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Fed Chair Jerome Powell says the central bank was in ‘a difficult situation.'
Ernest Hoffman is a Crypto and Market Reporter for Kitco News. He has over 15 years of experience as a writer, editor, broadcaster and producer for media, educational and cultural organizations.
FOX Business host Larry Kudlow analyzes the Fed's decision to keep rates unchanged amid the Iranian conflict on 'Kudlow.' #fox #media #breakingnews #us #usa #new #news #breaking #foxbusiness #kudlow #larrykudlow #economy #useconomy #federalreserve #interestrates #inflation #markets #finance #politics #political #politicalnews #government #iran #conflict #global #trade #business #money #stocks #investing
Historical analysis shows that when oil prices double rapidly, the S&P 500 typically suffers significant declines over the following 12 months. Current Middle East tensions and oil weaponization by Iran suggest oil prices could rise further, with $150 per barrel seen as a potential peak.
Alan Blinder, Former Federal Reserve vice chairman, joins 'Closing Bell Overtime' to talk what is ahead for the FOMC after Wednesday's decision to leave rates unchanged.
The latest producer price data suggest that inflation is no longer being driven primarily by what businesses pay for goods, but by what those enterprises decide to charge as those goods move through the system. February's Producer Price Index (PPI) came in above expectations, rising 0.7% for the month and 3.
Jerome H. Powell, who leads the central bank, also said he would not leave the Fed until a criminal investigation into his handling of renovations was over.
Wall Street ended sharply lower on Wednesday as investors reacted to the Federal Reserve's decision to hold interest rates steady, rising inflation pressures, and escalating geopolitical risks linked to the Middle East conflict. Major US indexes extended losses following the Fed's announcement and fresh economic data.
Federal Reserve Chair Jerome Powell said Wednesday that worries about tariffs had prompted Fed officials to raise their latest expectations for inflation and interest rates. That means oil isn't the only inflation worry Warsh would have to deal with were he to be confirmed soon.
The Fed opted to hold rates steady at its March meeting, as expected. Chair Jerome Powell talked about jobs, inflation, oil prices, and AI productivity gains.
Commercial crude-oil stockpiles rose by 6.2 million barrels last week. Analysts had predicted crude stockpiles would decline by roughly 40,000 barrels.
Current market conditions closely resemble the pre-crisis environment of 2007 in several primary ways, raising caution for investors. Echoes of the subprime crisis and official reassurances highlight systemic risks that may not be fully appreciated.
The March FOMC meeting reflected continued stability despite the multitude of negative externalities. The negative externalities include declining payrolls, rising oil prices, and a highly uncertain geopolitical world outlook.
Operator: Good morning and welcome to General Mills, Inc.'s third quarter 2026 earnings conference call. All participants are in a listen-only mode. After the speakers' remarks, we will conduct a question and answer session. To ask a question at this time, you will need to press star, followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Jeff Siemon, Vice President of Investor Relations and Corporate Finance. Please go ahead. Jeff Siemon: Thank you, Julianne, and hello, everyone. Thank you for joining us today for a live Q&A session on our third quarter fiscal 2026 results. I hope everyone had time to review our press release, listen to the prepared remarks, and view our presentation materials, which we made available this morning on our Investor Relations website. It is important to note that in our Q&A session, we may make forward-looking statements that are based on management's current views and assumptions. Please refer to this morning's press release for factors that could impact forward-looking statements and for reconciliations of non-GAAP information which may be discussed on today's call. I am here with Jeff Harmening, our Chairman and CEO, Kofi Bruce, our CFO, and Dana McNabb, Group President of North America Retail and North America Pet. Before we get to Q&A, I will turn it over to Jeff for some opening remarks. Jeffrey Harmening: Thanks, Jeff, and good morning, everybody. We will turn to Q&A here in a couple of minutes, but I thought I would just take a minute or two to provide some context of what we have been through through the first three quarters of this year, and then based on the progress we have been able to demonstrate, how we are positioned to deliver a significant step up in financial performance which will start in our fourth quarter, which is why we reaffirmed our guidance for fiscal 2026. As a reminder, as we entered this fiscal year, we made a proactive and strategic decision to reinvest to improve the remarkability of our brands, with full awareness that this would weigh on near-term results as we sharpened our competitiveness. Now three quarters into that plan, we are seeing strength and momentum on critical building blocks for sustainable growth, namely household penetration, improved baseline volume, distribution, and market shares. This progress only reinforces our conviction that this strategy is the right one for General Mills, Inc. In North America Retail, our investments in remarkability are resonating with consumers. We are rebuilding household penetration and baseline growth, which are the key indicators of future growth. In pet, we are adding households as well and fueling our fast-growing cat feeding portfolio and also taking steps to accelerate our growth through Love Made Fresh. We will continue to be competitive in North American Foodservice and International. We know there is still more work ahead. We know that. But with most of the reinvestment phase behind us, we expect to deliver meaningfully better top-line and bottom-line performance in Q4 and beyond. I also want to talk briefly about the other piece of news you may have seen yesterday, which was our agreement to sell our Brazil business. This builds on a strong track record we have in portfolio shaping both in acquisitions and divestitures—nearly a third of our portfolio once this is complete over the last number of years. Brazil includes our Yoki and Kitano brands. While it is not on the scale of pet or the yogurt transactions, it is the same disciplined approach we have consistently taken to reshape our portfolio, namely our desire to prioritize our resources and investments on brands and platforms where we have the strongest opportunity to generate profitable growth. This deal will enhance our margins and increases the International segment's focus on our key global platforms, including super premium ice cream, Mexican food, snack bars, and pet food, where we have stronger margin and excellent growth prospects. So with this transaction, as I said, we have turned over nearly a third of our net sales since fiscal 2018. As we look to fiscal 2027 as well, as we said in our press release, our number one goal is going to be to continue to improve our organic sales results while at the same time maintaining our industry leading—as well as the transformation initiative we have to make sure we are maintaining efficiency. In 2026, we are really pleased with the pound share competitiveness we have had in NAR as well as dollar share in the other segments. As we look at fiscal 2027, we will aim to improve our dollar share performance in NAR, as we have lapped a lot of these price investments and the rest of our Remarkability Framework elements take hold. We are confident in the strategy we have and we know that we are making progress. We will continue to do that in Q4 and into fiscal 2027. With that, let us open it up for Q&A. Operator: Our first question comes from Andrew Lazar from Barclays. Please go ahead. Your line is open. Andrew Lazar: Thanks so much for the question. Good morning, everybody. Good morning. So, Jeff, by the end of this fiscal year, General Mills, Inc. will have the bulk of the pricing investments behind it along with a lot of the remarkability work. You mentioned in your prepared remarks your expectation for more stable pricing next year as you lap the pricing. So I guess the key metric will be, right, can General Mills, Inc. return some level of volume growth in fiscal 2027, even in the context of category growth that remains, for now anyway, below the longer-term level? I was hoping for whatever you can share on expectations along these lines at this point, knowing you are not obviously going to get into specific 2027 guidance yet. Jeffrey Harmening: Andrew, you are on the right track in terms of our thinking. What I would say is that as we look at fiscal 2027, our goal really is going to be to increase our competitiveness in dollar terms. This year, we certainly did in pound terms as a result of all the pricing actions to be more competitive there, and in 2027, we will try to maintain the pounds as well as we can and, at the same time, let our innovation and the renovation on our core and our improved marketing and ROIs on our marketing campaigns do the job of increasing our dollar sales results. What we feel good about is that we have the building blocks in place, and we have taken a step up on new product innovation and renovation this year from where we were before. I would look for us to take another step forward as we look at next year, both on innovation and renovation, particularly in NAR and in Pet. So that will be our goal. It is a very volatile world, so what exactly that yields, we will talk about in June. We talked about at CAGNY, our category is growing about 1%. But as I said, volatile. We will come back with a revised view of what we think our categories will grow. But I can tell you definitively that our goal will be to increase our dollar share competitiveness across NAR, as we have done in the other three segments. Andrew Lazar: Got it. Okay. And then price mix, obviously, in categories, I think, continued to be positive despite some of your price investments. What have you seen competitively in your key categories following your own price investments? Thanks so much. Dana McNabb: Good morning, Andrew. Thanks for the question. From a price mix standpoint, we have seen price mix in our categories up a little bit. That is behind some small brand innovation. But predominantly, in terms of our price mix this year, as you know, in the front half, it was about investing to get our base shelf prices right. It was not about promotion activity, adding frequency or depth. It was about getting below key cliffs and gaps in competition, getting that right, which is why our price mix is down. As we start to lap that, we saw it a little bit in the back half of this fiscal year, but really the full lap will occur in the beginning of next fiscal year. We are starting and we expect to see that price gap close, starting first with our Pillsbury business and cereal, and then we will start to see some of our fruit snacks come along. We do expect to get back to price mix growth in fiscal 2027. Andrew Lazar: Thank you. Operator: Our next question comes from Leah Jordan from Goldman Sachs. Please go ahead. Your line is open. Leah Jordan: Hi. Thank you. Good morning. Building on some of that, you called out the step up in innovation this year. Can you talk about how that has been resonating so far? How is the growth tracking for new products versus the 25% goal that you had stated previously? And as we look ahead, I know you called out strong seasonal events for 4Q. What should we be looking for? Any early commentary on 2027 as well? Jeffrey Harmening: Overall, I would say we are really pleased with our innovation and we are tracking at about 25%, maybe a little higher in North America Retail, and between 20–25% for the portfolio in aggregate. I am really pleased with what we have seen out of NAR. Maybe I will have Dana give a little bit of color on what is resonating. Dana McNabb: From a NAR perspective, I think we will land a little bit higher than the 25% growth from new products. We have really leaned into mainstream premium benefits such as protein and fiber, and better tasting news on some of our snacks items, and that is resonating really well. I will use Cheerios Protein as an example. The biggest brand gaining a protein benefit—that is going to be $100 million by the end of this year. Some of the taste renovation that we have done on our salty snacks and our fruit snacks is resonating incredibly well. And then, of course, big businesses like Pillsbury and grain, where we have been able to bring great-tasting bake-up-bigger news or protein news, is resonating really well. So we are getting really good trial and repeat on our new product this year, which, of course, is encouraging for next year because it means year two on those items will be helpful to us next year. I think the plans next year are even better. We are going to see another step change in new products—again, better-for-you functional nutrition. We are bringing protein to the number one cereal, Honey Nut Cheerios. Our Ghost Protein Bars, which we have just started to launch, are turning very well. We are going to scale that nationally. We make fiber taste great. We have got Annie’s Fruit Snacks coming with fiber, Larabar Protein and Fiber, Ratio Granola and Fiber and Protein. As I look to some of the bold flavors we are launching, we are launching a new authentic Mexican brand called La Tiara. We have got hot honey coming on Pillsbury biscuits. We have got Tabasco Old El Paso kits and protein shells and chimichanga kits. We have really good innovation coming that is starting to ship this quarter, and we will support that with double-digit media investment, seasonal events, and really good in-store and online execution. I feel confident that now that we have got the shelf prices right and we have got pounds somewhat stabilized, when we lean into the rest of the Remarkable Experience Framework, we will be able to improve our performance next year. Leah Jordan: Okay. Great. Thank you. And then just a follow-up on Love Made Fresh. You called out an acceleration in recent weeks after some of the changes that you plan to make that you highlighted previously at CAGNY. Any more color on the magnitude of that acceleration, how we should think about further distribution growth from here, and then also an update on how your on-shelf availability is tracking? I know that has been an area of focus for you. Dana McNabb: Thank you for the question. I will just reiterate that we are pleased with where we see the Love Made Fresh launch so far. We have made really good progress in a lot of areas. We like our execution. We are above the 5,000 mark on coolers right now. We think our marketing execution has been strong, and we are getting great product reviews from retailers and from consumers. As we pointed out, the place that we needed to focus was strengthening our turns at shelf, and the number one place was our on-shelf availability. We realized we needed to have our store reps go to the stores every week to make sure that the coolers were full. We have had that happen now for about three weeks, and we have seen a step in turns in those stores. But again, it is only three weeks, so I would not want to lean into any specific number there, but we have seen a step up. The other two items that I think are going to be really important to improving our turns are that we did not have a stand-up resealable pack, and that pouch format is 55% of fresh sales. That is launching now, and we have that coming into the marketplace. It is two times the dollar ring of rolls, so that is going to really help us from a turns standpoint. From a building awareness standpoint, we are really pleased with how we have built broad awareness. We have to come down a little bit more in the marketing funnel and reach consumers and pet parents, tell them where they can find the product, and do more to convert to trial. Over the next month, we are definitely going to be adding more coolers. We are going to make sure shelf availability in those coolers is better with reps visiting the store once a week, and we are confident that we will see our turns improve. Leah Jordan: Very helpful. Thank you. Operator: Our next question comes from David Palmer from Evercore ISI. Please go ahead. Your line is open. David Palmer: Thank you. I wanted to ask you about the results you are getting from not just the Remarkability framework but the levels of spending, the kinds of spending that you are making, and maybe juxtapose it to what you did pre-COVID. A lot of, you know, 5% of sales in innovation is the activity rate that you had pre-COVID, and you have kind of gotten back there. Promotion spending has been restored, and you are leaning in on marketing as well. In that immediate pre-COVID period, you had stabilized your organic sales. What is different today versus then, just in terms of the responses you are getting from each of these growth spending activities? And I have a quick follow-up. Jeffrey Harmening: What has been different the last three quarters is that we have been investing a lot more in our base pricing, as Dana talked about, to maintain or improve our competitiveness. You are right, the level of new product innovation we have is approaching pre-COVID levels, which we feel good about. Our marketing is approaching pre-COVID levels, which we feel good about. Now our price gaps relative to competition will be approaching pre-COVID levels, which they have not been for the last couple of years, which is why we made this change in pricing. It is also why it gives us confidence as we look forward to Q4 and next year that our level of competitiveness in terms of dollars will improve because, as you said, we are getting back to the levels of activity—whether it is on the marketing side and innovation and media spending, or whether it is our price competitiveness—that we saw before. I would actually say Dana and her team have done a great job. Our level of renovation on our core is probably better than it was pre-COVID. That is what gives us confidence that, having gotten past the bulk of this pricing activity now on base price, the rest of the elements of our marketing framework will work a lot harder for us. You have hit on our thinking, which is that is what we see. The only other difference I would say externally is that the consumer is a little bit more stressed than in 2019. That is why we see our level of promotion activity up a little bit higher, even if the depth is not higher and frequency is not higher. Consumers are taking a little bit more away on promotion, which is why you see only a little bit of price mix in our categories. That is probably the one thing that has not bounced back all the way yet, but we believe that is a structural thing that is clearly cyclical, and as the economy improves, we would anticipate the consumers would improve with it. David Palmer: That is very helpful. Just one quick question. Maybe this one is for Kofi. In terms of the gross margin, this quarter was relatively low, maybe lower than what we typically see in a fiscal 3Q versus your overall fiscal year. If you can have stable organic sales in fiscal 2027, where do you think gross margins can live for this company? I am wondering about maybe something in the low thirties versus the mid-thirties—you know, the street is near 34% for fiscal 2027. If you do have stable organic sales, can you get back to mid-30s in terms of gross margins? Kofi Bruce: David, thanks for the question. I think you are starting with the right frame as we see it. We do see stable to growing volume as an enabler for returning and restoring our margins. We are not ready yet to go on record on where we expect them to be in 2027, but I think the path to improvement is certainly paved and aided by volume stability. What we find is when we have that, leverage improves obviously across the enterprise. We get more leverage out of our cost savings, which is always a significant contributor to stability and margin expansion in the middle of the P&L, as well as supporting reinvestment in the business. As a reminder, we are in the middle of a multiyear transformation initiative, which I would expect next year, on top of this year, will add meaningfully to productivity. As Jeff referenced, we would expect to see improvement in price mix and be able to leverage more of the full suite of our SRM levers as we step into next year. I think the combination of all those things will help us start moving back. In terms of where we would like to be for 2027, I will go on record as we get out of Q4 and into the first quarter of next year. Operator: Our next question comes from Michael Lavery from Piper Sandler. Please go ahead. Your line is open. Michael Lavery: Thank you. Good morning. Maybe following up on that and drilling in a little bit more to the inflation piece of it. You cited some inflation pressure this quarter already. Looking ahead, can you give a sense of what you see for fiscal 2027, maybe both with and without potentially elevated oil or diesel or oil derivative costs, and just an early sense of how it is shaping up? I know you have the savings you have given some color on, but how hard does that have to work to offset some of the inflation you might be looking at? Kofi Bruce: Appreciate the question. We are not prepared to give you the full suite of our assumptions for 2027 yet. Our best estimate right now on range of inflation is roughly in line with this year, inclusive of, maybe on margin at the far end of the range, some more modest pressure from the macro basket. Labor probably still remains one of the biggest inflationary components of our cost structure, whether embedded cost in logistics or manufacturing, or pass-through even in our transformed commodities. I would share that as a reminder. The other critical tent poles are we would expect another year of industry-leading HMM at at least 4%. As I referenced in my last answer, some significant contributions on top of this year’s significant contributions from our transformation initiatives to help round out the picture. It is important, before I leave this point on 2027, to make sure that I give you some of the other sides of the ledger. We will lap the 53rd week, which is a tailwind this year and will turn into a headwind next year. We have one month of U.S. yogurt results reflected in this year’s results; as a reminder, that closed at the end of June, so we will expect to see that as a headwind. Incentive comp we would expect to normalize next year. Those are three things on the other side of the ledger as we look at next year’s tent-pole assumptions. Michael Lavery: That is really helpful. As you look at finishing fiscal 2026, early in the year, you indicated you expected positive organic revenue growth in fiscal 4Q. Now the language is just “improved trends.” Could you be specific if the positive organic revenue growth is off the table, or is that still something that you think is in reach? If so, would that be total company or NAR, maybe both? What is the right way to think about how the rest of the year unfolds? Kofi Bruce: If you track from the midpoint of our guidance, implied in the annual guidance is probably about 75–80 basis points at the midpoint of organic sales growth. While we are expecting continued competitiveness—so pound share and dollar share in the rest of our business to hold—we are not banking, in this guidance, on a dramatic turn in market performance in Q4. Instead, we are expecting a lot of this to come from some mechanical factors. We referenced in our remarks a significant retailer inventory headwind in Q3 that we would expect to flip to a tailwind in Q4. That is on its own probably worth about 200 points of benefit to organic growth in Q4. We would expect the rest of the improvement to come from the reversal of trade expense timing, which was a headwind in Q3 and will become a pretty healthy tailwind as we lap last year’s Q4. Michael Lavery: Okay. Great. Thanks so much. Kofi Bruce: You bet. Operator: Our next question comes from Alexia Howard from AllianceBernstein. Please go ahead. Your line is open. Alexia Howard: Good morning, everyone. Can I ask about the Foodservice weakness this time around? You mentioned bakery flour volumes. Is that something that is likely to persist? What does it tell us about some of those category or channel dynamics in that segment? Jeffrey Harmening: Alexia, for Foodservice overall, let me take a step back, and then we will get to flour. As we think about Foodservice, the eating occasions at home are about 86%, and that has been pretty stable over the last few months or so. Commercial traffic is down about a half a point, and noncommercial traffic is up about a point. As a reminder, we over-index in the noncommercial space. As we looked at the third quarter, you see our volume decline a little bit and you see profitability decline. I will remind you on the profit side, about half of the decline is the yogurt divestiture. So when you see that big number for that decline, know that about half of it is yogurt and about another 30–35% is flour. Those are the two biggest items. As I think about the fourth quarter, we are thinking that our flour business will come back in the fourth quarter of this year. We will see what happens. Because of the complex nature of distribution through Foodservice, the movement is a little bit slower one way or the other. I am really proud of our competitiveness in K–12 schools and the fact that we have changed to natural colors ahead of when we said we were going to do, and we are competing quite effectively outside of flour. So outside of that one piece of our Foodservice business, I am pretty pleased with our performance and our level of competitiveness. This forecast we have for the rest of this year would not contemplate becoming more competitive on flour for the next three months. Alexia Howard: Got it. And then can I follow up on Love Made Fresh? You had the 5,000 cooler goal for January, which I think you hit, and it is probably a little bit above that now. Is there another milestone in terms of additional distribution that you can share, or at the moment is the focus on getting the turns up before you have another big move forward on the distribution side? Jeffrey Harmening: On the distribution side, there are the number of coolers and then the distribution within those coolers. To the extent we just launched a stand-up resealable pouch, that will add distribution, but it may not add the number of stores. It will add the number of SKUs we have in the store that we are currently in, and we think that is going to be the most productive. Our focus really is on enhancing the turns where we are. To the extent we get a little more distribution, that is okay too. But as Dana talked about, making sure that availability is increased significantly and that our marketing is taking place at the lower end of the funnel, closer to the point of purchase, that is going to be our focus. We know we have a great product. Now we have good distribution. The job to do now is to make sure we keep improving the turns where we are. As Dana said, three weeks into having more people at the shelf more often, we are seeing positive benefits of that. We will look to see that continue as well as redoing our marketing mix so that we have more at the point of attack, if you will. Operator: Next question comes from Robert Moskow from TD Cowen. Please go ahead. Your line is open. Robert Moskow: Dana and Jeff, I was hoping to dive into the high single-digit decline in Snacks. The salty snacks segment of the market has become much more competitive with price cuts and innovation. I wanted to know if some of that is just adjacent to you, or do you think that is carving into your brands at all? What gets us back to growth in that segment? Dana McNabb: Thanks for the question, Rob. Good morning. Starting first with salty, in the categories we compete in we are not seeing the same trends as some of the other salty competitors. In salty, this is a business where we have had three consecutive quarters of pound and dollar share growth. We are seeing consumers respond to our price investments. We have had really good price pack architecture, and the product renovation that we did to improve the flavor is resonating really well. Our salty business has performed incredibly well, and we think that will continue into next year. The challenge we have seen is really on our hot snack business. That is what has driven the deceleration that you are seeing in Snacks. As I have talked about before on hot snacks, one of the main drivers of that with Totino’s is that we did a price pack architecture conversion. We moved from a bag to a box, and in today’s economic times when the consumer is stressed, they did not see any value in that box, and we saw sales decline significantly. We are in the process of converting that back now. The retailers have been really supportive. We think we have got the price right, and we have really got to up the product quality and how we are talking about the product to consumers, which you will see going to marketplace this year. That is our main focus for Snacks going forward. On our grain snacks and our fruit snacks, it is about making sure we taste great and we have enough better-for-you innovation with protein and fiber, which we really do. We are leaning into the Annie’s business in our snacking categories, which we also think will work incredibly well for us. Robert Moskow: So ex-Totino’s, are Snacks stable, or can you tease it out for us? Dana McNabb: Ex-Totino’s, Snacks overall for us would still be down slightly. That is driven by our grain business. Our Nature Valley business is performing pretty well. Our proteins are doing really well, our wafers business is doing really well, and actually Fiber One is on the comeback with GLP-1 users, but it is still down. In Grain, consumers are moving towards more performance nutrition. That is why you have seen us ramp up this Ghostar innovation that is performing really well—high protein, low sugar. We are going to scale that nationally right now. We will continue to lean into everything that is working well on Nature Valley, and we will double down with GLP-1 users on our Fiber One and Protein One business. Jeffrey Harmening: As Dana said, the biggest challenge really is Totino’s, and a little bit in bars as well. Bars is about innovation; we think we have a good story there. Unlike what you might have heard from others on salty snacks, our salty snacks business was up double digits in the third quarter. I am really pleased with what Dana and her team have done in salty snacks. We have really good price pack architecture, Chex Mix is flying, and our fruit retail sales are flat. If you decomp the whole thing, we are really strong in salty snacks and home meal and fruit. The job to do really is primarily on Totino’s, with a little bit of bars as well. Robert Moskow: Got it. Thank you. Operator: Next question comes from Scott Marks from Jefferies. Please go ahead. Your line is open. Scott Marks: Thanks for taking our questions. First thing I wanted to ask about is some of the retailer inventory adjustments that you called out. Could you help us understand what parts of the NAR and Pet business were impacted, and how we should be thinking about the reversal in each of those segments for fiscal Q4? Dana McNabb: Thank you for the question. We have definitely seen some quarter-to-quarter fluctuations as it relates to retailer inventories. From a NAR perspective, we typically see our net sales and our retail sales trends track relatively consistently. They were a little bit off in Q3, and we think that will revert back in Q4. It is Pet where we see the more significant gap. That is about three points. As we look to Q4, our current guidance does not really contemplate a headwind or a tailwind from Pet in Q4. Historically, it has been really hard for us to predict shipment timing and retailer inventory in Pet, so we think the best planning assumption is to assume that it is going to be neutral in Q4. Scott Marks: Understood. Then I wanted to ask a little bit about the guide. Holding the guide implies maybe a fairly wide range for Q4. Can you help us understand the swing factors that could push results towards one end or the other? Kofi Bruce: Sure. The guide on profit is maybe even appreciably wider than on the top line. On the top line, as I referenced earlier, we are expecting the mechanical factors of the retailer inventory reset, which we expect to improve our organic growth rate about 200 basis points over Q3—so about 50 basis points in the quarter—and then our trade expense timing to carry the rest on the top line. On the bottom line, as Dana referenced in her remarks, we saw some additional pressure on top of things we had already anticipated going in. Specifically, going into Q3 we would have expected remarkability investments, divestiture headwinds, and trade expense timing comparisons to be a drag. Those accounted for about two-thirds of the decline in Q3. The other remaining factor that was frankly still variable and wide as we came into CAGNY and reset guidance was around shipment timing and the weather-related factors that impacted shipment timing and supply chain disruptions for us. Those added additional pressure to the results and largely account for the width of the range on profit. Our ability to recover fully from some of the cost overhang from the supply chain disruptions—we are making progress, but at the low end of our guidance, we might not be able to fully recover. At the more positive end of our guidance, we would see a more full recovery in those costs, as well as the factors around trade, supply chain, and retailer inventory flipping to tailwinds in the quarter. The last thing I would leave you with is a reminder that we do expect to see a significant contribution from the 53rd week in Q4, and that is baked into our guidance as a mechanical factor. But really the variability around supply chain and retail inventory recovery would account for the width of the range on profit. Scott Marks: Understood. Thanks very much. Operator: Our next question comes from Peter Galbo from Bank of America. Please go ahead. Your line is open. Peter Galbo: Kofi, back to the question around inflation for next year. I know it is probably still a little too early to know fully, but a couple of your peers have called out freight as a potential headwind, and I think freight even outside of what has happened in diesel. Can you comment on what you are seeing in terms of driver tightness or anything that might be a potential hiccup on that side? Kofi Bruce: Broadly, I do not know that we would call out different factors. We are tracking those. We are not done with our fiscal year, so we do not expect those to be material in this year given we are largely hitting at our contracted rates. It is a variable that we are factoring into the range that I gave you earlier in the call on our expected inflation for next year. We will be prepared to give you a more full picture in two more months as we close the quarter and the year. Peter Galbo: Okay. Fair enough. And Jeff, maybe this did not get a lot of air time, but the decision on Brazil—I do not think it comes as a huge surprise. Can you provide a few more details into the thinking to exit the market and what drove the decision this time? Jeffrey Harmening: It stems from our strategy to really focus on our core global brands outside the U.S. There we have a great right to win with our core global brands. They are fast-growing and quite profitable. As we looked at our Brazilian business, our Brazilian team has done a really nice job, but the challenge for us in Brazil is that not only are we under scale, but also our portfolio there is not really our global brands. It is some good local brands. The combination of having these local brands as well as not having the scale means that our Brazilian business has not been very profitable for quite some time. The idea to divest our Brazilian business is really a factor of our focusing on our core global brands, which will enable us in our International segment to improve our margin profile—which we have done a really nice job of this year, but there is another step change to go—and the divestiture of this business will help us do that while maintaining our growth and increasing our margin profile. In doing that, we will be able to shift our resources to places where we think we have a longer-term right to win that will be more profitable for us. Peter Galbo: Okay. Jeff Siemon: Thank you very much. Julianne, I think that is all the time we have this morning, so we should wrap there. Thanks, everyone, for the good questions and discussion, and we look forward to speaking with you over the course of the coming quarter. Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the Tecogen Inc. Fiscal Year 2025 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Jack Whiting, General Counsel and Secretary. Please go ahead, Jack. Jack Whiting: Good morning. This is Jack Whiting, General Counsel and Secretary of Tecogen Inc. This call is being recorded and will be archived on our website at tecogen.com. The press release regarding our fourth quarter and year-end 2025 earnings and the presentation provided this morning are available in the Investors section of our website. I would like to direct your attention to our Safe Harbor statement included in our earnings press release and presentation. Various remarks that we may make about the company's expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by forward-looking statements as a result of various factors, including those discussed in the company's most recent annual and quarterly reports on Forms 10-K and 10-Q, under the caption Risk Factors, filed with the Securities and Exchange Commission and available in the Investors section of our website under the heading SEC Filings. We may elect to update forward-looking statements; we specifically disclaim any obligation to do so, so you should not rely on any forward-looking statements as representing our views as of any future date. During this call, we will refer to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles, or GAAP, to the most directly comparable GAAP measures. A reconciliation of non-GAAP financial measures is provided in the press release regarding our Q4 and year-end 2025 earnings and on our website. I will now turn the call over to Abinand Rangesh, Tecogen Inc.'s CEO, who will provide an overview of fourth quarter and year-end 2025 activity and results, and Roger Deschenes, Tecogen Inc.'s CFO, who will provide additional information regarding Q4 and year-end 2025 financial results. Abinand Rangesh: Thank you, Jack. Welcome to Tecogen Inc.'s fiscal year 2025 call. I know many of you would like an update on how the data center cooling strategy is progressing, so today, I am going to start with an update on the Vertiv partnership. There have been some key positive developments that I will share, including their opportunities for our chillers. Then I am going to walk you through Tecogen Inc.'s data center opportunity pipeline outside the Vertiv partnership. After that, I will provide an update on the other avenues we are working on, including expanding our manufacturing throughput, increasing service revenue and margin, and the non-data center pipeline. We have seen significant forward momentum with the Vertiv relationship. First, Vertiv has designed, is in the process of designing, between 25 and 50 megawatts of our chillers into various projects. This is equivalent to 50 to 100 of our 150-ton dual power source air-cooled chillers. Second, we have been negotiating our master partnership agreement that expands the marketing relations agreement that we signed last year. Third, we have discussed bringing Tecogen Inc.'s hybrid drive technology to Vertiv's chillers. As the sales grow, this may allow Tecogen Inc. to scale manufacturing very quickly because we would focus on the dual power source and mate this to the refrigeration system that is already built in volume in Vertiv's factories. Last, and most exciting of all, we have secured a demonstration project with Vertiv. This is expected to ship sometime toward the end of Q2 for 1 megawatt of cooling, or two times our 150-ton dual power source chillers. Our chiller will go to the Vertiv controlled environment test chamber where it will operate under simulated AI data center conditions and various outside ambient temperatures. This technology demonstration project gives prospective customers data on how the chiller will operate under real-world data center conditions across a range of ambient temperatures. While we have been furthering the Vertiv partnership, we have also been expanding our own data center pipeline. In this list, we have only included opportunities where the end customer has told us they plan to use Tecogen Inc. chillers and have made significant progress on signing data center tenants. This list is sorted based on our current project confidence. Developers that have existing data center experience and financing are higher on the list. Based on past experience, customers typically want chiller equipment delivered six to nine months before the site needs to be operational. For sites that are expected to be operational in early 2027, this will suggest equipment orders no later than Q2 or Q3 this year. Timing is always difficult to predict because there are multiple moving pieces on the customer side, but the timeline we have seen to date is completely consistent with our historic sales cycle. Projects can also go through stop-start cycles before closing. For example, in the past five months alone, we have had two instances where potential customers have told us they were ready to place the purchase order but then hit unforeseen delays on their end. However, as you can see, we have multiple opportunities of various sizes, thereby increasing the odds in our favor. One project is an expansion of an existing data center. They plan to use our dual power source chiller to handle new tenants. Another is in the final stages of tenant negotiations and expects to use our DTX chillers to maximize IT capacity. The same developer also has a second project of a similar size and another of a larger scale. Next, there is an opportunity for a demonstration project with an established data center owner for up to 40 chillers. This developer evaluated the cost of power from our chillers against the alternatives and found the value highly compelling. However, they were also looking for some independent validation of our chillers. We believe that the Vertiv demonstration project will be instrumental in unlocking this opportunity. The remaining projects have filed for environmental permits and are in active discussions with tenants. They represent 100 to 200 chillers collectively. We expect more clarity on construction timing as permits are granted and tenant negotiations progress. In our previous call, we had mentioned an opportunity where we have an LOI for six STX chillers. Although this opportunity is progressing, we have moved this further down the list because we believe the others outlined above are moving faster and have more near-term potential. In addition to this list, we also have ongoing discussions with multiple hyperscalers and multiple other data center developers. The current timeline on these projects is completely in line with projects in other industries. We also believe that closing the first few opportunities will unlock significant demand. Based on conversations with prospects, even if we have chillers in other critical cooling applications, many data center owners would still like to see our chillers in other data centers or cooling AI loads. We believe this concern will be addressed with the Vertiv demonstration project and some of the near-term opportunities. Aside from data center projects, we are expecting chiller orders from other segments such as cannabis, hospitals, and comfort cooling. These represent at least another six DTX chillers. Expected delivery is the fall and winter of this year. We are also seeing a gradual resurgence in cogeneration leads as utility rates rise across the United States. Given the significant amount of interest in our dual power source chiller, we wanted to make sure we could handle a step change in order volume. We have now qualified a vendor for the sheet metal and refrigeration assembly. This vendor already built hundreds of similar refrigeration and sheet metal assemblies for a large chiller company. We have also qualified an electrical assembly vendor for the power electronics and are in the process of qualifying a second vendor. We are also presently building some inventory of both the dual power source chillers and DTX chillers. Our engineering team has been iteratively improving our design for manufacturability and to reduce build time. Given the cash usage over the last six months, I would like to provide some context and then the plan for the next nine months. Given the size of the pipeline, one of the concerns we had was being able to handle aggressive delivery schedules. As a result, we expended cash on several fronts simultaneously to get everything we needed to do done. Some of these uses of cash included manufacturing capacity expansion, performing the testing and improvements needed for our dual power source chiller to operate under data center conditions. We also hired a marketing firm that specializes in data centers. In addition to the above, in Q3, we invested significantly in the service group, especially in the Greater Manhattan area. We have found over the last two years, despite increasing our service contract rates greater than inflation, we have found that margin on the cogeneration products has reduced in the Greater Manhattan and Toronto service centers. The chiller product continues to maintain solid margins. The cost of labor and increased travel times between sites is one of the biggest contributors to this decline in margin. To counteract this, we invested in new engines in this territory with the latest performance improvements. This allows us to increase service intervals by at least 50%. We expect this to lower labor costs per hour of operation. In Q4, we saw an increase in both run hours and margin compared to Q3 in these. We will continue to monitor and, if needed, institute aggressive price increases or cost reductions where needed. Our current cash position is $10,000,000. By Q2, we plan to cut the cash burn down substantially. From 2023 to mid-2025, we managed with $2,000,000 of cash, including a factory move. Roger will discuss the results and the financial plan going forward. Roger Deschenes: Thank you, Abinand, and good morning, everybody. I will start with the fourth quarter results. Our revenues for the quarter decreased by $800,000 in the fourth quarter to $5,300,000 compared to $6,100,000 in 2024, and this is due to the decrease in product shipments and a reduction in energy production revenue. Our gross profit also decreased by 28% in the fourth quarter compared to the comparable period in the prior period, and this is due to the decrease in our products revenue and an increase in our service cost. The gross margin decreased 8.2% to 36.8% in the fourth quarter, from 45% in the comparable period in 2024. As Aminad touched upon earlier, our services margin was low compared to the same period last year but has increased compared to the third quarter of this year. The quarter-over-quarter changes in revenues and gross margin will be discussed further in our segment performance slide. Our operating expenses increased 57% in 2025 to $6,100,000 from $3,900,000 in 2024. This is due in part to a $900,000 increase in the asset impairment charge in our Energy Production segment, the increased operating costs in our Services segment, and increased costs in our Products segment, which we incurred for the manufacturing expansion that we are working towards. We also saw increases in our R&D costs, which were incurred to continue the development and refinement of our dual source chiller, which is focused on our entry into the data center market. Our net loss increased in the fourth quarter to $4,000,000 from $1,100,000 in the similar period in 2024, and this is due to the reduction in sales and gross margin, the asset impairment charge, and an overall increase in operating expenses. We will discuss expenses in more detail in our full-year 2025 numbers. Moving to adjusted EBITDA, the adjusted EBITDA loss for the fourth quarter was $2,400,000, which compares to about $700,000 in the same period last year, and again, this is due to lower sales and gross margin and the increase in operating expenses that we experienced. Moving to performance by segment, our products revenue decreased 68% to about $500,000 in the current period from $1,400,000 in 2024. This is due to a delay, as Avadar suggested earlier, of a couple of projects which we expected to ship in 2025, but we now expect to close these orders in the next few months. As we have discussed in the past, our product revenue has significant variability quarter to quarter, and it is borne out this past quarter. Our products gross margin decreased to negative 6.9% from 30.9% in 2024. This is increased unabsorbed labor, and this is labor that we are using to work towards increasing our throughput, an increase in our inventory reserve, a slight increase in warranty costs, and all of these costs, which have a disproportionate impact on margin due to the revenue decrease. Our services revenue increased 9% quarter over quarter to $4,500,000 in the fourth quarter compared to $4,100,000 in the comparable period in 2024, and this is due to higher billable activity and higher operating hours of the equipment from our existing service contracts. Our service margin decreased 7.4% to 43.4% in 2025, from 50.8% in 2024. This is due to increased labor and material cost in the Greater New York City area. Our energy production revenue decreased 28% in the fourth quarter 2025 to just under $4,000,000 compared to about $5,555,000 in the fourth quarter 2024, and this is due to contracts that expired early in 2024 and some of which expired late in 2023 and the temporary site closures during the year. Our energy production gross margin decreased to 13.7% in 2025 from 39% in 2024, and this is due to an increase in cost with our energy production business. Moving to the full-year 2025 results, our revenue increased 19.7%, or $4,500,000, in 2025 to $27,100,000 compared to $22,600,000 in fiscal 2024, and this is due to a significant increase in our products revenue and an increase in our services revenue. Our gross profit decreased about 05/2025 compared to 2024, and the decrease in the gross margin was 7.3%, which decreased from 43.6% in 2024 to 36.3% in fiscal 2025. We will review year-over-year changes in revenues and gross profit further in the segment performance slide. Our operating expenses increased 25% in 2025 to $18,100,000 from $144,000,000 in 2024 due in part to the $900,000 increase in the asset impairment charge in our energy performance segment, increased operating costs in our Services segment, and an increase in cost in our Products segment, again, that is geared to the manufacturing expansion, and increased R&D costs, which we incurred to continue again the development and refinement of our dual source chiller, again, we are focused to utilize in the data center market. Our net loss increased in 2025 to $8,200,000 from $4,700,000 in 2024, and the loss is due to, again, lower services and energy production gross margin, the asset impairment charge, and an increase in operating cost. We would like to point out that we are working on a program to reduce our OpEx to levels that are consistent with levels from 2024 spend, I should say, and anticipate to see reductions to commence in the second quarter of this year and further expansion of those reductions in the third quarter and the fourth quarter. Our adjusted EBITDA loss was $5,600,000 in 2025, which compares to $3,600,000 in the same period last year, and this is due to lower services and energy production gross margin and the increase in operating costs. Reviewing our performance by segment, our products revenue increased 105% to $9,100,000 in the current period from $4,400,000 in 2024, and this increase is due to an increased chiller and cogeneration revenue that was recognized in 2025, and as we mentioned earlier, this increase was partially reduced by or offset by the decrease in production revenue we experienced in the fourth quarter due to project delays. The gross margin for products improved 1% in 2025 to 33.2% from 32.2% in 2024. Our services revenue increased 3% year over year to $16,600,000 in 2025 compared to $16,100,000 in 2024, and this is due primarily to higher billable activity and a slight increase in operating hours of the equipment that is being serviced. Our service gross margin decreased 8.9% to 38.6% in 2025 from 470.5% in 2024, and this is due to increased labor and material cost incurred as we invested in new engines and new performance upgrades to the sites in New York City. The intention of these investments is expected to reduce labor hours needed per system going forward. The decline in margin is presently only in cogeneration equipment. Our chillers continue to generate expected and very strong margins. Therefore, we plan to institute both price increases for cogeneration equipment in the Greater New York City area and make significant cost reductions in the territory to—sorry—significant cost reductions in the territory to restore this region to higher profitability. Energy production revenue decreased 37% in 2025 to $1,300,000 from $2,100,000 in 2024, and again, this is due to contract expirations in the latter part of 2023 and early 2024 and temporary site closures for repairs. Energy production gross margins decreased to 28.3% from 38% in 2024. That concludes the results review, and I will turn the call over to Abhinat for his closing remarks. Abinand Rangesh: Thank you, Roger. So I think the single biggest improvement that we have seen in the last five months is really the securing of the first demonstration project. I personally believe that this will be the catalyst for everything else that will come and will also unlock the much broader opportunity that we have been pursuing. In a world where AI tokens per unit of power is a new metric, we provide the simplest and most cost-effective way for a data center to obtain more power, which directly results in more compute and more revenue. We have a robust pipeline of opportunities, the demonstration project, and I think all the pieces are coming together to unlock the larger projects on the multibillion-dollar data center cooling opportunity. Thanks for listening, and I will open the floor for questions. Operator: Thank you. We will now be conducting a question-and-answer session. Our first question is coming from Chip Moore from ROTH Capital. Your line is now live. Chip Moore: Hey, good morning. Thanks for taking the question. Abinand Rangesh: Morning, Tim. Chip Moore: Hey, Evan. Maybe starting there where you finished on the Vertiv demonstration project. So I think you said expect this to ship later in Q2. Help us think about how quickly that should be up and running and, you know, real-world data, you know, when that should flow, and assume this plays a role in the 25 to 50 megawatts that you mentioned that they are in the process of designing. Just, you know, when could we conceivably see some of those move to orders, you know, once that demonstration project is up and running? So I think the two pieces will move concurrently. Abinand Rangesh: So, the unit for chips in Q2 is actually going to go and get tested almost immediately in their thing. Because what typically happens in a lot of these projects that we have is the end customer would like to see, you know, how is this chiller going to run in, let us say, a 110-degree ambient at a certain, you know, out chilled water output. So what this does, because with our conventional DTX chiller, our own test cell, we can run a lot of those conditions here, but we cannot control for a 110-degree ambient or a 120-degree ambient. So the Vertiv test chamber allows us to do this. But it also acts as a way for a potential customer to come and see it as well. Right? That is usually a very good way to close projects. So the designing of the projects in the background, that happens concurrently, and they are going to continue marketing, and they are getting opportunities. I cannot talk very specifically on timing on their projects because at this point, it is either confidential or we do not yet have enough clarity on it. What I think it is going to do, this demonstration project, the hope is to have it actually running no later than the end of Q2. What we think it will do is act as both providing the feedback for some of the bigger projects that we have and also for some of the potential customers where they may want to use our chillers in, you know, certain environments, like, let us say, Texas. They want to know that this chiller would—how, you know, what output it will put out at different ambient temperatures. So that is also what you will get out of this, and it is really, I would say, an independent validation as well of our chiller. Right? And a massive load of support from Vertiv that they are essentially putting this together. Chip Moore: Understood. That is helpful. Appreciate that. And maybe for your own internal pipeline, that slide your highest think you have stacked them in a order that one where you are in final stages of negotiation and you could see orders here. I think you said Q2, Q3, for a 2027 type of project. Just any more you can expand on that on, you know, where that stands, what they want to see, you know, when that could move forward. Abinand Rangesh: So I do not want to predict timing because I think it is extremely hard to predict the timing. What I will say is the smaller projects actually—firstly, the DTX is a—there is—we have already got the test data. A lot of these smaller ones, you know, they have seen our equipment in other places. The smaller projects also find it easier to get tenants. So the odds of it moving faster is much, much higher. And, also, things like financing and getting approvals for environmental permits tend to be much easier for the smaller projects. Because some of the, you know, greater than a 100 megawatt projects, you have got more hurdles to go through on the back end to make sure the local site approvals, all of that, that happens without an issue. And then also having the tenants. What we are seeing more broadly in the data center industry is, you know, you are getting a lot of the Neo Cloud on the, you know, as potential tenants. And there is quite a few of the smaller scale Neo Clouds that are interested in these kind of smaller scale projects, which makes it much more likely that these things will go through. But I do not want to predict timing. All I know is that in many of these cases, the customer expects to be operational by early next year. So to really be able to get equipment in order, get everything delivered in that time and actually constructed on-site, they need—they need to move quickly. Chip Moore: Helpful. Very helpful. And maybe a last one for me just on the manufacturing side. It sounds like you have made some good strides and you have got some potential with Vertiv as well. Just, you know, what is the highest priority? What, you know, what are you focused on? What do you need to do, you know, here to get prepared? Thanks. Abinand Rangesh: I think we have gotten most of the key pieces together now, because a lot of that was getting the subcontractors qualified and really get first articles from them and then get the first article checked internally to make sure that meets our quality standards and that if we can get the different pieces from them to arrive at our factory, we can just do the final assembly, test it, get it out the door. So getting the subcontractors qualified was really the key. I think we have now done that, and also, these subcontractors have significant scale-up capability already. So there is—I believe, those pieces are now together, especially for the dual power source chiller. The DTX, I think, our supply chain was reasonably robust to start with. So, I think we have the ability because a lot of the bigger components on the DTX are built by some very large companies already. So we can get scale-up from them without too much of a problem. It was the dual power source chiller, really, with both the size of the machine as well as making sure that we were not having a lot of time on the floor in our factory here. To get some of the bigger components built outside and brought in. That was really the key. And I think we have now done that. Chip Moore: Got it. So, you know, maybe the follow-on, you know, with a lot of that heavy lifting done, it sounds like maybe you do not need to sacrifice non-data center orders, you know, if you start to see demand pick up in some of those other areas. Abinand Rangesh: Correct. I think we are going to see quite a bit more in non-data center projects as well. We—on the sales efforts and the marketing efforts, we essentially split the sales team to have some people handling non-data center and some handling the data center. Part of the lumpiness on the product side is just what we have seen overall in the industry is we used to get a consistent amount of small multifamily, like one-unit, two-unit orders that were kind of steady flow. With the anti-gas sentiment in some of the bigger cities like New York and Boston, that portion had declined. It is starting to come back. But what we are—what we have a very good pipeline of is multi-unit larger projects that are going into bigger buildings. But the problem with those projects is that if one project gets even slightly delayed, you have basically moved out three or four units at a time. So there is a little bit of timing issues there, but I think the pipeline is very, very robust on that. Chip Moore: All right. Appreciate it. Thanks very much. Abinand Rangesh: Thanks, Chip. Operator: Thank you. Next question today is coming from Alexander Blanton from Clear Harbor Asset Management. Your line is now live. Alexander M. Blanton: Thank you. Good morning. I am interested in—yes. I am interested in your outsourcing strategy. Because, clearly, to get significant orders from data centers, you are going to have to be sure that you can deliver the quantities that you are talking about. So could you just go into a little more detail about how that is going to work, what things are going to be outsourced, and is—I take it, it is going to be these components will come to your factory and just be assembled. And so you have obviously changed your manufacturing process significantly in doing that. Little more detail. Abinand Rangesh: Yep. No. That is a great question. So let me start with the end portion, which is we did not actually change our manufacturing process necessarily. When we designed the dual power source chiller, we always designed it with the option of being able to either do all of it in-house or have large portions of it built in subassemblies that then came internally. The other thing that we always did on that product was to use a lot of components that are built in larger volume to start with so that we could, with volume, also see an increase in margin. So, in other words, when you think about the dual power source chiller, right, I think of it in sort of certain blocks. You have one big block, which is really the refrigeration assembly. So that handles the—it is similar to an electric chiller. It has your compressors, it has your fans, it has your sheet metal assembly. Then you have the power assembly, which has the engine and the generator, and then we have the power conversion or the electronics, which is really the dual power source technology. A combination of the engine and the inverter and power electronics technology is very similar to our InVerde. The biggest challenge we have in our manufacturing space is just in terms of physical footprint on floor space. And also, we historically have built numerous InVerde units. So we can build those in volume very, very easily as they show up preassembled. We can mate it with our engine system, our generator, and essentially build that power electronics and engine package very quickly. The refrigeration assembly, you are dealing with a lot of sheet metal. It is not necessarily, you know, something that is best done in our factory here if we can reduce time on the floor by having somebody that built similar assemblies for other electric chiller companies. Then we can essentially have that portion prebuilt, pretested. It can come to us and get mated with the power electronics assembly. The other big advantage of really focusing on a power electronics assembly, or power electronics and engine assembly, is it gives you other options as well, including, you know, beyond just pure chillers. It gives you the option of being able to power things like, you know, fans in a data center or other loads, where you can arbitrage the two power sources. So you not only get a volume boost, but you can also open up a broader market. But going back to your question of, you know, putting these two together, it is essentially a lot of that sheet metal assembly; it is better done by people that that is all they specialize in. And they have the volume throughputs, and, usually, they are vertically integrated starting from the sheet metal all the way to all of the different components, and they are already buying a lot of subcomponents in volume. So getting that as a single assembly, bringing it into our factory, mating it with the power system, and then shipping it out is one way to do it. Eventually, we could even ship that power assembly to the sheet metal manufacturer. They do the final assembly. Everything is pretested at each location, and then it is shipped. So there are different ways to significantly improve volume and also hit delivery times using that approach. Alexander M. Blanton: Well, given these constraints, what is your effective capacity then if you have your subcontractor do the assembly? It seems to me that it expands quite a bit. Abinand Rangesh: Yeah. I mean, I would still say today, would use what I said in our, I think, the last call or the call before, where I would say about 100 units is where we are targeting. I believe it can be increased further from there. But that seems like, with a little bit of a ramp up, that is fully achievable. And then from there, with some optimization, it is likely that you can increase further from there. Alexander M. Blanton: A 100 units over what time period? Abinand Rangesh: I would say per year. Alexander M. Blanton: I think it is possible to go higher than that, but I think this is something that we have looked at and looked at the details on what it takes to get there. And, you know, it is possible to scale up substantially from there. It is just this, I think, is a good starting point. It will allow us to get many of the opportunities that we have on that pipeline, and then from there, there are different ways to figure out how you would scale from there. And what is the dollar volume of 100 units? Abinand Rangesh: I do not want to comment on exact dollar numbers since we do not put pricing out. But I would say it is three to four times what we have done in our highest year. So I would say, you know, at least $30,000,000 to $40,000,000 of product, likely more. Alexander M. Blanton: And that would be just for the data centers? Abinand Rangesh: Correct. Alexander M. Blanton: It does not include the cogeneration and other products for other markets. Right? Abinand Rangesh: That is correct. Alexander M. Blanton: Okay. Thank you. Operator: Thank you. Next question today is coming from Barry Hymes from Sage Asset Management. Your line is now live. Barry Hymes: Hi, thanks so much for taking my question. My question relates to the master agreement negotiation or renegotiation you are doing with Vertiv. Could you talk a little bit about what are your goals in doing that and what are their goals given that you already had an agreement? Thanks so much. Abinand Rangesh: Yes. So if you look at the marketing agreement we have with Vertiv, right, the way it is structured, it says that this is kind of the placeholder while we go through the full master agreement. So if you look at the marketing agreement, it has various terms that are to do with supply and, you know, delivery, things like that, that currently are not binding terms within that agreement. And all it does is it takes that marketing agreement and expands it. So it has all those different portions. It was always designed from day one to go into that broader agreement so that we could actually supply as an approved supplier and have this marketing portion rolled in as part of this broader agreement. Barry Hymes: Okay. Great. And what is the timing on when you expect that to get finalized and signed? Abinand Rangesh: At this point, I cannot really comment on timing because it is ongoing. Barry Hymes: Okay. Thanks. Appreciate it. Operator: Thank you. Next question is coming from Chris Tuttle from Blue Caterpillar. Your line is now live. Chris Tuttle: Great. Thanks for taking a couple of questions from me. First of all, I know it is not the sexy part of the business, but I wanted to go back to what you were talking about in terms of some of the investments you have had to make on lowering your service cost. I mean, these are mechanical units, which, I guess, in most cases have a nonlinear graph of support and maintenance costs over time, and so I am a little—I wanted to understand more about how, you know, you are situated in terms of, you know, if you have older inventory out there, you know, how much are you still sort of on the hook for in terms of, you know, what would normally be kind of a customer cost? Seems like you guys, you know, had to, you know, spend some of your own money on that in Q4. Abinand Rangesh: Yeah. So that is a great question. So it is—so the way the service contracts work, on the cogeneration units, we charge per run hour. You know? So for every unit that machine runs, we charge per run hour on those. And the service contract includes components, you know, everything inside the cogeneration path. So—and most contracts are either, you know, three year, five year, but they auto—in many cases, you know, the customers renew it. The reason the contracts were structured that way was so that the customer has some—it is actually predictable expenses, and it would allow the business to have a recurring stream of cash flow. But as the costs in places like New York have gone up, like the labor costs have gone up substantially, and the time to get from sites has gone up, the labor efficiency has gone way down. We have also seen material cost increases, but in the other territories, the material cost increases have been absorbed by any increases in service contract rates. So we had two choices. We could either turn around and say, you know what? These service contracts are no longer profitable. We either get out of that service contract or figure out a way to make those service contracts profitable. The concern we had with essentially walking away from some of these contracts was that over time, like, just as you are starting to get your data center side of things ramped up, the risk of a reputational hit, right, if you walk away from a number of service contracts, is high. So we felt, when we looked at the numbers, that with putting in new engines, we could substantially increase the service intervals. I mean, in our test cases, we got almost a 2x increase in service intervals. I commented about, you know, 50% increase on average. If you can do that and you do not have to go to the machine as often, the numbers suggested that we should get back up to, you know, our previous margins, which were somewhere around the 50% gross profit margin. That is kind of why—yes, it was very expensive in the short term, right? And it took us—I mean, it pulled our loss down. But at some stage, if the units—if we can increase that service interval, the numbers should play out. If for some reason that they are not happening, then we will go back and just raise our prices. In some cases, we will, you know, get rid of service contracts that are not profitable anymore. You know, that is—but in the short term, we felt that this was a better way to go, especially because you have got ongoing cash flow that comes from this. So it is much better to figure out a way to make them profitable than walk away from them. Chris Tuttle: Yeah. That makes a lot more sense now. Were those the territories where you feel like you had the problem to address? Abinand Rangesh: Yeah. It is really been the urban environments, like, just actually, just predominantly Greater New York, and to a certain extent up in Toronto. Those are the two territories that really pulled it down. The chiller services in those territories continue to make good money. And part of that is just because, you know, the chiller product is billed a little differently. It tends to be a flat rate contract. And it also tends to have already very long—like, one of the reasons, actually, we did this was because the chiller service intervals are much longer to start with. And that is why we took some of those improvements from the chiller product, applied it to the power generation thing, and said, if the chiller can make money, we should be able to make the same things with the same kind of structures and same improvements to the cogeneration and get the cogeneration units making the same margins. Chris Tuttle: Okay. Two other quick ones for me. Just one of them, could you remind us in terms of when you—like, your pipeline of business with the data centers and all that, and we understand they have been delayed. They have been delayed for lots of other companies. It has been very topical. What are the terms in terms of the revenue recognition and payment terms? Are there any upfront payments involved, like deposits? Do you recognize revenue on deliveries or customer acceptance period? And then what are the typical payment terms where you would be getting that cash? Roger Deschenes: This is Roger. Typically, we require a down payment from customers. It can go from 25% to as much as 40%. And then revenue is recognized when title transfers. In most cases, it is ex-factory. Sometimes it is destination, but for the most part, we recognize revenue when the products ship. So, obviously, you know, there are some holdback on the revenue rec for startups and, you know, minor things like that. But for the most part, when we ship a unit, we will recognize the revenue at that point. Chris Tuttle: Okay. And payment terms, 30, 60, 90 of the balance? Roger Deschenes: Payment terms are generally 30 days upon, you know, customer acceptance. Chris Tuttle: Okay. So, usually, that would add another 30 days to it, but, you know, it— Roger Deschenes: Yeah. Generally between 30 and 60 days, I would say. Chris Tuttle: Okay. And then last question. You know, really helpful update on the pipeline. It sounds like, you know, things that got delayed from Q4, like, they got delayed, you know, a bit into, you know, like, not just slipping into March—in the March, I mean, we are now almost done, you know, with the March. It sounds like expectation should be, you know, we are going to see more deliveries really starting more in Q2. Am I—sort of—did I not hear that right? Or, you know, I know it is a little bit awkward in terms of timing, but, you know, it seems like more of these things are going to be flowing, starting in Q2, Q3. Abinand Rangesh: There is two portions of it. So some of the projects there, that is non-data center related projects. Right? Those—there was some cannabis, some non-cannabis, like hospitals and comfort cooling and things. Those are the ones that pushed out a little bit. The data center pipeline, it has been, I think, within the range. Like, your typical sales cycle is longer than what we have seen already on the data center stuff. So I would say the two are likely to come together around the same time. With data center projects, it is very much—something could suddenly start moving equipment, like, close the projects as soon as they get a tenant, or a lot of pieces start to move very quickly after that. With the non-data center projects, usually, the timing is contingent on—if they are doing, let us say, air conditioning load, then they would usually do that off-season. So they would plan to take equipment deliveries in the fall and winter so that they could do the construction of the chiller plant in the off-season. So that typically moves that timing. Then with cannabis, a lot of it is just tied to their financing timing. You know, if they can get financing, the project moves. Chris Tuttle: Okay. So, therefore, you know, you can have some reasonable volume in Q1. Reasonable. But I think a lot of this, right now, right, I think some of the bigger projects will close. I think we have got enough over there. Abinand Rangesh: The timing is very hard to predict. Chris Tuttle: Yeah. Understood. Understood. Alright. I have got some other technical questions, but those are best left for another time. Thanks a lot, fellas, for the answers. Abinand Rangesh: Thanks, Chris. Operator: Thank you. Our next question today is coming from Matt Swadden, GeoInvesting.com. Your line is now live. Matt Swadden: Hi, good morning, I am Evinad. Quick question. I guess, just recall, I think, previous conversations with you, at least maybe during earnings calls, that you do not really see hyperscalers as an opportunity. But in the last few calls, you have kind of mentioned them. So I am trying to understand what has changed there. Is that from the cooling side or power side? And maybe you could touch on that a little bit for a few seconds. Abinand Rangesh: Yeah. Hey. So that is a great question, Naj. So, originally, we felt that the hyperscalers—the validation process, and a lot of this thing might just be out of what we would be able to do. But as we have started to go after many of these projects on the colocation side of things, we found that we have gotten—you know, we have either met hyperscalers at trade shows or direct outreach has resulted in actually very positive engagement. And the—I think with a lot of this, I cannot really comment on specifics on any of them. But it does seem like there is significant interest from the hyperscale side of things. So we are kind of letting the hyperscale conversations continue, and we will see whether that leads into projects or pilot projects or what that leads to. We do not yet know. It is just they appear to be happening concurrently. So we are just—you know, we are going to pursue it. We have presented to a number of them, and there has been, you know, clear interest on the technology for, you know, for the chiller side. So—and I think the power side, at this point, we are not leading with it. But there may be interest on some of the ancillary loads. But that is something that, you know, the chiller seems to have significant interest. Matt Swadden: Sure. Great. I have two more additional questions, real short. I will start with the service contracts. That business and the things you have done to decrease maintenance needs on-site, or increase in service intervals. Does it make sense to do that in other jurisdictions other than where you are at now to increase margins there too? Abinand Rangesh: Yes. But we are—in other jurisdictions, we are doing those because one of the biggest costs on the service side of things is your oil change intervals and your, you know, engine component intervals. It is better to do that when you are replacing the whole engine rather than do it on an engine with higher time. So we typically, in other service territories, we are doing those changes, but we are doing them as we get rather than do it, you know, proactively on units. Because at some point, right, there is an expense associated with that. So it is better to do it where you are going to have the biggest return on that expense. In other territories, we are doing it on a much more gradual basis. Matt Swadden: So at some point, you could see the overall gross margin on that business go up as places like New York catch up to being where they used to be, and other areas maybe even getting an improved gross margin profile? Am I understanding that correctly? Abinand Rangesh: Correct. I mean, the target is across the whole service territory. We would like to have at least a 50% gross profit margin. Matt Swadden: Okay. And finally, I just have a question on the modular data center space. I do not know—you have mentioned it in the past, like in fleeting comments, about that market kind of heating up a little bit. I was wondering if you could give us a little bit of color on what you are seeing there and if you are—if you can. And do you see opportunity for Tecogen Inc. to play in that growth potential there. Abinand Rangesh: Yeah. So we have seen quite a few leads in that space. As yet, nothing has got far enough that they made it into that opportunity list that I presented. We believe, just looking at the broader picture, that there is going to be a lot more modular data centers being built, but also there is going to be a lot more smaller-scale data centers being built because we are seeing some of the really large data center campuses run into other hurdles such as, you know, local opposition from, you know, people that live in the area or permit problems on the really large data center. So I think there is going to be a push for these modular as well as the smaller-scale data centers being built in urban environments. And in that sense, our product is like a perfect fit for that market. That would—where we are ready. Cool and the cooling side. Right? Matt Swadden: Sorry. Correct. Abinand Rangesh: Okay. Matt Swadden: That is all the questions I have. Thanks. Operator: Thanks, Maj. Thank you. We have reached the end of our question-and-answer session. I would turn the floor back over for any further or closing comments. Abinand Rangesh: Thank you very much for listening. And if anybody wants a further conversation on any of this, you know, management is available to have more in-depth discussions. Thank you. Operator: Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
Operator: Good morning, and welcome to the Ocean Power Technologies' Third Quarter Fiscal 2026 Earnings Conference Call. A webcast of this call is also available and can be accessed by a link on the company's website at www.oceanpowertechnologies.com. This conference call is being recorded and will be available for replay shortly after its completion. On the call today are Dr. Philipp Stratmann, President and Chief Executive Officer; and Bob Power, Senior Vice President and Chief Financial Officer. Following the prepared remarks, there will be a question-and-answer session. Now I am pleased to introduce Bob Powers. Robert Powers: Thank you, and good morning. Last evening, post market close, we issued our earnings press release for the third quarter of fiscal 2026 ended January 31, 2026, and filed our Form 10-Q with the SEC. Our public filings are available on the SEC website and within the Investor Relations section of the OPT website. During this call, we will make forward-looking statements that are within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections or other statements of the company's plans, objectives, expectations or intentions. These statements are based on assumptions made by management regarding future circumstances and involve risks and uncertainties that may cause actual results to differ materially. Additional information about these risks can be found in the company's SEC filings. The company disclaims any obligation to update the forward-looking statements made on this call. Finally, we've posted an updated investor presentation on our IR website. With that, I'll turn the call over to our CEO, Dr. Philipp Stratmann. Philipp Stratmann: Good morning. and thank you for joining us. OPT continues to see increasing traction across our core markets. Backlog reached a record $19.9 million, and our pipeline expanded to almost $164 million, reflecting growing engagement with government and commercial customers globally. Importantly, a significant portion of this pipeline is associated with defense and security programs. This quarter reflects more than contract wins. It highlights the role OPT is beginning to play in the evolving architecture of maritime security and autonomy. Our $6.5 million DHS award, together with our integration with Anduril positions our PowerBuoy systems within the next-generation defense sensing network. We believe this validates our role as a provider of persistent offshore infrastructure supporting U.S. national security missions. The first of these systems is being ready for shipment, and we expect to ship several more in the coming weeks. At the same time, we continue advancing what we believe represents a new category in the maritime domain, scalable autonomy infrastructure at sea. Our goal is to enable autonomous systems to power, recharge and operate persistently offshore, supporting long duration missions without the need for traditional logistics support. During the quarter, OPT expanded its global operational footprint. We shipped WAM-V autonomous service vehicle to Greece to support ongoing customer operations, further strengthening our presence in international defense and commercial markets. In parallel, we advanced development of our integrated autonomous docking and charging solution, transitioning the system from prototype into full scale build. We are targeting an early access commercial launch in calendar year 2026, designed to allow autonomous systems to dock, recharge and redeploy in support of persistent offshore missions. OPT also progressed system integration and open water validation activities through our collaboration with Mythos AI, enhancing autonomous navigation and control capabilities across our platforms. Taken together, these initiatives support our broader strategy of enabling persistent multi-domain offshore autonomy. We are seeing several opportunities within our pipeline progress into more advanced stages of customer engagement. As deployments increase, we expect a growing portion of our business to include services, data and system support associated with long duration offshore operations. Our capabilities align closely with expanding defense priorities around distributed sensing, autonomous systems and persistent maritime domain awareness. At the same time, our systems continue to accumulate operational hours in real-world maritime environment, generating valuable operational data that supports product improvements, enhances mission readiness for our customers and informs the continued scaling of our maritime autonomy infrastructure. More broadly, this progress reflects the business that is steadily building capability, operational experience and customer confidence. Our focus remains consistent, deliver reliable systems, support our customers' missions and execute against the opportunities we see developing across our core markets. From architecture refining projects, such as our DHS award, to expanding international WAM-V deployments to advancing autonomous docking and AI-enabled capabilities, we believe we are building the foundation for what could become a global maritime autonomy infrastructure layer. Over time, this strategy positions OPT not simply as a product provider, but as a platform supporting the future of offshore autonomy. With that, I'll turn it over to Bob to discuss backlog in more detail and review the quarter's financial results. Robert Powers: Thanks, Philipp. I'll begin with backlog, which provides the clearest view of our future revenue. As Philipp mentioned, backlog as of January 31 was approximately $19.9 million, an increase of $12.4 million and 165% from the same time last year. This reflects conversion of opportunities across defense, government security, offshore energy and commercial applications. Our pipeline for the quarter ended at $163.9 million, up $74.7 million and 84% year-over-year. The pipeline includes larger and more strategic opportunities, including multi-vehicle USB programs, integrated buoy and USV surveillance solutions in autonomy enabled missions. These indicators reinforce the momentum we are seeing in customer engagements. Production throughput remains stable, and we are prepared to meet scaling requirements as additional programs move forward. Revenue for the 3 and 9 months ended January 31, 2026, were $0.5 million and $2.1 million, respectively. Revenues for the 3 and 9 months ended January 31, 2025, were $0.8 million and $4.5 million, respectively. The year-over-year decline in revenue was largely driven by timing impacts associated with the U.S. federal government shutdown in October and November 2025. These disruptions shifted a number of OPT deliverables and development activities into subsequent quarters, which reduced our revenue. These timing effects are not indicative of underlying demand, and we expect a portion of the delayed work to convert later in the fiscal year. Gross profit for the 3 and 9 months ended January 31, 2026, was a loss of $0.8 million and $2.2 million, respectively, as compared to a gross profit of $0.2 million and $1.4 million for the corresponding period in the prior year. Gross margin for the quarter includes recognition of one-time losses associated with certain strategic contracts in accordance with U.S. GAAP. The expenses associated with these projects are now substantially complete, although that we continue to generate revenue over the next several months. Importantly, our core programs and commercial pipeline continue to demonstrate improving margin and operating leverage. Operating expenses increased primarily due to higher noncash stock-based compensation, which rose by $1.8 million for the 3-month period and $6.5 million for the 9-month period compared to the prior year. Increases in head count necessary to convert pipeline into backlog and strengthen the company's competitive position also contributed to the year-over-year increases. Including the noncash amounts, operating expenses were $8.4 million for the 3 months ended January 31, 2026, versus $6.1 million in the same period of 2025 and $24.2 million for the 9 months ended January 31, 2026, compared to $15.7 million in the prior year period. Excluding stock-based compensation, operating expenses increased approximately 9% for the 3-month period and 14% for the 9-month period, with employee-related expenses being the primary driver for both periods. Net losses for the 3 and 9 months ended January 31, 2026, were $11.4 million and $29.6 million, respectively. Net losses for the 3 and 9 months ended January 31, 2025, were $6.7 million and $15.1 million, respectively. Combined cash, unrestricted cash, cash equivalents and short-term investments as of January 31, 2026, was $7.2 million, which compares to $6.9 million at the beginning of the fiscal year. Net cash used in operating activities for the 9 months ended January 31, 2026, was approximately $19.9 million compared to $14.6 million for the same period in the prior year. With that, I'll turn the call back to Philipp for closing remarks before Q&A. Philipp Stratmann: Thanks, Bob. Stepping back, we are seeing continued positive momentum across our business. Demand signals across our core markets remain strong with backlog and pipeline levels significantly higher than a year ago. Government engagement is increasing, supported by new programs and initiatives across several agencies. And our international demonstrations are expanding market awareness while validating our capabilities in the field. At the same time, we have aligned our organization to support this growth. Our focus remains on execution reliability and delivering solutions that performed consistently in mission-critical environments. Operator: [Operator Instructions] Our first questions come from the line of Sameer Joshi with H.C. Wainright. Unknown Analyst: Philipp and Bob, starting off with the backlog, the $19.9 million is a solid backlog, do we have a visibility in terms of the cadence of delivering this backlog? And also, can you -- are you able to categorize this in by geography or type of customer? Philipp Stratmann: Yes. Sameer, absolutely. So of that $19.9 million in the contracted backlog, some of that is due for immediate delivery. As we stated in the past, we are working on shipping out the systems for the Department of Security, which we announced in January with the follow-up contract for the installation a couple of weeks ago. We're talking days and weeks here for those to leave our facility here and get ready for in-store. And if you talk in terms of cadence, that is, as we announced, that is a contractor-owned, contractor-operated contract for a 15-month period of performance. So once these are installed over the course of the next couple of weeks, that's when we're going to start recognizing revenue from them, essentially as if it was a lease contract over that 15-month period of performance. The other part of that backlog have slightly longer conversion cycles. And if you were to categorize them geographically, I'd say about roughly half of it is North America and the rest is sort of split between Latin America and parts of the Middle East with a couple of outliers in various other parts of the world. Unknown Analyst: Got it. And this next question could be sensitive, but you do have some activity in UAE waters. Is there any prospect of getting more contracts from there? Like are you in talks? If you cannot answer this, that is fine. Philipp Stratmann: I think what we can say on that is we have assets in country. We have several vehicles and a buoy in the country. We also do have local-based staff who are working -- first and foremost, they're all safe. And secondly, they're working tirelessly on efforts to help support shipping and safe port operations. Unknown Analyst: Got it. And just going back to sort of the backlog. I just want to make sure it includes revenues expected from the Merrows, which is likely to be a recurring revenues. What portion -- like what level of revenues do you expect? And what is the contracted period for the -- specifically Merrows orders? Philipp Stratmann: That's a great question. It's not like there is specific Merrows contracts in there, but there are contracts like the home and security efforts that utilize the Merrows platform. Take the Homeland Security contract, again, as a great example. It utilizes all of our systems, which then go via Merrows into other data-enabling platforms. That utilizing Merrows on the systems that we're providing enables us to do 2 things. One is to stream data to Coast Guard directly. The other one is to stream data to Anduril who is another party on a separate portion of these contracting mechanisms and integrate our data with their system, fortress lattice in order to kind of provide a unified operating picture. The fact that we have Merrows enables us to have multiple streaming efforts from 1 platform into a multiple kind of common operating pictures. Unknown Analyst: Got it. Understood. And then, on the gross margin front, should we -- these onetime or rather -- yes, onetime effects have been taken care of, going forward, should we expect to see positive gross margins? Philipp Stratmann: Yes. I think, as Bob stated in his remarks, several of the contracts are recently completed, had a lot of their costs already recognized due to GAAP impact with future revenues still to be reflected. So I think particularly on lease contracts or cocoa type contracts, if we're talking U.S. government, we're going to start seeing and working toward -- we're certainly working towards them. We should start seeing an improvement in the gross margin again as we move to larger scale deployments. . Unknown Analyst: Understood. And last question. The pipeline is also pretty strong and it has grown year-over-year, of course, but also quarter-over-quarter. Who are the kind of -- rather, what is the kind of competition that you are seeing for these potential sort of orders? And what confidence or probability do you assign to conversion of this $164 million pipeline into backlog? Philipp Stratmann: Yes. We recently stated -- we sort of largely completed the retooling of several parts of our team. That has included the commercial team, which now consists of many veterans of the U.S. armed forces. So that has enabled us to truly position the OPT suite of products, be that the underlying fixed assets or be that Merrows into the appropriate parts of the defense and security industry. And the same holds true, obviously, for private customers in the commercial industry. So it's -- we're seeing lots of collaboration in certain aspects of the industry. But competitively, I think OPT is positioned in a good place because we are going after a section of the market that isn't us heavily competed over as the big Navy fast interceptor, far-reaching, kinetic-type USVs. And that is enabling us to have, a, grow the pipeline, but also, b, gaining greater confidence in the conversion of that pipeline to backlog. Operator: Our next question has come from the line of Peter Gastreich with Water Tower Research. Peter Gastreich: Great. Thank you very much. Philipp and Bob, also congratulations on the great momentum in your pipeline and backlog. It's very encouraging. Just a few questions. A follow-up on the international defense engagements. Can you update us on the status of your defense engagements in Latin America? And are there any multi-asset opportunities there that are comparable and scaled to the DHS contract? Philipp Stratmann: Yes. Peter, absolutely. We recently completed several exercises in Latin America. One was in Brazil, and that was around Aramis, which was demonstrating the capabilities of our USV platforms as a broader tool in part -- for mine countermeasures over there. We also completed a submarine surgeon rescue exercise using 1 of our 8-foot WAM-V in Chile, where we demonstrated the ability to be launched from a manned asset from the Navy in order to locate in a simulated bottomed submarine. And we've got several discussions ongoing around buoys to be deployed for either underwater or surface surveillance operations. Can't comment on the specific countries or use cases where we have detailed dialogues ongoing. But it is fair to say that we continue at pace operating in Latin America and working on converting the backlog to meaningful revenues in the near future. Peter Gastreich: Okay. Just my next question is just about inventories. So you mentioned before about prebuilding buoys ahead of the contract awards to accelerate delivery. How should we think about your inventory strategy going forward? And does the balance sheet reflect additional prebuild activity for anticipated orders? Robert Powers: Peter, yes, absolutely. So you can see a little bit of a growth on our balance sheet versus where we were at the end of our fiscal 2025 and that absolutely reflects some buildup, particularly on the buoy side with regard to both current deliveries for what we have in our backlog as well as anticipated builds for what we see coming through in our pipeline. So, yes, you can expect to see more of that going forward. That is certainly part of our plan and strategy to build out that inventory in order to react quickly to our orders as they come in. Peter Gastreich: Okay. Just 1 more a question about your team. So can you discuss how your facility clearance and government-focused team are positioning you to expand beyond coast cards, potentially into other DHS components like CVP? And how is that pipeline developing? Philipp Stratmann: Yes. Absolutely, obviously with our SVP for commercial sales, Jason Weed, obviously, retired navy captain. And below him, we have a team of mainly Navy and other parts of the defense and security apparatus veterans. Given our clearance, that is enabling us to participate in conversations where there is real needs and real today use cases being discussed, which is positioning us to deliver for the hemispheric defense of our nation and to support our allies in other parts of the world. Operator: We have reached the end of our question-and-answer session. I would now like to hand the call back over to Philipp Stratmann for any closing comments. Philipp Stratmann: Thank you. Before concluding, I'd like to thank our shareholders for their continued support. Our team remains focused on executing our strategy, advancing our technology and delivering reliable solutions that meet the evolving operational needs of our customers. We believe our continued progress in strengthening the company's position in the market and building a solid foundation for long-term growth. We appreciate your support and look forward to updating you on our progress in the quarters ahead. Operator: Ladies and gentlemen, thank you so much. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
Operator: Good day, and welcome to the One Stop Systems, Inc. fourth quarter 2025 earnings conference call. Later, we will have the opportunity to ask questions during the question-and-answer session. As a reminder, this call is being recorded. As part of the discussion today, the representatives from One Stop Systems, Inc. will be making certain forward-looking statements regarding the company’s future financial and operating results, including those relating to revenue growth, as well as business plans, bookings, the company’s multiyear strategy, business objectives, and expectations. These statements are based on the company’s current beliefs and expectations and should not be regarded as a representation by One Stop Systems, Inc. that any of its plans or expectations will be achieved. Please be advised that these forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and that One Stop Systems, Inc. desires to avail itself of the protections of the safe harbor for these statements. Please also be advised that actual results could differ materially from those stated or implied by the forward-looking statements due to certain risks and uncertainties, including those described in the company’s recent Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and recent press releases. Please read these reports and other future filings that One Stop Systems, Inc. will make with the SEC. One Stop Systems, Inc. disclaims any duty to update or revise its forward-looking statements except as required by applicable law. It is now my pleasure to turn the conference over to One Stop Systems, Inc. President and CEO, Michael Knowles. Please go ahead, sir. Michael Knowles: Thank you, Sylvie. Good morning, everyone, and thank you for joining today’s call. 2025 was a defining year for One Stop Systems, Inc. and reflects the successful execution of a multiyear strategy to reposition the company around high-performance, ruggedized compute platforms that enable artificial intelligence, machine learning, and sensor processing at the edge. During the year, we saw that strategy translate into meaningful financial and operational progress. The strength of our performance throughout 2025 also created an opportunity to take an important strategic step for the company. In December, we completed the opportunistic sale of our wholly owned subsidiary Bressner and received proceeds of $22.4 million, subject to final closing working capital balances. One Stop Systems, Inc. acquired Bressner on October 31, 2018 for approximately $5.6 million, and we believe this transaction unlocks significant value for One Stop Systems, Inc.’s shareholders. While Bressner had been an important part of our history, the progress we made across One Stop Systems, Inc.’s core business positioned us to evaluate this asset from a position of strength. When we received an attractive offer for the business, we viewed it as a compelling opportunity to unlock that value, simplify our operating structure, strengthen our balance sheet, and concentrate our resources on the higher-margin, higher-growth, rugged enterprise-class compute opportunities that are driving the next phase of One Stop Systems, Inc.’s growth. As a reminder, following the transaction, Bressner’s historical financial results are now reported as discontinued operations, and the results we are discussing today reflect the performance of the core One Stop Systems, Inc. business. This transition effectively positions One Stop Systems, Inc. today as a pure-play provider of ruggedized AI compute platforms for edge applications. As a result, One Stop Systems, Inc. enters 2026 as a more focused company centered entirely on delivering high-performance compute solutions for both defense and commercial markets. With that strategic foundation in place, we exited 2025 with a strong fourth quarter performance, including revenue growth of more than 70% year-over-year, record quarterly gross margins of 58.5%, and positive net income from continuing operations of $2 million. These results reflect growing demand for our technology across both defense and commercial markets, as well as the benefits of operational improvements and product focus we have implemented over the past several years. So with that context, I would like to walk through several of the key developments that drove our performance in 2025 and discuss why we are excited about the opportunities ahead in 2026 and beyond. Turning to the operational progress we made during the year, we continue to see strong momentum as customers increasingly adopt our rugged enterprise-class compute platforms. As a result of our strong fourth quarter performance, full year 2025 revenue came in above the high end of our previously communicated guidance range of $30 million to $32 million. The quarter benefited from favorable customer demand and strong operational execution, which allowed us to complete several shipments earlier than originally anticipated, contributing to a stronger-than-expected finish to the year. Overall, demand for high-performance computing at the edge continues to expand as AI, ML, autonomy, and sensor fusion become central to next-generation defense and commercial systems. One Stop Systems, Inc. is uniquely positioned at the intersection of these trends, where customers require powerful compute solutions that can operate reliably in demanding environments outside of traditional data centers. One example of this is the continued development of our solutions on the P-8 Poseidon aircraft, a long-range, multi-mission maritime patrol aircraft used for anti-submarine warfare, surveillance, and reconnaissance operations. To date, One Stop Systems, Inc. has secured more than $65 million in total contracted revenue associated with the P-8 program, including over $23 million awarded since the beginning of 2025. These awards reflect the continued expansion of the platform and the growing role our rugged storage solutions play in enabling the aircraft’s critical mission systems. Most recently, we announced $10.5 million in new awards from the U.S. Navy and a leading U.S. defense prime, which represent the largest aggregate orders we have received to date tied to the P-8 program. Importantly, these awards are expected to contribute to revenue in 2026 and continue into 2027, providing continued visibility into future program revenue. The P-8 remains one of several multiyear programs that demonstrate the durability of One Stop Systems, Inc.’s platform strategy and the increasing demand for rugged, high-performance compute infrastructure supporting next-generation defense systems. Another example of our expanding defense presence is our growing partnership with Safran Federal Systems, one of the world’s leading high-technology defense contractors. During the fourth quarter, we received a $1.2 million follow-on production order from Safran for rugged 4U short-depth servers supporting naval and aircraft military applications. This order followed an earlier award in 2025 and brought the current aggregate order value to approximately $1.9 million. Based on the early success of the program and expanding platform requirements, we now expect this relationship to generate more than $7 million in cumulative production orders over the next five years, highlighting the potential for continued growth as the program scales. More importantly, we believe there are additional opportunities to deploy our solutions within Safran as the requirement for compute power grows across their defense systems. The last defense program I want to highlight today involves next-generation enhanced vision and sensor processing systems for U.S. Army combat vehicles. In January 2026, we announced a new agreement with a leading U.S. defense prime contractor to design and develop ruggedized integrated compute and visualization systems to deliver an enhanced vision system to augment vehicle driving and maneuverability. This program involves GPU-accelerated sensor processing systems designed to ingest and process real-time video and sensor data, enabling improved situational awareness and object recognition for vehicle crews operating and maneuvering in complex environments. Importantly, this engagement deepens our relationship not only with the U.S. Army’s research and development labs but also with the defense prime contractor, which we believe further validates our capabilities. Our existing 360-degree situational awareness program remains under testing and evaluation with the U.S. Army, while this enhanced vision system represents a separate development initiative expected to undergo initial testing at the Army Ground Vehicle Systems Center in late 2026. While both programs are in the early stages, we believe they represent two potentially transformative opportunities as the Army continues to modernize its vehicle fleet with AI-enabled sensor fusion and autonomous capabilities. We believe our work supporting both the U.S. Army’s innovation lab and a leading defense prime to support next-generation vision and sensor processing systems showcases our best-in-class technologies and strong position on this emerging platform. These programs highlight the company’s growing role at the intersection of several key trends shaping next-generation defense systems. Modern military platforms are rapidly integrating artificial intelligence, sensor fusion, and real-time data processing to accelerate decision-making on the battlefield. Enabling these capabilities requires powerful, rugged computing infrastructure designed to operate at the tactical edge, often in highly constrained, mission-critical environments. As global defense opportunities continue to emphasize situational awareness, autonomy, and data-driven operations, we believe One Stop Systems, Inc. is well positioned to support these evolving requirements. Our rugged and scalable enterprise-class compute platforms are designed specifically for demanding environments, and we believe the growing adoption of AI-enabled systems across defense platforms creates a significant opportunity for One Stop Systems, Inc. in the years ahead. Beyond defense, we are also seeing increasing adoption of our rugged enterprise-class compute platforms across a growing number of commercial applications that require the types of powerful capabilities that we provide. In February 2026, we announced a new engagement with a commercial robotics customer manufacturing autonomous construction and mining equipment. For this application, One Stop Systems, Inc. was selected to support advanced robotic systems designed to operate in complex real-world environments. Importantly, we were able to win this program by displacing an incumbent solution, highlighting the strength of our technology and the value customers place in our ability to deliver high-performance compute capabilities in demanding edge environments. Robotics platforms increasingly rely on powerful compute infrastructure to process large volumes of sensor data, enable real-time decision-making, and support autonomous operation. These systems require reliable, high-bandwidth, and low-latency compute solutions capable of operating outside of traditional data center environments. We believe this engagement highlights a broader trend we are seeing across the commercial market where emerging autonomous use cases are creating real and growing demand for rugged, high-performance compute infrastructure at the edge. Another example of our expanding commercial opportunities is our engagement with a Canada-based integrator of passenger cabin systems for the commercial aerospace industry. During the year, we announced an initial $1.5 million order to supply lighting control units and column integration controller units designed for deployment across commercial aircraft platforms. These systems are DO-160 qualified, meeting the stringent environmental and reliability standards required for aviation applications, and are expected to support passenger cabin control systems across multiple aircraft deployments. We expect this program to generate approximately $6 million in revenue over the next three years, with recurring production orders as the platform continues to scale. Programs like this demonstrate how One Stop Systems, Inc. technologies are increasingly being adopted across regulated commercial platforms where reliability, performance, and long product life cycles are critical. Finally, we continue to expand our relationship with a leading medical imaging OEM where our compute platforms support advanced breast imaging systems designed to enable noninvasive cancer detection. During the year, we received a $2 million follow-on production order for our next-generation liquid-cooled compute systems, which have become the standard platform supporting this customer’s breast scanning devices. This award represents the transition of the program from a successful development phase into volume production. Based on the current production ramp, we expect this engagement to generate more than $25 million of cumulative revenue over the next five years, highlighting the potential for One Stop Systems, Inc. technologies to support next-generation medical devices. Programs like this demonstrate how the same high-performance compute capabilities we have developed for demanding defense applications are increasingly enabling innovation across commercial sectors such as healthcare. New and expanding relationships supported the strong demand we experienced throughout 2025 and set the stage for continued growth in 2026. Despite the year-long continuing resolution, delays in defense awards, and extended lead times for certain components, One Stop Systems, Inc. generated a book-to-bill ratio of approximately 1.2x, reflecting continued growth in defense and commercial customer orders. This level of demand provides an important indicator of the momentum we are seeing across our pipeline and supports our expectations for continued revenue growth in 2026 and beyond. Importantly, as we expand our presence across multiyear platform programs, we believe we have greater visibility into future revenue opportunities than we have historically had as a company. Alongside this momentum, we continue to invest in advancing our technology platform to support the next generation of AI-enabled systems operating at the edge. As a result, research and development remains a critical component of our strategy, and we continue to work closely with customers on customer-funded development programs that allow us to design and deploy new compute architectures tailored to emerging applications. These engagements not only strengthen our relationships with key customers but also create opportunities for future production programs as those technologies move from development into deployment. Many of the programs we discussed earlier today began as development efforts where we worked with customers to design highly specialized compute solutions for demanding applications. As those systems mature and transition into production platforms, they can create multiyear revenue opportunities for One Stop Systems, Inc. We expect higher levels of customer-funded development to occur in 2026, supported by new defense and commercial development efforts. At the same time, we continue to advance our core technology roadmap. During the fourth quarter, we led the way in our market with the introduction of our next-generation PCIe Gen 6, increasing the compute required for AI applications at the edge. We believe these technology investments position One Stop Systems, Inc. well to support the growing demand for high-performance compute infrastructures as AI-enabled systems continue to expand across both defense and commercial platforms. As we look ahead to 2026, we believe One Stop Systems, Inc. is entering the year with strong momentum. Demand for high-performance compute at the edge continues to expand as AI, ML, autonomy, and sensor-driven applications become increasingly central to next-generation systems. These trends are creating growing demand for rugged, high-performance compute infrastructure capable of operating in challenging environments outside of traditional data centers. Across our defense markets, we are seeing increased interest from government organizations and defense primes as military platforms continue to incorporate AI-enabled sensor processing, autonomy, and real-time decision-making capabilities. At the same time, we are beginning to see similar requirements emerge across commercial industries such as robotics, aerospace, and healthcare. The platform programs and customer engagements we have discussed today give us confidence that One Stop Systems, Inc. is well positioned to benefit from these trends as we continue to expand our presence across both defense and commercial markets. As we plan for 2026, we are also closely managing several operational factors, including supply chain dynamics, in particular where we are seeing longer lead times for certain components, including memory, which may impact the timing of certain shipments throughout the year. For 2026, we expect continued revenue growth in the range of 20% to 25%, supported by our growing pipeline of platform opportunities, increasing customer engagements, higher customer-funded development activities, and a continued transition of development programs into production deployment. We expect gross margins of approximately 40%, reflecting product mix and an increasing contribution from customer-funded development programs, which is an important component of our strategy to advance new technologies alongside our customers. At the same time, we expect to generate positive EBITDA and adjusted EBITDA, while continuing to invest in key areas of the business, including sales expansion and customer support resources that support our growing pipeline and deepen relationships with strategic customers. In closing, 2025 represented an important milestone in the evolution of One Stop Systems, Inc. We delivered strong financial performance, executed on our strategic plan to sharpen our focus on the One Stop Systems, Inc. platform, and continued to expand our presence across a growing number of defense and commercial platforms that rely on high-performance computing at the edge. With a strong balance sheet, expanding customer relationships, and a growing pipeline of opportunities driven by the adoption of AI-enabled systems, we believe One Stop Systems, Inc. is well positioned to continue building momentum and delivering long-term value for our shareholders. We also believe our strengthened balance sheet provides the flexibility to pursue selective strategic acquisitions that could complement our technology platform, expand our customer base, and enhance our capabilities over time. Finally, I want to thank our entire team for their dedication, innovation, and relentless focus on delivering results for our customers and shareholders. So with this overview, I would like to now turn the call over to Daniel Gabel. Daniel Gabel: Thank you, Mike, and good morning to everyone on today’s call. As a reminder, on 12/30/2025, the company closed a definitive agreement to sell our Bressner business. All operations, assets, and liabilities associated with Bressner, including the gain recognized on the sale, have been classified as discontinued operations. Our Q4 results reflect a number of important financial milestones and records. First, we achieved robust top-line growth of 70.2%, which drove revenue to the second-highest quarter in our history. Second, we achieved record gross margins of 58.5%. This reflects favorable mix and pricing, and it showcases the strong value that we provide to our customers. Third, higher sales, record gross margin, and disciplined expense management produced record quarterly net income from continuing operations. And finally, with the December sale of Bressner and the October registered direct offering of common stock, we ended the year with the strongest balance sheet in our history, which included only $6.8 million in total liabilities, no debt, and $33.4 million in cash, cash equivalents, and restricted cash. We believe the company is in a strong position, and with a solid backlog and a robust pipeline, we are on track to achieve our 2026 guidance and to execute on our growth and profitability objectives. Now for a quick overview of Q4 2025 financial performance. For the fourth quarter, we reported total revenue of $12.0 million compared to $7.0 million last year and $9.3 million for the 2025 third quarter. The 70.2% year-over-year increase in total revenue was primarily the result of higher revenue for the development and production custom server products for defense customers, higher shipments of data storage products for a defense prime customer, shipments of server products to a medical device customer, and shipments of compute and server products for an autonomous maritime application. Gross margin in the fourth quarter was a quarterly record of 58.5% compared to 9.4% in the prior-year quarter. As a reminder, gross margin in the prior-year quarter was impacted by a $1.2 million contract loss. Excluding this charge, gross margin for the 2024 fourth quarter was 26.8%. The 31.7 percentage point increase from the prior year was primarily due to a more profitable mix of products shipped this year. In 2025, gross margin benefited from both operational efficiency and a favorable product mix. We continue to expect variability in gross margins quarter to quarter based on absorption, product mix, and program life cycle. On a sustaining basis, we continue to target One Stop Systems, Inc. segment margins in the mid-30s to mid-40s. Total fourth quarter operating expenses increased 21.8% to $5.1 million. This increase was predominantly attributable to higher R&D expenditures, reflecting targeted investment in new product development. We expect R&D expenses for 2026 of approximately 10% to 12% of annual sales. For the fourth quarter, the company reported record GAAP net income from continuing operations of $2.0 million, or $0.08 per diluted share, compared to a net loss from continuing operations of $3.4 million, or $0.06 per share, in the prior-year quarter. The company reported non-GAAP net income from continuing operations of $2.4 million, or $0.09 per diluted share, compared to a non-GAAP net loss from continuing operations of $2.9 million, or $0.14 per share, in the prior-year quarter. Adjusted EBITDA from continuing operations, a non-GAAP metric, was $2.5 million compared to an adjusted EBITDA loss from continuing operations of $2.8 million in the prior-year fourth quarter. Turning to the balance sheet, as of 12/31/2025, One Stop Systems, Inc. had total cash and cash equivalents of $31.2 million, restricted cash of $2.2 million, and no debt outstanding. Working capital increased to $45.3 million at 12/31/2025 compared to $24.0 million last year, reflecting a significantly higher cash balance and a 176% increase in our AR balance, reflecting revenue growth in 2025. As Mike mentioned, for the 2026 full year, we expect revenue growth in the range of 20% to 25%, gross margin of approximately 40%, and positive EBITDA and adjusted EBITDA. As in prior years, we expect some seasonality in our revenue, with second-half revenue higher than first half. However, we expect this ramp to be less pronounced in 2026 as compared to 2025. For 2026, we expect approximately 40% of our full-year revenue to be recognized in the first half of the year and 60% in the second half. We also expect negative EBITDA in the first half of the year to be offset by positive EBITDA in the second half of the year. As we enter 2026, we remain focused on disciplined execution, including managing our supply chain to convert customer demand into revenue, profit, and cash. We also remain focused on continuing to drive growth by investing in our technology, pursuing M&A opportunities, and securing new platforms that may provide sustained multiyear revenue streams. As always, we look forward to updating you on our success. This completes our prepared remarks. I will now turn the call back to the operator. Operator, please open the call to questions. Operator: We will now open for questions. To ask a question, please press star followed by one on your touchtone phone. You will then hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, we ask that you please lift your handset before pressing any keys. Please go ahead and press star 1 now if you have any questions. First, we will hear from Scott Searle at Roth Capital. Please go ahead, Scott. Scott Searle: Hey, good morning. Thanks for taking the questions. Hey, Mike, hey, Dan, congrats on the quarter and congrats on getting the Bressner deal done. Maybe for starters, looking at 2026, nice guide. I am wondering if you could talk a little bit about the visibility that you have got into that number. Maybe as well kind of the unfactored opportunity pipeline that you have talked about. And you hinted at this as well a little bit just in terms of some of the timelines. Obviously, with the current military actions ongoing, is that delaying the ability for decisions to get made in the near term? Obviously, it is good in the longer term when you think about autonomy and edge AI being adopted in these types of conflicts, but wondering what that is doing to the near-term decision-making process. Michael Knowles: Yeah. Just as a top level on that, Scott, I think our visibility in our pipeline is still as strong as we start 2026 as we were in 2025. We continue to expand opportunities commercial and defense. As I noted, there is still a strong pipeline supporting our growth objectives organically. So we feel good about that and where we are progressing and the momentum we have been building in that area. We are encouraged this year that there is actually a defense budget. As I noted in my remarks, we had the full-year continuing resolution and the new administration coming on board. So contracting of awards last year in terms of timing was a little bit challenging at times. But this year, with a budget in place, we have seen a little bit better movement in that respect. However, as in the past with conflicts like we are seeing today, and the quick movement and reestablishment of operational funds to support that, sometimes that will cause a little bit of delay in the contracting system as there are other higher priorities in certain areas. So we will continue to monitor that as it goes throughout the year, but as of right now, we do not anticipate that will be an impact on the full year. It just could be, again, impacted on timing from month to month or quarter to quarter. Daniel Gabel: And yeah, Scott, I might just add a little bit on the timing. As we put together our guide, we feel very strong about the demand environment. I think that some of the bookings that we have already released press on for Q1 support that—so really strong demand environment. What we have taken into account in our guidance is some of the supply chain and production lead times. We are seeing extended supply chain lead times, and so that does guide the conversion of those opportunities into revenue. Scott Searle: Gotcha. So just to clarify, you are already accounting for memory and other component issues within that 20% to 25% outlook. And then wondering as well kind of how you are thinking about military government applications versus the commercial mix for the year? Michael Knowles: Yeah. I will start on it. Yes. Our guide takes into account our expectations for longer lead times in the supply chain. As we are looking at the mix, I will just reiterate as we are seeing that market that the memory impact has been fairly noticeable. We have projected that into guidance and continue to monitor that. We have a fairly diverse supply chain and partners we work with. And our designs are somewhat flexible. So we have levers to pull to help to address that moving forward. And then as for defense commercial, they still remain well aligned in our ratios. They can change quite a decent amount from quarter to quarter based on opportunities and timings and awards. As we have noted before, we have generally been around the 50/50 area. However, in any given quarter or period, we could go 10%, 15%, 20% in either direction. No real impact on the strategy. Both markets need our componentry. Our hardware is generally agnostic to market. We use similar servers in defense as we use in commercial. So we are able to move and adjust quickly to where demand is in either market. Scott Searle: Got you. And if I could, two last ones. On the OpEx front, Dan, I am wondering, can you calibrate us in terms of the first quarter looking at the fourth quarter? I would imagine somewhat normalized for seasonality. But just to give us an idea about how we go into the first quarter and that progresses throughout the year. And then, Mike, now with the balance sheet, now with the opportunity set with you guys getting to sustained positive EBITDA, and the balance sheet, M&A starts to come into play, becomes more realistic. How active are you guys on that front? What is the pipeline looking like? And if you could put some parameters around how you are thinking about it in terms of size and timeline to accretion. Daniel Gabel: Yeah. I will start on the operating expenses. So we do expect somewhat lower operating expenses in 2026, most of that being driven by R&D. We made some one-time investments in R&D in 2025 that we do not expect to recur. So I think we mentioned our guidance for R&D expenditures in 2026 will be about 10% to 12% of revenue, so a bit of a step down from 2025. In terms of the time phasing of that throughout the year, I would expect R&D to be somewhat higher in the first half of the year compared to the second half of the year. You could think of about 60% of our R&D expenditures in the first half of the year, about 40% in the second half of the year. And that is really driven by the timing of customer-funded R&D efforts, which we deploy our engineering resources towards and away from internal investment. Michael Knowles: And, Scott, on the M&A part of the question. So, yeah, we have ramped up efforts on our strategy in that area. We had been working a funnel of opportunities since I joined the company just for the point in time we knew when we would have the levers to be able to be engaged in that kind of activity. And as we have noted in the financial performance, we believe we have some of those levers now to do that. So we have increased our activity on that front. I would say we have a decent funnel of opportunities that we are evaluating across both hardware-adjacent capabilities and potential for software capabilities that we could add to the company that would allow us to provide more integrated solutions and gather larger footprints and capabilities on edge platforms. In terms of timeline, I would just say that we look at this like we want to do the right deal that aligns to the strategy of the company, moves it forward, and makes sense to what we are doing. And so we will not be rushed into doing a deal. But we are actively engaged, and if we find the right deal, the right value that advances the company along with our strategy and performance, then we will do so. Scott Searle: Great. Thanks so much. I will get back in the queue. Michael Knowles: Alright. Thanks, Scott. Operator: Next question will be from Eric Martinuzzi at Lake Street. Please go ahead, Eric. Eric Martinuzzi: Yes. My congrats as well on the quarter and the guide for the upcoming year. You talked a little bit about the R&D investment. Curious to know on the sales front, are we adding folks in our sales and distribution, sales or marketing, at least as far as 2026? What is the plan for headcount there? Michael Knowles: Yeah. With the performance we have had, we are always evaluating our overall staff and sales and where we are going. So we are always making adjustments in capability access, whether it is through hiring people onto staff or utilizing distributors or consultants in certain areas. So we continue to be active across all those fronts. And so as we continue to grow, we will always look at what is the best method or approach for us to continue to accelerate pipeline identification and conversion to bookings so we can stay on the growth rate organically that we have indicated our pipeline could support and potentially grow that. So we treat those as opportunistic based on people, markets, etc. But our intent is we keep focused on that all the time and are always looking to expand where we can move and continue to grow the company or accelerate its growth. Eric Martinuzzi: So I guess, let me ask it a different way. So to support the sales growth of 20% to 25%, does that require additional hiring? If so, are we talking 10% to 15% increase in sales heads? Michael Knowles: Yeah. We think with the investments now in our sales team and Salesforce, we can support the growth rate that we have noted. Eric Martinuzzi: Okay. Alright. And you highlighted in the press release regarding the outlook that the higher customer-funded development sales as compared to 2025. Curious to know, is this coming from the same customers? Is this coming from additional customers? In other words, is there a potential for new logos? What is the mix kind of between new logos and existing customers in that customer-funded development? Daniel Gabel: Yeah, Eric, I think it will be a combination. So even some of the awards that we have already announced, including on the ground combat vehicle opportunity with a defense prime, that does involve some customer-funded development. So we will see that converting to revenue throughout the year. And then we also have some additional opportunities that are in the pipeline now that would represent new customers. Eric Martinuzzi: Okay. Thanks for taking my questions. Daniel Gabel: Thanks, sir. Operator: Next question will be from Brian Kinstlinger at Alliance Global Partners. Please go ahead, Brian. Brian Kinstlinger: Great. Thanks, guys. Been a great transformation. My first question is with the partnership with the defense prime you announced, I think it was January, to develop the enhanced vision system for Army vehicles. What is the addressable market opportunity for a product like this in a production environment? How many vehicles might this be integrated with? And then is there already an RFP that the prime is bidding on with this technology, or is it just in development phase so that they can bid on RFPs in the future? Michael Knowles: Yes, Brian. Thanks for the question and for joining in. So it is an early-stage development program that will, as we mentioned, complete this year and transition into testing. So there is not a formal RFP for deployment or production of this capability. It will roll through testing and evaluation. The system is somewhat agnostic to combat vehicle type. So there would be opportunities for multiple combat vehicle acquisition offices to evaluate the technology versus their requirements, their funding lines, and any deployment requirements or needs for that. And so as the system moves through testing, we will, of course, engage with those customer sets and follow that as it moves through. You know, the benefits could be in a wide range of scale depending on how the Army might move that forward in terms of one or multiple combat vehicle classes. The exciting part for us is that the U.S. Army generally, if they decide to form a program of record and deploy a system across vehicles, is known to buy things in tens and hundreds. Usually, it can end up in the thousands. And those would represent the kind of larger-end, more transformative type program awards for the company. Brian Kinstlinger: Great. And then as it relates to the low end of revenue guidance, I think one of the analysts asked about visibility. How much of the low end of revenue guidance, using the growth rate, comes from what is already in backlog or orders in contract? I am not sure if you answered that. And then do you expect traditional revenue seasonality or even more pronounced with the long lead time? Just curious how you think about that. Daniel Gabel: Yeah. I will jump in on the seasonality. So we do expect—we always kind of see this kind of an increase as we go throughout the year. We do expect that in 2026, and you are correct. That is driven largely by supply chain lead times as well as some production lead times in converting some of the orders that we have in backlog, as well as some of the orders secured in Q1, into revenue. Roughly, though, we expect about 40% of our revenue in the first half of the year, about 60% of our revenue in the second half of the year. So that is somewhat less pronounced than we saw in 2025. Brian Kinstlinger: Great. Thank you so much. Michael Knowles: Alright. Thanks, Brian. Operator: Ladies and gentlemen, this does conclude our question-and-answer session for today as well as the conference call. We would like to thank you for attending, and at this time, ask that you please disconnect your lines. Enjoy the rest of your day.
Operator: Welcome to the Williams-Sonoma, Inc. Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. A question and answer session will follow the conclusion of the prepared remarks. I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead. Jeremy Brooks: Good morning, and thank you for joining our fourth quarter earnings call. Before we get started, I would like to remind you that during this call, we will make forward-looking statements with respect to future events and financial performance, including our annual guidance for fiscal 2026 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances that these statements will materialize. Actual results may differ significantly from our expectations. The company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after today's call. Additionally, we will refer to certain non-GAAP financial measures. These measures should not be considered replacements for and should be read together with our GAAP results. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of this call will be available on our Investor Relations website. I will now turn the call over to Laura Alber, our President and Chief Executive Officer. Laura Alber: Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. I am excited to talk to you today about our fourth quarter and our full-year 2025 results. In 2025, we delivered sustainable, profitable growth in a dynamic environment. This performance is a testament to strong consumer demand for our distinctive products and brands and our world-class team. In Q4, our comp came in at 3.2%. We drove an operating margin of 20.3%, with earnings per share of $3.04. We delivered these results despite no material changes in the macro environment and continued unpredictability around logistics and tariffs. Normalizing for the fifty-third week last year and the tariff impact this year, we delivered substantial operating margin improvements versus last year. As we look forward to 2026 and beyond, we are confident in our competitive advantages that have allowed us to take market share, and our focus is on widening that advantage. Just a few things on Q4 before we spend more time on the year and our outlook for 2026. In Q4 2025, we saw strength and momentum across our strong portfolio of brands and in our channels. Our retail teams drove a 4.3% comp in the quarter, and there was a continued acceleration in our gift-giving brands. Both Williams Sonoma and our Pottery Barn Children’s business outperformed, with Williams Sonoma driving a 7.2% comp and our children’s business driving a 4% comp. And West Elm continued to pick up the pace with a 4.8% comp. Finally, our DTC channel was strong due to an improved customer experience, continued personalization, and incredible service. Thank you to our team. They continue to find leadership in our industry across product, service, and disciplined execution. Turning to the full year, we outperformed the industry with a comp of 3.5%. We delivered an operating margin of 18.1%, and full-year earnings per share increased 1% to a record $8.84, with the internal and external expectations on both the top and bottom lines. And in fact, we raised our guidance twice during the year. Before we get into the year, let us talk about tariffs. The tariff landscape was uncertain and unpredictable in 2025. We expect it will remain that way in 2026. As we all know, policy can shift quickly. But as you saw in 2025, we have proven that we are resilient and capable of mitigation. As we look to 2026, we will continue to execute our mitigation strategies, which include vendor negotiations, resourcing where it makes sense, supply chain efficiencies, cost improvements, and select pricing actions. We will stay flexible and continue to adjust quickly as the tariff environment evolves. We entered 2025 with a focus on three key priorities: returning to growth, elevating our world-class customer service, and driving earnings. Let me highlight the progress we made on each of these priorities in 2025. Starting with growth, we have been focused on building growth strategies across our portfolio of brands. In 2025, we drove positive top-line comps in all of our brands, and even as full-price selling increased, we gained market share. We focused on newness and innovation in product and brand development. We are not just competing on price. We are really competing on, and winning on, authority, aspiration, quality, design, exclusivity, and service. Collaborations were also an important part of our growth strategy in 2025. These partnerships drove relevance and excitement. They continue to bring in new customers while increasing engagement with our existing customers. B2B was another standout for the year. In 2025, B2B grew 10%. We continue to win because we have paired design expertise with commercial-grade products and end-to-end service. That combination is a clear market differentiator in the B2B space. Our emerging brands also delivered strong performance in 2025, with double-digit comps all year. We have invested in the growth of our emerging brands with expansion in categories and new product development. Our ability to incubate and develop brands in a portfolio approach is one of our long-term advantages. Our second priority for 2025 is customer service, and we are very proud of our progress. Our goal stayed simple: to deliver the perfect order, on time and damage-free, every time. Our supply chain team focused on operational excellence every day. They made industry-leading progress again on supply chain delivery and customer service metrics. Also, we are pleased with our improved customer handling by both our teams and our AI capabilities. That brings me to our third priority, driving earnings. Our profitability in 2025 reflected strong execution across the company. We have maintained tight control on SG&A. We also stayed lean on employment with a focus on productivity. The implementation of AI helps by automating work and allowing our teams to do more with the same resources. We also extended AI more deeply across our e-commerce and operations platforms. For example, we extended personalization, deepened product discovery and ranking, and increased the influence of data-driven recommendations. These enhancements are improving relevance, engagement, and monetization efficiency across our brands. AI is also embedded in friction reduction, from smarter product discovery to accelerated checkout experiences, supporting stronger conversion and a more intuitive shopping journey. Beyond digital e-commerce, AI and advanced analytics continue to improve forecasting, routing logic, and customer service workflows, driving operational efficiency across our supply chain and care operations. What differentiates Williams-Sonoma, Inc. is how AI amplifies our proprietary data, vertical integration, and deep brand expertise. Because we control the full ecosystem, we can apply AI in tightly integrated and scalable ways. In summary, AI is delivering measurable impact today and strengthening our long-term competitive advantages. Looking ahead, we are confident in our competitive advantages. And as I said earlier, we plan to further widen our moat. We have a powerful portfolio of brands, an in-house design team that drives exclusive product and newness, a vertically integrated sourcing and supply chain model, and leading omnichannel capability. And underpinning all of this is our experienced leadership team, who knows how to execute. In 2026, our plan is centered on the same three priorities we laid out last year. We just changed the words “returning to growth” to “accelerating growth.” We are going to accelerate growth, deliver world-class customer service, and drive earnings. These priorities all relate to one another. Growth creates leverage in our operating model, and improved customer service drives loyal and satisfied customers. When the customer is happy, our costs go down, driving earnings. Let us start with growth. We are focused on four areas: brand growth, product pipeline, brand heat, and channel experience. First, brand growth. In 2026, we are focused on comp growth throughout the company, specifically accelerating the Pottery Barn comp and building on the momentum of the West Elm comp. We expect Williams Sonoma to continue performing well, supported by premium quality, authority in the kitchen, and strong seasonal storytelling. We are planning for growth in the children’s business, with baby and dorm as highlights. And our emerging brands will contribute meaningfully, led by Rejuvenation. Finally, B2B remains a major opportunity for growth. Second, product pipeline. In 2026, our product pipeline will include an increased level of product newness. We will increase newness by offering new collections, finishes, and design details that are timely, on-trend, and unique. Also, we will expand into proven collections that are built around newness that performed well last year, adding SKUs to add sales. We will also lean into advantaged growth categories that expand our reach and create new reasons for customers to shop with us. A great example is West Elm Office, our new collection of modern and flexible office furniture made with high-quality materials with endless configuration. We see other outsized opportunities for growth in dorm, baby, and certain Pottery Barn categories. And at Williams Sonoma, we will continue to expand our successful branded and exclusive assortment. This strategy increases differentiation and supports value and margin. Third, brand heat. We will continue to create excitement and buzz for our brands. First, collaborations will be a key driver, with all brands delivering double-digit sales growth in collabs. Second, we will increase our social and influencer partnerships, and we will improve our storytelling across our websites, emails, and catalogs. Our fourth growth initiative is channel experience. We will continue to improve how customers discover and shop our brands, and we will build on the momentum we have seen in both DTC and retail. In DTC, our plan is to accelerate growth with elevated discovery, both on-site and externally. We will also drive DTC-advantaged categories, and we will continue to use AI to create more personalized shopping journeys that improve engagement and conversion. In retail, we will build on momentum by expanding Take It Home Today, scaling Design Services 3.0, and investing in new stores, repositions, and relocations where the returns are compelling. Now turning to delivering world-class customer service. We have always been a leader here and will continue to raise the bar as we keep pursuing the perfect order, on time and damage-free, every time. We believe we have continued opportunity from supply chain efficiencies across distribution centers, shipping costs, returns, replacements, and damages. AI is a key enabler here. Our AI service initiatives are expected to further reduce call center escalations and accommodations while also improving inventory in-stocks and accuracy for customers. And we are expanding AI tools to enhance supply chain intelligence, including better visibility into inventory and shipping. Finally, driving earnings. In addition to regular price testing, we will continue emphasizing full-price selling and improving product margin by reducing markdown depth. We will also continue to drive sourcing efficiencies through vendor cost reductions, resourcing, and organizational productivity. We will stay disciplined in controlling variable costs, including employment and ad spend, and we will drive AI-enabled efficiencies, including savings in engineering costs, care center payroll, and creative costs. Turning to our outlook for 2026, our assumptions reflect what we know today. We are not building into our assumptions a meaningful housing recovery, and allowing for all the uncertainties we know are out there and that we have discussed, we are guiding comp brand revenue growth of 2% to 6%, with a midpoint of 4%, and operating margin in the range of 17.5% to 18.1%, with a midpoint of 17.8%. This outlook reflects our current initiatives and the tariff environment in place today. Now let us review our brands. Pottery Barn ran a negative 2.3% comp in Q4 after delivering positive comp in each of the first three quarters. While Q4 was disappointing, Pottery Barn ran a positive 0.4% comp on the year, and Pottery Barn’s two-year comp improved over the year. Different than other quarters, the percentage of our decorating assortment is larger in the fourth quarter, and that assortment relied heavily on last year’s program, and sales did not meet our expectations. While furniture was better, it was not enough to offset the softness in non-furniture. A highlight was our retail performance, which was strong in Pottery Barn, with customers responding to our inspirational stores and the in-person shopping experience. But DTC lagged. Retail tends to lower comp. As we look at 2026, we are focused on driving stronger growth in Pottery Barn, and we are working as a team on quarter-by-quarter strategy and execution. Pottery Barn is refocusing on its heritage aesthetic and strengthening its product pipeline. We are also optimizing the core assortment. We are building proprietary collections and creating more brand heat through collaborations, influencers, storytelling, and store events. And we are investing in both digital and retail, with a focus on conversion and personalization. The good news is that we are seeing better comp performance quarter to date. Now I would like to talk about part of our children’s business, which delivered a strong fourth quarter, running a positive 4% comp. For the full year, Kids and Teens delivered a positive 4.4% comp, with strength across both furniture and non-furniture. Collaborations and licensing remain key drivers, led by fashion favorite LoveShackFancy, and the launch of the NHL collection. Innovation was strong, and holiday gifting outperformed, driven by high-quality personalized gifts across life stages. As the largest specialty retailer of home furnishings for children, we see significant growth ahead. Our pipeline of new product introductions and continued collaboration growth is strong, and we are excited to launch Dormify in late April, which expands our reach in the college and dorm market and strengthens our position with the next generation of customers. Now let us talk about West Elm. West Elm had a positive 4.8% comp in Q4, accelerating from Q3, and delivered a positive 2.9% comp for the full year. I am proud to say that West Elm is officially on a roll. West Elm made improvements across products, brand, and channel excellence. New introductions in both furniture and non-furniture drove results, and the brand’s mix shifted meaningfully towards new products. In Q4, the brand delivered positive comps across the board. Retail also performed well in West Elm. When customers walked into the stores, they saw more newness and better availability, and that showed up in the results. The strength in the brand and at retail gives us confidence to return to store count growth, with five openings planned in 2026. Finally, collaborations have been a big part of the strategy at West Elm, and we could not be more excited than right now when we are launching our collaboration with Emma Chamberlain, a leading Gen Z voice known for authenticity and unique style. With over 14,000,000 Instagram followers, her collaboration with West Elm marks her first venture into the home space. If you have not seen it, be sure to check out the exciting personality-driven assortment which launched yesterday. Now let us review the Williams Sonoma brand. Williams Sonoma finished 2025 strong with a positive 7.2% comp in Q4 and a positive 6.9% comp for the year. The Williams Sonoma brand continued to outperform across the board. 2026 marks our seventieth anniversary. And at seventy years, this brand is not mature; it is gaining momentum. The core of our kitchen business is accelerating, and our pipeline of proprietary in-house design products and market exclusives continue to separate us from the competition. In Q4, customers came to us for holiday gifting, cooking, and entertaining. Also, Williams Sonoma has benefited from a strong gift assortment with products that perform, design that is distinctive, and assortments that reflect both who our customer is and who they aspire to be. 2025 was our biggest year ever for in-store events at Williams Sonoma. We held Skill Series classes on Sundays, and we hosted 120 celebrity chef and influencer book signings. Highlights from the events in Q4 included signings of Martha Stewart, Trisha Yearwood, and Wishbone Kitchen. We look forward to welcoming customers into our stores throughout 2026 with even more opportunities to learn, engage, and be inspired. Now I would like to update you on B2B. B2B had another record-breaking quarter at 13.7%, anchored by our largest contract quarter in our history. Both contract and trade delivered double-digit growth, and corporate gifting had its best quarter ever. We saw strength in our core hospitality and residential designer businesses, and we gained momentum in emerging verticals like higher education, sports, and entertainment. We also delivered several marquee projects, including the Waldorf Astoria Beverly Hills, Hilton Canopy in New York City, the Opryland Hotel in Nashville, multiple locations for WeWork, and corporate gifting for several premier clients, including the New York Yankees. For the full year, B2B grew 10%, and we exited the year with a strong pipeline heading into 2026. We remain excited about B2B as a growth engine. Now I would like to update you on our emerging brands, which continue to deliver strong growth and profitability. Rejuvenation had another quarter of double-digit comp growth, exceeding both our top-line and bottom-line expectations. Performance is driven by momentum in cabinet hardware, bath, and lighting, as customers remain highly engaged in project-driven purchases. Product innovation continued to build with high-quality, design-driven products, distinctive details, and customizable options. With only 13 stores and great online growth, we are thrilled for the progress in Rejuvenation, and we continue to believe in the potential for Rejuvenation to be our next billion-dollar brand. Mark & Graham finished 2025 also with solid momentum, driven by a record-breaking holiday season and positive comps. We entered 2026 well positioned with a focused pipeline of launches across key gifting occasions, reinforcing the brand’s growth opportunity ahead. And I cannot forget our newest brand, GreenRow. We are thrilled that on March 6, GreenRow opened the brand’s first store in Soho, New York. If you are in New York, I would encourage you to stop by and see it in person. The store truly captures the entrepreneurial spirit that exists in our company that allows us to bring new concepts to life and scale them profitably. We look forward to building the business of GreenRow in 2026 and beyond. Finally, I would like to talk about our global business. We continue to see strong performance across our strategic global markets, including Canada, Mexico, and the UK, through differentiated products, omnichannel enhancements, and growth in our design and trade businesses. We are particularly encouraged by the customer response to the launch of Pottery Barn in the UK. As we reflect on the year, oh, what a year it was. We had many highlights, and we had a lot of things coming our way that we did not expect. However, at Williams-Sonoma, Inc., we delivered. We delivered a strong operating margin and record EPS. Our powerful portfolio of brands, strong channel execution, and growth strategies drove our results in 2025. As we look to 2026, we are focused on accelerating this growth. We are focused on delivering world-class customer service, and we are focused on driving earnings. We are confident in our future growth strategy and our profit profile. Our company is competitively distinct with advantages that set us apart, with a team that delivers. And with that, I want to thank our teams again for their hard work and their commitment, and I also want to thank our vendors and our shareholders for their partnership and support. And with that, I will turn it over to Jeff to walk you through the numbers and our outlook in more detail. Jeff Howie: Thank you, Laura, and good morning, everyone. We are proud to have delivered another quarter of growth with strong earnings, despite the headwinds from tariffs and anemic housing turnover. In fact, we have generated consistently strong earnings for several years, and now, top-line growth for five consecutive quarters. That execution and momentum gives us confidence as we transition into fiscal year 2026. Our ability to perform quarter after quarter reflects Williams-Sonoma, Inc.’s competitive advantages in the home furnishings industry, including a powerful multi-brand portfolio spanning categories, aesthetics, and price points to meet customers where they are; meaningful size and scale enabling us to capture market share and capitalize on attractive white space opportunities; a differentiated multichannel platform that serves customers seamlessly across e-commerce, stores, and business-to-business; our relentless focus on customer service, which drives efficiency and cost savings across our supply chain; and finally, a proven operating model that consistently delivers highly profitable earnings. Now let us turn to the numbers and see how our competitive advantages and strong execution produce results. I will begin with our fourth quarter performance, then review our full-year fiscal 2025 results, and finish with our outlook for fiscal 2026. As a reminder, fiscal 2024 was a fifty-three-week year for Williams-Sonoma, Inc. For Q4 fiscal 2025, we are reporting comps on a comparable thirteen-week versus thirteen-week basis. All other quarter-over-quarter comparisons are thirteen weeks versus fourteen weeks. We estimate the additional week in Q4 fiscal 2024 contributed 510 basis points to revenue growth and 60 basis points to operating margin. Q4 net revenues finished at $2.36 billion for a positive 3.2% comp. Positive comps in both our furniture and non-furniture categories drove our results, with our furniture trends accelerating from Q3. With the industry declining in the quarter, we gained market share even as we increased our penetration of full-price selling. From a channel perspective, both retail and e-commerce posted positive comps, with retail up 4.3% and e-commerce up 2.6%. Moving down the income statement, Q4 gross margin was 46.9%, down 40 basis points versus last year. The main driver of our lower gross margin was a 170 basis point decline in merchandise margins as the impact of higher tariffs flowed through our weighted average cost of goods sold. Occupancy costs contributed another 80 basis points to the deleverage, largely related to the fifty-third week. Partially offsetting these headwinds were shrink and supply chain efficiencies. Shrink added 160 basis points due to favorable year-end physical inventory results, and supply chain efficiencies added an additional 50 basis points. Our relentless focus on customer service continued to produce margin benefits from reduced returns, accommodations, damages, replacements, and shipping expense. Continuing down the income statement, Q4 SG&A was 26.6% of revenues, up 80 basis points versus last year. The main driver of the 80 basis points deleverage was general expense, which was up 120 basis points from last year. This increase was due to our lapping of an indirect tax resolution and a favorable insurance settlement in last year’s results. Employment and advertising expense leverage partially offset the impact from general expense. Employment expense leveraged 30 basis points, primarily due to lower variable labor costs across our distribution and customer care centers. Advertising expense was 10 basis points lower. Our in-house marketing team optimized spend while driving a quarter-over-quarter acceleration in e-commerce comps. On the bottom line, Q4 operating margin was 20.3%, down 120 basis points versus last year. Diluted earnings per share were $3.04 per share. Turning now to our full-year fiscal 2025 results, there are two items in fiscal 2024 that I want to remind you about. First, in 2024, we recorded a $49 million out-of-period adjustment related to freight accruals from prior years. This benefited fiscal 2024 operating margin by approximately 70 basis points. Second, the fifty-third week in fiscal 2024. For the full year, we are reporting comps on a comparable fifty-two-week versus fifty-two-week basis. All other year-over-year comparisons are fifty-two weeks versus fifty-three weeks. We estimate the additional week in fiscal 2024 contributed approximately 150 basis points to revenue growth and 20 basis points to operating margin on full-year results. Full-year 2025 net revenues were $7.8 billion at a positive 3.5% comp. All brands posted positive comps for the full year, driven by growth across both our furniture and non-furniture categories. From a channel perspective, both channels contributed to the strength, with retail up 6.4% and e-commerce up 2.2%. E-commerce was more than 65% of total revenues for the year. Full-year gross margin was 46.2%, a 30 basis point decline versus the prior year. The decrease was primarily driven by the 70 basis point impact from the prior-year out-of-period freight adjustment, a 40 basis point reduction in merchandise margins related to tariffs, and 20 basis points of occupancy deleverage. These pressures were partially offset by 50 basis points of supply chain efficiencies and 50 basis points of benefit from favorable shrink results. Full-year SG&A expense increased 10 basis points to 28%. Advertising expense leveraged by 30 basis points, partially offset by deleverage in employment and general expense. Employment deleveraged by 20 basis points due to higher performance-based incentive compensation, while general expense deleveraged by 20 basis points as we lapped the prior-year indirect tax resolution and the favorable insurance settlement mentioned previously. On the bottom line, full-year operating margin finished at 18.1%, 50 basis points lower year over year. Diluted earnings per share achieved a record $8.84, up 1% year over year. Turning to the balance sheet, we ended the quarter with over $1 billion in cash and no outstanding debt. Merchandise inventories were $1.5 billion, up 9.8% year over year. Included in year-end inventory is approximately $80 million of embedded incremental tariff costs. Excluding these tariff-related costs, inventories would have been in line with sales growth. Overall, we believe our ending inventory levels and composition are well positioned to support our fiscal 2026 guidance. Turning to cash flow and capital expenditures, we generated over $1.3 billion in operating cash flow in fiscal 2025. We reinvested $259 million in capital expenditures to support our long-term growth and delivered an industry-leading 51.6% return on invested capital on that spend. This resulted in $1.1 billion of free cash flow, and we returned nearly $1.2 billion to shareholders in fiscal 2025. That return included share repurchases of $854 million, or 4% of shares outstanding, at an average price of $174.70. Additionally, we delivered $316 million in dividends to our shareholders, reflecting a 13% year-over-year increase. Wrapping up my fiscal 2025 remarks, we are proud to have delivered growth and strong earnings for our shareholders despite the headwinds from tariff policy and anemic housing turnover. These results are a direct reflection of the exceptional talent and dedication of our team at Williams-Sonoma, Inc. I want to thank our team for their hard work and for delivering such strong performance. Now let us turn to fiscal 2026. The macroeconomic, geopolitical, and tariff environment remains uncertain. As we have demonstrated, we know how to navigate uncertainty and deliver consistently strong earnings. As we look ahead to fiscal 2026, we see significant opportunity to not only deliver strong earnings but, more importantly, accelerate top-line growth. Our guidance assumes no meaningful changes in the macroeconomic environment or housing turnover and does not include any benefit from the OB3 tax legislation. Our focus remains on what we can control: accelerating growth, delivering world-class customer service, and driving earnings. We expect fiscal 2026 net revenue comps to be in the range of 2% to 6%, with total net revenue growth of 2.7% to 6.7%. We expect operating margin to be in the range of 17.5% to 18.1%. On the top line, our guidance reflects our confidence in our strategies. We remain focused on accelerating growth through our compelling product lineup, continued investment in collaborations, and disciplined execution across our growth initiatives, including dorm, Rejuvenation, and business-to-business. And if there are more favorable macro conditions, we see potential upside to that growth. On operating margin, our guidance reflects our best estimate of the tariff impact on fiscal 2026 results based on three key assumptions. First, it reflects our estimate of how tariffs already paid and those we expect to pay in fiscal 2026 will flow through our weighted average cost of goods sold. As higher tariff costs are embedded in our inventory, we expect the impact on operating margin to be front-half weighted and then moderate over the balance of the year. Second, our guidance assumes that all tariff rates currently in effect remain in place for the balance of fiscal 2026. This includes the Section 232 tariffs, the current Section 301 tariffs, and the Section 122 tariffs at the announced rate of 15%. While the Section 122 tariffs are currently set to expire in July, our guidance assumes they will be replaced with tariffs at a similar rate. Third, our guidance does not contemplate any refund of UFLPA tariffs, given the uncertainty around both timing and process. It is important to recognize that tariff policy has been volatile and subject to multiple revisions. Given the ongoing uncertainty, it is impossible to say where tariffs will ultimately land and difficult to determine what impact they will have on our business. Our guidance reflects our best estimates based on the tariffs in place as of this call. As tariff policy changes, we may need to update our guidance. Turning now to capital allocation, our fiscal 2026 plans prioritize funding our business operations while continuing to invest in long-term growth. We expect to spend approximately $275 million in capital expenditures in fiscal 2026. About 95% of that investment will be focused on strengthening our e-commerce capabilities, optimizing our retail fleet, and driving supply chain efficiency. A key shift in the plan is a near doubling of capital investment in retail, reflecting the meaningful opportunity we see to accelerate growth through retail stores. Our stores are a competitive advantage—powerful brand billboards—to drive profitable sales. Our free interior design services continue to differentiate us. More than half of retail sales involve a design appointment, helping drive the 6.4% retail comp we delivered in fiscal 2025. We will remain disciplined, continuing to close underperforming stores that do not meet our profitability thresholds. In fact, since 2019, we have closed about 18% of our fleet. Starting in fiscal 2026, we are investing to drive more retail growth in two ways. First, we will continue repositioning stores from older malls into more vibrant lifestyle centers. We expect to complete 19 repositions in fiscal 2026—more than we have done in any single prior year. Second, we expect to open 20 new stores in fiscal 2026, primarily across West Elm, Williams Sonoma, Pottery Barn Kids, Rejuvenation, and our first two GreenRow locations. These expected 20 store openings represent our most openings in a decade. Every project meets our strict profitability and return on investment criteria. We expect to end fiscal 2026 with approximately the same store count as we ended fiscal 2025 due to store closures. After fiscal 2026, we anticipate store count growth in the years that follow of approximately 1% to 3% per year. Embedded in our fiscal 2026 guidance is approximately 70 basis points of non-comp growth from this real estate activity. Turning now to our commitment to returning excess cash to shareholders through a combination of increased dividends and ongoing share repurchases, on dividends, today we announced that our Board of Directors authorized a 15% increase in our quarterly dividend to $0.76 per share. Fiscal 2026 will mark our seventeenth consecutive year of dividend increases, an achievement we are proud of and remain committed to sustaining. On share repurchases, we have $1.3 billion remaining under our current authorizations, and we will continue to repurchase shares opportunistically as part of our disciplined approach to delivering shareholder returns. Looking beyond fiscal 2026, we are reiterating our long-term outlook for mid- to high-single-digit revenue growth and operating margins in the mid- to high-teens. It is worth noting that the high end of our 2026 guidance falls within our long-term outlook. Wrapping up our comments, we are proud to deliver strong results for our shareholders. As we look ahead, we are focused on accelerating growth, delivering world-class customer service, and driving earnings. We are confident we will continue to outperform our peers and deliver shareholder returns for these five reasons that remain consistent: our ability to gain market share in the fragmented home furnishings industry; the strength of our in-house proprietary design; the competitive advantage of our digital-first but not digital-only channel strategy; the ongoing strength of our growth initiatives; and the resiliency of our fortress balance sheet. Before we open the line for questions, I would like to mention that our 2026 investor presentation has been released and is available on our Investor Relations website. I encourage everyone to have a look. With that, I will open the call for questions. Operator: We will now begin the question and answer session. To ask a question, press 1 on your telephone keypad. To withdraw your question, press 1 again. We ask that you please limit your questions to one and one follow-up. Our first question will come from the line of Chuck Grom with Gordon Haskett. Please go ahead. Chuck Grom: Hey, thanks. Good morning. Congrats on a great year. Laura, can you talk about the opportunities for store growth in 2026 and beyond, particularly as you incubate new concepts, especially Rejuvenation? Also, how are you thinking about expanding B2B over the next few years? And then, Jeff, any hand-holding on margins and phasing throughout the year in addition to the tariff commentary? Laura Alber: Thanks, Chuck. I probably jammed—yeah. Good morning. Good morning. It is that coffee, Laura. Yeah. I have had coffee. Thank you. I love this store question because it is a big pivot for us. We have been talking about our optimization strategy at retail and focusing on, you know, more profitable stores and, you know, all the moves we have made. And we have been reducing our fleet, and now as we look forward, we do not see that as what our future holds. We see—actually, this year is an inflection point, and we are going to be net neutral at the end of the year. So we have the most new store openings that we have had in many years—over a decade. Over a decade. Yeah. So even better than that. And so we are opening this year 20 new stores, 18 repositions, net flat. And, you know, we see growth in West Elm. We have growth in Pottery Barn Kids. We have, you know, embedded opportunity in Rejuvenation. We shall see about GreenRow. You know, we opened our first store like two weeks—we will see how that works. We have another one on the docket that we will open later this year. And, you know, there are more kids’ stores open now. So we are excited about that change in trend and how profitable our stores are and how good they look. It is a big deal for us in terms of our growth algorithm. Second question on B2B. As you look at the macro and think about all the different opportunities, it is one that is continuing to be the outsized opportunity. And we had great growth last year, as you saw and you heard in our prepared remarks. And I think it is going to be better this year, frankly. You know, I love seeing the contract outpace the trade because it is more repeat business. And, you know, the combination of all the things that we do together gives us a competitive advantage. And I just think we have the best sales team in retail selling our B2B. Then I will hand it back to Jeff on margin. If you want to make a comment on the other two, that is great too. Jeff Howie: Well, I think, Laura, they are both Rejuvenation, retail, as well as B2B. They are all good examples of how we are really focused on accelerating growth. And we see a meaningful opportunity to do so in fiscal 2026 as we have guided. And I think Laura touched on those high points. I will say, Chuck, I am impressed—you got three questions in one. Diving right into the operating margin guidance for next year, regarding operating margins to be in the range of 17.5% to 18.1%. And, really, tariffs are the big story here. I think everyone knows that. And there are three things to consider when we think about how tariffs are going to impact our operating margin in 2026. The first is the tariffs we have already paid that are embedded in our inventory costs. Those will take a little while to flow through into our weighted average cost. The second thing to consider is the tariffs we are going to pay at the newer rates that have been announced. And then finally, it is just the uncertainty of the environment. So there are really three key assumptions that we have shared about how all these tariffs are going to flow through our operating margin. The first and most important thing to understand is it is not about a blended tariff rate. It is about how the tariffs flow through our weighted average cost of goods. And that is, you know, really a function of the costs that we ended the year with that are embedded in our inventory. And as we said in our prepared remarks, we expect the impact on our operating margin will be front-half weighted—heavily front-half weighted—and then moderate over the balance of the year as we start to comp the impact of tariffs in last year. And second, our guidance assumes all tariff rates currently in effect remain in place for the balance of fiscal 2026. Just to be clear, this includes the Section 232 tariffs, the current Section 301 tariffs, and Section 122 at what the administration has announced is 15%. And while we know the Section 122 tariffs expire in July, our guidance assumes it will be replaced with tariffs at a similar rate when they expire. And the third piece, and I will just say this—I think it is a given—but our guidance reflects our best estimates of the tariff impact based upon the tariffs in place as of this call. As we all know, tariffs have been subject to multiple revisions, and it is impossible to say where tariffs will ultimately land and what impact it will have on our business. Taking a step back, I think what we would observe is, you know, in 2025, we demonstrated we could navigate the tariff uncertainty and deliver consistently strong earnings. And regarding that, we believe we can do so again in fiscal 2026. Operator: Our next question will come from the line of Peter Benedict with Baird. Please go ahead. Peter Benedict: Hey, guys. Thanks for taking the question. So I guess one question would just be around, with the pivot to retail growth, you mentioned design services—you mentioned Design Service 3.0. I was curious if you could maybe expand on that. What is changing? What is different there? That is my first question. Laura Alber: So, you know, we have been really building our services in the percent charge almost, and we have told you how big that has been in part of our—the other brands that continue to have opportunity at that percent total. And in addition to purchasing homes with the big pieces, like furniture, we have been adding the second layer of accessories. And that was really two out of for us and all the accessories that go with, and then all the holidays that go with. The biggest option that we see in the future for design services is how we are going to use AI, and how we are going to put it in the hands of our sales associates to better decorate their homes. There is so much that we are doing with content and design services and Outward, and the combination of all that together with our people. And I will let Sameer Hassan mention a few things about that. Sameer Hassan: Yeah, thanks, Laura. It is just really exciting, the progress that we are seeing on the AI front. You heard Laura talk earlier in the prepared remarks about our strategies, and we are only starting to see it accelerate. And what is really exciting about what we are seeing with the evolution of AI and how customers are using it, how they are engaging with it, is that it really starts to play to our strengths as a business. AI works well when you have category authority. AI works well when you have expertise. And as customers are using it to find where there is value, where there is quality, where there are designs that meet their goals, both off our sites within these LLM engines, but also now on our site, as we are building these AI tools to help guide them through product discovery, to guide them through interior design—you have probably seen what we have launched with Olive on the Williams Sonoma site as a culinary authority to help customers with real problems and connect the dots between inspiration, between guidance, and ultimately towards shopping. So we are really excited about the progress we have made on the AI front, and we are really excited about what is yet to come. Operator: Our next question will come from the line of Oliver Wintermantel with Evercore ISI. Please go ahead. Oliver Wintermantel: Yes, thanks, and good morning. Could you maybe talk a little about quarter-to-date trends—if you have seen any disruptions from the winter storms? We heard some other retailers said that there was a disruption. But, Laura, I think you said Pottery Barn is actually off to a good start quarter to date. So maybe some details on that, please. Laura Alber: Yes. Good morning, Oliver. So yes, of course, there have been some disruptions in the winter, but, you know, it did not really materially impact our results. And, you know, there is always some weather someplace—always impacts us in one way or another, particularly this time of year—but it is not a big factor. In terms of what we are seeing quarter to date, as you know, we do not provide a lot of quarter-to-date commentary. We are not seeing any big impacts from anything. You know, our consumer continues to be resilient, and it is hard to say exactly where we are going to be there. And, you know, Easter is ahead of us. There is another Easter shift this year. But everything that we know today is embedded in our guidance. Operator: Our next question comes from the line of Kate McShane with Goldman Sachs. Please go ahead. Kate McShane: We wanted to ask about the real estate strategy, just in terms of the two strategies of moving to more vibrant locations and the opening of 20 new doors. Just what it means for your occupancy costs in 2026, and will you be able to leverage a higher occupancy cost at that 4% comp at the midpoint? Jeff Howie: Good morning, Kate. Good question. I think as you know, we do not guide individual lines like occupancy or even gross margin or SG&A. I think the story on retail is one really about growth, and we are seeing a meaningful opportunity to drive growth through our retail stores. And look, we delivered a 6.4% comp in retail in fiscal 2025, and we did so very profitably. And that is really because of what we talked about. First, our design services are a competitive advantage, and our customers are telling us that they love it and responding with opening up their pocketbooks. The second thing is the product we are delivering. We have really added the newness that we have been talking about in the past several calls to those stores, and we have improved the inventory position in those stores. They are really performing very well. And the third part of why we are delivering such strong comps and why we are confident in investing in the future is just the performance. I mean, the performance they have delivered, and it is really a function of the retail repositioning strategy that we have been through. So although this is a pivot, we are still going to be very disciplined. We will continue to close underperforming stores that do not meet our profitability thresholds. But we do see a meaningful opportunity to expand from here. Stores that we have repositioned from tired, older indoor malls to these more vibrant, high-traffic lifestyle centers have all seen substantial top-line comp improvements over their prior locations, as well as bottom-line improvements from less occupancy at that individual location. And that is why we are looking to do the most repositions this year that we have ever done. And then new stores—we are seeing meaningful opportunity there as well to go into white spaces in markets we are not in for certain stores, and there is a big opportunity there for us to continue that in the years ahead. Overall, we do not think it will have a major impact on our operating margin. It is embedded in our guidance that we have given today. But it is really a story about growth. And as we mentioned, you know, we will be flat at the end of this year in terms of store count. But as we look beyond 2026, we are guiding that we will increase our store count by 1% to 3% per year each year. Operator: Our next question will come from the line of Cristina Fernández with Telsey Advisory Group. Please go ahead. Cristina Fernández: Hi. Good morning, and congratulations on a good quarter and finish to the year. I had two questions. The first one is on Pottery Barn. As you look at the fourth quarter performance, I guess, how much of the disappointment was perhaps a lack of newness or the need to expand prices, and what changed in the first quarter to turn that from negative to positive? And then the second question is a follow-up on the tariff impact for the first half. Should we think about the fourth quarter pressure, the 170 basis points on the merchandise margin, as a good guide point for the first half? Or could it be higher given the mix of sales in the first half versus the fourth quarter? Laura Alber: Great. Thank you. So Pottery Barn, as you know, is a very strong, profitable, loved brand. And as I said in my prepared remarks, we are really happy to see the tier comps improving, and, in particular, stabilization in the furniture trend. As you all know, Q4 has a higher percentage of décor in Pottery Barn—substantially—than other quarters. And let us remember that, you know, post-COVID and housing flow, we were focused on decorating as a growth vehicle instead of furniture because people were buying garage furniture. Probably over-rotated a bit, to be honest with you. It reached an all-time high and saw a little bit of a giveback. But we also, you know, in retrospect, are self-critical. We are always looking for places to improve, and we probably had too much reliance on best sellers from last year, and we were not in it. And as we go into the first quarter and into the year, obviously the complexion of the categories changes back to be more balanced, and that is what is driving the improvement, we believe. Jeff Howie: All right. Now, transitioning to your second question on what we should think about in terms of operating margin in 2026. As you know, Cristina, we do not guide the individual quarters. But I will help you with the shape of the year. The big factor in the first half of the year is the embedded tariff cost we have already paid. We are on weighted average cost accounting, so it takes a little while for that to work through our operating margin. So as we have guided, the impact will be heavily weighted to the front half and then slowly moderate across the back half as the impact starts to wear off and we start to comp tariffs we paid last year. Operator: Our next question will come from the line of Jonathan Matuszewski with Jefferies. Please go ahead. Jonathan Matuszewski: Great. Good morning, and nice quarter. Laura, last quarter, you remarked that there were pockets of your assortment that remained underpriced. So how should we think about the magnitude of pricing that is embedded at the midpoint of 4% comps for the year? Thanks so much. Laura Alber: Well, I do not think about it like that. I mean, I think about the midpoint of range with the pricing. I would—I do not comment on the pricing, and then, Jeff, I do not know if you want to make a comment. But on the pricing, you know, whether it is, you know, because of tariffs or just all the time, we are constantly looking for the best price-value relationship and how to give our customers the winning combination that makes them buy from us. And the best thing we can ever do is give them a design they cannot resist at a fair price. Right? They can count on us for quality. They know that they are going to get great service. We have made such improvements with service, and we are also going to really help them because together with everything else in their house, which is a big deal because a lot of the other players, especially the online players, it is one-and-done, and you are not decorating. You are just buying an item—maybe for your garage. So in terms of pricing, there are pockets always where, gosh, we, because of something, blow it out, and we say, oh, it could have been a little higher, and, you know, think about that for next time and make adjustments. And there are some items and categories that are, we still think, undervalued. It is very competitive to open, so I do not really want to go through them all because I do not want to give that list of things to our competition to look at. But we do see some opportunity, and,you know, at the same time, look at the opposite too, which is, you know, where are we seeing an overpriced—as we get cost concessions, should we drive more units and take the price down slightly? So it is a pricing testing mindset in the company. We share it across brands and how pricing affects demand. Jeff Howie: Yes. I would just say, Laura talked about, when we think about pricing, it is category by category, SKU by SKU—really looking at each one of those categories, each SKU, and how is it compared to its competition. It is, for us, a little divorced from how we think about growth and how we think about our guidance. And that, you know, from that standpoint, what we are really thinking about when we look at guidance is we are looking at our trends. And last year, we delivered a 3.5% comp. And in fact, if you look at our Q4 results, our two-year comp accelerated, which we see as a positive indicator. And then we look at the confidence we have, the momentum we have with our growth strategies—you know, things like our white space opportunities that you have heard us talk a lot about, things like West Elm Office, which we launched in January; things like dorm; things like baby. We have white space opportunities that are going to be additive to our results. Then we have emerging brands. And we talked a lot about Rejuvenation. It is a brand that has been double-digit comps for over two years, and we just see continued opportunity to grow that. We think, over the long term, that can be a billion-dollar brand. We touched on B2B. It just delivered another double-digit quarter. It was up 14% comp. It had its largest quarter of contract volume to date. We exited the quarter with a very, very strong book of business and leads going into fiscal 2026. And then there is retail. We have talked a lot on the call about retail—it delivered a 6.4% comp in 2025, and we see meaningful opportunity to expand that. So when we think about our comp range and the midpoint of our comp guidance, which is a 4.0, it is really about our strategy and how we think that we have momentum behind our business. And the fact of the matter is we are taking market share in this industry, and we see an advantage to and ability to leverage our competitive advantages and take even more market share. Operator: Our next question will come from the line of Max Rakhlenko with TD Cowen. Please go ahead. Max Rakhlenko: Great. Thanks a lot. So first, Laura, can you speak to the health of the consumer and their willingness to stomach tariffs in the category? And just what is your take on the industry’s ability to maintain higher prices if tariff pressure does end up easing? Then, Jeff, just quickly, any more color on the shrink benefit that you saw in the quarter? Should that continue into next year, and just how to think about that? Laura Alber: Makes sense. In terms of the consumer, I can only comment about what we are seeing. You know, I am reading and hearing that other people are saying very different things, and you can see a lot of stepped-up promos in the competition. And so a lot of, like, flight-wise with “20 off” here and “20 off” there. And that is typically for a lot of the kind of smaller companies that are trying to be sold or that are—they are trying to, you know, establish themselves. They are playing that promo game. There is no sizable new entrant that we are seeing in the market. But I can comment that our customers are responding to our aesthetic, our newness, our collabs. They love them. Do not know if you got a chance now to look at what we are doing with Emma Chamberlain and West Elm. That is the kind of thing that they are delighted by. I mean, she has 14,000,000 followers—so fun. She is such a great marketer, and the product is really, really easy to buy. And that is how we are making the weather happen in our brand—is stuff like that. Furniture is single to us. I said that. B2B is growing. So, you know, we are seeing nice response from our consumers. But, you know, it is something you take for granted. Right? Every corner, every brand, we have strategies to improve the product line, to improve the mix, to improve our value equation, to improve our service, and to drive brand heat. And that is a big part of who we are and why we continue to deliver. Second part of your question on shrink. Jeff Howie: Simple. After completing physical inventory and reconciling all the inventory accounts, we had minimal shrink. And the thing is—and you have been doing retail for a long time—you simply never know until you take physical inventory and reconcile everything. And we attribute the favorable shrink results to ongoing supply chain improvements and fewer returns—fewer damages, fewer replacements, fewer last-mile shipping issues, better set-line inventory—and we think that is finally coming through in terms of physical inventory results. In terms of what it means for 2026, it is not a material driver, and any impact of shrink is embedded in our guidance. Operator: Our next question will come from the line of Brian Nagel with Oppenheimer. Please go ahead. Brian Nagel: Nice quarter. Congratulations. Nice year. Congratulations. I have two questions. I guess one is kind of short term and then maybe a longer-term one. So Jeff, on the short-term side, going back to prepared comments, there seemed like there were a lot of—if you look at gross margin—there were a lot of kind of one-off items here in the fourth quarter. I guess the question I want to ask is, how should we think about, as we look at fourth quarter gross margin—is there a way to frame if it was a normalized, I guess, year-over-year change? And then as we look into 2026, recognizing you do not give specific guidance, how should we think about kind of the puts and takes on the gross margin side? Jeff Howie: Yes, Brian, it goes back to what I have been saying in the call and the prepared remarks. When we think about the drivers of operating margin—and it flows a little bit through the gross margin—it really comes down to how the tariffs are going to impact us in 2026. And like I said, there are three pieces here. One are the higher tariff costs we have already paid that are sitting on our balance sheet that have to work their way through our weighted average cost. Then there are the tariffs that we are going to pay in 2026. And then, you know, we do comp somehow later in the year—as we head into Q3, Q4, we start to comp the tariffs. When you put all that together, our guidance is that the impact of tariffs on operating margin will be heavily front-half weighted and then moderate over the balance of the year as we start to comp it and the impact of the embedded tariffs works their way through our weighted average cost. Operator: Our final question will come from the line of Zach Fadem with Wells Fargo. Please go ahead. Zach Fadem: Hey, good morning. So just a couple more on the gross margin line. First of all, Jeff, what is the weighted average tariff rate today, and how has that changed over the last two quarters? And second, can you remind us how your freight contracts renew—how should we think about the impact of higher freight and oil today? Jeff Howie: I will take the second one first. In the way higher oil costs are impacting our transportation costs, I would just simply say it is very early, and it is a little difficult to tell how this plays out. I think we would all agree there is a lot of uncertainty about what is happening geopolitically in the world and what that means for price of oil and how it trickles through transportation. We are seeing some noise out there of higher prices. But overall, it is—all what we know today is embedded in our guidance. And it is such an area of uncertainty that our estimates we are providing today are just what we understand is going to happen. In terms of gross margin, remind me what your question was. Zach Fadem: Tariff rate today and how that has changed over the last two quarters? Jeff Howie: You know, we are not going to provide the specific tariff rate. As everyone has heard me say, we are not going to go up and down on the basis points or specific tariff rates every single quarter simply because it has been changing so much that every time there is a change, every time there is a tweak, it is going to be virtually impossible to get on the phone with everyone explaining the latest permutation. Our guidance assumes that the higher tariff rates that we paid in fiscal 2025 that are remaining in our balance sheet flow through our weighted average cost. So from that standpoint, it is still pretty high because those costs are still embedded in our inventory. But they will work their way through our weighted average cost of goods, primarily in the front half of the year. And then, as we said, the impact on our operating margin will moderate as we get through the back half of the year. Laura Alber: And I would like to just comment a little bit on the cost of the war. Again, you know, as Jeff said, there has been no huge cost increase that we have seen as of yet. We have seen some transportation costs increase, you know, on air, for example, and we have seen some domestic rates increase as well. But that is not material yet. We have not put in our guidance a material cost increase over the year that would come from cost of goods going up substantially or transportation going up substantially. So remember that, you know, we are not sailing in the Suez support routes. Thank God. And we have not actually seen our shipping times affected yet. So we have not seen either supply chain delays as of yet. But as we all know, we cannot predict this. So we suggest what we think—we have done the best job we can putting into our guidance a reasonable estimate, and we do not have a crystal ball on what this could mean longer term. What we are focused on, as you guys know, in wrapping this up, is really how do we deliver in any environment. And you have seen us do this with the same experienced management team, you know, through COVID, post-COVID giveback, and now through all this geopolitical uncertainty and tariff chaos. And, you know, it is noisy out there, but we tend to be able to handle it better than most and be ahead of it. And so we will take it as it comes, and we will continue to update you. Operator: This concludes the question and answer session. I will hand the call back over to Laura for any closing comments. Laura Alber: Thank you all. Hope it is getting warmer across the country. All of you—and some sunshine is out—and please go visit our stores and see what we are doing. We appreciate your support, and we cannot wait to update you throughout the year. Thank you. Operator: This concludes today’s call. Thank you all for joining. You may now disconnect.
Operator: Good day, and welcome to the Five Below Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Christiane Pelz, VP, Investor Relations. Please go ahead. Christiane Pelz: Thank you, operator. Good afternoon, everyone, and thanks for joining us today for Five Below's Fourth Quarter 2025 Financial Results Conference Call. On today's call are Winnie Park, Chief Executive Officer; and Dan Sullivan, Chief Financial Officer and Treasurer. After management has made their formal remarks, we will open the call to questions. I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and our SEC filings. The forward-looking statements today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements. In this presentation, we will refer to our SG&A expenses. For us, SG&A means selling, general and administrative expenses, including payroll and other compensation, marketing and advertising expense, depreciation and amortization expense and other selling and administrative expense. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP are included in today's press release. If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at fivebelow.com. I will now turn the call over to Winnie. Winifred Park: Thank you, Christiane. Hello, and thank you all for joining us this afternoon. We're excited to share our outstanding fourth quarter results that capped off a transformational year for Five Below, one that reaffirmed that Five Below is the destination for the kid and the kid in all of us. We are a unique brand and our incredible financial results in 2025 tell only part of the story because what made this year truly exceptional is how we achieved the results. We made a fundamental shift in how we operate, how we engage with our customers and how we strategize and deliver growth of the business and the brand. And our maniacal focus on our target customer has pushed us to be more agile in delivering newness at great value and as importantly, communicating with our customers in the social media channels they live in. In 2025, we invested in curated product stories bought with authority. Better in-stock position supported by a store labor model focused on replenishing product and serving customers during peak periods led to a better experience for our customers and drove sales. For the year, we delivered sales growth of 23% to over $4.7 billion, a comp of 12.8%, operating margin expansion of 70 bps to nearly 10% and adjusted EPS growth of 32%. We grew our store count by 8.5%, opening 150 net new stores with strong results, capped by 8 record-breaking grand openings in the Pacific Northwest in the fourth quarter. This performance was achieved during a challenging macro environment that required tremendous urgency and agility from our incredible crew, who are the real secret to our success in 2025. These results incorporate a better-than-expected end to the year with our strongest holiday performance since becoming a public company. We delivered fourth quarter sales growth of 24%, including a 15.4% comparable sales increase. Importantly, this growth was both broad and balanced as we further strengthen our position as a portfolio-driven product business. We saw strength across all our merchandising worlds, and we grew in all 170 districts, all vintages of stores and across all income cohorts. We drove both traffic and ticket growth resulting from improved marketing, amazing new product packed with compelling value, better in-store execution and positive customer response to our simplified pricing strategy. I'm so proud of our crew for their focus and dedication in producing these results. I'm equally grateful for their hard work and commitment as we united and embraced change. It was a year of transformation as we successfully delivered 6 hard nut moments with a new go-to-market process focused on storytelling and product newness. Tackled tariffs, overhauled our marketing to focus on social media, expanded our omnichannel capabilities with third-party delivery service and bolstered the executive team with new leaders in marketing, finance and merchandising, all of which has laid the foundation for continued growth. And most importantly, over the past year, we defined and executed our new strategy, which is underpinned by 3 pillars: a maniacal focus on the target customer, delivering a connected customer journey from social to in-store and collaborating cross-functionally to enhance execution throughout the year. Our strategy reinforces our position as the true destination for the kid and the kid and all of us. First, we further defined our target customers, sharpening our focus on Gen Alpha, Gen Z and millennial moms and ensuring our product, marketing and store experience resonate with their needs and more importantly, what is trending and what they are following. Second, we met our customers where they are, namely in social, where we can dynamically engage with creator content and amplify viral moments like the current Squishy Dumpling craze. Speaking to our customers in social channels and following up through targeted content and direct communications by capturing customer records will drive even more resonance and repeat visits as we develop our CRM capabilities. And third, changing how we work. We aligned merchandising, marketing, supply chain, IT and store teams around 6 curtain-up moments. operating with urgency and discipline to ensure a seamless flow of content and newness to our stores. This structural change through a disciplined cross-functional go-to-market process has activated our flywheel of delivering timely newness, compelling storytelling and great in-store experiences like events and curtain-up floor sets. The result is an improved customer experience, generating more visits from new and existing customers. On merchandise, we have systematically delivered relevant newness throughout our world with curated assortments at great value. We continue to focus on differentiating our offer through amazing price value for the quality we provide from the hottest license lines to viral trends in beauty, fashion, candy and collectibles. We've also launched exclusive licensed product for our old favorites like Stitch as well as newer franchises like Wicked. This holiday, we aspire to be the greatest little toy store in America. And to this end, we offered everything from LEGO to cracking kits and remote control cars, all at amazing value. In addition to compelling gifts from toys to beauty sets and yummy holiday PJs to ginger bread house kits, we offer customers a one-stop shop for holiday decor, gift wrap and party essentials. Value remains a critical linchpin for our offering, and we demonstrated that we can effectively provide exceptional value at $5 and below as well as at $7, $10, $15 and beyond. Customers recognize the compelling value across the assortment and at all price points and their receptivity to our expanded offering above $5 reinforces our belief in the tremendous relative value that our products provide. Moving to more rounded price points also helps simplify and improve the shopping experience for our customers and the crew. In terms of marketing, we redirected spend towards social and creator content so that we could be faster and more agile in communicating newness and amplifying viral moments that customers were generating on their own. We have just begun building a customer database, which will sharpen our ability to direct personalized social and direct marketing content to better engage with our customers and develop a relationship with them. While we're still in very early innings with the strategy, we are very pleased with how it drove traffic and sales growth, both online and in stores throughout the year. On to the store experience. We bought into newness and trend with conviction, delivering improved in-stock levels. We also invested in labor at peak periods to ensure that our shelves were restocked and customers' needs were met. We met -- we made our store easier to shop for our customers by beginning to move Five Beyond products in line with the categories where they logically belonged. As we simplified operations and improved communication and collaboration, our crew was even more engaged, leading to better execution and attentiveness to our customer, the boss. Providing a terrific experience for our customers while also driving greater productivity in our stores remains a priority. We also became more planful in our approach to new stores. We dialed back the pace of unit expansion to sharpen focus on the quality of locations and ensure that grand openings were brilliantly executed. With our customer-centric strategy well underway, strong comp performance and accelerating new store productivity, we're confident in the long runway of growth ahead. The results of 2025 offer clear proof points that our transformation is gaining traction, and we have more runway. As we enter 2026, we believe the business is well positioned for consistent, durable top and bottom line growth. Continuing to execute on our customer-centric strategy provides us great opportunity to further strengthen the Five Below brand and deepen the competitive moat that our unique retail concept provides. With our growing scale, we are focused on expanding our brand and customer reach across our communities, bringing joy to kids, adults and parents as we help them to play, live, give and celebrate. As we evolve, I am confident that we will retain our strong customer-focused and entrepreneurial culture and remain unrelenting in our commitment to provide unmatched value to our customers. With that, I'll turn it over to Dan. Daniel Sullivan: Thanks, Winnie. Good afternoon, everyone. I'll begin my remarks with a review of our fourth quarter and fiscal 2025 results and then discuss our outlook for the first quarter and full year of fiscal 2026. My comments will refer to results on an adjusted or non-GAAP basis. As Winnie mentioned, we were very pleased to end the year on a strong note with sales and profit exceeding our expectations. In January, we saw stronger-than-expected traffic growth, which converted well and broad basket growth that was fueled by AUR expansion. For the fourth quarter, net sales increased 24% to $1.7 billion, supported by a strong comparable sales increase of just over 15%, which was driven by growth in comparable ticket of 8% and comparable transactions of 7%. Importantly, operating profit grew ahead of comp sales growth, further evidencing the strength and efficiency of our business model. We are operating in a highly dynamic environment, and the end-to-end execution of our crew was noteworthy. In the fourth quarter, we opened 14 net new stores across 8 states compared to 22 net new stores in the fourth quarter last year. In 2025, we grew our store count by 8.5% and ended the year with 1,921 stores in 46 states, including the 2 new states of Oregon and Washington. Adjusted gross profit increased 24% to $697 million or 40.3% in rate of sale, a decrease of approximately 20 basis points compared to the fourth quarter last year. This was primarily driven by transitory tariff costs of 160 basis points, which were mostly mitigated by fixed cost leverage on the strong comp sales and improved shrink results. For shrink, the results of the physical inventory accounts we conducted in January were actualized and trued up for all stores for a total benefit of 50 basis points year-over-year. Adjusted SG&A expenses totaled $385 million in Q4 or 22.3% in rate of sale, which was consistent to last year's fourth quarter rate. The benefit of fixed cost leverage fully offset increased incentive costs and the incremental investment in labor hours that we made in the stores during the peak holiday period. Adjusted operating income grew 23% in the fourth quarter to $313 million, and adjusted operating margin decreased approximately 10 basis points to 18.1%. Net interest income was about $6 million for the fourth quarter or approximately $2 million higher than last year due primarily to a higher average cash balance throughout the quarter. Adjusted net income grew 25% to $240 million and adjusted earnings per share increased 24% to $4.31 per share. For the full year, net sales increased 23% to $4.8 billion, driven by a strong comparable sales increase of nearly 13% that was largely equally driven by both transactions and ticket growth. Adjusted gross profit for the year increased 25% to $1.7 billion or 36.1% in rate of sales, an increase of approximately 50 basis points compared to last year. Adjusted gross margin accretion was primarily driven by fixed cost leverage and improved shrink results, partially offset by the net impact of unmitigated transitory tariff costs. Adjusted SG&A totaled $1.2 billion in fiscal '25 or 26% in rate of sale, which represented a 20 basis point decrease compared to last fiscal year. This was driven by fixed cost leverage on the strong comp sales, largely offset by higher incentive costs and investments in store labor during the holiday. Adjusted operating income grew 33% for the year to $472 million and adjusted operating margin increased 70 basis points to approximately 10%. Net interest income was about $23 million for fiscal 2025 or approximately $8 million above last year due mostly to a higher average cash balance throughout the year. Adjusted net income for fiscal 2025 grew 33% to $370 million, and adjusted earnings per share increased 32% to $6.67 per share. We ended the year in a strong cash position with approximately $932 million in cash, cash equivalents and investments. Inventory was approximately $847 million at the end of the year, an increase of 28% with a commensurate 18% increase in units versus last year. The increase in inventory reflects both the higher store count and the impact of tariffs on average unit costs. Average per store units were up about 9% at year-end, reflecting the pull forward of inventory and our commitment to driving higher in-stock positions in store in support of our growth objectives. Capital expenditures, excluding the impact of tenant allowances, were approximately $175 million or 3.7% of net sales, which includes 115 net new store openings and investments in technology and infrastructure. We continue to allocate capital in support of growth with a clear view towards delivering the best return on that investment and with each dollar we deploy competing for the highest return. We generated strong free cash flow and plan to continue to focus on reducing our working capital in fiscal 2026 as we cycle the impact of tariffs. Overall, 2025 proved to be a year of transformation for our business and the successful execution of our strategy delivered outsized top and bottom line growth. In a challenging and dynamic macro environment, we operated with both urgency and discipline and with maniacal focus on the needs of our customers. Now on to our outlook for fiscal 2026. We're operating in a highly dynamic and increasingly complex macro environment with significant geopolitical uncertainties and difficult to predict implications for the consumer. We believe this backdrop provides the rationale for a measured, prudent outlook. This year also has a few nuances, primarily related to the cadence of sales and the impact of tariffs. With respect to tariff rates specifically, for 2026, we have assumed that the global tariff rates that were in place as we entered this fiscal year will remain in place all year. Our outlook, therefore, does not contemplate the impact of the recently enacted Section 122 tariffs, which are only in place for 150 days. Now with respect to our outlook for the year. Sales are expected to be in the range of $5.2 billion to $5.3 billion, an increase of 10% at the midpoint and comparable sales growth is expected to be between 3% and 5% or approximately 17% on a 2-year stack basis at the midpoint. Adjusted operating margin at the midpoint is expected to increase 100 basis points to 10.9%, driven by gross margin expansion, net of increased marketing investments. Adjusted diluted earnings per share is expected to be $8 at the midpoint or growth of 20% versus 2025 on 55.7 million shares outstanding. As a reminder, our outlook does not include the impact of share repurchases. We expect net interest income of approximately $26 million and a full year effective tax rate of approximately 26%. Capital expenditures are expected to be between $230 million and $250 million, excluding the impact of tenant allowances, which reflects approximately 150 net new store openings and increased investments in technology and infrastructure. On to the guidance for the first quarter of 2026. We expect total sales in the range of $1.18 billion to $1.2 billion or growth of 23% at the midpoint versus last year's first quarter, with comparable sales growth of between 14% and 16%. The first quarter is expected to be our highest comping quarter of the year, in part due to the un-anniversaried benefits of the rounded price simplification strategy that we implemented last year. We expect to open approximately 45 net new stores across 24 states in the quarter. Gross margin in the first quarter is benefiting primarily from fixed cost leverage on the strong comps, higher merchandise margins related to the net benefit of pricing and lower shrink. Adjusted operating margin at the midpoint is expected to be 9.7% versus 6.1% in the first quarter last year, with the majority of the 360 basis point increase driven by gross margin expansion and to a lesser degree, leverage over SG&A expenses. Adjusted diluted earnings per share at the midpoint is expected to be $1.63 per share or growth of 90% versus last year. In summary, we're very pleased with the underlying performance of the business and the continued execution of our customer-centric strategy underpins our confidence in this outlook for 2026. We remain focused on executing at a high level and continuing to deliver on our top and bottom line growth for the business. With that, I'll hand the call back over to the operator to start the Q&A session. Operator: [Operator Instructions] The first question will come from Matthew Boss with JPMorgan. Matthew Boss: Congrats on a great quarter and the continued momentum. So Winnie, could you help by breaking down the drivers behind the magnitude of comps that you're seeing near term, mid-teens comps the last 2 quarters? And if you could speak to the acceleration that you've seen in the first quarter or maybe even larger picture, if you could just walk through the structural changes to the organization and maybe some of the new customer acquisition metrics that support this as durable or drivers off of a higher revenue base from here? Winifred Park: Thanks so much, Matt. It has been a tremendous quarter, and we're excited to see that momentum continue. And really, I would say that there is one word that characterizes our success, and that is our crew. And I say that because what we've done is we have basically taken a year of pretty significant change and driven amazing results of that change and that transformation. The change started with a real focus on the customer and getting back to our roots and focusing on the kid and specifically Gen Alpha, Gen Z and millennial parents, who love to reward their kids with the trip to Five Below. The second piece is really focusing in on how our customers basically become aware of us and how they get to us and how we announce newness to them and creating what we're calling a connected customer journey. And we're meeting our customers where they live, which is in social media. So we redirected our marketing to focus on social media. We've also just begun the journey of actually capturing their records so that we can continue a dialogue with them and invite them back, which we think is going to be a major lever for growth in the future, just driven off of repeat visits and again, engagement on new content. The last piece is the team pulled together and executed brilliantly. And I call this the flywheel effect, and it really was about cross-functional collaboration across the organization. We honed in on the 6 curtain-up moments or new floor sets. But instead of just passing the baton between the merchants and marketers and stores, we basically start the season together, really hindsighting together what just happened. And then as we move forward through the season, being connected throughout. And that culminates in a call with our 1,900 stores to really tell them what is, number one, the newness that we're bringing forth. Two, what is the marketing message, what are we going to be activating in stores and beyond and then staying really connected in terms of how we drive the product into the stores and ensuring that they've got, honestly, good in-stock positions. So it is a bit of retail 101, but executed really, really well. And I think that moving forward, this is early innings. I joined a year ago, so we've just started executing against the strategy, and the team has executed very well. But we've got more growth ahead of us that I think is incredibly durable. And one of the things that makes it so relevant is the fact that we've got a unique retail concept. So we're operating as a differentiated specialty store for kids, but with the discipline of an extreme value retailer. So all very good. Thank you so much, Matt. Operator: The next question will come from Edward Kelly with Wells Fargo. Edward Kelly: I'd like to add my congratulations. I would like to ask you about just the comp momentum, and there's a lot of excitement about what you've been seeing so far in Q1. And I was hoping that you could maybe talk about what you think is driving that, particularly from a trend standpoint. And then as you take a step back and think about the Q1 comp guidance versus the full year comp guidance, can you just sort of help us bridge the way you're thinking about full year given the robust start out of the gate? Winifred Park: Thanks so much, Ed. I'm going to kick us off and talk to you about like the business that we're seeing now and then also have Dan lean in and talk about how we're going to bridge quarter-to-quarter. So we're really excited. I think what we saw in consecutive quarters last year continues this year. We really do have right now in Q1, broad-based growth. And it's across our entire assortment. We're excited that our worlds are all comping, and we have been very intentional to take more of an assortment approach as opposed to relying on a single item. So what you do is you take that growth across all of our worlds that's being kind of driven by great traffic, great transactions, also AUR. But then you layer on top of that some compelling trends that are happening right now. And in the past, when those trends happened, we weren't communicating directly with the customer vis-a-vis the channels that they live in like social. Today, we can engage directly. We see something pop on social like the squishy trend. And what's really nice is that we can amplify that through, honestly, what we say and do, but also watch it carefully. And we've got a whole community of stores that's also engaging as well as brands. So it's been really nice to see that, and we're enjoying that in this quarter in particular. And I'm going to let Dan step in and just help us bridge a bit. Daniel Sullivan: Yes. Thanks for the question. You're right. We're off to a good start here in the quarter that we're in, and I think you all see the same data that we see. There's great momentum coming out of the holiday, which we're super excited about. And the midpoint of our Q1 guide on comps puts us right smack in line with run rate trend, which we think is appropriate. As we go to sort of the balance of the year and to give you a little bit of the thinking on how we constructed the guide, I think the most important thing that I would highlight is what we're up against as we think about Q2, 3 and 4. We're going to start comping some really, really tough growth quarters. And I think just pure math, when you think about a Q2 last year at plus 12%, all the way up to plus 14% in Q3 and plus 16% in Q4, that's real, right? That's math and that matters. And so that obviously factors in. I think the second thing I would highlight is just the state of the consumer and the macro environment in which we're operating. And we just don't think it gets easier from here, whether it's the prices at the pump or this sticky inflation that seems to be hanging around or a job market that is somewhat sluggish. We think the environment here is going to continue to be challenging. And so we sort of factored that in as we thought about the plans that we have, the execution and the newness and the strategy that Winnie referred to and then ultimately, what we're up against in terms of back half of the year and trend. The last thing I'll say is when you look at Q2, 3 and 4 of our business on a 2-year stack, which is, I think, really important because it takes the noise out of a moment in time. Over those quarters, you're seeing mid-double-digit growth consistently Q2, Q3, Q4. So that tells us we're still in a real strong growth position, and I think we've put the guide together in a pretty constructive way. Operator: The next question will come from Simeon Gutman with Morgan Stanley. Pedro Gil Garcia Alejo: This is Pedro Gil on for Simeon. Great quarter, fantastic momentum. Congratulations. My first question is for Winnie. In your prior roles, have you experienced a period of such strong growth as you're seeing right now? And what are the learnings that you take from those positions, from those roles that you can apply to comp the comp here into 2026? And then I have a follow-up. Winifred Park: Thanks so much for the question. So I actually have seen strong growth in my past life, especially when I was engaged in international and in international luxury. What's nice though about Five Below is that we really think we've got I guess, a toolkit for durable growth as we move forward. And we think the strategy is compelling. I mean you really start with the fact that we have a unique retail concept that's focused on kids. And I think that, that's compelling here in other places. The second piece of this is our execution is really, really strong. And I think you can have a brilliant strategy, but if you can't execute, and with our teams and our crew, the execution is about collaboration and being really one team, one dream, being very close in terms of the trends that we're seeing and reacting quickly. And I would say the last piece of this is we're just really excited to be able to engage directly with the customer. The customer is responding well, I think, in part because we're talking to them. And it's not a one-way dialogue, traditional advertising where you just put it out there. We're engaging with them constantly. And through our new marketing efforts through social media, we can be incredibly agile. If something is popping, we can immediately react. And the other piece of it is we've got a rich source of information because we can see what's trending out there and again, react. So I would say that all of those things give us a lot of confidence. And I do think this growth is special, but it's also durable. Thanks so much for your question. Operator: The next question will come from Michael Lasser with UBS. Michael Lasser: It's really on investments that you can make in order to sustain this momentum moving forward, and it comes in 2 parts. First, Dan, you mentioned that you're expecting 100 basis points of gross margin expansion this year. How would you break that down from factors that are unique to this year versus letting more of the goodness flow to the bottom line rather than reinvesting in? And does that create some tension over the long term if Five Below is not reinvesting all of the scale and other benefits it gets from being a bigger organization? And then as part of that, if you could just talk about how we should be modeling the contribution margin if indeed you are able to sustain this comp momentum above and beyond your guidance, would you choose to reinvest some of this outperformance back to be able to sustain this comp beyond 2026? Daniel Sullivan: Michael, thank you very much for the thoughtful question. So look, if you look at 2026 as a whole, we've got actually 130 basis points of gross margin accretion year-over-year and about 100 basis points of operating profit accretion. That's the model that we've built, and that's on the 3% to 5% comp that we put together. The way we get there, to answer your first question on sort of what's driving that margin, taking away sort of the leverage point and the shrink point, I think you've got 3 fundamental drivers. You've got price, which we won't anniversary until late in 2Q. You've got the cycling of the transitory tariff headwinds of a year ago. and you've got a structurally lower tariff rate versus a year ago, mostly related to the reduction in the fentanyl tariff in China. Those are the predominant drivers of the gross margin accretion, and they'll play differently between half 1 and half 2. I think to your second question on the investment stance of this business, look, we feel really good that we are remaining committed to a growth stance for the business. That growth stance shows up, in my opinion, in a few different ways. We are incrementally investing in marketing this year, and you've heard Winnie talk a lot about the vision for how we want to engage, how we want to build awareness for this beautiful brand and talk to our customers in a different way. That's about 20 to 25 basis points of incremental year-over-year investment. We are continuing to invest in labor. We have seen the benefit of what happens when we put the right profile on the shop floor at our busiest times. And so we're committed to getting that model continue to be optimized. And then thirdly, we're going to continue to lean in on capital and support the growth of this business, both in new stores, but also in capacity within our distribution network to make sure that we're ready not only for 2026, but beyond. So I think we've got the right balance here of fueling and funding this growth, but also being thoughtful about what flows to the bottom line. Look, to your second question, what happens if we outperform this? That's a long way away for us. We would love to entertain that. We're certainly thinking about that every day, but we'll have more to say about that should that situation arise. Operator: The next question will come from Scot Ciccarelli with Truist Securities. Scot Ciccarelli: Dan, I think you mentioned you're seeing the same data that we're seeing on the outside. But I think what we're seeing on the outside would suggest you're providing a relatively conservative guide, at least at this point for the first quarter. Is that based on just conservatism? Is it because we still have Easter ahead, et cetera? If you just could provide more clarity around kind of the thinking on that. Daniel Sullivan: Absolutely, Scot. Thanks for the question. Look, we're seeing the same data. You're seeing -- we're thrilled with what's happening out there. I think we've got to put context here, though, as well. We're 7, 8 weeks into the quarter. These are relatively low volume weeks. And I think that's important to note. It doesn't take away from the performance. But I think this quarter is going to be delivered based on what's in front of us, not what's behind us. Easter is a big deal. Those are 2 really important selling weeks for us. It's an early Easter this year, which is not ideal, but survivable. And we've got to get that right, and we know we will. I think the second thing I'll go back to Winnie and I both talked about it is, look, the state of the consumer is not as strong as when we exited the year. And I think we have to be thoughtful about that as well. There's a threshold here in terms of wallet and the consumer is under a lot of pressure. And so I don't think we're trying to be conservative. It's not our intent. I think we're trying to be thoughtful halfway through the quarter, knowing we've got a lot left to do, particularly around Easter to land the quarter. So hopefully, that answers your question. Operator: The next question will come from Paul Lejuez with Citi. Paul Lejuez: Can you talk about your AUR and ticket assumptions for the first quarter versus transactions? And then I'm curious, as we think about 2Q to 4Q, are you looking at those quarters as being consistent on a 1-year basis as you move throughout the year? Or are you looking at them as being consistent on a 2-year basis? Or are you building in a stronger second quarter coming down a little bit, decelerating as we move throughout? Anything you could share on that second quarter to fourth quarter cadence and the AUR ticket and transaction assumptions? Daniel Sullivan: Great. Thanks for the question, Paul. Yes, look, let's start at the macro level. We've got comp growth built into every quarter in the year. So I want to reinforce that point. I think we made it in the opening remarks, but I think that's important to note. Obviously, yes, you're right, the sequential growth will slow as the cycling effect is more pronounced. And '25 got stronger as the year went on. which means the cycling challenge is harder in '26 as the year goes on. In terms of how we thought about sort of ticket and AUR, I would sort of maybe ladder up and just think about it in terms of half 1 and half 2. We've modeled very consistent trends that we saw coming out of the year, particularly in Q1 around ticket growth and AUR-driven ticket growth. It's what we saw in the fourth quarter. It's what we expect to see in Q1. That will obviously moderate as we move into Q2 and we anniversary the price increase. And then over the back half of the year, yes, you're going to see a little bit more balanced, a little bit more moderated growth between both ticket and transaction. We do expect growth in both, but it will be more modest given what we're cycling against. Operator: The next question will come from Robby Ohmes with Bank of America. Robert Ohmes: I was just curious on the first quarter and the strength you have there, and it might be hard to see behind it. But is there any -- was there any storm impact coming in the first quarter? Does early Easter mean anything for you guys? And maybe to call out historically, how has tax refunds helped or not helped Five Below's business? And are they helping right now? Daniel Sullivan: Yes. So all that certainly went into how we thought about the first quarter. There is certainly tax proceeds in the market. They came a bit earlier than what we've seen previously. We think that's a bit behind what we're seeing in the early results in the quarter. That's been favorable. Look, I think in general, an early Easter is less advantageous than a late Easter. It sets up that post-Easter time line where it's still unfortunately a bit cold and you don't get the full spring/summer sets going. But that's de minimis. That's probably on the rounding. I think at the end of the day, Easter is still a pronounced piece of the quarter for us earlier or later. It's a big piece of how we think about the quarter. And so yes, you've got a bit of tax funding that's worked its way through earlier than maybe we would have expected. You've got Easter out there. I think all of that has factored into how we constructed the first quarter comp guide. Operator: The next question will come from Chuck Grom with Gordon Haskett. Charles Grom: Can you guys unpack the traffic between new and existing customers? And then separately, on store growth, what it would take to accelerate unit expansion from here in '26 -- sorry, in '27 and '28? I guess what are you guys looking for given how strong NSP has been over the past year? Winifred Park: So we've seen growth in both new and existing at equivalent levels and actually at really, really great levels that we haven't seen in the past. As I mentioned before, I think that the marketing strategies that we've deployed are -- they're very effective. They're working. And as we gather customer records, I think that we'll be able to see further growth, especially with that existing customer base and hopefully, growth in that customer lifetime value, especially as kids enter and they grow up, see us at college and maybe one day become parents and come back to us. So really, really good potential out there. In terms of store growth, I think overall, we've taken a position of being incredibly disciplined. I think that's the difference in the past year. And that discipline means evaluating the best locations and more importantly, opening with maximum impact. So ensuring that we've got the right level of inventory, ensuring that we've got a crew who are well trained and really, I think, bringing back grand opening marketing and shouting to the community that we're there has worked. And so we really want to focus on the number of stores. I think there's a lot of white space out there for us, but it's more important that we get the right ones and the right level of execution against them. Thanks so much, Chuck. Operator: The next question will come from Zhihan Ma with Bernstein. Zhihan Ma: Winnie, I wanted to follow up on your comment about pricing and various price points above $5 to $7, $10, $15. Now it's not the first time that Five Below is going beyond the $5 price point. What do you think has changed in terms of you seeing the customers giving you the permission to realize more pricing power this time around beyond the $5 point? Winifred Park: Thanks so much, Zhihan. So a couple of things have changed fundamentally. One thing remains the same. We remain very committed to delivering as much value and as much assortment at $5 and below. It represents about 80% of our business in terms of units sold. We're very excited about that number. We're proud of it. We want to be a resource for customers where the price of entry is $1. And so building in great value is always going to be central to what we do. We took a very different approach to pricing above $5. A couple of things. One, we evaluated every single product and really looked at if you're going to bring in a price point above $5, does it deserve to be at $7, $10 or $15. And so an example over holiday was really compelling gift sets and bundled products that were at $10. That makes a big difference. And again, focus on relative value and also making sure that we are honestly priced better than competition. So that all goes in the mix. The other aspect of how we think we've gotten permission from the customer is we basically merchandise the store the way they shop. In the past, all of these goods would be in the back of store in the Five Beyond area. And we work very hard to actually try and expand that and actually put these really compelling wow value items in the zones where the customer is shopping. So I'll give you the example of a great speaker and the speaker table. You don't need that to be in the back of store. If you put it in the tech section with the other speakers, the customer sees the value in it. And so I think really leaning into how the customer shops, ensuring that they're getting great relative value and remaining very, very focused on what the competition is pricing at versus what we price at has been tremendous. The last thing I'll say about Five Below that's really great is we're about newness. And so as we introduce new products at higher price points, they're not comped to old products that were in the price -- in the line. So we can really step out and do something unique. And the customer has responded well and is giving us permission to do more at different price points. Thanks for your question. Operator: The next question will come from Brian Nagel with Oppenheimer. Brian Nagel: Great quarter. Congratulations. So the question I want to ask, focusing on sales, and look, we have laid out the guidance. I mean you talked about continued strength through the year, but really in the first quarter. But as we think about 2026, how should we -- are there factors that are beyond what you're already doing, new factors that should amount to key sales drivers for the year that we maybe did not see in 2025? Winifred Park: So Brian, thanks so much for your question. Honestly, I would say that in 2025, we planted a lot of seeds for growth, and we see a lot of green shoots. And so our intention during the course of the year is actually to amplify what we've already planted and started to read. And I will give you the example of our ability to actually react to trends as one of those ideas. So in the past, there could be trends that were really hot, especially for kids. And we were passive. We were able to provide the product, but we weren't able to engage with the customer and amplify those trends. Today, we've got a different toolkit. So we really can actually build community and engage with the customer about what's hot and also react much faster than in the past at addressing that trend. We also are going to take permission to look at those trends and introduce new trends along with that. So I think that, that is something we're beginning to exercise and we'll exercise throughout the year. We also -- honestly, last year, we had the tariffs hit us. And so we weren't able to actually buy or attain all the products that we wanted to fill out some of our worlds. And this year, that is not an object. We've worked very hard to diversify our store space to negotiate. We do have the benefit of being able to price at great value above $5. All of this is going to lead to greater range and greater growth in certain categories that we weren't able to really service last year. I hope that answers your question. Operator: The next question will come from Jeremy Hamblin with Craig-Hallum Capital Group. Jeremy Hamblin: And I'll add my congratulations on the success. First, just a clarifying question on the embedded tariffs in guidance. So I think what you said was that you're modeling actually like, for example, for China, what the ending 2025 tariff rate would be like 20% for China and not the 10% for the current global tariff rates. So just a clarification on that. And then my other question is, if you think about the long-term model here, and you guys for a very long time, for a decade did roughly an 11% to 12% EBIT margin every year. And you've been building back towards that through a combination of improved operations and clearly higher AUVs. Where do you think you would need to comp at? Or what do you think the average unit volumes would need to get to get back to that 11% to 12% EBIT margin? Daniel Sullivan: Thanks, Jeremy. Let me take the tariff question first, and then we'll talk about the business model. And maybe I'll just take a step back and confirm for the group, how have we thought about tariffs in total in this outlook. First of all, and I think you were in the right place to start. We have essentially assumed that the tariff rates that were in place as we started the fiscal year on February 1, remain in place. So in rough terms, that means that the IEEPA tariffs that were eventually struck down later in February, we have assumed those are still in place for the year. We think that's the best proxy in a very, very uncertain world given the comments that we've seen from the administration to get back to that level. So that's what's embedded in our outlook. Equally, we have not contemplated the impact in our guidance of this 150-day 10% global tariff rate, the infamous Section 122 tariffs. We have not factored that into our guidance. We don't believe that, that impact is material to the guidance. So that's how we thought about tariffs. On the business model question that you're asking, look, I think we're not running this business to achieve a certain number, 12%, 13% op profit. What we're doing is designing a model that provides durable growth. And I think this year is a great example of that. The ability to comp on top of 2025 speaks to the durable growth. We're going to be super smart and drive margin accretion and that margin accretion is going to balance reinvestment and bottom line operating profit growth. How that model plays out and over time, what does that balance look like between reinvest versus grow the bottom line? I think that's what we will ultimately decide as we engage over the years. But I think it all starts with a trusted, durable growth profile that based on the strategy and to Winnie's comments, the way we're executing the strategy, we feel really, really good about our ability to do that. And then I think over time, we will get the mechanism right and the balance right of reinvest to continue to fuel that growth versus grow the EBIT margin line. And that's what we will do over time. Operator: The next question will come from Krisztina Katai with Deutsche Bank. Krisztina Katai: Congrats on a great quarter. So Winnie, I wanted to ask on the 6 pertinent moments that delivered newness and the great in-store experience that you talked about. Just how many curtain-up moments are planned for 2026? If you could talk about the expected percentage of newness within the assortment that you aim to achieve through these? And then just lastly, some of the key categories that you anticipate driving the most excitement in the coming year. Winifred Park: Krisztina, so we will also feature 6 curtain-up moments this year like we did in 2025. And they really are the seasonal moments that our customers focused on, be it New Year's, followed by Valentine's through to spring, Easter, et cetera. So it really is their moments. And what's really nice is that between those moments, we can always layer in newness. And we actually have newness in each of our worlds that occurs between those moments, and we have the ability to now talk to the customer about when those moments deliver. The key to our business success this past year has been getting the right product at the right price. And I think that, again, it begins and ends with the focus on the customer. And when we talk about key categories that we think are important, we set off last year with a mission to really be the destination for the kid and the kid and all of us. And with that, really doubling down on games, toys and crafting those thought processes that we really stand out, both in terms of our position but also in terms of our unique concept. We've got 9,000 square feet on average. It's a fun place to shop, and it's a fun place to host kids. And then beyond that, really looking at teens and tweens. And so we continue to fuel our businesses like beauty as well as our lounge business and accessories. And so -- and then this year, I think we are really excited about doing more in terms of room and dorm. And so lots of great newness throughout our categories and our worlds. But again, with that focus on the kids and what they care about. Operator: The next question will come from Anthony Chukumba with Loop Capital. Anthony Chukumba: I guess I have a quick one for Winnie. This has just been such an amazing first year. Are you sure your first name is Winnie and not Winning? Winifred Park: Anthony, that's very kind. It's Winnie, like the Pooh. Which is also a great product in the line right now. Operator: The next question will come from David Bellinger with Mizuho. David Bellinger: I don't really know how to follow that one. But my question is on social media. I mean, Winnie, you mentioned some of the influencer, TikTok, Instagram marketing. Are you looking at those sales as truly incremental at this point? And just can you help us think through any of the economics around that? Do you pay for a post to the influencers, participate in any upside? Just help us understand the economics and the incrementality at this point. Winifred Park: Yes. So David, what we've done is basically redirect what used to be spent on traditional TV commercials into social media. And it's a whole range. It's both engagement in terms of creator content with creators and influencers. But it's also just ensuring that if you're watching -- if you're on social and your Gen Alpha and you're watching a great video about Stitch and your interest in Stitch product, we're serving up the right content to you. And so it's a multipronged strategy. It's not as simple as just going out and paying for influencers. I think that what's been really, really great, especially this year as we look at the first quarter is that it's less about influencer content, and it's much more about our ability to amplify what is user-generated that's out there. People are talking about these products. We're able to lean in and say, we've got those products, we've got you. Even our stores are engaged and talking about like this product just landed. So I think it just gives us access to a remarkable channel that, again, is agile, incredibly effective in terms of return on ad spend. And honestly, the last piece of this is compelling. It's something that the customers want to engage in. And so all those pieces give us courage to do more, but we always have a test, learn and ramp approach on anything we do. And so I've been really excited by what we've seen thus far. Operator: The next question will come from John Heinbockel with Guggenheim. John Heinbockel: Winnie, a quick question. I know in the past, you guys would run events in stores on the weekends. Your thought on that, the labor required for that? And then could you do birthday parties and other related parties or that's too complicated labor-wise? Winifred Park: Yes. John, great question. So first of all, on events, we continue to host events. We just had an amazing Pokémon event. We've been really pleased. And I think part of it is those events are incredibly sticky and create community. And it's something that certainly our brands and vendors want to help activate. So it's a 1 plus 1 equals 3 equation. And the sales that we generate in general, really do fund -- more than fund any labor that we put towards the events. I do think it's an interesting and compelling question with regards to birthday parties and other activations. We haven't contemplated that really fully. However, what we are trying to lean into is try to be a one-stop destination for your birthday needs. And so we're excited about our balloon business. We don't aspire to be all of balloons, but the best of balloons and really think about our target customer and then offering really great party celebration items that complement what we've always done, which is party favors and gifts. So those are some thoughts. But certainly, as we focus in on kids, we look at all avenues of potential growth and what that could do for us. Operator: The next question will come from Michael Montani with Evercore ISI. Michael Montani: I was going to ask, could you just summarize for the year where tariff headwinds ended up falling out for you? And then I believe in the first round of tariffs, it was roughly 1/3, 1/3, 1/3 offset from pricing, cost out and then vendor leverage. So I'm just wondering if you could provide an update on how that has played out so far. Daniel Sullivan: Yes. Thanks, Mike. So we ended up largely where we thought we would a quarter ago, about 90 basis points full year headwind in 2025. In terms of sort of what we -- how we addressed those impacts, I go back to what I think is like a really important point with this business, which is we offset tariffs penny for penny at the item unit level. And that's obviously super important to the economics, and you see the benefit of that in 2026. because some of the gross margin tailwinds that we are getting right now is as tariffs have eased, we've got unit economics in a great place, and we've got margin accretion. So I think it's noteworthy that the team was able to offset all of the tariff headwinds at the item level. How they did it, I think you've got the 3 buckets, right, in terms of the pricing benefit, the ability to negotiate and the ability to reengineer and redesign product. I think all of that factored in. I don't know that I would size it 1/3, 1/3, 1/3. I think pricing was probably a bit more, but I'll leave it at that for now because I think you've got all 3 of the right levers. Operator: The next question will come from Brad Thomas with KeyBanc Capital Markets. Bradley Thomas: What a great year. Question on the step-up in CapEx, Dan, just what's that going towards? Any interesting technology or supply chain opportunities? And how are you thinking about perhaps getting back into some of the store refresh store remodel programs that have been in the past? Daniel Sullivan: Yes. Thanks for the question. And you're right, it is a bit of a step-up year-over-year in CapEx. We plan to be somewhere just over 4% of net sales in capital, which is slightly higher than where we ended 2025. I think the capital is largely going to continue to be focused on the network and the stores and building out the next round of 150-ish new stores. That's obviously the priority. The second piece, and you're right, we are making investments in the distribution network. We've got to build for more capacity to support this growth. And so that process begins in 2026, and we've allocated capital for that. And then we are putting a bit more capital behind technology. We're seeing real opportunity here structurally to enhance technology. We talked earlier about our digital business and the website. We've talked about how do we make the merch teams more efficient and optimize end-to-end management of this business. So there's a technology investment. And so you've got the new stores, you've got investments in the network and in capacity, and you've got a bit more going towards technology to support the growth. Operator: The next question will come from -- sorry, go ahead. Winifred Park: I was just thinking, Brad. Operator: The next question will come from Phillip Blee with William Blair. Phillip Blee: Congrats on a great quarter. So Winnie, you've spoken a lot about the contribution of the crew and incremental investments in labor over the past few quarters, how that's led to better conversion and in-stock levels. Do you think stores are appropriately staffed now? Or do you think that there's room for further increases in either hours or headcount, particularly as you ramp up omnichannel efforts? And then if so, how do you think about the opportunity to make additional gains in conversion? What kind of contribution could that have? Or has most of the low-hanging fruit been taken already here now? Winifred Park: Yes. Thanks for your question, Phillip. Great question. It's interesting because I think last year, we made an initial investment in terms of labor to ensure that we could do kind of the basics, which is to get product -- move product from the back to the front and to drive the conversion. And as the quarters progressed and we started to hit peak periods like holiday, we took a really thoughtful approach to match up peak traffic, peak days with recovery in our stores and ensuring that not only did the customer see the product on the shelf, but they got a better level of service. And so we will continue with that model. And as it relates to kind of future endeavors like omnichannel, we are very much in a test, learn and ramp mode. We have initiated buy online, pick up in store. We've seen actually big, big growth with third-party delivery. And so we're going to continue to look at those avenues because we've got to meet the customer where they are. And I think particularly for the younger customers, specifically Gen Z, convenience is critical. And we think there's -- it's actually an opportunity to acquire new customers who may not have considered us or walk away just because it's not convenient. And so we'll take a test, learn and ramp approach in terms of how we look at that. But we think that turning on omnichannel is just going to actually lead to greater acquisition and greater conversion moving forward. Thanks for your question. Operator: The next question will come from Spencer Hanus with Wolfe Research. Spencer Hanus: Just curious what you're seeing in terms of growth from like new and then existing customers. And then any change in how the recent results are just impacting your view on where this business can comp like durably out in the future? Like has your expectations moved up about sort of where comps land sort of in '27 and '28? Winifred Park: So Spencer, in terms of new and existing customers, we actually had what I would call a banner year in terms of both acquisition as well as repeat visits. And I would attribute that to more effective marketing and really, again, meeting customers where they are. I talked about the fact that we've just started collecting records for customers. And we think that our ability to, again, get additional repeat and to drive our current customer base in terms of their value is much higher as we move through the year, and that's one of our major initiatives for the year. We will also continue to focus on new customers and driving our brand awareness. So all really, really good stuff. And then I'm going to pass it on to Dan to talk about comp in the future. Daniel Sullivan: Yes. Look, we're super bullish on the growth profile of this business, right? You have to be -- you look at the comp growth that we have delivered, you look at the new store growth. We haven't talked about it on this call, but what we've seen in 8 new stores in new markets in the Pacific Northwest. So we've got a business that we think has an optimal opportunity to comp strongly with a lot of white space. And that is a very, very unique concept within retail. And so that's how we feel about it. I think going back to Winnie's earlier comments, we've got a compelling strategy. We're executing at an incredibly high level with a talented crew, and there are so many things left to do here. We have not scratched the surface on what's possible. And so you put all that together, I'm going to stop short of putting a number to it. But certainly, we are bullish with the growth aspects that this business offers us, particularly with this strategy. Thanks for the question. Operator: The next question will come from -- and the final question will come from Joe Feldman with Telsey Advisory Group. Joseph Feldman: I pressed late, I guess. But I did want to ask you guys because I know you've talked about with maybe thinking about a new format for the store now that you've brought out the Five Beyond items back into the aisles and have a more fluid merchandise flow, I was just wondering if you guys have been playing around with a newer format and what you're thinking there. Winifred Park: Joe. I think we're always looking at ways to make the shopping experience that much more inspiring and frankly, just easier. And certainly, with the evolution, I would say, of the Five Beyond area, we have opportunity to take the back of store and make it even that much more productive. And so we are looking at how to create better flow within the store without that Five Beyond area in the back and testing how we honestly convert stores in the network, but then also looking at new format work that allows us to really truly bring to life this idea of these worlds that customers can shop in and move from. And we are serving some distinct customer groups, the youngest customers with Gen Alpha, Gen Z, more teens, tweens and young adults and millennial moms, and they have very different needs. And so we're thinking through how do we optimize the experience for each of those cohorts. So more to come on that, but thanks for your question. Operator: This will conclude our question-and-answer session. I would like to turn the conference back over to Winnie Park for any closing remarks. Winifred Park: First and foremost, thank you all so much for your support, and we hope to see everyone in our stores for all your spring break and Easter essentials. We appreciate you. Please convert with us, and thank you for your attention on the call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.