that are of a size and scale that can move the needle against the backdrop of our existing pipeline. And I think we've got some exciting ideas. Operator: The next question coming from the line of Dennis Ding with Jefferies. Yuchen Ding: We have 2, if we may. Number one is on Pulmovant. So you guys will have Phase II PH-ILD data in the second half of next year. I guess, how confident are you about the translatability from PAH to PH-ILD? And how should we think about that update? And what's the positive delta on PVR? And secondly, on the LNP litigation, I'm curious if you've done any work on what percentage of the U.S. doses were given to actual federal government employees as we think about a middle scenario for summary judgment? Matthew Gline: Thanks, Dennis. I appreciate it. Both great questions. Thanks for the question about Pulmovant. We're obviously super excited about mosli. Look, I think -- you have correctly identified the risk that exists in the mosli data that is we don't have data in the PH-ILD patient population, and that's sort of the nature of this study. In general, PVRs have translated well. And so I think that's an important backdrop fact between these indications. And where they haven't, it's mostly been, for example, because of the VQ mismatch issues associated with vasodilation in lung disease patients. And we think the format of mosli addresses that issue. So we are, I'd say, cautiously optimistic about that translation, but obviously, I feel a lot better when that Phase IIb data is in hand. And my hope is that we see pretty significant PVR reductions and pretty significant clinical benefit in those patients. So looking forward to that data in the second half of next year. That's another area where there's quite a lot of enthusiasm for the program and for new opportunities, especially with the overall growth from the prostacyclins in PH-ILD, leaving plenty of room for additional mechanisms. The other thing I'll point out is just the 38% PVR reduction we saw in pulmonary hypertension, even if PVR reductions are for some reason a little bit lower in PH-ILD, obviously, there's still a lot of room for a very significant amount of benefit for these patients. Your second question, what percent of doses given to federal employees? I don't think our best estimates of that are in any of our motions. But I think you can imagine, as you think about the number of federal employees that it's a relatively small percentage. Yuchen Ding: Got it. And if I can sneak one more in about the LNP litigation. Maybe remind us what's the status in terms of the OUS trials. We're not that familiar with the OUS process. So I guess, can you remind us how many cases you filed, which one is the furthest along? And can you get an initial decision in 2026? Matthew Gline: Yes. So thanks. It's a great question. In the case of Moderna, we filed a number of OUS actions, including in the UPC in Europe as well as in Canada and Japan and a couple of other places. Those litigations are all ongoing. There are important hearings in 2026. And the nice thing about some of these European jurisdictions is they can move quickly. So it is possible that we would get outcomes of various kinds within 2026 in some of those jurisdictions and obviously look forward to saying more when there's more to say. Operator: Our next question coming from the line of Yasmeen Rahimi with Piper Sandler. Dominic Risso-Gill: Congrats on a great quarter. This is Dominic, on for Yasmeen Rahimi. We just had a question going into the TED data. Could you help us understand what you're thinking about with the expectations for the studies that are reading out here soon? And what do you hope to see to consider development considering the competitive landscape? Matthew Gline: Yes. Thanks. It's a great question. We're looking forward to having that data relatively shortly for sharing it next year. Look, I think the competitive bar in TED is relatively high with IGF-1Rs being pretty efficacious. That said, they certainly leave room from a safety perspective, et cetera. And so I think we're looking to see data that makes sense in the context of the competitive landscape there. The other thing that I think -- and this is part of the reason why we're focused on the sort of competition in Graves' disease, I think we'll learn a lot about hyperthyroid Graves' patients from this study as well as the possible ways in which Graves' and TED might interact with one another. And so I think we're looking forward to the data from that perspective as well. We'll obviously make a final decision on a launch in batoclimab once we've got the TED data in hand and in consultation with our partner. Thanks. It’s a great question. Thank you. Operator: Our next question coming from the line of Douglas Tsao with H.C. Wainwright. Douglas Tsao: I guess, Matt, maybe as another follow-up on Graves' and TED. As you referenced, the 2 diseases are obviously sort of very interrelated with interplay. And I guess when we think about argenx, they will potentially come to market with VYVGART being both Graves' and TED hypothetically. Obviously, you have a big head start with 1402 in Graves'. So I'm just curious how you're thinking about potentially pursuing TED with 1402 versus, as you just noted, potentially thinking about batoclimab and the sort of disadvantage of maybe sort of coming at those dual markets with 2 different molecules. Matthew Gline: Yes. Look, thanks. It's a great question. And a couple of comments about this. One is it's -- we'll be speaking in the abstract now. We're going to know a lot more about the TED data that will inform the answer to this exact question, and we will be in possession of more information than anybody else will have at this moment in time on the sort of overall treatment landscape and on what FcRns can deliver. And so I think that will set us up really nicely to think about the possible options. They're totally different call point in terms of the physicians who treat these things and there are different stages of disease. And so I think they get treated at different times in different ways. And I think being able to talk to endos who are treating Graves' patients about the benefit in forestalling TED, for example, is an important potential thing to be able to discuss when we get to it. In terms of thinking about the sort of TED versus Graves' market dynamics, I'd say let's just wait and see what the TED data looks like, and then we can talk more about it. As a reminder, the Graves' population is meaningfully bigger and it's upstream of the TED population. And so I think there's a reason that was our first focus once we got into the clinic with 1402. Great question. Douglas Tsao: Okay. Great. And Matt, if I can, on a follow-up with brepo. Obviously, incredibly impressive results in DM. I'm just curious if you have given thought just given sort of somebody alluded to sort of the competitiveness in Sjögren's, have you ever thought of that as an indication because I think there is a mechanistic rationale and obviously, an oral option would be very attractive. Matthew Gline: Yes, thanks. I appreciate the question. Look, I think the short answer is, we have thought pretty exhaustively about possible indications for brepo. We have a number that we think are exciting beyond what we've talked about. I think if you look at the indications we've chosen so far, they've been indications where we can really chart a market-defining course. And I think there are maybe more to do in that story. But the short answer is there's an embarrassment of riches in terms of the indication set available for brepo, and we feel very privileged with the data we have in hand for what we've got. As a reminder, it has worked almost everywhere it has been tested. And so I think we feel like it's a great molecule and with a lot of great places to go. Thanks for the question. Operator: Next question coming from the line of Derek Archila with Wells Fargo. Hao Shen: This is a Hao, calling in for Derek Archila from Wells Fargo. I guess we have a question on brepo. We were at AACR. So very positive feedback from all the KOLs. So question is about really the competitive landscape. I guess we've seen VYVGART having data next year and the CAR-T is also starting their pivotal trials. How do you see the kind of the treatment paradigm evolve over the years? And brepo, do you have also plan to explore in other subtypes of myositis like [ IMNM and AS ]? Matthew Gline: Yes, perfect. So look, I think on the deal on competitive landscape, similar comment to, frankly, my comment in Graves', which is that I think it's a great opportunity to be able to get out in front of it. And obviously, first and foremost, it may be the easiest. And oral is always going to have a huge place. The majority of these patients are on oral therapy now. And so I think just like the overall profile that makes us unique. I'll say the CAR-Ts, that's not, in my opinion, going to play for the same patients mostly that we are. That's obviously a much different sort of intervention. And there's still plenty of open questions about benefit there. Look, I think that's also sort of a little bit about that landscape. FcRn could be a compelling option. Obviously, IVIg is used. But I'd say, first of all, it's good to have what we think of as a multiyear head start in DM. And we think the patient population that we have access to, given the nature of our therapy is really basically the entire DM patient population, which gives us a lot of room to go. So we think, again, similar to VYVGART and MG, we think we get to define that market and be the heart of it. And so I think that's all great. We also suspect that the data we have in DM specifically may be just the best overall, and that's the biggest part of the myositis market. Obviously, argenx is studying in other subtypes of myositis as well, and some of those may be more directly appropriate for an FcRn. As to your question about other subtypes of myositis for us, I'll just say again, we thought about a whole bunch of different places to go. There's a lot of exciting places to go, and we have an embarrassment of riches in terms of where we can take the molecule from here. Operator: Our next question coming from the line of Tess Smith with Leerink Partners. Thomas Smith: Congrats on the progress. Just with respect to the TED program and the competitive landscape, could you comment on some of the data we recently saw from the IL-6 class, whether you think Sat is approvable with that data set and sort of your expectations for batoclimab relative to those results? And then secondly, is there any update you could provide from the overseas study that you're running with 1402? And any sort of timing guidance for when we might see data from additional indications from that study? Matthew Gline: Yes, thanks. Those are, look, obviously great questions. I'll say, obviously, not our place to make comments on the approvability of other mechanisms. There was a notably high placebo response in the IL-6 study, which is something we've paid attention to. But overall, no specific comments on where that program goes from here. From a competitive landscape perspective, I think the competitive intensity in TED is real, as I said earlier. And the IGF-1Rs are efficacious, although they have safety and tolerability concerns associated with them. And so I think we're sort of focused on where we could play in TED. And then as we said a minute ago, thinking about Graves', an opportunity to impact the disease much earlier in its course. And I think that's an important thing to the way that we are approaching that with 1402. On the sort of second overseas study, look, I think we, obviously, at this point, have a number of large registrational programs running in 1402 that are big global studies. We continue to like the option of small, fast POCs overseas and feeding that information into bigger studies. If and when we have anything to share from those ongoing efforts, we'll share it. But mostly, it's being used to inform either indication selection or design decisions of the bigger studies. Operator: And our next question coming from the line of Brandon Frith with Wolfe Research. Brandon Frith: This is Brandon, on for Andy. Have you provided any analogs for the DM launch? And we're curious to know what to expect for the cadence out of the gate in longer term? Matthew Gline: Yes, perfect. Look, I think DM is an area with high unmet need, but also not a lot of novel therapies recently launched. So first of all, there aren't great analogs to look at, specifically in DM. And second of all, I think the appropriate course for any public company is to guide cautiously on launch speed and to say that we're going to do everything we can to get this drug out there and to get docs excited about it. And the thing that we're most confident in is that the overall market opportunity is large, that there is high unmet patient need and that when we get to peak penetration, there's a really big and exciting opportunity. Exactly how long it takes to get there, I think we're going to see is the answer, and we're going to do everything we can to make it as successful as we can. Obviously, the real value add is the stuff to get the long-term trajectory here right. So that's probably how I think about the launch. Operator: Our next question coming from the line of Sam Slutsky with LifeSci Capital. Gaurav Maini: This is Gaurav, on for Sam from LifeSci. So just a question on Graves' here. Based on all the market research done to date, as you compare the uncontrolled Graves' disease opportunity versus what FcRns have shown in the MG market, I guess, how do you size these up? How are you thinking about the opportunity? Is it bigger, smaller, similar as we think about MG for FcRns? Matthew Gline: I mean, look, it's hard to -- the MG market has been tremendous. And so I think it's hard to call it one way or another. But obviously, there's a lot of uncontrolled Graves' patients, and it's an exciting place to be. And I think we have a real opportunity to build something big. There's just lots and lots and lots of uncontrolled patients is the answer. The other thing I'll say is we'll talk more about the commercial opportunity in Graves' disease on December 11. And I think we're excited with what we see. And I think we can make -- I think the most important thing is there are hundreds of thousands of patients for whom we could make a meaningful difference and a lot of different ways for us to get into that market and establish different toeholds in places. And so we're looking forward to all of that. We're also learning, and I want to highlight this as an important advantage that we have from being first, so much about the Graves' opportunity by being out there with these docs enrolling patients in the study, looking out at what we're finding. And I think that competitive benefit is going to set us up really well to make sure we've got the right product on the market as well. Operator: There are no further questions at this time. I will now turn the call back over to Mr. Matthew Gline for any closing remarks. Matthew Gline: Thank you. Thank you, everybody, for listening this morning. Once again, a phenomenal quarter for us in terms of the results we delivered. And super importantly, looking forward to getting together on the 11th to talk about the future and address in further detail some of the very same questions we got on today's call. So I hope to see many of you there. And I hope you all have a great end to your year apart from that. Thanks very much, and have a good day. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect Goodbye.
Operator: Greetings, and welcome to the Simulations Plus First Quarter Fiscal Year 2026 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Lisa Fortuna, Investor Relations. Please go ahead. Lisa Fortuna: Welcome to the Simulations Plus First Quarter Fiscal Year 2026 Financial Results Conference Call. With me today are Shawn O'Connor, Chief Executive Officer; and Will Frederick, Chief Financial Officer of Simulations Plus. Please note that we updated our quarterly earnings presentation, which will serve as a supplement to today's prepared remarks. You can access the presentation on our Investor Relations website at simulations-plus.com. After management's commentary, we will open the call for questions. As a reminder, the information discussed today may include forward-looking statements that involve risks and uncertainties. Words like believe, expect and anticipate refer to our best estimates as of this call, and actual future results could differ significantly from these statements. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission. In the remarks or responses to questions, management may mention some non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are available in the most recent earnings release available on the company's website. Please refer to the reconciliation tables in the accompanying materials for additional information. With that, I'll turn the call over to Shawn O'Connor. Please go ahead. Shawn O'Connor: Thank you, and happy New Year to everyone. We delivered on the first quarter top line guidance we communicated in December, with revenue decreasing 3% as expected. Adjusted EBITDA was $3.5 million and adjusted EPS was $0.13, in line with our internal expectations. Turning to the macro environment. The positive trends we cited last quarter continued to present themselves. At the global level, most favored nation pricing agreements are moving forward, tariff threats have subsided and the biotech funding environment is improving. At the regulatory level, the FDA recently issued NAM guidelines for review as well as support of in silico methodologies. We began to see an uptick in spending at the client level, which is reflected in good performance in our Services segment, both revenue and bookings. We've experienced an acceleration in year-end spending, and this increase is encouraging since improvement in services typically precedes an increase in software activity. Our priorities in fiscal 2026 are to advance the progress we've made toward an integrated product ecosystem that combines 3 strengths of Simulations Plus, validated science, cloud-scale performance and AI that is grounded in regulatory-grade modeling. Across GastroPlus, MonolixSuite, ADMET Predictor, our QSP platforms and proficiency, we are driving innovation through advanced science, ongoing investment in the scientific engines trusted by global regulators in leading R&D organizations, a connected ecosystem, seamless interoperability across products powered by the S+ Cloud enabling end-to-end modeling workflows from discovery through clinical development. AI-driven services, intelligent tools that enhance data curation accelerate simulation analysis and simplify regulatory compliant reporting. AI and human collaboration, Copilots and reusable modules, that boost efficiency, consistency and turnaround times for scientists and consultants alike. These advancements aren't theoretical. They directly address customer pain points and aligned with the industry's trajectory. More importantly, they position us to deliver new capabilities to market faster and with greater cohesion than ever before. With that, I'll turn the call over to Will. William Frederick: Thank you, Shawn. To recap our first quarter performance, total revenue decreased 3% to $18.4 million. Software revenue decreased 17% representing 48% of total revenue and Services revenue increased 16%, representing 52% of total revenue. Turning to the software revenue contribution from our products for the quarter Discovery products, primarily ADMET Predictor, were 15%. Development products, primarily GastroPlus and MonolixSuite were 81%. In clinical ops products, primarily proficiency were 4%. On a trailing 12-month basis, Discovery products were 18%. Development products were 77% and clinical ops products were 5%. We ended the quarter with 302 commercial clients, achieving an average revenue per client of $97,000 and 88% renewal rate for the quarter. On a trailing 12-month basis, we achieved average revenue per client of $147,000 and our renewal rate was 87%. During the quarter, software revenue and renewal rates continue to be impacted by market conditions and client consolidations. Specifically, Discovery revenue increased 3% for the quarter and for the trailing 12-month period. Development revenue declined 6% for the quarter and grew 1% for the trailing 12-month period. Clinical Operations revenue declined 82% for the quarter and 28% for the trailing 12-month period. Shifting to our services revenue contribution by solution for the quarter, development, which includes our biosimulation services, represented 71% of services revenue and commercialization, which includes our MedCom services, represented 29%. The revenue contributions for the trailing 12-month period were 74% and 26%, respectively. Total services projects worked on during the quarter were 186 and ending backlog increased 18% to $20.4 million from $17.3 million last year. Overall, we have a healthy pipeline of services projects. Services revenue for the quarter increased compared to the prior year, primarily due to the strong contribution in our MedCom business. Specifically, Development Services grew 8% during the quarter and declined 5% for the trailing 12-month period. Commercialization Services grew 42% during the quarter and 191% for the trailing 12-month period. Total gross margin for the first quarter was 59%, with software gross margin of 84% and services gross margin of 36%. On a comparative basis, total gross margin for the prior period was 54%, with software gross margin of 75% and services gross margin of 26%. The increase in software gross margin was primarily due to the lower clinical ops revenue and the increase in services gross margin was attributable to the prior year reduction in force and the reorganization of services personnel to support product development efforts. Other income was $0.3 million for the quarter compared to $0.1 million last year, primarily due to higher interest income. Income tax expense was $0.3 million compared to income tax expense of $0.1 million last year, and our effective tax rate was 30% compared to 24% last year. Moving to our balance sheet. We ended the quarter with $35.7 million in cash and short-term investments. We remain well capitalized with no debt and strong free cash flow as we continue to execute our growth and innovation strategy. Our guidance for fiscal year 2026 remains the same as previously provided. Total revenue between $79 million to $82 million, year-over-year revenue growth between 0% to 4%, software mix between 57% to 62%, adjusted EBITDA margin between 26% to 30% and adjusted diluted earnings per share between $1.03 to $1.10. We anticipate second quarter revenue to be approximately $21 million to $22 million. I'll now turn the call back to Shawn. Shawn O'Connor: Thank you, Will. Fiscal 2026 marks our 30th year as a company, and we're excited about the opportunities ahead. Simulations Plus is transforming from a collection of pioneering modeling tools into a fully integrated ecosystem that supports discovery, development, clinical operations and commercialization. Through strategic acquisitions, continued investment in science and a unified operating model, we've broadened both our reach and our impact. What remains constant is our core purpose. Providing our clients the tools to bring safer, more effective therapies to patients through science-driven innovation. What is accelerating is how we fulfill that mission. With proven scientific engines, enhanced cloud capabilities, AI-powered workflows and a coordinated road map, we're positioned to support our clients with greater speed, consistency and interoperability than ever before. Thank you for joining us today. And with that, we'll open the call for questions. Operator: [Operator Instructions]. Our first question is from Matt Hewitt with Craig-Hallum. Matthew Hewitt: Maybe first up, I was hoping we could get a little bit more color on some of the positive commentary you spoke to regarding most favored nations lower tariff risk, those types of things? And how that you see impacting budgets from your customers and whether or not you're anticipating a greater allocation of those R&D budgets towards modeling and simulation. Shawn O'Connor: Sure, Matt. We just did our fourth quarter earnings call not that long ago, and we spoke to some of the events in the latter part of the calendar year '25 of agreements at some level in terms of most favored nation pricing and certainly, tariff talk as died down a bit. The U.K. agreement was put in place. So I think all of these things are starting to stabilize outlook for our clients, and we saw that begin to impact the discussions we had through the latter part of '25 as they were preparing budgets, so certainly a lot of activity and give us proposals, we want to put it in the budget for next year. And so that was a very positive impact. As an update here in January, we saw a pretty robust activity turning those proposals into contracts for next year. And, in some cases, accelerated requirements in terms of getting some of that work done before the year-end that budget flush that happens every year in the industry. Certainly took place this year, and that translated into a pretty robust service revenue delivery for us in our November and ending quarter. So certainly puts more wind in the sale in terms of optimism as we move into the calendar year of '26 that the constrained spending environment that we've operated in for the last number of years is starting to show some signs of opening up a bit. I'm Missourian and we'll believe it when I see it, but certainly, very optimistic given the activities of late. Matthew Hewitt: That's very helpful. And then maybe just to dive into the software a little bit. It looks like GastroPlus was pretty good. ADMET predictor was pretty good, but it looks like more on the DILIsym QSP side, things might have been a little bit soft. Is there -- was that just kind of a one-off in the quarter? Or is it waiting for the FDA guidance that we just got here a couple of weeks ago. If you could just kind of provide a little more color on the puts and takes there. Shawn O'Connor: Yes, certainly, certainly. The QSP models, if you recall, though, there is a recurring license, subscription license for the basic platform that many of our QSP models are accessed through. But the majority of QSP software licensing is the licensing of the therapeutic models, and our clients acquire those models on perpetual license basis. And we had an extremely good quarter a year ago, first quarter of last year and sold multiple therapeutic QSP models. And while we did have a closure here in this first quarter of this year, not the same level of activity on the QSP side in this quarter. Maybe look at it on a year-to-year basis, we anticipate QSP therapeutic model licensing to grow. But on a quarter-to-quarter basis, we had a difficult comp compared back to the first quarter. So in general, QSP software revenue came in as expected. It's always a lumpy perpetual license flow of business there, but the interest is very high for those models high and QSP space altogether, both software and service support in that area, a very rapid growing area in terms of biosimulation altogether. But this quarter, in particular, on a year-over-year basis that QSP software license growth impacted by a bunch of models that were recognized last year. Operator: Our next question is from Max Smock with William Blair. Christine Rains: It's Christine Rains on for Max. So just diving on the services side in a little bit more, it's nice to see that business performed so strongly this quarter. But given the relative softness this quarter in software relative to your mix guide, I'm hoping you can give us some color on the expected mix cadence for software in the remaining 3 quarters? And what will catalyze the relative step-up in software performance. Shawn O'Connor: Yes. No change in our guidance range in terms of software service mix. So the robust first quarter on the service side that brought its percentage of revenue up. That doesn't change our outlook for the year. Our guidance there is 57% to 62%. I think it is on a full year software contribution to our revenues. And our biggest software quarters are in third -- second and third quarter just from the seasonality of our renewals, the book of renewals that we have in those 2 middle quarters. So great performance in the first quarter from the service organization, as I indicated in the prepared remarks, I think, as our clients turn to a little bit more accelerated spending, they've got a backlog of projects that they've been holding back on in terms of giving green light to that's more easily initiated on their part, software licensing, acquisition, increasing their staffing and modeling and simulation department with come as a lag to that or follow the ease of opening up the outside service line of their budgets. And so I don't anticipate any change in what we've guided to in terms of software service mix at this time. Christine Rains: Great. That makes sense. And then just one more on the software side for us. You discussed last quarter how the consolidation of large pharma was somewhat of a headwind to software renewals in the back half of fiscal 2025. So given what appears to be an improving M&A environment, did you see this headwind intensify in the first quarter. And then what is your typical impact from normal consolidation historically versus what's baked into your 2026 guide? Shawn O'Connor: Yes. Consolidation is always an impactful contributor to that less than 100% renewal bankruptcies, the other component there in, and we certainly did see an uptick in some consolidation in the back half of our fiscal year '25. No major contribution in the first quarter in that regard. And certainly, as we've mapped out in terms of larger entity acquisitions. Typically, there's some visibility to announced acquisitions ahead of the renewal time frame and whatnot, so we get a little bit of forewarning, there's no forewarning of that in our renewal base for '26. I think the uptick in the accelerated acquisition activity that we're starting to see in the industry is large pharma acquiring assets from smaller biotechs or the smaller biotechs are typically not large software licenses. And so while it is a headwinds and it can have an impact as we experienced in the back half of '25, the outlook doesn't show tremendous impact there, not in the first quarter results, nor in our expectations or guidance for the year. Operator: Our next question comes from Scott Schoenhaus with KeyBanc Capital Markets. Scott Schoenhaus: So Shawn, I know you mentioned that the regulator guidance doesn't reflect any mix changes from the prior guidance. But it seems like the environment has improved and that there's a lot of momentum and backlog here. Does the cadence of your guidance change, should we expect less extreme back-weighted guidance here based on this sort of momentum and this improved environment. Shawn O'Connor: Well, there is a little backloaded when you look at it from a percentage growth perspective, from an absolute dollar perspective, it's not quite so backload. What do I mean by that? I mean we're pretty open in looking at our '26 versus '25 revenue streams. And we knew that on the software side, proficiency platform revenue, software revenue contribution was at its peak in the first and second quarter of '25, and its run rate trend line came down in the back half of '25. And while it moves forward positively, our first half of the year, year-over-year software growth is going to be impacted by proficiency contribution at a little lower level. The biosimulation software much, much better shape. You've got the dynamic that I just described in terms of the QSP perpetual license and they're having some impact, so on and so forth. So when we look at the software revenue flow on an absolute dollar basis, it kind of runs to the seasonality patterns of the past. But when you're looking at a year-over-year comp, given our profile of software revenue coming down in the back half of last year, 25 being at a higher level in the first half of the year, that overall year-over-year increase percentage is going to step up in the back half of the year as we get into a different comp situation. Scott Schoenhaus: And then actually it's a great fall earlier to my follow-on. So I think in the prepared remarks, you guys have mentioned that MedCom's business was outperforming beyond expectations in the quarter. If that's right, should we assume that those proficiency comps that you just talked about should prove to be a little bit more conservative than your initial expectations 90 days ago. Shawn O'Connor: Yes. Keep in mind, we're talking proficiency software platform licenses on the software side. Met Communication is the support we provide in commercialization service revenues. And yes, that came out of the shoots here better than anticipated, quite frankly, in the first quarter, and their backlog is looking good, and we look forward to their contribution in growth, but they will provide during the course of our fiscal year '26 here. That comp year-over-year challenges more dramatic and tackle on the proficiency software side. Operator: Our next question is from Jeff Garro with Stephens. Jeffrey Garro: Yes. Shawn, earlier in the prepared remarks, I think I heard a comment that services should be a leading indicator for software demand. Maybe you could revisit on why that's been the case historically and how that rationale would apply to the current setup of the integrated product vision and the maybe larger portfolio of products than you've had historically? Shawn O'Connor: Yes. I don't mean to imply that a clients will acquire service business prior to engaging in licensing. I mean, it goes both ways in terms of a new logo will start up -- could start up on either side of the business model. What I was referring to was the fact that as our clients work their way through their '25 -- calendar '25. And we're challenged to constrain their spending, cut back on their budgets. That didn't impact software as much as it affected outside services. That was the discretionary, if you will, budget line that they could hold back on, and we saw that impact our service business. As clients turn more favorably to spend, their ability to turn on and initiate a project to sign the contract or give the green length of the performance of the contract that's been sitting there on hold is much quicker. And as they open up their budgets, often software upsells with existing clients occur as they expand the modeling departments. So that expansion that green length to go hire more modelers into their organization, obviously, takes a little bit more of a lead time in terms of their recruiting process and building their organizations. So the fact that service bookings activity is picking up quite nicely and what that may be that a leading indicator that the budget in totality is going to increase, and we'll see on the software acquisition side, some follow step-up in activity there to come. Jeffrey Garro: Excellent. I appreciate that. And maybe to switch gears a little bit to the profitability side of things. There was the comment around the reallocation of services personnel to product development. want to see if there's a specific impact to the P&L in the quarter to call out there? And just whether that's a temporary shift or something a little bit more permanent in nature related to the integrated product strategy. And I'll just tack on a follow-up. I know we'll get the cash flow statement in the 10-Q, but with R&D expense a little bit higher than we modeled. I want to see if there's anything to call out on capitalized software development expense. Shawn O'Connor: Sure. Yes. I mean if I take you back in time, we undertook a reorganization of our organizational structure and the risk back in the third quarter fiscal year '25. And so the objective there was twofold. One, we rationalized our service resources to a lower level service revenue, and that has an impact on favorable margin in terms of excess staff that is no longer here. We also retained some of those valuable assets, people, scientists, and fully devoted them to our R&D effort, which was picking up with regard to the product vision that we were honing in on and beginning its implementation on. So that increase in R&D spend comes from additional personnel there invested in accelerating our product activity, which we look forward to take the opportunity to advertise. We have an Investor Day meeting scheduled on January 21 to walk through and give some visibility in more detail as to what that unfolds with for the future. And so yes, some increase in R&D expense. I'll let Will comment in terms of software capitalization and those sorts of things. I'd also before I hand it off, I point out that the R&D expense at a little bit higher percentage. Keep in mind that higher percentage were in our first quarter seasonality, the revenues are lower in the first and fourth quarter than second and third quarter. So the percentage increase of R&D spend in the first quarter will be averaged out over the course of the year as we work through our seasonal revenue quarters due to the end of the year. But Will, do you want to comment on capitalized software? William Frederick: Sure. I'll sort of step back as well, kind of revisit some of the items you mentioned, the reorg that we talked about, that was a reduction in services staff to look towards increasing utilization targets for billable personnel as well as reevaluating the work that folks did in the company on product development. So we've historically had last couple of years, services margins at around the 30%, and we're certainly looking, as we've messaged getting that closer to 30% to 35%. And that's due to the reorg as well as the reduction in force. The R&D expenses, certainly, we have continued to invest in that area. So what you saw in first quarter, the 16% of revenue we do expect to see about a 15% to 17% R&D spend of revenue for the year. But we're still keeping our operating expense total around [ 50% ] of revenue for the year. So that's sales and marketing continuing to run at the 13% to 15% range. And then G&A is the one that will continue to come down as a percentage of revenue. On the capitalized software standpoint, that's running about the same. It's in the mid-20% of the work that's done is going into capitalized software and then that comes through as amortization expense on a quarterly basis. Operator: Our next question is from David Larsen with BTIG. David Larsen: On the services side, I think you mentioned that the commercialization efforts showed the growth there. Is that mainly proficiency? And just any more color around the strength there would be very helpful. Shawn O'Connor: Yes. Just -- thanks, Dave, for the question. Yes, the proficiency acquisition in today's vernacular, brought us two revenue streams. One was the proficiency software platform, the training platform and clinical operations and the second revenue stream was medical communications and medical communications represents today 100% of our service revenues in the commercialization space. So yes, the medical communications in the commercialization market, it source was the proficiency acquisition. David Larsen: So if I recall correctly, like a year ago, proficiency services revenue growth was under some pressure, and that was leading to some challenges. And correct me if I'm wrong, but I think what we're seeing here is kind of a recovery there and maybe a little bit of an easier comp. Shawn O'Connor: Yes. The commercialization, the Med Communication service revenues like most all of our services was under pressure in the back half of our fiscal year '25 as budgets pulled back. And so the delivery in terms of MedCom in the first quarter was a bit above our expectations and very reflective of more active spend on our clients in that space and its outlook is pretty positive for fiscal year 2026. David Larsen: Okay. And then just one more quick one for me. On the software side, I think I saw clinical operations software down. I thought it was like 80% or something like that, which led to the overall decline in software year-over-year. So it looks like it's like is that one product line? Which product line was that? And is there a reason why it was unusual. Did a deal push or something like that? Shawn O'Connor: Yes. The clinical operations software is our proficiency training platform. And so upon acquisition, its contribution in its first and second quarter of fiscal '25 was pretty strong. We saw that come down in the back half of the year, driven by clinical trial start-up challenges and the like. And so here in the first quarter, while they delivered pretty much to expectation, the year-over-year comp is negative, but in line with our expectation at this point in terms of fiscal year '26. David Larsen: Okay. And just -- I'm sorry, one more quick one. 88% fee retention. Is that in line with your expectations? And then I'll hop back in the queue. Shawn O'Connor: Yes. It's been at that level over the last several quarters. Historically, 90% plus is where it's at. We did have a couple of renewals that didn't get signed over Thanksgiving weekend and got signed in the first week of December, that impacted that number a bit. So I think the renewal rate was relatively good, especially if you think of it in terms of those couple of deals that slipped into the beginning of the fourth quarter. Operator: Our next question is from Brendan Smith with TD Cowen. Brendan Smith: I wanted to actually first ask about this ongoing AI integration with the core platform and how the initial rollout is going? Anything of note you're hearing from customers? And maybe just how we should think about that as it pertains to license renewals and maybe pricing flexibility within those renewals over the coming months. Shawn O'Connor: Yes. The initial release of some of the new AI features went out with the GastroPlus release late last fiscal year, response has been favorable, very favorable to it with the -- what more can you do as some clients have gotten visibility to our road map and what that it's monetization comes along the way in several forms and shapes. We were a bit more aggressive this year in terms of our price increase, with some of that AI technology being embedded in the base model, if you will. And there will be opportunities to monetize it modules and other new products into the future. I look forward to walking through that in a couple of weeks at our Investor Day. But it certainly is immediately contributing as we bring it out across our product line in terms of an ability to be a bit more aggressive in terms of pricing. Brendan Smith: Got it. That's super helpful. And maybe just related to that, and this might be more a question for the Investor Day in a couple of weeks. But are there plans to launch any new verticals or products within the existing platform over the next, say, 12 to 18 months? Or should we really see this year as a time to land and expand within the existing franchises you have on hand now. Shawn O'Connor: There's no desire, if other verticals take us outside of our supportive drug development now. We do support work effort in the chemical space, agrobusiness, cosmetics, some business there. But certainly, our focus is primarily in drug development discovery clinical development, commercialization, clinical ops. And our baseline engines GastroPlus, Monolix, QSP capabilities, et cetera, are the engines that drive there are -- there's ability to create new revenue streams with the product ecosystem that we're working to deliver to the marketplace. And yes, we -- we'll walk through that in a little bit more detail at the Investor Day. I wouldn't anticipate that their delivery and translation into revenue flow I guess the way to put it is that it's not anticipated to be significantly impactful to our '26 revenue and/or is embedded in our guidance already. Operator: There are no further questions at this time. I'd like to hand the floor back over to Shawn O'Connor for any closing remarks. Shawn O'Connor: Yes. Thanks, everyone. We look forward to sharing more about the strategy we've been talking about and referring to our product road map. The next phase of our evolution is at our Virtual Investor Day on January 21. We're excited to give you a deeper look at how our ecosystem comes together and how it will create value for our clients investors and patients will go. You can register on the Investor Relations section of our website. And if you have any questions, please feel free to reach out to Lisa Financial Profiles who can assist with any questions you might have there. But otherwise, I appreciate your attention, and look forward to seeing you later in the month. Take care, everyone. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings. Welcome to the MSC Industrial Direct Co., Inc. reports fiscal 2026 First Quarter Results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press 0 on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Ryan Mills, Vice President, Investor Relations and Business Development. You may begin. Ryan Mills: Thank you, and good morning, everyone. Welcome to our fiscal 2026 first quarter earnings call. Martina McIsaac, President and Chief Executive Officer, and Gregory Clark, Interim Chief Financial Officer, are on the call with me today. During today's call, we will refer to various financial data in the earnings presentation and operational statistics documents, both of which can be found on our Investor Relations website. Let me reference our safe harbor statement found on Slide two of the earnings presentation. Our comments on this call, as well as the supplemental information we are providing on the website, contain forward-looking statements within the meaning of the U.S. Securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks is noted in our earnings press release and other SEC filings. During this call, we may refer to certain adjusted financial results which are non-GAAP measures. Please refer to the GAAP versus non-GAAP reconciliations in our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I will now turn the call over to Martina. Martina McIsaac: Thank you, Ryan, and good morning, everyone. As many of you know, this marks my first week as CEO of MSC Industrial Direct Co., Inc. Before we dive into our fiscal first quarter performance, I would like to share some thoughts since we last spoke. First and foremost, it's an honor and privilege to serve as the fifth CEO in MSC's eighty-plus year history. As part of the transition over the last couple of months, I've spent time engaging with our people, our suppliers, and our customers. This time has reaffirmed our direction, and I would like to share more about those near-term priorities on our path to creating incremental value. First, we are reconnecting and growing with our core customer, and we must remain steadfast in our focus to execute on the initiatives that have restored this growth. Most of these initiatives have been in flight for less than a year, and tremendous opportunity remains ahead. In addition to our work on pricing, website, and marketing, our highest priority over the last year has been to optimize the design of our sales organization to better match resources to potential and put us closer to the core customer. At the end of the first quarter, we turned our attention to our service model, now applying the same principles and aligning those teams to our more efficient geographic territory design. This will lead to an improved customer experience and enable us to further optimize our cost structure in early 2Q. We now look forward to driving sales excellence as we leverage our recent organizational changes and our new leadership structure that balances long-term MSC tenure with new thinking from the outside. I am particularly excited now that Jaida Nadi is onboarded in her role as SVP of sales. She will continue to strengthen our sales execution in the field as Kim Shaklet moves fully into her new role as SVP customer experience. By decentralizing and streamlining decision-making in this new structure, we will amplify the impacts of these changes and strengthen our position to achieve our long-term vision. To enhance customer experience and accelerate our ability to capture a greater share of wallet. To truly outperform, we must leverage our supplier community as a strong partner in these efforts as well. Over a year ago, we created a supplier council that we meet with regularly to share ideas and opportunities. These discussions are now evolving to the development of joint strategies to accelerate MSC's growth. For example, turning to slide four, I'm pleased to announce that in late February, we will be hosting an inaugural growth forum where approximately 1,400 MSC associates in customer-facing roles will come together with our supplier community. The event was designed in collaboration with our supplier council for maximum effectiveness and impact. Using data to pair sellers and suppliers in pursuit of a pipeline of customer opportunities, this highly curated three-day industry-leading event will be unlike our previous or other supplier conferences in its level of focus and partnership with our suppliers. We expect this event to be a key growth accelerator for MSC, demonstrating MSC's clear commitment to take sales execution to the next level. To enable our vision, it's clear that we must drive speed and consistency in our daily decision-making through our technology platform. Our CIO, John Reichelt, and his organization have continued making progress on the evaluation of our systems roadmap and will provide recommendations upon completion. We must also strengthen and improve financial visibility through operating systems to enhance our daily decision-making. Having the right leader will be critical in achieving this, which is why we are taking a selective approach to our search for a permanent CFO that remains a top priority. And finally, we're committed to elevating our strong differentiated culture. Our culture is a competitive advantage. Rooted in a highly talented and technical team that consistently puts the customer first. Building on the proud family legacy that has shaped who we are, we are raising expectations, driving more rigorous performance management, and embedding a mindset of continuous improvement. To deliver even stronger results. By remaining steadfast in these key areas of focus, we will capture the tremendous potential I see ahead and position MSC to achieve higher levels of profitable growth. In short, I am more energized than ever, and I want to thank our entire team of associates for their support and endless dedication to providing the best service to our customers. Before we move to the quarter's results, I want to highlight one further element of our strong culture and our commitment to improving each and every day and share with you some highlights from our most recent ESG report released last month. First, we reaffirmed our commitment to the planet and established a new long-term goal of reducing our scope one and two greenhouse gas emissions by 15% by 2030. We supported the recycling of over 8,000 pounds of carbide. We were recognized as being a best company to work for by several organizations across several dimensions. And lastly, we continue our strong partnership with nonprofit organizations, including American Corporate, with whom we work to provide mentorship to military members as they transition into a civilian workforce. Now digging deeper into our 1Q results on slide six, I am pleased with our performance in the fiscal first quarter. Average daily sales came in at the midpoint of our outlook and increased 4% year over year. This was primarily driven by benefits from price of 4.2% that was partially offset by volumes that contracted by 30 basis points. The decline in volumes was largely driven by the federal government shutdown, which negatively impacted sales by approximately 100 basis points in the quarter. This headwind was felt most in the public sector, as seen by a year-over-year decline of 5% in the quarter. Following the resolution of the shutdown, however, we have seen public sector sales resume growth in December. We were pleased to see national accounts return to growth in the quarter, but once again, underpinning our sales performance were daily sales trends in core and other customers that have now outperformed total company sales for two consecutive quarters. Core customers grew approximately 6% in Q1, buoyed by our initiatives around e-commerce marketing and seller optimization. Looking at the details, we experienced another quarter of year-over-year improvement in the number of customer location touches logged by field sales in fiscal 1Q. This is having a direct impact on our sales per rep per day trend, as seen by the high single-digit improvement in this quarter. The positive trend in these two metrics, as well as in total company sales, was achieved with fewer sellers, reflecting the efficiency of our new territory design. We will now take these learnings and apply them to geographies outside the US. Second, benefits from our web upgrades and enhanced marketing efforts continue to be realized in the quarter. Average daily sales on the web increased mid-single digits year over year. This was supported by several KPIs that continued improving year over year during the quarter, including the conversion rates of our top channels and direct traffic to the website. With respect to marketing, our efforts continued producing benefits in the quarter, including high single-digit improvement in the daily sales of our uncovered core customers. Given this building momentum, accelerated investment in marketing will likely continue. And third, we continue expanding our solutions footprint with our installed vending base, which was up roughly 9% year over year, and our implant programs, which were up 13% at quarter end. While implant signings remain strong, our year-over-year growth in the net number of programs at quarter end moderated in comparison to recent trending. This is not due to a slowing in the opportunity funnel, but rather an increased emphasis on sharpening financial acumen in the field. As a result, we saw a number of existing in programs convert back to more cost-effective service options better scaled to customer needs, such as traditional BMI. By working together with those customers, we were able to retain revenues at a lower cost to serve. Moving to profitability for the quarter. Gross margin of 40.7% came in at the midpoint of our outlook. As a reminder, in fiscal 4Q, gross margin was pressured by negative price cost due to greater than anticipated levels of inflation during the last two months of that quarter. This was addressed in fiscal 1Q by taking action on price in late September and early October. Given the timing of these actions, price cost and gross margin performed similar to September. That said, I'm pleased with our performance with price cost and gross margin, both returning to expected levels as we exited the first quarter. Reported operating margin came in at 7.9%, and adjusted operating margin of 8.4% came in at the upper range of our outlook, resulting in an incremental operating margin of 18% on an adjusted basis. Looking ahead, under a mid-single-digit growth scenario, we continue to expect adjusted incremental operating margins to be approximately 20% for the full fiscal year. Underpinning this confidence are several factors. First, we expect continued traction on our growth initiatives. And, hence, growth above the IP index. Second, we anticipate ongoing benefits from price, which should yield gross margin stability. And third, our productivity initiatives, including our ongoing network optimization, should continue yielding benefits, allowing us to support higher levels of revenues in the back half of the year with moderating operating expense growth. Turning to the environment, I would describe demand across the majority of our primary markets as stable. Aerospace remained strong, while some areas of softness remain in automotive and heavy truck. These mixed levels of demand are reflected in the MBI, as seen by the recent readings, which remain in contractionary territory. Looking at Slide seven, however, I am encouraged to see how MSC is performing in this environment. Average daily sales outpaced the industrial production index for the second consecutive quarter as a result of our improved core customer performance. Thus far in the fiscal second quarter, average daily sales for fiscal December, which ended for MSC on January 3, improved approximately 2.5% year over year. On a sequential basis, however, the month-over-month decline of roughly 20% was worse than what we typically experience in the month. Feedback we were receiving from customers around their planned shutdown activity suggested the month would be challenging. However, in addition, Christmas and New Year's occurred on a Thursday this year, which historically is typically the most challenging day for the holidays to fall on. To put some color on this, our sales from Christmas through the end of the fiscal month were down approximately 20% year over year, and weighed heavily on the overall growth rate in fiscal December. Having said that, we were pleased to see the core customer maintained its trend of outperforming total company sales during the month. Looking ahead with only three days into fiscal January, visibility into demand levels entering the new calendar year and the remainder of the quarter is limited. Greg will provide more detail on what this implies for our 2Q outlook. But despite this uncertainty, under a mid-single-digit growth scenario, we continue to expect adjusted incremental operating margins to be approximately 20% for the full fiscal year, supported by the momentum from the execution of our initiatives that continues to build. And with that, I will now turn the call over to Greg to cover our financial results in greater detail and expectations for the fiscal second quarter. Gregory Clark: Thank you, Martina, and good morning, everyone. Please turn to slide eight, you'll find key metrics for the fiscal first quarter on both a reported and adjusted basis. Fiscal first quarter sales were approximately $966 million, came in at the midpoint of our daily sales outlook, and improved 4% year over year. Price contributed 420 basis points to growth and was partially offset by a 30 basis point decline in volumes that can be attributed to the 100 basis point headwind related to the federal government shutdown. Sequentially, I am pleased by our modest improvement in daily sales despite the headwind during the quarter that I just mentioned. This was largely driven by benefits from price and strength in both core and national account customers. By customer type, we were pleased by the continued strength in core customer daily sales with year-over-year improvement of 6% in the quarter. National accounts improved 3%, while public sector daily sales declined 5% as a result of the federal government shutdown. On a sequential basis, average daily sales improved approximately 2% for both national accounts and core customers, while public sector daily sales declined by approximately 14%. In solutions, as Martina mentioned, we are encouraged by the continued expansion of our footprint. From a sales perspective, daily sales and vending for the first quarter were up 9% year over year and represented 19% of total company sales. Daily sales to customers with an implant program grew by 13% and represented approximately 20% of total company net sales. Moving to profitability for the quarter, gross margins of 40.7% performed as expected and was flat compared to the prior year period. This was primarily driven by benefits from mix due to lower public sector sales of 10 basis points that were offset by a price cost headwind. As a reminder, we took actions on the price after the first month in 1Q and exited the quarter in a better price cost position. Operating expenses in the first quarter were approximately $312 million on both a reported and adjusted basis and slightly favorable compared to the midpoint of our expectations. On an adjusted basis, operating expenses were up approximately $8 million year over year, primarily driven by the combination of higher personnel-related costs, and depreciation and amortization being partially offset by productivity. Adjusted operating expenses as a percentage of sales improved 40 basis points compared to the prior year due to the increase in sales. Sequentially, adjusted operating expenses increased approximately $7 million and was primarily due to the same drivers of the year-over-year increase. Reported operating margin for the quarter was 7.9% compared to 7.8% in the prior year. On an adjusted basis, operating margin of 8.4% was slightly above the midpoint of our outlook and compared favorably to 8% in the prior year. We delivered GAAP EPS of 93¢ compared to 83¢ in the prior year. On an adjusted basis, we delivered EPS of 99¢ compared to 86¢ in the prior year, an improvement of 15%. Turning to slide nine. Review our balance sheet and free cash flow performance. We continue to maintain a healthy balance sheet with net debt of approximately $491 million, representing roughly 1.2 times EBITDA. Capital expenditures are roughly $22 million, up approximately $2 million year over year as expected. We generated approximately $7.4 million of free cash flow in the quarter, representing approximately 14% of net income. It's worth noting that inventory investment combined with a step-up in receivables and prepaid expenses were the primary factors of the free cash flow decline year over year. Despite the slow start, we remain on track to achieve our expectation of 90% free cash flow conversion for the fiscal year. Lastly, in 2Q, we proactively amended our AR securitization facility and increased its capacity by $50 million to $350 million. Compared to the use of alternative sources, such as our revolver, this approach is expected to lower our cost of funds by over $1 million annually. Looking at our capital allocation strategy on slide 10, our highest priorities remain organic investment to fuel growth and advancing operational efficiencies across the business. Returning capital to shareholders also remains a priority. And in fiscal 1Q, we returned approximately $62 million to shareholders in the form of dividends and share repurchases. Moving to our expectations for the fiscal quarter on slide 11. We anticipate average daily sales growth of three and a half to five and a percent compared to the prior year. Sequentially, we expect daily sales to decline approximately four to 6% compared to the fiscal first quarter. While the midpoint of our outlook compares favorably to our sequential performance moving from 1Q to 2Q last year, it is below our historical performance in 2Q and driven by the following factors that I will now highlight. First, through the timing of our supplier conference that takes place during the last week of the fiscal quarter, we anticipate some revenues to shift from 2Q to 3Q and create a headwind of approximately 50 basis points. Second, and as seen in the operating stats, December sales this fiscal year were weaker than normal. This was anticipated due to the holidays, which fell on a Thursday this year, combined with feedback from customers on their planned shutdown activity for the month. That said, there are some sequential factors that we expect to work in our favor in February and partially offset these headwinds. Starting with the public sector, assuming headwinds related to the government shutdown in January did not occur in February, it will benefit daily sales by approximately 50 basis points sequentially. As a reminder, February is typically the seasonal low for public sector sales, which was considered in the amount of the expected benefit. And second, we expect sequential benefits from price and momentum from our growth initiatives to continue in 2Q. Lastly, on sales. The midpoint of our range implies a year-over-year growth a little more than 5% in January and February. Under this revenue range, we expect adjusted operating margin for the quarter to be 7.3% to 7.9% or up approximately 50 basis points at the midpoint compared to the prior year driven by the following assumptions. Gross margins of 40.8% plus or minus 20 basis points that includes negative mix from the public sector sequentially of approximately 10 basis points. And operating expenses, the headcount actions in early 2Q that were enabled by our sales authorization work to offset the sequential headwind to the two extra months of the annual merit increase in 2Q versus 1Q. Lastly, and included in the operating expenses, are costs related to our supplier conference that won't be self-funded through supplier registration fees such as travel, which will negatively impact adjusted operating margin by approximately 10 basis points. It is worth noting that this includes incremental in January and February that are higher than the average implied for the quarter. Following a seasonally soft December. We expect the January and February strength to sustain for the balance of the fiscal year as the benefits from productivity and pricing are expected to support higher levels of revenues with moderating operating expense growth. All of this underpins our confidence that under a mid-single-digit growth scenario, we expect adjusted incremental operating margins to be approximately 20% for the full fiscal year. Turning to the next slide for an updated view of our expectations on certain line items for the full year. Depreciation and amortization of $95 to $100 million or an increase of $5 to $10 million year over year. Interest other expense of roughly $35 million. Capital expenditures of $100 to $110 million, a tax rate between 24.5-25.5%, and free cash flow conversion of approximately 90%. To assist in modeling the cadence of sales for the remainder of the fiscal year, the bottom of the slide provides historical quarter-over-quarter average and key considerations for the second quarter and the back half of the fiscal year. And lastly, we have one extra selling day year over year in the fourth quarter as shown at the bottom of the chart. And with that, we will open the line for Q and A. Operator: Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question for today is from Ryan Merkel with William Blair. Hey, everyone. Good morning, and thanks for the questions. Ryan Merkel: My first question is just on price, and I guess it's a two-parter. The 4% price, I think that was a little bit more than you expected. Could you just unpack what drove that? And then how should we think about price in fiscal 2Q? Do you think you'll see more price? Ryan Mills: Hey, Ryan. This is Ryan. I'll talk about the 1Q price and then I'll pass it over to Martina to talk about our expectations for February. Now price came in kind of how we're expecting it. If you recall, you know, we took a price action in June. Late June, and we had some carryover from that. And then we took another price action in late September, early October, to address the price cost towards the end of fiscal 4Q. So you net it all together. The price came in as expected. And then, Martina, if you want to give some color on that. Martina McIsaac: Hi, Ryan. Thank you. So we're still seeing inflation, not the intense pace that we saw in July and August, but we're still taking pockets of inflation across the business. The strongest is seen on the metalworking side, and I think that's not a surprise for anybody who's kept track of what's happening with tungsten. So just to ground everybody, tungsten is the major input into carbide cutting tools. And its supply is controlled by China, and we've seen price increases now that exceed 100% on tungsten. So we are taking mid to high single-digit price increases from our metalworking suppliers, and we will pass that on starting in mid-January. To give you a little bit of a flavor on our exposure with tungsten, it impacts about 15% of our sales. So I'll walk you through that. Metalworking is about 50% of our total sales. Within metalworking, cutting tools is a big category, not the only category. Right? We have abrasives and machinery and accessories and fluids. There are other large categories as well, but cutting tools is a major category within metalworking. And then carbide cutting tools is a it's not an overwhelming majority, but it's about half of our cutting tool business. We also have, you know, high-speed steel and cobalt and other things in there too. So our exposure is about 15%. We'll take the first price increase in January. I don't think we're done. So I think there will be more inflation passed to us on that, and we're in conversation with our suppliers, so we may see another action needed later on in 2026. Ryan Mills: Then Ryan, if you take the carryover from the late September, early October pricing actions, and then what Martina alluded to in the mid-January, late January price increases. It wouldn't be a surprise if price 2Q was a little north of 5% year over year and around 11.4%, quarter over quarter just to give you a little bit of an idea. Ryan Merkel: Got it. Okay. Super helpful. Thanks for that. And then my second question is on the topic of IEPA, and we're gonna get a ruling Friday it seems. This may be hard to answer, but can you share any thoughts on the impact if IE tariffs are ruled invalid? Ryan Mills: Yeah. So we'll get the benefit from lower inventories working through the P&L. And then, of course, you know, if the market adjusts price, we would too. So it'd kind of be opposite of how price cost flows through our average inventory accounting method. So I'd say we'd probably take a hit initially, and then we'd get a benefit as we work through the inventory and start to receive that lower-cost inventory. So that's the way I think about it, Ryan. Ryan Merkel: Alright. Thank you. Pass it on. Operator: Your next question is from Ken Newman with KeyBanc. Ken Newman: Good morning. Ryan Mills: Morning. Ken Newman: So maybe for my first question here, Martina, I just wanted to run through that comment around I mean, you guys have certainly kind of hammered this idea of, call it, 20% incremental margins in a mid-single-digit environment. You know, when I run through the historical seasonality against the midpoint of that 2Q guide, it does imply the back half is growing something a little closer to low to mid-single digits. You know, I just want to give you the chance to maybe clarify the intent behind that mid-single-digit comment and you know, the opportunity to help us understand, you know, maybe the opportunity for better operating leverage in the back half versus typical seasonality? Ryan Mills: Yeah. Hey, Ken. This is Ryan. I'll give you a little bit of color and then pass it over to Martina. You know, you're right. If you run with that seasonality, you know, it would imply, you know, low to mid-single digits. But if you look at the annual outlook slide, you know, in the commentary due to price, and continued momentum in our initiatives, we wouldn't be surprised if we outperformed historical seasonal trends quarter over quarter in the back half. And then, you know, when we think about the productivity front, that will continue to grow, and we need incrementals to be a little bit stronger in the back half. And just to give you a little bit of color on the confidence there, you know, if you look at the midpoint of our outlook for February, incremental margin around 18%, you know, we talked about some increase in costs related to the supplier conference. Around travel, and other costs. You know, we view that as an opportunity to partner with our suppliers. We didn't feel it was the right thing to do to make them pay for that. If you back that out, it's about a million bucks. You know, incrementals look closer to twenty, on what was a challenging December in the quarter. So that gives us confidence in incrementals as we move through the rest of the fiscal year. And then, Martina, didn't know if there was anything you wanted to add. Martina McIsaac: Yeah, I mean, I think we're confident in our growth in the momentum in our growth. So we expect to be decoupling from our trend. Everything that we're doing is around sales execution and share capture. I think we have the right structure in place now, and now we turn to accelerated in the field. And what we're seeing is encouraging. So we're not declaring victory, but we do expect that higher pace of growth, particularly in our core customer. And then as I said, we're on track with a productivity program that we started a couple of years ago in terms of our network optimization. And optimizing the way we spend all of our big drivers of costs, right, where we spend freight dollars, how we optimize within our four walls. And so we're seeing the trajectory there, and it makes us pretty confident. Ryan Mills: And Cindy, the other thing I'd add too is, you know, the core customer has been growing for two plus quarters. The MBI still signals contraction. And then if you look in the off stats, you know, this is the second quarter that manufacturing daily sales outpaced price. So, you know, that's giving us encouragement too that, you know, the initiatives in place are working. Ken Newman: Got it. That's really helpful color. Maybe just for my follow-up here, you know, I'm curious if there's a way to quantify how you think about the net margin impact from the public sector sales implied in the second quarter. And I know that's you mentioned it's resuming back to growth after the shutdown headwinds last quarter. It's still against a pretty tough comp. I think that's a lower mix portion of the business, and how do you think about that maybe normalizing out mix-wise in the back half of this year? Ryan Mills: Yeah. So in the public sector, what we said is, you know, due to the headwinds in the first quarter from the shutdown, you know, quarter over quarter. Mix headwind will be about roughly 50 basis points. You know, we don't expect it to see a strong ramp in the public sector. We expect it to go back more to business as usual. And, you know, I would assume that to be the case in the back half of the fiscal year. That's how I would think about it, Ken. Then keep in mind that our outlook assumes, for 2Q assumes that there is not another federal government shutdown. I just wanted to throw that out there as well. Ken Newman: Very helpful. Thanks. Operator: Your next question is from Tommy Moll with Stephens Inc. Tommy Moll: Good morning and thanks for taking my questions. Ryan Mills: Good morning. Tommy Moll: Martina, in your prepared comments, you talked about some cost measures taken in early 2Q, and it was in the same breath as a mention on turning your attention to the service model. So I guess it's a two-part question here on the cost measures. What can you share there in terms of details, perhaps sizing or context? And was that meant to be linked to your comments around service, or were they more aimed at the selling organization? Thank you. Martina McIsaac: Yeah. Thanks for the question. Yeah. So our whole sales optimization program has sort of been pointed at our strategic goals of accelerating organic growth and optimizing our cost to serve. And that's what I've been talking about for the past year, and we focus primarily through those efforts on our core selling role. So we optimize geographies. We balance portfolios. And like I said, we believe that we're starting to see the impact of that. Right? Growth comes from more coverage and a better customer experience. And cost to serve comes from efficient resource deployment. So that work we had completed. But as you can imagine, there's a lot of other customer-facing roles in the business. So if you think about our core, you're talking about anyone from a small metalworking shop with 20 people up to a complex multisite business. And we have a lot of teams that support that business. So both in business acquisition and then in terms of service once we have customers enrolled into programs. And so we had not touched that side of the business. And so what we have done over the past quarter and a half is apply those principles to our service org to basically marry it up with what we've done in sales. And, again, the goal is to match the right amount of resource to the right potential. So we completed that work right at the end of the first quarter, and then at the beginning of February, we did have a headcount benefit as a result of that optimization. So I won't share a lot more detail for competitive reasons, but we think we have the right structure in place now. Ryan Mills: And then, Tommy, just to size it, you know, the way I would think about it is the headcount actions Martina alluded to in early on in fiscal 2Q. Further productivity eating away a large chunk of that $4 million, quarter over quarter headwind from two extra months in there. Tommy Moll: Okay. That's helpful. Thank you both. And then just sticking on the theme of profitability here, you gave helpful guidance on fiscal second quarter in terms of gross margin and OpEx? Any comments you want to offer now on seasonality for either gross margin percentage or OpEx? I mean, I guess the starting assumption might be gross margin percentage flat, maybe even a little bit improved as price cost improves? Post Q2 and on OpEx? I mean, unless you would point anything out, I think the starting assumption there would just be model normal variable expense associated with the sales commission as volume fluctuates, but any additional context would be helpful. Thank you. Ryan Mills: Yes, Tommy, good question. The way I think about it, starting with 2Q, we have I'll start with gross margin. Starting with 2Q, I think the outlook 40.8 plus or minus 20 basis points. You know, with one month under our belt and what we see, looking forward in the next two months, it doesn't feel like a tough hurdle to be at the upper end of that range. As you go through the remainder of the year, you know, that's gonna be dependent on core customer acceleration. And further, inflation working through the P&L if we see more supplier price increases. So as a ballpark, you know, I'd probably stay at that 40.8 plus or minus 20 basis points. With some potential upside in the back half. As we think about OpEx, you know, to your point, I think it's a good idea to take the variable OpEx associated with the sales growth. But then, you know, the other thing to keep in mind too is we expect productivity to improve throughout the year. So what I'm alluding to is, you know, we have a 20% incremental margin target for the year. You know, 18% in 1Q. At the midpoint of 2Q, we're at 18%. So that implies some stronger incremental margins in the back half and what we have line of sight to, we feel pretty comfortable in that. Tommy Moll: Thank you both. I'll turn it back. Operator: Your next question for today is from Nigel Coe with Wolfe Research. Nigel Coe: Thanks. Good morning. And Martina, congratulations on the new role. Martina McIsaac: Thank you. Nigel Coe: I want to go back to December. Just you know, understand, you know, the holiday timing and the impact on the customer shutdowns. But any more color on why so extreme just given you know, it was a one-day shift from last year from Wednesday to Thursday. So just wondering if there's any more kind of color in terms of why customers decided to, you know, shut down over that period? And then have you seen sort of normal operations resuming in January so far? Ryan Mills: Yeah. Nigel, good question. You know, the dynamics with December, first off, it wasn't a surprise. You know, with the holidays falling on Thursday. And keep in mind, our fiscal December runs through January 3, so we also have the impact from New Year's. The reason Thursday being the worst is, you know, customers take off Friday too for a long weekend. Just to give you an idea, the last time the holidays fell on a Thursday was back in 2014. You know, December was down 16% month over month. We're down 20% roughly, month over month. And then, you know, going back to the prepared remarks, you know, the December on, through the rest of the fiscal month, we were down 20%. So, you know, we really got hit hard in the back half of the month. Looking out to January, you know, visibility is still limited. I mean, we have two days under our belt. But, you know, going back to what Martina said on our growth initiatives, you know, the fact that CORE continued to grow in that challenging December and was our top grower, we expect that trend to continue. So regardless of macro conditions, you know, we feel like there's an opportunity to take share. Particularly within that core customer. But, you know, I didn't know if there's anything. Martina McIsaac: Yeah. I think, Nigel, you know, the important thing that we always call out is that January 2 day or the, you know, the last Friday actually falls into our corridor. It will fall into everyone else's January because of our fiscal calendar. And that represented a headwind alone of about 100 basis points on growth. And coming into Christmas, we were actually seeing trends that made us encouraged and positive. So core is still outperforming. We believe we're still taking share. So it was a number, obviously, for December. But as Ryan said, expected because of where the holidays fell. Nigel Coe: No. That's great color, and January 3 definitely hurts you a bit more. Just a quick follow on gross margins. You provided some really good color there. Obviously, you've got some pretty aggressive price increases coming through in January. I'm just wondering, have you included the benefits from those price increases in your 2Q guide? I know it's in your stub portion of that price increase, but would that be in your 2Q guide? Do you anticipate maintaining gross margins on both the price and cost inflation? Ryan Mills: Yeah. Yeah. So I'll give a little color on February, and then maybe I'll pass it over to Greg. To talk about, you know, price cross and gross margin in January. Contemplated in our outlook is, you know, the price increase that we have for mid-January. You know, we're not gonna speculate on future pricing from our suppliers for the remainder of the quarter or the year. But our goal is to maintain price cost neutrality. And like I said earlier, you know, see some upside to the range for February. You know, at the upper half of the range and 40.8 plus or minus 20 basis points for their back half of the year. Sounds like a good ballpark, with some potential upside. And then, Greg, I didn't know if you wanted to touch on, you know, how gross margin trended through January. Gregory Clark: Yep. Thanks, Ryan. Taking a look at just looking at gross margin, I saw quarter over quarter. Sequentially, with positive price cost and public sector driven mix were the biggest drivers of the 30 basis point improvement that we saw during the quarter. These benefits were slightly offset by some that didn't go our way during the quarter. Just looking at price cost in general, at the beginning of the quarter, saw price cost was negative and similar to 4Q levels. However, following our price actions, in late September, early October, did start to see price costs improve and exited the quarter in a much better position. Which led to the 40.8% plus or minus 20 bps guide for Q2. Nigel Coe: Great. Thank you. Operator: Your next question for today is from Patrick Baumann with JPMorgan. Operator: Patrick, your line is live. Patrick, can you hear us? Patrick Baumann: Sorry. I was muted. Thank you for letting me know. Good morning. Martina McIsaac: Good morning. Patrick Baumann: I just want to dive back into Nigel's question on December cadence. So you said that, I think, from Christmas through the end of your fiscal month. It was down 20. And I'm guessing, like, you know, sales trends at that time of year are the greatest anyway on a daily basis. So curious up until Christmas, what was the ADS growth versus that 2.5% you did for the month? Ryan Mills: Yeah. Just if you do the math, Pat, it's about, you know, four to 5% ish. Roughly. Patrick Baumann: Okay. And then when you're thinking about the first quarter and the January, February number being 3% above that at the midpoint of the second quarter number. Can you talk about the thinking behind that I guess, you mentioned price but just curious how that 3% compares to history. And then limited visibility that you have, why you think that's kind of a reasonable place to be? Ryan Mills: Yeah. Good, Pat. Good question, Pat. You know, to your point, January and February at the midpoint up roughly 3%. That's combined January and February ADS up 3% versus 1Q. You know, historically, that's roughly 2%. You know, digging a little bit deeper, you know, for the quarter, we talked about a 50 basis point benefit to ADS from the federal government shutdown, headwinds of 1Q. We already picked up a little bit of that in December. Public sector was up mid to high single digits sequentially, December versus November. So what I'm getting at there is maybe for January, February, that looks more like 35, 40 basis points. And then we talked about a 50 basis point headwind from the timing of our supplier conference. That's in the last week of February. We said 50 basis points, but if you isolate it for that two months, it looks more like 75 basis points. So, you know, we're in the whole 30 basis points roughly on when you add those two together, what's given us confidence is the price action in mid-January. That that will go into effect and also the continued acceleration we see in core customers and in national accounts as well. As we mentioned, you know, December despite a challenging December, core was still up mid-single digits. We feel confident that that could continue. Patrick Baumann: Got it. And then maybe one for Martina. I guess, the supplier event that you're hosting this year, you know, what are you hoping to accomplish from it? You know, you're bringing 1,400 associates to it and a bunch of suppliers. You know, the volume growth that the company is delivering is still, you know, versus industrial production, not exciting. Can you talk about, you know, how you get that to improve and maybe if this event is meant to help, you know, start to drive that? Martina McIsaac: Yeah. Thanks for the question. So since I've been at MSC, one of the things that I really focus on is rebuilding trust with our suppliers and strengthening those relationships. And we've done a lot of things in the background that we haven't talked about with you around making ourselves easier to do business with and increasing our supplier transparency. But one of the things that we did that was really important was to put this supplier council together because we talked straight about how to improve MSC's growth and how supplier collaboration with MSC can help us continue to outperform. So they actually designed what an ideal session would look like. And this is not a trade show. This is a working session, very detailed joint business planning that was designed by suppliers to be different from what they do in the industry today. And we do, exactly as you say, expect to come out of that with an engagement plan in the field that will be followed up and executed on and will be a growth accelerator. So it's a huge undertaking. It's a lot of upfront data-driven prep. It is a lot of people, as you said, but I think it's one way to make a big bang post all of these structural changes to aggressively go after growth. In partnership with suppliers. So we're really excited about it, and we think it's worth the effort of taking all those folks out of the field for a few days. But as Ryan said, it will shift some revenue then into the third quarter. Patrick Baumann: Okay. Thanks for the color. Operator: Your next question is from Chris Dankert with Loop Capital. Chris Dankert: Hi, good morning. Thanks for taking the questions. I guess just to poke at the 2Q guide a little bit more here. So if we're expecting price to be up 5% or a little bit north of that in the second quarter? Obviously, there's moving parts with the supplier conference and whatnot, but volumes here are implied to still be flat to down a bit. Can you kind of put that in context? Is that just being cautious given the macro backdrop? Are we expecting to get positive in the back half of the year? Maybe like how we get that core volume back up? And how does that compare with what is the demand on the ground here? Ryan Mills: Yeah. Chris, so, you know, if you look at it at a year over year, you know, keep in mind the challenging December, you know, January and February, you know, applies roughly, up five and a half percent year over year. We said, you know, we'd be surprised if price was a little north of 50 basis points. I mean, a little north of 5% year over year. So, you know, maybe a little bit of volume improvement. You know, going to the supplier conference, you know, I would say we were probably a little conservative on the potential impact. You know, that's three days in the last week. You know, 1,400 customer-facing individuals at MSC being out. You know, it could be less. It could be more. And given the fact that we don't have a lot of visibility here into the new calendar year, I'd say we're a little bit cautious with our outlook and what we're implying with January and February. Chris Dankert: That's helpful context. Thank you for that. And then maybe just as we think about growth drivers, I've noticed, you know, the implant sales growth is great, but the signings have tapered a little bit here. Are we more focused on the core and kind of letting the implant kind of bubble up more organically? Is that has that been deemphasized? Is it just timing, and I'm overlooking into this? Just any context on implant growth there? Martina McIsaac: Yeah. I'm so glad you asked because no. We still have focus on our largest customers. You know, we have an incredible team engagement team customer engagement concept that we call MRO Go. That builds programs for customers, and that includes placing implants if that's the appropriate part of the solution. And that's aimed at the top end of our customer segment. So our largest, most complex customers, national accounts, and that is still ongoing. I think what you saw in the conversion in the first quarter, you saw the net number sort of continue to grow, but grow a little bit more slowly. And that's because at the same time that we are fully engaged in opening new programs for suppliers, we're also very engaged in challenging our own cost structure, looking at the drivers of profitability. And building that financial acumen in the field. So not every customer needs an implant. We can provide outstanding service through a number of our service teams in a number of different models. And if a customer's needs are simpler, then the better thing to do is to allow that service to be provided in a simpler way. So we actually stepped down off a couple of existing implant programs in cooperation with the customer as part of our cost savings program that we put in place for them, and offered a different solution. So we'll continue to examine those going forward, but absolutely no slowdown in the pipeline. Absolutely no shift in emphasis. The teams that are working with those largest customers are still intact and in place. Ryan Mills: So, Chris, I would also add that, you know, the sequential growth you saw in the number of implant programs that what Martina's getting at is the signings were greater than that increase. Chris Dankert: Got it. That's really helpful color. Thank you both so much. Operator: Your final question for today is from David Manthey with Baird. David Manthey: Thank you. Good morning, everyone. My question too is on the first quarter to second quarter sequentials. If I'm calculating this right, if go to say, a 6% ADS in the second quarter, theoretically, that would still be, sequential of, like, minus four, and you're saying the minus two is the historical average. And if you go to that, you know, five and a half or 6% I guess you'd be sort of, factoring out the holidays and sales meeting and all that stuff. So and then on top of that, you get better government sales. You get this pricing acceleration. I'm just what I'm getting at is unless market demand is deteriorating, why wouldn't you be seeing more normal sequential trends in the second quarter versus what was already a seemingly weak first quarter? And then why wouldn't those be more normal or even higher as we move through the year if the economy gets better? Ryan Mills: Yeah. Dave, we tried messaging this at the fireside chats at recent conferences and following up with investors in the sell side. Look. December wasn't a surprise. You know, Thursday is the worst day for the holidays to fall on. And, you know, if you look at the, if you go back to the slides last quarter, you know, in the annual side when we talk about assumptions for the quarters in the back half, you know, what we said is the past two years the average is down four and a half percent. You know, we're at 5% at the midpoint. Like we said, visibility is a little bit limited. You know, we go into your point about the public sector. Yeah. We'll get a little bit of pickup there, but keep in mind that 2Q is a seasonal low for the public sector. The expectation is it's just going to go back to business as normal. So you're not gonna recoup that 100 basis points in 2Q. So, you know, as we stand here today, you saw in the macro indicators, the PMI, contracted new orders in the MBI contracted in December as well. You know, visibility is limited. We feel good about where we're doing from a growth initiative standpoint. But not gonna get ahead of our skis and feel like we're doing a good job on just giving what we currently view the market to be and our expectations. And then also keep in mind that the supplier conference too, that's something that we alluded to as well. With sales potentially getting pushed back up from February to March. David Manthey: Okay. Yeah. I know there's a lot of moving parts. We'll have to work through that. And but additionally, if you're looking at incrementals, sort of near term and even through the remainder of the year, here too, if essentially you're talking about mid-single-digit price increases being essentially all of the growth in the near term and maybe a little bit less than that going forward. But a big chunk of the growth with price predominantly driving your revenue growth with super high read-through on that in addition to some of these cost reduction efforts? You know, again, I'm not trying to push you on these numbers and get you outside your comfort zone, but why wouldn't contribution margins be higher than 20% if it's, you know, price plus cost reduction efforts? It would seem like you'd see abnormally high incrementals in that type of environment. What's the offset there that I'm missing? Ryan Mills: So if you look at what we're applying for the quarter, 18% at the midpoint. You know, given the soft December, is a five-week month, there's a lot of fixed costs associated with that. You know, you could imagine operating leverage was pretty challenged in December. You know, that would imply January and February look a lot better from an incremental margin standpoint than what's representative of the average for the quarter. And keep in mind, we have about a million dollars in incremental expense related to travel for the supplier conference. And then, you know, you heard us say in the back half, we expect incremental margins to be better than the first half. And if we were to be in a high mid to high single a high single-digit growth environment, to your point, Dave, we'd expect those incremental margins to be a lot stronger. David Manthey: Got it. Okay. Great. Thanks a lot. Ryan Mills: Thank you. Operator: We have reached the end of the question and answer session, and I will now turn the call over to Ryan Mills for closing remarks. Ryan Mills: Thank you, everybody, for attending today's call. Our next earnings call for fiscal 2Q will be on April 1. Have a good day. Bye. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Resources Connection, Inc. Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. At this time, I would like to remind everyone that management will be commenting on results for the second quarter ended November 29, 2025. They will also refer to certain non-GAAP financial measures. An explanation and reconciliation of these measures to the most comparable GAAP financial measures are included in the press release issued today. Today's press release can be viewed in the Investor Relations section of RGP's website and filed today with the SEC. Also, during this call, management may make forward-looking statements regarding plans, initiatives, and strategies in the anticipated financial performance of the company. Such statements are predictions, and actual events or results may differ materially. Please see the risk factors section in RGP's report on Form 10-K for the year ended May 31, 2025, for a discussion of risk, uncertainties, and other factors that may cause the company's business, results of operations, and financial condition to differ materially from what is expressed or implied by forward-looking statements made during this call. I will now turn the call over to RGP's CEO, Roger Carlisle. Roger Carlisle: Thank you, and welcome everyone to Resources Connection Q2 earnings call. Before we get into the quarterly earnings discussion, I want to thank our leadership and employees for welcoming me as the company's newly appointed CEO and for supporting a smooth transition. I also want to recognize our teams for maintaining a strong focus on our clients and our business during this time. I mentioned both our clients and our business as focal points because we have employees who serve our clients' needs as well as employees who support the needs of our client service professionals and our business. Both employee groups are critical to our success. For those of you on today's call with whom I have not yet had an opportunity to speak, I look forward to doing so in the near future. I recognize that you have invested time understanding the company, its services, and markets, and we appreciate your interest and effort. Regarding our business, let me start by saying my enthusiasm for the company's future has grown since stepping into this role in November. The deeper I get into our business, the more impressed I am with the talent and capability here. But even more so with the commitment and enthusiasm I find when talking with our people. The quality of our people is reflected in the caliber of long-standing and newly activated clients who trust us to assist them with issues they view as important to their success. I also want to say that while the market of our services has been more challenging and uncertain of late for a variety of reasons, I believe there is a sufficiently large market of client needs for which RGP is positioned to serve that will allow us to grow our business and financial results. However, doing so requires that we focus on what gives us a competitive right to win. That is providing relevant skills and solutions to our clients to satisfy their needs, at a price that brings them better overall value than other providers in the marketplace. Our balance sheet and liquidity are strong, which is a testament to the resilience of our people and client relationships, as well as the flexibility of our business model. However, our quarterly earnings results also reflect the continued lack of positive momentum for our consolidated revenue and adjusted EBITDA. These results underscore the need to take decisive actions to better align our cost structure with our current revenue levels, refocus our on-demand offerings to address the evolving needs of our clients, and scale our consulting business to deliver high-value solutions to both existing and new clients. These three points will form the basis of our strategy going forward. We have already made progress this quarter reducing our cost structure to better align it with our current revenue levels, and we will continue this work in the third quarter. Improving our financial results in the on-demand segment requires that we better understand our clients' current needs and adjust our ability to provide consultants to fit those needs. Scaling our consulting business requires identifying and hiring experienced consulting professionals to grow our ability to deliver value-added solutions to our clients. In the evolving consulting marketplace, we are finding that these types of professionals understand and are excited about the competitive nature of RGP's service offering model and the value proposition it offers to clients. We believe this will make us a strong employer choice for such professionals going forward. We also believe that RGP's ability to provide in-demand finance, risk, operation performance, and technology solutions in three different delivery models—that is, on-demand, consulting, and outsourced services—at a price point that is competitive to other traditional professional service firms, gives us an opportunity to be uniquely successful in winning and serving clients' needs in the changing landscape for such services. Lastly, no professional services firm can succeed in the present and future market without understanding how artificial intelligence, automation, and other technologies are impacting their clients' businesses and how it impacts the professional services they seek and procure. This is no different for RGP. We are actively working to understand how our clients' needs are impacted by their own AI and automation strategies. Likewise, at RGP, we are continuing to implement additional AI and automation tools across our business processes to enhance the cost-effectiveness of our client service delivery and internal business support functions. The work we have discussed so far today and the achievement of the expected results will certainly require time and disciplined execution. But the path forward is clear, and we are confident these actions will strengthen our business and create long-term value for our clients and shareholders. With that, let me turn the call over to Bhadresh Patel. Bhadresh Patel: Thank you, Roger, and good afternoon, everyone. Before I begin, I want to welcome Roger as our new Chief Executive Officer. With Roger's leadership and fresh perspective, we are well-positioned to strengthen execution, accelerate our strategic priorities, and drive operational discipline across the organization, capitalizing on our inherent strengths. In the second quarter, we exceeded expectations in adjusted EBITDA, despite revenue coming in below consensus, reflecting disciplined cost management and execution. In North America, expanded go-to-market initiatives across our on-demand and consulting segment, along with stronger cross-practice collaboration, drove improved pipeline activity. Our Europe and Asia Pac segment delivered both year-over-year and sequential growth. While outsourced services revenue remained essentially flat versus the prior year, we achieved meaningful improvement in gross margin. Overall, we remain focused on value-based pricing, targeted investments, leadership, and service capabilities to drive momentum, and cost discipline. Jennifer Ryu will provide additional details on our performance and efficiency initiatives shortly. With that, let me turn to our performance by segment. While consulting segment revenue declined year-over-year, we delivered essentially flat sequential revenue with growth in select areas of CFO advisory and digital transformation. Bill rates continue to improve both sequentially and year-over-year with higher increases on new projects, reflecting the strong demand for our specialized services. We are also moving up the value chain with existing clients, for example, highlighted in Q2 by a large technology company selecting RGP as a global preferred consulting provider, expanding our role from on-demand talent into advisory services on mission-critical work. As part of our strategy to grow the consulting segment, we will complete the integration of ReferencePoint by the end of the fiscal year. Combining ReferencePoint's capability with our consulting platform and leadership will enhance collaboration, streamline go-to-market execution, and strengthen our focus on CFO advisory and digital transformation. This positions us to deepen relationships with existing on-demand clients while also expanding our reach to new clients. Finally, on consulting, I want to thank John Bowman as he begins a well-earned retirement. His vision and commitment to both clients and employee values leave a lasting impact on RGP. I am pleased to announce Scott Rotman, who joined RGP in August, will succeed John as president of consulting services, leading our CFO advisory and digital transformation offerings. Under Scott's leadership, we will strengthen our integrated consulting segment and deliver client value across strategy, transformation, and on-demand talent. Turning to on-demand, revenue declined year-over-year but continues to show signs of sequential stabilization, supported by higher average bill rates compared to both the same period last year and the prior quarter. We remain focused on execution and disciplined pipeline management with emphasis on skills for ERP, finance transformation, data, and supply chain. Across North America, several markets delivered sequential revenue growth, and in markets that are lagging, we are in the process of bringing in new leadership. Turning to international, our Europe and Asia Pac segment delivered both year-over-year and sequential revenue growth in the second quarter, supported by higher weekly revenue run rates and improved bill rates versus the prior year, while maintaining stable gross margins. Performance was led by Europe, Japan, India, and The Philippines, underscoring the strength of our client relationships and the effectiveness of our regional strategy. We are committed to deepening multinational client relationships along with expanding our local client base, differentiating through a combination of local delivery and scalable global delivery centers, and maintaining disciplined cost management. Lastly, in outsourced services, revenue remained steady year-over-year, and gross margins improved versus the prior year. We continue to add new clients to our platform while also exhibiting strong retention, and bottom-line performance benefited from both operating leverage and efficiency measures. To conclude, we remain focused on disciplined execution and delivering meaningful value to clients across all segments, while continuing to see our strategy take shape and position RGP for sustained growth, profitability, and value creation over time. With that, I will now turn the call over to Jennifer Ryu. Jennifer Ryu: Thank you, Bhadresh. Good afternoon, and Happy New Year, everyone. Consolidated revenue for the second quarter was around the midpoint of our outlook range, $117.7 million. While gross margin of 37.1% was below the outlook, run rate SG&A expense of $39.7 million was significantly more favorable, enabling us to deliver adjusted EBITDA of $4 million in the second quarter, or a 3.4% adjusted EBITDA margin. We incurred $11.9 million of one-time expenses in the quarter in connection with the CEO transition and a reduction in force, contributing to a GAAP net loss of $12.7 million. I will now provide some additional color on our revenue, gross margin, and run rate SG&A expense. Consolidated revenue declined 18.4% on a same-day constant currency basis from the prior year quarter. While on-demand and consulting segment revenues remain soft, we are encouraged by the steady year-over-year growth in the Europe and Asia Pac and outsourced services segment. We continue to focus on improving sales execution as well as aligning both our consulting solutions and on-demand talent pool to client demand to drive more pipeline growth and faster revenue conversion. Gross margin for the quarter was 37.1% compared to 38.5% in the prior year quarter. We drove a 97 basis point improvement in pay bill ratio; however, leverage on indirect cost of service was unfavorable, notably related to healthcare costs and paid time off, including higher holiday pay due to Thanksgiving coming in the second quarter of this year. Enterprise-wide average bill rate was $121 constant currency, versus $123 a year ago, driven mostly by revenue mix shift toward the Asia Pacific region. On an individual segment basis, we saw a 6.4% improvement in consulting and a 2.4% improvement in both on-demand and Europe and Asia Pac segments. As we continue to execute our pricing strategy and scale the consulting business to deliver higher value, larger scale engagement, we expect to gain more upside in bill rates. Now on to our SG&A and cost structure. While we have been on a continuous journey to reduce costs over the last few years, we are conducting an even deeper assessment across the entire organization to streamline organizational structure, simplify processes, and adopt automation and AI to ensure our cost structure is adequately sized to the current revenue level. The assessment is near completion, and we expect to implement the cost actions over a twelve-month period. In October, we executed a reduction in force, the first in a series of actions to come in 2026. The reduction impacted 5% of our management and administrative headcount and is expected to yield annual savings of $6 million to $8 million. Back to our improved SG&A performance for the second quarter, enterprise run rate SG&A expense for the quarter was $39.7 million, a 15% improvement from $46.5 million a year ago. Management compensation expense improved significantly by $3 million as a result of the reduction in force we executed this quarter and at the end of fiscal 2025. The remainder of the year-over-year improvement in SG&A is attributable to lower variable compensation and reduced SG&A spend, including travel, occupancy, and professional services. Next, I will provide some additional color on segment performance. All year-over-year percentage comparisons for revenue are adjusted for business days and currency impact, and as a reminder, segment adjusted EBITDA excludes certain shared corporate costs. Revenue for our On-Demand segment was $43 million, a decline of 18.4% versus the prior year quarter. Segment adjusted EBITDA was $4.1 million, or a margin of 9.5%, relative to $5.6 million, or a 10.5% margin in 2025. Revenue for our Consulting segment was $42.6 million, a decline of 28.8% from the prior year quarter. Segment adjusted EBITDA was $4.5 million, or a 10.4% margin, compared to $9.7 million, or a 16% margin in Q2 fiscal 2025. Turning to our Europe and Asia Pac segment, revenue was $20.1 million, or 0.6% growth from the prior year quarter. Segment adjusted EBITDA was $1.5 million in both years, representing a 7.4% margin in Q2 fiscal 2026 and a 7.5% margin in Q2 fiscal 2025. Finally, our outsourced services segment revenue was $9.4 million, up 0.8% compared to the prior year quarter. Segment adjusted EBITDA was $1.7 million, or an 18.4% margin, up from $1.5 million, or a 16.4% margin. Turning to liquidity, our balance sheet remains strong with $89.8 million of cash and cash equivalents and zero outstanding debt. Quarterly dividend distributions totaled $2.3 million. With cash on hand, combined with available borrowing capacity under our credit facility, we will continue to take a balanced approach to capital allocation between investing in the business to drive growth and returning cash to shareholders through dividends and opportunistic share buybacks under our repurchase program, which had $79 million remaining at the end of the quarter. I will now close with our third quarter outlook. Early third quarter non-holiday weekly revenue run rate has been largely consistent with the second quarter. As expected, due to the midweek timing of Christmas and New Year's Day, revenues from those holiday weeks were much softer. Taking into account the seasonality and based on our current revenue backlog and expectations on late-stage pipeline deals, our outlook calls for revenues of $105 to $110 million in the third quarter. On the gross margin front, with the same seasonality impacting utilization and holiday pay for agile consultants, as well as employer payroll tax reset at the start of a new calendar year, we expect a gross margin of 35% to 36% in the third quarter. Now on to SG&A. Reflecting realized benefits from our cost reduction effort, offset by higher employer payroll taxes, run rate SG&A expense in the third quarter is expected to be in the range of $40 to $42 million. Non-run rate and non-cash expenses will be in the range of $6 to $7 million, consisting of non-cash stock compensation and restructuring costs. In closing, reiterating what Roger stated earlier, our strategy and our path forward are clear. We will continue to focus on improving our sales execution, optimizing our talent and consulting solutions to serve the needs of our clients, driving an efficient cost structure to strengthen our business, and deliver more value for our clients and shareholders. This concludes our prepared remarks, and we will now open the call for Q&A. Operator: Thank you. To ask a question, please press 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press 1-1 again. One moment for questions. Our first question comes from Mark Marcon with Robert W. Baird. You may proceed. Mark Marcon: Hey. Good afternoon, everybody, and nice to talk to you, Roger, and welcome to the company. I am wondering, can you talk a little bit about or elaborate a little bit on the specific areas where you are seeing, you know, AI leading to some disintermediation with regards to finance and accounting roles? And I am specifically interested in terms of, you know, how widespread is it at this point? How do you expect it to continue with specific roles and how you are adjusting to that? Roger Carlisle: Sure. Good to meet you. And I will let Bhadresh add. He has been here longer dealing with it than me. But I think we are seeing, for example, in operational accounting roles, things that, you know, or you can imagine through AI or automation are easiest to replicate and replace. And so that would be some of the roles that we see as most impacted by our clients' efforts in that regard in the AI and automation world. In terms of how widespread that is, I mean, I think it is my sense. Again, I will ask Bhadresh to add as well. My sense would be that it is like most of the things we hear about AI, there is a lot of activity going on. Those things that are internal, like those processes, are where AI and automation are having the earliest impacts, but there is still a lot of spending. There is still a lot of activity that is not being realized or benefit not been realized by clients. So I think, you know, it remains to be seen how pervasive and how rapidly that occurs, but we are seeing that. And, Bhadresh, add if you think there is something. Bhadresh Patel: Thank you, Roger, and I think you are spot on. What we are seeing with clients and everyone is what I would say is the experimenting with AI. They are seeing what leverage they can get in their organization, especially in finance. As Roger said, the operational accounting roles, what I would call more repeatable roles, are getting replaced. However, what we are finding is that it is getting clients access to data quickly and analytics of the data quickly and informing their ability to get their business more efficient. But that is requiring more work, right, to go execute. So we are not seeing that big windfall that everyone was expecting that AI is going to replace so many jobs. It is accelerating the ability for our finance organization and client finance organizations to provide insights to their segments in terms of performance, predictability, you know, future trends and things like that so people can take action on it. Our clients are also seeing that. I think, you know, a lot of them have continued to invest. Some feel like they are overinvesting and not realizing the benefits. So we feel like, you know, obviously, time will tell where this will land, but, you know, in the early stages into, you know, the early days of digital transformation where everyone is overspending until they normalize it. The second part of this is, you know, as clients are understanding how to leverage AI for their organization, it is just not that AI is replacing jobs. It is also changing processes and how companies operate. So it is becoming a transformation initiative that should drive, you know, our ability to provide more services requiring higher talented people that can understand what the impact of AI is, what AI can do, and then, you know, how that business operates and changes the way they work not only within the function but the interactions with other functions. Roger Carlisle: Bhadresh, I just want to add one thing. I think the second part of your question was what are we doing about it, right? In comments that, you know, our talent teams and our on-demand teams are working with clients to understand, you know, what skills they need in that environment. As Bhadresh said, there are certain, you know, skills and projects that are cost because of that work, and there are certain skills that are needed because of the technology being a major driver of that. So as we mentioned in our script, you know, ERP skills, other kinds of technology skills. So we are looking to shift our skill base towards the things that clients most need in this environment. Bhadresh Patel: Yeah. And, Roger, to add to that, I think, you know, what is becoming inherently clear is that, you know, the higher-level skills that we are staffing in the on-demand business, what clients are seeking is that they are also becoming AI experts or AI knowledgeable for that particular function or particular role. That is becoming critical. I think on the consulting side, what we are seeing is that clients are taking on these AI initiatives. Data authenticity and accuracy is becoming a bigger issue, which is leading to bigger data projects with data cleanup and data, you know, data tagging and things like that. So that is where a lot of focus is coming up in order for them to realize the full benefits of AI as they look at both, you know, end-to-end implementation of it. Mark Marcon: Just to elaborate a little bit, can you just like, you have a fairly broad swath of the Fortune 500 that you serve. How widespread is what you are currently seeing? And then can you be a little bit more precise with regards to the types of roles? Are we talking about, you know, just accounts receivables and payables, data entry, or is, you know, historically, you have also supplied people that were, you know, providing some analytical capabilities as well. And so I am trying to understand, you know, to what extent are these lower-level roles rather than also impacting higher-level roles? Bhadresh Patel: Yeah. I mean, the lower-level roles are definitely getting impacted, right? Because AI is able to do those analyses and things like that as you go, you leverage learning models to do that. In the higher-level roles, we do not see it as an impact. What we are seeing is a skill reconciliation is what I hope to say or skill evolution. You know? And as we are providing, for example, a controller or anything like that or in the senior financial analyst in these types of roles, they are looking for those that actually understand AI, know how to use AI, and know how to implement AI, to leverage it more. And that is, I think, the distinction we are seeing. In testing of reconciliation, receivables, all those types of things are, you know, evolution of RPA into, you know, AI. But FP&A is becoming a big area where clients are starting to use, you know, AI to really start to look at how do they accelerate what was historically done in Excel spreadsheets to drive those types of analytics data. So that is where we are really seeing the difference. Mark Marcon: Great. And then, Roger, you mentioned, you know, scaling up in consulting, and you mentioned incremental hiring there. Can you talk a little bit about the practice and the areas that you want to focus on within consulting? Roger Carlisle: Yeah. I think it is the issues that still remain in high demand in corporates, corporate America, for example. So financial transformation, financial technologies, you know, technology generally, data analytics, risk, all those kinds of things. Tax that, you know, that get towards the ability to, in some cases, both for the class to do more with less, for the class to have a better view of their own organizations, all of those things, and drive value. You know? So all of those things, I think, are still in high demand. Clients may be a little more cautious in taking their time to assess what they are doing, but those are still in high demand services. And so we are looking to add our capabilities in those regard. Those areas. Mark Marcon: Right. And then, Jen, just a clarification. With regards to the SG&A, you mentioned $40 million to $42 million, and then you mentioned $6 million to $7 million in terms of stock comp and restructuring. Is the $40 million to $42 million inclusive or exclusive of that $6 to $7 million in stock comp and restructuring? Jennifer Ryu: Yeah. The $40 to $42 million is exclusive. So $6 to $7 million of non-cash and non-run rate restructuring cost on top of the $40 to $42. And the reason why it is comparable essentially to our third quarter SG&A is because while we are realizing the, you know, the benefits and the latest reduction in force we did in October, you know, from a seasonality standpoint, we have the payroll tax reset. And, also, you know, when we did the RIF in October, essentially, Q2 already kind of has almost a full quarter of benefit already in there. So but to answer your question, the $6 to $7 million of non-run rate is in addition to, not a part of, $40 to $42. Mark Marcon: And then how much of an impact was the higher healthcare cost? And are you doing anything in terms of plan design changes with regards to what you offer to your employees to ameliorate that? Jennifer Ryu: Yeah. The healthcare, this quarter is about a million plus impact compared to Q2, so it is significant. It impacted both our and A and probably lesser to, you know, impact on SG&A, but a lot of impact on gross margin. Yes. We do, you know, we do take an annual assessment of our plan design. We also kind of look at, you know, the cost ratio sharing between employer and employees. I would say that this quarter, this is an anomaly. You know, we got a lot of unfavorable claims experience in October specifically. So I do not expect that this or at least I would think that this is an anomaly. So I think that this should normalize. You know? Again, we do not have control over our claims experience. But we do take a pretty deep look each on an annual basis on our plan design. Mark Marcon: Okay. Great. And then, Roger, I did not want to focus on the micro questions initially, but I would love to come back to just kind of the broader strategic framework. It sounded like you are basically going to be looking at things over the next twelve months. I am wondering if you can just talk a little bit about, you know, what you are going to really focus on, you know, and what your vision is, and it is probably going to end up changing as you learn more about the company. But what your vision is for, you know, what investors should expect, you know, twelve to twenty-four months from now? Roger Carlisle: Well, I think I am not sure the strategy itself changes at a high level. I mean, we are going to be focused on our on-demand services and our consulting services, and those, you know, that is the two biggest things we do. And it is where we can drive a lot of value for our clients. So I think it is why we said, you know, the three focal points for our strategy in the near term, you know, twelve months or longer if it takes, is right. Get the cost structure aligned with our revenue, so that we are profitable on that basis. You know, for lack of a better word, fix our on-demand. What I mean by that is we have talked about, which is be sure we are getting in front of our clients with our sales team and really understanding what the client needs. And then working with our talent team to be sure that we are, you know, sourcing and have that kind of talent to offer them. So we can bring that kind of value to clients. And do that in a focused, consistent manner. And then thirdly, grow the consulting segment that we can deliver those services. We can do that now. But we are not particularly scaled in those capabilities that we talked about earlier. So we want to add those, and I think we can grow. I think we have a real right to win in this space because of our ability to deliver in those three different modes that we spoke about earlier. And to do so at a price point that creates, I think, a better overall value than some of the other competitors in the marketplace. But all of that requires that we are focused in what we do and that we have the right talent in place to do it. And so there is some work in that. And that is really, for me, that is the main thing. Those eyes we just spoke about are the main thing we are focused on over the next twelve months. I cannot tell you when I think exactly we will see the results of that. I would like to think we will start seeing, you know, it be three quarters of nothing and then all in one quarter. So I would like to think you will start to see some incremental improvement as quarters go on, but I do not think that is going to be in the next quarter. I think there is a lot of work that we have to do. Mark Marcon: I appreciate it. Thank you. Roger Carlisle: Thank you. Operator: Thank you. And as a reminder, to ask a question, please press 1-1. Our next question comes from Kartik Mehta with Northcoast Research. You may proceed. Kartik Mehta: Hey. Good evening, Roger and Jen. Roger, I know you started talking about AI, and I am wondering, is that causing any of your clients to maybe take a step back as they try to figure out how they want to implement AI, roles they might want? Is that causing any delays from a decision standpoint? Roger Carlisle: Yeah. I do not know if that itself is causing any decision delay. I think there are things that happen in the market where there is some level of uncertainty that would contribute to decision delays by clients. I think in the case of AI and automation, you know, clients, first of all, I think by and large, like, you read in a number of places, resources, I think there is more interest and effort to implement if there is more impact and value yet for many clients. So I think it is fits and starts. Right? Like, if you start the investment, you might have told, you know, whoever was authorizing that investment that we are not going to need quite so much, you know, human capital to do these processes, so you do not hire as much. Then later you find out you do need it, so there can be some sort of starts and stops, but I think it is really more about what roles will AI sort of successfully make less necessary. And then as Bhadresh said earlier, what roles will AI enhance the capability of and actually make those roles more efficient or successful in what they do. So there is some learning, I think, going with clients, but I do not know that that is particularly contributing to decision delay. I know Bhadresh, you have a view on that. Bhadresh Patel: Yeah. The only thing I would add, Roger, is that, you know, what clients are getting bombarded with is spot technologies for a particular process or a spot process that AI can automate. And it is conflicting potentially with their enterprise applications. And those vendors are also SaaS-based products, which are saying they have AI in their products. And so no one is really matured full AI into all of their products. Right? So the clients are wrestling with, does my ERP system have AI now, and can I leverage it, or do I need a spot technology to fill a gap and then integrate that with my ERP technology to do that? So we are seeing that type of confusion right now. Right? We are finding some clients that are very forward-thinking, willing to experiment, and go aggressive, and, you know, understand that they may have to undo some things, and we always have laggard clients that are asking a lot of questions and kind of dip their toes in but are hesitant to do it. So we are seeing all sorts of spectrums around this. I do not think we are seeing delayed decisions, right, in purchasing, but what clients are inquiring more about is what can we do with AI with what we have and what can we do with AI, what we do not have. And that is the bigger debate with clients, and it is a slowdown in decision-making. Kartik Mehta: And, Jen, just on the gross margins, I know you talked about the healthcare costs obviously impacting both gross margin, SG&A, and then there is the extra holiday. You know, if you try to take those out and normalize gross margin, where do you think gross margins would have been for this quarter? For the quarter you reported, I apologize. Jennifer Ryu: Yeah. This quarter in Q2, the impact of healthcare is almost 100 basis points. So without the additional sort of the abnormal healthcare cost, we probably would have reached 38%. And then Q3, typically, that is our seasonality, right? Because we have a lot of holidays in there. So there is definitely, you know, seasonality, healthcare, a lot of noise. But if you look at our pay bill ratio, it has steadily improved over the, you know, the last probably last full, you know, three, four, probably plus quarters. You know? And all and, of course, Kartik, I mean, the impact of all of these indirect costs on gross margin also has to do with our revenue level too and that leverage. So, you know, I think the main thing that we, you know, we really focus on is things that we can control, which is the average bill rate and continue to, you know, to improve that. And also then on the consulting side, to improve our utilization, which, you know, which I think we have made pretty good progress in the last couple of quarters. Kartik Mehta: Perfect. Thank you very much. I appreciate it. Operator: Thank you. I would now like to turn the call back over to Roger Carlisle for any closing remarks. Roger Carlisle: Thank you, operator, and thanks, everyone, for joining our call today. As I said earlier, we appreciate your interest in RGP, and as I mentioned, I look forward to speaking with many of you in the coming months. Do not hesitate to reach out with any additional questions, and I hope everyone has a happy New Year. Thank you again. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal First Quarter 2026 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Lines will open for your questions following the presentation. Please note that this call is being recorded. On the call today, we have Hajime Jimmy Uba, President and Chief Executive Officer; Jeff Uttz, Chief Financial Officer; and Benjamin Porten, Senior Vice President of Investor Relations and System Development. And now I'd like to turn the call over to Mr. Porten. Thank you, operator. Afternoon, everyone, and thank you all for joining. Benjamin Porten: By now, everyone should have access to our fiscal first quarter 2026 earnings release. It can be found at www.kurasushi.com in the Investor Relations section. A copy of the earnings release has also been included in the 8-Ks we submitted to the SEC. Before we begin our formal remarks, I need to remind everyone that part of our today will include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance. And therefore, you should not put undue reliance on them. Benjamin Porten: These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. Also during today's call, we will discuss certain non-GAAP financial measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation nor as a substitute for results prepared in accordance with GAAP. And the reconciliations to comparable GAAP measures are available in our earnings release. With that out of the way, I'd like to turn the call over to Jimmy. Hajime Jimmy Uba: Thanks, Ben. And happy New Year to everyone for joining us on the call today. We are making good progress towards the goals we laid out in our annual guidance and towards achieving predictive comparable sales on a full-year basis. Regarding our goal of 16 new restaurant openings, we have 10 units under construction on top of the four restaurants open to date. Our commitment to aggressive cost management has reduced G&A as a percentage of sales by 80 basis points on an adjusted basis. We are also able to deliver labor as a percentage of sales, renewing our confidence in our ability to improve labor cost by 100 basis points in fiscal 2026. The first quarter has created a strong foundation for us to build on as we enter the easier comparisons of Q2 and Q3. Total sales for the fiscal first quarter were $73.5 million, representing comparable sales growth of negative 2.5%, outperforming the complex expectations we have shared during our last earnings call. We were very pleased to see the sequential improvement at the end of the quarter and before this momentum, to have continued past November. Most of it as a percentage of sales were 29.9% as compared to the prior year quarter's 29%. As a reminder, we took 3.5% price on November 1, did not see the proof of benefit. So Q1, also, as we have previously discussed, we expect full-year COGS to be around 30% after considering the impact of tariffs and achieving the full benefit of our mini price adjustment. Labor as a percentage of sales was 32.5% compared to the prior year period of 32.9% due to a number of initiatives relating to operating cost. Shifting to real estate, we opened four restaurants in the first quarter: Arcadia and Modesto in California, and Freeport and Lawrenceville in New Jersey. We currently have 10 restaurants under construction, including one in Tulsa and one in Charlotte, both of which are new markets for us. And we have mentioned in the last call as far as call, fiscal 2025 was the strongest across in this end of memory. And the restaurants we've opened to date are continuing to test it. We expect to open one more unit in the fiscal second quarter and for the remainder to open in the back half of the year. Turning to marketing, we are currently engaged in our campaign with Curvy, coinciding with the relief of Kabi Airlighters for stage two. As part of our efforts to maximize the impact of each collaboration, we have introduced I IP themed with the press stones and touch panels, which have been well received by our guests. As we mentioned in our last one of call, research is ongoing for the introduction of rewards program status tiers. We also began advertising our reservation system for the first time during the holidays. In preparation for the reservation systems marketing campaign, we have also decoupled the reservation system from our revert program with the hopes of encouraging production while removing the user friction created by a required work to download and allowing guests to place reservations directly through the cooler website or our Google Maps pages. In other system development news, the manufacturing of our robotic dishwashers is proceeding on schedule, and we continue to expect it to begin installation in Q3 and to have the majority of the 50 eligible existing restaurants better fitted by the end of the fiscal year. To conclude, we are pleased with the progress we made towards our towards the goals we shared with our annual guidance. We believe we are on the right path to achieving positive comp sales for the year. I would like to express my thanks to everyone of our team members at our restaurants and support center for their partnership in achieving these goals. This now I'll hand it over to you to discuss our financial results and liquidity. Thanks, Jimmy. Jeff Uttz: For the first quarter, total sales were $73.5 million as compared to $64.5 million in the prior year period. Comparable restaurant sales performance compared to the prior year period was negative 2% negative traffic of 2.5% and flat price and mix. Comparable sales in our West Coast market were negative 2.8% and comparable sales in our Southwest market were negative 2.7%. Effective pricing for the quarter was 3.5%. On November 1, we took a 3.5% menu price increase, and after lapping prior year increases, our effective price for the second quarter will be 4.5%. As a reminder, beginning in 2027, we will no longer provide regional breakdowns for comparable sales. As regional comps are largely determined by the timing of infills and we do not believe that they are indicative of overall company trends. Turning to costs. Food and beverage costs as a percentage of sales were 29.9%, compared to 29% in the prior year quarter due to tariffs on imported ingredients. Labor and related costs as a percentage of sales were 32.5% as compared to 32.9% in the prior year quarter, due to pricing and initiatives related to operations offset by sales deleverage and labor inflation. Occupancy and related expenses as a percentage of sales 7.9% compared to the prior year quarter's 7.4%. Due to sales deleverage. Depreciation and amortization expenses as a percentage of sales were 5.4% as compared to the prior year quarter's 4.8% due to sales deleverage and remodel costs. Other costs as a percentage of sales were 16.1% as compared to the prior year quarter's 14.5%, due to sales deleverage and higher marketing costs. This line is also impacted by tariffs, as some of the expenses in this category come from overseas purchases. General and administrative expenses as a percentage of sales were 13%, which includes 30 basis points in litigation accruals. As compared to 13.5% in the prior year quarter. Operating loss was $3.7 million compared to an operating loss of $1.5 million in the prior year quarter largely due to tariff pressures on our food and beverage costs. And other cost line items. Income tax expense was $36,000 as compared to $39,000 in the prior year quarter. Net loss was $3.1 million or negative $0.25 per share compared to a net loss of $1 million or negative $0.08 per share in the prior year quarter. Adjusted net loss, which excludes the litigation accrual, was $2.8 million or negative $0.23 per share as compared to an adjusted net loss of $1 million or negative $0.08 per share in the prior year quarter. Restaurant level operating profit as a percentage of sales was 15.1% compared to 18.2% in the prior year quarter. Adjusted EBITDA was $2.4 million as compared to $3.6 million in the prior year. And at the end of the fiscal first quarter, we had $78.5 million of cash cash equivalents and investments, and no debt. And lastly, I'd like to reiterate our following guidance for fiscal year 2026. We expect total sales to be between $330 million and $334 million. We expect to open 16 new units maintaining an annual unit growth rate above 20% with average net capital expenditures per unit continuing approximate $2.5 million. We expect G&A expenses as a percentage of sales to be between 12-12.5% and we expect full year restaurant level operating profit margins to be approximately 18%. With that, I will turn things back over to Jimmy. Hajime Jimmy Uba: Thanks, Jeff. This concludes our prepared remarks. We are now happy to answer any questions you have. Operator, please open the line for questions. As a reminder, during the Q&A session, I may answer in Japanese before my response is translated into English. Thank you. Operator: And we will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. Confirmation tone will indicate that your line is in the question queue. You may press 2 if you'd like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions. And our first question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question. Sharon Zackfia: Hi. Thanks for taking the question. Happy New Year. I wanted to talk about the decision to decouple the reservation system from loyalty. Can you talk about kind of what led to that decision? Were you not seeing loyalty members kind of react as you had hoped? And then as you started to market it, what is the early read then potentially bolstering those shoulder periods, which is what I think kinda was the hope for scenario with the reservation system. Benjamin Porten: Yeah. Hi, Sharon. This is Ben. Hi. So in terms of reward member uptake on the reservation system, we're actually extremely pleased. More than half of visits by rewards members are being done through the reservation system. And so uptake is frankly better than expected, and so that's been very encouraging. We really just wanted to open it up to a bigger audience. It's a big ask to have somebody install an app just for one function. And so we felt let them, you know, experience how useful it is, and then maybe they'll we'll be able to convert them into rewards members after the fact as, you know, obviously, we want as many people to join the rewards program as possible as they tend to visit more and spend more per visit. And so that's been very encouraging. We started marketing, reservation system more post decoupling in the last week of December. And so they're really there's pretty limited data in terms of you know, what we've seen in that that one week of advertising. But what is really encouraging is that for the people that have tried it, they they basically use it forever. And so I I think it's just a matter of awareness, and there remains upside to be unlocked for the reservation system. Sharon Zackfia: Thanks for that. And then it sounded like trends ended more strongly as you went throughout the the quarter, and it sounds like that continued through December. And I know you reiterated I think, plans for slightly positive comps for the year. Jeff, just given comparisons do get so easy here in the February quarter, do you expect comps to be positive as well? In the February quarter? Hajime Jimmy Uba: Sure. Thank you for your question, Sharon. Please answer your question in Japanese. Then you're gonna transfer it. Benjamin Porten: Sure. So in terms of our expectations regarding Q2 comps, we absolutely expect positive comps. In the November call, we mentioned our mid negative mid single digit expectations for Q1 comps. They came in at negative 2.5%, which you know, obviously indicates that November ended up being a very strong month. One particular item that's been of exceptional incursion for us is that following the November we took pricing on November 1, but November traffic and price mix improved. Over the prior month. And that trend is also continued into Q2. And so standing where we are today, you know, a month and change into the quarter, we we feel very good about Q2 comps. Sharon Zackfia: Okay. Great. Good to hear. Thank you. Hajime Jimmy Uba: Thanks, Erna. Thank you. Operator: And our next question comes from the line of Jeremy Hamblin with Craig Hallum. Please proceed with your question. Jeremy Hamblin: Thanks for taking the questions. And I wanted to hit on a couple of the the, kind of cost line items here. You know? So first question regarding food costs is you know, we don't know what's gonna happen with with tariffs. Clearly, it's been a significant headwind. I think Jeff, you'd called out maybe about 200 basis points for FY '26. But if there were a change as as we started to see some relief on on tariffs impacting food costs, how how long would it take for that to flow into your financials? Would it be, you know, sixty days, ninety days? If that change were to happen? And then also wanted to just ask about other operating expense category, which I think includes utilities, repairs and maintenance, insurance, credit card fees, etcetera. Know, just to get a sense for you know, let's say, the expected impact that you might have on that category with, let's say, a positive two and a half comp versus a down two and a half comp that you had in in Q1? What type of, you know, leverage, deleverage would you see under that hypothetical? Jeff Uttz: Yeah. Hey, Jeremy. I'll answer the question on food costs, then I'll turn it over to Jimmy to give some color on the other cost line item. But as it relates to food costs, we mentioned in the past, generally, we we we buy four to six months' worth of product. So it it it'll take a little bit of time to get through the product that we have on hand in order to see, you know, a benefit and a reduction in tariffs. That being said, where food cost is ending up for the year in our 30% estimate I'm quite pleased with that number. When we first started looking at this, it could have been a 300 know, somewhere between 304100% impact But because of the great negotiations that were done with suppliers as well as negotiating just the prices of things, you know, tariffs aside, I'm very pleased with that 30% number. If if the tariffs are reduced or do go away, that that number could get back into the twenty eighth again where it was. And, that's really the only headwind that we've really seen as far as COGS is uncontrollable, inputs such as tariffs. So we're optimistic. We'll see what happens over the next few months as it relates to to tariffs. But ending up at a 30% number is still something that we a company, are pretty proud of. Given the headwinds of the tariffs. Pose to us. Hajime Jimmy Uba: And, David, I'll this is Jimmy. I'll answer your question about other coastline, but please allow me to speak in Japanese. Benjamin Porten: In terms of the, the other cost line item, the the biggest impact unfortunately, for other costs as well was tariffs. Most of our promotional materials come from China, so our bicker upon toys, our giveaway items, those come from China, and they've been experiencing pretty heavy tariffs And so that's been a a meaningful pressure on the other cost line item. And, Jeremy, as as you mentioned, the sales deleverage that we had, while the comps came in better than expected, they were still negative. And so we saw, you know, sales deleverage on fixed and semi fixed costs. Utilities were up just on an absolute basis. We've seen that broadly across our restaurant base. And then lastly, the pricing that we took we took in November, and so we did not receive that benefit in, September, October. And in in terms of this is the upper end. Please. Okay. That being said, with the pricing that we took in November or in spite of the pricing that we took on November 1, we saw traffic improve in November and December. We also saw price mix improve in November and December. And we expect to, you know, for that to flow through and give us better leverage on our other costs. Which we're actually, we're already starting to see. So that's that's really encouraging for where we'll land at the end of the quarter. Jeremy Hamblin: Got it. Thanks for taking the questions, and good luck. Hajime Jimmy Uba: Thanks, Sherman. Thank you. Operator: And our next question comes from the line of Andrew Charles with TD Cowen. Please proceed with your question. Andrew Charles: Great. Thank you, guys. Jeff, wanna check with the shelf registration that you guys saw last week. You know, what are you monitoring for as you think about when you would potentially tap into it? Jeff Uttz: Yeah. I haven't really given a timeline on that. You know? When we did the capital raise a year ago, Andrew, and November 2024, you know, my thought was, you know, potentially, that could be the last one. Right now, where we're looking at where, you restaurant level margins at 18% versus 20%. For good corporate housekeeping and and to be ready when the time comes, if it does. Wanted to have that shelf registration statement out there. And be ready. But we still have $75 million of cash and investments on our balance sheet. So we're we're pretty liquid pretty strong on that side. But it's just it's it's just something I wanted to have out there in case the time comes. Certainly, you know, wanna keep an eye on where the share price is. And if the share price becomes attractive and there was a reason we wanted to go on to capital. It's just it's just being ready. Andrew Charles: Okay. That that's helpful context. Thanks. And then within the reiterated 18% rational margins, hear you on the 30% COGS target. Here you're on about 32% labor. But I'm just curious, does the margin target embed any additional price in 2026? I'm just trying to better understand the opportunities to improve the other operating costs. Amid the tariffs. Benjamin Porten: Mhmm. Relating to the, the 18% annual guidance that we, provided in the November call, that already contemplated the 15% restaurant level operating profit margin. We had for Q1. And so there's you know, we're we're fully on tracking relative to our own expectations. In terms of the pricing, we we feel that our our our as it stands today, we have no further expectations to take price in fiscal twenty six. We think pricing that we took on November is adequate. The flow through that we're seeing is actually better than expected, and so that's that's really encouraging there. And, yeah, between those two things, we we we remain extremely confident about that 18% full year target. And on another note, following the November pricing, we're actually we're already seeing leverage on our labor cost line earlier than expected. It's it's really encouraging, making it making us that much more confident in terms of hitting that 100 basis point labor leverage number and, opening up the possibility for know, maybe even better than a 100 basis points. Andrew Charles: Very good. Thank you, guys. Benjamin Porten: Thank you, Andrew. Thank you, Andrew. Operator: Our next question comes from the line of Jeffrey Bernstein with Barclays. Please proceed with your question. Jeffrey Bernstein: Great. Thank you very much. First question is just on the comp trends. You talked about the improvement to close the quarter. And seemingly sustaining into the second quarter and very confident in that positive. For the second quarter. I'm just trying to unpack how much you think is due to your own company specific efforts versus the macro. I know there's lots of investor optimism around near term benefits from lapping inclement weather and lapping the tariff headwinds. Maybe benefits from tax refunds and stimulus. So just trying to get your sense for how much you attribute to your own internal initiatives versus maybe your confidence of the broader industry that'll accelerate from here with those factors or you don't believe that to be the case, perhaps why not? And then I had one follow-up. Benjamin Porten: Sure. To Q1, we outperformed the industry on a number of metrics. Which were very encouraged by. That that was really par for the course for us historically. It hasn't been the case necessarily for the last year. And so to return to that position, has been very encouraging. We think the promotions that we had in November played a big part and really to Timmy's earlier comment about the biggest element of in terms of November, that was that was the pricing flow through and the traffic growth that we saw post price. And so to your commentary about macro, I mean, it it's still just a couple months, but that we interpret as an improvement in the consumer. So that that's very encouraging there. In terms of other company specific you know, comps, that comp benefit starts in December. And so November would not have benefited from that. And so and, when we were speaking about the industry comparisons, I I I meant to say November onwards. Not Q1. Jeffrey Bernstein: Gotcha. And just to clarify, I know you often talk about a two year stack. And if you held that first quarter trend, it would imply maybe a positive four or 5% in the second quarter. As your compares ease by, I think, 700 basis points. So I'm just trying to clarify think you said you assume modest positive comp for the full year. Just trying to clarify that. And did your trend in November and December improve on a one year or a two year stack basis? Just trying to get the sense for underlying momentum versus just comparisons. Benjamin Porten: Yeah. So to you, I didn't know. Go ahead then. Oh, please. Please. Without providing, you know, commentary on comp performance to date, we remain very, very confident about our ability to hit flat to slightly positive comps The momentum as we exited the quarter is very encouraging. And to Jimmy's repeated comments, that that momentum is continued. And so we we feel very good about achieving that flat to positive comp for the full year. Jeffrey Bernstein: Understood. Then just to clarify, I I think you said we know you opened four units in the first quarter and you have 10 more under construction. I'm guessing it's not surprising to you or maybe you turn these units around faster, but you're talking about 16 for the full year. Which seeming seems that you already have 14 with good visibility. Just how much lead time is needed in terms of construction that you're confident in that 16 plus relative to the 14 you have visibility on today? Benjamin Porten: Contracts on timeline open to the. I looking at the fiscal twenty six pipeline, we think that the 16 unit target as the upper bound We we continue to think that's the appropriate target. We don't expect that to change. There might be a little bit of benefit in terms of faster lead times, but that's not really something that we expect. It should pretty much be business as usual. So we opened four in Q1. We expect to open one in Q2. And the remainder are in the back half. Jeffrey Bernstein: Thank you very much. Benjamin Porten: Yeah. And so so for those 10 units, a lot of them just broke ground. And so yeah. You could keep that in mind for modeling purposes. That'd great. Jeffrey Bernstein: Presumably, you have two more to get you to that 16 that maybe haven't broke ground yet, but you have a good line of sight too. Benjamin Porten: Yes. Yes. Thank you. Thank you. Thank you. Operator: And our next question comes from the line of Jon Tower with Citi. Please proceed with your question. Jon Tower: Great. Thanks for taking the question. Maybe just circling back to a comment that, Jimmy, you had just made or maybe Ben, it was you, in response to the question. You had mentioned that the promos that you'd done in November had played a decent part in terms of getting some traffic back into stores and lifting sales. Can you dig into that a little bit Like, what exactly did you do during that window? Is it something that you feel like you can repeat in the future? And and know, have how can you is it something that was just one off and you don't expect to bring to future windows? Benjamin Porten: Sure. Hi. John. So as as it relates to November, we had our second one piece giveaway. And that outperformed our expectations a little bit. We had a a a gift card promotion. We typically have whatever year is we get closer to the holidays. But, really, the the biggest factor for the November outperformance was our LTO or curve reserve. This month or for for for November, the sort of theme item was sakura bacon. And we we weren't sure how big of a hit bacon sushi would be, but in retrospect, in hindsight, of course, bacon sushi is gonna be a slam dunk. And so that that really was was a big hit for us. In terms of whether or not it's replicable, we're not we we don't have plans to you know, have another software vacant, but there's nothing to preclude that in the future. Certainly, we're putting as much energy we can into our LTOs. We know that that's a really you know it's another lever for us. But, looking to December, while we don't have you know, another LTO a food LTO along those lines, We have our most exciting IP of the year, Kirby. And so we're it's you know, not to give it a dead horse, but we're we're really happy with how December's shaking out. Jon Tower: Okay. Yeah. And then that kinda leads to a question just regarding you'd mentioned earlier the idea of advertising the reservation system and preservation program more broadly to a to the non rewards members. And I'm just curious, to hear where you guys think the brand well, where the brand is today with respect to broad advertising, which I don't think it does much of. But where you wanna be over time, either as a percentage sales, you know, what mediums you wanna go in and and, frankly, where the message should be to guests. Is it more about hey. This is what Kora Sushi is, or is it more about a call to action in terms of LTOs like, you know, whether it's the the core reserve or it's the Curvy IP tie in You know, if you could expand on that, that'd be great. Benjamin Porten: Yeah. So I I I wouldn't expect us to do anything like television advertising. I we're very happy with the marketing efforts to date. We think that they've done a phenomenal job just in terms of spending our our ad dollars effectively. Primarily on social media influencers, etcetera, but those have been exceptional in terms of return on ad spend. I I I'd say that there's probably gonna be more of an emphasis on call to actions to your point Our rewards members very much are moved by call to action. And so that's gonna be an ongoing point of focus, especially because they they're continuing to trend upward in terms of spend. Which is, great. Jon Tower: Okay. So it just rewards members in general now that we're pretty far. I think we're a year in or so. Maybe I'm off a little bit. But can you speak to how they have moved in terms of either frequency and or spending levels versus where we started off? Know, a year or so ago? Benjamin Porten: Yeah. So so we're now up to a million members. If we're counting newsletter up, members, it's it's actually 1,700,000 members. And so that's that's really been very aggressive growth thanks to the efforts of the marketing team. In terms of spend, they a two person ticket per person, they spend about $6 more. On so that that's a pretty meaningful difference. And they visit more than twice or even triple nonmember. Jon Tower: Okay. Awesome. I will pass it along. I appreciate you taking the questions. Benjamin Porten: Thank you, John. Thank you, John. Operator: Thank you. And our next question comes from the line of Mark Smith with Lake Street Capital. Please proceed with your question. Mark Smith: Hi, guys. I'm curious if there's any other demographic or geographic trends that you saw in the quarter or even post quarter that are worth calling out For instance, curious if you saw any impact when government shutdown ended. Did that drive any incremental traffic or spend or anything else to call out here in the quarter? Benjamin Porten: So the the major change that we have seen is just the over you know, the broad based improvement from November onward, really are not seeing any sort of differences on a regional or geographic basis. As we've mentioned in the past, the differential between any given region, in terms of comp performance is really driven more by the timing of intels than anything else. And so it it's really just been a a broad based improvement both in in traffic and ticket, and so that's that's been really I I guess I keep coming back to the word encouraging, but it it it really has been encouraging. Mark Smith: Excellent. And and then as we look at restaurant level margins, I'm curious if you could talk comp units versus noncomp restaurants. Kind of where the margins are shaking out for each, and then if we've seen any real change over time in in the in in one or the other. Benjamin Porten: So we we haven't really commented too much on the difference between comp and non comp unit performance. What we have said is that, historically, new units have pretty strong honeymoon. They'll have elevated revenues, but they're not as efficient as at you know, managing costs as a more seasoned restaurant. And so the oral OPMs actually end up taking about the same. Mark Smith: Perfect. That's helpful. Thank you. Benjamin Porten: Thank you, Mark. Thank you, Mark. Thank you. Operator: And our next question comes from the line of James Sanderson with the Northcoast Research. Please proceed with your question. James Sanderson: Hey. Thanks for the question. I wanted to go back to the labor line item. Wondering if you could walk through any milestones or key drivers operationally that you'll need order to achieve that a 100 basis point improvement and when we can, expect that build in the next three quarters. Benjamin Porten: Mhmm. Hi, James. In terms of waiver, as it relates to Q1, the biggest driving factor was the pricing that we've taken. We feel that we're making great progress in terms of the the leverage that we expect to make the full year and have no concerns about hitting that 100 basis point target. And in fact, know, feel that there is a real possibility that we'll be able to get there even, or to to get even beyond a 100 basis points of leverage In terms of the the factors that need to go right, so to speak, for us to hit that, those are already in play. Or in place. They're largely gonna be driven by the initiatives that we put in the last fiscal year. So the reservation system, the the new touch panels, the new Mr. Freshdomes, those cumulatively will get us at least those 100 basis points. And the any any sort of labor initiative just the the benefit trends along with seasonality And so we were frankly a little bit surprised to see benefit as early as we did, and we just expect that to become more pronounced as sales grow, and we're better able leverage fixed costs. James Sanderson: Okay. So not necessarily, need to see the robotic dishwashers and other technology in into the store. In order to achieve that that gain. Benjamin Porten: So that that gain discuss Q4 Yeah. So so the the robotic dishwashers are contemplated in that 18%. But the impact is gonna be pretty minimal. For for for the full 18% RLOPM. And so we'll see even more benefit as we enter fiscal twenty seven and we've got you know, more of the the system updated to have the robotic dishwashers And so if we're able to implement these sooner than expected, then that's that's a potential point of opportunity as well. James Sanderson: Alright. Alright. Very good. Could you also review the collaborations you offered in the first quarter and if they performed to your expectations. Benjamin Porten: In terms of q one's collaborations, we had Gemon Slayer in September. That was the second month of Demon Slayer. Then we had, one piece in in October and November. Both met our expectations. James Sanderson: Both met okay. Very good. Last question for me. I just wondered if you had thought about your long term growth target rate of about 100 units in The United States, if you had revised that. Benjamin Porten: If we do have plans for a formal update, we'll be to let everybody know. But in the meantime, we will let the analysts provide their own estimates. On that bigger number. James Sanderson: Alright. Thank you very much. Benjamin Porten: Thank you. You, Dennis. Operator: Our next question comes from the line of George Kelly with ROTH Capital Partners. Please proceed with your question. George Kelly: Everyone. Thanks for taking my questions. So first one, just to revisit the tariff conversation. Just wanna make sure I'm capturing everything properly. So your 30% COGS target for the year bakes in, is it a 200 basis point impact from tariffs? And then can you quantify the tariff impact on your other expense line? Benjamin Porten: Hi. Hey, George. As it relates to the other costs, the impact, was largely on the the promotional items, the bigger upon prices and the giveaways. Cumulatively, as a percentage of sales, there's about a 40 to 50 basis point impact from tariffs. This is prepricing, and so know, post November results, that should ease a little bit. But it is a pretty meaningful step up in our our promotional costs. Jeff Uttz: And then, Jared, did I have George on that. Go ahead, Jeff. Yeah. On on cost of goods sold, 30% is where we think it's gonna end up for the year. It it is about a 200 basis point impact, but we've had some other pretty good negotiations that have offset that a little bit. So when you look at the map, from last year, she gets to 30%. I think it's, like, it'll end up being, like, a 150 basis points. You know, delta between the two years. But the tariff impact alone, is pretty significant at 200, basis points, but we've had some other good negotiations that have offset that a little bit. Is why we ended up 30% for the year. George Kelly: Okay. Okay. Helpful. And then second question I had is just related to promotions. You sound very pleased with how Kirby is performing. So I guess the the question is, is is the performance there you know, I understand, Kirby, that's a big, you know, draw a big big partner. But how have you executed it differently? Is is it partly sort of an internal execution issue? Maybe you're monetizing it better or advertising it better. So wonder if that's sort of part part of the reason. And then a second question is, you talk at all about your future planned promotions for the remainder of the year? Benjamin Porten: Yeah. Kurt, as it relates to Kirby, there were a number of things that we tried for the first time. With this collaboration. We have these customized mister FreshDomes. And so instead of know, just a clear dome, you have Kirby protecting your sushi. And we also updated the touch panels to be Kirby themed. These are both very well received by guests. We really wanna try to just keep trying new things and continue to grow the the experience. And so the guests feel that much more that, you know, it's something that can't be missed. And we are very, very pleased with the results. George Kelly: Okay. That's great. And can you comment at all about future planned promotions for the the year? Benjamin Porten: Oh, yeah. Sorry. Sure. So Kirby runs through the January. And then we have, Sanrio for February. And then March and April, we have Jujutsu Kaisen to coincide with their with their new anime season. George Kelly: Okay. Thank you. Benjamin Porten: Thanks, George. Thank you, Tubs. Operator: And our final question comes from the line of Todd Brooks with Benchmarkstone X. Please proceed with your question. Todd Brooks: Great. Thanks, and thanks for squeezing me in. Appreciate it. Couple of questions, few leftovers here. If we're thinking about the, same store sales guidance you provided the full year and the price increase that we took at the November, What's the right way to think about, PMICs for the balance of the year as we're kind of building into a component of same store sales? Benjamin Porten: Mhmm. In in terms of the components of COB, we we be pretty low to to share the price and mix expectations just given well, you know, early results post the November pricing have been very, very encouraging. That's really just two months. And so it's hard for us to extrapolate onwards or outwards. That being said, we do feel very confident that we'll be able to achieve that flat to to slightly positive just based off of our trajectory to date as well as the easier comparisons we're enjoying now. Todd Brooks: Okay. Fair enough. Second, in the other cost, I just wanted to clarify When you talked about elevated marketing cost, was that referring to kind of the promotional cost around, tariff related or upon pressures and Exactly. Yes. Okay. So as far as marketing spend on the brand itself, there's really no change year over year. This was that tariff related pressure that you were pointing to. It's on the per car pond? Yeah. As it relates to other costs, if we're comparing year over year the comps for the prior year quarter were 1.8% against the negative 2.5% that we posted for the current quarter. And so that alone gets you pretty meaningful deleverage. So that together with the tariff impact is is how we got to the current quarter's other costs. That being said, in terms of the the comp being a drag and deleveraging, we expect that dynamic to flip With Q2. As we comp positively. We expect the other costs to stabilize. Todd Brooks: Okay. Great. And the final one for me, and this this goes back when you guys talked about the environment coming out of the pandemic and just the kind of competitive decimation, the closures that you you've seen. I'm just thinking about if if you guys are absorbing 200 basis points of tariff pressure, if we start to think about independent competitors, and absorbing that kind of 300 to 400 basis points of pressure that Jeff was talking about related to tariffs are we seeing another wave of kind of mom and pop type of closures as you're continuing to roll out across the country here where you've just got a more open run runway as you continue to grow your footprint? Thanks. Benjamin Porten: Yeah. It's it's it reads it to say. I'll go ahead and ping. It it it I mean, we we we can't quantify it, and it's never good to see people go out of business. But this is a pretty consistent pattern Whether or not, you know, are gonna be closures on the scale of pen the pandemic, I mean, I I I don't think that'll be the case. But regardless of whether a restaurant closes outright, I still think that we'll be able capture traffic just because the pricing that our direct competitors are taking to offset their costs are only serving to highlight incredible value that we offer. Then looking to November, we we took 3.5% pricing Granted, 2.5% was rolling off, and so we were offsetting a a big part of the pricing was to offset that. But 3.5% is an unusually large step up for us. We typically price increments of one to 2% historically. And the fact that, you know, traffic and mix have only grown since extremely encouraging. Know, it's only been a couple months, and so we don't wanna read too much into it. But one possible interpretation is that the 3.5% that we've taken pales in comparison to the pricing that our competitors are taking, and that is why our traffic grows in spite of the pricing. Todd Brooks: Okay. Great. Thank you all. Benjamin Porten: Thank you, Todd. Thank you, Todd. Operator: Thank you. Ladies and gentlemen, that does conclude today's question and answer session. As well as today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
Operator: Good morning, everyone, and thank you for joining us. With me today is Steven Sintros, President and Chief Executive Officer. We will review our first quarter results for fiscal year 2026, but first a brief disclaimer. This conference call may contain forward-looking statements that reflect the company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties. Words anticipate, optimistic, believe, estimate, expect, intend, and similar expressions that indicate future events and trends identify forward-looking statements. Actual future results may differ materially from those anticipated depending upon a variety of risk factors. For more information, please refer to the discussion of these risk factors in our most recent Form 10-K and 10-Q filings with the Securities and Exchange Commission. And with that, I will turn the call over to Steve. Steven Sintros: Thank you, Shane, and good morning, everyone. Our first quarter results were largely in line with our expectations and our outlook for the full year remains unchanged. Revenues increased to $621.3 million, up 2.7% from the prior year period. Consistent with our guidance, operating income and adjusted EBITDA declined year-over-year, reflecting the impact of planned investments designed to accelerate growth and improve operating leverage, as well as higher than anticipated healthcare claims and legal costs during the quarter. As we discussed in our last call, we've been making investments in our sales and services organizations to build a stronger, more sustainable platform for accelerated growth. In addition to making targeted additions to our sales team during 2025, we invested in strengthening our service teams, expanding both capacity and stability. These enhancements position us to drive improved performance across all key aspects of our growth model and are beginning to show up in our operating metric improvements like account retention, new account sales, and additional product placements with our existing customers. In addition to driving top-line growth and the resulting benefits to our drop-through margins, we continue to invest in and execute on several initiatives that we believe will meaningfully enhance our profitability over time. As we have previously discussed, these priorities include operational excellence driven by the continued adoption of the UniFirst Way, our enterprise-wide operating framework focused on scalable, repeatable processes to enable consistent execution, operational efficiency, and continuous improvement. Enhanced inventory management, procurement, and sourcing are driven by our ongoing ERP implementation, which is improving inventory sharing, centralizing procurement, and expanding our global sourcing base while enabling enhanced supply chain execution. G&A productivity is driven by our broader digital transformation, which is designed to enhance scalability, cost discipline, and operating leverage. Turning to our segments, our core Uniform and Facility Service Solutions business delivered solid organic growth of 2.4%, with positive performance across both sales and service operations. New customer wins exceeded those in the same period last year, and customer retention continued its positive trajectory, logging a second year in a row of quarter-over-quarter improvement. We also grew facility service product placements within our customer base, underscoring the breadth of our offerings, the durability of our customer relationships, and the long-term cross-selling opportunities embedded in our platform. In our First Aid and Safety Solutions segment, we continued our momentum with robust revenue growth of 15.3%, primarily reflecting the investments we have made in our First Aid van business, including some small bolt-on acquisitions. Although growth during the quarter was somewhat tempered by a softer employment climate affecting both rental and direct sale accounts, we remain confident that our ongoing investments are yielding measurable improvements in the key areas of our growth model. Our balance sheet and overall financial position remain robust. We maintained our disciplined approach to capital allocation focused on investing in growth and returning capital to our shareholders. Underscoring the Board and management team's confidence in our strategy, execution, and long-term growth prospects, we repurchased approximately $32 million of common stock during the quarter, and over $77 million in the past two quarters, and again increased the common stock dividend. As always, I want to sincerely thank our team partners who continue to always deliver for each other and our customers. Every day, our team partners live our mission of serving the people who do the hard work—the people and workforce who keep our communities up and running—by providing the exceptional products, services, and support experiences that enable them to do their jobs successfully and safely. Through our "always deliver" philosophy, we remain committed to creating value for all stakeholders, including our employees, customers, the communities we serve, and shareholders. On that note, I want to briefly address the unsolicited non-binding proposal we received from Cintas recently. As we stated in our December 22nd press release, the UniFirst Board of Directors has engaged independent financial and legal advisers to evaluate the proposal and determine the course of action that it believes is in the best interest of UniFirst, our shareholders, and our other stakeholders. That work remains ongoing, and we will provide an update as soon as it has been completed. I also want to acknowledge the active dialogue our management team and Board have had in recent weeks with many of our shareholders. We look forward to further constructive engagement to advance our common goal of enhancing shareholder value. With that, I'll turn the call over to Shane, who will provide more details on our first quarter results as well as our outlook for the remainder of the year. Operator: Thanks, Steve. Consolidated revenues in our first quarter of 2026 were $621.3 million compared to $604.9 million a year ago. Consolidated operating income was $45.3 million compared to $55.5 million. Net income for the quarter decreased to $34.4 million, or $1.89 per diluted share, from $43.1 million, or $2.31 per diluted share. Consolidated adjusted EBITDA was $82.8 million compared to $94.0 million in the prior year. Our effective tax rate increased to 26.9% compared to 25.6% in the prior year, primarily due to the timing and amount of excess tax benefits and deficiencies related to employee share-based payments. Although we had a higher tax rate in the first quarter, we still believe that our tax rate for the full year will be approximately 26%. Our financial results in the first quarters of fiscal 2026 and 2025 included approximately $2.3 million and $2.5 million, respectively, in costs directly attributable to our ongoing ERP project or "Key Initiative." During fiscal 2026, these costs decreased operating income and adjusted EBITDA by $2.3 million, net income by $1.7 million, and diluted EPS by $0.09. Revenues in our Uniform and Facility Service Solutions segment increased to $565.9 million during the quarter compared to $552.8 million in the first quarter of 2025. The segment's organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was 2.4%, driven by strong new account sales and improved customer retention. Uniform and Facility Service Solutions operating margin was 7.4% for the quarter, or $41.8 million, compared to 8.8% in the previous year, or $48.5 million. The segment's adjusted EBITDA margin was 13.6% compared to 15.4% in the previous year. The costs we incurred related to our Key Initiative were recorded to this segment and decreased both the Uniform and Facility Service Solutions operating and adjusted EBITDA margins by 0.4% and 0.5% in the first quarters of fiscal 2026 and 2025, respectively. Segment operating and adjusted EBITDA margin comparisons reflect the planned investments in accelerating growth and improving operating leverage, as well as the increased healthcare claims expense and legal costs during the quarter Steve discussed. Energy costs in the first quarter of 2026 were 4.1% of revenues. Our First Aid and Safety Solutions revenues increased by 15.3% to $30.2 million from $26.2 million in the prior year, driven by double-digit growth in our van operations. The segment had a nominal operating loss of $400,000 during the quarter, reflecting the investments we made to drive continued growth and improve long-term profitability. Specialty Service Solutions revenues decreased 2.9% to $25.2 million from $25.9 million in the prior year, reflecting the anticipated start of a large refurbishment project wind-down and fewer reactor outages. The segment's operating margin for the quarter was 15.4%, down from the prior year due to the high fixed-cost nature of the business. As we mentioned in the past, the segment's results can vary significantly from period to period due to seasonality, as well as the timing and profitability of nuclear reactor outages and projects. At the end of our first fiscal quarter, we maintained a solid balance sheet and financial position with cash, cash equivalents, and short-term investments totaling $129.5 million and no long-term debt. In the first three months of fiscal 2026, our free cash flows were impacted by lower profit and heavy working capital needs of the business, including merchandise in service primarily related to the installation of a couple of large national account customers, as well as the timing of income tax payments and vendor payments. We continue to invest in our future with capital expenditures of $38.9 million, repurchased $31.7 million worth of common stock, and acquired four first aid businesses for $14.9 million. As Steve mentioned, we are reaffirming our full-year fiscal 2026 guidance with a consolidated revenue range of $2.475 billion to $2.495 billion and fully diluted earnings per share between $6.58 and $6.98. This guidance continues to include an estimated $7 million of costs directly attributable to our Key Initiative that we anticipate will be expensed in fiscal 2026. As a reminder, our guidance does not assume future share buybacks. This concludes our prepared remarks, and we would now be happy to answer your questions. Given Steve's update on the Cintas matter, we do not intend to be answering any additional questions regarding that situation and ask that you please focus your questions on our first quarter results and 2026 outlook. Thank you. Ronan Kennedy: Good morning. This is Ronan Kennedy on for Manav Patnaik. Thank you for taking our questions. Steve, may I ask if you could please remind us of the timeline for achieving the long-term objectives of the mid-single-digit organic growth and high teens adjusted EBITDA margins? And then, specifically, any significant milestones we should be mindful of through fiscal 2026 and 2027? And lastly, what gives you confidence in successful execution? Steven Sintros: Good question, Ronan. As you mentioned, we had talked about those milestones over the last couple of years. We had not given specific fiscal years for the achievement of those particular milestones. But when you look out over the next couple of years, our guidance for '26 is our guidance for '26. We expect to see steady improvement as we go through '27 and '28, getting closer to those mid-single-digit numbers—I would say by the third year or so. When you look at the profitability side, again, this year our guidance is our guidance. We have a lot inflecting in the next 18 to 24 months with the execution of our key initiatives and the completion of some of our tech projects. There's some large-scale profitability benefits that we're going to enable over the next year or so. And, again, we're not kind of giving guidance for '27 or '28 right now, but we believe that as we get through '27, you'll start to hit some of that inflection. Now, one of the things that at least over the course of this year into next year we have to keep an eye on is the impact of tariffs on our cost structure and so on. But we do feel like as you get to a year from now, you're going to start to have better line of sight to the inflection of some of those large-scale initiatives that will be starting to come into our results. We have a lot of confidence in the plan we've put forth. We think there are a lot of real benefits to be yielded. It's really a matter of time and executing these tech transformations and getting to the finish line. Ronan Kennedy: That's helpful. Thank you. And then if I'm not mistaken, I think fiscal 4Q 2025 was the highest quarter in new account installation. That momentum appears to have been sustained. Can you talk about those strategic investments in growth and the new customer acquisitions, but also the investments that you're making in the salesforce, the service organization, and any initial impact from the UniFirst Way initiatives through the COO? Steven Sintros: Starting with the sales organization, we talked a lot in the fourth quarter about the restructuring of the sales organization, adding different roles to ensure that we have the right level of sales representative in front of the right prospects. So, it's more of a tiered sales organization than it's been in the past. There were some strategic headcount increases that were made primarily in the back half of last year. And we're starting to see good progress on sales rep productivity and the yield from those additional resources in that restructuring. From a service perspective, again, kind of reiterating what we talked about in our fourth quarter earnings call: a number of strategic headcount additions to help bolster account management, account retention, adding some breadth and capacity to our service organization. Because when you think about our growth model, new account sales is obviously a key part of that. You look at the other key components of our growth formula—whether it be retention, strategic upsell into our customer base, as well as the management of price across our customer base—our service organization has a large responsibility in executing those three other pillars of growth. So, adding some of those strategic resources is starting to get us ahead in a number of those areas. I talked about in the quarter how we're starting to see some momentum in customer upsell, as well as some continued improvement in existing account retention. So, it's really a number of those things in the service organization coming together to drive the growth model. And that does filter into the service operations execution with the UniFirst Way. When we talk about renewing accounts and the discipline around ensuring that we're managing our account renewal process, just as an example, in a very disciplined, organized way. We've talked over the course of last year how our metrics around accounts renewed continued to sequentially improve. And it's not a surprise that that's yielding improved overall customer retention. So, that's one example I can give of our overall operational execution discipline yielding benefits in our growth model through our service organization investment. I know you asked a lot of pieces to that question. Feel free to follow up if I didn't answer what you've asked. Tim Mulrooney: Steve, Shane, good morning. Just sticking on this higher new account growth conversation. I think you characterized that in your prepared remarks even as strong new account sales. So, I was hoping you could unpack that a bit more for me. Curious if you know, the new accounts that you're winning, which I think you said was higher year-over-year, which was good to hear—does that broadly match your customer mix? Or are you noticing, I don't know, a higher number of new accounts from any particular industry or client type? Steven Sintros: I would talk about it less in terms of industry and probably more in terms of customer size. When I talk about some of the structural changes we've made in our sales organization to more of a tiered model, we had previously talked about sales in the context of national accounts or local accounts. Well, there's a large universe of accounts that fall in between the, say, $80-a-week account and the true national accounts. And we're really making more progress over time in those mid-sized accounts. And that was really part of that investment in this tiered selling organization where we have sales reps focused on that tier of customer as opposed to just the two ends of the spectrum. So, that's been an evolution over the last couple of years, and that's something we're going to continue. Because we think we can yield a lot better success in that midsize customer demographic, and we're starting to see the success there. Tim Mulrooney: Helpful color. Thank you. And you had strong new account growth, but you did mention in your prepared remarks growth was somewhat tempered by a softer employment climate, which, I guess, affected your rental customer accounts. You've highlighted net wearer levels as being a slight headwind the last couple of quarters. But has that gotten progressively more difficult the last couple of months? We all can see the job numbers. And, look, if you've got good, strong new account growth, but your organic growth is low single-digit, that implies that something is offsetting that. Right? So, I assume that's the net wearer levels. Can you set me straight on that and talk about if that's gotten progressively more of a headwind recently? Thank you. Steven Sintros: Probably the way I categorize it is it has gotten incrementally more impactful. And look, we are on a journey to building toward stronger growth. So, when we talk about stronger new account sales and better retention, we still have progress to make in those areas. And the one in particular is that existing account penetration. So, that is sort of the universe that encompasses the employment situation, but also the work that we do to continue to add product placements to our customers. So, yes, there was some incremental weakness in that area. And some of that was offset by some progress that we have made in product placements. I think that continues to be the biggest opportunity over the next couple of years combined with continuing our journey on improved retention to drive toward that mid-single-digit sustainable growth. Josh Chan: Hi. Good morning, Steve, Shane. Thanks for taking my questions. I was wondering about your unchanged revenue guidance because it sounds like you have decent momentum in the business. You know, it sounds like you're installing some national accounts customers in the quarter, a couple of acquisitions. So, I was wondering about the potential that the guidance could have been raised and maybe why it wasn't necessarily raised on the revenue side. Steven Sintros: Good question. I mean, I think we're one quarter into the year, but I think your comment is correct. I think we do feel like we have some good momentum on the top-line side. I think it's just a little early to make meaningful changes to any of the guidance. But, no, I think incrementally, we do feel positive about the top line. I think some of the economic weakness that I just talked about—I made in my comments some remarks on the direct sales side—some of our customers just have sort of incrementally less purchasing, so there's a little bit of a drag there as well. And given how early we are in the year, I think that's what landed us at the guidance that we've reiterated. Josh Chan: Okay. Great. Thank you for that. And then on your comment earlier about, you know, hitting some sort of inflection in '27 in terms of these margin improvement initiatives. Could you just kind of bucket for us what categories of savings you expect to achieve with these projects and how they will kind of operationally flow through into the business? Thank you. Steven Sintros: Sure. I mean, there are a number of things, and I talked about some of them in a little bit more depth last quarter. But when you look at some of the bigger opportunities that are out there, I'll give a couple of examples. One of them is sort of the enablement of what I'll call global inventory sharing, which is across our used garment portfolio. Today, we don't meaningfully share used garments across different facilities. So, that's something we're actively working through with our tech initiatives as well as our operational execution teams to put the technology and processes in place to enable that. That is a meaningful impact. Now, as you save on merchandise, as you all know, less new merchandise going in service ultimately materializes as what would have been new merchandise coming in service amortizing over time. It's not an immediate margin impact. So, that's something that as we go through '27, we hope to be enabling. I don't have a date right now that I would give to you to say when will that be enabled, but then there will be a longer tail to that to get the full benefit of starting to reutilize that used merchandise in a more meaningful way. A couple of other opportunities that are somewhat larger scale: We have some new products that we will be launching in the facility service area. That will allow us to penetrate our customers further but also allow for some meaningful sourcing improvements in some of those products. That's something, again, that we expect to be launching over the course of '27. So, part of the reason that '27 seems like a pivot year is because we believe it will be—that a number of these things will be going live. But the full impact of them won't be hitting until later in that year or even into the year after. So, as we go forward over the upcoming quarters, we'll be able to crystallize some of that timing better for everybody. But there are some meaningful initiatives that we feel can inflect the margins. At the same time, some of the operational improvement things are more ongoing and will start to build over the course of '27 into the upcoming years. That being said, there's still a fair amount of investment and execution around these tech and other initiatives to get them off the ground. And that will keep—we've talked about going through this year—some of the margins muted until we hit that inflection point. But part of that journey is also, as you get to the other side of these things, meaningfully taking advantage of our new infrastructure to sort of moderate the G&A machine that we've been managing with all of these tech projects and other projects, to a point where some of them will be enabled by the technology (more automation, centralization, and efficiency), and some will just be the wind-down of some of the additional resources that are supporting all of these initiatives. So, hopefully, that gives you a sense. You know, it's not just around the corner, but we are getting to a much closer line of sight to these things starting to inflect. Alex Hess: Hi, everybody, and happy New Year. This is Alex Hess on for Andrew Steinerman. Wanted to maybe start with the margins in the quarter. Could you elaborate how much of the in-year sales and service investments fell in 1Q? And should we expect this pace to continue or will it moderate from here? Just trying to sort of think about the margin impact there. Steven Sintros: Yes, good question. And I made the comment that, you know, some of these investments sort of materialized over the back half of last year. So, when you think about that from a year-over-year quarter perspective, some of these margin impacts of these investments are more pronounced in the first quarter than they will be as you move throughout the year. And I don't think it's a stretch to say that the first quarter from some of those specifics is sort of the biggest impact, based on the way those costs trended last year and the way we expect them to trend this year. I think that's what you're getting at. Alex Hess: Correct, sir. Thank you. And then on the ERP implementation, can you let us just sort of know where that stands, what still needs to be done—and, keeping in mind this is a very big project for you guys—do you have a firmer sense of when in '27 ERP implementation will be complete? And then, you know, anything we need to just sort of keep in mind with respect to the ERP implementation. Steven Sintros: When you look at this year, there will be some releases scheduled for this year—the more core financial foundation of the ERP. In '27, there'll be some supply chain-centric and some procurement enhancements that will come online. Don't have the exact end dates for those yet, but in the bulk of the next 18 months, this will be largely playing out. And that sort of fits with the timeline I'm giving as some of these benefits start to materialize. So, this year is primarily still foundational. And then as we get into next year, there are some more of those supply chain pieces that will come online. Operator: What I would add is when we first started talking about the ERP, we said that the timeline took us largely through 2027, with that last release being supply chain-centric—delivering some of the capabilities Steve spoke about, sort of benefiting the latter half of '27 and into '28. That timeline really hasn't changed. Again, Steve had mentioned this year, we're going to be focused on the core finance modules and starting to progress that third and final release. That'll take us through 2027. Steven Sintros: I want to thank everyone for joining us this morning to review our first quarter results for fiscal twenty twenty six. Thank you, and have a great day.
Operator: Good day, and thank you for standing by. Welcome to Apogee Enterprises Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. As a reminder, this conference is being recorded. For replay purposes. Will now turn the conference over to Jeremy Stephan, Vice President, Investor Relations and Communications to begin. Jeremy, please go ahead. Jeremy Stephan: Thank you. Good morning, and welcome to Apogee Enterprises. Fiscal 2026 Third Quarter Earnings Call. On the call today are Don Nolan, Apogee's Chief Executive Officer and Mark Ogdahl, our interim chief financial officer. During this call, the team will reference certain non-GAAP financial measures. Definitions of these measures a reconciliation to the nearest GAAP measures provided in the earnings release and slide deck. Are available in the Investor Relations section of our website. As a reminder, today's call will contain forward-looking statements. These reflect management's expectations based on currently available information. Actual results may differ materially from those expressed today. More information about factors could affect Apogee's business and financial results be found in our press release and in the company's SEC filings. With that, I'll turn the call over to Don. Thanks, Jeremy, and good morning, everyone. We're glad you could join us for our third quarter earnings call. Don Nolan: Before I begin my prepared remarks, I want to acknowledge an announcement made earlier today. Matt Osberg has informed us of his decision to leave the company to pursue an opportunity elsewhere. Want to thank Matt for his many contributions over the past three years, and wish him continued success in the future. Stepping in as the interim CFO is our chief accounting officer, Mark Ogdahl. Who has been at Apogee for over twenty-five years. I look forward to partnering with him as we begin our search for the company's next CFO. Next, I'd like to start by saying it's a real privilege have the opportunity to lead the company through this period of transition. While I've served on Apogee's board since 2013, the past few months as CEO have given me a deeper perspective strengthening my confidence in Apogee's future. I'd like to share a few observations. First, our customers consistently tell us how much they value the quality and reliability of our products and services. That feedback is energizing and underscores a core principle of mine, Companies that delight their customers, win in the market. Apogee has built that reputation over seventy-six years and continues to raise the bar. Second, across Apogee, we have exceptional talent. Individuals who are passionate, resilient, and relentlessly focused on exceeding the expectations of customers. Their ability to deliver tremendous value especially in this dynamic environment, reinforces the strength of this company and gives me tremendous confidence in our future. And third, the Apogee management system continues to drive value across our manufacturing footprint. The returns on our AMS investments are fueling margin benefits and reinforcing the operational excellence helps define our organization. I'd also like to highlight the UW Solutions acquisition which celebrated its one-year anniversary this quarter. We pleased with the initial results, and the team is on track to deliver our fiscal 2026 expectations of $100 million in net sales approximately 20% in adjusted EBITDA margin. UW Solutions expands our market and geographical reach adding substrate capabilities and coding technology and provides a platform for potential growth in fiscal 2027 and beyond. Now turning to our results for the quarter. I am pleased with the team's ability to deliver in a dynamic environment. This performance reflects not only disciplined execution, but also the strength of our culture the dedication for our people. It reinforces my confidence in the strategies put in place and our ability to adapt and win in dynamic markets. Although macroeconomic factors remain challenging, Apogee is well positioned because of three key strengths. Operational excellence through AMS, driving continued productivity improvement across our manufacturing footprint, our proven cost out execution with Fortify phase one, phase two, and a strong balance sheet and healthy cash generation, giving us flexibility for future M&A. These fundamentals, combined with the talent of our team, enable us to navigate near-term challenges and capitalize on long-term opportunities. In the near term, our priorities remain clear and unchanged. First, become the economic leader in our target markets with differentiated product and service offerings and competitive cost structures. Number two, managing our portfolio through pursuing accretive M&A opportunities aligned with our strategic and financial objectives. And number three, strengthening our core by driving more efficient operations, greater scalability, and enabling sustained profitable growth. I'm confident in our strategy and excited about what's ahead Together, we have the opportunity to create significant value for all stakeholders. With that, I'll turn it over to Mark. Thanks, Don, and good morning, everyone. First, I'll begin with the review of the results of the third quarter. And then follow with commentary on our outlook for the remainder of fiscal 2026 and some early insights into fiscal 2027. Beginning with our consolidated results, net sales increased 2.1% to $348.6 million primarily driven by $18.4 million of inorganic sales from the acquisition of UW Solutions. As well as favorable product mix. This was partially offset by lower volume primarily in metals. Adjusted EBITDA margin decreased slightly to 13.2%, The year-over-year change was primarily driven by lower volume and price and higher aluminum and health insurance costs. These were partially offset by lower incentive compensation expense and benefits from the cost savings related to Fortify phase two. Adjusted diluted EPS was $1.02. In line with our expectations and down year-over-year primarily driven by higher amortization and interest expense as a result of the UW Solutions acquisition. Turning to our segment results. Metals net sales declined primarily due to lower volume partially offset by favorable price and product mix. Adjusted EBITDA margin improved to 13.5%, primarily driven by increased productivity, including cost savings from Fortify phase two, lower incentive compensation expense, and favorable price and product mix. Mark Ogdahl: These were partially offset by lower volume. Our services segment delivered its seventh consecutive quarter of year-over-year net sales growth. Primarily due to increased volume. Adjusted EBITDA margin increased to 9.7% mostly driven by lower incentive compensation expense. Partially offset by unfavorable project mix. Additionally, backlog for services ended the quarter at $775 million down slightly from Q2 but up over 4% compared to Q3 of last year. Glass net sales increased slightly to approximately $71 million primarily driven by increased volume and favorable mix. Partially offset by lower price driven by end market demand softness. Adjusted EBITDA margin moderated from last year primarily due to lower price and higher material costs. Partially offset by higher volume favorable product mix, and lower incentive compensation expense. Performance surfaces net sales increased driven by the inorganic sales contribution from the acquisition of UW Solutions. Inorganic growth primarily from price. Adjusted EBITDA margin decreased primarily driven by the dilutive impact of lower adjusted EBITDA margin from the UW Solutions and unfavorable productivity. Partially offset by favorable product mix and price. Turning to cash flow and the balance sheet. For the third quarter, net cash provided by operating activities was $29.3 million down slightly from $31 million in the third quarter of prior year. On a year-to-date basis, cash from operating activities was $66.6 million compared to $95.1 million a year ago, due to lower operating cash flow in the first quarter. Our balance sheet remains strong Don Nolan: with a consolidated leverage ratio of 1.4 times. Mark Ogdahl: No near-term debt maturities and significant capital available for future deployment. Turning now to our outlook for the remainder of fiscal 2026. We are updating our estimates for both net sales and adjusted diluted EPS. We now expect net sales to be approximately $1.39 billion and adjusted diluted EPS in the range of $3.40 to $3.50. This outlook includes an updated estimate of the EPS impact from tariffs of approximately $0.30 Our updated outlook assumes an adjusted effective tax rate of approximately 27% and capital expenditures between $25 million and $30 million The current macroeconomic backdrop remains challenging, in both our metals and glass segments competitive market dynamics continue to put significant pressure on pricing and volume. Additionally, in our metal segment, average aluminum prices in the third quarter rose approximately 13% compared to the second quarter and are up over 50% compared to the third quarter of last year. These factors are driving volume pressure and margin compression. And we anticipate this dynamic will continue to impact us through the fourth quarter and to some extent, into fiscal 2027. Additionally, as we look ahead to fiscal 2027, we expect cost headwinds from the normalization of incentive compensation expense. And higher health insurance costs. In order to offset a portion of the anticipated impact of these headwinds, we have expanded the scope of Project Fortify Phase two to include further restructuring actions primarily in metals and corporate. Based on the expected benefits of the expanded scope of Fortify phase two, we now expect to incur a total of approximately $28 to $29 million in pretax charges and deliver an estimated annual pretax cost savings of approximately $25 to $26 million. With approximately $10 million of that benefit to be realized in fiscal 2027. In addition, we expect the majority of the tariff impact of fiscal 2026 not to repeat. And to be a benefit to fiscal 2027. Although we are on the in the initial stages of our planning for fiscal 2027, we are taking proactive measures. Such as the expansion of Fortify phase two to manage near-term headwinds as well as position us to be more agile and better equipped to capitalize on growth opportunities as market conditions stabilize. Finally, I wanna recognize and thank our employees for their resilience and dedication. Their commitment is critical to our success. By executing with rigor today, we are laying the groundwork for long-term value creation opportunities for our shareholders. Don Nolan: With that, Mark Ogdahl: will now open the call to questions. Operator, please go ahead. Operator: Thank you. As a reminder, to ask a question at this time, you will need to press 11 on your telephone and wait for your name to be announced. Please stand by while we compile the Q and A roster. First question coming from the line of Brent Thielman with D. A. Davidson. Your line is now open. Brent Thielman: Hey. Thanks. Good morning. Don, I mean, a lot has changed here since the last earnings call. Don Nolan: And maybe if you could just start off and talk about what the board is looking for in terms of new leadership on a go forward basis. And is there any different view on the strategic direction of the company going forward versus what's been vocalized is the strategy before, particularly sort of scaling the Performance Services business? Hi, Brent. Brent Thielman: Thanks for that question. No. No change in strategy. We remain focused on the existing strategies. The strategies that quite frankly, were working, you know, before my tenure. On becoming the economic leader in our target market, continuing to manage the portfolio, and pursuing accretive M&A opportunities in faster growing markets. You UW Solutions being the the best example And then, you know, strengthening our core, driving more efficient operations, greater scalability, and and enabling, you know, sustained profitable growth. So notes, strict There's no change whatsoever. Brent Thielman: Okay. And and sorry, Don. In terms of what you're looking for in terms of new new leadership as you're out with Don Nolan: CEO search here? Yeah. So so look, we started we started our process. And clearly, we're looking for someone who has deep growth and operational excellence experience M&A integration, you know, the things that are are are called out in our strategy. Brent Thielman: Alright. And then I mean, in terms of the updated outlook, it looks to me like the big impact there is just discontinued inflation and aluminum that we continue to see post quarter. Assume it's predominantly impacting the metals Yes, Brian, if I could. But that's the yeah. Yeah. Please. I'll let you follow-up with your the rest of your question. No. Just just in regard to the outlook. And the updated outlook, looks like it's primarily the metals segment, I presume. If that's the case, Don Nolan: looks like Brent Thielman: you're sort of embedding a more severe impact to margins in metals in the fourth quarter relative to what you saw in the third quarter. Is that the right way to think about this? Yeah, Brent. Good observations. You have you know, both I would say both in metals and in glass, Don Nolan: market dynamics continue to be very they continue to to evolve. So, yeah, back on metals, the prime primary issue there is Brent Thielman: the aluminum prices continue to increase. You know, in our prepared comments, we commented that Don Nolan: between Q2 and Q3, Brent Thielman: aluminum prices went up third 13%. Don Nolan: And then even here in December, we're seeing, you know, continued increases in that price So the margin pressures continue to build. Brent Thielman: And then, you know, maybe a little bit in glass as well. Don Nolan: You know, we have about a sixty day window on what we can see for orders. At the '3 or excuse me, at the '2, we thought that we would kinda maintain that level, but we're we're seeing slightly declines there. So we're again, seeing a little bit of an impact both on volume and price going into the fourth quarter. I would tell you, though, that, you know, we you know, we remain focused on managing our margin dollars. Brent Thielman: So as as Don Nolan: to the best of our abilities, we're controlling costs and implementing things that we can control those costs, Fortify phase two expansion as an example. Brent Thielman: And and I guess not notwithstanding some of these short term pressures that you are seeing in the market, are the long term kind of EBITDA margin targets that you laid out before they'll sort of appropriate to think about? Again, know there's going to be some nuances in the near term for some of the things you called out. Don Nolan: That's exactly right, Brent. Brent Thielman: Okay. Okay. Thank you. I'll pass it on. Don Nolan: Thank you. Operator: And our next question in queue coming from the line of Jon Braatz with KCCA. Your line is now open. Jon Braatz: Hello? Don Nolan: Hi, Jon. Oh, I'm sorry. I I I missed my queue. Jon Braatz: Don, I just want to go back to the Don Nolan: sort of the strategic direction of the company. And Jon Braatz: how much emphasis you might place on on M&A activity because Don Nolan: let's face it, in in the past, it just it hasn't turned out to M&A activity hasn't been that Jon Braatz: positive for Apogee. And it seems to me the focus should be almost exclusively on running the business as profitably as possible Don Nolan: returning cash flow to Jon Braatz: to shareholders in terms of dividends and share repurchases. So I I wanna get a better sense from you as as Don Nolan: where you see M&A going forward. Jon Braatz: Well, look. Our our our pipeline for M&A is robust. It's very active right now. And, you know, I I we we have spent a great deal of time and energy building all the processes and systems in the company. To continue to drive M&A. UW Solutions was a great a great acquisition for us. Twelve months in, we have achieved or beat all of our objectives. So you know, it's a business that's growing robustly. You know, our our performance services business, that segment, was able to successfully integrate a the UW Solutions almost doubling the size of the business and deliver organic growth at the same time. So we've demonstrated that we can execute We can we can select a great acquisition that works for in our strategy. We have the discipline to execute on the integration. And we continue to work our our pipeline aggressively. Jon Braatz: Okay. Another question. In in the fourth quarter of last year, when Project Fortify was announced, mentioned $26 million in cost, costs that will be incurred and savings of 13 to 15 million. Don Nolan: And Jon Braatz: this quarter, said cost of 28 million to 29 million a little bit higher. But savings of 25 to 26. Is what's the difference between the fourth quarter savings and and what you said here in the first quarter? Am I I have something wrong there? Nope. Jon, I'll take that Yes. You're the ranges that you provided were accurate. The the increases in in costs are primarily head headcount based, and re and holding our cost structure tight, we we we did incur some footprint related matters in the fourth quarter here. Don Nolan: Which was the Jon Braatz: the primary cost in the court in the fourth quarter. But, you know, again, we're we're focusing on things that will drive cost savings going forward. Don Nolan: So so the cost savings Jon Braatz: 13 to 15 to 25 to 26, that's correct with that number? Yep. That's what we're showing. Don Nolan: Okay. Alright. Alright. Thank you. Operator: Thank you. Our next question coming from the line of Gowshihan Sriharan with Singling Research. Your line is now open. Gowshihan Sriharan: Good morning. Can you hear me? Don Nolan: Yes. Loud and clear. Gowshihan Sriharan: Thank you. Thank you for taking my questions. My first question is on on the metals in glass. I know you guys have mentioned some pricing discipline Don Nolan: with keeping the plants efficiently utilized. How are you thinking about the bid approval process threshold and hurdle mud hurdle margins changing over the six months. I mean, have you walked away from any large pack, projects or packages that might that might leave kind of under absorption risk in early fiscal twenty seven? And are you willing to or when would you start considering the the the flexibility around the pricing discipline? Don Nolan: I'll I'll start off, and Mark Ogdahl: then turn it over to Mark. But look, glass is a highly competitive market. Don Nolan: But the glass team has been working hard maximize EBITDA dollar contribution while protect protecting their premium margins. They faced significant challenges on volume and price, true, But, look, the business is in a much stronger position than during the last downturn. Even with the market challenges that we face today, glass is still operating in the teens EBITDA margin versus mid single digit in the last downturn. So, you know, yes, we're we're gonna continue to to focus on maximizing EBITDA dollar contribution. As we move as as the market, you know, shifts. Mark Ogdahl: Don, I really I don't really have anything to add. I think you covered up what I thought was important with is, you know, we we implemented some really, really nice and solid pricing strategies as we were executing our initiating our current strategy. And we intend to to continue on that process. Of course, you know, volume Don Nolan: matters. Mark Ogdahl: So we need to we need to look at every every project and every opportunity when they come across. The other thing I would mention is you know, as was pointed out, you know, fortify one, fortify two, Don Nolan: we continue to actively manage our cost structure. To mitigate, you know, these short term headwinds. So in addition to making sure that we hold onto our margins and manage manage the the top line appropriately. Also managing our cost structure. Gowshihan Sriharan: Gotcha. And are you seeing any noticeable pricing differences between your, say, your strategic repeat customers as opposed to your more transactional work? Has that Don Nolan: No. I don't think so. Gowshihan Sriharan: Gap kind of widened or narrow since we spoke, in Q2? Don Nolan: You know, I think we're we're look. We're seeing higher volume of projects. Mark Ogdahl: In glass for sure. Don Nolan: And, you know, on average, a little smaller. What we've seen in the past. Mark Ogdahl: Yep. Primarily Oh, it's a very challenging environment. There you go. Thank you. Yes. Gowshihan Sriharan: And on the performance services side, can you kind of unpack on how much of that growth is coming from the high margin SKUs versus kind of mid tier offerings? And with the current mix, would you adjust your long term margin aspirations for that segment? Don Nolan: Well, we've so so we've mentioned this in past quarters. We took some share over the past few quarters in our distribution business. So these are, you know, think of it as retail shelf space. Okay? So we've we've expanded our shelf space. A couple years ago, we lost some. And we gained that back. Mark Ogdahl: And Don Nolan: that is that that is a very attractive business. Gowshihan Sriharan: Gotcha. The the other the other area that I might mention is Don Nolan: look, the UWS solutions, one of the reasons why we thought this was such an attractive acquisition is because it allowed us to enter a part of the flooring market that serves warehouses and manufacturing facilities. Mark Ogdahl: So this is a growth area Don Nolan: and has has demonstrated some nice organic growth for us. Mark Ogdahl: Okay. In our highest in our highest performing segment. Don Nolan: Yeah. Highest margin segment. Yeah. Gowshihan Sriharan: I'll make this my last question. I know you've highlighted the lower incentive compensation as a tailwind to margin across several segments. This quarter. I know I I think you've alluded that that there will be some kind of normalization in in the the intensive compensation. But how how should we think about from a sustainability and talent standpoint? Are you structurally resetting some of that incentive programs? Or or is this or is this, paying below at a at a at a tough year? Are you as you look at the labor market in your key regions, are you comfortable with the overall comp structure remains competitive? Enough to, execute project 45 and your growth plans. Mark Ogdahl: Yeah. We we believe our our structure is fine. We just entered a into a more difficult year and our we're not meeting our targets. So our compensation will be less this year, but we expect that to normalize. Into the future. Gowshihan Sriharan: Thank you. That's all I have. Thank you, guys. Operator: Thank you. Our next question coming from the line of Julio Romero with Sidoti. Your line is now open. Julio Romero: Thanks. Hey. Good morning. Don, could you help us think about how you view the company's growth trajectory and opportunity set And then also, how does the next leg of growth in your view for the company translate to any change in in ROIC hurdles or or or metrics? Don Nolan: Well, Julio Romero: you know, first of all, we'll be the strategy that we're focused on hasn't changed. So we remain focused on becoming the economic leader in the target markets we serve. Managing our portfolio, and strength strengthening the core. Julio Romero: So Don Nolan: no change, Julio, in how we think about where we're where we're gonna grow and how. The addition of UW Solutions certainly opened up new markets, new products, that will enable us to grow faster. And as part of our managing portfolio strategy, we continue to look for new opportunities along those lines. So looking for acquisitions that will enable faster growth and at higher margins. We're gonna we're gonna talk a lot more about that on our next call when we talk about fiscal year 2027. Julio Romero: Okay. Understood. I guess maybe can you dig into a little bit into the priorities that are more near term in nature. Obviously, you you you have project Fortify expansion any other kind of quicker turn wins, or or low hanging fruit that Mark Ogdahl: looking to kind of achieve early on? Don Nolan: Well, Julio Romero: delivering the results you know, delivering our results will be critical. Know, we're we're focused on delivering the year. Right now. Julio Romero: I mean, that's that's front and center. Mark Ogdahl: Hooey, I would just add yes, project four to five phase two is probably the most important, but I would I would suggest that, you know, we're amping up AMS. Again as it as we think about, you know, how we're trying to drive cost structure down, our best tool to do that is through the Apogee management system. So that's that's our that's gonna be our tool to get there. Don Nolan: I mean, to Frank, Julio, so so AMS, I mean, that's one of my observations for the search my first sixty days. Operational excellence of productivity improvements that we've been able to deliver through AMS are are truly extraordinary, especially in the glass business. We're seeing strength across the board, safety, quality, on time delivery, you name it. And by the way, that was the birthplace of AMS. So they're leading the way and it shows what we could do with the rest of the company. So it's it'll be a key focus for us. Last thing is, you know, I I mentioned a couple times, but accretive M&A, it's it's right. It's front and center too. We have a very we have a robust pipeline and we're active. Julio Romero: Got it. And I guess it just you know, just going back to my first question a little bit more, you know, and it ties into the your comment about robust M&A pipeline. Do you see any any kind of you know, viewpoint difference with regards to yourself versus the last management team with regards to kind of kind of you know, IRR hurdles or or rate of return hurdles, when you look at that M&A and kind of moving forward with that. Don Nolan: No. I don't think any difference in in the Julio Romero: in the financial Don Nolan: analysis, but I would say, you know, move faster. And you know, we we move with discipline, of course, but also faster. Julio Romero: Got it. That's that's helpful. I appreciate it. And then last one for me would just be on you know, you gave some some preliminary commentary on your fiscal twenty seven You talked about you don't expect the tariff impact to reoccur in fiscal twenty seven, but any other kind of high level thoughts with regards to how you see, you know, the possibility of revenue or profit growth in '27? Mark Ogdahl: Yeah. I guess I'll reiterate, you know, kind of in the process right now of our doing our AOPs. We highlighted what I viewed are the are the key headwinds and headwinds that have in front of us, tailwinds being project four to five phase two, and the tariffs not repeating. In the headwinds, of course, you know, we've covered now several times with normal normalization of incentive comp and certainly, aluminum prices will continue to be monitored as we go through the fourth quarter and as we scenario plan our AOP. Julio Romero: Helpful. Best of luck, guys. Thanks. Don Nolan: Thank you. Operator: Thank you. And I'm showing no further questions in queue at this time. I will now turn the call back over to Donald for any closing comments. Don Nolan: Well, thank you for joining us today. We look forward to sharing the fourth quarter and full year results in April. Along with our fiscal 2027 outlet. I would look. I hope you have a great week. Operator: Ladies and gentlemen, this concludes today's conference call. I Thank you for your participation, and you may now disconnect.
Operator: Good morning, everyone, and welcome to the Cal-Maine Foods Second Quarter Fiscal 2026 Earnings Conference Call. All participants are in a listen-only mode. After today's prepared remarks, there will be a question and answer session. At that time, I will provide instructions for those wishing to ask a question. Please note that this call is being recorded. I will now turn the call over to Sherman Miller, President and Chief Executive Officer of Cal-Maine Foods. Please go ahead, sir. Good morning. Sherman Miller: Thank you for joining us today. I want to remind everyone that today's remarks may include forward-looking statements. These are based on management's current expectations and are subject to risks and uncertainties described in our SEC filings. Looking at our performance in the second quarter and first half of the year, the story is clear. We've built real momentum. We delivered solid results even against a tough comparison to last year, which was marked by supply-demand imbalances and historically high prices. With lower egg prices, our increasingly diversified business model, combined with effective execution, has proven to be a source of resilience. That positions us uniquely today, a rare combination of both value and growth, with the potential to strengthen even further over time. Our specialty egg business maintained strong prices and volumes despite challenging comparisons and delivered growth in the first half of the fiscal year. At the same time, our recently announced expansions are positioning our prepared foods business to deliver sustained double-digit volume growth. Another key trend we're seeing is the ongoing shift in our sales mix across the portfolio. This shift was visible throughout the second quarter and first half of the fiscal year, and we expect it will steadily enhance the durability and predictability of our earnings. It's a direct reflection of the deliberate execution of our long-term strategy. We believe our results continue to reinforce just how effective that approach will be in pursuit of operational and financial excellence. Let me share a few strategic highlights from the second quarter and first half of the year that show how we're driving continued sale diversification and favorable mix shifts. In 2026, shell egg sales represented 84.4% of total net sales compared to 94.7%. Specialty eggs drove a greater portion of shell egg sales, accounting for 44% of total shell egg sales compared to 31.7%. Specialty eggs and prepared foods combined accounted for 46.4% of net sales compared to 31.2%. In 2026, shell egg sales represented 85% of total net sales compared to 94.5% in 2025. Specialty eggs drove a greater portion of shell egg sales, accounting for 39.6% of total shell egg sales compared to 33%. Specialty eggs and prepared foods combined accounted for 42.8% of net sales compared to 32.4%. None of this happens without our people. I want to sincerely thank our teams across the organization whose disciplined focus and commitment to excellence drive the operational and financial performance that underpins everything we do. Their hard work and dedication continue to set us apart, and these results are a direct reflection of their efforts. Before Max walks you through our results in detail and provides additional color on our financial performance, I'd like to take a few minutes to focus on the long-term strategic direction of the company, how we're positioning ourselves for sustainable growth, and where we see the most compelling opportunities ahead. Cal-Maine enters this moment from a position of strength. Our core shell egg platform is durable, proven, and built through decades of effective execution. That foundation gives us something rare in today's market: structural integrity at the base of our business paired with powerful avenues for growth. What makes this platform particularly compelling is how the category and consumer behavior are evolving. Across the US, eggs remain an affordable protein source. Consumers are seeking complete high-quality proteins, GLP-1 users are gravitating towards satisfying nutrient-dense foods, younger consumers and families are treating eggs as an everyday staple, and across the board, convenience is a major tailwind with rising interest in ready-to-eat and ready-to-heat formats. We see consumers trading up, with specialty and premium segments showing stronger repeat usage and alignment with the attributes people care about: wellness, taste, simplicity, and clean labels. Put simply, eggs are leading on health, convenience, and quality. That combination is reshaping category growth in a way that we believe plays directly to our strengths. This is why we're intentionally evolving Cal-Maine into a more resilient, strategically diversified portfolio, growing specialty eggs and accelerating value-added prepared foods. It's not a pivot; it's a progression. We're taking a well-established business and expanding into multiple growth engines that we believe will deliver higher quality earnings, deeper customer partnerships, and a stronger alignment with long-term consumer trends. A major part of that progression is our prepared foods platform. Building on the acquisition of Echo Lake Foods, we're investing to meaningfully expand our prepared foods capabilities. We've launched a $15 million network optimization and capacity expansion project that is expected to add 17 million pounds of annual scrambled egg production by mid-fiscal 2027. This project consolidates all scrambled egg manufacturing into a single modernized facility, eliminating redundancy across sites, streamlining workflows, and strengthening supply reliability. It also adds a new production line and upgraded automation that will improve yields, reduce labor requirements, and increase throughput. In short, we believe it positions Echo Lake Foods to support both near-term customer demand and long-term organic growth with greater efficiency and precision. This builds on our previously announced $14.8 million high-speed pancake line, which is expected to add another 12 million pounds of capacity through early fiscal 2027. As these projects ramp, Echo Lake Foods has and will experience temporary lower volume and higher costs beginning late in 2026 and are expected to continue through the remainder of the fiscal year. We believe the short-term impact will be outweighed by the long-term benefits: higher output, improved efficiency, and a more agile, modernized platform. We're also scaling our joint venture, Trapini Foods, which is investing $7 million through fiscal 2028 to add 18 million pounds of capacity, expanding production more than sevenfold. When you combine Echo Lake and Trapini, we expect total prepared foods capacity to increase more than 30% over the next eighteen to twenty-four months. We believe this will position us to meet accelerating demand for high-protein, ready-to-eat, convenience-forward formats that are aligned with changing consumer preferences. In addition to accelerating value-added prepared foods, we're growing specialty eggs. In the second quarter, we acquired certain production assets from Clean Egg LLC in Texas, which expands our specialty cage-free and free-range egg capacity, supports local sourcing, captures accelerating market growth, and optimizes our supply chain. These investments are expected to help strengthen our mid-cycle earnings profile and build a more resilient business over time. They also reinforce what makes Cal-Maine unique among agriculture producers. We're a pure-play leader in one essential category, selling roughly one out of every six eggs consumed in the US, with full vertical integration from feed and flock to processing, distribution, and customer delivery. We're using that scale strategically, designing solutions that make egg consumption easier, more valuable, and more accessible across all channels. This is a long-term investment story, not a short-term trade. The egg industry has always been cyclical, supply-driven, and headline-sensitive. The objective has never been to avoid cycles; it's to manage through them effectively. That is where we have consistently differentiated ourselves. We have been in environments like this many times before. Periods of supply disruption and price volatility are not new to this industry. Each time we've navigated them, we've emerged stronger. Importantly, the supply challenges related to high-path AI are not behind us. The current epi curve closely resembles prior years, including 2022. Global outbreaks continue, and recovery remains uneven and unpredictable rather than linear. This is not a short-term dislocation; it's a structured reality that reinforces the importance of scale and operational execution. Looking long-term, one of the most compelling opportunities in eggs is increasing US egg consumption. That growth does not occur without reliable supply. Reliability builds trust with retailers, food service partners, and consumers. Increasing in numbers over time is not a negative; it's a prerequisite for sustainable growth. Customers consistently value consistency over spot pricing, and in an environment where volatility is the norm, reliability becomes a durable competitive advantage. Our strategy is intentionally designed to perform across cycles. We maintain a strong balance sheet to preserve flexibility in all environments, pursue accretive growth with disciplined capital allocation, and continue expanding our portfolio across egg types and adjacent categories. We remain relentlessly focused on cost drivers and efficiency to protect margins through cycles, earning trust by doing the right thing with customers, employees, and partners. This is not a strategy for a single cycle; it's a strategy built for durability. Demand in this category is real, but it is also complex. What is often labeled as demand reflects a wide range of dynamic variables, including the timing and geography of bird gains or losses, shifts in where consumers shop, media-driven panic buying, weather patterns, wholesale market movements, promotional activity, and holiday timing. Navigating that complexity effectively is a core operational capability. Finally, this is a fundamentally different company than the last time we experienced similar market conditions. Today, we have a stronger balance sheet, meaningful growth both organically and through acquisitions, greater diversification into specialty eggs and prepared foods, deeper bench strength across the organization, and reduced exposure to pure commodity pricing through specialty mix, hybrid pricing models, and value-added products. We are more diversified, more resilient, and better positioned to compound value over the long term. With that, let me turn the call over to Max to drill down into our financial results and discuss our capital allocation framework. Max? Max Bowman: Thanks, Sherman, and good morning, everyone. As a reminder, we published our earnings release in October 2026. Unless otherwise indicated, all comparisons are to the comparable period of fiscal 2025. For 2026, net sales were $769.5 million compared to $954.7 million, down 19.4%. Total shell egg sales were $649.6 million compared to $903.9 million, down 28.1%, with 26.5% lower selling prices and 2.2% lower sales volumes. Conventional egg sales were $363.9 million compared to $616.9 million, down 41%, with 38.8% lower selling prices and 3.6% lower sales volumes. Specialty egg sales were $285.7 million compared to $287 million, down 0.4%, with relatively flat sales volume and selling prices. Breeder flocks grew 12.7%. Total chicks hatched rose 65.1%, and the average number of layer hens expanded 2.6%. Prepared food sales were $71.7 million compared to $10.4 million in 2025, up 586.4%, and compared to $83.9 million in 2026, down 14.5%. Echo Lake Foods contributed $56.6 million of the sales in 2026 compared to $70.5 million in sales in 2026. As Sherman mentioned, the announced expansion initiatives had an impact on the second quarter of fiscal 2026. Gross profit was $207.4 million compared to $356 million, down 41.8%, primarily driven by 26.5% lower shell egg selling prices and 2.2% lower shell egg sales volumes, partially offset by lower egg prices for outside purchases and a 3% increase in percent sold, as well as contributions from prepared foods. Operating income was $123.9 million compared to $278.1 million, down 55.5%, with an operating income margin of 16.1%. Net income attributable to Cal-Maine Foods was $102.8 million compared to $219.1 million, down 53.1%. Diluted earnings per share were $2.13 compared to $4.47, down 52.3%. Cost of sales decreased 6.1%. Lower costs associated with egg purchases and egg products more than offset the increase in prepared food costs due to the acquisition of Echo Lake Foods, as well as the increase in our farm production and processing, packaging, and warehousing costs. SG&A expenses increased 6.8% due to the addition of Echo Lake Foods and increased professional and legal fees. This was partially offset by a reduced charge in the change in earn-out liability recorded in the prior year period and lower employee-related costs. Net cash flows from operations were $94.8 million compared to $122.7 million, down 22.8%. We ended the quarter with cash and temporary cash investments of $1.1 billion, down 18.2%. We remain virtually debt-free. We purchased 846,037 shares of our common stock during the quarter for a total of $74.8 million. These transactions were completed under our current share repurchase authorization, which permits the repurchase of up to $500 million, of which $375.2 million remains available. In 2026, we will pay a cash dividend of approximately 72¢ per share to holders of our common stock pursuant to our variable dividend policy. The dividend is payable on February 12, 2026, to holders of record on January 28, 2026. The final amount paid per share will be based on the number of outstanding shares on the record date. Our capital allocation strategy is designed to balance disciplined stewardship with long-term value creation. We maintain a strong cash position and an unlevered balance sheet, giving us the flexibility to execute targeted and accretive acquisitions, reinvest through CapEx, and return capital to shareholders. Recent operating cash flows have funded strong dividends under our long-standing policy of paying one-third of net income and have also supported share repurchases to further enhance returns. At the same time, reinvestment is focused on expanding specialty eggs and prepared foods. Mix shift, scale efficiencies, and vertical integration drive margin enhancement and higher quality earnings. Together, these actions are expected to create total shareholder return in which dividends, buybacks, earnings per share growth, improved mix, and long-term multiple expansion all work together to compound value over time. Turning to 2026, net sales were $1.7 billion, down 2.8% or $48.4 million. Total shell egg sales were $1.4 billion compared to $1.6 billion, down 12.5%, with 12.6% lower selling prices as volumes remain relatively flat. Conventional egg sales were $869.8 million compared to $1.1 billion, down 21%, with 19.4% lower selling prices and 2% lower sales volumes. Specialty egg sales were $569.2 million compared to $543.7 million, up 4.7%, with 3.8% higher sales volumes and 0.8% higher selling prices. Breeder flocks grew 21.6%. Total chicks hatched rose 71%, and the average number of layer hens expanded 6%. Prepared food sales were $155.6 million compared to $19.4 million, up 702.9%. Echo Lake Foods contributed $127.1 million in sales. Gross profit was $518.7 million compared to $603.3 million, down 14%, primarily driven by 12.6% lower shell egg selling prices and partially offset by a decrease in the price and volume of outside egg purchases, as dozens produced increased 3.1%, as well as contributions from prepared foods. Operating income was $373.1 million compared to $465 million, down 19.8%, with an operating income margin of 22.1%. Net income attributable to Cal-Maine Foods was $302.1 million compared to $369 million, down 18.1%. Diluted earnings per share was $6.26 compared to $7.54, down 17%. Cost of sales increased 3.2% as our dozens produced increased 3.1%, and our farm production cost per dozen increased 2.1%. Our prepared foods cost increased due to the acquisition of Echo Lake Foods. These costs were partially offset by lower costs associated with outside egg purchases and egg products. SG&A expenses increased 9.2% due to the addition of Echo Lake Foods and increased professional and legal fees. This was partially offset by a reduced charge in the change in earn-out liability recorded in the prior year period. Net cash flow from operations was $373.4 million compared to $240.2 million, up 55.5%. That concludes my review of the financial results. I will now turn the call back over to Sherman. Sherman Miller: Thanks, Max. Looking ahead, our priorities remain centered on execution. As we expand Specialty Eggs and Prepared Foods, integrating new assets, scaling new capabilities, and continuing to focus on the quality and consistency customers expect. We're pursuing innovation and selective acquisitions that are expected to expand consumer choice, strengthen channel reach, and build a more reliable growth profile. Ultimately, our opportunity is to demonstrate where Cal-Maine's going, not just where it's been. Building a business with strong base returns and multiple growth engines. One that compounds value over time by serving consumers across every preference, at every rung of the egg value ladder. That's the Cal-Maine we're creating. Durable, diversified, and positioned to lead the category's next decade of growth. With that, I'll turn the call back over to the operator to begin the Q&A portion of today's call. Operator: Thank you. We will now begin the question and answer session. We ask that you please limit yourself to one question and one follow-up. Once your questions have been answered, please reenter the queue if you would like to ask additional questions. One moment while we compile our Q&A roster. Our first question is going to come from the line of Heather Jones with Heather Jones Research. Your line is open. Please go ahead. Heather Jones: Good morning and congratulations on a solid quarter. Apologize for my voice. I have a really bad cold, so apologies. I wanted to ask about, given where current spot prices are for eggs, in the past, that would have translated to Cal-Maine generating losses, you know, at the EPS line. I was just talking about the changes that you all have made in the portfolio over the last few years, the push into prepared foods and the higher percentage on cost-plus type models. Just wondering if you could walk us through how you think about the earnings power or the earnings trajectory in depressed ag markets like this? Sherman Miller: Good morning, Heather. This is Sherman, and thank you for that question. As you know, we don't give specific guidance, but I'll touch on each of those. Specialty is something that we've been working on for a long time, and we've had double-digit growth. We believe that will continue. Prepared foods is exciting for us, and it's performing. We committed to already a 30% growth over the next eighteen to twenty-four months, and we're excited about also additional growth there, whether it's organic or M&A in the future. Also, the hybrid pricing, we talked about it last quarter that there's trade-offs. On the higher side, but the real benefit happens in lower markets. So the point that you hit on is valid. The real key there is us supporting our customers' go-to-market strategy and being a trusted supplier for the long term. We believe that each of these will continue to improve our mid-cycle performance. Max, you want to add anything there? Max Bowman: Sherman, I think you covered it, but what you said in your remarks about we're a different company than where we were the last time the market was at these levels, and you highlight those things. Just the growth we've had, even stronger balance sheet, more diversification, the growth in prepared foods, continued emergence of specialty. All those things, I think, make us a stronger, more durable company going forward. Heather Jones: Okay. And just to follow-up on that, and I know there are always tail risks and things that could happen, but given these changes, do you think Cal-Maine is in a position that it can weather down markets like this without generating losses given these changes? Sherman Miller: Once again, Heather, we don't give guidance, but Max just hit on the real strengths that make us completely different than where we were the last time we saw these market conditions. Our balance sheet certainly is positioned better than it's ever been. The growth that we've had, we've been very strategic to focus that growth in specialty eggs and also prepared foods, which carry a lot of weight in these lower market conditions. On top of that, the hybrid pricing we think is going to be very beneficial to us. So in a much better position than we've ever been, Heather. Max Bowman: And those prepared foods, Heather, as we said before, Prepared Foods runs a little bit countercyclical. They're going to benefit from a lower egg market. So that's just another strength, I think, that we didn't have before. Heather Jones: Okay. Thank you. Operator: Thank you. And one moment for our next question. Our next question comes from the line of Pooran Sharma with Stephens. Your line is open. Please go ahead. Pooran Sharma: Good morning, and thanks for the question. Wanted to start off with the prepared foods segment. Understanding you're making some adjustments there. So lighter volumes, maybe a little bit higher cost until the end of the year is what I'm understanding. You saw gross margins for that segment come down roughly 3% to around 19.6%. Is that a right kind of level to think about for the rest of this year? Or what kind of color can you give us in regards to gross margin for prepared foods? Sherman Miller: Good morning, Pooran, and thank you for that question. Prepared foods, we gave guidance right out of the gate with Echo Lake that we're looking at a 19% EBITDA margin, and we still think that holds true. There was some slippage in this quarter for the reasons you mentioned, us preparing for a stronger future. There will probably be a little additional slippage during the next quarter, but the year as a whole, we're still feeling good about the 19% EBITDA margin. So, once again, well worth the time of us pulling back and preparing for the future of this growth. Of 30% over the next eighteen to twenty-four months is really exciting to us. Max, what would you add to that? Max Bowman: I think you covered it. Pooran Sharma: Great. Great. I guess my follow-up would be, and you guys have talked about the M&A pipeline in the past, maybe opening up when ag markets are depressed. But just given your broader expansions into prepared foods, do you think that this would limit your opportunity or your M&A pipeline? Because I would think that for these businesses, a lower ag market would mean higher earnings potential and potentially higher valuation. So just wanted to get your take on the broader M&A pipeline opportunity given the depressed egg markets and given the change in your business? Sherman Miller: Pooran, the attractiveness to that prepared foods business is tied back to stability. Away from what you're talking about, feast or famine. So, we don't necessarily think that will be a huge influence. To us, growth is broader than it's ever been. All remaining egg-centric to our core, but now, growth in conventional, specialty, prepared foods, possible ingredients feeding prepared foods, even prepared foods brands are all possible avenues of growth for the future. We'll continue to use a very disciplined model to evaluate acquisitions and move forward at the right pace. Max? Max Bowman: Again, you covered it well, Sherman. I'll leave it there. Pooran Sharma: Okay. Appreciate the color. Operator: Thank you. And one moment for our next question. Our next question comes from the line of Veronica Augustine with Goldman Sachs. Your line is open. Please go ahead. Leah Jordan: Hi. Good morning. This is actually Leah Jordan with Goldman. So the shift to specialty eggs and prepared foods is really the key part of your story here going forward, and it looked great on the quarter today. But just how are you thinking about capacity growth for specialty eggs over time? Given the Clean Egg acquisition we saw this quarter, how do you think about M&A versus organic growth to continue that capacity expansion? Ultimately, any color on how we should think about the cadence of the mix shift in your sales towards specialty over the longer term? Sherman Miller: Good morning, Leah. As you said, our specialty eggs and prepared foods are exciting, making up 46% of our net sales for the quarter. We've seen double-digit CAGR type growth in acreage. We look forward to continuing to drive to those same type growth metrics. Longer term, we can definitely see specialty eggs making up greater than 50% of our total shell egg net sales. When you pair that with the 30% growth that we're targeting in prepared foods, we think it lends well to much more stable earnings here in the future. Max Bowman: Yeah. And Leah, you brought up the Clean Egg acquisition. That was a small but very timely important acquisition for us. If you look at the description we gave, it's composed of 677,000 brown cage-free and free-range layers and pullets, all specialty. We have market growth planned and occurring now, and getting those eggs at this time and for what we anticipate upcoming was very important and critical to the continued growth of that specialty business. Leah Jordan: Thank you. That's very helpful. Just to follow-up on the prepared foods discussion, given the investments underway, any more detail around the progress of the optimization and expansion efforts so far? As well as any more color on the related higher costs that we should think about in the back half of this year relative to what we saw this quarter? As those investments come online over the next twelve to eighteen months, how should we think about that cadence of the growth trend there? Sherman Miller: You pointed out the important piece that is an eighteen to twenty-four month project, and we've announced the CapEx piece of it, $36 million for that 30% growth. In the interim of pulling back some lines so that we can get all of our automation and all of our different lines in place, there's some volume efficiency penalties we received from that. But the growth long term is certainly going to be good, and all at the same time, still believing we'll hit that 19% EBITDA margin that we talked about. Max Bowman: We're confident that we can continue over the long term to grow that business, as we called out when we acquired Echo Lake at that 9 to 10% CAGR. So again, we talked about in the first quarter about sort of letting it run, let's see what it can do, and then we kind of assessed. Now we're making the changes that we think position us the best for long-term growth and success in prepared foods. Leah Jordan: That's all very helpful. Thank you. Operator: Thank you. And one moment for our next question. Our next question comes from the line of Ben Klieve with Benchmark Stonex. Your line is open. Please go ahead. Ben Klieve: Alright. Thanks for taking my questions, and congratulations on a good result here in a very dynamic period. The first question is on the specialty volume front. I'm wondering if you can hone in on specialty volumes within the second quarter. They were basically flat, given that they're basically flat and, you know, you noted that small acquisition you had in the quarter, plus a general upward trend in specialty volumes. I'm wondering if you can kind of break down the puts and takes that led to specialty volumes being, again, kind of roughly flat in the quarter? Sherman Miller: Good morning, Ben. Especially last year was a tremendous year, so we're making a very tough comparison. If you remember, conventional eggs became extremely tight, which put a lot of demand on specialty eggs. So to be flat is a huge win, we believe, and especially specialty eggs now accounting for 44% of total shell egg sales. I did mention that free-range and pasture-raised both had double-digit growth, both in dollars and dozens. We don't formally break down that category, but as a whole, specialty eggs are solid, and the double-digit CAGR we've been seeing, we think the mechanisms are in place for us to continue to do that. Max Bowman: Yeah. I mean, the comparative quarter is a tough part there, and just to expand a little further on what Sherman said, when conventional eggs are selling for higher than specialty, of course, the consumer is going to move towards specialty because they perceive it as a bargain. That was the case that we had last year that has totally turned around in this quarter we're reporting and today. But yet we held on to flat volumes. We still feel good and have said that we believe that we can have double-digit specialty growth over time. So despite a very difficult market comparison, we still have a lot of confidence in where our specialty business is and where it's going. Sherman Miller: One additional point, Max, is we do participate across every major specialty egg subcategory, which means that we're serving all customers interested in specialty. So, regardless of which type of specialty egg they're in, we take pride in producing that. Ben Klieve: Very good. That's very helpful across the board. One more for me, and then I'll get back in queue. Is this dynamic that you've talked about regarding pricing of commodity eggs, and kind of evolving that from purely market-based to more towards cost-plus contract-based, however you want to characterize it. Can you talk about the receptivity of your retail customer for this dynamic today in the face of kind of normalized egg pricing versus even several months ago when prices were elevated? I mean, I would expect that the retailers are maybe less excited to engage in this conversation today than they were, but I'm wondering if you can elaborate on that dynamic in any way. Sherman Miller: Yeah. Be glad to. It really all centers on the particular customer's go-to-market strategy, whether they're a high-low customer or whether they're an everyday low price, they have different needs, and so that's the way these pricing structures are geared. I think the models perform exactly like they're supposed to be. For the customer, it gives them some high side, which is very important. During these tight periods, there's some benefit on the low side for us, which once again ties back to our mid-cycle earnings performance. Max, what would you add to that? Max Bowman: I think you nailed it. I mean, it's just that long-term relationship. I think your thoughts are generally right, Ben. But, you know, Sherman points out different customers have slightly different priorities. The other thing that we mentioned in some of our prepared remarks is just the reliability of supply. What we're trying to do for the long term is demonstrate that even in times of tough production last year and even this year, Cal-Maine continues to get the egg to the customers that they want and demand, and we're going to work with them to build those long-term relationships to support their pricing priorities. Ben Klieve: Got it. Got it. Very helpful. Very good. Well, thanks for taking my questions. Appreciate the time. I'll get back in queue. Operator: Thank you. One moment for our next question. Our next question comes from the line of Heather Jones with Heather Jones Research. Your line is open. Please go ahead. Heather Jones: Thanks for taking the follow-up. I'm just trying to get a sense of how much of a step down we should anticipate for the prepared foods business for the second half of 2026. Revenues came down significantly from Q1 to Q2, but some of that I would assume is due to egg pricing. But just how should we be thinking about the cadence of that business given its significance for your earnings for the second half? Thank you. Sherman Miller: Well, Heather, I think we indicated that we would expect Q3 to have a continued pullback as we make these changes that we believe are good for the long term. So, quarter over quarter, Q3 compared to Q2, I think you'll see slightly different results there. But we're confident that we're positioning the business for the long term. Sherman called out that growth that we're looking for over the next eighteen to twenty-four months. You won't see as much of that in the third quarter. I think it starts emerging in the fourth quarter and then builds from there over the next twelve months or so. Heather Jones: Okay. Thank you for that. Then on the SG&A side, that came in somewhat higher than I was expecting for the quarter. So just trying to think because last year, you had a contingency payment of like I think it was, like, $7 million. So the year-on-year increase was much more significant in Q2 than Q1 on an adjusted basis. So how should we think about SG&A expense for the rest of the year? Sherman Miller: Well, you're calling out that contingency payment that was associated with Favio, and we called that out. It was less this quarter than it was the same quarter last year, and that was just a factor of egg prices being so high last year and down a bit now. I think that continues through October this fiscal year or excuse me, this calendar year. So we'll be following that and completing that at the end of '26. What was the other part of your question? I lost my train of thought. Heather Jones: Oh, just trying to figure out what kind of numbers should we be using. Sherman Miller: Going forward, so it's like a run rate. Yeah. The other thing on the SG&A, I think we called out increased professional fees. That seems to be the order of the day, these days. So I think those numbers are going to run a little hot. The other thing that drives SG&A is particularly specialty volume sometimes. We still are confident specialty volumes are going to grow. When you do that, you're going to have some promotional expenses and some fees associated with that that will make SG&A be up a bit. I suspect as our retailers get more comfortable with supply, we will see more promotional activity in the back half of the year, which will likely drive some increased costs on the SG&A line there. Heather Jones: Okay. Thank you. Operator: Thank you. And one moment for our next question. Our next comes from the line of Benjamin Mayhew with BMO Capital Markets. Your line is open. Please go ahead. Benjamin Mayhew: Hey, good morning. Congratulations on the quarter. So it looks like you had a bit of a COGS benefit during the quarter as a result of lower-priced outside egg purchases. So my questions are, has your volume of outside egg purchases been on the decline sequentially as your company's supply recovers? Can you remind us how you plan to utilize outside egg purchases moving forward as supplies reach more normalized levels and egg prices are at a dollar? So what I'm really trying to get at is like, should we expect ongoing benefits in future quarters from outside purchases, or is this more of a one-off item? Sherman Miller: Good morning, Ben. Last year was certainly a year, and our customers had some periods of extreme orders. If the stores we serviced had eggs, and the store across the road did not, then our orders were growing exponentially. We cover those orders through our production plus outside sales. We have been reporting our percent of produced of sales for quite a while. We've moved back to that right at that 90% mark. We do see that growing a few percentage points going forward. Just because we plan on adding supply to be able to ensure that our customers have the eggs that they need. So whenever we do that, that does force lower purchases on the outside, and that's some of the effect that you're seeing. But we plan our business well far ahead, and short-term changes are difficult, whether up or down. But we do see the percent produced of sales to get back to that more of that 93, 94, 95% range here in the near term. Max Bowman: Yeah. And, Ben, just historically, we've called out before, those outside egg purchases to a large degree are sort of a gap filler or how we address changes in the market. As Sherman said, if we were to see more disruption in the market, for the same reasons as last year, that would likely drive additional purchases because we will do that to benefit our customers. As we said before, to prove up markets, if you will, and try to develop longer-term customers for the future. So it's a little bit opportunistic there, and it's a little bit based on what market conditions are. But no doubt egg prices being down. We called out the percentages related to the decrease in the egg price as well as the volume. So both of those factors affect it. At this point, with prices where they are, I think it will certainly be down. As Sherman says, as our production comes fully online, that should help mitigate it as well. But keep your eye out for those other dynamics that could drive more purchases as we go forward. Benjamin Mayhew: Thank you for that. Yeah. And that's a good segue to my last question here. Other dynamics. Do you have any thoughts on why we have seen such a rapid decrease in bird flu cases across the industry? Is there any one thing that industry players are doing that is protecting against the spread? Or do you chalk it up more to, you know, maybe luck? Sherman Miller: There's lots of ways of measuring that. If you're looking at just pure layer numbers, you would be correct. But if you look at what we think is a greater indicator, and that's just the presence of the virus, it's an absolute terrible situation. It's all over the US. Bigger than that, it's all over the globe. Back in 2015, when we saw the virus disappear, we also saw it disappear on a global scale, slightly before it did here. All the indicators that it's a huge global presence, since October. First, 26 countries are reporting high-path AI in poultry. The number of outbreaks is 496. So the presence of the virus is extremely strong. 2025 was the worst year ever at 45.6 million layers and pullets. That exceeded the next worst year of 2022 of 43.1 million. So, Ben, it's very difficult to estimate the magnitude, but all the indicators of the problem are still there. The incidence rates in November were as high as 2022. Just not the high bird numbers because smaller flocks were affected. Usually, whenever big losses occur, there's some type of precursor, whether it's a major wild bird dive or where it's a turkey population area or a commercial duck population, something increases that overall virus load in an area before we see these large bird explosions. So unfortunately, Ben, I would say that we're still on pins and needles watching this virus. Max Bowman: I'd just add. I was reading last night a lead market analytics report that came out. Amongst the things he was doing in that report was sort of critiquing his own primarily forecasting ability over the last several years and how it was driven. There are many points, and it's worth a read if you have access to that. But one of the things that he said, and I'll tie into what Sherman said, the incidences are still there. So the potential is still there. Since '22, if you look at sort of the projections for flock numbers and those kinds of things, for the most part, you've seen they've been underestimated. Excuse me. They've been overestimated because of the influence of the or the likelihood that we see further potential AI. We don't know what the future brings. Always the past isn't necessarily the best predictor for the future, but it does inform it. I think it's worth consideration. Benjamin Mayhew: Very helpful. Thank you. I'm going to hop back in the queue. Operator: To ask a question, please press 11 on your telephone. I'm showing no further questions at this time. I would like to hand the oh, I'm sorry. One moment. Alright. I am showing no further questions at this time. I'd like to hand the conference back over to Sherman for further remarks. Sherman Miller: Alright. Well, thank you. Since there's no additional questions, operator, if you would, we're ready to conclude the call. Operator: This concludes our question and answer session. A replay for today's webcast will be available following the call on the Investor Relations page of the Cal-Maine Foods website. In addition, a transcript of today's call will be posted on the Cal-Maine Foods website in the Investor Relations section. Thank you for joining us today. You may now disconnect. Everyone, have a great day.
Operator: Welcome to the Albertsons Companies Third Quarter 2025 Earnings Conference Call, and thank you for standing by. This call is being recorded. I would now like to hand the call over to Cody Perdue, senior vice president of treasury, investor relations, and risk management. Please go ahead. Cody Perdue: Good morning. Thank you for joining us for The Albertsons Company's Third Quarter 2025 Earnings Call. With me today are Susan Morris, our CEO, and Sharon McCollam, our President and CFO. Today, Susan will provide an overview of our 2025, and update you on our progress against our strategic priorities. Then Sharon will provide the details related to our third quarter financial results and our outlook for the remainder of fiscal 2025. Before handing it back to Susan for closing remarks. After management comments, we will conduct a Q and A session. I would like to remind you that management may make forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in our filings with the SEC. Any forward-looking statements we make today are only as of today's date. And we undertake no obligation to update or revise any such statements as a result of new information, future events, or otherwise. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these financial measures to the most directly comparable GAAP financial measures can be found in this morning's earnings release. And with that, will hand the call over to Susan. Susan Morris: Thanks, Cody. Good morning, everyone, and happy New Year. This quarter marked the first since we declared a new day at Albertsons. And we delivered. We drove bold decisions in our Tech and AI transformation, purposeful investments to strengthen our customer value proposition, and accelerated execution in digital and pharmacy. In the face of a government shutdown, SNAP delays, and a challenging consumer backdrop, our team executed with discipline and urgency. Identical sales grew 2.4%, digital sales rose 21%, and adjusted EBITDA was $1.039 billion. These results underscore the resilience of our model anchored by more than 2,240 neighborhood stores. Our proximity, deep fresh expertise, and trusted portfolio of brands give us a clear advantage in serving more than 49 million loyal customers and advancing our customers for life strategy. We're building a structurally advantaged Albertsons. One that wins in any environment. And yet our current valuation does not reflect the progress that we've made or the long-term earnings power we're creating. This disconnect only sharpens our resolve to execute faster, scale our transformation, and deliver the performance that ultimately commands the value this company deserves. Our mission is clear, growing customers for life by leveraging our strengths, sharpening our competitive edge, and delivering consistent value for customers all while driving sustainable long-term value for our shareholders. During the quarter, execution was strong, and we delivered meaningful efficiencies through intentional and methodical cost control. Importantly, year-over-year unit trends improved sequentially versus the second quarter, reflecting the impact of our surgical price investments and reinforcing the effectiveness of our broader strategy. I'm extremely proud of how our team is executing. Also during the quarter, we continue to advance our strategic priorities with intent and conviction to position us for profitable growth as we enter 2026. These priorities include modernizing capabilities through technology, scaling digital engagement and monetizing our media collective, enhancing our customer value proposition, and unlocking structural productivity gain. As we look forward, one of the most exciting drivers of our transformation and a key source of long-term competitive advantage is technology. Our advanced cloud data infrastructure provides the foundation for scaling AI solutions and business processes across the enterprise. Additionally, we're enhancing our agility and speed to market with our global capability center in Bengaluru. We're not just adopting AI. We're working to scale it across the enterprise to fundamentally change how we operate and how customers experience Albertsons. This is not incremental. It's designed to be a step change in speed, intelligence, and personalization. Our teams are energized, and our foundation is strong. Our strategic priorities are clear. With bold decisions and partnering with world-class leaders like Google, OpenAI, and Databricks, we're building a future where every decision is smarter, every process is more efficient, and every interaction is more seamless. So where are we focused first? Our transformational big bets are in four critical areas. First, in digital customer experience. Digital customer experience is a critical pillar of our growth strategy. By leveraging AI, we're creating differentiated experiences that go beyond convenience. They increase basket size, drive repeat trips, and deepen loyalty. Early results are compelling. Our Ask AI search capability is already delivering a 10% increase in basket size for those customers using it, signaling a meaningful revenue upside as adoption scales. In addition, our autonomous shopping assistance is meeting customers where they are and delivering frictionless personalized journeys, keeping our omnichannel customer experience modernized and on-trend. Next, in Merchandising Intelligence. We'll be equipping our merchants with AI-driven insights and automated execution to optimize pricing, promotions, and assortment decisions, transforming category management and driving margin improvement. Our vision is a future where intelligent automation guides these decisions, freeing our people to focus on strategy and innovation. Our ambition is for customers to truly feel seen, to reliably find the essentials they need at prices they trust, while also discovering unique inspiring items that make our stores a destination and eliminate the need for a trip elsewhere. Next in empowering and managing labor. We're deploying generative AI to optimize labor forecasting and scheduling across our retail labor model, reducing costs while improving associate experience through intuitive conversational tools. By leveraging AI, we ensure the right associates are in the right place at the right time, which not only drives productivity but also elevates customer service. This transformation simplifies complex scheduling tasks, frees up associates to focus on the customer, and positions us to deliver consistent execution across thousands of stores. Finally, optimizing our end-to-end supply chain. AI demand forecasting is central to our supply chain transformation, enabling precise product tracking from vendor to customer. By applying advanced analytics and computer vision, we're improving forecasting accuracy, fulfillment, quality, and on-shelf availability, optimizing labor and inventory while ensuring that customers can find the products they need when and where they need them. In sum, our tech and AI are designed to be scalable enterprise-wide programs that can deliver measurable impact and build the foundation for tomorrow. By embedding this across our business, we will unlock structural cost advantages, accelerate speed to market, and create new profit pools. Returning technology into a growth engine, improving margins, deepening customer loyalty, and positioning us to win. With momentum accelerating and a clear roadmap, we're confident that this transformation will help drive sustainable value for customers and long-term returns for shareholders. Turning to our digital e-commerce business. We continue to gain market share with sales up 21% this quarter and penetration now at 9.5%. As we've consistently said about our e-commerce business, the resilience, scalability, and customer proximity of our store-based fulfillment model remains a structural advantage in last-mile fulfillment and positions us well for profitable growth. In fact, during Q3, more than half of our orders were delivered in three hours or less, underscoring the speed and convenience that differentiate our offering. In addition, more than 95% of our delivery households are eligible to receive our flash delivery in as soon as thirty minutes. We're also adding features to our platform, the AI shopping assistant I just mentioned, a groundbreaking tool that redefines the shopping experience. This AI-powered assistant enables customers to interact in natural language, receive personalized recommendations, and build smarter baskets faster. Whether they're planning meals, discovering new products, or shopping for specific occasions. This innovation enhances convenience for our customers while strengthening our competitive advantage by leveraging rich data to optimize marketing, improve loyalty, and unlock new monetization opportunities. Through our media collective. Our Pharmacy and Health business delivered another outstanding quarter. Growth was driven by strong execution in our immunization offering, GLP-one therapies, and core prescriptions. We captured leading share in immunizations and strengthened long-term customer relationships. These efforts reinforce our position as a trusted health partner and deepen engagement across channels. Customers who engage across both grocery and pharmacy continue to demonstrate significantly higher lifetime value, underscoring the strength of our customers for life strategy. Based on the strength of this performance, we remain on track to deliver profitable growth in our pharmacy business in 2025, supported by disciplined execution and efficiency initiatives. Scaling higher-margin services, expanding central fill capabilities, driving innovative procurement, and leveraging operational efficiencies continue to be key priorities as we position this business for sustained growth into 2026 and beyond. In loyalty, we continue to drive digital engagement and value creation with membership growing 12% to over 49 million members in the third quarter. Program enhancements and simplification continue to fuel deeper engagement. Members are transacting more frequently, redeeming rewards more easily, and spending more. 40% of engaged households continue to choose the cash-off option, underscoring the appeal of immediate value for our most engaged and loyal customers. Loyalty also serves as a rich data source for our merchant and for our media collective, enabling targeted marketing and monetization. Most recently, we again extended the value of our loyalty platform beyond grocery with the launch of a new offering with Uber One, offering members exclusive benefits and savings, further strengthening engagement and broadening the appeal of our platform. Our media collective continues to gain traction as a high-margin growth engine. In Q3, On-site Media delivered double-digit growth year over year. We also strengthened performance by adding transaction capability to Off-site Ad units. These improvements drove higher ROI for our partners, faster campaign activation, positioning us to capture incremental spend. While the retail media space remains highly competitive, our advantage lies in the depth of our loyalty data and omnichannel reach, which enable targeted, measurable campaigns that improve both partner outcomes and the customer experience. Looking ahead, we're focused on scaling these capabilities and unlocking new monetization opportunities, creating a structural profit pool that complements our core retail business. Few companies possess the depth of store-level, customer-level, and category-level data that we do. And we're increasingly using that data to deliver a more relevant, localized, and differentiated customer experience. From a customer value perspective, we continue to invest in value through loyalty enhancement, personalized promotions, and selective price investments in key categories. And these actions, combined with vendor funding and own brands innovation, are strengthening engagement and driving unit growth. In our own brands portfolio, we have a clear path to growing penetration from 25% to 30%. In the divisions where we've launched our new lower-priced campaign, we continue to see fundamentally better unit trends and growth in unit share, reflecting the impact of our targeted strategy. We also very carefully managed the pass-through of inflation to deliver value for customers across the entire company, ensuring affordability while protecting margin. Importantly, unit trends for the quarter improved sequentially even with the government shutdown, again underscoring the resilience of our approach. Productivity remains a cornerstone of our transformation and a critical enabler of our investments. Our teams are executing with discipline across multiple fronts. Optimizing our labor model, redesigning ways of working, including a targeted global diversification of talent to drive efficiency at scale. We're also unlocking structural savings through automation, advanced analytics, and process simplification across merchandising, supply chain, and store operation. In pharmacy, where growth continues to accelerate, we're streamlining fulfillment and procurement to improve cost to serve while also enhancing the customer experience. These efforts are not isolated. They're part of our comprehensive plan to deliver $1.5 billion in productivity gains over the next three fiscal years, creating capacity to fund innovation, strengthen our value proposition, and improve profitability. Already in 2025, we're seeing the benefits of our productivity, reduced SG and A spend, as we accelerate our efforts around labor optimization. By attacking waste, modernizing labor planning, and embedding technology into core processes, we're building a leaner, more agile organization that's positioned to win. Finally, before I hand it over to Sharon to cover the financial details of the quarter, our outlook for the remainder of the year, I want to spend a minute on the consumer backdrop. And what we continue to see from our customers. Consistent with what you've heard from others, the environment remains mixed and continues to reflect pressure across income segments. At the low end, shoppers are clearly stretched, putting fewer items in the basket each trip and prioritizing essentials while visiting more frequently as they manage their cash flow. Middle-income households, have been relatively resilient, are showing some signs of softening with increased price sensitivity and trade-down behavior emerging in certain categories. At the high end, spending patterns remain largely stable but even these customers are becoming more conscious of price and value, reflecting a broader shift towards cautious discretionary spending. Looking ahead, our outlook and actions are fully aligned with these dynamics. We're leaning into personalized promotion, loyalty enhancements, and the surgical management of cost inflation to deliver immediate value while continuing selective price investments in key categories to support unit growth. At the same time, we're leveraging technology and AI just as we discussed. Deepen engagement and optimize the shopping experience, ensuring that our strategy not only addresses current consumer behavior but also positions us to capture share and drive profitable growth as behaviors evolve. Sharon, over to you. Sharon McCollam: Thank you, Susan, and good morning, everyone. It's great to be here with you today. Building on Susan's comments, Q3 did mark a new day for our Albertsons teams. Disciplined execution and purposeful investments drove a 2.4% identical sales increase and a 21% increase in digital sales. While temporary headwinds from the government shutdown and delayed SNAP funding negatively impacted ID sales by approximately 10 to 20 basis points, we sequentially strengthened our year-over-year unit trends. Clear evidence that our targeted price investments are working and reinforcing the resilience of our model. In pharmacy and health, sales increased 18% as we delivered another strong quarter and deepened engagement through immunization and value-added services. Loyalty membership grew to 49.8 million, reinforcing the strength of our customers for life strategy. At the same time, as Susan shared, we continued scaling the media collective and advancing our technology transformation, including embedding AI across the enterprise and modernizing capabilities to drive productivity and growth. Each of these initiatives contributed to the results we just delivered for the third quarter. Which I will discuss now. From a top-line perspective, ID sales grew 2.4% which is net of the 10 to 20 basis point government shutdown headwind and we saw encouraging growth in areas where we made price investments. Gross margin came in at 27.4% a decline of 55 basis points year over year excluding fuel and LIFO. Reflecting the expected mix shift impact of digital and pharmacy and our targeted price investments. Importantly, year-over-year gross margin improved sequentially versus Q2. As productivity benefits partially offset targeted investments demonstrating that our actions are delivering results even as we prioritize value for customers. Our selling and administrative expense rate was 24.9% down 33 basis points year over year excluding fuel, another clear proof point of disciplined cost management. This improvement reflects ongoing productivity initiatives and operating leverage, which we are using to fuel our investments to drive growth. Interest expense increased $7 million to $116 million this quarter, primarily due to borrowings related to our $750 million accelerated share repurchase program announced last quarter. Adjusted EBITDA in Q3 was $1.039 billion and adjusted EPS was $0.72 per diluted share, in line with our expectations and reflective of the strategic investments we're making in long-term growth. Turning to capital allocation, our priorities remain clear. Invest in the business to drive growth and value for our customers, maintain and grow our dividend over time, opportunistically repurchase shares, and preserve a strong balance sheet that gives us flexibility to accelerate investment when opportunities arise. In Q3, we invested $462 million in capital expenditures to upgrade our store fleet, and advanced digital technology and supply chain capabilities. In our store fleet, we opened two new stores, completed 23 remodels, and closed 16 underperforming locations. All actions that strengthen our asset base for long-term competitiveness. From a digital and technology perspective, we further invested in AI and digital transformation, to create structural cost advantages, deepen customer loyalty, and unlock new profit pools. Further modernizing the company for sustainable profitable growth in an evolving retail landscape. We also returned $77 million to shareholders through our quarterly dividend of $0.15 per share, and continued our $750 million accelerated share repurchase program, which began last quarter and is expected to be complete in early 2026. The benefits of this ASR will accrue to EPS as we move through fiscal 2026. There is also $1.3 billion remaining under our existing $2.75 billion authorization. That can be executed at the completion of the ASR. Our net debt to adjusted EBITDA ratio ended the quarter at 2.29 times, underscoring the strength of our balance sheet and capacity to fund growth while returning capital to shareholders. Finally, in the third quarter, we also refinanced $1.5 billion of existing indebtedness in two tranches. $700 million of 5.5% notes due 2031 and $800 million of 5.75% notes due 2034. These proceeds were used to refinance our 07/2026 bond maturity and repay $750 million in borrowings under our revolving credit facility. Demonstrating the strength and flexibility of our balance sheet. Before we turn to the outlook, I'd like to give you a quick update on our year-to-date labor negotiations. As a reminder, in fiscal 2025, we had collective bargaining agreements covering 120,000 associates up for renewal. As of today, we've successfully reached agreements covering more than 112,000 of these associates leaving only 8,000 left to bargain this year. Now let's walk through our 2025 outlook. Our focus remains squarely on investing in and driving long-term profitable growth through our strategic priorities. Digital remains a powerful growth engine as we continue to add loyal shoppers to our ecosystem and scale the business profitably. Disciplined cost control and productivity also remain key focuses of our strategy. Fueling reinvestment into these high-impact initiatives while maintaining financial strength. At the same time, we expect our pharmacy business to continue to accelerate. Driven by immunizations and value-added services that enhance customer engagement, through profitability. In pharmacy, however, on 01/01/2026, the Inflation Reduction Act Medicare drug price negotiation program took effect reducing consumer prices and supplier costs on certain branded drugs. While this will result in lower reported pharmacy sales, the impact to profit is near neutral. In the fourth quarter, we estimate and have included in our outlook an approximate 65 to 70 basis point headwind to identical sales which will equate to a 16 to 18 basis point impact for the full year with no impact to adjusted EBITDA. With that as the backdrop, we're updating our fiscal 2025 outlook as follows: For identical sales, we are narrowing our range to reflect the impact of the inflation reduction act to 2.2% to 2.5%. Adjusted EBITDA is now expected to be in the range of $3.825 billion to $3.875 billion including the approximate $65 million in adjusted EBITDA in the fourth quarter related to our fifty-third week. We are narrowing our adjusted EPS to a range of $2.08 to $2.16. The effective income tax rate is expected to be in the range of 23% to 24%, and capital expenditures are unchanged in the range of $1.8 to $1.9 billion. And with that, I will hand it back to Susan for closing remarks. Susan Morris: In closing, our Customers for Life strategy is building a future-fit distinct Albertsons company. When it combines scale with local relevance. Advanced analytics with deep experience of our team and operational excellence bold growth ambition. The path forward is clear. The opportunities are significant, and we're just getting started. Q3 demonstrates the strength of this foundation and the acceleration of our transformation. We're not just navigating a competitive and dynamic environment, we're reshaping it. Our investments in digital loyalty, pharmacy, and retail media are delivering measurable results today while our AI strategy positions us to lead tomorrow. When we get together again for our fourth quarter earnings release, we'll share the next evolution of our Customers for Life strategy. Building on the progress we've made and the strength of our model. As we've said, at the core of this evolution is a deeper integration of data and AI across the enterprise. We're not using AI as a short-term lever. We're embedding it into merchandising, labor, and supply chain to create a durable structural advantage. From personalized shopping and merchandising intelligence to supply chain optimization, these capabilities are already scaling. Driving lower costs, faster execution, and compounding return that will support growth profitability for years to come. We're also focused on delivering a more differentiated customer experience. We'll provide an overview of micro-market merchandising. And how we're leveraging our robust customer data to create more curated experiences across the assortment pricing and promotion, while further strengthening our leadership in Fresh and expanding affordable meal solutions. In parallel, we're actively transforming our portfolio for the future. We'll outline how we plan to densify, differentiate, and scale our network including through strategic partnerships. We're targeting markets where we have strong share and growth. As well as opportunities where we see a clear right to win, through new store development and strategic acquisitions that enhance our footprint drive supply chain efficiencies, and create meaningful synergies. Supporting all of this is our continuous productivity engine. We will reiterate our commitment to disciplined cost management while outlining the next tranche of initiatives designed to deliver benefits in 2026 and beyond. Fueling reinvestment in growth innovation and customer value. As we approach fiscal 2026, we do so with confidence and a clear path to sustainable, profitable growth. To our 280,000 associates, thank you for your passion and commitment. You're the driving force behind this transformation, and together, we're creating an Albertsons that wins for our customers, our communities, and our shareholders today and for the long term. We look forward to continuing this journey and delivering against our priorities. Thank you and we'll now take your questions. Operator: Thank you. If you'd like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow for as many questions as we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Mark Carden with UBS. Please proceed with your question. Mark Carden: Good morning. Thanks so much for taking the questions. So to start, you continue to make surgical investments in value, and they seem to be gaining traction with the grocery unit growth. At the same time, you've got some of your larger competitors continuing to make price investments as well. Just how is the overall pricing environment lined up relative to your initial expectations? And do you see much risk ahead for the need for incremental price investments? Susan Morris: Hi, Mark. Thanks for the question. So first, I'd start out with we are taking a very surgical and targeted data-driven approach to our price investments. And I think we've shared that we've seen green shoots in the categories where we're investing. I also want to make sure that I call out that price investment comes in in three ways for us. Well, many ways, but three of them are our investments in loyalty, our investments in, pulling forward on promotion, base price investments, and then how we're managing through inflation we're working very hard to soften the pass-through of inflation to our customers. So that said, we are pleased with the progress that we see in our price investments to date. I also want to make sure that you understand that our price gaps are very market-driven category-driven, and we're very thoughtful about how we're approaching each of these investments. Our price indices versus competitors often miss our personalized loyalty discounts, and that really materially makes a difference in our effective price. So we do intend to continue to invest very surgically, very thoughtfully. We're pleased with the initial results that we've seen and recognize there are some more surgical opportunities out there. But also, I want to remind you that we look at price as one key piece of the value equation. Along with that, are our fresh capabilities, proximity to our customers, our e-commerce and pharmacy expertise. That add value for the customer. Sharon McCollam: And, Susan, I might also add Oh, go ahead, Mark. Mark Carden: No. Please, Sharon. Go on. Sharon McCollam: I also want to add that another area of key focus for us, which we can talk about later, is our own brand focus. That has been a primary offering that we have put front and center for our customers because to provide value our own brands is one of the tools in our toolbox in order to do that. And it is an area that we are doubling down and amplifying. Mark Carden: That's great. And then just as a follow-up, you guys have talked in the past about your ability to capitalize on some of the drugstore closures that are taking place across the country. How are you progressing with getting your new pharmacy shoppers to cross over? And purchase more grocery items And are you seeing any changes to the timing or lifts just given some of the macro pressures that you highlighted in the call? Thank you. Susan Morris: Sure. So again, we're very pleased with our pharmacy growth overall. Much of it has come from organic growth inside our store. We're seeing core scripts excluding GLPs grow. Obviously, GLPs play a factor as well. What we typically see is the bulk of our customers are already shopping with us in some way shape or form in grocery and as they convert into the pharmacy that's when we start to see the deeper relationship They become more highly engaged. They adopt our digital platforms, they engage our loyalty programs. And, I think we've shared with you in the past it's somewhere around a one to two-year journey depending on the customer to get to a fully robust loyalty platform with us. But that said, again, I want to remind you that the bulk of our customers are already shopping in the store. It's really about deepening that engagement. We're pleased with the acquisitions that we've had. Both some that we've paid for and many of our customers are just choosing to come to us. Which we see as a structural advantage from the services that we provide. Mark Carden: Thanks so much. Good luck. Susan Morris: Thank you. Thank you. Our next question comes from the line of Leah Jordan with Goldman Sachs. Please proceed with your question. Leah Jordan: Thank you. Hi, Susan and Sharon. Thanks for all the detail on the call today. I know it's a little too early to guide for FY 2026 at this point. But there are a number of potential headwinds investors have been concerned about, such as and just ongoing volume pressure within food across the industry. Along with the lower Medicare drug prices, as you noted in the prepared comments. But then you have your own efforts and in driving unit improvements, which we saw this quarter, along with the ongoing productivity efforts. So just seeing if you could comment on a high level the puts and takes we should think about next year and your confidence in being on algo? Thank you. Susan Morris: You bet. Hi, Leah. Thanks. So first and foremost, want to reiterate our confidence in our algo. And the reasons we believe in that is our Customers for Life strategy is working We see that we have outsized upside in pharmacy, in our digital customer growth. Our media which we've shared is very early in its journey. We've talked about our focus on value enhancement, which includes pricing, it includes loyalty, as Sharon just mentioned, own brands. We're pleased with our technology modernization, but again, that's early stages. We believe there are more unlocks to come in the future there. And then our productivity agenda continues to deliver quarter over quarter, and we only expect that to grow. And I think all of these feed one another Pharmacy digital and loyalty grow engagement in baskets. Media creates high margin fuel. Our productivity and tech agenda frees up resources to reinvest in value. So we are very confident in our ability to deliver the algorithm. Sharon, what would you add to that? Sharon McCollam: I would only add that each of these initiatives Leah, build on one another. And as you think about it, for '26 and you think about the year, it's gradually and incrementally going to build. So as you're calendarizing the year, think of it in that way. And I think that this concept of gradual and incremental I don't care who you're talking to about AI and some of the digital transformation that's occurring, that learning is so powerful and the value that it's bringing to the bottom line just continues to grow. So as we look forward to next year, the other thing about the algo that Susan didn't say is remember when we gave that we talked about this last quarter. We ran multiple scenarios. We know that this environment is constantly changing and evolving, and we acknowledge everything that you just said around the different aspects of the macro that could be affecting us. But our plan at this point in time has levers to pull And, again, I will reiterate Susan's confidence in our ability to get into the algo next year. Leah Jordan: Thank you both. That's all really helpful color. Just wanted to go back to the lower ID sales guide for this year. And I understand the impact from the Medicare drug prices that you detailed. But within the lower guide, it's still implying a fairly wide range for the fourth quarter. So just maybe more detail on how you're thinking about the key drivers there, what gets you to the high versus low end, and how much is just tied to the uncertainty in the consumer as you highlighted just a broadening pressure across income cohorts? And then if you could, any color on kind of where quarter to date trends are tracking for ID sales? Susan Morris: I think there's two key areas, Leah, where the guidance range is wide. First and foremost, we've got this 65 to 70 basis point impact that we are anticipating from the Inflation Reduction Act drug pricing issue. So you pointed that out. We've tried to incorporate that. That's 10 to 20 or 16 to 18 basis points on the full year. It's very significant. But within pharmacy, there's also a lot of other opportunities happening There's scenarios, where GLP one's going, what's gonna be the adoption with New Year's resolutions around weight loss, the pill that's coming out for GLP-1s. So there is upside in our minds depending on how each of those play out. We're also keeping a I would say, a cautious view around industry units You pointed it out on the units in the industry. And that can be ranged So within those ranges, we're keeping everything that we currently see in mind. And, again, I would say this, when you take out the impact of the inflation reduction act, on the drug pricing, we are very much where we expect it to be at this point in time. Leah Jordan: Great. Thank you. Operator: Our next question comes from the line of Edward Kelly with Wells Fargo. Edward Kelly: Yeah. Hi. Good morning. So I just wanted to follow-up on, you know, that Thiago, next year maybe to start. And I just wanna make sure. Are you are you saying that if the backdrop stays where it is currently from a, you know, unit volume standpoint and we have you know, slightly less you know, pricing, which obviously is gonna put some pressure on IDs. That you still think that you can get into your file, though, next year. If that's the case, maybe can you just talk about, you know, what the levers are? That you might be pulling in order to do that? And then, you know, big picture here, you maybe talk about know, the temptation to move a bit faster, from an investment standpoint. To generate you know, longer term growth versus, the desire to deliver EBITDA growth you know, in line with the plan. Susan Morris: Hi, Ed. I'll I'll I'll start, and I'll I'll ask Sharon to chime in as well. So as she stated a couple seconds ago, one of the pivotal points of our strategy is our ability to be agile. And recognizing that the market is dynamic, there are different levers that we can pull to meet the algo. We we keep continued to talk about our acceleration in digital platforms, merchandising intelligence, our firm seeing customer experience, our price investments and so forth. We believe they'll deliver outsized growth and a lot of that growth is building as we exit 2025 and continues to grow as we go throughout 2026. We recognize there are some pressures from the pharmacy Inflation Reduction Act that we just spoke of. That I want to make sure everybody understands too, though, that that is a top line pressure. It is not a bottom line pressure. It's actually net neutral to the bottom line. Sharon, what would you I wanna be make sure that I understand your question. Because with the Inflation Reduction Act, the 16 to 18 basis points that we have quantified on the full year comp for 2025 that is only two periods for us this year. So you can see the magnitude of that for 2026. It is possible. We we said that we would have a two plus percent comp store sales increase Because of this reduction act, to that point it is possible the comp will be on a comparable basis. It won't be comparable. There will be a significant headwind, could be as much as 125 basis points to the comp. And if that was the case, you may not deliver the comp number with x x the inflation act. It would be in the two plus. But it may be different depending on how many more drugs get added to that. So we've gotta think through that. When we're talking about the algorithm, we are talking about on a comparable basis to 2025 We expect comp store sales growth to be two plus percent before the adjustment for the Inflation Reduction Act and that adjusted EBITDA will grow slightly faster than that. Edward Kelly: Got it. And then just a follow-up I was hoping maybe you could talk about the progress of the cost savings and how you're tracking so far against the plan, and the cadence in terms of savings as you think about 2026? Susan Morris: Yeah. So I'll start off and just say we're executing very well against our $1.5 billion plan. As we've stated, driven by technology, automation, analytics, We've also undergone process redesign across the company in merchandising supply chain, store operation, You can see the results that we've shared in our SG and A We're very pleased with what's flowing through the bottom line there from a productivity perspective. That said, though, part of our productivity is meant to fuel our growth in terms of the reinvestment in price, how we're we're structurally managing our store labor, and developing stronger customer experiences both in store and online. Sharon, anything you want to offer about our outlook on Yeah. Activity? When we get into 2026, in our Q4 discussion that Susan shared in our call, we'll also be giving you an update on productivity. We do see new opportunities with all of the things that we've talked about, and we'll be giving you an update on our productivity agenda. To Susan's point, we are achieving our productivity, and to some extent exceeding our productivity. You can see that in the numbers that we're delivering. And we expect to continue to be pushing that heavily. As we go into 2026 and these opportunities course, are like, I've everything I keep saying, they're gradually incremental because they're building on each other. Edward Kelly: Great. Thank you. Operator: Our next question comes from the line of John Heinbockel with Guggenheim Securities. Please proceed with your question. John Heinbockel: Hey, Susan. You you guys have you've you've acquired a lot of customers. You've missed 12% growth right, year over year over the the past couple of years. Can you talk to wallet share? Right? When I think and you also talked about that one to two-year journey with pharmacy. When I think about, you know, maybe your upper decile you know, loyalty members, average loyalty, you know, brand new. Can you maybe at least give us some guidance on you know, how those wallet share numbers differ? Right? So, like, is, you know, is the highest decile two x the average, or what does that look like And then, is there much difference, I guess, with a pharmacy customer some of those new ones are still lagging. Right? The the wallet share of mature pharmacy customers. Susan Morris: Thanks, John. So our digitally engaged customers spend approximately two to three times more than those not engaged in digital. And engagement rises further as they broaden to our ecosystem. So as they engage in online ordering, in loyalty, in different features on our apps as our health as an example, our pharmacy. And when we get when pharmacy enters that, that ecosystem, we start to see that number grow, four x, five x, So our most loyal customers definitely have outsized growth in lifetime value. And our focus there is to continue to build upon that strength as customers engage with us, delivering more personalized journeys. We talked about our AI assistant offering meal planning. We can help you curate a party or different occasions. And all of those things help deepen baskets and repeat trips for us. John Heinbockel: Okay. May maybe a follow-up. You talked about the divisions where you've invested in price. I'm curious, have they crossed over into positive food volume territory And then, maybe related to that, think you've talked about core, noncore assets and wanting to you know, wanting to double down on on some of the strongest markets. Do you do you see potential to exit markets and redeploy those assets and resources to the strongest ones or not really? Susan Morris: Okay. So with with regards to the price investment, I I'll speak to it more at the category level. We have seen strong unit improvement in the categories that we've invested. In many cases, they've moved to positive, year over year. In other cases, they've the decline has lessened substantially. And as we think about our price investments, I want to remind you too that we've got some areas where we've executed a new low price campaign, but there are other areas where we're leveraging price in terms of deepening promotion and as I mentioned before, the mitigation of inflation path. Through. So we're very pleased to see the positive customer response there in share as well. With regards to our fleet, yes, we're evaluating our entire portfolio end to end as we always do. And I think we mentioned a couple calls ago that because of the merger, we were unable to conduct some of the normal hygiene that we would do in terms of store closures, and you'll see an outsized list of closures as we exit 2025 based upon that. But as we look forward, yes, we're looking very much at where we're strong and want to grow. Again, organically or through acquisition. And then we'll also evaluate markets where we perhaps aren't performing as like we should and make the determination on if we can grow. If we can invest differently and make a change there. And, John, I would add to that we are also looking to materially sophisticate our real estate operations in 2026. In addition to that, we are looking at all noncore. When I say noncore assets, surplus real estate, things other things like that. Everything is being evaluated at this point in time. I want to make sure, however, that we are not having a similar conversation to other competitors in the grocery landscape. We did not have material type investments like others. And in no way do I are we indicating or signaling any type of massive write-off in front of us. John Heinbockel: Right. Thank you. Operator: Our next question comes from the line of Rupesh Parikh with Oppenheimer and Company. Please proceed with your question. Rupesh Parikh: So just going back to, I guess, the gross margin line, we've seen now improvement for really the two or three quarters. It's the lowest decline that we've seen all year. Sharon, just curious how you're thinking about Q4, some of the puts and takes there and whether you'd expect further improvement versus what we saw in Q3? Sharon McCollam: Yes. I think as you think about Q4, you should think about it more like Q2. And here's the reason. In the third quarter, we saw an exceptionally strong pharmacy business. And it was in the value-added side of the business which brought some incremental profit. It really moved from Q4 into Q3 because of what happened nationally with flu, and, fear of COVID, We saw an acceleration into the third quarter that will then turn itself around in the fourth quarter. And fourth-quarter pharmacy margin is never as strong as Q3. So you'll be in the I think if you model out more like Q2, in the neighborhood. Rupesh Parikh: Great. And then maybe my follow-up question, just going back to the GLP one conversation, given some of the enthusiasm out there on the pill format, does your team at this point think it's it sounds like you does your team at point think it could be more of a tail or maybe even a bigger tailwind as we go into year? Is is that the current thought process? Or just any thoughts on how your team's thinking about it. Susan Morris: Yes. We absolutely think it can be more of a tailwind as as we move forward with the accessibility and and delivery mechanism change, and pills versus shots and so forth. Sharon McCollam: Yeah. And, Rupesh, I think the inflection on the pill version of the GLP-one, it is not so it's not broadly used, obviously. And it will depend likely on the side effects. But at this point, we do not see it having a material impact one way or the other on the EBITDA in pharmacy. This is really about top line, and it's really about our patients. If they could come out with a pill and provide our patients with a pill form versus the injection form that would be great for the patients. But from a material P and L point of view, I don't see it in the short term. As something that you need to worry about from a modeling point of view as it relates to adjusted EBITDA. Rupesh Parikh: Great. Thank you for all the color. Operator: Thank you. Our next question comes from the line of Tom Palmer JPMorgan. Please proceed with your question. Tom Palmer: Good morning, and thanks for the question. I wanted to ask again just the price investment side. It sounds like there was perhaps a more intense promotional environment in November, especially when SNAP benefits were deferred. One of your competitors discussed the likelihood of higher promotions persisting into subsequent quarters. I think you you earlier addressed your tactical actions on this call, but I I wondered if you might talk maybe more broadly about what you're seeing across the industry and whether we should think about maybe more promotions funded by food producers or if you know, more of that funding is coming from kind of the grocer side? Thank you. Susan Morris: Hi, Tom. So with regards to pricing, yes, we also saw a more aggressive promotional environment. This year. And certainly, it was accelerated throughout the holiday season. As we've mentioned before, our customers are absolutely more price sensitive. Our value-focused competition is clearly showing growth. But that said, our market density and strong location combined with our loyalty and AI-driven personalization, help us create a more durable edge to serve our customers faster and at a closer proximity while protecting value. So we absolutely see promotional investments continuing. By the way, our by nature, we are a promotional merchant. That's who we are. That's who we've always been. And with our buying better together work, we're we're spoken before about how we're leveraging our size and scale. As a national company, to procure a lower cost of goods to secure more promotional funding where it makes sense all of those things will help us support where we need to be to meet the customers where they are in terms of of a price impression. And the timing for us when you think about our productivity related to buying together where we're bringing our buying for the divisions and buying together as a national at the national level. The timing of that and the fact that that is an opportunity and front of us it completely is in line with the timing of the nature of your question. So obviously, that is opportunistic at the moment. Tom Palmer: Understood. For the details. Susan Morris: Thank you. Operator: Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question. Zach: Hi, this is Zach on for Simeon. Thanks for taking our questions. You mentioned the sequential improvement in unit trends. Can you speak to the composition of that trend? Is it loyal families spending more? Is it new customers? How much is coming from digital versus in store? Thanks. Susan Morris: So what I would say, just a reminder too for everyone that the industry what we've seen in the industry is units were slightly positive in the first quarter, turned negative in the second quarter and remained flat to negative in the third quarter. And obviously, within that backdrop, our unit trends improved sequentially and we credit that to our surgical price investment and to our loyalty-led value. I would say that we continue to see customers very price sensitive. Thinking about how they prioritize essentials, We're seeing some smaller baskets in those price-sensitive customers and, obviously, some trade down that's happening as well there. We know that customers are more value aware. Their spending remains relatively stable. For us. And again, our personalized promotions, targeted price investments, our own brands innovation all of these are designed to support unit recovery over time. Zach: Thank you. And as a quick follow-up regarding digital sales, what is the economic model look like today? And where are you on the profit curve there? Susan Morris: Sure. So I'll I'll start and ask Sharon to chime in on some of this. But as a reminder, it continues to be a very powerful engine for us. We shared that sales were up 21%. We're very pleased with our penetration growth quarter over quarter. And also, we have a structural advantage in that for last mile, over half of our orders are delivered in less than three hours. And I think we shared 95% of our households are eligible for delivery, which means as fast as thirty minutes. So that reinforces speed and convenience for us. From a profitability perspective, we continue to see margin improvement as we scale adoption and embed an AI into everything that we're doing end to end. Cherry, do you wanna add any color on profit? Sharon McCollam: Only that we had said that we expect that as we continue to grow, we will get to profitability, possibly the end of this year or going into next year. The volume levers, obviously, the fixed cost And when we're talking about profitability, we are not including retail media. And we are fully allocating that P and L with fixed cost. Operator: Thank you. Our next question comes from the line of Kelly Bania with BMO Capital Markets. Please proceed with your question. Kelly Bania: Hi. Thanks for fitting us in. Sharon, I wanted to go back to the efforts to shift the buying to a national buying campaign rather than than more localized Just wondering if you could talk about how that is progressing Did the did the savings, are they starting to come through as you expected? And what does that imply for maybe the gross margin outlook into the fourth quarter and next year? Sharon McCollam: When we laid out our productivity Kelly, we said that we expected the big benefits from that to come in year two and year three of our productivity program, thus the response to the earlier question. That as we are seeing this more competitive environment, this is still in front of us. I'm going to turn it over to Susan in a second because the other thing that we're doing simultaneously is in our four big bets, on AI, merchandising intelligence, is one of those. And that provides a very data-driven way to approach this change material change in the way we're working And I'll let Susan talk about the merchandising organization and how that's transformed, since she took this role. So, Susan, you wanna just add a little bit to that? Susan Morris: Of course. And I'll just tag on to to your AI comment as well. It the merchandising intelligence that we listed under AI does exactly what Sharon described, but it and it's also meant to help us not only create better customer experiences, create curated assortment, but also optimize the profitability of our price and promotion end to end. We're very excited about our proprietary work there. From an internal construct perspective, we've, as as we've shared before, we've we've got a new merchant Michelle Larson took the seat a few months ago. And under her leadership and with the collaboration across all of our divisions, we're actually very, we're bullish about what we're going to be able to capture from a benefits perspective as we leverage our size and scale to to buy better together. We've got alignment across every single one of our divisions, We've got a common calendar. We're building the right processes and tools, as I just mentioned, from an AI perspective to support all of this. So we're very bullish about the future potential benefits that we will deliver in 2026 and beyond. Kelly Bania: That's helpful. Can I just follow-up a little bit on the discussion of of the units? I believe the the plan was to try to approach flattish units by year end. I was wondering if if that's, you know, possible still on the horizon terms of the core grocery categories? And can you also talk about the performance of fresh versus branded? I think you talked a little bit about private label, but just some of the growth in some of those categories versus your expectations? Sharon McCollam: I'll start, and then I'll let Susan take the second half of your question. In the outlook, that we have for the fourth quarter and as we think about where we will start to go into the algorithm in 2026, in light of industry units being negative and the trends in that having no clear sign of material improvement or catalyst for improvement. We will we did not assume that we would be at flat units coming into 2026. And don't expect to be in 2025 Q4. Susan Morris: And what I would add to that is again, we've seen strong unit inflection in our price investment categories and other categories as well. We are bolstered by what we're seeing there and that only helps us gain confidence in our pricing approach and supports what we want to do as we move into 2026 and beyond. Thank you. Operator: Thank you. Our final question this morning comes from the line of Paul Lejuez with Citi. Please proceed with your question. Paul Lejuez: You gave us an update on free income demographics earlier in your comment. I'm curious what you actually saw in each of those three during this quarter? And how does that differ in store versus online? Curious where you're seeing yourselves gain share by income demographic or maybe even losing a little share? Thanks. Susan Morris: Sure. So thanks, Paul. So we are by by nature, by the our go to market strategy, we are appeal more to the middle and upper income customer base. Now that said, we serve everyone in many markets across the country. And as we've said before, our low-income customers are certainly stretched, and that is where we're seeing smaller baskets. They're focusing on essentials. Our middle-income households also though do show some softening of what we're seeing there is maybe a trade down. So instead of buying steak, they're buying beef and so forth. Our higher-income customers, their spend is largely stable. But also we are starting to see that see them be increasingly value conscious. And that's again where we're really leaning into our personalized promotions, our surgical cost inflation management, making sure that we're delivering value across all cohorts. And we're able leverage our loyalty programs to help us do that in a more meaningful way. Paul Lejuez: Hey. This just just one follow-up on on units. If we exit out pharmacy, in terms of this quarter's ID sales, how did that look in terms of pricing versus units? If we look at the ID sales x pharmacy? Sharon McCollam: I think it's gonna we expect Q4 to look pretty similar. We're expecting to see similar trends to Q3. Paul Lejuez: What was that what was that? Sharon McCollam: We didn't give that specifically. Paul Lejuez: Inflation piece, the pricing piece in Q3? Sharon McCollam: CPI was up two. In Q3. We did not pass through 2%. And, we passed through less than our cost inflation. That's what you see in the margin. Paul Lejuez: Thanks, Good luck. Susan Morris: Thank you. Okay. Thank you all for your time today. That concludes our Q and A section. Have a great day. Thank you. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good afternoon, and welcome to Applied Digital's Fiscal Second Quarter 2026 Conference Call. My name is Konstantin, and I will be your operator for today. Before this call, Applied Digital issued its financial results for the fiscal second quarter ended November 30, 2025, in a press release, a copy of which has been furnished in a report on a Form 8-K filed with the Securities and Exchange Commission, or SEC, and will be available in the Investor Relations section of the company's website. Joining us on today's call are Applied Digital's Chairman and CEO, Wes Cummins, and CFO, Saidal Mohmand. Following the remarks, we will open the call for questions. Before we begin, Matt Glover from Gateway Group will make a brief introductory statement. Mr. Glover, you may begin. Matt Glover: Thank you, operator. Hello, everyone, and welcome to Applied Digital's Fiscal Second Quarter 2026 Conference Call. Before management begins formal remarks, we'd like to remind everyone that some statements we're making today may be considered forward-looking statements under securities laws and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statements. More detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the SEC. We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. We also discuss non-GAAP financial metrics and encourage you to read our disclosures and the reconciliation tables to the applicable GAAP measures in our earnings release carefully as you consider these metrics. We refer you to our filings with the SEC for detailed disclosures and descriptions of our business as well as uncertainties and other variable circumstances, including, but not limited to, risks and uncertainties identified under the caption, Risk Factors in our annual report on Form 10-K and our quarterly reports on Form 10-Q. You may access Applied Digital's SEC filings for free by visiting the SEC website at www.sec.gov. I'd like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of Applied Digital's website. Now I'd like to turn the call over to Applied Digital's Chairman and CEO, Wes Cummins. Wes? Wesley Cummins: Thanks, Matt, and good afternoon, everyone. Thank you for joining our Fiscal Second Quarter 2026 Conference Call. I'd like to begin by thanking our employees for their dedication to delivering high-performance, sustainably engineered infrastructure for AI, cloud and blockchain workloads. Their execution and commitment continue to be foundational to our success. This quarter marked several important milestones across our HPC data center and hosting business. Polaris Forge 1 reached ready-for-service, energizing 100 megawatts on schedule and completing the first of 3 contracted buildings. The remainder of this AI factory campus is expected to be completed by the end of 2027, and will host 400 megawatts for CoreWeave, representing approximately $11 billion in prospective lease revenue over approximately 15 years. We also announced a roughly $5 billion 15-year lease with a U.S.-based investment-grade hyperscaler for 200 megawatts at Polaris Forge 2. This is a $3 billion project near Harwood, North Dakota that is advancing on schedule with initial capacity expected in 2026 and full build-out in 2027. Together, these agreements represent 600 megawatts of lease capacity and approximately $16 billion in prospective lease revenue across our North Dakota campuses. Having secured two hyperscale leases in the region, inbound demand has increased meaningfully. As a result, we are in advanced discussions with another investment-grade hyperscaler across multiple regions, including additional locations in the Dakotas and select Southern U.S. markets. While there can be no assurance of future contracts, we believe we are well positioned to begin construction of additional campuses in the near term. Hyperscalers are competing aggressively to secure sites that can support massive AI demand, responding to data highlighting significant shortfalls in global power capacity. Many are being asked to commit capital to 30-year power plant developments, meaning energy may take years to come online, it could cost more than anticipated. Beyond the immediate rush, AI infrastructure is ultimately a cost of capital business where every input matters. In this context, we chose the Dakotas because we believe they provide a durable competitive advantage with low cost of abundant energy, [ new ] climate, ample land for expansion of existing sites and potential for future large-scale super sites that could align with regional energy developments, making Applied Digital sites not only immediately valuable, but we believe also more efficient and cost-effective over the long term compared with other regions in the U.S. and globally. Building on this advantage, we have significantly evolved our construction and design capabilities. Our current data center designs are modular and highly efficient, allowing us to run numerous concrete plants simultaneously and leverage prefabricated components delivered by 18-wheelers. The approach reduces construction timelines and lowers overall cost. We've expanded the footprint and flexibility of our buildings designed to allow for different GPU and ASIC chip architectures and networking infrastructure to support multipurpose AI use cases and traditional cloud workloads. While AI is driving significant demand, cloud computing continues to grow and increasingly competes for data center capacity. Our facilities are purpose-built to support training, inference and traditional cloud workloads intended to give hyperscalers maximum flexibility over the life of the asset. Looking ahead, we expect to maintain a meaningful competitive advantage in the Dakotas and intend to announce additional locations in other advantaged regions. With that, I'll turn the call over to our CFO, Saidal Mohmand, for a detailed review of our financials. Saidal? Mohammad Saidal Mohmand: Thanks, Wes, and good afternoon, everyone. This quarter represents a major inflection point for Applied Digital. After two years of construction and over $1 billion invested in our first 100-megawatt data center, we have now begun to generate lease revenues. We expect lease revenues to ramp over the next quarter, and it's important to note that we currently have two different campuses under construction simultaneously representing 600 megawatts. These buildings are expected to come online over the course of calendar 2026 and 2027, where we anticipate meaningful revenue growth over the coming 18 to 24 months. This does not include any additional campuses currently under advanced discussions with customers, which would be layered into these numbers according to their respective design and build time lines. From a high-level finance perspective, we have agreements in place with top-tier financial institutions that allow us to execute this repeatable and capital-efficient framework. The first step of this process is to draw on our development loan facility with Macquarie Equipment Capital, which allows us to fund pre-leased construction for new sites. Subsequent to the second, first quarter end, we made our first draw under this $100 million facility. The second step, following a mutually agreed upon executed lease with an investment-grade hyperscaler is to access the Macquarie Asset Management's $5 billion preferred equity facility. To date, we have drawn $900 million from this facility to support our Polaris Forge 1 and 2 campuses. We expect a similar financial structure will be used going forward for future development projects. This multilayered financing framework allows Applied Digital to leverage third-party capital for a majority of the upfront investment, while retaining majority ownership of each site, providing financial flexibility and reducing reliance on public capital markets. On the debt front this quarter, we completed a $2.35 billion private offering of our 9.25% senior secured notes due 2030 to finance the first 2 -- 2 of the 3 buildings at our Polaris Forge 1 site, supporting the core releases, allowing us to refinance existing debt. Note, project-level debt typically carries higher interest rates initially as it finances the riskier portion of development. But once the buildings are operational, our goal is to refinance at lower rates. Additionally, our team is actively exploring and working on options to reduce the cost of debt for the third building, ensuring we continue to optimize our capital structure. Now let's turn to the quarter. Revenues for the fiscal second quarter of fiscal '26 were $126.6 million, up 250% from $36.2 million in the prior year. The increase is primarily due to a $73 million of revenue generated from tenant fit-out services associated with our HPC Hosting Business, along with $12 million of recognized revenue in connection with the commencement of the first CoreWeave lease at Polaris Forge 1, reflecting partial quarter lease revenue. On a cash basis for the leases, revenues were approximately $8 million. The difference between cash received and the revenue recognized reflects ASC 842 lease accounting, which requires lease revenue to be recognized on a straight-line basis over 15 years. We will aim to provide clarity on this difference on an annual basis going forward. Applied Digital's Data Center Hosting segment, which operates 286 megawatts of customer ASICs across two North Dakota facilities had an exceptionally strong quarter, contributing $41.6 million of revenue, up 15% compared to the prior year. This growth was primarily driven by increased capacity online across the company's hosting facilities. We are very pleased with this business, which generated roughly $16 million in segment operating profit in just one quarter on a $131 million asset base. Cost of revenues in total were $100.6 million compared to $22.7 million in the prior quarter. Approximately $69.5 million of the increase in the cost of revenue was associated with the tenant fit-out services for our HPC Hosting Business, while the remaining increase was associated with our Data Center Hosting business and other expenses directly attributable to generating revenue. SG&A was $57 million compared to $26 million. This increase was due to an increase of $23.8 million in stock-based comp due to accelerated vesting of certain employee stock awards, $4.7 million in professional service expenses primarily related to an increase in legal services and $1.2 million in personnel expense for employee costs and other costs attributable to supporting the growth of the business. Interest expenses is $11.5 million compared to $2.9 million, while net loss was $31.2 million or $0.11 per share. On an adjusted basis, adjusted net income was a positive $100,000 or $0.00 per share. Adjusted EBITDA for the quarter totaled $20.2 million. From a balance sheet perspective, Applied Digital is exceptionally well positioned. We ended with the second fiscal quarter with $2.3 billion in cash, cash equivalents and restricted cash versus $2.6 billion in debt, most of which does not mature until 2030, and approximately $2.1 billion in total equity. Note, these figures do not include the $382.5 million in proceeds from financings completed subsequent to the quarter end. Our goal is to maintain one of the strongest balance sheets in the industry throughout the majority of the construction phases, intentionally holding a robust liquidity position to preserve a strong credit profile while enabling additional investments in equipment and new sites, then reassessing as buildings come online as our cash flow increases. With that, I'll turn over the call to Wes for closing remarks. Thank you. Wesley Cummins: Thank you, Saidal. Applied Digital is executing in a market defined by extraordinary hyperscaler investment now exceeding $400 billion annually. With our first two hyperscalers under contract for 600 megawatts in additional sites in advanced discussions, we are well positioned to scale rapidly. We now expect to surpass our long-term goal of $1 billion in NOI within 5 years. The Dakota campuses are expected to provide a durable strategic advantage through low-cost energy, natural cooling and a supportive regulatory environment. We remain committed to responsible development, strong community partnerships and environmental stewardship. We continue to invest ahead of the curve. This quarter, we led and invested $15 million in a $25 million funding round for Corintis, supporting advanced liquid cooling solutions for high-density AI workloads. We are also working with utilities and strategic partners, including Babcock & Wilcox Enterprises to explore ways to add power to the grid without increasing costs to our customers. These initiatives reinforce our leadership in next-generation data center design, responsible grid management and a long-term shareholder value creation. We plan to continue advancing our thought leadership at the forefront of data center technology and deepening our influence across the broader ecosystem. I'm also proud to announce the launch of Applied Digital Cares, a community initiative funding brands that support education, health, innovation and local development in the regions where we operate. Through this initiative, we aim to improve the standard of living in these focused communities because of our success -- because our success depends on theirs. Finally, as noted earlier, I want to expand on the Board's decision to spin out Applied Digital Cloud. We've entered a non-binding Letter of Intent to combine Applied Digital Cloud with EKSO Bionics to form ChronoScale, a dedicated GPU accelerated-compute platform for demanding AI workloads. This transition separates our cloud platform from our data center business intended to allow each to scale independently with greater strategic and capital flexibility. ChronoScale is set up to leverage [ the proven ] Applied Digital Cloud platform among the first to deploy NVIDIA H100 GPUs at scale. On an anticipated closing in the first half of 2026, Applied Digital is expected to own over 80% of ChronoScale. Today, the cloud business generates roughly -- generates over $60 million in trailing 12-month revenue with $313 million in assets. We believe spinning off our cloud business best positions us to serve the accelerated AI -- accelerating AI market while enhancing long-term shareholder value. With that, operator, we'll open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Nick Giles from B. Riley Securities. Nick Giles: My first question was just -- I was hoping to get a sense for your growth appetite in the cloud business. Good to see the announcement there for ChronoScale. Should we expect the Applied platform to be a host for any future GPU purchases? Or how could Applied ultimately help attract incremental customers in -- for ChronoScale? Wesley Cummins: Thanks, Nick. We've had a lot of discussions around that. So I think one of the key advantages that ChronoScale will have is the relationship with Applied Digital and access to large-scale data center facilities, deploying the accelerated compute, whether it be GPUs or TPUs or LPUs is part of the equation, but having access to large-scale data center facilities to actually make those deployments is a bigger part of the equation right now. And I think that's going to give that platform an advantage having the relationship with Applied Digital. We've had some of those discussions. We don't really want to get into how that will work in the future, but I do think that's a big advantage for the cloud business as it spins out. Nick Giles: Got it. I appreciate that, Wes. My second one was just you signed an agreement for a limited notice to proceed with Babcock & Wilcox, and I was just wondering if you could touch on the opportunity there. What kind of optionality does this really give you going forward? And what should we be looking for in the upcoming contract release? Wesley Cummins: The -- so for us, with the BW solution is a very unique solution and an exciting solution in the market because it uses older technology or an older process, which has been proven out for 100-plus years. It's using steam turbines, think of coal plant boilers, but we're using natural gas. That company has actually made a lot of coal and natural gas conversions over the past decade plus, and what it allows us to do is go to market earlier. If you get in line for natural gas -- traditional natural gas turbine right now, if we put an order in today, we're probably not getting delivery until 2031, 2032. For that equipment, we need power earlier than that. We are working with our utility partners, specifically now in the Dakotas, but expect to in other states as well, the initial reaction from those utilities has been overwhelmingly positive and really interested in the solution that the utilities -- any utility in the country knows who BW is. The company has been around for a long time, very good reputation. And for us to be able to bring a product forward 3, 4-plus years to be able to generate power in the near term is the big advantage for those utilities and for us. And I think you should expect to see more information about that in the first quarter as we proceed with a site and an actual schedule for build on that equipment. But it provides a really good option for Applied Digital to expand its current campuses and future campuses faster than we would be able to otherwise. Operator: Next question comes from the line of Darren Aftahi from ROTH Capital. Darren Aftahi: Congrats on the progress. Two, if I may. Wes, can you just talk generally about the landscape for leases and how pricing may have changed over the last 6 months? Like is it improving, staying the same, going down? And then second question, can you just talk a little bit about the pre-lease financing? I appreciate what it's actually doing. But like what does that say about your confidence when you're progressing on sites where you don't have signed leases? Just any kind of commentary and context would be great. Wesley Cummins: Sure. So I'll start with pricing and Darren, I'll keep it specifically to us. I don't want to speak for the market at large. But I would say, generally, pricing has been stable to slightly better over the past 6 months. The demand profile for the past 6 months has been extraordinarily robust. There's -- I always want to expand a little bit on this with contracting. There's the headline price that you'll see in contracts and a calculated yield, which is using an estimated cost to build. That's one aspect of it. What I would say, though, that's as important or even more important is we're getting more favorable terms in other aspects of the contract that we focus on very acutely for things like cancellation of transferability, a lot of the things that make these contracts for us, much more rock solid over that 15-year time frame. And we're getting a lot more favorable treatment in those aspects as an example, our current contracts are really noncancelable for 15 years. The customer can cancel for convenience. However, they owe us the 15 years of payments if they do, so that's typically referred to as a make-whole or a cancellation in the contract. So we've been able to get that 100% make whole transferability that doesn't allow them to transfer to a credit rating. It's either equal or higher. There's a lot of things that go into the contracting. So I would just say, in general, the contracting environment has gotten more favorable over the past 6 months. And then on the Macquarie equipment facility and us announcing that, I think you should think back to what we did for our facility in Harwood, North Dakota. We did something very similar. And at the time, I spoke about that as well as -- we will go forward with groundwork, breaking ground, getting the project moving when we have a high degree of confidence that we're going to find a lease at a new campus or new campuses and that facility. We use that same style of facility. Now we've made that facility effectively at Evergreen so that we can continue to draw and pay it back. But we use that in Harwood. We paid that back with the draw on Macquarie Asset Management. We've now drawn down again. We purchased some land and some other equipment. We'll start construction on at least one new campus by the end of January. And that's because we have a high degree of confidence that we're going to sign a lease with a new customer that is different. And we've set investment-grade hyperscaler, it's different than the original one we signed in Harwood. And that's the goal for us. Darren, we have a lot of momentum. So we've talked a lot about this before where we're qualified with most of the investment-grade hyperscalers are really focused on fixed companies total here. And so we want to add new locations, and we want to add new customers. So we diversify both in location and by customer and we expect to have a lot of success on that in 2026, and with what we're doing and what you're seeing the actions are now, you should expect that we think it's going to be in very early '26. Operator: Your next question comes from the line of Rob Brown from Lake Street Capital Markets. Robert Brown: Congratulations as well on all the progress. Just back to the ChronoScale spinout, I think you said midyear for kind of closing. What's the -- give us a sense of what steps have to happen between now and then in terms of getting finalized agreement and a closing step? What sort of has to happen here? Wesley Cummins: Sure. So it technically will be a merger, Rob. And so we'll get to a definitive -- hopefully later this month or early in February. And then there would just be a process for a shareholder vote to complete the merger. I think in the first half of '26 is the expectation. I think if I were handicapping it, on the very, very early side in March, but I would expect kind of the April-May time frame as we go forward with that. Robert Brown: Okay. Great. And then as you kind of think about that business and the growth possibly there, I think you said $60 million trailing or $75 million, I think, [ you said ] sort of perspective. What's sort of the growth opportunity? Is there additional capacity that can get leased out as a stand-alone business? Or do you expect -- I assume you expect some growth in capacity as well, but just a sense of the growth opportunity there? Wesley Cummins: Yes. So just for context on this, Rob, when we announced back in April, we were -- we put that into discontinued ops. We are seeking strategic alternatives. We evaluated a lot of alternatives. But while we were evaluating those alternatives, I think that market changed pretty significantly. And what we're seeing is a big opportunity in the compute side of the market, obviously, the data center side as well, but the compute side of the market, you're seeing a lot of deals happen over the past 3 or 4 months in that part of the market. We're involved in -- with a lot of those counterparties and discussions that have been, and we think there's a really large opportunity for our cloud business as we spin it out into ChronoScale to get some of those types of contracts. And we're working with us. We think there's a really unique relationship there where we can get data center capacity to be able to deploy significant scale for those style of contracts with those customers. And so we think this is the absolute best path for value creation for our shareholders to let this company spin out and capture that opportunity and raise its own capital and get on its own growth trajectory, which we just haven't focused on for the past 8 months. So we think there's a huge opportunity there, and you can see the stuff that's going on in the market, and we're really well positioned to capture some of those opportunities. Operator: Next question comes from the line of Mike Grondahl from Northland Securities. Mike Grondahl: You've mentioned a couple of times advanced discussions. Can you talk a little bit about how many sites you're having advanced discussions about like how many megawatts just so we can get a feel kind of a sense of the breadth that you're talking about? Wesley Cummins: Sure. I think we've talked about 2 or 3 sites. So I'll tell you, it's -- we're in advanced discussion on 3 sites in 900 megawatts. Mike Grondahl: Great. 3 sites in 900 megawatts. And then, Wes, how are you thinking about the pipeline today? How would you characterize that pipeline? Wesley Cummins: The pipeline remains robust. I will say, Mike, when I think about the business, and it's been like this for the past few months, I'm thinking less about the demand side of the equation, and I talked about this a lot on the last call, which is our ability to scale, our ability to scale across multiple sites then do construction across multiple sites and how many sites can we do construction across and the team spent a lot of time in 2025, and we'll continue in '26, working on our ability to scale and execute these projects at the size that we're doing across multiple sites. So it's less on the demand side because that's not been really the issue for us or really, I think the issue for the industry. We'll focus more on how much can we do and how much can we build from a supply chain perspective, from a personnel perspective, on an annualized basis. And so I don't think demand is going to be the limiter for us, but I want to make sure -- we always want to make sure that we're delivering on time and on budget for our customers. And I don't want to go too far out. We haven't hit that limit yet but it's the piece that I think about a lot, and we internally think about a lot is what is the limit for us on an annual basis. It's a large number but that's really more of the limiting factor for us and not what the demand picture looks like. Operator: Next question comes from the line of George Sutton from Craig-Hallum. George Sutton: Wes, you mentioned having been qualified by a few of the investment-grade hyperscalers, can you just talk about what that means when we talk about being in advanced discussions, I mean, how much more simplicity of getting something across the finish line is there once you've gone through that process versus hypothetically someone new in the market? Wesley Cummins: So what I would say generally and I'm going to only be able to reference our experience. So getting onboarded, getting to the point where you signed a master agreement that governs typically work orders or service orders you'll sign underneath of that can be anywhere from -- on the low end, 3 months to -- on the high end 9 months to a year, and so we've been through the process there for most of these hyperscalers. So there's the 6 that we target, which are the 5 investment-grade hyperscalers and then CoreWeave. So we're through -- out of those 6, we're through that process with 5 of those. And so I think we're in a really good position. And so if we've already been through that process, doing a new building even if -- a new building on the same campus or expansion in the current building or doing even a new campus if you're through that with one of those hyperscalers is a much shortened time frame, abbreviated time frame to get to that actual contract versus starting from scratch. George Sutton: Got you. So I want to put a couple of things together, and if you can help me. You were on CNBC the other day, mentioned, by the way, movie star quality experience, frankly. But you mentioned you had done $16 billion of deals in '25, and that you would anticipate doing that or potentially better in '26. And I want to dovetail that with what you just said on we're late stage with 3 sites in 900 megawatts. Am I kind of putting these things all together correctly? Wesley Cummins: Yes, I think that's correct. What I would just add to that on the -- George, on the 900 megawatts, I don't want to set the expectation that all of that is done at the same time. That could be one at a time. It could be none. We've been through enough of this. George, you've been through this with us as we've gone through the last few years. Nothing is done until it's done. That's just what we're working through right now. But that's -- those two going together, I think, you're reading that correctly. Operator: Next question comes from the line of John Todaro from Needham & Company. John Todaro: Wes, you spent a good amount of time talking about how, I guess, supply and execution is a little bit more of the difficulty part than demand. I think you ultimately ended ahead of schedule in that first build for CoreWeave. Can you just walk us through maybe what you learned from that execution and give us confidence in how you'd be able to continue to execute on those builds on the development side? And then I have a follow-up. Wesley Cummins: Yes. So we learned a lot going through that process on that first building, and we've made a lot of refinements -- typically, John, I think you've probably heard me talk about this before. So for us, one of the things I think differentiates us in the market is we started on this path back in 2022. We've stubbed our toe in a lot of different ways through the years. Luckily, we did most of that at a very small scale, but we had a lot of lessons on that first building, and you can see that reflected in design change, and then construction change and how we operate all the way through our supply chain and standardizing a lower amount of SKUs, lower amount of suppliers, all of these things that streamline the process that we do to build these facilities. And so we feel like we have a really good handle on our construction time lines. There's always things that can cause a problem that are out of our control on construction. One of the things I always worry about is weather, but we've built -- I think this is our fourth year in a row building in North Dakota in the wintertime. So we're pretty accustomed to that as well. But we have -- we went back securing supply chain well over a year ago, 18 months plus ago, and we thought we were really forward thinking on locking in 600, 700 megawatts of MEP per year that we have for us. Now we're working to expand that. That fits what we're doing right now, but I think that needs to go larger for us. So -- but we feel good about our processes we have in place and kind of the maturation of the construction and development group versus what we did on building 1. I'm proud of -- I'm really proud for the entire team that we delivered that on time and on budget for our customer. But we have to continue to do that. We feel really good about where we are for the CoreWeave building that we're expecting to deliver in the middle part of this year and the building in Harwood we're expecting to deliver shortly after that. And then the next two buildings after that, both in Ellendale and then in Harwood. So we're feeling really good about where we are on schedule. But it's about the fact that we have streamlined this and we're on, what I call our fourth generation design has really helped us in simplifying the process and streamlining the process and being one of the companies that does deliver on time. John Todaro: That's great. And then just a quick follow-up. I think you've mentioned in the past getting calls from entities with sort of stranded power. And it sounded like there might be a little bit more pockets of available power out there than some of us in the industry had initially thought. Could you just maybe frame that up? Is there still additional kind of pockets to acquire more fairly near-term power? And maybe talk to your color on that? Wesley Cummins: Yes. We keep finding more opportunities, more and more opportunities. Everything we're in process with right now is organic. So we have a large amount in-flight that is organic. But we continue to see opportunities, third-party opportunities. We continue to evaluate those opportunities. And some of those, really, for us, it could be in a different geographic market for us, that is a really attractive market. But we continue to look at that. But everything we're doing right now is organic, but we see those, I would say, daily -- weekly at least, but typically multiple times in a week. Operator: Your last question comes from the line of Michael Donovan from Compass Point. Michael Donovan: Congrats on the quarter. Following up on Mike's pipeline question, can you touch upon expansion opportunities at PF-1 and PF-2? Do you still have confidence in those reaching 1.4 gigawatts and 1 gigawatt, respectively? And I have a follow-up. Wesley Cummins: Yes. So every one of our campuses, I think this is an important point. Every one of our campuses has the potential to go to at least a gigawatt. And some significantly beyond a gigawatt. But when we think about our goals inside the company, we have two campuses now that can each go to 2 gigawatt or more. So we have that pipeline in the future for ourselves, we're working on three additional campuses. We're working on a lot more than that. But think of -- things we're in advanced stage on three more campuses. Each one of them can scale to 2 gigawatt capacity. So for us, if we put those in place, those contracts in place, we have different customers on those campuses. We have a view and a pretty clear path to whether it's by 2030 or 2031 or 2032 to growing our capacity to 5 gigawatts, if we don't add another campus after that. We would expect that we would, but it puts a really good growth path out for the company just having these campuses in place, just getting the 2 gigawatts, if we were talking about this a year ago, would be monumental for us. But if we can expand to 5 campuses and have a clear path to 5 gigawatts plus of capacity over the next 5 years. That's a really great position for [ us ]. But all of those campuses have that expansion potential. Michael Donovan: Great. I appreciate that. And with the discussions around NVIDIA this week with liquid-cooling [ via ] Rubins, can you discuss a bit on what makes Corintis a competitive solution? Wesley Cummins: So Corintis is really interesting. You could go and look at their technology. They had a very nice announcement with Microsoft, I think, a couple of months ago. What we like about it is Corintis has a cold plate technology that I liken to semiconductor and then module. A lot of semiconductors are built into modules. So they have the technology that I would classify in this case, a semiconductor, which is a specially designed patterned cold plate that is dependent on each chip individually. So whether it's B200, B300, Rubin, whatever it might be, they map that chip. They make the heat points of that chip. They design the cold plate with a lot of micro channels through it. And then it goes into a full cold plate and it sits on top right now. But this technology is designed to go inside the semiconductor packaging in the future and then actually inside the manufacturing process in the [ epi ] for semiconductors. And the goal for this technology and a lot of this has proven out for them is that you can use -- if a chip goes, let's say, it's using 1 kilowatt down, but the next-generation chip uses 3 kilowatts or 5 kilowatts, this technology can use the same amount of liquid to chill chips as they go up. Now there's a point where that breaks and there's a change where we need more liquid. But from a data center operator perspective, when having that efficiency inside is always great for our customers, but to be able to deliver the same amount of liquid on the data center side for a chip that's 3x the power density of what we're currently running really helps us future-proof our infrastructure. And so we're really excited about that technology. Operator: There are no further questions at this time. I'd like to turn the call back to Wes Cummins for closing comments. Sir, please go ahead. Wesley Cummins: Thanks, everyone, for joining us for our Q2 earnings call. I appreciate all of the support and look forward to speaking to you in April. Thanks. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.