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Lavanya Wadgaonkar: Good evening, everyone. I'm Lavanya Wadankkar, Corporate Executive for Global Communications Office. Welcome to Nissan's First Half Financial Results for Fiscal Year 2025. Along with financial year results today, we will be presenting an update on Re:Nissan. Today's session is for 45 minutes and is held on site as well as online. First, let me start with the introduction of the speakers today, Ivan Espinosa, Chief Executive Officer; Jeremy Papin, Chief Financial Officer. We will begin with the presentation. So I'll hand over to Ivan. Ivan? Ivan Espinosa: Thank you, Lavanya. Hello, everyone. Thank you all for your continued support. It was a pleasure to meet and host many of you at the Japan Mobility Show. Before we begin, I want to emphasize that Re:Nissan is on track, and I am grateful to all who have shown patience and trust during these decisive actions. Despite ongoing challenges and volatility, we remain focused on recovery. Today, Jeremy will present our first half performance, second quarter results and full year outlook. I will then update you on the Re:Nissan before the Q&A. So Jeremy, please. Jeremie Papin: Thanks, Ivan. Building on the disciplined approach, our cost control measures are showing encouraging signs amid a challenging environment. Now let's take a closer look at our retail sales results. Total unit sales reached about 1.5 million in the first half, down by 7.3% year-on-year. Second quarter sales, excluding China, were down by 3.6%, an improvement over the first quarter. We are already seeing clear acceleration in Q2 with North America delivering stronger results and China posting year-on-year growth since the month of June for the first time in 15 months. North America saw acceleration with 2% growth overall and 6.7% in Q2. U.S. sales were flat, Mexico up 8%, maintaining market share leadership. China sales declined by 17.6% in H1, but have grown year-on-year for 5 months, led by N7 demand. Japan dropped by 16.5% in H1, but our showroom traffic has been recovering from a low point reached in July, thanks to marketing and dealer program initiatives. Europe and other markets had temporary declines from model year changeovers and increased competition. First half consolidated net revenue was about JPY 5.6 trillion with an operating loss of JPY 28 billion, better than we had expected. Net loss was JPY 222 billion, largely due to lower equity method income, impairments of assets and restructuring costs. The automobile business revenue was about IDR 4.9 trillion, driven by foreign exchange effects and lower wholesale volumes impacted mainly by tariffs. R&D spending was controlled at JPY 275 billion through disciplined resource allocation, some project deferrals, thanks to a shortened development schedule and optimized hourly engineering costs. Our operating loss widened to minus JPY 177 billion. Automotive free cash flow was negative JPY 593 billion in H1, but Q2 performed better than expected at negative JPY 202 billion. At the end of the period, net cash stood close to JPY 1 trillion. Importantly, we maintained solid liquidity at IDR 2.2 trillion in automotive cash and equivalents and unused committed credit lines at IDR 2.3 trillion. This slide shows the year-on-year operating profit variance factors. Foreign exchange had a negative impact of about JPY 65 billion, driven by weaker U.S. and Canadian dollars as well as the Argentinian peso and Turkish lira. Raw material costs were slightly positive at JPY 3 billion, while tariff had a negative impact of JPY 150 billion. Sales performance contributed ID 24 billion but negative volume was offset by a favorable mix. Together, volume and mix delivered IDR 62 billion improvement. However, competitive pressures continued to weigh on incentives. Monozukuri improved by IDR 67 billion as the Re:Nissan recovery plan delivered cost savings alongside lower R&D spend and purchasing efficiencies. Inflation absorbed JPY 50 billion, moderating the overall benefit. Onetime items added JPY 65 billion, mainly due to lower warranty costs recognized in Q1 and reduced U.S. emission expenses recognized in Q2. Other items, including sales finance and remarketing expenses added JPY 45 billion. We achieved a positive impact on G&A costs through Re:Nissan initiatives. Taken together, these factors resulted in an operating loss of JPY 28 billion for the first half. I will now move to the outlook for the remainder of the fiscal year. For the second half, we anticipate a strong rebound in volume driven by new products and marketing initiatives. In China, demand for N7 is encouraging, and sales are expected to exceed previous outlook by 13%. North America is expected to sustain momentum, and we will intensify our efforts in Japan, Europe and other markets. Although the first 6 months showed a year-on-year decline, we are confident the next half will deliver growth. The markets remain challenging, but the industry volumes are stable. Our full year sales forecast remains unchanged at about 3.25 million units, representing a 2.9% decline year-on-year. We are adjusting our outlook to reflect the positive developments ongoing in China, but we are reducing our consolidated retail sales to account for the lower performance of the first half. The production is projected to remain around 3 million units as we maintained a very disciplined inventory management and actively manage supply risk. Recent launches and model enhancements will strengthen the lineup and attract customers in H2. Operational improvements, including a third shift at Nissan [ Shatai Kyushu ] will boost output. Net revenue is expected to be about JPY 11.7 trillion for the current fiscal year. As outlined in our revised outlook last month, we anticipate a full year operating loss of about JPY 275 billion, breakeven before the impact of tariffs. Our operating profit outlook includes JPY 25 billion for assumed supply risk, which we will revisit as the situation evolves. We are still evaluating the impact of Re:Nissan, so we are not of Re:Nissan initiatives, and we are not providing a net income outlook today. The forecast is based on an exchange rate assumption of JPY 146 per dollar. Let me outline the factors behind our operating profit forecast. Compared to last year's JPY 70 billion operating profit, we expect significant headwinds from tariffs and currency. On the positive side, we anticipate benefits from an improved product mix and continued support for our U.S. built models. Year-on-year, we expect cost improvements as Re:Nissan initiatives take hold even amid inflationary pressures. Tariff-related carrefour adjustment will add cost in the second half, limiting manufacturing efficiency gains, but we are expecting savings in logistics, R&D and purchasing. Onetime positives include lower warranty provisions and reduced emission penalties. Overall, we forecast an operating loss of JPY 275 billion for the year. We remain disciplined in our balance sheet management, and we are retaining sufficient liquidity. Total liquidity is about JPY 3.6 trillion with JPY 2.2 trillion in cash and JPY 2.3 trillion in unused credit lines. Year-end automotive debt is forecast at about JPY 2.1 trillion, fully in line with our initial plans, and this is following the successful refinancing of JPY 700 billion in debt maturities this year. Let me now hand over to Ivan. Ivan Espinosa: Thank you, Jeremy. I will briefly recap H1 performance and the outlook. First, on sales performance, despite volatility and competition, we stay resilient. Q2 declines narrowed signaling stability. North America showed strong Q2 growth. Retail non-EV share has risen for 3 straight quarters and continued in October. China turned positive since June, while Japan and Europe experienced some softness, but we expect recovery with upcoming launches and dealer programs. Second, on financial performance, we possessed JPY 3.6 trillion of total liquidity. Over JPY 80 billion in fixed cost savings were achieved in H1 through Re:Nissan recovery initiatives. While tariffs and currency headwinds pressured profitability, disciplined cost management and structural efficiencies continue to deliver benefits. Finally, the outlook. We anticipate a stronger second half driven by Re:Nissan product-led growth and momentum from Q2. We remain on track for operating profit breakeven, excluding the tariff impact. We target JPY 1 trillion net cash at year-end and expect positive out of free cash flow in H2. We will balance optimism with prudent risk management as we navigate challenges. In short, we are prepared for second half growth, leveraging new launches, operational improvements and disciplined execution. Building on this momentum, let's turn to the strategic update. While navigating a challenging environment, Nissan is advancing steadily through Re:Nissan, redefining our strategy, accelerating innovation and reinforcing the foundations for sustainable growth. We have been driving a transformation that goes beyond tackling current challenges to redefining our future. It rests on 3 powerful drivers: First, disciplined cost reductions to strengthen our financial base. Second, a bold redefinition of markets and products to deliver what customers truly want. And third, reinforcing partnerships that unlock scale and efficiency and with clear target, returning to positive automotive operating profit and free cash flow by fiscal year 2026, excluding tariffs. And we know what it takes to get there. That's why we're targeting JPY 500 billion in savings split between variable and fixed costs to reshape our cost structure and strengthen our competitiveness. Let me take you through how we are tracking against these targets. Over the course of this year, our variable cost reduction initiatives have gained notable momentum. As of November 2025, we have generated 4,500 ideas, identifying a potential impact of JPY 200 billion, a progressive leap from JPY 75 billion in May and JPY 150 billion in July. Over 2/3 of these ideas are technical solutions like redesigning headlamps for efficiency or optimizing seat designs to cut material costs. Major cost reductions target high-volume models like Rogue, Kicks globally, Pathfinder in North America and Serena in Japan. Every action upholds our commitment to quality with no compromise on safety, reliability or performance. We are advancing in manufacturing and logistics, including parts diversity reduction and supplier collaboration. Encouragingly, ideas are maturing with more moving from concept to implementation. This structured approach ensures credible, sustainable savings embedded in design and operations, always with quality as a top priority. We have delivered over $80 billion in fixed cost savings in H1, a strong start. We aim to exceed $150 billion by fiscal year-end and surpass $250 billion by fiscal year 2026. In manufacturing, we have completed 6 of 7 targeted site actions with Compass, the sixth plant ending production later this month. On engineering, we are progressing towards our 20% cost per hour reduction target currently running at 12%. Parts complexity reduction is delivering also strong results, complemented by Obea activities with models like the next-generation Rogue using 60% fewer parts. We are also optimizing assets to unlock value for transformation. A key step is our global headquarters in Yokohama. We will proceed with a sale and leaseback transaction under a 20-year agreement. This ensures Nissan's continued presence and commitment to Yokohama while ensuring no impact on employees or operations. Part of the proceeds will fund critical investments like accelerating AI-driven systems, digital modernization and transformation initiatives while preserving our ability to invest in innovation and growth. These steps go beyond cost. They create a leaner, more agile Nissan ready to compete and win. We have made strong progress on cost actions, and now the momentum is shifting towards the next 2 drivers of Re:Nissan, redefining our product market strategy and reinforcing partnerships. On product lineup, our product lineup tells the story. From the award-winning Leaf to the new generation [indiscernible] car, we are gaining traction. Between now and fiscal year 2027, we will be introducing 9 new models. As we look ahead, our product strategy rests on 3 pillars. Hartbeat models, icons that showcase Nissan's DNA and innovation like the globally recognized Leaf. Core models, vehicles that lead in key markets such as the Kashkai ePower with class-leading fuel economy and the Kicks recently named Best Buy 2025 in Brazil. Partnership models are collaboration that strengthen our reach, including the N7 with 40,000 units sold in China and the Ros KCar with 15,000 presales in just 6 weeks. Finally, I want to stress the importance of partnerships for our future. Many of our products, as I mentioned earlier, reflect the strong power of collaboration. Now coming to partnerships in technology. These are critical to strengthening our presence in next-generation mobility. In recent months, we have announced several initiatives, a tie-up with Boldly, Premier Aid and KQ Corporation to pilot autonomous mobility services here in Yokohama. Collaboration with WAVE, the U.K. pioneer of AI driver software to set new standards for driver assistance in our next-generation ProPilot technology. And in China, our new Tiana features advanced intelligent connectivity, becoming the first ICE vehicle equipped with Huawei's Harmony Space 5.0 smart cockpit. These partnerships are more than projects. They are strategic moves that position Nissan at the forefront of intelligent mobility. In conclusion, our first half results reflect the challenges we face, but they also confirm that Nissan is firmly on the path to recovery. We have made meaningful progress. And while there is more to do, the foundation for future success is in place. Having implemented decisive cost-saving measures to secure profitability, we are now accelerating forward, prioritizing new products, key markets and breakthrough technologies that will define our next chapter. The second half will bring challenges, but with focus, discipline and the actions we are taking, I am confident we will deliver strong results. We have the right strategy, the right products and the right team to capture growth and create value. Together, we will navigate the road ahead and with confidence, seize the opportunities and lead with innovation. Thank you for your attention. With that, we will now take your questions. Lavanya Wadgaonkar: [Operator Instructions]. I already see a lot of hands going up. [Operator Instructions]. Just so we go with maybe the first front row middle. Unknown Analyst: [Interpreted] My name is Taki. I have 2 questions. The first question is as follows. Last week, Japan Mobility Show started. And here, you have a stand, new L Grand and new Petrol were displayed in the show. Sspinosa-san, you made the presentation personally. That's what I heard. What's the reaction of the people who saw it? And what's your opinion about the overall show? This is my first question to Ivan-san. And the second one, partnership. Was it -- since last fiscal term with Honda, you have been -- well, capital tie-up is kind of went back to scratch, but you are trying to continue with the collaboration with Honda. What is the progress so far to the extent that you can disclose? These are the 2 questions. Ivan Espinosa: Okay. So thank you. Thank you for your questions. On the Japan Mobility Show, first of all, thank you for visiting. I really enjoyed the show and having the opportunity to guide many of you through the booths and show you what Nissan is capable of doing. Then as for the reaction, the reaction has been extremely positive, both for L Grand and for Petrol. The level of buzz that we are seeing, and I have some numbers for you actually. The conversations on social network spiked by 15x versus the normal average that we have. And out of that, we have 35% positive sentiment in total, which is a 25% increase versus where we were before. So clearly, the products are well received and Nissan is starting to become attractive to customers again, which was exactly the goal. It's exactly the goal of the second phase of our RNissan program. As I've mentioned before, the first step was about cost and restructuring. Now we are shifting gears into the second phase, which has to do with product, market strategy updates, innovation and technology. As for the partnership with Honda, well, we keep discussing with them, as I have said before, on several projects. There's nothing that we can disclose at the moment, but we keep discussing with them opportunities in several fields as we outlined in previous announcements. Thank you. Thank you for the question. Lavanya Wadgaonkar: Take the question from the right side. Unknown Analyst: [Interpreted], my name is [indiscernible]. There are 2 questions from me. The first one is the regional breakdown of the sales. China and U.S. are better, but how about Japan and Europe? There's a decline which is continuing in Europe and Japan. Sunderland and [indiscernible], what is the utilization rate so far? ELV and Micra, you are going to introduce new cars. You are talking about the second stage of Re-Nissan. Europe and Japan, when will it grow? The volume -- when will the volume in these 2 regions grow? This is my first question. And the second one is the objectives of the Re:Nissan. In May, when you devised the plan in fiscal year 2026, automotive profit and free cash flow will be the positive. That's what you said. But you said that you didn't talk about excluding tariffs, but now you are saying it's excluding tariffs. Does that mean that you made a downward revision on the goal for 2026? Ivan Espinosa: So let me start with the first question. So the volume, as we explained earlier in Europe and Japan was soft on the first half. Europe had some impact from the model changeover. So we were on the runout of the previous [ Cashkai ] and entering with a new Cashkai that has the third-generation e-POWER. So we expect Europe to pick up in the second half now that we are launching full blast, the third-generation ePOWR, which has been very positively received and evaluated by media. In Japan, we had a slow first half and for several reasons. One, of course, the impact of media and communications, the negative media coverage that we had in the first half, because of the situation that we went through. This had an impact on showroom traffic and customers were wary of Nissan's situations because of the financial condition. Now we are seeing change. We see, as I mentioned before, sentiment from the public is changing towards us. They are understanding that Nissan is a great company that makes great cars, and we start to see the positive sentiment changing. A lot of this, thanks to your support as well as media because you have been providing a lot of support to us. And we see that the sentiment is changing. The showroom traffic starts to improve. And the proof of that is also the very strong reception to rucks, around 15,000 orders received in only 6 weeks. So this signals that we can start bouncing back, and we expect a strong bounce back in Japan as well in the second half. As for the objectives, the objectives have not changed. The fact that we are now clarifying tariffs is because we didn't know when we announced at the beginning for how long tariffs will be remaining. We thought initially as many in the industry that it was a temporary thing. But now that this is here to stay, it's -- we are just recognizing that the tariffs will have to be managed. And this is not a downward revision. It's just a clarification of what we expect for next year. Thank you for the question. Jeremie Papin: Yes. On the FY '26 guidance, there is absolutely no change, fully in line with what we had announced in the month of May. Lavanya Wadgaonkar: Thank you. If I go to the last left side, first row. Unknown Analyst: [Interpreted]. My name is Sakamura. I also have 2 questions. First of all, Re:Nissan. So far, 20,000 people headcount reduction was talked about. In which country will you be reducing headcount in what degree? Can you substantiate that plan and give us an update on the substance of that plan? Second question, new model introduction. In China, N7 is doing very well. So in the future, China produced cars exporting to other countries. I thought that you were studying such possibility. How far has that study gone? And is there a possibility for export to Japan? Ivan Espinosa: Thank you, Sakamura-san, for the question. So on headcount, on your headcount question, what I can tell you, we are not providing a breakdown. What I can tell you is these numbers that we announced are global, and we are tracking according to our plan. So the plan is ongoing, and we are tracking according with our expectations in terms of speed and size of adjustment of the workforce. But we are not providing details on the breakdown. As for the new model, N7 and future exports, the answer is yes, we are working on export plan. You maybe heard we established already an export JV company that will help us enable and facilitate and speed up this. And we are looking at several products that we have a potential, and we are looking at different market options. But nothing specific to share today. But the answer is yes, we will be exporting cars because this is part of our strategy to defend ourselves outside of China, bring more scale to our China operations also and use the speed of China in terms of development, technology and costs to defend ourselves in markets where Chinese OEMs are being aggressive. So this is what we are set to do. Thank you for the question, Sakamura-san. Lavanya Wadgaonkar: Thank you. If I move to the second row in the middle... Unknown Analyst: The question to CEO. So in relation to the previous question, you have a commitment of achieving operating profit in the automotive business by fiscal year 2026. However, net income forecast has not been disclosed with a massive loss loss in fiscal year 2025. Can this target be met? Can it be achievable in time? I think that Mr. Papin has already answered that question partly, but I need to -- I need an answer from Mr. Espinosa and a strong message in your commitment. And the second question is very simple. So you emphasized the change of an atmosphere around Nissan. Does it mean the darkest hours of Nissan is over or still to come, the darkest time of Nissan is over or not? Ivan Espinosa: Thank you. So for me, the important thing is to have customers looking at Nissan with eyes that represent what Nissan is capable of doing. And Nissan is a company that has over 100,000 employees working very hard to create great products. And that's proof of what we saw in the Japan Mobility Show. It's evidence and proof that this company, our company is a great company that can deliver great exciting products. This is what we're focusing on, and this is what our people with a lot of love for our company are doing every day. As for your question on OP, the answer is yes. We are committed to deliver what we said. And proof of that are the numbers that we just explained to you. I think we have a couple of good examples. As we said, on the fixed side, we have achieved already more than JPY 80 billion in the first half of savings. We are on good track to achieve JPY 150 billion by the end of this year. And we are confident that we can overachieve JPY 250 billion next year that we have committed to achieve. And on the variable cost side, as mentioned, the progress is very consistent, gradually growing the impact or potential that we see, now reaching JPY 200 billion versus the JPY 75 billion that we had in May and the JPY 150 billion that we had in July. So again, this is evidence that the company efforts is bringing fruits. So this gives us confidence to achieve the objectives that we have set for ourselves next year. Thank you for the question. Unknown Analyst: Darkest hour [indiscernible]? Ivan Espinosa: Well, I don't know what you mean by the darkest hour. Again, for me, the important thing is to change the customers' minds and have them look at Nissan as a great company that it is. Thank you very much. Lavanya Wadgaonkar: Stay in the middle... Unknown Analyst: [indiscernible] newspaper. First, Expedia semiconductor manufacturer impact. [ OPamMaushu] reduction has become clarified, but how much impact are you foreseeing in terms of volume? What's the maximum reduction? And are you thinking of alternative purchasing? So what's the progress in terms of choosing an alternative? Secondly, how do we interpret volume? N7 was better than expected. So there was a hit, but the full year volume is unchanged and minus from 2024 and sales has been revised downward. So top management, how confident are you on the second half? And you will continue to introduce new models next year, but are you -- do you think that, that will really have a positive impact? What's your level of confidence? Ivan Espinosa: Thank you. So I will answer the second question and then let Jeremy elaborate on the first one. On the confidence on the H2, I think there's 2 elements to consider, not only the new car launches, but the fact that in North America as well as in China from the second quarter, we already start seeing growth. So we have seen consistent growth in North America and the U.S., particularly, I can tell you, our retail share in non-EV has quarter-over-quarter grown. If you look at the numbers, Q3 2024, we trail at 4.3% Q4 2024, we were at 4.8%, and now we're running at 5.3%. So this is proof that the performance is improving, thanks to the focus that we have put in our marketing and sales activities and the products that we are rolling out in the U.S. Then Japan, as mentioned, we had a slow H1. So that's why we believe we will not be able of recovering the full year estimate, but we expect a strong bounce back in the H2. Thanks, as we said, from the good showroom traffic improvement that we see, the positive sentiment from the consumers that they are placing again their confidence in our brand and our company. And again, proof of that is the very good reception and the preorders of the old Nissan books. So that's why we are confident on the second half performance on sales. Jeremy, do you want to elaborate on the first one? Jeremie Papin: Yes. On the supply risk that we are managing at the moment, there are actually 2. One is an aluminum supply issue in North America that is affecting many market participants following the fire at a supplier. The second one is obviously the situation with Nexperia and the chips that were being banned from export from China, but that ban in the last few days seems to have been lifted. So I would say the situation is extremely fluid, and we are, I would say, managing it extremely closely. This forecast, as I shared with you, includes a JPY 25 billion risk which we put as a placeholder last week when the situation was quite uncertain. I would say, as the situation clarifies, should this placeholder be unnecessary, we will be removing it from the forecast. Lavanya Wadgaonkar: Next question. I can move to the media, please. Unknown Analyst: [Interpreted]. My name is Matsuka. I have 2 questions. For this fiscal term, in the first half, how do you assess the first half results of this year? And the sales and leaseback of GHQ without renting it, how by going to the suburbs where you have an R&D center, it would have been more beneficial. What was the thinking behind this? Wasn't there any opposition from other executives in the company? These are the 2. Ivan Espinosa: Thank you for the question. So on the first half assessment, as mentioned, we had a result that came in better than we expected, but it was supported by external factors as well. So we had some onetime events and that are evident that we are doing well, but there's more work to do. So that's what we qualified earlier in the presentation. So the plan is on track, but we have to keep working hard in the second half to deliver the objectives that we have set for ourselves. Now as for the sale and leaseback, we discussed at length in the EC, and it's something that also we reported to the Board. And the best option was to do what we did, the decision that we made, which is trying to minimize the impact on the employees and on the suppliers and on the local economy and having a good business strategy to utilize better our assets. bring some resources in that will help us, as I said, modernize and go further into digitization, AI implementation and many other things that we have to do, while also it allows us to spend the precious R&D resources that we need for our future, especially in a year where free cash flow will be negative. So this is the -- these are the considerations that we took for the decision that we made. Thank you -- thank you for the question, Ms. Matsuka-san. Lavanya Wadgaonkar: Move to the left side, yes, please. Unknown Analyst: [Interpreted] from Bloomberg. Last time during the press conference, Papin-san, you said that net loss for this fiscal year, you said that details will be provided in November, if I remember correctly. But this time, you are not going to give a full year guidance for net income. Once again, why are you in this situation? Was there any change that took place from last time? Is there something that you didn't see last time to the degree that you can disclose? Could you elaborate why you cannot give a full year guidance of the net income? And Page 16, Global Design Studio is reorganized and Global Information System Center is relocated. That's what it says. Did you sell assets in these moves? Could you elaborate on these 2 points? Jeremie Papin: So on the net loss outlook, I think the situation is the following. We are, at the moment, considering further implementation of restructuring actions under Re:Nissan, in particular, accelerating decisions. And as we are working on those options, we just didn't have a clear enough forecast to share something that was robust enough in order to make a communication. So we want the transparency and we want to provide the guidance, but today was just not the day where we could. And so I think you just need to bear with us and understand that we're working on assessing further restructuring and implementation of Re:Nissan plans in fiscal year '25, and that will have P&L consequences that we are assessing. On -- more generally on the events that you mentioned, I would say that when we free up any assets today, there is a consideration of monetizing the asset if we own it. And so there is just a systematic review. So we will keep you informed as we progress with asset sales or any asset disposal. Unknown Analyst: [Interpreted] Hatanaka of Nippon Broadcasting. I have a question to Mr. Espinoza. During the Mobility show, your group company, Nissan Shatai Shona plant announcement was released. You will be using it for -- to manufacture service components. What's your take? And did Nissan -- was Nissan involved in that decision-making? And Mobility show was very popular. The main LGA and Petrol, Nissan Kyushu manufactures those models. So these models will continue to be manufactured in the same way? Or will the manufacturing site be transferred? Ivan Espinosa: Thank you. As for the Nissan Shatai question on Shonan, I will kindly ask you to ask the question to Shonan. We cannot comment on Nissan Shai. However, on your question on L Grand, we are -- we will be continuously assessing the industrial strategy. So for the moment, we will start producing in Nissan Shatai Kyushu together with Caravan and frame vehicles. As you have seen, the welcoming of patrol and QX80 is very good globally. So we are currently looking at what options we could have to further increase the capacity of such models because they are performing very well, and they are very profitable. Now this, as I said, we will continue to explore. But for the moment, there is no intention to move the products out from Nissan. Thank you for the question. Lavanya Wadgaonkar: We have time for 2 or 3 questions. So next question, please. Unknown Analyst: [Interpreted] My name is Togashi. Espinosa-san, this is a question for you. Nissan Stadium naming rights is the question. Yesterday, Yokohama, Mayor Yamanaka, as of the end of last month, he said that he received a new proposal. Could you elaborate on the proposal that you made to the degree that you can disclose? But once they renewed the contract at JPY 50 million in response to your proposal. But once again, there was an instruction to review the proposal. What's your approach or thinking behind this? Ivan Espinosa: So first of all, we are committed to Yokohama. This is our home base, our hometown. -- and we're going to stay here. This is why we also announced that we will continue to be the largest shareholder in the Yokohama Marinos because it's an icon of our company and a symbol of pride for many of our employees. With that in mind, we've been discussing with Yamanaka-san and the city of Yokohama because we want to continue our collaboration in the Nissan Stadium for the same reason. Now we have made an offer, as you said, we are discussing now with Yamanaka-san and the team in the city, and we will update you when this is concluded. So we will continue discussing with them based on this offer that we provided, but no detail to be shared today. Lavanya Wadgaonkar: Thank you. Come to the middle. Unknown Analyst: [Interpreted] Tokyo, my name is Abe. Nissan GHQ will be sold, you said. In reality, you are going to rent it and there will be a rent which will be booked. For 20 years, what is the annual rent that you have agreed on? This is my first question, please. Ivan Espinosa: So yes, we have agreed to do a sale and leaseback, as I said, and there will be a rent. We don't -- but we are not going to disclose the level of rent. I just tell you that it is a good financial decision. It's a good business decision that will allow us to invest resources in our future. Thank you for the question. Lavanya Wadgaonkar: I think we're right on time. Thank you very much once again for joining us. If you have any further questions, the communication team is available. Please reach to us. Have a good day. Thank you. Ivan Espinosa: Thank you.
Operator: Good morning. Thank you for standing by, and welcome to Buckle's Third Quarter Earnings Release Webcast. [Operator Instructions]. Members of Buckle's management on the call today are Dennis Nelson, President and CEO; Tom Heacock, Senior Vice President of Finance, Treasurer and CFO; Adam Akerson, Vice President of Finance and Corporate Controller; and Brady Fritz, Senior Vice President, General Counsel and Corporate Secretary. Before beginning, the company would like to reiterate its policy of not providing future sales or earnings guidance. All forward-looking statements made on the call are pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially due to risks and uncertainties described in the company's SEC filings. The company undertakes no obligation to publicly update or revise these statements, except as required by law. Additionally, the company does not authorize the reproduction or dissemination of transcripts or audio recordings of the company's quarterly conference calls without its expressed written consent. Any unauthorized reproductions or recordings of the calls should not be relied upon as the information may be inaccurate. As a reminder, today's webcast is being recorded. And I'd now like to turn the conference over to your host, Tom Heacock. Thomas Heacock: Good morning, and thanks for being with us this morning. Our November 21, 2025, press release reported that net income for the 13-week third quarter ended November 1, 2025, was $48.7 million or $0.96 per share on a diluted basis compared to net income of $44.2 million or $0.88 per share on a diluted basis for the prior year 13-week third quarter, which ended November 2, 2024. Year-to-date net income for the 39-week period ended November 1, 2025, was $128.9 million or $2.55 per share on a diluted basis, compared to net income of $118.3 million or $2.35 per share on a diluted basis for the prior year 39-week period ended November 2, 2024. Net sales for the 13-week third quarter increased 9.3% to $320.8 million compared to net sales of $293.6 million for the prior year 13-week third quarter. Comparable store sales for the quarter increased 8.3% in comparison to the same 13-week period in the prior year, and our online sales increased 13.6% to $53 million. Year-to-date net sales increased 7.2% to $898.7 million compared to net sales of $838.5 million for the prior year 39-week fiscal period. Comparable store sales for the year-to-date period increased 6.3% in comparison to the same 39-week period in the prior year, and our online sales increased 11.6% to $142.9 million. For the quarter, UPTs decreased approximately 1.5%, the average unit retail increased approximately 4% and the average transaction value increased about 2.5%. Year-to-date, UPTs decreased approximately 1%, the average unit retail increased approximately 3% and the average transaction value increased approximately 2%. Our gross margin for the quarter was 48%, a 30 basis point increase from 47.7% in the third quarter of 2024. The current quarter margin expansion was a result of 40 basis points of leverage buying, distribution and occupancy expenses, partially offset by a 10 basis point reduction in merchandise margins. Our year-to-date gross margin was 47.4%, up 50 basis points from 46.9% for the same period last year. The year-to-date increase was the result of a 20 basis point increase in merchandise margin, along with 30 basis points of leverage buying, distribution and occupancy expenses. Selling, general and administrative expenses for the quarter were 29% of net sales compared to 29.1% for the third quarter last year. And year-to-date, SG&A was 29.5% of net sales compared to 29.6% for the same period in the prior year. The third quarter decrease was due to a 35 basis point reduction related to nonrecurring digital commerce investments made a year ago, a 35 basis point decrease in store labor-related expenses and a 5 basis point decrease in certain other SG&A expense categories. These decreases were partially offset by a 50 basis point increase in incentive compensation accruals and a 15 basis point increase in G&A compensation-related expenses. Our operating margin for the quarter was 19% compared to 18.6% for the third quarter of fiscal 2024. And for the year-to-date period, our operating margin was 17.9% compared to 17.3% for the same period last year. Income tax expense as a percentage of pretax net income for both the current and prior year fiscal quarter was 24.5%, bringing third quarter net income to $48.7 million for fiscal 2025 compared to 44.2% -- $44.2 million for fiscal 2024. Income tax expense as a percentage of pretax net income for both the current and prior year, year-to-date periods was also 24.5% bringing year-to-date net income to $128.9 million for fiscal 2025 compared to $118.3 million in fiscal 2024. Our press release also included a balance sheet as of November 1, 2025, which included the following: Inventory of $165.8 million, which was up 11% from the same time a year ago and $371.3 million of total cash and investments. We ended the quarter with $162.3 million in fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $11.1 million and depreciation expense was $6.2 million. For the year-to-date period, capital expenditures were $34.5 million and depreciation expense was $18.2 million. Year-to-date capital spending is broken down as follows: $30.4 million for new store construction, store remodels and technology upgrades and $4.1 million for capital spending at the corporate headquarters and distribution center. During the quarter, we opened 2 new stores and completed 6 full store remodels, 3 of which were relocations in new outdoor shopping centers. Additionally, post quarter end and during November, we have opened 2 new stores and completed 2 store relocation projects in advance of the holiday selling season, which brings our year-to-date count through today to 6 new stores, 17 full remodels and 3 store closures. For the remainder of the year, we anticipate completing 4 additional full remodeling projects. Buckle ended the quarter with 442 retail stores in 42 states compared to 445 stores in 42 states as of the end of the third quarter last year. And now I'll turn it over to Adam Akerson, Vice President of Finance. Adam Akerson: Thanks, Tom, and good morning. Our women's business continued its acceleration in year-over-year growth rate during the quarter, with merchandise sales increasing about 19%, which was on top of 3% same week growth a year ago. For the quarter, our women's business represented approximately 51% of sales, which compares to 47% last year. This growth continued to be led by the performance of our denim category with women's denim increasing approximately 17.5% and average denim price points increasing from $81.15 in the third quarter of fiscal 2024 to $86.95 in the third quarter of fiscal '25. This AUR increase continues to be primarily the result of strong growth in our Buckle Black Label, which has outperformed the total denim business, along with strong growth of other higher price point national brands. Complementing our strong women's denim selection, our team continued delivering compelling trends and fashions for our guests, for the quarter, we achieved growth across all women's merchandise categories with the most notable growth in knits and sweaters, casual and fashion bottoms and accessories. In total, average women's price points increased about 6% from $49.95 to $53.05. On the men's side, we were pleased to see growth for the second consecutive quarter with men's merchandise sales up about 1% against the prior year, representing approximately 49% of total sales compared to 53% in the prior year. This growth was also led by our men's denim category, which was up about 1% for the quarter. Average denim price points increased from $88.10 in the third quarter of fiscal '24 to $88.15 in the third quarter of fiscal '25. In other categories, we saw nice performance in both our short and long sleeve tees business in a variety of lifestyles as well as strong selling of our vests, jackets and accessories. For the quarter, overall average men's price points increased approximately 2.5% from $54.30 to $55.70. On a combined basis, accessory sales for the quarter increased approximately 7.5% against the prior year, while footwear sales were essentially flat. These 2 categories accounted for approximately 10% and 4.5%, respectively, of third quarter net sales, which compares to 10% and 5% for each in the third quarter of fiscal '24. For the quarter, average accessory price points were up approximately 3.5% and average footwear price points were up 4.5%. Also on a combined basis, our kids business continued its strong growth trend, increasing approximately 22% year-over-year. This continues to be a category where our teams are excited to keep building the business and selection for our guests. For the quarter, denim accounted for approximately 46% of sales and tops accounted for approximately 29%, which compares to 46% and 29.5% for each in the third quarter of fiscal '24. As previously mentioned, with strong selling and trends in many of our brand styles, our private label business decreased as a percentage of our total mix for the quarter. For the quarter, private label represented 47.5% of sales versus 48.5% for the third quarter of fiscal 2024. And with that, we welcome your questions. Operator: [Operator Instructions]. Our first question comes from Mauricio. Mauricio Serna Vega: This is Mauricio Serna from UBS Research. First, maybe could you speak on a high level what you're seeing on the health of the U.S. consumer coming into the holiday season. There's been some talks about maybe some pressure on the lower income consumer. So I was interested in hearing from your side, what have you been seeing? And then also, could you speak about the denim business? I think you talked about the momentum in women's being up 17%. What do you -- how do you -- how are you thinking about the sustainability of this growth? And maybe could you talk about what you saw in men's denim demand over the quarter? Dennis Nelson: Thank you for the question. On the consumer, we haven't seen a big change in our stores. I mean the team and guests seem excited about our product response. There's probably a slight caution in some as our units per sale are off very slightly. But overall, we feel good about it. And if the guest is excited about the product and the quality we have, it's been going pretty well. The ladies denim business continues to be excellent. There's still a lot of variety of styles and fits. We've added some of our branded sources to the mix, which has added some higher price points, have been good for the business. And our fashion brands and our private brands continue to sell well. So we're optimistic about the gal's denim business throughout the rest of the year. On the men's denim, our private label brands are consistent and doing well, having good sell-throughs. We haven't seen as much from other brands adding to the private brands mix, but feel our denim business is solid in men's as well. Operator: There are no further questions in queue. [Operator Instructions]. Okay. It looks like we have another question from Mauricio. Mauricio Serna Vega: Great. Just on the other thing that I wanted to ask was the merchandise margin. It was down 10 basis points. Maybe could you elaborate on what were the puts and takes behind the merchandise margin trend in this quarter? Thomas Heacock: Thank you, Mauricio. This is Tom. Yes, merchandise margins were down 10 basis points for Q3 and up 10 basis points for Q2. So I think if you look year-to-date with everything going on with tariffs, we feel really strong about where we're at from a merchandise margin perspective. And we've been operating at a high level of merchandise margins for a long time and have continued to improve that. So both Q1 and Q2 were all-time highs merchandise margins and we were off just a little bit in Q3. So I feel really good about where we're at. The biggest drivers are really -- Adam called out the decrease slightly in private label business with some of the brands performing really well, especially in women's denim. That's the biggest driver probably of the shift this year and especially Q2 compared to Q3 and then a slight increase in costs with tariffs and other flow-throughs. Operator: There are no further questions in queue. [Operator Instructions]. Okay. It looks like there are no further questions. I will now turn the call back over to Buckle for any closing remarks. Thomas Heacock: Thank you for your participation today. It will be a quick call, but I wish everyone a wonderful weekend and a wonderful holiday season. So thank you for joining us today.
Operator: Hello. Welcome everyone to the 2026 First Quarter Earnings Call for Commercial Metals Company. Joining me on today's call are Peter Matt, Commercial Metals Company's President and Chief Executive Officer, and Paul Lawrence, Senior Vice President and Chief Financial Officer. Today's materials, including the press release and supplemental slides that accompany this call, can be found on Commercial Metals Company's Investor Relations website. Today's call is being recorded. After the company's remarks, we will have a question and answer session, and we'll have a few instructions at that time. I would like to remind all participants that today's discussion will contain forward-looking statements, including with respect to economic conditions, effects of legislation and trade actions, U.S. Steel import levels, construction activity, demand for finished steel products and precast concrete products, the expected capabilities, benefits, costs, and timeline for construction of new facilities, the expected benefits of recent acquisitions, the company's operations, the company's strategic growth plan and its anticipated benefits, legal proceedings, the company's future results of operations, financial measures, and capital spending. These statements reflect the company's beliefs based on current conditions but are subject to risks and uncertainties. The company's earnings release, most recent annual report on Form 10-Ks, and other filings with the U.S. Securities and Exchange Commission contain additional information concerning factors that could cause actual results to differ materially from those projected in forward-looking statements. Except as required by law, Commercial Metals Company does not assume any obligation to update, amend, or clarify these statements. Some numbers presented will be non-GAAP financial measures, and reconciliations for such numbers can be found in the company's earnings release, supplemental slide presentation, or on the company's website. Unless stated otherwise, all references made to year or quarter end are references to the company's fiscal year or fiscal quarter. And now for opening remarks and introductions, I will turn the call over to Peter. Peter Matt: Good morning, everyone, and thank you for joining Commercial Metals Company's first quarter earnings conference call. I hope each of you had a wonderful holiday season and a Happy New Year. Commercial Metals Company had an exceptional start to our fiscal year as we built on the strategic foundation laid in fiscal 2025, continuing to meaningfully and sustainably enhance our financial profile. The first quarter was one of the best in our company's history, serving as validation that our ambitious strategy is bearing fruit. Strategic actions taken over the last twelve to eighteen months, including the launch of TAG, organizational realignment in critical areas, and the onboarding of key talent and resources to support growth areas, are directly driving bottom-line improvement. We are confident there is much more to come, particularly with the addition of Commercial Metals Company's large-scale precast platform. Our strategic focus remains on transforming Commercial Metals Company into an even stronger organization with higher, more stable margins, earnings, cash flows, and returns on capital. Now let's jump into the first quarter results. For the quarter, Commercial Metals Company reported net earnings of $1.773 billion or $1.58 per diluted share. Paul Lawrence: Excluding certain charges, which I will take you through in more detail, adjusted earnings were $206.2 million or $1.84 per diluted share. Our consolidated core EBITDA of $316.9 million grew by over 50% from a year ago and nearly 9% sequentially, reaching its highest level in two years. Our core EBITDA margin of 14.9% likewise expanded both year over year and compared to the prior quarter. As outlined on Slide five, this occurred against a good market backdrop with stable demand, limited imports, rising long steel metal margins, and attractive project opportunities within certain construction segments. Though Commercial Metals Company certainly benefited from these constructive conditions, our results were meaningfully enhanced by solid execution that allowed us to capitalize on the opportunities we are seeing across our North American footprint. Let's review some highlights, starting with our North America Steel Group. Commercial Metals Company's mill network had a strong operational performance, which was critical to supporting customers in a relatively tight domestic supply environment and maintaining high levels of customer service. CAG initiative efforts, including the scrap optimization initiatives launched in fiscal 2025, contributed nicely to metal margin expansion. With the program now rolled out across all domestic mills, we are using less scrap per ton of steel produced and utilizing lower-cost scrap blends, increasing the metal margin on each ton. Last quarter, I discussed new commercial rigor in the way Commercial Metals Company approaches opportunities within its downstream fabrication business. The positive impact of this change is only just beginning to be reflected in our financial results, but we are seeing it more significantly benefit our average price in backlog, which represents the work that will be shipped in future quarters. Encouragingly, despite enhanced selectivity in the projects we accept, the volume in Commercial Metals Company's downstream backlog increased modestly year over year and sequentially. We believe this is at least in part related to Commercial Metals Company's ability to leverage its unique and comprehensive portfolio of capabilities to win projects, particularly those that require specialized reinforcing solutions or large-scale resource deployment. A recent example has been the success we have had in the LNG space, which requires highly specialized cryogenics, the reliability of a large fabrication and logistics network, and expertise in project management, all of which we provide. Strong execution helped our Construction Solutions business, formerly known as our Emerging Businesses Group, achieve a record first quarter adjusted EBITDA. Similar to our North America Steel Group, underlying market conditions were supportive, but our efforts to capitalize on these drove results to new heights. At Tenthar specifically, we are seeing several important commercial and operational initiatives gain traction. Our team has moved to deepen relationships with key customers, improving our visibility into their upcoming product demand. We have also positioned ourselves to better address market demand across a full spectrum of GeoGrid solutions. Our highest value products are experiencing strong demand from mega projects such as LNG investments, but we are also capturing more opportunities in mid and lower-tier portions of the market. Operationally, the Tenthar team is doing an exceptional job managing costs and increasing production reliability, ensuring that we have the product available where and when needed at a cost that optimizes margins. Our Commercial Metals Company Construction Services business achieved strong results during the quarter, with revenue growth outpacing the broader market due to several impactful initiatives to acquire new customers, gain share of wallet through more productive proactive outreach, and standardized pricing and service levels across the footprint. This is just a sampling of the initiatives that we are undertaking to drive our business from good to great. Our success reflects the strategic efforts of Commercial Metals Company's leaders to push their businesses to new levels of performance. I mentioned earlier that we capitalized on the supportive environment in the quarter. Let me provide a bit more color on what we saw. In North America, we experienced healthy, stable underlying demand for our major products. This, in combination with a well-balanced supply landscape, supported volumes and margins during the quarter. Shipments of finished steel were virtually unchanged year over year and down less than a percentage point from fiscal Q4, compared to a more typical 4% to 5% seasonal sequential decline. Consistent with our guidance, metal margins increased sequentially as we were able to capitalize on the summer price announcements. Downstream bid volumes, our best gauge of the construction pipeline, remained healthy and were consistent with recent quarters, with continued strength across key market segments, including public works, data centers, institutional buildings, and energy projects. We continue to see substantial pent-up demand, particularly within non-residential markets, a view supported by historic strength in the Dodge Momentum Index or DMI, as well as recent conversations with many of our largest customers who are increasingly bullish as they experience a large inflow of project inquiries related to energy generation, reshoring, advanced manufacturing, and LNG infrastructure. The DMI leads construction activity by twelve to eighteen months and increased by approximately 50% on a year-over-year basis in November, with the Commercial segment growing by 57% and Institutional by 37%. Even excluding data centers, a hotbed of growth in North America, commercial showed solid expansion, rising 36% from a year ago. Peter Matt: We remain confident that emerging structural drivers, including investment in U.S. Infrastructure, reshoring industrial capacity, growth in energy generation and transmission, the build-out of AI infrastructure, as well as addressing a U.S. Housing shortage, will support construction activity over the long term. As noted on Slide 10 of the earnings presentation, nearly $3 trillion of corporate investments were announced across related areas in calendar 2025. Commencement of even a handful of these related mega projects could provide a meaningful demand catalyst for Commercial Metals Company in the quarters ahead. Before I move on to our other segments, I would like to briefly update you on the status of the rebar trade case filed with the International Trade Commission or ITC back in June, alleging exporters located in Algeria, Bulgaria, Egypt, and Vietnam are guilty of dumping material into the U.S. Market. In December, the Department of Commerce provided a preliminary ruling against Algeria, finding that producers based in that country are guilty of dumping and subjected them to the maximum duty sought by the domestic rebar industry, which is 127%. While this margin rate could change once the Department of Commerce finalizes its investigation on Algeria in March, we are encouraged by the preliminary results and applaud the department's defense of fair trade. Preliminary rulings are expected in March for antidumping duty investigations covering Egypt, Vietnam, and Bulgaria. Turning to our Construction Solutions Group, current conditions are similar to those just described, with steady activity across most construction segments punctuated by a few hot areas like data centers and large energy projects. Our commercial teams continue to see encouraging signals regarding future activity, including healthy quoting levels and improved velocity of quote conversion to backlog. In addition to these broad indicators of potential demand, we are seeing an increase in attractive individual opportunities that require specialized reinforcement solutions, particularly among bridge and energy projects. Conditions for our Europe Steel Group softened modestly from the fourth quarter. Demand remained resilient on solid Polish economic growth, providing an outlet for healthy shipping volumes, but average price and margin levels were negatively impacted by the import flows. A portion of the price pressure experienced during the quarter may have been related to buyers of foreign material seeking to import product ahead of the European Union's carbon border adjustment mechanism or CBAM taking effect on 01/01/2026. We view this as a temporary overhang and expect prices in our primary markets to benefit from the launch of CBAM, which should increase the cost of some imports, particularly those that have historically been most aggressively priced. The green shoots we have noted in recent earnings calls continue to mature with more emerging. Recent market developments include signals of a coming recovery in residential construction activity driven by declining mortgage interest rates and a need for new housing stock. We are also more optimistic about the prospect of CBAM benefiting long steel pricing. Paul Lawrence: With greater clarity regarding the terms and implementation now available, our team in Poland believes the program could increase the cost of some imported long products by at least $50 per ton and help support overall market price levels. Wrapping up my comments on the quarter, let me dive more deeply into TAG. This is our enterprise-wide operational and commercial excellence program aiming to drive a permanent step-change improvement to our margins, earnings, cash flows, and ROIC. Fiscal 2026 will be a pivotal year as execution further permeates the organization and as the expected level of EBITDA benefit increases meaningfully. During fiscal 2025, TAG initiatives were primarily focused on domestic mill operations and logistics. This year, we are focused on operational initiatives in every line of business across each segment and are increasing our emphasis on key commercial opportunities. We are also targeting meaningful efficiencies in our SG&A expenses while maintaining our high level of performance. We are pleased with the execution on new initiatives so far in fiscal 2026 and have maintained solid momentum on programs launched in fiscal 2025, including the scrap optimization, mill yield, alloy usage, and logistics benefits that delivered approximately $50 million of EBITDA last fiscal year. Looking at fiscal 2026 and beyond, commercial excellence is a major opportunity where we see significant upside potential through achieving better margins and fuller value realization for Commercial Metals Company's industry-leading capabilities and service levels. For the mills, this comes in a variety of forms, including enforcing grade and size extras, applying appropriate premiums to pricing on special orders, and addressing areas of margin leakage such as delayed price implementation and freight recovery. It will also mean more definitive segmentation of our customer base with clear value propositions to the different customer segments and related commercial terms to ensure that all accounts generate acceptable margins. In our downstream fabrication business, we are pursuing enhancements to our margin structure through increased price discipline, a willingness to decline work that does not reach a suitable profit threshold, and improved terms and enforcement mechanisms in contracts. At the heart of our efforts is the ability to leverage Commercial Metals Company's unique capabilities and scale to achieve better margin outcomes on complex jobs that only a few fabricators can perform. Based on progress we are making across commercial and SG&A initiatives, I am confident that we will reach or exceed our ambitious goal of exiting fiscal 2026 with an annualized run rate EBITDA benefit of $150 million. In December, subsequent to the end of the first quarter, Commercial Metals Company closed on the acquisitions of CP&P and Foley, which is transformational for us, broadening Commercial Metals Company's commercial portfolio in a way that increases our value proposition to customers, meaningfully enhancing our financial profile and extending our growth runway. Based on our initial observations over the last few weeks of owning these businesses, I am even more confident regarding their potential to strengthen Commercial Metals Company and create meaningful value for shareholders. Both CP&P and Foley are excellent cultural fits for our company and have talented teams in place at every level of their organization, including very strong leadership groups that will remain in place and are fully aligned in executing Commercial Metals Company's strategic vision and delivering meaningful synergies. Discussions with Precast leadership regarding the business outlook for fiscal 2026 have been positive. Backlogs are at good levels, featuring solid volumes and attractive average pricing, which should support healthy shipment levels as we enter the spring construction season. The outlook for underlying demand is positive for our core Mid-Atlantic and Southeastern geographies, bolstered by the expected growth in data centers, manufacturing facilities, and stormwater management systems. We look forward to providing further details on our second quarter earnings call, which will include financial results for our Precast business within Commercial Metals Company's Construction Solutions segment. Having mentioned our Construction Solutions group a few times, I would like to highlight the reasons for renaming the segment. First, we believe that the title Construction Solutions better reflects the business composition of the segment, as more than 95% of the EBITDA will be derived from providing high-margin solutions to the construction market. Additionally, the new name more closely aligns with the strategic priorities of Commercial Metals Company, in particular, the aim to profitably grow our role in early-stage construction and build a commercial portfolio that makes us the preferred partner by our customers. Before turning the call over to Paul, I would like to recognize the efforts of our world-class employees. We have asked a lot of the team as we execute our ambitious vision for the future, and I am truly inspired by all that they have accomplished so far. Their efforts have been instrumental in laying the groundwork for years of success ahead, and I look forward to maintaining that momentum. With that, I'll turn the call over to Paul. Paul Lawrence: Thank you, Peter, and good morning. And Happy New Year to everyone on the call. As noted earlier, we reported fiscal first quarter 2026 net earnings of $177.3 million or $1.58 per diluted share compared to a net loss of $175.7 million and a net loss per diluted share of $1.54 in the prior year period. During the quarter, we incurred approximately $36.7 million in pretax expenses, with $24.9 million related to the acquisitions of CP&P and Foley, $3.7 million for interest on the judgment amount associated with the previously disclosed litigation, as well as an $8.1 million unrealized loss on undesignated commodity hedges. Excluding these expenses, which amounted to $28.9 million on an after-tax basis, adjusted earnings for the quarter totaled $206.2 million or $1.84 per diluted share, compared to $86.9 million and $0.76 per diluted share, respectively, in the prior year period. As a reminder, the prior year period included an adjustment for an estimated net after-tax charge of $265 million to reflect an adverse litigation verdict accrual. During the 2026, Commercial Metals Company generated consolidated core EBITDA of $316.9 million, representing a 52% increase from $208.7 million in the prior year period. Commercial Metals Company's North American Steel Group generated adjusted EBITDA of $293.9 million for the quarter, equal to $257 per ton of finished steel shipped. Segment adjusted EBITDA increased 58% compared to the prior year period, driven primarily by higher margin over scrap cost on steel products, resulting in an EBITDA margin of 17.7% compared to 12.3% in the prior year period. Financial results also benefited from continued improved operational performance at Arizona 2, as well as contributions from our TAG efforts. As Peter mentioned, we are driving continued gains from TAG initiatives launched during fiscal 2025 and have more recently rolled out commercial initiatives to improve margin capture. The Construction Solutions Group's first quarter net sales of $198.3 million grew by 17% on a year-over-year basis. Adjusted EBITDA of $39.6 million significantly increased by 75% year over year, driven by strong results from TENSAR and Commercial Metals Company Construction Services, as well as some improvement at Commercial Metals Company Impact Metals from the depressed levels of a year ago. TENSAR achieved its best first quarter financial performance under Commercial Metals Company ownership, benefiting from solid project demand, the positive impact of the sales initiatives mentioned by Peter, and strong cost management efforts. Commercial Metals Company Construction Services likewise profited from self-help measures that drove EBITDA improvement on both a year-over-year and sequential basis. Contributions from our Performance Reinforcing Steel division remained historically strong but declined modestly from recent elevated levels. Construction Solutions Group adjusted EBITDA margin of 20% improved by 6.6 percentage points compared to the prior year period. Our Europe Steel Group reported adjusted EBITDA of $10.9 million for the 2026, down from $25.8 million in the prior year period. The decline was driven by lower CO2 credit, which amounted to $15.6 million during the 2026 compared to $44.1 million received during the year-ago period. The reduction in the CO2 credit was a result of the credit generated for calendar 2024 being separated into two tranches, one of which was received during the 2025, the remaining amount was received in the 2026. By comparison, results for last year's first quarter reflected the entirety of the 2023 annual CO2 credit. Excluding the impact of energy cost rebates, adjusted EBITDA improved on a year-over-year basis on stronger shipping volumes and higher metal margins. Shipments grew by approximately 16% from the 2025 as a result of continued Polish economic expansion and reduced import flows from Germany. Metal margins expanded by $37 per tonne, largely driven by the same factors. During the quarter, our Polish mill underwent an annual maintenance outage, which incurred approximately $10 million of costs. The team did an excellent job starting up efficiently following the planned downtime and, similar to recent quarters, continues to effectively manage costs across the organization. I will now discuss Commercial Metals Company's balance sheet liquidity position as outlined on Slide 13 of the supplemental presentation. As of November 30, cash, cash equivalents, and restricted cash totaled $3 billion. This amount included approximately $2 billion in proceeds raised through a senior notes offering in November, most of which was earmarked to fund the company's purchase of Foley products. In December, we closed both the CP&P and Foley acquisitions, and payments of approximately $2.5 billion were made. The table on the left-hand side of Slide 13 provides an illustrative view of Commercial Metals Company's cash balance, net debt, and net debt to EBITDA, assuming both transactions had closed on November 30. As you can see, net leverage stands at approximately 2.5 times using combined adjusted EBITDA for legacy Commercial Metals Company and our newly acquired precast business. This is lower than the 2.7 times pro forma figure shared at the time of the Foley acquisition, with the reduction resulting from the increased EBITDA generation of our business. We continue to be confident in our ability to return to our net leverage target of below two times within eighteen months and will prioritize delevering in the quarters ahead. This effort will be aided by strong cash flow generation from the Precast platform itself, the wind-down of capital expenditures for the construction of Steel West Virginia, and the significant cash tax savings generated by the 48 program in the One Big Beautiful Bill. Additionally, we have reduced our share repurchases during the period of leverage reduction to amounts approximating our annual share issuance under our compensation programs. Subsequent to quarter-end, Commercial Metals Company increased the capacity of our revolving credit facility from $600 million to $1 billion. This will ensure a strong liquidity position to support the execution of strategic goals going forward. Using the same adjustments to our November 30 balance sheet to give effect to the precast acquisitions, also giving effect to the upsized revolver, estimated available liquidity would have been slightly over $1.7 billion. Commercial Metals Company's effective tax rate was 3.1% in the first quarter. Peter Matt: Looking ahead, we anticipate a full-year effective tax rate between 5% and 10% for fiscal 2026. As a result of several factors, including our 48C tax credit, bonus depreciation on our West Virginia mill investment, as well as accelerated depreciation on the assets of the acquisitions of Foley and CP&P, we do not anticipate paying any significant U.S. Federal cash taxes in fiscal 2026 or for much of fiscal 2027. Turning to Commercial Metals Company's fiscal 2026 capital spending outlook, we anticipate spending approximately $625 million in total. Of this amount, approximately $300 million is associated with completing the construction of our Steel West Virginia micro mill, as well as a handful of high-return growth investments within our Construction Solutions group, and approximately $25 million in our newly acquired Precast businesses. This concludes my remarks, and I'll turn it back to Peter for additional comments on Commercial Metals Company's financial outlook. Thank you, Paul. Turning to our outlook, we expect consolidated core EBITDA in the 2026 to decline modestly from first-quarter levels due to a normal level of slowdown within our key markets. This will be partially offset by the addition of Commercial Metals Company's recently acquired Precast businesses. The company will recognize several acquisition-related expenses during the second quarter, including transaction fees, debt issuance costs, and customary purchase accounting adjustments, each of which will be excluded from core EBITDA. Segment adjusted EBITDA for our North America Steel Group is anticipated to be lower sequentially due to normal seasonal volume trends and the impact of planned maintenance outages, while steel product metal margin is expected to remain relatively stable. Financial results for the Construction Solutions Group should improve compared to the 2026, with the contribution of the Precast business more than offsetting seasonal weakness across the segment's other divisions. Europe Steel Group adjusted EBITDA is expected to be approximately breakeven, with margin growth potential later in fiscal 2026 when the carbon border adjustment mechanism takes full effect. The first quarter marked an excellent start to fiscal 2026, and Commercial Metals Company is well-positioned to deliver strong results for the remainder of the year. Solid market dynamics, benefits of our TAG program, and effective operational execution are generating momentum in Commercial Metals Company's existing businesses. This will be supplemented by $165 million to $175 million of EBITDA contributions from approximately eight and a half months of ownership of the Precast businesses in fiscal 2026. Looking out longer term, I am confident that Commercial Metals Company will continue to create value for our shareholders as we remain focused on executing against our strategic initiatives, which we expect to deliver meaningful and sustained enhancements to our margins, earnings, cash flow generation, and return on capital. I would like to conclude by thanking our customers for their trust and confidence in Commercial Metals Company and all of our employees for delivering yet another quarter of very solid safety and operational performance. Thank you. And at this time, we will open the call for questions. Operator: Thank you. We will now begin the question and answer session. The first question will come from Satish Kasinathan with Bank of America. Please go ahead. Satish Kasinathan: Yes, hi, good morning and congrats on the strong quarter and as well as the closing of CP&P and Foley acquisitions. Based on what you have seen in the past three to five weeks since the closing of these acquisitions, can you maybe talk about some of the positive or negative surprises you have seen so far? And do you see any potential for acceleration of the three-year timeline to realize the announced $30 to $40 million in synergies? Peter Matt: Yeah. Thanks, Satish. Great question. Again, with the preface of this is early days, our ownership of this business, I would say that we have been really, very pleasantly surprised with everything that we've seen. And I wouldn't say there's anything that's really come up that we weren't expecting on the negative side. And I'd say there are a number of things that are on the positive side that we've seen. And let me just give you a little story from one of my trips. I went to a CP&P off-site, and it was a gathering of probably 100 folks from CP&P and then a couple of product experts from Commercial Metals Company. And two remarks I'd make that were, I think, super gratifying as a, you know, kind of new owner of the business. First is, in the room, you could have been in a room with Commercial Metals Company folks. The cultural affinity is outstanding. And that was super helpful to see because I think it's gonna make our integration efforts go well. Second was I noted that we brought a couple of Commercial Metals Company product experts and there was a tremendous amount of discussion around, you know, kind of different opportunities that we and CP&P have together and a lot of excitement around that. So that was also super encouraging because it kind of validates the part of our investment thesis. In terms of the synergies, we are, I would say, the work we've done so far leads us to believe that we're very confident that we can get the synergies. What I would say is that it's early to speculate on the timing, and I wouldn't want to accelerate what we've said in the past. But we're very confident that the synergies are there, if not more. Operator: Okay. Thank you for that. Satish Kasinathan: Maybe my second question is on the North American metal margins, which are currently at three-year highs. Can you maybe talk about how you see those margins sustain or improve in the coming quarters given the context that we have some new supply to come into the market? Peter Matt: Yes. Maybe I'll start on this going backwards and commenting on the new supply. So there's been a lot of talk about the new supply and yes, there is new supply coming into the market. I think we've been consistent in saying that we're not overly concerned by the new supply. And that's particularly true in the current context where you've got much lower imports than we've had in previous years. So based on the level of demand as it is today, we feel comfortable that the marketplace can absorb the new supply as it comes in. And if demand gets stronger, which we believe it will, then, I think it's fair to say that there's to be plenty of demand to absorb any new supply that comes into the market. So we feel good about that. Getting to your question on margins, so in Q2, we would expect mill margins, so our steel product margins to be flattish. And that is taking into account the fact that we do expect to realize all of the November $30 price increase. But we also have seasonally stronger scrap in this period and that will offset some of that. And in our downstream, we could see, I think we think it's going to be flat to could be slightly down given the kind of the raw material path through to the fabrication business. But as we go forward, I think the shape of the margins is really going to depend on a couple of factors. One is obviously the supply-demand that emerges in the marketplace. And the second is really our TAG initiative. And I think this is an important point to make on TAG because, you know, TAG is all about growing margins in a sustainable way across our business. And we expect that some of that TAG contribution is gonna come in the form of benefiting metal margins as we go forward. So we're very excited about that. And I think as we go into the back half, there has been a merchant price increase of $50 a ton, we should see a little bit of that in the second quarter, but really most of it is going to be in the back two quarters and any other pricing actions will really set us up for a strong back half of 2026. Satish Kasinathan: Okay. Thank you. I appreciate the color. Peter Matt: Thank you. Operator: The next question will come from Katja Jankic with BMO Capital Markets. Please go ahead. Katja Jankic: Hi, and a Happy New Year to everyone. Maybe staying on the more near term, so you expect seasonally volumes to be impacted by seasonality. But can you talk a little bit about what that means? Because it seems that so far we haven't really seen a material impact from seasonality. Peter Matt: Yes. It's a great point. We did have stronger volumes than we honestly than we expected in the first quarter. But going into the second quarter, we are expecting kind of typical seasonality. And remember, in the second quarter, we've got the winter conditions, construction slows down, and typically there's been going Q1 to Q2, there's a 5% to 10% decline, and we'd expect to be in that range. But I will acknowledge that, you know, the volumes have been stronger heretofore. Katja Jankic: And then maybe on the West Virginia mill, can you update us on what the ramp-up plan there is? Peter Matt: Yeah. We're super excited about that. You start one of these projects and it seems like a long way off and now kind of we're within six months of the startup. So we've actually started some of the cold commissioning already. The hot commissioning, which is, you know, the official startup is, as Paul noted, likely to begin or will begin in June. And we feel really good about it. And just to comment on West Virginia, you know, given the market conditions, we couldn't be bringing that on at a better time. But the other thing I think that really bears note is the fact that we are bringing this project in on budget. And I have to say hats off to the whole West Virginia team for the incredible capital discipline that they've shown in this project. You know, these are big dollar expenditures. We're spending over $600 million on this project. And there is a lot of examples of projects that are kind of over budget. And thanks to the discipline that everyone's shown, we've managed to bring it in and ultimately that helps us from an ROIC perspective, which is a critical objective for us to improve. Paul Lawrence: Got you. The only thing I would add to Peter's comments is just recall from a startup perspective, this is a rebar-only mill different from Arizona 2. And so typically, based on our other rebar-only mills and the fact that this is not near the degree of new technology being introduced as we did with AZ2, we would expect to ramp the operation up over the following twelve months once we meet that hot commissioning startup. Katja Jankic: Perfect. Thank you. Peter Matt: Thank you, Katja. Operator: The next question will come from Tristan Gresser with BNP Paribas. Please go ahead. Tristan Gresser: Yes. Thank you for taking my questions. The first one is on the old EBG division. If you can talk a little bit about the outlook for fiscal Q2, also, more specifically, what kind of seasonality usually do you see on the precast business? Is it fair to assume a normalized EBITDA quarterly run rate for Precast? And add a bit of, I mean, because TENSAR has been pretty strong as well. So I would assume maybe a bit stronger on that division, but yeah, we'd love to have your thoughts on that. Peter Matt: Yes. So thank you for the question, Tristan. So EBG, typically, there is, as we've said before, there is absolutely seasonality in that business. As we noted in the prepared remarks, a substantial portion of that, most of the lion's share of that is going into the construction market. So seasonality is definitely a factor in our Q2. It is the weakest period. And I should note that TENSAR in particular with ground stabilization is kind of the most seasonal as we look at that business from year to year. So I think you can expect normal Q2 seasonality in that. Precast, so in our Precast business, we think that will largely follow the seasonality that we have in our business overall. And what I mean by that is our steel business overall. Typically, you've got in the winter months, you've got a reduction in the amount of activity that you see, and we expect that to be the case too. So this is maybe not part of your question, but I'll go to it directly to say, we expect in the second quarter the Precast business to contribute about $30 million of EBITDA roughly speaking. Which will seem lighter and that goes entirely to seasonality. And as Paul noted in his comments, the backlogs that we're seeing are very strong. They're stronger than last year. And so we feel very good about the prospects for that business going into our ownership in 2026. Tristan Gresser: Alright. No, that's very clear. Going back to your prepared remarks on scrap sorting, how much of a benefit it's been, can you give us some numbers? And what you've been doing and how has it changed today versus what you used to do in the past? In terms of using less scrap and varying the quality of the scrap, any color there would be great. Peter Matt: Yeah. I'll start and then Paul can jump in with any additional comments. But I guess what I'd start by first saying is that in the past, we talked about the scrap optimization being, I think it was a $5 million to $10 million opportunity. And that has grown substantially. And I think the key point is that we started out in a couple of mills and now we're pushing it to other mills. So we're getting the benefit across our broader footprint. And there are two points, as you said, one is in the quality of the scrap. We've done a tremendous amount of work in the quality of the scrap and we've identified places where, for example, we're using a lot more shred than we need to use. So we can cut back on the shred and that obviously kind of reduces scrap costs and so forth. We've also done a tremendous amount of work on yield, and that has helped us a lot in terms of obviously using less scrap to produce the tons and sell the tons that we want to produce and sell. Paul Lawrence: The only thing I would add, Tristan, is, you know, as we've noted, what we achieved last year was approximately $50 million from TAG. And I would say those two initiatives, just given the dollars involved, Peter outlined, probably were near half of the realization that we had last year. And as Peter said, those were on, you know, piloting the initiatives in a few locations and growing throughout '25 and '26 and an incremental number of mills to get it across the entire platform. And so we are very excited about the opportunity of those initiatives to continue to contribute well to our business. Peter Matt: One thing that's maybe worthy of an additional comment vis-a-vis TAG is, and this goes for a lot of our TAG initiatives. What we found is that on something like scrap optimization, it started out in one mill. And then you start to see these real benefits in the mill. And, of course, every mill manager wants to run their mill as well as they possibly can. So there's been this kind of compounding effect as more of the mills take it on and bring it into full bloom. So and that's, I think, a characteristic of the TAG program in general. And one of the things that we're super excited about, we see a new initiative coming in and sizable new initiatives coming in. And we got to build charters and plans around these different initiatives. But you can see how this can be really a game-changer. And as we've talked about in the past, again, the goal is long-term sustainable margin improvement over what we would be otherwise, right? So if x was our historical margin, we want to be at x plus Y. And we're working internally on some tools to help you all define that, but we believe that there is through TAG the opportunity to make our business durably better. And I think that'll be a really important contributor to value. Tristan Gresser: Alright. That's very helpful and interesting. Thank you. Operator: Thank you. The next question will come from Alex Hacking with Citi. Please go ahead. Alex Hacking: Yes. Hi, thanks. Good morning. Happy New Year, everyone. I guess the first question, you mentioned increased commercial selectivity in rebar fab and part of that was about reducing risk. Has counterparty risk been rising and is there a reason why? Thanks. Peter Matt: Why reduce, so let me just make sure I understand your question. Why were addressing that point? Sorry, the question was, has counterparty risk been rising and why has counterparty risk been rising if it has been rising? Alex Hacking: Yeah. I wouldn't say it's been rising. I would say this is a risk that we have taken historically that we are looking to reduce in the portfolio. And where it manifests itself is, Alex, in our fabrication business and some of the contracts will be asked to do longer-term jobs. And a lot of times, those longer-term jobs can be at a fixed price. And of course, our raw material inputs can change. So you can get out two years or three years and there have been some instances with this company in the past and I'm sure others where you can get upside down on a project. And what we're trying to do is to reduce that risk by making sure either through proper escalators, proper indexing, that we are being compensated for that risk. So that again, it goes back to the ROIC point that in any environment, we are generating a good return on the capital that we've put in, which is substantial on a business like this. Paul Lawrence: And I just to reiterate, and make sure it's clear, you know, counterparty risk, we have historically never had an experience of significant counterparty risk and nor do we see that really going forward with the structure of how the construction contracts are written. This is all about reducing the risk, Peter said, around margin preservation and ensuring we're getting a good margin on the job. Alex Hacking: Oh, I get it. Thanks for the clarification. I guess I misinterpreted. And then on Europe, as you mentioned, the importance of getting ahead of CBAM. How do you have any idea, like, how long it could take for prices in Europe to stop benefiting from CBAM? Thanks. Peter Matt: Yeah. So again, it took effect January 1. And our read on the situation is for certain importers, the average impact on them could be €50 a ton. And for many of them, it could be higher initially because they have to be qualified to get to the €50 a ton. And before they're qualified, there's a default rate that's even higher. So this is going to play out over the course of calendar 2026. I think it's fair to say you've probably noted in the import numbers that there was a large pre-buy of incremental tons coming into Europe that probably before CBAM, excuse me, that will probably delay the impact of the CBAM credit that we should be getting. But I do believe by the time we get to the, we'll get a little bit of it in our second quarter and in our third and fourth quarters, we should see a substantial portion. And certainly, over the course of the year, the calendar year, it will roll in. The other thing to note is that in addition to the CBAM, there is also this safeguard mechanism that was renegotiated by the EU. And the safeguard mechanism, remember, that's effectively a quota system. And in the revised safeguards, the quotas are reduced by 50% and the tariffs for being above the quotas are increased by 50%. That should come into effect in the middle of the year and that should be only additive to the situation in Europe. And just to frame it a little bit for you, if you think about our production capability in Poland, and you think about the $45 million of CO2 credits we get, that's about $30 a ton above our breakeven operational performance today. And then add €50 to that, all of a sudden, start to get to numbers where we are running at levels at or above our through-the-cycle performance. So again, this is not something that's going to happen overnight, but in addition to all the other catalysts in Poland, I think it's reason for some real optimism. Alex Hacking: Thanks and best of luck. Peter Matt: Thank you. Operator: The next question will come from Timna Tanners with Wells Fargo. Please go ahead. Timna Tanners: Yes. Hey, good morning and Happy New Year. I wanted to tailor my questions to trade. So you talked about the CBAM implications helping pricing, but I think another aspect of CBAM is that it helps domestic producers in Europe perhaps take some market share. So curious about, you know, what volume impact you might see there? And then I have a follow-up on the U.S. Trade side. Peter Matt: Yep. I think that's a fair point that you're making. And I think there are some volume opportunities. We have been running at, I would say, a relatively good rate of production recently. So I think there is some volume opportunity for us. But I wouldn't say it's huge at this point. Timna Tanners: Okay, great. Second question on the U.S. Side, I know you mentioned, of course, Algeria, Bulgaria, Egypt, Vietnam. But if you look at the latest trade data, actually, imports are coming again from Turkey and from what I think Portugal and Spain. So just any thoughts on the Turkish side and also maybe Portugal and Spain keep more production domestic in that falls off. But it does seem like the other countries before you mentioned are already shrunk in terms of importance probably because of the filing of the case even before any decision. Peter Matt: Yeah. No. It's a great point. We've definitely seen some pullback in the imports from those countries. And I'll just remind you, and others that those countries in 2005, the trade case countries imported about 500,000 tons of steel into the U.S. So if there was an outcome that's anything like what we have on the Algeria case and a preliminary ruling, I think that's going to be really helpful in terms of keeping those imports out of the country. And remember on those trade cases, these are five-year terms before the sunset review. So it's quite a durable point. I think to your question on Turkey, we have noticed that Turkey has increased their shipments. We'll have to watch that. Again, in the context of overall imports today, not overly concerned about that. But again, we'll be watching that carefully to see to make sure that it to make sure that what they're importing, they're importing as a fair trader. Timna Tanners: Got it. Yes, seems like imports could take yet another leg down. But thanks for the color and all the best. Appreciate it. Peter Matt: Thank you, Timna. Operator: The next question will come from Bill Peterson with JPMorgan. Please go ahead. Bill Peterson: Yes. Thanks, everyone. Happy New Year, and thanks for all the color on the call thus far. I wanted to ask about AZ2, how the ramp has progressed during the prior quarter and what utilization you're running at? And then how should we think about operations and utilization ahead? Peter Matt: Yeah. AZ2, we've said in the past that this has been a challenging one. And my comments will cover that a little bit. But I think the important point is we reached profitability on EBITDA in the fourth quarter and we were nicely profitable in the first quarter too. And we expect to be nicely profitable throughout the year there. In terms of utilization rates, we exited last year at about 60%. We expect to demonstrate full run rate during our fiscal year 2026. But we don't expect to be at full run rate in 2026. And that is because we still have a number of merchant specs that we've got to perfect and that's going to take some time and it'll force us to run at, you know, kind of suboptimal utilization. But we feel good about where we are. There's still some challenges there to be clear. But the team has done an incredible job. And this is where I think the Commercial Metals Company team really shines because we have drawn people and expertise from all across our network to help us with this operation. And remember, the challenge is this isn't your grandfather's steel mill, so to speak, right? This is a very innovative steel mill. It will be a workforce in our portfolio, but there's a lot of new technology to make work. And the other challenge that we've had there, Bill, is just with kind of the people not from the vantage point of the people good, the people are great, but it takes some training to learn this. And so we've done a lot of work around training, and I think that's enhancing our reliability substantially and it will continue to do so as we go through the year. So hopefully that helps you. Bill Peterson: Yes, it does. Thanks for that. And then my second question, can you speak a bit more to the pricing profile of your downstream backlog and whether new order entry continues to be priced higher? What's in the backlog? And I guess to what extent is the commercial discipline TAG initiatives you spoke of earlier playing a role? Peter Matt: Yes. Absolutely. So we do continue to see prices improve in our downstream. So we have been really for the last couple of quarters putting new orders into the backlog at higher prices. So that continues and we feel good about that progression and actually kind of starting out the year, we've had a couple of new orders that have come in a really nice place. So I think we feel good about that. And again, demand in that business remains very solid. And so there's a lot of project activity and a lot on the drawing board. So we're optimistic about where things go there. Bill Peterson: Thanks again. Peter Matt: Yes. Thank you. Operator: The next question will come from Carlos De Alba with Morgan Stanley. Please go ahead. Carlos De Alba: Yes. Thank you very much. Happy New Year, everyone. So maybe just adding to the discussion on the new commercial approach in the fabrication business. How much of your business is already in this indexed format where you are able to maybe better protect your margins? And how do you see that evolving in the coming quarters in still not a big percentage of the overall business? Peter Matt: Yes, it's not a big percentage today. And the openness to it among the customers can vary. Right? So there are some DOTs, for example, that are more inclined to it than others. So we're working from a relatively low base on that, but we do see the opportunity to increase it and to open the dialogue with customers on indexation. And indexation is just one of the strategies, right? The other obvious strategy there is just proper escalation. And when you talk about commercial excellence, one of the things that we've been, I think, showing the team's done an amazing job on being more disciplined about this is in making sure that number one, we have proper escalators in place. And then number two, that we're actually enforcing those escalators as we go through, you know, kind of go through the period. So this is a journey, but the way we think about it internally is that over time, it doesn't make sense for companies like Commercial Metals Company to take this type of risk in the way that we've been taking it. And over time, we will work towards reducing that. And that will again contribute to higher margins through the cycle, higher returns, more consistent returns, all the things that we're pointing towards. Paul Lawrence: And Carlos, I would just add, you know, what we've spoken of is really around protecting the risk from a duration perspective. There's also recognizing the value that Commercial Metals Company brings from a reliability perspective. And I think that is also critical in terms of our capabilities and ensuring we get value for the service we bring. There's a tremendous amount of risk to a construction project that comes with all the subcontractors. Having a reliable partner as Commercial Metals Company is drives a higher value recognition. And we got to make sure we capture that. Carlos De Alba: That makes sense. And then what is the EBITDA margin that your $160 million to $170 million EBITDA guidance for CSG represent? And would you say that this guidance, this EBITDA guidance is somewhat conservative given that you're just starting to take over those assets? Peter Matt: Yeah. I mean, Paul, you can comment on the margin, but I would say, look, it's early days, right? And we're doing a lot of work on integration. As I said at the very beginning, we feel kind of good about what we've seen. But there's some adjustment that has to happen as you bring a new company into our company and so maybe we're being a little bit conservative, I think it's appropriate to be cautious and again, our goal with all of you and with all of our investors is to be in a situation where we are under-promising and over-delivering and that's what we're shooting to do here. Paul Lawrence: And as far as the margins are concerned, it'll be made up of the two buckets. Our existing business typically is in the high teens, call that 18% to 20% margin. We would expect that to remain there. And the Precast business to come up, the combination of the two entities to be in the 30% to 35% range from a margin perspective. So no change. Obviously, it's just a different mix going forward than what we've had historically. Carlos De Alba: Yeah. Great. Thank you, Paul. Yeah. I misspoke. A period $165 million to $175 million EBITDA guidance is not for CSG. It's for the Precast unit. Thank you very much. Good luck. Operator: Thank you. The next question will come from Mike Harris with Goldman Sachs. Please go ahead. Mike Harris: Yes. Good morning. Thanks for squeezing me in. Just one quick question on my part. When I look at the TAG program, I think last quarter, the expectation for the expected run rate annualized EBITDA benefit at the '6 was greater than 150. And now you're saying 150. So does that change just a function of timing? Or did you adjust your initiative list? Or just being conservative? Peter Matt: No. I don't think it was greater than 150. I think we have moved towards 150 as we've gotten more clarity on the opportunities in TAG. And by the way, as we've said in many other forums, this is just the beginning. Right? So it's not like 150 is the end. As we get more fidelity around this, we will share more. What we're really doing in TAG is we're trying to build durable margin improvement. So rather than throw lots of programs in that we haven't fully vetted or we haven't done the work to make sure that they deliver and they deliver in a sustainable way, we're proceeding a little bit more slowly. But I think the outcome will be something that's more lasting. Mike Harris: Okay. Thanks a lot for that clarification. Peter Matt: Thank you. Operator: The next question will come from Phil Gibbs with KeyBanc Capital Markets. Please go ahead. Phil Gibbs: Hey, good morning. Sorry if this question was asked earlier, but what is the typical seasonality of the North American business from a volume standpoint relative to Q1? Paul Lawrence: Typically, Phil, it's in the 5% to 10% range that we expect. Obviously, it's very much weather dependent and we've seen some inclement weather on the West Coast. Certainly, nationally, it's been pretty good so far, but we were only in the early innings of the winter. So typical is 5% to 10% and that's what we're guiding towards. Phil Gibbs: Thank you. And then in terms of integrating just baseline depreciation, I'm assuming you're going to have some write-ups associated with the Precast deals. I think your baseline for D&A was like $70 million or $75 million in Q1. So what should we be anticipating for Q2? Paul Lawrence: Yes, it's a great question, Phil. And as we have owned these businesses just for a short period of time and the complexity of some of the purchase accounting, we're not in a place from a D&A perspective, well, really, amortization perspective to provide guidance. There's a lot of intangibles associated with the businesses and they all have different valuation approaches and durations. And so what we know is cash flow, the cash flow of these businesses will be certainly very attractive as we outlined at the acquisition. We were able to achieve the financing at very attractive rates in November and excited about the conclusion of the financing. But as far as the accounting, we are not yet in a position to really provide much outline in terms of what the amortization will be. Phil Gibbs: Thank you. Paul Lawrence: Thank you. Operator: At this time, there appear to be no further questions. Mr. Matt, I'll now turn the call back over to you. Peter Matt: Thank you, Nick. At Commercial Metals Company, we remain confident that our best days are ahead. The combination of structural demand trends, operational and commercial excellence initiatives to strengthen our through-the-cycle performance, and value-accretive growth opportunities create an exciting future for our company. Thank you for joining us on today's conference call. We look forward to speaking with many of you during our investor calls in the coming days and weeks. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. My name is Jeannie, and I will be your conference operator today. I would like to welcome everyone to the TD SYNNEX Fourth Quarter and Full Year Fiscal 2025 Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to remove your question, press 1 again. We request that you limit yourself to one question to allow time for other participants to ask their questions. Thank you. At this time, for opening remarks, I would like to pass the call over to Nate Friedel, Head of Investor Relations at TD SYNNEX. Nate, you may begin. Thank you. Good morning, everyone, and thank you for joining us for today's call. Nate Friedel: With me today is Patrick Zammit, our CEO, and David Jordan, our CFO. Before we continue, let me remind you that today's discussion contains forward-looking statements within the meaning of the federal securities laws, including predictions, estimates, projections, or other statements about future events, including statements about our strategy, demand, plans and positioning, growth, cash flow, capital allocation, stockholder return, as well as our financial expectations for future fiscal periods. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties discussed in today's earnings release, in the Form 8-Ks we filed today, in the risk factors section of our Form 10-K, and our other reports and filings with the SEC. We do not intend to update any forward-looking statements. Also, during this call, we will reference certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP results are included in our earnings press release and the related Form 8-K, available on our Investor Relations website, ir.tdsynex.com. This conference call is the property of TD SYNNEX and may not be recorded or rebroadcast without our permission. I will now turn the call over to Patrick. Patrick? Patrick Zammit: Thank you, Nate. Good morning, everyone, thank you for joining us today. We are pleased to report another set of record results that complete an outstanding year for our organization. Over the full year, our business excluding HIVE increased its gross billings in the high single digits year over year, while improving both its gross margin and operating margin profile. Additionally, Hive grew its gross billings double digits, and well above our expectations, and has made further progress expanding its set of offerings and diversifying its customer base. Turning to the fourth quarter, our non-GAAP gross billings of $24.3 billion represented an increase of 15% year over year, or 13% in constant currency, and non-GAAP diluted earnings per share of $3.83 represented an increase of 24% year over year. Both of these established new records for our company, demonstrating the value of our diversified business model, the successful execution of our long-term strategy. Within TD SYNNEX, excluding HIVE, our momentum continued with gross billings increasing 10% year over year, and gross profit and operating income each also increasing by double digits. Hive experienced another strong quarter, with gross billings increasing by more than 50% year over year, and ODM Centimeters gross billings increasing 39% year over year, driven by sustained broad-based demand in cloud data center infrastructure from our hyperscaler customers. HIVE's operating income also grew meaningfully year over year, and continues to become a larger portion of our overall mix. Our results reflect its strength across all regions and key technologies. North America continued to grow steadily supported by demand across each of our key customer segments, prioritization of increased security requirements, and ongoing shifts towards complex, multi-cloud architectures. Europe grew faster than we anticipated, as customers prioritized infrastructure software, PC device upgrades, modernization of aging infrastructure, despite the slower macroeconomic backdrop. We've seen over the last few quarters, Asia Pacific and Japan remain a key growth engine, driven by rapid cloud expansion, PC device upgrades, accelerating AI development, and strong demand from fast digitizing economies across the region. Lastly, our growth story in Latin America remains encouraging, delivering double-digit top-line momentum with strong engagement across our and customer base. Our performance is a direct outcome of executing on the strategy we outlined at investor day. As we enter 2026, we are sharpening execution around four focus areas that will define what we want to be known for. We will start with omnichannel engagement. Through disciplined investments in our partner-first digital portal, we've built a frictionless interface that meets customers wherever they transact, and simplifies the experience end to end. By pairing seamless digital engagement with our personalized relationship-driven support, our highly skilled teams help customers navigate complexity, and move beyond transactions, earning the role of trusted adviser and forging long-term partnerships. We enhanced our partner-first digital bridge functionality in Q4, with a new AI assistant that enables customers to transact in a self-service mode 24 by 7 in their working environment. This enhancement transforms how our customer sales teams access and act on information to support their end customers in real time. Our customers have already tested that the new capability has saved employees in sales and product procurement operations multiple hours per day. The industry is also recognizing our strength in this area. During the quarter, we were awarded UK iCloud Marketplace of the Year by CRN. We received this honor due to the differentiated quality of our platform, along with our leadership in customer enablement, and technical training. Helping our customers navigate what has been a transformative year in this space and ultimately accelerating growth throughout our cloud portfolio. The next strategic pillar is specialized go-to-market. Our collection of specialist approach combines deep technical expertise with a deep understanding of our customers' go-to-market strategy and needs. This dual competency accelerates technology adoption, and positions us as a growth catalyst for vendors and customers. It's a differentiated capability that strengthens stickiness and expands our wallet share in high-growth segments. Our Q4 accomplishments within this pillar include winning a global security RFP, that will enable us to expand our portfolio in existing geographies with large enterprise customers, is a segment that has not historically purchased through TD SYNNEX. We have chosen due to our global presence and deep security specialization as well as for our ability to unlock substantial cost savings for the vendor while still improving customer experience. Expect these customers will increasingly leverage our broader product and service portfolio over time, enabling them to consolidate spend, and capture additional growth in the market. Our emphasis on specialization has been recognized by our vendors as well. In Q4, Cisco named TD SYNNEX as distributor of the year globally, as well as regionally in The Americas and EMEA. These awards reflect how our specialization deep alignment with Cisco, and innovation across markets consistently deliver real business outcomes for our customers. Our next pillar is focused on delivering best-in-class enablement. We accelerate time to market by equipping our customers with advanced training certification programs, enablement tools, and precise resources and expertise tailored by technology, and customer segments. This approach reduces ramp-up time strengthens customer capabilities, and drives faster adoption of high-value solutions. Which ultimately improves productivity and expands our share of wallet. During Q4, we announced AI game plan, a new customer-led workshop experience designed to help their sales teams translate AI opportunities into real-world business outcomes for their end customers. Are just at the beginning, and we continue turning our vast data lake and algorithms into industry-leading scalable digital services that enhance experiences lower costs, and unlock new revenue and efficiency opportunities for our existing customers. These strategies work in concert to support and substantiate our final strategic pillar, expanding our brand visibility. Our brand promise making IT personal, describes our role as an indispensable partner in the technology channel. We aim to be visible, personal, and influential at every stage of the customer journey. Reinforcing trust and driving loyalty. This sustained presence amplifies our market relevance and underpins long-term growth. By bringing our strategy to life every day, across these four pillars, we are continuing to strengthen our competitive position as the strategic business partner that our partners can rely on to create more opportunities that deliver sustainable long-term growth. Moving to HIVE. We continue to experience sizable growth benefiting from broad-based demand for cloud data center infrastructure, across our hyperscaler customers. And we believe that we are very well positioned to continue to get more opportunities that showcase our ability to support a wide breadth of programs for our customers. Our customers are turning to us for, among other things, our production flexibility, favorable US footprint, ability to co-develop complex solutions, and secure supply chain. These differentiators position us to continue to be a trusted partner in the assembly and deployment of complete rack-level systems across all market environments, through time. Looking ahead, I am bullish on the long-term value proposition of HIVE and IT distribution. We believe the untapped market opportunities in front of us in both businesses remain substantial as we aim to service a greater portion of the overall IT market through time. Now I will pass it to David to go over the financial performance and outlook in more detail. David? David Jordan: Thanks, Patrick, and good morning, everyone. We're pleased to report a strong close to our fiscal year with fourth quarter results that exceeded the midpoint of our guidance across all key metrics. Gross billings increased 15% year over year reflecting broad-based strength across both distribution and highs. Our gross operating margins expanded year over year driven by a combination of operational efficiencies favorable mix, and disciplined margin management. Non-GAAP earnings per share increased 24% year over year delivering meaningful value for shareholders and underscoring the strength and value of our business model. Moving into the details. Our endpoint solutions portfolio increased gross billings 12% year over year due to continued demand for PCs driven by the ongoing Windows 11 refresh and sustained demand for premium devices. Which has continued to be a tailwind. Globally, PCs have now increased double digits for four consecutive quarters, and we expect continued momentum heading into the initial months of 2026. Our advanced solutions portfolio increased gross billings by 17% year over year and 8% year over year when excluding the impact of HIVE. Driven by meaningful growth in cloud, security, software, and other strategic technologies. Hive, which is reported within the advanced solutions portfolio, increased more than 50% year over year primarily due to strength in programs associated with server and networking rack builds. In the quarter, there was approximately 29% reduction from gross billings to net revenue, which was in line with expectations. Our net treatment as a percentage of billings continues to remain elevated versus the prior year, primarily driven by a higher mix of software within distribution and increases in certain hive programs. As a result, net revenue was $17.4 billion up 10% year over year and above the high end of our guidance range. Gross profit increased 15% year over year to $1.2 billion. Gross margin as a percentage of gross billings was 5%. Which was flat year over year. Non-GAAP SG and A expense was $698 million or 3% of gross billings, Our cost to gross profit percentage, which we define as the ratio of non-GAAP SG and A expense to gross profit was 58% in Q4. An improvement of approximately 100 basis points year over year, demonstrating our progress toward managing costs as a percentage of gross profit down over time. Non-GAAP operating income increased 18% year over year to $497 million Non-GAAP operating margin as a percentage of gross billings was 2.04%, representing a five basis point improvement year over year. Interest expense and finance charges was $88 million, an increase of $1 million year over year. Our non-GAAP effective tax rate was approximately 24% compared to 21% in the prior year. Total non-GAAP net income was $313 million and non-GAAP diluted earnings per share was $3.83. An increase of 24% year over year and another all-time high. For TD SYNNEX. Free cash flow was $1.4 billion driven by strong earnings growth and meaningful improvements in our cash conversion cycle quarter over quarter. This also brings our annual free cash flow to $1.4 billion which was well ahead of our expectations. FY '25 marks the third consecutive year that we have generated annual free cash flow of over $1 billion demonstrating our commitment to sustainable cash generation. Within the quarter, we returned $209 million to shareholders with $173 million in share repurchases and $36 million in dividend payments. In total, we returned $742 million to shareholders this fiscal year bringing our cumulative return to shareholders over the last three years to over $2.2 billion This is approximately 61% of our free cash flow during that same time period within the medium-term range of 50% to 75% outlined at our Investor Day. Underscoring our belief in the strength of our business and the commitment to creating long-term shareholder value. As of November 30, we have $1.2 billion remaining on our share repurchase authorization. Net working capital was $2.9 billion down approximately $300 million from the prior year. Our gross cash days were twelve days, a two-day improvement from the prior year which I'll talk more about shortly. We ended the quarter with $2.4 billion in cash and cash equivalents and debt of $4.6 billion Our gross leverage ratio was 2.4 times and our net leverage ratio was 1.1 times. You'll note that our cash position was elevated at year-end. This is the result of two primary factors. First, we successfully completed a new debt issuance during the quarter which will be used to pay off $700 million of debt that matures in August 2026. Additionally, as you'll see in our working capital, our teams across both distribution and Hive did an outstanding job driving cash flow and made meaningful improvements toward optimizing the return on capital for both businesses. At the same time, it's important to remember that the balance sheet is a snapshot at a single point in time. At year-end, we had a few large receipts come in just before period end that would have normally fallen into the next quarter. We estimate Q4 benefited a few $100 million, which will normalize in FY 2026. Going forward, we continue to be laser-focused on generating sustainable free cash flow and improving our return on invested capital. For the current quarter, our Board of Directors has approved a cash dividend of $0.48 per common share. Will be payable on 01/30/2026. To shareholders of record as of the close of business on 01/16/2026. Moving on to our outlook. For the '6, we expect non-GAAP gross billings in the range of $22.7 billion to $23.7 billion representing an increase of approximately 12% at the midpoint. Our outlook is based on a euro to dollar exchange rate of 1.16. Net revenue in the range of $15.1 billion to $15.9 billion which translates to an anticipated gross to net adjustment of 33%. Non-GAAP net income in the range of 243 to $283 million non-GAAP diluted earnings per share in the range of $3 to $3.5 per diluted share based on a weighted average shares outstanding of approximately 80.1 million. We are anticipating a cash outflow in Q1 in part due to typical seasonality of the business and due to the timing impact that benefited Q4, which we described earlier. We expect that our cumulative free cash flow over fiscal '25 and fiscal '26 will be in line with our medium-term framework, of 95% non-GAAP net income to free cash flow conversion. While we are not providing full-year guidance today, our long-term outlook remains consistent with the multiyear compounded annual growth rates that we outlined at our Investor Day earlier this year. We'll remain focused on delivering against that financial framework we've shared with you which includes stable growth, margin expansion over time, consistent cash generation, and deploying capital where it maximizes long-term value creation within our capital allocation framework. To close, we're proud of what we've achieved this year, strong financial performance, disciplined execution, and continued progress against our strategy. We're entering fiscal twenty-six with solid momentum, a healthy balance sheet, and a clear set of priorities that support durable growth. We'll remain focused on operational excellence and delivering long-term value to shareholders. With that, we'll open up the call for questions. Operator? Operator: Press star, then the number one on your telephone keypad. We request that you limit yourself to one question to allow time for other participants to ask their questions. If there is remaining time, you are welcome to re-queue with additional questions. Your first question comes from the line of Keith Housum with Northcoast Research. Please go ahead. Keith Housum: Good morning, gentlemen, and thanks for the opportunity here. Obviously, outstanding growth in Europe and Asia Pacific, especially Asia Pacific and Japan there. As we think about that growth here that's happening, guess, you talk about perhaps how much of it is market growth versus your ability to take market share and then second, how sustainable are some of these growth rates that we're seeing going forward? Patrick Zammit: Okay. Thanks, and good morning. So in FPGA, we for sure, we've experienced very nice, high double-digit growth. As you know, our share in the region is relatively low. So we are investing significantly in the region to gain share and grow of a market. So when you look at, the results, for sure, we gained significant share. We're also positioned in countries, especially India, where, as you know, the growth of the market is significantly above the average of the region. And the team is focused on product segments, vendors, and customer segments which should make the growth sustainable for the long run. So very, very pleased, very proud of the team. And very confident for the future. The only thing I would add is that it's not only the growth in sales. We're also experiencing an over-proportional growth in operating income in the region as the team is investing, but also keeping a good cost discipline. David Jordan: Great. And how about for Europe? Because Europe, obviously, was better than we would expect. You can say the macro conditions you have there. Patrick Zammit: So just, so we got some market data. Europe, the European market grew let's say, mid, mid-single digit, slightly better even than North America. But for sure, we had, our outstanding performance. We continue to gain significant share in the region. Have a strategy which is very well executed. Again, we are going after technologies, vendors, and customer segments. Where we can enjoy higher growth in the market. And that's what you are seeing in the results. David Jordan: Great. Thank you. I'll get back in queue. Nate Friedel: Good luck. Keith Housum: Bye. Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Please go ahead. Ruplu Bhattacharya: Hi. Thanks for taking my questions. Patrick, you reported strong 15% growth in billings for 4Q and are guiding 12% billings growth for 1Q. How are you handicapping any end market demand destruction from higher component costs like DRAM and NAND And one for David, can you just update us on the CapEx spend for year as well as any investments planned for HIVE for 2026? Thank you. Patrick Zammit: Yes. So good morning. Thanks a lot for the question. So again, the guidance for Q1 reflects what we see from the regions, from the BUs, I can confirm that the memory price have increased dramatically, and what we are seeing already is an increase in ASP on a series of product families, especially PCs, servers, storage, So the ASP increase is on one hand, the tailwind in the short term. What would be interesting to see is what will be the impact on the volume going forward But again, specifically for Q1, the guidance reflects the result of the bottom-up exercise with the regions and the forecast is done by technology by country. So David Jordan: And, Ruplu, the only thing I would add is when you think about total CapEx, for TD SYNNEX, we're probably planning for a similar level of CapEx in '26 relative to '25. And that would include the investments needed to support Hive's continued growth. Ruplu Bhattacharya: Can I just clarify, have you actually seen any demand destruction from higher component cost and is that factored into your guidance? Patrick Zammit: So specifically, I haven't seen it. And, again, what is reflected in the guidance is the outcome of our bottom-up exercise. Ruplu Bhattacharya: Okay. Thank you for the details. Operator: Your next question comes from the line of Eric Woodring with Morgan Stanley. Please go ahead. Eric Woodring: Hey, guys. Good morning. Thank you very much for taking my question. And Patrick, I'm going to stay on the same line questioning there as Ruplu, which is just, can you maybe ask it a different way? Can you maybe help us understand what you're seeing in terms of any potential pull forward in either the November or the January just with customers wanting to get ahead of future pricing increases for any of those kind of memory exposed products you just mentioned, PC servers, storage, smartphones, and just how you might think more broadly. I know you're not guiding to fiscal twenty-six, but just how you think that this dynamic could have an impact on either revenue or profit seasonality for the year? Thanks so much. Patrick Zammit: Okay. So let me start with the broad forwards. So it's difficult to assess, but very pretty confident that we haven't had any I would say, material brought forward in the last quarter. Now, again, what's going so the Q1 guidance reflects the what the countries are seeing in the read in their region, and, again, for PC servers, and storage, If I look at the overall year, so the tailwind for us is clearly the increase. As you know, I mean, when, the vendors increase, their prices, we usually pass it through to the market. So no concerns, on the margin quality. On the demand, tailwind related to the ASP increase, And then what's going to be interesting to watch is what will be the impact on the volume. And, as you know, the elasticity will be different by product category. And probably the category which is going to be the most sensitive is PCs, But we have a very, very low position on consumer PCs. We primarily focus on commercial PC So I'm relatively confident that here, the elasticity should be, relatively low So I continue to be relatively optimistic about the prospects of the PC market. Let's not forget that the refresh is not over. There is I mean, it started a little bit later than expected, so we should continue to benefit from it. In the next quarter. And then when you look at storage and server, I think here, again, the elasticity related to the price increase should be relatively low. So again, on the demand, I think the demand is going to be driven by other considerations, the need for customers to, embrace AI, upgrade their servers. I mean, there's a server refresh happening as we speak, and it's not over. Again, I think on the demand, relatively, I should say, cautiously optimistic. And then the ASP increase should, should help. Operator: Your next question comes from the line of David Voigt with UBS. Please go ahead. David Voigt: Great. Thanks, guys. Maybe 1.5 for David. So David, you mentioned in your prepared remarks free cash flow cumulatively for 2025 and 2026 is going to be consistent with the long-term framework. Of 95% of net income. Given kind of the mix of business going into fiscal twenty twenty-six, it sounds like netted down is going to be a bigger portion of that based on the guide at least for Q1. Can you talk through kind of the mix of the revenue that drives that netted down effect? And then what sounds like a decline in free cash flow, even million of payments in Q4 that was pulled forward in '20 versus '25. David Jordan: Sure. So good morning, David. When we in our prepared remarks, we said we expect cumulative free cash flow across '25 and '26 to be within the 95% Got it. Historically, our business consumes cash in the first half and generates cash in the second half. What you saw in Q4 is we had a really, really strong cash flow quarter. And so some of that will normalize as we go into Q1. So we still feel really good about generating cash for the full year, but we do expect an outflow in Q1 that will ultimately, be recouped as we work through the balance of the year. And it's not it's not as much mix driven per se as it's just the additional cash that we generated in Q1 that will be Normalized or sorry, that we generated in Q4 that will be normalized in Q1. Operator: Your next question comes from the line of Adam Tindle with Raymond James. Please go ahead. Adam Tindle: Okay, thanks. Good morning. I wanna just acknowledge, Patrick, the strong return on capital, primarily great working capital management. But if I looked at the margin side of things, it does look like some of that is being a little bit suppressed, and you talk about investments in Hive. I wanted to ask about that. This has been an ongoing theme. I wonder if you could maybe just recap some of the prior investment decisions that you made in Hive and the outcomes that lead you to invest further, in Hive including, you know, any potential further new customers, for example. And for David, as we kind of, you know, look at this in the model, if you could maybe help us quantify or break out the investments in Hive. Is it you know, gonna increase throughout the year? Are we sort of at the right run rate? You know, what does this look like, you know, throughout, fiscal twenty-six? Thanks. David Jordan: So maybe I can start, and Patrick, chime in. So in the prepared remarks, we talked about HIVE grew meaningfully both billings and profit. And so I wouldn't impute that there's a margin issue. In terms of investments in we continue to invest in HIVE. So Patrick talked about we've invested in leadership. We've invested in the engineering team. We've invested in some additional capabilities within the site. We have enough capacity to support our current demand. And we'll continue to make investments to ensure Hive can truly be an end-to-end go-to player for tier one hyperscalers and others. And so we feel very good about how the business is performing, the investments we've made, and the prospects going forward. Operator: Your next question comes from the line of David Paige with RBC Capital Markets. Please go ahead. David Paige: Congrats on some really nice results here. Just a quick follow-up on Hive. The 50% growth. Is that come evenly split between ODM and Centimeters or both the customers? Or maybe just a little bit more details around the growth there? Thank you. Patrick Zammit: Yes. So good morning. So we had so as you know, we have our ODM Centimeters business. That one, grew very nicely. In line, if not slightly better than the pace of the market. And then we had a very strong, also quarter with, let's call it, supply chain, cut by division. As you know, this is a more lumpy opportunistic business. It's a service we render, so it highly dependent on what the customers are asking for. And in Q4, we had a very strong quarter. And, better than expected. So that's how I would summarize the sales growth for the quarter for Hive. Thank you. Operator: Your next question comes from the line of Joseph Cardoso with JPMorgan. Please go ahead. Joseph Cardoso: Maybe another follow-up on the Hive business. I just wanted to touch on, like, the progress that you're making with Hive relative to capturing additional share with your existing large customers there and perhaps what you're seeing from a portfolio or kind of the products that you're shipping there towards mix moving more towards AI servers networking racks, storage racks, and the opportunity to onboard potentially a new large customer beyond the two that you have today. Thank you. Patrick Zammit: Yes. Good morning. So again, I mean, we mentioned it at, in the prior calls. We continue to invest to expand the capabilities and capacity of Hive. And so we are very active in bidding on new programs, with our existing customers and potential new customers. I would say that, thanks to the investments we've made, especially in engineering, and some of the differentiators of HIVE in the market. Mean, we are seeing, we are making very good progress on, on winning some new programs and potentially new customers. I would say that, those programs take some time to ramp. So, again, when you look back at the our Q1 guidance, it reflects what we have as forecast for the next quarter. But going forward, yes, I would say we continue to make good progress and are confident about the prospects. Operator: Your next question comes from the line of Austin Baker with Loop Capital. Please go ahead. Austin Baker: Hey, guys. Thanks for taking the question. Just really quick, I guess, would love to understand how margins you view margins for Hive kind of going forward. Are they improving, normalizing as volume scales? And then lastly, how do you feel about the visibility for high programs today versus maybe this time last year? David Jordan: So I can take that one. We feel pretty good about the overall margin profile of TD SYNNEX. When you think about what we laid out at Investor Day was a couple of things. We want to grow operating profit faster than billings, and so we're constantly looking for ways both within Hive and within our distribution business to focus where we can make additional margin. And so, again, we feel very good about that business. Patrick? Patrick Zammit: Yeah. I would just add that, when I look at the pipeline and I compare it to where we were last year, I think we are in very healthy position. And, again, that's what is reflected in, in our Q1 guidance. Operator: Your next question comes from the line of Vincent Colicchio with Barrington Research. Please go ahead. Vincent Colicchio: Yeah, Patrick. Another good quarter on PCs. Just could you give us an update on your thinking in terms of what inning we're in here? Patrick Zammit: Yeah. So good morning. Thanks a lot. Yes. So as far as the game Q4, for PCs, broad-based, primarily driven, from commercial, So going forward, as I mentioned, I think that the refresh is not over. So, that tailwind should continue again in 2026. And we have also the weight of AIPCs who have a slightly higher ASP that should continue to be so there's still a lot of potential for upgrading the PCs and make them AI compatible in the market. So that should be a tailwind. We talked about the memory price increase impacting the ASP of the PCs, that should be gained a tailwind. And then you have the uncertainty related to the price on the demand. But, again, the fact that we are primarily focused on the commercial PCs, I mean, I think we are in a slightly better position than we would have a high weight of consumer PCs. So I would say for next year, I'm continuing to be confident about the prospects of the PC market. again, back to the guidance for Q1, I mean, the various assumptions have been taken into account. And are reflected in the guidance. Vincent Colicchio: And did AIPCs perform incrementally better this quarter? Patrick Zammit: to nicely increase. Yeah. It continues to the weight of AIPC continues So that's a positive. Vincent Colicchio: Thank you. Operator: Your next question comes from the line of David Voigt with UBS. Please go ahead. David Voigt: Hey guys, I just wanted to ask a follow-up, David. On the netted down impact, it looks like there's a big tick up in Q1. That's what I was trying to understand also. Is it mix driven? That's gonna be a bigger headwind to your revenue conversion, kind of can you talk about what's going on there from a netted down effect in the guide? David Jordan: Yep. And sorry. I missed that part of your question. That's my fault. No worries. So all good. Gross to net gross to net increased in Q4, and we've got an increase in to Q1. There's a couple of dynamics. One, strategic technologies continues to become a bigger portion of our business. A lot of that business is software, which, as you know, is netted. Additionally, within Hive, there are a number of programs that are also net. And as the mix changes, that does influence that metric. And so if you think about how we set Q1, that's probably an assumption of kind of the run rate gross to net that we expect for FY '26. Hopefully, that helps. David Voigt: And that would suggest that software and Hive continues to grow as a portion the overall billings pie. That a reasonable takeaway? David Jordan: Exactly right. You're right. David Voigt: Great. Thank you. Operator: There are no further questions at this time. I will now turn the call back over to Patrick for closing remarks. Patrick Zammit: So thank you, everyone, for joining us. I want to close by emphasizing that we'll remain committed to profitable growth and free cash flow generation. Our strategy is designed to ensure that every step forward strengthens our business and supports greater long-term value creation. With our reach, our people, our unique capabilities, and our momentum, we are confident in our ability to continue to succeed. Thank you, and have a great day. Operator: That concludes today's conference call. You may now disconnect. Have a nice day.
Operator: Good day, and welcome to the Lindsay Corporation Fiscal First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Randy Wood, President and CEO. Please go ahead. Randy Wood: Thank you, and good morning, everyone. Welcome to our fiscal 2026 first quarter earnings call. With me today is Sam Hinrichsen, our Chief Financial Officer. Once again, I'm very proud of our team's execution in the quarter despite external headwinds impacting our business. While ongoing trade uncertainty, low commodity prices and high input costs have negatively impacted customer profitability and sentiment, our team's focus on price and cost management and operational efficiencies gained through our diversified global footprint helped us deliver solid profitability and maintain earnings quality in the quarter. In our domestic U.S. irrigation business, customers continue to delay large capital purchases due to high input costs and low profitability. In our international business, we're encouraged by the strength and opportunities in the project market, including the Middle East and North Africa. Our ability to help growers globally improve productivity and optimize resources remains a key differentiator for Lindsay and has supported performance amid a challenging macroeconomic environment. Subsequent to the end of our fiscal first quarter, we announced a supply agreement to provide Zimmatic irrigation systems and FieldNET remote management and scheduling technology in the MENA region. This project is valued at approximately $80 million in total revenue with approximately $70 million of revenue realization this fiscal year. This announcement reflects our ability to compete and win large-scale projects globally, but also demonstrates Lindsay's role as a trusted partner in advancing sustainable agriculture while supporting localized production and enhancing food security. We're very proud of our team's commitment to delivering transformative projects in our international markets and look forward to executing this important project in the region. Our Infrastructure segment delivered solid performance in the first quarter with total revenues up 17% year-over-year. Increased road construction activity supported segment performance in the quarter, and we continue to see solid interest in our Road Zipper solutions product. Moving forward, we expect further momentum as infrastructure funding and road project activity advance. Turning to our market outlook. As we mentioned last quarter, in North America, we expect softer market conditions to persist in the near term. Market indicators suggest the current trough environment will persist until there's greater clarity around international trade impacts and an improvement in customer profitability. The U.S. administration has announced a $12 billion Farmer Bridge Assistance package designed to offset trade-related pressures on U.S. farmers. The program includes onetime payments of approximately $44 per acre for corn and $31 per acre for soybeans. While this support will be appreciated by growers, we don't expect it to drive significant incremental demand in the short term. Within our international markets, we remain encouraged by the overall outlook for future growth and market fundamentals in Latin America, including Brazil. Elevated interest rates and ongoing constraints on credit access for growers continue to weigh on near-term equipment investment in the region, tempering what otherwise remains an attractive long-term growth opportunity. Within our infrastructure segment, we continue to see opportunities develop across system sales, leasing and road safety products, and our sales funnel remains strong. As previously communicated, we do not see a large Road Zipper project exiting the funnel in fiscal year '26. This creates a difficult comparison, particularly in Q2, where we shipped a large $20 million project last year. We do have incremental opportunities for smaller projects and other segment growth to offset half of that total with the majority coming in the second half of the fiscal year. Road safety funding in the United States remains steady, and we remain very excited by the long-term potential of our Road Zipper leasing model, which continues to gain traction and supports a more stable and balanced margin profile over time. With that, I'd like to now turn the call over to Sam to discuss our fiscal first quarter financial results. Sam? Samuel Hinrichsen: Thank you, Randy, and good morning, everyone. It is a privilege to join you today for my first earnings call as Chief Financial Officer at Lindsay Corporation. I'm excited to continue partnering with this talented team as we drive our strategy forward, deliver on key initiatives, and create meaningful long-term value for our shareholders. I look forward to building on the strong foundation already in place. Now let me walk you through our financial results for the quarter. Total revenues for the first quarter of fiscal 2026 were $155.8 million, a decrease of 6% compared to revenues of $166.3 million in the same quarter last year. The decline in revenue was driven by lower volumes in our irrigation segment as continued uncertainty around trade, lower commodity prices, and higher input costs continue to weigh on farmer sentiment. Lower volume in irrigation was partially offset by year-over-year growth in our infrastructure segment. Operating income for the quarter was $19.6 million, a decrease of 6% compared to $20.9 million in the prior year period. Operating margin for the quarter was 12.6%, consistent with the prior year. Despite a lower revenue base, our solid operating margin performance for the quarter reflects continued execution of our operational strategy, coupled with effective cost and pricing management. While near-term irrigation market conditions in North America are expected to remain soft, we anticipate that our business will continue to show resilience. Net earnings results for the quarter were $16.5 million or $1.54 of net earnings per diluted share, marking a slight decline compared to net earnings of $17.2 million or $1.57 per diluted share in the first quarter of last year. The difference in net earnings when compared to the prior year period was largely attributable to lower operating income and a slightly higher effective tax rate. These were partially offset by an increase in other income. Turning to our segment results. Irrigation segment revenue for the first quarter were $133.4 million, a decrease of 9% compared to segment revenues of $147.1 million in the prior year. North America irrigation revenues of $74.3 million decreased by 4% compared to $77.7 million in the prior year. Within our North American markets, the impact of lower overall unit sales volume was partially offset by higher average selling prices compared to prior year. In international irrigation markets, we delivered revenues of $59.1 million compared to $69.4 million in the first quarter last year. The decrease was primarily attributable to 2 factors. First, the timing of project revenues in the MENA region is difficult to predict. First quarter results were impacted by the timing gap between last year's project and the recently awarded new project in the region. Secondly, sales volumes in Brazil were lower than anticipated as this key market continues to be constrained by elevated interest rates and an unfavorable credit environment, which is weighing on investor activity for growers in the region. These declines were partially offset by approximately $1.5 million of favorable effects of foreign currency translation compared to the prior year. Total Irrigation segment operating income for the first quarter was $23 million, a decrease of $1.8 million compared to $24.7 million in the first quarter last year. Segment operating margins of 17.2% of sales grew compared to 16.8% of sales in the first quarter of last year. Despite lower segment revenues, our irrigation margin profile continues to reflect resilience in a down cycle market. In our infrastructure segment, revenues for the first quarter increased 17% to $22.4 million compared to $19.2 million in the prior year. The increase was driven by higher sales of road safety products, while Road Zipper System revenues were similar compared to the prior year. Infrastructure segment operating income for the first quarter increased 9% to $4.5 million compared to $4.1 million in the prior year. Infrastructure segment operating margin for the quarter was 20.1% of sales compared to 21.5% of sales last year as revenue growth was offset by higher operating expenses. Turning to the balance sheet and liquidity. Our total available liquidity at the end of the first quarter was $249.6 million, which includes $199.6 million in cash and cash equivalents and $50 million available under our revolving credit facility. Free cash flow for the quarter was impacted by an increase in working capital to support business growth and elevated capital expenditure levels. We also utilized our strong free cash flow conversion to opportunistically buy back shares in the open market. In the first quarter, we deployed $30.3 million into share repurchases, exhausting our original authorization. During the quarter, we were pleased to announce the authorization of a new share repurchase program of up to $150 million. Our team have strategically maintained a very robust balance sheet, and this authorization provides us with the ongoing flexibility to continue returning capital to our shareholders. We are pleased with our strong financial position and balance sheet, which enable us to deliver shareholder returns while continuing to invest in future growth opportunities and innovation. This concludes my remarks. And at this time, I will turn the call over to the operator to take your questions. Operator: [Operator Instructions] Our first question comes from Nathan Jones with Stifel. Nathan Jones: I guess I'll start with North America irrigation, still down a little bit, but it seems to be bottoming out here. Does it feel to you like we're getting to the trough of the market here? Are there risks that we could take another leg down here? Or I know Valmont's commented that they kind of think we're at replacement level. Is that kind of your feeling about the market where -- I mean, obviously, there's a lot of external headwinds that you can't control, but they seem to all be lining up about as bad as they could get at the moment, which is probably a good thing in itself that if it can't get any worse. Just any commentary you might have about how you're thinking about the domestic irrigation market here? Randy Wood: Yes. Nathan, this is Randy. I'll take that one. And we would agree that we are bouncing along the trough here. And there's been some announcements on incremental funding. That's always good news, not enough to move the needle. And I don't think when we talk to customers that they see a lot of upside until there's more certainty on profitability. So in the near, near term, we don't see it getting progressively better, but I would say also we don't see it get progressively worse. So I do believe bouncing along the bottom of the trough here is how we'd characterize it. Nathan Jones: I guess the pipeline on international projects here, nice to see the $80 million one. Can you talk about opportunities for other projects? Could we see some more of those come through this year? I think they've been -- most of the ones you've done over the last few years have been with one customer. Are there opportunities outside of that? Are there things in the funnel that are coming from outside of that? Just any commentary around that, please. Randy Wood: Yes. I would say in the region, we have had some repeat business, which we view as a good thing. If you execute well, you get the opportunity for that repeat business. But we've also attracted new clients in the region. So it's a combination of recurring business with repeat customers and some new customers that we've pulled in as well. And I think the language around projects is the same as it's been for the past couple of years. We do see a robust funnel. We see a multiyear runway on projects like this one in this part of the world. And not all of them are in the same country or the same part of the country. We see a broad spectrum of opportunities across the MENA region for the same drivers around food security and stability for those countries in that part of the world. So we do see a good runway here, Nathan. And whether there's another one in 2026 is up in the air. I think the same caveat always applies. These are complex, large, difficult negotiations. Even when you have a deal, you move into credit. logistics. So it's never easy. It's never quick, but I would say there are more opportunities in the market. And again, our track record is a good one. So we'll fight and win for the ones that we want to pull across the finish line. And when we are in a position that the project is locked in, credit secured, that's when you'll hear us talk more about it. Until that time, we'll continue to comment on the positive elements of the funnel and the long-term growth potential in that part of the world. Nathan Jones: And I guess one more for me. You guys have had elevated CapEx in fiscal '25 and planned again in fiscal '26 as you're doing a lot of upgrades in Lindsay and around some of your plants. Can you talk about how that's gone, where you are in that process, what contribution that's already generating to profitability, and how we should think about the improved throughput, improved efficiency that you'll gain from that, this year and as we head into next fiscal year as well? Randy Wood: Yes. I'll start on kind of the narrative on what we're doing and where we are and then Sam can comment more specifically on how that might impact some of your models, Nathan. But we, in Lindsay, Nebraska right now have activated our large tube mill investment. This is a world-class tube mill, improving safety, efficiency, productivity. Testing has gone extremely well. And I expect in the next 30 days, we'll turn that over to full production once we get certification from our vendors. That project has gone extremely well and will change the way that we produce tubing and really decrease our reliance on labor, which was a key part of some of these investments. We have a second investment in our galvanizing facility that will completely reengineer that process for us, make it safer, more efficient, more environmentally friendly. And that investment will continue to make throughout this calendar year, and we would expect around the end of calendar 2026, we would see that operation potentially kicking off and going into production. I turn it over to Sam for a little more narrative on the numbers. Samuel Hinrichsen: Yes. So if you think about margins, this is an ongoing project. It's not been finalized. So there's no impact from a margin perspective in the first quarter. And as Randy alluded, in the short term, once completed, incremental depreciation will offset productivity gains at the current demand level. We expect to see improvements in margins from operating leverage once demand picks up following the completion of the project. And then following, again, the installation, we also expect to get back to more normalized capital spending levels. Operator: Our next question comes from Brian Drab with William Blair. Brian Drab: I wanted to ask maybe a similar question to what Nathan was getting at. But can I ask if this new $80 million MENA project is with the same customer in the same country as the June 2024 $100 million project announcement? Randy Wood: We would acknowledge, Brian, that this is a repeat customer in the same part of the world. Brian Drab: Okay. And then can you comment, Randy, at all on the margin that you're expecting with this new $80 million order? Randy Wood: I would say, overall, we would acknowledge project margins generally are going to be dilutive to the overall business. It does create a lot of operational efficiencies and absorption through the facility. So if we characterize it, the margin profile in this project will be as good as or better than the prior project. I think that's about as directional as we'd want to get, Brian. Brian Drab: Okay. But a little bit below segment average or overall irrigation margin? Randy Wood: Slightly below, correct. Brian Drab: Got it. Got it. Okay. Randy Wood: And that's consistent with the projects of this size. Brian Drab: Yes. Understood. Just wanted to check on this one specifically. Okay. And then just -- I'm curious if The Big Beautiful Bill, I think you mentioned in the slides, I'm not sure there was a lot of commentary in the prepared remarks, but I'm just wondering, did you see any demand related to accelerated depreciation? Is that a narrative that you're hearing from the customer base? And do you expect that to drive any demand going forward? Randy Wood: We -- I would say we didn't see a lot of significant impact, and we didn't anticipate it. I think some of the negative macro market drivers just overwhelmed a little bit of potential incremental benefit from the bill and accelerated depreciation. So not a significant contributor. Operator: Our next question comes from Ryan Connors with Northcoast Research. Ryan Connors: I wanted to -- you talked about the cycle earlier in North America in the first question there from Nathan. But I wanted to kind of come back to that and look at it from a bit of a different angle. So we were down 4% irrigation in North America in the first fiscal quarter here. Is that kind of reflective of how we should maybe be thinking of a reasonable run rate for the balance of the year? Or do things get better or worse? Just kind of curious how you think that the 1Q print on North America, what that tells us about the balance of the year specifically? And then also, if you could maybe unpack that on a price versus volume basis as well, that might be helpful. Randy Wood: You bet, Ryan. I'll cover the first part and kind of turn it over to Sam for the second part. And I think we'd characterize North America as flat to down on a full year basis. And whether that 4% carries forward or degrades slightly, improves slightly, as you know, the tricky part for us in Q4 is going to be storm volume. And last year was a relatively light storm volume year. The year before that was relatively high. So if we kind of split the difference, I think the run rate that we saw through Q1 could be pretty consistent with what we see the rest of the year. So we're planning for flat to down in our spending, our inventory, our supply chain, and we'll react up or down if we have to. But I think that's probably a good starting point. I'll let Sam cover. Ryan Connors: And then -- yes, on the price versus volume. Samuel Hinrichsen: Yes. So again, if you think about pricing, we called out that average selling prices in North America were up during the first quarter. We have a history of price stewardship, and we expect to be able to continue maintaining solid margins. Pricing is one key contributor. In addition, of course, there's cost management, there's productivity gains across the organization that are contributing to maintaining this margin profile despite the current top end situation. Ryan Connors: Yes. Okay. And then kind of -- maybe while I have you there, Sam, a bit of a below-the-line item. Pretty nice contribution from the interest, other income line, as you mentioned. Is there any color you can give us around what drove that, and how we should think about modeling that line over the balance of the year? Is that something that should continue? Or are we going to kind of revert back to normal there? Samuel Hinrichsen: So I can't go into the very specific details, but I would say interest income, of course, is driven by the regional mix of funds at the interest rates in various regions. And that's why we have seen an increase year-over-year in Q1. I'm not going to speculate on the interest rate environment, but that's what's the key driver for this improvement in Q1. Ryan Connors: Got it. Okay. And then lastly, we haven't really talked much about infrastructure here in the Q&A. And I wondered, Randy, if you can kind of unpack for us this lull in Road Zipper. I mean, obviously, it's a lumpy business and there are lulls from time to time. But is there anything we should read into that in terms of are we -- is the low-hanging fruit plucked to any degree in terms of the TAM there? Or just any color you can give us on how you're thinking about the fact that we're into a pretty light year it looks like on Road Zipper? Randy Wood: Yes. And I don't think we're anywhere near plucking all of the easy to pick fruit or addressing the cap on the TAM. This is a lumpy project-oriented business. And I think just like the irrigation business, the good news for us is we're at the table. We're engaged with our sales funnel. We're talking to specific customers about specific bridges, about specific project sites where Road Zipper is going to allow them to solve their problem better than any other option in the market. It just takes time. So this is a very different type of business. And I think as you model it out, you look at the historical lumpiness, some of the big projects that we've dumped in prior fiscal periods, we love them. When they hit it, it just creates a really difficult comp the next year because they're not -- we can't calendarize one every second quarter, every fiscal year. So this is us being transparent, I believe, in what we think we see in the market. And as we start to get better clarity on fiscal '27, fiscal '28, that's where we see more of these Road Zipper projects landing right now. And if that changes, where we see some accelerating because incremental funding is available, we'll certainly be transparent and clear with you. But I think the narrative we've shared indicates what we see this year, but it's not an indication that the market is any better, any worse, any softer than it has been. It has been lumpy project business. It's going to continue to be lumpy project business. Again, the good news is with our shift-left strategy, we've got better visibility, both short and long term. And I think that's where we're willing to be more transparent and open with you guys, so you can kind of work that into your models as well. But we see long-term growth opportunities for Road Zipper well into the future. Operator: Our next question comes from Brett Kearney with American Rebirth Opportunity. Brett Kearney: I know the most recent project win you have, Middle East North Africa includes your FieldNET capabilities. Obviously, I think those are incorporating all the Pivot sales you make in North America at this point. But just curious what you're seeing as you look to the international irrigation project funnel today, what kind of adoption appetite there is an opportunity for you all with some of your technology offerings in some of these regions? Randy Wood: I'd characterize it this way that when you're making these significant investments. These are huge agro operations where there has been basically nothing. And in the Mid East, it's essentially desert that they're converting to be these highly productive, highly efficient farms. And with the size of investments they're making, they want every piece of technology that's available to them. And this isn't a normal technology adoption curve where you start with small equipment and you migrate towards large equipment. They're starting with the biggest tractors, the biggest planters, the biggest combines, and they want every technological advantage that they can find to be as efficient as they can be in their production, in their consumption of water and energy. So I think this has really been a shift in the last 5 to 10 years where the technology has proven itself, where it brings real value to our customers. And again, at these investment levels, I think the customers are intelligent. They're smart, and they want every advantage that they can bring to the table. And certainly, FieldNET, FieldNET Advisor and the advantage that it creates for our growers is an important part of that mix. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Randy Wood for any closing remarks. Randy Wood: Thank you all again for joining us today. We appreciate your ongoing support, and we look forward to updating you on our second quarter earnings call. Thanks for joining us. Operator: Thank you for attending today's presentation. The conference has now concluded. You may now disconnect.
Operator: Hello, and welcome to the First Quarter 2026 Earnings Conference Call and Webcast. As part of the discussion today, the representatives from NTIC will be making certain forward-looking statements regarding NTIC's future financial and operating results as well as their business plans, objectives and expectations. Please be advised that these forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and that NTIC desires to avail itself of the protections of the safe harbor for these statements. Please also be advised that these actual results could differ materially from those stated or implied by the forward-looking statements due to the certain risks and uncertainties, including those described in the NTIC's most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q and recent press releases. Please read these reports and other future filings that NTIC will make with the SEC. NTIC disclaims any duty to update or revise its forward-looking statements. I would now like to hand the call over to Patrick Lynch, President and CEO. Please go ahead. G. Lynch: Good morning. I'm Patrick Lynch, NTIC's CEO, and I'm here with Matt Wolsfeld, NTIC's CFO. Please note that a press release regarding our first quarter fiscal 2026 financial results was issued earlier this morning and is available at ntic.com. During today's call, we will review various key aspects of our fiscal 2026 first quarter financial results provide a brief business update and then conclude with a question-and-answer session. Please note that when we discuss year-over-year performance, we are referring to the first quarter of our fiscal 2026 in comparison to the first quarter of last fiscal year. I'm very pleased that for first quarter, we were able to deliver record consolidated net sales, driven by the strongest year-over-year growth rate we've had since fiscal 2024. Our performance was further augmented by higher sales across key sectors, including ZERUST Oil & Gas, NTIC China and North American Natur-Tec sales. ZERUST Oil & Gas achieved record first quarter sales marking the second consecutive quarter with more than $2 million in revenue, demonstrating improving demand from both new and existing customers. Improving profitability is a top priority for NTIC in fiscal 2026 and we expect to begin to realize the benefits from the strategic investments we made over the past 3 years towards upgrading our global operations and supporting future growth. We are also focused on flattening our operating expenses and driving sales in the higher-margin segments of our business, which we expect will improve our profitability and strengthen our balance sheet this fiscal year. Overall, the start of fiscal 2026 is encouraging, and we expect these trends to support anticipated higher year-over-year sales and profitability as the year progresses. So with this overview, let's examine the drivers for the first quarter in more detail. For the first quarter ended November 30, 2025, our total consolidated net sales increased 9.2% to a quarterly record of $23.3 million as compared to the first quarter ended November 30, 2024. Broken down by business unit, this included a 58.1% increase in ZERUST Oil & Gas net sales a 6.9% increase in ZERUST Industrial net sales and a 2.2% increase in Natur-Tec product net sales. Turning to our joint venture sales, which we do not consolidate in our financial statements. Total net sales for the fiscal 2026 1st quarter by our joint ventures increased year-over-year by 2.9% to $24.5 million, reflecting improved demand across many of our joint ventures partially offset by a mid-single-digit decline at our German joint venture. We continue to closely monitor trends across our European markets for signs of stabilization following years of subdued demand as governments begin to implement targeted economic stimulus packages. We expect that any economic recovery from these stimulus packages will lead to a positive impact on our joint venture operating income in future periods, especially in Germany. Improving sales trends continued at our wholly owned NTIC China subsidiary fiscal 2026 first quarter net sales at NTIC China increased by 23.5% year-over-year to $4.9 million, demonstrating a strong demand in this geography. Furthermore, given that the majority of NTIC China sales are for domestic Chinese consumption, we believe NTIC China's exposure to U.S. tariffs is limited. We expect demand in China will continue to grow and improve in fiscal 2026 helping to support anticipated higher incremental sales and profitability in this market. We believe that China is on its way to becoming a significant market for our industrial and bioplastic segments. So we plan to continue to take steps to enhance our operations in this geography. Now moving on to ZERUST Oil & Gas. First quarter of fiscal 2026 ZERUST Oil & Gas sales were $2.4 million, a first quarter's record and an increase of 58.1% from the same period last year. This growth rate demonstrates the wider adoption of our VCI solutions by new and existing customers across the global oil and gas industry as well as at our Brazil subsidiary. As discussed on our prior call in November 2025, we announced that our 85% owned subsidiary, ZERUST Brazil, secured a 3-year contract for a major offshore project with a leading global engineering, procurement and construction, or EPC company. Under this agreement, ZERUST Brazil will be providing advanced corrosion protection solutions for Floating Production Storage and Offloading Units or FPSOs, with an estimated total value of approximately $13 million over the next 3 to 4 years based on current foreign exchange rates. We expect this project to ramp up throughout the current fiscal year and continue through calendar 2028. We believe this is a significant validation of our engineering capabilities, the scalability of our ZERUST Oil & Gas business and the reputation we've built as a trusted partner to leading offshore operators. Brazil represents one of the fastest-growing deepwater markets globally, and we believe this win provides a strong foundation for continued growth and expansion across international oil and gas markets. As indicated in prior calls, we have continually invested in our ZERUST Oil & Gas business to enhance our sales team and add resources to support anticipated future growth. This has improved our ZERUST Oil & Gas sales pipeline as the size and number of opportunities have expanded among both new and existing customers. Our pipeline includes global opportunities to protect above-ground oil storage tanks, pipeline casings and offshore oil rigs from corrosion. While the nature of this industry will always cause certain fluctuations in our ZERUST Oil & Gas sales, we still expect to see ZERUST Oil & Gas sales and profitability improved significantly in fiscal 2026 as we plan to leverage these investments and rein in operating expenses. Turning to our Natur-Tec bioplastics business. First quarter Natur-Tec sales were a quarterly record of $6 million, representing a 2.2% year-over-year increase and a 16.5% increase from the fourth quarter driven primarily by higher sales in North America. We continue to pursue several larger opportunities in North America and India for our Natur-Tec solutions that we believe holds significant promise to benefit our Natur-Tec sales in coming quarters, including advancing the compostable food packaging solution we mentioned on prior calls. Overall, we believe Natur-Tec is a best-in-class compostable plastic business that is well positioned for significant future growth in the U.S. and abroad, and we expect sales to continue to expand throughout the year. Before I turn the call over to Matt, I want to acknowledge the hard work and dedication of our global team of both employees and joint venture partners. Our success and our ability to navigate more complex economic periods are a direct result of their efforts. With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2026 first quarter. Matthew Wolsfeld: Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 9.2% in fiscal 2026 first quarter, driven by the strongest year-over-year growth rate we have achieved since fiscal 2024 because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures increased 2.9% in the first quarter. Joint venture operating income in the first quarter decreased 5.1% compared to the prior fiscal year period. Primarily due to a slight increase in operating expenses at the joint ventures. Total operating expenses in fiscal 2026 first quarter increased to $9.7 million, a 2.9% increase compared to the prior fiscal year period, primarily due to higher selling and general and administrative expenses, partially offset by a reduction in research and development expenses. We expect quarterly sales to grow faster than operating expenses as we continue to leverage recent investments and upgrades across our global operations. Gross profit as a percentage of net sales was 36% during the first 3 months ended November 30, 2025, compared to 38.3% during the prior fiscal year period. Lower gross margin for the first quarter was primarily due to a temporary supplier lead time issue. We expect gross margin to improve sequentially during fiscal 2026. NTIC reported net income of $238,000 or $0.03 per diluted share for the fiscal 2026 first quarter compared to net income of $561,000 or $0.06 per diluted share for the fiscal 2025 first quarter. For the fiscal 2026 first quarter, NTIC's non-GAAP adjusted income was $344,000 or $0.04 per diluted share compared to non-GAAP adjusted net income of $667,000 or $0.07 per diluted share for the fiscal 2025 first quarter. A reconciliation of GAAP to non-GAAP financial measures are available in our first quarter fiscal year 2026 earnings press release that was issued this morning. As of November 30, 2025, working capital was $19.4 million, including $6.4 million in cash and cash equivalents, compared to $20.4 million, including $7.3 million in cash and cash equivalents as of August 31, 2025. As of November 30, 2025, we had outstanding debt of $12 million, including $9.1 million in borrowings under our revolving line of credit. This is down slightly from outstanding debt of $12.2 million as of August 31, 2025. Reducing debt through anticipated positive operating cash flow and improving working capital efficiencies is a strategic focus in fiscal 2026. On November 30, 2025, the company had $29.3 million of investments in joint ventures, of which 53.4% or $15.6 million was in cash, with the remaining balance primarily invested in other working capital. In October 2025, NTIC's Board of Directors declared a quarterly cash dividend of $0.01 per common share that was payable on November 12, 2025, to stockholders of record on October 29, 2025. To conclude our prepared remarks, we believe our first quarter results demonstrate positive momentum building across many parts of our business. We expect higher year-over-year sales combined with improving gross margins and controlled operating expense growth through the year, which we expect to benefit our profitability in fiscal 2026. We believe we're well positioned for a strong fiscal 2026 and I look forward to sharing the progress we're making in future calls. With this overview, Patrick and I are happy to take your questions. Operator: [Operator Instructions] And our first question will be coming from Tim Clarkson of Van Clemens. Timothy Clarkson: Patrick, Matt, great quarter revenues-wise. Earnings not quite there, but obviously, sharply improved from the fourth quarter. So just getting into some of the color, what are some of the levers you guys can do to improve profitability? Matthew Wolsfeld: I think from an overall profitability standpoint, it still kind of comes back to the key fundamentals of driving sales growth, which is going to obviously increase gross margin, which is going to push money down to the operating profit line. We certainly have an expectation during the current fiscal year and what you saw from an operating expense standpoint of keeping relatively flat operating expenses and still achieving significant growth. I think the majority of the growth, typically our second quarter is one of our lower quarters. We expect it to be pretty consistent with what we saw in the first quarter with a significant amount of growth coming in the third and fourth quarter, which is pretty historically consistent. So as we see that happen, I would expect the profitability is going to stem from the gross margin dollars that are flowing through to the bottom line. The other key contributor here isn't associated with revenue is the joint venture operating profits. And kind of the expectation is that we are going to see certain growth from a joint venture level through the remainder of the year as well. So those should be the key drivers to get us back up to profitability levels that we saw 6 to 8 quarters ago, which is kind of where we expect to be towards the end of the year. Timothy Clarkson: Are there anything you could do on the expense end that would be where you can eliminate some expenses? I know you want to basically keep expenses flat, but are there any opportunities in terms of cost cutting? Matthew Wolsfeld: There are some opportunities, but there's also -- the main situation that we're up against is that we have made specific strategic investments in the oil and gas business around the world and the Natur-Tec business around the world. And additionally, we've made investments in North America from a -- both from a manufacturing investment standpoint and from a new CRM system, things like that. So I don't know that it's necessarily a matter of cutting expenses. It's more a matter of letting the revenues catch up to the increases in expenses that we saw over the past 2 years. So I think that's ultimately how we're going to get long-term profits. We don't want to cut expenses to potentially increase quarterly profits by a few cents and then ultimately hinder what would be long-term growth or the stability that we need and the people that we need for the long-term success of the business as we see Natur-Tec and oil and gas ramp up over the coming 2, 3 years. Timothy Clarkson: Now are you guys pleased with the work the sales team on the oil and gas hires from last year are doing? G. Lynch: Well, they're getting -- they're starting to put business on the books. The biggest increase you saw this year, obviously, was from ZERUST Brazil and that was a 1-year contract. The rest is now starting to pick up that [indiscernible] where they're getting business out of India and Middle East. And we hope to see Europe starting to contribute in the coming months. Operator: And our next question will be coming from Don Hall. Unknown Analyst: Did I hear my name, Don Hall? G. Lynch: Yes. We're happy to take your question. Unknown Analyst: Okay. I believe in previous calls, you mentioned the oil and gas opportunity in Brazil, plus another -- a couple of other major opportunities. Are there still other major ones that you can discuss? G. Lynch: In what business? Unknown Analyst: I am sorry, what? G. Lynch: What you're talking about oil and gas? Unknown Analyst: I can't pick you up. It's kind of fog. G. Lynch: Well, I mean, the biggest contract we have in place right now is the one in Brazil, but obviously, we're talking to other oil companies around the world and starting to make inroads. So we expect to see the business growing all over. Operator: And I'm showing no further questions. I'd now like to hand the call back to Patrick for closing remarks. G. Lynch: Thank you all for joining us this morning, and have a nice week. Operator: And this concludes today's program. Thank you for participating. You may now disconnect.
Operator: Greetings, and welcome to Oxford Industries Third Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Brian Smith from Oxford. Thank you, and you may begin. Brian Smith: Thank you, and good afternoon. Before we begin, I would like to remind participants that certain statements made on today's call and in the Q&A session may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees, and actual results may differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results of operations or our financial condition to differ are discussed in our press release issued earlier today and in documents filed by us with the SEC including the risk factors contained in our Form 10-K. We undertake no duty to update any forward-looking statements. During this call, we'll be discussing certain non-GAAP financial measures. You can find a reconciliation of non-GAAP to GAAP financial measures in our press release issued earlier today, which is posted under the Investor Relations tab of our website at oxfordinc.com. And now I'd like to introduce today's call participants. With me today are Tom Chubb, Chairman and CEO; and Scott Grassmyer, CFO and COO. Thank you for your attention. And now I'd like to turn the call over to Tom Chubb. Thomas Chubb: Good afternoon, and thank you for joining us today. As is typical for our third quarter, I'll keep my comments on Q3 relatively brief before turning to what we're seeing in the early weeks of the fourth quarter and how we are approaching the holiday season and the rest of the year. We are pleased with what we were able to accomplish during the third quarter with our financial results broadly in line with the expectations we set earlier in the year. The environment remained highly competitive and promotional, and the consumer continued to be selective with their discretionary spending, often requiring new and innovative product to catch our attention. Against that backdrop, our team stayed focused on our long-term priorities and executed well on the fundamentals of our strategy. Strong sales growth in both the Emerging Brands Group and Lilly Pulitzer offset declines at Tommy Bahama and Johnny Was. Total company comp sales were slightly positive. And while gross margins continue to reflect the pressures we've discussed in prior quarters related to tariffs, our underlying adjusted gross margin, absent that pressure, improved over last year's even in a highly promotional environment. In addition to the financial results, we made important progress on a number of key initiatives across the enterprise, starting with people, we were pleased to have realigned and strengthened our teams in Johnny Was and the Emerging Brands Group through a combination of internal promotions and hiring key executive talent from outside the company. Also at Johnny Was, we made significant progress with the business improvement plan we discussed last quarter. In Tommy Bahama, our bars and restaurants are a distinct competitive advantage, and we were pleased to have added 2 important restaurant openings during the quarter. In Lilly Pulitzer, we anniversaried last year's very successful Palm Beach Fashion show with a fashion show in Key West. Last year's event has helped fuel creative content and commercial success throughout 2025, and we expect this year's event to do the same for 2026. We also completed the renovation of our Worth Avenue Lilly Pulitzer flagship location in Palm Beach. Finally, we are in the final stages of construction of the new state-of-the-art fulfillment center that will be such an important asset to our direct-to-consumer businesses. None of these items will have immediate impact on our financial results, but are critical parts of the foundation of future success. As I previously mentioned, across the portfolio, performance varied by brand as it has for much of this year. The bright spot continued to be Lilly Pulitzer, where the brand again demonstrated a deep connection with its core consumer and delivered healthy growth in the quarter. Our Emerging Brands business also posted strong year-over-year sales gains, reflecting growing recognition, relevance, customer engagement and growth potential. Moving to Tommy Bahama. While our third quarter results did not meet our goals for the brand, we did see encouraging progress. Comps improved sequentially to down low single digits from down high single digits earlier in the year. We believe we've made meaningful headway in addressing key areas that contributed to softness early in the year, particularly around color assortment and completeness of the line, which led to disparate regional performance and softness in Florida, our most important market. There is still work to do, but we feel good about the adjustments made so far. At the same time, we continue to invest in the long-term health of the brand through thoughtful expansion of our retail and hospitality footprint. During the quarter, we reentered the important St. Armands Circle outside of Sarasota with a beautiful new full-service restaurant and retail store, which replaced our previous restaurant that was damaged and closed in 2024 due to a hurricane. This new location reinforces the strength of our hospitality model in one of our most important markets. We also opened a new Marlin Bar in the Big Island of Hawaii, further deepening our connection to a region that has been central to the Tommy Bahama brand for decades. Both locations are off to encouraging starts, and we believe they will be long-term assets for the brand. Turning to Johnny Was. We made several important changes during the quarter to strengthen the foundation of the brand and position it for long-term success. As we discussed last quarter, Johnny Was is an incredible brand with beautiful product, a loyal and engaged customer base and a hard-working, deeply dedicated team. To ensure the brand can fully capitalize on that potential, we have refreshed key leadership roles, including the promotion of Lisa Caser, our formal Chief Commercial Officer at Johnny Was, to lead the brand as President of Johnny Was. Lisa is an experienced business leader with over 25 years of leadership roles at Neiman Marcus, including 10 years as SVP, General Merchandising Manager of Women's ready-to-wear. We also made changes to the lead designer and Head of retail positions to bring sharper creative focus, strong merchandising discipline and more consistent execution across the business. Earlier in the year, we also engaged an outside specialist to help us assess the Johnny Was business and identify the actions needed to meaningfully improve profitability. That comprehensive project has now been largely completed, and we have begun executing against its recommendations with clear priorities around creative direction, merchandising and planning, marketing efficiency and retail performance. While we are still early in the process, we're encouraged by the focus, energy and alignment we are seeing across the team. We believe that the combination of refreshed leadership with a very capable incumbent team and a clear actionable plan will allow us to reinforce the fundamentals of the brand and unlock the substantial long-term opportunity we continue to see in Johnny Was. With that backdrop, let me turn to the fourth quarter and our early read on the holiday. As a reminder, our comps in the fourth quarter last year were flat and benefited from a post-election bounce. When evaluating the early results of the fourth quarter this year, it is clear that the softer start to the holiday season reflects a combination of tariff-related product limitations and a holiday period that has been more promotional across the industry compared with last year that made for a difficult environment, along with the more challenging comps than earlier in the year. Most significantly, our brands have experienced challenges in our product assortments that trace back to the tariff-related sourcing decisions made earlier in the year. When our brands were building their holiday and resort lines last spring, the tariff landscape was highly uncertain with the potential for substantial increases on certain China origin categories. As a result, we made difficult but prudent choices to reduce our exposure in categories heavily reliant on China, for example, sweaters and other cold weather product that are important at this time of year. Those decisions were appropriate given the information available at the time. However, they left us with assortments that were not as complete or as comprehensive as we would like for the holiday season. Sweaters in particular have historically been strong drivers of fourth quarter demand across our portfolio and our reduced presence in this category has been a meaningful headwind. At the same time, the holiday selling period has been more promotional than last year with consumers showing heightened sensitivity to value and a willingness to wait for deeper discounts. While our promotional cadence and depth were consistent with our brand-appropriate approach, many competitors entered the season earlier and more aggressively. That dynamic contributed to a slower start for us in the opening weeks of the quarter. At Lilly Pulitzer, our holiday promotions included curated gift with purchase events and a broader seasonal sale, both of which resonated well with our core consumer, and we saw strong engagement with many of our most giftable styles and capsules. Unfortunately, our successful gift with purchase events were somewhat limited due to high Chinese tariffs and the difficulty of shifting the production of these items elsewhere. Similarly, we identified that there were gaps in our assortments related to the tariff environment, particularly in novelty items and certain other seasonal products that could not be quickly moved out of China, which limited our ability to fully serve demand. We also leaned into our core programs to mitigate tariff exposure, which reduced the level of newness we might have otherwise offered. At Tommy Bahama, we built on themes introduced earlier in the year, offering a compelling mix of gift-ready items and cold weather seasonal product. But as with Lilly, many of the categories that historically carry momentum for us during holiday, especially sweaters and other cold weather essentials that are heavily China reliant were reduced as a result of the tariff uncertainty earlier in the year. Those gaps, coupled with a promotional marketplace that moved earlier and deeper than usual, created incremental pressure. Despite these challenges, we have seen continued encouraging response in our Tommy Bahama Boracay pants that we discussed last quarter. While the price point increased from $138 to $158, new product innovation has led to significant sell-throughs and the Boracay pant has played meaningfully into the holiday gifting mindset. This success also highlights some of the trends we have seen in the market where consumers are gravitating to versatile products that can be worn to work and casual events and are less discretionary than some other categories. At Johnny Was, the customer continues to connect most strongly with the unique artful product that defines the brand. Elevated embellished pieces, rich textures and vibrant color stories, again resonated with loyalists. But similar to our other brands, limitations in certain seasonal categories due to tariff-driven sourcing adjustments, along with heightened promotional intensity across the marketplace created a more challenging backdrop for converting that interest at the levels we had anticipated early in the season. While still small in absolute terms, our emerging brand group continues to be a meaningful source of energy and growth within the portfolio. Southern Tide, The Beaufort Bonnet Company and Duck Head have each built strong momentum this year, and we are seeing that momentum carry into the holiday season with a stronger start than what we have seen in our 3 larger brands. These brands benefit from exceptionally loyal customer bases, focused product stories and highly engaged teams and their performance is a testament to the opportunity we believe exists in each of them. As we continue to invest in their capabilities, particularly in product, marketing and retail expansion, we remain very encouraged by the role of the Emerging Brands Group can play in our long-term growth algorithm. Taken together, these early holiday trends reinforce what we observed throughout the year when we deliver fresh, differentiated product that aligns with our brand heritage, the customer responds. However, given today's promotional climate, achieving that response requires a more competitive value proposition. As a result. And as Scott will detail in a few minutes, we now expect our fourth quarter performance to land below our previous guidance, and we are revising our outlook for the remainder of the year. And that is our focus across the portfolio, concentrating on what makes each brand special and ensuring that what we put in front of the consumer inspires confidence, joy and a sense of possibility. That same focus has guided our product development and marketing plans throughout the year. It's why we have leaned into newness and innovation across our brands, and it's why we continue refining our offerings to match the customers' mindset heading into resort in the early spring period. While the environment remains dynamic, we are approaching the remainder of the year with clear-eyed realism. We recognize that the consumer continues to navigate uncertainty and that promotional intensity remains high, but our teams are executing with discipline, and we believe we are well positioned to meet the consumer where she is today while investing in the long-term strength and potential of our business through initiatives such as those I outlined at the beginning of the call. As we look ahead to fiscal 2026, we are approaching the year with a clear focus on improving profitability and with confidence in the levers we have already begun to put in place. We expect to begin realizing the benefit of cost reduction initiatives that we started during fiscal 2025, including efforts around indirect spend and other SG&A-related efficiencies across the enterprise. At Johnny Was, the significant merchandising and marketing work we undertook this year should begin to bear fruit, and we also expect to extend the merchandising efficiency project we piloted at Johnny Was to the other brands in our portfolio. In addition, we will continue to focus on input cost reductions and tariff mitigation as we refine our sourcing strategies. Capital expenditures will decline significantly as we complete our new fulfillment center in Lyon, Georgia, which will allow us to meaningfully reduce our debt levels. All of these actions position us well to make tangible progress on profitability while continuing to invest with discipline in the long-term strength of our brands. As always, I want to express my deep appreciation for our people across the enterprise. Their resilience, creativity and focus on our customer continue to be the foundation of everything we do. With that, I'll turn the call over to Scott for more detailed commentary on our updated financial outlook. K. Grassmyer: Thank you, Tom. As Tom mentioned, our teams have shown great discipline and resilience in executing our plan against the backdrop of a challenging consumer and macro environment. In the third quarter, our teams were able to deliver top and bottom line results within our previously issued guidance range. In the third quarter of fiscal 2025, consolidated net sales were $307 million compared to sales of $308 million in the third quarter of fiscal 2024 and within our guidance range of $295 million to $310 million. Our direct-to-consumer channels were up in total with a total company comp increase of 2%, which was in line with our guidance for the quarter. The direct-to-consumer increase was led by increased e-commerce sales of 5% and increased sales in our food and beverage and full-price brick-and-mortar locations of 3% and 1%, respectively. The increases in full-price brick-and-mortar were driven primarily by the addition of noncomp locations, with comps in our restaurant and full-price brick-and-mortar locations down slightly at 2% and 1%, respectively. Sales in our outlet locations were comparable to the prior year. Our increased direct-to-consumer sales were offset by decreased sales in the wholesale channel of 11%, driven primarily by decreases in off-price business. By brand, Lilly Pulitzer delivered another strong quarter with total sales increasing year-over-year, driven by double-digit growth in retail and high single-digit growth in e-commerce, partially offset by a decline in the wholesale channel. The positive comp sales at Lilly Pulitzer, along with positive comp sales and overall sales growth in our emerging brands businesses helped to offset the low single-digit negative comp at Tommy Bahama and high single-digit negative comp at Johnny Was that led to sales decreases in both businesses. Adjusted gross margin contracted 200 basis points to 61%, driven by approximately $8 million or 260 basis points of increased cost of goods sold from additional tariffs implemented in fiscal 2025, net of mitigation efforts and a change in sales mix with a higher proportion of net sales occurring during promotional and clearance events at Tommy Bahama and Lilly Pulitzer. These decreases were partially offset by lower freight cost to consumers due to improved carrier rates from contract renegotiations, a change in sales mix with wholesale sales representing a lower proportion of net sales and decreased freight rates associated with shipping our products from our vendors. Adjusted SG&A expenses increased 4% to $209 million compared to $201 million last year, with approximately 5% or approximately 70% of the increase due to increases in employment costs, occupancy costs and depreciation expenses due to the opening of 16 net new brick-and-mortar locations since the third quarter of fiscal 2024. This includes the 13 net new stores, including 3 Tommy Bahama Marlin Bars and 1 full-service restaurant opened in the first 9 months of 2025. We also incurred preopening expenses related to some planned new stores scheduled to open in the fourth quarter. The result of this yielded an $18 million adjusted operating loss or negative 5.8% operating margin compared to a 3% operating loss or negative 1.1% in the prior year. The decrease in adjusted operating income reflects the impact of our investments in a challenging consumer and macro environment. Moving beyond operating income. Our adjusted effective tax rate was 30.3% was higher than we anticipated due to certain discrete items that were amplified by our operating loss. Interest expense was $1 million higher compared to the third quarter of fiscal 2024, resulting from higher average debt levels. With all this, we ended with $0.92 of adjusted net loss per share. As a result of interim impairment assessments performed in the third quarter of fiscal 2025, the company recognized noncash impairment charges totaling $61 million, primarily related to the Johnny Was trademark. The impairment charges for Johnny Was reflect the impact of organizational realignment activities in the third quarter of 2025, including changes to the Johnny Was executive team that Tom discussed. Revised future projections based on Johnny Was recent negative trends in net sales and operating results and challenges in mitigating elevated tariffs. I'll now move on to our balance sheet, beginning with inventory. During the third quarter of fiscal 2025, inventory increased $1 million or 1% on a LIFO basis and $6 million or 3% on a FIFO basis compared to the third quarter of 2024, with inventory increasing primarily as a result of $4 million of additional costs capitalized into inventory related to the U.S. tariff implemented in 2025. We ended the quarter with long-term debt of $140 million compared to $81 million at the end of the second quarter and $31 million at the end of fiscal 2024. Our debt historically increases during the third quarter, primarily due to seasonal fluctuations in cash flow with lower earnings during the third quarter, resulting in increased cash needs. Cash flow from operations provided $70 million in the first 9 months of fiscal 2025 compared to $104 million in the first 9 months of fiscal 2024, driven primarily by lower net earnings and changes in working capital needs. We also had $55 million of share repurchases, capital expenditures of $93 million, primarily related to Lyons, Georgia distribution center project, which remains on track for completion and go live in early 2026 and the addition of new brick-and-mortar locations and $32 million of dividends that led to an increase in our long-term debt balance since the beginning of the year. I'll now spend some time on our updated outlook for 2025. Comp sales figures in the fourth quarter to date are negative in the mid-single-digit range, which is lower than our previous expectations of flat to low single-digit positive comps. While our average order value has increased nicely, traffic has been mixed, but mostly down, and conversion has been very challenging across our portfolio. Due to the slow start to the holiday season, we are revising our guidance for the remainder of the year with the expectation that the mid-single-digit comp will continue for the remainder of the year. For the full year, net sales are expected to be between $1.47 billion and $1.49 billion, reflecting a decline of 2% to 3% compared to sales of $1.52 billion in fiscal 2024. Our revised sales plan for the full year of '25 includes decreases in our Tommy Bahama and Johnny West segments, driven primarily by negative comps, partially offset by growth in our Lilly Pulitzer and Emerging Brands segments, driven by positive comps and new store locations. By distribution channel, the sales plan consists of a low single-digit decrease in most channels, including wholesale, full-price retail, e-commerce and outlets, partially offset by a low to mid-single-digit increase in our food and beverage channel that is benefiting from the addition of 3 new Marlin Bar locations and 1 new full-service restaurant opened during the year. For fiscal 2025, our current annual guidance reflects a net tariff impact of approximately $25 million to $30 million or approximately $1.25 to $1.50 per share. While tariffs represent the primary driver of margin contraction this year, we also expect continued promotional activity across our brands to weigh on margins as consumers remain highly responsive to value and deal-oriented shopping in the current macroeconomic environment. We expect our gross margins for the year to contract by approximately 200 basis points. In addition to lower sales and gross margins, we expect SG&A to grow in the mid-single-digit range, primarily due to the impact of our recent continued investments in our businesses, including the annualization of incremental SG&A from the 30 net new locations added during fiscal 2024, incremental SG&A related to the addition of approximately 15 net new locations this year, including 3 new Tommy Bahama Marlin bars and a new full-service restaurant. Also within operating income, we expect lower royalties and other income of approximately $3 million in fiscal 2025. Additionally, our fiscal 2025 guidance includes the unfavorable impact of nonoperating items, including $7 million of interest expense compared to $2 million in 2024 or an approximate $0.20 to $0.25 incremental EPS impact. Increased debt levels in fiscal 2025 are due to our continued capital expenditures on the Lyons, Georgia distribution center, technology investments and return of capital to shareholders exceeding cash flow from operations. We also expect a higher adjusted effective tax rate of approximately 25% compared to 20.9% in 2024. The higher tax rate is primarily a result of a significant change in the impact that our annual stock vesting had on income tax expense in 2025 compared to 2024. We anticipate the higher tax rate will result in an approximate $0.15 to $0.20 per share impact. Considering all these items, including the $1.25 to $1.50 per share impact from tariffs, higher interest expense and a higher tax rate, we have revised our guidance and expect 2025 adjusted EPS to be between $2.20 and $2.40 versus adjusted EPS of $6.68 last year. The biggest drivers of the decrease in EPS guidance includes a reduction of our fourth quarter comp assumption from low single-digit positive comps to a mid-single-digit negative comp. A decrease in royalty and other income from lower order expectations from key licensing partners who customers have elevated inventory levels that will lead to a shift in orders from Q4 to Q1 of next year; an increase in SG&A, primarily resulting from increased consulting costs related to our ongoing projects to improve operating results and some additional costs related to our new Lyons, Georgia distribution center. In the fourth quarter of 2025, we expect sales of $365 million to $385 million compared to sales of $391 million in the fourth quarter of 2024. This primarily reflects our mid-single-digit negative comp assumption and decreased wholesale sales in the low single-digit range, partially offset by the impact from noncomp stores. We also expect gross margin to contract approximately 300 basis points, primarily driven by increased tariffs and a higher proportion of net sales occurring during promotional and clearance events. SG&A to grow in the low to mid-single-digit range, primarily related to the new store locations, increased interest expense of $1 million, decreased royalty and other income of $1 million and an effective tax rate of approximately 26%. We expect this to result in fourth quarter adjusted EPS between $0 and $0.20 compared to $1.37 last year. I will now discuss our CapEx outlook for the remainder of the year. Consistent with our prior guidance, we expect capital expenditures for the year to be approximately $120 million compared to a total of $134 million in fiscal 2024. The remaining capital expenditures relate to completing the new distribution center and the execution of our current pipeline of new stores at Tommy Bahama and Lilly Pulitzer. We expect this elevated capital expenditure level to moderate significantly in 2026 and beyond after the completion of the Lions Georgia project. Consistent with the seasonal nature of our business, we expect a modest decrease in outstanding borrowings in the fourth quarter. Thank you for your time today, and we will now turn the call over for questions. Bond? Operator: [Operator Instructions] Our first question comes from Ashley Owens with KeyBanc Capital Markets. Ashley Owens: So just first and foremost, I appreciate all the color on what was exactly a gap within each of the banners in terms of assortment for the holiday. But just moving forward as we navigate the quarter, just how meaningful would you expect this to be for the upcoming season? Is it something that's been corrected? Or are you observing some disruption still? Just want to understand how much of holiday is now fully aligned versus where you originally planned? And then maybe on that, I know China is complex right now and that it might be ironing out a little bit, but would ask if this gap -- is this shifting your viewpoint or sourcing strategy moving forward? Would you try to diversify further, place orders further in advance? Just any color there. Thomas Chubb: Yes. I think the big thing and while we did give a lot of detail, one thing that we didn't really call out specifically was that it's really what's on the floor right now that most impacted some of our sourcing decisions. And the reason is at the time that we were placing the buys for what's on the floor right now corresponded with that brief period of time where the duty or the tariff on China was going to be 145%. When it's been 20% or 27% or whatever, that's something that we could make a conscious decision to just stay in China with a particular product if we needed to and just try to take various routes to mitigate that tariff. When we were looking at 145%, which that's off the table at this point, but that was right when we were placing the buys for what's on the floor now. lots of stuff we were able to move out of China. Tommy and Lilly are mostly out of China, if not completely. But sweaters are the one category, and there are a couple of other ones. Sweater is the big one, but there are just not a lot of -- haven't historically been great resources that we could go to outside of China. So what we decided to do, Ashley, and at the time, I think it was the right call. We knew we couldn't bear that much tariff. So we really cut back the sweater assortment and tried to fill it in with other products. You look at our assortment right now, and you wish you had the sweaters. And that's really what we were talking about. So by the time you get to spring, that had settled down a lot. The tariff stuff is still a little bit up in the air, but it settled down a lot, and we were able to either move the stuff or know that it was going to come in at a tariff rate that we could deal with otherwise. So for spring, I don't think we have the same kind of impacts. We still have tariff issues that we have to deal with, but they're not going to impact the assortment the way that they have for this season. Does that help? Ashley Owens: Yes, that's super helpful. Just a couple of other questions really quickly. So I think you mentioned earlier that competitors were more aggressive with promotions for holiday and also earlier, which created that tougher backdrop. Any insight as to what you're seeing in the marketplace now in terms of that and if the intensity has moderated, but also how that's helping to inform your promo strategy for the balance of the year? And then additionally, just following your leadership refresh and then the external assessment on Johnny Was. Would be curious as to what emerged as the key priorities you're now focused on? And then also as you look out to 2026, key objectives for the brand? And should we be thinking of this as another period of stabilization? Or any color you could provide us on some of the road map or some of the key building blocks for stabilizing Johnny? Thomas Chubb: Okay. So with respect to the promotional sort of intensity out there, I would say right now, it still feels quite high, but we're a little bit in that in between time between the Black Friday, Cyber Monday weekend and the final stretch, and those are usually the most promotional times. I don't think it's really retracted, but I'm not sure it's taken another step up yet but wouldn't be surprised to see that happen. And we're going to try to be responsive to that in brand-appropriate ways. I think the catchword in all the brands is to stay nimble. We do want to make sure that we're not totally selling out our brands, but we're also thinking about things that we can do to respond to the marketplace. The one other thing I'll point out, and this is this calendar that we have this year where there are 27 days between Thanksgiving and Christmas and Christmas falls on a Thursday. The last time we had that calendar was in 2014. And that year, the business sort of came very late. If you looked at the sales build through the Thanksgiving to Christmas selling period, it really came on late. Last year, if you remember, you had Christmas on Wednesday. So this year, they got an additional weekday to shop, which could be meaningful. And also, it allows us to cut off e-com shipments probably on Saturday or in some cases, even Sunday and still have people feeling good that they're going to get them by Christmas, while last year, that was mostly on Friday that we were cutting off. So there are some things there that we kind of built the current trajectory into our forecast, but I think there's some reason to hope that it could -- the season could rally a bit. I don't think it's going to be a great one, but there are some differences there that are worth noting. And then on the Johnny Was plan, the -- I will say a couple of things that the game plan was developed by the team at Johnny Was with some outside assistance, but it's very much the team's plan. Lisa Kaiser, who's now the President of Johnny Was, was part of that team. She's relatively new to Johnny Was, but she's been with us for several months. She was the Chief Commercial Officer before, and she was very, very much central to the development of that plan. So the refreshment of the leadership does not entail, I would say, any change in the direction of the plan that we've been working on. And as we talked about last quarter, the keys to that are merchandising effectiveness, which is about having better assortments that hit -- have the right level of investment in the right price points, the right product categories, getting that to the stores at the right time and in the right store level assortments. And all of that will drive, we believe, some incremental sales versus what we would have otherwise had and also improve the margins, improve full price sell-through and ultimately gross margin. And then the other -- 2 other big areas of focus by the team, and again, it's the team's plan, really the same team. We've just added a few more people and elevated a few people, including Lisa, who we're very excited about. But the second element is about marketing efficiency. And that's really just more effectively spending the dollars that we spend to drive better results. And some of that, we've already started to kick in. And I will say what we're seeing to date is encouraging in that we're actually getting, I would call it, better efficiency out of the spend that we've done in the last month or so, maybe a little longer than that. And then the last thing is about improving the go-to-market process and calendar, and that's something that the whole team led by Lisa is they're very bought into that. Lisa is a big believer in that kind of discipline. So I think this -- the refreshment of the leadership team and the elevation doesn't change the plan because they all developed the plan, but it enhances our ability to execute it well. Ashley Owens: Great. Appreciate all the information, and I'll pass it along, but best of luck. Operator: Our next question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: I wanted to dig into wholesale a little bit. I know it's a relatively smaller piece of the business, but just curious if you can share what's going on there. It sounds like your wholesale partners are being a bit more cautious with orders, but there's maybe a little bit more inventory in the channel. And then I think you mentioned that off-price was going to be down. Is that a strategic plan? And maybe just elaborate on what's going on there. Thomas Chubb: I think on the -- overall on the wholesale, I think it is a level of concern and caution by the retailers. And I would say most, especially the specialty retailers that are a big part of our wholesale base. And during uncertain times, they tend to pull back a bit, and I think we're seeing that now. And Scott, I don't know if you want to elaborate on the off-price situation a bit. K. Grassmyer: Yes. Yes, we did have less inventory that needed to be liquidated through those channels. So we are trying to keep our owner inventory and hopefully, we'll continue to have less that we have to put through those channels. Janine Hoffman Stichter: Got it. And then just thinking through the tariffs, as you're just now seeing the impact of the products that you were planning, I guess, in April or May when the China tariffs were 145%, is the Q4 what we should think of as a peak headwind from tariffs? Or how much should we think about continuing into the first quarter of next year? Thomas Chubb: Well, I think in terms of it -- the impact it had on our product assortment, I think it is peak. I think as we get into spring, we were able to make the product that we wanted to make it somewhere that was a manageable level of tariff. In terms of the impact, the financial impact of tariffs, remember, we didn't have them during the first quarter of last year. really, they didn't really kick in until later in the year. So first quarter, you're not going apples-to-apples. And then as you get later in the year, you start to lap the tariffs. I don't know if you want to add. K. Grassmyer: Yes, yes. We accelerated a lot of products early in the year, knowing that tariffs were going to be coming or fearful they are going to be coming. So we were able to most of the first quarter had very, very minimal. Now we go into first quarter of next year, everything will have some tariff on it, but we will have some price increases to at least help mitigate that impact. As we get later in the year, we'll be going apples-to-apples with tariffs and hopefully have a little bit more mitigation price-wise as the year moves on. Operator: Our next question comes from Joseph Civello with Truist Securities. Joseph Civello: Following up on wholesale a bit, I understand the general cautious tone from retail partners. But can you give any incremental color on your sort of competitive positioning within the channel and maybe as we get past the tariff pressures on inventory and stuff like that, that you're facing right now? Thomas Chubb: Well, I think through third quarter, our relative performance to the extent we know, and we don't always have perfect information, but I think we performed well, and I don't think we -- for the -- overall, I would say, well, there were small pockets where maybe that was not the case. But I would say, overall, our performance was quite good on the retail floor. For the fourth quarter and the holiday, I think it's too early to know for sure. We don't have enough data, but my hunch is that we're going to continue to perform well relative to the rest of the floor, and it's more about the general caution. Joseph Civello: Got it. Makes sense. And then if we could also just get a little bit more color on thoughts around price increases as we go through the spring, which I believe is like the original trajectory you're looking at? K. Grassmyer: Yes. We do have some price increases in for the fall holiday. period, but there will be more in the spring. But again, we'll have the full tariff load coming in that inventory. And then we're looking at next fall pricing on are there any adjustments we -- additional adjustments we need to make. So I think there will be -- once we get out the early part of next year, the pricing should -- the goal is to have it mitigate the tariff dollars. I don't think we'll get the percentage quite mitigated, but the dollars once we get out of the early part of the year. The goal is to have the pricing mitigate the tariff dollars. Operator: Our next question comes from Paul Lejuez with Citigroup. Tracy Kogan: It's Tracy Kogan filling in for Paul. I had a question about what you're seeing quarter-to-date. And outside of the key sweater category, can you talk about the trends there in some of those other categories and also talk about trends by brand quarter-to-date. Is it pretty broad-based weakness you're seeing across the brands? Or is there a big deviation of one brand or the other? Thomas Chubb: Sure. Thank you, Tracy. Well, I would say that -- and we talked about this in the prepared remarks, but the big 3 brands are all relatively weak at the moment. And the smaller brands are still sort of humming along. They were plus 17% in the third quarter, and they're continuing to have a strong fourth quarter, while the big brands are where we're really seeing the softness. And then in terms of product, we also talked about that a little bit. And I think in Lilly, we're -- because of the China tariff situation and the threat of 145%, China is where we make a lot of our more embellished kind of novelty type stuff, things with sparkles and [indiscernible] and bows and that kind of stuff. And so we've just got less of that stuff. And so the consumer is almost being forced into some things that -- I mean, Lilly is never basic product that within the Lilly spectrum are a little more tame. And then in Tommy Bahama, we've actually seen very good performance in things like the Boracay pant which is basically a Chino. It's a really great one, really nice one, but it's a chino pant. And that, as we talked about third quarter and again this quarter, we introduced a new one or I say third quarter, second quarter. We introduced it earlier in the year. It's at 158 versus 138. It does have some new features and benefits, but it's sold just incredibly well. And actually, we're selling a lot more of them than we sold the old one last year. And then also things like long sweet sleeve wovens are performing well, some of the second layer knits. And I think the kind of theme to a lot of those things is versatility, things that can be worn on a lot of different use occasions. But we'll see more as the season develops, Tracy. Operator: Our next question comes from Mauricio Serna with UBS. Mauricio Serna Vega: I guess I understand now in this fourth quarter, you're experiencing some assortment issues that's related to the sweaters and the move out of China for that -- for this particular season. But as you think about the spring 2026 season, how are you thinking about your assortment, how ready you are in terms of different -- the 3 big brands, I guess, and the potential for maybe after getting through this bit of a hiccup in Q4, maybe having stronger results in the first half of next year? Thomas Chubb: I think the challenges to the assortment were really mostly for what's on the floor right now. I think as we get into spring, by the time we were placing those buys the 145% tariff was off the table and/or we had found other places to make things. So I don't think we'll have that challenge so much in the spring. As Scott mentioned a minute ago, the tariff issue for the spring will just be that this year we will have tariffs, whereas in spring of last year, we didn't really have them yet because that been implemented and/or we were pulled in inventory ahead of them. Mauricio Serna Vega: Got it. And just a reminder, what kind of price increase are you planning for Spring '26 to offset the tariffs? K. Grassmyer: Yes. It's kind of varying, but it's ranging from 4 to say 8%, but some of it, the ones that are more in the 8% or more of the -- it's more a little more elevated in mix. So I think for the tariff piece of it around 4 which kind of offsets the dollar impact. Yes. Yes, not quite the margin impact, but the dollar impact. Operator: This now concludes our question-and-answer session. I would like to turn the call back over to Tom Chubb for closing comments. Thomas Chubb: Thanks to all of you very much for your interest. We look forward to talking to you again in March. And until then, I hope you have a happy holiday season. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.
Operator: Greetings, and welcome to Torrid Holdings Third Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Chinwe Abaelu, Chief Accounting Officer and Senior Vice President. Thank you. You may begin. Chinwe Abaelu: Good afternoon, everyone, and thank you for joining Torrid's call today to discuss our financial results for the third quarter of fiscal 2025, which we released this afternoon and can be found on our website at investors.torrid.com. With me on the call today are Lisa Harper, Chief Executive Officer of Torrid; and Paula Dempsey, the Chief Financial Officer. Ashlee Wheeler, our Chief Strategy and Planning Officer, is also present and will be participating in the Q&A session. Before we get started, I would like to remind you of the company's safe harbor language, which I'm sure you're familiar with. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements may include, but are not limited to, statements containing the words expect, believe, plan, anticipate, will, may, should, estimate and other words and terms of similar meaning. All forward-looking statements are based on current expectations and assumptions as of today, December 3, 2025. These statements are subject to risks and uncertainties that could cause actual results to differ materially. For further discussion of risks related to our business, see our filings with the SEC. With that, I'll turn it over to Lisa. Lisa Harper: Thank you, Chinwe. Hello, everyone, and thank you for joining us today. I'll review our third quarter performance and provide an update on our strategic initiatives, including the enhancement of our product assortment, our commitment to the growth of our sub-brands, the expansion of opening price point strategy and execution on our store optimization plan. Then I'll turn the call over to Paula to discuss the financials. We are clearly disappointed with our overall performance this quarter. Despite some areas of strength, it was more than offset by missteps in our overall assortment mix that we are addressing head on with decisive corrective actions, and I'll discuss that shortly. For the quarter, while sales came in at the low end of our guidance, profitability was dampened by deeper promotional activity than we had planned, impacting our adjusted EBITDA. We delivered third quarter sales of $235 million and adjusted EBITDA of $9.8 million. I want to be clear, these results largely reflected execution issues that are within our control. Let me walk you through the factors that influenced our results. This quarter delivered strong performance in several key categories with denim, non-denim, dresses and intimates meeting our expectations, all generating positive comparable growth. However, this improvement was more than offset by missteps in our tops and jackets category. Tops represented approximately half of the year-over-year sales miss this quarter. Specifically, we shifted too heavily towards fashion-forward designs at the expense of our core assortments and established franchises. While innovation is important, the shift moved us too far from the functional replenishable items. Our customer feedback has been invaluable in guiding our course correction. We are successfully attracting and reactivating consumers who embrace our elevated fashion and lifestyle offerings across our sub-brands. However, our loyal long-standing customers continue to rely on us for their core ward drove essentials and their solution-oriented products and trusted fabrics with evolutionary rather than revolutionary style updates. Our denim category exemplifies the balanced approach we're implementing going forward. In Q3, we successfully integrated fashion elements while preserving our core franchise DNA, delivering mid-single-digit growth on top of last year's double-digit performance. This demonstrates our ability to innovate within our customers' expectations, and we're applying those learnings across all categories moving forward. We are taking decisive action to address these challenges with clear time lines and measurable outcomes. First, we've strengthened our merchandising foundation by implementing enhanced guardrails in our merchandising process and building a more robust assortment planning function. I'm personally overseeing both initiatives to ensure rapid execution and accountability. Secondly, we're actively addressing near-term assortment gaps. We've initiated chase orders for our key franchises, focusing on the core fabrications and silhouettes our customers expect in both knits and woven tops. These products will begin arriving in January, positioning us to see sequential improvement in knit and woven performance by the end of Q4 with accelerating momentum into Q1 2026. Looking ahead, we've completed a comprehensive review of our spring/summer 2026 buying strategy. We're rebalancing our investments to deliver the right mix across categories, fits, fabrics and end users, ensuring we meet our customers where they are while maintaining our innovative edge. These actions reflect our commitment to operational excellence and customer centricity. We have clear visibility into the path forward and confidence in our ability to return these categories to growth. Shifting to footwear. Our strategic decision to pause the footwall category in response to tariff-driven cost pressures was sound, but we underestimated the attachment rate impact. The loss of this anchor category resulted in lower overall basket sizes and transaction frequency, leading to what we estimate as an approximate $12.5 million in lost sales this quarter, of which $10 million was contemplated. The timing amplified the impact as October represents our peak boot selling season, which historically drives some of our highest attachment rates of the year. We've taken decisive action to quickly course correct. We reintroduced a carefully curated footwear assortment in mid-November and early performance has been encouraging. We've restructured our sourcing and SKU mix to mitigate tariff exposure while maintaining the category's ability to drive attachment. Based on what we're seeing, we expect to scale footwear back to historical sale levels of approximately $40 million in 2026, but importantly, an improved profitability given our more disciplined approach to the category. This positions us to recapture both the direct footwear revenue and the attachment-driven sales we lost during the temporary pause. Now turning to our strategic initiatives. We are focused on enhancing our product offering by expanding sub-brands and strategically introducing an opening price point strategy designed to increase market share through customer acquisition and increase frequency among our loyal customers. Our sub-brand strategy is working and is on track to deliver approximately $80 million in sales this year, attracting new, reactivating lapsed and increasing spend among our high-value customers. These lifestyle concepts offer unique collections that provide newness and excitement while broadening our customer base. Importantly, sub-brands create a halo effect, driving attachment rates to core categories and supporting customer reactivation through targeted community and influencer marketing. Looking ahead to 2026, we're implementing a more strategically balanced assortment architecture. Approximately 30% of our assortment offering will be opening price points, developed in close partnership with our merchandising design and product development teams to ensure we maintain our quality standards while delivering accessible value to customers. We are excited about momentum in our intimates business with 3 new bra launches planned for 2026, our first substantive bra introduction since 2019, representing significant innovation in this important category. Bras as a category drives strong customer acquisition and loyalty and engagement, and we believe there is significant runway in this business. On the marketing front, we are committed to a balanced approach with emphasis on both mid- and upper funnel awareness and acquisition as well as lower funnel conversion and retention. This includes increased digital media investment, a robust influencer strategy and several in-person activation. In 2026, you will see even greater expansion of these community and brand-building engagement efforts. Our popular model search campaign ran from September to November this year and was done through our digital channels, supporting a broader reach. We had an incredible response again this year, so much so that we selected 5 top models, one from each age demographic ranging from 18 to 50-plus, showcasing the range and relevance of our brand and community. Additionally, we have improved the value proposition of our loyalty program and our private label credit card, which drives significant expansion in customer lifetime value. We remain committed to our store optimization strategy, and I'm pleased to report we're executing exceptionally well against our plan. As consumer preferences continue to shift toward digital channels, we're proactively rightsizing our physical footprint to deploy capital more efficiently and enhance shareholder returns. Our execution remains on track. We closed 15 stores in Q3, bringing our year-to-date total to 74 stores, and we continue to expect approximately 180 closures for the full year. Importantly, we're seeing strong retention metrics aligned with our expectations that validate our approach. Customer retention from this year's closures is running in line with our expectations, demonstrating the strength of our omnichannel ecosystem, the success of our enhanced retention strategies, including multi-touch communication plans and our ability to successfully migrate customers to nearby locations and digital channels. With 95% of customers engaged in our loyalty program, we remain well positioned to effectively migrate customers to nearby stores and digital channels. The financial benefits are substantial and will accelerate as we move through this optimization. These closures are expected to contribute significant adjusted EBITDA margin benefit in 2026, while also generating significant free cash flow improvement that will provide increased flexibility for future strategic investments. Now I'll turn the call over to Paula to discuss the financials. Paula Dempsey: Thank you, Lisa. Good afternoon, everyone, and thank you for joining us today. I'll begin with a review of our third quarter financial performance and then provide our outlook for the remainder of fiscal 2025. While sales landed at the low end of our guidance, softer demand in our digital channel required higher-than-planned promotional activity, which has pressured adjusted EBITDA. At the same time, we continue to realize meaningful benefits from our store optimization initiatives, resulting in 11.5% year-over-year reduction in SG&A. We remain committed to disciplined inventory management and ended the quarter with inventory down 6.8% compared to last year. Net sales for the third quarter were $235.2 million compared to $263.8 million in the prior year. Comparable sales declined 8.3% and our tariff-related pause in the shoe category drove approximately 400 basis points to this overall decline as we temporarily scaled back while navigating elevated import costs in the category. Gross profit was $82.2 million versus $95.2 million last year. Gross margin was 34.9% compared to 36.1% in the prior year, reflecting higher promotions and deleverage on the lower sales base. SG&A expenses continue to reflect the disciplined cost structure we're building across the enterprise. SG&A was favorable by $8.6 million, resulting in $66.3 million for the quarter compared to $74.9 million a year ago. As a percentage of net sales, SG&A leveraged 30 basis points to 28.2%. This year-over-year improvement is a direct result of our multiyear transformation to structurally reduce operating expenses. Benefits from our store optimization initiatives and our focused approach to organizational prioritization are enabling us to reduce fixed costs. These gains reflect more than store closures alone. They represent a broader shift towards a more efficient, more variable cost structure designed to flex with demand, strengthen margin resilience and enhance free cash flow. As store optimization progresses, we expect further SG&A leverage and incremental liquidity benefits in fiscal '26. Marketing investment increased by $2.7 million to $15.7 million as we leaned intentionally into customer acquisition and brand visibility during the quarter. These investments support our long-term plan to strengthen top of the funnel, improve brand relevance and drive traffic. We continue to refine our marketing mix towards higher return channels with more personalized targeting and improved attribution. The timing shift of our model search event from Q2 to Q3 also drove this increase. This event continues to deliver high engagement and long-term customer loyalty. Net loss for the quarter was $6.4 million or $0.06 per share compared to a net loss of $1.2 million or $0.01 per share last year. Adjusted EBITDA was $9.8 million, representing a 4.2% margin versus $19.6 million and a 7.4% margin a year ago. We ended the quarter with $17.2 million in cash compared to $44 million last year. As of November 1, we had $14.9 million drawn on our revolving credit facility with approximately $86.2 million of remaining availability. Inventory totaled $128.8 million, down 6.8% from last year, reflecting both lower receipts and our reduced store base. Turning to store optimization, which remains a cornerstone of our multiyear transformation. During the quarter, we closed 15 stores and remain on track to close up to 180 stores in fiscal 2025. Customer retention from these closures continue to perform consistently with historical levels. The stores we're exiting are structurally unproductive and closures are aligned with natural lease expirations, minimizing exit costs. On a Q3 year-to-date basis, we have realized approximately $18 million in lower operating expenses from closing 74 stores this year and 35 total stores in the prior year, and these savings are already reflected in our performance. As we move through Q4 and complete the planned closures for fiscal '25, we expect even greater savings in fiscal '26, which will enhance our liquidity position. This initiative is both a structural realignment, reflecting where our customers increasingly choose to shop with about 70% of demand originating online and a proactive liquidity strategy designed to protect the business, strengthen our balance sheet and enhance the resilience of our operating model. Overall, we believe store optimization will deliver substantial adjusted EBITDA margin expansion in fiscal '26. We are updating our outlook for the remainder of the year to reflect third quarter performance and current trends. We now expect full year net sales in the range of $995 million to $1.002 billion and adjusted EBITDA in the range of $59 million to $62 million for the full year. Capital expenditure is expected in the range of $13 million to $15 million. In closing, we're executing a disciplined and deliberate transformation of our retail footprint. By taking advantage of natural lease expirations to rightsize our store fleet, we're structurally improving our cost base and strengthening the long-term health of the business. The combination of lower fixed costs, enhanced digital capabilities and a more productive store base is expected to drive sustainable margin expansion and generate meaningful incremental liquidity as we move into fiscal 2026. Now we will open the call to your questions. Operator? Operator: [Operator Instructions] Our first question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: Could you elaborate a bit on some of the product missteps that you talked about? What cues are you getting from the consumer to tell you that this is where the challenge is and this is what needs to be fixed? And then you talked about the promotions being higher on the digital channel. Maybe elaborate on why that is or why you think that is and what you saw in the stores during the period. Lisa Harper: Thanks, Janine. It's Lisa. The merchandising missteps were very focused on tops, as we mentioned. So tops were about half of the total revenue miss for the quarter. Shoes were about 40% and then jackets because of their seasonal importance were about 10% for the quarter. So it's pretty -- we've talked through the shoe situation, which is a pause based on the tariffs. We've reintroduced shoes and boots recently are having a great response to them. We'll continue to build that business back up and recapture that revenue as we move into 2026. But for the quarter, the biggest miss and the biggest action was really focused around the tops category. What I would say from a merchandising miss perspective was the advocation of a couple of our core fabrications and core kind of entry point solution-based products for the customer. And so we've been able to chase that product very quickly. It's longer tops, more tunics, brushed waffles, super soft knits and Sally in the woven category. So it's very focused on a few fabrications, very focused on a few end uses. And because we are able to platform that fabric, we're being -- we're back into some of those businesses in the fifth week of December and throughout January and February in terms of receipts. So we expect to see improvement in those categories as we move into early first quarter as we'll have, I think, chased the bulk of what we feel is missing in the assortment right now. So what we've done to avoid that in the future is really enhance, although we have pretty substantive guardrails to this, this was a merchandising this was obviously very disappointing and frustrating for the organization for the quarter. And so we put enhanced guardrails around the process. We've put in a robust assortment planning, multifunctional approach to the categories, particularly. And we are just increasing oversight, and I'm involved in every step of that. I would say that as an organization, they were able to effectively kind of innovate and balance product assortments in all areas except for tops. So I would say that -- I would -- all areas except for tops and jackets. The benefits of that innovation and expansion to the core product is present in denim, non-denim dresses and intimates. And so those areas were able to positive comp. As we mentioned in the prepared remarks, they weren't able to offset the detriment of the tops miss. So if you think about the total miss for the quarter, I'll restate it, it's about 50% tops, about 40% shoes and related transactions with shoes and then about 10% in jackets for the quarter. And I'll turn it over to Ashlee to answer the promotional conversation. Ashlee Wheeler: Janine, I'd say that the accelerated promotional activity was in large part correlated to the miss in the top space. So as Lisa noted, in the absence of some of those core franchises, entry price point solution-based items and a swing into more highly novel or more fashion-oriented assortment. It put a little more pressure on promotional activity, AUR, for example, in the absence of those entry price point categories. That said, I think we've done a really nice job making sure that we're coming out of the season clean. So there are no inventory issues to speak of related to some of these missteps in assortment. Janine Hoffman Stichter: Perfect. And then maybe just one more for me. The full year guidance implies, I think, a mid-teens revenue decline in Q4. Anything you can share about where you're tracking quarter-to-date versus that guidance? Lisa Harper: Obviously, we are able to incorporate current performance into that guidance. We don't anticipate a recovery, substantive recovery in either tops or shoes for the balance of this quarter. We'll start to see some improvement in tops in first quarter. We'll still be -- have a drag in shoes as we go through the fourth quarter and the first half of next year. So contemplate -- all of that is contemplated into that guidance. Operator: Our next question comes from Brooke Roach with Goldman Sachs. Brooke Roach: Lisa, for a couple of years now, the balance of fashion versus basics and opening price point versus stretched product has been something that the business has been chasing. What's changing in the processes to ensure that you have both those opening price points and balance items in your assortment and planning architectures? And other than oversight, how do we ensure that this is something that's more systematic on a go-forward basis as we look into 2026 and beyond? Lisa Harper: Thanks, Brooke. I just called you by your last, I apologize. Thanks, Brooke. So I would say that the issue -- the overall issue and opportunity in this business was -- is about innovation and remaining relevant and commercial. That is balanced against the need of the customer and the request of the customer -- the focus of the customer on price point. And so as we go into first quarter of next year, we will be in terms of opening price point, close to 30% of sales and assortment associated with those categories of businesses that service our customer in terms of core products, solution-oriented, high quality at a price that she has shown us that she reacts to and values. That is built into the architecture, the assortment architecture as we move forward. It is something that we are -- have embedded in that process. Both sides of this are important. First of all, we have to move forward and remain relevant. I think that we've been able to do that with sub-brands. We've been able to do that in the categories that I mentioned before, denim, non-denim dresses and intimates. And the miss really is in the tops area, which had advocated and exited through merchandising direction to many of the core programs. Those core programs are bought and will be -- already have been planned to receive as we get into January receipts going into 2026 sales, and it's part of the assortment architecture. So the need for the business to move forward and innovate with product was important as our customer feedback had been that -- our styling was not keeping up with their demand. We've balanced that, I think, in every area, except for the misstep in tops, where we will be going into first quarter with a much stronger opening price point strategy across the board, but primarily the highest level of opening price point will be in tops as we move forward. It's built into the assortment architecture of the business. I don't know, Ashlee, do you want to add anything? Ashlee Wheeler: Brooke, I might add, if we take a look at the categories where we executed well in the third quarter, so denim as a proxy is a place where we stayed committed to the franchises that the customer knows us for, the Bombshell franchise, for example. We stayed very committed, but we expanded upon that, gave her more innovation through leg shape, wash treatment, finish. And that system has worked very, very well. It's worked well for us in dresses where we've stayed committed to end use covering every aspect of her life and been very focused on multi-end use, it's worked well. Tops where we misstepped in the third quarter, we did not do that, and we walked away from very critical end use and solutions. We have to get back and stay focused on the same balance that we applied in denim and in dresses to our tops category, which is the largest category of the business. Brooke Roach: That's really helpful. As a follow-up, have you seen any larger or outsized shifts in engagement among any specific income demographic or age cohort of your consumer? Maybe said another way, are you seeing any changes in the demographic makeup of your businesses which customers are engaging with you the best? Lisa Harper: In terms of customer demographics or income cohorts, performance has stayed consistent across all of those. What we observed in the third quarter, very different from previous quarters is our most loyal, our most engaged customers pulled back, and we saw that come through reduced frequency and fewer purchases in the tops departments in particular. Operator: Our next question comes from Corey Tarlowe with Jefferies. Corey Tarlowe: Leslie, can we just talk a little bit about the sub-brand momentum and any updates there as that's continued to build in the assortment and how you think about this quarter's results may alter or change the approach in the sub-brand strategy? Lisa Harper: Thanks, Corey. No change in the sub-brand strategy. I think that we have a clear winner in the [indiscernible] brand and think that, that will expand. Nightfall and retro are continuing to perform very, very well. Belle Isle is more -- we've identified it more as a first half brand than a back half brand. And so we'll be adjusting kind of the sales momentum associated with Belle Isle to be probably more 60% first half, 40% back half. And then we've introduced Tru in our active business, which we're very happy with the results there. And Lovesick is still kind of, I would say, in test mode. We don't have a lot of revenue associated with that as we move into next year as we're able to refine that assortment moving forward. I think in general, very, very pleased with the sub-brand momentum and expect it to continue to grow dramatically as we go into 2026. Corey Tarlowe: Great. That's really helpful. And then just a follow-up. Can we talk about the leverage profile and how that changes with all the store closures and what the perhaps new leverage profile might be as we think about easier lapse in 2026 and what that could mean from a margin perspective? Paula Dempsey: Corey, this is Paula. So as we think about 2026 with the store closures, what's going to happen is our profile will be more flexible from an expenses standpoint. So of course, less fixed expenses, and we'll have the ability to be more dynamic from that standpoint. I think from a gross margin, the profile may be staying closely the same to where that total enterprise is today. But what you're going to see is a substantial EBITDA margin expansion in 2026 with the store closures. So currently, we are seeing the store closure optimization work really well. We have delivered over $18 million of cost reductions this year alone. We expect that number to be much greater mid 2026 when we annualize 180 stores. And so that will also strengthen our liquidity substantially for 2026. Operator: Our next question comes from Alex Straton with Morgan Stanley. Alexandra Straton: Maybe for Paula, I think you said you expect significant EBITDA margin expansion next year. I'm not sure if I heard that right. But if so, can you just elaborate more on that and what type of level is in reach? And then just on -- as a follow-up to the sales guidance for the fourth quarter, worse pressure than the third quarter is what's implied. So is that reflecting what you've seen quarter-to-date? And what areas is that are getting worse from a quarter-over-quarter perspective? Paula Dempsey: So going to Q4 guidance, we are all in for Q4 guidance. So what you're seeing is essentially accounting for what Lisa had mentioned before, the miss in tops along with shoes. There is also a seasonality impact in our business typically in Q4. So it goes along with that seasonality impact. As we moved into fiscal '26 with store closures and EBITDA margin growth, what you're going to see there is, if you recall, a lot of these stores that we're closing, actually, most of them are very highly unproductive stores. So by closing them, we're essentially giving money back to the business through reductions in many items in the P&L, right? So such as store payroll or store occupancy, et cetera, et cetera, et cetera. So we're going to see a greater amount of savings from that standpoint. And just to touch base again, we're seeing retention, customer retention, sales retention from these store closures to be well aligned with our historical rates, which is a great sign for us. So everything is going really well from that standpoint. I would say as we are on track to closing up to 180 this year. And I think that's all we have from a store optimization at this point. Operator: Our next question comes from Dana Telsey with Telsey Advisory Group. Dana Telsey: As you think about the current merchandising adjustments that are being made, what are you seeing in the competitive landscape? Do you think of this more as an internal issue that Torrid needs to fix? Or is there changes in the competitive landscape and whether it's product assortment, price point or where your customer is going? Lisa Harper: Thanks, Dana. I do think there's a seasonal aspect to it. I think, obviously, a lot of this is self-inflicted driven by really advocating core products in the knit and woven top categories. I do think seasonally, there are a lot of options that other brands have extended sizes, and it's more sweat shirt-oriented, sweater oriented that are not as fit specific. We certainly didn't see this impact in the tops business in the first half of this year. So it really did accelerate as we go into third quarter. I think we have a real opportunity to build back with the opening price point strategies that we discussed and keep fabrications that our customer really values. More tunics in the mix, more kind of figure flattering solution-oriented products in the knit category and then more kind of wear-to-work and blouse business in the woven categories. But I do think that in the third quarter, there is an ability to choose tops among a broader range of retailers because just the seasonal impact of being less fit specific and more oversized. I don't -- while we -- to that end, we didn't see the degradation in any of our bottoms businesses, which are more fit specific or our dress business, which also we were able to have great representation of end uses and fit solutions. So I feel like it's isolated, very clearly isolated. I do think it could be -- could have been -- I don't have any data to really support it, but just broadly from a mindset, it could have had a larger impact because of the seasonal nature of the products in the knit and woven categories during the time. So again, quickly move to address it. When I think Ashlee mentioned earlier about our less frequency in terms of tops purchases in the third quarter, tops really are a frequency driver for us so that they don't buy denim as often or dresses as often, but they do buy tops more often. And I think that opportunity to by tops other places might have been enhanced by that timing. I do think anything that we've seen in terms of surveying with our customers, they're still very dedicated to Torrid. They're very interested in shopping at Torrid. They're still maintaining their strong relationship and our loyalty program continues to be very highly penetrated. So we have a lot of opportunity to communicate and connect with this customer and understand exactly what's missing. And as I mentioned, the one thing that continues to come up is opening price point that I would say we did have fits and starts with over the last several years, but very deeply invested and committed to based on the analysis and of our previous OPP programs and the expansion related to that. So I think we're going to be able to recapture her tops purchase in addition to maintaining the denim and dress purchase from her as we introduce -- reintroduce these core businesses at an opening price point. Did I answer the question, Dana? Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to Lisa Harper for closing comments. Lisa Harper: Thank you for joining us today. We look forward to sharing the progress on the store optimization program and the remerchandising of our tops area as we join you for the fourth quarter and fiscal '25 conference call. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.
Operator: Good morning. My name is Elliot, and I'll be your conference operator today. At this time, I would like to welcome everyone to Root's third quarter earnings conference call for fiscal 2025. [Operator Instructions] On the call today, we have Meghan Roach, President and Chief Executive Officer; and Leon Wu, Chief Financial Officer. Before the conference call begins, the company would like to remind listeners that the call, including the Q&A portion, may include forward-looking statements concerning its current and future plans, expectations and intentions, results, level of activities, performance, goals or achievements or any other future events or developments. This information is based on management's reasonable assumptions and beliefs in light of information currently available to Roots, and listeners are cautioned not to place undue reliance on such information. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected. Company refers listeners to its third quarter management's discussion and analysis dated December 9, 2025 and/or its annual information form for a summary of the significant assumptions underlying forward-looking statements and certain risks and factors that could affect the company's future performance and ability to deliver on these statements. Roots undertakes no obligation to update or revise any forward-looking statements made on this call. The third quarter earnings release, the related financial statements and the management's discussion and analysis are available on SEDAR as well as on Root's Investor Relations website at www.investors.roots.com. A supplementary presentation for the Q3 2025 conference call is also available on the Roots Investor Relations site. Finally, please note that all figures discussed on this conference call are in Canadian dollars, unless otherwise stated. Thank you. You may now begin your conference. Meghan Roach: Good morning, and thank you for joining us. I will begin with a summary of our results for the third quarter of fiscal 2025. For the quarter, revenue was $71.5 million, representing a 6.8% increase compared to the same period last year. Direct-to-consumer sales rose 4.8% to $56.8 million, and comparable sales were 6.3%, driven by strong traffic online and conversion in stores. On a 2-year stack basis, comparable sales growth stands at 12.1%. Partners and others also reported a robust quarter with sales increasing 15.3% due partially to earlier orders from our Taiwanese partner and strong growth in our B2B channel. Our direct-to-consumer gross margin was 65.4% and improved 140 basis points, reflecting continued progress in reducing markdowns, improving product mix and strengthening our supply chain discipline. Our adjusted EBITDA was $7.5 million compared to $7.1 million last year. And excluding the impact of the DSU revaluation, adjusted EBITDA was $7.6 million compared to $7 million last year, an increase of 7.3%. Overall, our Q3 demonstrates that our strategy is working. We delivered improved execution across merchandising, marketing and operations. We'll continue to invest in long-term health of the brand. The broader retail environment remained dynamic during the quarter, and we experienced unusually warm fall. Despite these conditions, our brand continues to resonate as evidenced by our strong sales and strong new customer acquisition during the quarter. Our performance reinforces the importance of Root's brand strength, heritage and commitment to high quality comfortable clothing that serves as differentiators in this market environment. Over the last year, we continue to strengthen our go-to-market process and our merchandising strategy has gained momentum. During the quarter, we delivered strong results across multiple collections, including our new Roam travel capsule, which features modern basics with technical product attributes and Cloud, our ultra-plush, minimal logo, sweatshirts and sweatpants. Style productivity has also improved this year, reflecting tighter assortments and more disciplined buys as well as our investments in AI-driven allocations. Each year, we are making measurable progress in enhancing our product architecture and elevating our offering. However, we continue to believe meaningful opportunities remain. Our brand building efforts remain a core driver of our long-term value and an important part of our multifaceted growth strategy. Q3 marketing efforts centered on new store openings in Vancouver and Toronto, our fall/winter product launches and our enhanced campus presence with the University of Toronto. These activations exceeded our expectations on engagement and traffic. In the third quarter, we also continued our testing in paid media with increased spending across the full marketing funnel. As we enter the fourth quarter and look to 2026, these earnings will help further fine-tune our marketing efforts and create more disciplined creative testing. We are looking closely at the impact of agentic AI and customer product discovery, and continuing to adapt to this changing landscape. We also saw strong storytelling for our brand ambassadors, reinforcing Roots as a brand that connects people to nature, community and a sense of belonging. Our omnichannel strategy continues to strengthen our connection with our customers with the goal of enabling customers to shop Roots wherever, however and whenever they choose. The 6.3% increase in comparable store sales in the quarter which is 12.1% on a 2-year stack basis, reflects the positive impact in the strategy and performance. In our retail channel, we saw strong conversion wins driven by improved product storytelling, disciplined inventory management, and refreshed visual merchandising, combined with enhanced sales associate training schedules. Our paid media efforts have also driven substantial traffic to the e-commerce channel, which we are focused on converting in the fourth quarter. In addition, increased personalization and search and product merchandising, the integration of wish list, more functionality such as filters and improvements in the shopability of our [ landing ] pages will support both revenue and the customer experience in the fourth quarter and beyond online. As our results highlights, our strategy remains consistent and focused. We are strengthening our core franchises, expanding into complementary categories and increasing the clarity and differentiation within our assortment. We are also elevating the brand to collaboration, heritage storytelling and more targeted marketing. We are also enhancing our omnichannel experience with a focus on convenience, speed and personalization, and we are driving operational excellence across the business. I would now like to comment on early Black Friday trends in the fourth quarter. We've seen good engagement with our products and marketing efforts with consumers responding positively to curated offers in our core franchises in different categories. Early in the holiday season, we continue to experience positive trends. Our Seth Rogan partnership has been resonating well with consumers who understand the strong alignment between our brands and have enjoyed the witty, light, holiday approach to the campaign. Before I conclude, I would like to thank Root's employees across Canada for their commitment and hard work and our customers for their ongoing loyalty to the brand. Roots is a brand with strong heritage, a clear purpose and significant long-term potential. We remain focused on disciplined execution and on creating long-term sustainable value for all stakeholders. With that, I will now turn the call over to our Chief Financial Officer, Leon Wu, for a deeper review of our financial results. Leon Wu: Thank you, Meghan, and good morning, everyone. The past quarter marks the fifth consecutive quarter of growth in top line sales, gross margin and profitability, while we continue to reduce our year-over-year net debt. The ongoing momentum reflects the collective efforts of our multipronged product, channel and marketing functions, working in lockstep to offer the best Roots experience to our global customers. I will now share some more details on the key elements of our results. Sales in Q3 were $71.5 million, increasing 6.8% as compared to $66.9 million in Q3 2024. The growth in our total sales was driven by both our direct-to-consumer and partners and other segments. Our DTC segment sales were $56.8 million in the quarter, growing 4.8% relative to $54.2 million last year. Our comparable same-store sales grew 6.3% in the quarter and 12.1% on a 2-year stack basis. The continued DTC sales growth reflects a strong omnichannel experience offered to our customers. We have seen a strong response to the investments made into our store renovations and data-enabled technology that offers an elevated and more personalized brand experience. This was further supported by the curation of new seasonal styles that amplified and complemented our core product offerings, an authentic marketing moment. As Meghan mentioned, these initiatives have contributed positively towards our traffic, conversion and customer account metrics underpinning our ongoing DTC sales growth. Our partner and other sales were $14.6 million in Q3 2025, up 15.3% compared to last year's sales of $12.7 million. The growth in this segment was driven by earlier orders by our wholesale operating partner in Taiwan for the upcoming holiday and spring selling season, a portion of which was fulfilled in the fourth quarter last year, as well as higher domestic wholesale sales of custom Roots branded products. Total gross profit was $43.4 million in Q3 2025, up 8.1% as compared to $48.2 million last year. The growth in gross profit dollars was driven across both segments and highlighted by the gross margin expansion in the DTC segment. Total gross margin was 60.8%, up 80 basis points compared to last year. Our Q3 2025 DTC gross margin was 65.4%, up 140 basis points compared to 64% last year. The DTC gross margin expansion was driven by growth in our product margins resulting from continued improvements to our product costing and lower discounting. The unfavorable year-over-year foreign exchange on U.S. dollar purchases in this quarter was offset by improvements in freight costs. SG&A expenses were $38.2 million in Q3 2025 as compared to $34.5 million last year, an increase of 10.6%. The largest increases in our SG&A expenses were driven by a combination of increased investments in marketing and higher personnel-related costs, along with higher variable selling costs resulting from stronger sales. As referenced over the last few quarters, we have increased our marketing investments in 2025 with the goal of supporting both in-year sales growth and long-term multiyear brand uplift. Proportionate to the size of the fourth quarter, which represents our largest selling period, we are expecting to invest an incremental $2 million to $3 million in marketing dollars in Q4 2025. The incremental spend will be across a range of initiatives across the full marketing funnel, balanced between top of funnel investments to build long-term brand equity with benefits through the future years and more immediate bottom funnel sales driving activities. We have seen great results thus far in how our marketing contributes towards brand momentum over the last few quarters. As we look forward, we are constantly reflecting on the results of each initiative, and we'll leverage the learnings from this year to refine our marketing strategy with the goal of maintaining momentum while focusing on the most effective and efficient initiatives. Additionally, SG&A increased by $0.7 million of higher noncash stock option expenses and costs related to changes in key personnel, $0.3 million as a result of higher U.S. tariffs on sales to U.S. customers as the U.S. duty-free de minimis exemption was eliminated in August and $0.1 million from the unfavorable revaluation of cash settled instruments under our share-based compensation plan, which is directly tied to increases in our share price. During Q3 2025, we generated $2.3 million of net income, down 4.5% as compared to $2.4 million last year. This equates to $0.06 per share in both years. Excluding the impact of our DSU revaluation expense headwinds resulting from our share price appreciation, our net income would have been $2.4 million, improving 1.5% compared to last year. Our adjusted EBITDA was $7.5 million, increasing $0.4 million or 5.3% compared to $7.1 million last year. Adjusted EBITDA would have grown by 7.4% without the aforementioned DSU revaluation impacts. The strong improvement in our profitability reflects the sales growth and margin expansion achieved during the quarter. Now turning to our balance sheet and cash flow metrics, which also reflects the strong results for the quarter. Our Q3 ending inventory was $66.6 million, increasing 10.3% as compared to $60.4 million last year. Approximately $0.7 million of the increase was driven by the higher U.S. dollar foreign exchange paid on our inventory. The remaining year-over-year increase in inventory was driven by improved inventory position ahead of the peak holiday selling period and higher in-transit inventory to support sales for the next year. Our Q3 free cash outflow was $4.6 million, improving from an outflow of $6 million last year. The year-over-year improvements in free cash flow were driven by sales growth and ongoing management of working capital, partially offset by higher capital investments during the quarter. Due to the seasonality of our business, we typically see cash outflows as we build up our working capital ahead of our peak season. Before generating larger cash inflows through the upcoming holiday selling period. During Q3, we repurchased 415,000 common shares for $1.3 million under our normal course issuer bid. As of the end of the quarter, we were eligible to repurchase up to 325,000 common shares under the current NCIB program, which is in effect until April 10, 2026. Net debt was $44.1 million at the end of Q3 2025, down 5.9% as compared to $46.9 million at the same time last year. Our net leverage ratio measured as net debt over trailing 12-month adjusted EBITDA was approximately 1.9x. With that, operator, you may now open the call for questions. Operator: [Operator Instructions] First question comes from Brian Morrison with TD Cowen. Brian Morrison: Meghan, you commented, you said in the transcript that you continue to experience positive trends. Maybe just -- I know you don't want to go into detail, but maybe just talk about the consumer behavior you've seen going into Black Friday and relative -- as you approach the holidays? Are you seeing any change in maybe the basket size or the AUR? And then lastly, is there any bifurcation of consumer you're seeing with respect to income demographics or by region? Meghan Roach: Thanks, Brian. Nice to hear from you. I would say, overall, the trends from a Black Friday perspective, I think, are really reflecting the overall economy that we see today, right? So I would say that from a consumer perspective, we're definitely seeing people shop earlier. So I think that Black Friday for a lot of people is pulled forward into early November. And I think we've seen a continuation of some of the discounting trends kind of post Black Friday, which reflects changes in the economic environment as we see today. Our consumer continues to be strong, and so we were happy to see those positive trends overall. I would say, fundamentally, the consumer continues during this time period to look for both uniqueness as well as deals and not something we've seen kind of year-over-year, that trend continues. And that's been a trend we've seen for the last number of years also. So I think fundamentally, the consumer is, as you've seen broadly from a market perspective, continuing to reflect the current economic reality and our consumer has continued to be positive, which is good for us. I think our product categories are unique positioned from a heritage perspective, comfort perspective. I think the fact that we have sustainability in our products now is very unique to us also. So we've been happy to see the positive reaction that the consumers have had to our overall product selection. And I think getting in front of those consumers also early as well as the right type of marketing has been helpful to us. Brian Morrison: Right. And you can see in store the uniqueness and expansion of the product breadth. I guess in terms of marketing, you addressed this on the call, but I think you said $2 million to $3 million additional in Q4. Maybe can you just talk about when you look forward to next year, I think you're still in the assessment phase, but is there -- maybe talk about the options? Is the plan to wean off marketing a little bit? Or do you maintain full steam ahead to further stimulate top line growth in order to drive operating leverage? Maybe just talk about how you're looking at that for next year. Meghan Roach: Yes, absolutely. So what I would say is I think we want to continue to trade through December. We still have quite a lot of the month left to go. Typically, at this point in time, we have kind of almost half of the quarter left. There's still a lot of time to go from that perspective. And I think the marketing efforts that we have put into the fourth quarter, we want to continue to evaluate those on a full year basis. That being said, I think when we look holistically at what we're trying to accomplish, obviously, this year, doing a bit more of a mix between top-of-funnel awareness building brand growth perspective, which will help us over a multiyear basis and then that short-term conversion driving activity. So that blend has obviously shifted a bit this year to have a little bit more of that top of funnel approach to it. So when we look into next year, really, what we're looking at is really making sure that we go through all the marketing spend this year, have a fantastic understanding of what generated return -- immediate return to us and what we think is important to drive longer-term value from a brand perspective. Roots is in a unique position because we do have significant awareness across the country. We have been 80% plus, in some cases, we see 90%-plus awareness, depending on the survey you look like from a brand perspective. So a lot of what we're attempting to do from a marketing perspective is really not to drive awareness to the brand, but it's really about making them aware of the things that we have today, how the brand has changed, the broad collection that we have and also, we're also looking at different channels. So if you think about the changes that are happening with the ChatGPT, the Gemini, the AIs of the world, obviously, making sure that we have the right investments put behind. Making sure our website, our brand broadly is searchable and findable on those platforms. It's really important to us. And so I think those are -- our marketing investments as a whole are continuing to reflect the changing reality of how you act in front of consumers. So I won't give you a direction in terms of what the marketing dollars look like overall for next year. But I would say that this year was definitely a year we were testing and learning across a multitude of different things. And so we will be tweaking our marketing overall from a mix perspective next year as we take those earnings and apply those to -- thinking about both short-term and long-term growth. Brian Morrison: Okay. That's helpful. And then last one, maybe, Leon, the gross margin, product cost, and it seems to be an ongoing strength here. I get the lower promo contribution to gross margin. But how are you achieving ongoing product cost? Is it sourcing? Is there more room to go? Maybe just comment on that. Leon Wu: Yes. I mean for the sourcing, we've really built out a robust process over the last few years in terms of understanding how we procure our products from overseas. And one of the main drivers of it is understanding with our vendors how we continue to maintain the quality of our products, but then source it with buying deeper. We're buying earlier to bring the product at a better cost. Another area that we have achieved a lot of the sourcing gains recently has been shifting where the manufacturer is coming from. So where there's more duty favorable countries to source from to bring into Canada. That is also helping us gain a lot of the margins. Brian Morrison: And is that a function of tariffs in the U.S. on to China as well? Leon Wu: No. So the tariffs for the U.S. that we referenced is just related to the U.S. e-commerce part of our business, which is a smaller part of our overall business. In Canada, we pay import duties to bring goods from overseas and that have slightly different tariff structures or duty structures than the U.S. But on the U.S. side, again, it's a small part of our business. Brian Morrison: Yes, no, I'll take it off-line. I think I was going somewhere else with that, but I appreciate it and look forward to seeing strength in the Q4 results and wish you both a prosperous holiday season. Operator: [Operator Instructions] We have no further questions. I'll now hand back to Meghan Roach for any final remarks. Meghan Roach: Thank you, everyone, for joining the call today. For those of you celebrating, we wish you a wonderful holiday season, and we look forward to updating you on our fourth quarter results in the new year. Operator: Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.
Operator: Welcome to the AEO Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Judy Meehan, Head of Investor Relations and Corporate Communications. Please go ahead. Judy Meehan: Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer; Jen Foyle, President, Executive Creative Director for American Eagle and Aerie; and Mike Mathias, Chief Financial Officer. Before we begin today's call, I need to remind you that we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results actually realized may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at www.aeo-inc.com in the Investor Relations section. Here, you can also find our third quarter investor presentation. And now I'll turn the call over to Jay. Jay Schottenstein: Thanks, Judy, and good afternoon. I hope everyone had an enjoyable Thanksgiving weekend. I'm extremely pleased with the trend change we've seen across brands, reflecting a number of decisive steps we've taken from merchandising to marketing to operations. These deliberate actions are having a positive impact on our near-term results and also serve us well for the long run. We delivered record revenue in the third quarter and very strong momentum has carried into the fourth quarter. We're seeing an encouraging response to the newness the teams are delivering with each new collection gaining steam, most notably, Aerie and Offline are generating exceptional growth across categories. As discussed last quarter, we have made incremental investments in advertising, which is contributing to stronger demand while better positioning our business for enhanced long-term brand awareness and overall customer engagement. At the same time, we are focused on operational improvements and cost efficiencies to drive higher profitability in what continues to be a dynamic macro environment. Turning to the quarter. Total revenue increased 6% to $1.4 billion, a third quarter record. Operating income of $113 million exceeded our guidance of $95 million to $100 million, fueled by higher-than-expected demand and well-controlled costs. As previously noted, our results also included about $20 million of net impact from tariffs. Diluted EPS for the quarter of $0.53 increased 10% compared to the adjusted EPS last year. The strong top line reflected a return to positive comps, which increased 4%. This was a meaningful acceleration from the 1% decrease last quarter. Improvement was made across both brands and channels, all posting positive comps. Aerie's 11% comp in the third quarter was a real standout where strong demand was broad-based across all categories. Growth accelerated throughout the period, which has continued into the fourth quarter, where we are seeing exceptional demand so far. As we look to the future, we continue to see untapped opportunities within Aerie and Offline, which are rapidly emerging as important customer destinations. At just under $2 billion in revenue and less than 5% market share, this indicates a significant runway for future expansion, underscoring our ability to capture a much larger piece of the market as we execute our strategic initiatives. American Eagle's comp growth of 1% marked a sequential improvement from last quarter. Strength in jeans, coupled with better results in men's were among the drivers. As Jen will review, AE's business strengthened with greater in-stocks in our strongest sellers and new product flows. Positive trends have continued so far in the fourth quarter, including a terrific Thanksgiving weekend. Beyond product, our results have benefited from the success of our recent marketing campaigns, which have driven engagement and attracted new customers. We are encouraged by the impact of the campaigns and collaborations with Sydney Sweeney and Travis Kelce and now holiday gifting with Martha Stewart. We see measurable benefits, especially across our digital channels. Looking forward, we will build on this momentum with more exciting campaigns ahead. All in all, I'm very pleased with the progress and meaningful turnaround from the first half of this year. Now the holiday season is upon us, and the fourth quarter is off to an excellent start. We are seeing a clear acceleration from the third quarter, including a record Thanksgiving weekend with strong performance across brands and channels. As a result, we are raising our fourth quarter outlook. We remain well positioned with exciting new collections centered on gift-giving and events planned throughout the season to continue to delight our customers. Before I turn it over to Jen, I want to take a moment to acknowledge our incredible team for all their hard work and tremendous dedication. Their efforts have fueled a meaningful trend change across our leading brands. Great work continues, and I couldn't be more optimistic about the long-term outlook for our business. We look forward to driving more success as we head into 2026 and beyond, driving profitable growth and enhanced value for AEO. Let me turn it over to Jen. Jennifer Foyle: Thank you, Jay, and good afternoon, everyone. I am very encouraged by the stronger performance across our brands, marking a significant turnaround from the first half of the year. This demonstrates the resilience and product leadership of our portfolio of iconic brands. The increasing customer demand, which has accelerated in the fourth quarter, is spanning new and existing customers, fueled by a well-coordinated effort across both merchandising and marketing. Compelling product collections, combined with higher engagement and expanding brand awareness are driving our performance. And the teams are executing very well, leveraging our expertise in key categories and most importantly, by listening to our customers. Let me walk you through a few highlights in the third quarter, beginning with Aerie. The Aerie brand continues to exceed expectations. We achieved record revenue with the third quarter comps up 11%, fueled by strength across all categories, including intimates, apparel, sleep and Offline. Aerie and Offline's performance has been especially impressive with a meaningful acceleration in demand since the spring season. In fact, comps have strengthened with each new delivery. The resurgence in intimates has been very encouraging with solid growth in both bras and undies. Greater depth and breadth of our signature fabrications, strength in new fashion across bralettes and bra tops and fun prints with matchbacks to apparel are just a few highlights fueling the brand's double-digit growth. Aerie apparel remained consistently strong, driven by bottoms, fleece, tees and sleep, which has emerged as a powerful growth category. Offline by Aerie also continues to gain meaningful mind share as we expand awareness and move into newer markets. We remain highly focused on growing the Activewear segment. We are building on our signature fabrics and franchises such as our core leggings while also launching newness with updated fashion silhouettes. Needless to say, we are very excited about our future for both Aerie and Offline. We are well positioned for the remainder of the holiday season and continue to believe in the substantial long-term opportunities ahead. Now moving to American Eagle, which posted a positive 1% third quarter comp, demonstrating a meaningful improvement from the spring season. Positive demand was fueled by trend right new fall collection combined with bold marketing and exciting product collaborations. Underpinned by our dominance in denim, our strategies to reset the brand and firmly position American Eagle at the center of culture are beginning to yield results. The quarter marked an improvement in our men's business, where we saw nice wins across tops, sweaters, fleece, graphics and knits, all areas we have been working to recapture. Bottoms provided a stable foundation with jeans and non-denim pants trending positive. And favorable trends have continued into the fourth quarter, reflecting the positive reception of our new product. In women's, although we had a very good back-to-school season, the quarter in total was not as strong. Robust demand early in the period led to a number of out of stocks in some of our best-selling items. Non-denim bottoms, shirts and dresses proved more challenging, while knit and fleece tops as well as jeans were positive highlights where we continue to see strong demand. And importantly, better in-stocks late in the quarter drove positive results, which have continued into the fourth quarter. AE is a true holiday destination with amazing gift-giving focus combined with fun fashion and party dressing. The response to date has been highly encouraging. Now shifting gears to marketing. This fall season, American Eagle launched its largest, most impactful advertising campaigns ever, which are delivering results. By collaborating with high-profile partners who are defining culture, we are attracting more customers and have more eyes on the brand than ever before. Combined, the Sydney Sweeney and Travis Kelce partnerships have garnered more than 44 billion impressions. Total customer counts are up across brands and customer loyalty grew 4% in the quarter. AE is clearly building long-term awareness and desirability and has captured the attention of both new and existing customers. Traffic has also increased consistently throughout the quarter, which is most evident within our digital selling channels that include both AE and Aerie. Although it's still early days of our renewed marketing strategy, we know that having the right talent amplifies our brand and product at key moments. We are very encouraged by our progress and expect to continue fueling brand excitement into 2026 and beyond. Our recent holiday campaign with Martha Stewart is yet another example of how we are creating fun moments to delight our customers while reinforcing our position as the go-to gifting destination. The holiday season is in full swing. And as Jay mentioned, we are encouraged with the results so far. We are heads down and focused on the rest of the year to deliver long-term sales and bottom line growth. Thanks to our amazing teams, and thanks to all of you for your ongoing support. I wish everyone a happy and healthy holiday season. And with that, I'll turn the call over to Mike. Mike Mathias: Thanks, and good afternoon, everyone. I'm pleased to see the steady progress throughout our business, which led to strong revenue and profit above our expectations in the third quarter. In addition to generating a meaningful top line improvement, we successfully controlled costs, created efficiencies, managed promotions and navigated through a highly dynamic sourcing environment, minimizing the impact of tariffs. Consolidated revenue of $1.36 billion increased 6% to last year, fueled by comparable sales growth of 4%, with Aerie up 11% and AE up 1%. We saw growth in transactions across brands driven by higher traffic. The average unit retail price was flat to last year. Gross profit dollars of $552 million increased 5%, reflecting higher demand. The gross margin declined 40 basis points to 40.5% compared to 40.9% last year. Net tariff pressure was as expected at $20 million or 150 basis points. Higher markdowns were largely offset by positive sales growth and lower non-tariff costs, including favorability in freight. Buying, occupancy and warehousing leveraged 20 basis points due to higher sales and a continued focus on operational improvements. For example, we drove lower cost per shipment within our direct business, which has been an area of ongoing focus. SG&A increased 10% due to investment in advertising as previously discussed. With our focus on long-term brand benefits, the campaigns are already delivering results and helping to advance our goal of expanding our reach and generating growth across brands. The balance of expense is leveraged, reflecting our ongoing cost management program. Operating income of $113 million was above our guidance of $95 million to $100 million, driven by stronger-than-expected demand. The operating margin of 8.3% declined from an adjusted margin of 9.6% last year. Consolidated ending inventory cost was up 11% with units up 8%. Inventory is balanced across brands, reflecting better in-stocks for American Eagle jeans, new store openings and the demand acceleration at Aerie and Offline. The increase in cost includes the impact of tariffs. Third quarter CapEx totaled $70 million, bringing year-to-date spend to $202 million. We continue to expect CapEx of approximately $275 million for the year. As a reminder, this includes a onetime spend of about $40 million to relocate our New York design center as we previously disclosed. We're on track to open 22 Aerie and 26 Offline stores, which are coming out of the gate quite strong. We'll complete about 50 AE store remodels with full upgrades to our modern design. A few great examples of recent store upgrades are the Aventura Mall and Sawgrass Mills in Miami and our new SoHo location in New York City. All of these A+ stores are among our best, and we want to ensure the customer experience is unmatched. The upgraded footprints have allowed us to showcase our signature brands, AE Aerie and Offline. We're utilizing new technologies to elevate the shopping journey and create a cohesive and modern retail experience. Overall, our remodeling program is generating comps nicely above the average. As we continue to position our fleet for profitable growth, we're also on track to close about 35 lower productivity AE stores. Our capital allocation priorities remain unchanged, and we're focused on prudently investing in growth to continue to build our brands while returning excess cash to shareholders through dividends and share repurchases. As a reminder, during the first half of this year, share repurchases totaled $231 million and year-to-date dividend payments have totaled $64 million. We have a strong balance sheet and ended the period with cash of $113 million and total liquidity of approximately $560 million. Now turning to our outlook. The fourth quarter is off to an excellent start. As the team noted, we're encouraged by the broad-based strength across brands and channels with particular strength in Aerie and Offline. Our inventory and product offerings are well positioned to deliver a successful holiday season, and we're all focused on achieving a strong fourth quarter result. Based on quarter-to-date sales trends and the recognition that we have important selling weeks still ahead, we are raising our fourth quarter operating income guidance to a range of $155 million to $160 million based on comp sales growth of 8% to 9% with similar growth in total revenue. Guidance includes approximately $50 million of incremental tariff costs. Buying, occupancy and warehousing costs are expected to increase due to new store growth for Aerie and Offline and increased digital penetration. SG&A is expected to increase in the low to mid-single digits, driven by investments in advertising. Given the top line strength, we expect both BOW and SG&A to leverage in the fourth quarter. The tax rate is estimated to be approximately 28% and the weighted average share count will be roughly 173 million. To wrap up our prepared remarks, clearly, we're very encouraged by the progress made across our brands. We're highly focused on delivering the remainder of the year, driving strong profit flow-through and sustaining this momentum into 2026. Now we'll open up the call for questions. Operator: [Operator Instructions] The first question comes from Jay Sole with UBS. Jay Sole: My first question, I think, it's for Mike. You talked about the acceleration of fourth quarter to date, and you raised the guidance, the comp guidance, I think you said 8% to 9%. That's pretty significant from where you ended Q3. Can you just talk about where you're trending quarter-to-date to be able to guide to that level? And what's driving the acceleration. And then maybe for Jen, you mentioned strength in denim. If you could elaborate a little bit if people aren't wearing skinny denim like they were, like what are the new silhouettes that are working? And how durable are those trends? Do you think the trends that you're seeing can last well into 2026 or beyond? And if you can help us on that, that would be great. Mike Mathias: Yes. Thanks, Jay. I can talk you through the guidance. So the 8% to 9% comp increase includes a nice improvement or acceleration for both brands quarter-to-date from what we just reported in Q3. I would say if you want to break it down by brand, we'd be looking for the AE brand to be in the low to mid-single digits and Aerie in the high teens, mixing to that 8% to 9% comp. And both brands are ahead of that quarter-to-date, but we know we've got some big weeks ahead of us, only about half the quarter in, but definitely pleased with how November turned out and where we are quarter-to-date through the Thanksgiving weekend. Jennifer Foyle: Yes. And Denim has been very strong. In fact, particularly in women's, we saw acceleration throughout the quarter, getting into the back half of Q3 and into black. It's been our #1 Black Friday as far as denim is concerned. The jeans are certainly winning for us. And as you know, that's our key competency business. Look, silhouettes are changing faster than ever. And I always reemphasize that our teams strategically do just extensive testing and scaling. And we did have some out of stocks, particularly in women's in Q3. Sydney Sweeney certainly accelerated some of that, and we needed to move swiftly to get back into business. And I like what we're seeing at the end of Q3 and headed into Q4 with the denim business. So we're excited. Operator: And the next question comes from Matthew Boss with JPMorgan. Matthew Boss: Congrats on the improvement. So Jen, at Aerie, maybe if we could dig a little deeper. Could you speak to the drivers of the same-store sales improvement over the past two straight quarters? And with that, I guess maybe could you break into customer acquisition trends that you're seeing and initiatives in place to sustain double-digit comp growth in your view? Jennifer Foyle: Yes. It's certainly exciting to see Aerie back on track. Coming off of Q1, we definitely needed to pivot as a team, and we really hunkered down and really thought about our strategy and what we needed to get back to win, not only coming from our core competency businesses, which all accelerated and have been accelerating starting in Q3 into Q4, but also there's new businesses in town. Sleep is doing quite well for us, and it's proving to be a year-round business for us. So a new category there. So obviously, we have Offline too, which is our secondary business coming off of Aerie and that business has proven where you're hearing some decel in the athletic apparel areas. We're holding our own and our leggings are still tried and true and winning for us. The customer acquisition has been strong. Our customers are spending more. We're seeing even so. So coming off of Q3, as we head into Q4, they're actually -- our acquisition has been accelerating. Last week was an incredible week for Aerie, where we saw a huge amount of customer acquisition. So we are taking advantage of our traffic. We're winning our customers. I think we're showing up really proudly. We launched our new 100% real campaign, which is tied to our core competency of how we launch this business, what our platform is. And it's talking to our community, it's speaking towards-- it's playing off of no air brushing our models. And now we've leveraged some of that into the AI world and thinking about how we approach that differently. So Aerie does things differently. We always think into the white space that sometimes can be scary, but we're so proud of what we do in this brand. And I think the team is doing an incredible job leveraging our community, amplifying marketing, but also it's 100% about our product. What we do every day is about our product and winning our customer. Matthew Boss: That's great. And then Mike, could you speak to expectations for markdown in the fourth quarter relative to the third quarter just overall health of your inventory? And how best to think about gross margin levers remaining into next year? Mike Mathias: I can start with inventory, Matt. I mean we're very pleased and comfortable with the plus 11 in total dollars, plus 8 in units, is positioned well to continue to fuel this Aerie and Offline trend. We definitely, as Jen talked about in her remarks, kind of resetting some denim inventory to make sure we're continuing to be in stock and don't miss a sale within the AE jeans category. And again, that plus 11% cost includes the impact of tariffs along with just supporting those businesses. On the markdown front, look, we competed in the third quarter. Markdowns are up a little bit in terms of the total impact to the quarter. We expect Q4 to be similar. We're just be ready to compete in these big days. We competed over the weekend. This November trend that we've seen or the quarter-to-date trend includes a little uptick in markdowns to compete. But definitely winning in terms of the top line growth and the overall margin dollar growth attached to that. And it is in a couple of places. I mean, Aerie is similar markdown rate to last year. So we're driving this trend on markdown rates similar to history. We're not driving it through promotion. And then it really is competing in jeans more than anything from a category perspective that's adding to the markdowns a bit. But we're -- we think that's the right strategy from here. Gross margin then in total, really pleased with the third quarter results. We talked -- we disclosed or we hit the $20 million guidance roughly on the tariff impact. That's about 150 basis points. But as you can see, gross margin only deleveraged by 40 baiss points on four comp. So the team is doing a great job, not only just mitigating tariffs on the front end, but then finding kind of opportunities and efficiencies on other non-tariff impacted line items within our costs. We highlighted freight but there's more work than just on the freight line. So Q4 is similar. I mean, we're guiding to a $50 million impact and kind of the net absolute value or the net impact of that -- absolute impact of that would be about 300 basis points. But we're obviously not guiding gross margin down that much. So we expect to see the same opportunities in terms of offsets and other line items. And then just on an 8% to 9% comp, obviously, we're leveraging a lot of expense lines that are up in gross margin, including and BOW, so including rent, digital delivery, distribution costs, compensation up there as well. But other cost line items within our product costs are being leveraged, too. So we continue to expect to do that going forward. Operator: And the next question comes from Paul Lejuez with Citi. Kelly Crago: This is Kelly on for Paul. I guess first question for you guys. Just could you talk about why -- given you've had these very splashy and high-profile marketing campaigns that were more kind of -- more based on American Eagle marketing campaigns, like why you didn't see that accrue more to AE versus what you're seeing in Aerie, where it seems like you're benefiting a lot from whether that's the product assortment or maybe some of the marketing campaigns. Just help us kind of understand what's happening there. And then just secondly, on the tariff impact, I think you said $50 million impact in the fourth quarter. Is that the right net tariff impact that we should be thinking about for the first half of '26? Jennifer Foyle: Sure. As a company, we're leaning into advertising, we need to compete. When we see what our competition is doing, there was definitely opportunity for us to lean in. And certainly, Sydney Sweeney and Travis, I mean, with the 44 billion impressions, really it was something that we did not expect. And certainly, I mentioned some of the out-of-stocks in women's particularly, but men's certainly turned around in the mid-single-digit comp zone. And that was really -- we are so pleased to see that. And I just wanted to say sometimes there's a halo effect in marketing, right? So as we saw -- as we got into -- as denim, we got our stock in stocks back to more normalized levels towards the end of the quarter. We saw acceleration, particularly in women's and into black. As I mentioned, it was an incredible week for us, Thanksgiving week and Friday was amazing. So we're seeing the results now. And look, this is important for our future. We need to remain strong and competitive, and we need to amplify our product. The teams have been working tirelessly on this price value equation that I think American Eagle does better than anyone, and we're leaning in, and this marketing will certainly amplify. Jay Schottenstein: Jen, I'd like to also add -- we've also seen a significant increase in our loyalty members, too. We saw over 1 million more loyalty members join us in these past few months. And as Jen said, you don't see it right away. As you also pointed out that it's interesting with Sydney Sweeney, the jeans that we have made specifically for Sydney Sweeney, they sold out like within 2 days. They boomed right out right away. Mike Mathias: Then I can take the tariff question. I think maybe the best way to provide some color is just to give the quarterly impact. So we'd expect to go forward, if tariffs hold as is in terms of the impact, we'll see how that continues to progress, about a $25 million to $30 million impact in each of the first and second quarter. So call it, somewhere between 200, maybe 200 to 225 basis points of impact in Q1, same impact in Q2, $40 million to $60 million, call it, in the first half. Next Q3 on the $20 million we just incurred in Q3, we expect Q3 on a full basis to be about a $35 million to $40 million, so call it, $15 million to $20 million impact incrementally next year. And then with the anniversary roughly the $50 million that we're guiding to this fourth quarter. So it's about a 200 to 225 basis point impact on a full year basis. And -- but again, with continued offsets in work, we'd expect the gross margin to not be impacted to that level just like we've seen here in Q3 and Q4. Jay Schottenstein: And Mike, there may be like as Supreme Court ruling coming on shortly, too. It may have changed everything right away. Kelly Crago: So the assumption then would be that you would be taking some like-for-like pricing into next year? Mike Mathias: Yes. I think, I mean, on the pricing front, we definitely do not have a specific strategy to pass through the impact of tariffs to our customers. We continue to take shots where we know we can, where we're making price moves that we still fit within our price value equation that the customer expects, and we don't see any resistance to those price changes from the customer. And just ticket changes that allow us to create a little more room on the promotional front, too, to make some decisions within our lease lines. So we'll continue to do that. I think we're seeing success doing or approaching it that way in the back half right now. We'll continue to do that in next year. Operator: And the next question comes from Jungwon Kim with TD Cowen. Jungwon Kim: You mentioned strong customer acquisition across both brands. Maybe you can give us a little bit more detail around who those customers are and if you're gaining more higher income cohorts. Just curious on who you are gaining share from as you acquire new customers? And then another question, just a follow-up to that is, what are your strategies around retaining those customers you gained in the last 2 quarters? Jennifer Foyle: Look, both brands have -- our customer file is stronger than ever. And -- we certainly have seen acceleration, as I mentioned, going into even leaving Q3 -- exiting Q3 and going into Q4 with some really high -- it's really high-end problems here that we're seeing. Look, it's what we do every day. Our teams need to certainly focus on the retention. And we've been all year long, that's what we've been up to. Our retention is not even -- we're winning on retention. We are winning on customer acquisition. The teams have strategies. Those I tend to not share publicly, but the strategies are already paying off. You can see it in the news that we're just reporting today. We're getting talent. We're working on our influencer programs, but we're also working on our communities. And that is the most important thing. We have powerful brand platforms that we stand for something, and it wears the test of time. And when that works and we have the great product attached to it, we can win and show up in a new way. And the teams have very many strategies, whether it's upper funnel, getting out there and bringing in new customers or working on our performance marketing spend and our influencer strategies. So it's not only -- it's never about one part of the strategy. It's about getting the product right first and making sure that our tactics will amplify that strategy. Certainly, Sydney -- an example, Sydney and Travis, but even the more recent Martha, I mean, that is talent, that's upper funnel. That is us getting our brands out there in new ways. But if you lean into Aerie and how they're working, their marketing strategy, they're leveraging our community in a new way and showing up with how do we go from not air brushing our models I just mentioned into what does AI mean to such a pure brand as Aerie with such an amazing platform. So it is about -- we have two different brands. We have a portfolio of brands in the same token that we leverage our brands. Certainly, we share a platform, but it is about making sure that we play up each brand DNA in the right way, and it's working. That strategy is working. I can just -- I can say that now, and there's work to do always. As we look ahead, we have exciting collaborations, new talent and just new ideas. We're constantly thinking of new ideas. Operator: The next question comes from Rick Patel with Raymond James. Rakesh Patel: I wanted to double-click on your expectations for AUR in Q4. As we think about the company remaining competitive with promotions, but also factoring in some product and perhaps some pricing wins, where do you see AUR landing in the fourth quarter? And then second, what are your expectations for where inventory will end the year, both in terms of dollars and units? Mike Mathias: Hey, Rick, yes, the AUR for the third quarter was relatively flat even with a bit of a markdown increase, just the mix of the businesses between the brands, category mix, our AUR was relatively flat at the company level. We're expecting a similar thing in Q4. November to date here, we saw it play out that way. Aerie is actually driving these comps on some uptick in AUR. We know we're spending a little more markdowns in the jeans category in AEs to drive the business. So the mix for the quarter, we'd expect right now to be similar around a relatively flat AUR for the fourth quarter. And I think it's the way we really expect to plan the business go forward. Rakesh Patel: Great. Any thoughts on inventory? Mike Mathias: Q4, we're not providing specific guidance, but at the end of the day here with the uptick in the trend exceeding plans, we're definitely in chase mode here, which is a good thing when we make -- we have -- we see a lot of profit flow-through when we're doing that, especially on the Aerie side of the house. So we expect inventory in line with sales. We're guiding to the plus 8% to 9% comp. And as of now, I'd expect similar kind of inventory in line with sales or at least units in line with the sales growth, knowing there will be a tariff impact ongoing. But we're not providing specific guidance at this point, but that's what we'd expect to see. Operator: And the next question comes from Chris Nardone with Bank of America. Christopher Nardone: So first, can you just refresh us on how we should think about plans for both the Eagle and Aerie store fleets heading into next year? And if the recent results of both businesses has changed how you're thinking about that versus maybe 90 days ago? Mike Mathias: Yes, Chris, I think for the AE brand, we talked about closing roughly 35 stores at the end of this year. We're looking forward into plans next year, and I expect that to slow down as we've largely closed, I think, over the last 3, 4 years, kind of the lower productivity stores in the fleet in the mainline AE fleet. So 35 at the end of this year here in January, maybe something lower than that, I would expect next year. On the Aerie and OFFLINE growth front, we talked about 22 Aerie, 26 OFFLINE openings this year in 2025. We're looking at a similar 40 to 50 store count at the moment, probably similar weighting offline, a little more -- a little higher count in OFFLINE than in Aerie. But we are looking at this tremendous growth, and we'll -- if we did anything, we'd maybe accelerate some openings on the Aerie and OFFLINE side, but those plans are still in work. Right now, a similar 40 to 50 count is what's in the plan. Christopher Nardone: Okay. Got it. And then just a quick follow-up. I think you alluded Aerie comps are running above the high teens for the quarter, quarter-to-date. And if AUR is roughly flattish, can you just unpack a little bit further? It sounds like you're seeing inflections across the product suite, but are there particular channels, whether that's digital versus retail or certain categories where you're seeing the biggest inflection? We're just trying to understand a little bit better what has changed so drastically over the last 6 months. Mike Mathias: Yes. Look, correct. The guidance we're giving at the 8% to 9% comp, I'll just reiterate, American Eagle low to mid-single expectations, Aerie high teens. Both brands are running ahead of that trend November to date or through the Thanksgiving weekend. Digital ahead of stores. And I think the marketing campaigns that Jen and Jay are talking about, the traffic we're seeing digitally off of those campaigns is significant, and that's where we're seeing a lot of the gains from those efforts and from the effectiveness of those campaigns. So digital was -- both channels were positive in Q3, but digital was on the high end or the high single-digit level for Q3. And we'd expect for Q4 at a plus 8% to 9%, same kind of outcome that digital would really outpace stores, and we've seen that through November and especially over the holiday weekend here where both channels were positive, and we're happy with the success in both channels, but digital is where we're seeing the outpaced growth at the moment. Jennifer Foyle: And in Aerie specifically, I mean, as I mentioned before, men's, we saw an incredible turnaround. And Aerie specifically, all categories are working. Look, the team -- when you have to pivot coming off of Q1, we focused on our product and winning that customer back and ensuring that we could get that momentum that we deserve again. This brand is incredible. And I did want to say, I need to remind everyone on this call that Aerie's brand awareness is only at 55% to 60%. So when I think about our opportunity as we build into 2026, we have an incredible runway in front of us. So we're pulling in product as we speak. We're chasing and the team is working fast and furiously so that we can continue this momentum into next year. Jay Schottenstein: And also, Jen, I think our merchandise is better, too, which help. Jennifer Foyle: I'd like to say that, yes. Operator: And the next question comes from Alex Straton with Morgan Stanley. Alexandra Straton: Congrats on a nice quarter. On these big campaigns that you guys have pursued, can you just give us some context on where you think you'll end the year on marketing expense as a percentage of sales versus typical? Like are you investing more than history? And then as we think about next year, should that line item continue to move higher? Or how do you think about kind of that flywheel between the marketing investment and growth? Mike Mathias: For this year, yes, we're -- I mean, obviously, we made a significant investment in Q3. Q4 is up as well within our guidance, not anywhere near the increase on a percentage basis that Q3 was. Really pleased with the SG&A leverage we'll see in Q4 off of this comp guide. Advertising is still deleveraging a bit, but we're leveraging all other expense categories as intended pretty significantly in the fourth quarter. For the year, we're going to wind up somewhere in the mid-4s as a percentage. And historically, we've been more in the -- I think last year, for example, around 4%. So we're definitely resetting a baseline for advertising spend at the moment. It's working. We're continuing to monitor it. Jen and I and our teams are working very closely and cross-functionally on really on a week-to-week basis, how we're pulsing the spend in advertising on top of the campaigns that are obviously planned well ahead of time. I'd expect -- we expect in our initial plans here for next year is to continue this in the first half, possibly passing more toward a 5% type of rate to reset ourselves and then leverage all our expense lines, funnel some expense or some investment toward advertising and anniversary this come next year around this time in the third quarter. I think that 5% is a good sweet spot that we'd like to maintain over time. So as we're kind of resetting the baseline, we're pathing towards 5%, like the top line growth we're seeing from it. Again, just to reiterate, anniversary it come next year and start to just maintain that type of rate, and we'll evaluate things from there. Jay Schottenstein: And Mike, and trips in the bank, too. We're not saying we have more trips in the bank. Mike Mathias: Yes. More to come. We'll talk -- we have some things on our fourth quarter call in March probably to talk about more exciting things to come. Alexandra Straton: That's great. Maybe one follow-up for you, Mike. Just kind of zooming out here. I know there's been some wrenches in your medium-term outlook since you provided it a couple of years ago. But maybe as we move into the final year of that plan and excluding some of the noncontrollable headwinds like tariffs, can you just like, big picture, talk about where you've made the most progress versus that plan and where there's still more work to be done in this final year here? Mike Mathias: Yes. I'll start on the top line. I know we obviously had a few missteps here in the first half of the year in the first quarter, but the net result of this year with this guide is actually going to wind up kind of in that low to mid-single or within the algorithm we've talked about wanting to achieve every year. So we'll be at a kind of low single-digit trajectory on the full year with this back half being kind of the mid- to high single-digit range. So I think that's the continued focus. I'd also say we made a lot of headway in just the culture change around expenses in total. So we continue to control costs across the P&L. I think the leverage that we're seeing here in BOW, this back half of the year and then SG&A in this fourth quarter is a testament to that. Even with the significant increase in advertising this year that you just asked about and I just provided the calendar on all the other SG&A line items are leveraging in this year. And SG&A in total will be relatively flat on the year at the kind of the low single-digit total year outcome. So I think that's a big change for us over the last several years. It's been a massive focus to have a different mentality around controlling expense. It's allowing us to funnel some of these dollars toward advertising. And so we'll continue to do that. And yes, to your point, the tariff headwind is something we can't control. But I mean, our goal is still this 10% aspiration. Tariffs are going to set that back a little bit. But we're going to continue down the path that we're on, on controlling all other costs, investing some dollars in advertising, fueling Aerie and OFFLINE, hitting that kind of low single plus trajectory in AE and passing back toward that 10% that is still our ultimate goal. Jay Schottenstein: Yes. And Mike, as a general thing, this team after the first quarter, and Jen couldn't emphasize it enough, really took a hard look at everything. We went through all the different areas of the business, every single area, every opportunity the merchandise to the operations, looking where -- what's important, what's not important to the company. The dedication of the associates have been amazing in the last few months, and I'm so proud of this team because that first quarter, we got kicked very hard and nobody quit. Nobody cried about it. Nobody quit. Everybody went to figure out how can we do things better, transformational, looking for where the real opportunities are, looking for where we should go in the future, where the opportunities are and what's it going to take to be the best. And one thing I'm very proud of, if you go into our stores, we have the best-looking stores, the best maintained stores in the mall. If you walk in the mall, our stores look the best. If you go look at our new stores, you go to down to SoHo and you look at our new store we just opened in SoHo, you go to Aventura down in Miami, you'll be very impressed by the stores. They're very, very impressive stores. They're very functional stores. And so I think that we're very excited. I know what we have planned for marketing next year. I know where the merchants are focused. I know the excitement that everybody has in this company, and it's going to be great. Operator: And the next question comes from Janet Kloppenburg with JJK Research Associates. Janet Kloppenburg: Congratulations. And I agree the stores look terrific. Aerie in particular, but American Eagle as well. I just wanted to ask about -- I think you had to chase product earlier in the year as well, Jen. And I'm wondering what's going on there and if that situation is resolved now with the comps being as healthy as they are. And then for Mike, on a 4% comp, you weren't able -- did you leverage buying an occupancy? I think you may have. And what is the target point on that? And in terms of price increases, are they all behind you now? Have you taken them all? Or are there more to come? Jennifer Foyle: Yes, for sure. Thanks, by the way, Janet. We -- it's -- primarily, it's been in women's denim, to be frank. We've been sort of in chase mode since Q1. And quite frankly, we haven't been able to keep up with the demands. And as you know, we have a huge short business, and that business never really turned on. We expect shorts to turn on as we enter Q2, back half of Q1 into Q2, and that never happened. So then we continue to see this demand in long legs, and we really couldn't keep up with that demand. So moving into Q3, we felt like we were in a better position, but we wanted to be prudent as well with our inventories. As you know, denim is probably our higher cost of goods as well, but it's our biggest business. So it's always an art, managing that business. And with the launch of the Sydney Sweeney and actually Travis, we couldn't really keep up with that demand. The teams worked swiftly. We were definitely in the right businesses. We definitely had the right silhouette and the right investment in silhouettes, which led to some of that out of stock, good news there. Bad news, we needed a little bit more inventory to carry and to get that business -- to get women's in total because of the penetration of denim. So good news is certainly in the back half of Q3, we saw nice levels of inventory getting back into our key silhouettes. The top 5 jeans, just to give you some perspective, we planned at -- this is just top 5 jeans styles in women's. We planned up 25% they were up 50% on demand. So we had a lot of work to do. We feel better as we head into Q4. And nodding to what Mike mentioned, we're going to look at denim a little bit differently so that we're maintaining that business while we grow new categories. Mike Mathias: And Janet, on BOW, yes, we did leverage BOW by 20 basis points in the third quarter on the 4 comp. And then that's a good target for us that low to mid-single-digit result to leverage expense really across the board other than this advertising reset we're talking about. And then the fourth quarter on the 8% to 9% comp, we obviously definitely expect to leverage BOW at that kind of result as well. And SG&A will leverage significantly on that kind of result for the fourth quarter. Janet Kloppenburg: Okay. And then just on pricing? Mike Mathias: Yes. We talked about a little earlier. We're not -- I mean the AUR is flat for Q3. We're expecting similar AUR in Q4. We're not pathing through the impact of tariffs to the consumer purposely. We are taking our shots on price moves where, as Jen has said, keeping -- maintaining that price value equation that our customer expects and making sure we're not impacting conversion and give ourselves a little room on the promotional side when we do that as well. So we'll continue to kind of optimize that, take our shots, but net AUR similar to last year is the intent. Operator: And the next question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: Congrats on the great quarter. With this quarter-to-date acceleration, it sounds like a lot of it's been driven by traffic and new customer acquisition. Just wondering what you're seeing on conversion, particularly with some of the product improvements you've made. And then maybe if you can just share your thoughts on the Gen Z consumer. We've certainly heard a lot about that consumer potentially being pressured and pulling back, but it doesn't seem like you're seeing that at all in your business. So I would just love to hear your thoughts on kind of where the consumer is and how they're spending? Mike Mathias: Yes. I think on the metric side of things, traffic was definitely a driver in Q3. We continue to see that here in the fourth quarter through November. With AUR flat, it's been a mix of sort of traffic and then ADS or the UPT, part of the ADS equation, AUR flat, some uptick in UPTs and then traffic with conversion being relatively flat with AUR being relatively flat. That's sort of your mix of metrics that we saw in the third quarter and early days here in Q4, obviously, a big traffic uptick that we've capitalized on through November and through Thanksgiving, and we'll see how that continues to play out. But with AUR relatively flat, we would assume a similar kind of mix of metrics, traffic being a driver, ADS being a driver with AUR flat, conversion relatively flat, and we'll see how it pans out through December. Jennifer Foyle: Yes, we're not feeling that -- we're entertaining Gen Z in all of our brands. So even when you look at Martha Stewart, that might be a question mark, right, why Martha Stewart, but Martha Stewart resonates with Gen Z. That's a perfect example of what we're up to. We're seeing momentum in all age groups. We do have still some opportunity on the lower age scale in AE women's in particular, and we're up to invigorating some product to entertain that age bracket. But honestly, we're not seeing it. And also, this is a critical time to for gift giving, too. So we see mom and dad out there purchasing as well. Judy Meehan: Okay. We have time for one more question. Operator: And the last question comes from Corey Tarlowe with Jefferies. Corey Tarlowe: Mike, I just wanted to ask on SG&A for Q3 and Q4 and just kind of how to think about it next year from a dollar perspective. Is there anything that either comes in or goes out, whether it's marketing? I think you talked -- maybe you talked about incentive comp in prior years, how to think about that just structurally, understanding on a rate basis, obviously, with Q4 sales being so strong, there's going to be a bit of a delta there, but curious what you could unpack for us. Mike Mathias: Sure. Yes. I think, as I said, we'd expect to see some continued investment in advertising through the first half of next year, incremental to where we've been intention to pass toward, call it, that 5% rate annually. So we'll anniversary things in the back half that we're doing currently. Incentive comp is a bit of a TBD. We're still setting plans for 2026. Those annual plans are based on our EBIT target is the success metric. So we'll probably -- we'll give more color in March around 2026 SG&A and how we think that will pan out by quarter with advertising and possibly a bit of more incentive comp in the mix, but more to come in March. Corey Tarlowe: Great. And then just a quick follow-up on Aerie. The momentum has been very, very strong. Curious what you think is specifically working there versus the competition when you either walk the mall or view kind of the competitive set, how you think about your market share gains and the opportunity there? Jennifer Foyle: Yes. I did mention the brand awareness still is -- we have opportunity there. We're still only at 55% to 60%. So as we gain and look towards the future, we have a lot of opportunity there. It's never about one thing. Certainly, we doubled down on the product, the design team and merchant teams really came together and thought about our future strategies and where we were seeing some losses and how we recalibrated all of our categories. And the team did an excellent job from launching new ideas to rebuilding old franchises, i.e., undies. Undies is a fire starter for any order, any basket. And our undies tables have never looked better. So it's all about the product. But strategically, we built into promotions that makes sense, but we pulled back in other areas where it doesn't make sense. And then you layer on this great marketing campaign that we've had in Aerie, which it's been really resonating, 100% real. It's what we're all about. And the team has doubled down and our influencer campaign, getting our clothes on our influencers has been a real win. And there's more to come. We have so many great new ideas, innovations for the future. The team is 100% locked and loaded on thinking about each category, new fabrications, new ideas, new launches. newness in general has been a win for Aerie with our new drops, and that's been really working. So we have a lot in store for 2026. But in the meantime, we're pulling goods in for -- to pull out Q4. We're excited about what's happening right now.
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp's Fiscal Third Quarter 2026 Financial Results Conference Call. Please note that today's call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Saratoga Investment Corp's Chief Financial and Chief Compliance Officer, Mr. Henri Steenkamp. Please go ahead, sir. Henri Steenkamp: Thank you. I would like to welcome everyone to Saratoga Investment Corp's Fiscal Third Quarter 2026 Earnings Conference Call. Today's conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required to do so by law. Today, we will be referencing a presentation during our call. You can find our fiscal third quarter 2026 shareholder presentation in the Events and Presentations section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last night. For everyone new to our story, please note that our fiscal year-end is February 28. So any reference to Q3 results reflects our November 30 quarter end period. A replay of this conference call will also be available. Please refer to our earnings press release for details. I would now like to turn the call over to our Chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks. Christian Oberbeck: Thank you, Henri, and welcome, everyone. Saratoga Investment Corp highlights this quarter include continued NAV growth from the previous quarter and year with stable NAV per share, an increase in NII of $0.03 per share from the previous quarter, a strong 13.5% return on equity, beating the industry, net originations of $17.2 million, including 3 new portfolio companies, and importantly, continued solid performance from the core BDC portfolio in a volatile macro environment. Continuing our historical strong dividend distribution history, we announced a monthly base dividend of $0.25 per share or $0.75 per share in aggregate for the fourth quarter of fiscal 2026, which when annualized, represents a 12.9% yield based on the stock price of $23.19 as of January 6, 2026, offering strong current income from an investment value standpoint. Though we did see an increase in adjusted NII of $0.03 per share from the previous quarter, our third quarter NII of $0.61 per share continues to reflect the impact of the last 12 months trend in decreasing levels of short-term interest rates and spreads on Saratoga investments largely floating rate assets as well as continued high levels of repayments. Strong originations outpaced repayments during the third quarter, which when coupled with the repayment of a $12 million baby bond resulted in our cash position at quarter end decreasing to $169.6 million, though we still have significant cash available to be deployed accretively in investments or to repay existing debt. During the quarter, we began to see an increase in M&A activity despite continued competitive market dynamics. While our portfolio again saw multiple debt repayments in Q3, we had strong new originations, resulting in net originations of $17.2 million for the quarter. Specifically, we originated $72.1 million in 3 new investments and 9 follow-ons as well as closing on new investments in multiple BB and BBB structured credit securities. Our strong reputation and differentiated market positioning, combined with our ongoing development of sponsor relationships, continues to create an attractive investment opportunities from high-quality sponsors, which is continuing post quarter end with 4 new portfolio company investments, either closed or closing in Q4 so far, which further improves our run rate earnings. We continue to remain prudent and discerning in terms of new commitments in the current volatile environment. We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges. At the foundation of our strong operating performance is the high-quality nature and resilience of our 1.016 billion portfolio with all 4 historically challenged portfolio company situations resolved. Our current noncore CLO portfolio was marked up, including realized gains by $2.9 million this quarter, more than offsetting the CLO and JV markdown of $0.4 million, resulting in the fair value of the portfolio increasing by $2.5 million during the quarter. As of quarter end, our total portfolio fair value was 1.7% above cost, while our core non-CLO portfolio remains 2.1% above cost. The overall financial performance and solid earnings power of our current portfolio reflect strong underwriting in our growing portfolio companies and sponsors in well-selected industry segments. During the third quarter, our net interest margin increased from $13.1 million last quarter to $13.5 million driven primarily by a $0.5 million decrease in interest expense, reflecting the recent $12 million baby bond repayments. This quarter's interest income remained relatively unchanged, benefiting from first average non-CLO assets increasing by approximately 0.9% to $962 million. And second, this quarter's repayments resulting in various accelerated OID recognitions. This was largely offset by 2 factors: First, the absolute yields of the core non-CLO BDC portfolio reducing from 11.3% to 10.6% due to SOFR rates resetting from earlier reductions, combined with the impact of lower yielding new originations during the quarter. And second, the timing of new originations and repayments in Q3. In addition, the full period impact of the 0.5 million shares issued through the ATM program in Q2 and the partial impact of the additional 0.1 million shares issued in Q3, resulted in a $0.01 per share dilution to NII per share. Our overall credit quality for this quarter continued to improve to 99.8% of credits rated in our highest category. There's just one investment remaining on nonaccrual status, Pepper Palace, which has been successfully restructured, representing only 0.2% of fair value and 0.4% of cost. With 83.9% of our investments at quarter-end in first lien debt and generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations, we believe our portfolio and company leverage is well structured for future economic conditions and uncertainty. As we continue to navigate the challenges posed by the current geopolitical tensions and volatility in the broader underwriting, M&A and macro environment, we remain confident in our experienced management team, robust pipeline, strong leverage structure and disciplined underwriting standards to continue steadily increase the size, quality and investment performance of our portfolio over the long term and deliver compelling risk-adjusted returns to shareholders. As always, and particularly in the current uncertain environment, balance sheet strength, liquidity and NAV preservation remain paramount for us. At quarter end, we maintained a substantial $396 million of investment capacity to support our portfolio companies, with $136 million available through our existing SBIC III license, $90 million from our 2 revolving credit facilities and $169.6 million in cash. This level of cash improves our current regulatory leverage of 168.4% to 183.7% net leverage, netting available cash against outstanding debt. Moving on to Saratoga Investments fiscal 2026 third quarter, key performance indicators as compared to the quarters ended November 30, 2024, and August 31, 2025. Our quarter end NAV was $413 million, up 10.2% from $375 million last year and up 0.7% from $410.5 million last quarter. Our NAV per share was $25.59, down from $26.95 last year and $25.61 last quarter. Our adjusted NII was $9.8 million this quarter, down 21.3% from last year and up 7.8% from last quarter. Our adjusted NII per share was $0.61 this quarter, down 32.2% from last year and up 5.2% from last quarter. Adjusted NII yield was 9.5% this quarter, down from 13.3% last year and up from 9% last quarter. And latest 12 months return on equity was 9.7%, up from 9.2% last year and 9.1% last quarter and above the industry average of 6.6%. While last year, saw markdowns to a small number of credits in our core BDC -- our core BDC, Slide 3 illustrates how our recent results have delivered an ROE of 9.7% for the last 12 months above the industry average of 6.6%. Additionally, our long-term average return on equity over the past 12 years of 10.1% is well above the BDC industry average of 6.9%. Our long-term return on equity has remained strong over the past decade plus, beating the industry 9 in the past 12 years and consistently positive every year. As you can see on Slide 4, our assets under management have steadily and consistently risen since we took over the BDC 15 years ago, despite a slight pullback recently, reflecting significant repayments. This quarter saw originations again outpacing repayments, resulting in an increase in AUM as compared to the previous quarter, and we continue to expect long-term AUM growth. The quality of our credits remains strong with just 1 recently restructured investment remaining on nonaccrual Pepper Palace. Our management team is working diligently to continue this positive long-term trend as we deploy our significant levels of available capital into our pipeline while at the same time being appropriately cautious in this evolving and volatile credit and economic environment. With that, I would like to now turn the call over to Henri to review our financial results as well as the composition and performance of our portfolio. Henri Steenkamp: Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal third quarter ended November 30, 2025, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q3 was 16.1 million, increasing from 15.8 million and 13.8 million shares for last quarter and last year's third quarter, respectively. Adjusted NII was $9.8 million this quarter, down 21.3% from last year and up 7.8% from last quarter. This quarter's increase in adjusted NII as compared to the prior quarter was largely due to the net interest margin changes that Chris mentioned earlier. The decrease from the prior year reflects lower AUM and base interest rates, along with the recent repayment of certain well-performing investments. The weighted average interest rate on the core BDC portfolio of 10.6% this quarter, compares to 11.8% as of last year and 11.3% as of last quarter. The yield reduction from last year primarily reflects the SOFR base rate decreases over the past year, but is also indicative of recent tighter spreads experienced on new originations versus historically higher spreads on repaid assets. Total expenses for Q3, excluding interest and debt financing expenses, base management and incentive fees and income and excise taxes increased by $0.5 million to $3.3 million as compared to $2.8 million last year, and increased by $0.8 million from $2.5 million last quarter. This represented 0.8% of average total assets on an annualized basis, unchanged from last quarter and down from 0.9% last year. Also, for investors interested in digging deeper into the income statement and balance sheet metrics for the past 2 years, we have again added the KPI Slides 26 through 29 in the appendix at the end of the presentation. Slide 50 is a new slide that we recently added comparing our nonaccruals to the BDC industry. You will see that our nonaccrual rate of 0.4% of cost is 8x lower than the industry average of 3.2%. This highlights the current strength and credit quality of our core BDC portfolio. Moving on to Slide 6. NAV was $413.2 million as of fiscal quarter end, a $2.7 million increase from last quarter and a $38.3 million increase from the same quarter last year. In Q3, $1.5 million of new equity was raised at or above net asset value through our ATM program. This chart also includes our historical NAV per share, which highlights how this important metric has increased 23 of the past 53 quarters. Over the long term, this metric has increased since 2011 and grown by $3.62 per share or 16.5% over the past 8.5 years. On Slide 7, you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis. Starting at the top, adjusted NII per share was up $0.03 in Q3. This is due to an increase in non-CLO net interest income during the quarter of $0.02, primarily driven by accelerated OID on repayments. The increase in BB investments interest income of $0.02 from higher assets and the increase in other income of $0.03 from both higher advisory fees on originations and prepayment penalties on redemptions. This was partially offset by an increase in operating expenses of $0.03, reflecting expenses related to the recent annual meeting and increased deal expenses and dilution from the increased DRIP and ATM program share count of $0.01. On the lower half of the slide, NAV per share decreased by $0.02 with the $0.14 under earning of the dividend, fully offset by net realized gains and unrealized depreciation of $0.14, including deferred tax benefit. This leaves a $0.02 net dilution from the ATM and DRIP programs. Slide 8 outlines the dry powder available to us as of quarter end, which totaled $395.6 million. This was spread between our available cash, undrawn SBA debentures and undrawn secured credit facilities. This quarter end level of available liquidity allows us to grow our assets by an additional 39% without the need for external financing, with $170 million of quarter end cash available, and that's fully accretive to NII when deployed, and $136 million of available SBA debentures with its low-cost pricing, also very accretive. In addition, all $269 million of our baby bonds, effectively all of our 6% plus debt is callable now, providing us the option to refinance them, creating a natural protection against potential continuing future decreasing interest rates, which should allow us to protect our net interest margin, if needed. These calls are also available to be used prospectively to reduce current debt. This quarter, we also repaid our $65 million in senior credit facility, refinancing it with the issuance of an upside $85 million credit facility with a group of banks led by Valley Bank. The terms of this facility are substantially the same while cutting the spread cost by approximately 150 basis points and extending the maturity to 3 years. We do have our $175 million, 4.375% 2026 notes maturing at the end of February 2026. We are currently assessing our existing liquidity and cash in addition to various capital markets options in determining the most optimal source to use to repay this. We remain pleased with our available liquidity and leverage position, including our access to diverse sources of both public and private liquidity and especially taking into account the overall conservative nature of our balance sheet and that most of our debt is long term in nature. Also, our debt is structured in such a way that we have no BDC covenants that can be stressed during volatile times, especially important in the current economic environment. Now I would like to move on to Slides 9 through 12 and review the composition and yield of our investment portfolio. Slide 9 highlights that we have $1.016 billion of AUM at fair value and this is invested in 46 portfolio companies, 1 CLO fund, 1 joint venture and numerous new BB and BBB CLO debt investments. Our first lien percentage is 83.9% of our total investments, of which 29.7% is in first lien last-out positions. On Slide 10, you can see how the yield on our core BDC assets, excluding our CLO investments has changed over time, especially this past year, reflecting the recent decreases to interest rates. This quarter, our core BDC yield decreased to 10.6% from last quarter's 11.3%, with 3/5 of the decrease, reflecting further core base rate reductions and the rest due to recent tight spreads experienced on new originations versus historically higher spreads on repaid assets. The CLO yield decreased to 10.0% from 11.8% last quarter, reflecting the inclusion of the new BB and BBB CLO debt investments to this category that have a yield of approximately 8% to 10%. Slide 11 shows how our investments are diversified through primarily the United States. And on Slide 12, you can see the industry breadth and diversity that our portfolio represents, spread over 41 distinct industries in addition to our investments in the CLO, JV and BB and BBB CLO debt securities, which are included as structured finance securities. And finally, moving on to Slide 13. 8.3% of our investment portfolio consists of equity interest, which remain an important part of our overall investment strategy. This slide shows that for the past 13-plus fiscal years, we had a combined $45.6 million of net realized gains from the sale of equity interests. This year alone, we have generated $6 million in net realized gains. This long-term realized gain performance highlights our portfolio credit quality, has helped grow our NAV and is reflected in our healthy long-term ROE. That concludes my financial and portfolio review. Our Chief Investment Officer, Michael Grisius, will now provide an overview of the investment market. Michael Grisius: Thank you, Henri. I'll give an update on the market since we last spoke in October and then comment on our current portfolio performance and investment strategy. We are starting to see a pickup in M&A activity in the market we participate in. But the biggest driver of our increased production is the success we are seeing in our own business development efforts. As seen by the fact that 5 of the 7 most recent new platform companies we have closed or are in process of closing are with new relationships. The combination of historically low M&A volume in the lower middle market for an extended time and an abundant supply of capital has kept spreads tight and leverage full as lenders compete to win deals, especially premium ones. Market dynamics remain at their most competitive level since the pandemic. We've also experienced repayment activity from some of our lower leveraged loans being refinanced on more favorable terms. Although we are seeing some signs of a pickup in M&A volume, historically low deal volumes have made it more difficult to find quality new platform investments than in prior periods. Since we can't control M&A activity, we focus on the things that we can control. In summary, to first stay disciplined on asset selection; second, invest in and generally expand our business development efforts in a market that is still largely underpenetrated by us; and third, continue to support our existing healthy portfolio companies as they pursue growth. The relationships and overall presence we've built in the marketplace, combined with our ramped up business development initiatives, give us confidence in our ability to achieve healthy portfolio growth in a manner that we expect to be accretive to our shareholders in the long run. Now before leaving this topic, I'd like to reiterate that we continue to believe that the lower middle market is the best place to be in terms of capital deployment. As compared to the larger end of the middle market, the due diligence we're able to perform when evaluating an investment is much more robust. The capital structures are generally more conservative with less leverage and more equity, the legal protections and covenant features in our documents are considerably stronger and our ability to actively manage our portfolio through ongoing interaction with management and ownership is greater. As a result, we continue to believe that the lower middle market offers the best risk-adjusted returns, and our track record of realized returns reflects this. Our underwriting bar remains high as usual, in a very tough market, yet we continue to find opportunities to deploy capital. As seen on Slide 14, providing additional capital to existing portfolio companies continues to be an asset deployment means for us with 25 follow-ons in calendar year 2025. Notably, we have also invested in 7 new platform investments this calendar year, reversing the decline we experienced in the prior calendar year. Overall, our deal flow is increasing as our business development efforts continue to ramp up. Our consistent ability to generate new investments over the long term despite ever-changing and increasingly competitive market dynamics is a strength of ours. Portfolio management is critically important, and we remain actively engaged with our portfolio companies and in close contact with our management teams. We ended the quarter with just 1 investment still on nonaccrual status, Pepper Palace and now only 0.2% of the portfolio at fair value and 0.4% at cost are on nonaccrual status. In general, our portfolio companies are healthy and the fair value of our core BDC portfolio is 2.1% above its cost. 84% of our portfolio is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in stressed situations. We have no direct energy or commodities exposure. In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention. Now looking at leverage on the same slide, you can see that industry debt multiples move closer to 6x with unitranche in the mid-5s. Total leverage for our overall portfolio is down to 5.05x, excluding Pepper Palace. Slide 15 provides more data on our deal flow. As you can see, the top of our deal pipeline is significantly up from the end of calendar year 2024. This recent increase of deal sourced is as a result of our recent business development initiatives, with 25 of the 79 term sheets issued over the last 12 months being for deals that came from new relationships. Overall, the significant progress we've made in building broader and deeper relationships in the marketplace is noteworthy because it strengthens the dependability of our deal flow and reinforces our ability to remain highly selective as we rigorously screen opportunities to execute on the best investments. Our originations this fiscal quarter totaled $72.1 million, consisting of 3 new investments totaling $40.5 million, 9 follow-ons totaling $25.6 million, and BB and BBB CLO debt investments of $6 million. Two of the 3 new portfolio companies closed in the quarter are with new relationships. Subsequent to quarter end, we closed or currently have been closing in our core BDC portfolio, approximately $89.3 million of new originations in 4 new portfolio companies and 6 follow-ons, including delayed draws, offset by $30.5 million of repayments. Three of these 4 new portfolio companies are with new relationships. As you can see on Slide 16, our overall portfolio credit quality and returns remain solid. As demonstrated by the actions taken and outcomes achieved on the nonaccrual and watch list credits we had over the past year, our team remains focused on deploying capital and strong business models where we are confident that under all reasonable scenarios, the enterprise values of the businesses will sustainably exceed the last dollar of our investment. Our approach and underwriting strategy has always been focused on being thorough and cautious. Since our management team began working together 15 years ago, we've invested $2.4 billion in 125 portfolio companies and have had just 3 realized economic losses on these investments. Over that same time frame, we've successfully exited 85 of those investments, achieving gross unlevered realized returns of 14.9% on $1.34 billion of realizations. The weighted average returns on our exits this quarter were consistent or even slightly higher than our overall track record at around 15.6%. Even taking into account the recent write-downs of a few discrete credits, our combined realized and unrealized returns on all capital invested equal 13.5%. Total realized gains within the quarter were $3.1 million across 2 portfolio companies and year-to-date were $6 million. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien senior debt. As mentioned, we now have only 1 investment on nonaccrual, although Pepper Palace has been restructured, we are still classifying it as red with a fair value of $2 million. Pepper Palace continues to be managed actively with several initiatives underway. In addition, during the quarter, our overall core non-CLO portfolio was marked up by $2.9 million, including realized gains, reflecting the strength of our overall portfolio. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital and our long-term performance remains strong as seen by our track record on this slide. Moving on to Slide 17, you can see our second SBIC license is fully funded and deployed, although there is cash available there to invest in follow-ons, and we are currently ramping up our new SBIC III license with $136 million of lower cost, undrawn debentures available, allowing us to continue to support U.S. small businesses, both new and existing. This concludes my review of the market, and I'd like to turn the call back over to our CEO. Chris? Christian Oberbeck: Thank you, Mike. As outlined on Slide 18, our latest dividend of $0.75 per share in aggregate for the quarter ended November 30, 2025 was paid in 3 monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended February 28, 2025, marking the fourth quarter of our new dividend payment structure. We also distributed a $0.25 per share special dividend, which was paid in December. Board of Directors will continue to evaluate the dividend level on at least a quarterly basis, considering both the company and general economic factors, including the current interest rate and macro environment's impact on our earnings. Moving to Slide 19. Our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 11%, vastly beating out the BDC indexes negative 4%. This places us in the top 6 of all BDCs for calendar 2025. Our longer-term performance is outlined on the next slide, Slide 20, which shows that our 5-year total return places us above the BDC index, and our 3-year return is in line with the industry. Additionally, since Saratoga took over management of the BDC in 2010, our total return of 851%, has been almost 3x the industry's 283%. On Slide 21, you can further see our last 12 months performance placed in the context of the broader industry and specific to certain key performance metrics. We continue to focus on our long-term metrics such as return on equity, NAV per share, NII yield and dividend growth and coverage, all of which reflect the value our shareholders are receiving. While NAV per share growth has lagged this past year, this is largely due to last year's 2 discrete nonaccrual investments previously discussed. With regards to NII yield and dividend coverage, the recent repayments of successful investments have reduced this fiscal year's NII, leaving a healthy level of cash available for future deployments. In this volatile macro environment, we will be prudent in deploying our significant available capital into strong credit opportunities that meet our high underwriting standards. Our focus remains long term. We also continue to be 1 of the few BDCs to have grown NAV accretively over the long term and have a consistent, healthy return on equity with our long-term return on equity at roughly 1.5x the industry average, and latest 12 months return on equity also beating the industry by 310 basis points. Moving on to Slide 22. All of our initiatives discussed on this call are designed to make Saratoga investment a leading BDC that is attractive to the capital markets community. We believe that our differentiated performance characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions. These differentiating characteristics, many previously discussed, include maintaining 1 of the highest levels of management ownership in the industry at 10.8%, ensuring that we are strongly aligned with our shareholders. Looking ahead on Slide 23, while geopolitical tensions and macroeconomic uncertainty remain ongoing factors, we began seeing renewed momentum in the M&A activity across the market, and we continue to focus on expanding deal sourcing relationships. At the same time, our portfolio continues to perform, and we remain encouraged by the resilience and strength of our pipeline. While broader sentiment towards private credit market has become increasingly cautious due to a few high-profile bankruptcies, we believe these issues are largely idiosyncratic and not indicative of the broader credit market fundamentals. In addition to these companies not being representative of the lower end of the middle market that we participate in. Supported by our experienced management team, disciplined underwriting and strong balance sheet, we believe we are well positioned to responsibly grow the size and quality of our portfolio, generate consistent investment performance and deliver compelling risk-adjusted returns for our shareholders over the long term. In closing, I would again like to thank all of our shareholders for their ongoing support. I would like to now open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Erik Zwick with Lucid Capital Markets. Erik Zwick: I wanted to start first, Chris, in your prepared comments, you mentioned that you saw an increase in M&A activity in the most recent quarter. And I'm curious if maybe you could just provide a little more color there in terms of whether that was fairly broad-based or has it been concentrated in a few industries. And do you expect that to continue into '26 here? Christian Oberbeck: Well, I guess we're not really equipped to talk about the entire M&A marketplace. But I think, clearly, just take the large end of some mega, mega deals done last year, and that are fairly new to the market recently. So large M&A has picked up substantially. And then in the world that we're focused on, we're just seeing more deals, more -- more people are getting ready to transact on both sides, sellers and buyers. And I think as Mike mentioned in his remarks, and I'll turn it over to Mike to talk more -- more specifically, I think we're also seeing, even though the M&A is up, we're seeing a lot more competition. So there's just a lot of interest in all these M&A transactions. So we are hopeful that this is the beginning of a -- sort of back to more of a normalization of the level of M&A that we've seen in general that has been missing over the last couple of years. Mike? Michael Grisius: Yes. Let me expound on that. So when we look at the deal flow that we're getting from our relationships that we've had for years, we view that as kind of more of an indicator of the M&A market moving because we're already seeing deal flow from that group. And if their deal flow is picking up, we view that as a good sign and probably reflective of M&A activity growing. It's a little too early to say with certainty, but certainly, we do see a pickup there, and we're seeing more change of control transactions there and getting involved in more processes, which is great. One of the things that we like so much about being at our end of the market is that, we're not just beholden to the M&A market and having to just kind of wait for the tide to come in, if you will. At the lower end of the middle market, there's just thousands upon thousands of companies. And so if you put effort into getting deep into the various markets throughout the country and getting to know the different deal dealers and investors in these small end of the market, you can drive a lot more deal flow. And that deal flow doesn't necessarily move 1 to 1 with the larger M&A activity. Some of these businesses get -- involved in a change of control transaction because there's somebody is retiring and moving on and deciding to sell their business. It might be baby boomer activity, things of that nature. And so we're in a position where certainly we're affected by M&A activity, and we are seeing a pickup there. But we also feel like our destinies in our own hands, which you see in the origination activity that we've been successful with. Recently, a lot of that's just based on us, doubling down on our outreach in the marketplace. Erik Zwick: That's great color. And then moving to Slide 13, where you've outlaid kind of the historical trends for realized gains. It's nice to see over the past 3 quarters, you've returned to your longer-term trend of positive gains there. And I know it's hard to have too much of a forward-looking view there. But anything expected in the near term, either in the current quarter or maybe a quarter out where you might see some more realizations there? Christian Oberbeck: As you can appreciate, we're not in control of that. And so it's hard for us to make a prediction. I mean there are some processes underway in some of our portfolio companies, but how they wind up is not something we're in a position to predict at this moment. Henri Steenkamp: Yes, Erik, I would say just timing is hard to say, but what we are really happy about is that on the noncore -- sorry, our core non-CLO BDC business, our fair value is about 2% above our costs. So that's just from an overall perspective, which obviously we're happy to see. Erik Zwick: Got it. And last one for me. Just thinking about the impact of lower short-term interest rates. You noted that several times during your comments, you've got a slide addressing that. I think that November cut probably has not been fully realized in the portfolio and not the December cut as well, and the futures market is looking at another 50 as well as spreads remaining tight. Henri, you mentioned the opportunity on the liability side to maybe bring out some cost savings there. So just trying to think about the earnings power from kind of the current level that you just reported, is holding the line there, would you consider that success kind of given the headwinds there? Or is the opportunity to put some of that liquidity to work that you've mentioned provides you the opportunity to potentially grow NII dollars over the next few quarters? Christian Oberbeck: Well, I think you laid out pretty much a number of our considerations. One thing to add perhaps is capital deployment. I mean we've got a lot of capital that hasn't been deployed yet. We have a growing pipeline. And so I think the mix of all those things you've described, including incremental deployment, those are all the factors that we're looking at and working on them. I think our quarterly progression this year, we think this is very positive and sort of on all fronts. And so we're hopeful that, that will continue. We obviously can't predict it. We do have those headwinds, but we've had those headwinds all year and we're still to continue to make progress. And we hope to -- again, I think that capital deployment is probably the place to look for. And I think also as the M&A market expands, we're hopeful that maybe the spread compression will go in other direction. I mean there's lots of -- there's AI, there's mega deals. There's all sorts of things happening in the M&A marketplace that hopefully are going to result in. And then maybe the private credit, the bloom is off the rose a little bit. There's a bad press out there. So maybe the flow of money into it that isn't quite the magnitude that was before. So hopefully, the whole thing settles out to a much more normalized place. I mean we personally -- I think in our opinion, we think spreads are tighter than they should be relative to all the factors out there. And we think that's more of a temporary thing. And so -- as interest rates go down, spreads may widen as they have generally historically. So I think putting all that mix together, we feel are well equipped and well positioned to make the best of the opportunities ahead. Operator: Our next question comes from the line of Casey Alexander with Compass Point Research & Trading. Casey Alexander: Mike, this is for you. I probably heard 5 or 6 times during the prepared remarks about tighter spreads on new investments. And I'm interested, what's the trade-off to make sure that you're receiving an adequate risk-adjusted rate of return, right? Are you -- is the spreads allowing you to still capture the covenants? Is that a competitive aspect? Is it being the spread allowing you to capture a new relationship? Or is the spread allowing you to capture a little additional equity on the deal? How do we get comfortable with that you're still earning an adequate risk-adjusted rate of return when spreads get tight like this as they have been? Michael Grisius: Well, I think the way I'd answer that question is that we don't necessarily look at it as a trade-off. The spreads are tightening. And the way we look at every deal is do we feel like the fundamental risks of the investment that we're making are level set. That is, are we getting a return where we feel like it's appropriate from a risk-adjusted standpoint. Do we feel like under almost all reasonable circumstances, we're going to get our capital back and we're going to earn a good return over time. And is that going to be accretive to our shareholders relative to our cost of capital. So we enjoy the benefit of the SBIC license, which gives us very favorable cost of capital. We certainly evaluate which deals fit in the SBIC and price those accordingly. But all the deals that we're doing, we're looking at as being from a standpoint of being accretive to our shareholders, for sure. I would also point out one of the things that's really nice about being in our end of the market, which you don't see in the middle market so much is we referenced the 7 deals that we closed or have in closing right now, 6 of the 7 of those deals, we have an equity co-investment. And you also heard us reference the return that we've got on some of the exits this quarter, which were about 15%. Most of that delta between the current rate and that ultimate IRR are achieved through the equity co-investments, which is pretty core to our strategy and not something that the middle market or upper middle market enjoys. Casey Alexander: Okay. My last question is, it seems like over the last 2 or 3 years that the majority of the new portfolio companies have come from new relationships. And while I understand that you want to broaden the platform, at the same point in time, there's value to the deals that you have from the existing relationships because you tend to know how they act when things get sideways. And so I just want to hear how you're balancing that risk because new relationships sometimes can surprise you when things go wrong, and so I want to get a feel for how you feel about that effort? Michael Grisius: Yes. And that's a very fair question and something that we spend a lot of time thinking about as well. I would remind you that for us, what's so neat about our business model and our investment approach is that most quarters our follow-on activity exceeds our new origination new platform activity. So most of the investments that we're making, we're sort of coming in with a relatively small bite-size, and then we're watching the performance of the asset and then we're supporting their growth over time, and it gives us sort of option value, if you will. And most of that historically has really been candidly with existing relationships. This progress that we've been making with new relationships is relatively new thing, and it's been a result of a lot of the business development efforts that the whole team has embarked upon, I'll call it, in the last year to 18 months. That -- the gestation period of getting a deal done with a new relationship is quite long. In a lot of ways, we wish it were shorter. But ultimately, it's quite long, and it's one of the reasons you have some pretty healthy barriers to entry in developing new relationships. But typically, when we're cultivating a new relationship, we have a really good sense of the sponsorship's reputation in the marketplace. We have a really good sense of the portfolio that they've constructed, how it's performed. We have a really good sense of the key team members. We generally have been in the market for a long time. We do a lot of work trying to get comfortable that the ownership group is the right one for the asset that they're investing in and that we're supporting. So it is something that we take a lot of take into account. And I would tell you, the bar is a bit higher as you correctly pointed out, when you know a group and you know exactly how they behave and what -- where they're really good, and maybe where they don't have as strong an investment perspective, it can make it easier to make investment decisions. When you don't have that history, you've got to do a lot more work, which is something that we have done and we'll continue to do. Christian Oberbeck: The other thing I would add, Casey, is that is the opportunity side of this, which is these are -- these are new relationships for doing a deal. We've been courting these people for a long time. And so in many instances, we've been tracking them. So it's not like they're brand new parties. And if you look at how we grow and our market opportunity across the smaller middle market, each one of these new relationships can all of a sudden lead to, as Mike was describing, a series of investments with follow-ons and sort of a compounding growth effect in terms of the opportunity flow. And relatively, I'm not going to say proprietary because that might be too strong a word, but certainly preferred flow in our direction with us having a lot more control over our participation in the follow-ons and the new deals. Operator: Our next question comes from the line of Heli Sheth with Raymond James. Heli Sheth: So obviously, in the same tune as Erik and Casey, originations and repayments were elevated this quarter, and there seems to be a pickup in the M&A market. Any sort of shift in the mix of the kind of deals you're seeing in the pipeline in terms of sponsor versus nonsponsor, incumbent versus new borrowers or LTVs? Michael Grisius: Really, really good question. Not a significant difference in that respect. We have developed a really strong expertise in SaaS lending. We continue to see, therefore, a lot of deals in that space and think that it's still a rich market for us to lend to and invest in. But I would say that we've also grown our relationships outside of that space, and we are seeing probably more deals outside of the software space than we have historically. So the majority of the deals that we've done or have been closing are non-software deals that are kind of core lower middle-market businesses generally. Outside of that, I think the flavor is what it typically is, a mix of mostly sponsored deals, but also some deals where they're an independent sponsor or we're backing a management team directly. And that's been a core part of our business as well and has been an area where we've invested very successfully. Heli Sheth: Alright. That's helpful. And you mentioned kind of also investing outside SaaS and tech. I know AI has been a concern when it comes to lending. So any ideas of what industries you would say are vulnerable to AI outside of tech? Michael Grisius: That could be a much, much longer answer than I could give on this call. But I would say when we're looking at any business, we're always evaluating it from a perspective of what is it that AI brings to the table. And could AI change the business in a very significant way where it could get disrupted. And if the conclusion is that it's hard to say how the impact is going to be, we're going to steer away from those deals. So it's -- I think the AI development is relatively new, but it's something that we're highly attuned to and evaluating for every single deal that we look at. I would say there's also some portfolio companies that we have, where they're incorporating AI and they're using it to improve their business in a way that is improving the credit profile of some of our portfolio companies as well. So it's -- it's a double-edged sword, but it's something that we're very much focused on. Christian Oberbeck: And we're definitely staying away from taxi medallions. Heli Sheth: Perfect. And then 1 last quick one. Could I get the spillover balance as of the end of the quarter? Henri Steenkamp: Yes. And per share, Heli, it's probably around approximately $2 per share at the moment. Operator: And I'm showing no further questions at this time, and I would like to hand the conference back over to Christian Oberbeck for closing remarks. Christian Oberbeck: Well, I would like to thank everyone for their time and interest and support of our Saratoga Investment Corp., and we look forward to speaking with you next quarter. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.
Ken Murphy: Good morning, everyone, and a very happy New Year. Thank you for joining us today for our quarter 3 and Christmas trading update. As usual, I'm here in Welwyn with Imran, and I'll start with a brief overview of our performance before opening the line for your questions. We are delighted with the way the customers have responded to our continued investments in value, quality and service. Group like-for-like sales grew by 2.9% over the 19 weeks, including 3.7% growth in the U.K. Customer satisfaction improved, and our U.K. market share is at its highest level in more than a decade, following 32 consecutive periods of gains. We set ourselves a challenging plan for Christmas, and we delivered in line with that plan. With over 2 billion products going through our tills and more than GBP 6 billion of sales in the 4 weeks to Christmas Eve, our teams right across the group worked hard to deliver the outstanding service that customers have come to expect from Tesco. I would like to start the call today by saying a huge thank you to them for delivering a Christmas we can all be proud of. Our performance builds on last year's successful results and reflects the strength of our core food offer. In a highly competitive market and with customers looking to make their money go further, we saw particularly strong growth in fresh food with like-for-like sales up 6.6% in the U.K. Running alongside familiar festive favorites, we launched 340 new and improved own brand Christmas products, including 180 in Finest. We recognize that for many families, the cost of Christmas can be a stretch. We did everything possible to make sure our customers got the best value from us. Starting with our fresh Christmas dinner for a family of 6 for under GBP 10, and just GBP 1.59 per person, it was even better value than last year. More broadly, our rate of inflation eased through the Christmas period and continues to be materially behind the market. We also invested in making the Christmas shop even easier for customers, including hiring over 28,000 additional colleagues. And with support from AI-powered scheduling tools, we offered more than 100,000 extra online delivery slots in the week before Christmas. Through better forecasting and planning, AI also helped us to deliver best-in-class availability and to optimize deliveries across our network. Customers continue to embrace Finest with sales growth of 13% in the U.K., including a 22% increase in our Finest party food range. Highlights included Christmas center pieces such as our Finest Turkey Crowns and Chef's Collection Beef Wellington as well as our curated Finest gifting range and a long list of award-winning products. We sold around 21 million Finest pigs in blankets, along with 2.5 million bottles of Finest Prosecco. We also saw strong demand for low alcohol options, including selling almost 0.25 million bottles of Nozeco. While Turkey retained its popularity, some customers opted for other meats this Christmas with sales of beef joints up 29%, making it the most popular alternative. Online remains our fastest-growing channel with growth of 11% across the 19 weeks. It was our biggest online Christmas, including our 2 busiest days ever. In the week leading up to Christmas, we delivered on average 2 orders every second. Whoosh also performed strongly with sales up 47% and more than 0.25 million customers trying it for the first time. Both in-store and online, customers benefited from additional value through Clubcard. Alongside thousands of Clubcard prices per week across a broad range of family favorites, we offered customers more personalized rewards, including gamified experiences with Clubcard challenges. Our retail media offering continues to engage customers and brands, including the return of sponsored Christmas Gratis now in their third year. The Tesco Media team continued to make great progress, and we were delighted to be named Media Brand of the Year at the Media Week Awards. In Ireland, we built on last year's strong performance and are now in our fourth year of market share gains with fresh food continuing to lead the way. With 5 openings in the period, including 2 large stores, we now have 190 stores in Ireland. We continue to roll out Whoosh, which is now available in Dublin, Galway and Cork. Booker performed well despite challenging market conditions, with increased customer satisfaction scores in both core catering and retail. Our wine and spirits specialist, Venus, continued to win new business. And in our symbol brands, Premier opened its 5,000th store. In Central Europe, our targeted price investments contributed to growth in both food and nonfood across the period despite a backdrop of subdued consumer confidence and increased competition. Value continues to be a key priority as customers seek to make their money go further, and we're determined to do everything we can to help. Earlier this week, we launched a new commitment to Everyday Low Prices on over 3,000 branded products, alongside our existing Aldi Price Match on more than 650 lines and thousands of Clubcard prices. Our strong performance this Christmas gives us the confidence that group adjusted operating profit will now be at the upper end of the GBP 2.9 billion to GBP 3.1 billion guidance range that we issued in October. We continue to expect free cash flow within our medium-term guidance range of GBP 1.4 billion to GBP 1.8 billion. So as we move to your questions, I just want to say another big thank you to all our colleagues for everything they did to help our customers to have a brilliant Christmas. Thank you all for listening, and I'll now hand back to Sergei. Operator: [Operator Instructions] Our first question is from Rob Joyce from BNP Paribas. Robert Joyce: So the first one, Ken, you referenced the easing food inflation over Christmas. Was that the entire driver of the slowdown versus 3Q? Are we seeing any sort of broader volume slowdown in the market? And do you think the overall market stepped down over Christmas? That would be the first one. And then the second one is probably a bigger question, but clearly guiding to a broadly flat EBIT this year after strong top line performance. What do you think needs to change for you or the market for you to be able to return to profit growth? Ken Murphy: Thanks, Rob. Happy New Year. Two great questions. Look, I think definitely, the very strong trading plan we put together contributed to the drop in the kind of overall market growth. And therefore, the easing of inflation was a material factor. There was also a step down in volume, even though we outperformed the market in terms of our volume growth, and we're really pleased with that consequentially. So I would say that our performance was pitched exactly right. It was an aggressive trading plan, but it was complemented with a fantastic product innovation pipeline and really consistent execution, both online and in stores. So for us, it's been a really pleasing performance. In terms of -- you're right, the guidance is broadly flat year-on-year. I think that's an exceptional performance if you think about where we started this year and some of the competitive activity that we responded to. What I'm really pleased about is how decisively we acted and how we got on the front foot and delivered very strong market share performance consistently across the year. And what's particularly pleasing, Rob, is that we didn't stop investing in the future. So we've been making substantial investments in our store estate, substantial investments in automation to keep our savings programs going, and even more importantly, making substantial innovation, investments in technology for the future. And so we've got a very clear strategy. We believe in the long-term possibilities for this business, and we're quite confident for the future. Imran Nawaz: And maybe if I could just add maybe 2 bullets from my end as well, Rob. Two things on the ability to upgrade the outcome for this year and continue to invest to continue the momentum and continue to protect the position of strength that we have, I think, is not a bad place to be. The second thing to your sort of longer-term question, it's important to go back to the performance framework that we did set out almost 5 years, and we really stick to, which is we are very clear that we want to continue to drive up customer perception, to drive up market share, which in turn drives up profit and drives up cash. And I think you've seen us do that year in, year out. I think this year was an exceptional year with an exceptional reaction to a competitor, but I think we stuck to our guns. We invested into the proposition. We invested into price and truthfully, being able to upgrade is a nice feeling, because it demonstrated that everything we've done really worked out well. Robert Joyce: And just a quick follow-up on that inflation point. Do you think -- is the inflation then more -- the slowdown more driven by your own investment in price relative to your sort of input costs? Or are you seeing input costs falling more broadly? And does the kind of -- I'm just looking at next year and thinking people have got -- markets got Estimates U.K. growing above 3%. Does that look a bit ambitious given the Christmas exit rate? Imran Nawaz: Look, let me take first the Christmas specific question. Look, Kantar calls around an inflation of around 4% or so, slightly north of 4% over the Christmas period. As Ken just said, we made conscious choices to invest. There's no other time when you've got so many customers in your stores and you build momentum. And if you look at our market share gains, our volume market share gains were even stronger than our value market share gains over 12-year records. And I think you get -- that pays back as you then go into Jan, Feb, March and April into the next year. So I'd say to you, it was a conscious decision to invest into value, which we saw pay off in the market share. Then in terms of next year's outlook, you know as well as I do that inflation is a driver of commodities as much as it is of stickier costs on payroll. All of those things are still to be worked out, and we'll see where we land when we talk to you in April. Operator: Our next question comes from Xavier Le Mené from Bank of America. Xavier Le Mené: A quick one actually on the market share. As you said, you've got the strongest market share ever for the last 10 years. But where potentially do you see your peers? Do you still think that you've got opportunity to grow your market share? Or are you more in a position to defend what you've got right now? Ken Murphy: So Xavier, we are always thinking offensively rather than defensively. That's our mindset. And we see it less about the market share per se and more about are we doing the right things for all our stakeholders and particularly our customers. So are we getting our value right? Are we getting the quality of the proposition right from a product point of view? Are we getting our execution right? And are we innovating and thinking about the future in ways that customers' trends and needs are adapting. And that's really where we focus all our energy. And then we look to market share as a measure of how successfully are we executing against that strategy. So we don't see any limits in terms of where we can take market share, but it is not a given. It's something that we have to work very hard to achieve. Xavier Le Mené: Right. And just one follow-up on actually Rob's question. Sequentially, you said you've seen a bit of a slowdown. It sounds like it's also market driven, but do you expect the slowdown to continue heading to '26, or do you think that potentially it's more a question of consumer confidence and hopefully, U.K. consumers getting a bit better going forward? Imran Nawaz: Look, I mean, I think when I look at consumer confidence this year, I would say it's mixed. But it's been mixed throughout the entire year, right? What you saw was people that are -- there's a cohort of groups that are, frankly, in a good place and feeling comfortable with their savings and their spending, and there's a group of people looking for value. I feel we saw that reflected. When you look at Finest's performance, in a way it's a reflection of the fact that people looking for value and quality at the same time were able to hit that. So I think our Everyday Low Price campaign that we're launching, again, hits the bull's eye on that. I think addressing all of those opportunities for those customers looking for value is the right way to go forward. Fair to say that as you -- the question behind the question is, was the market overall a bit softer over Christmas? I'd say yes, on a volume basis. The reality, though, also is because we really outperformed every single month over the last 19 weeks on a volume share basis, we were not really affected by that. And I think one proof point for me is the way we exited the year was very clean on stock. Then how it plays out next year, we'll obviously talk to you again in April. But look, one of the things that we do feel good about in this business is, and I think we've demonstrated that over the last 5 years is, we are very good at adapting ourselves to whatever the environment throws at us. And it's one of the reasons why we've put value at front and center of everything we're doing. Operator: We'll now take our next question from Manjari Dhar from RBC. Manjari Dhar: Just 2 questions from me, please. My first question is on supplier-funded promotions. We've seen them picking up over recent months. Just wondering how much higher could this go? And if it does continue to drift higher, does that change your approach for the Tesco business, maybe for your private label business? And then my second question is on the digital data opportunity. I guess how much further is there to go with Clubcard personalization and AI? And what sort of things should we be expecting this year? Ken Murphy: Thanks, Manjari. So I would start off by saying that kind of supplier-funded promotional penetration or participation is actually only returning to what it was pre-COVID. So it's not like it's wildly out of kilter with historical norms. That's the first thing to say. The second thing is that actually, as you saw from our announcement this week, we have reinvested a lot of promotional funding back into everyday low pricing through the extension of our low-price campaign from 1,000 to 3,000 lines. And that really is based on an insight from customers that say they need reliable low pricing during these months where money is tight and they're watching every penny. And so that is the first signal, by the way, that we are kind of -- we are responding to customers' needs in the moment. So I'm kind of relaxed about that, if you like. I think it's a normal... Imran Nawaz: And maybe to give you a number on that, just to give you a sense to underpin Ken's point, last year's promo percentage was around 33%, and this year was 34% over that 19-week period, which gives you a sense. There was a slight creep up, but not massive. Ken Murphy: Yes. It was artificially depressed during COVID, Manjari. So it was very hard to compare apples with apples. If I go to your second question, which is a very exciting question. It's a question we're really excited about. We don't see any limits to the opportunity around data and particularly the opportunity to serve customers better through data, getting to understand their needs better, responding much more dynamically, using AI to help us be there for customers whenever they need us. And we're investing behind that, and we'll continue to do so. And I think it will be something that you'll see continuous improvement from us over the next number of years. I think there's infinite possibilities. Manjari Dhar: Great. Maybe just a quick follow-up. Should we be expecting investment levels behind that overall group CapEx to slightly step up now as a result? Ken Murphy: Well, we've always been quite clear about our kind of breakdown of CapEx being kind of a 3-part logic, which is part 1 is where we're investing in our core estate renewal and the shopping experience. Part 2 is where we're investing in automation to support our Save to Invest programs, and Phase 3, which is all about innovation, technology investment for optimizing our proposition. And probably the greatest -- we've seen step-up investments across the board actually in all 3 areas. And that's been what's been behind our progressive increase in capital. And actually, as we've gone, we've kept a very close eye on return on capital employed, and that has also been improving over time. So we're very disciplined in how we spend our money. Imran Nawaz: Yes. And also what's really nice is, in the base, we've also reflected already increases year-on-year into our tech organization, because we know that this is an area of opportunity for both on the growth side, but also on the efficiency and savings side. Operator: We'll now move to our next question from Sreedhar Mahamkali from UBS. Sreedhar Mahamkali: Maybe 3 for me, if you don't mind. First one, in terms of improving price position versus the market statement and the comment in the statement, can you talk to us if it's been the case versus all operators as you see it, especially given one of your big competitors reset and continuing investment? That's the first one. Secondly, just trying to understand the new or renewed push on everyday low prices. A couple of questions there. Is this reallocating the promotional funding more to be fully behind Everyday Low Prices versus Clubcard Prices? How do you see the offer to the consumer changing in the round as a result of what you've been executing really well on Clubcard Prices already? And second one, sticking with Everyday Low Prices, is this first signal to us that 2026 is likely to be as big a year of investment as it was in 2025? Is that how we should read this? Ken Murphy: Okay. Thank you very much, Sreedhar. I think I'd start off by saying that our price position has strengthened over the year versus the market generally. And that I think more importantly, the sophistication of our pricing investment has improved through the technology investments we've made such that we focus on the lines that matter most to customers. So we're investing in value, but we're investing wisely and quite judiciously. And I think that is what has helped us to outperform the market. On your point around Everyday Low Pricing, I think that was a response to customer insight, which said they wanted more reliable pricing on everyday essentials in these key periods in January, February. And so we made a long-term commitment to, as you say, invest principally promotional funding back into Everyday Low Pricing. And you shouldn't read it as any more than us responding to a customer insight to give customers the best possible value in these early months of the year. And I don't think it's a signal of anything other than our intent to stay on the front foot from a value for money point of view in 2026. Imran Nawaz: Yes. I think one aspect, Sreedhar, that's important is we already have Everyday Low Prices on 1,000 SKUs. And what we're doing is because it worked so well, we're giving it more visibility, more color, and it's been expanded to 3,000 of people's favorite brands in the country. So from that level, it's also a confirmation of something working really well that we want to double down on -- or triple down on, I should say. Sreedhar Mahamkali: And in the round, I guess what I'm trying to understand is Clubcard Prices have been incredibly successful for you. Is this a recognition, to Ken's point, I guess, some of that needs to be more upfront shelf prices rather than Clubcard Prices. Is that how I should see it? Imran Nawaz: I mean, I think it's a continuous conversation depending on what customers are looking for, but I'd be very comfortable to say to you that as opposed to having only exclusive deals on Clubcard prices, we want to have more, as Ken said, more longer-term price fixes as we've been doing on Low Everyday Prices now rebranded. Operator: We'll now move to our next question from Clive Black from Shore Capital Markets. Clive Black: Also, very happy New Year. Very well done, by the way. Not an easy thing to deliver. The question I have is really around volume. First of all, why do you think volume in the Christmas period was a bit slower than you and maybe the industry expected? And in particular, do you think there are features around alcohol consumption and maybe diet suppressant drugs that are starting to kick in more noticeably in that respect? And then in terms of that volume, is that a key factor why you expect working capital -- or sorry, your free cash generation to come in with the existing guidance, which might mean that working capital is a bit of a flatter benefit year-on-year? Would that make sense? Ken Murphy: Clive, Happy New Year to you too, and thank you for your comments. I'll speak to the volume comment, and then I'll pass over to Imran maybe to talk about working capital. So I'd start off by saying that what was particularly pleasing about our performance is we outperformed the market on volume. I think it's fair to say that the market overall was a little bit softer on volume, but our outperformance was particularly important. And within that, I was particularly pleased with our fresh food performance. So speaking to your point about is there a little bit less alcohol consumption, is there an impact? I think there's a general impact from people wanting to eat and live more healthily. And for sure, within that, GLP-1 will be having an impact. But our fresh food sales at plus 0.6% were particularly strong. So my feeling is that whatever way this trend evolves, we're really well set up to take advantage of it. And we've been investing very heavily in our fresh food proposition over the last couple of years, and it has been the principal driver of our business, which we feel really pleased about. There's no doubt, as you saw from some of the stats that I shared on the call earlier that you are seeing a significant rise in low and no alcohol sales, but we respond to that as well. We have the products and the range to address it. And within our food range, we have a high number of high-protein products that are really well-suited to anybody looking to pursue that kind of diet. So we feel really well set for whatever trends are coming our way. But for sure, trends are emerging and we are keeping a very close eye on them. Clive Black: Sorry Ken. Just in that respect, Ken, are you therefore seeing -- sorry, are you seeing notable step back, therefore, in areas that are more exposed to change in ambient carbohydrates and the like? Ken Murphy: No, not really. I mean, we shifted an extraordinary amount of chocolate tubs over the Christmas period. So I think -- and I was a material contributor to that personally. So no -- the short answer is no, it's been really strong. Clive Black: Sorry, Imran? Imran Nawaz: Yes. No, absolutely. Just on your second question, I mean, just to reiterate what Ken just said, I mean, we -- and how it impacts cash, I mean, obviously, we were less affected by the market slowdown because if I look at Q3 and the Christmas period, we were growing volume every single month and outperforming on market share every single month. So that gives you a sense of it not being a real driver on working capital, because ultimately, volumes are positive. And more pleasingly, I could say that we're exiting very, very cleanly. Actually, I was very happy about that. I mean, we set up a very ambitious Christmas, and we delivered in line with that. And when you exit cleanly, it just helps you get momentum also into January, which is nice. In terms of cash flow, look, we had a very, very strong first half, over GBP 1.6 billion. As you know, typically, our cash flow is skewed towards the first half. And in the second half, you've got the payments out the door from all the supply you bring in for Christmas. So that phasing will play itself out as per normal. And as you know, our guidance on cash is that consistent range we've been giving, GBP 1.4 billion to GBP 1.8 billion. I know we've delivered always to the upside on that one. And so it's never stopped us from doing a good job, and the plan is to continue to do so. But as you also know, the working capital balances at Tesco are enormous. So just to give us a bit of flex in terms of any last-minute payments or receivables or anything like that, it gives us a bit of space to do that. But obviously, cash is important, and the plan is absolutely to continue to deliver within that range. Operator: Our next question is from Monique Pollard from Citi. Monique Pollard: Two from me, if I can. The first one, obviously, good market share gain, U.K. market share gains of 31 bps over Christmas. And from what I understand from the commentary from Imran, the volume market share gains over that period are even stronger than that. What I'd like to understand from customer feedback, the surveys you do, et cetera, are you able to give us some sense of how much of that you think is due to strong price positioning? And you mentioned your price position has strengthened versus the market this year, and you were aggressive in terms of inflation over the Christmas period. So how much of that is price positioning? And how much is things like investment in availability over Christmas, which is probably particularly strong versus particularly some competitors over the period and things like the store estate, staff in stores, et cetera, over that period? And then the second question is just me trying to understand that level of price investment that you've put in, whether some of that was seasonally specific to the Christmas period. As you mentioned, you never get that volume of customers in store and therefore, important to be on the front foot on price, or whether that is sort of something we should expect to be a bit ongoing? Ken Murphy: Right. Monique, so I think the short answer to your first question is that delivering the kind of market share performance we've delivered, not only over Christmas but right across the year, is actually a composite of great value, great quality, great execution. I think you'll have seen amongst some of our competitors that even if you drive a very strong value message, if you don't have the quality and the supply chain precision and the in-store execution to go with it, it's very hard to deliver the performance. So I would say that our market share performance has been a composite performance of everybody in Tesco across all the functions and departments doing their job really well and executing against the plan. So I think that would be the answer to the first question. The second question around price investment is that clearly, Christmas is the FA Cup final for retailers. So we all lean in very heavily to a very strong trade plan over Christmas. And it's also a chance for customers to reappraise your proposition, shop [ B2B ] for the first time and really like and appreciate what they see. So we work very hard from everything from product innovation through to hiring of nearly 30,000 extra people through to the very strong trade plan that we delivered. And that is quite a specific event. It doesn't necessarily mean anything for the rest of the year per se other than the fact that we will continue to invest appropriately. And I think as you saw from our announcement earlier this week, we acted against a specific customer insight for January, February, which said we needed to provide more reliable Everyday Low Pricing on a wider range of products. And so we've traveled our Everyday Low Pricing range to 3,000. And so what you can expect from us is that we will adapt constantly to insights from customers and react, so that we're giving them the best value and that's appropriate for the moment. Imran Nawaz: Another angle, Monique, as well to keep in mind is the perspective on channels. So when you look at where the market share gain came from over the Christmas period, we got it in large stores, which is great, because that's the key estate. But at the same time, that 11% growth we saw in online also led us to continue to gain market share in our online business, which was also great to see. And given the fact that we are over 36% market share in online, that gave us an extra benefit on market share as well. Operator: We'll now take our next question from Matt Clements from Barclays. Matthew Clements: First question was, you often give a very useful insight into the health of the U.K. consumer at your update. I was wondering if you could just talk us through how sentiment and spending evolved through the period, particularly around maybe November with the budget? And how do you think we're set up on consumer health into '26, government policy, et cetera? And then the second question was around Finest, which is compounding exceptional growth now. Any views on Finest into next year? I mean, particularly around the dining-out to dining-in trend? Do you expect that to continue? What's the innovation pipeline like? Anything on that would be helpful. Ken Murphy: Great. Thanks, Matt. So I think the first thing to say on consumer sentiment is that we've definitely seen that consumer sentiment is mixed. I think we have a section of the community that is in pretty good shape from a household budget perspective. And then we have a section of the community that is really struggling to make ends meet. And I think that is playing out overall in terms of how customers are shopping. They're very value conscious. At the same time, though, there is a significant proportion of households that are in decent shape financially, and they are looking for good value for money. And that, I think, is a big factor in what's driving our Finest sales. I think there is that trend towards eating in more and eating well, and that's driving our fresh food sales. And I think the consumer has shown great resilience in a lot of uncertainty. I think the budget is just one factor in a number of factors that's driving uncertainty. But we have seen a pretty resilient consumer in terms of their spending pattern and habits. And we continue to monitor it very closely. But we, to a certain extent, as long as employment remains strong, expect that resilience to continue. And Finest really is a subset of that. I think Finest, for us, is delivering on 2 fronts. It's responding to that trend of wanting to eat restaurant quality food in your home, but it's also responding to the fact that historically, Tesco would have undertraded in that particular meal occasion or mission. And I think what you've seen for us in terms of the amount of product innovation, the bravery to go deeper into distribution, to go into more and more different categories and cuisines has given us the confidence to really fight for fair share in that meal occasion. And so we still believe there's a lot of room for growth in Finest in the coming years. Operator: We'll now take our next question from William Woods from Bernstein. William Woods: Happy New Year. When you look at your success over the last 5 years, you've had great success with things like Aldi Price Match, Clubcard Prices, Finest, et cetera, and your peers have played catch-up. What do you think are the next levers that you can pull over the next 5 years to continue to innovate, continue to lead the market and gain market share? Ken Murphy: Thanks very much, Will. I think first and foremost, we would say that our strategy of focusing on the core basics and executing them brilliantly and consistently remains a fundamental pillar and foundation stone of our strategy going forward. The second thing I would say is that the building out of our proximity to customers in terms of their food needs is equally important. So what we've done in terms of extending our grocery home shopping, slot availability, the work we've done to build Whoosh into a really market-leading from a value point of view quick commerce model. The launch of F&F online are all contributing factors to getting closer to customers and making life more convenient. And then on top of that, we're working very hard to get really close from a data point of view to our customer base. And that is really starting to deliver results for us. And that, I think, is where the greatest opportunity lies is using data and insight to really get closer and closer to customers and anticipate and serve their needs, both digitally and physically. And we see clearly Clubcard at the very heart of that. And we also see dunnhumby as a clear source of competitive advantage to help us deliver that as well. And probably I should finish by saying something that's not necessarily the sexiest thing, but is absolutely critical, which is that we have an incredibly strong Save to Invest program. Imran has led this since he's joined the business. The step-up in our savings has been extraordinary from GBP 300 million a year to nearly over GBP 0.5 billion a year. And that shouldn't be underestimated in what it has allowed us to do in terms of stepping up capital investment, stepping up our investment in value without ever compromising on the customer journey. So they'd be the key pillars of what underpin our future growth opportunity. Operator: Our next question comes from Ben Zoega from Deutsche Bank. Benjamin Yokyong-Zoega: Just a couple of questions, follow-ups from my side. Firstly, on inflation, and secondly, on supply funding. So firstly, you say you've improved your price position against the market. I just wanted to ask, is this broad-based across competitors, or were there particular competitors that you'd call out as closing that gap against? And are there any particular product areas where you focused your price investments such as fresh foods? Secondly, on supplier funding, is it fair to say that the elevated levels of supplier funding in H1 has continued into Q3 and Christmas, particularly as the market turned more promotional? And are you able to comment on the levels of brand support behind the expansion of Everyday Low Prices? Imran Nawaz: Look, I mean, in terms of inflation and strengthening price position, I mean, we take a view, and we obviously have our own pricing strategy, and we have stuck to that since over the last 5 years. And look, we take a broad view that we want to continue to strengthen versus everyone. I mean, ultimately, the ultimate judge of how strong your price really is, is the customer. And the combination of Aldi Price Match, Clubcard Prices and now Low Everyday Prices, in our view, is the right combination, and it's made us stronger and stronger, and it's working well for us. And I would say to you, it's a broad-based strengthening across most of our competitors, which is good to see. Then in terms of promo intensity and supplier funding, look, the truth is, promo funding has gone up a bit. You saw that from the brands wanting to regain volume growth, which is good for us, because it comes under the banner of Tesco and Clubcard Prices. So we like to see that. That's a good thing. You will have noticed that the Low Everyday Prices is -- or Everyday Low Prices is brand oriented, which is good. Brands like to grow, and they can see that they have grown with Tesco online and in-store, and they want to continue to grow, and we have a great partnership with them. As ever, any campaign or events we run, there are always some investments from our side, some investments from the brand side, but you wouldn't expect me to give you some commercial details on the call here in terms of how we execute these. But suffice it to say, they are customer-centric and data-led. And clearly, the idea behind them is to continue to grow and gain share. Operator: And we'll now take our last question today from Karine Elias from Barclays. Karine Elias: Most of them have been answered, but just one final one. In the release, you mentioned, obviously, the competitive environment being as competitive as ever. Just broadly speaking, I think historically, you've called it more rational. Do you feel that that's still the case? Or perhaps there was some intensity going into Christmas? Ken Murphy: So the definition of rational is always a broad one when you're dealing with 10 to 12 different competitors who are all looking to win the basket from you. But I would say that the market intensity in terms of competition, pricing, et cetera, has remained strong since February last year. It didn't really change over Christmas. But I think what, and hopefully, you will have observed is that our response has been really decisive and really quick, and we have maintained that intensity throughout the year. And that's what really helped us underpin the very strong market share performance that you saw over Christmas. Operator: Thank you. That was the last question today. With this, I'd like to hand the call back over to Ken Murphy for closing remarks. Over to you, sir. Ken Murphy: Thank you so much, everyone, who's joined the call, took the time out. I know it's an incredibly busy day with a lot of announcements from various different companies. So we really appreciate you taking the time to join us. Thank you all for the excellent questions. I wish everybody a really happy New Year and a prosperous 2026, and I'm looking forward to seeing you all in April. Thank you. Goodbye.
Operator: Good morning, everyone, and welcome to Pure Cycle Corporation's First Quarter 2026 Earnings Call. We have had a great start to the year, and we're excited to share with you guys our results for the first quarter. A couple of housekeeping notes. The earnings presentation is on our website. So if you're listening on a phone or on replay, you can download the slides from our website. [Operator Instructions] And with that, I will turn over the call to our President and CEO, Mark Harding. Mark Harding: Thank you, Mark, and I'll add my welcome. As Mark sort of foreshadowed, we've had a very good first quarter. Typically, our first quarter is usually a little more challenging just because of weather issues. And for those of you that are watching for ski reservations, we've had a pretty dry year and a good weather year. So it's allowed us to really advance a lot of our construction projects out of Sky Ranch. So with that, let me go ahead and start the presentation. Our first slide is always our forward-looking statement, which includes the fact that statements are not historical facts contained in reference in this corporation are forward-looking statements. I'm sure most of you are familiar with our forward-looking statements qualifier. Always want to give a shout out to our management team. And here with me is Marc Spezialy as well as Cyrena Finnegan, our Controller, in the event that they have any specific questions that they might be able to weigh in on. But a great team of professionals that continue to really provide leadership to the company and really all segments of what it is that we're doing as well as our Board of Directors. We have a terrific Board, very heavyweight Board for a company of our size and all are really engaged and provide significant contributions to the company. But I want to give a shout out to our team and let you know their continued support and engagement. As most of you know, this is just a quick investment snapshot. We've got a continuing streak of profitable quarters. So we're very thrilled that we continue to deliver profitability and shareholder value. We operate in all 3 business segments: land development, water utilities and single-family rentals, and they're all doing great. We have good visibility with our land development. We're really striving to continue to develop and build our recurring revenue base. And then our great balance sheet, we continue to build, fortify our strong balance sheet and continue to invest in our business lines as well as grow the business and create shareholder value. So really a solid diversification of the company's activities. Let me jump into the quarter results. And as you see from a revenue side, great quarter on the revenue. Q1, really, I think it was a record-setting Q1 for us just because of the seasonality issues. And what we really see on the highlights are we brought in 2 new homebuilders to our portfolio that are really engaged in Phase 2D, which is what we're working on. We punched out completion of Phase 2C at the end of our fiscal year last year and continuing through with Phase 2D, and we'll talk a little bit more about 2E coming up. But due to the weather, we were able to get a lot of the curbs and even asphalt down in the November, December time frame, which is really unheard of here. So we're about 80% done with the roads in 2D, and that's about 5 or 6 months ahead of schedule. So really capitalizing on the weather, and we really kept our contractors engaged on the site so that as we continue to have that weather, we were able to capitalize on that. Moving over to the profitability side, net income and earnings per share, significant increases in net income and earnings per share, and that's a result of the progress on Phase 2D. So you see a significant uptick in both of those. So we're very pleased to be able to continue to deliver those results and streamline our revenues throughout the year. And this would be a more typical even flow of those earnings and those revenue streams. But with the seasonality, we kind of have those variability factors. Through the first quarter, we achieved about 1/3 of our fiscal year forecast. So we're ahead of schedule on what our guidance was. Take a look at that great start, bringing in a little over $9 million in revenue and then about $6.2 million in gross profit. So terrific results from our management team and our operators and folks in the field. Year-to-date results, net income, earnings per share, similarly, we're ahead of our guidance. We've got about 37% of our full year guidance on that. So terrific opportunity to continue to deliver that. And then really moving forward from how we're looking at developing the land side of it, really being able to be in a position to deliver more results on Phase 2E continuing to produce those lots for our homebuilder customers. So I really want to take those results and parse those out a little bit for everyone, so we can separate that out into the 3 segments and show you kind of what the contributions are for each of those segments, breaking them down into the water utility segment. As most of you are familiar with, we really have 2 revenue sources -- 2 classes of customers. We have our domestic customers, which is where we deliver water and wastewater to residential units. So those are customers that are at Sky Ranch. They're at other projects that we provide water service to in other areas. And then we have our industrial customers where we provide water to the oil and gas industry, primarily for fracking wells that they're drilling in and around mostly Roble County. We have done wells in other counties, but the bulk of our activity really centers around Roble County and the Lowry Ranch, which is our service area. And then in those revenues in the water and the wastewater side, we kind of have 2 different forms of revenues. We have the recurring monthly revenues where we're doing that on a metered basis. And then we also have the capital component of that, which are connections, which are really connecting to our water system from our homebuilder customers, our homes, businesses to each individual system connection and those are through the form of tap fees, and they're high capital costs, which are usually incorporated into a mortgage or the development of that business. And so those are the 2 revenue streams attributable to that. When you parse out that data, we continue to see strong customer growth of the recurring revenue. So we get a 22% customer CAGR. So we're very pleased about continuing to grow that recurring revenue. And while we had a record quarter overall, the water segment, a little bit softer than normal, and that was primarily attributable to just the timing of getting building permits, getting some of those tap fees and then also taking a gap in the oil and gas deliveries. We had our oil and gas operators concentrating on building a portfolio of well permits. And we'll see that sort of tick up the rest of the year. We've got a number of wells that have been drilled and completed, and then they're just starting fracking later this month, and they'll be fracking most of the year. So you're going to see a substantial uptick in that. You take a look at that in comparative quarters through the last couple of years, that shows you really kind of the variability of the oil and gas side, but we do expect that to tick up for the rest of the year. Taking a look at kind of that one specific industry on the oil and gas side, they fluctuate. And that, as I said, it really is a function of kind of permits and getting the sites constructed. They're building these large multi-well pad sites that will have somewhere between 10 and 20 wells on each of these pad sites. So they're really concentrating their activity to a pad site and they have the directional drilling on these pad sites. But as you see some of the trending in that, this is kind of an annual snapshot of how we look for oil and gas revenues. And as an illustration in 2024, they were pretty evenly distributed throughout the quarters. I think you're going to start to see a little bit of that similar activity of the quarterly distribution for the rest of the quarters for us in fiscal 2026. What we do like to do is kind of give you a feel for capacity, how much water is available for our high-volume customers like the oil and gas customers as well as where we're at on continuing to invest into the company's assets. So what we like to try to do is make sure that we have a steady pace of investment in water and wastewater infrastructure for our customers. and balance that out with sort of the need for that portfolio. And this kind of shows you we do have a substantial amount of capacity that we've invested in. And if you took a look at it just for the quarterly area, really didn't use all that much of it just because of that oil and gas variability. So we're really only using about 3% of our overall water portfolio and then taking a look at the capacity that we have for annual production, we can produce about 2,800 acre feet, and we really only used about 150 acre feet of that. So it does give you a sense of kind of what the pedal strength is on our water portfolio and our water system. Let's take a look at our land development segment. We're -- this aerial shot is illustrative of high school that is under construction. So we're very pleased to see that being coming out of the ground, and that will be completed in time for our kids for the fall of 2026. In our land development segment, you've heard us talk a lot about the various phases. Phase 2C, which we did complete last fiscal year, we're midway, a little bit more than midway on Phase 2D, and we have a percent completion methodology for how we recognize revenue on that. Continued lot protection for Phase 2D and then also moving into Phase 2E, which will be about another 160 lots, but we'll start grading on that sometime in this March time frame. And really enjoying some of that good weather so that we can continue to do some of that pavement and curbs and gutters for delivering those lots. If you take a look at the lot development revenue, this is really where the strength of the quarter came from is really building into that Phase 2D. We're complete with Phase 2C, really kind of highlighting some of this, if you want to take a look at the number of homes that are being built. And that's really kind of a function of the housing market. And I know there's a lot of press out there about the housing market and the strength of the housing market and how interest rates are impacting that. But we're seeing substantial continued support for what it is that we're doing. And I think that's largely indicative of our market segmentation as an entry-level product. Taking a look at the homes complete or under construction in Phase 2B, which is really going to balance out the inventory for each of our homebuilders out at the project, we've got about 85% of Phase 2B completely built out. Taking a look at Phase 2C, which is what we just delivered. There's -- we have one of our newer homebuilders going vertical with a strong portion of their portfolio. And then we even have one of our new builders into the portfolio already starting homes in Phase 2D, even though we haven't fully completed 2D, we have completed enough of the -- much of that infrastructure where we've got all the water, sewer, storm, curbs and gutters and access for that for them to start in 2D before we deliver all of those finished lots. And so what you're seeing is we typically had annual lot deliveries for what was a portfolio of 4 builders. And they try and manage out that inventory so that they don't take any more inventory than what they foresee is for an annual year production. And as we -- as the market sort of slowed, what we saw was that there was availability for other builders in there. So we moved our portfolio up to 7 national homebuilders working on that. So that gives us a strong portfolio of builders that each of them are continuing to maintain their desired level of inventories, and we can continue to pace our development of the project so that we're continuing to accelerate the monetization of the land side. This is kind of an illustration of sort of the snapshot -- the visual snapshot of each of the phases from the sub phases from Phase 2 here, some nice aerials with certain activities, each of our entry-level segmentations on these and a lot of product diversity where we have a 35-foot lot, 40-foot lot, 45-foot lot on the standard [indiscernible] but then we have segmentation into paired product, which is a townhome product -- I'm sorry, a duplex product and then also townhome products that really offer a variety of price points for this entry-level market. The land development time line, this is kind of an illustration of how we do the accounting for that, right? There's 3 basic phases that we deliver lots to our homebuilder customers. And that's at a plaque where you've got a severable title instrument to the individual lot, and we typically get 1/3 of our revenue for the lot payment on that. Then we do the grading and wet utilities with that money to deliver that progress payment. And then finally, moving into the roads, curbs and gutters to get the finished lot payment. So that kind of shows you a phasing of that, and it really shows you how we layer in the phasing by quarters. And really, I think the key area for us this year was being able to really substantially do a bunch of finished lots in this Q2, which typically doesn't happen for us just because of the seasonality. I want to really talk a little bit. We were able to expand and amend our interchange access permit with CDOT and really got us another phase. We've been talking about a lot of these subphases for 2, which started out as about 850 lots. And I think we have the flexibility to get about another 180 lots in there. And so this Phase 2E is about 159 lots. This is an aerial of where that's going to look. It's right across the street from the school there. And so we'll start grading on this spring, and you're going to start to see a bit more overlap in that chart we had before on how we deliver those lots to our homebuilder customers. As I mentioned, the key milestone was the start of production of the high school. And so this gives us a full K-12 campus on site, which is very -- it's a high advantage. Most of our homebuilder customers really in the feedback that they're getting from their purchasers, the school is one of the key elements that are driving people to Sky Ranch just because it's a local school, it's walkable for everybody. It's a terrific asset for us. What we always like to highlight is kind of some of the key areas of where the Denver metropolitan area is growing and kind of gives you a perspective. I think this is a graphic that many of you have seen before, but it kind of gives you the fact that we really grow one direction, right? We can't grow west just because of the mountains, and we find ourselves in really the most attractive submarket of the Denver metropolitan area along the I-70 corridor. If you're looking at the mapping on the right of this illustration, that black line at the top is the interstate I-70 shows you where Sky Ranch is positioned on that. And then the pink area is really our service area, the Lowry Ranch. And what you're seeing is more and more development occurring around the borders of the Lowry Ranch. And so we're excited about continuing to expand our operations out of the Lowry property as the State of Colorado determines what it is that they're looking for and how they'd like to monetize that asset for the school trust. I want to give you an update on single-family rental segment. We've got 19 homes now completed and all rented. So that segment continues to drive recurring revenues. We've got another 40 units under contract. And what we're trying to do is phase how those really hit the market. We're trying to phase those as around 4 or 5 units coming online each month, and that will start beginning in May and then bringing those units online so that we make sure that we can get them leased and continue to really offer an opportunity for those who are looking for a house but are running into the affordability challenges. And that continues to be one of the key issues in the housing market is the affordability. Taking a look at some of the individual performance on there, continued growth in the rentals. That's because adding more units online as well as capital appreciation of those assets. It's a very tax-advantaged segment for us because we retain the equity of the lot and the water service connections in there, and those houses continue to grow in value as we continue to add value to the overall community. Little bit about kind of the phasing of how we're looking at bringing these units online for each of these different phases from the first Phase 1, which we completed several years ago up through what we're looking for in 2E. So bringing online about 100 units for that. I'll talk a little bit about our capital allocation and kind of how we're building that continued shareholder value. Really want to emphasize each of these segments, the water segment, where we're growing assets in each of these segments through investing in them, whether we're investing into the brick-and-mortar of the land segment, whether we're investing into pumps and pipes and diversion structures for our water segment and then building our home inventory for single-family liquidity. We continue to grow the balance sheet in all 3 of these segments. and then really take a look at protecting and preserving the balance sheet so that we can have that liquidity for continuing to invest in our each business segment and deliver recurring revenues for our customers. How that looks? We drive shareholder returns through those recurring revenues in water, single-family units and a diversified mix of revenue from tap fees to industrial water fees. We have oil and gas royalties, which were substantially -- they were very strong last year. We continue to build our earnings. And really, each of these segments kind of build value from each other. So there's a vertical integration in some of those segments that give us where we get value to one, we're adding value to all. Shareholder value reiterates our fiscal year guidance as well as gives you some interim and build-out forecast revenues for our asset growth. So when you take a look at kind of the segment of the revenues, the water recurring revenues as well as single-family rental revenues, gives you a snapshot of how we're building that through the portfolio as well as what that asset growth is. We've talked substantially about kind of bringing on that asset value from Sky Ranch, building out the rest of the residential projects as well as the commercial projects. So great opportunities, and we continue to execute on that. Trending. This illustrates the profitability trend and our fiscal year guidance and kind of the near-term outlook. So again, we want to stay on pace with that. We've had a great quarter on delivering ahead of schedule and ahead of results on fiscal 2026. And then this kind of shows you as we get that interchange constructed, how we look to open up and unlock the balance of the portfolio value. Valuation and sensitivities. Our fiscal year guidance was in that $26 million to $30 million range. Earnings per share, $0.43 to $0.52 per share and kind of the upside in the timing acceleration for delivering some of those lots and how we might continue that trend. Continuing to reinvest in ourselves with our share buyback program and balance the liquidity needs of the company and how we're investing into each of our land assets against what we continue to believe is an undervaluation of the company's current trading price. What I also wanted to do, a bit of a new slide this quarter and really kind of illustrate, you've heard us talk about the interchange, its importance and kind of how it's phasing, and what we're looking to do is get that permit finalized with the county and CDOT sometime early half of this year and then really take a look at the bonding opportunities with some mill levies that we've reserved at the project and start construction on that in 2027. But this is kind of what it looks like, and how it's going to orientate to the overall development. We're -- the existing interchange will go away. We'll realign that along the section line and give it kind of a diamond interchange capacity here. And so this is obviously an important component for us to continue to build into Phase 3 as well as bringing online the commercial opportunities for that. Taking a look at a little bit longer-range outlook. The commercial parcels really provide a lot of the high-value land and a lot of the AV. That assessed value is really where the public improvement reimbursables get their strength on us not having to advance those funds, getting reimbursed. I think our receivable on that is currently around $50 million. And so the combination of the assessed value, Colorado's what we define as a sales tax incentive state. So we get literally 4x the tax revenues from commercial assessed value as we do residential assessed value. And then in this particular case, we get public improvement fees on that, which is really a sales tax receipt on that. So those 2 are significant revenue drivers. And so this kind of gives you a feel for some of the land planning that we're doing there with some grocery anchors and then taking a look at a flex building structure like this, where what we're looking at is maybe offering opportunities for us to partner with others that might be high water users. Some of the current activity, we've engaged local realtor -- real estate -- commercial industrial real estate brokers that are very active in data centers, and we have a very unique opportunity here at Sky Ranch and together with PureCycle, given the fact that we have a high availability of water, so we can really distinguish ourselves for these high water use and high water-intensive type users. So we'll see how that develops over the next few months, year or so. So with that, those are our prepared remarks. And maybe what we can do is open it up to some questions and get a little bit of color if you'd like on kind of how things are rolling along. So if you're on mute or if you're not on mute and you've been quiet, thank you. And just go ahead and shout out. And if you've got a question, we'll try and give you some detail. Elliot Knight: Mark? Mark Harding: Yes, Elliot. Elliot Knight: Very interesting to see you put the estimates of earnings out there. There was one pretty obvious blank, and that was for fiscal '27. What should we be thinking about in terms of estimated earnings range for fiscal '27? Mark Harding: Good question. '27 is going to be a large component of Phase 2E and then taking a look at how we roll into some of the interstate construction and some of the other segments. So I think it's going to look a lot like the last couple of years. It's not going to be a real breakout year in 2027, but we really think that breakout year is going to be more once we get the interchange complete and get that commercial online and into development. There are opportunities to do non-high-traffic commercial users out there that we're marketing to. But as we continue to grow traffic, we have that obligation to kind of continue to build that infrastructure. Elliot Knight: Okay. So probably $0.75 a share is too high for fiscal '27 is what I think you're saying. Mark Harding: Yes. I wouldn't say that, that would be a good clear guidance. But when we take a look at that commercial and bringing on that in that 2028 time frame, you really do supercharge because what we're really going to see, we're going to see delivery of lots on the residential side, and then we think we double up on that revenue stream on the delivery lots on the commercial side. Elliot Knight: Okay. Refresh my mind. I can't remember whether on taps sold, the pretax margin is 50% or 60%, which is it? Mark Harding: That's a great question. When we look at it on the aggregate, if you look at the build-out of what will be 60,000 units of it, we believe that margin is around 50% because we have to continue to build that system. In a more short-term basis, I think we're seeing a lot more margin on those because we've kept ahead on developing capacity on that. And so when we're looking at year-over-year in the last couple of years and the next couple of years, those margins might be a little bit higher on that. But when we look at it on an average build-out, if you take $40,000 applied to 60,000 taps at $2.4 billion revenue potential on that, that's usually about -- it's going to cost us about $1.2 billion to build that system out. But I think near term because we have that excess capacity, those actual realized margins are going to be higher than that 50%. Elliot Knight: Okay. So when you in the past have talked about we're going to have to spend $1 billion, that $1 billion, is it amortized in the cost when -- is the 50% pretax margin after including amortization of that $1 billion that you talk about? Unknown Executive: That's included. Mark Harding: Yes. Elliot Knight: Okay. Unknown Executive: It is included. Tucker Andersen: Mark, Tucker Andersen, can you hear me? Mark Harding: I can, Tucker. Nice to hear from you. Tucker Andersen: First, I'd like to take a minute as long as you guys were nice enough to provide it to shout out hello to my old friend, Elliot Knight. Anyway, a couple of questions. First, what do you see as the opportunities for water acquisition at this point? As you've talked about in the past, you're always on the lookout for adding to your water acquisition and opportunities for utilizing that water. Could you talk about that broadly? Mark Harding: You bet. I'd say we've got a very strong water portfolio right now. And when we take a look at water acquisitions because we always do and one of the ones that folks are constantly knocking on doors with projects, I think are -- we're content with where our portfolio is today. And our acquisitions are really going to be strategic where they are adjacent to our existing portfolio, right? They provide the most economies of adding to it and the synergies around where we've got our investments today. So I would say our appetite for water acquisitions is probably it has to be the right water right. It has to be in the right location. And so it -- I'd say we're more cautious about water acquisitions than I think we would otherwise be in maybe some of the other areas like land. We'd be more aggressive on land acquisitions than water acquisitions right now just because we want more portfolio on vertically integrating that value because where we buy that land, we have water that we can serve it. We have infrastructure that's there that we can serve it and then building into the land portfolio and then single-family rental portfolio, that really -- that drives all 3 segments where a water acquisition would be nice. It will be valuable because we not make it anymore. And in fact, it's getting dryer and dryer. So the existing water rights continue to illustrate value. But it's a bit -- we already have a deep portfolio there. So Tucker, I would say they have to be the right water right in the right location. Tucker Andersen: Well, you've just segued into the next topic on my question list here, and that is what's happening in the area of land acquisitions given the sort of tension between homebuilding having slowed down substantially, but you still being in a fairly rapidly growing area where, as you pointed out, you can only grow in so many directions. And are you seeing -- are you more optimistic, less optimistic or sort of the same in terms of your potential for land acquisitions? Mark Harding: I'm more optimistic. I'd say conversations that we've had with the landowners through the years and where they were previously and where they are today are much more interesting and much more active. So I would say I'm more optimistic about where that sits for us to expand our portfolio and really show a stronger runway of beyond the $600 million, $700 million that we think we're going to monetize out of Sky Ranch. Tucker Andersen: I look forward to that, although you know my baseline comparison is always going to be the attractiveness of Sky Ranch, and I'm not expecting you to buy anything quite that attractive at this point. Mark Harding: Well, you're right about that. And I'd hate to see the economy that leads us to what it would look -- what it looked like when I did acquire Sky Ranch, but... Tucker Andersen: Third, in terms of the -- I found the data center comment interesting. Where in your area are there potential locations of data center and -- data centers? And how does that sort of fit in with your service area? Mark Harding: Great question. And we spent a bit of a time working on this data center opportunities. There's a lot, a lot of money sitting, waiting for ready-to-go sites. And there's really -- there's 3 metrics for data center. Where are the property location, availability of power, and availability of water. And I'd say we have -- the advantage that we have is we have the water side. And a lot of these cities and municipalities really don't want that type of user just because it doesn't grow their AV as fast. They may end up having to commit 700 homes worth of water to one user, and that user is not going to have the same tax base as that 700 homes worth would. And so we have the ability of providing that water to them. We're long. It's a good allocation for us. The siting of it is less important. They can move around, but they do need to be close to water. They do need to be close to power. And because of Sky Ranch's location, it really does check all those boxes. And so we have had conversations with specific users. We've had engagement with Cushman and they're one of the largest brokers that are managing sites for data centers. So we're very optimistic that, that might lead to a great opportunity for us. Tucker Andersen: And last, my question is, in your market, what's happening to price appreciation in general in the Denver market on existing homes? And two, is your first phase or maybe your first 2 phases been in existence long enough so that you're starting to see resales and how those resales compare to the owner's original cost? Mark Harding: Yes. We are seeing great appreciation on the resales in Sky Ranch. And I think that's attributable to when we broke into the market, we had a very attractive lot value, which allowed our homebuilders to have a very attractive home price. And so some of the Phase 1 home prices are up as much as 30%, 40% since they were built, which is terrific for the community. It's terrific for those homeowners. On average, home appreciation is in that 4% to 5% on a national average. I'd say we're seeing a little bit stronger performance on that at Sky Ranch because you're getting more amenities, you're getting schools, you're getting a more mature community on that, and there's less inventory at this price point. And so if you bought a house for $430,000, that appreciation is going to -- there's still no homes for sale sub-$500,000. And so there's a lot of opportunity for appreciation of those homes sub-$500,000. Tucker Andersen: So that makes Sky Ranch then -- that's one of the real attractions for your existing builders in effect? Mark Harding: It is. It is. I'd say that's why in a relatively weak market, and you can see in some of the local press where a lot of homebuilders are dropping a lot of projects in and around the metropolitan area, but we're getting new homebuilders in our existing project. Tucker Andersen: Thanks Mark. Keep up the good work. Joakim By: This is Joakim from Circulus Asset Management in Stockholm, Sweden. So I have 2 questions. And the first one was on the guidance range. It would be interesting to hear you elaborate a little bit around the 2 different -- it was quite broad outcomes... Mark Harding: Say that again... Joakim By: The guidance range that you provided here... Mark Harding: You know what that's going to be is really a flex into how much oil and gas we get in there. We -- they pay us to be at their back and call, right? They pay us a lot of -- a high rate for delivering raw water, and they want a ton of water, but they go from 0 to 100 in days, right? And so sometimes it depends on how the rig availability is, how -- what I do know is they have all their permits lined up and then they've constructed their pad sites, and so it's a matter of keeping that rig on site. So I know they drilled 10 wells on one pad site. They're currently drilling, I think, another dozen wells on another pad site. So we see some -- there's some foreseeability into 20 -- between 20 and 35 wells on that. And so that's kind of the -- that's the range on that because it is a high-margin opportunity for us. Joakim By: The other question was around water assets. If you have seen water prices starting to creep up, and I think that's the general trend. And what's the pricing on water assets right now? And what would be the kind of the worth of the water if you marked it to market, so to say? Mark Harding: Yes. Great question. And there's 2 benchmarks for that. We continue to see strength and appreciation in the tap fees. So our tap fees over the last, say, 3 or 4 years have increased around 6%, 7% per year. So we're up north of around $42,000 a year in our water and wastewater connections. And then when taking a look at just the straight cost per acre foot, we bought some water in a strategic location. Our first farm that we bought in that location was about 4 years ago -- 4 or 5 years ago. We paid about $9,700 per acre foot for that. And most recent transactions are north of $20,000 an acre foot. So that gives you kind of 2 different benchmarks, actual acre foot purchases as well as the strength of the service model that we have and providing service on those 60,000 connections. Unknown Executive: Maybe I'll just take a second, too. I know you got -- I don't know if you were asking specifically about our guidance in fiscal 2028 and kind of where that's coming from. But a lot of what we're projecting after the interchange in 2027 is the ability to sell some of that commercial along with Phase 3. So when we add the capacity to Sky Ranch, our lot revenue will really be able to scale as long as the market holds it with some commercial lots as additional to some home lots. So in 2025, 2026, we're just selling residential lots in subphases and 2 to kind of stay within our capacity limits of the interchange. What we kind of see in 2028 and beyond is the ability to do residential as well as commercial. I don't know if that was kind of specifically what your question was related to. But that's really the big change that you see in some of the guidance that we're expecting in the future. So I don't know if you want to comment on that. Mark Harding: Yes, that's a good clarification. Operator: [Operator Instructions] Elliot Knight: In the meantime, if nobody has a question, would you talk a little bit, Mark, about what's going on at the Lowry Ranch. Your comments suggested again that building is right up to it. I know you don't speak for the landlord nor do you want to. But do you have any sense at all as to whether they are giving thought to starting to develop that land commercially because we have an exclusive there, and it's 20x the size of Sky Ranch. Mark Harding: Those are the correct stats. So you're right. We continue to believe that's our most valuable asset, right? How do you monetize water? It's nice to buy water right, but it's very hard to kind of monetize water rights other than providing service. And our model of providing service, we are investing in infrastructure. We have a franchise service area at the Lowry Ranch. It is one of the most unique properties in the country, right? There's no property like having 27,000 acres of continuous land right next to a metropolitan area. And when we got into this 30 years ago, and I see my good friend, Dick Guido on the call, who is one of our -- it dates back to 1990. And Elliot, you were around in 1990 as likely Tucker was very closely after that. But it was so far away from Denver area, right? You take a look at the migration of the Denver area over that period of time and surrounding Lowry and where the landlord was looking at kind of monetizing and generating revenue for those assets back in 1990 and where that opportunity is 30 years later, it just has tremendous value. And it's really an asset for the public education, the K-12 public education system here. It's -- I can't help but be excited about all of the activity surrounding it and really the significant opportunities that the state has with it. But it is their asset. It is an asset that they look at holistically and saying we want to do everything we can and everything possible with that, that some of those lands are going to be conserved. Some of those lands are going to be for a multi-revenue use purpose. Some of those lands are going to be developed. And so the magnitude of the challenge for them on that is really just to figure out what the best way to use it. And it's hard when you're taking a look at how am I going to eat this elephant. And it's one bite at a time. You can't look at it holistically. It's 27,000 acres, you've got to scale it back and look at what am I going to -- what are the opportunities with some of the most in-demand parcels and how do we look at that and how do we want to continue to participate with that. One of the things that we've done and increased our portfolio is we have the ability to help them develop it. Whereas in 30 years ago, we were just looking at the water utility side. And now our portfolio looks that we can help develop the land, we can develop the infrastructure, we can develop the open space, we can develop recreational uses. We can develop a whole bunch of things that would check all the boxes that they're looking for on that. And so how do we match those up with their needs, their wishes and their time line. And we're very active on that. but we're not trying to get over our skis ahead of them on that either. So we want to be partners. We want to be a catalyst in it, and we also want to make sure that we are a strong advocate for their wishes and their desires for the property. Unknown Analyst: Mark, can you hear me? Mark Harding: I can. Unknown Analyst: I was interested in that -- the slide that had commercial development on it, I think it was the first time, wasn't it? Mark Harding: Yes. Yes. I just kind of wanted to kind of give you 2 things because we talk about that interchange all the time and to give you a relative perspective of the importance of that relative to the overall project. Unknown Analyst: From a practical perspective, is the commercial development dependent on the new interchange? Mark Harding: It is, yes. Unknown Analyst: And what's the timing on the interchange, realistic timing? Mark Harding: So I think we get that -- we've been working on that permit for the last 3 years with the county and CDOT. We're fairly close to getting that submittal. And, you know, it -- the submittal on it is going to be like 2,000 pages of -- you name it, engineering, rights of ways, designs, permitting, traffic control, everything associated with it. And then they -- each stage of that over the last 3 years, they've reviewed, they've commented, they've kind of set the parameters on that. And then -- so we'll get that into them sort of this spring. They'll review it in its completeness. Then we move forward to final design concurrently with that and the bonding of that later in the year. And then we look to go to bid for the interchange sometime end of the year and be under contract for construction in 2027. And it will only take probably 6, 9 months -- probably 9 months to construct. It's not a -- as you saw, it's not a hugely complex one, and we're able to take advantage of existing on, off-ramps. So we're just really constructing a new bridge -- wider bridge, longer ramps to the new one. Unknown Analyst: So if things went according to that plan, it would be completed construction beginning of 2028 calendar? Mark Harding: Yes, yes. Unknown Analyst: Okay. You didn't talk any -- mention public comments and opportunities for the public to delay or stop. Is that going to be an issue? Mark Harding: That's a good question. I'm not sure that there is a comment period to that because it's just replacing an existing interchange. So if it were a new interchange, it might be a little bit different process, but because we're just -- it's an existing interchange replacement upgrade. Unknown Analyst: Mark, yes, so I just wanted to ask on the data center potential. A lot of people don't like living near data centers. And so how are you thinking about where this location would be within Sky Ranch? And then also, obviously, a good way to unlock some of that water capacity, but would you be able to monetize it at the same rate as like a single-family home. So if there's -- if the data center is 500 single-family homes, would you be able to charge them a similar rate for that? Mark Harding: Good questions, both of them. On the first one, location, we're sort of talking -- if we look at the site that we're currently evaluating, it would be tucked up into kind of that top corner of the commercial parcel. So nobody would be living next to it. Next to it being a relative term, what is next to it, is -- next to it is being a few hundred feet, is next to it being 0.25 of a mile. So that's kind of the separation that we would see between that land use and our residential land use. So I do think we've got a good spacing and a good buffering opportunity for that. We're not just looking at that one site. We're looking at other sites that are going to be more remote where we could get water to them on a more remote basis and maybe it's where power is more accessible in a more remote location. These data centers are not site-specific. And quite frankly, being next to the interstate isn't what they would otherwise need. They don't need that kind of access. That we have that site, that site is zoned, permitted, ready to go with all of the water out there is super attractive, right? So a lot of these are -- what's the availability? What's your time line? Can we jump into a site sooner rather than later? And so all those things are attractive for Sky Ranch because it's already ready to go. As it relates to what that water supply might look like, that's a little bit -- there's a lot of nuances in that because they don't need full potable water, right? They don't need that same level of service that -- they're not going to be drinking that water supply. So we've had conversations with them about water quality, raw water service that might have a little bit of a price incentive for them where we don't have the same level of cost. We don't have the same level of water quality monitoring, those sorts of things. So that one is TBD. We do want to capitalize on the value of our water supply, but we also are cognizant of the fact that we're very long on water supply and maybe we have a supply agreement with them for a period of time that would be look one way and maybe get that water back in another way to give them some incentives so that we're not losing 60,000 units worth of capacity, but then we're also using that water in the interim. So there's all of those opportunities with that type of customer. Well, if there's no other thoughts on the quarter, don't hesitate if you listen to this on rebroadcast or your technology didn't work or you had a -- you get distracted and to run up something else, don't hesitate to give me a hello. We're continuing to really accelerate the company, and we're very excited about where we're at. We're excited about execution, and we're excited about how things are going to look for the coming quarters and coming years. So thank you all for your continued support, and we wish you very best in the new year. Unknown Analyst: Thank you, Mark. Mark Harding: Thanks all.
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.