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Rishi Basu: A very good evening, everyone, and wishing you all a very happy new year. Thank you for joining us today. My name is Rishi. And on behalf of Infosys, I'd like to welcome all of you. As always, since this is the new year, my rules don't really change, one question from each media house. We try our best. But with that, let me invite our Chief Executive Officer, Mr. Salil Parekh, for his opening remarks. Over to you, Salil. Salil Parekh: Thanks, Rishi. It's good to see that you are very consistent, and I'm sure the media team is as well. Good afternoon, everyone, and thank you for being here. Warm wishes for the new year to all of you. We've had a strong performance in Q3. Our revenue grew 0.6% sequentially and 1.7% year-on-year in constant currency terms. Our large deals were at $4.8 billion, with 57% net new. This was across 26 deals. Our adjusted operating margin was 21.2%. We generated free cash flow of $915 million. One of the most significant large deals we won was with the National Health Service in the U.K. This $1.6 billion deal expands our work in the healthcare sector. We will help NHS leverage AI to streamline operations and improve patient care for U.K. citizens. We have deepened our Topaz AI capability with an agent services suite called Topaz Fabric. This suite helps our clients manage and implement AI agents across the enterprise. We had strong momentum in AI adoption across our client base. Today, we work with 90% of our largest 200 clients to unlock value with AI. We are currently working on 4,600 AI projects. Our teams have generated over 28 million lines of code using AI. We've built over 500 agents. We're scaling our forward deployed engineer team. We are now witnessing 6 AI-led value pools emerging that could unlock a large incremental opportunity. We also see productivity-led benefits that compress some legacy areas. The 6 large AI-led value pools are: AI engineering services, data for AI, agents for operations, AI software development and legacy modernization, AI deployed in physical devices and AI trust and risk services. We believe we are uniquely positioned to capture market share across these value pools and emerge as the leading AI value creator for global enterprises. We will share a comprehensive view of our approach at an Investor Day later this quarter. With a strong performance in this quarter, we have revised our revenue growth guidance for the financial year. The new revenue growth guidance for this financial year is 3% to 3.5% growth in constant currency. Our operating margin guidance for the financial year remains the same at 20% to 22%. With that, let's open it up for questions. Rishi Basu: Thank you, Salil. We will now open the floor for questions. Joining Salil is Mr. Jayesh Sanghrajka, Chief Financial Officer, Infosys. The first question is from Ritu Singh from CNBC TV18. Ritu Singh: Rishi, sorry, this is our only chance to speak with the management every quarter. So we'll have to exceed that one question limit. With that, Salil and Jayesh, to begin with, I wanted to start with your head count number. We've seen an increase of 13 to 46 over just the last 2 quarters. And this is interesting because it's coming at a time when your peer, TCS, is cutting 30,000 jobs. How should we read into this? I mean, is this a real indicator of how you see the demand environment improving? And with that, I wanted to get to your guidance figure being raised to 3% to 3.5%. How much of that upgrade is because of large deals like NHS being factored in? How much of the Versent acquisition, which is yet to be completed as we understand, is baked into that number? And -- because last quarter, you were telling us, for instance, there are segments like retail that remain the weakest link, so where are you seeing improvement that has led you to upgrade your guidance? That's one. Also, sequentially, we've seen a very light -- a bit of a marginal dip in your margins that is to 20.8%. This is at a time when there are tailwinds emerging from the rupee depreciation. So if you could break down why that has been the case? And while you continue to tell us about how you're uniquely placed to exploit that AI opportunity, and the likes of HCL Tech and TCS have been giving us concrete numbers. Why does Infosys refrain from doing so? Salil Parekh: So let me start, I think, on margin, Jayesh might have some points. I think the first part, I missed a little bit, it was the head count increase, right? Yes. So on the head count increase, I think it demonstrates that we have confidence in where the market is, what we are seeing in terms of the demand. And that also feeds in, in a way to the second point you had in terms of how are we raising the guidance, the growth guidance. So first, in terms of the growth guidance, we are just finishing the third quarter, so only one quarter is left. So this -- we have had a lot of large deals in the previous few quarters plus we had a very strong execution in this quarter. We have also seen -- you asked a little bit about the industries. We've seen, for example, in financial services, and we've seen in energy, utilities, resources, services. We see that the way the deals have come, the way we have become AI partner of choice with our largest clients, we see a good outlook even as we look into the next financial year. And that's in part helped us to increase the guidance, which is only for this financial year, which is for ending in March at the end. On margin, you want to? Jayesh Sanghrajka: Yes. So first of all, very happy new year to all of you. Before I come to margin, I just wanted to also touch upon the head count part. If you recollect last year, we had called out that we are going to hire 20,000 freshers this year, right? And we have onboarded roughly around 18,000 freshers, and we are well on our way to finish our 20,000 number for this year, which, in a way, reflects in a head count also because many of them are under training. And if you look at our utilization, including trainees, has come down. So that is our investment into building capacity for future in a way, right? So that's on the headcount. If you look at margins, we have expanded our margin this quarter by 20 basis points versus the last quarter. We are now on a 9-month basis at 21% margin, which is midpoint of the guidance that we have given. The puts and takes of 20 basis point expansion this quarter is 40 basis points came from currency; 50 basis points came from the Project Maximus, mainly on account of value-based selling and the Lean in Automation that we have done on multiple projects, offset by the furloughs and working day that we had. We also accrued a higher variable pay compared to last quarter, which was offset by some of the one-offs that we got. So that's the broad margin work in a way. But if you look at a 9-month period margin, which is 21%, we have invested in our sales and marketing, which has gone up by 50 basis points on a year-on-year basis. So that has been absorbed in the margin. The lower utilization of almost a 1% has been absorbed in our margin. So this margin is after absorbing all of that where on one side, we are building capacity for future, on the other side, we are investing in sales and marketing, and we still had a stable margin front. Ritu Singh: Do you have an outlook for next year now that you're completing this 20,000 for the year? You've had a lower attrition as well this quarter. Jayesh Sanghrajka: We will have an outlook once we give our guidance for next year in April. Ritu Singh: And also the wage hikes, what's planned for the year and what kind of impact that could have on the margins from here on? Jayesh Sanghrajka: So we just finished one cycle of our wage, which was in 2 parts in January and April. We haven't yet decided on the next part yet. We will decide on that as we progress. Salil Parekh: Yes. On AI, I think one of the points I shared, and we have a lot of that sort of information was with our largest 200 clients, with over 90% of them, we are doing AI work. What we are doing in AI is unique AI services with clients. And also, we've reshaped all of our existing services, leveraging AI in, for example, we are using agents in several of our service lines to help enhance either growth or productivity. So that's what we are sharing in terms of what our impact is. Rishi Basu: The next question is from Mansee Dave from ET Now. Mansee Dave: Salil and Jayesh, this is Mansee Dave from ET Now -- ET Now Swadesh. My question is on demand visibility, tech spending and AI adoption. Now looking at the constant currency growth scenarios and commentary around fewer billing days and deal timing, how are clients thinking about calendar year 2026 tech spending, especially discretionary versus transformational led programs? And at the same time, pace of enterprise AI adoption as well as tech spending outlook are amongst the key monitorables which we were looking towards. How does the scenario look like? And how are the pricing models evolving according to you? Salil Parekh: So I'll start with that, maybe a little bit on the pricing, Jayesh might have some views. On the demand, we see good demand outlook in the sense of we have had strong large deals. Our large deals pipeline remains healthy. And we are seeing in the 2 industries that I mentioned, on financial services, on an energy retail -- sorry, energy resources, utility services, a way that our work on AI is going, and the way the deals have shaped up, we see a good outlook as we look even beyond this financial year into the next financial year. On financial services, specifically, we see discretionary spend and good traction in what we are seeing across the market. Having said that, overall, we want to still see all of the other industries and segments start to show that. But these 2 are definitely something that we are seeing today. Jayesh Sanghrajka: And on the pricing, I think as the newer and newer technology evolve, every time there's a change like that, you see a new pricing model evolving as well. We are seeing multiple new pricing model evolving. Some of them are being led by us, whether it is outcome-based pricing or whether it is pricing, which is specific to agents, et cetera. So a little early in my mind in terms of calling out specifically what are the pricing models going to evolve on this, but everybody is testing new pricing models at this point in time. Rishi Basu: The next question is from Shristi Achar from The Economic Times. Shristi Achar: Happy new year to all of you. So a couple of quick questions on, one, I wanted to know on the sharp decline in operating margins that we're seeing. So I want to know if the impact is beyond the labor code charges that the company has taken? And I also wanted to know in terms of -- there has also been a sequential decline in your top contribution -- revenue contribution from your top 5 and top 10 clients. So why -- can you give us a sense of why that is happening? And what the next couple of quarters look like on that? On the third, I also wanted to know -- sorry, this is the last one. So I also wanted to know in terms of the whole H-1B role that is going on. So this morning also, we saw some claims of employees being [indiscernible] on the same as well. So I wanted to just know what is going on around that? Salil Parekh: You want to start on the labor code? Jayesh Sanghrajka: Yes. So if you look at the margins, if you're looking at reported margins, yes, the reported margins were impacted because of labor code. But if you look at the adjusted margins, as we have called it out also, the adjusted margins have actually expanded. If you exclude the impact of labor codes, adjusted margins have expanded by 20 basis points sequentially. And on a full year basis, it's remained 21%, which is similar to our last year margin. So -- and that, as I said earlier, that was despite -- after absorbing the investment that we have done in sales and marketing, which would have impacted margins by 50 basis points, after absorbing the impact of lower utilization, which is building capacity for future. So after absorbing both of that, we've been able to maintain margins. You had a second question? Rishi Basu: Client contribution. Jayesh Sanghrajka: Yes. Client contribution. I think sequentially, client contribution is not a way to see in my mind because there is a seasonality involved, right? Every Q3, you typically have furloughs, et cetera, which would have impact certain specific clients and larger the clients, larger will be the impact of furloughs if there is one in that account. Typically, you will see that year-on-year, and we don't really see a significant change in the year-on-year client metrics. Salil Parekh: On your last question, I just want to read out, no Infosys employee has been apprehended by any U.S. authority. A few months ago, one of our employees was denied entry into the U.S. and was sent back to India. Rishi Basu: The next question is from Chandra Srikanth from Moneycontrol. Chandra R Srikanth: Just a follow-on to that employee who wasn't allowed and sent back, are you contesting that in any form? Secondly, one of the big trends this quarter we've seen is a big acquisition from Coforge, where they acquired Encora for $2.35 billion; TCS has acquired Coastal Cloud for $700 million. So can we expect more action on the M&A front? Are there assets that attractive, if you can take us through your M&A strategy? Salil Parekh: On M&A, so we have -- as we've looked at over the last few quarters, we've done acquisitions on cyber, on consulting and energy services. And we will continue with that sort of an approach. We have a good pipeline of possible companies that we are looking at and discussions. We have strong support in terms of our balance sheet. So we will continue with that. It's not something that is different in that sense from what we were doing in the past. We have a set of areas. We're also looking sort of in geographies which are new. We are looking at expanding in some service areas where we can go deeper. So that will continue on. Chandra R Srikanth: On the ICE, any other details that you can share? Salil Parekh: That's what I had to share. Chandra R Srikanth: Okay. Jayesh, sorry, just one thing on the labor code. So according to your fact sheet, Infosys has incurred INR 1,289 crores on account of labor codes. So has the full impact been absorbed? Or will it sort of be staggered? How will that work? Jayesh Sanghrajka: So whatever is to be accrued until this quarter end has been accrued in the books, right, which is for the -- I mean, labor code has impact across multiple aspects, whether it is gratuity, whether it is other aspects of wage, and that has been accrued. There will be an ongoing impact of roughly around 15 basis points. That will happen on an annual basis. That is a regular impact of the labor code as we go ahead. Rishi Basu: The next question is from Haripriya Suresh from Reuters News. Haripriya Suresh: A few questions. One on the H-1B front. Will you be looking at making new applications? Or is it primarily just hiring in the U.S. and the employees that you have already? In retail, is that specific softness because of how America is right now? And when do you sort of see that recovery? And third is, Salil, your term for a CEO ends in March 2027, at least a 5-year term. What is succession plan? Has that started? And what is that looking like? Salil Parekh: On the first one, I think we -- on H1 and what the recruiting is, so our approach is very clear. We have, as we've shared in the past, majority of our employees in the U.S. who are not requiring any visa situation. We are continuing with our deployments and our delivery using a mix of what we have, work in the U.S. and work in India. So no changes to that approach. Haripriya Suresh: [indiscernible] application, [indiscernible]. Salil Parekh: At this stage, we are continuing with that process because there's an existing set. We will examine it as it comes up in the future. On retail, what we are seeing is there is some places where we see positives, there are some places where we see different client situations, which are under some cost containment for that subvertical within that. So we are waiting and we are pushing to make sure that the retail pipeline, which is growing, becomes converted into what we drive into the retail growth. On my own situation, no comment. Haripriya Suresh: Like overall as a company [indiscernible]. Salil Parekh: Yes. No comment from my side. Rishi Basu: The next question is from Avik Das from The Business Standard. Avik Das: Quick questions. One, a little bit more on the BFSI commentary because what we understand that financial services, BFSI, overall has been improving in the North American geography. So which sectors or which subsegments within that sector is actually growing, if you can just throw some more light, Salil. And North America seems to have degrown in a constant currency basis. Any reason? Was it a client specific? Or was it any sector specific? Maybe retail that pulled it down, if you can just throw some more light? And Jayesh, there seems to be that idea that new large deals will be smaller or maybe far and few to come by as more AI-led deals sort of take the center stage. Keeping that in consideration, how do you think the margins are going to play out across the industry and for you and specific in the long run, if you can just throw. Salil Parekh: So I'll start off on financial services. We see a good traction across most of the sub verticals we have within financial services. So we are seeing good traction with retail banks. We're seeing good traction with what are considered mid-market banks. We're seeing good traction on payments. We're seeing good traction in the mortgage area. So overall, pretty strong. Some are stronger, some are less strong. But overall, we see a good demand environment. There's good adoption of AI across the spectrum with our large financial services clients. We recently announced, for example, a partnership with Cognition, which is very strong, and we are working with them jointly in some of the financial services companies. On North America, nothing very specific. It's a mix of different industries and different plays. The overall situation on energy utilities, on financial services remain strong, on some of our other verticals remains something that is coming back over time, but not yet. On the third on the margin? Jayesh Sanghrajka: Yes. On the large deals, if you look at the deals that we have signed, we have signed $4.8 billion this quarter if you look at it even on a 9-month basis. Compared to the last year, our deals, large deal signings have gone up. So while there is always a productivity ask that goes up because of AI, et cetera, there is also a lot of deals that are getting structured because of cost optimization -- cost takeout, et cetera, from the client side. So a lot is getting bundled when you look at it. And on the margin side, large deals always have slightly lower margin than the company average. But as a portfolio, you always make up on a margin because the new work that comes up, comes up at a better margin, et cetera. So that's a trend that we have seen. We have not seen a change in the trend from that perspective. Rishi Basu: The next question is from Sanjana from the Hindu Business Line. Sanjana B: So manufacturing and Europe, they have grown significantly for Infosys this quarter. Both of these were previously seeing some softness. So can you expand on what were some factors contributing to this growth? And also, I think the tech budgets for the calendar year 2026 are expected to be rolled out soon. Based on client conversations, what are you hearing? Is there any sign of uptick in discretionary spending? And also, the guidance was raised upwards despite seasonalities and uncertainties. Any reasons for this? And the last question, regarding the collaboration with Cognition, which is an AI startup, what were the gaps in your AI portfolio that you were looking to bridge with this particular collaboration? How is this contributing to your whole AI momentum? Just that. Salil Parekh: So starting on manufacturing in Europe. Firstly, I think Europe has been in a good position for us for many quarters. And actually, even manufacturing has had a strong activity across the board, we've seen good traction. There are pieces within the manufacturing client base, which are benefiting massively from the AI growth, for example, we do work with companies that provide power solutions. We do work with companies that provide manufacturing into those solutions that provide engine capacity, that provide generating capacity. So there's a lot of those pieces which are doing well, are those client industry components, which are doing well and where our team is really active on that. We've also got some good traction within manufacturing on the engineering part of the work -- engineering services part of the work. The second one... Unknown Executive: Guided tech projects for 2026. Discretionary spend. Salil Parekh: On the discretionary spend overall. So first, on financial services, we are definitely seeing that what we shared earlier. We are seeing a good set of deals which have happened, and then we see that with the AI traction we have in that industry, we will become more -- the next financial year, we'll have better outcomes than this financial year on that. And financial services, is going well this year. Similarly, on energy and utilities, we are seeing a good set of deals that have come together across the whole industry vertical, and that is helping us with that momentum. So those are the ones we are seeing. On the others, we are not seeing any deterioration, so which is one sign. And we see overall, the macro environment seems to be where people are expecting maybe some interest rate cuts. So we'll see if that happens, especially in the U.S. And then some of the other expansions we are doing, for example, we have a program where we're working with some of our smaller sets of clients, and those are growing pretty well. So overall, we feel that as we look out into the next year, these are things that support our growth. Then on AI itself, we are seeing what I shared earlier, these 6 areas, where we see a potential good growth over the next several years, not just in the next year, and that will -- as we start to execute on that, that will help us. On Cogni -- so which one was that? Rishi Basu: Cognition. Salil Parekh: Cognition, right? On Cognition, so it's not so much a gap. So what the Cognition people are doing is they've built an agent which is working to do software development. And we are working with our clients as a partner with them, where we are also doing -- we are building agent capacity, and we are enabling those agents to work in a client environment. So the advantage is we have a detailed understanding of how the client technology landscape is set up and we have a good understanding of what are the industry constraints or opportunities. And that, combined with the software agent with Cognition, becomes a very powerful combination in many clients. So that's something that will expand quite nicely here. Rishi Basu: The next question is from Jas Bardia from The Mint. Jas Bardia: Just two-pronged question. In what segments and for what clients will you all be using these AI software engineers? And how will this impact delivery? How will this impact billing? And more importantly, how will it impact future hiring? That is FY '27 onwards, considering you're using a lot of these AI software engineers to work in client projects actively. Salil Parekh: So what we see there, first, where will it be used? My sense is as I've interacted with our clients and with some of these partner companies, the usage is going to be across essentially every industry, every client over time. So it's a function of what is the client landscape and what it is that they want to achieve. My sense is there are, for example, in those 6 that I described earlier, there are places where the economics have changed completely from a client perspective. If you take legacy modernization, here, if you use software agents plus our expertise, plus our knowledge, the whole economics from a client perspective becomes much better, and that allows a lot of these projects, which were not happening before, to start happening. So it's not a case of something which was being done, which is now being done differently. That will also happen. But this is more a case of something which was not being done, which will now start to happen. So in that light, we will continue to hire. As Jayesh mentioned earlier, we will announce as we do in April, our plan for next year, we are going to hire on campus. We know that. And today -- this year, we've done 18,000. We will do 20,000 campus hires, and we will continue in that sort of a range for next year because these are new areas of demand. And so it's incremental to what we are doing. And we will have our people working and these software agents, which makes the overall economics for the client much better. Jas Bardia: The billings? Salil Parekh: Billing? What was the... Rishi Basu: The impact of billing. Salil Parekh: It will -- the value that we create will drive the billings. So a lot of these things will be based on the traditional ways, as Jayesh was saying, of billing. And a lot, over time, will change as the AI market itself develops. So today, there is not any immediate change. But over time, we will see that. Rishi Basu: The next question is from Poulomi Chatterjee from The Financial Express. Poulomi Chatterjee: So I wanted to ask, like, recently, we've seen across Indian IT, there's been a trend -- there's been a slew of like AI-related acquisitions. So what is your approach with regards to that? And also like IT companies are now competitively building, hiring specialized AI talent among freshers who are getting paid significantly more like -- so what does the talent pool look like? And what are you looking at when you're hiring these set of people? Salil Parekh: So in terms of acquisitions, in the landscape, there are not so many AI services companies today that we see. What we do see are companies where we are partnering, which are really AI, whether they build agents or models or foundation tools, which exists, and those are the ones we are partnering. We will look in an acquisition approach to AI as they start to appear as larger AI services companies. And we have some that we are looking at, which is part of our overall acquisition, meaning there are other things in the acquisition as well. In terms of the compensation, I think Infosys has always been a leader in making sure that we put new constructs in regard to our employees and the new people we recruit. What we've now done with the most recent approach and launch is put together an approach for very good software engineers who'll work in AI and who will have that level of expertise to be specialized engineers within our structure and with different and higher or much higher compensation levels. So in the AI world, there will be different types of people working jointly with AI agents with different levels of training. And we want to make sure that we remain in the leading position in that recruitment environment. And with that, what we have launched for specialized engineers, that's the approach we put in place. Rishi Basu: The next question is from Uma Kannan from Deccan Herald. Uma Kannan: So last year, you announced AI first GCC model. So I want to understand how it is shaping up? And a follow-up question on partnership. This month alone, you have announced a couple of partnership. Going forward, will there be more AI-native collaboration? And one more question. Some of your peers have made it mandatory to stay at the office for 6 hours. So do you have any plans when it comes to office requirement -- office hours requirement? Or will you continue the present hybrid flexible model? Salil Parekh: So on the GCC, we have, as you mentioned, launched the AI-specific approach. We have a lot of client activity in that. We have some clients we're already working on that. There are several others which are in the pipeline for large AI-specific capability building in GCC. So beyond regular GCC work that we're doing, and that's going pretty well at this stage. In terms of partnerships, we will have a number of different partnerships because there are several companies, smaller companies, but with great capability on AI, on the foundation model, on coding, on agent development, on customer service. So we will continue with that because those are the areas which our clients are most interested in, and we will continue. We are already working with those companies, but we will have these sort of strategic announcements as well. And the third one? Rishi Basu: Work from office. Salil Parekh: Work from -- yes, no, we are not making any change to our approach. We'll remain flexible in the way we are today, in the way that our employees are interacting with the company and with our clients. Rishi Basu: The next question is from Padmini Dhruvaraj from the New Indian Express. Padmini Dhruvaraj: Sorry if these questions have been already asked. So one is, going forward, do you see labor code having an impact on profit margins? And do you see this having an impact on your appraisals going forward? And the U.S. government plans to cap the credit card limit -- interest limit at 10%. So do you see this also having an impact? Salil Parekh: So let me start with the second one. Labor code, Jayesh mentioned, I can also mention on the appraisal. On the U.S. credit card, what you mentioned, that is something that the U.S. banking system will look at and how they have to implement it. What we do with our clients, with the large banks is help them as they have to go through different regulatory changes. And if that requires our help and support, we will continue to do that. On the margin impact, Jayesh will mention the number on the appraisals, there will be no change in our appraisal approach. Jayesh Sanghrajka: Yes. So on the labor code, whatever is the impact till quarter -- till December end is already taken in our financial statement. That's a onetime impact because the regulation has changed, and there is an impact for the number of years that employees would have served for us, et cetera. So that impact has already been taken in the financial statements. There will also be an ongoing impact because of the wage code that has changed, and that will be taken as and when we go through. That is approximately 15 basis points on an annual basis. Rishi Basu: Thank you. With that, we come to the end of this press conference. We thank our friends from media. Thank you, Salil, and thank you, Jayesh. Before we conclude, please note that the archived webcast of this press conference will be available on the Infosys website and on our YouTube channel later today. Thank you very much, and please join us for hi-tea outside.
Aki Vesikallio: Okay. I think clock is now 1:00 here in Helsinki, so I can welcome you to Hiab's pre-silent call ahead of our fourth quarter results. Still some people joining, so I'm letting them in. So we will start having a presentation by Mikko Puolakka, recapping the third quarter results and any notable releases during the fourth quarter. After that one, we will have a Q&A session. [Operator Instructions]. Just to note that this call is recorded and will be then later available on Hiab's website. So with that, over to you, Mikko. Mikko Puolakka: Thank you, Aki, and happy New Year also from my side. So a quick recap on our quarter 3 results, then a couple of words about the releases and the developments, what we have seen during quarter 4, and then, like Aki said, questions-and-answers section. About quarter 3. So our order intake was EUR 351 million. That was down by 3% year-on-year. And based on the first 9 months performance, our order intake was more or less flat compared to the previous year. So this was now the 3rd -- 12th consecutive quarter in a row when our order intake has been fairly flat. Our last 12 months order intake has been roughly on the level of EUR 1.5 billion. And primarily the order, kind of, intake headwind we have seen, the Americas region, especially in the U.S. area. While in Europe, we have seen some improvement in the overall market and also in a couple of seg end markets like defense logistics and the wind segment orders what we have announced also earlier in 2025. When we look geographically, the first 9 months EMEA has been up by 13%. Americas down by 14%, very much driven by the tariff-related uncertainties, especially smaller customers withholding their investment decisions, while some kind of bigger home improvement customers have been still quite nicely placing orders. On a positive side, there has been a positive momentum in defense logistics. We have a very good pipeline in that area, of course, the deals typically -- kind of, the revenue we recognized from the defense logistics orders, typically, over multiple years. And then the energy segment, like mentioned already earlier. All in all, there is a robust replacement demand both in EMEA, but also in Americas, like I said, in the U.S., especially the larger kind of home improvement customers have been renewing their fleet. But on the kind of minus side, trade tensions in the U.S., those have increased the customers' uncertainty, and that's why we have seen, especially in the smaller customers in the U.S., quite cautious ordering activity. Our sales decreased in quarter 3 due to the lower order book. Sales were basically on the same level what we had the order intake in quarter 3. Currencies, in currencies, we had, in quarter 3, roughly 2 percentage points negative impact. And if we look at the year-to-date 9 months sales, that's down by 6%, primarily coming from the U.S. market, that lower order intake, especially in the early part of the year. Americas' sales was down by 9% during the first 9 months. EMEA was down by 4%. APAC sales grew slightly in quarter 3, but year-to-date, September, more or less flat on year-on-year basis. We have had a good development in the Eco portfolio sales, especially in the circular solutions and climate solutions. So year-to-date, 38% of the total sales. If we look at our comparable operating profit, so especially in quarter 3, our comparable operating profit was negatively impacted by the lower U.S. equipment sales. That impact was approximately EUR 20 million in our comparable operating profit. Gross profit margin decreased by 80 basis points, also very much coming from the U.S., kind of, lower utilization. SG&A costs, we have been able to reduce year-on-year, but that's not necessarily enough to compensate quite sizable decline in the U.S. equipment sales. And that's why we have also announced in connection of quarter 3, the EUR 20 million cost savings program in order to protect the profitability in 2026 if this kind of market activity would continue in the coming quarters. Key takeaways from quarter 3. So overall, the market uncertainty has continued. Overall, we have not seen any dramatic changes compared to the previous quarters. So gradual improvement in EMEA, while in Americas, especially in the U.S., the customers' decisions have been impacted by the tariff situation. Despite the market situation, we have been able to improve our comparable operating profit if we look at the rolling 12 months performance. And as mentioned, we have started the planning for the EUR 20 million cost savings program. And this would be EUR 20 million lower costs compared to the 2025 level. Nothing has been changed in our strategy. So even despite the current tariff situation in the U.S., we see that the U.S. market is able to offer us good growth opportunities in the future by addressing those white spaces, what we have, for example, in the Central and Western part of the U.S. Also services and the focus on 4 key growth segments have still been intact in our strategy. So overall, no changes in our strategy. Despite the lower top line, our cash flow has been very strong in the first 9 months, and our balance sheet is also very strong, offering, for example, in quarter 3, if we would look the quarter 3 balance sheet, that would offer us roughly EUR 800 million M&A firepower. And with that kind of EUR 800 million additional debt, we would be still below the 50% year-end target. A couple of releases from quarter 4. So we announced in the first week of January, the acquisition of ING Cranes. ING has been founded in 2010. Last -- 2024 revenues, EUR 50 million. We had already, before the ING acquisition, a business in Brazil, Argos, which we acquired back in 2017. Argos has been mainly focusing on light and medium loader cranes, while ING brings into our portfolio the heavier loader cranes in the Brazilian market. So actually quite nice complementary acquisition for our Brazilian business, plus then offering also sales channels for the Southern American markets. We also announced the proposals by the Nomination Board for the Board of Directors. So the current Board members would continue except for Ilkka Herlin, who has informed that he is not available for reelection in the AGM, which is to be held on 24th of March. And the other releases -- press releases, what we have announced, during quarter 4, you can find in our website. And as a last topic, our outlook for 2025 is unchanged. So what we have said already earlier this year, we are aiming at reaching higher than 13.5% comparable operating profit. And as we are now at the end of the year, I would like to remind you also about our dividend policy, which is 30% to 50% of the net income. Aki Vesikallio: Thank you, Mikko. We can jump to this consensus already now and then take the Q&A. So we -- at the change of the year, we also changed the provider of our consensus services. So we now work with Modular Finance. So all of the analysts will be -- sell-side analysts will be reached out by Modular Finance to collect in the numbers. The consensus is now available on Hiab's website, hiabgroup.com. But with that, we jump to Q&A. And Antti Kansanen was first with his hand. Please, Antti, go ahead. Antti Kansanen: Yes. A couple of questions, and I'll start with the earnings side of things. If we think about Q4 versus Q4 last year, I think there was a couple of recurring type of cost elements on the fourth quarter last year. So how much of those that you don't expect to repeat this year? Just a reminder. And maybe then also reflecting on the EUR 20 million that you are flagging on the lower U.S. sales impact on Q3, will that impact be different on Q4 in terms of realized savings or higher volumes on the U.S. production on the fourth quarter? Mikko Puolakka: Thank you, Antti. So if I remember correctly, we had, last year, in quarter 4, approximately EUR 15 million nonrecurring items. We have also announced when we communicated this EUR 20 million cost savings program that for the full transparency, we will report these as items affecting comparability, so below the comparable operating profit. However, as the program is still on the planning phase, we do not anticipate, let's say, significant amount of one-off items in quarter 4, some but not in a significant manner. Once the program implementation starts in the first half of this year based on the planning, then we should start to see the nonrecurring items. What comes to the U.S.? Our quarter 3, like you mentioned, was impacted by the lower volumes. We got a fairly sizable home improvement customer order in quarter 2. And basically, that order, we have started to deliver now in quarter 4. So that will support the U.S. market profitability to some extent at least. So the expectation is that, that kind of volume impact would contribute to the equipment and total higher top line in quarter 4. Antti Kansanen: Okay. And then on the order side, don't have it in front of me, don't remember if you disclosed the U.S. orders from Q4 last year. But overall, just if you think about kind of the run rate that we saw in the U.S., especially on the equipment side in the past 2 quarters versus Q4 last year, what's kind of the delta? Mikko Puolakka: We have not -- if I remember correctly, in quarter 4, we have not announced any sizable orders in the U.S. So the comparison period as such was quite high. Antti Kansanen: Yes. And is there any seasonality that if we just like think about that the demand is similar as it has been, let's say, Q3? Is Q4 typically higher and lower in any type of calendar impacts or anything like that? Mikko Puolakka: Overall, quarter 3 for us is the lowest, typically due to the holiday season, and then quarter 4 is higher than quarter 3. And if I think the U.S. market in general, like I mentioned also earlier that there are kind of bigger customers, are kind of quite okay from the investment side, while the smaller customers are more considerate. However, with the bigger customers, the order timing might sometimes fluctuate so that they don't necessarily place orders in every quarter. Aki Vesikallio: Thank you, Antti. And next in line, we have Mikael Doepel. Mikael Doepel: Yes. So a couple of questions. Just firstly, coming back to the cost takeout. So just to be clear here, so what you're saying is that it's still in the planning phase and it's going to be implemented in the first half of this year, but you still expect the full EUR 20 million to flow through on the P&L next year? And related to that, how big will the one-off cost be at the end of the day? Mikko Puolakka: Yes, it's still in the planning phase. Of course, we need to have the works council negotiations before we can start to do the implementation. This EUR 20 million is the 2026 impact. So if you would compare at the end of 2026, our cost base, that would be EUR 20 million -- fixed cost base, that would be EUR 20 million lower compared to 2025. Aki Vesikallio: And on the one-off costs... Mikko Puolakka: One-off costs. We would come to the one-off costs most probably somewhere around the full year results announcement, in February. Mikael Doepel: Okay. Yes, right. And this EUR 20 million, is this purely just layoffs? Or are you doing something else as well to get those costs down? Mikko Puolakka: It's anticipated that it comes from various sources, personnel costs surplus, also other non-personnel-related costs. Mikael Doepel: Okay. Good. Then just secondly, on this aftermarket or the service business. So despite the fact that the markets have been fairly muted overall, I think you have been able to grow the business in quite a good way in the last couple of quarters. How should we think about this business going forward into Q4 into next year? What are kind of the levers for you to keep that business growing? And are you seeing any headwinds within this aftermarket business currently? Mikko Puolakka: Overall, like you said, despite the equipment volumes decline, we have been able to grow the services business. In our case, in 2025, the services growth has been very much coming from the recurring services, so spare parts, maintenance-related services. And this is actually very much according to our strategy because in our strategy, we have been focusing on the connected fleet, increasing through that basically the spare parts capture rate from the, let's say, current 47% towards 52% by 2028. And then basically, whenever we sell new equipment, we try to combine with that also the maintenance contract. And through the maintenance contract, then we can ensure that we or our partners, like dealers, get then the maintenance work and the spare parts sales when the customer requires the servicing. So basically, we have not, let's say, made any kind of new inventions as such, but we are just prudently executing those strategic initiatives, which we have been, let's say, identifying already, some years backwards. And these are now starting to bear the fruit, and you can see that in our service development. What comes to the U.S. market? We have seen that equipment utilization in the U.S. has been on a good level despite kind of new equipment orders declining, so indicating that customers are actively using the equipment and for that purposes, they need to buy spare parts. In the U.S., we have seen to some extent that customers are perhaps not holding as large spare parts inventories and what they kind of in a pre-tariff situation would hold in the spirit of not tying up capital in the inventories. Mikael Doepel: Okay. And then just finally, a question on your guidance. So you tend to guide an adjusted EBIT margin for the year. Is this the way forward as well? Or are you considering some other measures, perhaps sales growth or something else also for this year? Any changes planned for the guidance essentially the question? Mikko Puolakka: At the moment, no changes planned. So we have considered that for us the most important is the profitable growth. And of course, we want to make sure that the profitability is on that kind of trajectory that it brings us to the 16% comparable operating profit margin by 2028. Aki Vesikallio: Next in line is Tom Skogman. Tomas Skogman: I'd just like to talk a bit about the dynamics of the U.S. market. So I mean, now we have had a time with tariffs on your products and also on trucks. I've heard at least some rumors that in the truck industry that some seem to have difficulties to push through the tariffs and are backing off a bit, not to kill demand too much. Have you heard anything about this? And are you 100% confident your kind of price hikes are sticking basically? Mikko Puolakka: Yes, I can't talk about the others. But in our case, we have sticked with the principle that tariff is an extra cost for us, which we move to the customers. So we are also very transparent with the so-called tariff surcharge in our invoicing, not kind of hiding it in the price list, but showing as a separate line item in the invoice. Of course, we are doing also actively measures to mitigate as much as possible the tariff impacts, localizing the supply chain. We already assembly more than 50% of our U.S. revenues in the U.S. market. So continuously looking ways at how can we reduce the tariff cost, and that is also something what we continuously also reflect in the customer invoicing. So not kind of just sitting and waiting because most probably these tariffs are here to stay at least in some extent or in some form and shape. Aki Vesikallio: And in our industry, many of the OEMs have a similar type of assembly setup that we have. So global supply chains with local assembly, so no clear big differences between the players. Tomas Skogman: And there seems to be discipline that all stick to kind of adding tariffs to prices. You don't see this? [ You were inside the market. ] Mikko Puolakka: Yes. This is what our competitors have been doing as well. And in the U.S., the most -- let's say, most of the competition is coming from European companies. Tomas Skogman: We have seen lately that the Trump administration is quite active when it comes to Fannie Mae and Freddie Mac, trying to boost private consumption and construction, making it easier for the consumer. But do you see any positive signs in some segment of the market or some geography in the U.S.? Or is it still just negativity everywhere, basically? Mikko Puolakka: At least so far, until today, we have not seen any kind of notable changes in customers' behavior in the U.S. market, in none of the kind of end markets where we operate. Tomas Skogman: And then the opposite in Germany, we have seen good construction data in December. Do you see any -- the recovery is continuing, I guess, but do you see that it's accelerating or... Mikko Puolakka: I would say that the recovery, what we started to see in the latter part of 2024, has continued in those main markets like Germany, here in Europe. I can't say that we would have seen a kind of acceleration in the recovery, but solid development in that improvement part. Still, it's good to remember that -- or note that also our European volumes, if we would look the unit volumes, those are not necessarily in all markets even yet on 2019 level. So there is a kind of a replacement need coming -- piling up, but at least so far, we have not seen any kind of accelerated replacement activities. Overall, good tendering activity has continued like we saw already in quarter 3, but still it takes quite a while for the customers to make the kind of final investment decisions also in Europe. Tomas Skogman: And then I'd like to not discuss the Q4 margin yet, but if you go to H1, I mean, you had very good margins in H1 in '25. And help us to -- or remind us about the cost savings you had last year when you had the biggest incremental help. I mean, how is it then you roll over to Q1 and Q2 in 2026, then apparently, these savings for this year, this EUR 20 million will not really help now in H1. It's rather an H2 thing now. And -- but you had savings, if I remember right, immediately from the beginning of last year, right? Mikko Puolakka: Yes. Some kind of quick wins we had already from the beginning of 2025. But I would say that let's say, majority of the previous EUR 20 million cost savings kind of a run rate we started to reach somewhere in the middle of 2025. And also in this new program, which we announced now in quarter 3, I would say that it will not have, let's say, significant impact in the -- at least not in the first quarter and possibly also not yet in the very early part of the second quarter. Aki Vesikallio: As a reminder, so in the first half last year, the U.S. business were still much less impacted by the slow decision-making as we had volumes stemming from the latter part of '24 and January '25. Tomas Skogman: So do you -- I mean, is it wise just to expect that margins go down in the first 6 months then given you have lower order books and these savings are not really helping now the new savings in H1 and you had big savings from the beginning of last year? It sounds like that. I mean it's just good that we don't expect too high margins in H1, if that's the case at the moment, that it's more of a... Mikko Puolakka: Yes, let's come back to the 2026 margins when we provide the full year outlook. But yes, overall, like I said, the first half of last year, i.e., 2025 was still quite normal for the U.S. market, while we were then negatively impacted in quarter 3 and to a certain extent, in quarter 4, even though we started to book some of the revenues from those U.S. orders, which we received in quarter 2. But overall, as the U.S. order intake has been lower this year compared to last year, that will at least impact us to a certain extent in the first half of next year, before the cost savings start to kick in. Tomas Skogman: Then finally, are you in active acquisition discussions for more companies at the moment given your strong balance sheet and earlier communication? Mikko Puolakka: We have discussions with potential target companies. Aki Vesikallio: [ Edward ], you next in headline. Unknown Analyst: Sorry about that. Just an understanding on the EUR 20 million savings. Is this a structural saving? Or if the market turned in the U.S., as one hopes it does and gets back to a normalized market conditions, how much of that EUR 20 million would you actually see having to go back in? And then just on the other question, do you actually see then a sort of margin mix dilution as the equipment part picks up, going back to your comment about the overall usage and extension of either rental and lease contracts and over usage of equipment as it is, that you actually see the new kit being bought and the service side drops? That's one. And then the other question was just on pricing in the U.S. If you looked at your pricing for '26 versus your pricing that you were thinking about for the second half of '25, is there a major delta difference between that thinking? Mikko Puolakka: Thanks for the questions. First on the savings, we aim at doing as much as possible structural savings. So those should be fairly sticky, i.e., not kind of traveling type of savings, which might go up when the business picks up. So as much as possible, structural savings. Then what comes to the mix when the business improves? Yes, the equipment growth -- equipment business growth might have a slightly negative impact on the mix as services is now a bigger portion of the business due to the equipment sales decline. But it's good to remember that before the U.S. market decline also, our equipment business was doing a very solid double-digit comparable operating profit. So yes, equipment growth can have a slightly negative adverse impact on the mix. But on the other hand, with the equipment volumes, we can get good leverage on our SG&A costs. And then what comes to the pricing in the U.S.? I would say that the kind of underlying pricing in the U.S. has been fairly stable. But then, of course, due to this tariff surcharge, I would say that our pricing kind of invoicing to customers has been, say, 10-plus percent higher since, I would say, 1st of March compared to the beginning of 2025. Unknown Analyst: Okay. And then just a last question. If you just look at the overall inventory between both from yourselves and from competitors actually in the distribution network, how is that looking running into '26? Mikko Puolakka: In our case, our kind of inventories have declined in 2025 due to the top line declining. And if we think our dealers, they don't typically hold sizable inventories. They kind of -- when they get an order from the customer, then they place an order for our equipment, so they don't -- except for some kind of high runner, very standardized products. Otherwise, they don't typically hold sizable inventories. Aki Vesikallio: I don't see any hands up or any questions in the chat, but if we have any questions from the telephone lines, now is your chance. So I don't hear any questions from the telephone lines, but [ Edward ] has a follow-up. So please go ahead. Unknown Analyst: Sorry, I'll take an opportunity then. You talked earlier about discussions with clients in the U.S. that not much really has changed. But if you take the commentary from the larger clients at least, I mean what is their planning for '26? I mean, okay, we had the whole tariff friction through '25, but at some point, companies just say, "Okay, we just have to swallow it to a certain extent. We've had it so far. There's a degree of known dynamics within it. We've got to get on with the business." So what are they actually talking to you, the larger clients, at least who probably have the financial flexibility to make decisions? Mikko Puolakka: Yes. The larger clients, they have done, for example, market consolidation. So they have been buying competitors. And what they have been doing in '25 and most probably they would possibly do also in '26 is this kind of fleet renewals. They might have thousands of our equipment in use. And basically, every year, they may have to replace hundreds of those. So basically, they have -- like you said, they have stronger balance sheets. They have established relationships with leasing companies, and they are looking perhaps things in a bit longer time horizon than perhaps smaller players who might kind of have a bit more constrained balance sheet. Aki Vesikallio: Thank you. I don't see any further hands up, so it's time to conclude today's call. So we will go into the silent period on 22nd of January, and the results will be published on 12th of February. So stay tuned and have a nice, let's say, winter so far, and let's get back to the topics on 12th of February. So thank you, and bye-bye. Mikko Puolakka: Thank you.
Bruce Young: Good afternoon, everyone, and thank you for participating in today's conference call to discuss Concrete Pumping Holdings financial results for the fourth quarter and full year ended October 31, 2025. Joining us today are Concrete Pumping Holdings CEO, Bruce Young, CFO, Iain Humphries, and the company's external director of investor relations, Cody Slach. Before we go further, I would like to turn the call over to Mr. Slach to read the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead. Thank you. Cody Slach: I'd like to remind everyone that during this call, to give you a better understanding of our operations, we will be making certain forward-looking statements regarding our business and outlook. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Concrete Pumping Holdings annual report on Form 10-Ks, quarterly report on Form 10-Q, and other publicly available filings with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether because of new information, future events, or otherwise. On today's call, we will also reference certain non-GAAP financial measures, including adjusted EBITDA, net debt, and free cash flow, which we believe provide useful information for investors. Provide further information about these non-GAAP financial measures and reconciliations of the comparable GAAP measures in our press release issued today or in the investor presentation posted on the company's website. I'd like to remind everyone that this call will be available for replay later this evening. A webcast replay will also be available via the link provided in today's press release as well as on the company's website. Additionally, we have posted an updated investor presentation to the company's website. Bruce Young: Now I'd like to turn the call over to the CEO of Concrete Pumping Holdings, Bruce Young. Bruce? Thank you, Cody, and good afternoon, everyone. In the fourth quarter, our results continued to demonstrate the durability of our operating model and the benefit of our diversified platform. Despite a challenging macroeconomic backdrop, US concrete pumping volumes in the fourth quarter remained stable in the commercial market. The continued improvement in infrastructure was offset by lower homebuilding volume and softer residential construction markets. Our Eco Pan Waste Management Services segment again delivered steady year-over-year growth, underscoring the benefits of our diversified platform. In addition, our disciplined approach to cost management, fleet efficiency, and strategic pricing played an important role in top-line pressure and supporting profitability. Turning to specific comments by segment within our U.S. Pumping business, we continue to experience year-over-year improvement in publicly funded infrastructure work, including road, bridge, and education projects. Infrastructure projects are 25% of our US concrete pumping revenue during fiscal 2025, and our national footprint remains an advantage as previously allocated federal and state funding moves into proactive project starts. In the commercial end market, which was 47% of our US concrete pumping revenue, the demand environment in heavy commercial construction improved through the year in our key geographies, and this is underpinned by expansion in data center, chip plant, and large warehouse activity. Light commercial activity was softer year-over-year as construction volumes remained more sensitive to interest rate pressure and tariff-related uncertainty. Moving on to the residential end market, affordability constraints from higher interest rates continue to cause downward pressure on homebuilding demand volumes, and year-over-year revenue was lower in this end despite pricing being relatively stable. Our residential end market mix was at 29% of total revenue on a trailing twelve-month basis. We expect that moderating mortgage rates will encourage a steady path towards normalization to address this structural supply-demand imbalance in housing. We expect this will support medium to long-term home building activity, and we believe the Federal Reserve's path to interest rate reduction should provide incremental support to this end market's growth over time. Moving to our UK operations, commercial construction activity remains subdued as elevated interest rates and economic uncertainty continue to weigh on volumes. However, infrastructure remains resilient in the UK, particularly in energy projects and continued growth in HS2 rail construction, which still has a long construction runway remaining to project completion. In our US concrete waste management business, we continue to increase revenue due to both organic volume and pricing growth, even as the broader US construction markets remain challenged. I would like to pivot to 2026 in our capital investment plans, particularly surrounding an upcoming change with tighter emission standards that we believe will impact the broader construction industry. As a company focused on sustainable growth and long-term shareholder value, we are proactively accelerating a $22 million investment from fiscal 2027 into fiscal 2026 in our US concrete pumping and Eco Pan fleet in advance of the upcoming 2027 stricter NOx emission standards. For those of you who are unaware of what this means, NOx refers to nitrogen oxides, which are emissions produced by diesel engines and regulated due to their impact on air quality. The upcoming 2027 standards that are expected to go into effect January 1, 2027, will significantly tighten allowable NOx emission levels for new heavy-duty equipment. For fleet operators like Concrete Pumping Holdings, these standards affect the cost, design, reliability, and availability of new OEM equipment and will increasingly influence customer preferences on job site requirements. The decision to accelerate equipment purchases is based on a couple of key considerations, navigating the expected disruptions from first-generation truck technologies and anticipated truck price increases in 2027 driven by incremental OEM production costs. From an operational standpoint, we have experienced this change in emission regulations before, in transitioning heavy construction equipment to meet modern NOx emission standards is far more complex than simply replacing an engine or adding emissions hardware. These changes fundamentally alter how the equipment behaves in real-world conditions. In the last engine emissions change, it took several years to achieve an acceptable standard. This pull forward of a significant portion of fiscal year 2027 investment will reduce replacement CapEx expenditures in fiscal year 2027 and aligns with our capital allocation roadmap to allow for a smooth transition under new regulations to improve the company's competitive positioning. I will now let Iain address our financial results in more detail before I return to provide some concluding remarks. Iain? Iain Humphries: Thanks, Bruce, and good afternoon, everyone. Moving right into our fourth quarter results. Revenue was $108.8 million compared to $111.5 million in the prior year quarter. The slight year-over-year decline reflects continued timing delays in commercial construction activity and softness in residential demand driven primarily by the prolonged high-interest rate environment. Revenue in our US Concrete Pumping segment, mostly operating under the Brundage-Bone brand, was $72.2 million compared to $74.5 million in the prior year quarter. Looking at our end markets, infrastructure projects remain the bright spot, with demand supported by sustained federal and state investments. Commercial project volume was largely consistent with the prior year fourth quarter. Strength in heavy and complex commercial projects helped to offset softness in light commercial work that continues to feel the pressure from high-interest rates. Residential demand softened late in the fiscal year, consistent with the broader affordability challenges and the prolonged high-interest rate environment. Revenue in our US concrete waste management services segment operating under the Eco Pan brand increased 8% to $21.3 million compared to $19.8 million in the prior year quarter. This organic growth was driven by higher pan pickup volumes and continued pricing momentum, underscoring the durability of this business through the cycle. For our UK operations, operating under the Camfaud brand, revenue was $15.3 million compared to $17.1 million in the same year-ago quarter. The decline was primarily volume-driven, reflecting ongoing weakness in commercial activity amid elevated interest rates and economic uncertainty. Foreign exchange translation was a 220 basis point benefit to revenue in the quarter. Returning to our consolidated results, fourth-quarter gross margin declined 170 basis points to 39.8% from 41.5% a year ago. As we continue to focus on the elements of business that we can control, a strong emphasis on cost control initiatives and pricing discipline helped mitigate margin pressure from lower demand volumes. However, these benefits were slightly outweighed by lower volumes and reduced fleet utilization. General and administrative expenses in the fourth quarter were $26.5 million compared to $27 million in the prior year quarter. As a percentage of revenue, G&A was 24.4% in the fourth quarter, compared to 24.2% in the prior year quarter, reflecting some operating deleverage on lower revenue rather than an increase in absolute spending. Net income available to common shareholders in the fourth quarter was $4.9 million or $0.09 per diluted share compared to $9 million or $0.66 per diluted share in the prior year quarter. Consolidated adjusted EBITDA in the fourth quarter was $30.7 million compared to $33.7 million in the same year-ago quarter. Adjusted EBITDA margin was 28.2% compared to 30.2% in the prior year quarter. The decline was primarily driven by lower revenue volumes partially offset by ongoing cost initiatives across the organization. Our US Concrete Pumping business, adjusted EBITDA declined to $17.5 million compared to $19.7 million in the same year-ago quarter. In our UK business, adjusted EBITDA was $4.1 million compared to $5.2 million in the same year-ago quarter. For our US Concrete Waste Management Services business, adjusted EBITDA increased 3.8% to $9.1 million reflecting robust operating leverage on higher volumes and pricing. Turning now to liquidity. At October 31, 2025, we had total debt outstanding of $425 million and net debt of $380.6 million, representing a net debt to adjusted EBITDA leverage ratio of approximately 3. We ended the quarter with approximately $3 million of available liquidity, including cash on hand and availability under our ABL facility, providing substantial financial flexibility. Now moving on to our share buyback plan. During the fourth quarter, we repurchased approximately 274,000 shares for $1.8 million or an average price of $6.73 per share. Since initiating this program in 2022, we have repurchased approximately 4.9 million shares roughly $31.5 million with $18.5 million remaining in the current authorization through December 2026. We continue to view repurchases as a flexible and opportunistic component of our capital allocation strategy that demonstrates our ongoing commitment to delivering enhanced shareholder value. Turning to our outlook for fiscal 2026. We expect revenue to range between $390 million and $410 million and adjusted EBITDA to range between $90 million and $100 million. Our guidance assumes no meaningful recovery in the construction markets during fiscal year 2026. While overall manufacturing and commercial activity remains muted, due to interest rate and tariff uncertainty, we continue to see healthy bidding activity in project starts in large-scale commercial projects such as data centers, semiconductor facilities, and distribution centers where pricing remains constructive. Our infrastructure and residential end markets, we expect 2026 revenue to be roughly flat year-over-year. We expect free cash flow, which we define as adjusted EBITDA, less net replacement CapEx, less net cash paid for interest, to be at least $40 million. The 2026 outlook assumes approximately $23 million of net replacement CapEx and $32 million of net cash paid for interest. This excludes the exceptional accelerated CapEx brought forward from 2027. As Bruce mentioned, we are incorporating accelerated fleet investment into our fiscal 2026 planning and long-term capital allocation framework. Fiscal 2026, we expect to invest approximately $22 million has been accelerated from our planned 2027 capital allocation investments. This represents a timing shift rather than a structural change to our long-term capital framework. With our fleet net replacement expected to be a low single-digit percentage of revenue in fiscal 2027. Our balance sheet and liquidity position is comfortable to support this fleet investment, we remain committed to disciplined capital deployment maintaining leverage within our target range and prioritizing returns on invested capital. We believe we are well-positioned to strengthen our service offering in anticipation of a market recovery. With that, I'll now turn the call back to Bruce. Bruce Young: Thanks, Ian. While end markets have yet to show signs of a sustained recovery, we believe the company is well-positioned to benefit as construction activity ultimately improves. Over the last several quarters, we have preserved financial flexibility and generated strong cash flow, reinforcing the stability of our platform. Our focus remains in the areas within our control, executing against our disciplined growth strategy, maintaining our commercial leadership, driving efficiency through operational excellence, and strategically investing in our fleet as a source of significant competitive advantage. With our solid financial position, we have the flexibility to pursue acquisitions when opportunities arise, invest in organic growth initiatives, and deliver superior shareholder value. We continue to take a disciplined and opportunistic approach to M&A with a focus on value-added acquisitions that strengthen our core platform. In November 2025, we completed an acquisition in the Republic of Ireland that aligns us well with our strategy. While modest in size, the transaction has complementary capabilities and a new international region with healthy long-term demand drivers. The durability of our business model combined with a track record of successfully navigating cycles gives us confidence in our ability to deliver healthy financial and operating results through a variety of environments. We believe this positions the company to create long-term shareholder value over time. With that, I'd now like to turn the call back over to the operator for Q&A. Vaughn? Operator: Thank you, sir. We will now be conducting a question and answer session. If you would like to ask a question, please press star and the number one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And our first question comes from Tim Mulrooney with William Blair. Please proceed with your question. Ian, Bruce, good afternoon. Tim Mulrooney: Hey. Good afternoon, Tim. So a couple of questions on the guide here. I know you're expecting construction end markets to remain challenged this year, but it looks like you're actually expecting revenue to be up modestly at the midpoint. So can you just talk about the drivers of that? Is the year-over-year growth primarily from the acquisition? Or are you expecting some organic growth as well? Iain Humphries: Yes. Tim, this is Iain. I'll take that. It's more so we're expecting volume to be largely consistent year-over-year, but we do expect to see some pricing improvement. Some of that will come from the larger projects that we mentioned. But year-over-year, we expect the volume to be relatively flat. Year-over-year. So that's where the incremental growth at the midpoint would come from. Tim Mulrooney: Okay. That's helpful. Thanks, Iain. And then sticking on the guide for a minute. It looks like you expect revenue to be up a little bit, but margins to contract. Correct me if I'm wrong on that math, but if I'm right, you know, how should we think about the primary drivers of that margin pressure in 2026 in the context of that low single-digit top-line growth implied by the midpoint of your outlook? Is it just fleet utilization? Is there more that I should take into consideration there? Iain Humphries: Yeah. No. I think you're right. It's mostly fleet utilization. I mean, obviously, we scale volume. We get a nice incremental margin, but with the volume being flat, there's a marginal decline in that margin percentage at midpoint. From that lower than expected or optimal utilization. Tim Mulrooney: Okay. Got it. Very clear. And if I could just sneak one more in, if you permit me. I wanted to ask about your outlook for residential construction. I know it continues to be a challenge right now, but was a source of strength not all that long ago. So would you characterize this market right now for you, for new home construction, as getting progressively softer in recent months or stabilizing or on a slow path to recovery? I ask because we're getting all sorts of different signals and opinions from macro data points out there. Bruce Young: Yeah. Thanks, Tim. I'll take that. And then I think I would look at that from the different regions. The regions where we do most of our residential, it was a little softer last year, but starting to improve slightly, and we do expect that it should improve some during this year. We're actually somewhat optimistic on residential. Tim Mulrooney: Okay. Understood. Thanks for taking my questions and good luck in '26. Iain Humphries: Alright. Thanks, Tim. Operator: Our next question comes from Brent Thielman with D.A. Davidson. Hi, thanks. Good evening, guys. Yeah. I just wanted to maybe just follow-up on the overall kind of growth outlook for 2026. As you sit here today? And maybe just ask in a different way, your high-level views and expectations for each of the business groups. I guess I'm thinking a little more towards the UK group and the Eco Pan. What's sort of a good framework for us to think about for those two businesses with what you see in front of them? Bruce Young: Yeah. Thanks, Brent. So taking them one at a time. So in the UK, we have a really strong presence in the publicly funded work, especially HS2 and some of the energy projects that are going on. There's some work around London that we are very well positioned for. So we expect public spend to be really good and our revenue in the UK to be quite strong with that. Our opportunity that we have in Ireland being run out of a UK operation. We see that as you know, the commercial market in Ireland is good. The infrastructure market in Ireland is good. So we expect that small business that we bought there to improve throughout the year. And the real question mark for us in the UK is really the rebound of the commercial market. It appears that there may be months behind even the US market on commercial work. And so that's kind of our outlook there. Eco Pan, as you know, we always expect double-digit growth, and we think the construction market went backwards significantly last year, but Eco Pan still had reasonable growth. We think with kind of the flatness in the market going forward this year that Eco Pan should be back to high single digits, maybe double-digit growth. We feel pretty good about the outlook for them. And with our US concrete pumping business, you know, we just mentioned residential. We expect it to be somewhat resilient this year. Infrastructure has been a little bit better for us. The real question for us is in the commercial market, as you know, we do a lot of work on data centers and chip plants and those sorts of things, which are really nice jobs for us that require, you know, large technical equipment, high volumes of being placed often in remote areas. That's a really nice fit for our business. That's the upside, but the downside is, you know, still no office buildings, no manufacturing because of tariff concerns. Really hasn't come about like we would expect it to. Hopefully, you know, the tariff discussions get settled out sometime this year and manufacturing starts coming back. But the commercial market is kind of questioning us as well. There'll be chip plants and data centers keep us going strong while we're waiting for something, you know, like commercial in some of these other markets and segments to come back. Brent Thielman: That's really helpful, Bruce. Appreciate all that. Maybe just on Eco Pan and getting to that high single, potentially low double-digit kind of growth. Is that contingent on your ability to get into new markets, or can you get there in the existing sort of geographies that you're operating in? Bruce Young: Good question. So we're always moving into every year, we move into a couple of new markets, but it takes a little while for them to develop. But again, the markets that we have moved into previously haven't matured yet. And so there's an awful lot of opportunity to create greater density in some of the current markets that we're already in. Brent Thielman: Got it. Maybe just the last question. The CapEx pull forward, does this address all of your requirements associated with the upcoming regulations? Or should we think there's another big slug in CapEx the next year too? Bruce Young: No. This pull forward will address almost all of that issue. You know, I don't know if you remember back in 2008, the last time there was a major change in the emissions, it for the concrete pumping industry, it literally took from 2008 to 2013 before they could come out with a reliable truck that they could put underneath a concrete pump and operate it. And now I realized, you know, during that time, we had the GFC, and so there maybe was a lot of effort to put into that, but we are concerned about the disruption. To giving us a truck that is reliable to service our customers the way we need. And that's the reason we're pulling that forward so we don't get caught up in that as they're trying to sort through getting us a reliable solution. Brent Thielman: Okay. Thanks very much. I'll pass it on. Bruce Young: Thanks, Brent. Operator: Before we take our next question, as a reminder, please press star 1 on your telephone keypad. You will hear a confirmation tone to indicate your line is in the question queue. Our next question comes from Andy Wittmann with Baird. Please proceed with your question. Andy Wittmann: It's nice to have a CEO that has been around long enough to learn from the 2008 truck crisis. To avoid it in the past. So that's a good thing. I guess just Eco Pan margins, you know, good revenue growth. EBITDA didn't come through quite as much, Iain. Was that a comp issue, or you had to mention that I think you said that the pickups and the deliveries were big drivers. I guess that's probably a little lower margin. Is that what it is? Is that the bridge? Normally, I'd expect positive leverage out of the business here, but I think you could address. Iain Humphries: Yeah. So, look, I mean, as Bruce mentioned just in the last of his closing remarks, we did move into some new regions. So as you know, there is a little bit of overhead investment to stand up some of those newer regions. So I mean, change in the EBITDA margin percentage, but, you know, the payback and the ROI still really healthy. So yeah, we're still very happy with the margin. But, you know, as you know, there's a bit of an investment lag as we stand up some of those newer markets that we entered into, so late in '25. Andy Wittmann: Yeah. Okay. And then just I just thought I'd ask about fuel, actually. Crude prices are way down, but it doesn't look like diesel's followed suit quite as much. And I was hoping you could just address what the net impact was in fuel to the quarter. What you're looking for what's kind of underwritten in your guidance? I know, obviously, there's a range, so there's a range in your fuel outcomes as well. But so are you thinking is that a headwind year over year in '26, tailwind? I know that diesel prices in November were super low actually, but they've kind of popped up a little bit more since then. So just maybe if you could address the topic as a whole would be helpful for us. Iain Humphries: Yeah. Sure. So, I mean, obviously, we track that as well. And so year over year in the quarter, were largely flat. The have come down. I mean, since back from, like, 2022-2023, but it's sort of been a bit uneven. Would say over the last year or two. Our assumption is going forward that that will largely remain. So we don't see it normally like a headwind or a benefit going into next year as we sit here currently yeah, that's a quick look back and where we see things going forward. Andy Wittmann: Got it. And then just yeah. Now, Bruce, just I know the Ireland investment's not that significant, but it feels kind of like a bit of a change. You're I guess you're not in Dublin. There's I know the whole country is kind of growing, but is this a one-off, or do you feel like now that you got at least some kind of a flag planted here that you need to build out, the rest of the republic. And maybe if you could just talk about any things that we should think about for modeling that one, Iain, that'd be helpful. Either cash outlay or how much revenue we should expect from it. Just so we can understand what it could might contribute. Bruce Young: Yeah. Well, for the question, Andy. But, certainly, we wouldn't have gone into court just as a one-off. We see opportunity for several other opportunities for acquisitions in Ireland. Okay. And certainly not anything to talk about currently, but, you know, our plan is to do to take that and grow it. Iain Humphries: Yeah. Any comments anything you can say in the economics, or should we just wait for the filing? Yeah. I mean, on the economics, I mean, in US dollars, it's largely a couple of million dollars of revenue and about half a million of EBITDA contribution. And as Bruce says, I mean, obviously, they're scaling there. I mean, one thing that we can do is there's a common they call it a common travel area. Between the UK and Ireland. So there is an ability to move labor back and forth as we sort of build out that landscape. I mean, you move between like, Galway, Dublin, Lubbock, and down to Cork, it is there's a really strong economy that's back in some of that construction activity we're seeing there. Andy Wittmann: Okay. Last one for me. Sorry to keep going here, but with round them all up. Bruce, just kind of on the environment, I guess, for lack of a better term, you know, at first, when interest rates are going up and things were kind of slowing down, it was there's talk there was talk about projects delayed timing, not cancellation. You still kind of had them on the roster for doing the job someday. Just want to check-in on that. Has there been, in fact, now cancellations that you're gonna have to kind of re-win the jobs, or what is kind of the status of some of the stuff that was a one-time plan, but it's been kind of slow-moving now for a while? I'm just kind of curious if so. What you kind of see there and where your backlog stands today as a result of that. Bruce Young: Yeah. So the only two areas that I would say that we have that concern, any office buildings were planned over the last few years, they've been shelved, there's no telling when they might they may come back. Manufacturing, there's a lot of that that is on hold, may start up depending on how the tariff conversations land. Many of those projects, we already have. And if they go, we will we'll be in line to do those projects. So we feel pretty good about that. But like we mentioned earlier, the offset is the chip plants and the data centers where we're doing quite well on that. And as long as they can keep providing energy and water to those sites, you know, we think that could be really good for us this year. Andy Wittmann: Alright. That's all I had. Thanks a lot. Iain Humphries: Alright. Thanks, Andy. Operator: At this time, this concludes our question and answer session. I would now like to turn the call back over to Mr. Young for closing remarks. Bruce Young: Thank you, Vaughn. We'd like to thank everyone for listening to today's call, and we look forward to speaking with you when we report our first quarter results in March. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Jamie Dimon: Welcome to JPMorgan Chase's Fourth Quarter 2025 Earnings Call. This call is being recorded. Your line will be muted for the duration of the call. We will now go live to the presentation. The presentation is available on JPMorgan Chase's website. Please refer to the disclaimer in the back concerning forward-looking statements. Please stand by. At this time, I would now like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon, and Chief Financial Officer, Jeremy Barnum. Mister Barnum, please go ahead. Jeremy Barnum: Thank you, and good morning, everyone. This quarter, the firm reported net income of $13 billion and EPS of $4.63 with an ROTCE of 18%. These results included the previously announced reserve build of $2.2 billion NCCV related to the forward purchase commitment of the Apple Card portfolio. Revenue of $46.8 billion was up 7% year on year on higher markets revenue as well as higher asset management fees and auto lease income. The increase in NII ex markets was primarily driven by higher firm-wide deposit and revolving balances in card, largely offset by the impact of lower rates. Expenses of $24 billion were up 5% year on year, predominantly driven by higher volume and revenue-related expenses and compensation growth, including from office hiring, partially offset by the release of an FDIC special assessment accrual. Turning to the full year results, I'll remind you that there were a few significant items in 2025 which are listed in the footnote. Excluding those items, the firm reported full-year net income of $57.5 billion, EPS of $20.18, revenue of $185 billion with an ROTCE of 20%. And in terms of the balance sheet, we ended the quarter with a standardized CET1 ratio of 14.5%, down 30 basis points versus the prior quarter as net income was more than offset by capital distributions and higher RWA. This quarter's higher standardized RWA is driven by increases in lending across both wholesale and retail including the Apple Card purchase commitment, which contributed about $23 billion of standardized RWA partially offset by lower market risk RWA. You'll see that sequentially, the advanced RWA is up more significantly than standardized. And as you know, our SCB is now at the two and a half percent floor which makes advanced RWA more relevant, so we have added it to the page. The Apple Card transaction's advanced RWA contribution about $110 billion based on the sum of expected drawn balances and undrawn lines on closing. The elevated level of Advanced RWA is temporary and is expected to reduce to approximately $30 billion in the near term. Moving to our businesses. DCP reported net income of $3.6 billion or $5.3 billion excluding the reserve build for the Apple Card portfolio. Revenue of $19.4 billion was up 6% year on year, predominantly driven by higher NII on higher revolving balances in card, and a higher deposit margin in banking and wealth management. A few points to highlight. Consumers and small businesses remain resilient. We continue to monitor leading indicators for any signs of stress. And despite weak consumer sentiment, trends in our data are largely consistent with historical norms and we are not currently seeing deterioration. Cross income groups, debit and credit sales volume continued to perform well, up 7% year on year. For the full year, we had strong growth in our franchise with 1.7 million net new checking accounts, 10.4 million new card accounts, and record households in wealth management across digital and advised channels. Next, the CIB reported net income of $7.3 billion. Revenue of $19.4 billion was up 10% year on year driven by higher revenues in markets, payments, and security services. To give a bit more color, IB fees were down 5% year on year, reflecting a strong prior year compare and the timing of some deals that were pushed to 2026. In terms of the outlook, we expect strong client engagement and deal activity in 2026, supported by constructive market dynamics which is reflected in our pipeline. Markets, fixed income was up 7% year on year, with strong performance in securitized products, rates, and currencies in emerging markets. Largely offset by lower revenue and credit trading. Equities was up 40% with robust performance across the franchise, particularly in prime. Turning to asset and wealth management. AWM reported net income of $1.8 billion with a pretax margin of 38%. Revenue of $6.5 billion was up 13% year on year, predominantly driven by growth in management fees on higher average market levels and strong net inflows as well as higher performance fees. Long-term net inflows were $52 billion for the quarter, $29 billion for the full year, positive across all channels, regions, and asset classes. In liquidity, we saw net inflows of $105 billion for the quarter and $183 billion for the year. And we saw record client asset net inflows of $553 billion for the year. To finish up the fourth quarter results, Corporate reported net income of $3.7 billion and revenue of $1.5 billion. Before I go over the outlook, I want to make a few points on nonbank financial institution lending given the attention it received last quarter. When we look at NVFI lending internally, we use a narrower definition than what the call report uses. Our definition focuses on exposure to nonbank financial institutions that is collateralized by the loans the NVFIs are making to end borrowers. At the top of the page, we've provided a reconciliation of the regulatory definition to our definition. And as you can see, that results in excluding, for example, subscription lending to private equity funds resulting in about $160 billion of exposure as of the fourth quarter. We've also given you categories of the exposure that we believe are a bit more intuitive and map to recognizable industry categories and business models of the MBF. Now looking at the bottom left, you can see that even though our narrower definition produces a smaller absolute number, the growth over the last seven years has been quite significant no matter how you look at it. And the drivers of that growth are well understood in terms of market dynamics, and regulatory pressures. In terms of risk, on the bottom right of the page, we've given you some detail on the structural features associated with different versions of this lending and the different asset classes. Even the significant amount of credit enhancement involved in this activity as well as the absence of a traditional credit cycle during the period it's not surprising that when we look at the loss history since 2018, we've only seen one charge-off. One related to apparent fraud. Stepping back, in light of the growth and the novel elements of some components of this activity, we are quite mindful of the risks. But given the structural protections, you would generally expect losses in this NVFI category to appear either as a result of additional instances of fraud-like problems or as a result of a particularly deep recession erodes all the credit enhancement. In that scenario, losses associated with traditional lending to end borrowers would likely be the greater concern for the industry. Now turning to the outlook for 2026. We continue to expect NII in its markets to be about $95 billion. The drivers we explained last quarter remain largely the same, so I'll cover them quickly. Usual, the outlook follows the forward curve, which currently assumes two rate cuts. Offsetting that is the expectation for continued loan growth in card, was slightly less than last year as the REVOLVE normalization tailwind is behind us as well as modest firm-wide deposit growth. For completeness, we expect total NII to be about $103 billion for the year as a function of markets NII increasing to about $8 billion due to lower funding costs from the rate cuts, which you should think of as being primarily offset in NIR. On expense, as we told you at an industry conference in December, we expect 2026 adjusted expense to be about $105 billion. Broadly, the expense growth continues to align with where we see the greatest opportunities across our businesses. The details of the thematic drivers are listed on the page and are broadly consistent with what we told you before. On the slide, we've shown you 2024 and 2025 as well as 2026 and called out the foundation contribution and the FDIC's funding assessment. And adjusting for those, the 2026 growth looks a bit more in line. So 2026 in isolation clearly represents meaningful expense growth in both dollar and percentage terms. And that growth reflects our structural optimism about the opportunity set for the company. When we look through the cycle, as well as some optimism about the near-term revenue outlook. More generally, the environment is only getting more competitive, and so it remains critical that we are making the necessary investments to secure our position against both traditional and nontraditional competitors. To wrap up, on credit, we expect the 2026 card net charge-off rate to be approximately 3.4% unfavorable delinquency trend driven by the continued resilience of the consumer. We're now happy to take your questions. Let's open the line for Q and A. Operator: Thank you. Please standby. Our first question comes from the line of Glenn Schorr with Evercore. Your line is open. Glenn Schorr: Hi, thanks very much. I wanna ask on the stablecoin issue. This week, we're gonna have some markings up and talk in congress. I saw the ABA letter this week talking about the immediacy of the issue and whether or not they can close the loophole on interest on Stablecoin. And I think they've estimated that or treasury estimated that it's, like, $6.6 trillion of bank deposits could be at risk if they don't close that loophole. So my question is, it was written from the ABA standpoint, the Computing Bank standpoint. Is there any reason why it wouldn't be all banks, you specifically? And then how big of a deal the banking system if they're not successful closing that hold? Because it does put people at risk of not having insurance and all that stuff. So I'll let you all pine. Thanks. Right. Okay. Thanks, Glenn. Jeremy Barnum: I'll start by saying you probably know more about this than I do. And I think Mary Anne is really the expert at this point, and she did give some comments about this at a recent industry conference. But I'll give you my brief take broken into a couple of pieces. So one, you know, it's worth saying, although it's not directly responsive to your question, that as a company, we've been quite involved in the whole blockchain technology space for some time. And through our Connexus offering, are doing a bunch of kind of really cool stuff across both wholesale. As you know, we launched the first our first tokenized money market fund. And so a capability that we've developed over a long period of time. We have really cutting edge inversion there, and we're kind of using that kind of across the whole company as we engage more in that ecosystem. On a related point, also, I think in CCB, know, we're plugging in a little bit more to the crypto ecosystem and you know, we have an agreement with Coinbase, and it's gonna know, be possible to buy crypto up in the in the CCB ecosystem too. So I say that all my way of saying that, like, we see the interesting developments in the space, the technological innovation, we're engaged. We're watching. We care. Glenn Schorr: On How would you how would you do it? Jeremy Barnum: Add one quick thing. That letter was signed by the ABA, the FSF, the ICBA. It was all banks. It wasn't a handful of banks. Glenn Schorr: Okay. Jeremy Barnum: Didn't actually know that, so helpful. And I think that what I was gonna say narrowly about that point is there I think it's a two-part answer to your question. One, I think it's very clear, and it's in the spirit of the Genius Act legislation and everything that we're advocating for, that, you know, the creation of a parallel banking system that is sort of you know, has all the features of banking, including something that looks a lot like a deposit that pays interest without sort of the associated credentials safeguards, that have been developed over hundreds of years of bank regulation is an obviously, like, dangerous and undesirable thing. And so that is the core of our advocacy. Your narrow question of, like, if this doesn't turn out the way we're arguing it should, what is the risk in banking system deposits? I actually think that's a pretty complicated question, and it involves a lot of nuances about does the money come from, where does it go, what securities are purchased from whom, what is the impact on system-wide deposits, And how does that sort of move between consumer and wholesale? But, clearly, there is some risk for some firms, maybe for many firms, and some version of a threat to the business model I think, you know, we always embrace competition. So this is not about saying that don't wanna compete, but it's about avoiding the creation of a parallel ecosystem that has all the same economic properties and risks without appropriate regulation. And so you know? And the final point to say, I guess, is that in the end, all of our thinking around this from a customer perspective and from an investment and from a franchise perspective, is organized around the question of what actual benefit does the consumer get. So as much as like, the technology is cool and there's interesting stuff there, in the end, you have to ask yourself, how does this actually make the consumer experience better? And in the cases where it does, you know, we either need to get involved or improve our own service offering. In the case where it doesn't, you sort of sometimes it's a little bit of a solution in search of a problem. So I think the question of the quote, unquote, risks to existing business models and banking system deposits needs to be looked at through that lens. But it's always an important question, and our CCB folks are spending a lot of time on that. Glenn Schorr: I appreciate that. I have a very short, narrow follow-up. You noted the 1.7 million net new checking accounts opened for the year, and deposit growth is small, but I also noted the 17% growth in client investment assets. Is that all of it? Or are there other things at play that's limiting deposit growth despite all this great checking account growth? Jeremy Barnum: Oh, interesting. So I think what you're saying implicitly is, like, is the reason that growth in checking account balance is relatively muted. That sort of investment flows are competing that away in some sense. Good question. I would say partially, but not really. I guess the broader narrative is about sort of attention between the very robust franchise growth, which you've alluded to, with the 1.7 million net new accounts, offset against the systems, albeit at a much lower level of yield flows. So to the extent that you consider flows into investments, yield-seeking flows, I think there is a relationship between the two. But I would probably put more traditional yield-seeking flows you know, higher up the list relative to investments, but it's clearly both. And so, yeah, as we talked about over the prior few quarters, like, the level of yield-seeking flows dropped off a lot. But it's not zero. And so as we talked about last quarter, when you combine that with a slightly lower savings rate and a couple of other dynamics, that sort of moment where we were expecting the balance per account number in CCB to start growing again, has just been pushed out a little bit. And so that's the reason, you know, that we talked about previously, I think, last quarter, that our expectations for consumer deposit growth in 2026 are lower than they had been in our scenario analysis. At investor day, and that remains the case. Glenn Schorr: Alright. That was awesome. Thank you. Thanks, Glenn. Operator: Thank you. Our next question comes from Ken Usdin with Autonomous. Your line is open. Ken Usdin: Thanks. Hi. Good morning. Jeremy, you mentioned when you were talking about the expense outlook that there's obviously part of the investment cycle there. You mentioned that the revenue growth outlook in there also looks pretty good. I was just wondering and we can see that in the volume-based parts of the growth. But I'm just wondering, have your NII outlook, we have your expenses. Just what parts of the fees are you expecting to be strong? You mentioned some deals pushed out in IB. If you can kinda just help us flavor you know, kinda understand, like, just where the biggest drivers of fee revenue growth are gonna be as you look across the businesses to help us kind of, know, fill in a little bit? Thank you. Jeremy Barnum: Yes, good question. So and I sort of chose my words carefully there because I think there are two versions of this in terms of expenses and investments in terms of, like, short term versus long term. So narrowly, when you look at 2026, we do show you there volume and revenue-related expense which what we traditionally describe as good expense. And, certainly, that is a driver of the overall growth in expenses. We do also note in there there's a significant chunk of that as auto lease depreciation, which is, you know, essentially, it should be thought of as primarily a counter revenue item or whatever. So, you know, there's some optimism about the fee environment embedded there. So to answer your question directly, breaking down 2026, I obviously don't wanna kind of break our tradition of not guiding on fees slash an IR given how market dependent they are and volatile they are. But, you know, you won't be surprised to hear that we're obviously optimistic on investment banking fees generally. I would say on markets, we're very optimistic about the franchise, and the environment is quite supportive, but it was an exceptionally strong year this year. So as we always say in markets, the number will be whatever it'll be, and we'll fight to make it as big as possible. And on the rest of the kind of fee items, the sort of broad wealth management, asset management across both CCB and AWM, again, you know, we're very optimistic about know, the position of the franchise there and the associated implications for fees. But we're a little bit cautious about sort of market appreciation drivers given kinda where we're launching from and given the type of year that it's been this year. So it's a little bit of a balanced scenario, I would say, in terms of fee outlook for 2026, not for any particular negative reason, but just because, you know, 2025 was so exceptionally strong. And then just to briefly pivot to the larger point, the distinction I'm drawing too is the relationship between 2026, you know, projected expense growth and the associated 2026 revenues versus the broader category of investments in long-term growth of the franchise, kind of the top bar of the page, across, you know, bankers, branches, product capabilities, etcetera, which is also a reflection of optimism about long-term optimism that, you know, this is a franchise that rewards investment across all of its parts. Ken Usdin: Excellent. Thank you for that, Jeremy. And, you know, the follow-up, that balancing act also is I think you guys have been more than fine not counting on positive operating leverage every year. How do you balance where your efficiency ratio versus your ROE outputs are given that you're still on this really strong upper teens zone that is obviously still generating tons of capital and allowing you to do a lot with the company. Jeremy Barnum: Yeah. I mean, I guess I would sort of anchor my answer on that one on the word output that you used. So on a couple of dimensions. So if you remember, my Day presentation, we talked a little bit about, you know, the way that we think about capital deployment sort of across the descending stack of marginal return opportunities. And the fact that we will very much deploy large amounts of capital below 17% because the alternative is to buy back stock at implied returns that are much, much, much lower than that. And that's a good thing, and we don't apologize for that, and we think it's shareholder accretive. So for that reason, we really are starting to pivot much more to really discuss the through the cycle ROTCE target as simply an output of, like, our overall business strategy and the intelligent deployment of our financial resources and our investments, across the entire opportunity set. And in some respects, that's also true about the efficiency ratio. You know? In the end, we do what we need to do to compete. We're gonna invest what we need to invest to secure the future of the company and to drive the revenue growth that we need to drive. And, you know, as long as what we're doing is still expected to be long-term profitable, in some sense, you know, the efficiency ratio is a bit of an output, Jamie always says that, you know, perennially expanding know, the notion of you know, constant operating leverage mathematically implies perennially expanding margins, which is an obvious impossibility a highly competitive business that we operate in. So it is a good sanity check, you know, when that number drifts high, maybe you have to look a little harder at your expenses and make sure that everything that you're doing is you know, what you want it to be with the maximum possible efficiency, but we sort of do that all the time anyway. So that that's what I would say in response to that. I would just say the capital is invested to get a good return through the cycle. You know, which means sometimes you have a better efficiency ratio, sometimes you have a worse efficiency ratio. It's kind of more of an outcome of the decisions you make. Operator: Thank you. Our next question comes from John McDonald with Truist Securities. Your line is open. John McDonald: Thanks. Good morning. I wanted to ask a little bit about credit card business. I mean, guess, first, in terms of the Apple Card acquisition, maybe you could talk about the attraction of that business to you guys, both the actual book and also what you're hoping to get out of the co-brand partnership. And the platform more broadly? Jeremy Barnum: Yes, absolutely. So let me start by pointing out what I think is obvious but is worth saying. In light of you know, how much attention this deal has gotten, which is that as you say, like, from a narrow perspective, just in terms of the portfolio and the transaction, this is, you know, an economically compelling transaction for us. As a co-brand deal. I think someone described it, you know, as a win-win-win for all three parties, and I think that's very much how we feel about it. So that's a good starting point. And then in addition to that, you know, obviously, you're talking here about a partnership with Affirm, Apple, that is, you know, a leader in, you know, payments innovation, and user experience and then obviously, like, a very compelling distribution channel for card. And so what's gonna be challenging for us you know, the integration is gonna take two years for a reason. We feel confident that we'll get it done successfully, and I think the process of getting it done in a narrow sense is gonna make us better. Just generally accelerate and challenge our modernization agenda and the user-friendliness of everything we do in the card business. And beyond that, you know, we'll see. We'll see what comes out of the partnership. But, obviously, you know, anyone should be thrilled to be in a partnership with Apple. John McDonald: Okay. Thanks, Jeremy. And then maybe you, or Jamie could provide some thoughts on the idea of regulators putting caps on credit card APRs, just potential impacts on the industry and how you would think through strategic reactions as a big issuer? Jeremy Barnum: Yeah, thanks John. And I appreciate the way you framed the question because the thing that I'm sort of trying to avoid doing is spend a lot of energy or time speculating on the probability that this does or doesn't happen in whatever form it does or doesn't happen. So I think for the purposes of this call, and, obviously, you can assume that institutionally, we'll be doing all the well-relevant contingency planning. But for the purposes of this call, given how little we know at this point, the way I would prefer to talk about it is just assume for the sake of argument that something in the general mode of price controls on credit card interest rates goes through. What would be the consequences of that? And I think the first thing to say, you obviously know very well, is that the card ecosystem is an exceptionally competitive ecosystem. It's among the most competitive businesses that we operate in, and that's true for all levels of borrower credit score from a high FICO to low FICO. And so in that context, when you just basic economics, when you start with that as your starting point, you know, the right assumption about what the response of the system is going to be to the imposition of police controls is not that you will simply compress the profit margins, which are already at their sort of competitively optimal level, and thereby pass on benefits to consumers. What's actually simply going to happen is that the provision of the service will change dramatically. Specifically, you know, people will lose access to credit. Like, on a very, very extensive and broad basis. Especially the people who need it the most, chronically. And so that's a pretty severely negative consequence for consumers. And, frankly, probably also a negative consequence for the economy as a whole right now. I don't wanna let this without saying that I think it should be obvious that that would also be bad for us. I'm not gonna get into quantifying, but in a narrow sense, this is a big business for us. It's a very competitive business, but we wouldn't be in it if it weren't a good business for us. And in a world where price controls make it no longer a good business, that would present a significant challenge, clearly. Beyond that, you know, the way we actually respond would have a lot to do with the details, and I just don't think we have enough information at this point. John McDonald: Okay. Thanks, Jeremy. Thanks, John. Operator: Thank you. Our next question comes from Betsy Graseck with Morgan Stanley. Your line is open. Okay. So I just one follow-up to the last question is does it impact how you're thinking about the co-brand cards you have, the rewards card, is because I think one of the media narratives here is that it would impact only revolvers. And I'm wondering if that's a view that you share, or is this an impact on the entirety of the card book? Jeremy Barnum: Right. Can I just look at this? There obviously, it would impact prime less than subprime. It would be traumatic on subprime. And some of those co-brands are a lot of subprime, etcetera. So you really have to go co-brand by co-brand. But you would have to adjust your model for the added risk by this and ongoing price controls and things like that. So you know, if it happened the way it was described, it would be dramatic. You know, if it happens in a way which modified quite a bit, it would be less. Betsy Graseck: And we don't know the number yet, but it would be very dramatic if it was just a cap. And then on the Apple Card, two years to bring on. Jeremy, you mentioned for good reason. Is this primarily a function of the technology that Apple Card was built on. Right? Like, so as far as I can I'm aware, the current offering had a built-for-purpose technology stack. And I understand you know, I guess my question is for you. Are you building out a whole new technology to enable that same interface with the users of Apple Card or are you able to take are you able to enhance your current system to enable the users to come on to your current system, or is it under a whole new tech stack? And or are there other reasons why it's a two-year process? Jeremy Barnum: There are no other reasons. It is if it was a traditional credit card thing, we can fold it in rather quickly and just put it in our systems. But it's not. They actually built a completely different integrated into iOS tech stack, and they did a good job. So it's good stuff. But to but we have to integrate that inside our system. System. And to do that, it's gonna take two years and cost a bit of money to meet the terms and standards. Those terms and standards are actually quite good. We looked at them and said, no. That's good. They Apple wants to take very good care of those customers. And a lot of those things will be built directly into our system we could obviously apply some of that customer service stuff in other places. And we wanna do it right. And that's all it is. We have to rebuild what their tech stack is, embedded into our system. Betsy Graseck: Excellent. Thank you. Jeremy Barnum: Thanks, Betsy. Operator: Our next question comes from Erika Najarian with UBS. Your line is open. Erika Najarian: Hi, good morning. My first question is for Jamie. Jamie, investors were feeling quite optimistic about the fundamental macro opportunities for the banks in 2026, paired with deregulation, of course. And I think this weekend sort of shook their confidence given the, you know, social media post, by about credit card rate caps and, of course, additionally, the DOJ subpoenas to chair Powell. And, you know, investors kept saying over the weekend, we can't wait till hear what Jamie has to say about the 2026 outlook. So if you could start there in terms of how you're seeing the macro backdrop unveil in 2026 for the banking industry. And how you're considering, the risks, whether it's executive overreach or the geopolitical, situation at the moment. Jamie Dimon: Yeah. So I mean, I'll answer the question, but I think when you're guessing of what the macro environment is gonna be, if you ask me, in the short run, call it six months and nine months and even a year, you know, that's pretty positive. You know? Consumers have money. There's still jobs even though it's weakened a little bit. There's a huge there is a lot of stimulus coming from one big beautiful bill. Deregulation is a plus in general, not just for banks, you know, but they banks will be able to redeploy capital. But the backdrop is also important, but the time tables are different. Geopolitical is an enormous amount of risk. I don't have to go through each part of it. It's just a big matter of risk that may or may not be determined the state of the economy. You know, the deficits in The United States and around the world are quite large. We don't know that's gonna bite. It will bite eventually because you can't just keep on borrowing money endlessly. And so you know, early on fine, you know, who knows? And so and, you know, of course, we have to deal with the world we got. Not the world we want. And, you know, I've never you know, we don't guess about the outcome. We serve clients. Serve them left and right, and we'll deal and navigate you know, with the politics and the issues that we have to deal with you know, around the world and stuff like that, and we're comfortable we can build our business. I do think if you look at things, you know, the rising tide is lifting all boats a little bit. I'm quite conscious of that. And how I look at the numbers at least. But it doesn't mean it's not gonna it does not mean it's gonna stop this year. Erika Najarian: Got it. And my follow-up question is for you, Jeremy. Underneath the $95 billion of NII ex markets for the year. Could you give us a sense of what kind of balance sheet growth you think, is underpinning that? And maybe some commentary on how you're thinking about you know, deposit growth in, you know, two thousand and twenty-six relative to your earlier commentary about yield-seeking flows. And how those statistics would compare to balance sheet growth of 8% in '25 and average deposit growth of 5% in '25. Jeremy Barnum: Sure. So, I mean, not to be pedantic here, Erica, but I'm gonna pivot away from balance sheet growth per se and just talk about, you know, loans and deposits recognizing that you know, some non-trivial portion of balance sheet growth is coming from inside of markets these days. And the name on that stuff is you know, variable and also not part of the NIIX markets. But taking a step back in terms of the big sort of balance sheet drivers and know, growth and mix drivers of the NII. Number one, you know, as the slide says and as I mentioned in my prepared remarks, card, card loan growth is still a driver. You know, I think we're expecting something like six or 7% car loan growth for 2026. So that is lower than we've seen recently, obviously, but we've been talking about that for some time. As a function of the normalization of the revolver account. So that as tailwind is largely behind us, and what we have now is just growth from overall system growth and consumer balance sheet growth as well as our optimism about share and client engagement, customer engagement across the card ecosystem. So that's one important loan driver. On the deposit side, you know, starting with wholesale, 2025 was an exceptionally strong year for wholesale deposit growth. So as we look to '26, we're still pretty optimistic about the wholesale deposit franchise and the payments franchise know, products, offerings, customer engagement, growth opportunities, etcetera, but it's gonna be tough to beat. The 2025 performance in wholesale deposit growth. So we have a more modest for 2026 wholesale deposit growth. And then I touched a little bit on what we're thinking about consumer deposit growth earlier, but just to reiterate, you know, the narrative there is the balance between what is very robust engagement and franchise success manifested through the 1.7 million new accounts that were originated this year, and the fact that the balances per account are sort of not growing quite as fast as we thought earlier in the year. As a function of yield-seeking flows, that are much, much lower than they were at the peak but are still not exactly zero. So there's a kind of tension between those two things. And at this point, we're sort of expecting that inflection in balance per account to kick in the 2026, at which point you would start to see kind of a reassertion of the consumer deposit growth, which would get us to you know, modest deposit growth for CCB in 2026, but certainly lower than that 6% scenario that we talked about at Investor Day, which is stuff we already told you about last quarter and that Mary Anne has discussed. Jamie Dimon: Can you just ask one more can you add one more factor? Which the Fed you know, they don't call it QE. But they're talking about doing $40 billion a month of buying t bills. That adds $40 billion a month into bank all things being equal to bank reserves. And most of that initially shows up in wholesale deposits. And then, you know, maybe gets redeployed. So we'll see how that plays out too. But it does create more liquidity in the system which I should have mentioned as another tailwind for you know, No. That's exactly right. And I think in our in our sort of crude framework, we, as Jamie says, would initially tend to assume that that growth in system-wide deposits would accrue to extremely high beta wholesale deposits and is therefore not gonna tend to be a big driver of the NII story year on year. But it's significant in terms of the system and the functioning line. Erika Najarian: Does that conclude your question, Erica? Erika Najarian: Yes. Thank you. Yes. Thank you. Jeremy Barnum: Thanks, Erica. Operator: Thank you. Our next question comes from Gerard Cassidy with RBC Capital Markets. Your line is open. Gerard Cassidy: Good morning, Jeremy. Good morning, Jimmy. Jeremy, thank you for the you for the data around the MBFI portfolio. Can you share with us an expansion you talked about the growth over this last seven years has been significant. And the drivers of the growth are, you know, the market dynamics and regulatory pressures. Can you expand upon that to give us a little more color of, know, what's behind that? Jamie Dimon: Yeah. Oh, you wanna take that? Go ahead, Jamie. Well, I'd look. Look. We it is. We obviously do things that we think are safe and proper and stuff like that. But it is arbitrage. We participate in that. We're better from regulatory capital holding know, AAA piece of something on top of something else. As opposed to doing the direct loan itself. That's what it is. It's also arbitrage between banks and insurance guys and stuff like that. And that has been some of that growth. Of the things I would tell the regulators is when you see arbitrage, it should you should look at it. I always ask the question why and ask you're better off doing it that way as opposed to another way. Yeah. Exactly. There's nothing mystical about the loans that all these MBFIs are making. This stuff has been going for a long period of time. It's just bigger now. Jeremy Barnum: Yeah. Exactly. On the point of nothing mystical, my version of that, Gerard, and part of the reason that I chose those words in the prepared remarks is to ask the question, well, like, what's the narrative here if you go back in terms of regulation and you know, competitive dynamics with the private credit ecosystem in particular and what has led to what and how is that all evolved. And I think you know, it's well understood that in addition to the regulatory capital factors, were also the leverage lending guidelines, which really did meaningfully constrain bank lending into this type of space. When those were released. And I there's an argument to say that that seeded or accelerated the growth of this ecosystem in ways that otherwise might not have happened. But at some level, that is what it is. And I think as we've been talking about for the last couple years, there's no reason that we can't compete head to head in that space. So the whole, you know, direct lending initiative and the realization that in many cases, what sponsors want is, like, a quick execution of a unitranche structure where they don't have to negotiate with a syndicate. But other times, they wanna go through the syndication process. And that's why we really leaned in to this whole product agnostic strategy that we talked about. And at the same time, in the cases where we don't wind up being the lender, yeah, sometimes we're competing with these folks. Sometimes they're our clients. Sometimes they're both. And, you know, done properly, as we talk about on the slide, we're very happy, you know, to be to be lenders to them. So it's all part of a you know, competitive partner ecosystem, and you know, yeah, we just wanted to frame it out a little bit given all the questions last quarter. No. That was very helpful. Appreciate it. And as a follow-up question, you guys obviously have given us the guidance for NII with and without markets. And when you go back to the markets number in 2024, I think you guys put up about a billion dollars in revenues. You show us '25 at 3.3 in market conditions, of course, that will impact your guidance on the $8 billion. But what's the strategy of growing that business from where it was in 'twenty-four to where we are today? Yeah. Good question. So a couple of things about this. So number one, broadly speaking, over short periods of time, that markets and AI number is gonna fluctuate primarily as a function of rates. And is liability sensitive. So in other words, at higher rates, the number is lower. So what we saw if you sort of and we would we we show the number every quarter. If you plot the evolution of that number as function of the policy rate, you're gonna see that relationship very strongly. It's also true, I pointed out in different moments, that probably the reason that we deemphasize it is that if there are particular mix changes in any given moment, know, Brazilian futures versus cash or something, you know, high-interest rate countries, you can get pretty big swings in the number in ways that have essentially no bottom line impact. Which is the reason we deemphasize the change. But third piece, is just that you know, as has been noted, the market's balance sheet has grown a lot. Over time. And so as we extend more financing to clients, the size of this effect gets bigger. Which is all the more reason that we find it useful to carve it out and make it clear that in general, short-term fluctuations don't have any bottom line impact. And Jamie wanted to something. Yes. We don't run the business at all trying to grow NII in particular because we just look at the revenues created by the trade. Sometimes NII, sometimes it's a net revenue. But growing the business is important. We have you know, the best FIC business in the world, one of the best equity business in the world. Have extraordinary people around the world. We grow the business by building technology adding research, adding cells, sales know, doing a better job in parts of the world where we don't have a great share, but someone else is doing better than us. So we're gonna grow that business. We're quite good at it. It's critical to the capital markets of the world. And, you know, the capital markets of the world are gonna grow. Dramatically. Over the next twenty years. So, you know, we're that's that's how we build a business. NII is just an outcome. On itself, almost irrelevant. Gerard Cassidy: Very good. Thank you. Operator: Thank you. Our next question comes from Mike Mayo with Wells Fargo Securities. Your line is open. Mike Mayo: Hi. I think I get it. JPMorgan spends for growth. You're getting growth. Up 7% year over year in the fourth quarter, and you're willing to sacrifice returns for more growth. I guess, because that increases SBA. But like, it is a wow the $9 billion increase in expenses, your guide year over year. And I get it. That some of that is simply because revenues are likely to come in higher than expected. But if we could please have some more details on the rest, this is the first time we have a chance to address that $9 billion increase in expense guide. So maybe some areas. Jeremy, as far as tech spending, I think went up $17 billion to $18 billion last year. Went up even more after you include the savings that you achieved and especially since you're past peak modernization. Where do you expect Textpend to be in 2026? And as it relates to AI, what was your spend last year, and where do you expect that to go, and what sort of payoffs? And then, Jamie, since you're upping the bar, upping the stakes with the $9 billion of investments, the degree of your confidence that you're going to get the desired returns and outcomes from that. Thank you. Jamie Dimon: So can I just we're not going to give Mike, we owe you all as shareholders as much information we can give you? But we're not going to give you information which I think puts us at a competitive disadvantage. So we've been quite with you guys. First of we try to put everything in there. Everything. So even the Apple spending was in there. Inflation is in there. The expectation that revenue might go up is in there. So if revenue don't go up, that number won't be as big. You know? And but for the most part and tech is gonna go up. We but the good news is when we look at the world, we see huge opportunity. And we're opening rural branches, which we think will be good. We're opening more branches in foreign countries. We're building better payment systems. We're adding better personalization in consumer banking credit card. We're adding AI across the company, and those are all opportunities. You know? And I understand your issue of concern about the $9 billion, but I think you should be saying if you really believe that they're real, you know, you should be doing that. That's the right way to grow a company. And you look at the complexity of the world, the amount of capital requirements, the our SRI initiative, I think that SRI initiative you know, may be far bigger than we thought. You know? And that's in there. So you know, we're gonna we'll you'll be justified by the results, but we're not gonna be giving, you know, detail on every single thing, every single quarter. And you got to just part of to trust me. I'm sorry. Mike Mayo: Alright. Well, I guess I could probably just leave it there. I do have a couple, a little bit more color if you want, Mike. I would also point out we do have company updates. Coming, so that's an opportunity to talk in a bit more detail on this. I do think we highlighted you know, the vast majority of the major thematic drivers on the page subject to Jamie's caveat about not giving away too much competitive information. Maybe I'll just do one minute of, like, a little bit of additional context. I think one thing that's notable is that we did do a big kind of living within our means thing last year, and we did that. And we're gonna continue to do that. So I think as a company, we still, generally speaking, want to make sure that when someone needs to get something done, whether it's in technology or elsewhere, their first reaction is not hire more people. Having said that, you know, the process of you know, emphasizing that a little bit more last year did give us some confidence that, you know, we were actually using resources optimally. And now as we look ahead, a lot that we wanna get done. There's a lot that we need to get done. The Apple Card is part of that, but there's other stuff too. And so at the margin, we are allowing ourselves to at least plan for some additional hiring and technology in order to support what Jamie's saying, like the long-term investment initiative, in particular, in the businesses. Where we need to, develop prod develop and deliver products and features. And, yeah, AI is a little bit of that. But there are other things too. There's maybe one other thing I would say, which I don't think is competitively sensitive and is important, which is that you know, if you think about what's happened to the headcount of a company over, say, the last five or six years, it's grown a lot. And that happened during an obviously complicated period. There was the whole return to the office. Hot desking, remote work, all this stuff. The end result of that is that the amount of real estate square footage over that period grew a lot more slowly than the headcount. At the same time, as we've decided as a company to be an in-office company, we realized it's obviously the case that we need to provide employees a reasonable in-office experience. And that, in some cases, means a little bit of dedensification and catching up on some space renovations around the world. Now we're not just talking about Midtown Manhattan here. For all of our 320,000 employees, they were a little bit overdue. So I would call that a little bit of catch up to the headcount. Jeremy, don't scare them. It's not a big driver the call. Small number. It's a small number. Okay. But I think it's thematically Health care is three hundred million dollars. You know? And I just you can go item by item, but everyone's gonna have health care in place. Inflation. Real estate's a very small number, so we shouldn't bounce Yeah. I don't wanna overemphasize it. I just thought it was. Thematically interesting and not, I would say, competitively sensitive. So that's what we got. We may give you a bit more color. That company update. Alright. Well, if I could just yeah. I guess, as you know, for any analyst, it's trust but verify. Right? So if I could just try one follow-up, just bloody think about your tech spending? Or AI spending for 2026? Jamie Dimon: It'll it's gonna go up a bit, but know, Mike, we have we're building more payment systems. We're building more AI systems. We're building more we're connecting more branches, which means you have the higher network expenses. You know, we're doing all the things you want us to do, You know? But the tech spend is always one of the harder ones to measure and evaluate. That's been true my whole life. You can imagine we're pretty detailed out of what we're doing, why we're doing it, are we delivering it on time, But there isn't an area where you if you dug into it, that you wouldn't say, yeah. You wanna be you better be the best in the world in tech. But we spend money on trading. We spend money on payments. We spend money on We spend money at asset management. We spend money in corporate. We spend my we need to have the best tech in the world. That drives investment. It drives margin. It drives competition. A lot of it is consumer-facing, digital, personalization, travel, offers, all these things. We think are wonderful things. And I like the fact that we have these organic opportunities. I'm I think it's something I'm looking at and saying, I'm looking at and saying it's a good thing that I can point out that we have in every single area, in every single part of the company, we can grow. In some areas, it's like trench warfare. Think of, you know, certain trading. And investment banking. In other areas, we're kinda out front, and we wanna build the next generation of technology. But you know, investment the thing about you've heard me talk about this before. A lot of businesses, you build a new plant, you capitalize it, and then you expense it over to twenty years. A lot of our business, everything gets expensed up front. It doesn't mean it isn't a good return. Mike Mayo: And you're studying more AI? Jamie Dimon: We will be setting more in a we will I think that AI we will be spending more, but it is not a big driver I do think it'll be driving more efficiency down the road. I also point out about that. You know, efficiency because other banks have to do it too, will eventually be passed on to the customer. This is like, you know, you're gonna build three points of margin and get to keep it. You don't. So you need to you need to build some of these things just to keep up. And, you know, we have Thank you. You know, we look at we and we look at all of our competitors, but those competitors include all the fintech. You have Stripe. You have SoFi. You have Revolut. You have you know, you have Schwab. You have everyone out there, and these are good players. And we analyze what they do and how they do it. I would stay up front. And we are going to stay up front so help us God. We're not gonna try to meet some expense target. And then, you know, ten years from now, you'd asking us us the question, how did JPMorgan get left behind? Mike Mayo: Alright. Thanks. You're welcome. Thanks, Mike. Operator: Thank you. Our next question comes from Ebrahim Poonawala with Bank of America. Your line is open. Ebrahim Poonawala: Hey, good morning. I guess maybe, Jeremy, quick one to a follow-up on this whole credit card interest rates. I think you said understandably, this would be very bad for the credit card industry. And JPMorgan. Given that the president put out a timeline for Jan twentieth. Is it fair for us to conclude there's been no communication from the administration to the banks or the industry on how they plan to implement this, and are you expecting anything over the coming days? Jeremy Barnum: Yeah. I guess I just this has happened so quickly, and there's just so little flow of information, at least that I'm aware of, that I just think it's better to not answer those questions. I mean, it's entirely possible that in the last twelve hours, someone spoken to someone. I don't know. But this is happening very quickly in a sort of unconventional way starting with a you know, social media post. So I understand why you're asking the question, but I just don't have anything for you. Ebrahim Poonawala: Got it. And just very quickly on capital, when we think about more updates coming on GSA, Basel and game probably over the coming months. When you think about the right level of capital, just in your seat, do you think two, 300 basis points of excess capital wherever the regulatory minimum shakes out is the right place to be given all the, risk that Jamie talked about, geopolitics, competitive landscape, etcetera? Or do you have a view on where in a perfect world you would want to operate the bank relative to where capital requirements shook out? Jeremy Barnum: Okay. So I wanna be very precise in my answer to your question here, and there are a few pieces to it. So let's start first with the fact that rules aren't done yet, and there are some things that are still out there. And then there's pro you know, periodically reference to a discussion about the right level of capital for banks or for the system. And our answer to that, which we said frequently, but I'll just say it again, is that the answer to that question is do every part of the methodology, across RWA G SIB, and stress testing correctly supported by data to get the right answer for that individual thing. And whatever the sum of those things is, for the system, for any individual bank is what it is. And it should very much not be a sort of goal-seeking exercise or some arbitrary number at the level of the system or for large banks or for small banks and certainly not for any given firm. I think the good news is that from what we're hearing and from what we understand, that is in fact the direction of travel from the agencies, and so that's encouraging. Let's see what happens. But you know, in that context, obvious example that we always talk about, but it's really just worth saying out loud again, is G SIB where, you know, at some point, you really have to ask yourself, you know, what is the right difference between the amount of capital that we should be required to hold and, for example, a very large American regional bank, especially given the enormous amount of progress that's been made over the last ten or fifteen years on resolvability and all other aspects of the framework. So, I won't give you the long speech about why g SID is completely poorly conceived. Hopefully, that gets adjusted in a way that's reasonable, but should be done correctly. Jamie Dimon: Wanna jump in, Jay? Hey. Look. We'd end up with $30.40, or more billions of dollars of excess capital. Yeah. We have tons of capital. There's no scenario where capital is gonna be the issue. I think it's very important that you gotta look across the full spectrum of capital, liquidity, stress testing, and all these things about what can you do to make the system safer. For a lot of these banks, it's not capital You know? It's interest rate exposure or it's liquidity or it's resolution-related type of stuff. And so I think there's overly focused in capital and so you're gonna get to see as people respond to all the Fed you know, APRs they put out, whatever the NPRs they put out, know, what people think about capital. But I actually believe and this is the important fact, that you could make the system with less capital change liquidity, and make it safer. That's what we should be focusing on. Make it as safer so that you all don't have to worry about bank failures. And it isn't just capital. Jeremy Barnum: Yeah. Very much so. Do want to go back and answer your actual question. Does for the avoidance of doubt because you talked about kind of the right level of capital for us and where we wanna run the company, and you referred to, like, a few 100 basis points. And I think there, it's very important to draw the distinction between what we think is the right amount of excess capital for us to carry now given the risk that we see now in the short to medium term, We obviously have a lot of access right now relative to basically any version of final rules. And, you know, that feels more appropriate than ever, I would argue, given, you know, what what what we see out there in terms of the risks and potential opportunities to deploy in the event of a disruption. There's another version of your question which is implicitly a question about long-term buffers, and I that's what I'm sort of wanna steer away from because in the end, like, we're gonna run the company at the right level of capital and capital requirements are requirements. There's a larger discussion about buffer usability. So I'm I just wanna not leave any doubt about a sort of implicit 300 basis point management buffer, which is very much not the way we're thinking about that. There should be no buffers. And the fact is these capital numbers are already set to handle maximum stress. That's how they're set. Ebrahim Poonawala: That was very comprehensive. Thank you both. Jeremy Barnum: Thanks, Ibrahim. Operator: Thank you. Our next question comes from Jim Mitchell with Seaport Global Securities. Your line is open. Jim Mitchell: I just want ask about loan growth. Jeremy, as you pointed out, a lot of the growth has been driven by NDF and cards. But we've seen three rate cuts in September. We have a few more expected. Deregulation is beginning to have an impact in areas like leverage lending, with more to come. So are you seeing any sort of I guess, number one, are you seeing any early signs of a broadening out of demand across other categories like traditional C and I mortgage, or auto? And what are your expectations for '26? Jeremy Barnum: Yeah, Jim. So things about that. You know, I did actually hear that it was a pretty busy day. The home lending business on the back of, what happened in the mortgage market. So you know, maybe we'll actually start to see some pick up there. But, you know, obviously, there are still some larger dynamics in the housing market. That that will be a challenge there. So at a high level, when we look out to 2026, I still think that for CCB, know, the story is really about card. I think in wholesale, if you set aside sort of markets lending for the sake of argument, I actually think we have a what I would describe as a moderately optimistic outlook for loan growth in terms of traditional C and I. And CC and CIB. Now obviously, you don't need to hear my speech about how NCIB you know, C and I lending is an output, not an input. It's kind of a loss leader or whatever. But still, it does give you some indication of the level of client engagement and optimism maybe in c suites. And I think the way that outlook of ours is built up for sort of like modest C and I loan growth outside of markets is a combination of the generally optimistic outlook for frankly, the global corporate environment as a whole as well as some optimism about our growth and expansion strategies, and that's space, are significant and is one of the areas in which we're investing. And, of course, as we acquire new clients, while we don't acquire them for the sake of lending, the new clients often come with loans, and that's very much part of the strategy. So I would say broadly, nothing that dramatic. As a function of the lower rate environment in particular, but you know, a modestly optimistic outlook. Jim Mitchell: Okay. And maybe just a follow-up on credit. You had some more charge-offs this quarter that seemed a little elevated. But NPAs came down in commercial. So just trying to think what's your view there? Do you feel like with rates coming down and the outlook pretty solid, do you feel like, still steady Eddie? Any improvement or any concerns out there on the corporate credit side? Jeremy Barnum: Yes. Good question. I guess a couple of nuances there. So the charge-offs this quarter were largely already provisioned actually, which is part of the reason that we sort of explained the wholesale credit cost narrative through the lens of the net provisions. If you do charge-offs and allowance, it's a little bit nonintuitive. But when you do that and you look at the drivers of the provision, I think it's fair to say that at the margin, and it's a very small margin, I would point out, but it's more negative than positive, meaning downgrades are exceeding upgrades. By a little bit. And we did make some, you know, parameter updates to assume slightly higher loss given default, in the wholesale lending portfolio, which drove a little bit of an increase in the allowance. I don't wanna make too big a deal out of that stuff. It's pretty small in this scheme of things, and I definitely would not say we're saying anything concerning in a broader sense. And, also, it's worth noting that when it comes to wholesale charge-offs, you know, the numbers have been running at exceptionally low levels for a long time. As the portfolio has also grown. So simply bringing that back to slightly more normal through cycle charge-off rates would still involve some increase in charge-offs. So in other words, it's a wholesale version of the whole, like, normalization versus deterioration story that we were talking a lot. About in card as the cycle normalized. With the caveat being, of course, that in wholesale, tend to be a lot more lumpy. And, you know, any given moment, you don't know whether something is idiosyncratic or the a sign of a larger trend. But at a high level, I would say nothing that concerning. And it's not particularly in my mind, driven by rate one way or the other. Jim Mitchell: Okay. Great. Thanks. Jeremy Barnum: Thanks. By the way, we lost Jamie. He had to go to another meeting, but you still have me for any remaining questions. Operator: Thank you. Our last question will come from Chris McGratty with KBW. Your line is open. Chris McGratty: Great. Good morning. Thanks for squeezing me in. Jeremy, my question is on consumer deposit competition. As rates come down, and we talked about loan growth showing some signs of life. I'm interested in your thoughts on incremental competition by market, product, peer, more or less competitive. Anything you could add? Jeremy Barnum: I mean, space is always very competitive, I would say. Has been, you know, throughout this entire cycle. I wouldn't I haven't heard anything recently to change that narrative one way or the other. You know? I mean, I think the larger point, of course, is that all else being equal, with a lower policy rate, you would expect yield-seeking flows to abate even further. Again, they're already at very low levels, but as we discussed previously when talking about consumer deposit outlook, there's currently a little bit of this sort of standoff between those low level of yield-seeking flows. And the pending return to growth of deposits per account. And one thing that you might expect all on SQL is that when the headline policy rate drops, it incrementally decreases the amount of yield-seeking flow pressure. Aside, obviously, from the direct translation into lower CD rates, which is just straightforward. But at a high level, I would say I haven't really heard anything interesting or new beyond the background ever-present factor of a very competitive marketplace? Chris McGratty: Great. Thank you. And then a follow-up on AWM, the flows and margins. Remain very, very good. Interested in your thoughts about sustainability and opportunities for the pieces of growth in the medium term? Jeremy Barnum: Yeah. I mean, AWM is one of the businesses where we're investing. I think we've been optimistic there for a long time. We've been investing there for a long time. We've had a bunch of, you know, product innovation in the asset management space. That's worked out very well and led to AUM growth. And, yeah, I mean, specifically, you know, hiring advisers. And bankers, in the private bank has been a source of you know, it's been very successful, and we're continuing to lean in there quite aggressively. So our franchise is doing great. Flows have been exceptional. And it's one of our areas of optimism for the future. Chris McGratty: Great. Thank you. Operator: Thank you. We have no further questions. Jeremy Barnum: Okay. Very much everyone. See you next quarter. Operator: Thank you all for participating in today's conference. You may disconnect at this time and have a great rest of your day.
Operator: Hello, everyone. Thank you for joining us and welcome to the Concentrix Fourth Quarter and Fiscal Year 2025 Financial Results Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, press 1 again. I will now hand the conference over to Sara Buda, Vice President of Investor Relations. Please go ahead. Sara Buda: Great. Thank you, operator, and good morning, everyone. Welcome to the Concentrix Fourth Quarter and Fiscal 2025 Earnings Call. This call is the property of Concentrix Corporation and may not be recorded or rebroadcast without the written permission of Concentrix Corporation. This call contains forward-looking statements that address our future and expected performance and that, by their nature, address matters that are uncertain. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements as a result of new information or future expectations, events, or developments. Please refer to today's earnings release and our most recent filings with the SEC for additional information regarding uncertainties that could affect our future financial results. This includes the risk factors provided in our annual report on Form 10-K and our other public filings with the SEC. Also during the call, we will discuss non-GAAP financial measures, including adjusted free cash flow, non-GAAP operating income, non-GAAP operating margin, adjusted EBITDA, adjusted EBITDA non-GAAP net income, non-GAAP EPS, and constant currency revenue growth. Reconciliation of these non-GAAP measures is available in the news release and on the company's Investor Relations website under Financials. With me on the call today are Christopher A. Caldwell, our President and CEO, and Andre S. Valentine, our Chief Financial Officer. Christopher A. Caldwell will provide a summary of our operating performance and growth strategy, and Andre S. Valentine will cover our financial results and business outlook. And then we will open up the call for your questions. Now I'll turn the call over to Christopher A. Caldwell. Christopher A. Caldwell: Thank you, Sara. Hello, everyone, and thank you for joining us today for our fourth quarter and fiscal year 2025 earnings call. Going to start off with an overview of 2025 and provide some thoughts on the year ahead before I hand it over to Andre S. Valentine who will discuss details of our financial results and outlook for 2026. For the past few years, we have been clear about evolving our business to deliver more solutions that involve technology. Have made investments in building out capabilities while strengthening our deep domain in line with this. This early start embracing technology solutions has helped us capitalize on the introduction of AI by helping clients navigate the path to success with these new advances. We see a vast opportunity in front of us today redefine our industry and add incremental value to clients. At the start of 2025, we started to execute on an internal plan to capture more of this opportunity and accelerate our evolution to a high-value intelligent transformation partner. To execute, we aligned our team around four key sets of actions. First, focus on complex work and high-value services to become our clients' preferred number one partner while deepening our relationship with them. Second, grow share of wallet by utilizing our extended offerings as clients consolidate the use of CX, BPO, and IPS vendors into fewer partners. Third, leverage our own IP investments and platforms to differentiate ourselves from competitors Fourth, and finally, drive incremental efficiencies so we can save to invest in these new areas of growth and opportunity. Reflecting on 2025, I am pleased with the progress have made along these four areas. First, high complexity work. This year, we were successful in reducing our non-complex work from 7% to 5% of our revenue. What we are most happy about is we did the majority of this by putting in our own technology to automate work. We also worked with clients to optimize their cost structure by re-solutioning existing work to take advantage of technology and our global footprint. In fact, in 2025, we invested $95 million in new capabilities capacity, facilities, security, footprint. This helped move 4% of our onshore business to offshore centers. This migration does result in some margin compression as we incur additional and duplicate costs for a period of time, However, by doing so, we captured share drove new solution sales, attracted new talent, and strengthened our position with our client base while providing a foundation for further growth into 2026. Second, wallet share. Striving to be number one in execution with our clients, has allowed us to grow our share of wallet by selling them additional solutions. Capitalize on these opportunities, we invested in retooling our go-to-market capabilities significantly through the year. We have retrained our entire sales and account management team upgraded 25% of this team with enterprise sellers, invested in SME supporting technology solutions, and developed a clear vertical offering while building out our partner organization for a little over $25 million of incremental spend. These results are now showing strong promise. A few data points. A 6% increase in the annual contract value of deals in the pipeline as we exited this year. And 9% increase in new wins year on year. A 14% increase in transformational deal values this year, a 23% increase in cross-sell/upsell deals this year, and a 37% increase in values for our new service areas this year. These data points help illustrate the business mix evolving more to technology-enabled specialist and adjacent services. We are now being recognized in enterprise circles as being a trusted end-to-end solutions partner. This has also helped drive our consolidation wins to record highs this year. Within our existing base, 98% of our top 50 clients now rely on Concentrix Corporation for more than one solution. Going into 2026, believe we have foundation to gain market and wallet share with the right clients doing the right business. Third, leveraging our own IP. 2025 was also a pivotal year as we launched IXSuite, our AI platform. This was an incremental investment of over $25 million in the fiscal year to develop, productize and commercialize our products. While the AI market is crowded and competitive, we have been very happy with our progress in differentiating and gaining adoption of our tech. Particularly with our IX Hero solution that augments and supercharges human advisers. We exited 2025 with over $60 million in annualized AI revenue of just our AI platform, reaching breakeven as we committed to at the start of the year. This is in addition to us selling third-party AI solutions and helping clients deploy their own AI investments. Now more than 40% of our new business includes some form of our own technology as part of the solution. This attach rate is well ahead of our expectations. Most importantly, our clients are realizing tangible results and impressive feat amidst a market backdrop of AI noise and failed promises. Fourth and finally, to drive efficiencies in our business. As I have laid out, we have been busy accelerating our evolution that has brought forward some costs. To offset as much of these costs as possible, we've been very disciplined in driving efficiencies in our own business so we can invest in the areas we have just talked about. We deployed significant technology internally and retooled many areas of our business to focus on our future state. This has allowed us to reduce our expenditures on non-billable resources and infrastructure by close to $100 million by run rate as we exit Q1 2026 and invest those savings in the areas that drive further future growth. Looking back at the successful operations of 2025, I am pleased with our results Through the year, we supported clients through significant tariff uncertainties, natural disasters, and geopolitical headwinds staying a valuable part of their ecosystem. Doing what is right for clients has allowed us to continually accelerate our revenue growth increase our CSAT, and develop a defensible model that blends technology and services. This year, we exceeded revenue expectations with steadily improving year on year growth every quarter throughout the year. For the fiscal year, we delivered 2% total growth in cost currency and exited Q4 with constant currency revenue growth above 3%. This growth was achieved even as we reduced the amount of low work in our business by 2% year on year, moved 4% of our onshore business to offshore and acted selectively in the business we took on. Our newer adjacent offerings have a growth rate reaching high single digits in aggregate and now represent a meaningful part of our business. The quality of revenue has never been stronger. Before I hand over to Andre S. Valentine, would like to highlight a few key wins in 2025 to bring life for investors how we have seen our offerings evolve. We were chosen by one of the largest banks in the world to design, build, and operate build, operate transfer model for the bank's highly complex investment banking asset security trading back office processes. We now have opportunities in multiple geographies with multiple lines of business to grow that relationship. Were selected by one of the largest car companies to manage their digital footprint providing insights, content, and warnings back to their head office, all being supported by our technology solutions. We have been recognized for helping scale their global presence and driving operational efficiencies. We took over a captive of one of our clients with the introduction of our own system and processes and have been able to achieve significant cost savings within the first year for the client while improving their customers' experience. This is resulting in further opportunity with the client to take over other shared service centers around the world. For one of our largest European banks, we proactively automated the entire intake of claims resulted in a larger award of business. To us that grows our revenue and our margins. We have launched a revenue generation program with one of the largest AI model makers helping them find sources of revenue and developing a community of integrators to use their technology, demonstrating even the leaders in AI rely on Concentrix Corporation for services. These are just a few of the magnitude of wins we have had our business in 2025 that demonstrate the value we bring to our clients. No matter if a client has their own operations or uses ours, uses our AI solutions, or is a true AI company, an emerging contender or a mature enterprise, are able to win, service, and grow these clients. Turning our thoughts to 2026. The demand environment continues to evolve and Concentrix Corporation wants to lead the way. For our clients, we believe scale matters in many ways. Cost optimized global footprint, breadth of offering, domain expertise across vertical, horizontal regions and technologies. We believe we're competing and winning in this market because we bring both the agility of an entrepreneur entrepreneurial organization the maturity and scale of an established market leader to deliver the innovation and excellence clients expect. Regardless of the fluctuation of our stock price in 2025, we're committed to evolving our business. Despite three years of speculation, we are proving that AI is a tailwind for our business. We are growing our revenue consistently quarter over quarter. We are entering new areas of TAM growth. We are generating strong cash flow. We are returning value to shareholders and we are paying down debt. In short, a valuation today is a stark disconnect from the underlying strength of our business and the upside opportunity of our long-term strategy. In summary, this is the right market and the right moment for Concentrix Corporation. We see a tremendous opportunity in front of us to refine our industry and deliver the solutions our clients need at the speed, scale and caliber they expect. We're making the right investments in the business to capitalize on these opportunities that continue to increase our quality of revenue, revenue that is longer term, margin accretive after implementation, higher complexity with multi-service consumption that drives tangible value for our clients. I am positive about our vision, our model, and our prospects for long-term profitable growth. And I'm excited about the road ahead. And now I will turn the call over to Andre S. Valentine. Andre S. Valentine: Thank you, Christopher A. Caldwell, and hello, everyone. 2025 was a year of significant achievement for Concentrix Corporation. We accelerated revenue growth in each sequential quarter. We achieved breakeven profitability with our IX suite. We generated record adjusted free cash flow, growing our adjusted free cash flow by over $150 million from the prior year. We returned a record $258 million shareholders through a combination of our dividend and share repurchases, We reduced our net debt, We help clients manage through a dynamic geopolitical environment. We weather natural disasters, and we continue to diversify and broaden our value to clients through a diversified set of service offerings. With a successful 2025 behind us, I'm confident that we are positioned to grow revenue and cash flow in 2026. As Christopher A. Caldwell mentioned, we're on an exciting journey as a company. We're successfully evolving to become one of the world's most trusted partners for intelligent transformation solutions. Now let me review our financial results for the fourth quarter and fiscal 2025 and then discuss our outlook for 2026. In the fourth quarter, we delivered revenue of approximately $2.55 billion. On a constant currency basis, this represented growth of 3.1%, which is above the high end of the guidance we provided in September. On a constant currency basis, our revenue growth by vertical in the fourth quarter was as follows: Revenue from banking, financial services, and insurance clients grew 11%. Revenue from communications and media clients increased 7%. Revenue from travel clients grew 12.7%, and revenue from other clients also grew 7%, primarily reflecting growth with automotive clients. Revenue from technology and consumer electronics and healthcare clients both decreased by approximately 2%, reflecting shore movement, and underlying volumes. Turning to profitability. Our non-GAAP operating income was $323 million within the guidance range we provided on our last call. Non-GAAP operating income margin was 12.7%, a sequential quarter increase of 40 basis points compared with the third quarter as we work through the overcapacity related issues we discussed earlier in the year. On a year-over-year basis, non-GAAP operating income margins decreased from the 2024. Adjusted EBITDA in the quarter was $379 million a margin of 14.8%. Non-GAAP net income was $192 million in the quarter, and non-GAAP diluted earnings per share was $2.95 per share. In the quarter, we generated over $287 million of adjusted free cash flow, a quarterly record for Concentrix Corporation. In the quarter, we returned nearly $80 million to shareholders through a combination of our quarterly dividend and $56 million in share repurchases. Our GAAP net loss reflected a $1.52 billion noncash goodwill impairment charge recorded in the quarter. This impairment charge reflects the trading range of our stock during the quarter. A full reconciliation of our GAAP and non-GAAP measures is provided in today's earnings release. Looking at our results for the full year fiscal 2025, we delivered 2.1% growth on a constant currency basis, 60 basis points above the high end of the guidance range we provided a year ago, and above many peers. Non-GAAP operating income of $1.254 billion non-GAAP operating margin of 12.8%, adjusted free cash flow of $626 million an increase of 32% and more than $100 million over the prior year, We returned $258 million to shareholders Specifically, we repurchased $169 million of our common shares representing nearly 3.6 million common shares at an average price of approximately $47 per share. And we paid approximately $89 million in dividends during the year. Reduced our net debt by approximately $184 million during the year and we further reduced our off-balance sheet obligation related to accounts receivable factoring by $43 million during the year, to approximately $119 million at year end. At the end of the fourth quarter, cash and cash equivalents were $327 million and total debt was $4.639 billion bringing our net debt to $4.311 billion at year end. Our liquidity remains strong at nearly $1.6 billion including our $1.1 billion line of credit, which is undrawn. With this, let me now turn my attention to discuss our outlook for 2026. And the first quarter. We are confident in the growth of the business and believe we are making taking a conservative position on guidance for 2026. As Christopher A. Caldwell mentioned, we continue to strategically invest in the business for long-term growth, while continuing to drive strong cash flow. For 2026, our expectations include full year reported revenue, of $10.035 billion to $10.18 billion. Our guidance implies constant currency revenue growth for the full year in a range of 1.5% to 3%. Based on current exchange rates, our expectation assumes a 60 basis point positive impact of foreign exchange rates compared with 2025. Our revenue expectation is based on the following. Progress in evolving our business with our successful track record of growing market share and wallet share in our high growth verticals. Growth in new service offerings and a strong pipeline of the business entering 2026. At the same time, we also expect the proactive reduction of our non-complex work which will impact our revenue by approximately 1% in fiscal 2026 and resolutioning of our work to optimize our clients' cost structure which we think will impact our revenue by 2% in fiscal 2026. Moving to profitability. We expect full year non-GAAP operating income to be in a range of $1.24 billion to $1.29 billion. And full year non-GAAP EPS is expected to be $11.48 to $12.07 per share. This assumes interest expense of approximately $257 million approximately 60.6 million diluted common shares outstanding approximately 4.9% of net income attributable to participating securities. The effective tax rate is expected to be approximately 25%. Our view of profitability is based on our expectation that we will drive ongoing efficiencies in our cost structure through automation, and simplification of our business balanced by our investments in the business to support long-term growth. Including optimizing our footprint to meet client demand, incurring duplicate costs for a period of time as we resolution client programs and making intentional investments in our go-to-market spending. Including investment in technology, SMEs, and vertical offerings to take advantage of the current market opportunity and support the growth of our own AI platform. Our expectation is that we will drive sequential quarterly increases in non-GAAP operating income in the 2026 by removing duplicate costs while simplifying the business continuing the acceleration of our growth rate and progressing the delivery of the transformational deals we have won in fiscal 2025. Turning to cash flow. For full year 2026, we expect adjusted free cash flow to increase to a range of $630 million to $650 million through a combination of higher income, and lower interest expense. Our capital allocation priorities remain balanced. Expect spending on fiscal year 2026 share repurchases to be similar to that of fiscal year 2025. Taking advantage of what we believe has a significant disconnect between the fundamentals of our business and our current valuation. We are committed to maintaining investment grade principles repaying our debt to move closer to our target leverage ratio, and supporting our dividend. Turning to the first quarter, we expect first quarter reported revenue of $2.475 billion to $2.5 billion implying constant currency revenue growth of 1.5% to 2.5%. Based on current exchange rates, our expectations assumes a 290 basis point positive impact of foreign exchange rates compared with the 2025. Non-GAAP operating income is expected to be in a range of $290 million to $300 million. We expect non-GAAP EPS of $2.57 per share to $2.69 per share, assuming interest expense of $66 million, approximately 61.5 million diluted common shares outstanding and approximately 5% of net income attributable to participating securities. Effective tax rate in the first quarter is expected to be approximately 25%. As in prior years, we expect adjusted free cash flow in the first quarter to be slightly negative, although improved as compared to last year's first quarter. Followed by consistent strong cash flow generation over the remaining quarters of the year. Our business outlook and cash flow expectations do not include any potential future acquisitions or impacts from future foreign currency fluctuations. We're pleased with our market position. We have intentionally and strategically expanded our value by broadening our portfolio of offerings across the spectrum of business and technology solutions. Our success in doing this supports our confidence that our business is on the path to mid-single-digit growth. As Christopher A. Caldwell said, we're excited about the road ahead. With that, operator, please now open the line for questions. Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, press 1 again. Please stand by while we compile the Q&A roster. Operator: Your first question comes from the line of Ruplu Bhattacharya with B of A. Please go ahead. Ruplu Bhattacharya: Hi. Thank you for taking my questions. Christopher A. Caldwell, can you remind us on the metrics you focus on in terms of judging how much to invest in AI-related software and chatbot? And can you give us more details of your areas of spend in 2026, both in terms of OpEx and CapEx and how you will judge their success. Christopher A. Caldwell: Hi, Ruplu. Thanks for the question. So first of all, when we look at our metrics on our AI, our pure own AI platform, we are very committed to making sure that we could be accretive this year and hit a certain revenue goal. And obviously, we achieved that kind of exiting the year with $60 million of run rate on sort of that total spend of around a little over $50 million give or take with $25 million incremental within the fiscal year 2025. Right now, we see the ability to continue to invest, but we want to continue to make sure that it's accretive to our business and we're doing the right things to not only control the market share but also make sure that clients in the right circumstances, are using our technology. A very crowded and competitive space right now, Ruplu, so we're being very entrepreneurial and running that business very much like a start-up in that space to drive the returns that we expect. We look at our capital allocation in terms of OpEx and CapEx for fiscal '26, our CapEx really historically has been anywhere from 2% to 3% of our revenue. And we don't see that very different in 2026. In fact, probably, Andre, two, two and a half percent is where we're going to come in at. From an OpEx perspective, what we're very focused and committed to, Ruplu, right at the moment, is driving OpEx spend that is variable and driving net new opportunities for our business. And so our go-to-market spend, we spent an incremental $25 million in '25. We're spending probably another incremental number reasonably in that level for '26. And we're seeing the benefits of it. You saw the stats where our cross-sell upsell, our deeper domain expertise, our technology solutions are all growing. Much more rapidly than we entered the year in '25 at our expectation is that we'll continue to drive that into '26. And we're looking at on a quarterly by quarterly basis to making sure that we're making the right investments and being very nimble in that space. In terms of the other large investments that we're making, we look at it aligned to our clients and the type of revenue we're driving. And so I go back to the quality of revenue comment We invested sort of $95 million in '25, that went into capabilities and facilities and footprint and security. All of those are really kind of tied to the new revenue that we're driving, the new transformational contracts that we're driving. And we can see by our models that as we finish the implementation, we start to finish some of those. Implementations. We're seeing accretive margins to our business. We're seeing longer-term relationships We're seeing more opportunities within that client base. And that's the return that we're looking for. And as we think of 2026, spending sort of similar amounts, expecting similar, if not better returns as we get more leverage off of our cost base. Ruplu Bhattacharya: Okay. Thanks for the details there, Christopher A. Caldwell. Can I ask how do you determine whether it's worth supporting a customer as they may themselves face a slowdown and have lower call volumes? So in terms of the deals that may require more upfront investment, whether it's facilities or training, how is that determination made And what the levers do you have if you feel that the volumes are not materializing? How do you plan to deal with that situation? Christopher A. Caldwell: Yeah. Ruplu, good question. I at first, make a sort of a clarification comment that call volumes have nothing to do with any of our thesis around investment. It's around the type of services that client needs. And if you look at the examples I gave, actually, none of those relate to call volumes. They all relate to other areas of work that we're servicing them. And when we look at a client of making investments, we look at how historically they buy. Are they a price shopper? Are they a long-term value-focused client? We look at do they want to be best in class within their market? And so we can help them enable that. We look at are they a client who consumes multiple levels of business and services, or do we have that opportunity? And we're very focused on sort of this long-term client relationship. So if you look at our top 25 clients, we're now close to almost eighteen years of service. We look for those types of clients with that type of longevity who, equally, we help support as they go through challenges, and they help and support us as we kind of evolve our business by consuming more goods and services. So it's a bit of both a qualitative and quantitative discussion around that. But so far, we've been extremely happy with what we've seen. And moving into some of these higher-end areas, we're seeing the same benefits that we've seen before. Ruplu Bhattacharya: Okay. If I can sneak just one more in. At what rate do you think the market is growing at? Looks like you're guiding for low single-digit revenue growth in fiscal 2026 on a constant currency basis. Did WebHelp meet your expectations for synergies and growth And now going forward, how are you thinking about acquisitions? Thank you. Christopher A. Caldwell: Yeah. So WebHelp absolutely met our expectations, if not a little better. I mean, a lot of the consolidation work that we're winning is because of our global footprint. And where we're able to service people from the technology that we were able to bring to the solution to WebHelp clients and some of the technology that WebHelp had that brought to the existing client base. We met our synergy goals, in fact, just slightly exceeded them from a cost take-up perspective. And we're seeing that ability drive that new growth in the business. And in fact, a fairly reasonable size of that 4% movement from onshore/offshore came out of Europe into other markets, which was traditionally the WebHelp business. And so we've been very, very happy with that because it's driving the right type of business that we want. From a market perspective, look, the traditional CX market is flat. Overall. When you look at some of the other services that we're talking about, it's mid-single digits. And as we talked about in the prepared remarks or in my prepared remarks, have a lot of these services that are now a meaningful part of our business. Growing at high single digits. And so we're winning in the right markets doing faster than what people would, I think, expect. And in the sort of the business that from a CX perspective, I think we're taking share and doing well in that market as well. Ruplu Bhattacharya: And acquisitions? Christopher A. Caldwell: Sorry. From an acquisition perspective, look, We are going to be opportunistic. We're going to do things that support our client base. We're going to do things that have the right financial profile for us. And drive the right long-term business. And so as Andre S. Valentine talked about, we're very focused on kind of reducing our debt to our target leverage ratio. And so we don't have anything kind of on the works, but, definitely, we will participate in the consolidation in the marketplace. Ruplu Bhattacharya: Thank you for all the details. Appreciate it. Christopher A. Caldwell: Thank you, Ruplu. Operator: Your next question comes from the line of David Koning with Baird. Please go ahead. David Koning: My biggest question is really on margins. You know, when we look back a couple of years, 14%. This year, you're guiding to about 12.5%. Seems like there was a lot of discrete kind of investment and some one-off capacity, excess capacity around the tariff in the mid-mid kinda mid last year time frame. Are we just dealing with kind of an April, Q2 of this year, meaning it's down year margin's down year over year, but by the back half, is there reason to believe they will be up year over year and sustainably up after that? Andre S. Valentine: Yes. So in answering that question, you're right. And in my prepared remarks, I mentioned that we expect to see sequential improvement in the back half of this year. In margins. As we complete working through some of the overcapacity issues around the tariffs, we made good progress on that in the fourth quarter. As we move through some of the process of implementing some of the transformational deals that we've won in 2025 and get closer to kind of the run rate profitability of those deals. And as we move forward with automation efforts and the simplification of our business, to take out some of the duplicate costs that we currently have that are created by some of the resolution that we've talked about and some of the costs that come with some of these transformational deals as well. So all those things give us confidence that we can see the margin improve in the back half of the year, which mathematically will get you to a situation where we're looking at year-over-year margin increases as we close out the year. Yes. Okay. And then just momentum. Revenue growth accelerated each quarter of the year. So momentum actually seems very very good. You're guiding a little less than the 3% constant currency growth in Q4, you did 3%, but you're guiding a little less than that in '26. Is there really anything behind that other than just pay it the full year? You don't wanna get ahead of yourself? Andre S. Valentine: That's really it, David. Oh, you know, we talked about all throughout the fiscal 2025 about the fact that we're being conservative for the revenue guide, very focused in each quarter and for the full year and coming in in 2025. At or above the high end of the guidance range. Our principles, we think about our guidance for 2026 with regard to that, haven't changed. And so there is nothing that's going on underneath the covers that would imply any sort of slowdown in things. In fact, we're quite confident that we can continue the trajectory of sequential quarterly revenue increases. As sequential acceleration as we go through fiscal 2026. David Koning: Great. Thanks, guys. Andre S. Valentine: Alright. Thank you. Operator: Your next question comes from the line of Luke Moore Morrison with Canaccord Genuity. Please go ahead. Luke Moore Morrison: Hey, guys. Thanks for taking the question here. So last year's results you know, you mentioned laid out several deliberate growth drag run off of low complexity work, those onshore to offshore transition, we it looks like you expect some of those to persist in '26. I think, resulting in aggregate 3% headwind to growth. Can you just help us think about sort of the lingering or continuing effects of those headwinds over the long term, you know, this year, next year, on fourth? Christopher A. Caldwell: Yeah. For sure, Luke. So from a low complexity work perspective, we did 2% in '25. We expect 1% in '26. Always expect there'll be some portion of low complexity work as part of our portfolio. So that kind of wanes to weed off to less headwinds in '27, frankly. We just don't see a big push past that. From an offshore work perspective, we have about 15% give or take, of our revenue that could possibly go offshore. But the reality is that some clients have brand promises to do things onshore. Some things from a compliance perspective can't go offshore. Some markets and some things that we service are highly sensitive from a sovereignty perspective. And so when you think about that 4% move this year and what we're kind of leading to next year, you're weeding through that pretty quickly. And as we've talked about for the last gosh, Andre S. Valentine probably a year and a half, really the vast majority of work that we are winning right now, vast, vast, vast majority of work is being put where it should stay and not move from. And so you're not rekindling this top of the funnel. You're really kind of optimizing what we've already got in place. Luke Moore Morrison: Excellent. And maybe just a follow-up I think you mentioned high single-digit growth in some of your adjacent services. Could you just double click there and unpack that? Like, what are you seeing Where are you seeing the most momentum, etcetera? Christopher A. Caldwell: Yeah. So if you look at a lot of the specialized services, whether it be data annotation, analytics, FC and C, so financial crimes and compliance, any money laundering, are some of our IT services within that space, some of our revenue generation capabilities and digital assets in that space. In fact, you're probably getting close to 20% of our revenue. That is growing at high single digits. Luke Moore Morrison: Okay. Great. Thank you. Operator: Your next question comes from the line of Vincent Alexander Colicchio with Barrington Research. Please go ahead. Vincent Alexander Colicchio: Yeah, Christopher A. Caldwell. I didn't hear too much about consolidation I know that some a theme that's been strong for you. So how does that look in the quarter? Are there still legs to that? Christopher A. Caldwell: Yeah. We expect there's gonna be a lot of consolidation. There was in this quarter. There's a lot more going into 2026. And I think is what we kind of commented about driving the share of wallet in our clients. Clients are consolidating with us because not only can we do their CX and BPO, but we can also do their IT services and vice versa, by the way. In the quarter, we actually picked up some IT client or sorry. Had some IT clients that we picked up some of their CX and BPO services from which most people might not realize that we're actually doing. Clients are looking for stronger partners, more mature operations, global scale security, a lot of things that we've been investing in to consolidate with. And we're doing very, very well in that space. Vincent Alexander Colicchio: And what is the how does the pricing look in the traditional CX business? Is pressure increasing? Christopher A. Caldwell: So in commodity work, it's very, very, very competitive, Vince. Very competitive. I think people are chasing a lot of volume for volume versus quality, and so we're seeing that as being very competitive. I think in the rest of the business, look, it's always competitive, but it's reasonably competitive if that makes sense. And people do the right business. And we've been very selective on the types of work we get, What we're most focused on, as we talked about, is driving the quality of revenue which is margin accretive when we get past implementation. Complex work that is sticky and hard to do that's really driving a lot of value for the client so that they see us as being a valued partner to their business. Vincent Alexander Colicchio: And are you finding it are you experiencing any challenges accessing talent as you move into higher-end solutions? Christopher A. Caldwell: Yeah. So, look, we spent more this year than I think some people were expecting to get that talent. We haven't necessarily found problems but we also have a global footprint that we can pull from, and that's been very, very helpful to us because we are in so many markets We are able to access a very, very robust talent pool for it and we are making sure that we harness that and utilize that strategically. Vincent Alexander Colicchio: Thanks, Christopher A. Caldwell. Christopher A. Caldwell: Thank you. Operator: There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.
Matthew: Good morning, everyone, and welcome to the Delta Air Lines Fourth Quarter Fiscal Year 2025 Earnings Conference Call. My name is Matthew, and I will be your coordinator. At this time, all participants are on a listen-only mode until we conduct a question and answer session following the presentation. As a reminder, today's call is being recorded. If you have any questions or comments during the presentation, you may press 1 on your phone to enter the question queue at any time. I would now like to turn the conference over to Julie Stewart, Vice President of Investor Relations and Corporate Development. Please go ahead. Julie Stewart: Thank you, Matthew. Good morning, everyone, and thanks for joining us for our December and full year 2025 earnings call. Joining us from Atlanta today are our CEO, Ed Bastian, our President, Glen Hauenstein, our CFO, Dan Janki, and our Chief Commercial Officer, Joe Esposito. Ed will open the call with an overview of Delta's performance and strategy. Glen will provide an update on the revenue environment, and Dan will discuss costs and our balance sheet. After the prepared remarks, we'll take analyst questions. We ask that you please limit yourself to one question and a brief and related follow-up so we can get to as many of you as possible. After the analyst Q&A, we'll move to our media questions. As a reminder, today's discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from forward-looking statements. The factors that may cause such differences are described in Delta's SEC filings. We'll also discuss non-GAAP financial measures, and all results exclude special items unless otherwise noted. You can find a reconciliation of our non-GAAP measures on the Investor Relations page at ir.delta.com. And with that, I'll turn the call over to Ed. Ed Bastian: Thank you, Julie, and good morning, everyone. The Delta team delivered a strong close to our centennial year, with results that are a clear proof point of the differentiation and the durability that we felt. Incredibly proud of our performance. We delivered for our customers and our employees, while also creating value for our owners. All through a challenging environment. Operationally, Delta continues to set the standard for reliability and customer experience. We have the number one net promoter score among major airlines, and Cirium recently recognized our employees for the fifth consecutive year, naming Delta as the US industry's most on-time airline. Financially, we continue to extend our industry leadership and delivered on key elements of our long-term framework. In December, we achieved record revenue, maintained a double-digit operating margin, and delivered earnings that were consistent with our expectations outside of the impact of the government shutdown. For the full year, we recorded record revenue of $58.3 billion, an operating margin of 10%, pretax income of $5 billion, and earnings of $5.82 per share. A key highlight is free cash flow. We delivered $4.6 billion at the top end of our long-term financial framework, and the highest in Delta's history. Over the past three years, we've generated $10 billion in free cash flow, allowing us to strengthen our investment-grade balance sheet and reduce leverage by more than 50%. Our return on invested capital of 12% is well above our cost of capital, placing us in the upper half of the S&P 500 and leading the industry. These results underscore the strength of our brand and the resilience of our competitive advantages. It would not be possible without the dedication of our people. To all 100,000 members of the Delta team, we thank you for your unwavering commitment. Your care and professionalism, especially through a busy holiday season, are the reason customers choose Delta. And why our results lead the industry. At Delta, sharing success is at the heart of our culture. That's why in 2025, we awarded a 4% pay increase and I'm pleased to announce that we will celebrate with our team $1.3 billion in well-earned profit sharing this February. This is one of the largest profit-sharing payouts in Delta's history, a testament to the extraordinary efforts of our people, who set us apart from the rest of the industry. Turning to our outlook. The year is off to a strong start. Last week, we set a new record for bookings with cash sales up double digits on top of the strength that we saw last year. Top-line growth is accelerating on consumer and corporate demand, supporting an outlook for revenue growth of 5% to 7% in March. The US economy remains on firm footing. Consumers continue to prioritize experiences with travel among the top spending categories. Business travel is showing signs of improvement as corporate confidence grows, with the most recent survey of corporate customers indicating that they expect to grow their travel spend this year. Structural changes are taking hold across the industry. As unprofitable flying is rationalized, supporting a healthy balance between supply and demand. Against this backdrop, and with continued benefits from Delta's strategic initiatives, we expect to deliver earnings per share growth of 20% year over year in 2026, ahead of our long-term target. Cash generation remains a key differentiator for Delta, and in 2026, we expect to generate free cash of $3 billion to $4 billion, supporting further debt reduction and growth in shareholder returns. Our teams are executing our bold vision of reshaping the end-to-end travel experience and cementing Delta as the world's most loved airline. We're elevating every phase of the customer journey, making travel simpler, faster, and even more enjoyable. This includes expanding our premium lounge network, delivering a connected experience for SkyMiles members, more than 1,100 aircraft already equipped with faster free Wi-Fi, and introducing innovative digital tools like Delta Concierge. Our exclusive partnerships with leading brands such as American Express, Uber, and YouTube further enhance the experience. We're leveraging technology and personalization at scale, with over 115 million annual logins to our industry-leading DELTAsync platform, creating new opportunities for personalized engagement and partnerships. At the same time, we're streamlining the travel experience with initiatives like Uber Airport Express drop-off at LaGuardia and Atlanta, offering customers curbside hospitality and a direct path to security. Saving time, reducing congestion. Response to our Delta Uber partnership has been tremendous, with over 1.5 million SkyMiles members linking their accounts since launch. Demonstrating the power of our loyalty strategy to engage members beyond the flight and drive high-margin diverse revenue streams. Our Delta Amex co-brand card portfolio continues to deliver double-digit spend growth, outpacing the broader consumer credit card industry. Co-brand cardholders are among our most valuable and satisfied customers, traveling more often and spending more on Delta. Building on our strong domestic foundation and loyalty success, we're expanding Delta's international footprint in 2026 and beyond while continuing to grow our margins. To support profitable growth, we're leveraging best-in-class joint ventures and investing in the renewal and expansion of our wide-body fleet. This morning, we announced an order for 30 Boeing 787-10s with options for 30 more, set for delivery starting in 2031. These aircraft will enhance our international network, deliver superior economics, and extend our long-haul capabilities. As we look ahead to our next century of flight, my optimism for Delta's future has never been brighter. Much of our strong positioning today is thanks to the leadership and vision of Glen Hauenstein. Glen has not only transformed our commercial strategy, but he has also been an incredible copilot throughout our journey to make Delta the world's best and most profitable airline. His unwavering customer focus and strategic discipline have built a world-class global network, firmly establishing Delta as the airline of choice for premium travelers. Glen's legacy is woven into the fabric of our company, and his vision will continue to guide us. With Glen's leadership and the talented team that he has built, we have a deep bench to support a seamless transition. With Glen's retirement next month, Joe Esposito has been elevated to Chief Commercial Officer. With thirty-five years at Delta, much of it spent working very closely with Glen, Joe has led the teams behind our global network planning and revenue management. This continuity ensures our commercial organization remains in excellent hands. Glen, it's been an honor and a privilege to work with you over these past two decades. On behalf of the Delta family, thank you for your incredible leadership and your friendship. You'll always be part of Delta, your impact on our company, and our industry cannot be overstated. Now I'm pleased to hand it over to Glen for one last earnings call update. Glen Hauenstein: Thank you, Ed, and thank you so much for those kind words. I am really truly grateful to have worked by your side for these last twenty years. And I'm deeply proud of what we've accomplished together. Our strategy is proven, our culture is strong, and our team is truly the best in the business. Looking to the future, I'm confident that Delta's commercial team will continue to extend our leadership. As you mentioned, Joe and I have worked closely together for the past twenty years, and he'll be supported by an exceptional team of senior executives that our investors know well. Paul Baldoni in network planning, Roberto Ioriyati in revenue management, Dwight James in loyalty, and Steve Sear in global sales and distribution. They have combined more than one hundred years of experience at Delta. Together, we've reengineered Delta's global network and built a customer-focused airline while diversifying revenue into higher-margin sources. We've expanded our premium products and services, aligned customer value to price paid, and made generational investments in our airport facilities and lounge networks. At the same time, we created an incredibly powerful loyalty program that extends beyond the flight and provides a more durable financial foundation. This consistent and integrated strategy positions Delta with a sustained unit revenue premium nearly 115% relative to the industry. Last year's performance truly showcased Delta's differentiation and industry leadership. In 2025, we delivered record revenue of $58.3 billion, up 2.3% year over year, with diversified revenue streams now representing 60% of total revenue. Premium revenue grew 7%, reflecting robust demand for our most popular products, while cargo revenue increased 9% and maintenance, repair, and overhaul revenue grew 25%. Total loyalty revenue improved 6%, and travel products continued to grow at double-digit rates. Our loyalty ecosystem remains a powerful engine of enterprise value, anchored by the strength of the SkyMiles program, a highly engaged member base, and our exclusive co-brand partnership with American Express. For the year, American Express remuneration grew 11% to $8.2 billion, driven by a fourth consecutive year of more than 1 million new card acquisitions and double-digit year-over-year co-brand spend growth in every quarter. This impressive performance underscores the power of the Delta brand and the success of our integrated commercial and customer strategy. Roughly one-third of active SkyMiles members carry a co-brand card, and we see significant runway ahead as member engagement and penetration continue to rise. In 2026, we expect high single-digit growth in co-brand remuneration, keeping us on track to achieve our $10 billion goal within the next few years. For December, Delta delivered record revenue of $600 million, 1.2% higher than in 2024, including about two points of impact from the government shutdown on capacity growth of 1%. Consistent with the full year, diverse revenue streams led with high single-digit growth year over year. Demand trends were healthy outside of the temporary impact from the FAA-mandated flight reductions, with premium showing continued strength and consumers demonstrating resilience with the holiday season. Corporate sales grew by 8%, with growth across all sectors led by banking, consumer services, and media. International performance improved significantly from September, with unit revenue growth improving five points driven by Transatlantic and Pacific. Turning to our outlook. Delta is well-positioned to deliver positive unit revenue growth throughout 2026. Building on the strength of our premium brand, deep loyalty engagement, and continued progress on commercial initiatives. We are heading into 2026 with robust demand and a balanced industry supply-demand environment. With March revenue expected to increase 5% to 7% year over year, several points ahead of capacity growth. As Ed mentioned, the year has started off with great momentum. Last week, cash sales were the highest in our one hundred-year history, with strength across the booking curve and in all geographies. Historically, March has been the strongest period for bookings, so it is very encouraging to be setting new records here in early January. We are aligned with U.S. GDP expectations, and we plan to grow capacity by 3% for the full year, with all new seat growth concentrated in premium cabins. Driven by interior upgrades and new aircraft deliveries. Domestically, we have balanced growth across our core and coastal hubs and are leveraging our integrated strategy to strengthen our industry-leading position. Internationally, we will build on our leading domestic foundation to expand into high-growth Asia and Middle East markets while continuing to renew our wide-body fleet with larger, more capable, and more efficient aircraft. Beyond network and fleet initiatives, we are focused on better aligning products and price to the value delivered. This expands our ability to sell and service segmented products across every channel and leverages digital platforms to unlock incremental revenues from travel products and partnerships. With this plan, our diverse revenue streams—premium, loyalty, cargo, MRO, and travel products—are expected to continue to lead the growth, further differentiating Delta and positioning us for long-term success. In closing, I am proud of what we have built together and excited to watch this very experienced leadership team carry our momentum forward. I have never been more confident in Delta's future. To the Delta people, thank you for your passion and commitment to our customers and to one another. It's been the honor of my life to work alongside you. And to our analysts and investment community, thank you so much for your engagement and support throughout the years. I appreciate the confidence you have placed in Delta. And with that, thank you all again, and I'll turn it over to Dan. Dan Janki: Thank you, Glen. And good morning, all. I want to start by recognizing the Delta team for their outstanding work through a demanding holiday season. In the fourth quarter, we delivered a pretax profit of $1.3 billion, an operating margin of 10%, and earnings of $1.55 per share. As previously disclosed, the government shutdown reduced pretax profit by $200 million, or 25¢ per share. The FAA-mandated flight reduction and weather disruption impacted nonfuel unit cost growth by about one point. For the quarter, nonfuel CASM increased 4% year over year on 1% higher capacity. For the full year, disciplined execution kept nonfuel unit cost growth at 2%, in line with our long-term target of low single-digit. Combined with revenue performance, we delivered a full-year operating margin of 10%, EPS of $5.82, and a return on invested capital of 12%. Strong cash generation is a key highlight of our performance. We reinvested $4.3 billion in the business, including 38 new aircraft deliveries, and continued enhancement to the customer experience and technology. Free cash flow of $4.6 billion supported debt reduction of $2.6 billion, and we ended the year with gross leverage of 2.4 times. We closed the year with adjusted net debt of approximately $14 billion and unencumbered assets of $35 billion, positioning Delta with the strongest balance sheet and the highest credit quality in our history. I'm proud of how the team navigated 2025, staying focused on what we control and extending Delta's leadership even in a year of unexpected challenges. Looking ahead, we are entering 2026 with momentum. For March, as Glen shared, we expect revenue growth of 5% to 7% year over year with positive unit revenue growth. With that, we expect first-quarter earnings of $0.50 to $0.90 per share and an operating margin of 4.5% to 6%, both improving year over year. For the full year, we expect EPS of $6.50 to $7.50, representing 20% year-over-year growth at the midpoint. Free cash flow of $3 billion to $4 billion and leverage of 2x by year-end. This outlook reflects margin expansion from growing high-margin diverse revenue streams while maintaining disciplined cost management. On nonfuel cost, we expect another year within our long-term framework of low single-digit. And as we prepare the fleet for peak summer, the first-quarter nonfuel CASM growth is expected to be modestly above the full-year average. We are driving efficiencies across the operation, improving aircraft availability, scaling into our resources, and deploying new technology. Which enables continued investment in our people and in the customer experience while delivering on a competitive cost performance. Strong earnings growth will drive higher operating cash flow, supporting reinvestment and higher return opportunities. In 2026, we plan CapEx of $5.5 billion, including around 50 aircraft deliveries, and ongoing investment in customer experience and technology. Our free cash flow outlook of $3 billion to $4 billion remains within our long-term target, though lower than 2025 due to increased capital investment and our transition to becoming a partial taxpayer. Debt reduction remains our top capital allocation priority, with the opportunity to grow shareholder returns as we continue to reduce leverage. With today's aircraft order, I'd like to highlight how our fleet strategy is positioning Delta for the future. Enhancing the customer experience, driving operational improvement, and supporting high-margin expansion. Domestically, prioritizing flying on high-margin large narrow-body aircraft, retiring older fleets, and building scale across our fleet types. This unlocks maintenance and crew efficiencies, elevates customer experience, and improves fuel burn. For our international franchise, our growing next-generation wide-body fleet, strong domestic foundation, and leading joint ventures will enable further global expansion. New wide-body aircraft deliver up to 10 points margin advantage over aircraft they replace, offering more premium seating, 25% better fuel efficiency, and expanded cargo capability. Today's Boeing 787 order enhances the diversity of our wide-body order book while creating cost-efficient scale across all wide-body fleets. Before we move to Q&A, I want to highlight our ongoing commitment to financial reporting as the business evolves. We're providing additional detail on third-party maintenance, repair, and overhaul business, including revenue and cost. MRO is a unique Delta capability with strong growth potential, furthering the differentiation and durability. Given its profile, we'll separate MRO from our nonfuel unit cost metrics for preserving visibility into the core airline cost trends while also realigning loyalty-related revenue components to better match our reporting of how we operate. Finally, I want to recognize Glen. Over the past five years, he's been an invaluable mentor, offering guidance, wisdom, and partnership, for which I am deeply grateful. Glen's impact and vision have redefined success in our industry. And the world-class team we built will continue to extend Delta's leadership well into the future. Thank you, Glen. And with that, I hand it back to Julie for Q&A. Julie Stewart: Matthew, we're now ready to open it up to analysts' questions. Matthew: Certainly. At this time, we'll be conducting a question and answer session for analysts. If you have any questions or comments, please press 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. We do ask that all Q&A participants please limit to one question. Once again, if you have any questions or comments, please press 1 on your phone. Your first question is coming from Jamie Baker from JPMorgan. Your line is live. Jamie Baker: Oh, hey. Good morning. And, look. Nothing but accolades from the JPMorgan team. Glen, you've always been so gracious and patient with us. We're really gonna miss these interactions. Thank you so much. First question for Ed. You know, I know it's early innings, but if this 10% rate cap is, you know, codified and becomes reality and withstands legal scrutiny and all that kind of stuff, where does that leave Delta relative to your competitors? I mean, you have higher card fees. You lean into premium. If industry loyalty does take a hit, is the natural conclusion that higher-end loyalty outperforms lower-end, or should we be thinking about it differently? Ed Bastian: Well, thanks, Jamie, and I could not agree with you more about your comments about Glen. You know, as you said in preface, it's late early innings. And so it's really, really hard to speculate. And candidly, the challenges to having that comment of whatever the president is looking to do here brought into actual delivery I'm informed with likely require legislation. And I believe your company was out this morning with some pretty strong comments in terms of their disagreement and willingness to fight that potential order. That all said, we at Delta have the premium card in the industry. No question, the value of what we've been created to distinction differentiation, if it did come to pass, would be greater. I think one of the big issues and challenges with the potential order is the fact that it would actually restrict the lower-end consumer from having access to any credit. Not just what the interest rate they're paying, which would upend the whole credit card industry. So from our standpoint, we'll be working closely with American Express, but I don't see any way we could even begin to contemplate how that would be implemented. Jamie Baker: Okay. And then a follow-up for Glen. This is actually a retirement-related question. And, look, maybe you don't think in these terms, but is there anything about the industry's evolution or Delta's evolution that maybe you regret that you won't be at the table for? I mean, you obviously have a strong view on what Delta can accomplish going forward. But is there anything in particular that you're just personally disappointed to be missing? Thanks in advance. Glen Hauenstein: No. I think there's a couple of things I'll mention here. One is the continued evolution of our partnerships. And I think these are the strongest partnerships in the world with the strongest airlines in the world. So whether it's LATAM or whether it's Korean, these are very, very deep relationships, which I think are still in their infancy. And I think one of the things that's underappreciated is also, you know, we have equity stakes in all of them. And so we are at the table with them, and I do think that, you know, one of my counsels to Julie is to continue to highlight that because those are winning carriers and their stocks are appreciating well as well. I think that's undervalued in our valuation. So I think that the international continued expansion of international, the new fleets. Like, if you're an airline nerd like I am, who doesn't like to see how the new fleets perform once they get here? You know, the continue another thing I think is under Delta is the fact that we've made these generational builds that can really sustain growth for Delta over the next fifteen to twenty years without incremental CapEx. Into facilities. So, you know, seeing those, seeing the Salt Lake City facility that we've just built get used over the next ten to fifteen years, there's so much I'm gonna miss. There's so much I'm not gonna miss too. You know, controlling your own calendar is key at this age once you realize you don't have infinity left in the world. So there's so many exciting things at Delta and the team is really an extraordinary team. And the people of Delta have just been amazing to get to know over the past twenty years. So there's tons I'll miss. Thanks for that interesting question. Thank you so much. Matthew: Thank you. Your next question is coming from Mike Linenberg from Deutsche Bank. Your line is live. Mike Linenberg: Oh, yeah. Hey. Good morning, everyone, and kinda echo Jamie's words. I mean, Glen, you know, you're an industry thought leader and innovator. I mean, always willing to push the envelope. I mean, I just I feel privileged to have had the opportunity to have learned from you for all these years. So thank you. Thank you. Thank you for the kind words. And I guess with that, you'll get you'll get my last question. I have really only one question here and just sort of drilling down. I mean, this acceleration that we are seeing on demand from the fourth quarter into March, I mean, you talk about all groups and all geographies. But as I recall, you know, in the past, you did talk about that the leverage was maybe going to be in the main cabin in 2026. And I wonder whether or not you are seeing that the lower end of the fare structure is truly moving up, and that's helping to drive that acceleration. And combined with that, just the booking curve, I mean, is there any have we seen the booking curve really shift to normality, or are there any sort of idiosyncrasies about that curve that are maybe helping that acceleration? So, you know, just the revenue down. Thanks for taking my question. Glen Hauenstein: Sure. The revenue has definitely accelerated here. And we're very excited about it. And it's across all entities. It's across all geographies. The booking curve really hasn't moved out that far. It's just kind of returned to a more normal level. I think what happened in the fourth quarter, it was all over the place, right, is that the time we got to the shutdown in November and we had, you know, the Secretary of Transportation questioning the safety of air traffic control. There was a lot of noise in the fourth quarter. And so I do think if we took out that noise and saw where we were in October and see where we are sitting today. We are a step above where we were in October, which was a fantastic month for the company. And what's really exciting about the return of business as we head into '26 is 'twenty five grew I think it's 8% it grew. But it was mostly unfair. And right now, we're seeing both fair and traffic. And so seeing that traffic come back is, I think, a really good start to 2026. Mike Linenberg: Great. Thank you. Thank you. Matthew: Your next question is coming from John Gordon from Citi Research. Your line is live. John Gordon: Hey, guys. Thank you for taking my question here. I wanted to kind of follow-up on the concept of accelerating trends as well, but specifically on corporate demand and what you're seeing there. It sounds like the numbers to start the year are quite good. And I was curious, is that the broader environment? Is that market share gains? Anything you can say to help us unpack that would be fantastic. Glen Hauenstein: Well, I think it is the broader market. I do think that Delta's market share has never been higher. But that's a gradual, you know, that's year after year knocking away half a point, a half a point, a half a point. I think our market share is in a fantastic position. But and it's at all-time highs, but I do think it's much broader than just Delta at this point. Joe, you have any comments? Joe Esposito: I think we're setting up for a really good economy. And everybody can feel that. And the corporate environment is optimistic about their travel plans for the future. So I think those are things that are lining up for a positive 2026. John Gordon: Got it. And if I could just ask a follow-up on that. Just broadening up and linking it to the guidance a little bit. Obviously, an accelerating environment is fantastic. Are we in a situation where things need to accelerate even further and step even higher to get us to the high end of the annual guidance or even exceed it? Or if we just saw these trends continue that you're observing right out of the gate, that's enough to get us there. I'm just trying to sensitize the guidance. Ed Bastian: John, I appreciate that question. And you know, it's the second week in January. It's really hard to take a few weeks of bookings and reach any kind of early conclusion. I'm encouraged by what we saw, and absolutely, if the momentum that we currently see continues, we'll be fine. We'll do well on our guidance range. That said, we also learned of the volatility. We're reminded of the volatility of the industry this past year. We want to make certain that we have a bit of caution as we project how we'll do. Glen Hauenstein: Could I add one thing? Because I didn't really answer Mike Linenberg's question about the main cabin. And we have not really seen the main cabin move yet. So I think when you think about the higher end of our guide, that would definitely be the main cabin starting to move. And I do think that it will move in '26. We just have not seen it yet. John Gordon: Appreciate all the color. Thank you. Matthew: Thank you. Your next question is coming from Conor Cunningham from Melius Research. Your line is live. Conor Cunningham: Everyone, thank you. Echoing everyone else, Glen, congrats on the retirement. We've learned a ton from you over the years, so thanks again. Maybe I could kick it over to Joe, actually. So, I mean, hoping you could just talk about your priorities as you take on the new role. You've obviously helped mold the Delta network for a long time, but just curious how you approach things with the commercial hat on if the strategy changes at all. Just any thoughts there would be helpful. Thank you. Joe Esposito: Yeah. Thanks, Conor, and good morning. Overall, I feel very fortunate and grateful for working with Glen for twenty-plus years now. And, you know, we've learned so much, and we've been there from the beginning of transforming Delta. I think that theme, though, carries over into consistency and continuity. Our strategies aren't changing. In fact, we're going to be digging even deeper into those strategies for further integration. You know, I think the integration is still in the early innings of how we go to market from a complete commercial perspective. You know, it used to be network and price. Now it's so much more with the consumer and Amex and what we do for the customer and club. So, I mean, there's lots of runway ahead for us in product deployment. We've been doing this for over fifteen years, and I think there's still a lot more runway to go in where we're going on the product side. We're in the early stages of merchandising. There's more to do with Amex premium products and the fleet that we're getting for the future is really exciting. So I think there's a lot to look forward to. There's a lot to build off of what we've already done. And, you know, I'm honored to lead the commercial team and proud to work with a really talented group of people that support us both not only within the commercial organization but operationally. So, again, I want to thank Glen for all we've done together. And I think there's a lot more to do. Conor Cunningham: Great. And maybe I can, Glen, maybe you want to jump into it. It's up to you. But, like, just on the geographies in general as you look about, you talked a little bit about the main cabin on the U.S. side. And I think the overall assumption from a lot of us is that there's a lot of opportunity in the U.S. domestic market, but international has been wildly resilient. And it obviously picked up again in the fourth quarter. So if you could just talk about your expectations for Transatlantic and Asia and so on, that would be super helpful. Thank you. Joe Esposito: I'll take it. You know, the Transatlantic and Pacific resiliency, you know, I come from, I think, years of building the domestic network to have that strong foundation to launch from. You take the loyalty of cities, you think about New York, Los Angeles, Boston, and new gateways, we're able to expand with. You layer on top of that new airplanes, being able to monetize that premium cabin. So I think there, you know, a lot of it's coming together and the order of the 787 is just another future marker out there. For innovation, and especially when you think about, you know, in the wide-body space, fleet efficiency is really what wins the day. You think about taking a 777 and replacing it with a 350 or a 787 drives that incremental margin. Drives better product, and drives incremental margin. Conor Cunningham: Great. Thank you. Matthew: Thank you. Your next question is coming from Ravi Shanker from Morgan Stanley. Your line is live. Ravi Shanker: Great. Thanks. Good morning, everyone. Glen, obviously, congratulations on an incredible career. You will be tremendously missed, but I'm also very envious of your travel plans. So please keep us in there. Maybe a couple of maybe start with my follow-up here. Obviously, a lot of questions in a strong January. Glen, do you have any indication that there's been maybe some pent-up demand from 3Q or 4Q? That's now coming on maybe in corporate or international which may, you know, which may kind of maybe question the sustainability of the strength or do you not think so? Glen Hauenstein: Well, you know, as Ed mentioned in his opening remarks, '25 had some very choppy points in it. And I think there was a lot of reason for people to hesitate to travel at different points in the year for different reasons. And so as we look at '26, assuming that the core demand stabilizes, there's huge upside for us. Across all entities, I think. So, you know, especially as you get to the latter part of the first quarter and into the second quarter where the tariff uncertainty and the economic uncertainty was kind of hitting the crescendo. I think, you know, that's what gives us confidence that '26 is gonna be a great year. Ravi Shanker: Understood. That's helpful. And maybe also if you guys could unpack the previous response on the 787s. Again, what was the rationale for that aircraft versus the 350 or maybe some others? And, also, it almost sounds like you're planning to deploy them differently than your existing wide bodies or on very specific routes. So any clarity there would be helpful even though I know that's something. Joe Esposito: Yeah. Thanks, Ravi. I think it's a natural evolution in our fleet. When you think about I think our priorities up to this point was to get critical mass into the 350. And the 339, and we're well on our way to do that. And that drives great efficiency, and that efficiency is needed in the wide-body category. When we look out to the future, the 787 is a great airplane. Financially, a great airplane. We're able to do a lot with the 10 version of this on the premium seating. It's a great cargo airplane. And it also drives diversification within our fleet, both not only on the airframe but on the engine side. So it's a natural fit, especially when it starts to replace the 767-400, which it's slated to. It's designed for growth and replacement. And we think about swapping a 764 or 763 with a 787-10. It's a very powerful change in a step function improvement in margin. Glen Hauenstein: I could be a little flippant here since it's my last call. I can be a little flippant and say, this one's too hard. This one's too soft. This one's just right. If you remember, I think that was Goldilocks. It is. We have three fleets. And one has long range. One has a lot of capabilities. One is a category killer on CASM. One is kind of our Milk Ron airplane that's gonna do most of the spoke services out of our core hub. So think, you know, we've got a really good array just like we do domestically. We can go all the way from the 76 seater up to and so I think this gives us a lot of versatility moving forward and best in class for economics. Ravi Shanker: Very good. Thanks, Amil. Matthew: Thank you. Your next question is coming from Savi Syth from Raymond James. Your line is live. Savi Syth: Hey. Good morning, everybody. And I'd like to echo all the kind of glowing commentary on Glen, and congratulations to both Glen and here. And what I would like to actually maybe ask a two-part question that's very similar. And on the operation side, Delta's really differentiated itself in terms of kind of reliability and recoverability historically. It was kind of once described to me, but I know your time is swash was dismantled during COVID and had to keep it back together. So first, I was wondering if you could provide an assessment on how operational reliability and recoverability stacks up today compared to where it was during COVID. And second, with kind of many of your competitors looking to kind of meet this standard that you have set, you know, what's your assessment on how your relative performance has evolved? And if you know, is that still a strong differentiator, especially as you have your corporate contract discussion? Ed Bastian: Savi, this is Ed. Let me take a stab at that. There's no question that we have work to do. With respect to the resiliency of our recovery. From irregular operations. Working off of a great foundation, which has renamed last week by Cirium as the most on-time airline in North America. So it's not as if we've got a big hole to fill. But that said, with a lot of the change post-COVID, including some pretty significant changes in our pilot contract, in terms of how we route and reroute and schedule pilots, particularly. At times of change. Have caused some difficulties in providing the level of reliability that we like in the recovery aspect. So we're all hands on deck. In that regard. We know what the factors are. That's been driving. It's just gonna take us a little bit of time. Get after, but we're working very, very closely with our flight ops team. Our maintenance team, our technology team, our ops control team. As well as with the pilots union to ensure because our pilots don't like some of the recovery challenges with that either, to make certain that we to the top, not just in on-time, but also in overall recovery. Savi Syth: And can I just follow-up on that? You know, as you think about your comparison and your competitors really trying to meet that standard that you've set, like, is there something in how Delta approaches this that it maintains your leadership, or how should we think about that? And how is that in terms of all the corporate discussions that you're having? Ed Bastian: Well, I think we're number one across the board in almost every metric in this that you can look at. So I don't believe we've lost our leadership in total. But, yeah, I think that this we said all along I've said all along we want there to be a healthier industry. A higher quality form of experience for customers that forget Delta, everyone can see the industry in a much better more reliable light. And I think one of the great things that Delta has done for the industry is raise the bar the spotlight on what can be done collectively on many levels. And this will be the next opportunity for us. Joe Esposito: I just wanna echo I appreciate what Ed said is that a better industry makes for selling more tickets. At an industry level, not just at a Delta level. Definitely. And so raising the bar is a great thing for the industry that. Savi Syth: Fair point. Alright. Thank you. Matthew: Thank you. Your next question is coming from Duane Pfennigwerth from Evercore ISI. Your line is live. Duane Pfennigwerth: Hey, good morning. Thank you. Glen, I was struggling with what to get you. I thought I'd ask you one last question. As a parting gift, but congratulations. If we go back into the archives of your early career, maybe back to the days trying to restructure Alitalia. What are the biggest surprises in how the industry and how Delta evolved relative to what you might have thought at that point in your career? Glen Hauenstein: You know, I think Ed and I share this journey together, and when you think about where we entered Delta, I think a lot of people would look and say, well, why do you go there? Because it was in such trouble at the time we joined. And so, you know, I remember to this day that I wrote Jerry Grinsteyn a note saying that I wanted to help restore Delta back to its rightful place at the top of the US aviation industry. And I think, you know, not just not to sound old or arrogant, but I think I could say mission accomplished on that. And I think it's underappreciated how much hard work it was. And how many bold things we had to do to get here. And I think that's what I would impart on you and our team is in order to stay here now, you have to continue to be bold. You have to continue to look beyond what the next quarter is or what the next year is and look at what the next decade looks like. And where do you want this company to be ten years from now. And I think this team does that every day. And I'm really proud to be a part of that, and I know the future is gonna be super exciting. Duane Pfennigwerth: Congratulations again. And then just to switch gears on MRO, maybe Dan, you're providing increased transparency. Can you speak a little bit about the outlook for that segment? Revenue growth, margin expansion, and if there are any capital commitments embedded in the CapEx outlook for this year? Thank you for taking the questions. Dan Janki: Sure, Duane. Thank you. Quite optimistic about the MRO business. I think they had a really good 2025. Great commercial wins. Building the backlog. I think this is a business that we're excited to see across the billion-dollar mark. And one that we continue to hold out and see it as a two, then getting to two, then getting to $3 billion of top line. That it can continue to grow. This is a business that, you know, where it's positioned, it's high single-digit margins today. It should be mid-teens. And one that we've we have fed at Capital, but it's one of those things that you just have to consistently stay after as it relates to both shop capacity, but also repair capability. And how you think about it, it's something that Delta team is building off a really strong maintenance capability. And that we can extend to third-party. So we're quite excited about it. We do think it is one of those elements that truly is unique to Delta and related to our differentiation and durability and why we wanna make sure that we provide you that our investors, that transparency to know we're over time. Duane Pfennigwerth: Thank you. Matthew: Your next question is coming from Chris Wetherbee from Wells Fargo. Your line is live. Chris Wetherbee: Hey, thanks. Good morning, and congrats, Glen. Obviously, we haven't got to spend a lot of time together, but your reputation certainly. So congrats and enjoy the next leg of the journey here. I guess I wanted to ask a question about premium versus main cabin. Obviously, the revenue growth spread has been very wide here in the back half of 'twenty five. So as we think about sort of a normalization and maybe improvement as we go through 'twenty six, what can that sort of spread look like? Obviously, capacities could be weighted towards premium, but what do you think normal looks like at that relationship? Glen Hauenstein: Well, the margin spreads, as you indicated, have never been greater. And as you know, the bottom end of the industry and the commodity side of the business has been struggling greatly. And so I do think there's, you know, we saw consolidation earlier in the week. We're, you know, waiting to see what happens with the spirit here as it continues to try and restructure. But that sector has been unable to grow here for the last several years. And when that sector is not growing, it can't contain its CASM. Its CASM goes up significantly every quarter. More than ours. And so that's become a real challenge for that sector in the industry. I don't, Scott Kirby would say it's only math, but you know, I think that challenge continues to haunt that side of the industry, and it has to rebalance at some point. And the only way it can do that is to get their revenue bases up because their costs aren't going down. And so it's taken longer than I would have thought, to be quite honest. But I believe it's still to come. And that is pure upside to us. Chris Wetherbee: Okay. That's super helpful. And then I guess a quick follow-up. Just as you think about the guidance ranges that you guys have given, it seems like there's a path towards the upside of that. I guess what are the things that we should be thinking about as risk to the downside outside of obvious macro challenges that may arise? I guess in terms of the trends that you're seeing so far, they're relatively robust. Anything we should be thinking about, it would be one or as we think out a little bit further into 2026? Ed Bastian: Hey. This is Ed. So in the risks you don't have to go too far to think about what the risk could be. Look at last year. And where we were a year ago, we thought we were gonna have a banner year. And gave guidance, you know, kinda similar to what we're giving today. And it got derailed a little bit. So I think the New Year offers optimism. For a different outlook than we were a year ago. I think relative to the administration and their priorities, I think we're all a one year smarter and more conditioned. To expect maybe the unexpected. In some of the policy approach. And I think we're, you know, if you look at the economy, if you look at the strength of the market and you look at how just airlines are looking at it, you're looking at how high-end consumers are feeling. About their opportunities, they're quite bullish. And so that's how I'd frame it. Chris Wetherbee: Appreciate the time. Thank you. Matthew: Thank you. Your next question is coming from Andrew Didora from Bank of America. Your line is live. Andrew Didora: Hey. Good morning, everyone. Actually, just wanted to touch upon the free cash flow generation here. I think it's, you know, it's obviously very unique to Delta. But, like, Ed, Dan, you know, today, you know, giving us all a closer look at, you know, MRO, loyalty, and the like. When you look at the drivers of this free cash flow generation year in, year out, much of this comes from these ancillary businesses versus the core airline? Does it over-index? Is it a bigger percentage of free cash flow than as a percentage of your revenues? Dan Janki: When you think about it, free cash flow is ultimately driven by your margins. And drive your operating cash flow. So I would say the loyalty premium certainly given its margin profile, has an outsized impact on it. Things like MRO that are smaller, things like cargo have less impact. Than the core. But premium would be outsized related to it. Andrew Didora: That makes sense. And when we think about, you know, kind of this free cash flow going forward, we think about the CapEx side of the equation. Any step up in CapEx coming over the next few years, maybe particularly because of the new Boeing order from this morning? Anything there to think about? Thanks. Ed Bastian: Andrew, this is Ed. No. You know, we've been very consistent over the last decade of CapEx in that $5 billion, some years a little lower, some years a little higher. Range. And while, clearly, there could be a one-off, maybe a year with a little bit more, broadly speaking, though, we're very disciplined about that. And I think one of the real exciting opportunities for Delta when you look at where our leverage ratio is, where it's going, the continued free cash flow generation, and I said on CNBC this morning, I think the most tangible return we can generate for our shareholders is that free cash flow opportunity. And as the balance sheet continues to be delevered, there's gonna be even more return possibilities for our shareholders. It's not going to go into starting to try to get on a big growth spurt. That's not an answer that, you know, we've seen people try that in the past. That never ends up well. Andrew Didora: That's great. Thank you. Matthew: Thank you. Your next question is coming from David Vernon from Bernstein. Your line is live. David Vernon: Hey, good morning, and Glen, all the best for the future. Just kinda looking at the bigger picture, the commentary that you guys have provided today, it sounds like Delta revenue is accelerating, but the main cabin isn't. And I'm just wondering if that more plainly just means that this is about, you know, Delta and the strategies you guys put in place kinda working for Delta. And maybe the industry outlook is a bit more mixed. And if that's right, you know, what does that mean for, like, kinda competitive capacity as you're looking out at the market for 2026? Particularly in relation to your hubs and where capacity is shifting in the marketplace? Is it right to think that maybe you guys have, you know, started to carve out a path? It's a little bit easier to glide to a more mixed sort of industry outlook. Glen Hauenstein: Well, I think that's what '25 was a proof point on. Is that the industry, if you look at it, was very challenged in '25 and Delta was at the very top of the industry. And I believe when everybody reports, this is my hypothesis, that we will never have been in our past a higher percentage of the industry's total profits. Than we were in '25. And so as you think about what's working here at Delta, the diversification of the revenue streams, the continued focus on premium products and services, I think, we have charted a different path. And you know, we don't control what decisions are made at other airlines, but I do think that those who cater to more commoditized you've seen them trying to change, right? You've seen Southwest going in a very different direction, talking about clubs, talking about international. So I do think we have charted our own path, and I do think there's a lot of tremendous upside for us the industry finally does reckon with the fact that the commodities are not making any money, and they either have to be removed or they have to be upgraded. David Vernon: And as far as kinda competitive capacity, is you like, what last year, we're talking about how, you know, competitive capacity is a little more subdued in your core hubs. Obviously, the industry entered in a very different position in terms of what it thought its growth aspirations were going to be last year. But I was wondering if they're also a little bit of a parting in the Red Sea for you guys around some of the core hubs. Joe Esposito: Well, I think this is Joe. At competitive capacity, it's in a really good place for us as we start the year. I think the, you know, to your earlier comments, the bottom side of the industry has been and will continue to rationalize that capacity. You've seen a lot of the unprofitable part coming out but is there only, you know, when you look at how they are going to come out of this, it's either gonna be an internal, external restructuring. So the competitive capacity, like I said, is good today. We offer our customers great products in our own hubs. And we're very competitive in all of our hubs. David Vernon: Alright. Thank you. And, Glen, again, I'll let you drop the mic here, but thanks, and good luck in your retirement. Glen Hauenstein: Thank you so much. Matthew: Thank you. Your next question is coming from Michael Goldie from BMO Capital Markets. Your line is live. Michael Goldie: Good morning, and thanks for the question. Revenue diversification continues with non-main cabin CapEx kind of getting to that 61%, 61.5% this quarter. Seat growth is really concentrated in premium going forward. Where do you see this non-main cabin revenue mix over the longer term? Is 65, 70% the coming years? Thank you. Glen Hauenstein: You know, I don't think we're seeking out a number here. We're reacting to how customers behave. And how the industry constructs it. So again, as we talked about the margins being in the premium products right now, at some point, this is going to shift. And it'll shift to have hopefully, the premiums not go down, but the main cabin go up because that's just how the math has to work. And so I think as you look forward to that, that's clearly upside for Delta, but some place the industry has to go. And I think we thought that it would happen before now, but it's taken a long time. And but it's happening. It's happening with capacity reductions. It's happening with consolidation. It will continue to happen around us until the main cabin returns. Michael Goldie: Accelerate. Glen Hauenstein: And as a follow-up, on the industry consolidation, you know, we saw this week you've had a Hawaiian a year or two ago, Spirit. When you step back, you think the landscape will see further consolidation in the coming years or eventually find a plateau? Glen Hauenstein: I think it's very clear that you're gonna see further rationalization. It can come in lots of forms. It could be in consolidation. It could be liquidation, could be internal. Can be external drivers as we've seen in the industry with activists involved. I think you're gonna see rationalization in any carrier that's not earning its cost of capital. Is already experiencing significant duress and distress amongst their ownership base and they need to continue to work to enhance their business models. Michael Goldie: Thank you. Matthew: Thank you. Your next question is coming from Catherine O'Brien from Goldman Sachs. Your line is live. Catherine O'Brien: Hey. Good morning, everyone. And, Glen, another congratulations on such an amazing career. It's really been a pleasure getting to work with you, and I hope you're looking forward to a lot of time in Italy in 2026. And maybe just, you know, speaking of international destinations, maybe a shorter-term one, but could you walk us through how you're thinking through sequential trends across each of your geographies in one Q, you know, on a RASM basis? It all sounded positive in the prepared remarks. So just, I guess, any bright spots that stand out in particular? Glen Hauenstein: No. I'll let Joe take that question because, you know, I'm easing out of this, reading these reports every morning. So, he's probably more up to date than I am. Joe Esposito: Yeah. Hi, Katie. I think, you know, our sequential trends in international and domestic are both really positive as we go into 2026. We've seen the most sequential trends from the third quarter to the fourth quarter. We had identified more of a blip for the summer of twenty twenty-five, and that played out the way we wanted to as improving those trends as we went along. I think that's gonna continue. Especially as we go into 2026. If you look at the Transatlantic embedded capacity, it looks really good as we go forward in the summer. And looking forward, our partners are well-positioned. I think we're expanding conservatively, but from a position of strength. And the traveling public is very excited about new destinations. When you look at where we've added this year into and we put that out to our loyalty program. For a vote. So we're doing some kind of unique things, some exciting things. On the Pacific Side, our cornerstone with the Pacific is Korean Air. And they're a great partner. And we've built our foundation around the Incheon hub and also now expanding a little bit beyond into the biggest economies. We've seen really good progression as Korea and Asiana work through their merger. The Incheon Hub has been a fantastic hub to connect through. So there's only greater upside into pushing our traffic through Incheon. And, also, making sure we have access to some of the biggest economies out there like Taipei, Hong Kong, and there'll be a few others later. Later in the next couple of years. And finally, Latin America is kind of two different entities. You got the short haul which acts very much like domestic, short haul in The Caribbean, Central America. And that moves with domestic and is much more of a leisure operation for us. And we've had a very good Christmas. We've got really good strength in the Christmas bookings. Good strength in spring break. And so some of what you're seeing in close-end bookings and cash sales really goes to the leisure side of spring break. You've got March, April, and Easter, and that also includes the short haul Latin America. And then with our partner, LATAM, in South America, further integration into their hubs. They just opened up, you know, the Lima Airport is fairly new in how we move traffic. Efficiently through South America, and they've got fantastic hubs that they continue to develop which is only a positive for us for the future. Catherine O'Brien: Okay. Got it. Thanks, Joe. And just, like, very I just wanna make sure that international, you're expecting a bigger sequential improvement versus domestic into the first quarter. Is that what you said? Joe Esposito: Yeah. They're both moving at the same rate. I would say as we go into the first quarter, I think with international, we have good margin upside. We've closed a lot of those gaps over the years. From international to domestic. There's more, especially when you think about using the fleet and premium products for international. Catherine O'Brien: Okay. And if you guys will allow it, maybe just a bit of a follow-up to your answer to Andrew Dan. As you work towards your two turns leverage this year on your way to one turn, can you remind us how increasing shareholder returns fits into your capital allocation priorities? I think back at Investor Day, Ed might have noted that, you necessarily need to be at one dot zero turns of gross leverage to consider share repurchases. What factors go to that calculus? Thanks for the time. Ed Bastian: Thanks, Katie. You're right. We don't have to be exactly at one-time gross leverage in order to expand the range of shareholder return capabilities and opportunities to create. And every step that we take getting closer to that, you know, time is time continues to afford us those opportunities. First, starting with as we've done the growth of the dividend rate, which we hope we will continue. Last year, we put a shelf on the table. For repurchase it was a three-year, and I certainly expect we'll be utilizing that over the course of that time frame. And, obviously, looking at the multiple and where it's headed, our priority is very clear for this year. It's continued to pay down debt. But as the year and the next couple of years go, you're gonna see more opportunities explored. I'll leave it at that. Catherine O'Brien: Great. Thanks for all the time. Congrats again, Glen. And Joe. Julie Stewart: Matthew, we'll now go to our final analyst question, Tom Fitzgerald at Cowen. Matthew: Certainly. Tom Fitzgerald, your line is live. Tom Fitzgerald: Hey, everyone. Thanks very much for the time. Congrats, Glen. Just curious on, at Investor Day, you talked a lot about the revenue segmentation and further aligning value with price. So I'd love to hear what's next for that this year. And then on the technology side, just curious with the advances we're seeing every day, do you guys see some low-hanging fruit as we move through 2026? Thanks again for the time. Glen Hauenstein: Alright. I think we've talked about really having three categories for every product, which is basic, main, and extra. And that continues to evolve. I think we put those products in place for comfort plus earlier in the year. And that implementation is producing results that are actually slightly above our internal projections. So as you see us continue to bring that and move that up the ladder to give customers choice not only of the seat but the actual product that they wanna buy with that seat. And I'm really disaggregating that out. And that should be rolled out pretty much throughout '26 and as part of our initiatives in our Delta initiatives in our plan. And hopefully, those exceed our own expectations of how people select because I think if you were offered a $500 ticket, there was no reason for you to ever wanna pay more than $500 because it was fully loaded. Now we have that seat. It's $500, but you could buy it for $450. If you're willing to get the seat assignment at forty-eight hours. If you're willing to have it nonrefundable, and then all the way up to extra where it's fully refundable you get the best seats unlocked at that time. So I think it's the seat and then it's the product attributes, and we'll be bringing that into 26. That's one of our 26 initiatives. Joe, you wanna add anything? Joe Esposito: No. And no. That's exactly right. And we've been incredibly thoughtful about not going too fast, making sure that we're measured in that approach. We're still testing comfort basic right now. We're gonna expand that. The rest of this year. The great thing is you think about merchandising is the products you're able to put in there. And we've got a lot of products. We're innovating with more products. And there's just more we can offer the customer based on what they're willing to pay. And I think that's the key to merchandising in the future. This is, you know, if you look further out, this continues to be multibillion dollars. Opportunities in period of add high value lower cost, lower margin higher margin products we don't have on the shelf today. And that's really what our retailing tools are going to enable over the next several years. Julie Stewart: Okay. That'll wrap up the analyst portion of our call. I'll now turn it over to Trevor Bansner to open the media portion. Ed Bastian: Thank you, Julie. Matthew, if you could read the instructions to the media for queuing up for questions, and then we'll get into the final part of the call. Matthew: Certainly. At this time, we'll be conducting a Q&A session for media questions. Please hold while we poll for questions. Thank you. And once again, everyone, if you have any questions or comments, please press star then 1 on your phone. Please hold while we hold for questions. There are no media questions in the queue at this time. Julie Stewart: Alright. Well, thank you everyone for joining us today, and we look forward to talking with you again in April. Matthew: Thank you. That concludes today's conference. Thank you for your participation today.
Shamali: Good morning. My name is Shamali. And I will be your conference operator today. At this time, I would like to welcome everyone to the Park Aerospace Corp. Third Quarter Fiscal Year 2026 Earnings Release Conference Call and Investor Presentation. 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 ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, simply press star and then the number two. Thank you. At this time, I will turn today's call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference. Brian Shore: Thank you, operator. Welcome, everybody. Happy New Year. This is Brian Shore. Welcome to the Park Aerospace Corp. Fiscal Year 2026 Third Quarter Investor Conference Call. I have with me, as usual, Mark Esquivel, our President and CEO correction, COO. I gave you a promotion there, Mark. Sorry. And just some little housekeeping stuff, we announced and released our third quarter earnings release or published our third quarter earnings release right after close. You want to get ahold of that because in the release, there's link information to access the presentation we are about to go through. The presentation is also posted on our website. So we have a lot to cover, so let's get started. We have our dilemma. We have a lot of new investors, a lot of veteran investors. So how much do we cover the background stuff is, you know, always a little bit of an issue. We will do the best we can. Also, I just want to mention that we did file an S-3 registration statement with the SEC after the close as well. So we are going to get started with the presentation. We have a lot to cover. Obviously, at the end of our presentation, we will be happy to take any questions you might have. So let's plow ahead. Slide two, forward-looking disclaimer. If you have any questions about this language, please let us know. Let's go on to slide three, table of contents. Fiscal Year '26 the Q3 investor presentation, we are about to go through that. And then the supplementary financial information in appendix one. We are not going to review that or cover it, but if you have any questions about it, please let us know. As has become our practice in recent quarters, we are featuring the James Webb Space Telescope, runaway supermassive black hole, 10,000,000 times the mass of the sun. That sounds pretty big to me, being boosted from its galaxy at a 1,000 kilometers per second, which is about 2,000,000 miles an hour. Thank you, James Webb Space Telescope. The James Webb was produced with 18 Park proprietary sigma struts. James Webb is now orbiting, I think it's called a range orbit about a million miles from Earth. Okay, let's go on to slide four. Our quarterly results. Let's just focus on Q3, where we just announced sales, $17,333,000. Gross profit, $5,003,000. Gross margin, 34.1%. Adjusted EBITDA, $4,228,000. Adjusted EBITDA margin, 24.4%. We are not going to go over the history, but we provide it to you for perspective. The prior quarters. I mean, what do we say about Q3 about our Q3 record we just announced during our October '2 investor call. Sales estimate was $16.5 to $17.5 million, so we came in within that range. Adjusted EBITDA estimate was $3,700,000 to $4,100,000. So we came in a little bit above that range. Just want to remind you that when we provide you with these estimates, we do not do what is called guidance that, I guess, everybody else does, almost everybody else does. When we tell you, we give you an estimate, we are telling you what Mark and I are telling you what we think will happen. We do not provide any fudge room so we can, you know, we reduce our what we think by 10% so we can come in and beat the number and be heroes. We do not get involved in that kind of stuff. I just want to always remind you when we talk about our estimates, what they mean, what they do not mean. Okay. Let's go on to slide five. Good quarterly results continuing this. The Q3 considerations. Alright. We always have to talk about the Erie Business Partner Agreement because it has an impact upon our quarters. Guess a little tedious, but I think we need to explain it. We entered into a business partner group, Arian group. They are, you know, wonderful, a French company. We have known them for about twenty years. They are, I think, a JV between Saffron and Airbus. A large company. That was in January 2022, under which Arien appointed Park as exclusive North American distributor for their Ray Car of C2B fabric used to produce ablative composite materials for advanced missile programs. So this is, you know, a lot of people consider it to be the Cadillac of this category of fabric that is used for ablative, as they call sometimes. Missile programs. So this is why we have to talk about it because OEMs buy the fabric or stockpile the fabric because they are trying to protect their Let's just go into it. We had zero sales of the fabric in Q3. Very critical missile programs, but they have to buy from us. And so we are the exclusive distributor in North America. They the OEMs we buy the fabric from Aireon, our partner. And then we resell it or sell it rather to the OEMs with a for a small markup. Right? And we do not even deliver to the OEMs. We store the product, the fabric in our factory as a favor to them, I guess. Because ultimately, they do not need it. They are going to give us the releases at some point to go ahead and take that fabric and produce the prepreg material. With it. So small markup, I probably should have put this bread in here because it is not going to explain it. Even as far as I presented considering tariffs, This is because we passed through all the tariffs and they are significant, but you passed through passed through on a dollar per dollar basis to go into our sales line. But we do not provide a markup on the tariffs that would be kinda ridiculous. So that actually makes the markup even percentage even lower if you follow and say, we sold We had so we had zero sales of fabric in Q3. And we had a little bit more than a million sale million dollars of sales of the materials manufactured with C2B product in Q3. So when we produce the prepreg, that actually results in very good margins. So when we have significant sales of material, not too significant fabric, that is actually a plus for our bottom line. But the opposite often happens, and we will talk about that when we talk about our Q4 forecast. We have a lot of sales of fabric not as much of materials that will drive down our margins. It is all good. It is all wonderful. It is ultimately everything that we all the fabric that we sell to the OEMs and they stockpile, we will end up producing. That is the reason we keep it in our factory. But the timing kind of distorts our quarters sometimes, so that is what we have to talk with, Let's go on to slide six. Total miss shipments and Q3, approximately 740,000. That number is up quite a bit. It was caused principally by international freight supply chain and customer spec. And engineering issues. So what was going on here? Industry challenges are reemerging as industry recovers and program ramps accelerate. This is actually a good thing, good news. You know, after the pandemic or when the pandemic started, it was a mess because supply chain was so screwed up. And after a couple years, we kinda got back to something what would be more acceptable. Which is okay. But now that the industry is recovering, and the programs are ramping quickly, now the supply chain, the industry is actually getting a little bit behind the power curve again. That is what is going on there. So actually, it is good news. That impact of tariffs and tariff related costs and charges maybe Mark can help us with this. Go ahead, Mark. Mark A. Esquivel: Yeah. I did. This is a very eventful update again, but which is, I think, a good thing. We have minimal impact. On tariffs in our Q3 just as we have had previously. I think we talked about it. You know, we price our materials on short term basis. Most of our business. So we are able to pass them on. If we do get them, The second bullet, possible future, of impact. So, again, this has been quiet again for us the last few months or you know, it seems to stabilize as far as what is coming our way. That does not mean there could be changes to that. But as far as the you know, the near term, it you know, we I probably think the bullet would be pretty similar to the first one. You know, going forward in the next week quarter. But you just never know, but there is minimal impact for Park. At this point. Brian Shore: Okay. Thanks, Mark. Let's go on to slide seven. Keep moving here. This is a slide that our veteran investors are familiar with every quarter. We share with you our top five customers and we do a little picture of that is associated with each of these companies, the top five companies alphabetically. The seven thirty seven MAX, you know, we have said in the past, we do not have much content on that. That is actually Norian. That is a weather master radon that Norian produces for the seven thirty seven product line. What else do want to talk about here? I guess maybe oh, the Valkyrie. Yeah. So we have talked about the Valkyrie quite a bit. Over the last few years. This is a creative program that we are on. But US the recent news is the marine corps just selected the Valkyrie for its collaborative combat combat aircraft program, loyal wingman, sometimes it is called. So that is very good news for Kratos and also for Park. The PAC three, that is an AA item, and the Airbus h h m 20 neo, that is obviously Middle River. Sikorsky, Sikorsky, New Orleans, we already talked about which program is associated with Neurocrine. Let's go on to slide eight, our pie chart here. So the comment is always that if you look at fiscal '21, which is really the pandemic year, the pie chart quite different. The other years, kind of very similar. Year over year. People ask if the military piece of the pie chart will grow and it might, but commercial is growing too, we are not sure. My expectation would be that business aircraft as a percentage would maybe shrink over time. So let's go to slide nine, Park Loves, Niche Military Aerospace aerospace program. This is a slide that we include every quarter as well. And these are not necessarily the biggest military programs we are on. These are just things we want to share with you. As we mentioned in last couple of quarters, we feel less comfortable giving many specifics about these programs, but these are all programs at Park. Is in are is associated with. Let's see. The only thing that I would mention in terms of for recent news is the the standard missile six SM six program. The Navy just just awarded Raytheon a contract to boost the s m six production. This is all public, so you can look it up yourself. Do not think we need to comment on any other programs here. Let's go on to oh, sorry. Could not find slide 10. Slide 10. This is another slide that we have included for probably, I know, a dozen presentations. So a lot of you are very familiar with it. No real change to it. GE Aerospace jet engine programs, you know, major major program opportunity for Park, firm pricing LTA, from nineteen to twenty nine with Middle River Aerostructure Systems, MRAS, which is currently a sub of SD Engineering Aerospace, a Singapore aerospace company. But when we got all these programs, they were a sub of GE Aviation, GE Aerospace. That is why these programs are all related GE engines or CFM engines. We built a redundant factory for them and exchange for agreeing to to to give us the LTA through '29. What programs are we talking about? The first if you look at the bottom left side of the page, the first five are all h three twenty neo aircraft family programs. They are all the same engine, LEAP one a engine. Which is a CFM engine. The seven forty seven eight that airplane is no longer being produced, but there are still spares that were involved with COMEC nine one nine. COMEC is a Chinese aircraft company. With LEAP one c engines. The nine one nine is COMAK's offering to compete a single aisle to compete with the seven thirty seven and the eight for 20. On the right hand side of the page, nine nine zero nine, it is also a COMAT aircraft, and that is a regional jet. And that also is a GE engine, of course. The Bombardier Global 7,500 passport 20 engine. The picture here is the seven forty seven-eight. As you can see, engine installs We like this picture because it just gives you perspective on the size of these nacelles and everything you see there is made with park material and a lot of what you do not see inside the nacelles are made with park material as well. On that 47 program. Let's go on to slide 11. So more on GE Aerospace, we are continuing Let's skip the first item. Second item, vacate containment wrap. This is for the triple seven x g nine x engines for triple seven x. That is produced with our AFP material and other composite materials. And let's go on to the third item. Emirates Park LTA, which you already mentioned, was amended to include three proprietary park film adhesive formulation product forms. And the last item, life or program agreement, which was requested by MRAS and SDE. Remember, SDE is the owner of MRAS now. And we have said your agreement is under negotiation for a few quarters now. But this time, it is on us, you know, because the MRAS team wanted to get together with us in December and we said, look, we are really going to focus on this expansion. And this expansion is for their benefit, you know. So we say, can we delay the the next meeting on the life of program a couple of months? And they said, fine. So that one is on us. We cannot blame anybody except us. The fact that this is still still an open item. As we said previously, we would love to have the life of program, but we are okay either way. Let's go on to slide 12, continuing with the update. On the this is now updated on GE Aerospace and Engine Programs. So let's start with the eight three twenty NEO aircraft m one. That is the big dog of all the November '25, Airbus had already delivered 4,275 a through 20 neo aircraft, and Airbus has a huge backlog of these aircraft, 7,900 as of, like, September That is a total of over when you look at how much I mean, we are delivered and what is in the backlog, it is all over over 12,000 airplanes. That is huge. We and look at the delivery history here at the bottom of the the bottom half of slide. We will go through the numbers. But you could kinda see what happened is that they were ramping up as the program was growing and then hit the pandemic and, you know, kinda hit a brick wall. And the ramp up has was slowed down a little bit. I think they are ramping up much more aggressively now in December '25, they delivered 97 airplanes which is a lot, but they plan to deliver even more. You probably read about this, but the h 20 neo has issues with fuselage panels and also software that was caused by solar activities, which reduced the deliveries Those those issues have been resolved but nevertheless, we probably held back to deliveries in '25. Let's go on to slide 13. This is the key thing. Airbus is targeting a delivery rate of 75. Remember what I 50, 51, 75 per month in 2027. So that is, doing the math, a 50% increase over where we are now, which is a lot. Considering it is a very large program. It is 50% of a lot. On 10/07/2025, the a three twenty aircraft family became the world's most delivered commercial jet. That was surpassing the seven thirty seven and A320 aircraft family continues to rack up new orders. The game changing a three twenty one XLR, we have spoken about this you know, lawsuit in the last few quarters. Maybe I go through each item, but if you have questions about it, please let us know. This is a pretty exciting game changing aircraft for for Airbus. So this is part of the a three twenty a three twenty neo family. I just want you to understand that. Were there approved engines for the a three twenty new aircraft family, there are two of them. One is the CFM LEAP one a engine. That is a program we are on. The other one is a Pratt and Whitney GTF engine, p w 1,100 g engine. We are not we are not involved in Pratt program, only the CFM program. On slide 14, we supply it to the oh, I just talked about the first item, the first one. Okay? Second bullet item. So, basically, if you look at the market share of firm engine orders, between the CFMA through LEAP or one a and the Pratt engine, you know, and this is for the a three twenty program, of course. The leap CFM leap engine has a 64.5% mark share, you know, much more than half. So and it has been that way for a while. The LEAP market share is much more than the Pratt market share which is good for Park, because we are on the LEAP program and not the Pratt program. At that delivery rate of 75 airplanes per month, that is 64.5% market share translates into, you know, a lot of engines pure 1,160 Just so you understand, this relate this this this 64.5% is based upon all orders, all backlog for both engines. We are talking about thousands and thousands and thousands of airplanes, so it is not it is not a number that is usually distorted by kind of a small perspective or short time short time frame perspective. Let's keep going. The PRED engine, unfortunately, continues to struggle with serious reliability issues. I just read an article this morning that these reliability issues are expected to continue. Now for LEAP engine, reliability has been a selling point. Reliability is a very, very key thing for an airline. Not reliability relates to how how much downtime your airplane has late to maintenance. So if these airplanes are down for maintenance or inspections for these engines, that is a real bad problem because when the airplanes turn it around, they are not making money. Airlines their margins are not that great. They cannot afford to have excess downtime. And that is why the reliability issue is a real serious problem. I do not know what is going to happen but, you know, when I even speculate that because reliability continues to be a problem with Pratt, and the CFM LEAP is is doing well with reliability, that could drive the market share potentially even more to the leap side of the ledger. CFM is significantly ramped up production deliveries of LEAP benches according to LEAP one a. That is really significant because we talked about supply chain restrictions holding back the market, holding back deliveries. There are a lot of different things, but what was often was mentioned most often were engines. So the fact that CFM is leaping up I am sorry, ramping up the LEAP engine is a good thing because that will help Airbus ramp up their 20 needle program, which, of course, is what we want. Slide 15. What are we doing here? As of, 09/30/2025, there were 7,900 firm LEAP one eight. See what I am talking about. There is a lot of there there is a lot of engine orders. Firm leap one a engine orders. So, you know, we are recently told that our our customer was given indication as to how many engine how many nacelles, basically. That is where they produce nacelles They need to plan to produce for this program and we cannot disclose that number but it is significantly more than 7,900. Significantly more. The a three twenty neo aircraft family program can end up being our largest program. We will see. But over the long over the course of the of the program, it could be I do not know. Everybody is different opinion about this, but my I will give you my opinion, which is probably not worth much. But my opinion is that that Airbus will will be making these airplanes with these engines in 2040. We will see if I am wrong or right. Comeback nine one nine, is a Chinese aircraft. It has been a while. We talked about that. It also has a LEAP engine. LEAP one c. And this is the the single aisle to compete against the seven thirty seven b for '20. Comac is expected to fall short of his 25 two to 25 delivery target. Not surprising. It is a Chinese company so sometimes they have historically had some trouble kinda getting their programs up and going. Target shortfall, they say it is caused by supply chain, whatever, you know, the international international production issues, international trade production issues. So I do not know. Let's just go on to the next slide. I do not think we need to be let's go on the next slide. We are still under nine one nine. Comeback is increasing manufacturing capacity to achieve production rates of one fifty and twenty seven, two twenty nine. Now if you look at that juggernaut slide and you throw down the presentation, we are assuming one fifty. We are assuming a top set of one fifty. But Comac is building capacity for 200 per year. Comac reportedly has over 1,200 orders for the nine one nine. Now let's look at the nine zero nine. This is a regional jet and, again, produced by Comac with a GE engine, a different type of GE engine, of course. So according to the state run Global Times, under seventy five nine zero nines have been delivered. The nine zero nine zero nine operating routes of the ten and twelve Asian countries, which is good because originally, these airplanes are thought to be well, China only airplanes. That is obviously not happening. I mean, Comac does not want it to happen anyway. Nine zero nine aircraft now carried over 30,000,000 passengers. That is a lot of passengers in these small airplanes. There were seven 385 open orders So here is a good thing to talk about because this aircraft is in a rate for a couple years. So it took Old Comac a while to get to rate, but they are rate. They got there, and that is the key thing. So with the nine one nine, maybe it will take a little bit longer from the get to rate, but the my opinion anyway is they will get to rate, and that will be very good park. These are starting from base zero. So let's go to slide 17. The Bombardier Global 8,000 variant, the 7,500 variant, and it was just certified and first delivery last month. The fastest civilian aircraft since the Concorde, 8,000 nautical mile range. This triple seven x, with g nine x engines, The triple seven x tax program has amassed a lot of hours, a lot of flights. Boeing reportedly has over 600 orders for the aircraft. The certification test program is moving into phase three of the TIA, which is important. I mean, I am not going to know what that means. Not expert anyway, but it is an important step along the way to getting your aircraft certified with air FAA. Slide 18, stolen triple seven x. Boeing now anticipates FA certification entry into service and first delivery of triple seven x n 27. This airplane is delayed too, so we cannot all just say, well, the Chinese are sometimes late with your aircraft. The c the Boeing CEO has indicated that 777X aircraft and the engines are performing quite well. Mentioned increased FAA scrutiny as key factor in their certification delay. I think what he is really getting at, I what is nice about it is that the FAA is being more stricter because of the issues with the the MAX, the seven three seven MAX. Why do not we go on to slide 19? Here is some numbers, GE Aerospace programs. This is why we emphasize a lot because it is a, you know, it is it is a big deal for BART, the GE Aerospace jet engine programs. We will not go into the sales history. You can see it here for your benefit. Q3 sales were $7,500,000. Our forecast for Q4, 7.25%, eight seven 3 quarters, 8 a quarter million. And for the year, $29,000,000 to $29,500,000, just kind of adding down And you could see that there is a recovery going on here in fiscal twenty almost $29,000,000, and it is going to fell off a cliff during the pandemic. There has been a real struggle to get back to that level that it is only now. That we are at that level this this fiscal year. And my feeling and sense is that this number is going to will move up quite aggressively over the next two or three years. Let's go on to slide 20. Okay. This is now going talking about park, just GEs, solar park. Park's financial performance history and forecast estimates. So and the you know, top part of the page, in yellow, fiscal year twenty six u three. Well, we already gave you those numbers. And then we have estimates forecast estimates. Remember what we said, these are not this is not guidance. This is what Mark and I think is going to happen for the rest of our ability Sometimes we are wrong. Sometimes it is higher. Sometimes it is lower. We will be telling you telling you what we think is going to happen. Q4, about $23.5 million to $24.5 million. EBITDA of 4.75 to 5.25. Now a lot of smart people are thinking, well, what is going on here? Q3 sales were $17,300,000. Q4 sales a lot more Q3 EBITDA $4,200,000 So why is it the forecast for Q4 EBITDA a lot more? We have a lot more sales. You gotta look at the footnote, there are two asterisks. Forecasted to include approximately $7,200,000 of C2B fabric sales. So that is a small market very, very light margins, and that is what is going on there. That is what you need to understand. That is why with those kind of sales, we are not seeing much higher EBITDA numbers. And then while we are at it, let's look at the total for forecast total for '26. This is just adding down. Take into account the Q4 forecast. $72,500,000 to point 5,000,000, and here is your EBITDA number. And, again, look at the at the footnote three asterisk, forecast to include approximately $9,800,000 of C2Bit fabric sales mostly in Q4 it looks like. Alright? Okay. Let's go on to slide 21. So this is just some history with on the right hand column, the '26 forecast estimate included, the estimate we just went over with you. So we will go over that again. I think what is interesting is look at the top line, this sales starting in 1718, nineteen, twenty went up $1,010,000,000 approximately per year from '17 to '20, and then it fell off a cliff. You still have the pandemic and the supply chain issues and industry chaos that resulted for a long time. And even last year in '25, we still had barely gotten back to that fiscal twenty number. Now we start seeing fiscal twenty six. We start to see some acceleration getting out of that rut that the industry has been in for a long time, like five years. It has been a long five years, I would say. So it is what it is, but it has been a long five years. Let's look at the notes down here. So Supply chain limitations affecting your your fish industry. That is what we just discussed. We looked at sales numbers, ramping up, of course, for the Juggernaut. And, again, reminding you the fiscal twenty five sales includes $7,500,000 of C2B fabrics and a '26 sales include $9,800,000 of C2B fabric. Very important to understand those things. Okay? And until now, you know, I should just go back and say, the OEMs have been stocked by lots, lots, need to be fabric much more than the what we are producing in terms of how that would translate into producing the producing prepreg with the C2B fabric. So let's go on to slide 22. Change your gears a little bit. Our buyback authorization and activity, an update Okay. So we announced in May 22, our board authorized to purchase $1,500,000 shares of our common stock Under this authorization, Parkers purchased total 718,000 shares of its common stock at an average price of $12.94. $12.94. So you have to say we are some kind of geniuses I mean, considering the stock prices now, I mean, I know. I do not what you think, but we probably should be invited on CNBC or maybe to to talk and be a guest lecturer at the Wharton School of Economics Let's keep going. We do not have to talk about well, except that we are we did not buy any stock in Q2 or Q3. We are not we bought any stock so far in Q4. Let's go on to Slide '23. Trying to rush you a little bit, sorry. Our balance sheet cash and very incredible cash dividend history, we have zero long term debt, $63,600,000 of cash at the end of Q3. Forty one consecutive years of uninterrupted regular regular quarterly cash dividends. And now paid $608,600,000 or $29.72.5 per share in cash dividends since the beginning of 2005. We are kinda stinking up on that $30 per share number. Parks founders always kinda like to include this photo with the with the cash dividend history because this is really the beginning of Park. When we really had almost nothing. We started with basically nothing. Let's go on to slide 24. It is a lot a lot of money, a lot of dividends, I would say, for a company to start with basically nothing. Slide 24, financial outlook for GE, GE Aerospace, Gen programs, the Juggernaut. We have used that term for a while now. The timing, we are not sure that Juggernaut is coming as now. With the capital n o w. Cannot be stopped. Better be ready. Let's go on to slide 25. I am rushing a little bit. I just want to stop and say for a second for some of you new shareholders, if you want a more detailed explanation of some of these things, please just call us. We are happy to go over these items in more detail. We are kind of rushing through them. We just want to get to some of the the newer items that toward the end of the presentation. Slide 25. So the we are talking about engineers per year assumptions. And there is a footnote explaining how we came up with those assumptions. Revenue per engine, that is that is that in sorry, that information is provided to us. By our customer. And the annual revenue per program just multiplying across. And we end up with a total of $61,800,000 at the outlook year. So couple notes here, our revenue per engine unit estimates are updated. We have been given updated information from our customer. And here is something we have not really touched on, why the engine units or your assumptions may be conservative. Let's just try explain this quickly. So h and 40 neo, let's look at that one. We have 1,080 engines. We are talking about the year. That is based upon 75 airplanes per month, two engines per airplane, a 60% mark share for LEAP. Just do the math. That is eight eighty. Alright? So that is based on how many LEAP how many a three twenty airplanes will be built with LEAP engines. Do you think that every engine itself structure that is produced will end up on those engines? That would be a really, you know, ideal situation, but you know, something called scrap and fallout and things get rejected sometimes. We are not taking that into account at all. We are not taking spares into account either. So that is why this assumption about NGUs per year might be a little conservative. I just want to touch on that. Okay? Slide 26, we do not have to go over this. These are all the footnotes related to the how we computed the numbers and did the math on slide 25. Let's keep going. Okay. Now we are to changing gears completely. Warren Peace Parks new Juggernaut. Actually, that term, the new Juggernaut came from one of our investors. We liked it, so we decided to stick with it. Some of this is a review from last quarter. Some of it is a little new. Unprecedented demand for missile systems. Missile system stockpiles have been seriously depleted. By the wars in Europe and Mideast. There is an urgent need to replenish those depleted missile system stockpiles. According to Wall Street Journal reporting, the Pentagon is pushing defense OEMs to double or even quadruple missile missile system production on a breakneck schedule. That is a direct quote, obviously. List of Pentagon targeted missile systems include the Patriot missile system, the LRASM, and the SM six. Patriot probably being a particular priority. Apart actively participates in all of those missile systems. Review of an update on the Patriot Missile Defense System, that is the big one for us. Also, we focus on it because it is public. We do not we are not providing any confidential inside information. Everything we are providing you is based upon public information. There is just lots and lots of public information. About the patriot missile system. You know, president Trump talks about it. Sometimes. A large deployment of PAC three Patriot missile defense systems, largest, sorry, in history, response to Iran's ballistic missile strikes. On our Ford Air Base in Qatar. That was, I guess, a few months ago after we bombed Iran, bombed our nuclear sites. On slide 38. So what happened here is we moved the Patriot missile systems to Qatar anticipation of this attack from South Korea and Japan, but I do not know if South Korea and Japan are so happy about that. The Department of War wants a very significantly increased patron missile stockpiles in Asia. So, we just took a lot of them out of Asia. So obviously, we had a problem on our hands in terms of Patriot missile systems availability. Israel's and Ukraine's Patriot missile systems have been seriously completed. A result of those wars. Recent news from US defense OEMs including RTX Boeing Lockheed l three indicating significant ramp up of Patriot missile system production. It is apparent that US plants do much more than just replenish the depleted stockpiles. On 09/03/2025, Lockheed missile and fire control division received its bigger biggest contract in history, a $9,800,000,000 with a b, or from the US army. That is the branch that uses the patriot systems. For about 2,000, just a little less than 2,000 Patriot missiles. It is a lot. Slide 29. Here is some big stuff. Slide 29. Well, new. On 01/06/2006. What was that? About a week ago? Yeah. About a week ago. Lockheed announced it reached a seven year agreement This is all being driven by the Department of War. With the US Department of War to increase its Patriot PAC three missile segment enhancement, MSC interceptor. These are basically pager missiles. Production to a capacity from 600 to 2,000. 06/2000. You see that number? The last two years. This is even more interesting in a way. Lockheed record increases production of of Patriot PAC free interceptors by 60%. So do the math, It was a if it was increased by 60% to get to 600, that that means it was 375. Two years ago. So we are going from I am just doing the math. Three seventy five to 2,000. You get those numbers? It is on kind of unheard of. Unheard of. The new seven year agreement framework is designed to encourage Lockheed and its suppliers to make the capital investments necessary This is a team again for Department of War. They want the Defense Department to make capital investments rather than paying dividends and buybacks and stuff like that. Necessary to boost production capacity to levels needed to support to dramatically increase PAC-three missile program requirements. Do we need encouragement? No. We do not need any encouragement. We are already building our factory. We would get to that in a minute. I am planning to build a factory to support this program. Lockheed or poorly supplied PEG factory missile supply. Sorry. Missile systems to The US and 60 other countries. So a lot of countries that want to system and are not getting it right now. Breaking news. This is this morning. US Department of War is investing $1,000,000,000 in l three Harris solid rocket business, that is Airjet, to boost critical solid rocket production for Patriot and other missile systems. This is a new separate publicly traded company will be created in connection with this investment. This is a big deal. It is a big deal for Park as well. But you see what is going on here? This is Department Ward driving all this stuff. It is new world order, as we say, later on the presentation. Let's go on to Slide 30. The story continues. What do we have to do with the Patriot missile system? Park supports the factory Patriot missile system with special ablative materials produced with airing room. There is an airing group name again. Their proprietary C2B fabric. This one probably should be in bold, we are trying to be modest about it. Park is sole source qualified. For specialty ablative materials on a PAC three missile system program. You just think about that. And think about all we just talked about, what we discussed regarding this this program. Parkers recently asked to increase our expected output, especially by the materials from for the program by significant orders of magnitude. So how are we going to do that? We will fully support this request with the additional manufacturing capacity provided by parks major facilities expansion discussed below. We did not need any incentive or encouragement. We are already there. Okay. Let's keep going. Now we gotta go back and talk about area area group a little bit. More, not from the perspective of how it affects our quarters from a kind of bigger picture perspective. We have agreements with Airing Group a really wonderful French aerospace company JV between Airbus and Safran, relating to their proprietary C2B fabric used by Park to produce a blade and composite materials for the Patriot missile system and other missile systems. Then we entered into a business partner agreement, that is what they call it, They because they refer to us as their partner, very nice. With Erin in January 22, under which Arian appointed Park as its exclusive North American distributor other C2B fabric. Slide 31. On March 2725, we entered into what they call a new agreement with Aireon under which Park agreed to advance €4,587,000 to area against future purchase by park of C2P fabric. Now that was a fifty fifty deal. Park this advances to be used by by Aireon to increase its CQP manufacturing capacity in Europe. So they kicked in the same amount. We went fifty fifty on this investment. To increase the capacity in Europe, and we already paid our first installment of that amount of that amount. Sorry. Here in group with Park, our partnering on a study to investigate the economic and other considerations relating to potential establishment of a major C2B fabric manufacturing facility in The US. Park committed to contribute Again, it is fifty fifty deal. It is greater €50,000 to the study. We expect that amount to be expensed in our Q4. Originally, we said Q3 is probably in Q4, but that is another fifty fifty deal. This is something we are partnering on this study. The bottom park is engaged in ongoing discussions with Erin Group relating to potentially significantly increasing C2B fabric manufacturing capacity in The US to support critical Department of War missiles programs, including the Patriot Missile System program. It is very important that we highlight this because there is a significant need for for a much more C2B fabric capacity. So it is very important that this additional capacity be installed to support these programs as they ramp up aggressively. Let's go on slide 32. So we have referenced the pay missile steps. I am already explaining this a little bit, but it is a very high profile, well known, numerous other but there are new sorry. There are numerous other critical missile programs currently in production or in development which Park is actively supporting. Unfortunately, many of these programs are too confidential or sensitive for us to identify at this time. Please understand that certain of these programs represent very significant revenue opportunities for Park over long periods of time. So last thing on war and peace. How about The US defense industry's new world order? We already talked about this a little bit. President Trump wants to increase The US defense defense budget to $1,500,000,000,000 with a t in order to build our dream military. So this is a two edged sword for the defenses industry. You know? The it is being what is it? Somebody giveth and taketh away. Here is the taketh away. But according to president Trump, the defendant industry needs to get us back together. So buybacks, dividends, no. Once you invest in defense programs, CEO even CEO pay limits, So, you know, there has been a real issue with the aerospace industry generally. Programs getting being not on time and not on budget. And I think that the department ward does not really like that very much. They are asking the defense industry to kind of get its act together. What do we think about the new world order? We think it is great. Parkton is great. We think it is wonderful. Slide 33, Okay. Let's talk about our new plan. Sorry it is going on so long. I am rushing as you probably can hear through this as quickly as I can. The park's new major new composite materials manufacturing plant. So now we are going to give you a little bit more information about this new plant. We are planning to build a major new composite material manufacturing plant. New plant is being designed to be fully functioning and integrated a fully functioning, sorry, and and integrated composite material manufacturing plan. It will include the following manufacturing line solution training, hot mill film, hot mill tape, confidential manufacturing lines, and support equipment, New plan will also include full production, lab facilities, office space storage, and freezer, and ancillary equipment necessary to support all plant manufacturing activities and operations. It is like a fully integrated plant with everything that is needed. New plant is being designed or produced parks, to produce and support parks complete composite materials product line, including film adhesives and lightning strike materials. Slide 34, the plate is not gonna is not being designed currently anyway to produce a composite parts, structures, assemblies. Okay? Plan plant size, it is getting pretty big, a 120,000 square feet. This could change, but that is our current guesstimate on the plant size. When a plant is complete and operational, get this, new plant will approximately double parts current composite materials manufacturing capacity. So that is, you know, see why the plant is that big. When will a new plant be completed? Well, we we have some internal discussion about that and even debate. But let's just say for now, the second half of calendar '27. And when will be operational? What do mean by operational? Not fully ramped up. That means we are producing and selling some product. You know, some product has been qualified. For production sale. Maybe second half of, let's say, calendar year '28, would be a target for when the plant will be operational. Estimated capital budget for new plant, approximately $50,000,000. What is the timing of the capital spend on the plant Again, this is planning in flux. At this point, fiscal year '27, that is the coming fiscal year, probably 60% of that money Fiscal '28, maybe 30% of the money. Fiscal year '29, maybe 10% of the money. That sort of money will be going out the door. How will we fund the capital spending for the new plan? Well, with our cash, with our cash flow, and to some extent from the offering that we just announced if that offering is successful. But is the new plant project dependent on the public offering discussed below? Absolutely not. We are doing this. There is no question about it. Nothing has to be decided. It is going to be done. We are just finishing the planning. It is not dependent on anything. It is something we are committed to doing for very good reasons for Park and for our investors. Okay. Let's go on to slide 35. Stolen a new plant, Where will the new plant be located? We have a finalist location in Midwest, but we are still waiting for approvals from local community. Economic development. These things, for us, go much more slowly than we like. Why are we building this new plant? Well, that is obviously the $64,000 question. Or maybe the $50,000,000 question. Are juggernauts plural? You know, both of our juggernauts, we talked about require it. Our long term business and sales outlooks require it. Significant additional composite materials manufacturing capacity is required. To support our juggernauts. And long term business and sales outlooks. And we are doing this to ensure we continue to have the manufacturing capacity needed for park to be parked So we are doing this to ensure park is able to to be the company of, yes, the can do company, the yes we can company, So we are not looking to become a mill. We are not going to abandon how we got here. Why we have the the great in my opinion, success we have. Why we have more opportunities than we could ever handle. So it would be really foolish for us to abandon how we got here become a mill company where, you know, we just run our factory like a mill, and then somebody want customer wants something. Okay. We could help you out maybe a year from next month. I am not exaggerating. That is really what happens in this industry. That is not for us. Let's go on to slide 36. What are our crawling cards? Flexibility, responsiveness, and urgency. So we are doing this to ensure Parker's able to continue to do those things which got us here. It would be very unfortunate mistake for us to abandon the things which got us here. A very bad mistake. So our new plan needs to be designed with being parked in mind. Meaning being flexible, being responsive, having urgency, saying, yes. We can. You need something. We are going to move everything around. We just we just talking yesterday, maybe Friday. About whatever large customers, they want to move so many things around. It was any other supplier, we would say, well, sorry. We do not ever say sorry. Sure. We will move everything around a lot. It requires us to juggle a lot. It requires production juggle a lot, but that is what we do for a living. Okay? And that is why we had the success that we had in my opinion. When our new manufacturing plant is complete and fully operational, Mobile Park's total composite materials manufacturing capacity be? Well, you know, it is a question that is not so easy to answer. It depends on how do you define manufacturing capacity. Park being parked manufacturing capacity, that means run the business the way we want to run it so we have that maximum flexibility responsiveness, urgency. If we run a factory like a mill, I just plant it, you know, for us six days a week, twenty four hours a day, we could do that. But then our flexibility is almost no. But parking park manufacturing capacity, maybe about $220,000,000. Parking park manufacturing capacity, but pushing it to some extent. Still being parked, but pushing it to some extent. About 260,000,000 these are preliminary estimate numbers. We have been asked by a number of investors Please give us some help here. Please give us some perspective on the manufacturing capacity. The maximum state of manufacturing capacity, this is what we do not want. Would be about 315 or $20,000,000. That is not what we want. Okay? So when you ask we have not asked what the manufacturing capacity is, we have to say, well, depends on what you mean by that. Let's go on to slide 37, and I just want to say these are numbers we are working on. We are doing a massive amount of work. You know, Mark and the guys on the expansion plan. So a lot of work has been done, but we are not quite finished with everything. And even after we are finished, things can move. You know, mix can change. Things like that, which will affect capacity and sales. Slide 37. Park's long term sales outlook for composite materials, including film adhesive materials and lightning strike protection materials, So we gotta say again, what does this mean? It is our number is approximately 200,000,000. 200,000,000? Okay? But how is this out? What computed. It is really under important to understand what this means because not a forecast, it is an outlook. And this is how this outlook was computed with line items that are known items. These are known sales and known programs and known customers. There is no other category. There is all line items of known opportunities, known customers, known programs. That is how it is computed. Well, that is what that outlook includes. What does it not include? So do you think that in the next three or four years, will will there be no other opportunities, like, six months from now or a year from now or tomorrow. We will get a call from an OEM about a program they want us to work on. My guess is it would probably be tomorrow because we are getting so many opportunities. You are not including any of that. Which we do not know. You know, what comes. So it is important you understand it is not a forecast. It is just an outlook. How we what the methodology that we use. What are the high and low risk of the outlook? So I think we feel pretty about the line items in the forecast, but it is possible that that will you know, that either we are on those programs or we will get in those programs Those programs will be ours. But it is possible those programs will not pan out to the level that we have been we are being told by our customers you know, maybe they will not be as strong, maybe it will take a longer to ramp up I do not know. It is possible. So that there is risk on the low side. What about the high side? The high side is all those things we just talked about, things we do not know yet. That are definitely going to come. They are not there is no way We we have not used we have not provided other category in our forecast or outlook rather. The way we computed it. Just things we know about. What is the target year for the outlook? Well, that is another controversial question internally. I think we are saying fiscal year '31, and I will tell you I would say the end of fiscal '31. You said fiscal thirty year '31 sounds like a long time from now. But it starts four years from now. That means for us to be able to be at that level, everything had to be ramped up. The plant would have to be fully built and the new plant and qualified. All the programs have to be qualified. And we would have, you know, hired all the people, all the staffing and we are fully ramped up. So to me, to do that in four years, that is a little aggressive. That is why I think what we should think about to be a little more conservative is the end of fiscal 03/01, is more like five years from now. Does not mean we want to be sales, but to be ramped up that low, probably, I would think to be more conservative, we might want to think five years from now, rather than four years from now. Thoughts about our ROI? For parks investment in the new plant, $50,000,000. We are not going to go through the what the bottom line impact is now, but, you know, you think about it. We have this year, what is $72,000,000 of sales We are talking about $200,000,000 of sales. $50,000,000 investment. So you could probably do the math a little bit on your own. You had some real smart investors. We are not going to go with that number now, but we think that their way would be extremely attractive that we would not if without any any investor would ever have a problem with Let's go on to slide 38. We new Park's newly announced public offering, just touch on this quickly. Today, sorry, it is going on so long. Today, we filed a form s three registration statement of prospective supplement with the SEC for a $50,000,000 at the market public offering of parts common stock. What is the purpose in this offering and financing? First of all, to replenish a portion of the $50,000,000 that we plan to invest in our new composite plant, composite materials plant, that is part of it. But very importantly, to ensure that Park has the necessary funds to be in a position to take advantage of and exploit key opportunities currently being presented to Park and new key opportunities as they arise in the future. The availability of funds necessary to exploit key opportunities has been a key strategic advantage to Park. So, you know, you are probably thinking, well, can you give me an example? Yeah. I can give you an example. We talked about GE Aerospace. You know, how many hundreds of millions of dollars of business was represented. Well, remember what happened. GE said to us it was GE at the time, not not as GE Yeah. We will give you the LTA for 2029. But Park, we are concerned to get your sole source qualified in these programs we want you to build a redundant factory. And then if you commit to doing that, we will give you the LTA. And we said, sure. We will do that. We did not say sure, but we gotta go see if we can get the money or go to banks and you know, that it would have been terrible. This GE, if you are smart, would think, well, I do not know if Park is going to get the money. Let's go talk to somebody else. That never happened. Because we said right there, on the spot, yep. We will do it. And we had the money to do it. It was about $20,000,000 at a time. I think we believe if we had to do that plan now, it would probably be twice as much between the inflation. We are quite sure it is in parks and our very best interest for park to be able to continue to exploit such opportunities as they arise in the future. Just a little interesting information. Do not know. Footnote. You know where our last public offering was? It was well, Martina found a tombstone in our office. It was 03/06/1996, thirty years ago. It was a $100,000,000 convertible note. Offering that was converted to all equity almost all equity. I think 96 of it was converted to equity. Were Needham, Robin Stevens, and Lehman. We would have until last two. Anyway, just a little interesting history. Sorry to go on for so long, everybody, but operator, we are happy to take any questions at this time to the extent there are any Operator? Thank you. Thank you. Shamali: 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. A confirmation tone will indicate your line is in the question queue. You may press star to to remove yourself from the queue. Participating in speaker equipment, it may be necessary to pick up your handset before pressing the star key. And again, if you have any questions, you may press star then the number 1 on your telephone keypad to join the queue and ask a question. And it looks like we have no questions at this time. Therefore, I will turn it before back over to Mr. Brian Shore for closing remarks. Brian Shore: Thank you, operator. Thank you, everybody, for listening. We apologize the presentation went on so long. There is a lot to cover. Please feel free to give us a call if you have any follow-up questions. Know, of the items, I think, we kinda skimmed over a little bit quickly, so feel free to give us call. We are happy to help you out with any follow-up questions. Have a good day, and once again, happy New Year. All the best to you and your family in 2026. Goodbye. Shamali: Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and welcome to the 2025 Fourth Quarter Earnings Conference Call hosted by BNY. [Operator Instructions] Please note that this conference call and webcast will be recorded and will consist of copyrighted material. You may not record or rebroadcast these materials without BNY's consent. I will now turn the call over to Marius Merz, BNY Head of Investor Relations. Please go ahead. Marius Merz: Thank you, operator. Good morning, everyone, and welcome to our fourth quarter earnings call. I'm here with Robin Vince, our CEO; and Dermot McDonogh, our CFO. As always, we will reference our quarterly update presentation, which can be found on the Investor Relations page of our website at bny.com. And I'll note that our remarks will contain forward-looking statements and non-GAAP measures. Actual results may differ materially from those projected in the forward-looking statements. Information about these statements and non-GAAP measures is available in the earnings press release, financial supplement and quarterly update presentation, all of which can be found on the Investor Relations page of our website. Forward-looking statements made on this call speak only as of today, January 13, 2026 and will not be updated. With that, I will turn it over to Robin. Robin Vince: Thanks, Marius. Good morning, everyone, and thank you for joining us. I'll begin with a strategic update, and then Dermot will take you through our financial performance in the fourth quarter, our outlook for 2026 and our increased targets for the medium term as we look ahead toward the next phase on our journey to unlock BNY's full potential over the long term. Starting on Page 3 of our quarterly update presentation. 2025 was another successful year for BNY. In short, we delivered record net income of $5.3 billion on record revenue of $20.1 billion and generated a return on tangible common equity of 26%. Total revenue grew by 8% year-over-year. In combination with expense growth of 3%, we drove 507 basis points of positive operating leverage on a reported basis and 411 basis points, excluding notable items, resulting in an improved pretax margin of 35%. Consistent execution delivered 4 consecutive quarters of positive operating leverage in 2025, bringing us to 8 consecutive quarters overall. Taken together, we grew earnings per share by 28% year-over-year to $7.40 and returned $5 billion of capital to our shareholders through common dividends and share repurchases. This strong financial performance was the output of our work to reimagine BNY and was enabled by tangible progress across strategic priorities over the past year, which we highlight in the 4 boxes on Slide 4. First, our commercial model is working. Operating as One BNY, we are starting to bring the full breadth of the company together to deliver more products and services to meet our clients' needs. This includes embedding sales practices and behaviors that enable our teams to deliver more and better for clients with greater consistency to drive deeper relationships with existing clients and open the door to new ones. We achieved record sales performance for the year, and we announced several noteworthy wins in the fourth quarter. Further deepening our relationship, WisdomTree selected BNY as their banking as a service provider for the WisdomTree Prime platform. This solution brings together banking, payments, custody and digital assets to support the growth of WisdomTree's new retail distribution model and its strategy on being a leading digital asset forward investment manager. [ Jupiter ], an active asset manager, selected BNY for a suite of capabilities from front to back from investment operations and data management all the way through to custody, streamlining their operating platform and positioning them for the future. And Japan's Government Pension Investment Fund selected BNY to deliver integrated data and analytics for private markets. This solution aims to help them manage complexity, enhance transparency and improve decision-making across their growing alternative investment portfolio. Second, we continued to make progress in unlocking the scale and growth potential of our platforms by transitioning approximately half of our people into the platform's operating model over the course of 2025, which brings us to more than 70% of our people working in the model today. This initiative has been a core component of rewiring BNY to make us more agile and intentional in how we deliver to clients. [indiscernible] performs part of a larger collection of initiatives that are at the heart of running our company in a fundamentally different way. Third, in 2025, we made significant advances in the adoption of AI, underscoring our industry leadership in this burgeoning space. Built upon very deliberate investments over the past several years, our enterprise AI platform, Eliza, is unlocking capacity for our people, allowing them to focus on higher value work for our clients. We recently announced a collaboration with Google Cloud to integrate Gemini Enterprise capabilities into our Eliza platform, enhancing our ability to support deep research, analysis and data-intensive workflows across the company, building on existing collaborations with OpenAI and others. These collaborations underscore our commitment to deploying AI responsibly and scale. We expect that over time, AI will allow us to remake many of our processes and systems in new and exciting ways. And that, together with embedding AI in our products and services, represents a significant opportunity for our company in the years ahead. Fourth, BNY has a rich 241-year history of innovation, from issuing the first loan to the U.S. government to becoming the first U.S. [ G-SIB ] to offer digital asset custody. Our focus on innovating new products and solutions is centered on building trusted market infrastructure for the long term and serving our clients in new and evolving ways including increasing delivery of new capabilities connecting the traditional and digital asset worlds. This past quarter, for example, we launched the Dreyfus Stablecoin Reserves Fund, a government money market fund designed to support stablecoin issuers and institutional participants to manage eligible reserve assets providing BNY's cash and liquidity solutions expertise to the growing digital payments ecosystem. Our recently announced tokenized AAA CLO strategy in partnership with [ Securitize ] brings high rated structured credit product onto the blockchain with BNY serving a sub-adviser and custodian of the underlying assets. And just last week, we announced that we have taken the first step in our strategy to tokenize deposits by enabling the on-chain mirrored representation of client deposit balances on our digital assets platform. As we reflect on the scope of our market-leading businesses, our central position as a provider of financial market infrastructure and the depth and breadth of our client relationships, traditional and digitally native. We believe that we are particularly well positioned to advance the future of financial markets. From the very beginning of our work 3 years ago, we have taken a long-term view toward unlocking BNY's full opportunity as a financial services platforms company with a commitment to disciplined execution and sustained value creation for our clients and shareholders over time. I'm going to touch briefly on some of the work that has brought us here described on Page 5 of our presentation. Two years ago, we communicated our strategic road map and a set of medium-term financial targets for what we viewed as the first foundation setting phase in a multiyear transformation of BNY. While there are elements of that work that will continue well into the future, we consider that this is the right moment to begin to turn the page towards our next phase. But before we get to that, I'll take the opportunity to reflect on our efforts, the impact that we've seen across our businesses and operations and how this has started to translate into improved financial performance. As we embarked on the journey, we recognized early on that we had to work across several fronts at the same time. Simplifying how we operate, improving execution and delivering for our clients and that how we did it as a team was essential to creating deep and enduring change. Thorough strategic and financial business reviews demonstrated to us the powerful combination of capabilities within BNY. We are the #1 custodian in the world and the #1 collateral manager, the leading provider of issuer services and the primary settlement agent for U.S. government securities. We operate a top-tier payments and liquidity franchise and offer our clients leading investments and wealth capabilities. Individually, these are market-leading businesses together they represent a set of highly adjacent financial services platforms operating at the center of global financial markets, difficult to replicate at scale and increasingly valuable to our clients. To organize the company around execution, we deliberately framed our work across 3 simple elements of strategy, which we continue to focus on. The first was clients. To be more for them, to deliver more of our existing products to our existing clients to add new clients, to add new products and to meet clients where they are with solutions tailored to their needs and responsive to market trends and opportunities. The second was on how we run our company. We knew we could do that better simplifying, improving financial discipline, breaking down barriers, challenging the status quo and reimagining our operating model as a platform company. The third was culture. Simple to say, hard to do, but magical when it works, a collective sense of ownership, teamwork and accountability, all coming together to bring the other 2 key strategic pillars to life. This spirit of ownership and accountability is at the heart of our delivery. So it was important to us to build credibility and momentum through consistent execution toward better business and operational performance, some examples of which you can see on Slide 6. What has been and continues to be the single most compelling growth opportunity for BNY is doing more business with our existing clients. In 2024, we launched our new commercial model designed to encourage our sales and service teams to raise their ambition equip them with new tools and to enable our people to deliver solutions from across BNY, leveraging the full breadth of our platforms. Over the last 2 years, the number of clients buying 3 or more of our services increased by more than 60%, and organic fee growth has climbed to 3%, reflecting good progress with even greater opportunity ahead. In combination with stronger organic growth, we took steady, deliberate actions to reduce sensitivity to interest rates, driving more resilient top line revenue growth in a range of macroeconomic environments. At the same time, our ongoing transition and increasing maturity in the platform's operating model is reducing friction and driving further productivity improvements. For example, investments in digitization and automation have meaningfully lowered the unit cost for processes like striking a NAV and settling a trade and our people are building innovative AI solutions that we expect over time will have a meaningful impact across the company. We're proud that in 2025 alone, we deployed over 130 digital employees, industry-leading multi-agentic AI capabilities. Our digital employees work alongside our people, supporting them with tasks like validating payment details and remediating code vulnerabilities, allowing teams to focus on higher value work and client outcomes. Taken together, these metrics give glimpses into the how of our execution, milestones and examples, not end points, but helpful indicators that our strategy is working and that there continues to be meaningful opportunity ahead. Turning to Slide 7. By centering the company on positive operating leverage as our North Star, we created a clear intuitive framework for our teams to execute on. The cumulative impact of our steady improvement year after year while capitalizing on a relatively supportive market backdrop has resulted in a meaningful improvement in BNY's financial performance over the last few years. More consistent revenue growth and deliberate expense management have resulted in positive operating leverage, margin expansion and improved profitability, together, driving double-digit annual earnings per share growth. Turning to Slide 8. When compared to BNY's financial performance over the prior decade, we can see the difference that consistent discipline, clear intent and sustained execution make over time. More resilient top line revenue growth has started to build and better control of our expense base has allowed us to continue to self-fund important investments in future growth. While we're encouraged by this progress, we are not satisfied. Our work is far from complete. We remain humble and intensely focused on the opportunity ahead. To that point, I'll wrap up on Slide 9 with where we are headed next. With the foundations largely in place and more of the people in their seats to help us execute. The next phase of our journey to unlock BNY's potential is about realizing scale and growth opportunities across our company. As we mature in our new commercial and platform models unlock capacity using AI and in so doing, serve our clients in new and better ways, enabling the global financial markets and infrastructure of the future. Taken together, our focus for 2026 and over the medium term represents an exciting shift: Built on the work done over the past 3 years to enable higher growth and deliver on the competitive advantages embedded in BNY as we remain steadfast in our commitment to create value for you, our investors. I want to thank our teams around the world for their dedication to our clients and their commitment to reimagining our company. We are entering 2026 with positive momentum and we are excited for the work ahead of us. With that, I'll turn it over to Dermot to take you through the financials for the quarter in greater detail before reviewing our outlook for 2026 and our next set of milestones. Dermot? Dermot McDonogh: Thank you, Robin, and good morning, everyone. I'm picking up on Page 12 of the presentation with our results for the fourth quarter. Total revenue of $5.2 billion was up 7% year-over-year. Fee revenue was up 5%. This included 8% growth in investment services fees primarily driven by net new business, higher market values and higher client activity. Investment Management and performance fees were flat as growth primarily resulting from higher market values was offset by the impact of the mix of AUM flows and the adjustment for certain rebates we discussed in prior quarters. Firm-wide AUC/A of $59.3 trillion increased by 14% year-over-year, reflecting client inflows, higher market values and the favorable impact of a weaker U.S. dollar. Assets under management of $2.2 trillion were up 7%, reflecting higher market values and the weaker dollar, partially offset by cumulative net outflows. Investment and other revenue was $135 million in the quarter, including $43 million of other investment losses and $15 million of net securities losses. Net interest income increased by 13% year-over-year, primarily reflecting the continued reinvestment of maturing investment securities at higher yields and balance sheet growth, partially offset by deposit margin compression. Expenses of $3.4 billion were flat year-over-year on a reported basis and up 4% excluding notable items. This reflects higher investments and revenue-related expenses, employee merit increases and the unfavorable impact of the weaker dollar, partially offset by efficiency savings. Provision for credit losses was a benefit of $26 million in the quarter, primarily driven by improvements in commercial real estate exposure and changes in the macroeconomic forecast. Pretax margin was 36% on a reported basis and 37% excluding notable items. And return on tangible common equity was 27%. Taken together, we reported earnings per share of $2.02, up 31% year-over-year. And excluding notable items, earnings per share were $2.08, up 21%. Robin touched on our results for the full year earlier, but turning to Page 13, I'd like to expand on some of the most important items. We grew total revenue by 8% year-over-year to a record $20.1 billion for the full year of 2025. Fee revenue was up 6%. We grew investment services fees by 8%, primarily driven by net new business, higher market values and client activity. Investment Management and performance fees were down 2%, reflecting the mix of AUM flows and lower performance fees, partially offset by higher market values and the weaker dollar. Net interest income was up 15%, primarily driven by the reinvestment of maturing investment securities at higher yields and balance sheet growth, partially offset by deposit margin compression. Expenses of $13.1 billion were up 3%, both on a reported and on an operating basis. Excluding the impact of notable items, the increase reflects higher investments, employee merit increases, higher revenue-related expenses and the unfavorable impact of the weaker dollar, partially offset by efficiency savings. Pretax margin was 35% on a reported basis and 36% excluding notable items. And return on tangible common equity was 26% for the year. As Robin noted earlier, we reported earnings per share of $7.40. Excluding notable items, earnings per share were $7.50, up 24% year-over-year. On to Capital and Liquidity on Page 14. Our Tier 1 leverage ratio for the quarter was 6%, down 9 basis points sequentially. Average assets increased by 3% on the back of deposit growth, and Tier 1 capital increased by $439 million, driven by capital generated through earnings and a net increase in accumulated other comprehensive income partially offset by capital returns through common stock repurchases and dividends. Our CET1 ratio at the end of the quarter was 11.9%, up 17 basis points sequentially. Over the course of the fourth quarter, we returned $1.4 billion of capital to our shareholders, representing a total payout ratio of 100%. Our consolidated liquidity coverage ratio as well as the consolidated net stable funding ratio remained unchanged at 112% and 130%, respectively. Next, net interest income and balance sheet trends on Page 15. We Net interest income of $1.3 billion was up 13% year-over-year and up 9% quarter-over-quarter. Like the year-over-year increase discussed earlier, the sequential increase was primarily driven by the continued reinvestment of maturing investment securities at higher yields and balance sheet growth, partially offset by deposit margin compression. Average deposit balances increased by 4% sequentially, reflecting 4% growth in interest-bearing and 1% growth in noninterest-bearing deposits. Average interest earning assets were up 3% quarter-over-quarter. Cash and reverse repo balances increased by 4%, loans increased by 5% and investment securities portfolio balances increased by 2%. Turning to our business segments, starting on Page 16. Security Services reported total revenue of $2.5 billion, up 7% year-over-year. Total investment services fees were up 11%. In Asset Servicing, investment services fees grew by 11%, primarily reflecting higher client activity and higher market values. Asset Servicing continues to show strong momentum as clients increasingly access the breadth of capabilities across our platforms to help them evolve their operating models. Sales wins over the course of the year showed broad-based growth across products and segments with particular strength in custody and with alternative asset managers, banks and broker-dealers, a testament to our targeted investments in the fastest-growing segments of the market. ETF AUC/A of $3.8 trillion ended the year up 34% year-over-year, reflecting growth from the more than 2,500 funds serviced on our platform, which was up 22% year-over-year. Alternatives AUC/A were up 10% year-over-year, including double-digit growth in private markets. We continue to invest in capabilities to support our clients' growth, including in retail alternatives with solutions spanning custody, fund services corporate trust, FX and hedging. Broadly speaking, approximately half of all asset servicing wins this past year represented multiline of business solutions reflecting the growing effectiveness of our new commercial model and client demand for consolidating with trusted partners. In Issuer Services, Investment Services fees were up 12% primarily driven by higher client activity in depository receipts. And in our Corporate Trust business, we're pleased with the momentum across our franchise and see significant multiline of business opportunities ahead especially with corporate and municipal clients. We maintained our #1 position in conventional debt servicing and in CLOs and munis where we hold #2 positions we increased our market shares by 4 and 3 percentage points year-over-year, respectively. In Security Services, overall, foreign exchange revenue was down 3% year-over-year reflecting lower spreads on the back of lower volatility, partially offset by higher client volumes. Net interest income for the segment was up 8% year-over-year. Segment expenses of $1.7 billion were flat year-over-year, reflecting higher investments and revenue-related expenses, employee merit increases and the unfavorable impact of the weaker dollar, offset by efficiency savings and lower litigation reserves. Security Services reported pretax income of $838 million, a 30% increase year-over-year and a pretax margin of 34%. It is worth highlighting that for the full year of 2025, Security Services reported a pretax margin of 33%. That was an improvement of 4 percentage points year-over-year and exceeded the medium-term target of equal to or greater than 30% that we established for this segment in December of 2021. Next, Markets and Wealth Services on Page 17. Markets and Wealth Services reported total revenue of $1.8 billion, up 8% year-over-year. Total Investment Services fees were up 4%. In Pershing, investment services fees were down 2%, reflecting client activity in the prior year quarter related to the de-conversion of lost business, partially offset by higher market values. Net new assets were $51 billion in the fourth quarter, representing healthy growth from both new and existing clients. Over the course of 2025, we earned numerous wins from new $1 billion-plus wealth firms and the business accomplished several multiyear contract renewals with key clients. Our commitment to serving multibillion-dollar growth-minded wealth firms across a full suite of custody, clearing, lending, investment products and wealth services is met with interest from existing and new clients and we remain focused on capitalizing on the important opportunity to enable growth for breakaway advisers as their platform of choice. For example, this past quarter, 71 West Capital Partners and West [indiscernible] Wealth Partners selected BNY Pershing to provide custody and clearing for their new independent full-service RIA firms. In Clearance and Collateral Management, Investment Services fees increased by 15%, reflecting broad-based growth in collateral balances and clearance volumes. Average collateral balances of $7.5 trillion increased 15% year-over-year, and average settlements exceeded 1 million per day in the fourth quarter, reflecting higher market activity and new clients on our platform. Against a supportive backdrop from continued issuance and demand for U.S. treasuries, we're focused on innovating solutions that help our clients optimize capital meet evolving regulatory requirements, scale, operational efficiency and access market infrastructure and liquidity. In our Payments & Trade business previously called Treasury Services, Investment Services fees were up 3%, primarily reflecting net new business. Over the course of the year, this business has shown strong performance on the back of broad-based growth across products and regions. Solid growth in sales wins over the course of the year, enabled by our strategic investments in capabilities and talent, give us good momentum into 2026. Net interest income for the segment overall was up 20% year-over-year. Segment expense of $930 million were up 9% year-over-year reflecting higher investments and revenue-related expenses, employee merit increases and higher severance expense, partially offset by efficiency savings. Taken together, our Market and Wealth Services segment reported pretax income of $882 million, up 9% year-over-year and achieved a pretax margin of 49%. Turning to Investment and Wealth Management on Page 18. Investment and Wealth Management reported total revenue of $854 million, down 2% year-over-year. Investment Management fees were up 1% driven by higher market values and the favorable impact of the weaker dollar, partially offset by the impact of the mix of AUM flows and the adjustment for certain rebates, which I mentioned before. Segment expenses of $703 million were flat year-over-year as the impact of higher investments and the weaker dollar was offset by efficiency savings. Investment and Wealth Management reported pretax income of $148 million, down 14% year-over-year and a pretax margin of 17%. As I mentioned earlier, assets under management of $2.2 trillion increased by 7% year-over-year. In the fourth quarter, we saw net outflows of $3 billion including $23 billion of net outflows from long-term strategies and $20 billion of net inflows into cash. Wealth Management client assets of $350 billion increased by 7% year-over-year, reflecting higher market values. Over the past year, we've worked hard to bring our investment in wealth management business closer to our other BNY platforms, streamlined operations and build towards stronger top line growth, including by making several key strategic hires. We expect that 2026 will be the year in which this work will start to translate into improved financial performance. I'll close with our financial outlook. Page 21 shows the current expectations for 2026. Notwithstanding a very dynamic operating environment, positive operating leverage continues to be our North Star and so we have set ourselves up for another year of more than 100 basis points of positive operating leverage in 2026. This reflects our current expectation for total revenue excluding notable items, to grow by approximately 5% year-over-year in 2026 market-dependent. And accordingly, a plan for approximately 3% to 4% growth in expenses, excluding notable items. Specific to the first quarter, I would like to remind you that staff expenses are typically elevated due to long-term incentive compensation expense for retirement-eligible employees. And on taxes, I'd like to note that over the course of 2026, we expect a quarterly tax rate of approximately 23%, with the exception of the first quarter, in which we currently expect to see a tax benefit from the annual vesting of stock awards. Finally, turning to Page 22 for our outlook for the medium term. 2 years ago, we communicated our first set of medium-term financial targets, which were to improve BNY's pretax margin to equal to or greater than 33% and our return on tangible common equity to equal to or greater than 23% while maintaining a strong balance sheet. Today, we are raising the bar. We are increasing our pretax margin target by 500 basis points to 38% and we are increasing our return on tangible common equity target also by 500 basis points to 28%. These new medium-term financial targets represent the next milestones on our path to unlocking BNY's full potential over the long term. What remains unchanged is our commitment to prudent balance sheet management and with it, our philosophy for capital deployment and distributions. Our Tier 1 leverage ratio management target remains unchanged at 5.5% to 6%, and we will continue to manage ourselves conservatively to the upper end of that range for the foreseeable future. Robin talked about our strategic priorities for this next phase on our multiyear transformation of BNY earlier. These new medium-term financial targets are a reflection of our confidence in the solid foundation we've built over the past few years and they demonstrate our determination to continue driving positive operating leverage as we realize greater scale and growth opportunities across our platforms. And with that, operator, can you please open the line for Q&A. Operator: [Operator Instructions] We'll take our first question from Ebrahim Poonawala with Bank of America. Ebrahim Poonawala: I guess maybe first question for you, Dermot, on the guidance, especially when we look at the revenue growth, just annualizing our fourth quarter NII gets you to about 9% growth on the NII side. So if you don't mind unpacking that a little bit around what are the assumptions underpinning that revenue growth outlook and on fees as we think about '26? Dermot McDonogh: Okay. Ebrahim, hope you're well. So let me start with saying this year, we're doing it slightly differently. We finished the year with $20.1 billion of revenue, and the performance over the last 3 years has given us confidence to guide top line growth. And as I said in my prepared remarks, the guides that we're giving to you for 2026 is up 5%, plus or minus year-on-year on the top line revenue. Now underneath that, you have both fees and net interest income. And I've said previously that Q4 is a good jumping off point but December was a particularly strong month for us in NII. So the way I would think -- the way you should think about NII for us this year is a little bit ahead of 5%, fees may be a little bit lower than 5%. So all in top line growth, up 5%. Ebrahim Poonawala: Understood. That's helpful. And I guess maybe one bigger picture question, just around as we think about the strategic targets and maybe, Robin, your thoughts, I guess the one missing piece here is how would you want the seat to think about -- I guess, the medium-term earnings growth potential for BNY. And within that construct, for whatever reason, if the revenue growth environment worsens, your level of confidence in defending the margins and the ROTCE targets that you've upgraded today? Robin Vince: Sure. So look, I'll take it, it's kind of got 2 parts. I'll take it both parts of that. But first of all, on the growth targets. Look, we've said all along, the positive operating leverages are North Star. And we've also said that there will be different components to achieving that in any year. And I think it is important to note that, and that's one of the reasons why as Dermot just said, we sort of moved to the total revenue guide because we recognize it's sort of a compositional question. But you should be able to hear from us, certainly, in our prepared remarks, is a bit of an increased conviction inside the company about our ability to win and grow. And we've certainly been setting internal aggressive sales and revenue targets to be able to do that. But to your question, we're certainly humble about the fact that we've got to be careful around any particular assumptions on market environment. And this is where I come back to the fact that we're all risk managers at heart. We're sort of projecting out a lot of different potential scenarios. And we take very seriously the fact that we've got to have levers to the extent that the markets might end up disappointing. And so we created agility in our expense base. And that's been part of our work over the course of the past 3 years. The platform's operating model work, the work that we originally did around some of the efficiency savings, making choices. And the fact that we've now got the rhythm of saying, "hey, we could actually make different choices on business development expenses, compensation if needed, the investment book of work." And so this agility is extremely important. But I'll just also recap with a reminder of the fact that we've also deliberately positioned the platforms inside the company and the whole company to trying to reduce the macro sensitivity to the world. And so you've seen that in NII. We actually specifically called it out in the presentation. But if you look at the different cylinders of the revenue engine of BNY equity market values, fixed income market values, equity market transaction volumes, fixed income market volumes, government issuance, private sector issuance, capital markets activity, GDP growth, payments, software, services, execution and clearing, generally, fixed income and equities. That is all very deliberately positioning ourselves to be able to be more resilient. But then, of course, to your question, to the extent that things happen, we can still react to them. That's how I think about it together. Operator: We'll take our next question from Michael Mayo with Wells Fargo Securities. Michael Mayo: As part of your new hire targets, how much does your thought about tech and AI play into that and specifically, as it relates to AI, you certainly got our attention. You have over 100 digital employees. How many of those AI digital employees do you expect to have over 3 to 5 years? And what's the savings from them? And again, how does that play into your new hire targets? Robin Vince: Yes. Thanks, Mike. Look, AI, we think, is super important. We think it's just going to be able to be a catalyst for transformational change. We think that's true for the world. One of the most important evolutions in a technology, frankly, in hundreds of years is the way that we think about it. And so given that, it's very hard to project very clearly exactly where we'll be 1, 2, 3, 4, 5 years from now. And so there's always the risk that we haven't properly and fully incorporated it into our medium-term targets because while we thought about it, it's hard to look into the future that clearly. But the way that we think about AI and maybe this will be helpful, therefore, is we think that the technology has already gotten to a level where it can have a very significant impact, frankly, on all of us individually and companies and certainly here at BNY. And if that follows then we think it follows that adoption and integration risk becoming the limiting factors. So what we focused on is the real cultural side of it. Making AI for everyone, everywhere and for everything at BNY is our mantra. We launched our AI hub in 2023. That was just after the ChatGPT moment. We now have an enterprise AI platform, Eliza, that's general intelligence model-agnostic, and it supports this multi-agent functionality that underpins the digital employees that you referenced. And then we've put in place the resources to support that to really enable the scaling of it. That's all of the GPU compute. We've got our own NVIDIA hardware and tech, but we've also got the collaborations with Google that I mentioned in my prepared remarks and OpenAI and others. And then the culture point again, and you'll see this, it sort of resonates through the whole set of transformation and rewiring concepts that we're talking about for the company. It's as true for AI because if AI is this great capability, it's a superpower, it can, therefore, be a capacity multiplier for our people and so that's what is causing our people to be able to pull AI towards them, hence, the digital employees working side by side with our people. Now it is early days. We will continue to give you mark-to-market in terms of how we're making progress on this. But we are short-term enthusiastic, medium-term excited and long term, believing that it will have a significant positive impact. Michael Mayo: That was helpful. So I get the enterprise with Eliza scaling culture, you're excited about it, but could you put a little bit more meat on the bones if you could, like you might have 134 digital employees today and does that equate to in savings? And where do you think that number goes to? Or that's a little bit more detail, if you could? Dermot McDonogh: Mike, it's Dermot here. If you review the materials on Page 6 of our financial presentation, you'll see over the last couple of years that our headcount has trended down a little bit, but that's not really anything to do with [ AIES ]. We talk about internally, AI is unlocking capacity we don't think about it as in the narrow definition of efficiency. It's all about growing with clients, increasing revenues and optimizing the potential for our employees. So you have to think that over time, AI as a superpower as Robin just said, is going to increase revenues, create capacity and will allow us to do more with existing resources. And over the last couple of years, we've been doing this right since the get-go in terms of enterprise-wide strategy. We've been quite constrained in our spending, and we've been very disciplined, we continue to spend more on cyber resiliency than we do on AI. So the return for our money is very, very high from probably getting from the enterprise today. And so we only see upside from here. Operator: We'll move to our next question from Ken Houston with Autonomous Research. Unknown Analyst: I wonder if you can detail a little bit the pretax margin improvement to 5 points. What -- can you go through kind of each of the businesses and talk as to how your individual business line pretax margin thoughts are evolving within that too? Like where do we get the most juice? Dermot McDonogh: Okay. Thanks for the question. So if you kind of go back to 2023, we delivered an actual performance pretax margin of 30% and ROTCE of 22%. And back then, when we initially established the medium-term targets, we went for 33% and 23%. And now we're going with new medium-term targets today of 38% and 28%. So you see real progression there over the last 3 years. And also today, as I mentioned on the first question from Ebrahim, you see us guiding for the first time, top line revenue growth. Previously, we guided by business. You will have seen us guide 4 years ago on security services and we've kind of surpassed that guide. And so that really speaks to the power of the One BNY transformation that we've been doing over the last 3 years. We have 3 segments: Security Services; we see upside in Corporate Trust; we see upside in Depository Receipts. We feel that asset servicing over the last 3 years has really transformed in terms of growing revenues, taking advantage of efficiencies and driving pretax margin. So that kind of disciplined focus on expenses is allowing us to better price for business to win in Asset Servicing. Market and Wealth Services is the most akin to platforms at scale that we have at the moment as the rest of the firm matures in the platform operating model. The pretax margin there is roughly, give or take, around 50%. We would expect to grow that pie at that margin. And so the upside from there on that segment was probably a little bit muted. But in Investment and Wealth Management, where we've guided 25% and we finished last year at roughly 17%. That's where we see the most opportunity in '26 and beyond as we kind of begin to see the green shoots of recovery in that segment come back. So One BNY overall delivering for clients, as Robin said in his prepared remarks, 64% increase in clients buying from 3 or more lines of business in the last 3 years. 10% of new logos coming to the firm last year as a percentage of sales. So the clients are noticing what we're doing and want to do more with us. Robin Vince: And remember, there's a compositional thing here as well, Ken, because if you think about the combination of corporate trust, depository receipts, payments, trade CCM and Pershing, which are kind of the platform [ e-businesses ]that Dermot was talking about, that now represents about 2/3s of the PTI of the company, 3 years ago, that was just 55%. So there's a bit of an averaging here given the fact that that's -- those are the -- that's the segment, MWS and the businesses that are actually growing the fastest inside the company. So actually as a percentage of the whole, they're growing. And that's a factor here, too. Unknown Analyst: Yes. Got it. And just a follow-up, Dermot, on your point about how December was a strong month for NII. You guys have done a very good job kind of consistently being conservative about your NII outlook. What would you say about the fourth quarter? Was it deposit balances? Was it pricing? Like what are the elements that may not run rate forward relative to your exit? Dermot McDonogh: So Q4 really was balances held in quite nicely, and we had -- we always say that we don't lead with deposits and really NII is an output as a result of franchise activity. And in Q4, we had very strong activity in our asset servicing business, which caused balances to outperform in the last few weeks of December, and that caused the outperformance. Unknown Analyst: Okay. I would just think that just as you're continuing to push, as you mentioned just before, like why wouldn't that just be a better organic hold on just activity and overall balances? Dermot McDonogh: So if you kind of take balances overall, for 2026, we expect balances throughout the course to be roughly flat, Q4 is normally our strongest quarter on balances. Q3 is usually the seasonally slowest and you would expect over the next couple of quarters to moderate down slightly. When we give you the -- when we think about the 5% plus, it's really around the asset side of the balance sheet where we have securities kind of rolling off, and we're reinvesting as a kind of [ 100 to 150 ] basis point pickup. So we kind of -- we've narrowed the range of the cone of outcomes as it relates to interest rate volatility, balances we expect remain roughly in line or flat, and the pickup will come from assets rolling off into higher-yielding securities. Operator: We'll take our next question from Steven Chubak with Wolfe Research. Steven Chubak: So Robin, I wanted to start with a question on your newly launched tokenized deposit capabilities and I was really hoping you could speak to institutional demand for the offering what has been some of the early feedback? And as the effort scales over time, how might your monetization approach differ versus some more traditional deposit gathering activities. Robin Vince: Sure. So look, I just sort of step back from the whole thing because this really is part of the overall digital asset opportunity. We see global financial markets as transforming, moving towards more of an always-on operating model. And we're in the business of moving, storing and managing money. And so we think we're particularly well positioned to connect the traditional and the digital rails to really be able to enable clients. And so our road map has really been, right from the beginning, focus on the innovation, be able to bring the capabilities online with that first with digital asset custody, stablecoin enablement. You just mentioned the tokenized deposits. And so that allows us to be able to serve both the new digital native clients who, by the way, want the new digital services, but they also want some of the traditional services from us. So we're enabling both with them, and it also allows us with our existing clients to be able to help them to be able to move into this world. So for instance, as a client might want to open up a new share class in parallel to their traditional share classes, maybe they want to open up a tokenized share class, we can do that as well. So it really is these 2 things working in concert that we think unlocks new possibilities. And we see the value of the improved efficiency, reducing friction that is real value here. And so then when you click in, stablecoins and tokenized deposits are just to become 2 examples of all of that, stablecoins providing the on-chain settlement currency, which is very necessary and it's frankly because it's their stable value, probably better some of the other alternatives. And there, of course, there are choices there in the stablecoins. And then tokenized deposits really improving the internal utilization of cash. And so for a client making a deposit with us, we can actually improve the usability of that deposit, it becomes sort of programmable, if you will. And it allows that money to be able to work harder and faster for them to be able to facilitate other activities and ultimately might, in fact, create the opportunity for clients to be able to do more things with us anchored around some of those types of activities. Steven Chubak: Robin. And for my follow-up, maybe for Dermot, just on the clearance and collateral management business. You've delivered 4 consecutive years of double-digit fee growth in that area, exited this year growing 15%. Just given expectations for a meaningful uptick in treasury issuance, how does that inform the outlook for the business? Is this double-digit growth rate sustainable? And what are some of the factors that could potentially derail some of the recent momentum? Robin Vince: Great question. So the way I would think about this is, as you rightly pointed out, the growth rate over the last couple of years has been quite nice to see. And so we would say the growth rate from here, probably a little bit more modest compared to previous years. We have the treasury clearing mandate coming in, which we expect to kind of influence some of the things that go on there. So in the U.S., I would say, more treasury issuance a little bit more stable than we've seen in the prior couple of years because we've kind of volumes, et cetera, et cetera, are beginning to moderate and where we see some of the growth opportunities outside the U.S., and we've said that on prior calls, where we're continuing to invest in new products and services around the world. So we expect to continue to grow internationally and moderate in the U.S. Operator: We'll take our next question from Alexander Blostein with Goldman Sachs. Alexander Blostein: I was hoping to jot a little bit and talk about the fee revenue outlook as a whole. You guys updated the organic revenue growth for 2025, which looks like came in at 3%. Some businesses are doing better, some are doing a little worse. And the ones where you're seeing strength, particularly things like Security Services, it sounds like that momentum is continuing and then in things that are slower when I think about like Pershing or maybe your asset management, there are some idiosyncratic things that you pointed to that should improve. So as you think about organic fee growth into '26 and beyond, any way to frame what that could look like? Dermot McDonogh: So thanks for the question, Alex. I really would look at and study Page 6 of our presentation. There are 2 graphs that I particularly like on that page. One is the deeper client relationships where you can see that over the last 3 years, we've grown clients who are buying for more than -- 3 or more lines of business has increased by 64% and then when you pivot over to the middle page, you can see that 2022 flat organic, '23 flat organic 24%, 2% and 2025, 3%, then that gives us the confidence to be able to guide 5% to the top line of $20.1 billion. And as I said in an answer to an earlier question, 10% of our sales last year was with new logos. And when you listen to Robin and his answer to the previous question on digital assets, more clients are coming to us because they want thought leadership. And as a consequence of leadership in new spaces, frontier products, we're doing stuff in traditional services. So the short answer to your question is it's the portfolio effect of delivering One BNY to a broad range of clients. Robin said 3 years ago, we have a client list that's the envy of The Street. We pretty much service most of the S&P 500. And so clients are seeing the change that's happening at the company, and they want to do more with us. So I would say no one business is doing better than the other. Everything has upside, everything is opportunity. As it relates to Pershing specifically, I'm pleased to say that the last couple of years, I would have said on most calls, [ were ] deconversion due to M&A activity, that's largely behind us, which reinforces why we feel confident that we continue to grow now at mid-single digits for net new assets. So we feel good about Pershing and the opportunity that's in front of us there. And also, as I said in the answer to a previous question, we feel we've turned the corner in IWM and '26 is the year that we're going to begin to see the transformation as we brought that business closer together with BNY. Robin Vince: And Alex, I'll just add one thing, which is -- and I understand because we've talked about this a bunch over the course of the past couple of years in terms of, okay, where is the growth going to come from? How are you really thinking about it? We talked before about the alpha and beta that we see in the overall business model. And so I just want to remind you of the beta point. Dermot touched on it related to digital assets. But just remember, there are quite a few megatrends that that we think can be quite interesting tailwinds for the company. And so the question is, have we positioned the company in the right way and all of our business platforms to really be able to serve clients as it relates to those various different trends. So just very briefly to tick through them, capital markets, the growth in capital markets issuance, trading, movement of assets. Think about it, corporate trust, our payments and trade business depository receipts, they line up very well with that particular trend, alternatives and our ability to support clients -- alternative clients end-to-end, private market assets, again, Corporate Trust, Asset Servicing, very much playing in that space, wealth very important segment, Pershing, wealth investments are all significant players in participating in the growth of that megatrend. Digital assets, which we talked a bunch about already. And that, again, many of our businesses aligned to enabling that. The growth of fixed income, which Dermot touched on, that's relevant, not only in the obvious ways, but also in the financing private markets, data centers, U.S. treasury borrowing. And then the big one, outsourcing, clients wanting to focus on what they're really good at and asking us to step in because of the breadth of what we can do to do some of the one-stop shopping being a trusted provider and really giving us that opportunity to serve them more comprehensively. So when you think about that backdrop we have not only the alpha of all of the individual work that we're doing internally, but we're also positioning to be able to take advantage of that. We think the combination of the two things is pretty interesting. Alexander Blostein: Yes. No, I agree that. And definitely like the direction where things going on that Chart 6 -- or Slide 6. For my follow-up, guys, real quick on the buyback. I don't think I heard you guys talk about the capital return plans for 2026 specifically? And then just broadly, when you think about the growth algorithm of the firm, your medium-term targets. Obviously, you gave us margins and the return of capital. But as you think about the share repurchases and the total return of capital, how does that play out over the next couple of years? Dermot McDonogh: So big picture, Alex, the capital -- our capital philosophy remains unchanged as you both know, Robin and myself, we like to run to the upper end of our Tier 1 leverage ratio, lot of uncertainty in the markets the last couple of years. The outlook is going to be a little bit uncertain. So we like to kind of be in that kind of 6% ZIP code of Tier 1 leverage ratio. And when you step back from what is BNY, it's a capital-light balance sheet with a very clean balance sheet, very liquid balance sheet capital generator. And over time, we've consistently returned earnings to our shareholders. And so we expect that to continue and when you kind of solve for the model of what we've guided for 2026, it's going to be consistent. So the buyback number as a percentage is really an output to all the things that we've talked about earlier. So it's going to be in that kind of [ 95, 105 ] range. And so don't really feel that it's necessary to guide on the buyback anymore given the overall algorithm and the model that we have for the future. Operator: Our next question comes from Brennan Hawken with BMO Capital Markets. Brennan Hawken: I actually have a question on organic growth as well. And thanks for all the color you've given. So you generated 3% organic growth last year. Your assumptions in your outlook are that organic growth would accelerate, markets are flat, but yet the fee revenue outlook is sub-5%. So this is kind of 2 possible outputs, conservative outlook? Or was there some over-earning or onetime items that might have elevated the baseline that you're growing off of when we think about 2025 into 2026. Dermot McDonogh: So look, organic growth in '26 versus '25. I think if you look -- go back to Page 6 and you see the impact that the commercial model is having, right, on the 2 graphs of organic fee growth and deepening client relationships. The story is quite compelling. And so we continue to hire new talent. The commercial model is not even 2 years old. So we continue to bring in new talent around the world and we continue to raise the ambition of what we want to do with clients across a wide range of services. So I would expect higher organic growth this year, which reflects the flywheel of the new commercial model and also new product development and the culture that we've kind of changing over the last couple of years at the firm. We haven't really mentioned this, but we have hired a new Chief Product and Innovation Officer who's been with us a little bit over a year, and we would expect a similar impact on the product side of the house that we've had on the commercial side of the house. So we feel quite good about the outlook for organic growth to 2026. Brennan Hawken: No, no. I totally appreciate that. My question is if the organic growth is going to accelerate, markets are flat. How do we end up with sub-5% fee revenue growth? And correspondingly, if you've got organic growth -- I might as well also just throw my follow-up now. Why would balances be flat? Don't balances tend to move with organic growth as well. So shouldn't that move with organic growth? Or was there something in the baseline that might cause that -- those 2 metrics to diverge? Robin Vince: You framed the question at the beginning as we are we over-earning. We don't think we're over-earning. We think we are being thoughtful in the way that we're positioning the outlook for 2026. We see, of course, variability on each of the inputs to the total revenue actually overall line. But we recognize that it could come a little bit more or less with NII. It could come a little bit more or less with the organic fee growth. Of course, no one quite knows what going to happen with markets, which is why we're sort of making what we think is a reasonable baseline assumption there. So you're doing the math and we're kind of agreeing with you. We're not quite exactly sure how the composition is going to come, but we feel pretty good about the guide. Brennan Hawken: Excellent. Okay. Well, I look forward to seeing that organic growth continue to grind higher. So it's a great outcome. Operator: Our next question comes from Betsy Graseck with Morgan Stanley. Betsy Graseck: All set. All my questions have been asked and answered. Thanks so much for the time today. Operator: We'll take our next question from Glenn Schorr with Evercore. Glenn Schorr: Thanks. I'll just do one small one. We're getting long in the tooth here. So I heard your comments about the deconsolidation in Pershing running its course, and I agree. I just -- taking a step back, there's been a ton of consolidation in the space, except there's also a lot of PE ownership. There's a lot of more consolidation to come. And so I'm curious if you've looked underneath the covers to see your book of business and how high up in the table, it is, meaning do you service a lot of the consolidators or the consolidates in the future because there's going to be more. And then I worry a little bit about -- not that I agree with it, but in the past, sometimes when they get big enough, they think they can in-source and do it themselves. I'm just curious if you could talk a little bit about any part of that. Dermot McDonogh: Okay. Thanks for the question, Glenn. I see us playing a very significant role in what is a very big market. We are a $3 trillion player in this space. And we believe we have the products, we have the talent, and we have a right to play in this space. And we've seen that over the last 12 months, where we -- and I've said it in our prepared remarks, we've had contract renewals with big players. We've had a couple of breakaway clients in the fourth quarter that we've onboarded, which I said in my script. And so we feel like we're going to do as well as anybody else in this space, and we have the tools and the solutions and clients are happy with Wove. They like Wove. We've invested -- we have more than 50 clients on that platform now. We continue to grow revenue, and we continue to bring in talent to be able to drive the business forward. And so we kind of think maybe for the next couple of quarters, you won't see necessarily the M&A that's been seen in the last few quarters as people are digesting those transactions. And so there has to be a kind of a a pause for digesting and our pipeline is robust and healthy. Operator: We'll move to our next question from David Smith with Truist Securities. David Smith: Your new medium -- your new medium-term targets aren't too far ahead of the adjusted performance of the past quarter. Can you just go into some more details about why you feel like these are sufficiently ambitious given the opportunity set in front of BNY over the next 3 to 5 years? You pretty much hit your targets that you set in January 2024, for your full year 2024 adjusted results. So now I hear you about conservatism and the importance for unity across a range of market backdrops. But what -- can you share to show us why the bar has been set high enough for the next few years? Dermot McDonogh: Okay. So I was expecting this question. So as you -- who gets to ask it. The way I would answer it, if you go to Page 22 of our highlights presentation. When we were at [ finish '23 ], pretax margin was at 30% and we went with medium-term targets of 33% and 22% on ROTCE, 23% was the medium-term target. I think you appreciated that ambition and liked the targets, and it was doing it for the first time and said, okay, BNY is kind of raising the bar in itself. So now we closed the year quite strong and we're going with 38% and 28% for 3 to 5 years out. So again, we're going to stay -- we're going to do that over time through the cycle. And so a lot of things can go in a different direction. It's going to be nonlinear and we're raising the bar. Every day, we're trying to outperform that, but we're setting -- maybe think of that as a floor to our ambition and we'd look to outperform it. So we feel like it is stretchy for the firm given where it is in its transformation, and we're always going to look to outperform those targets. David Smith: Just as a follow-up, it's great to see the improvement in client relationship depth with clients who work with 3-plus businesses up 64% versus 2 years ago. Can you give us any sense of the number in absolute figures? Is it a single-digit percent of use 3 or more businesses at BNY right now? Is it the majority? Is it somewhere in between? Where do you want us to get to over the medium term? Dermot McDonogh: So one of the things that I haven't said is last year, we had 2 individual record sales quarters. So I would say it's all across the firm. And we've had 3 consecutive years of year-on-year growth in core fee sales. And so when you look about that in the context of a commercial model that's not even 2 years old, then you have to feel optimistic about the future. 60% of new clients buying from 3 or more lines of business and 10% of sales in 2025 were clients that are new to BNY. And that is some of the points that Robin made about the new products where clients are coming to us for thought leadership. And while they're with us and talking to us, they're doing traditional services. And we've seen an increase -- a 20% increase in annual sales productivity. So I think the hustle and energy within our commercial organization is possible and clients really want to talk to us about doing more with us. And also, the last point I'd make on this is -- over the last 3 years, we've roughly spent $0.5 billion each year investing in the firm and providing improved client service, improve solutions, improved product. And you can see that particularly showing up if I was to pick one business or one segment. You see it showing up in security services, which is really where we've really outperformed on the margin. And so we see a real flywheel of momentum there and we expect that to continue on the forward. Operator: Our next question comes from Gerard Cassidy with RBC. Gerard Cassidy: Robin, can you give us bigger picture, you guys have obviously put up very strong organic growth numbers, and that's the focus. But when you think about opportunities to grow through acquisitions or inorganic growth, is there any areas that have an interest to you? I know you've done a small deal a couple of years ago. And all the focus, again, has been on organic, which has been fabulous. But what about inorganic or acquisitions? How do you think about that? Robin Vince: Sure, Gerard. So look, let me just start with just bringing you back to our remarks because I do think this is a very important context for M&A because there are a lot of different reasons why folks can do M&A and one of them is obviously when they absolutely need to go do something because they've run out of runway themselves in some respect. And I think our headline is that our organic transformation is working and it started to show tangible results, and we think we've got strong momentum and the runway to create more value here for clients, and therefore, for shareholders over the near, medium and long term. We're certainly open-minded about inorganic opportunities if they can accelerate, derisk or enhance our value proposition. But we do feel -- so we have a lot of optionality here because we've got the momentum from what we're already doing. We feel good about that organic path. And so we don't have any pressure to do M&A. And that's very important because we think that when you look out and see the reasons why various different folks do M&A is not always for the best reasons. So that optionality, we think, is a very a very real thing. Now in terms of the philosophy, there's no change to it. So M&A, if done well, can be a powerful tool in the toolkit. We're certainly open to things. We look -- Dermot said this before, ever since last summer when there were all these rumors in the market, we've had a lot of bankers calling us with inorganic opportunities. So we see the flow and we're in touch with it, which is good. But for us, it's going to be about good discipline, alignment with strategic priorities, strong cultural fit, attractive financial returns and the bar is definitely high. It would have to make a lot of sense because as I said, we don't feel like we need to do it, but that's sort of collectively how we think about it. Gerard Cassidy: Very good. And just to tie into that, in the markets you operate what are the markets that are the most robust? Is it domestic U.S.? Or is it Europe? Asia? Because obviously, you're global, you've got a good feel for that. Where are you guys seeing the best growth and the best opportunities for growth? Robin Vince: It's interesting. It's going to sound like I'm not going to give you a satisfactory answer to the question because it really is all of the above. The U.S. is the biggest market that we operate in. If you want the split, it's approximately 40% outside of the U.S. So we feel like we've got a good global balance, but the U.S. obviously has got a lot of opportunity for us and a lot of our platform have seen the growth. But actually, last year, the fastest growing in percentage terms region was actually Asia. So clearly, there's opportunity there as well. And I would say historically in Europe, we might have been a little bit under-penetrated so that there's real opportunity there as well. So I wouldn't really break the opportunity down on geographic lines. And as Dermot said, we don't really break it down on business lines either because we see opportunity and pathway in each one of the businesses, albeit for very different reasons, and that really ties back to this point about the different things going on in the market, these mega trends, whether it's capital markets, private markets, et cetera, that I talked about before. So this is a critical part of how we're thinking about the company. We are deeply invested in making the company work more effectively, the agility, the platform's operating model in terms of how we run the place. We've deeply invested in the commercial model so that we can actually get more and more out of the businesses that we have, this great breadth of businesses to deliver to clients, including in more combinations and more solutions, which is exciting. Dermot mentioned product and innovation, that's exciting because that's about new products in the same way as he mentioned, new logos earlier on. And so all of those things come together for us think, to be able to drive opportunity, which is one of the reasons why when we sit and look at what we have, going back to the beginning of the answer to your question on M&A, we feel like we've just got a lot of opportunity with what we've got to make more of it. Gerard Cassidy: Very good. And then Dermot, a quick question on Slide 6, as you referred to one of your favorite graphs, the deeper client relationship graph. I don't think you mentioned this, but if you did that, I apologize. What percentage of the customers are now taking more than 3 products or 3 businesses? Or are you is there still enormous room for this to continue to grow at this rate because you just haven't deeply penetrated all of the customer base at this level? Dermot McDonogh: So I would say a lot more room for improvement. It's a momentum. It's a cultural transformation. It's a de-siloing of the firm in some ways, we're kind of turning a page here today on Phase I to Phase II but the work is never done. And so we think there is more upside, more training, deeper integration of the businesses. We kind of like -- if I just give you one specific example, asset management can do a lot more with Pershing than what it does today. Asset Management can do a lot more with asset servicing kind of it does today. And the leadership of those 3 businesses are beginning to see that opportunity. We have great manufacturing capability and asset management. We need to deliver that to the rest of the firm and their BNY clients. Operator: We'll take our next question from Emily Ericksen with Citigroup. Emily Ericksen: I wanted to ask first on -- on the expense side of things, you're guiding to 3% to 4% for '26, so take the midpoint of that comes in somewhere near where you guys printed for '25. But we're talking about flat markets, right, from year-end. Is the way I kind of square, I guess, that difference is some of the market-related [ uplifted to expenses ] expected to kind of recede the balance between what you're able to harvest in efficiency savings relative to the incremental investments, the $500 million from '25, how should I think about that particular balance on the expense side of things in the '26? Dermot McDonogh: So I'm looking at Page 21 of the financial presentation, Emily. And look, for the first time this year. Previously, we've guided some operating leverage and positive operating leverage. Today, we're coming out and saying it's going to be greater than or equal to 100 basis points. And over the last few years, I think we've managed to establish some credibility that we are very good stewards of our expense base, very good financial discipline. And we've harvested roughly $500 million a year for each of the last 3 years, and we've reinvested that in the business to grow. And so it's really about the 3% to 4% guide for 2026 is that continued investment in the business in a very agile and dynamic way, which gives us then the confidence to be able to guide to the top line growth of 5%. So it all starts with top-down where we kind of say we want to solve and deliver positive operating leverage to you. And then as a consequence of that, in the budget season, then we're going to go through the bottoms-up planning analysis, and we arrive at this model that gives us this flex on the expense side. Emily Ericksen: Got it. Okay. And then just on the NII side of things, you've talked about breaking out that 5% on total revenue a little better if we look just at the NII piece. How much of that -- can you sort of walk through the drivers of where NIM goes from here? I know you have the reinvestment impact on the security side of things, but you also pointed to some deposit margin compression in 4Q. Is there room for significant NIM expansion to support that 5% plus on the NII side? Dermot McDonogh: So I'm not too sure what your definition of significance is, but I would expect over the course of 2026 for NIM to grind higher from where it is today. Operator: Our final question comes from the line of David Konrad with KBW. David Konrad: My question on capital was asked and answered, so we can end it here. Operator: And with that, that does conclude our question-and-answer session for today. I would now like to hand the call back over to Robin for any additional or closing remarks. Robin Vince: Thank you, operator, and thanks, everyone, for your interest in BNY. If you have any follow-up questions, please reach out to Marius and the IR team. Be well. Operator: Thank you. This does conclude today's conference and webcast. A replay of this conference call and webcast will be available on the BNY Investor Relations website at 03:00 p.m. Eastern Time today. Have a great day.
Operator: Good afternoon, and welcome to Phoenix Education Partners First Quarter Fiscal 2026 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following prepared remarks, we will open the call for questions. I would now like to turn the call over to Elizabeth Coronelli, Vice President of Investor Relations. Please go ahead. Elizabeth Coronelli: Welcome to the Phoenix Education Partners first quarter 2026 earnings conference call. Speaking on today's call are Christopher Lynne, our Chief Executive Officer, and Blair Westblom, our Chief Financial Officer. Before we begin, I would like to remind everyone that certain statements and projections of future results made in this presentation constitute forward-looking statements. These are based on current market, competitive, and regulatory expectations and are subject to risks and uncertainties that could cause actual results to vary materially. Listeners should not place undue reliance on such statements. We undertake no obligation to update publicly any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions, or otherwise. The risks related to these forward-looking statements are described in our filings with the SEC, including our most recent Form 10-K, Form 10-Q, and other public filings. We will also discuss certain non-GAAP financial measures. You should consider our non-GAAP results as supplements to, and not in lieu of, our GAAP results. Reconciliations to the most directly comparable GAAP measures can be found in our earnings release and SEC filings. Unless otherwise noted, comments in the call will focus on the comparison to the prior year period. We also direct you to the supplemental earnings slides provided on the Phoenix Education Partners website. With that, I turn the call over to Christopher Lynne. Christopher Lynne: Thank you, Elizabeth, and good afternoon, everyone. We appreciate you joining us as we report our results for 2026. This quarter's results demonstrated disciplined execution of our strategy, marked by steady growth, strong retention, and continued investment in student success and long-term value creation. At the University of Phoenix, our mission remains clear: to expand access to higher education that delivers relevant, career-aligned skills for working adults. The students we serve reflect that mission. As our students balance work, family, and education, we remain focused on meeting their needs through flexible programs, strong academic outcomes, and a personalized student experience. Turning to the first quarter, we delivered a solid start to the year with financial performance consistent with our expectations and results that reinforce the full-year outlook we provided on our November earnings call. First quarter revenue grew 2.9% year-over-year, with a 4.1% increase in average total degree enrollment to 85,600 students. Employer-affiliated enrollment continues to be an important contributor to overall enrollment growth and now accounts for approximately 34% of total enrollment, which is up from approximately 31% in the first quarter of 2025. Adjusted EBITDA increased 7.2%, reflecting continued revenue growth, enhanced productivity, and operational efficiency while sustaining strong student outcomes. Our focus on student outcomes, as well as execution and efficiency, carries directly into how we approach AI technology across the university. As we've discussed previously, we view AI as an important enabler of our existing strategies, and we apply it in a disciplined, deliberate manner, empowering our team to explore and evolve how we work in service of our students. Our approach centers on two priorities: First, we are preparing students to be AI fluent. As the workforce landscape continues to change rapidly, we are embedding AI into programs, course content, and the learning experience so students build practical, career-relevant skills. We are equipping learners to use AI ethically and appropriately, understanding when AI adds value and when human judgment is essential. Second, we are leveraging AI as an institution to drive operational excellence. We are starting to use AI to remove friction, increase personalization, automate complexity, and unlock capacity, enabling us to focus on what truly matters. We are encouraged with our progress leveraging AI to improve outcomes across the student journey, with examples that include the use of AI assistant appointment setting and outreach in certain situations to improve enrollment conversion and retention, as well as several pilots we have in production leveraging large language models with our proprietary data to enhance our AI chat assistance and servicing our students 24/7 both inside and outside the classroom. Let's move on to regulatory updates. Last week, the negotiated rulemaking committee reached consensus on accountability measures related to changes enacted under the One Big Beautiful Bill Act. The proceedings were consistent with our expectations. No new material areas of risk were introduced during the process, and we are pleased we will now have an accountability framework that applies equally to all programs at all institutions. As part of negotiated rulemaking, the Department of Education released preliminary program performance accountability metrics. While this information is preliminary, we were encouraged that based on these informational program performance metrics, all University of Phoenix programs for which metrics were provided are passing. I'd also like to briefly address the cyber incident involving our Oracle E-Business Suite software platform, which was disclosed in our early December 8-K. The university was one of numerous organizations, including other academic institutions, from which an unauthorized third party exploited a zero-day software vulnerability in Oracle EBS to obtain certain personal information without authorization. The software vulnerability has since been remediated. The incident did not impact our student and academic programming and was addressed promptly. We recorded $4.5 million of expense associated with this incident, principally representing costs to notify the affected parties, fees from third-party cybersecurity firms, legal fees, and other expenses related to the incident response. While we expect to incur additional related expenses in future periods, we maintain a comprehensive cybersecurity insurance policy, subject to customary deductibles, exclusions, and limits. Reflecting confidence in the durability of our cash generation, we announced the declaration of our inaugural regular quarterly cash dividend of approximately 21¢ per share of common stock, which was approved by our board of directors and is consistent with the dividend amount we outlined during the IPO process. This decision underscores our disciplined approach to capital allocation and long-term value creation while continuing to invest in our students, programs, and growth initiatives. As we move into 2026, our focus remains on disciplined execution and investing resources intentionally as we balance growth, student success, and financial performance. We started the year on solid footing and are well-positioned to continue executing against our strategic priorities and are guided by our mission to enhance the learner experience and strengthen engagement and retention to support adult learners achieving meaningful educational and long-term career outcomes. I'll now turn the call over to Blair to walk through our financial results in more detail. Blair Westblom: Thank you, Christopher, and good afternoon. For 2026, our results were in line with our expectations. Net revenue increased 2.9% to $262 million, driven by a 4.1% increase in average total degree enrollment to 85,600 students, supported by new student growth and retention gains from fiscal year 2025 continuing into the first quarter of 2026. Net income attributable to the company was $15.5 million or 40¢ diluted earnings per share, compared to $46.4 million a year ago or $1.23 diluted earnings per share. The decrease in net income attributable to the company and diluted earnings per share was primarily due to noncash share-based compensation and other expenses that resulted from the initial public offering. Adjusted net income attributable to the company increased 5.3% to $53.6 million, up from $50.9 million in the prior year period. Adjusted EBITDA for the quarter rose 7.2% to $75.2 million, and adjusted diluted earnings per share increased 3¢ to $1.38. As a reminder, our earnings per share for all periods have been retrospectively recast to reflect our IPO and related transactions. Please refer to our annual report on Form 10-K and quarterly report on Form 10-Q for additional information regarding our dilutive securities. Adjusted EBITDA in the first quarter excludes $29.5 million of noncash share-based compensation expense, $4.5 million of expense related to the cybersecurity incident, and other items as detailed in our earnings release and quarterly report on Form 10-Q. The share-based compensation expense in the first quarter is not indicative of our expected long-term annual run rate for share-based compensation and was principally the result of expense for modifying pre-IPO stock options. Adjusted EBITDA margin was 28.7%, up from 27.5% in the prior period, reflecting the increase in net revenue, improved student-facing team productivity, as well as lower financial aid processing costs and bad debt expense, in part due to our transition to dispersing financial aid by course. Regarding expenses, instructional and increased $7.1 million to $115.2 million, and general and administrative was up $24.6 million to $106.6 million. Both increases are principally attributable to the share-based compensation expense increase discussed in my earlier comments. From a cash and liquidity perspective, we continue to maintain a strong balance sheet with no outstanding debt. We ended the quarter with substantial cash and marketable securities and no borrowings under our revolving credit facility, providing flexibility to invest in the business while maintaining a disciplined capital allocation strategy. As of November 30, 2025, total cash and cash equivalents, restricted cash and cash equivalents, and marketable securities were $218.1 million compared to $194.8 million as of August 31, 2025. The increase was primarily attributable to $31.1 million of cash generated by operating activities, which was partially offset by $4.7 million of capital expenditures. As Christopher mentioned, we announced a regular quarterly common stock dividend today, payable on February 18, 2026, to shareholders of record as of January 28, 2026. We expect to pay quarterly dividends of approximately 21¢ per share or approximately 84¢ per share annually, in each case subject to board approval. Our capital allocation priorities remain unchanged, guided by a commitment to financial discipline and flexibility. We allocate capital to reinvest in the business, supporting strong student outcomes, driving sustainable enrollment growth, advancing our technology platform, and enhancing operational efficiency while maintaining strong liquidity and returning capital to shareholders. With respect to our fiscal 2026 outlook, we are reiterating the net revenue guidance of $1.025 billion to $1.035 billion and adjusted EBITDA guidance of $244 million to $249 million, both of which we provided on our November earnings call. Our first quarter performance represents a strong start to the year and reinforces our confidence in our full-year outlook. We continue to operate from a position of financial strength with strong cash generation to support our strategic priorities. We remain focused on disciplined execution while investing in the success of our students and long-term value creation. I'll now turn the call back to the operator to open the line for questions. Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star then the number one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. One moment while we compile the Q&A roster. Your first question comes from Gregory Parrish with Morgan Stanley. Your line is open. Gregory Parrish: Congrats on the result. Nice to see solid enrollment growth despite the identity verification changes last year. There'll be a lot going on at the Department of Education last week as well. Sounds like a positive for you, the gainful employment changes, but maybe you could talk a little bit more about that. If you just zoom out, there continues to be a real impetus on cracking down on fraud, and it seems like a lot of the risk here is behind you. Right? Your past verification, this earnings threshold is now out there. But just kinda level set where we are, what you're watching, and then any potential impacts here for this year. Christopher Lynne: Yeah. Thanks, Gregory. This is Christopher. Yeah. So NEG regs have been there's a lot that's been covered. The most relevant session was last week for us. They discussed, as I'm sure you know, the program performance metrics for higher education. And the punch line on what we saw is, I mean, they did reach consensus, which we thought was a positive thing. They're moving in a direction of this earnings metric both for gainful employment and the One Big Beautiful Bill Act earnings threshold across all programs treating all universities and colleges the same. And so that's consistent with our early expectations, and they've moved further in that direction, which we see as a positive. We don't anticipate, and we've said this in the past, any adverse impact from this regulation. What we learned last week was supportive of that. In fact, they actually the department released preliminary information on program performance metrics for earnings for institutions and for the programs that they released for us where they had earnings data. All of our programs passed. So, obviously, that is encouraging. So we feel pretty good about things there, and I would say that, you know, everything is preliminary until it's final, but it's moving in the direction that we had anticipated, which we see as a positive thing. In terms of the focus, I think you were alluding to the federal government's focus on fraud. There's nothing really new to report there from my perspective as it relates to negotiated rulemaking. The department is, as we discussed a little bit on the last earnings call, aware of the unusual enrollment activity in the market environment, and nothing's changed there in that they're focused on increasing their controls around the FAFSA process to prevent those types of issues. And there's nothing new to report. We didn't have any new or material activity with the department over the last quarter. As it relates to our efforts with unusual enrollment activity, we continue to see the outcome of our control structure that we put in place with detection and verification in fiscal 2025. We saw the productivity enhancements that we talked about in Q4. As a result, continue into Q1, and we feel like we have that under control at the moment. Gregory Parrish: Great. That's very helpful. Thank you. Congrats. Christopher Lynne: You're welcome. Thank you. Operator: Your next question comes from Alex Parrish with Barrington Research. Your line is open. Alex Parrish: Hi, guys. Thanks for taking my questions. And congrats on a better than expected quarter. I'll just switch up the order here a little bit to follow-up on that last question. You said, Christopher, regarding the preliminary data that was provided by the Department of Education where earnings data was available. How comprehensive was that? In terms of the programs addressed? Were there a lot of programs given? Did it cover the majority of your programs, or are there some that were still waiting? Important programs that we're still waiting for data? Christopher Lynne: I don't have the exact data because the team is working through it. What I can say is it was a majority greater than 50% of our programs that we did have earnings information for. And it covered a pretty material amount of our programs in terms of size and importance of the programs. One reason why I think earnings may not be available for programs is it just gonna have large enough cohorts. So, there would be a probably a larger proportion of those that they didn't have earnings information for that would correlate with smaller programs. But don't have the exact data I have it at a high level, and our team is working through it. But I think it's net positive from the perspective that it was a greater than 50% of our programs that were reported on. Alex Parrish: Great. That's good news. Intuitively, are there any programs among the University of Phoenix offering that you would think that it is gonna have any challenge, and what percentage of enrollment does that account for? You know, like, in the old days, gainful employment, concerning programs would have been culinary or criminal justice and things like that. Any programs that you think might have a challenge when that data is available just from what you know from previous? Christopher Lynne: Yeah. Thanks, Alex. Yeah. We talked a little bit about this in the process of going public. I can't recall if we've talked about it on the last earnings call, but and I hesitate to speculate too much about this based on where we're at because I don't want to leave an impression one way or the other. But what we had done earlier in the process is we looked at all of our programs, and this is something that historically we've been good at in terms of taking all available data. Some of this data was similar to the data that you would track for gainful employment regulations that we've been looking at since the Obama administration. And within that assessment, what we would have on our radar are programs that are in disciplines that structurally have lower earnings. So the one area that we talked about was some of the behavioral sciences where just by the nature of those programs, the graduates don't make a lot of money comparatively. And so, you know, we thought that that may be an area of risk. And when this was going through Congress, that was an area that there was a lot of discussion in while the bill was in sort of preliminary form. With that said, you know, if we were to look at preliminary info, it was positive. Reflecting on what we speculated. But again, it's preliminary info. So you know, we didn't anticipate and continue not to this having any kind of material adverse impact on our programs. Alex Parrish: Good. Well, thank you. That's helpful. And then last one on that regulatory front. It seems that the controls, the algorithms that you put in place that you've moved to the top of the funnel in the fourth quarter is doing what you wanted it to do. I was just curious. Has there been any let up in the number of fraudulent attempts? Or are the criminals still running around the industry? Christopher Lynne: Yeah. I mean, the activity is definitely still in the marketplace. I would say that as we put the controls further up in the funnel, we've seen those volumes deter and trend downward since Q4, pretty significantly since Q4 when we put the detection and verification processes at the application process. But the volume that we're deterring that we can see is still, I would consider, pretty significant. So I would say that the activity is definitely in the marketplace. And we're just doing an effective job of stopping it from getting into our enrollment funnel. Alex Parrish: That's great. And then my last question is regarding new student enrollment. I know you don't report it specifically new student enrollment, but, you know, based on the IPO roadshow and our conversation since, it did have an impact on enrollment in, you know, maybe the 2024 and early into 2025, yet I if I understand it correctly, your new student enrollment has been up year over year for the last couple of quarters. When do the comps get easier in terms of new student enrollment? Is it in the third quarter of this year or the fourth quarter of this year? Christopher Lynne: Yeah. For new student, we had pretty significant productivity impact in the enrollment funnel that was seen through Q3 of last year. It did improve quite a bit in Q4, as you just mentioned, of fiscal 2025, and that was associated with moving these detection and verification controls to the top of the funnel. And what that meant is we were doing a better job of preventing that noise in the funnel, which means our enrollment representatives were seeing a lot more productivity and moving closer to historical levels that we've predictably and sustainably met over many years. So we continue to see that productivity carry into Q1. And to your point, that is helping with continued new student growth. And we expect that trend to continue in Q2 and Q3. And then in Q4, you know, the comp as it relates specifically to those productivity enhancements will be a little bit tougher because that's when we saw the trend reverse historically. Alex Parrish: Gotcha. Okay. Well, thank you for the additional color. I appreciate it. I'll get back in the queue. Christopher Lynne: Thanks, Alex. Operator: Your next question comes from Jeffrey Bibb with Truist Securities. Line is open. Jeffrey Bibb: Hey. Good afternoon, everyone. I think, on the last call, you messaged 2026 was gonna be a little bit of second half weighted year from enrollment growth perspective. Has that changed? I mean, it seems like fairly strong start to the year here in the first quarter. Christopher Lynne: Yeah. Jasper, I'll take that question. The primary conversation from my perspective in the last quarter talking about trajectory this year was really around the relationship between our enrollment growth and our revenue growth. And so we are anticipating that our revenue growth is going to be, I don't know, from a lack of a better word, unknack lower than our enrollment growth through Q3 driven by the fact that last year, we had a higher volume of students that we were attracting into our risk-free period that ended up not persisting beyond the initial courses. So that created shorter-term revenue last year that we're not anticipating based on who we're attracting into those into that risk-free cohort this year. So, you know, said differently from a pure financial perspective, the quality of the incoming revenue is higher but you're gonna see a little bit of a lag related to the average total degree enrollment growth. And that's gonna be more prominent in Q2 and Q3. So that's what we intended to communicate last quarter, and it will be consistent with what we still believe in we'll expect that to normalize much more in Q4. In terms of average total degree to enrollment growth, you know, we had a solid first quarter. You know, we think we set a solid foundation for the year. We're not, you know, we're reiterating our outlook for the year. We're still early in the year, so we continue to stand behind the outlook that we provided last quarter and this quarter. Jeffrey Bibb: Thanks for that. Maybe just following up on the headwind from higher, I guess, students going through the risk-free period last year, should we expect that to show up, you know, in revenue per student or enrollment? I just you could provide a bit more detail there from a modeling perspective. Yeah. I mean, revenue student guess my question is yeah. Was that recognized in enrollment or in the prior year? And should it just flow out of revenue per student this year? Christopher Lynne: Yeah. So, you know, revenue per student for us is not a key metric. But if you were to calculate the revenue per average total degree of enrollment, we would expect that to come down in Q2 and Q3 as a result of this because we had enrollment associated with those students that didn't persist among the past the first few courses last year, but we had, sort of a shorter-term impact on revenue. And so we're not seeing that revenue carry into this year. So based on that calculation of revenue per student, you should anticipate this would be something that would drive down revenue per student. Blair, I think you wanted to add something to that. Blair Westblom: Absolutely. Thanks, Christopher. Great question. Thanks, Jasper. I just wanted to comment you know, you will see variability in growth of revenue versus average total degree enrollment by quarter, and that's driven by a number of different factors, including the timing of course starts, composition of enrollment, in addition to the factors that Christopher mentioned. And in Q1, '26, as I'm sure you noted, revenue growth of 2.9% driven by growth in average total degree enrollment of 4.1%. The difference was primarily the expansion of B2B. As Christopher noted in his remarks, it was up three points year over year, and B2B students typically receive a higher discount rate than that of non-B2B students. So those are other factors that could impact it by quarter. Jeffrey Bibb: Super helpful. Thanks so much. Christopher Lynne: You're welcome. Operator: Your next question comes from Griffin Boss with B. Riley Securities. Your line is open. Griffin Boss: Hi. Good evening. Thanks for taking my questions. Just starting off on the enrollment growth aspect there. Is there any color you can provide about where primarily you're seeing that new student growth? Is it broad-based, or are there specific disciplines that you're seeing stronger demand for? Christopher Lynne: Yeah. Griffin, thanks for the question. You know, as we've described, our program offerings, you know, we have done a lot of work and continue to focus on ensuring that they're aligned to fields that are in demand and growing. Over 90% are aligned to the market in that way. And as a result, we're seeing broad-based growth across our programs. And I think that's reflected also in what we're seeing with the B2B growth because that's aligning to what we're seeing employers they're hiring and where they currently have employees. So I think the simple answer is that it's broad-based. Griffin Boss: Got it. Okay. Thanks, Christopher. And then just have a couple quick ones on the OpEx side. First, just curious if there will be some level of higher operating expenses going forward given that cybersecurity event you saw last fall and the $4.5 million paid in the quarter, is there gonna be any, you know, marginal increase in cybersecurity or maybe legal fees that you're gonna be paying that wouldn't have happened had that cybersecurity event not occurred? Christopher Lynne: I'll take that question. So, yeah, we do anticipate additional expenses associated with the incident itself. We don't expect those to be material. As Blair mentioned in opening remarks, we do have a comprehensive cybersecurity policy that covers the majority of the cost we would anticipate, including the majority of the costs associated with the $4.5 million in expenses to date. And in terms of sort of the and we've treated that as you can see, as a sort of one-time in nature. It's an add-back to our adjusted in our adjusted EBITDA calculation. In terms of recurring costs associated with cyber, you know, we've always aspired to have a cyber control environment that represents best practices. This cyber event, not getting too into it, but I think it was pretty clear that this was a zero-day vulnerability. I mean, what that means is this is something that could not have been prevented. It was not known to anyone except the threat actor, and it happened to our software provider Oracle. But there are things that, you know, we can continue to do to reduce impact for the risk of those things. But from what we can see, we expect to be able to absorb that into our outlook and don't anticipate any kind of incremental operating expenses on our recurring expenses as a result of this. Griffin Boss: Okay. Great. Understood. Thanks, Christopher. And then just last quick for me on the stock-based comp side. Blair, obviously, you mentioned $30 million, of course, is not gonna be recurring going forward per quarter. But is there any sense that you can give now as a public company of kind of how that stock-based comp going forward? Maybe a range of percentage of revenue or something like that or how you're thinking about it? Would be helpful. Blair Westblom: Yeah. Sure. Appreciate the question. So the large noncash expense of $29.5 million in Q1 2026 is not indicative of our expected long-term annual run rate for stock-based compensation, and it was principally the result of expense from modifying pre-IPO stock options that were granted years ago. They were structured in a way that didn't contemplate an IPO. And the modification of such stock options, which were mark to market, represented $23 million of the $29.5 million of the total noncash SBC expense in the quarter. So once we've, you know, anniversaried the IPO date, we wouldn't expect that to be an ongoing expense. There were also some share grants as of the IPO associated with the IPO that vest over a three-year period. So once we've recognized the expense associated with that, we would expect our stock-based compensation to normalize. And I'd suggest that you refer to Form 10-Q for more detail in terms of our stock-based compensation. Christopher Lynne: Yeah. One thing, probably worth mentioning is the grant you'll see if you look at the proxy, that was subsequent to the IPO. Based on the outside compensation consultant, that grant was at a level that would be a little higher on a per participant basis given the IPO than future awards. So, you know, it's difficult to predict where that'll land given that process that'll be evaluated in the future by our board, but those would be higher than what I would anticipate on a per participant basis in the future. Griffin Boss: Got it. Okay, Christopher. Blair, thanks for taking my questions. Appreciate it. Christopher Lynne: Yeah. You're welcome. Operator: Your next question comes from George Tang with Goldman Sachs. Your line is open. George Tang: You provided some additional color on the earnings threshold test of gainful employment. Can you talk a bit more about how programs performed with the debt to earnings test? Christopher Lynne: Yeah. Thanks, George. I'll take that question. We've been looking at the debt to earnings ratios as associated with the gainful employment regulations. As they were constructed under President Obama. And as you know, those were never actually implemented. And then as they were contemplated under the Biden administration. And so, you know, that's all proxy analysis internally over the years. But what I can say is that our average borrowing trended in the right direction across all programs, our average earnings trended in the right direction across all programs. The last official analysis, which is a little dated right now, suggested very little risk if the gainful employment regulations were to be implemented. So we feel good in light of gainful employment regulations, and you know, based on our understanding of actually where the regulations are going, we are seeing that the regulations are going to converge with the legislation in the One Big Beautiful Bill Act. So in terms of any accountability that would affect our ability to offer Title IV, it will be only in earnings threshold metric as we understand it currently. And there'll be some reporting requirements potentially on debt to earnings, but nothing that would affect our eligibility for Title IV. George Tang: Got it. That's helpful. And then with respect to detection and verification measures put into place to fight fraud and suspicious activity. Can you quantify or ballpark what impact that had in the quarter in terms of growth and what you're expecting and what you're contemplating in the guide? Christopher Lynne: We're not really in a position to do that. You know, what I can say is we saw nothing in Q1 that puts any concern in the outlook that we provided in Q1, which is why we're reiterating our guidance. We feel good about the controls that we put in place. They've been effective and continued to be effective since we implemented them. So we've seen consistency earlier in Q4, and we've seen consistent improvements in productivity on a per enrollment rep basis. So, you know, we see it as a net positive, and it's been reflected in our outlook. I will give you a little bit of color that because the activity continues to exist in the marketplace, this is not something that can just put on cruise control. We have very effective controls, and we have very effective metrics. So it's something we're constantly calibrating and making sure we're managing, but it's been well managed and sort of become part of our normal operation since we put it into place. So hopefully, that's helpful. But in terms of giving you more specific quantification, we're not in a position to do that. George Tang: Got it. That's helpful. Thank you. Christopher Lynne: You're welcome. Operator: Your next question comes from Jeffrey Silber with BMO Capital Markets. Your line is open. Jeffrey Silber: Thanks so much. Sorry to go back to some of the regulatory items. Beyond the earnings premium test, I guess there's some loan caps that are gonna start, beginning next July. I know they affect graduate and professional programs. You don't have as much exposure there. But if you can give us a little bit of color what you think the exposure might be. Thanks. Christopher Lynne: Yeah. Thanks, Jeffrey. From any internal analysis we've done, nothing's changed. And we don't see any material impact expected from loan caps, removal of loans, changes in Pell, offerings, workforce Pell. None of those other items that were contemplated in the One Big Beautiful Bill are anticipated to have any kind of material impact on us. Jeffrey Silber: Alright. That's great to hear. And then as a follow-up, I know it's only the first quarter of the year but and you didn't provide specific guidance for the quarter, but I think you handily beat most expectations. Are you just being somewhat more conservative in terms of not changing your guidance for the rest of the year because of that? Christopher Lynne: Good question. The way I look at it, coming into this call is we had a solid first quarter. That includes our fall enrollment, which is great. We set a strong foundation for the year. We feel really good about that. We're in the second quarter. Still early in the year. And based on the seasonality of how our quarters work, we're coming right out of the holidays. Which is a very seasonal period for us. So, you know, our students are off for a couple weeks in December, for example. So it's just early in the year. And so at this point, we think it's prudent to have reiterated our outlook for the year based on Q1. Jeffrey Silber: Alright. That makes sense. Thanks so much. Christopher Lynne: You're welcome. Operator: Your next question comes from Stephanie Moore with Jefferies. Your line is open. Stephanie, your line is open. Stephanie Moore: My apologies. Can you hear me better now? Operator: Yes. Stephanie Moore: Oh, my apologies. You know, I wanted to follow-up on some of the commentary from a B2B standpoint, if you could give us an update on how some of those employer engagement employer engagement is going this year in the opportunities we can see for, you know, continued growth in that vertical would be helpful. And I'll stop there. Christopher Lynne: Okay. Thanks, Stephanie. Yeah. So you know, it's consistent with what we've shared in the recent past. Our account management structure has been effective at helping us build deeper penetration with our current employer affiliates. We came into the year with an expectation to continue to grow that, and we've seen that happen effectively into Q1. We did seed some investments in some newer incremental growth. So we have an account management team focused on actually adding new employers. We have 2,500 employer alliances, but we're seeing some opportunities in adding new clients and approaching the conversation differently than we've in the past since we have some newer products that help employers with needs beyond the degree program offerings. And so we're seeing some success there that's helping drive some of the growth. So that account management focus, we expect to continue to answer your other question, to drive the growth that we're expecting going forward. Stephanie Moore: And maybe just as a follow-up you know, you spoke in the actually, last answer to the last about kind of the seasonality of the business. As you continue to see strength in the B2B side, does that change the traditional seasonality of the business that we should think about? Maybe not necessarily this year, but in future years. We'd love to future years. We'd love to hear your thoughts. Thanks. Christopher Lynne: Yeah. We're not anticipating any and I jumped right in here. So, yeah, Blair looks at our seasonality much closer than I do. But from what we can see, we have seasonal patterns that have been pretty consistent. Whether or not B2B or B2C. So there's no there are season patterns associated with B2B that are driven by the timing of reimbursement and things like that. That they may have an impact over time. But I don't think that's something that I would having a meaningful impact going into, like, next fiscal year. The seasonal patterns for the most part for our students, given most of them are working adults, are pretty consistent across both B2B and B2C. Stephanie Moore: Understood. Thanks so much. Operator: Your next question comes from Robert Sanderson with Loop Capital. Your line is open. Robert Sanderson: Thank you. Good afternoon, everybody. Thanks for taking my questions. I have two, please. First, just on it's been you've held enrollment pricing consistent for I can't remember how many years, but a long time now. And obviously, the cost of education has been moving higher in the market. So you've suggest you've got this sort of large and growing umbrella versus broader industry trends. Could you just sort of I mean, price guarantee, I think, is important to your marketing message, but sort of under what conditions might you consider using price as a growth lever? And then I've got a follow-up on AI. Christopher Lynne: Thanks, Robert. Yeah. The way we think about prices, you know, we believe based on our assessment of the markets that we operate in that the pricing could be a lever, but we also believe long term that affordability is gonna matter more and more to our students. You know, we've been very effective at driving operating leverage into our model for quite some time. I think our hasn't changed since 2018, and we've seen consistent improvements in our ability to improve student outcomes. And reduce the cost to deliver those outcomes, and that's from a lot of things that we've been doing but heavily from the investments in our tech and data foundation. And we believe that we can continue that. And we've talked a lot about AI being it's almost serendipitous this moment we're in because these investments really position us well to continue to do this leveraging, AI technologies. And so, you know, when we contemplate the future, we believe that we can continue to build that operating leverage in ways that offset inflation and other drivers of cost. Know, if we were to see that dynamic changing, you know, price is a lever that we could choose to pursue. And we have a lot of forward visibility in the business, so I think that is a lever we could be proactive with if necessary. And then, you know, over time, I think as we deepen these relationships with employers and that value proposition gets stronger and stronger and grows. And that's the area that I think over time, we'd like to drive pricing is really based on value that we're delivering in the marketplace. But for now, we continue to believe that know, we can hold pricing constant and drive up our margins. The way that we have put out in our outlooks. Robert Sanderson: Great. Now we wanna talk a little bit about AI. You know, you mentioned just on the call or on your prepared remarks how you've been implementing AI into the curriculum and your health helping learners sort of prepare to responsibly to use this new technology. But can you offer any thoughts on just future job displacement and the need for reskilling because of AI? And is this, you know, a trend that your enterprise affiliates are talking about or perhaps, you know, thinking about preparing for? Christopher Lynne: Yeah. I think that absolutely. You know, our belief based on everything we can see across our leadership and our organization and working with employers is that there is gonna be displacement and there is gonna be change in the workforce and that the jobs of the future are gonna be held by those that are fluent and using AI to drive value in organizations. Now you can get deep into that, and, you know, there are studies that come out almost weekly now about what the future looks like and five to ten years. But we're confident that that's the direction things are going. And I think this is a nice moment in that every organization has to look inward to figure this out with their workforce and think about the future. So we are hearing this feedback from employers. But frankly, as an organization ourselves, we're contemplating the same things. And we can see the power of AI, but we also see the power of our team members and our people and augmenting the capabilities we have across our teams with the capabilities of AI is very much the focus on now into the distant future. And we're seeing a lot of that with employers. So I think there's gonna be segments of the economy where there may be displacement fully. And so we're very cognizant that those that are affected by that, we wanna be able to provide them programs and offerings that move them into the jobs that exist, and those jobs are going to require AI skills. And then for most other jobs, it's ones that are gonna keep the jobs and advance the workforce are the ones that are gonna be fluent in AI, which is why it's a big focus of our curriculum. Robert Sanderson: Thank you, Christopher. Christopher Lynne: You're welcome. Operator: That concludes our Q&A session. I will now turn the conference back over to Christopher Lynne for closing remarks. Christopher Lynne: Thank you, everyone. The 2026 reflects a strong start to the year and continued progress against our strategic priorities. We're encouraged by the momentum we're building and excited about the opportunities ahead as we remain focused on expanding access to personalized career-relevant education and supporting student success. I want to close by thanking our faculty and our entire team for their dedication to our mission, and for keeping students at the center of everything we do and thank you all for joining us today. Operator: This concludes today's call. Thank you for attending. You may now disconnect, and have a wonderful rest of your day.
Aki Vesikallio: Okay. I think clock is now 1:00 here in Helsinki, so I can welcome you to Hiab's pre-silent call ahead of our fourth quarter results. Still some people joining, so I'm letting them in. So we will start having a presentation by Mikko Puolakka, recapping the third quarter results and any notable releases during the fourth quarter. After that one, we will have a Q&A session. [Operator Instructions]. Just to note that this call is recorded and will be then later available on Hiab's website. So with that, over to you, Mikko. Mikko Puolakka: Thank you, Aki, and happy New Year also from my side. So a quick recap on our quarter 3 results, then a couple of words about the releases and the developments, what we have seen during quarter 4, and then, like Aki said, questions-and-answers section. About quarter 3. So our order intake was EUR 351 million. That was down by 3% year-on-year. And based on the first 9 months performance, our order intake was more or less flat compared to the previous year. So this was now the 3rd -- 12th consecutive quarter in a row when our order intake has been fairly flat. Our last 12 months order intake has been roughly on the level of EUR 1.5 billion. And primarily the order, kind of, intake headwind we have seen, the Americas region, especially in the U.S. area. While in Europe, we have seen some improvement in the overall market and also in a couple of seg end markets like defense logistics and the wind segment orders what we have announced also earlier in 2025. When we look geographically, the first 9 months EMEA has been up by 13%. Americas down by 14%, very much driven by the tariff-related uncertainties, especially smaller customers withholding their investment decisions, while some kind of bigger home improvement customers have been still quite nicely placing orders. On a positive side, there has been a positive momentum in defense logistics. We have a very good pipeline in that area, of course, the deals typically -- kind of, the revenue we recognized from the defense logistics orders, typically, over multiple years. And then the energy segment, like mentioned already earlier. All in all, there is a robust replacement demand both in EMEA, but also in Americas, like I said, in the U.S., especially the larger kind of home improvement customers have been renewing their fleet. But on the kind of minus side, trade tensions in the U.S., those have increased the customers' uncertainty, and that's why we have seen, especially in the smaller customers in the U.S., quite cautious ordering activity. Our sales decreased in quarter 3 due to the lower order book. Sales were basically on the same level what we had the order intake in quarter 3. Currencies, in currencies, we had, in quarter 3, roughly 2 percentage points negative impact. And if we look at the year-to-date 9 months sales, that's down by 6%, primarily coming from the U.S. market, that lower order intake, especially in the early part of the year. Americas' sales was down by 9% during the first 9 months. EMEA was down by 4%. APAC sales grew slightly in quarter 3, but year-to-date, September, more or less flat on year-on-year basis. We have had a good development in the Eco portfolio sales, especially in the circular solutions and climate solutions. So year-to-date, 38% of the total sales. If we look at our comparable operating profit, so especially in quarter 3, our comparable operating profit was negatively impacted by the lower U.S. equipment sales. That impact was approximately EUR 20 million in our comparable operating profit. Gross profit margin decreased by 80 basis points, also very much coming from the U.S., kind of, lower utilization. SG&A costs, we have been able to reduce year-on-year, but that's not necessarily enough to compensate quite sizable decline in the U.S. equipment sales. And that's why we have also announced in connection of quarter 3, the EUR 20 million cost savings program in order to protect the profitability in 2026 if this kind of market activity would continue in the coming quarters. Key takeaways from quarter 3. So overall, the market uncertainty has continued. Overall, we have not seen any dramatic changes compared to the previous quarters. So gradual improvement in EMEA, while in Americas, especially in the U.S., the customers' decisions have been impacted by the tariff situation. Despite the market situation, we have been able to improve our comparable operating profit if we look at the rolling 12 months performance. And as mentioned, we have started the planning for the EUR 20 million cost savings program. And this would be EUR 20 million lower costs compared to the 2025 level. Nothing has been changed in our strategy. So even despite the current tariff situation in the U.S., we see that the U.S. market is able to offer us good growth opportunities in the future by addressing those white spaces, what we have, for example, in the Central and Western part of the U.S. Also services and the focus on 4 key growth segments have still been intact in our strategy. So overall, no changes in our strategy. Despite the lower top line, our cash flow has been very strong in the first 9 months, and our balance sheet is also very strong, offering, for example, in quarter 3, if we would look the quarter 3 balance sheet, that would offer us roughly EUR 800 million M&A firepower. And with that kind of EUR 800 million additional debt, we would be still below the 50% year-end target. A couple of releases from quarter 4. So we announced in the first week of January, the acquisition of ING Cranes. ING has been founded in 2010. Last -- 2024 revenues, EUR 50 million. We had already, before the ING acquisition, a business in Brazil, Argos, which we acquired back in 2017. Argos has been mainly focusing on light and medium loader cranes, while ING brings into our portfolio the heavier loader cranes in the Brazilian market. So actually quite nice complementary acquisition for our Brazilian business, plus then offering also sales channels for the Southern American markets. We also announced the proposals by the Nomination Board for the Board of Directors. So the current Board members would continue except for Ilkka Herlin, who has informed that he is not available for reelection in the AGM, which is to be held on 24th of March. And the other releases -- press releases, what we have announced, during quarter 4, you can find in our website. And as a last topic, our outlook for 2025 is unchanged. So what we have said already earlier this year, we are aiming at reaching higher than 13.5% comparable operating profit. And as we are now at the end of the year, I would like to remind you also about our dividend policy, which is 30% to 50% of the net income. Aki Vesikallio: Thank you, Mikko. We can jump to this consensus already now and then take the Q&A. So we -- at the change of the year, we also changed the provider of our consensus services. So we now work with Modular Finance. So all of the analysts will be -- sell-side analysts will be reached out by Modular Finance to collect in the numbers. The consensus is now available on Hiab's website, hiabgroup.com. But with that, we jump to Q&A. And Antti Kansanen was first with his hand. Please, Antti, go ahead. Antti Kansanen: Yes. A couple of questions, and I'll start with the earnings side of things. If we think about Q4 versus Q4 last year, I think there was a couple of recurring type of cost elements on the fourth quarter last year. So how much of those that you don't expect to repeat this year? Just a reminder. And maybe then also reflecting on the EUR 20 million that you are flagging on the lower U.S. sales impact on Q3, will that impact be different on Q4 in terms of realized savings or higher volumes on the U.S. production on the fourth quarter? Mikko Puolakka: Thank you, Antti. So if I remember correctly, we had, last year, in quarter 4, approximately EUR 15 million nonrecurring items. We have also announced when we communicated this EUR 20 million cost savings program that for the full transparency, we will report these as items affecting comparability, so below the comparable operating profit. However, as the program is still on the planning phase, we do not anticipate, let's say, significant amount of one-off items in quarter 4, some but not in a significant manner. Once the program implementation starts in the first half of this year based on the planning, then we should start to see the nonrecurring items. What comes to the U.S.? Our quarter 3, like you mentioned, was impacted by the lower volumes. We got a fairly sizable home improvement customer order in quarter 2. And basically, that order, we have started to deliver now in quarter 4. So that will support the U.S. market profitability to some extent at least. So the expectation is that, that kind of volume impact would contribute to the equipment and total higher top line in quarter 4. Antti Kansanen: Okay. And then on the order side, don't have it in front of me, don't remember if you disclosed the U.S. orders from Q4 last year. But overall, just if you think about kind of the run rate that we saw in the U.S., especially on the equipment side in the past 2 quarters versus Q4 last year, what's kind of the delta? Mikko Puolakka: We have not -- if I remember correctly, in quarter 4, we have not announced any sizable orders in the U.S. So the comparison period as such was quite high. Antti Kansanen: Yes. And is there any seasonality that if we just like think about that the demand is similar as it has been, let's say, Q3? Is Q4 typically higher and lower in any type of calendar impacts or anything like that? Mikko Puolakka: Overall, quarter 3 for us is the lowest, typically due to the holiday season, and then quarter 4 is higher than quarter 3. And if I think the U.S. market in general, like I mentioned also earlier that there are kind of bigger customers, are kind of quite okay from the investment side, while the smaller customers are more considerate. However, with the bigger customers, the order timing might sometimes fluctuate so that they don't necessarily place orders in every quarter. Aki Vesikallio: Thank you, Antti. And next in line, we have Mikael Doepel. Mikael Doepel: Yes. So a couple of questions. Just firstly, coming back to the cost takeout. So just to be clear here, so what you're saying is that it's still in the planning phase and it's going to be implemented in the first half of this year, but you still expect the full EUR 20 million to flow through on the P&L next year? And related to that, how big will the one-off cost be at the end of the day? Mikko Puolakka: Yes, it's still in the planning phase. Of course, we need to have the works council negotiations before we can start to do the implementation. This EUR 20 million is the 2026 impact. So if you would compare at the end of 2026, our cost base, that would be EUR 20 million -- fixed cost base, that would be EUR 20 million lower compared to 2025. Aki Vesikallio: And on the one-off costs... Mikko Puolakka: One-off costs. We would come to the one-off costs most probably somewhere around the full year results announcement, in February. Mikael Doepel: Okay. Yes, right. And this EUR 20 million, is this purely just layoffs? Or are you doing something else as well to get those costs down? Mikko Puolakka: It's anticipated that it comes from various sources, personnel costs surplus, also other non-personnel-related costs. Mikael Doepel: Okay. Good. Then just secondly, on this aftermarket or the service business. So despite the fact that the markets have been fairly muted overall, I think you have been able to grow the business in quite a good way in the last couple of quarters. How should we think about this business going forward into Q4 into next year? What are kind of the levers for you to keep that business growing? And are you seeing any headwinds within this aftermarket business currently? Mikko Puolakka: Overall, like you said, despite the equipment volumes decline, we have been able to grow the services business. In our case, in 2025, the services growth has been very much coming from the recurring services, so spare parts, maintenance-related services. And this is actually very much according to our strategy because in our strategy, we have been focusing on the connected fleet, increasing through that basically the spare parts capture rate from the, let's say, current 47% towards 52% by 2028. And then basically, whenever we sell new equipment, we try to combine with that also the maintenance contract. And through the maintenance contract, then we can ensure that we or our partners, like dealers, get then the maintenance work and the spare parts sales when the customer requires the servicing. So basically, we have not, let's say, made any kind of new inventions as such, but we are just prudently executing those strategic initiatives, which we have been, let's say, identifying already, some years backwards. And these are now starting to bear the fruit, and you can see that in our service development. What comes to the U.S. market? We have seen that equipment utilization in the U.S. has been on a good level despite kind of new equipment orders declining, so indicating that customers are actively using the equipment and for that purposes, they need to buy spare parts. In the U.S., we have seen to some extent that customers are perhaps not holding as large spare parts inventories and what they kind of in a pre-tariff situation would hold in the spirit of not tying up capital in the inventories. Mikael Doepel: Okay. And then just finally, a question on your guidance. So you tend to guide an adjusted EBIT margin for the year. Is this the way forward as well? Or are you considering some other measures, perhaps sales growth or something else also for this year? Any changes planned for the guidance essentially the question? Mikko Puolakka: At the moment, no changes planned. So we have considered that for us the most important is the profitable growth. And of course, we want to make sure that the profitability is on that kind of trajectory that it brings us to the 16% comparable operating profit margin by 2028. Aki Vesikallio: Next in line is Tom Skogman. Tomas Skogman: I'd just like to talk a bit about the dynamics of the U.S. market. So I mean, now we have had a time with tariffs on your products and also on trucks. I've heard at least some rumors that in the truck industry that some seem to have difficulties to push through the tariffs and are backing off a bit, not to kill demand too much. Have you heard anything about this? And are you 100% confident your kind of price hikes are sticking basically? Mikko Puolakka: Yes, I can't talk about the others. But in our case, we have sticked with the principle that tariff is an extra cost for us, which we move to the customers. So we are also very transparent with the so-called tariff surcharge in our invoicing, not kind of hiding it in the price list, but showing as a separate line item in the invoice. Of course, we are doing also actively measures to mitigate as much as possible the tariff impacts, localizing the supply chain. We already assembly more than 50% of our U.S. revenues in the U.S. market. So continuously looking ways at how can we reduce the tariff cost, and that is also something what we continuously also reflect in the customer invoicing. So not kind of just sitting and waiting because most probably these tariffs are here to stay at least in some extent or in some form and shape. Aki Vesikallio: And in our industry, many of the OEMs have a similar type of assembly setup that we have. So global supply chains with local assembly, so no clear big differences between the players. Tomas Skogman: And there seems to be discipline that all stick to kind of adding tariffs to prices. You don't see this? [ You were inside the market. ] Mikko Puolakka: Yes. This is what our competitors have been doing as well. And in the U.S., the most -- let's say, most of the competition is coming from European companies. Tomas Skogman: We have seen lately that the Trump administration is quite active when it comes to Fannie Mae and Freddie Mac, trying to boost private consumption and construction, making it easier for the consumer. But do you see any positive signs in some segment of the market or some geography in the U.S.? Or is it still just negativity everywhere, basically? Mikko Puolakka: At least so far, until today, we have not seen any kind of notable changes in customers' behavior in the U.S. market, in none of the kind of end markets where we operate. Tomas Skogman: And then the opposite in Germany, we have seen good construction data in December. Do you see any -- the recovery is continuing, I guess, but do you see that it's accelerating or... Mikko Puolakka: I would say that the recovery, what we started to see in the latter part of 2024, has continued in those main markets like Germany, here in Europe. I can't say that we would have seen a kind of acceleration in the recovery, but solid development in that improvement part. Still, it's good to remember that -- or note that also our European volumes, if we would look the unit volumes, those are not necessarily in all markets even yet on 2019 level. So there is a kind of a replacement need coming -- piling up, but at least so far, we have not seen any kind of accelerated replacement activities. Overall, good tendering activity has continued like we saw already in quarter 3, but still it takes quite a while for the customers to make the kind of final investment decisions also in Europe. Tomas Skogman: And then I'd like to not discuss the Q4 margin yet, but if you go to H1, I mean, you had very good margins in H1 in '25. And help us to -- or remind us about the cost savings you had last year when you had the biggest incremental help. I mean, how is it then you roll over to Q1 and Q2 in 2026, then apparently, these savings for this year, this EUR 20 million will not really help now in H1. It's rather an H2 thing now. And -- but you had savings, if I remember right, immediately from the beginning of last year, right? Mikko Puolakka: Yes. Some kind of quick wins we had already from the beginning of 2025. But I would say that let's say, majority of the previous EUR 20 million cost savings kind of a run rate we started to reach somewhere in the middle of 2025. And also in this new program, which we announced now in quarter 3, I would say that it will not have, let's say, significant impact in the -- at least not in the first quarter and possibly also not yet in the very early part of the second quarter. Aki Vesikallio: As a reminder, so in the first half last year, the U.S. business were still much less impacted by the slow decision-making as we had volumes stemming from the latter part of '24 and January '25. Tomas Skogman: So do you -- I mean, is it wise just to expect that margins go down in the first 6 months then given you have lower order books and these savings are not really helping now the new savings in H1 and you had big savings from the beginning of last year? It sounds like that. I mean it's just good that we don't expect too high margins in H1, if that's the case at the moment, that it's more of a... Mikko Puolakka: Yes, let's come back to the 2026 margins when we provide the full year outlook. But yes, overall, like I said, the first half of last year, i.e., 2025 was still quite normal for the U.S. market, while we were then negatively impacted in quarter 3 and to a certain extent, in quarter 4, even though we started to book some of the revenues from those U.S. orders, which we received in quarter 2. But overall, as the U.S. order intake has been lower this year compared to last year, that will at least impact us to a certain extent in the first half of next year, before the cost savings start to kick in. Tomas Skogman: Then finally, are you in active acquisition discussions for more companies at the moment given your strong balance sheet and earlier communication? Mikko Puolakka: We have discussions with potential target companies. Aki Vesikallio: [ Edward ], you next in headline. Unknown Analyst: Sorry about that. Just an understanding on the EUR 20 million savings. Is this a structural saving? Or if the market turned in the U.S., as one hopes it does and gets back to a normalized market conditions, how much of that EUR 20 million would you actually see having to go back in? And then just on the other question, do you actually see then a sort of margin mix dilution as the equipment part picks up, going back to your comment about the overall usage and extension of either rental and lease contracts and over usage of equipment as it is, that you actually see the new kit being bought and the service side drops? That's one. And then the other question was just on pricing in the U.S. If you looked at your pricing for '26 versus your pricing that you were thinking about for the second half of '25, is there a major delta difference between that thinking? Mikko Puolakka: Thanks for the questions. First on the savings, we aim at doing as much as possible structural savings. So those should be fairly sticky, i.e., not kind of traveling type of savings, which might go up when the business picks up. So as much as possible, structural savings. Then what comes to the mix when the business improves? Yes, the equipment growth -- equipment business growth might have a slightly negative impact on the mix as services is now a bigger portion of the business due to the equipment sales decline. But it's good to remember that before the U.S. market decline also, our equipment business was doing a very solid double-digit comparable operating profit. So yes, equipment growth can have a slightly negative adverse impact on the mix. But on the other hand, with the equipment volumes, we can get good leverage on our SG&A costs. And then what comes to the pricing in the U.S.? I would say that the kind of underlying pricing in the U.S. has been fairly stable. But then, of course, due to this tariff surcharge, I would say that our pricing kind of invoicing to customers has been, say, 10-plus percent higher since, I would say, 1st of March compared to the beginning of 2025. Unknown Analyst: Okay. And then just a last question. If you just look at the overall inventory between both from yourselves and from competitors actually in the distribution network, how is that looking running into '26? Mikko Puolakka: In our case, our kind of inventories have declined in 2025 due to the top line declining. And if we think our dealers, they don't typically hold sizable inventories. They kind of -- when they get an order from the customer, then they place an order for our equipment, so they don't -- except for some kind of high runner, very standardized products. Otherwise, they don't typically hold sizable inventories. Aki Vesikallio: I don't see any hands up or any questions in the chat, but if we have any questions from the telephone lines, now is your chance. So I don't hear any questions from the telephone lines, but [ Edward ] has a follow-up. So please go ahead. Unknown Analyst: Sorry, I'll take an opportunity then. You talked earlier about discussions with clients in the U.S. that not much really has changed. But if you take the commentary from the larger clients at least, I mean what is their planning for '26? I mean, okay, we had the whole tariff friction through '25, but at some point, companies just say, "Okay, we just have to swallow it to a certain extent. We've had it so far. There's a degree of known dynamics within it. We've got to get on with the business." So what are they actually talking to you, the larger clients, at least who probably have the financial flexibility to make decisions? Mikko Puolakka: Yes. The larger clients, they have done, for example, market consolidation. So they have been buying competitors. And what they have been doing in '25 and most probably they would possibly do also in '26 is this kind of fleet renewals. They might have thousands of our equipment in use. And basically, every year, they may have to replace hundreds of those. So basically, they have -- like you said, they have stronger balance sheets. They have established relationships with leasing companies, and they are looking perhaps things in a bit longer time horizon than perhaps smaller players who might kind of have a bit more constrained balance sheet. Aki Vesikallio: Thank you. I don't see any further hands up, so it's time to conclude today's call. So we will go into the silent period on 22nd of January, and the results will be published on 12th of February. So stay tuned and have a nice, let's say, winter so far, and let's get back to the topics on 12th of February. So thank you, and bye-bye. Mikko Puolakka: Thank you.
Operator: Good morning, everyone, and welcome to the Sify Technologies financial results for the third quarter FY 2025-2026. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Praveen Krishna, Head of Investor Relations of Sify Technologies. Praveen, the floor is yours. Praveen Krishna: Thank you, Jenny. I'd like to extend a warm welcome to all our participants on behalf of Sify Technologies Limited. I'm joined on the call today by Mr. Raju Vegesna, Chairman; and Mr. M.P. Vijay Kumar, Executive Director and Group CFO. . Following our comments on the results, there will be an opportunity for questions. If you do not have a copy of our press release, please call Luri Group at 1 (646) 824-2856, and we'll have one sent to you. Alternatively, you may obtain a copy of the release at the Investor Information section on the company's corporate website at www.sifytechnologies.com/investors. A replay of today's call may be accessed by dialing in on the numbers provided in the press release or by accessing the webcast in the Investor Information section of the corporate website. Some of the financial measures referred to during this call and in the earnings release may include non-GAAP measures. Sify's results for the year are according to the International Financial Reporting Standards or IFRS, and will differ somewhat from the GAAP announcement made in previous years. The presentation of the most directly comparable financial measures calculated and presented in accordance with the GAAP and a reconciliation of such non-GAAP measures and of the differences between such non-GAAP measures and the most comparable financial measures calculated will be made available on Sify's website. Before we continue, I'd like to point out that certain statements contained in the earnings release and on this call are forward-looking statements rather than historical facts and are subject to risks and uncertainties that could cause actual results to differ materially from those described. With respect to such forward-looking statements, the company seeks protection afforded by the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors, including competitive developments and risk factors listed from time to time in the company's SEC reports and public releases. Those lists are intended to identify certain principal factors that could cause actual results to differ materially from those described in the forward-looking statements but are not intended to represent a complete list of all risks and uncertainties inherent to the company's business. I would now like to introduce Mr. Raju Vegesna, Chairman of Sify Technologies. Chairman? Raju Vegesna: Thank you, Praveen. Good morning, everyone. And thank you for joining us on the call. India's growth story has moved decisively from promising to performance. Strong economic fundamentals, policy continuity and accelerating digital adoption are positioning India as a central pillar in the global technology ecosystem. India IT is entering into a new phase, one defined not only by scale, by -- but by leadership in digital infrastructure, cloud and AI-led innovations. As enterprises and government intensify their focus on AI, cloud and data-driven platforms, demand for the secure and high-performance and governance digital infrastructure is rising rapidly. At Sify, our strategy is aligned with this inflection point through a sustained investment in hyperscaler data centers, resilient networks and AI-driven platforms, positioning us to enable the next decade of enterprise transformation in India. Let me now bring in our Executive Director and Group CFO. Mr. M. P. Vijay Kumar to explain both the business and financial highlights. Vijay Kumar? M. Vijay Kumar: Yes. Thank you, Chairman. We continue to exercise fiscal discipline while making measured investments to strengthen our long-term capabilities. Our capital allocation across data centers, networks, and people for digital platforms remains guided by a disciplined approach to risk and future readiness with a focus on long-term value creation. Let me now expand on the business highlights for the quarter. The revenue split between the businesses for the quarter was Network services 37%, data center co-location services 40% and Digital services, 23%. In this quarter, data center co-location capacity of 9.1 megawatts was sold. As of December 31, 2025, Sify Network Services provides services via 1,214 fiber nodes, a 9% increase over the same quarter last year. And as at the same date, we have so far deployed 9,695 SD-WAN service points across the country. A detailed list of our key wins is recorded in our press release, now live on our website. Let me briefly sum up the financial performance for Q3 of financial year 2025-'26. Revenue was INR 11,596 million, an increase of 11% over the same quarter last year. EBITDA was INR 2,470 million, an increase of 29% over the same quarter last year. Loss before tax was INR 257 million and after tax INR 329 million. Capital expenditures during the quarter was INR 3,452 million and cash balance at the end of the quarter, 31st December 2025, was INR, 3,627 million. I will now hand over to our Chairman for his closing remarks. Raju Vegesna: Thank you, Vijay Kumar. Sify is committed to driving technology-led growth by enabling enterprises to modernize, expand and capture new opportunities. Our resilient infrastructure and comprehensive portfolio of services provide a strong foundation to deliver sustainable value and long-term returns. As we execute on this road map, I want to thank you for your continued confidence and support in our vision for the future. Thank you for joining us on this call. I will now hand over to the operator for any questions. Operator: [Operator Instructions] Our first question is coming from Greg Burns of Sidoti & Company. Gregory Burns: I just wanted to start off just asking about maybe an update on the timing for the IPO of Infinit Spaces. Are there any milestones that are upcoming? Or how should we think about the major milestones that still need to be completed and the timing -- the expected timing for that IPO? M. Vijay Kumar: Yes, Greg, we filed the draft prospectus middle of October 2025. And usually in the period of 3 to 4 months, we get the securities regulators approval. We are expecting the approval of the draft prospectus this month. And we will be guided by the bankers on the exact timing of opening the issue and getting listed. Once we get the SEBI's approval this month, there are additional processes in terms of updating the draft prospectus with the financials as of 31 December. And basis the banker's guidance, we will go to the market for listing. Gregory Burns: Okay. And I guess you mentioned that you had sold an additional, I think, 9 megawatts of capacity this past quarter. Could you update us on maybe what your total design capacity currently is and how much of that in total has been sold? M. Vijay Kumar: Yes. The total design capacity is 188 megawatts, out of which the capacity which is ready for service is 130 megawatts. And out of 130, the total sold capacity is about 127 megawatts. Gregory Burns: Okay. Great. And then of I don't know, maybe over the next 6 to 12 months, could you give us maybe an update on the road map for your new data center construction, maybe in terms of either DCs or capacity that you expect to bring online? M. Vijay Kumar: Yes. There are 2 facilities in our Rabale data center campus, which will go live in this calendar year for which we have contracted with the customer. And there are other 2 greenfield projects, which are under construction. One of which will get delivered middle of this calendar year and the other will get delivered middle of the next calendar year. Gregory Burns: And the total capacity of those 4 facilities? M. Vijay Kumar: Okay. The aggregate capacity of all the 4 facilities at present is about 125 megawatts, but basis customers' actual deployment, the capacity could be a little higher because we are seeing customers bringing in AI workloads into the country. It has just begun. So the densities are expected to increase. Gregory Burns: All right. And then lastly, the digital services still operating at a loss. How should we think about that part of the business longer term. At what point do you expect that to maybe either be at breakeven or profitable? When are you going to start to get some operating leverage on the investments you're making there? M. Vijay Kumar: Yes. To breakeven -- I don't want to sound forward-looking, but let me give a little guidance to the extent I can. The next fiscal year, '26-'27, latter part of the year, we should hopefully become breakeven. And depending on how the services market scales up for the new offerings, which we are investing, we will see profitability thereafter. . Operator: Our next question is coming from [ Ramesh Vijaj ] of StockHifi. Unknown Analyst: Sir, you mentioned the 12.16 megawatt capacity sold since June 2025. How much of this is already revenue generating? M. Vijay Kumar: Out of that, the revenue generating will be about 4 megawatts because a substantial part of the orders have come in December, which will generate revenue in the coming quarter. Unknown Analyst: What is the average contract tenure and return on capital employed per megawatt? M. Vijay Kumar: For hyperscaler, the average [Technical Difficulty] Praveen Krishna: Hello, Jenny. We are experiencing difficulties on the line? Operator: Yes. Ramesh, I'm going to just boost your line. Are you quite far away from your handset? Unknown Analyst: No, we are able to speak. I hope you guys are able to hear us. Operator: That's better. Praveen Krishna: Jenny just a confirmation. I think we lost Vijay on this call. Operator: Okay. Bear with me one second. Vijay's line is still connected. Vijay, can you hear us? Okay. The line is still connected. Just bear with me a second. I'll try and pull the line, just one second. Okay. I'm trying to get Vijay back in the call. So just bear with me, I try and do that. Okay. One second. Praveen Krishna: Yes, please. He got dropped, so he's asking to connect again. Operator: Okay. For the moment, we have lost Vijay, and I'm not getting him back in at the moment. I will keep trying. In the meantime, if -- would you like me to carry on with any questions. We still have Ramesh on the line. Praveen Krishna: I would give it another -- could you hold for a minute, please? Could you hold for a minute? Operator: Yes, certainly. Yes. Ladies and gentlemen, we'll just wait a moment to see if we can get the Chairman back on the line. Praveen Krishna: I have Vijay on my phone, and he is listening in on this call, so he can take your questions. Operator: Okay. So Ramesh, if you would like to ask your question again. Unknown Analyst: The question was regarding the tenure of [indiscernible] . M. Vijay Kumar: Yes. The hyperscale contracts are all for a tenure of 7 years and with renewal for 2 further terms of a similar period and for enterprise contracts, it is 5 years and which usually tend to get renewed for similar periods. Unknown Analyst: Okay. Return on capital employed each megawatt per megawatt? M. Vijay Kumar: Return on capital employed, we measure it essentially for the stabilized facilities, which is facilities when they get fully populated. And for the fully populated facilities, the return on capital employed is in high teens. Unknown Analyst: So this IPO, which you're coming out with Sify Infinit, is this proceed going to be used for debt reduction of parent level? Or is it going to be used for fresh network expansion? M. Vijay Kumar: The IPO primary portion of it is going to go for data center expansion. A portion of the funds will go towards retiring the existing loans, and we will replace those loans with lower cost and longer-term infrastructure debt subsequently. Unknown Analyst: So how is Sify Infinit structurally separated like more debt, cash flow, everything, how exactly is it separated? M. Vijay Kumar: Yes. Sify Infinit Spaces is the 100% subsidiary of Sify Technologies Limited, separate legal entity. And its separate financial statements are available on our website. They are also available in the IPO documents which we have presented. It's also available at the MCA portal. The separate financial statements are available. And since our [ debt ] is listed in the Bombay Stock Exchange, the quarterly results are also updated in the Bombay Stock Exchange portal. Unknown Analyst: Okay. is the existing Sify shareholders ADR going to get any kind of shareholder quota in the new IPO? M. Vijay Kumar: We have been advised by the bankers that the existing ADR shareholders are holders of American Securities and the legal framework does not allow any priority to be given. However, the U.S. shareholders who have -- if you are in U.S., you can -- and you have a nonresident account in India, you can participate through the NRE account which you have here. Operator: [Operator Instructions] Our next question is coming from Prateek Singh of IIFL Capital. Prateek Singh: The first question is on the depreciation. So basically, I understand that the management estimates useful life for power equipment to be around 8 years. Is it something -- does it mean that after 8 years, we'll need to replace power equipment? I don't think so, right? It's just for accounting, the power equipment would be lasting for 15, 20 years. Is this understanding correct? M. Vijay Kumar: Exactly. You're right, Prateek. In fact, we have been in business for about 25 years. And except for certain items like the UPS and the batteries, rest of them have a life north of 15 years, north of 15 years. One of the reasons the company took a depreciation policy of an average of 8 to 10 years is to coincide with the pricing model, which the company adopts. So our pricing model assumes 8 to 10 years' capital recovery. And hence, the depreciation is synced to that. Prateek Singh: The next question is on margins of the data center business, which is kind of a steady state and growing very well for us. Margins, while I understand that they are stable, we saw a small dip in margin this quarter. So usually, when we have to forecast numbers, how should we look at it? Is it like hyperscalers? Are they driving pricing down or the situation is quite tight in India, and that's not the case. It might be due to power costs going up. How should we look at margins and pricing environment going ahead? M. Vijay Kumar: Okay. The EBITDA margins are consistent between 44% to 45%, 100 basis points difference at times arises between quarters, depending on the customers ramping up their IT power consumption. So when -- for example, Rabale Tower 5 went live in the last 9 months, and those equipments have come in, which have contributed to capacity revenue, but the power revenues start scaling up over a period of time. And similarly, whenever new large capacities come live, there are -- there is that period of ramping up for about 6 to 9 months where you have some operating expenses, which later give us the operating leverage to reduce the same. So it generally fluctuates between 100 to 200 basis points. Otherwise, it's close to 45%. Prateek Singh: Understood. And sir, so like you said, like sir said earlier that our design capacity is 188, installed is around 130, operational is 127. So did I hear it correct, the installed is 130, right? Or was it 150? M. Vijay Kumar: 130. Prateek Singh: Okay. So these are the same numbers as of June as per the DRHP. So does it mean that the CapEx that we are doing right now is going into capital work in process and we can see a step jump when a new facility is commissioned. M. Vijay Kumar: Correct. Correct. You're right. The design capacity of 180 between the DRHP of June and now is the same. A substantial amount of capacity is going to get added in this calendar year, where we have Rabale Tower 6 and 7, which will go live and Rabale 11 also, which is going to go live. So you'll have a substantial capacity getting added. Prateek Singh: And what kind of time difference do we see? Like -- so I understand that design capacity is bare shell, right, without UPS, gensets and all those things and installed capacity has all those things. So what kind of time difference do we see between 130 going to 188? Is it more like 6, 7 months? Or is it more like 12 months? So basically, how long does it take for installed capacity to rise to the level of design capacity in short? M. Vijay Kumar: Yes. So the markets are divided as Mumbai and other cities. In Mumbai, the recent experience is any capacity you add, the design capacity getting fully populated is approximately about 15 months, 15 months, whereas in other cities, where you build on a tower concept, where you build a core and shell meet the future demand because when customers come in, they see whether the capacity is scalable, that becomes one of the important requirements. So in other markets, they experience this, it takes about 3 to 4 years to get fully populated. But at times, if a hyperscale customer comes in, then it gets populated earlier. The second question you had on pricing. We are not seeing any pricing challenges, whether it is hyperscale customers or the enterprise customers. The pricing -- the return on capital is fairly consistent [indiscernible] for customers to look at it is availability of capacity on time. And the service providers quality of product and operations and maintenance is a key criteria for the customers and it continues to be so now. Prateek Singh: Understood. And sir, just a bit... Operator: Prateek, your line cut out for a second. Would you mind reasking the question, please? Prateek Singh: Sure. So is my line clear now? Operator: Yes. M. Vijay Kumar: Better. Better. Prateek Singh: Yes. So on the related party disclosures in the DRHP, when we talk about expense transfer and revenue transfer with the Sify Technologies, I wanted to get more sense as to what these are and how should we look at it? M. Vijay Kumar: Yes. Yes. So the related party transactions are broadly 2 things. The revenue transfer and the expense transfer, which you see there is actually in the context of some of the contracts which were signed by the parent company before the data center business was carved out. So those customer contracts have remained with the parent company because they are largely with the public sector companies, so those contracts, whatever revenue comes, we pass it on as it is to the data center entity as per the business transfer agreement. So parent company does not have any margin. It's just a simple revenue and expense transfer, which is -- that's point number one. Second is there are 3 data center assets, which are owned by the parent company. Those assets have been given on lease to the subsidiary because when we did the business transfer in 2020, it was tax efficient to retain the asset in the parent company and give it on a long-term lease to the subsidiary. The third point is as far as the go-to-market of the company is concerned, the go-to-market, we have for hyperscale business, a dedicated go-to-market team within the data center entity. But for the domestic enterprise business, we leverage on the go-to-market capabilities, which are there in the parent company, where we have about 5,000 enterprise customers. So that go-to-market cost and the marketing costs are apportioned on an actual cost basis to the data center entity. Prateek Singh: Understood. And just one last clarification. When sir said that December quarter will -- the capacity sold in December quarter will generate revenue in the upcoming quarter. By upcoming quarter, do we mean March or June? M. Vijay Kumar: March, March, March. A few more questions we can interact any time at your convenience, please feel free to reach out to us. Operator: Our next question is coming from Sourabh Arya of Oaklane Capital. Sourabh Arya: Am I audible? M. Vijay Kumar: Yes, you are. Yes. Sourabh Arya: Sir, my first question is actually on the Network business. So why this business is flat in this quarter? M. Vijay Kumar: Yes. As far as the Network business is concerned, during this quarter, we had some bit of price corrections for our existing customers. Second is there is also a small shift of customers moving from MPLS to Internet and when the customers move from MPLS to Internet because of the new technologies like SD-WAN and SASE, the price realization comes down. But at the same time, we manage our costs also to protect our margin. So volume-wise, we would have grown, but the revenue numbers would look a little flattish. Sourabh Arya: So does that mean this exercise will continue? And second, then how should one look at the growth of this business? Because I was under the impression, ultimately, it should grow in line with the data center business. M. Vijay Kumar: Correct. Correct. Correct. And that's actually what will happen. The Network business will grow similar to the Data Center business, but probably not at the same pace because Data Center growth momentum is significantly higher, but Network will also grow alongside the Data Center business. Sourabh Arya: Okay. And second was there's continuous new [ Vizag ] and this Google partnership on the networking side. Can you explain that if like what exactly is happening? And what kind of CapEx Sify would be doing because these are very large numbers that keep coming. M. Vijay Kumar: Yes, yes. So as far as Sify Network business is concerned, you might be aware, we are a carrier-neutral cable landing station operator in the country. We have one operating cable landing station in Mumbai for over a decade where there are 3 cable systems, which are landing and those cable systems may take them into the city to the various data centers. Now some of the hyperscalers, as part of their overall strategy, are looking at landing capacities in other cities in India. Visakhapatnam happens to be one such chosen location. So Google for their cable landing system, which is coming on the eastern side has chosen Sify as the partner for setting up the cable landing station where their cable will come and land. So this cable will land in a data center, which we are setting up in Visakhapatnam, which we call as an edge data center, where we'll have some anchor customers as well. And this cable will land there. And this cable from the data center and the cable landing station investment is not a material investment. It's a very strategic investment, though. The material investment will be carrying the capacity from the cable landing station to Google's own data center, which they are putting up in Visakhapatnam, which is not too much of a distance. So that will be a capital investment to be done. At this point in time, we don't have a real estimate of how much is that. But typically, those investments are largely funded by the customer themselves. So they would not be balance sheet heavy for Sify Technologies. Sourabh Arya: Okay. That is fine. So you will continue to benefit from this but not by putting too much of capital. M. Vijay Kumar: Correct. Correct. It's a very strategic investment. What it actually helps us in the long term is carrying the traffic which comes to the subsea cable systems into the data centers, length and breadth of the country. So that's the kind of strategic position it comes. It's similar to an international -- cable landing station is similar to an international airport where the traffic comes in. And from there, you carry the traffic to your network into the domestic cities. So that's a simpler way of understanding the cable landing station investment. Sourabh Arya: Okay. Okay. And one last question. So you said that the new data centers, the Rabale, the new towers, there the capacity is some 30s, right, per tower. But you are seeing some AI investments if they can upgrade the capacity. But is the -- so does it mean the CapEx per megawatt for some of these upgradation is far more than your traditional $5 million, $6 million per megawatt investment, which happens in normal scenario? M. Vijay Kumar: Yes. So currently, what is happening, Sourabh, is the 4 data centers, 2 of them are 77 megawatts, the other 2 are 55-megawatt. The 77 megawatts we are going to host AI infrastructure of the customer. So a customer is bringing in substantial amount of AI into that facility. This facility was originally designed for 52, whereas now it's going to be for 77 megawatts. And the incremental capacity, incremental CapEx cost for the AI is marginal for us, and some of it is getting funded by the customers themselves because they are bringing some proprietary design. Second, coming to the 52 megawatt is what I mentioned. The other 52 megawatts, which I mentioned, has been originally designed for cloud workloads. But if the customer is coming with AI workloads, we have the opportunity of increasing that 52-megawatt to a higher capacity. So it depends eventually on what kind of workloads the customer is bringing in. Sourabh Arya: Sure. This is helpful. Just very lastly. So when the normal DCs there, you have got air cooling. So does it mean -- and as you are saying, the CapEx would not increase much and it is done by the customer only. So does it mean none of these new capacities have some liquid cooling, et cetera, which are very, very expensive. And even if those are there, those would be borne by the customer. M. Vijay Kumar: No, no, no. That's not the right way to understand. All our data centers, which have gone live since 2024, are NVIDIA certified and capable of hosting liquid cooling systems. They're all designed for that. And our new facilities, Rabale 6 and 7, which is coming, right from day 1, will have liquid cooling system. And the commercial engagement with the customers varies from customer to customer, contract to contract. Some contracts we incur the whole amount and it gets added to the capacity charges. Some customers, the customer invests in that for which we enable the same. So it depends on contract to contract and customer-wise. And whenever you have the liquid cooling system coming in, the incremental cost is approximately $1.3 million per megawatt. Sourabh Arya: $1.3 million per megawatt, right? M. Vijay Kumar: Correct. Correct. Correct. Sourabh Arya: Okay. Okay. That is helpful, and that is borne by the customer or by you? M. Vijay Kumar: As I told you in some cases, the customer does it. Sometimes we do it and charge from the customers. Sourabh Arya: Okay. Perfect. And one last, if I can squeeze, is on the data services side, though you gave the guidance that maybe we will see some flat margins for breakeven by next year, second half. But what kind of ramp-up in this business is expected? Like because you've been building this business for quite some time now. And what are the green shoots? M. Vijay Kumar: We are expecting a combination of actions to help us get to breakeven. One is from our portfolio of services. We will look at focusing on 2 or 3 services more for revenue ramp-up like we have the cloud and managed services, the network managed services and the security managed services. So those are a portfolio, which we will see some revenue growth to help us get to breakeven, where we are actually developing capabilities around AI ops to bring the differentiation to the customers. That's part one. Some of the portfolios where the scale of opportunity is limited, we might decide to repurpose those resources and get them to businesses which are productive. So we are looking at that carefully, and we will do it in a calibrated manner over the next 3 to 4 quarters. We have good quality resources engineers, very young engineers, whom we have trained good quality people. So we would like to monetize their capabilities by increasing the focus on certain set of services. Operator: Our next question is coming from [ Ramesh Vijaj ] of StockHifi. Ramesh, can you hear us? Ramesh. It's quite hard to hear you. Unknown Analyst: Are you able to hear me? Operator: Yes, we can hear you now. You can ask a question. Unknown Analyst: There is a small thing that we would like to know. How should we go forward with this equity stability, especially such as CapEx and debt going forward, which is continuing to rise? M. Vijay Kumar: Yes. As the capital requirements is substantially for the data center business, and our initiative now to do an IPO helps us to create the stock as a currency. The initial primary capital which you are raising should take care of the demand growth for the next 2 to 3 years. And thereafter, we should be able to do a combination of rights and QIPs to raise capital to meet the incremental capital requirements. In fact, this listing is essentially to fund the growth for the future, given the fact that the business has very good prospects over the next decade. Unknown Analyst: What kind of offloading has been -- or what kind of new equity is being issued? How much percentage would be impacting for the existing shareholders for the Sify Infinit? M. Vijay Kumar: The DRHP has been filed and it is in the company's domain. I would encourage given the fact that these are all subject to capital market regulations, I encourage you to read the same. The primary capital which we are raising is INR 2,500 crores, and there's an offer for sale from our capital partner, Kotak, where we have [ Arya ] and GIC as LPs, where they'll be liquidating a small portion of their existing holding for INR 1,200 crores. So total issue size is INR 3,700 crores. Operator: And our next question is coming from Prateek Singh of IIFL Capital. Prateek Singh: Just a clarification on an earlier answer. So when we said we have 4 capacities in line, Rabale, 2 brownfield and 2 greenfield. So these 2 greenfield are in Rabale as well or they are in some other city or some of the area? M. Vijay Kumar: Yes, Prateek, all the 4 are greenfield. All the 4 are greenfield. 2 of them are right adjacent to the existing facilities. And the other is right opposite -- other 2 are right opposite the existing facilities. They all constitute a single CapEx. All the 4 are greenfield projects. Prateek Singh: Okay. In Rabale itself, right? All 4 are in Rabale. M. Vijay Kumar: In Rabale. They're all part of the same campus and all the 4 are greenfield projects. Prateek Singh: Understood. Understood. And when we sign these AI contracts, do they have -- do we expect to maintain similar kind of return on capital employed in AI contracts like cloud? Or would they be a bit higher? M. Vijay Kumar: At present, we are seeing same kind of returns. Early stages, Prateek, let's see how it increases in the future. But at present, it's the same set of returns. Prateek Singh: Okay. And the Andhra Edge facility will be 50 megawatts. Is that the right understanding? M. Vijay Kumar: No, no, no. Andhra Edge facility is on a land parcel of 3.6 acres. The initial design could be for 5 acres, but it's early stages. Once everything is firmed up, we will communicate to you. It's early stages. But typically, all the edge sites, we are designing it for 5 megawatts. Prateek Singh: Understood. M. Vijay Kumar: And just to clarify on that Andhra one. Apart from the 3.6, we have a land allotment of 50 acres, probably your 50-megawatt context came there. So we have a land allotment of 50 acres, which is there in Visakhapatnam, which is for the future capacity additions depending on how the demand comes in. Operator: Well, we appear to have reached the end of our question-and-answer session. I will now hand back over to Raju for any closing comments. Raju Vegesna: Thank you for joining us on the call. Have a good day. Thank you. . Operator: Thank you very much. This does conclude today's call. You may disconnect your phone lines at this time, and have a wonderful day. We thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Global Mofy AI Limited Fiscal Year 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Celine Meng. Please go ahead. Celine Meng: Thank you, operator. Welcome, everyone, to Global Mofy's Fiscal 2025 Financial Results Conference Call. Covering the period between September 30, 2024 and September 30, 2025. Thank you all for joining us on such short notice. My name is Celine, and I am the company's Securities Affairs representative. Today, I'll be presenting our prepared comments and then followed by a Q&A session with our CTO, Ms. Wenjun Jiang; and CFO, Mr. Chen Chen. Fiscal year 2025 marks a pivotal year of strategic transformation for Global Mofy. Beyond strong financial performance, this year represents our transition from AI-driven tools to AI native production workflows, laying the foundation for scalable, defensible and margin accretive growth. During today's call, we will review our financial results, strategic milestones, core technologies and growth outlook. Before we begin, I would like to remind everyone that today's discussion contains forward-looking statements, which involve risks and uncertainties that may cause actual results to differ materially from those indicated. These forward-looking statements are subject to risks described in our filings with the U.S. Securities and Exchange Commission. We encourage you to review our Form 20-F and other SEC filings for additional information. Today's conference call is being recorded, and a replay will be made available on the company's website. Fiscal year 2025 delivered record financial performance while also marking a strategic inflection point for Global Mofy. Highlights include total revenue of $55.9 million, representing 35.3% year-over-year growth, a gross profit of $22.5 million [Technical Difficulty] entered into a digital cultural tourism cooperation framework with Lianyungang’s Haizhou High-Tech District. We completed a total of $10.3 million in strategic private placement financings, established Gauss AI Lab and end-to-end AI-powered content framework, expanded our global AI data and training capabilities through Eaglepoint AI Inc. These milestones reflect not incremental optimization but fundamental transformation and how digital content is produced. For those who are new to Global Mofy, let me briefly introduce the company. Global Mofy is an AI-driven technology solutions provider focused on virtual content production and 3D digital asset development for partners across the digital content and value chain. Advanced AI and 3D reconstruction technologies, we create high-precision digital representations of characters, scenes and props, enabling deployments across film, television, gaming, XR and emerging AI native workflows. We operate across Beijing and Zhejiang China. And since our NASDAQ listing in October 10, 2023, under the ticker GMM.US. We've continued to scale both our technology platform and asset base. According to the Frost & Sullivan report, Global Mofy is now recognized as one of China's leading digital asset banks with more than 150,000 high-precision 3D digital assets. This slide highlights Global Mofy's evolution from a traditional digital content provider into an AI native production platform. Key milestones include early leadership in virtual production and software IP accumulation, strategic partnerships with Alibaba DAMO Academy and leading industry players, NASDAQ listing in 2023 and establishment of our Zhejiang headquarters, launch of [indiscernible] flagship AIGC platform built on NVIDIA Omniverse, expansion into global AI training and data engineering through Eaglepoint AI. Our road map reflects a deliberate multiyear transition towards AI-native infrastructure rather than short-term experimentation. [Technical Difficulty] leadership in technology and innovation. Highlights include National High-tech Enterprise designation, multiple most valuable investment Chinese Concept stop and Innovation Awards, membership and leadership roles in MIIT, Metaverse and digital economy organizations, recognization as a specialized and new SME in Beijing. These honors reinforce our credibility with enterprise customers, government partners and institutional investors. Innovation remains at the core of Global Mofy's long-term strategy. In FY 2025, R&D spending reached $7.5 million, representing 14.1% of revenue. Our R&D to revenue ratio significantly exceeds industry average of 5% to 8%. We hold 45 independent intellectual properties with over 10 new IPs added annually. Beginning in fiscal year 2025, we intensified development of generative AI production tools, AI native workflows, AI agent-driven data governance frameworks. We believe that our scale advantage in 3D digital assets, combined with deep production expertise, positions us uniquely for the next generation of AI-driven content creation. Now let's turn to our mission, vision and values, which define who we are as a company and guide us in everything we do. Starting with our mission, we aim to empower creativity through the innovative use of AI and digital technology. This mission drives our efforts to push boundaries and redefine what's possible in the digital content industry. Our vision is clear: to drive technological advancements while cultivating a culturally rich corporate environment. Our values, first, foster innovation, encouraging both ideas and groundbreaking solutions. Second, we prioritize and exceed customer expectations, delivering value that goes beyond the ordinary. Ultimately, our ambition is to build the world's leading digital asset bank, serving as a foundational infrastructure for AI native content industries. The Gausspeed platform is a flagship AIGC platform designed for industrial-grade cinematic production. Built on NVIDIA Omniverse, Gausspeed enables professional-grade visual generation. Gausspeed creates stunning realistic visuals with advanced AI technology, ensuring top quality results for virtual projects. Storyboard and shot design. It provides intuitive tools for detailed storyboard and shot design, allowing creators to visualize and plan each theme precisely, reducing the need for costly revision. A precise preproduction planning. Gausspeed offers advanced [indiscernible] capabilities for accurate preproduction planning, helping clients define service needs and minimizing trial costs. Editable assets, the video scenes and 3D digital assets generated by Gausspeed can be reedited to meet more customized demands, providing flexibility and adaptability for various project needs. We are confident in Gausspeed's ability to transform the filmmaking industry by providing a powerful AI-driven tool that enhances creativity and efficiency. Our 150,000-plus high-precision 4K 3D digital assets form the backbone of our AI capabilities. These assets span characters, scenes and props, natural environments, science depiction, historical errors and architecture. This asset bank enables faster production cycles, higher visual fidelity, scalable AI training and inference. It is a foundational competitive moat for Global Mofy. Mofy Lab integrates over 40 proprietary software systems into a one-stop content generation platform. Key capabilities include high-precision 3D reconstruction technology, digital content editing middleware, low-code and no-code production tools after reuse invocation and workflow optimization. Global Mofy allows us to deliver systematic, repeatable and scalable production outcomes. This slide summarizes several defining moments of Global Mofy in the past few years. NASDAQ listing and increased global visibility, launch of our Zhenjiang headquarters, entry into the AIGC field through strategic partnerships, completion of a major strategic transformation. Each milestone reflects progress towards an AI native operating model. Our management team brings deep expertise across technology, finance and operations, led by our CEO, Mr. Haogang Yang; and supported by CFO, Mr. Chen Chen; CTO, Ms. WenJun Jiang; and CMO, Mr. Nan Zhang, the team continues to execute our strategy with discipline and a long-term focus. Financial data-wise, now let me talk -- walk you through our financial performance for the fiscal year ended September 30, 2025, and provide some additional context around the key drivers behind these results. As of September 30, 2025, the company's total assets increased to $78 million compared to $59.2 million as of September 30, 2024, representing a 31.9% year-over-year increase. This growth was primarily driven by our continued investment in intangible assets, particularly those related to 3D digital assets and AI-related technologies. These investments reflect our deliberate strategy to strengthen Global Mofy's long-term technology foundation, expand our digital asset bank and support the transition towards AI native production workflows. Revenue for fiscal year 2025 increased to $55.9 million, representing a 35.3% increase from $41.4 million in fiscal year-end 2024. This growth was driven by sustained demand for virtual content production and 3D digital assets licensing business across multiple end markets, including film, television, advertising, game and digital tourism and et cetera. Demand remained resilient throughout the year, reflecting both the recovery of content production activity and increasing adoption of digital and AI-enabled production solutions. In addition, during fiscal year 2025, the company proactively responded to the active expansion of the short-form drama market by adopting an innovative cooperation model to participate in short-form drama investments and production projects. While still at a very early stage, we believe the continued expansion of this business line will further diversify our revenue streams and provide incremental revenue support over time, complementing our core virtual technology services. Gross profit and gross margin. Gross profit for fiscal year 2025 was at $22.5 million compared to $20.8 million in fiscal year 2024. Gross margin was 40.2% for the year. The year-over-year margin profile reflects a period of intentional investment as we continue to scale our AI native production infrastructure, expanded R&D initiatives and deployed AI agent-based workflows designed to support long-term automation and efficiency. While these investments weighed modestly on near-term margins, we believe they are critical to unlocking structural margin expansion in future periods, particularly as AI workflow mature and production efficiency continues to improve. Research and development expenses for the fiscal year of 2025 totaled to around $7.9 million compared to $7.4 million in fiscal year 2024, representing a 6.7% year-over-year increase. These investments were primarily focused on expanding and enhancing our 3D digital asset library to support growing AI-driven demand, advancing the development of AI-based generative tools and initiating AI-native production workflow research through the launch of Gauss AI Lab. We believe that these R&D efforts are essential to support long-term efficiency, scalability and intelligence production capabilities and position Global Mofy for sustained growth as AI native adoption accelerates across the digital content industry. Global Mofy is transitioning from using AI tools to embedding AI natively across production, data and workflows. Our growth strategy focused on international market expansion, especially in June 2025, Global Mofy made a strategic investment in Wetruck AI, a digital freight platform headquartered in Ethiopia, marking the company's first direct market entry into Africa and represents an important step in expanding the application of our AI capabilities beyond digital content into real-world infrastructure and logistics scenarios in emerging markets. Building on this foundation, in January 2026, the company recently established Eaglepoint AI, Inc., a Delaware-based AI infrastructure company, majority owned through our wholly owned U.S. subsidiary, GMM Discovery, LLC. Eaglepoint AI focused on AI data engineering, data governance and AI model training support, serving as a critical component of our global AI infrastructure plan out. Additional growth strategies also include strategic alliance and selective acquisitions, brand positioning as an AI-native content infrastructure provider, continued R&D investment in AIGC and asset expansion, enhanced customer experience through intelligent workflows, these strategies together underpin our long-term margin expansion and scalability. Thank you for your attention. And before we open the floor for questions, please note that the management team will be answering in Chinese for any discrepancies between the translated responses and the original answers. The original answers should be considered accurate. Please feel free to ask any questions you may have about our financial performance, strategic initiatives, our market outlook. Operator, please open the line now for questions. Operator: [Operator Instructions] We going to proceed with our first question. Question come from the line of [ Dona Young ] from Red Dragon. Unknown Analyst: Okay. Here's my first question. Could you explain how the company maintains a stable and strong revenue growth trajectory? Chen Chen: [Foreign Language] Unknown Executive: [Interpreted] Okay. So I will now translate the question for our CFO, Mr. Chen Chen, for answer. I will now translate the answers from Mr. Chen Chen. In fiscal year 2025, the company achieved a revenue of USD 55.94 million, representing a 35.3% year-over-year increase and marking a record high in our history. Mr. Chen Chen emphasized that this growth was primarily driven by 3 factors: First, continued demand growth for 3D digital assets and models across multiple application areas, including film, vision, advertising and virtual cultural tourism. Second, the overall expansion of the film, TV and short drama market, which increased demand for high-quality virtual content production services. Third, in response to the rapid growing short drama market, the company adopted innovative cooperation models to enter short drama investment and production, further diversifying our revenue sources. Mr. Chen Chen emphasized that we believe the continued development of the short drama business will provide additional revenue support and diversification going forward. Unknown Analyst: I have the second question -- can you provide an outlook of future performance? Chen Chen: [Foreign Language] Thank you for your question. And I will now translate the question for Mr. Chen answer. Unknown Executive: [Interpreted] Thank you, Mr. Chen Chen, and I will now translate Mr. Chen Chen's answer for your question. Mr. Chen Chen answered that building on the stable growth of our existing core business lines, the company expanded into short drama production in fiscal year 2025 as part of our virtual technology services and continue to advance our strategic planning in the AI agent space, which together strengthen our growth foundation. Looking ahead to fiscal year 2026, we expect to maintain strong growth momentum and further expand our market presence across key application areas through ongoing technological innovation, supporting sustainable and steady revenue growth over the long term. Operator: [Operator Instructions] [Technical Difficulty] I am showing no further questions. So I'll now turn back to Celine Meng for closing remarks. Unknown Analyst: Operator, can you repeat one more time the directions to join the call. Operator: [Operator Instructions] The next questions come from the line of Jason Liu from [indiscernible]. Unknown Analyst: Can you hear me? Operator: Yes, we can hear you. Unknown Analyst: I've got two questions. And the first one is over the next 3 to 5 years, will the company prioritize technical or ecosystem expansion? And how will resource be allocated? Wenjun Jiang: [Foreign Language] And then I will now translate the question for our CTO, Ms. Wenjun Jiang, for answers. Unknown Executive: [Interpreted] Thank you, Ms. Wenjun Jiang and I will now translate the answers from Ms. Wenjun Jiang. As CTO, Ms. Wenjun Jiang have just answered that we believe the technological depth and ecosystem expansion are complementary other than conflicting. Deepening our technology enables us to respond effectively to evolution market dynamics. While ecosystem expansion allows us to leverage existing technological strengths to attract more digital content, cultural tourism and entertainment projects, our resource allocation philosophy can be summarized as technology first and service-driven. Technology priority includes continued investment in AIGC and 3D reconstruction technologies, both of which form our core competitive advantages, serve expansion, including leveraging these technologies to broaden application scenarios and deliver more comprehensive solutions to clients. The company, Global Mofy will remain technology-driven while steadily expanding its ecosystem to achieve balanced growth and innovation. Thank you. We hope we have answered your question well. And if you have further questions, you may ask now. Unknown Analyst: Yes. I got one more question. The second one is, is short drama investment a long-term strategy or short-term monetization approach. Wenjun Jiang: [Foreign Language] Unknown Executive: [Interpreted] And I will now translate the question for our CTO, Ms. Wenjun Jiang for answers. Thank you, Ms. Wenjun Jiang, and I will now translate your answers in English. First of all, short drama investment is not merely a short-term monetization tool, but rather than an integral part of the company's long-term strategic planning. Driven by technology ecosystem expansion, as mentioned before, and user experience optimization, short dramas enhance brand visibility while serving as a strategic entry point for a broader market and technology application. We build the segment as a platform for aligning technical capabilities with sustainable commercial value. Thank you. We hope that we have answered your questions. And if you have any more questions, you may raise them now. If not, you may hang up. Operator: I am showing no further questions at this time. So I'll turn the call back to management for closing remarks. Celine Meng: Thank you. Thank you all for your insightful questions and for joining us today. On behalf of the entire Global Mofy team, we thank you for your continued support and interest in our journey. We look forward to reconnecting with you again soon. If you have any further questions, please do not hesitate to reach out to our Investor Relations team through e-mail. Have a great day. Operator: This does conclude the program. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Thank you for standing by. This is the conference operator. Welcome to the AGI Third Quarter 2025 Results Conference Call and Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions] Before we begin, we caution listeners that this call contains forward-looking information and that actual results could differ materially from such forecasts or projections. Further, in preparing the forward-looking information, certain material factors and assumptions were used by management. Additional information about the material factors that could cause actual results to differ materially from the forecast or projections and the material factors and assumptions used by management in preparing the forward-looking information are contained in our third quarter MD&A and press release, which are available on the AGI website. I would now like to turn the conference over to Paul Householder, President and CEO of AGI. Please go ahead, sir. Paul Householder: Good morning, and thank you for joining AGI's Third Quarter 2025 Results Call. Today, I'll review our Q3 performance and how the execution of our strategy is driving results. After my remarks, I'll turn the call over to Jim for additional commentary on the quarter. I'll begin with safety, which remains a top priority at AGI. Our recordable incident rate decreased 15% year-over-year to a new all-time low. In addition, more than half of our production facilities have now surpassed 1 year without a lost time accident. Clear evidence of our progress on safety and the benefits of embracing a zero-harm culture. We continue to invest in proactive measures, including enhanced training, digital monitoring and near-miss reporting. Safety isn't a stand-alone metric. It's embedded in how we plan, operate and make decisions each and every day across the entire company from our facilities to our corporate offices. To begin our prepared remarks this quarter, I would like to first address the delay in filing our results. This quarter, we experienced a delay in our third quarter filings, and we're unable to meet the prescribed timelines for releasing financial results and related disclosures. We concluded that further time was required to confirm and finalize the accounting treatment of operations in Brazil, as we have become aware through our internal channels of various financial reporting and internal control matters that required additional time to evaluate. Additionally, over a relatively short period of time, we created and launched a new business model, secured several large and comprehensive projects and formed an investment fund to support current and future projects. These measures, while delivering favorable profitable growth, added significant complexity to our business, which contributed to our auditors needing to fully review. Additionally, our audit committee performed an independent and comprehensive review of various matters relating to our financial reporting and internal controls with respect to operations in Brazil. Through this comprehensive review, we identified specific opportunities to improve our financial reporting processes and internal controls related to Brazil. These findings were determined to constitute a material weakness in our internal control over financial reporting. We are actively addressing this material weakness and have initiated remediation measures, which are further detailed in the disclosure controls and procedures and internal control over financial reporting section of the MD&A. Turning to a recap of our Q3 results, as well as a broader discussion on our key corporate strategies. AGI delivered a solid quarter with growth in both revenue and adjusted EBITDA despite a challenging market segment backdrop. Consolidated revenue reached $389 million, which represents 9% growth year-over-year. Importantly, this is consistent with our prior commentary on realizing second half revenue growth. Adjusted EBITDA came in at $71 million, up 4% versus prior year. Our third quarter results reflect both the strength of our strategy and the realities of our markets. While the North America farm market navigates challenging Ag equipment dynamics, our Commercial segment, in particular, within the international regions of our business are quite strong and continue to demonstrate a steady growth profile. Our third quarter results are perhaps the clearest example yet of the benefits we're realizing from the successful execution of the key strategies and tactics put into place over the last few years. AGI is now better positioned to capitalize on market opportunities across diverse geographies. As a reminder, we've organized our corporate strategies into 3 areas: profitable organic growth, operational excellence and balance sheet discipline. As we get into our third quarter results, I'd like to use this framework to provide updates across all 3 of these areas, including where these strategies have been implemented over recent years and how they are delivering value and supporting growth potential. I'll begin with profitable organic growth. Recall this strategy included 3 areas: product transfers, emerging markets and growth platforms. An inherent strength of our strategy is that each of these areas are interrelated, which serves to reinforce their effectiveness. I will address each in order. Undoubtedly, product transfers have been a growth driver for AGI. As a reminder, product transfers involve taking highly successful products from one region within AGI and running an internal transfer program to migrate the sales through to manufacturing capabilities to other attractive regional markets. Product transfers often include some local market product customization to ensure it will fit the requirements of a new customer base within that new region. Similar to the first half of the year, International Commercial segments benefited from our efforts on executing product transfers. Customer demand for complete solutions is high in Brazil, and our team is actively advancing several major projects secured in both 2024 and 2025 across food, feed and fertilizer in addition to our long-standing presence in the grain market. All these elements have come together to deliver strong customer engagement and a high pace of activity. Our comprehensive offering is a competitive advantage, which has enabled us to rapidly grow market share in one of the most strategically important and high-growth agriculture markets in the world. We are encouraged by the highly active pipeline and note that significant opportunities remain as we move into 2026. Product transfers have also been a key part of our success in areas outside of Brazil. In India, our storage bins, permanent material handling and portable material handling solutions have added important capabilities, which are providing top line stability and serving as a catalyst to access large and rapidly growing markets within India and across Asia Pacific. As a relatively early entrant into this emerging market, we remain optimistic about the potential of these new in-country capabilities to provide long-term profitable growth. Food, feed and fertilizer product transfers are the next areas of focus for India as we look towards 2026 and beyond, building on our success in Brazil. The second pillar of our profitable organic growth strategy is a focus on emerging markets, particularly within our EMEA business. A strategic deployment of business development resources into the Middle East has yielded several large project wins. Activity has also been steady in Africa and Southeast Asia with a consistent stream of new project wins. Preliminary visibility into potential new projects in Ukraine has begun to emerge. In aggregate, we have expanded our presence in many areas of the world, which supports the overall diversification and resilience of our business. Finally, the third pillar of our profitable organic growth strategy is our growth platforms. These include food and feed equipment businesses, as well as our digital products. These businesses have a focus on enhancing processing capabilities, which naturally complement our core storage and handling expertise. In addition, these areas all participate in very large and growing addressable markets. So far, our efforts have been mostly on enhancing and developing solution offerings. Leveraging capabilities within AGI and pulling them together into comprehensive stand-alone global business units. With that process largely complete, we are now gaining momentum and making positive contributions to our financial results. The feed business has a large pipeline with numerous opportunities in advanced quoting stages. The food platform is benefiting from concentrated efforts to develop new customer relationships and diversify across global end markets. And finally, the digital business, which has primarily been a North America offering is now being taken to new regions around the world, most notably into Brazil. Overall, these 3 strategies implemented just a few years ago have generated favorable financial and strategic results for AGI. These strategies are collectively driving the above-market growth we are delivering in the Commercial segment. As conditions in the farm market eventually stabilize, our strategy provides upside potential to our results, which fundamentally did not exist just a few years ago. A few further comments on the other 2 core elements of our corporate strategy, operational excellence and balance sheet discipline. Our operational excellence program continues to progress and is designed to optimize the business and deliver margin-enhancing efficiencies. Two significant facility consolidations within North America are nearing completion, enabling us to streamline production and remove costs, helping to create a more agile manufacturing network that can quickly and efficiently respond to market shifts and customer needs. In addition, towards the end of 2025, we also divested one of our smaller non-core Canadian facilities to a new owner, further streamlining our footprint within North America. Building on these consolidations, we've advanced several initiatives to optimize manufacturing throughput and streamline our supply chain. Our teams have implemented process improvements across key sites, rationalized product lines and enhanced logistics coordination. These efforts are already delivering benefits in cost structure and working capital efficiency and set the stage for improved profitability as volatile market conditions stabilize and demand rebounds in the North America farm market. Finally, our ERP implementation remains a cornerstone of our overall transformation. This enterprise-wide initiative is now progressing through a series of deployment phases. Once fully implemented, our new ERP platform will unify our systems, accelerate quoting and engineering workflows, and unlock significant efficiencies across finance, operations and supply chain, among other areas, which all ultimately serve to enhance the customer experience. This expanded organizational capability will deliver cost savings in addition to the potential for additional revenue through a more effective and integrated information system. While we are encouraged by the progress we've made in managing what is in our control by streamlining costs and finding more efficient ways to operate the business, as we look towards 2026, we expect to take additional steps to improve our operating efficiency across North America. These actions are designed to both optimize our operating cost structure while enhancing the customer experience. The measure of success of these actions will be to strengthen our North America operating margins across 2026. Finally, an update on our balance sheet discipline strategy. We continue to make meaningful progress on working capital, advancing the deployment of upgraded and consistent processes, tools and capabilities to each of our facilities and improving overall working capital visibility and control across the organization. In September, we launched a new commercial investment fund in Brazil, complementing the existing farm structure. This innovative investment vehicle allows us to bring differentiated offerings to the market, while monetizing AGI's long-term financing receivables tied to large commercial projects. With the fund now in place, future cycles of project financing and receivables monetization will be more streamlined, creating structural competitive advantages for our Brazil business. The first monetization of financing receivables occurred shortly after Q3. We expect additional inflows in early 2026, providing both liquidity and support for debt reduction. Finally, through a partnership with a leading Canadian financing institution, we have initiated a payables optimization program aimed at improving terms and increasing our average length of payables with certain high-volume suppliers. This will help maximize cash flow and incrementally further reduce overall working capital. Moving on to our order book. Our current order book remains healthy, supported by momentum in the Commercial segment. At the end of the quarter, our order book stood at approximately $667 million, up slightly year-over-year. Consistent with the first half of the year, the order book is heavily weighted towards commercial, given ongoing industry-wide challenges in the Farm Ag equipment segment. With over 90% of the order book allocated to Commercial, our order book is more impacted by the timing of successfully winning large commercial projects. The overall composition of our order book reflects a strategic shift towards higher-value projects with longer execution time lines. This approach enhances revenue visibility, strengthens customer relationships, while partially mitigating the impact from the slow Farm segment activity. A few comments on tariffs and recent developments. Tariff dynamics remain fluid and our internal teams are actively monitoring developments across key markets. New regulations and increased tariff rates were introduced in the third quarter. Our teams continue to explore available avenues to mitigate the effect of tariffs, including modifying and redesigning our supply chain. Overall, our agile organization, global sourcing strategies and flexible supply chain enable us to manage these uncertainties effectively, minimizing disruption and margin impacts. We will continue to closely monitor the situation for new developments. Progressing through the fourth quarter, activity and quoting pipeline across our international commercial segment remained steady. However, soft sentiment across the North American agriculture sector, particularly in our Canadian farm business continues to weigh on our overall performance with unclear timing for our meaningful for market recovery. The near-term focus for our North America farm business is order intake and a successful execution of our early order program. In addition, business activity in India and North America Commercial historically strong market for AGI began to slow through the end of the year with expectations to remain subdued into early 2026. Despite these headwinds, the strength of our order book within certain areas of the Commercial segment highlight the resiliency of our diversified business model, helping to partially offset the challenges across certain markets. Overall, Q4 expectations are for lower adjusted EBITDA sequentially and versus prior year, largely from challenging market conditions, negative mix and notably higher SG&A costs from a comparatively lower prior year. We remain excited about the potential of the company with the compounding impact of our strategy, delivering international commercial momentum combined with an eventual rebound in the North America Ag Equipment segment. I'll now turn the call over to Jim. James Rudyk: Thank you, Paul, and good morning, everyone. Today, I'll touch on a few areas that includes an overview of our third quarter results, an update on key balance sheet metrics, some comments on cash flow and a quick recap of our capital allocation priorities. Total revenue for Q3 was $389 million, up 9% year-over-year while adjusted EBITDA reached $71 million, an increase of 4%. Adjusted EBITDA margin came in at 18.2%, down about 100 basis points from last year, primarily reflecting the mix shift toward commercial projects. Our Commercial segment continues to deliver strong year-over-year revenue growth. This performance reflects our execution of large-scale projects across multiple international markets. Brazil remains a standout contributor. Customer demand for comprehensive solutions is high, and our team is actively advancing several major projects secured in both 2024 and 2025. Thanks to our product transfer program, technical support from strategic third-party partners and customized financing options, we are able to maintain a high pace of activity. Elsewhere, our EMEA region continues to make meaningful contributions driven by the execution of several major projects in the Middle East and Africa. Strong third quarter revenue growth was coupled with excellent cost control initiatives to enable an outsized capture of incremental adjusted EBITDA contribution from this region. As a result of execution of large-scale projects, increased volume and disciplined cost containment, our Commercial segment's adjusted EBITDA margin expanded to 19.5%, up from 17.9% year-over-year. It's worth clarifying that we did have some commercial revenue, which was anticipated in Q4, moved into Q3 based on project timing and accelerated achievement of certain milestones. Though this doesn't impact our overall outlook for second half revenue growth on a fully consolidated basis, which also includes expectations for a strong Q4 result for our Commercial segment. Turning to our Farm segment, while overall revenue declined this quarter, performance varied across regions. Brazil showed improvement with revenue and order book up quarter-over-quarter, the U.S. saw only a slight revenue decline and early signs of order book stabilization and Canada softened after a strong 2024, with conditions now broadly in line with the U.S. Low commodity prices continued to pressure farmer income and while dealer inventory for portable equipment declined through Q3, it's still above historic levels. As a result, our Farm segment adjusted EBITDA margin remains compressed due to lower volumes and an unfavorable product mix. We recently launched our annual early order program for portable grain handling equipment, a category hit hard by current market conditions. Adjustments have been made to better align with today's environment, but early feedback suggests purchasing trends may mirror last year's weak performance. While the program offers insight into sentiment, it's too early to call a trough in the overall market. Conditions remain challenging, and we're focused on cost control and preparing for a recovery. The simple reality is that industry conditions within our farm market have not changed. Crop prices are still low, dealer inventories are still high, and tariffs and subsidy support remain uncertain. We expect the near-term uncertainty in the North American farm market to persist into early 2026. One final comment on some of the details of our adjusted EBITDA in the quarter, it's worth calling out the transactional transitional and other line item in our adjusted EBITDA reconciliation. We have diligently worked to reduce this figure, as we have now progressed through several onetime expenses and projects related to streamlining the business. As a percentage of total adjusted EBITDA, this line item is largely immaterial this quarter. While certain transient projects and onetime expenses can come up on occasion, we believe we are now in a place where this line item should be smaller and less variable than prior quarters, enhancing our overall earnings quality. Moving on to our balance sheet and cash flow. Our net debt leverage ratio held steady at 3.9x on a quarter-over-quarter basis. This was primarily due to the sizable, but temporary working capital investments required to support large-scale projects, particularly in Brazil. Importantly, operating cash flow in the quarter remained strong, demonstrating the underlying strength of our business, though free cash flow was impacted by the requirement for some additional project financing in Brazil. We anticipate this cash flow dynamic will shift in the coming months and quarters as the previously announced investment fund setup in Brazil steadily monetizes these long-term receivables. This increases our cash flow, while decreasing our overall working capital investment. The process of monetizing these receivables through the investment fund has already started with AGI collecting some initial inflows in Q4. As we proceed into 2026, further monetization actions are expected. Strategically, with the investment fund in place, further projects and related transactions will be able to more rapidly move through our balance sheet and produce cash inflows, a unique advantage for AGI in the Brazilian market. And finally, a few comments about our capital spending plans for 2025. We remain on pace for total CapEx of approximately $30 million for the full year 2025 with about $21 million incurred through the third quarter. The expenses for our ERP implementation are not included in these figures. We're continuing to evaluate larger, more strategic capital investment opportunities and are advancing planning efforts in parallel. In closing, I would like to reiterate the importance of AGI delivering a solid Q3 amid varied market conditions. This is a tangible signal that our strategic initiatives are working and delivering real value to the business. Thank you for your continued support, and we look forward to updating you on our progress in the quarters ahead. Now back over to you, operator, to open up the call for questions. Operator: [Operator Instructions] The first question today comes from Gary Ho with Desjardins. Gary Ho: Just maybe just start off with respect to the reporting delay. There's a lot of accounting and legal jargon in the release. So maybe just can you walk us through kind of what the weakness in internal controls were related to? Was that uncertainty with revenue recognition, segregation of duties, maybe just high level, like what did the accountants get comfort with? And I'm assuming that's all been resolved and working through the remediation, we shouldn't experience any delays looking out. James Rudyk: Gary, thanks for the question. Yes, and so we did -- a lot of business opportunities in Brazil happened throughout the year, large projects, complex projects, new stuff to us. And we felt it necessary to do a deeper dive in our operations in Brazil. And really, it was great to do, make sure that we establish the right foundation and structure because these opportunities are quite large, and we expect them to continue for quite some time. So we took the time, and you could probably appreciate new businesses, new things going on and studied how we were doing anything. And the areas of focus that came out of it centered around a few areas related to things that you probably expect, segregation of duties. So in new businesses, typically, you have fewer people involved running with them and doing things. And so we have an opportunity to have more people involved, spread that responsibilities around, improve our segregation of duties. From a technical accounting perspective, these deals are and the legal agreements are quite complex. And so there's an opportunity there. I mean, we rely on third parties, but there's an opportunity there to enhance our specific accounting knowledge in these complicated areas and help with training people, providing more information for people and having more people internally be involved in the process. And then the last thing, too, that we've -- we're establishing is really just extra review processes and making sure that all the right sets of eyes are involved, scrub it and make sure that everyone is comfortable going forward. I think this is something that happens inevitably whenever a business gets involved in a new area, and so fortunately, we were able to do all the work and it's quite exhaustive work and come out of it with a very good remediation plan. Paul Householder: Yes. And maybe, Gary, just building on that to the second half of your question, building on Jim's comments, yes, that remediation plan, which is outlined in the MD&A, we've obviously internally built that out into a pretty comprehensive plan that our teams are focused on executing and implementing. And then the whole intention there, obviously, Gary, is to better position us to handle these projects in the future and avoid any type of delays in the future, again, to the second half of your question. Gary Ho: Great. Okay. And then my second question, just on the -- maybe for Jim, just on the long-term receivables that moved up $127 million in Q2, $169 million in Q3, I know you talked a little bit about the Brazil financing vehicle. Maybe just walk us through how quickly you can monetize these receivables and bring cash in and deleverage throughout 2026. James Rudyk: Yes. So we talked -- we did an announcement a little while ago about we put the fund in place. The fund is quite sizable and allows us to fund. It's now increased actually, but we announced a $1.2 billion [indiscernible] of availability. That structure is put in place. It's a unique solution. So part of the challenges of taking some time is this isn't an off-the-shelf solution. We've been working with our partners to get that put in place properly. It's in place. We have the investors lined up, the money is committed. And so now it's a matter of administratively for each of our deals, making sure all the steps are followed. And so that's what's taking a bit of time. That the administrative process for some of these tasks in Brazil is onerous and so we expect to have those completed through the early part of 2026. And no risk on the funding, no risk on things being done. It's really more procedural administrative. You've got a lot of -- from a legal perspective, part of the great feature of what we put in place is that we have lower cost of funding. And the reason for that is because we've got -- we're not just selling receivables, there's still collateral involved, and that collateral needs to be registered and that requirement is just administratively takes a bit longer in Brazil. Gary Ho: Okay. Maybe just a finer point. As we end next year, how -- like from now until end of '26, how much would do you think you can monetize through that or a range? James Rudyk: Well, it depends on the opportunities that we continue to take on. So we expect of the current opportunities that we have, we would monetize a good percentage of it. So we've talked about in the past, monetizing 60% to 80% of the amount of the sales at a minimum. And so we expect to continue to -- that would be our expectation of the percentage. We do keep some of the financing ourselves, but our intention, the way we're setting this up, Gary, is to make sure that all of our costs are funded through this monetization vehicle so that effectively, we're not dipping into our working capital or to our own cash to fund these deals or the cost of these deals. Operator: The next question comes from Steve Hansen with Raymond James. Steven Hansen: Yes. Look, real mixed emotions over this filing delay and the outcome, frankly. I mean, I don't know. I don't think anything about it was normal, really from an external standpoint. I think it's best to be said. I can appreciate the need for all the deep dives that sends the reason, but the delay was nothing normal course. But maybe just a question about it all. Were you surprised by the outcome at all? And why does it take so long ultimately is the question. And again, the complexity I can understand, but the timing and the delay, I don't think I really understand. So just, maybe when you got into this -- was it a surprise to you that it would take so long to go through all this review with the auditors? Or maybe just give us a sense for how the outcome reflected your initial expectations. Paul Householder: Yes. Thanks, Steve. Appreciate the question. And certainly appreciate the sentiment as well, one shared by us. As Jim commented, the activity that we undertook in Brazil was quite complex. It was -- the complexity was related to both the projects as well as the fund that was set up that Jim just outlined. As we started to understand that it was going to take more time to complete the audit and complete the internal reviews compounded by some concerns and questions that were raised internally. Steve, the focus quickly went to making sure that we got this right. So we were patient. We worked through it diligently. We wanted to make sure that we got it right. We wanted to make sure that we flushed out all of the opportunities for improvement so that we were better set up to handle this type of activity in the future. Net-net, it did take a while. That was certainly unfortunate. It was compounded a bit by some of the holiday seasons that we ran into. But to get to your question on the outcome, as Jim outlined and as written in the MD&A, some very valuable opportunities for us to enhance the structure of our finance and accounting procedures related to these, which again, as we implement those changes will better position us in the future. Steven Hansen: Okay. Appreciate that. Just turning back to the fundamentals then for a minute. Can you maybe just describe where you think we're at on the inventory side for portable in North America? I know you described it as above average, but it has been coming down, I think, by most accounts. The question is, when do we start to get to sort of that -- sort of basement level or normalization level where we can start to move off the floor because it's all -- integrates back into your own production profile, of course. Where do you think we're at? Are we 10% above average, 50% above average? Just give us a sense for that. And then how you think the front half of the selling season is going to play out here? And can we get back into sort of a higher operating rate in the back half? Paul Householder: Yes. Terrific question, Steve. And obviously, our portable product line fundamental to our farm business, very important across North America, as well certain pockets internationally. As you rightfully point out and as we've been commenting on the past, one of the headwinds that we have had with our portable equipment is a high level of inventory that's been maintained at our dealers that inventory levels really spiked at the tail end of 2024. The teams have really done a nice job partnering with our dealers across North America to implement various incentives to work that dealer inventory down. I would say, Steve, across the first half of 2025, those inventory levels were a bit slow to move that certainly accelerated across the second half of the year, we end 2025 in a much better inventory position than we started. As you noted, it's still above historical levels, but we're getting much closer. There's not a holistic answer to that question. And what I mean by that, Steve, is in the U.S., our inventory levels are actually in a bit of a better position. That's likely because the challenges that we saw in the market started first in the U.S. And so that cycle is just a little bit more progressed and you see that in our portable inventory levels being in a little bit of a better shape. We're confident that we're going to see the same result up in Canada, certainly across the first half of 2026. Jim did comment that our early order program continues to progress. At this point in time, we see it slightly ahead of where we were last year. And again, that's predominantly on the strength in the U.S. and that improved dealer inventory levels. Operator: The next question comes from Andrew Wong with RBC Capital Markets. Andrew Wong: So maybe let's just start with -- in the Commercial segment. The large-scale projects in Brazil. They've been a big success in terms of driving revenue. And they account for a lot of that year-over-year revenue growth in 2025. So maybe just 2 questions. One is, how long do you anticipate these projects run for? And is there enough momentum to kind of sustain that, that level of revenue or even grow that level of revenue in the coming years? Or should we expect maybe some more variability in the contribution year-to-year, just given how large these projects are? And then secondly, could other competitors also implement a similar receivables monetization type of solution like you have? Paul Householder: Andrew, terrific question. Thanks for that. We are encouraged. We are excited about these large-scale projects that we've done. The team has done an excellent job. Really building very valuable customer relationships in this area that position us very well to look at future projects. Our pipeline here is attractive. It is -- the opportunities do exist going forward. We'll continue evaluating those opportunities, looking to make the best decisions to deliver value to the company. So the opportunities do exist. We enter 2026 with some projects still in our order book that we will execute across 2026. So those will contribute to our 2026 results. In addition to that, there are opportunities for us to sign new deals within the year that could also further contribute. But again, we'll look to evaluate each of those on a case-by-case basis. You do, Andrew, raised a very valid point in terms of the variability because these are large projects, right? The signing of them comes in chunks. So if and as you sign one or two projects in a certain quarter, you see the impact initially in the order book and then translates later into our revenue. So you are right, this does create a bit of a lumpiness and variability in our order book. Obviously, the revenue recognition and the percentage of completion helps steady that out a bit from a financial results standpoint. Your final point there, Andrew, from a competition element, I mean, it's certainly possible for competitors to implement similar programs as we have. That being said, it's a heavy lift, and we would say that we have a significant head start that would form a level of differentiation for some time yet before any competitor is in a position to mirror what we've been able to put in place, both from a financial structure standpoint as well as partnership execution capabilities in other areas. Andrew Wong: Okay. Great. And then maybe just on other parts of the Commercial segment. It sounds -- obviously, Brazil has been strong, but it sounds like there maybe was some headwinds or a little bit of slowdown in India and North America. Can you just maybe comment on that and provide a little bit more details? And then just looking at the order book, it's up about 1% in Q3, is that a reasonable growth expectation for 2026? Like I'm just trying to help -- maybe just help us frame like how to think about Commercial in 2026, just given how much of a big revenue driver it was in 2025. Paul Householder: Yes. terrific, Andrew. All good points there, all good questions. Let me take them individually. We'll start out in India. We really like our India business, our India position that's been focused traditionally on rice milling for the past 4, 5 years, really up to 2025, we experienced tremendous growth, very strong market conditions. We have seen those market conditions shift across 2025, particularly in the second half of the year, we expect those market conditions to remain soft entering 2026. Andrew, at a very high level, it's a similar dynamic as we're seeing in North America, but at a different magnitude, obviously, not at the same magnitude. But basically, it's supply demand. The supply of rice is quite high. The demand is lower. That puts pressure on pricing, it puts pressure on the overall supply chain and ultimately leads to a softening of demand and we expect it to take a couple of quarters for that to work through. So that's our position on India, specifically on the rice milling. Fortunately, we've been very successful in product transfers. In our grain handling and storage area, the bins, the material handling, that gives us another avenue to explore market growth, which we expect can partially offset some of that headwind in India. To your next part of your question, North America Commercial, yes, we have seen some softening of that market activity really coming on here in just the latter part of 2025, we expect that softening conditions to continue in 2026, would suggest that this is consistent with some of the difficult farm ag market conditions that we have been experiencing over the past 18 to 24 months now translating a bit over to the Commercial segment impacting investment decisions. So the same kind of dynamics, lower commodity prices, trade uncertainty, volatility in tariffs likely impacting investment decisions around the commercial business in North America. Another dynamic is we have seen that investment by a large grain trader shipped from North America into -- out to the international and into emerging markets, where they see a lot of growth potential. Fortunately, our business positions in these markets enable us to capitalize on that. Finally, the order book, yes, we're pleased with where the order book is right now. We still have Q4 to work through, Andrew, before we have visibility into 2026. As we've commented, we remain cautious on the outlook for 2026. We are now saying that the trough in North America was not 2025. We expect those trough conditions to persist into 2026. We also anticipate, because our order book is weighted so heavily to commercial, that the timing of signing large commercial projects will impact our order book. If we don't sign a large project in 1 quarter and then we do a next, obviously, you'll get swings in the order book. So we're looking forward to 2026, the challenges of 2026. We do anticipate that the challenging market conditions will persist. Operator: The next question comes from Michael Tupholme with TD Cowen. Michael Tupholme: Just regarding the filing delay and the review that was completed by the Audit Committee, I guess I'm just wondering if you can talk a little bit about whether or not this was -- I mean, it seems clearly like it was focused on Brazil, but was there any consideration given to possibly needing to look at any other areas? And then as it relates to the remediation plan, can you sort of lay out a bit of a road map as to how that's going to unfold and at what point you would expect for all of the measures to be implemented? Paul Householder: Yes. Thanks, Michael. But 2 good questions there. And again, I think we've been -- we've covered a good bit of this in our MD&A. But just a further, yes, the focus of the audit was specifically on Brazil. We did not have any reasons nor do we have any concerns to look into any of our other regions. So yes, just to be clear on that, the focus of it was specifically on Brazil. In terms of the remediation plan that is outlined in the MD&A, obviously, we have built that out into further details here internally. We are signing accountabilities on the specific actions, we're putting a project plan in place that has specific timing around it. This is obviously a top priority for us and we will work through it diligently. Our plan is to get this implemented as quickly as possible. We don't yet have a specific timing in which all of these items will be completed. It will probably vary. Some of the things will get done and put in order pretty quickly. Others when you talk about training, knowledge transfer and learning across the organization, that could take a little bit more time. But nonetheless, this is a top priority for us, and we'll get it done quite quickly. Michael Tupholme: Okay. That's helpful. And good to understand. Regarding the commentary you provided around the fourth quarter specifically, you're talking about a sequential decline in adjusted EBITDA. I'm wondering if you can provide any more detail on that outlook, particularly given the fact that we're in early January here? And also maybe to what extent this is reflected in sort of dynamics in Farm versus Commercial? I mean, I think we -- it's clear that commercials were even seen most of the strength and farm more challenged. But any kind of commentary at the segmented level? And then I'm also curious about the SG&A cost that you're suggesting are going to be higher in the fourth quarter. Is that specifically related to some of this review process? Or is there something else going on? And will these remain elevated? Or is this more of a Q4 specific dynamic that ceases to be sort of higher cost when you get beyond Q4? Paul Householder: Yes. It's terrific, Michael. I'll address the first half of your question, and then I'm going to turn it over to Jim on the SG&A side. But you're absolutely right. We do expect Q4, as we commented on, to be down sequentially and down versus prior year. A good portion of this is market related and some of the challenges that we're seeing both in North America, specifically Canada Farm and a bit North America Commercial as well as in India. Those are 2 business drivers -- market drivers that are a headwind to our Q4 results and are impacting EBITDA consistent with what we've outlined in our prepared remarks. SG&A Is also a variable when you look to prior year, and I'll let Jim comment on that. James Rudyk: Yes. So Michael, SG&A is more of a Q4 dynamic. Last year, as we entered Q4 and then got caught a bit off guard with the lower-than-expected U.S. farm or farm results. That required us to do an adjustment to our bonuses primarily across the company. That adjustment was done in Q4 last year. So SG&A last year was slightly lower. This year, we've been on top of the bonus recordings and expectations throughout the year. So you don't have that adjustment as you did in Q4. So really just a onetime dynamic for Q4. Paul Householder: Yes. So just to pick up on, Michael, we wouldn't expect this to be something that continues going forward. SG&A remains a focus for us. We understand the importance of ensuring that our cost structures align with our market and revenue reality. Operator: The next question comes from Tim Monachello with ATB Capital Markets. Tim Monachello: Most of my questions have been answered. But could you just remind us, I guess, how much was monetized under the [indiscernible] structure in Q4? James Rudyk: Well, so we did monetize some in Q4, a smaller amount. So we'll get into those details as we report our Q4 results. So that's good. So the first -- one of the first deals went through the fund. So the fund structure works. We know how that all flows through. And now we're focused on monetizing the other ones as quickly as possible, which will be done in early 2026. Tim Monachello: Okay. And then in terms of some of the efficiency initiatives that you're implementing in 2026, so I'm wondering if you could provide a little bit more detail on the facility closures and facility consolidations that are ongoing and the impact that you see to margins due to these initiatives and potentially any operational impacts that you see? Paul Householder: Yes. Tim, thanks. Terrific questions. I mean, obviously, as we've noted, the accounting ag equipment market dynamics have continued in North America across 2025. This does give us an opportunity to continue to review what I'll call our integrated supply chain to ensure that we've got the right and the optimized cost structure. And when I say integrated supply chain, you can think of manufacturing in the middle, but obviously, our suppliers, as well as our inventory, working capital, all of those things fall within that integrated supply chain review. So there is opportunity given the softness for us to optimize our cost structure, make sure that we do are running an efficient operations. We actually kicked off this initiative just at the onset of Q4, we expect actions to take place across Q4 as well as Q1, which should put us in a better position to run a more efficient operations across 2026. As we've noted, the measure of our progress in this area will be gross margins. When you look at our gross margins across our farm business, they are depressed in 2025. A number of factors are contributing to that. We obviously had tariffs as a headwind. We had a bit of mix within our farm business as a headwind. And then the third one is the point that you brought out, just the opportunity to improve the efficiency of our operations. So we expect to get that in a pretty good shape at the tail end of Q1, which then should be something that is a bit favorable from a margin standpoint in the second half of 2026. Tim Monachello: Can you say any specifics around which facilities are being consolidated? And any commentary around maybe proceeds from the facility divestiture received in Q4? Paul Householder: Yes. Yes, for sure, Tim. So we had 2 facility consolidations that we initiated throughout 2025. One of those was a facility in North America that we commented on really at the tail end of 2024, as we consolidated our bin manufacturing to our facility in Canada. The second one that we implemented more towards the middle of 2025 was the smaller operations in Canada that we also consolidated within one of our other Canada manufacturing facility. So I'll note both the consolidations increased our activity within Canada, but ultimately improved our manufacturing footprint. In terms of the small facility non-core that we moved to a new owner, that was -- that did not have any significant impact. I would categorize that, Tim, as less than $10 million. Tim Monachello: Okay. And do you expect any onetime costs or increase in transaction, transition and other costs in Q4, Q1 related to some of the initiatives that are being implemented today? James Rudyk: Yes, there will be some additional costs, some legal costs that will run through there, not significant. Not anywhere near the magnitude of what you've seen in the past. A lot of our -- as we commented in the script, a lot of those large unusual items that have happened in the past are behind us. And so going forward, you'll only have a smaller amount of costs that we'll identify out for you to be able to do what you want with in terms of how you view them. But they'll be related to nonoperational, just more restructuring type costs or unusual legal costs. So we did have this work done in Q4. So we'd expect to see a small amount going through there in Q4. Tim Monachello: Okay. And then I just want to talk a little bit about, I guess, signals that you're seeing on the demand side in North American farm. You've talked about sort of historical cadence of demand and sort of the troughs and how long they last. And it would suggest -- or seem that you're probably reaching a sort of new record time line for a dearth of portable demand. And -- while you see inventories declining at the dealer, do you have any commentary or feedback from your dealers related to, I guess, demand that they're seeing coming in their doors? Like is that changing at all? Is it weakening or strengthening in any way? James Rudyk: Yes. Thanks, Tim. Obviously, the North America farm market is one that we're paying extremely close attention to. We're looking at various macro level indicators that could go -- provide us insights into where we are in this cycle as well, Tim, as you've noted, specific feedback from our dealers and insights on market activity. As we sum all of those insights up, it does lead us to the conclusion, consistent with what some of the other players in the market have articulated that 2025 is not expected to be the trough, likely more 2026 is the trough. That's not significantly different from the look back at historical ag market cycles that we've commented previously, where peak to peak can be in a 6-year time frame. So if you put that into context, '26, as a trough is not unreasonable. Getting to the second half of your question, what are we hearing from dealers? What are we hearing about their inventory levels? As we've commented on from the portable equipment, inventory levels are certainly coming down. That is encouraging. We are in a much better place in aggregate than we were entering 2025. That is also encouraging, a little bit more strength in the U.S. than in Canada, likely from a timing standpoint. So our dealers -- I would say, have remained cautious. I think that's probably the best description. Our dealers remain cautious heading into 2026, as do we recognize the importance of that relationship with dealers. We're partnering with them. We're very close to them on navigating this market cycle. And we'll continue to work forward or work with them going forward. Operator: The next question comes from Maxim Sytchev with National Bank Financial. Maxim Sytchev: Maybe the first question for you, if I may. Just circling back to accounts receivables. And maybe qualifying -- sort of like, should we be concerned around the aging of these receivables, sort of -- I mean, that's the first part of the question. And the second part, when you use the fund to monetize what you already have, so can you just utilize these 4 new projects? Or can you use that sort of like in the bucket of overall projects as those are cycling through the percentage of completion dynamic? So can you provide a bit more color there. And I mean, I guess, ultimately, it's also sort of linking to how should we be thinking about the free cash flow generation on a prospective basis. James Rudyk: So okay. So the first part of your question, Max, in terms of concerns on the aging. So our receivables, overall, generally, the aging has not deteriorated. It remains consistent across our company. We've got extremely, extremely low write-offs historically in terms of concerns with customers not paying. So the aging is not a concern. However, for these new deals, and as you get through and go through the financial statements, you'll see commentary. Terms offered for some of these deals are typically 5 years, a large one, though is at 15 years. And so that's -- offering that length of financing is why what's exciting about this fund that we've created helps us with. And so we can monetize and reduce our risk of all those finance -- the length of that financing time and by having these investors provide us with the cash upfront. In your question in terms of -- your second part was about which -- what can I use the fund for? These are, I mean, it's not just for any type of receivables. It's for certain these larger projects -- certain types of customers where the investors like the profile, they like the dynamics of it. They like the areas of the industry that they're focused on. And we have a governance structure set up, whereby there's an approval required at the fund level to determine on which projects will get funded. That said, how we set it up was based on the projects that we have in our pipeline and the customers and what we see coming down the pipe. So we expect to be able to fully utilize the entire amount of that fund over the coming year. Maxim Sytchev: Okay. And I guess, do you mind maybe commenting about the inflection dynamic around free cash flow, how we should be thinking about this? Paul Householder: Yes. So the timing it's the free cash flow for this year. If you look at the LTM in our MD&A, it's a negative, negative $61 million. Initial expectations were for that funding to happen in Q4, which would flip that into a positive that will be stretched out into early part of 2026. And the funding is significant. And when that does happen, we will not be impacted by doing these types of deals from a free cash flow perspective. So said differently, we expect positive free cash flow through in 2026, and we'll be able to continue to take on these larger deals and not have an impact our free cash flow going forward once this fund is up and running and moving very smoothly through the process. Maxim Sytchev: Okay. Understood. And then, Paul, if I may, just 2 quick ones. In terms of -- I mean, obviously, there was speculation that Kepler Weber could be potentially acquired in Brazil? Just I was wondering if you have any initial thoughts on that in terms of the competitive dynamic? And if you can also provide a bit of an update on ERP implementation just in terms of milestones, et cetera? And that's it for me. Paul Householder: Yes. Thanks, Max. We're aware of some of the conversations around Kepler Weber that have surfaced publicly. Obviously, we're not going to speculate on how that could play out. As I've noted in prior commentary, Kepler Weber is a good competitor, long-standing competitor down in Brazil. Traditionally have had the #1 market share. We like the competition. We've learned a lot from Kepler Weber. And we expect, regardless of what transpires down there that they will continue to be a good competitor for us in the market. Regarding ERP, we're now fully in the -- what we would call the deployment phase of ERP. We've completed the global design. We are now deploying it across our facilities. An important milestone. We completed our first deployment at a Canada facility this year. That was a great learning for the team, fantastic participation by that facility. Great work by our ERP implementation team. 2026 will be specifically focused on implementations. Our next one is planned for India, which we are targeting to get done somewhere around the first half of this year. And then after India, expectation is that we will move to North America Farm. We're excited to get into the deployment phase. We're focused on having a very efficient ERP implementation, but also one that we quickly work through so that we can start to realize the benefits that the new ERP system is going to deliver. Operator: The next question comes from Steve Hansen with Raymond James. Steven Hansen: Just one quick follow-up. Just notwithstanding all of the accounting review stuff that we've already talked about. Jim, do you feel like you've got the people and the team in place in Brazil to manage all of these big projects? I'm thinking more on the operational and the engineering side, the upfront side and then even as it dovetails into that into the downstream manufacturing side, like what else you need to do to really capitalize on this opportunity? It sounds like it's not 12 months. It sounds like it's a multiyear. So just trying to understand what else where you need to invest, if at all, to take advantage of the opportunity? Paul Householder: Steve, excellent question, and that is absolutely one of the areas that we're going to look on and address as part of our comprehensive remediation plan. As we've outlined in the MD&A, specific around the training and development of that team as we look at these large complex projects as well as the complexities of the fund transfer that Jim has outlined. We do expect that there could be additional resources that we would look to add to complement the capabilities that we already have in Brazil. As you've noted, Steve, that would be very appropriate given the opportunities that exist in front of us. We want to make sure that we are well set up. We got the capabilities. We've got the knowledge to efficiently handle these. So yes, adding resources, adding capabilities down into Brazil is absolutely something that we're going to take a look at. Operator: The next question comes from Krista Friesen with CIBC. Krista Friesen: I was just wondering if there's any other levers you're able to pull on in 2026, like previously, you've talked about a rebate program to try and help stimulate some demand. I'm just wondering if there's anything else that could be done at this point. Paul Householder: Yes. It's a terrific question, Krista. And just based on your question, as you're referencing levers, I assume that's related to the North America farm market and what we can do to stimulate demand. What I would say is that we're looking across all available levers. So that is a very appropriate question. We have used rebates and we continue to use rebates in very targeted areas, and those rebates are around driving down inventory levels, which certainly helps to stimulate demand. We are also looking at a number of different areas, how we can continue to improve our cost structure for our portable equipment so that we can further improve the competitiveness of our products. We actually launched a number of new products on our portable product line. We introduced those new products, Krista, and some of these large farm shows across 2025. Those new product lines were very well received. We've now introduced those out into the market. That is a significant lever for us to pull to stimulate demand. So our product development, product enhancement initiatives along with cost, along with rebates are all levers that we would look to pull. So it's a spot-on question and the team is doing a lot of great work in that area. Krista Friesen: Okay. Great. And then, maybe just to think about margins on that front. You spoke to a previous question that the length of this downturn maybe isn't too different than previous ones. Using history as a guide, how are you thinking about margins in 2026? Yes, any color there would be great. Paul Householder: Yes, for sure. Krista, we didn't comment on margins. We commented on the opportunity for us to enhance our operational efficiencies in 2026, a measure of which would be improved margins. If you look specifically at North America Farm, our portable team has done an outstanding job in managing the business and maintaining margins. Really, our focus is more on the permanent side as well as complementing into North America commercial. So it's in those areas that we want to make sure that we've got the right cost structure in place. We got the right capabilities built out from a customer service, customer engagement standpoint. And in those areas, we would expect to make improvements in the early part of 2026 that support margins in the second half. Operator: Next question comes from Kyle McPhee with Cormark Securities. Kyle McPhee: I'd like one final clarification on the Brazil accounting issues. The very back of your MD&A does state that the material weakness cannot be considered remediated yet. And you've defined material weakness as leaving potential for finding or incurring reporting misstatements. So is it fair to say that we can't yet rule out the need for a restatement or a change to how you account with the operations in Brazil? Or is that risk fully gone? James Rudyk: Well, the work has stopped in terms of the review, and there was no restatement. So, I mean, that's stayed in the MD&A. In terms of the timing of getting everything remediated, as Paul talked to earlier in his response, some of these things and activity just take time. And that's -- it's really just that simple. It's just a number of initiatives being done to put in place, and there's no expectation of any issues of no material adjustments, as you noted. And so it's really just a few of the activities will take some time to put in place. Kyle McPhee: Okay. And then the last one, just can you provide any color on the terms you expect as you monetize these long-term accounts receivable related to Brazil, like pennies on the dollars you're expecting to get, notably given we now see these are 5- to 10-year receivables, and you do have that first little case study looks like you monetized $8 million in Q4. So any color there, if you can. James Rudyk: So when you say the terms, what do you mean the terms? The amount? Kyle McPhee: You're presumably not selling the receivables at full face value. So I mean anything you can tell us from what you learned about the first $8 million at the very least? And how much of a discount? James Rudyk: So well, so the rate that we're being charged for the monetization is similar to the rates that we're using to discount what we record. One of the unique features about this whole monetization is the way we set it up. The collateral that's provided, the percentage of receivable that we're monetizing is very different than your traditional factoring of receivable approach. So the cost to us is significantly lower and fully reflected in our financials. Paul Householder: Thanks for the question, Kyle. And we really appreciate all the questions and participation that we've had in the call this morning. We look forward to further discussions on the quarter over the next week. So thanks, everybody, for dialing into the call this morning. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the Acuity Brands, Inc. Fiscal 2026 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, the company will conduct a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Charlotte McLaughlin, Vice President of Investor Relations. Charlotte, please go ahead. Charlotte McLaughlin: Good morning, and welcome to the Acuity Brands, Inc. Fiscal 2026 First Quarter Earnings Call. On the call with me this morning are Neil Ashe, our Chairman, President, and Chief Executive Officer, and Karen Holcom, our Senior Vice President and Chief Financial Officer. Today's call will include updates on our strategic progress and on our fiscal 2026 first quarter performance. There will be an opportunity for Q&A at the end of this call. As a reminder, some of our comments today may be forward-looking statements. We intend these forward-looking statements to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, as detailed on slide two of the accompanying presentation. Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP measures are available in our 2026 first quarter earnings release and supplemental presentation, both of which are available on our Investor Relations website, www.investors.acuityinc.com. Thank you for your interest in Acuity Brands, Inc. I will now turn the call over to Neil Ashe. Neil Ashe: Thank you, Charlotte, and thank you all for joining us today. We delivered strong performance in our 2026. We grew net sales, expanded our adjusted operating profit and adjusted operating profit margin, and increased our adjusted diluted earnings per share. We generated strong cash flow and allocated capital effectively. Acuity Brands Lighting performed well in a tepid lighting market. This is the result of the cumulative effect of our strategy to increase product vitality, elevate service levels, use technology to improve and differentiate both our products and how we operate the business, and to drive productivity. Our product vitality efforts continue to deliver value for our customers and for us. This quarter, we launched our new EAX area luminaire product family by Lithonia, an outdoor luminaire that can be used in any environment, from walkways to large parking spaces. EAX is available in our design select portfolio and has over 60 configurable options, including an option to embed RN-like controls. This makes it easier for our agents to choose the right option for our customers and ensures flexibility for multiple types of projects. ABL is winning in new markets through the combination of our luminaires and electronics. Interestingly, our Nightingale brand won several 2025 Nightingale Awards by Healthcare Design Magazine because of our patient-centric approach to product design. Our Nightingale solutions are engineered with the entire patient journey in mind, creating an environment that supports medical teams while ensuring patient and visitor comfort. For example, the Attend sconce and the Asure Nightlight deliver functional low-level illumination that supports patient sleep while enabling caregivers to perform essential duties. In the Refuel segment, we continued to expand and upgrade our lighting solutions. We initially entered the market with the development of our canopy lighting products. In this quarter, we began delivering a comprehensive offering by incorporating AIS products, including our Atrius software and Distech controls, into the refuel solution. By addressing the canopy lights outside, to refrigeration controls in the back of the convenience store, and everything in between, we are creating value throughout the location. The industry continues to recognize the strength of our products. This quarter, several products in our portfolio were awarded Grand Prix de Design Awards and Lit Lighting Design Awards. Two products recognized by both include the Cyclone Lupa, a contemporary outdoor luminaire that focuses on pedestrian safety and security in public spaces like campuses, parks, and city streets. The Eureka segment, a slim minimalist linear LED pendant light designed for a variety of indoor commercial and hospitality environments. Now switching to Acuity Intelligence Spaces, which continues to deliver strong performance. Through Atrius, Distech, and QSC, we have unique and disruptive technologies that are driving productivity for people experiencing spaces and for the people who are providing those spaces. Spaces that range from amusement parks to theaters, university campuses to healthcare facilities, sports stadiums to your office. Atrius and Distech control the management of the space, and QSC manages the experiences in the space. Over time, we will use data from both to enhance productivity outcomes through data interoperability. Taken together, this is how we can make spaces autonomous. This quarter, we began to change customer outcomes by combining our Distech Resets Move, our Q SYS platform. RESETsmove is a multisensor device that uses thermal, light, sound, air quality, temperature, and humidity sensors with AI at the edge, helping users understand how their space is being used. Data collected by the resets move drives changes in the room, including the ability to adjust the screens, cameras, and microphones from our Q SYS platform. Q SYS Reflect is then able to monitor outcomes and performances of the devices within the room. We are then able to further layer lighting controls and shade controls into the solution for an autonomous room experience. We demonstrated this solution to a large multinational technology company in our experience center, and they chose to implement it throughout their headquarters. AIS is also being recognized for the strength of their product portfolios. During the quarter, Atrius Facilities was named a winner in the smart buildings category of the 2025 Facilities Net Vision Awards. Our Q SYS full stack AV platform, the National Systems Contractors Association's Excellence in Product Innovation Award in the category of best centralized AV platform for command and control. And our Q SYS Core 24F processor was recognized with a ProAV Best in Market 2025 award. Before I turn the call over to Karen, I want to reiterate that both ABL and AIS are performing well in a challenging market. In Acuity Brands Lighting, we continue to experience a tepid lighting market. The market appears to be waiting for clarity around interest rates, inflation, and policy. In Acuity Intelligent Spaces, Atrius, Distech, and QSC are working well together, both from a customer perspective and an operational perspective. Our AIS business is strategically differentiated and positioned for value creation. We continue to control what we can control, and we are confident in the long-term performance of both the lighting and spaces businesses. Now I'll turn the call over to Karen who will update you on our first quarter performance. Karen Holcom: Thank you, Neil, and good morning, everyone. We had a strong start to fiscal 2026. We grew net sales, improved adjusted operating profit and adjusted operating profit margin, and increased our adjusted diluted earnings per share. For total Acuity Brands, Inc., we generated net sales of $1.1 billion, which was $192 million or 20% above the prior year. This was driven by growth in both business segments and includes three months of QSC sales. During the quarter, our adjusted operating profit was $196 million, up $38 million or 24% from last year. Adjusted operating profit margin during the quarter expanded to 17.2%, an increase of 50 basis points from the prior year. Our adjusted diluted earnings per share was $4.69, which was an increase of $0.72 or 18% over the prior year. ABL delivered sales of $895 million, an increase of $9 million or 1% versus the prior year, primarily as a result of growth in the independent sales network. As we mentioned last quarter, the independent sales network benefited from an elevated backlog that resulted from orders that were accelerated in advance of price increases in 2025. The higher backlog favorably impacted the fourth quarter of last year and the first quarter of this year. Adjusted operating profit increased $6 million to $160 million. This improvement was driven by our efforts to lower operating expenses. We delivered an adjusted operating profit margin of 17.9%, which was up 60 basis points compared to the prior year. Now moving to Acuity Intelligent Spaces. Sales for the first quarter were $257 million, an increase of $184 million with the inclusion of three months of QSC. Both Atrius and Distech combined and QSC grew in the mid-teens this quarter. Our AIS business also benefited from an elevated backlog that resulted from orders that were accelerated in advance of price increases in the back half of fiscal 2025. The higher backlog favorably impacted the fourth quarter of last year and the first quarter of this year. Adjusted operating profit in Intelligent Spaces was $57 million, with an adjusted operating profit margin of 22%, which was up 100 basis points compared to the prior year. Now turning to our cash flow performance. In the first three months of fiscal 2026, we generated $141 million of cash flow from operations, which was $9 million higher than the same period in fiscal 2025, primarily due to higher profitability. During the quarter, we allocated $28 million to repurchase over 77,000 shares at an average price of around $357. We additionally repaid another $100 million of our term loan during the quarter and have now repaid half of the $600 million of debt used to finance the QSC acquisition. In summary, we started the year with strong performance. We grew net sales, improved margins, and increased adjusted diluted earnings per share. We generated strong cash flow from operations and allocated capital effectively. Thank you for joining us today. I will now pass you over to the operator to take your questions. Thank you. Operator: Our first question comes from Christopher Snyder with Morgan Stanley. Your line is now open. Christopher Snyder: Thank you. I wanted to ask on gross margin. Typically, every year, I think gross margin peaks in Q3 and then down in Q4 and again sequentially into Q1 on the volume declines. The last couple, those step downs have been more significant, I guess, on a six-month basis than typical, which I assume is the result of tariffs coming in and pressuring that margin rate. But I guess, as we look forward and it seems like that's now in the base, do you think the business is, you know, positioned to kind of deliver typical gross margin seasonality, including the step up into the back half of the year? Any color on that would be helpful. Thank you. Neil Ashe: Yeah. Good morning, Chris. I'll start, and then Karen please fill in. So first of all, I think you're really referring to ABL when you talk about that kind of gross margin profile. There is so much noise, I think, in the last call it, nine months, and that'll work its way through the system over the next several. So I think a couple things are going on. First of all, obviously, the tariffs, as you mentioned, those have been inconsistent. So I think the headline is they all happened on April 2, but that's not really what's happened. So there's been a series of different the two thirty-two tariffs to steal, those sorts of things. Have come in and out at different times. So we have then reacted to that by driving and accelerating productivity efforts, number one. And then number two, taking price strategically in different parts of the portfolio. That's the bay that's what you see kind of cascading through the income statement today. As we look forward, and I say this, you know, not on a quarter basis, but on a longer-term basis, we're confident in our ability to continue to drive the margins at ABL. So, you know, as we've said, we're targeting 50 to 100 basis points of operating profit margin improvement per year. We're kind of right in that range now. It just so happened this quarter that was the benefit benefited more from OpEx than we did from gross profit margin. But we feel really good about where we're going. It doesn't mean that everything's gonna go up every quarter, but we feel good about where we are. Christopher Snyder: Thank you. I appreciate that. And then maybe just to follow-up on some of the ABL commentary. You know, I think, typically, we would see a pretty material step down in ABL SDNA from Q4 to Q1, you know, as the volumes drop. You know, I know the OpEx there did come down, but it was pretty muted. Step down Q4 to Q1. Was that a function of some of these productivity investments you just referenced? Or are there other things that are kind of going on on that, the OpEx line, line within SD and A? Thank you. Karen Holcom: Yeah. I think, Chris, overall, when we look at OpEx and you see what ABL did in the third quarter of last year, we started to take costs out. So when you look at the fourth quarter and the third quarter, that really is reflective a lot of those realigning the work and taking some of costs out of the business. So that's probably why it was a little bit more muted as we had already taken a good chunk of those costs out. But overall, you know, we were focused on driving that operating profit margin improvement year over year, and they improved by 60 basis points despite the decline in gross profit that we talked about. So we feel really good about their performance this quarter. Christopher Snyder: Thank you. I appreciate that. Operator: Our next question comes from Tim Wojs with Baird. Your line is now open. Timothy Wojs: Maybe just my first question, Neil. You know, you talked about some if you want to call them, sell deployments between ABL and AIS. And both the fueling market and in some office markets. As you're, you know, kind of going through, you know, those types of, you know, those types of sales and those types of, you know, RFPs and things, are there any sort of gaps in terms of the product portfolio that you're kind of finding that you need? Or do you feel like, you know, the products that you have in both of those spaces is kind of, you know, good for what you're trying to do in those verticals? Neil Ashe: Yeah. Great question, Tim. And let me start philosophically first, which is that it's our view, it's my view that cross-sell opportunities should be driven by customer. So, if the customer realizes the benefit that we're providing across an entire solution, then that will get pulled through the channel as opposed to us, you know, trying to push it. So that's our philosophy. So by as a result, when we start to talk about these things, it'll be because customers have pulled them through, not because we're aggressively pushing them. Net net, it might take a little bit longer, but we'll have a much more durable relationship with those customers. We chose to highlight the two, the two that we highlighted. So first, within AIS, the cross-sell opportunity between the Distech portfolio and the CUSYS portfolio, because it really was the first coming together of the basically inside the space and the management of the space. So that for the benefit of, for the benefit of autonomous room experience. So, there are things we can add to that experience for sure, but they're not required to provide the solution that we provided. I think the refuel is even at least as interesting in that that now spans the entire company. So, obviously, the refuel effort was one that was started in the lighting business. But quickly you realize that the two most important things for the convenience store are to get people into the store, and then from a management perspective inside the store to manage the refrigeration inside the store. So this tech can provide that, I am super pleased by how our teams have worked together to provide those solutions. So we there are other things in the, in that store, for example, that we don't provide, like digital signage, but, basically, they're coming together. Timothy Wojs: Organic and inorganic opportunities to add to the portfolio of AIS over the, you know, the next, you know, two years or so. So, we're pretty enthusiastic about what those opportunities are. Okay. Okay. Super. Thank you. And then I guess just a modeling question. Karen, I guess, in both of the segments, talked about kind of executing on an elevated backlog over the last two quarters. I guess, is the insinuation that, that is kind of behind you and maybe there's a little bit of slower over the next couple of quarters as you kind of the market the company kind of grows closer to the market versus the market plus backlog? Karen Holcom: Yes, Tim, I think that's right. Historically, seasonality is going to be a little bit skewed as we look ahead to Q2 based on those accelerated orders and coming into the first quarter with a little bit of a higher backlog. So as we said in the prepared remarks, both ABL and AIS were favorably impacted from that higher backlog. And so the first half, I would say, is going to be more representative of normal seasonality, but Q2 could be down a little bit more than normal. Timothy Wojs: Okay. Okay. Sounds good. Thank you, guys. Operator: Our next question comes from Christopher Glynn with Oppenheimer. Your line is now open. Christopher Glynn: Just wanted to talk about some of the divergence with ISN and DSN. They kind of diverged a little more than normal in the quarter. I know you called out the backlog strength really impacting the ISN space. But, maybe some other factors beyond that. It was pretty wide divergence. Neil Ashe: Yeah, Chris. I think that that's a good call out, and thanks for the opportunity to talk about them. When I look at the business, I tend to combine them. So if you look at them on a combined basis, that basically exactly where we expect it to be. Accounts move between the two of them, so that's a little bit of the noise that exists there. But, if you take them together, we're kind of exactly where we expected to be. Christopher Glynn: Okay. I'll think about that and follow-up later. But appreciate that. And then, you know, a lot of talk about the gas station under Canopy. Being in-store opportunity there today and combining Q SYS. You also acknowledged some things you don't have, like the signage. And you know, there's a player there that's pretty established with that broad channel strategy. So is it interesting you called out, you know, some of the differentiating factors and some of the lack. Where are you in terms of, you know, meeting your penetration goals there? Is this, you know, a bit of a dog site, or are you availing some clear runway? Neil Ashe: I would say that we're really pleased with our entrance into the market. And taking a step back, this is what I wanted our company to demonstrate. Demonstrate to itself first and to everyone else second is that we can identify an organic opportunity that has some size, and we can develop product portfolio, the go-to-market strategy, and the entrepreneurial spirit to go attack a new vertical like that. So, by all metrics, we're succeeding in that effort. So, we're not the only player in that market, and that market is a comparatively small part of our company. It's decidedly not our whole company. So, but this is a muscle that we want to build so that we can apply it here where we're doing really, really well. And in other areas like healthcare where we're doing well, like sport lighting where we're starting to come in, and others as we go along. So I think the real read here is our ability to attack an area that was not initially in our purview or not historically in our purview and to build both the business model, the product portfolio, the go-to-market that's necessary to be successful there. And that's kind of what's happening. Christopher Glynn: Great color. Thanks, Neil. Neil Ashe: Thanks, Chris. Operator: Our next question comes from Michael Francis with William Blair. Your line is now open. Michael Francis: Hey. Hi, everyone. This is Mike on for Ryan. Wanted to start with just a cleanup. I saw there wasn't the guidance in the PowerPoint. Is there anything that's changed in the outlook? Karen Holcom: Yeah. In the Michael, in the presentation that Charlotte will post after the call, you will see just the same slide with the sales and EPS guidance that we provided in the fourth quarter. So no, nothing changed there. Michael Francis: Okay. Understood. And then one of the talk about gross margins on the AI side. 60% be considered a ceiling, and you think there's more you could do there? Neil Ashe: I think we're good, Mike. We're I think we feel good about 60%. So as we continue to grow, we will focus on two things. One is that the level of margin in that business demonstrates the strategic value of the controls that we provide. So, that's a recognition, I think, of the strategic importance of the business there. As we add products to that portfolio, we may choose to add some additional business models that maybe are slightly lower margin, which will balance it out a little bit. But net net, we feel really good about kind of where that is. Michael Francis: Okay. And then wanted to hear seems like end markets haven't changed at all. Wanted to hear if anything has changed in the quoting environment with that backlog or that backdrop, and any color from the channel would be helpful. Neil Ashe: Yeah. On first, on the lighting side, I would say that as we've said for, what, the last Karen three quarters, it's kind of a tepid lighting environment. We would like the lighting market to be a little bit stronger. All indications we have are that we are at least holding, if not accelerating, our position in the market. So it is where it is. And as I'll point out, I like to point out, you can't build a space or touch a space without touching the lighting. So kind of lighting is all spaces at this point, and we are obviously the best performing player in those spaces. So, yeah, would we like the lighting market to be a little bit stronger? We would. And at some point, it will, and we'll benefit from that. On the AIS side, we've got, you know, disruptive businesses there that are effectively growing through market environments because of their ability to take share from others. So they continue to perform, despite the environment. And it doesn't mean they're gonna be up as much as they are this quarter, every quarter, but we feel good about kind of the trajectory that we're on in AIS. Michael Francis: Thank you. Pass it on. Operator: Our next question comes from Jeffrey Sprague with Vertical Research. Your line is now open. Jeffrey Sprague: Hello. Good morning, everyone. Hope everyone's feeling well. You know, I wanted to get your thought on tariffs. We have the Supreme Court ruling coming up on Friday. Who knows what we get? But, if tariffs would somehow ruled illegal, you know, do you think you'd have to roll back price as tariffs came back? How do you think the channel would respond to that? Or is there, you know, a possibility to sort of pocket some spread there if we have a dramatic change in tariff regime? Neil Ashe: Yeah. Good question, Jeff. So let's take a step back, and I'll tell you what our working hypothesis is and then what I think the practical implications of that are. Our working hypothesis is that things will stay mostly the same. So, however it plays out, I'm not a legal expert, so I can't predict what the ruling will be or how they will rule. But it just feels like if there were a completely adverse ruling that there would be some counterbalance that would keep things roughly the same. The administration would have an alternative or that would be written in some way that things are mostly the same. But let's go down the path of their rules they are disavowed in some way, and then we're there. The question then becomes, okay. So we as the practical matter, we sell our product to a distributor. The distributor sells that product to the contractor. The contractor effectively sells that to the owner of the project. That is that's not the sales process, but that is the flow of revenue. So, if we were to somehow kind of realize the benefit from a tariff, like, you know, refund, who would we give it to? So as you push that down the slide, then the distributor we would have to assume that if we did the distributor would give it to the contractor and that the contractor would give it to the building owner. I just don't think that seems reasonable. So now if you look forward, then our second the second half of our expectation is that there would be a new market that everyone was adapting to, and we would need to adapt to that market from that point forward, just like everybody else was. And we feel good about the dexterity we've demonstrated in our ability to respond to that versus the rest of the industry. Jeffrey Sprague: Mhmm. Yeah. No. Could be quite interesting if that happens. And then just the sort of a quick one back on sort of the backlog normalization. Obviously, a big backlog business in the grand scheme of things. But our backlog is sort of in a normal spot now relative to what your top line guide is? Are we below normal around kind of tepid outlook that you're talking about? Neil Ashe: Yeah. I think we're Jeff now, like, you and I have been having this conversation for now five years. And when I five years ago, I wasn't, you know, what was normal was not normal. And then we've changed through that. I would say that we the industry and we got accustomed to higher backlog levels through the post-COVID period, through kind of tariffs, price increases, and whatnot. So we're now at backlog levels which are more consistent with what they were before all of those things happened, and therefore, our order rate is more consistent with our quarterly performance. And that's what Karen was indicating. So there's still some noise from the price markets in the third quarter and the fourth quarter, which affected this. Is why she said we probably will see more seasonality in the second quarter, especially in the lighting business than we have historically. We're comfortable operating in both environments. But we would like the lighting market to be a little bit stronger. Jeffrey Sprague: Yeah. Understood. No. Thanks for all that color. Thank you. Operator: And I'm showing no further questions in queue at this time. I'd like to turn the call back to Neil Ashe for any closing remarks. Neil Ashe: So I think we had a really good first quarter. So both of our businesses continue to perform. ABL is clearly the best performing lighting business in the world. We've demonstrated through our growth algorithm that we can separate ourselves from the market. And we feel good about kind of the long-term opportunity there to a, continue to grow and, b, continue to improve margins. With AIS at both Atrius, Distech, and QSC, we have disruptive technologies which are taking share in their marketplaces. Over the long term, we have great organic and inorganic opportunities there. So, we are excited about those. So, thank you for spending time with us this morning, and we'll look forward to talking to you again in another quarter. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Ken Murphy: Good morning, everyone, and a very happy New Year. Thank you for joining us today for our quarter 3 and Christmas trading update. As usual, I'm here in Welwyn with Imran, and I'll start with a brief overview of our performance before opening the line for your questions. We are delighted with the way the customers have responded to our continued investments in value, quality and service. Group like-for-like sales grew by 2.9% over the 19 weeks, including 3.7% growth in the U.K. Customer satisfaction improved, and our U.K. market share is at its highest level in more than a decade, following 32 consecutive periods of gains. We set ourselves a challenging plan for Christmas, and we delivered in line with that plan. With over 2 billion products going through our tills and more than GBP 6 billion of sales in the 4 weeks to Christmas Eve, our teams right across the group worked hard to deliver the outstanding service that customers have come to expect from Tesco. I would like to start the call today by saying a huge thank you to them for delivering a Christmas we can all be proud of. Our performance builds on last year's successful results and reflects the strength of our core food offer. In a highly competitive market and with customers looking to make their money go further, we saw particularly strong growth in fresh food with like-for-like sales up 6.6% in the U.K. Running alongside familiar festive favorites, we launched 340 new and improved own brand Christmas products, including 180 in Finest. We recognize that for many families, the cost of Christmas can be a stretch. We did everything possible to make sure our customers got the best value from us. Starting with our fresh Christmas dinner for a family of 6 for under GBP 10, and just GBP 1.59 per person, it was even better value than last year. More broadly, our rate of inflation eased through the Christmas period and continues to be materially behind the market. We also invested in making the Christmas shop even easier for customers, including hiring over 28,000 additional colleagues. And with support from AI-powered scheduling tools, we offered more than 100,000 extra online delivery slots in the week before Christmas. Through better forecasting and planning, AI also helped us to deliver best-in-class availability and to optimize deliveries across our network. Customers continue to embrace Finest with sales growth of 13% in the U.K., including a 22% increase in our Finest party food range. Highlights included Christmas center pieces such as our Finest Turkey Crowns and Chef's Collection Beef Wellington as well as our curated Finest gifting range and a long list of award-winning products. We sold around 21 million Finest pigs in blankets, along with 2.5 million bottles of Finest Prosecco. We also saw strong demand for low alcohol options, including selling almost 0.25 million bottles of Nozeco. While Turkey retained its popularity, some customers opted for other meats this Christmas with sales of beef joints up 29%, making it the most popular alternative. Online remains our fastest-growing channel with growth of 11% across the 19 weeks. It was our biggest online Christmas, including our 2 busiest days ever. In the week leading up to Christmas, we delivered on average 2 orders every second. Whoosh also performed strongly with sales up 47% and more than 0.25 million customers trying it for the first time. Both in-store and online, customers benefited from additional value through Clubcard. Alongside thousands of Clubcard prices per week across a broad range of family favorites, we offered customers more personalized rewards, including gamified experiences with Clubcard challenges. Our retail media offering continues to engage customers and brands, including the return of sponsored Christmas Gratis now in their third year. The Tesco Media team continued to make great progress, and we were delighted to be named Media Brand of the Year at the Media Week Awards. In Ireland, we built on last year's strong performance and are now in our fourth year of market share gains with fresh food continuing to lead the way. With 5 openings in the period, including 2 large stores, we now have 190 stores in Ireland. We continue to roll out Whoosh, which is now available in Dublin, Galway and Cork. Booker performed well despite challenging market conditions, with increased customer satisfaction scores in both core catering and retail. Our wine and spirits specialist, Venus, continued to win new business. And in our symbol brands, Premier opened its 5,000th store. In Central Europe, our targeted price investments contributed to growth in both food and nonfood across the period despite a backdrop of subdued consumer confidence and increased competition. Value continues to be a key priority as customers seek to make their money go further, and we're determined to do everything we can to help. Earlier this week, we launched a new commitment to Everyday Low Prices on over 3,000 branded products, alongside our existing Aldi Price Match on more than 650 lines and thousands of Clubcard prices. Our strong performance this Christmas gives us the confidence that group adjusted operating profit will now be at the upper end of the GBP 2.9 billion to GBP 3.1 billion guidance range that we issued in October. We continue to expect free cash flow within our medium-term guidance range of GBP 1.4 billion to GBP 1.8 billion. So as we move to your questions, I just want to say another big thank you to all our colleagues for everything they did to help our customers to have a brilliant Christmas. Thank you all for listening, and I'll now hand back to Sergei. Operator: [Operator Instructions] Our first question is from Rob Joyce from BNP Paribas. Robert Joyce: So the first one, Ken, you referenced the easing food inflation over Christmas. Was that the entire driver of the slowdown versus 3Q? Are we seeing any sort of broader volume slowdown in the market? And do you think the overall market stepped down over Christmas? That would be the first one. And then the second one is probably a bigger question, but clearly guiding to a broadly flat EBIT this year after strong top line performance. What do you think needs to change for you or the market for you to be able to return to profit growth? Ken Murphy: Thanks, Rob. Happy New Year. Two great questions. Look, I think definitely, the very strong trading plan we put together contributed to the drop in the kind of overall market growth. And therefore, the easing of inflation was a material factor. There was also a step down in volume, even though we outperformed the market in terms of our volume growth, and we're really pleased with that consequentially. So I would say that our performance was pitched exactly right. It was an aggressive trading plan, but it was complemented with a fantastic product innovation pipeline and really consistent execution, both online and in stores. So for us, it's been a really pleasing performance. In terms of -- you're right, the guidance is broadly flat year-on-year. I think that's an exceptional performance if you think about where we started this year and some of the competitive activity that we responded to. What I'm really pleased about is how decisively we acted and how we got on the front foot and delivered very strong market share performance consistently across the year. And what's particularly pleasing, Rob, is that we didn't stop investing in the future. So we've been making substantial investments in our store estate, substantial investments in automation to keep our savings programs going, and even more importantly, making substantial innovation, investments in technology for the future. And so we've got a very clear strategy. We believe in the long-term possibilities for this business, and we're quite confident for the future. Imran Nawaz: And maybe if I could just add maybe 2 bullets from my end as well, Rob. Two things on the ability to upgrade the outcome for this year and continue to invest to continue the momentum and continue to protect the position of strength that we have, I think, is not a bad place to be. The second thing to your sort of longer-term question, it's important to go back to the performance framework that we did set out almost 5 years, and we really stick to, which is we are very clear that we want to continue to drive up customer perception, to drive up market share, which in turn drives up profit and drives up cash. And I think you've seen us do that year in, year out. I think this year was an exceptional year with an exceptional reaction to a competitor, but I think we stuck to our guns. We invested into the proposition. We invested into price and truthfully, being able to upgrade is a nice feeling, because it demonstrated that everything we've done really worked out well. Robert Joyce: And just a quick follow-up on that inflation point. Do you think -- is the inflation then more -- the slowdown more driven by your own investment in price relative to your sort of input costs? Or are you seeing input costs falling more broadly? And does the kind of -- I'm just looking at next year and thinking people have got -- markets got Estimates U.K. growing above 3%. Does that look a bit ambitious given the Christmas exit rate? Imran Nawaz: Look, let me take first the Christmas specific question. Look, Kantar calls around an inflation of around 4% or so, slightly north of 4% over the Christmas period. As Ken just said, we made conscious choices to invest. There's no other time when you've got so many customers in your stores and you build momentum. And if you look at our market share gains, our volume market share gains were even stronger than our value market share gains over 12-year records. And I think you get -- that pays back as you then go into Jan, Feb, March and April into the next year. So I'd say to you, it was a conscious decision to invest into value, which we saw pay off in the market share. Then in terms of next year's outlook, you know as well as I do that inflation is a driver of commodities as much as it is of stickier costs on payroll. All of those things are still to be worked out, and we'll see where we land when we talk to you in April. Operator: Our next question comes from Xavier Le Mené from Bank of America. Xavier Le Mené: A quick one actually on the market share. As you said, you've got the strongest market share ever for the last 10 years. But where potentially do you see your peers? Do you still think that you've got opportunity to grow your market share? Or are you more in a position to defend what you've got right now? Ken Murphy: So Xavier, we are always thinking offensively rather than defensively. That's our mindset. And we see it less about the market share per se and more about are we doing the right things for all our stakeholders and particularly our customers. So are we getting our value right? Are we getting the quality of the proposition right from a product point of view? Are we getting our execution right? And are we innovating and thinking about the future in ways that customers' trends and needs are adapting. And that's really where we focus all our energy. And then we look to market share as a measure of how successfully are we executing against that strategy. So we don't see any limits in terms of where we can take market share, but it is not a given. It's something that we have to work very hard to achieve. Xavier Le Mené: Right. And just one follow-up on actually Rob's question. Sequentially, you said you've seen a bit of a slowdown. It sounds like it's also market driven, but do you expect the slowdown to continue heading to '26, or do you think that potentially it's more a question of consumer confidence and hopefully, U.K. consumers getting a bit better going forward? Imran Nawaz: Look, I mean, I think when I look at consumer confidence this year, I would say it's mixed. But it's been mixed throughout the entire year, right? What you saw was people that are -- there's a cohort of groups that are, frankly, in a good place and feeling comfortable with their savings and their spending, and there's a group of people looking for value. I feel we saw that reflected. When you look at Finest's performance, in a way it's a reflection of the fact that people looking for value and quality at the same time were able to hit that. So I think our Everyday Low Price campaign that we're launching, again, hits the bull's eye on that. I think addressing all of those opportunities for those customers looking for value is the right way to go forward. Fair to say that as you -- the question behind the question is, was the market overall a bit softer over Christmas? I'd say yes, on a volume basis. The reality, though, also is because we really outperformed every single month over the last 19 weeks on a volume share basis, we were not really affected by that. And I think one proof point for me is the way we exited the year was very clean on stock. Then how it plays out next year, we'll obviously talk to you again in April. But look, one of the things that we do feel good about in this business is, and I think we've demonstrated that over the last 5 years is, we are very good at adapting ourselves to whatever the environment throws at us. And it's one of the reasons why we've put value at front and center of everything we're doing. Operator: We'll now take our next question from Manjari Dhar from RBC. Manjari Dhar: Just 2 questions from me, please. My first question is on supplier-funded promotions. We've seen them picking up over recent months. Just wondering how much higher could this go? And if it does continue to drift higher, does that change your approach for the Tesco business, maybe for your private label business? And then my second question is on the digital data opportunity. I guess how much further is there to go with Clubcard personalization and AI? And what sort of things should we be expecting this year? Ken Murphy: Thanks, Manjari. So I would start off by saying that kind of supplier-funded promotional penetration or participation is actually only returning to what it was pre-COVID. So it's not like it's wildly out of kilter with historical norms. That's the first thing to say. The second thing is that actually, as you saw from our announcement this week, we have reinvested a lot of promotional funding back into everyday low pricing through the extension of our low-price campaign from 1,000 to 3,000 lines. And that really is based on an insight from customers that say they need reliable low pricing during these months where money is tight and they're watching every penny. And so that is the first signal, by the way, that we are kind of -- we are responding to customers' needs in the moment. So I'm kind of relaxed about that, if you like. I think it's a normal... Imran Nawaz: And maybe to give you a number on that, just to give you a sense to underpin Ken's point, last year's promo percentage was around 33%, and this year was 34% over that 19-week period, which gives you a sense. There was a slight creep up, but not massive. Ken Murphy: Yes. It was artificially depressed during COVID, Manjari. So it was very hard to compare apples with apples. If I go to your second question, which is a very exciting question. It's a question we're really excited about. We don't see any limits to the opportunity around data and particularly the opportunity to serve customers better through data, getting to understand their needs better, responding much more dynamically, using AI to help us be there for customers whenever they need us. And we're investing behind that, and we'll continue to do so. And I think it will be something that you'll see continuous improvement from us over the next number of years. I think there's infinite possibilities. Manjari Dhar: Great. Maybe just a quick follow-up. Should we be expecting investment levels behind that overall group CapEx to slightly step up now as a result? Ken Murphy: Well, we've always been quite clear about our kind of breakdown of CapEx being kind of a 3-part logic, which is part 1 is where we're investing in our core estate renewal and the shopping experience. Part 2 is where we're investing in automation to support our Save to Invest programs, and Phase 3, which is all about innovation, technology investment for optimizing our proposition. And probably the greatest -- we've seen step-up investments across the board actually in all 3 areas. And that's been what's been behind our progressive increase in capital. And actually, as we've gone, we've kept a very close eye on return on capital employed, and that has also been improving over time. So we're very disciplined in how we spend our money. Imran Nawaz: Yes. And also what's really nice is, in the base, we've also reflected already increases year-on-year into our tech organization, because we know that this is an area of opportunity for both on the growth side, but also on the efficiency and savings side. Operator: We'll now move to our next question from Sreedhar Mahamkali from UBS. Sreedhar Mahamkali: Maybe 3 for me, if you don't mind. First one, in terms of improving price position versus the market statement and the comment in the statement, can you talk to us if it's been the case versus all operators as you see it, especially given one of your big competitors reset and continuing investment? That's the first one. Secondly, just trying to understand the new or renewed push on everyday low prices. A couple of questions there. Is this reallocating the promotional funding more to be fully behind Everyday Low Prices versus Clubcard Prices? How do you see the offer to the consumer changing in the round as a result of what you've been executing really well on Clubcard Prices already? And second one, sticking with Everyday Low Prices, is this first signal to us that 2026 is likely to be as big a year of investment as it was in 2025? Is that how we should read this? Ken Murphy: Okay. Thank you very much, Sreedhar. I think I'd start off by saying that our price position has strengthened over the year versus the market generally. And that I think more importantly, the sophistication of our pricing investment has improved through the technology investments we've made such that we focus on the lines that matter most to customers. So we're investing in value, but we're investing wisely and quite judiciously. And I think that is what has helped us to outperform the market. On your point around Everyday Low Pricing, I think that was a response to customer insight, which said they wanted more reliable pricing on everyday essentials in these key periods in January, February. And so we made a long-term commitment to, as you say, invest principally promotional funding back into Everyday Low Pricing. And you shouldn't read it as any more than us responding to a customer insight to give customers the best possible value in these early months of the year. And I don't think it's a signal of anything other than our intent to stay on the front foot from a value for money point of view in 2026. Imran Nawaz: Yes. I think one aspect, Sreedhar, that's important is we already have Everyday Low Prices on 1,000 SKUs. And what we're doing is because it worked so well, we're giving it more visibility, more color, and it's been expanded to 3,000 of people's favorite brands in the country. So from that level, it's also a confirmation of something working really well that we want to double down on -- or triple down on, I should say. Sreedhar Mahamkali: And in the round, I guess what I'm trying to understand is Clubcard Prices have been incredibly successful for you. Is this a recognition, to Ken's point, I guess, some of that needs to be more upfront shelf prices rather than Clubcard Prices. Is that how I should see it? Imran Nawaz: I mean, I think it's a continuous conversation depending on what customers are looking for, but I'd be very comfortable to say to you that as opposed to having only exclusive deals on Clubcard prices, we want to have more, as Ken said, more longer-term price fixes as we've been doing on Low Everyday Prices now rebranded. Operator: We'll now move to our next question from Clive Black from Shore Capital Markets. Clive Black: Also, very happy New Year. Very well done, by the way. Not an easy thing to deliver. The question I have is really around volume. First of all, why do you think volume in the Christmas period was a bit slower than you and maybe the industry expected? And in particular, do you think there are features around alcohol consumption and maybe diet suppressant drugs that are starting to kick in more noticeably in that respect? And then in terms of that volume, is that a key factor why you expect working capital -- or sorry, your free cash generation to come in with the existing guidance, which might mean that working capital is a bit of a flatter benefit year-on-year? Would that make sense? Ken Murphy: Clive, Happy New Year to you too, and thank you for your comments. I'll speak to the volume comment, and then I'll pass over to Imran maybe to talk about working capital. So I'd start off by saying that what was particularly pleasing about our performance is we outperformed the market on volume. I think it's fair to say that the market overall was a little bit softer on volume, but our outperformance was particularly important. And within that, I was particularly pleased with our fresh food performance. So speaking to your point about is there a little bit less alcohol consumption, is there an impact? I think there's a general impact from people wanting to eat and live more healthily. And for sure, within that, GLP-1 will be having an impact. But our fresh food sales at plus 0.6% were particularly strong. So my feeling is that whatever way this trend evolves, we're really well set up to take advantage of it. And we've been investing very heavily in our fresh food proposition over the last couple of years, and it has been the principal driver of our business, which we feel really pleased about. There's no doubt, as you saw from some of the stats that I shared on the call earlier that you are seeing a significant rise in low and no alcohol sales, but we respond to that as well. We have the products and the range to address it. And within our food range, we have a high number of high-protein products that are really well-suited to anybody looking to pursue that kind of diet. So we feel really well set for whatever trends are coming our way. But for sure, trends are emerging and we are keeping a very close eye on them. Clive Black: Sorry Ken. Just in that respect, Ken, are you therefore seeing -- sorry, are you seeing notable step back, therefore, in areas that are more exposed to change in ambient carbohydrates and the like? Ken Murphy: No, not really. I mean, we shifted an extraordinary amount of chocolate tubs over the Christmas period. So I think -- and I was a material contributor to that personally. So no -- the short answer is no, it's been really strong. Clive Black: Sorry, Imran? Imran Nawaz: Yes. No, absolutely. Just on your second question, I mean, just to reiterate what Ken just said, I mean, we -- and how it impacts cash, I mean, obviously, we were less affected by the market slowdown because if I look at Q3 and the Christmas period, we were growing volume every single month and outperforming on market share every single month. So that gives you a sense of it not being a real driver on working capital, because ultimately, volumes are positive. And more pleasingly, I could say that we're exiting very, very cleanly. Actually, I was very happy about that. I mean, we set up a very ambitious Christmas, and we delivered in line with that. And when you exit cleanly, it just helps you get momentum also into January, which is nice. In terms of cash flow, look, we had a very, very strong first half, over GBP 1.6 billion. As you know, typically, our cash flow is skewed towards the first half. And in the second half, you've got the payments out the door from all the supply you bring in for Christmas. So that phasing will play itself out as per normal. And as you know, our guidance on cash is that consistent range we've been giving, GBP 1.4 billion to GBP 1.8 billion. I know we've delivered always to the upside on that one. And so it's never stopped us from doing a good job, and the plan is to continue to do so. But as you also know, the working capital balances at Tesco are enormous. So just to give us a bit of flex in terms of any last-minute payments or receivables or anything like that, it gives us a bit of space to do that. But obviously, cash is important, and the plan is absolutely to continue to deliver within that range. Operator: Our next question is from Monique Pollard from Citi. Monique Pollard: Two from me, if I can. The first one, obviously, good market share gain, U.K. market share gains of 31 bps over Christmas. And from what I understand from the commentary from Imran, the volume market share gains over that period are even stronger than that. What I'd like to understand from customer feedback, the surveys you do, et cetera, are you able to give us some sense of how much of that you think is due to strong price positioning? And you mentioned your price position has strengthened versus the market this year, and you were aggressive in terms of inflation over the Christmas period. So how much of that is price positioning? And how much is things like investment in availability over Christmas, which is probably particularly strong versus particularly some competitors over the period and things like the store estate, staff in stores, et cetera, over that period? And then the second question is just me trying to understand that level of price investment that you've put in, whether some of that was seasonally specific to the Christmas period. As you mentioned, you never get that volume of customers in store and therefore, important to be on the front foot on price, or whether that is sort of something we should expect to be a bit ongoing? Ken Murphy: Right. Monique, so I think the short answer to your first question is that delivering the kind of market share performance we've delivered, not only over Christmas but right across the year, is actually a composite of great value, great quality, great execution. I think you'll have seen amongst some of our competitors that even if you drive a very strong value message, if you don't have the quality and the supply chain precision and the in-store execution to go with it, it's very hard to deliver the performance. So I would say that our market share performance has been a composite performance of everybody in Tesco across all the functions and departments doing their job really well and executing against the plan. So I think that would be the answer to the first question. The second question around price investment is that clearly, Christmas is the FA Cup final for retailers. So we all lean in very heavily to a very strong trade plan over Christmas. And it's also a chance for customers to reappraise your proposition, shop [ B2B ] for the first time and really like and appreciate what they see. So we work very hard from everything from product innovation through to hiring of nearly 30,000 extra people through to the very strong trade plan that we delivered. And that is quite a specific event. It doesn't necessarily mean anything for the rest of the year per se other than the fact that we will continue to invest appropriately. And I think as you saw from our announcement earlier this week, we acted against a specific customer insight for January, February, which said we needed to provide more reliable Everyday Low Pricing on a wider range of products. And so we've traveled our Everyday Low Pricing range to 3,000. And so what you can expect from us is that we will adapt constantly to insights from customers and react, so that we're giving them the best value and that's appropriate for the moment. Imran Nawaz: Another angle, Monique, as well to keep in mind is the perspective on channels. So when you look at where the market share gain came from over the Christmas period, we got it in large stores, which is great, because that's the key estate. But at the same time, that 11% growth we saw in online also led us to continue to gain market share in our online business, which was also great to see. And given the fact that we are over 36% market share in online, that gave us an extra benefit on market share as well. Operator: We'll now take our next question from Matt Clements from Barclays. Matthew Clements: First question was, you often give a very useful insight into the health of the U.K. consumer at your update. I was wondering if you could just talk us through how sentiment and spending evolved through the period, particularly around maybe November with the budget? And how do you think we're set up on consumer health into '26, government policy, et cetera? And then the second question was around Finest, which is compounding exceptional growth now. Any views on Finest into next year? I mean, particularly around the dining-out to dining-in trend? Do you expect that to continue? What's the innovation pipeline like? Anything on that would be helpful. Ken Murphy: Great. Thanks, Matt. So I think the first thing to say on consumer sentiment is that we've definitely seen that consumer sentiment is mixed. I think we have a section of the community that is in pretty good shape from a household budget perspective. And then we have a section of the community that is really struggling to make ends meet. And I think that is playing out overall in terms of how customers are shopping. They're very value conscious. At the same time, though, there is a significant proportion of households that are in decent shape financially, and they are looking for good value for money. And that, I think, is a big factor in what's driving our Finest sales. I think there is that trend towards eating in more and eating well, and that's driving our fresh food sales. And I think the consumer has shown great resilience in a lot of uncertainty. I think the budget is just one factor in a number of factors that's driving uncertainty. But we have seen a pretty resilient consumer in terms of their spending pattern and habits. And we continue to monitor it very closely. But we, to a certain extent, as long as employment remains strong, expect that resilience to continue. And Finest really is a subset of that. I think Finest, for us, is delivering on 2 fronts. It's responding to that trend of wanting to eat restaurant quality food in your home, but it's also responding to the fact that historically, Tesco would have undertraded in that particular meal occasion or mission. And I think what you've seen for us in terms of the amount of product innovation, the bravery to go deeper into distribution, to go into more and more different categories and cuisines has given us the confidence to really fight for fair share in that meal occasion. And so we still believe there's a lot of room for growth in Finest in the coming years. Operator: We'll now take our next question from William Woods from Bernstein. William Woods: Happy New Year. When you look at your success over the last 5 years, you've had great success with things like Aldi Price Match, Clubcard Prices, Finest, et cetera, and your peers have played catch-up. What do you think are the next levers that you can pull over the next 5 years to continue to innovate, continue to lead the market and gain market share? Ken Murphy: Thanks very much, Will. I think first and foremost, we would say that our strategy of focusing on the core basics and executing them brilliantly and consistently remains a fundamental pillar and foundation stone of our strategy going forward. The second thing I would say is that the building out of our proximity to customers in terms of their food needs is equally important. So what we've done in terms of extending our grocery home shopping, slot availability, the work we've done to build Whoosh into a really market-leading from a value point of view quick commerce model. The launch of F&F online are all contributing factors to getting closer to customers and making life more convenient. And then on top of that, we're working very hard to get really close from a data point of view to our customer base. And that is really starting to deliver results for us. And that, I think, is where the greatest opportunity lies is using data and insight to really get closer and closer to customers and anticipate and serve their needs, both digitally and physically. And we see clearly Clubcard at the very heart of that. And we also see dunnhumby as a clear source of competitive advantage to help us deliver that as well. And probably I should finish by saying something that's not necessarily the sexiest thing, but is absolutely critical, which is that we have an incredibly strong Save to Invest program. Imran has led this since he's joined the business. The step-up in our savings has been extraordinary from GBP 300 million a year to nearly over GBP 0.5 billion a year. And that shouldn't be underestimated in what it has allowed us to do in terms of stepping up capital investment, stepping up our investment in value without ever compromising on the customer journey. So they'd be the key pillars of what underpin our future growth opportunity. Operator: Our next question comes from Ben Zoega from Deutsche Bank. Benjamin Yokyong-Zoega: Just a couple of questions, follow-ups from my side. Firstly, on inflation, and secondly, on supply funding. So firstly, you say you've improved your price position against the market. I just wanted to ask, is this broad-based across competitors, or were there particular competitors that you'd call out as closing that gap against? And are there any particular product areas where you focused your price investments such as fresh foods? Secondly, on supplier funding, is it fair to say that the elevated levels of supplier funding in H1 has continued into Q3 and Christmas, particularly as the market turned more promotional? And are you able to comment on the levels of brand support behind the expansion of Everyday Low Prices? Imran Nawaz: Look, I mean, in terms of inflation and strengthening price position, I mean, we take a view, and we obviously have our own pricing strategy, and we have stuck to that since over the last 5 years. And look, we take a broad view that we want to continue to strengthen versus everyone. I mean, ultimately, the ultimate judge of how strong your price really is, is the customer. And the combination of Aldi Price Match, Clubcard Prices and now Low Everyday Prices, in our view, is the right combination, and it's made us stronger and stronger, and it's working well for us. And I would say to you, it's a broad-based strengthening across most of our competitors, which is good to see. Then in terms of promo intensity and supplier funding, look, the truth is, promo funding has gone up a bit. You saw that from the brands wanting to regain volume growth, which is good for us, because it comes under the banner of Tesco and Clubcard Prices. So we like to see that. That's a good thing. You will have noticed that the Low Everyday Prices is -- or Everyday Low Prices is brand oriented, which is good. Brands like to grow, and they can see that they have grown with Tesco online and in-store, and they want to continue to grow, and we have a great partnership with them. As ever, any campaign or events we run, there are always some investments from our side, some investments from the brand side, but you wouldn't expect me to give you some commercial details on the call here in terms of how we execute these. But suffice it to say, they are customer-centric and data-led. And clearly, the idea behind them is to continue to grow and gain share. Operator: And we'll now take our last question today from Karine Elias from Barclays. Karine Elias: Most of them have been answered, but just one final one. In the release, you mentioned, obviously, the competitive environment being as competitive as ever. Just broadly speaking, I think historically, you've called it more rational. Do you feel that that's still the case? Or perhaps there was some intensity going into Christmas? Ken Murphy: So the definition of rational is always a broad one when you're dealing with 10 to 12 different competitors who are all looking to win the basket from you. But I would say that the market intensity in terms of competition, pricing, et cetera, has remained strong since February last year. It didn't really change over Christmas. But I think what, and hopefully, you will have observed is that our response has been really decisive and really quick, and we have maintained that intensity throughout the year. And that's what really helped us underpin the very strong market share performance that you saw over Christmas. Operator: Thank you. That was the last question today. With this, I'd like to hand the call back over to Ken Murphy for closing remarks. Over to you, sir. Ken Murphy: Thank you so much, everyone, who's joined the call, took the time out. I know it's an incredibly busy day with a lot of announcements from various different companies. So we really appreciate you taking the time to join us. Thank you all for the excellent questions. I wish everybody a really happy New Year and a prosperous 2026, and I'm looking forward to seeing you all in April. Thank you. Goodbye.
Operator: We'll now begin the LY Corporation financial results briefing for the second quarter of fiscal year 2025. Thank you very much for joining us today. We will be referring to the financial results presentation available on the LINE and Yahoo! LY Corporation website. During today's session, we kindly ask you to follow along with the material. Joining us today from LY Corporation are Mr. Takeshi Idezawa, President and CEO; Mr. Ryosuke Sakaue, Executive Corporate Officer, CFO; Mr. Yuki Ikehata, Corporate -- Executive Corporate Officer, Corporate Business Domain Lead; Mr. Makoto Hide, Executive Corporate Officer, Commerce Domain lead; Mr. Hiroshi Kataoka, Executive Corporate Officer, Media and Search Domain lead. First, Mr. Idezawa will provide an overview of our financial results for the second quarter of fiscal year 2025. Following his presentation, we will hold a Q&A session. The entire briefing is scheduled to take approximately 1 hour. We will be live and streaming this session. If there is any distortion or inconvenience in the video or audio, please try alternate server link. Takeshi Idezawa: This is Idezawa of LY Corporation. First, before explaining our financial results, I would like to comment on the system failure caused by a ransomware attack that occurred at our group company, ASKUL Corporation on October 19 and the partial leakage of information held by the company. We sincerely apologize for the significant concern and inconvenience caused to our customers who use our services as well as to our business partners. The details regarding the damage potential information leakage and recovery status have already been communicated by ASKUL. The company is continuing to work closely with external experts prioritizing a safe and prompt restoration of systems while investigating the cause and confirming the scope of impact including any personal data. LY Corporation is fully cooperating with all recovery and investigation efforts. As the parent company, we take this matter seriously, and are committed to restoring the situation and preventing recurrence and strengthen the information security framework across the entire group. Now let me explain our second quarter financial results. Please turn to the next page. First, here is an overview of the second quarter results. Consolidated revenue was JPY 505.7 billion, up 9.4% Y-o-Y. Consolidated adjusted EBITDA grew 11.3% Y-o-Y to JPY 125.4 billion showing solid profit growth. Additionally, progress in AI agentization and the expansion of LINE Official Account and Mini apps are progressing smoothly, preparations for the LINE renew are also steadily progressing. Home tab refresh scheduled within the year. We will now proceed with the explanations in the order of the agenda you see here. First, the consolidated company-wide results. Next page, please. These are the results for the second quarter. Although consolidated revenue was slightly behind the guidance due to the decline in search advertising revenue, adjusted EBITDA and EPS are on track with the guidance. Next page, please. These are the consolidated performance trends, driven by the growth of PayPay consolidated and progress in efficiency improvements at LY Corporation, adjusted EBITDA grew 11.3% Y-o-Y, achieving double-digit profit growth. The margin also improved year-on-year. Next page, please. These are factors of change in consolidated adjusted EBITDA. Although expenses increased, revenue growth in the Strategic Business and Commerce Business outpaced the expense increase, resulting in a year-on-year increase of JPY 11.7 billion in adjusted EBITDA. BEENOS and LINE Bank Taiwan have been fully consolidated since the second quarter with the 2 companies contributing JPY 900 million to adjusted EBITDA. Next page, please. This is consolidated total advertising-related revenue. This quarter, commerce advertising achieved double-digit growth driven by increased transaction value and the total ad revenue grew by 2.4%. Next page, please. This is consolidated e-commerce transaction value. Domestic shopping transaction value grew 13.1% year-over-year, supported by last-minute demand ahead of the discontinuation for awarding points for hometown tax donation program. Reuse saw year-on-year growth of 15.7%, driven by Yahoo!'s lead market growth and BEENOS contribution. Next page, please. Regarding the upward revision of the dividend forecast, we conducted share repurchase during the first half of the current fiscal year and the cancellation of these shares was completed on September 3. Consequently, as the number of shares eligible for dividends has decreased, the annual dividend has been revised upward from JPY 7 to JPY 7.3. Next page, please. This is on progress on the LINE app revamp. The renewals of the talk, shopping and wallet tabs have been rolled out in phases since September. Home tab renewal is scheduled to make a test release this year. Next page, please. This is on optimization of management resources. Firstly, on human resources, we are reallocating to growth areas such as AI agents, which will be explained later, Official Accounts and MINI Apps. We will reallocate our human resources so that by FY 2028, 50% will be allocated to growth areas. We will reduce the fixed cost by JPY 15 billion by the end of fiscal year by 2026 and build a leaner financial structure. Next page, please. From here, I will explain the financial results by segment. Next page, please. First, the Media Business. Although both revenue and adjusted EBITDA declined, continuous cost-saving efforts are yielding results, leading to improvement of adjusted EBITDA margin on Q-on-Q basis. This is performance analysis of the Media Business. While search advertising revenue contracted, growth in account advertising drove an increase in total advertising revenue. Next page, please. Account advertising continues to perform strongly in both the number of paid LINE Official Accounts and pay-as-you-go revenue. As this is an area we are strengthening alongside MINI Apps, we will provide a more detailed explanation of future strategies and initiatives later. Next page, please. Next, the performance trends for the Commerce Business. Second quarter revenue reached JPY 216.6 billion, a year-on-year increase of 7.2%. Adjusted EBITDA was JPY 33.3 billion, although profit declined due to increased promotional expenses related to the hometown tax donation program, the decline narrowed compared to the previous quarter. Next page, please. Performance analysis of the Commerce Business. The business as a whole is expanding steadily. In addition to the full consolidation of BEENOS, Yahoo! Shopping and subsidiary growth contributed to increased revenue. Next page, please. performance trends for strategic businesses such as payment and financial services. Revenue continued to be driven by PayPay consolidated, reaching JPY 109.7 billion, a year-on-year increase of 35%. Adjusted EBITDA also continued to grow, reaching JPY 22.9 billion, an year-on-year increase of 52.1% with margin remaining at a high level. Next page, please. Performance analysis of strategic businesses. Payments and financial services are both growing steadily. Furthermore, the full consolidation of LINE Bank Taiwan contributed to increased revenue. PayPay consolidated business overview. Each service is growing smoothly. Our number of payment per user and unit price, those KPIs are progressing smoothly. As a result, consolidated sales has increased Y-o-Y, plus 30.4%. Consolidated EBITDA was more than doubled. So the second quarter showed a significant strong growth. Next, from here, I will explain our key strategy going forward. Next page, please. As our company-wide key strategy, we will advance as 2 wheels that agentization of all services and the enhancement of Official Account and MINI Apps. In agentization for the 100 million users using our services, we will provide services like search, media, finance and commerce more conveniently via AI agents. And for corporate clients such as businesses, companies, stores and brands, we will provide customer contact points and business support function through our function enhances Official Accounts and MINI Apps by improving the value provided to both users and clients and by seamlessly connecting both via AI agents, we will realize new service experiences and expansion of revenue opportunities. Please turn to the next page. First, regarding our initiatives for AI agentization. First, our goal is daily AI agent used by our 100 million users in Japan, aiming for 100 million DAU. Currently, in October, DAU for AI services is 8.6 million, especially AI answers on Yahoo! JAPAN search and LINE AI Talk Suggestions are used frequently and user numbers have begun to expand. Also for AI Talk Suggest, user billing has started and monetization efforts has also begun. Going forward, we will promote AI agentization of each service and aim to expand users. Next page, please. Next, regarding the enhancement of OA, Official Account and MINI Apps. But before talking about the specific initiatives, I'd like to explain the structural transformation of the Media Business. Earlier, I explained the revenue decline in search advertisement in the Media Business, while steadily bolstering the conventional search and display advertising businesses, we will achieve sales and profit growth by further growing OA and MINI Apps where we can provide our original value. Over the next 3 years, we will increase the share of high gross margin OA and MINI Apps to about 40% and aim for an adjusted EBITDA margin of 40% to 45%. First, regarding the performance of OA, Official Accounts in Japan over the last 3 years, our track record, the number of paid OAs improved by a CAGR of 14% and ARPA also improved. And as a result, OA revenue also grew 16% annually on average and sales have grown to the scale of JPY 100 billion in Japan and JPY 140 billion, including global. Please turn to the next page. On top of this OA growth foundation by further building a MINI App platform and adding a SaaS-like store support solutions, will create a multilayered revenue structure and aim to double sales in 3 years. This fiscal year, as I mentioned, doubling the JPY 140 billion to JPY 280 billion. In this fiscal year, we will first focus on expanding MINI Apps based on OA and launching the SaaS business. Important KPIs for the revenue models of each areas are shown in the lower section of this page. MINI Apps are -- our scale expansion is very important for KPIs in the growth phase. In OA SaaS, we set ARPA improvement as KPIs. But we think these KPIs as leading indicators to monitor our business goals. Next page. Let me explain structurally. First, there is an OA, Official Account as a base. Currently, there are 1.3 million active Official Accounts used in Japan, in which number of paid Official Accounts are 310,000. We see the target accounts for future expansion such as businesses, companies, stores and brands at about 5 million. So we can still grow the number of OA accounts, and we will also further increase the ratio of paid accounts. The second layer, MINI Apps to OA using companies and stores, we will propose a customer contact point via MINI Apps, expanding MINI Apps numbers, growing users and creating businesses like payments and ads within them. The third layer is SaaS solutions, developing specialized support for high affinity industries like Store DX or reservations, aiming to raise ARPA. Service launch planned for 2026 first half. And we'll have more new solutions at the right timing when we can introduce them to you, we will. We will provide services more broadly and deeply and provide a deeper solution via SaaS by industry to expand our sales. Finally, regarding the recent growth of MINI Apps, as you can see on the left-hand side graph, number of apps has increased by 1.5x and the number of users has increased by 1.6x, steady growth. And we are strengthening our sales structures. We are enhancing proposal to bigger companies and installation at large enterprises like these are beginning. As you can see, and as a measure to strengthen inflow, we are leveraging LINE touch, which allows users to instantly launch MINI Apps at stores and the LINE apps revamp focusing MINI Apps will also begin. So we will further expand both the number of apps and the users and build a situation where businesses like advertising payments that can be provided. Let's turn to the next page. And finally, a summary of the Q2 financial results. Sales and profit expanded steadily. Our company performance was -- experienced a solid growth. Going forward, centered on AI agentization and Official Accounts and MINI Apps, we will accelerate the growth. We will promote AI agentization across all services, offer AI services to 100 million users and create new value. Also, we will enhance OA and MINI Apps. And while transforming the media portfolio, we will achieve growth and improved profitability. This concludes our Q2 financial results explanation. Thank you very much. Operator: We would like to now begin the Q&A session. [Operator Instructions] First from Goldman Sachs Securities, Munakata-san. Minami Munakata: I'm Munakata from Goldman Sachs. I have 2 questions. My first question is on search ads. In the first quarter and also in the second quarter, the impression I got is this business is quite tough. The degree of toughness, is it correct to understand that it's the extension of the first quarter? Or are there any additional reasons? And on search ad, what would be the realistic guidance towards the second half? That's my first question. Ryosuke Sakaue: Thank you for the question. I am Sakaue. I'm the CFO. Let me reply to your question. Second quarter year-on-year is worse compared to Q1. One of the factor is one major client budget allocation was weak, and that continued into the second quarter. And in addition, in other clients, the budget reduction happened. This I'm referring to large EC companies in Japan and vertical companies declined, and that can be called additional from Q1. So that was the additional factor for Q-on-Q deterioration. And Q3, Q4, I think the degree of negative -- negativity is same as Q2. For Q3 and Q4 as well, that is our forecast. Minami Munakata: I have a follow-up question. There are other clients with quite reduction. Is there any structural reason such as shifting in-house or revisiting ROI of advertising? Is it more of an economic trend? What is the nuance? Yuki Ikehata: This is Ikehata. Let me reply to your question. This is Ikehata. I would like to add some more comments. In addition, there were some industry -- well, in addition to prior quarter's reduction trend in other industry, partially, that is -- there was a reduction in ad spend for search ad. The concept of ad placement, I don't think that is such a reason. But overall, LINE Yahoo! search ad performance is being monitored and the advertisers operate. So based on that, there is -- there was a decline in ad placement. We will continue to work on the performance improvement of search ad, and that would lead to getting these customers back. So rather than any unique circumstances, we are to continuously work on performance improvement of search ad. Minami Munakata: I understood fully. Another question is on MINI App. This time, various figures were presented and outline was explained, and I was able to learn. Thank you very much for that. The portfolio shift -- this chart has been shown. Just to reconfirm display and search, basically, it's very difficult to grow these areas. Is that the assumption you are setting? And JPY 140 billion to be expanded to JPY 280 billion, that has been rather difficult. And what is the pathway you envision? For example, from the first half of 2026, you're going to start SaaS service. So from the second half of next year, do you expect the sales to accelerate? Takeshi Idezawa: This is Idezawa. Let me answer your question. Display, search, naturally, the measures to revamp or to boost them, we are taking measures. And also thanks to the organizational change that we have implemented, we are able to implement activities to work on recovery. But structurally speaking, I don't think this is an area where we can expect high growth rate. So from that perspective, we will support the baseline for the display, search. And then apps will drive the growth. And we have the target of Official Account doubling and CAGR-wise, it has been 16%. And so we have this growth of OA, Official Account as a basis. And to add on top of that, we are going to provide MINI Apps and SaaS services. So we will be pursuing the target by having breakdowns or compositions in mind. On MINI App, it's not a linear growth, but when we have a certain number of clients, then we can expect a significant activation. So the MINI App platform will be stronger in the later half. And then that would be the overall picture. Operator: Next question from SMBC Nikko, Mr. Maeda, please. Eiji Maeda: This is Maeda from SMBC Nikko. I have 2 questions as well, please. I'll be recapping the previous comments regarding search linked ad. Together with popularization of GenAI, the negative impact to queries. And when I look at the performance, some of the clients looks like ad placements are declining in numbers. So because of this GenAI, the performance is having a negative hit on the flip side. If you could please share more on the recent trend? And also for the market, we -- there is still a concern that GenAI rise can be a negative for a search-linked ad. If you could please share your outlook, that would be great. Ryosuke Sakaue: Thank you, Mr. Maeda. Sakaue, I will start, then possibly Kataoka will follow up. At the moment, Yahoo! Search, 10% of query comes from AI search. And at the same time, the answers from AI search are business query where there is no opportunity for search-linked ad, like questions and answers. Those are the search keywords that we get. So it doesn't have much impact to our revenue and profit making. But at the same time, mid- to long term, regarding those business query, I would think that the there will be more use on use of GenAI. So media and search, we expect the next 3 years to be flat plus extra. Hiroshi Kataoka: This is Kataoka speaking. As Sakaue mentioned, number of queries for search have not resulted in significant decline in the number of queries. There is no major time shift in the search trend. And ad performance itself hasn't deteriorated. So within this big global trend, there's more use cases from GenAI are increasing. And I'm sure more of our clients companies are considering to further use GenAI. We believe that there will be opportunity, the monetization business opportunity when it comes to GenAI-led search as well. So we are considering various different means to monetize. Eiji Maeda: Second question, regarding Commerce Business. In second quarter, each services growth on the Page 8. Regarding Yahoo! Shopping, the hometown tax, I wonder how much of that impact is included. I wonder in the second half, there can be a significant decline in the growth as a reversal factor. And if you exclude the BEENOS impact, what is your true growth opportunity? So the growth in the cruising pace and growth from a one-off reason, if you could please share for the results in the first half and what you expect for the second half, please? Unknown Executive: Okay. Sakaue would share some figurative indication then -- and I'll have my colleague, Hide to provide additional information. And regarding Yahoo! Search -- sorry, Yahoo! Shopping, for second quarter, the growth was about 19%, 1-9, so quite significant. And hometown tax, late high single digits, mid-single digit to high single-digit growth. And for Reuse, this includes Yahoo! Auction, Yahoo! Flea Market and BEENOS as to be about 15% growth. So excluding BEENOS, we do have mid-single-digit growth. Second quarter has this last-minute demands for hometown tax. So that led to this significant growth rate. Makoto Hide: This is Hide to provide additional information. Regarding Yahoo! Shopping, a significant impact from hometown tax. This is something that was happening at the end of the year in December time. So it's a front-loading of that demand now. Compared to the last year, Q3 growth rate will be stagnant, will slow down. For Reuse, excluding BEENOS, I do see the trend continuing. In other words, Yahoo! Auction growth is quite steady and Flea Market is growing significantly. So when you take the weighted average, our growth is mid-single digit. I would think that for the second half, we can expect a similar growth, and we'll have a synergy, as you can see on the right-hand side, to have a more significant growth in the midterm. Operator: Next, Okumura-san from Okasan Securities. Yusuke Okumura: This is Okumura from Okasan Securities. Can you hear my voice? Unknown Executive: Yes. Yusuke Okumura: I have 2 questions. On Page 26, you have been explaining on the account ad and MINI App expansion and double the sales from this, I would like to reconfirm Official Account, the platform part based part, the assumption is the current growth rate. And through MINI App several dozen billion will be added on top. Is that the assumption? If this becomes a reality, it's wonderful. But what is the background for being so bullish at the time of launch, the assumption of the MINI App or MAU in order to achieve your assumption, what kind of measures and scale of investment you're going to make in order to achieve your strategy? That is my first question. Unknown Executive: Firstly, the growth image of official apps, I would like to explain and the strategy to grow will be replied by Idezawa-san and Ikehata-san. The existing OA part, the current level of growth can be maintained. To be more specific, 10% to 15%. Currently, it is growing at nearly 15%. So maintaining the same growth level. The paid accounts can be expanded in this pace, but that will not bring us to double. So the gap will be compensated by MINI App and SaaS. The strategy will be explained by Ikehata. Yuki Ikehata: Thank you for your question. Let me just add some more comments. In your question, you said that it's still the starting phase and this forecast may be bullish at the starting phase. But right now, we already have Official Accounts and MINI Apps, although partially we are not monetizing yet to many customers, similar solutions are offered and being used, and it's been -- the customers are satisfied. So for MINI Apps, we will increase the number. And at the same time, we will focus on monetization. That is for next year and beyond. Official Account SaaS solution already, including third-party solutions, we are collaborating with various companies and various solutions are already being utilized. So our strategy is to monetize them from next year and onward. We haven't been able to try or something that does not fit the market to start from scratch. Well, that is not the case. We already have existing foundation of Official Accounts, and we are offering various services, and we will expand and further monetize. So that is the basis of our assumption to achieve these targets. Yusuke Okumura: What about the scale of investment? JPY 10 billion was the media investment for this year. What about the investment going forward? Unknown Executive: The details will be discussed, but we are working on the awareness strengthening through advertising for MINI Apps and we are going to focus on promotion and PR. And regarding manufacturing or production, as shown on the slide, we are to reassign human resources to these growth domains to speed up the launch of products. Yusuke Okumura: My second question, on LINE, you are going to implement AI agents. I would like to ask about that. ChatGPT has instant checkout and strengthening the functionalities, and they are expanding partners, the user side rather than ChatGPT, why do they use LINE's chat or AI agents? What is the value that you offer in the future? The relationship is that parent company is -- has strong ties with OpenAI. And what kind of positive influence will that relationship with OpenAI has with your company? Takeshi Idezawa: This is Idezawa. Let me reply to your question. Our company does not have our own LLM. So we use OpenAI solutions or other solutions. We pick and choose. It's not just LINE, but within our company, we have a variety of services, news, commerce, finance, auto, so each service will be agentized. That is what we are working on right now. And like Yahoo! and LINE or integrated agent will be created. So that is the perspective of our user interface. We do not have LLM ourselves. But on the other hand, we have a lot of touch points with so many users and services. So within one ID, ours can be used in a seamless manner. That is the value we offer. So that is why we are working on agentization of various services. Operator: Next from Mizuho Securities, Mr. Kishimoto, please. Akitomo Kishimoto: My name is Kishimoto from Mizuho. I have 2 questions too. Both are about LINE Ads. The first is commerce functions of LINE SHOPPING functions. I would think that it will be launched quite soon as a new platform. I know you've done some testing. So I wonder what is lacking in order to have a full launch? That's my first question. Makoto Hide: This is Hide speaking. We are providing bucket test. We have already launched the test launch for this within the LINE SHOPPING tab. We are not offering any service actively or making a big sales promotion. We are testing system stable operations. Then within this test bucket, we are trying to expand our product and services or to enhance sales promotion activities so that we'll be able to have 100% full launch. We have been working together with various internal stakeholders. The situation is a bit different from the users of shopping -- Yahoo! Shopping, where they already know what they want to buy or they want to buy certain things. LINE, we need to propose what is appropriate and right that would resonate to the LINE users. Once we know that right business model solutions, then we will be able to launch under such use case and sell products as well. So there's a great opportunity, and we've been testing at the moment. Akitomo Kishimoto: On Page 27, please, you mentioned about second tier, third tier. I'd like to ask you a question about the capability for the third tier. I understand that you have been reallocating your staff together with AI agents. I wonder whether you'll be able to run all these initiatives under the current manpower? Or are you going to strengthen your perhaps sales capabilities with more new recruits? Is this something you can do with the current resource? Unknown Executive: I'm sure it's based on the selection criteria, but thank you for your question. Your point, recently, we do have a certain amount of resource that we had to allocate that we had to secure from other departments to this department. So as mentioned on this page, we are going to have 50% of this existing business to new domain or the focus domains. So we will be shifting our business focus as well as resource allocation as well. And we also are considering more partnership, leveraging outside resources as well. We have many different ideas. Operator: Next, Nagao-san of BofA Securities. Yoshitaka Nagao: Can you hear? Unknown Executive: Yes. Yoshitaka Nagao: This is Nagao speaking. My first question is on MINI App MAU is to be increased from 25 million to 75 million and from 35,000, the KPI direction is being presented, the price charging per app or how you consider retention. What are the methods you're going to take? 60% comes from OA and 40% comes from MINI Apps. So proactive monetization will be necessary. So can you explain concrete ways you have in mind for monetization of MINI Apps. Yuki Ikehata: Thank you for the question. This is Ikehata speaking. Let me answer your question. Right now, well, MINI App numbers are to be increased, and we are to increase the number of users significantly. That is the plan. So on MINI Apps themselves from LINE application, there will be a lot of touch point from the users. So we are increasing touch points by linking with LINE app and LINE media to increase the opportunity for as many people as possible to touch MINI App. On the monetization of MINI App, the payment function and also advertising within MINI App and receive ad placement fee. So those are 2 monetization sources. The application that can generate fruits in terms of profitability is what we are planning to build. The sales force, we are strengthening right now so that as many people as possible will utilize MINI App and open Official Accounts. From next fiscal year and beyond, we expect monetization of revenue. We already are seeing the account openings by many on Official Account. So we have confidence. Yoshitaka Nagao: My second question is related to Page 24 of the material, the target of EBITDA margin, 40% to 45%. Right now, 37% or 38% is the Media Business margin. Official Account and MINI App domain overlaps SaaS domain. So when you expand the scale, the sales staff or development cost will be heavier upfront. And I have a concern that the profitability may decline. The existing search and display ad by the sales of that part decline will affect the overall margin. So what is the overall ad margin? And in achieving 40% to 45%, what would be the contribution of OA and MINI Apps? If possible, could you disclose those information? Unknown Executive: Rather than speaking on the concrete number, it's more of a guide, the search, the basis is that profitability is not that high, and we have been communicating that from before. There's a certain fee that we pay to Google. So the search margin originally is low. And adding with display, it's shown as flat, but the search will be down trend and display, we achieved certain growth in Q2. So the ratio of display will likely to expand. So the margin on the lower part will increase -- will improve. And on display, as you know, there is a commission with the agents that is included in the COGS. So it's -- that is the margin structure. OA the margin will be similar to display. The SaaS part, it will be dependent on the pricing structure, but vertical MINI App or SaaS peers, when we look at them, the profitability is quite high. Compared to ad business, it's low, but still, it's high enough to be able to support. On top of that, MINI Apps, the ad on MINI Apps and within MINI Apps, we will place ads in a network style. So that's the type of ad business that we would like to deploy within apps. So we expect that we can secure profitability on a certain extent. Yoshitaka Nagao: One quick question on Page 11, the JPY 15 billion reduction plan is shown in the medium term, the Media Business ad expense, in some part will increase, in some part it can decline, but the fixed cost of the Media Business will it be unchanged? Unknown Executive: This slide is the company-wide figure. This fiscal year, JPY 10 billion for LLM cost will be incurred. And next year and beyond, LLM expense will continue to rise. But through various programming, we can expect improvement of operational efficiency. So JPY 15 billion, even LLM commission rises next year, we intend to reduce the fixed cost, even including that JPY 15 billion, the promotion expense and advertising for commerce, it is linked with GMV. So that is not included in this figure. And on Media segment, there are subcontractors and some of the human resources cost through use of AI, we can create a leaner structure. So those are combined to set the target margin at 40%. Operator: Next, from Nomura Securities. Mr. Masuno. Daisaku Masuno: This is Masuno speaking from Nomura. Can you hear me? Unknown Executive: Yes, we can. Daisaku Masuno: I just have one question, please. Renewal of LINE apps, you are -- been talking about adding a commerce tab. And I know you have been trying various scenarios under beta. Fundamentally, are you trying to transition the info traffic to service like LINE GIFTS? Or are you going to provide a brand-new shopping experience to LINE users. So I wonder what kind of inflow -- what kind of user experience are you trying to create through this commerce tab? Unknown Executive: What we are testing right now under the current version, all the products that's on LINE tabs are LINE GIFT products. Going forward, in addition to the LINE GIFT products, the stores that are present in Yahoo! Shopping, some of their merchandises we would like to post there. So not just for gift needs, LINE SHOPPING, Commerce products, we would like to offer through that tab. So comprehensive portal shopping corner is how we like this service to grow to be. So what type of stores, what type of products from Yahoo! Shopping really has to do with the previous questions and answers that we had. What kind of products will be the right fit, best resonate to the LINE user. It really depends on that. That's what we are testing right now. So we have to have a right product mix on top of the GIFT products, we've been carefully studying what would be the type of product group that is worth promoting heavily behind it on this new effort. Daisaku Masuno: Okay. So this is not a purchase intent visit. I can understand LINE GIFT. I wonder for those users who are not thinking of purchasing anything would ever be a real customer, whether they would convert by visiting the site? Unknown Executive: Other than Yahoo! Shopping, our customers right now are searching for what they want out of tens of thousands of our products with a certain purpose, compare prices and make decision-making. We have a massive number of products on Yahoo! Shopping. It doesn't make sense to put all of that on LINE tab. I don't think it will drive sales. So out of what's available in Yahoo! Shopping, those stores, we need to focus on products with more uniqueness, originality and some product group with extremely high demand once they release, always sells out. So those will be the right products, we think to be on the LINE tab. Those will be the right products for this casual shopper. Daisaku Masuno: Are you talking about hundreds or thousands? I don't think you're talking about dozens of thousands. So I just have no idea about the scale of the products that would be available through this LINE tab. Unknown Executive: That is exactly what we are trying to get to. That's why we've been repeating the test. So it really depends on the -- we don't know. There's nothing that we can share with you regarding the size or scale of the stores or the type of products or the scale of the product. Operator: Next, Kumazawa-san of Daiwa Securities. Shingo Kumazawa: On Page 11, fixed cost reduction of JPY 15 billion. This is the topic of my question. Currently, what is the fixed cost? And how much is this JPY 15 billion? And from last year, you have been spending on security-related costs. Is that included in this reduction of JPY 15 billion? I believe it's mostly outsourcing that you can reduce. Are there any major items that you expect to reduce significantly? And I believe AI agent is contributing to reduction. So from -- compared to last year, how much reduction is this? Ryosuke Sakaue: This is Sakaue. I will answer your question. LY stand-alone fixed cost is roughly JPY 700 billion. As you stated in your question, security-related costs will come down. On the other hand, LLM commission will almost offset that increase. From April of next year, we will increase the office space to accommodate a 3-day commuting of our employees, and that means the cost increase. And by using AI, we intend to reduce JPY 15 billion in total. If we do not take any action, the fixed cost will likely to go up by JPY 2.5 billion to JPY 2.6 billion. In the areas of reduction, outsourcing part and software license from outside, the system that employees use, we can make progress in the integration of the platform. So double payment can be eliminated. So that is included as the cost reduction on software license. Shingo Kumazawa: The areas you can reduce, I understand it's difficult to name the concrete name or ServiceNow or others or Salesforce. Is it possible to cut them entirely rather than specific ones? Unknown Executive: It's an overall effort, frankly speaking. And for example, there are licenses that are given to all of the employees. But if we identify the staff that really uses, then we can reduce the number of license. And also, there may be redundant functions on the software and cut one of them. Operator: Next from [ SBR. Mr. Jose ], please. Unknown Analyst: I have a question regarding capital structure and security governance. I understand in the past, administrative [ court ] instruction was given from Ministry of Internal Affairs and Communication, administrative guidance pointing out your capital structure. Now that under new administration, any risks that you foresee or any changes to the relationship with the government regarding capital structure, please? Unknown Executive: Regarding the administrative guidance, we've been responding appropriately. And from -- for the 2026 March, we are making progress toward it. And regarding the capital movements, we've been continuing the discussions, reflecting our past track record. No major changes to or the [ FY 2026 ]. Unknown Analyst: I understand. So for 2026 March, you will conclude all the measures to meet the administrative guidance? Unknown Executive: Correct. Yes on track. Unknown Executive: Now, we would like to close because the schedule ending time has arrived. I would like to now have Idezawa to offer a final reading. Before Idezawa's final remarks, I mentioned about the fixed cost of JPY 700 billion, that was a mistake. It's roughly JPY 400 billion to JPY 500 billion. Takeshi Idezawa: This is Idezawa speaking. Thank you very much for raising a lot of questions. The environment surrounding AI is rapidly changing. And our 2 core strategy is AI agents and OA, and we will continuously grow by changing our business structure. That is the message of today's presentation. I will ensure that these plans will be executed steadily, and we would like to ask for your continued support. With this, we would like to close LY Corporation's FY 2025 second quarter earnings call. Thank you for staying with us until the end. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Lavanya Wadgaonkar: Good evening, everyone. I'm Lavanya Wadankkar, Corporate Executive for Global Communications Office. Welcome to Nissan's First Half Financial Results for Fiscal Year 2025. Along with financial year results today, we will be presenting an update on Re:Nissan. Today's session is for 45 minutes and is held on site as well as online. First, let me start with the introduction of the speakers today, Ivan Espinosa, Chief Executive Officer; Jeremy Papin, Chief Financial Officer. We will begin with the presentation. So I'll hand over to Ivan. Ivan? Ivan Espinosa: Thank you, Lavanya. Hello, everyone. Thank you all for your continued support. It was a pleasure to meet and host many of you at the Japan Mobility Show. Before we begin, I want to emphasize that Re:Nissan is on track, and I am grateful to all who have shown patience and trust during these decisive actions. Despite ongoing challenges and volatility, we remain focused on recovery. Today, Jeremy will present our first half performance, second quarter results and full year outlook. I will then update you on the Re:Nissan before the Q&A. So Jeremy, please. Jeremie Papin: Thanks, Ivan. Building on the disciplined approach, our cost control measures are showing encouraging signs amid a challenging environment. Now let's take a closer look at our retail sales results. Total unit sales reached about 1.5 million in the first half, down by 7.3% year-on-year. Second quarter sales, excluding China, were down by 3.6%, an improvement over the first quarter. We are already seeing clear acceleration in Q2 with North America delivering stronger results and China posting year-on-year growth since the month of June for the first time in 15 months. North America saw acceleration with 2% growth overall and 6.7% in Q2. U.S. sales were flat, Mexico up 8%, maintaining market share leadership. China sales declined by 17.6% in H1, but have grown year-on-year for 5 months, led by N7 demand. Japan dropped by 16.5% in H1, but our showroom traffic has been recovering from a low point reached in July, thanks to marketing and dealer program initiatives. Europe and other markets had temporary declines from model year changeovers and increased competition. First half consolidated net revenue was about JPY 5.6 trillion with an operating loss of JPY 28 billion, better than we had expected. Net loss was JPY 222 billion, largely due to lower equity method income, impairments of assets and restructuring costs. The automobile business revenue was about IDR 4.9 trillion, driven by foreign exchange effects and lower wholesale volumes impacted mainly by tariffs. R&D spending was controlled at JPY 275 billion through disciplined resource allocation, some project deferrals, thanks to a shortened development schedule and optimized hourly engineering costs. Our operating loss widened to minus JPY 177 billion. Automotive free cash flow was negative JPY 593 billion in H1, but Q2 performed better than expected at negative JPY 202 billion. At the end of the period, net cash stood close to JPY 1 trillion. Importantly, we maintained solid liquidity at IDR 2.2 trillion in automotive cash and equivalents and unused committed credit lines at IDR 2.3 trillion. This slide shows the year-on-year operating profit variance factors. Foreign exchange had a negative impact of about JPY 65 billion, driven by weaker U.S. and Canadian dollars as well as the Argentinian peso and Turkish lira. Raw material costs were slightly positive at JPY 3 billion, while tariff had a negative impact of JPY 150 billion. Sales performance contributed ID 24 billion but negative volume was offset by a favorable mix. Together, volume and mix delivered IDR 62 billion improvement. However, competitive pressures continued to weigh on incentives. Monozukuri improved by IDR 67 billion as the Re:Nissan recovery plan delivered cost savings alongside lower R&D spend and purchasing efficiencies. Inflation absorbed JPY 50 billion, moderating the overall benefit. Onetime items added JPY 65 billion, mainly due to lower warranty costs recognized in Q1 and reduced U.S. emission expenses recognized in Q2. Other items, including sales finance and remarketing expenses added JPY 45 billion. We achieved a positive impact on G&A costs through Re:Nissan initiatives. Taken together, these factors resulted in an operating loss of JPY 28 billion for the first half. I will now move to the outlook for the remainder of the fiscal year. For the second half, we anticipate a strong rebound in volume driven by new products and marketing initiatives. In China, demand for N7 is encouraging, and sales are expected to exceed previous outlook by 13%. North America is expected to sustain momentum, and we will intensify our efforts in Japan, Europe and other markets. Although the first 6 months showed a year-on-year decline, we are confident the next half will deliver growth. The markets remain challenging, but the industry volumes are stable. Our full year sales forecast remains unchanged at about 3.25 million units, representing a 2.9% decline year-on-year. We are adjusting our outlook to reflect the positive developments ongoing in China, but we are reducing our consolidated retail sales to account for the lower performance of the first half. The production is projected to remain around 3 million units as we maintained a very disciplined inventory management and actively manage supply risk. Recent launches and model enhancements will strengthen the lineup and attract customers in H2. Operational improvements, including a third shift at Nissan [ Shatai Kyushu ] will boost output. Net revenue is expected to be about JPY 11.7 trillion for the current fiscal year. As outlined in our revised outlook last month, we anticipate a full year operating loss of about JPY 275 billion, breakeven before the impact of tariffs. Our operating profit outlook includes JPY 25 billion for assumed supply risk, which we will revisit as the situation evolves. We are still evaluating the impact of Re:Nissan, so we are not of Re:Nissan initiatives, and we are not providing a net income outlook today. The forecast is based on an exchange rate assumption of JPY 146 per dollar. Let me outline the factors behind our operating profit forecast. Compared to last year's JPY 70 billion operating profit, we expect significant headwinds from tariffs and currency. On the positive side, we anticipate benefits from an improved product mix and continued support for our U.S. built models. Year-on-year, we expect cost improvements as Re:Nissan initiatives take hold even amid inflationary pressures. Tariff-related carrefour adjustment will add cost in the second half, limiting manufacturing efficiency gains, but we are expecting savings in logistics, R&D and purchasing. Onetime positives include lower warranty provisions and reduced emission penalties. Overall, we forecast an operating loss of JPY 275 billion for the year. We remain disciplined in our balance sheet management, and we are retaining sufficient liquidity. Total liquidity is about JPY 3.6 trillion with JPY 2.2 trillion in cash and JPY 2.3 trillion in unused credit lines. Year-end automotive debt is forecast at about JPY 2.1 trillion, fully in line with our initial plans, and this is following the successful refinancing of JPY 700 billion in debt maturities this year. Let me now hand over to Ivan. Ivan Espinosa: Thank you, Jeremy. I will briefly recap H1 performance and the outlook. First, on sales performance, despite volatility and competition, we stay resilient. Q2 declines narrowed signaling stability. North America showed strong Q2 growth. Retail non-EV share has risen for 3 straight quarters and continued in October. China turned positive since June, while Japan and Europe experienced some softness, but we expect recovery with upcoming launches and dealer programs. Second, on financial performance, we possessed JPY 3.6 trillion of total liquidity. Over JPY 80 billion in fixed cost savings were achieved in H1 through Re:Nissan recovery initiatives. While tariffs and currency headwinds pressured profitability, disciplined cost management and structural efficiencies continue to deliver benefits. Finally, the outlook. We anticipate a stronger second half driven by Re:Nissan product-led growth and momentum from Q2. We remain on track for operating profit breakeven, excluding the tariff impact. We target JPY 1 trillion net cash at year-end and expect positive out of free cash flow in H2. We will balance optimism with prudent risk management as we navigate challenges. In short, we are prepared for second half growth, leveraging new launches, operational improvements and disciplined execution. Building on this momentum, let's turn to the strategic update. While navigating a challenging environment, Nissan is advancing steadily through Re:Nissan, redefining our strategy, accelerating innovation and reinforcing the foundations for sustainable growth. We have been driving a transformation that goes beyond tackling current challenges to redefining our future. It rests on 3 powerful drivers: First, disciplined cost reductions to strengthen our financial base. Second, a bold redefinition of markets and products to deliver what customers truly want. And third, reinforcing partnerships that unlock scale and efficiency and with clear target, returning to positive automotive operating profit and free cash flow by fiscal year 2026, excluding tariffs. And we know what it takes to get there. That's why we're targeting JPY 500 billion in savings split between variable and fixed costs to reshape our cost structure and strengthen our competitiveness. Let me take you through how we are tracking against these targets. Over the course of this year, our variable cost reduction initiatives have gained notable momentum. As of November 2025, we have generated 4,500 ideas, identifying a potential impact of JPY 200 billion, a progressive leap from JPY 75 billion in May and JPY 150 billion in July. Over 2/3 of these ideas are technical solutions like redesigning headlamps for efficiency or optimizing seat designs to cut material costs. Major cost reductions target high-volume models like Rogue, Kicks globally, Pathfinder in North America and Serena in Japan. Every action upholds our commitment to quality with no compromise on safety, reliability or performance. We are advancing in manufacturing and logistics, including parts diversity reduction and supplier collaboration. Encouragingly, ideas are maturing with more moving from concept to implementation. This structured approach ensures credible, sustainable savings embedded in design and operations, always with quality as a top priority. We have delivered over $80 billion in fixed cost savings in H1, a strong start. We aim to exceed $150 billion by fiscal year-end and surpass $250 billion by fiscal year 2026. In manufacturing, we have completed 6 of 7 targeted site actions with Compass, the sixth plant ending production later this month. On engineering, we are progressing towards our 20% cost per hour reduction target currently running at 12%. Parts complexity reduction is delivering also strong results, complemented by Obea activities with models like the next-generation Rogue using 60% fewer parts. We are also optimizing assets to unlock value for transformation. A key step is our global headquarters in Yokohama. We will proceed with a sale and leaseback transaction under a 20-year agreement. This ensures Nissan's continued presence and commitment to Yokohama while ensuring no impact on employees or operations. Part of the proceeds will fund critical investments like accelerating AI-driven systems, digital modernization and transformation initiatives while preserving our ability to invest in innovation and growth. These steps go beyond cost. They create a leaner, more agile Nissan ready to compete and win. We have made strong progress on cost actions, and now the momentum is shifting towards the next 2 drivers of Re:Nissan, redefining our product market strategy and reinforcing partnerships. On product lineup, our product lineup tells the story. From the award-winning Leaf to the new generation [indiscernible] car, we are gaining traction. Between now and fiscal year 2027, we will be introducing 9 new models. As we look ahead, our product strategy rests on 3 pillars. Hartbeat models, icons that showcase Nissan's DNA and innovation like the globally recognized Leaf. Core models, vehicles that lead in key markets such as the Kashkai ePower with class-leading fuel economy and the Kicks recently named Best Buy 2025 in Brazil. Partnership models are collaboration that strengthen our reach, including the N7 with 40,000 units sold in China and the Ros KCar with 15,000 presales in just 6 weeks. Finally, I want to stress the importance of partnerships for our future. Many of our products, as I mentioned earlier, reflect the strong power of collaboration. Now coming to partnerships in technology. These are critical to strengthening our presence in next-generation mobility. In recent months, we have announced several initiatives, a tie-up with Boldly, Premier Aid and KQ Corporation to pilot autonomous mobility services here in Yokohama. Collaboration with WAVE, the U.K. pioneer of AI driver software to set new standards for driver assistance in our next-generation ProPilot technology. And in China, our new Tiana features advanced intelligent connectivity, becoming the first ICE vehicle equipped with Huawei's Harmony Space 5.0 smart cockpit. These partnerships are more than projects. They are strategic moves that position Nissan at the forefront of intelligent mobility. In conclusion, our first half results reflect the challenges we face, but they also confirm that Nissan is firmly on the path to recovery. We have made meaningful progress. And while there is more to do, the foundation for future success is in place. Having implemented decisive cost-saving measures to secure profitability, we are now accelerating forward, prioritizing new products, key markets and breakthrough technologies that will define our next chapter. The second half will bring challenges, but with focus, discipline and the actions we are taking, I am confident we will deliver strong results. We have the right strategy, the right products and the right team to capture growth and create value. Together, we will navigate the road ahead and with confidence, seize the opportunities and lead with innovation. Thank you for your attention. With that, we will now take your questions. Lavanya Wadgaonkar: [Operator Instructions]. I already see a lot of hands going up. [Operator Instructions]. Just so we go with maybe the first front row middle. Unknown Analyst: [Interpreted] My name is Taki. I have 2 questions. The first question is as follows. Last week, Japan Mobility Show started. And here, you have a stand, new L Grand and new Petrol were displayed in the show. Sspinosa-san, you made the presentation personally. That's what I heard. What's the reaction of the people who saw it? And what's your opinion about the overall show? This is my first question to Ivan-san. And the second one, partnership. Was it -- since last fiscal term with Honda, you have been -- well, capital tie-up is kind of went back to scratch, but you are trying to continue with the collaboration with Honda. What is the progress so far to the extent that you can disclose? These are the 2 questions. Ivan Espinosa: Okay. So thank you. Thank you for your questions. On the Japan Mobility Show, first of all, thank you for visiting. I really enjoyed the show and having the opportunity to guide many of you through the booths and show you what Nissan is capable of doing. Then as for the reaction, the reaction has been extremely positive, both for L Grand and for Petrol. The level of buzz that we are seeing, and I have some numbers for you actually. The conversations on social network spiked by 15x versus the normal average that we have. And out of that, we have 35% positive sentiment in total, which is a 25% increase versus where we were before. So clearly, the products are well received and Nissan is starting to become attractive to customers again, which was exactly the goal. It's exactly the goal of the second phase of our RNissan program. As I've mentioned before, the first step was about cost and restructuring. Now we are shifting gears into the second phase, which has to do with product, market strategy updates, innovation and technology. As for the partnership with Honda, well, we keep discussing with them, as I have said before, on several projects. There's nothing that we can disclose at the moment, but we keep discussing with them opportunities in several fields as we outlined in previous announcements. Thank you. Thank you for the question. Lavanya Wadgaonkar: Take the question from the right side. Unknown Analyst: [Interpreted], my name is [indiscernible]. There are 2 questions from me. The first one is the regional breakdown of the sales. China and U.S. are better, but how about Japan and Europe? There's a decline which is continuing in Europe and Japan. Sunderland and [indiscernible], what is the utilization rate so far? ELV and Micra, you are going to introduce new cars. You are talking about the second stage of Re-Nissan. Europe and Japan, when will it grow? The volume -- when will the volume in these 2 regions grow? This is my first question. And the second one is the objectives of the Re:Nissan. In May, when you devised the plan in fiscal year 2026, automotive profit and free cash flow will be the positive. That's what you said. But you said that you didn't talk about excluding tariffs, but now you are saying it's excluding tariffs. Does that mean that you made a downward revision on the goal for 2026? Ivan Espinosa: So let me start with the first question. So the volume, as we explained earlier in Europe and Japan was soft on the first half. Europe had some impact from the model changeover. So we were on the runout of the previous [ Cashkai ] and entering with a new Cashkai that has the third-generation e-POWER. So we expect Europe to pick up in the second half now that we are launching full blast, the third-generation ePOWR, which has been very positively received and evaluated by media. In Japan, we had a slow first half and for several reasons. One, of course, the impact of media and communications, the negative media coverage that we had in the first half, because of the situation that we went through. This had an impact on showroom traffic and customers were wary of Nissan's situations because of the financial condition. Now we are seeing change. We see, as I mentioned before, sentiment from the public is changing towards us. They are understanding that Nissan is a great company that makes great cars, and we start to see the positive sentiment changing. A lot of this, thanks to your support as well as media because you have been providing a lot of support to us. And we see that the sentiment is changing. The showroom traffic starts to improve. And the proof of that is also the very strong reception to rucks, around 15,000 orders received in only 6 weeks. So this signals that we can start bouncing back, and we expect a strong bounce back in Japan as well in the second half. As for the objectives, the objectives have not changed. The fact that we are now clarifying tariffs is because we didn't know when we announced at the beginning for how long tariffs will be remaining. We thought initially as many in the industry that it was a temporary thing. But now that this is here to stay, it's -- we are just recognizing that the tariffs will have to be managed. And this is not a downward revision. It's just a clarification of what we expect for next year. Thank you for the question. Jeremie Papin: Yes. On the FY '26 guidance, there is absolutely no change, fully in line with what we had announced in the month of May. Lavanya Wadgaonkar: Thank you. If I go to the last left side, first row. Unknown Analyst: [Interpreted]. My name is Sakamura. I also have 2 questions. First of all, Re:Nissan. So far, 20,000 people headcount reduction was talked about. In which country will you be reducing headcount in what degree? Can you substantiate that plan and give us an update on the substance of that plan? Second question, new model introduction. In China, N7 is doing very well. So in the future, China produced cars exporting to other countries. I thought that you were studying such possibility. How far has that study gone? And is there a possibility for export to Japan? Ivan Espinosa: Thank you, Sakamura-san, for the question. So on headcount, on your headcount question, what I can tell you, we are not providing a breakdown. What I can tell you is these numbers that we announced are global, and we are tracking according to our plan. So the plan is ongoing, and we are tracking according with our expectations in terms of speed and size of adjustment of the workforce. But we are not providing details on the breakdown. As for the new model, N7 and future exports, the answer is yes, we are working on export plan. You maybe heard we established already an export JV company that will help us enable and facilitate and speed up this. And we are looking at several products that we have a potential, and we are looking at different market options. But nothing specific to share today. But the answer is yes, we will be exporting cars because this is part of our strategy to defend ourselves outside of China, bring more scale to our China operations also and use the speed of China in terms of development, technology and costs to defend ourselves in markets where Chinese OEMs are being aggressive. So this is what we are set to do. Thank you for the question, Sakamura-san. Lavanya Wadgaonkar: Thank you. If I move to the second row in the middle... Unknown Analyst: The question to CEO. So in relation to the previous question, you have a commitment of achieving operating profit in the automotive business by fiscal year 2026. However, net income forecast has not been disclosed with a massive loss loss in fiscal year 2025. Can this target be met? Can it be achievable in time? I think that Mr. Papin has already answered that question partly, but I need to -- I need an answer from Mr. Espinosa and a strong message in your commitment. And the second question is very simple. So you emphasized the change of an atmosphere around Nissan. Does it mean the darkest hours of Nissan is over or still to come, the darkest time of Nissan is over or not? Ivan Espinosa: Thank you. So for me, the important thing is to have customers looking at Nissan with eyes that represent what Nissan is capable of doing. And Nissan is a company that has over 100,000 employees working very hard to create great products. And that's proof of what we saw in the Japan Mobility Show. It's evidence and proof that this company, our company is a great company that can deliver great exciting products. This is what we're focusing on, and this is what our people with a lot of love for our company are doing every day. As for your question on OP, the answer is yes. We are committed to deliver what we said. And proof of that are the numbers that we just explained to you. I think we have a couple of good examples. As we said, on the fixed side, we have achieved already more than JPY 80 billion in the first half of savings. We are on good track to achieve JPY 150 billion by the end of this year. And we are confident that we can overachieve JPY 250 billion next year that we have committed to achieve. And on the variable cost side, as mentioned, the progress is very consistent, gradually growing the impact or potential that we see, now reaching JPY 200 billion versus the JPY 75 billion that we had in May and the JPY 150 billion that we had in July. So again, this is evidence that the company efforts is bringing fruits. So this gives us confidence to achieve the objectives that we have set for ourselves next year. Thank you for the question. Unknown Analyst: Darkest hour [indiscernible]? Ivan Espinosa: Well, I don't know what you mean by the darkest hour. Again, for me, the important thing is to change the customers' minds and have them look at Nissan as a great company that it is. Thank you very much. Lavanya Wadgaonkar: Stay in the middle... Unknown Analyst: [indiscernible] newspaper. First, Expedia semiconductor manufacturer impact. [ OPamMaushu] reduction has become clarified, but how much impact are you foreseeing in terms of volume? What's the maximum reduction? And are you thinking of alternative purchasing? So what's the progress in terms of choosing an alternative? Secondly, how do we interpret volume? N7 was better than expected. So there was a hit, but the full year volume is unchanged and minus from 2024 and sales has been revised downward. So top management, how confident are you on the second half? And you will continue to introduce new models next year, but are you -- do you think that, that will really have a positive impact? What's your level of confidence? Ivan Espinosa: Thank you. So I will answer the second question and then let Jeremy elaborate on the first one. On the confidence on the H2, I think there's 2 elements to consider, not only the new car launches, but the fact that in North America as well as in China from the second quarter, we already start seeing growth. So we have seen consistent growth in North America and the U.S., particularly, I can tell you, our retail share in non-EV has quarter-over-quarter grown. If you look at the numbers, Q3 2024, we trail at 4.3% Q4 2024, we were at 4.8%, and now we're running at 5.3%. So this is proof that the performance is improving, thanks to the focus that we have put in our marketing and sales activities and the products that we are rolling out in the U.S. Then Japan, as mentioned, we had a slow H1. So that's why we believe we will not be able of recovering the full year estimate, but we expect a strong bounce back in the H2. Thanks, as we said, from the good showroom traffic improvement that we see, the positive sentiment from the consumers that they are placing again their confidence in our brand and our company. And again, proof of that is the very good reception and the preorders of the old Nissan books. So that's why we are confident on the second half performance on sales. Jeremy, do you want to elaborate on the first one? Jeremie Papin: Yes. On the supply risk that we are managing at the moment, there are actually 2. One is an aluminum supply issue in North America that is affecting many market participants following the fire at a supplier. The second one is obviously the situation with Nexperia and the chips that were being banned from export from China, but that ban in the last few days seems to have been lifted. So I would say the situation is extremely fluid, and we are, I would say, managing it extremely closely. This forecast, as I shared with you, includes a JPY 25 billion risk which we put as a placeholder last week when the situation was quite uncertain. I would say, as the situation clarifies, should this placeholder be unnecessary, we will be removing it from the forecast. Lavanya Wadgaonkar: Next question. I can move to the media, please. Unknown Analyst: [Interpreted]. My name is Matsuka. I have 2 questions. For this fiscal term, in the first half, how do you assess the first half results of this year? And the sales and leaseback of GHQ without renting it, how by going to the suburbs where you have an R&D center, it would have been more beneficial. What was the thinking behind this? Wasn't there any opposition from other executives in the company? These are the 2. Ivan Espinosa: Thank you for the question. So on the first half assessment, as mentioned, we had a result that came in better than we expected, but it was supported by external factors as well. So we had some onetime events and that are evident that we are doing well, but there's more work to do. So that's what we qualified earlier in the presentation. So the plan is on track, but we have to keep working hard in the second half to deliver the objectives that we have set for ourselves. Now as for the sale and leaseback, we discussed at length in the EC, and it's something that also we reported to the Board. And the best option was to do what we did, the decision that we made, which is trying to minimize the impact on the employees and on the suppliers and on the local economy and having a good business strategy to utilize better our assets. bring some resources in that will help us, as I said, modernize and go further into digitization, AI implementation and many other things that we have to do, while also it allows us to spend the precious R&D resources that we need for our future, especially in a year where free cash flow will be negative. So this is the -- these are the considerations that we took for the decision that we made. Thank you -- thank you for the question, Ms. Matsuka-san. Lavanya Wadgaonkar: Move to the left side, yes, please. Unknown Analyst: [Interpreted] from Bloomberg. Last time during the press conference, Papin-san, you said that net loss for this fiscal year, you said that details will be provided in November, if I remember correctly. But this time, you are not going to give a full year guidance for net income. Once again, why are you in this situation? Was there any change that took place from last time? Is there something that you didn't see last time to the degree that you can disclose? Could you elaborate why you cannot give a full year guidance of the net income? And Page 16, Global Design Studio is reorganized and Global Information System Center is relocated. That's what it says. Did you sell assets in these moves? Could you elaborate on these 2 points? Jeremie Papin: So on the net loss outlook, I think the situation is the following. We are, at the moment, considering further implementation of restructuring actions under Re:Nissan, in particular, accelerating decisions. And as we are working on those options, we just didn't have a clear enough forecast to share something that was robust enough in order to make a communication. So we want the transparency and we want to provide the guidance, but today was just not the day where we could. And so I think you just need to bear with us and understand that we're working on assessing further restructuring and implementation of Re:Nissan plans in fiscal year '25, and that will have P&L consequences that we are assessing. On -- more generally on the events that you mentioned, I would say that when we free up any assets today, there is a consideration of monetizing the asset if we own it. And so there is just a systematic review. So we will keep you informed as we progress with asset sales or any asset disposal. Unknown Analyst: [Interpreted] Hatanaka of Nippon Broadcasting. I have a question to Mr. Espinoza. During the Mobility show, your group company, Nissan Shatai Shona plant announcement was released. You will be using it for -- to manufacture service components. What's your take? And did Nissan -- was Nissan involved in that decision-making? And Mobility show was very popular. The main LGA and Petrol, Nissan Kyushu manufactures those models. So these models will continue to be manufactured in the same way? Or will the manufacturing site be transferred? Ivan Espinosa: Thank you. As for the Nissan Shatai question on Shonan, I will kindly ask you to ask the question to Shonan. We cannot comment on Nissan Shai. However, on your question on L Grand, we are -- we will be continuously assessing the industrial strategy. So for the moment, we will start producing in Nissan Shatai Kyushu together with Caravan and frame vehicles. As you have seen, the welcoming of patrol and QX80 is very good globally. So we are currently looking at what options we could have to further increase the capacity of such models because they are performing very well, and they are very profitable. Now this, as I said, we will continue to explore. But for the moment, there is no intention to move the products out from Nissan. Thank you for the question. Lavanya Wadgaonkar: We have time for 2 or 3 questions. So next question, please. Unknown Analyst: [Interpreted] My name is Togashi. Espinosa-san, this is a question for you. Nissan Stadium naming rights is the question. Yesterday, Yokohama, Mayor Yamanaka, as of the end of last month, he said that he received a new proposal. Could you elaborate on the proposal that you made to the degree that you can disclose? But once they renewed the contract at JPY 50 million in response to your proposal. But once again, there was an instruction to review the proposal. What's your approach or thinking behind this? Ivan Espinosa: So first of all, we are committed to Yokohama. This is our home base, our hometown. -- and we're going to stay here. This is why we also announced that we will continue to be the largest shareholder in the Yokohama Marinos because it's an icon of our company and a symbol of pride for many of our employees. With that in mind, we've been discussing with Yamanaka-san and the city of Yokohama because we want to continue our collaboration in the Nissan Stadium for the same reason. Now we have made an offer, as you said, we are discussing now with Yamanaka-san and the team in the city, and we will update you when this is concluded. So we will continue discussing with them based on this offer that we provided, but no detail to be shared today. Lavanya Wadgaonkar: Thank you. Come to the middle. Unknown Analyst: [Interpreted] Tokyo, my name is Abe. Nissan GHQ will be sold, you said. In reality, you are going to rent it and there will be a rent which will be booked. For 20 years, what is the annual rent that you have agreed on? This is my first question, please. Ivan Espinosa: So yes, we have agreed to do a sale and leaseback, as I said, and there will be a rent. We don't -- but we are not going to disclose the level of rent. I just tell you that it is a good financial decision. It's a good business decision that will allow us to invest resources in our future. Thank you for the question. Lavanya Wadgaonkar: I think we're right on time. Thank you very much once again for joining us. If you have any further questions, the communication team is available. Please reach to us. Have a good day. Thank you. Ivan Espinosa: Thank you.
Operator: Greetings. Welcome to Helen of Troy Limited Third Quarter Fiscal 2026 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Ann Racunis, Director of External Communications. Thank you. You may begin. Ann Racunis: Thank you, operator, and good morning, everyone. Welcome to Helen of Troy's Third Quarter Fiscal 2026 Earnings Conference Call. The agenda for the call this morning is as follows: I will begin with a brief discussion of forward-looking statements. Scott Azel, our CEO, will then share his thoughts and areas of focus. And Brian Grass, our CFO, will provide an overview of our financial performance in the third quarter and our expectations for the full year fiscal 2026. Following our prepared remarks, we will open up the call for Q&A. This conference call may contain certain forward-looking statements that are based on management's current expectations with respect to future events or financial performance. Generally, the words anticipates, believes, expects, and other similar words are words identifying forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ materially from the actual results. This conference call may also include information that may be considered non-GAAP financial information. These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by other parties. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Scott, I would like to inform all interested parties that a copy of today's earnings release can be found on the Investor Relations section of the site by scrolling to the bottom of the homepage. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. I will now turn the conference call over to Scott. Scott Azel: Thank you, Ann. Good morning, and happy New Year, everyone. I appreciate you joining our call. We delivered third quarter results in line with our outlook, reflecting disciplined execution by our global associates who have driven progress towards stabilizing the business despite a challenging external environment. While I'm encouraged by our Q3 progress, we remain fully focused on sharpening our priorities and executing as we fix the fundamentals and improve our performance trends. Recent trends reinforce our view that consumers are being selective. We continue to see a bifurcated economy. Robust spending from high-income households while lower middle-income consumers face significant inflation in essentials like rent, food, and insurance, making them increasingly cautious with discretionary purchases. Regardless, we need to win, and I know what's required. We will invest in our brands. We'll invest in innovation. And we'll invest in talent to restore this business to growth. And some of the initial steps we're taking to restore our business are reflected in the revised outlook for Q4 and the balance of the fiscal year, which Brian will outline shortly. First, I'm energized by the product innovation underway and the upcoming launches in fiscal 2027. We're investing in strengthening brand loyalty through storytelling, to deepen our connection with the consumer and advancing our commercial execution capabilities. These initiatives reflect our commitment to consumer engagement, growth, and delivering value for our stakeholders. Over the past four months, I visited offices around the globe, spoke with hundreds of associates and customers, conducted a comprehensive review of operations, technology capability, financial performance, and external benchmarks. These experiences have given us a fresh perspective, challenging the team to think more critically about long-term value drivers. My biggest takeaway, enthusiasm for our brands is strong. Partners, associates, and customers all want us to win. These conversations reinforce my commitment to improving how we operate, sharpen our priorities, and amplify our focus on consumers. Building on organizational changes put in place last summer, we've made strides to prepare for success. In October, I outlined four priorities: reenergize our brands and our people, adapting our structure to put the consumer at the center, strengthen the portfolio for predictable growth, improve asset efficiency while maintaining shareholder-friendly policies. This is informing our direction as we complete our FY '27 annual planning process and will inform our go-forward strategy. FY 2027 will be the first big step towards our future. More to come in the coming months. As a brand company, we win and lose with the consumer. And growth is our scoreboard. We will make bold choices, embrace new thinking, and learn from past decisions while minimizing disruption. Our growth priorities are clear. Staying true to our north star of the consumer, invest in brand building and editing and amplifying our focus, and execute with excellence. By fully leveraging the talent and skill sets that already exist. By keeping the consumer at the center, we sharpen priorities and move from slow and complex to fast and agile. Teams are untangling complexity to enable faster decision-making closer to the consumer as we speak. A growth priority is product innovation. I'm inspired by the passion, commitment, and expertise of our teams. I believe we can drive new product development by better understanding our consumers, allocating resources, and accelerating time to markets. Brands of our size can't do everything, but we must be focused and sharp as we drive separation from our competition. Each business will have a distinct strategy centered on two to three priorities. Making these tough choices will bring greater clarity to our brands, for employees, consumers, and investors. As we reposition the business, we plan to direct resources in a disciplined and targeted manner towards the most impactful opportunities and innovative ideas, allowing them to incubate and take hold. This will both strengthen our portfolio and drive momentum of those products and brands that have the best opportunities for growth. Not just for this quarter or next fiscal year, but for the long term as well. To fund these investments and decisions, and position us for long-term sustainable growth, we plan to stay focused on maximizing operational and balance sheet efficiency. A key ingredient of our success will also be the power of our organization to fully leverage talent and skill sets that already exist in the building. We recently welcomed back a key member of my leadership team to reignite the power of one. This is the plumbing that enables the work to be done more effectively at Helen of Troy. It's a common language of systems and processes and people. We must balance short-term performance and long-term aspiration. This work starts with my global leadership team and will be cascaded throughout the organization. We will continue to emphasize working capital efficiency and balance sheet health and productivity. A good example is the recently announced amendment to our credit agreement, which extends the leverage ratio holiday and updates the interest coverage ratio definition. These changes give us greater flexibility to navigate the evolving trade and external landscape. We look forward to sharing our fiscal 2027 outlook in April and plan to outline our long-term growth strategy in 2026. And now I'd like to briefly touch on quarterly business segment performance. Overall, net sales outperformed our expectations. Home and outdoor and beauty and wellness sales declined 6.7% and 0.5% respectively, while international sales fell 8.1%. Olive and June continues to outperform our profitability expectations delivering nearly $38 million in sales. While I am not satisfied with these overall results, I'm encouraged by some of the highlights across our portfolio. These give me confidence we can learn and replicate across our portfolio and execute. Our ability to grow and capture market share is a product of leadership choices and operational excellence. We plan to be more intentional on our agenda and sharpen our execution. Highlights include, we grew Osprey, Oxo, and Olive in June. We exceeded Olive in June internal expectations. We increased organic B2C revenue by 21%. And we delivered $29 million of free cash flow despite $58 million in tariff drag. Across our portfolio, we're delivering exciting innovation. In the home and outdoor segment, we launched Osprey and Hydro Flask cooler collaboration, combining Osprey's legendary carry technology with Hydro Flask leak-proof insulation for ultimate performance. Osprey also introduced a mountain-bound series of winter luggage, crafted with nanotube fabric for rugged, highly water-resistant protection for ski and snowboard gear. Hydro Flask delighted families with the Eric Carle collaboration, featuring the iconic Very Hungry Caterpillar in our insulated kids' bottle. OXO expanded its top baby-led weaning suite and added new tot and coffee SKUs at our top partners. This month marks the debut of OXO's Trident series cookware, which provides superior heat distribution and high-performance cooking without the hassle of cleanup. In beauty and wellness, Olive and June continued to introduce trend-right collections tied to holidays and events, including the Be Bold collection, Halloween designs, and festive holiday stickers. After quarter-end, Olive and June launched a playful collaboration with Peachy Babies, combining nails and slime for the most satisfying collab yet, along with products for kids and tweens, which is seeing strong early success at top retailers. For cold and flu season, Honeywell introduced two fresh new style Allergen Plus HEPA certified air purifiers, a three-in-one for large rooms and a tabletop for smaller spaces. These innovations, along with many more coming to market, give me increasing confidence we're focused on the right things to improve our business. I believe we can win for our consumer through innovation and marketplace execution. This allows us to return to revenue leadership, strong margins, and robust cash flow. But we know it won't be a straight line. We're making tough choices to invest in our future. We build our platform for growth and improve our financial profile through better operating leverage while we create greater competitive advantage across the portfolio. With that, I'm gonna turn it over to Brian to walk through the financial results and outlook. Brian Grass: Thank you, Scott. Good morning, everyone, and happy New Year. Today, we reported third-quarter net sales and adjusted EPS results in line with our expectations. I would like to thank our associates for their hard work in achieving our financial objectives for the quarter in what continues to be a challenging environment. Operationally, we made headway on improving our go-to-market effectiveness, leaning in on innovation for more product-driven growth, focusing on the fundamentals, and putting our brands back at the center, fully leveraging their unique strengths. Scott mentioned several new innovations in the market, and I'm excited by new launches planned for the coming year. There is renewed energy across our organization, reinforced by the culture work Scott mentioned. Our third-quarter results reflect progress towards simplifying operations, sharpening priorities, and increasing agility. But we know much more improvement is needed, and we continue to take decisive steps to position Helen of Troy for sustainable growth. On tariffs, we advanced mitigation strategies, including supplier diversification, SKU prioritization, cost reductions, and price increases. The majority of our price adjustments are now in place, but we are still navigating some parts of the market where we achieve less than full pricing realization due to stop shipments we believe are necessary to support consistent adoption of price increases by our retail partners, primarily impacting the beauty and wellness segment. We expect some residual impact from stop shipments to carry into the fourth quarter, which I will touch on later in my remarks. Year-to-date, gross unmitigated tariffs had a $31.3 million impact on gross profit, with the full-year impact expected to be in the range of $50 million to $55 million. We now expect less than a $30 million tariff impact on operating income for the full year, net of mitigation actions, up from our prior expectation of approximately $20 million, primarily driven by delayed timing of pricing realization. We remain on track to reduce our cost of goods sold subject to China tariffs to between 25% to 30% by 2026. Our diversification and dual sourcing strategies are reducing long-term supply chain risk, helping to insulate us from further policy changes or other geopolitical impacts. Turning to our results, consolidated net sales decreased 3.4%, favorable to our outlook range and a sequential improvement compared to the first and second quarters of the year. Organic net sales declined 10.8%, approximately 3.3 percentage points or $17.3 million of the organic revenue decline was driven by tariff-related revenue disruption, which includes the pause or cancellation of direct import orders from China, changing dynamics within the China market, and the impact of stop shipments referred to earlier. Home and outdoor net sales declined 6.7%. We saw strong demand for travel, technical, and lifestyle packs, strong holiday orders from brick-and-mortar retailers in the home category, and incremental revenue from tariff-related price increases, offset by softness in insulated beverageware, lower online sales in the home category, and lower overall closeout channel sales. Beauty and wellness net sales decreased 0.5%. Organic beauty and wellness sales declined 13.9%, approximately 4.5 percentage points or $12.9 million, driven by tariff-related disruption. In beauty, hair appliances and prestige liquids were impacted by soft consumer demand, competitive pressures, the cancellation of direct import orders, and lower closeout channel sales. Wellness was unfavorably impacted by lower international sales due to evolving dynamics in the China market, pricing-related stop shipments referred to earlier, and a below-average illness season. These headwinds were partially offset by a strong contribution from Olive and June of $37.7 million. Consolidated gross profit margin decreased 200 basis points to 46.9%, primarily due to the net unfavorable impact of higher tariffs and a less favorable inventory obsolescence impact year over year. These factors were partially offset by the favorable impact of Olive in June and lower commodity and product costs exclusive of tariffs. SG&A ratio increased 160 basis points, primarily due to the acquisition of Olive in June, higher outbound freight, higher annual incentive compensation expense compared to the same period last year, and unfavorable operating leverage. Lower gross profit margin and a higher SG&A ratio resulted in a consolidated adjusted operating margin decrease of 370 basis points to 12.9%, consisting of a decrease of 650 basis points for home and outdoor and 120 basis points for beauty and wellness. The declines were driven primarily by the net unfavorable impact of tariffs, higher incentive compensation expense, and unfavorable operating leverage, partially offset by margin accretion from Olive and June in the beauty and wellness segment. We incurred higher interest expense due to higher average borrowings driven by the Olive and June acquisition, higher inventory carrying costs due to tariffs, and higher CapEx spend as we make supplier transitions out of China. Higher interest expense was partially offset by lower adjusted income tax expense, resulting in adjusted EPS of $1.71. Inventory ended at $505 million, which includes $35 million in incremental tariff-related costs year over year and incremental inventory from the Olive and June acquisition, compared to $451 million at the same time last year. Debt closed at $892 million with $325 million in revolver availability. Our net leverage ratio was 3.77 times, compared to 3.54 times at the end of the second quarter. The increase in our leverage was due to lower trailing twelve-month EBITDA, driven primarily by higher tariff costs. The unfavorable cash flow and balance sheet impacts of tariffs on our outstanding debt balance. Year-to-date free cash flow was $29 million, which includes $58 million of incremental cash outflows for tariff payments and the cost of supplier transitions out of China. Now I'd like to turn to our annual outlook. We've tightened our range on the top line to $1.758 billion to $1.773 billion, with home and outdoor net sales of $812 to $819 million, compared to our previous expectation of $800 to $819 million. Beauty and wellness net sales of $946 to $954 million, compared to our previous expectation of $939 to $961 million. We lowered our adjusted EPS expectations to a range of $3.25 to $3.75, driven by less than full pricing realization, consumer trade-down behavior, and less favorable mix, higher trade and promotion expense, and the preservation of investments in our people and brands to build revenue momentum and more favorable operating leverage going forward. We expect the full-year GAAP SG&A ratio in the range of 38% to 40%. Expect a full-year adjusted effective tax rate in the range of 13.4% to 14.7%. Inventory is expected to be $475 million to $490 million at year-end, which includes an estimated $39 million of incremental costs from tariffs. Our outlook includes the ongoing impact from changing dynamics in the China market, lapping of tariff-related order pull-forward in 2025, and residual stop shipments to support consistent tariff pricing adoption. We expect modest improvements in direct import orders and select programs shifting to warehouse replenishment. Overall, we expect retailers to continue to closely manage inventories. Despite a recent uptick in flu incidents, overall incidents for the full season and upper respiratory illness in particular, are tracking well below both last year and the trailing three-season average. The retailer inventories look to be sufficiently stocked during the remainder of the fourth quarter to supply demand should illness continue to increase. Given the challenging operating environment, we expect margin pressure to persist through the fourth quarter, reflecting consumer trade-down, a more promotional environment, a delay in achieving full pricing realization, and cautious retail behavior. While we remain focused on cost control, we are preserving key strategic investments in support of our people, new product innovation, stronger brand loyalty, and better commercial execution. As we transition back to growth mode, we expect to have a bias towards revenue improvement over cost reduction in order to recapture our operating leverage. Before I conclude my remarks, I want to direct your attention to the investor presentation posted to our website, which contains additional information and perspective on our third-quarter results and our outlook for the remainder of the year. And with that, I'll turn it back to the operator for Q&A. Operator: Thank you. We will now conduct a question and answer session. If you would like to ask a question, you may press 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit to one question and one follow-up question and requeue for additional questions. Our first question is from Rupesh Parikh with Oppenheimer and Company. Please proceed. Rupesh Parikh: Thanks for taking my question. So I guess just going back to some of the top-line trends and the performance of your brands, it's helpful color in terms of the brands that are actually growing. But just curious, as you look at some of the declining categories, where there's beverageware, hair appliances, etcetera, where you are with, you know, in the progress and turning around these brands? Scott Azel: Good morning, Rupesh. Yeah. Thank you. Good question. First, yeah, we are very encouraged by our results on the brink green sheet brands like Osprey, Olive and June, OXO, Braun, and Pure. They continue to meet and exceed our internal expectations. We have work to do in the area that you identified, and we are focused on that. Everything from innovation on bringing new products to markets that are in the kitchen or kinda in the lab as we speak. Making sure we've got the right commercial triangle in place, which is a combination of marketing, operations, and commercial excellence. And then making sure that we're providing the right resources to the right opportunities that are gonna create the right value. So, that's our methodical approach. We feel very confident in the work that we're doing. As we said in kind of our pre-recorded remarks, our performance will not be a straight line. Some of our brands will move at a much faster rate. The ones that you identified, we're working on aggressively. Rupesh Parikh: Great. And then I guess my follow-up question just to help frame, you know, where we are right now. So as, you know, as you look at your earnings guidance this year, is there any way to say whether you believe that maybe that's the bottom in earnings power? I don't know if there's any insight at this point or is it helping us frame how to think about next year and whether we can take this year's guidance as maybe a baseline to build upon? Scott Azel: Yeah. What I'd say is this, and I'm definitely gonna let Brian opine on it, maybe more specifics. The bottom line is this company's done probably a pretty good job of trying to get its cost structure in place the last several years. But our focus right now needs to be around growth, and that means we gotta invest in innovation, brand building, and marketplace excellence in terms of how we execute. And that's what you're gonna see we're investing in in quarter four. As well as we talk about our long-range plan, which you'll see the first big steps in FY 2027. It will be about growing the top line responsibly but growing the top line and making sure our brands are winning. As well as managing against our earnings power. Brian, anything to add? Brian Grass: Just a little bit to say. We're shifting our focus to revenue improvement versus cost reduction. And we think the benefit of operating leverage is gonna be greater than any benefit we can get from trying to just purely cut costs. You know, that takes a little bit more time, but that's a much more effective and sustainable strategy, and it's gonna be better for the long-term health of the business. So we're making a bit of a pivot. Hopefully, you can hear that. And our focus is gonna be on revenue improvements and revenue growth first and then, you know, growth and profitability will come after that. Rupesh Parikh: Great. Thank you for all the color. I'll pass it on. Our next question is from Bob Labick with CJS Securities. Please proceed. Bob Labick: Good morning, and happy New Year. Thanks for taking our questions. Scott Azel: Hey, Bob. Hey. Bob Labick: So, you know, one of the focuses one of the key things you're focused on is the, you know, return to consumer-centric innovation and, you know, obviously, you've had that in the past. Maybe, you know, was it deemphasized? Why was it deemphasized as kind of part of the question. Then the next thing is how long does that take? And so, like, you know, when should we see, you know, that reemphasis translate into the top line? Because as you said, your scorecard's gonna be returned to revenue growth. And the shift back to consumer-centric. How does that play out? What are you actually doing more specifically now than you didn't do last year, and how long does it take to flow through? Scott Azel: Bob, this is Scott. Good question. I can only give you a headline on the past because I wasn't here. But, you know, the bottom line, you know, I've seen companies go through different transitions. Some they think that they can that brands are in a better place than they are or they can misread the market I don't know. But I know this going forward that if I've traveled the globe, and I spent time with teammates and I've analyzed our brands, that, you know, we have a 30% to 40% of our portfolio that has innovation and opportunity to grow faster, going to invest in them as we speak, and you'll see the benefits of that in quarter four as well as in FY 2027. Have a number of our brands in our portfolio that have been underinvested in, have not been organizationally set up for success, have for whatever reason missed the mark on the consumer, that we're working on the renovation steps as we speak. To get them in a position to bend the curve. Bend the curve means to stabilize the business, as we go into FY '27 and grow further in FY '28 and beyond. But the net is we would expect that you're gonna see an improvement in our business quarter four on as we go forward as we come through and talk about our FY '27 plan. But the key is, as Brian said and what I said earlier, is there is a bias towards healthy brands and growing and winning in our categories first. And also then delivering value as we do that. Bob Labick: Okay. Great. And then, you talked about a bunch of, you know, I guess, new releases and I'm looking at the investor presentation right now. Can you maybe focus us on a few of the major releases or milestones of, you know, of key brands that should, you know, be more meaningful than not. So, you know, things for us to judge on success next year and not trying to, you know, pin you to a quarter for return to growth, but just really what are the kind of, you know, big releases that you think should move the needle and we can watch in 2026, calendar '26? Scott Azel: Yep. Bob, as you know, I can't speak on, you know, a specific future, innovation that's not out in the public domain. But what I can say is brands like Osprey, Olive and June, Braun, OXO, just like the performance we've had in the most recent quarter, we expect that to continue. And as we funnel resources to these brands that I believe do a lot more now, you're gonna see a lot more acceleration against them. I don't know if I'm really getting to your question of, like, a very specific launch. That's happening in the future, but that's our focus. I don't know, Brian. Yeah. I can add a little in without getting too specific. Brian Grass: I mean, we have things teed up in Hydro Flask that allows us to play, as you and I have talked about, Bob, kind of in, you know, the areas where we wanna reach the consumer, but we believe it's right for Hydro Flask to play in. And it's not all areas, but we have a strategy there. We're excited about that. We have some category adjacency plans. It's Hydro Flask too that we're excited about, and those will be coming out soon. You know, in the brands that Scott didn't mention where, you know, we've got more green shoots, we've got exciting innovation going on there, and that includes Pure. That includes Vicks, and that includes Honeywell. So, you know, the point I'd like to make is innovation wasn't lost in all of our businesses and all of our brands. We had brands that were doing that well, Osprey, OXO. And Olive and June, some of the others, but it was a little bit lost in some of these other brands that we're talking about. And we have strong plans and strong innovation in the road map that is already in the process of being developed. And so it's not like we're starting today on those development plans. They're well underway, and they'll be coming out soon. And it's, you know, it's the accumulation of all of them. There's not, like, one big launch that really does it. It's really making sure that all your businesses have it and have a strong pipeline so that there's no gaps. Just had a little bit too much of gaps in the past. Bob Labick: Okay. Got it. Thank you very much. Operator: Our next question is from Peter Grom with UBS. Please proceed. Peter Grom: Thank you. Good morning, everyone. So two questions for me, and I'll just start with this. But I guess I was just hoping to get some perspective on what you're seeing from a category standpoint. I think there's a lot of cross currents that are driving the top-line trends that we are seeing in your results. If you strip out all of the noise, do you have a view on kind of where underlying demand in your categories is trending today? And then I guess just looking ahead, there seems to be some optimism on the U.S. consumer, tax refunds, etcetera. So just kind of curious do you think that some of these things could drive some sequential improvement in category demand following what's been, you know, very challenging few years here. Scott Azel: Well, I'll take the first stab, Peter. First of all, absolutely. When I step back, from the standpoint that, even in the most challenging times, brands that have tight brand propositions, relevant innovation, and connect with the consumer, meeting them where they are, have a way to continue to win. And like brands like Osprey, Olive and June, OXO, Braun, Pure, in our portfolio. You know, they will do well or when the consumers are in a better place. The other brands in our portfolio that have not performed over where they need to be, they have nothing but upside opportunity to bend the curve through better innovation, more focused storytelling, and an organization set up that enables them to be close to the consumer and execute with excellence. Which today we're not doing and we will do better. You'll see that a little bit in our outlook on Q4 of why we're not pulling down our revenue. But you're also gonna see that as you look at FY 2027, what we expect going forward in terms of improving our performance from a top-line standpoint on a broader range of brands beyond the ones we have today. Brian Grass: I'd just add, Peter, that I think, you know, the question you're asking is a good one, but it's hard to answer. Like, in the moment, there's a lot of things in the market related to higher pricing, price increases, and things like that. And, you know, the consumer has been resilient up until this point. I think the key is how will they respond to kind of this next phase of inflation and pricing in the market, and we'll have to wait and see. But we have plenty of category growth in some of our categories. We have some that are decreasing, but we also have plenty of them that are increasing. And so we're gonna lean into that. Peter Grom: No. That's super helpful. And then I guess just a follow-up on just kind of the 4Q outlook and just kind of the big divergence on the bottom line versus the prior outlook? Because Scott, to your point, the sales are kind of in line with your prior outlook. So can you maybe speak to the moving pieces where things are playing out differently than what you would have expected? And I guess this is maybe asking Rupesh's question differently. Know we'll get 27 guidance enabled. But I guess, would you say there's a 4Q dynamic is more one-time in nature? Or are there things investors should be extrapolating, you know, from this leisure exit rate out to next year? Scott Azel: I'll take the first part and let Brian opine on it. First of all, as you look at Q4, I think of it like kind of a wedge. This is the beginning. We want to invest in our brands for growth. I want the word growth to be a part of what we're about, and it's responsible growth. And what we're doing is we believe that we can grow the top line if we make the investment against new product innovation, better storytelling, getting our organization with the consumer at the center, we can bend the performance. And you're gonna see a little bit of that in Q4, and you'll see a lot more of that big steps forward as we go into FY 2027. But, you know, as far as outlook long term, of course, we're not ready to publish that. I don't know if Brian can share any more color or texture to that. Brian Grass: I can give you some good perspective on Q4 and then, you know, give you some dimensionality of how to feel about going forward from that. And I just say to tag on to what Scott was saying, you know, our conclusion is more of the same. It's gonna get us where we wanna go. We've been trying to cut our way to better performance over the last two to three years, and it's not sustainable. And we're at a point where it's gonna be very difficult to continue to do that. We're shifting our focus to revenue improvement versus cost reduction. To get better operating leverage. That's gonna take more time. And I think in the short term, you're gonna see more pressure on the bottom line as we look to lift the top line. And then once the top line is lifting, it makes solving the bottom line much easier and much more healthy. With respect to the fourth quarter in particular, there's a slide on Page 14 in the investor presentation, which will give you an illustration. The main driver in the change is really unfavorable pricing realization. So in the third quarter is when our pricing was really implemented. And compared to our original expectations, we did not achieve we've got basically leakage versus what our original expectations were both in realization of the price increase margin that we wanted to gain and stop shipments that we're in the process of implementing to enforce uniform pricing adoption. And we think that's crucial in getting price increases to stick. They have to be uniformly adopted. Otherwise, it doesn't work. And the other thing I'll note is that pricing leakage drops straight to the bottom line. It has so it has an outsized impact on the bottom line versus the revenue impact. And so be aware of that. We also built in the expectation of higher consumer trade-down because we are seeing that. And a less favorable mix. We and I mentioned some of this in my remarks. We also assume higher promotion expense and margin compression as we look to tighten up our balance sheet. And really get our inventory levels in the right place. And we expect that to occur in the fourth quarter. And then the last point I'd make or last two points, while we believe overall retail inventory is healthy, there were a couple areas where we had inventory that was higher than we would have liked. And so we built in the assumption that that's gonna rebalance in the fourth quarter. And then the last point is we're preserving key investments in our people, innovation, and brands. And actually want to reinstate some of what we cut in the first three quarters of the year. And so we're gonna make those choices for the fourth quarter so that we can get to this revenue improvement, you know, and better operating leverage as we go forward. So that's a little bit of and I would say, look. There's gotta be some continuation of investment back into growth as we go to fiscal 2027, but we're not prepared to give you anything specific with respect to fiscal 2027 at this time. Peter Grom: Okay. That's helpful. And lastly, maybe just quickly, you know, a lot of focus on this call around the top line getting these brands back to healthy levels of growth. And so, Scott, I'd kinda be curious as you've kinda dug in and started to study this business more over the last several months. Is portfolio optimization part of that exercise? Or do you kind of see the same opportunity across the entire brand portfolio? Scott Azel: Yeah, Bob. Great question. You know, I'd say this. We're always, you know, as we do our strategic review let me back up. You know, I've been here four months. I focused on four areas that I think about the last four months. And one of which has been job one, which is kind of what how do we get their aspiration looking out for the future? And then what are our big steps in FY '27? As a part of that process, which we kicked off in the last thirty days, which you'll see more of it in the coming months, is looking at our portfolio, but fundamentally, as I talked about earlier, we have 30% to 40% of our brands that have, you know, upside opportunity given investment and given the right focus. And we're gonna kinda step down on them, step down in a good way, push them forward, then we have a number of our brands that we have to evaluate what is the right model going forward. How do we invest, what's the right operating model. There's so much opportunity there. And then, like, any company, we're always gonna be evaluating our portfolio over the next, you know, as we look at our strategic plan, on what brands are best fit and which ones don't. But at this point, I don't have any specific answer on that. Bob Labick: Great. Thank you so much for all the color. I'll pass it on. Our next question is from Susan Anderson with Canaccord Genuity. Please proceed. Susan Anderson: Hi, good morning. Thanks for taking my question. Maybe just a follow-up on the innovation front. I guess, I was curious are there certain areas such as, you know, maybe the most underperforming areas that you're gonna touch first, or is this something where you're just kinda gonna touch all areas of the portfolio? And then in beauty, I guess, you know, that industry obviously has seen growth the entire time. So just kinda curious what you think kinda went wrong there and what you need to do to kinda turn Drybar around whole on the liquid side and fixture side. And then I'm not sure if I heard, but did you say how Pearl Smith performed in the quarter? Thanks. Scott Azel: Yeah. First of all, yep, Susan, thank you. From an innovation standpoint, we can't run at every innovation equally. So if we just cannot do that, we've gotta be really smart about it. And we have several brands that I would say today, can do a lot more, can grow a lot faster with the right level of support. And we're gonna make sure as we go in FY '27 that they get what they need. And then we have a number of brands that call that are in the post phase of renovation that need work. Any work from everything on getting sharp on the consumer, sharp on the product pipeline, sharp on the structure to support the brand in the marketplace. And we're gonna do that work. So as I expect our growth curve going forward to be not a straight line, we're gonna have parts of our portfolio growing very at a faster rate, and then some parts, we're just trying to stabilize. We go into FY '27. Specifically around beauty, we've got an opportunity. We got we got some work to do in that area. And I can tell you this, the team is on it. They've gone through a big reset moment in the last twenty-four months. FY '27, we should see some improvement, but it'll be much more around stabilization and clarity of future than being in the green bucket of high growth, which we're getting from things like Olive and June. Osprey, and Braun, etcetera. I don't know, Brian, you have anything you wanna add. Brian Grass: I just say on Pearl Smith's, I mean, we're not giving that level of detail. Pearl Smith didn't have the best quarter in terms of our shipments in the quarter, but I wouldn't say that's indicative of the health of that business. Susan Anderson: Okay. Great. And then maybe just a follow-up. I guess, if you could talk about kinda how you're thinking about your leverage. I guess, where would you like it to go longer term? And, I guess, you know, I guess, how long do you think it would take you to reach that goal? And then maybe just a follow-up on, you know, kind of the portfolio and potentially rationalizing some of it. I guess, do you think there's opportunity there maybe even to help pay down quicker some of your leverage? Thanks. Scott Azel: Yeah. I'll take the first step, and Brian can step in. You know, in addition to I know you've growth, which I fundamentally think is a job one for Helen of Troy, and we have that opportunity against our brand. In addition to that, going as you'll hear in our plan forward, getting our balance sheet healthy and driving operational efficiency will also be kind of an in tandem strategic priority for us that we're gonna be focused on. I'll let Brian talk more about the leverage ratio. But specifically around the portfolio, I mean, just I've been doing this world of kinda running portfolios of brands for many years and always reevaluating the portfolio mid, short, mid, and long term. And I'd say in the short term, you know, we're gonna be focused on how do we bend the curve and improve our performance from our green brand and through and as well as our renovation brand. I think midterm and long term, we'll be looking at what is the right portfolio for Helen of Troy, and how does that create the long-term value for the company. We're not at a position today to or I'm not I'm not holding back right now that I have a specific specific brand and I'm like, oh, it shouldn't be there because we're doing the hard work of saying, how do we drive the right strategic plan for the company? And we're just not there yet. But, it's definitely something we will be considering and that she will wrestle with as we do the work. Do you have anything you wanna add on the leverage ratio piece? Yes. Sure. Go ahead. Go ahead. Let's turn it over to Brian. Brian Grass: Yeah. I just say, look. We have a base plan that we feel really good about in terms of our leverage and our ability to bring leverage down. We've got a big opportunity to tighten our balance sheet and make it more productive. We've been working on that, and we're gonna double down on that area of focus. That's you heard some of my comments earlier about inventory. We're gonna tighten up our inventory, which will produce a lot of cash, and we're gonna put that to work to pay down the debt. We also have some longer-term assets that we can look to monetize and we can consolidate from three distribution centers to two. That's gonna take a little time, but that's on our mind. So I would say that that's the base plan and plan A that we're kinda working first. But as Scott said, we're always, you know, thinking about divestiture, and I'll tell you, we get inbound interest on some of our brands. You know, on a regular basis. I think our focus is more on the plan A at this point while we're maybe thinking about and working on the plan B of divestiture. Divestitures are very distracting. They take a lot of work, and you can put all that work in and to the end, and you don't get the value that you're looking for. And you may not be successful. We have to be very choiceful about the ones that we're going to invest that level of work and time into. And I think Scott needs time to build his growth strategy and really look at this. And then once we've done all that and done that assessment, then I think we're better prepared to say we wanna focus on, you know, x, y, or z. So that's how we think about it. Susan Anderson: Okay. Great. That was very helpful, you guys. Thanks for all the details. Good luck in the New Year. Operator: Thank you. Our next question is from Olivia Tong with Raymond James. Please proceed. Olivia Tong: Great. Thanks. Good morning, and happy New Year. Based on the innovations you're planning for next year, do you think you find a revenue rebase in FY '27 or perhaps when do you think you can omit the commentary around the recovery not being linear? I know it's unlikely you'll provide a lot of building blocks for fiscal '27, but there are quite a few exogenous issues that hit this year. Both on revenue and profitability, most notably, obviously, the tariff hit. So what are the incremental hits that we should be thinking about after tariffs begin to enter the base in the late spring? Brian Grass: Yeah. I mean, Olivia, the first part of your conversation was, you know, kinda when do you think we'll inflect on it from a revenue perspective, and I wanna address that. And I think Scott, you know, can also address a piece of it. But then I think you're also saying, look. You had some exogenous headwinds during the year that you don't have to repeat as you go into next year, and I would agree with that sentiment. We had a lot of disruption in our revenue, you know, related to tariffs and direct imports and China dynamics. That is stabilizing. We still have work to do to ensure that we can recover all of that revenue base as we go into next year, and I'm not making a commitment on that at this point. We're doing the work, and we're trying to recapture all that revenue. And I think it's definitely no matter what. It's a definite building block year over year because we already know that some of that's back in our base. But whether we can get all of it is still an open question. So I, you know, I can't tell you to what extent at this point, but it's a work in process. And, yeah, the tariff situation is better. I think the hopefully, what you're hearing from our commentary though is that benefit that we're gonna get from things like tariff stabilization and they reduce the rate, and, you know, we now have pricing in the market. They're even talking about refunds potentially with the Supreme Court. We wanna put that back into the business to make sure that we have steady, consistent, reliable revenue growth. And then I think the algorithm on the profit improvement comes in. But that's gonna take a little bit of time. We're gonna focus on revenue first. We get that strong. Everything else kinda takes care of itself. But I don't expect that immediately. We gotta get the revenue back first, and then we're gonna two-step it to the profit. Olivia Tong: Got it. Maybe if I could double click on that about what you think is a potential steady-state operating margin for the company. Do you think you can get back to double-digit EBIT margin over time? If so, what sort of needs to happen to get there and what's your view on timing of that? Brian Grass: Yeah. I do think we can get back to that. But, again, hopefully, it we're not gonna time warp back to margins from three years ago. That's not the way it's gonna work. We're going as we get to revenue improvement first, then revenue growth, then we'll use the operating leverage to have some kind of an algorithm that delivers on profit growth to a degree, but we're gonna over-index on the revenue piece of it. So I don't wanna give you a specific margin at this point, but what I will tell you is we will once we get back to revenue growth, we will have an algorithm that produces margin expansion. And, you know, if it's two points of revenue growth, then it's probably 20 bps of margin expansion. If it's five points of revenue growth, maybe it's 50 points of revenue expansion. But just to be clear, that's a couple steps away. We have to get to revenue improvement first, then consistent revenue growth, then we'll focus on margin expansion. Olivia Tong: Got it. Thank you. Operator: We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks. Scott Azel: Thank you very much, everyone. With renewed enthusiasm across the company, we're ready to leverage our portfolio and return to sustainable, profitable growth. Our path to our aspiration is becoming clear. This leadership team is determined to show sequential improvement across our business in the coming quarters. We will do this by staying focused on our North Star, which is keeping the consumer at the center of everything we do. By realigning our commercial triangle of product, sales, and marketing, we are reinvigorating brand building and strengthening retail operation execution. Our teams are energized. We're ready to fully leverage our diverse portfolio of leading brands to get us back to a path to growth. Thank you for participating today. We look forward to speaking with many of you at the ICR conference and the virtual CJS conference next week. Have a good day. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: We'll now begin the LY Corporation financial results briefing for the second quarter of fiscal year 2025. Thank you very much for joining us today. We will be referring to the financial results presentation available on the LINE and Yahoo! LY Corporation website. During today's session, we kindly ask you to follow along with the material. Joining us today from LY Corporation are Mr. Takeshi Idezawa, President and CEO; Mr. Ryosuke Sakaue, Executive Corporate Officer, CFO; Mr. Yuki Ikehata, Corporate -- Executive Corporate Officer, Corporate Business Domain Lead; Mr. Makoto Hide, Executive Corporate Officer, Commerce Domain lead; Mr. Hiroshi Kataoka, Executive Corporate Officer, Media and Search Domain lead. First, Mr. Idezawa will provide an overview of our financial results for the second quarter of fiscal year 2025. Following his presentation, we will hold a Q&A session. The entire briefing is scheduled to take approximately 1 hour. We will be live and streaming this session. If there is any distortion or inconvenience in the video or audio, please try alternate server link. Takeshi Idezawa: This is Idezawa of LY Corporation. First, before explaining our financial results, I would like to comment on the system failure caused by a ransomware attack that occurred at our group company, ASKUL Corporation on October 19 and the partial leakage of information held by the company. We sincerely apologize for the significant concern and inconvenience caused to our customers who use our services as well as to our business partners. The details regarding the damage potential information leakage and recovery status have already been communicated by ASKUL. The company is continuing to work closely with external experts prioritizing a safe and prompt restoration of systems while investigating the cause and confirming the scope of impact including any personal data. LY Corporation is fully cooperating with all recovery and investigation efforts. As the parent company, we take this matter seriously, and are committed to restoring the situation and preventing recurrence and strengthen the information security framework across the entire group. Now let me explain our second quarter financial results. Please turn to the next page. First, here is an overview of the second quarter results. Consolidated revenue was JPY 505.7 billion, up 9.4% Y-o-Y. Consolidated adjusted EBITDA grew 11.3% Y-o-Y to JPY 125.4 billion showing solid profit growth. Additionally, progress in AI agentization and the expansion of LINE Official Account and Mini apps are progressing smoothly, preparations for the LINE renew are also steadily progressing. Home tab refresh scheduled within the year. We will now proceed with the explanations in the order of the agenda you see here. First, the consolidated company-wide results. Next page, please. These are the results for the second quarter. Although consolidated revenue was slightly behind the guidance due to the decline in search advertising revenue, adjusted EBITDA and EPS are on track with the guidance. Next page, please. These are the consolidated performance trends, driven by the growth of PayPay consolidated and progress in efficiency improvements at LY Corporation, adjusted EBITDA grew 11.3% Y-o-Y, achieving double-digit profit growth. The margin also improved year-on-year. Next page, please. These are factors of change in consolidated adjusted EBITDA. Although expenses increased, revenue growth in the Strategic Business and Commerce Business outpaced the expense increase, resulting in a year-on-year increase of JPY 11.7 billion in adjusted EBITDA. BEENOS and LINE Bank Taiwan have been fully consolidated since the second quarter with the 2 companies contributing JPY 900 million to adjusted EBITDA. Next page, please. This is consolidated total advertising-related revenue. This quarter, commerce advertising achieved double-digit growth driven by increased transaction value and the total ad revenue grew by 2.4%. Next page, please. This is consolidated e-commerce transaction value. Domestic shopping transaction value grew 13.1% year-over-year, supported by last-minute demand ahead of the discontinuation for awarding points for hometown tax donation program. Reuse saw year-on-year growth of 15.7%, driven by Yahoo!'s lead market growth and BEENOS contribution. Next page, please. Regarding the upward revision of the dividend forecast, we conducted share repurchase during the first half of the current fiscal year and the cancellation of these shares was completed on September 3. Consequently, as the number of shares eligible for dividends has decreased, the annual dividend has been revised upward from JPY 7 to JPY 7.3. Next page, please. This is on progress on the LINE app revamp. The renewals of the talk, shopping and wallet tabs have been rolled out in phases since September. Home tab renewal is scheduled to make a test release this year. Next page, please. This is on optimization of management resources. Firstly, on human resources, we are reallocating to growth areas such as AI agents, which will be explained later, Official Accounts and MINI Apps. We will reallocate our human resources so that by FY 2028, 50% will be allocated to growth areas. We will reduce the fixed cost by JPY 15 billion by the end of fiscal year by 2026 and build a leaner financial structure. Next page, please. From here, I will explain the financial results by segment. Next page, please. First, the Media Business. Although both revenue and adjusted EBITDA declined, continuous cost-saving efforts are yielding results, leading to improvement of adjusted EBITDA margin on Q-on-Q basis. This is performance analysis of the Media Business. While search advertising revenue contracted, growth in account advertising drove an increase in total advertising revenue. Next page, please. Account advertising continues to perform strongly in both the number of paid LINE Official Accounts and pay-as-you-go revenue. As this is an area we are strengthening alongside MINI Apps, we will provide a more detailed explanation of future strategies and initiatives later. Next page, please. Next, the performance trends for the Commerce Business. Second quarter revenue reached JPY 216.6 billion, a year-on-year increase of 7.2%. Adjusted EBITDA was JPY 33.3 billion, although profit declined due to increased promotional expenses related to the hometown tax donation program, the decline narrowed compared to the previous quarter. Next page, please. Performance analysis of the Commerce Business. The business as a whole is expanding steadily. In addition to the full consolidation of BEENOS, Yahoo! Shopping and subsidiary growth contributed to increased revenue. Next page, please. performance trends for strategic businesses such as payment and financial services. Revenue continued to be driven by PayPay consolidated, reaching JPY 109.7 billion, a year-on-year increase of 35%. Adjusted EBITDA also continued to grow, reaching JPY 22.9 billion, an year-on-year increase of 52.1% with margin remaining at a high level. Next page, please. Performance analysis of strategic businesses. Payments and financial services are both growing steadily. Furthermore, the full consolidation of LINE Bank Taiwan contributed to increased revenue. PayPay consolidated business overview. Each service is growing smoothly. Our number of payment per user and unit price, those KPIs are progressing smoothly. As a result, consolidated sales has increased Y-o-Y, plus 30.4%. Consolidated EBITDA was more than doubled. So the second quarter showed a significant strong growth. Next, from here, I will explain our key strategy going forward. Next page, please. As our company-wide key strategy, we will advance as 2 wheels that agentization of all services and the enhancement of Official Account and MINI Apps. In agentization for the 100 million users using our services, we will provide services like search, media, finance and commerce more conveniently via AI agents. And for corporate clients such as businesses, companies, stores and brands, we will provide customer contact points and business support function through our function enhances Official Accounts and MINI Apps by improving the value provided to both users and clients and by seamlessly connecting both via AI agents, we will realize new service experiences and expansion of revenue opportunities. Please turn to the next page. First, regarding our initiatives for AI agentization. First, our goal is daily AI agent used by our 100 million users in Japan, aiming for 100 million DAU. Currently, in October, DAU for AI services is 8.6 million, especially AI answers on Yahoo! JAPAN search and LINE AI Talk Suggestions are used frequently and user numbers have begun to expand. Also for AI Talk Suggest, user billing has started and monetization efforts has also begun. Going forward, we will promote AI agentization of each service and aim to expand users. Next page, please. Next, regarding the enhancement of OA, Official Account and MINI Apps. But before talking about the specific initiatives, I'd like to explain the structural transformation of the Media Business. Earlier, I explained the revenue decline in search advertisement in the Media Business, while steadily bolstering the conventional search and display advertising businesses, we will achieve sales and profit growth by further growing OA and MINI Apps where we can provide our original value. Over the next 3 years, we will increase the share of high gross margin OA and MINI Apps to about 40% and aim for an adjusted EBITDA margin of 40% to 45%. First, regarding the performance of OA, Official Accounts in Japan over the last 3 years, our track record, the number of paid OAs improved by a CAGR of 14% and ARPA also improved. And as a result, OA revenue also grew 16% annually on average and sales have grown to the scale of JPY 100 billion in Japan and JPY 140 billion, including global. Please turn to the next page. On top of this OA growth foundation by further building a MINI App platform and adding a SaaS-like store support solutions, will create a multilayered revenue structure and aim to double sales in 3 years. This fiscal year, as I mentioned, doubling the JPY 140 billion to JPY 280 billion. In this fiscal year, we will first focus on expanding MINI Apps based on OA and launching the SaaS business. Important KPIs for the revenue models of each areas are shown in the lower section of this page. MINI Apps are -- our scale expansion is very important for KPIs in the growth phase. In OA SaaS, we set ARPA improvement as KPIs. But we think these KPIs as leading indicators to monitor our business goals. Next page. Let me explain structurally. First, there is an OA, Official Account as a base. Currently, there are 1.3 million active Official Accounts used in Japan, in which number of paid Official Accounts are 310,000. We see the target accounts for future expansion such as businesses, companies, stores and brands at about 5 million. So we can still grow the number of OA accounts, and we will also further increase the ratio of paid accounts. The second layer, MINI Apps to OA using companies and stores, we will propose a customer contact point via MINI Apps, expanding MINI Apps numbers, growing users and creating businesses like payments and ads within them. The third layer is SaaS solutions, developing specialized support for high affinity industries like Store DX or reservations, aiming to raise ARPA. Service launch planned for 2026 first half. And we'll have more new solutions at the right timing when we can introduce them to you, we will. We will provide services more broadly and deeply and provide a deeper solution via SaaS by industry to expand our sales. Finally, regarding the recent growth of MINI Apps, as you can see on the left-hand side graph, number of apps has increased by 1.5x and the number of users has increased by 1.6x, steady growth. And we are strengthening our sales structures. We are enhancing proposal to bigger companies and installation at large enterprises like these are beginning. As you can see, and as a measure to strengthen inflow, we are leveraging LINE touch, which allows users to instantly launch MINI Apps at stores and the LINE apps revamp focusing MINI Apps will also begin. So we will further expand both the number of apps and the users and build a situation where businesses like advertising payments that can be provided. Let's turn to the next page. And finally, a summary of the Q2 financial results. Sales and profit expanded steadily. Our company performance was -- experienced a solid growth. Going forward, centered on AI agentization and Official Accounts and MINI Apps, we will accelerate the growth. We will promote AI agentization across all services, offer AI services to 100 million users and create new value. Also, we will enhance OA and MINI Apps. And while transforming the media portfolio, we will achieve growth and improved profitability. This concludes our Q2 financial results explanation. Thank you very much. Operator: We would like to now begin the Q&A session. [Operator Instructions] First from Goldman Sachs Securities, Munakata-san. Minami Munakata: I'm Munakata from Goldman Sachs. I have 2 questions. My first question is on search ads. In the first quarter and also in the second quarter, the impression I got is this business is quite tough. The degree of toughness, is it correct to understand that it's the extension of the first quarter? Or are there any additional reasons? And on search ad, what would be the realistic guidance towards the second half? That's my first question. Ryosuke Sakaue: Thank you for the question. I am Sakaue. I'm the CFO. Let me reply to your question. Second quarter year-on-year is worse compared to Q1. One of the factor is one major client budget allocation was weak, and that continued into the second quarter. And in addition, in other clients, the budget reduction happened. This I'm referring to large EC companies in Japan and vertical companies declined, and that can be called additional from Q1. So that was the additional factor for Q-on-Q deterioration. And Q3, Q4, I think the degree of negative -- negativity is same as Q2. For Q3 and Q4 as well, that is our forecast. Minami Munakata: I have a follow-up question. There are other clients with quite reduction. Is there any structural reason such as shifting in-house or revisiting ROI of advertising? Is it more of an economic trend? What is the nuance? Yuki Ikehata: This is Ikehata. Let me reply to your question. This is Ikehata. I would like to add some more comments. In addition, there were some industry -- well, in addition to prior quarter's reduction trend in other industry, partially, that is -- there was a reduction in ad spend for search ad. The concept of ad placement, I don't think that is such a reason. But overall, LINE Yahoo! search ad performance is being monitored and the advertisers operate. So based on that, there is -- there was a decline in ad placement. We will continue to work on the performance improvement of search ad, and that would lead to getting these customers back. So rather than any unique circumstances, we are to continuously work on performance improvement of search ad. Minami Munakata: I understood fully. Another question is on MINI App. This time, various figures were presented and outline was explained, and I was able to learn. Thank you very much for that. The portfolio shift -- this chart has been shown. Just to reconfirm display and search, basically, it's very difficult to grow these areas. Is that the assumption you are setting? And JPY 140 billion to be expanded to JPY 280 billion, that has been rather difficult. And what is the pathway you envision? For example, from the first half of 2026, you're going to start SaaS service. So from the second half of next year, do you expect the sales to accelerate? Takeshi Idezawa: This is Idezawa. Let me answer your question. Display, search, naturally, the measures to revamp or to boost them, we are taking measures. And also thanks to the organizational change that we have implemented, we are able to implement activities to work on recovery. But structurally speaking, I don't think this is an area where we can expect high growth rate. So from that perspective, we will support the baseline for the display, search. And then apps will drive the growth. And we have the target of Official Account doubling and CAGR-wise, it has been 16%. And so we have this growth of OA, Official Account as a basis. And to add on top of that, we are going to provide MINI Apps and SaaS services. So we will be pursuing the target by having breakdowns or compositions in mind. On MINI App, it's not a linear growth, but when we have a certain number of clients, then we can expect a significant activation. So the MINI App platform will be stronger in the later half. And then that would be the overall picture. Operator: Next question from SMBC Nikko, Mr. Maeda, please. Eiji Maeda: This is Maeda from SMBC Nikko. I have 2 questions as well, please. I'll be recapping the previous comments regarding search linked ad. Together with popularization of GenAI, the negative impact to queries. And when I look at the performance, some of the clients looks like ad placements are declining in numbers. So because of this GenAI, the performance is having a negative hit on the flip side. If you could please share more on the recent trend? And also for the market, we -- there is still a concern that GenAI rise can be a negative for a search-linked ad. If you could please share your outlook, that would be great. Ryosuke Sakaue: Thank you, Mr. Maeda. Sakaue, I will start, then possibly Kataoka will follow up. At the moment, Yahoo! Search, 10% of query comes from AI search. And at the same time, the answers from AI search are business query where there is no opportunity for search-linked ad, like questions and answers. Those are the search keywords that we get. So it doesn't have much impact to our revenue and profit making. But at the same time, mid- to long term, regarding those business query, I would think that the there will be more use on use of GenAI. So media and search, we expect the next 3 years to be flat plus extra. Hiroshi Kataoka: This is Kataoka speaking. As Sakaue mentioned, number of queries for search have not resulted in significant decline in the number of queries. There is no major time shift in the search trend. And ad performance itself hasn't deteriorated. So within this big global trend, there's more use cases from GenAI are increasing. And I'm sure more of our clients companies are considering to further use GenAI. We believe that there will be opportunity, the monetization business opportunity when it comes to GenAI-led search as well. So we are considering various different means to monetize. Eiji Maeda: Second question, regarding Commerce Business. In second quarter, each services growth on the Page 8. Regarding Yahoo! Shopping, the hometown tax, I wonder how much of that impact is included. I wonder in the second half, there can be a significant decline in the growth as a reversal factor. And if you exclude the BEENOS impact, what is your true growth opportunity? So the growth in the cruising pace and growth from a one-off reason, if you could please share for the results in the first half and what you expect for the second half, please? Unknown Executive: Okay. Sakaue would share some figurative indication then -- and I'll have my colleague, Hide to provide additional information. And regarding Yahoo! Search -- sorry, Yahoo! Shopping, for second quarter, the growth was about 19%, 1-9, so quite significant. And hometown tax, late high single digits, mid-single digit to high single-digit growth. And for Reuse, this includes Yahoo! Auction, Yahoo! Flea Market and BEENOS as to be about 15% growth. So excluding BEENOS, we do have mid-single-digit growth. Second quarter has this last-minute demands for hometown tax. So that led to this significant growth rate. Makoto Hide: This is Hide to provide additional information. Regarding Yahoo! Shopping, a significant impact from hometown tax. This is something that was happening at the end of the year in December time. So it's a front-loading of that demand now. Compared to the last year, Q3 growth rate will be stagnant, will slow down. For Reuse, excluding BEENOS, I do see the trend continuing. In other words, Yahoo! Auction growth is quite steady and Flea Market is growing significantly. So when you take the weighted average, our growth is mid-single digit. I would think that for the second half, we can expect a similar growth, and we'll have a synergy, as you can see on the right-hand side, to have a more significant growth in the midterm. Operator: Next, Okumura-san from Okasan Securities. Yusuke Okumura: This is Okumura from Okasan Securities. Can you hear my voice? Unknown Executive: Yes. Yusuke Okumura: I have 2 questions. On Page 26, you have been explaining on the account ad and MINI App expansion and double the sales from this, I would like to reconfirm Official Account, the platform part based part, the assumption is the current growth rate. And through MINI App several dozen billion will be added on top. Is that the assumption? If this becomes a reality, it's wonderful. But what is the background for being so bullish at the time of launch, the assumption of the MINI App or MAU in order to achieve your assumption, what kind of measures and scale of investment you're going to make in order to achieve your strategy? That is my first question. Unknown Executive: Firstly, the growth image of official apps, I would like to explain and the strategy to grow will be replied by Idezawa-san and Ikehata-san. The existing OA part, the current level of growth can be maintained. To be more specific, 10% to 15%. Currently, it is growing at nearly 15%. So maintaining the same growth level. The paid accounts can be expanded in this pace, but that will not bring us to double. So the gap will be compensated by MINI App and SaaS. The strategy will be explained by Ikehata. Yuki Ikehata: Thank you for your question. Let me just add some more comments. In your question, you said that it's still the starting phase and this forecast may be bullish at the starting phase. But right now, we already have Official Accounts and MINI Apps, although partially we are not monetizing yet to many customers, similar solutions are offered and being used, and it's been -- the customers are satisfied. So for MINI Apps, we will increase the number. And at the same time, we will focus on monetization. That is for next year and beyond. Official Account SaaS solution already, including third-party solutions, we are collaborating with various companies and various solutions are already being utilized. So our strategy is to monetize them from next year and onward. We haven't been able to try or something that does not fit the market to start from scratch. Well, that is not the case. We already have existing foundation of Official Accounts, and we are offering various services, and we will expand and further monetize. So that is the basis of our assumption to achieve these targets. Yusuke Okumura: What about the scale of investment? JPY 10 billion was the media investment for this year. What about the investment going forward? Unknown Executive: The details will be discussed, but we are working on the awareness strengthening through advertising for MINI Apps and we are going to focus on promotion and PR. And regarding manufacturing or production, as shown on the slide, we are to reassign human resources to these growth domains to speed up the launch of products. Yusuke Okumura: My second question, on LINE, you are going to implement AI agents. I would like to ask about that. ChatGPT has instant checkout and strengthening the functionalities, and they are expanding partners, the user side rather than ChatGPT, why do they use LINE's chat or AI agents? What is the value that you offer in the future? The relationship is that parent company is -- has strong ties with OpenAI. And what kind of positive influence will that relationship with OpenAI has with your company? Takeshi Idezawa: This is Idezawa. Let me reply to your question. Our company does not have our own LLM. So we use OpenAI solutions or other solutions. We pick and choose. It's not just LINE, but within our company, we have a variety of services, news, commerce, finance, auto, so each service will be agentized. That is what we are working on right now. And like Yahoo! and LINE or integrated agent will be created. So that is the perspective of our user interface. We do not have LLM ourselves. But on the other hand, we have a lot of touch points with so many users and services. So within one ID, ours can be used in a seamless manner. That is the value we offer. So that is why we are working on agentization of various services. Operator: Next from Mizuho Securities, Mr. Kishimoto, please. Akitomo Kishimoto: My name is Kishimoto from Mizuho. I have 2 questions too. Both are about LINE Ads. The first is commerce functions of LINE SHOPPING functions. I would think that it will be launched quite soon as a new platform. I know you've done some testing. So I wonder what is lacking in order to have a full launch? That's my first question. Makoto Hide: This is Hide speaking. We are providing bucket test. We have already launched the test launch for this within the LINE SHOPPING tab. We are not offering any service actively or making a big sales promotion. We are testing system stable operations. Then within this test bucket, we are trying to expand our product and services or to enhance sales promotion activities so that we'll be able to have 100% full launch. We have been working together with various internal stakeholders. The situation is a bit different from the users of shopping -- Yahoo! Shopping, where they already know what they want to buy or they want to buy certain things. LINE, we need to propose what is appropriate and right that would resonate to the LINE users. Once we know that right business model solutions, then we will be able to launch under such use case and sell products as well. So there's a great opportunity, and we've been testing at the moment. Akitomo Kishimoto: On Page 27, please, you mentioned about second tier, third tier. I'd like to ask you a question about the capability for the third tier. I understand that you have been reallocating your staff together with AI agents. I wonder whether you'll be able to run all these initiatives under the current manpower? Or are you going to strengthen your perhaps sales capabilities with more new recruits? Is this something you can do with the current resource? Unknown Executive: I'm sure it's based on the selection criteria, but thank you for your question. Your point, recently, we do have a certain amount of resource that we had to allocate that we had to secure from other departments to this department. So as mentioned on this page, we are going to have 50% of this existing business to new domain or the focus domains. So we will be shifting our business focus as well as resource allocation as well. And we also are considering more partnership, leveraging outside resources as well. We have many different ideas. Operator: Next, Nagao-san of BofA Securities. Yoshitaka Nagao: Can you hear? Unknown Executive: Yes. Yoshitaka Nagao: This is Nagao speaking. My first question is on MINI App MAU is to be increased from 25 million to 75 million and from 35,000, the KPI direction is being presented, the price charging per app or how you consider retention. What are the methods you're going to take? 60% comes from OA and 40% comes from MINI Apps. So proactive monetization will be necessary. So can you explain concrete ways you have in mind for monetization of MINI Apps. Yuki Ikehata: Thank you for the question. This is Ikehata speaking. Let me answer your question. Right now, well, MINI App numbers are to be increased, and we are to increase the number of users significantly. That is the plan. So on MINI Apps themselves from LINE application, there will be a lot of touch point from the users. So we are increasing touch points by linking with LINE app and LINE media to increase the opportunity for as many people as possible to touch MINI App. On the monetization of MINI App, the payment function and also advertising within MINI App and receive ad placement fee. So those are 2 monetization sources. The application that can generate fruits in terms of profitability is what we are planning to build. The sales force, we are strengthening right now so that as many people as possible will utilize MINI App and open Official Accounts. From next fiscal year and beyond, we expect monetization of revenue. We already are seeing the account openings by many on Official Account. So we have confidence. Yoshitaka Nagao: My second question is related to Page 24 of the material, the target of EBITDA margin, 40% to 45%. Right now, 37% or 38% is the Media Business margin. Official Account and MINI App domain overlaps SaaS domain. So when you expand the scale, the sales staff or development cost will be heavier upfront. And I have a concern that the profitability may decline. The existing search and display ad by the sales of that part decline will affect the overall margin. So what is the overall ad margin? And in achieving 40% to 45%, what would be the contribution of OA and MINI Apps? If possible, could you disclose those information? Unknown Executive: Rather than speaking on the concrete number, it's more of a guide, the search, the basis is that profitability is not that high, and we have been communicating that from before. There's a certain fee that we pay to Google. So the search margin originally is low. And adding with display, it's shown as flat, but the search will be down trend and display, we achieved certain growth in Q2. So the ratio of display will likely to expand. So the margin on the lower part will increase -- will improve. And on display, as you know, there is a commission with the agents that is included in the COGS. So it's -- that is the margin structure. OA the margin will be similar to display. The SaaS part, it will be dependent on the pricing structure, but vertical MINI App or SaaS peers, when we look at them, the profitability is quite high. Compared to ad business, it's low, but still, it's high enough to be able to support. On top of that, MINI Apps, the ad on MINI Apps and within MINI Apps, we will place ads in a network style. So that's the type of ad business that we would like to deploy within apps. So we expect that we can secure profitability on a certain extent. Yoshitaka Nagao: One quick question on Page 11, the JPY 15 billion reduction plan is shown in the medium term, the Media Business ad expense, in some part will increase, in some part it can decline, but the fixed cost of the Media Business will it be unchanged? Unknown Executive: This slide is the company-wide figure. This fiscal year, JPY 10 billion for LLM cost will be incurred. And next year and beyond, LLM expense will continue to rise. But through various programming, we can expect improvement of operational efficiency. So JPY 15 billion, even LLM commission rises next year, we intend to reduce the fixed cost, even including that JPY 15 billion, the promotion expense and advertising for commerce, it is linked with GMV. So that is not included in this figure. And on Media segment, there are subcontractors and some of the human resources cost through use of AI, we can create a leaner structure. So those are combined to set the target margin at 40%. Operator: Next, from Nomura Securities. Mr. Masuno. Daisaku Masuno: This is Masuno speaking from Nomura. Can you hear me? Unknown Executive: Yes, we can. Daisaku Masuno: I just have one question, please. Renewal of LINE apps, you are -- been talking about adding a commerce tab. And I know you have been trying various scenarios under beta. Fundamentally, are you trying to transition the info traffic to service like LINE GIFTS? Or are you going to provide a brand-new shopping experience to LINE users. So I wonder what kind of inflow -- what kind of user experience are you trying to create through this commerce tab? Unknown Executive: What we are testing right now under the current version, all the products that's on LINE tabs are LINE GIFT products. Going forward, in addition to the LINE GIFT products, the stores that are present in Yahoo! Shopping, some of their merchandises we would like to post there. So not just for gift needs, LINE SHOPPING, Commerce products, we would like to offer through that tab. So comprehensive portal shopping corner is how we like this service to grow to be. So what type of stores, what type of products from Yahoo! Shopping really has to do with the previous questions and answers that we had. What kind of products will be the right fit, best resonate to the LINE user. It really depends on that. That's what we are testing right now. So we have to have a right product mix on top of the GIFT products, we've been carefully studying what would be the type of product group that is worth promoting heavily behind it on this new effort. Daisaku Masuno: Okay. So this is not a purchase intent visit. I can understand LINE GIFT. I wonder for those users who are not thinking of purchasing anything would ever be a real customer, whether they would convert by visiting the site? Unknown Executive: Other than Yahoo! Shopping, our customers right now are searching for what they want out of tens of thousands of our products with a certain purpose, compare prices and make decision-making. We have a massive number of products on Yahoo! Shopping. It doesn't make sense to put all of that on LINE tab. I don't think it will drive sales. So out of what's available in Yahoo! Shopping, those stores, we need to focus on products with more uniqueness, originality and some product group with extremely high demand once they release, always sells out. So those will be the right products, we think to be on the LINE tab. Those will be the right products for this casual shopper. Daisaku Masuno: Are you talking about hundreds or thousands? I don't think you're talking about dozens of thousands. So I just have no idea about the scale of the products that would be available through this LINE tab. Unknown Executive: That is exactly what we are trying to get to. That's why we've been repeating the test. So it really depends on the -- we don't know. There's nothing that we can share with you regarding the size or scale of the stores or the type of products or the scale of the product. Operator: Next, Kumazawa-san of Daiwa Securities. Shingo Kumazawa: On Page 11, fixed cost reduction of JPY 15 billion. This is the topic of my question. Currently, what is the fixed cost? And how much is this JPY 15 billion? And from last year, you have been spending on security-related costs. Is that included in this reduction of JPY 15 billion? I believe it's mostly outsourcing that you can reduce. Are there any major items that you expect to reduce significantly? And I believe AI agent is contributing to reduction. So from -- compared to last year, how much reduction is this? Ryosuke Sakaue: This is Sakaue. I will answer your question. LY stand-alone fixed cost is roughly JPY 700 billion. As you stated in your question, security-related costs will come down. On the other hand, LLM commission will almost offset that increase. From April of next year, we will increase the office space to accommodate a 3-day commuting of our employees, and that means the cost increase. And by using AI, we intend to reduce JPY 15 billion in total. If we do not take any action, the fixed cost will likely to go up by JPY 2.5 billion to JPY 2.6 billion. In the areas of reduction, outsourcing part and software license from outside, the system that employees use, we can make progress in the integration of the platform. So double payment can be eliminated. So that is included as the cost reduction on software license. Shingo Kumazawa: The areas you can reduce, I understand it's difficult to name the concrete name or ServiceNow or others or Salesforce. Is it possible to cut them entirely rather than specific ones? Unknown Executive: It's an overall effort, frankly speaking. And for example, there are licenses that are given to all of the employees. But if we identify the staff that really uses, then we can reduce the number of license. And also, there may be redundant functions on the software and cut one of them. Operator: Next from [ SBR. Mr. Jose ], please. Unknown Analyst: I have a question regarding capital structure and security governance. I understand in the past, administrative [ court ] instruction was given from Ministry of Internal Affairs and Communication, administrative guidance pointing out your capital structure. Now that under new administration, any risks that you foresee or any changes to the relationship with the government regarding capital structure, please? Unknown Executive: Regarding the administrative guidance, we've been responding appropriately. And from -- for the 2026 March, we are making progress toward it. And regarding the capital movements, we've been continuing the discussions, reflecting our past track record. No major changes to or the [ FY 2026 ]. Unknown Analyst: I understand. So for 2026 March, you will conclude all the measures to meet the administrative guidance? Unknown Executive: Correct. Yes on track. Unknown Executive: Now, we would like to close because the schedule ending time has arrived. I would like to now have Idezawa to offer a final reading. Before Idezawa's final remarks, I mentioned about the fixed cost of JPY 700 billion, that was a mistake. It's roughly JPY 400 billion to JPY 500 billion. Takeshi Idezawa: This is Idezawa speaking. Thank you very much for raising a lot of questions. The environment surrounding AI is rapidly changing. And our 2 core strategy is AI agents and OA, and we will continuously grow by changing our business structure. That is the message of today's presentation. I will ensure that these plans will be executed steadily, and we would like to ask for your continued support. With this, we would like to close LY Corporation's FY 2025 second quarter earnings call. Thank you for staying with us until the end. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Good morning or good afternoon, and welcome to the Vince Q3 2025 Earnings Conference Call. My name is Adam, and I'll be your operator today. [Operator Instructions] I will now hand the floor to Akiko Okuma to begin. So please go ahead whenever you are ready. Akiko Okuma: Thank you, and good afternoon, everyone. Welcome to Vince Holding Corp., Third Quarter Fiscal 2025 Results Conference Call. Hosting the call today is Brendan Hoffman, Chief Executive Officer; and Yuji Okumura, Chief Financial Officer. Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that the company expects. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that statements made during the call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on the call. In addition, in today's discussion, the company is presenting its financial results in conformity with GAAP and on an adjusted basis. The adjusted results that the company presents today are non-GAAP measures. Discussions of these non-GAAP measures and information on reconciliations of them to their most comparable GAAP measures are included in today's press release and related schedules, which are available in the Investors section of the company's website at investors.vince.com. Now I'll turn the call over to Brendan. Brendan Hoffman: Thank you, Akiko, and good morning, everyone. We are extremely proud of our third quarter performance as we drove healthy sales growth across all channels and exceeded our expectations for both top and bottom line. Our assortments are resonating across both our women's and men's businesses. But most encouraging is the acceptance we have seen to the strategic price increases implemented this quarter as well as in the momentum in our DTC segment, given the enhancements we have made to the customer experience. In our women's assortment, which has the highest impact from tariffs, prices increased more than our overall average increase of approximately 6%, but units were nearly flat to last year, validating the quality and value of our product in the marketplace. Beyond the pricing actions, our teams have done an exceptional job in continuing to manage the evolving tariff environment. Our goods are flowing smoothly despite significant changes in sourcing and importantly, we've maintained our quality standards throughout this transition. With respect to customer experience, following the store renovations from earlier this year, we enhanced our e-commerce site in Q3 with a strategic site refresh, increased marketing support and the launch of dropship. Our e-commerce site refresh elevated the customer experience with more modern, creative elements and enhanced site merchandising. We are now using AI-generated video content to enrich product detail pages and introduce more service elements like our Cashmere care guide. This investment in our digital platform contributed meaningfully to our strong performance, and we're seeing the benefits flow through in both conversion rates and average order values. Our e-commerce site also significantly benefited from the marketing investments we made in mid-funnel marketing this quarter. Through this work, we grow triple-digit growth in site traffic late in the quarter and supported full price new customer acquisition as well. And at the end of the quarter, we went live with a new dropship strategy, which we believe will be a significant growth opportunity for us moving forward. In the first month since launch, we have seen significant increase in volume. Our initial launch focused only on shoes, but we have plans to expand to other categories, capitalizing on our partnership with Authentic Brands and the category expansion opportunities that provides. The dropship strategy allows us to not only offer more fashion-forward products that we might typically feel comfortable procuring directly, but enables us to showcase a more diverse assortment to our customer providing learnings on customer preferences that we may incorporate into our store channel as well. In addition to these initiatives, we opened 2 new stores this quarter in Nashville and Sacramento, following our successful store opening in Marylebone, London earlier this year, which continues to exceed our expectations. Moving to our wholesale business. We delivered solid growth versus last year, with some of this reflecting the timing benefits from the Q2 shipment delays that we discussed previously, as well as ongoing performance of key partners. We were excited to recently celebrate our 2025 holiday collection, along with our continued partnership with Nordstrom with an immersive experience in L.A. with Nordstrom's top clientele, Nordstrom's VP Fashion Director; and our Creative Director, Caroline Belhumeur. It was a great event to kick off the holiday season and highlight our holiday campaign, which celebrates our brand spirit and showcases connections through stories and gift giving with a 360-degree omnichannel strategy. Thus far, we have seen a very strong start to the holiday quarter, including record sales across the Black Friday and Cyber Monday weekend in our direct-to-consumer business. Given the strength of Q3 and the momentum we are continuing to drive, I am more confident than ever in the trajectory ahead for Vince Holding Corp., and the prospects we have to leverage our platform further to drive growth. We continue to successfully navigate the tariff challenges while maintaining the quality and brand integrity we are known for. We are beginning to reinvest in the business, particularly in marketing initiatives that we had pulled back on earlier in the year and we're seeing positive returns on these investments. The underlying fundamentals of our business remain strong. We're operating with disciplined execution, while positioning for growth. With that strong foundation and the momentum we're building, I'll now turn it over to Yuji to discuss our financial results in more detail and provide our updated outlook. Yuji Okumura: Thank you, Brendan, and good morning, everyone. As Brendan reviewed, we are very pleased with our third quarter performance as we saw momentum continue across the business, enabling us to begin to reinvest in key areas of the business. Total company net sales for the third quarter increased 6.2% to $85.1 million compared to $80.2 million in the third quarter of fiscal 2024. With respect to channel performance, our wholesale channel increased 6.7% and our direct-to-consumer segment increased 5.5%. As Brendan reviewed, part of the growth in wholesale reflects the timing of shipments, given the delays we experienced earlier in the year with tariff disruption. Our teams are doing an excellent job and continuing to manage our supply chain and our goods are flowing smoothly and expect to be back in line to normal course timing by the spring. Gross profit in the third quarter was $41.9 million or 49.2% of net sales. This compares to $40.1 million or 50% of net sales in the third quarter of last year. The decrease in gross margin rate was primarily driven by approximately 260 basis points due to the unfavorable impact of higher tariffs and approximately 100 basis points due to increased freight costs partially offset by 140 basis point increase due to favorable impact of lower product costing and higher pricing and approximately 110 basis points due to favorable impact of lower discounting. As Brendan reviewed, we are very encouraged by customers' response to our strategic price changes and our team's ongoing focus on tariff mitigation efforts. Given timing and mix of sales, we experienced less of a headwind than originally expected from tariffs during the quarter but expect these costs to ramp into the Q4. Selling, general and administrative expenses in the quarter are $36.5 million or 42.8% of net sales as compared to $34.3 million or 42.8% of net sales for the third quarter of last year. The increase in SG&A dollars was primarily driven by approximately $1.1 million related to compensation and benefits and $760,000 of increase in marketing and advertising costs as we reinvested into mid-funnel activities. Operating income for the third quarter was $5.4 million compared to operating income of $5.8 million in the same period last year. Net interest expense for the quarter decreased to $1 million compared to $1.7 million in the prior year. The decrease was primarily due to lower levels of debt under our term loan credit facility. At the end of third quarter of fiscal 2025, our long-term debt balance was $36.1 million, a reduction of $14.5 million compared to $50.6 million in the prior year period. Income tax expense was $2 million compared to 0 income tax provision in the same period last year. The increase is due to the impact of applying our estimated annual effective tax rate to the year-to-date ordinary pretax income. In the prior comparative period, we had a year-to-date ordinary pretax losses for the interim period, and as such, we did not record any tax expense for the same period last year. As a reminder, following the change in controls that earlier this calendar year, we have limitations to use of the NOLs that we did not have last year also impacting the cash tax expense comparison to previous years. Net income for the third quarter was $2.7 million or income per share of $0.21 compared to net income of $4.3 million or income per share of $0.34 in the third quarter of last year. The year-over-year decline in net income was driven by the increase in tax expense. Adjusted EBITDA was $6.5 million for the third quarter compared to $7.4 million in the prior year. Moving to the balance sheet. Net inventory was $75.9 million at the end of the third quarter as compared to $63.8 million at the end of the third quarter last year. The year-over-year increase was primarily driven by approximately $4.2 million higher inventory carrying value due to tariffs. Turning to our outlook. As Brendan discussed, we have seen a very strong start to the fourth quarter with a record holiday weekend sales performance in our DTC segment. Our outlook for the period assumes that this momentum continues with the growth in DTC segment expected to outpace our total net sales growth for the period, which is expected to increase approximately 3% to 7%. This guidance also takes into account potential shift in timing with respect to wholesale shipments given end of the year seasonality. In addition, we expect adjusted operating income as a percentage of net sales for the quarter to be approximately flat to 2% and for the adjusted EBITDA as a percentage of net sales to be approximately 2% to 4% compared to 6.7% in the prior year period. Our guidance for the quarter takes into account approximately $4 million to $5 million of estimated incremental tariff costs that we continue to expect to partially offset with our mitigation strategy. Given our year-to-date performance, and our outlook for the fourth quarter, we expect full year net sales growth to be approximately 2% to 3%. Adjusted operating income as a percentage of net sales to be approximately 2% to 3%, and for the adjusted EBITDA as a percentage of net sales to be approximately 4% to 5% compared to 4.8% in the prior year period despite incurring approximately $8 million to $9 million of incremental tariff costs compared to last year. This concludes our remarks. And I'll now turn it over to the operator to open the call for questions. Operator: [Operator Instructions] And our first question comes from Eric Beder at SCC Research. Eric Beder: Congratulations on a great Q3. I want to talk a little bit about some of the potential drivers here. So you have just started to roll out some of the licensed product, we've seen handbags and suiting in our store tours. I'm curious, you mentioned it also in your comments, where do you think that goes? And I know that the tariffs kind of slowed down the rollouts. What should we be thinking about the potential for that in 2026 and beyond? Brendan Hoffman: Well, I think it's -- I'm even more bullish now after the last month based on my comments on dropship. So what we saw with dropship with Caleres and shoes in the last 4 or 5 weeks, is truly spectacular. And so the opportunity to launch that on e-commerce in the spring on these other categories and then figure out how to better utilize that within the stores, in addition to obviously showcasing the product I think it has -- it can have a real impact on our business more than I was anticipating prior to the dropship launch. Eric Beder: And when you look at -- I know that you've been also looking at putting -- you put some COH denim into some of the stores. How should we be thinking about that potential opportunity to kind of collaborate with other our key fashion brands to kind of help both of you? Brendan Hoffman: Yes. That's something that we're going to continue to explore and prioritize. Very happy with the Citizens of Humanity collab. It also highlights the opportunity we have in denim. So whether we do that in-house, although that's a long haul or continue to do partnerships in denim with Citizens and look for other categories that perhaps ABG isn't licensing at this point. And we can bring to kind of round out our assortment. So that was another good win for Vince. Eric Beder: Great. And you opened up 2 new stores in new markets. I know it's very short. Could you give us a little bit of thought process? And then kind of what should we be thinking about -- I know that we pulled back on that a little bit this year just because of all things going on this year. But given the results here, what is the store opportunity kind of back on full swing for next year and going forward? Brendan Hoffman: Yes. I mean we're pleased with the way the Nashville and Sacramento have been received within the community. It's still early days. Also, we'll be monitoring what it does to our e-commerce business. I think we have 60 stores now between the outlets and full price. And I wouldn't expect that number to move much, maybe a couple more, a couple less depending on opportunities. We continue to be really pleased with our Marylebone store in London. So I'm going to see if there's opportunities in other parts of Europe, both to do business where we can be profitable like Marylebone and also provide some visibility for us in regions where we have a wholesale business and stores can just reinforce that. So we'll continue to monitor the direct-to-consumer opportunity led by e-commerce. But as I've always said, it's not an either/or with direct-to-consumer and our wholesale business. It's both. It's an and. And I think they just reinforce each other, and we saw that in Q3 and continue to see that in Q4. Eric Beder: Great. Congrats and good luck for the rest of the holiday season. Operator: The next question comes from Michael Kupinski from Noble Capital Markets. Michael Kupinski: And I'd like to offer my congratulations as well. Sales were obviously much better than what we were looking for. Were there any particular bottlenecks or limitations that could have delivered even better sales? And I'm thinking any inventory constraints for particular items, for instance? Brendan Hoffman: I mean, there's never a crystal ball. So you always -- there are certain things you wish you had a little bit more. But I think overall, we were in a good inventory position. Really working through the first half of the year, disruption from tariffs as we discussed. So as I'm doing my store tours, I'm not getting too much pushback from the stores about where they need more inventory. I think Vince also since I was here last, is doing a much better job with our logistics and operations, refilling the stores on a timely basis. So I think we have a good handle on that. Again, not to harp on it, but I am so excited about it, this dropship opportunity, which allows us to take full advantage of Caleres' shoe inventory. I mean that's a big deal because that's where we did have some holes in our inventory assortment because it's a little bit more difficult with our third-party partners to properly procure ahead of time. So this opens up a really big opportunity for us going forward, as I've been saying. But overall, the inventories, I think we're in a good position and help fuel the growth we saw. Michael Kupinski: And how much of the strong revenue growth was driven by price versus product volume? I know that you touched on that in your comments, but I was wondering if you could just expand on that. Brendan Hoffman: Yes. Well, I mean we are really pleased that the units held steady and actually grew at the higher price points. So we had anticipated given the price changes that we would see a little bit of erosion in our unit velocity. But so far, we haven't seen that. And the customer seems to be trading up with us. I don't know if that's because they're trading down from other luxury brands. And as those prices skyrocket, but our core customer continues to see us as a value. And as I said in my comments, women's was where we had to take the largest price changes. And the units held strong. So it was a win-win, and that's continued into all of it. So we'll continue to monitor that, continue to see if there's even a little bit more opportunity to push up price where we think the customer will react positively. But definitely a driver was the strength in the units. Michael Kupinski: And then given that wholesale and direct-to-consumer looked like revenues were -- the revenue growth were pretty much similar. But I was wondering if there was any divergence between the 2 channels in terms of product sales and particularly as you go into the fourth quarter. Brendan Hoffman: No. I mean we -- our e-commerce was clearly the big winner and driver when you look across all the channels. But overall, saw strength at the register with our wholesale partners. We continue to work with Saks Global to make sure that we're able to properly service their business while they go through their transformation. So that creates a little bit of noise. But overall, as we start December, the product is checking at the register everywhere. Michael Kupinski: Got you. My final question is, can you just talk a little bit about trends in freight costs. I know that I was just wondering if you negotiate annual contracts. And if you could just talk a little bit about what you're seeing there. Yuji Okumura: Yes, certainly. So yes, we are seeing freight cost increases. That's also partially due to the fact that we are changing sources as well of where we are sourcing the product. So it's really more the product of -- depending on the shift in timing, we're airing more stuff or certain pieces are taking longer in terms of distance wise to get here. So it's not so much of the actual inherent sort of freight contracts and the pricing related to that. It's really more along the lines of the timing of when we want to bring in the product, which method we're using to bring in the product. Operator: [Operator Instructions] We have no further questions so I'll hand the call back to the management team for any closing comments. Brendan Hoffman: Okay. Well, thank you all again for your participation today, and we look forward to updating you on our year-end results in the spring, and happy holidays to all. Thank you. Operator: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.