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Operator: Ladies and gentlemen, thank you for standing by, and welcome to Uxin's Earnings Conference Call for the quarter ended September 30, 2025. [Operator Instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your host for today's conference call, Ms. [indiscernible]. Please go ahead. Unknown Executive: Thank you, operator. Hello, everyone. Welcome to Uxin's earnings conference call for the third quarter ended September 30, 2025. On the call with me today, we have D.K., our Founder and CEO; and John Lin, our CFO. D.K. will review business operations and company highlights, followed by John, who will discuss financials and guidance. They will both be available to answer your questions during the Q&A session that follows. Before we proceed, I would like to remind you that this call may contain forward-looking statements, which are inherently subject to risks and uncertainties that may cause actual results to differ from our current expectations. For detailed discussions of the risks and uncertainties, please refer to our filings with the SEC. Now with that, I'll turn the call over to our CEO, D.K. Please go ahead, sir. Dai Kun: [interpreted] Hello, everyone, and thank you for joining Uxin's earnings conference call today. It is a pleasure to reconnect with our investors through this call, and we appreciate your continued interest and support. To better facilitate communication with both our domestic and international investors, I will be sharing our latest business updates in both Chinese and English. In the third quarter of 2025, we continue to build strong growth momentum. Retail transaction volume reached 14,020 units, representing a 134% year-over-year increase and marking the sixth consecutive quarter of year-over-year growth above 130%. Despite a significant expansion in inventory, our inventory turnover remained at around 30 days. Customer satisfaction also remained at an industry-leading level. Our Net Promoter Score was 67 this quarter, sustaining a level of 65 or above for 6 consecutive quarters, the highest in the industry. At the same time, profitability continued to improve with gross margin increasing to 7.5%, the highest level we have achieved in the past 3 years. The expansion of our superstore network has also continued to progress smoothly and in line with our plan. Earlier this week, our Jinan Superstore officially commenced operations. Together with the Wuhan and Zhengzhou Superstores that opened earlier this year, we have now completed all 3 new superstore openings planned for 2025. Our Wuhan Superstore, which opened in February, is expected to reach nearly 1,800 retail units in December with local market share approaching 10%. The store continues to operate in a phase of rapid growth. Meanwhile, our Zhengzhou Superstore, which opened in late September, has been operating for just 3 months and is already expected to achieve approximately 900 retail units in December with market share nearing 5%. Zhengzhou has already become the largest used car retailer in its local market, and both its sales ramp-up and profitability trajectory are progressing faster than what we experienced at the Wuhan Superstore. With these additions, we now have 5 superstores in operation. The continued ramp-up of newly opened locations, together with sustained growth across our existing stores will remain a key driver of the company's performance going forward. In addition, over the past few months, we have announced strategic partnerships with local governments in Tianjin, Guangzhou and Yinchuan to jointly invest in and operate new used car superstores. Each of these projects is designed to support a capacity of more than 3,000 vehicles for display and sale. These partnerships extend our service coverage across Northern, Northwestern and Southern China, further strengthening the foundation for our long-term growth. Meanwhile, we are actively advancing superstore projects in several other cities, and we plan to open 4 to 6 additional superstores in 2026, marking a transition into a phase of accelerated nationwide expansion for our business. By now, we believe that Uxin has established a clear and proven path to scaling its business model nationwide, driven by the coordinated execution of 3 core capabilities that are more precise pricing, higher customer satisfaction and superior operating efficiency. First, our machine learning-based pricing system becomes increasingly effective as our retail scale expands. With a growing base of real transaction data used to train our models, pricing accuracy continues to improve. ensuring that each vehicle is competitively priced in real time. This allows us to maintain high inventory turnover of around 30 days. Second, our landmark large-scale superstores play a critical role in enhancing the customer experience. By offering high-quality, competitively priced vehicles supported by professional and reliable services, we are able to consistently improve customer satisfaction and referral rates, creating a self-reinforcing cycle of brand trust and organic growth. Third, our fully integrated factory logistics retail operating model enables end-to-end control across procurement, reconditioning and retail sales. This model delivers operational efficiency that significantly outperforms traditional used car dealers while remaining highly standardized and replicable. As a result, new superstores reached maturity faster and losses during the early ramp-up phase are more predictable and better controlled. Going forward, as long as the market conditions remain stable, we are highly confident in the sustained and rapid growth of our business. As such, for the fourth quarter, we expect our retail transaction volume to exceed 18,500 units, representing a year-over-year growth of more than 110%. For the full year 2025, we expect retail transaction volume to surpass 50,000 units, reflecting year-over-year growth of more than 130%. With that, I'll turn the call over to our CFO to walk you through the financial results. John, please. Feng Lin: Okay. Thank you, D.K. [interpreted] Hello, everyone. I will continue to present the company's performance in both Chinese and English to better communicate with all of you. In the third quarter, our retail transaction volume reached 14,020 units, representing a 134% increase year-over-year and a 35% increase quarter-over-quarter. Sales at our existing superstores continues to grow, whilst new superstores have come into operation progressively. Looking ahead, we expect our retail transaction volume to maintain a high growth trajectory over the next several years. Retail revenue for the quarter totaled RMB 820 million, up 84% year-over-year and 35% quarter-over-quarter. The average selling price or ASP for retail vehicles was RMB 58,000 compared to RMB 59,000 in the prior quarter and RMB 74,000 in the same period last year. While ASP declined as we shifted toward a more affordable inventory mix, the strong growth in transaction volume more than offset the pricing impact and drove our overall revenue expansion. Our current inventory structure is well aligned with mainstream consumer demand, and we believe pricing has now stabilized at a rational level. As such, we expect ASP to remain relatively steady in the near term. Turning to our wholesale business. Our wholesale transaction volume was 1,884 units in the third quarter, representing an 81% increase year-over-year and a 54% increase quarter-over-quarter. Total wholesale revenue was RMB 33.2 million. Combining both retail and wholesale, total revenue for the quarter reached RMB 879 million, representing a 77% increase year-over-year and a 34% increase quarter-over-quarter. Gross margin for the quarter was 7.5%, up 0.5 percentage points from 7% a year ago and up 2.3 percentage points from 5.2% in the prior quarter, marking the highest level over the past 3 years. The improvement was primarily attributable to the easing of the price competition in the new car segment during the third quarter, which supported a rapid margin recovery in the used car market. In addition, our Wuhan Superstore, which opened in February, has moved beyond its start-up phase with margin performance continuing to ramp up and driving a meaningful lift to this quarter's gross margin. Adjusted EBITDA loss for the quarter narrowed significantly to RMB 5.3 million, representing a substantial 43% reduction year-over-year and a 68% reduction quarter-over-quarter. Looking ahead to the fourth quarter of 2025, we expect retail transaction volume to exceed 18,500 units, representing year-over-year growth of over 110%. Total revenue is expected to exceed RMB 1.15 billion. For the full year 2025, we expect retail transaction volume to exceed 50,000 units, representing year-over-year growth of over 130%. That concludes our prepared remarks for today. Thank you, everyone. Operator, we're now ready to begin the Q&A session. Operator: [Operator Instructions] The first question today comes from Wenjie Dai with SWS Research. Wenjie Dai: [interpreted] Congratulation and now we see gross margin reached 7.5% this quarter, 3 years high. How does management view the sustainability of the current margin level? And what factors could further drive margin improvement going forward? Unknown Executive: [interpreted] This quarter's gross margin was 7.5%, representing a new high since we transitioned to the self-operated model, and there are 2 main drivers behind this improvement. First, new car pricing has stabilized, which naturally supports a recovery in used car profitability. At our existing Xi'an and Hefei Superstores, gross margin exceeded 8%, up nearly 2 percentage points sequentially. Second, profitability at our new Wuhan Superstore has also been improving. Our Wuhan Superstore officially opened in February and started from the third quarter, its gross margin has improved significantly compared with the early operation phase in the second quarter. Looking ahead, we believe there is still substantial room for further margin expansion. First, as China continues to implement policies aimed at reducing excessive competition in the auto industry, we expect vehicle prices to remain stable or even trend upward over the coming quarters, which would be supportive for our margins. Second, as D.K. just mentioned, our data-driven pricing capabilities continue to improve. Pricing errors are becoming less frequent and the proportion of loss-making vehicles is declining. Finally, our value-added services still have significant penetration upside as higher-margin ancillary revenue contributes more meaningfully to our revenue mix. This will further lift our gross margin. Over the long term, our target gross margin is around 10%. At our existing Xi'an and Hefei superstores, we are already seeing gross margin approaching this target, which gives us strong confidence in continued margin expansion. That's my answer. Thank you. Operator: The next question comes from Fei Dai with TF Securities. Fei Dai: [interpreted] My first question is following the opening of the Zhengzhou Superstore, both sales and profitability ramp up seems to be faster than what we saw in Wuhan. Could management share what key initiatives drove this outperformance? And looking ahead, how long do you expect the newly opened superstores to take to reach stable operations? Unknown Executive: [interpreted] Thank you for your question. Our Zhengzhou Superstore has only been operating for about 3 months and monthly sales have already reached 900 units. Its profitability is also higher than what we saw at the same stage for the Wuhan Superstore. On the one hand, our Wuhan Superstore can be viewed as the first large-scale replication of our superstore model and is already performing meaningfully better than our Xi'an and Hefei superstores. Zhengzhou, in turn, benefited directly from what we learned in Wuhan from construction and launch to inventory build and sales ramp-up. So our organization and operating systems are running more smoothly. On the other hand, as our sales volume expands, we now have a much larger pool of real transaction data to train our pricing system. This has further improved our pricing capability. The pricing system has adapted more effectively to the Zhengzhou market with more precise pricing, which helps ensure sales efficiency and support stronger profitability in the early stages of operation. Standard new superstore with a planned capacity of approximately 3,000 vehicles, our current expectation is that it reaches breakeven in about 9 months. This is consistent with what we achieved at the Wuhan Superstore. We expect inventory to reach its planned capacity in about 18 to 24 months, at which point both sales volume and profitability should reach a mature and stable level. That's my answer. Thank you. Fei Dai: [interpreted] My second question is U.S. used car company, Carvana recently surpassed $100 billion market cap. Could management comment on the key similarities and difference between Carvana's model and Uxin's? Unknown Executive: [interpreted] Carvana is a leading used car company in the U.S. and has delivered very strong capital market performance. We have conducted in-depth research on Carvana. Starting with the differences, the biggest distinction is the sales channel. Carvana sells online, while Uxin operates through both offline superstores and then online marketplace. Currently, over 70% of our sales come from offline superstores with online contributing roughly 30%. This mainly reflects the different market realities in China and the U.S. At this stage in China, a car typically represents a larger share of the household assets, so people make purchase decisions more cautiously. As a result, many consumers still want an in-store experience and a test driver before buying a used car. Over time, as auto consumption continues to develop and trust in the used car market keeps improving, we do expect the online share to increase as well. That said, we share many similarities. First, both companies operate under an own inventory model with large-scale reconditioning through self-operated facilities and tight control over every step of the process to reduce per unit cost and improve inventory turnover efficiency. Second, given that used cars are a highly nonstandardized product, both Carvana and Uxin focused on precise pricing to ensure efficient vehicle turnover. Carvana's annual retail volume is around 500,000 units, while Uxin currently sells about 50,000 units per year. These real transactions form the most critical training data for pricing models. As our retail scale continues to expand, we expect our pricing capabilities to further strengthen. Third, both companies prioritize customer satisfaction and brand reputation. Carvana's NPS is above 80, and our NPS reached 67 this quarter and has remained at the highest level in the industry for more than a dozen consecutive quarters. Strong word of mouth reflects the value we deliver to customers and also drives incremental referral traffic. Today, Uxin is a used car company with annual retail volume of approximately 50,000 units. We are highly confident that by continuing along our current development path, we can sustain year-over-year sales growth of more than 100% over the next several years and reach Carvana's current sales volume within 4 to 5 years. That's all I wanted to share. Thank you. Operator: This concludes our question-and-answer session. I would like to turn the conference back over for any closing remarks. Unknown Executive: Thank you all for participating on today's call. We are looking forward to reporting to you soon. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. [Portions of this transcript that are marked [interpreted] were spoken by an interpreter present on the live call.]
Operator: Good morning. My name is Stephanie, and I'll be your conference operator today. At this time, I'd like to welcome you to Optical Cable Corporation's Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] Ms. Felix, you may begin your conference. Caroline Felix: Good morning, and thank you for joining us for Optical Cable Corporation's Fourth Quarter and Fiscal Year 2025 Conference Call. By this time, everybody should have a copy of the earnings press release issued earlier today. You can also visit www.occfiber.com for a copy. On the call with us today are Neil Wilkin, President and Chief Executive Officer of OCC; and Tracy Smith, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements that involve risks and uncertainties. The actual future results of Optical Cable Corporation may differ materially due to a number of factors and risks, including, but not limited to, those factors referenced in the forward-looking statements section of this morning's press release. These cautionary statements apply to the contents of the Internet webcast on www.occfiber.com as well as today's call. With that, I'll turn the call over to Neil Wilkin. Neil, please begin. Neil Wilkin: Thank you, Caroline, and good morning, everyone. I will begin the call today with a few opening remarks. Tracy will then review the fourth quarter and full year results for the 3-month and 12-month periods ended October 31, 2025, in some additional detail. After Tracy's remarks, we will answer as many of your questions as we can. As is our normal practice, we will only take questions from analysts and institutional investors during the Q&A session. However, we also offer other shareholders the opportunity to submit questions in advance of our earnings call. Instructions regarding such submissions are included in our press release announcing the date and time of our call. Fiscal year 2025 was a solid year for OCC driven by the successful execution of our growth strategies and strong positioning in our target markets. We entered into a strategic collaboration with Lightera that expands our growth opportunities which we believe will be reflected in our top line in fiscal year 2026 and beyond. At the same time, we continue to operate efficiently and benefit from our strong operating leverage to drive gross profit growth. In fiscal year 2025, we realized the benefits of actions we took the previous year as the weakness across our industry during the second half of fiscal year 2023 and most of fiscal year 2024 subsided. As a result, in 2025, we were able to capture new opportunities and deliver consolidated net sales of $73 million. Our net sales increased during each quarter of fiscal year 2025 and compared to the same periods in fiscal year 2024. I'm pleased to share that OCC achieved growth by all measures during fiscal year 2025. Net sales grew by 9.5% and gross profit grew by 24.1%. Gross profit margin increased to 30.9% compared to 27.3% and SG&A expenses decreased as a percentage of net sales, all contributing factors to the significant improvements in operating results compared to fiscal year 2024. OCC benefited from strong operating leverage in fiscal year 2025, and we anticipate this will continue to bolster our results in fiscal year 2026 and beyond. Our manufacturing operating leverage tends to create disproportionate increases in gross profit as net sales and production volumes increase. While both gross profit and gross profit margin can be impacted by product mix, as OCC's net sales and production volumes increase, substantial fixed costs are spread over higher sales volumes. And importantly, manufacturing efficiencies also tend to increase particularly for fiber optic cable production. Gross profit disproportionately increased 24.1% as net sales increased 9.5% during fiscal year 2025. Our SG&A operating leverage also tends to be positively impacted by efficiency -- or excuse me, tends to positively impact efficiency and profitability as net sales increase. Many SG&A expenses are relatively fixed cost rather than varying with net sales, including significant public company costs. As a result, OCC's SG&A expenses as a percentage of net sales typically decrease with increased net sales. OCC's commitment to pursuing new growth opportunities, including expanding our presence in targeted market sectors and the enhancement of our product solutions offerings, including those resulting from our strategic collaboration with Lightera will fuel our future success. As demand for cloud computing and artificial intelligence applications continues to accelerate, OCC is capturing the opportunity by expanding our existing presence and product solutions offerings for the data center market. We have continued to expand and innovate both our fiber optic cable product solutions offerings and our cable and connectivity product solutions offerings. As previously announced in July 2025, OCC and Lightera entered into a strategic collaboration agreement to expand product offerings and solutions especially for the data center and enterprise sectors. As a global leader in fiber optic and connectivity solutions, Lightera has a long history of industry-leading innovation, design and manufacturing capabilities, including the production of high-performance optical fibers. As respected manufacturers in the fiber optic industry, OCC and Lightera have partnered in various ways over many years, and this strategic collaboration builds on that long successful relationship. Through this strategic collaboration, OCC and Lightera expect to benefit from offering expanded fiber optic and copper cabling and connectivity solutions to the enterprise and data center sectors as well as an expanded presence in other sectors. The companies have combined portions of the extensive product portfolios of both OCC and Lightera to deliver integrated cabling and connectivity solutions offerings that will be sold by OCC. In connection with this strategic collaboration, Lightera has made an investment in OCC purchasing shares of OCC common stock from OCC and resulting in Lightera holding 7.24% of OCC's outstanding shares. Looking ahead, OCC remains uniquely positioned in the fiber optic and copper cabling and connectivity industry with differentiated core strengths and capabilities that enable us to offer top-tier products and application solutions and to compete successfully against much larger competitors. OCC is committed to enhancing and leveraging our core strengths and capabilities to drive long-term value for our shareholders. I'd like to highlight a few of those strengths for you today. First is our strong market positions, brand recognition and long-term industry relationships with loyal customers, decision-makers and specifiers, installers and integrators and end users across a broad range of targeted market sectors. Second is our extensive industry experience and expertise in OCC's engineering, sales and business development teams who are well respected for their product an application, experience and expertise, which enables OCC to create and offer its portfolio of innovative, high-performance products. Next, OCC has a growing portfolio of innovative fiber optic and copper cabling and connectivity products and solutions that enable us to meet the unique needs of our customers and end users as they are well suited for the applications in our various targeted market sectors. We have significant availability of production availability at our facilities, supported by knowledgeable and experienced manufacturing quality and engineering teams. Finally, our broad and diverse geographic footprint enables us to sell into approximately 50 countries every year. OCC has earned an exceptional reputation for its service excellence, innovation and entrepreneurial spirit, and we have built a team that embodies OCC's core strengths and capabilities. As we turn to fiscal year 2026, we are optimistic about our growth opportunities, encouraged by our successes this past year and excited to build on the growing momentum we are creating in our targeted market sectors. We look forward to leveraging our strengths and executing our strategies and initiatives to create long-term value for our shareholders. I'd like to thank the OCC team for its hard work, its commitment to OCC and those that count on us. Your contributions to the team's accomplishment this past year have been significant. Much has been accomplished by the OCC team this year, and we are confident we are well positioned for future growth in 2026 and beyond. I'd also like to thank our shareholders for your continued support of OCC. And with that, I'll turn the call over to Tracy, who will review an additional detail on our fourth quarter and fiscal year 2025 financial results. Tracy Smith: Thank you, Neil. Consolidated net sales for fiscal year 2025 increased 9.5% to $73 million compared to net sales of $66.7 million for fiscal year 2024 with sales increases in both our enterprise and specialty markets. At the end of fiscal year 2025, our sales order backlog and forward load was $7.3 million compared to $5.7 million as of October 31, 2024. Looking forward, we anticipate additional growth opportunities during fiscal year 2026. We continue to expand our product solutions offering for the data center market as demand for cloud computing and artificial intelligence applications continues to accelerate. Consolidated net sales for the fourth quarter of fiscal year 2025 increased 1.8% to $19.8 million compared to $19.5 million for the same period in the prior year. We experienced an increase in net sales in both our enterprise and specialty markets during the fourth quarter of fiscal year 2025 compared to the fourth quarter of fiscal year 2024. Sequentially, OCC's net sales decreased less than 1% during the fourth quarter of fiscal year 2025 compared to net sales of $19.9 million for the third quarter of fiscal 2025. Turning to gross profit. Our gross profit increased 24.1% to $22.6 million in fiscal 2025 compared to $18.2 million for fiscal 2024. Gross profit margin, our gross profit as a percentage of net sales increased to 30.9% during fiscal 2025, up from 27.3% for 2024. Gross profit margin for fiscal year 2025 was positively impacted by higher volumes as fixed charges were spread over higher sales, the impact of operating leverage. Additionally, our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix. Gross profit decreased slightly to $6.3 million in the fourth quarter of fiscal 2025 compared to $6.5 million for the same period last year. Gross profit margin decreased to 31.9% in the fourth quarter of fiscal 2025 compared to 33.5% in the fourth quarter of fiscal 2024. During the fourth quarter of fiscal year 2025, there was no significant change in the gross profit when compared to the third quarter of fiscal 2025. Gross profit margin sequentially increased to 31.9% in the fourth quarter of fiscal 2025 compared to 31.7% during the third quarter of fiscal 2025. SG&A expenses increased to $23 million in fiscal year 2025 compared to $21.5 million in fiscal year 2024. SG&A expenses as a percentage of net sales were 31.4% in fiscal year 2025 compared to 32.2% in fiscal year 2024. SG&A expenses increased to $6 million in the fourth quarter of fiscal 2025 compared to $5.9 million for the same period last year. SG&A expenses as a percentage of net sales were 30.4% during the fourth quarter of 2025 compared to 30% during the same period of fiscal year 2024. The increase in SG&A expenses during the fourth quarter and fiscal year 2025 compared to the same periods last year was primarily the result of increases in employee and contracted sales personnel-related costs and shipping costs, included in employee and contracted sales personnel-related costs, our compensation costs and sales incentives. While profitable during the second half of fiscal 2025, OCC recorded a net loss of $1.5 million or $0.18 per basic and diluted share for fiscal year 2025 compared to $4.2 million or $0.54 per basic and diluted share for the fiscal year 2024. OCC recorded net income of $49,000 or $0.01 per basic and diluted share for the fourth quarter of fiscal 2025 compared to net income of $373,000 or $0.05 per basic and diluted share for the fourth quarter of fiscal 2024. And with that, I'll turn the call back over to you, Neil. Neil Wilkin: Thank you, Tracy. We have received a number of questions in advance of the call today. And we believe that those would be an interest to most participants. So we're willing to go through those questions first, and then we will address any remaining live questions from analysts, institutional investors because some of those questions overlapped, we did try to combine them in a manner that we're addressing the core questions that were submitted in the advance. . Caroline, if you could please read the questions. We're happy to provide our responses. Caroline Felix: Thanks, Neil. The first question is, can you update us on the data center opportunity in general, how you feel about it if the opportunity has strengthened or not during the quarter? And any major changes or updates? Neil Wilkin: Yes. We believe like others in our industry that the data center markets are strong and will continue to grow. I wouldn't say that it had a significant impact in our fourth quarter, but we believe that it will start to impact us in fiscal year 2026. OCC has a presence in the data center market with established market relationships as well as products. Of course, as you all know, OCC's products are best suited for multi-tenant data centers or MTDCs, and enterprise data centers, sometimes referred to as Tier 2 and Tier 3 data centers. We're currently working to expand our presence in portions of the data center market, and we're optimistic that the data center market, particularly this multi-tenant data centers and the enterprise data centers will provide an opportunity for revenue growth in fiscal year 2026 for OCC. . Caroline Felix: Next question is, over the last quarter, you have been commenting on improvements in OCC end markets. Have those improvements continued into Q4? Can you comment on new and emerging trends or risks? Neil Wilkin: Yes, OCC continues to see strength in most of our targeted market sectors. There are certain market sectors where we've seen some projects delayed, but we do not believe that this has negatively impacted OCC's growth this year or that it would negatively impact OCC's growth in fiscal year 2026. We also believe that the continued growth opportunities in OCC's targeted market sectors for fiscal year 2026 continue to be significant. Of course, as we have said in the past and experienced in the past, during the first half of each year, OCC does experience the impact of seasonality. And as of now, we currently expect that to be the case as well. Caroline Felix: The next question is whether you believe OCC will have any hyperscale data center opportunities? Neil Wilkin: We've talked about this before or we've received this question before. And as we've noted, that really, our product solution offerings for the data center market are better suited and best suited for the multi data centers and enterprise data centers. We believe that there's significant growth opportunities in the multi-tenant data centers market segment as well as enterprise data centers, but particularly for the MTDCS. And that will provide significant opportunities for OCC in fiscal year 2026. Yes. I'd also add that -- and Tracy mentioned this in some of her comments, that the multi-tenant data centers also are possibly impacted by the growth -- current growth in cloud computing and artificial intelligence. And so we believe that, that's a true market opportunity for us. . Caroline Felix: Next question is, what do you think the potential sales look like for 2026 and 2027? Neil Wilkin: I'll let Tracy take the financial questions. Tracy Smith: Sure. As we said before, we don't provide forward-looking guidance. However, I will say that we are optimistic about potential increases in sales based on the opportunities that we expect to arise in fiscal 2026, particularly during the second half of fiscal 2026. Our belief is based on what we're seeing in our targeted market sectors as well as our expected opportunities to expand in those market sectors as a result of the strategic collaboration with Lightera. . Caroline Felix: Next question. Can you give a sense of the financial metrics behind the operational leverage? For example, how much EPS can impact different forward sales levels if they do, in fact, inflect higher on the collaboration? Tracy Smith: We can't give you a specific formula. As you all know, operating leverage as a result of fixed cost and manufacturing and also in SG&A costs being spread over higher sales. Manufacturing operating leverage is also impacted by product mix sold, which is not a variable that's very easy to predict. Caroline Felix: Next question is, Q1 and Q2 are typically the weakest quarter in terms of seasonality. Should we still expect the typical seasonality into 2026? . Tracy Smith: As Neil mentioned, we do continue to see a seasonality impact in our first and second quarters, although there can be exceptions particularly if there are larger orders that impact the first half of the year, or unanticipated macroeconomic conditions during the year. Caroline Felix: Got it. Next question. Is the focus still on Tier 2 data centers? Or is there some potential to capture some of the Tier 1 data center demand as part of your collaboration? Neil Wilkin: Well, without speaking specifically about the strategic collaboration with Lightera. What I'd say is that OCC products are best suited for Tier 2 or multi-tenant data centers and the enterprise data center market. And so that's really where our focus is, as we mentioned before. And I would not expect that OCC to directly have any significant participation in Tier 1 or hyperscale data centers. Doesn't mean there couldn't be some impact at some level. And of course, those growth in Tier 1 data centers in the market, can impact what kind of growth is being seen in Tier 2 for multi-tenant data centers and other parts of the market. But directly, I wouldn't expect us to have a significant participation at all in the Tier 1 or hyperscale data centers. Caroline Felix: In terms of capacity available and any capacity constraints, are there any changes versus what you commented on last quarter? . Neil Wilkin: We continue to evaluate our capacity. But right now, we believe that OCC has the capacity to capture the growth opportunities that we expect to see in fiscal year 2026. So I think that really answers that question. Caroline Felix: Question. OCC has been hiring a lot recently. Can you comment if you have seen any issues to find the right workers? Why you saw the need to hire that significantly? And if this will increase OpEx significantly? . Neil Wilkin: Yes. I don't know if I'd characterize our hiring recently as significant. We do have a number of open positions that we are seeking to fill, and that's not unusual for that to be the case. Most of those positions are typically in manufacturing. We are fortunate that OCC has a good record of recruiting and retaining needed talent. But I think like a lot of businesses generally, not just in our industry, OCC has seen some additional turnover among newly hired personnel. However, OCC has what we believe is a record of unusually low turnover among our longer-term employees. So we do continue to expect to see hires. I don't expect that to significantly increase operating expense specifically. And of course, we are consistently looking at what expenses we're incurring in order to provide the appropriate staffing as well as the appropriate balance of expense relative to our opportunities. . Caroline Felix: Thanks, Neil. Next question is, can you please provide an update on progress of the Lightera collaboration? . Neil Wilkin: Sure. So OCC and Lightera partnered in various capacities for many, many years. And so it's not surprising because we worked well with them in the past that our new strategic collaboration with Lightera, I believe, is going well. The Lightera team is exceptional. And we think highly of the OCC team as well, obviously. And we believe that the strategic collaboration will create growing opportunities for OCC in fiscal year 2026 and hopefully for -- although I can't speak for Lightera, and for Lightera also. Caroline Felix: Last question this morning is, Lightera has recently announced an investment into manufacturing. Is this an indication of strong demand for OCC? . Neil Wilkin: Well, we can't -- OCC really can increment on announcements that Lightera has made or what their specific business plans are. So I'd leave those questions for Lightera rather than OCC. . Caroline Felix: Thanks, Neil. We have no other questions that were provided in advance of the call today at this time. . Neil Wilkin: Okay. So if those are the questions, I guess, operator, Stephanie, if you could let us know if there's any questions from analysts, and we're happy to answer them. And if you could please, Stephanie give the instructions for the folks to ask those questions, that would be wonderful. Thank you. . Operator: [Operator Instructions] We'll take our first question from Anthony Christ with Odyssey Investments. . Anthony Christ: Thank you very much. Mr. Wilkin, I have tried to call 2 or 3 times, I'm located up in Northern Virginia. My question deals with, is there any visibility into whether or not Lightera may refer us some of the SMF cabling, single-mode fiber cabling or the hollow fiber cabling, which is basically Tier 1 products. And if you could -- I know the words -- if you could take a minute and explain what those 2 products are, I'd appreciate it. And then I have a follow-up. Neil Wilkin: Okay. So Hollow-Core on the -- is the type of fiber that's really looking to reduce latency and increased speed in certain applications. And so that is something that probably is usable in a lot of different applications. And our engineering team would be better able to answer that question, but as a general matter, that's the case. I think that I can't comment on what people are thinking about with respect to or what Lightera is thinking about with respect to how they're going to use that product. But OCC, we partnered with Lightera in a number of different ways, and Lightera is a large fiber producer of various different products that have been leading performance in the industry for many, many years. So again, our products are more focused on the traditional markets that we've had, enterprise, various parts of the enterprise market as well as a number of specialty markets, including harsh environment and military and others. We use some specialty technologies in some of those products. And then in data centers. We've had a presence in data centers before, but now we're focusing on expanding that and leveraging our current relationships and also focusing on expanding our product offering. I don't know if that really helps specifically on your question. SMF, specifically, I think, of just a single mode fiber. So that's a more typical product that would be used in data center, although multimode fiber is also used. Operator: And we'll take our next question from Shawn Boyd with Next Mark Capital. Neil Wilkin: He said he had a follow-up question, though. Did you want to take that, Stephanie, first? Anthony did. Operator: Anthony, would you like to announce your follow-up? Anthony Christ: Yes. Yes. Operator: Your line is open, Anthony. . Anthony Christ: Okay. Dare I ask Neil, if those 2 fibers, the SMFs and the Hollow case fibers would make -- were competitive with the Corning fibers? And if any automation, AI would be given us by Lightera to produce them. . Neil Wilkin: Yes, I'm not the best person to answer the question about how those are going to be used. And there's a whole lot of intellectual property and strategy that goes behind which fibers are going into which applications and what plans the fiber manufacturers have. What I can just say is that Lightera is known for having leading technology in fiber development, everything from the Rollable Ribbon fibers to many, many other types of fibers. They've been a leader in many ways and are well respected in that regard. How they plan to deploy those technologies in different markets, is not really something that we can comment on. And those are questions that will really be left to Lightera, if they choose to answer them, which they may not be because of the proprietary nature of some of that. But Anthony, one thing I guess I would add is if you're asking how they compare to Corning, I would suspect that as with any other competitors, Lightera would have a very favorable view of their products, and I think the market does too. Operator: [Operator Instructions] And we'll take our next question from Shawn Boyd with Next Mark Capital. Shawn Boyd: Can you hear me okay? Neil Wilkin: It's a little low, but I think we've been able to make out what you're saying. Shawn Boyd: Okay. Let's give it a shot here. So historically, the company has been -- has shown real positive seasonality in its October quarter, it's fourth quarter, up double digits sequentially. This year, we didn't quite see that. And I thought I might have heard something about delays. So the question is, were there any project delays or pushouts that might have caused that? Neil Wilkin: Well, first of all, generally, our seasonality is what we see in the first quarter versus the second quarter -- I mean, excuse me, the first half of the year versus the second half of the year. So I don't have the precise percentage in front of me, but the growth that we would have seen from the second quarter to the third quarter would have been, I would expect in double digits. Sequentially, that wasn't the case from Q3 to Q4, but I would expect Q3 and Q4 to be more equal. Again, with most of the seasonality being impacting the first half of the year and seeing positive increases in the second half of the year. . Tracy Smith: And we did see our seasonality this year mirror that from 2024. So for the second half of the year, I think it was 48% in the first half..... Neil Wilkin: Of total sales. Tracy Smith: I'm sorry, 46% of total sales in the first half of the year and the rest in the second half of the year, and that was exactly the same in 2025 compared to 2024. Neil Wilkin: And we'll be filing our annual report on Form 10-K today, we expect to, in the footnotes, we disclose details about some of the seasonality. Tracy Smith: And the MD&A. Neil Wilkin: The other question that you had was the -- part of the same question you had was, did we see any products that have been delayed impacting the fourth quarter? I don't think that, that was significant. And again, I think that those delays are significant overall. I think there -- and one of the things that OCC benefits from is we're in many, many different markets geographically, in particular market segments. And so sometimes, we'll see big fluctuations in certain market sectors that are not truly visible because they're offset by other fluctuations in other market segments that we're targeting. Tracy Smith: Let me just correct the seasonality percentage that I stated earlier, it was 46% in the first half of the year and 54% in the second half of the year. And that was the same seasonality pattern that we saw in 2024 and 2025. . Shawn Boyd: Okay. So the 46%, 54% is the year we just finished, FY '25? . Tracy Smith: Yes, as well as 2024. They were exactly the same. . Shawn Boyd: Got it. Okay. That color is helpful. Appreciate that. So just as a follow-up, the collaboration with Lightera, which we inked back in July, you indicate that should -- would you start to see that impact the top line in 2026. Can you give us any more color on that? Can we see that in the first half, would it be the second half? And just as a follow-on, why is that taking this long? What is it that -- what are the gating factors before we see the revenue contribution of that? . Neil Wilkin: Yes. I mean, it's a good question. It also has a lot of details behind it, say specifically what we're going to see in 2026. We don't provide forecast on what we're going to see -- we do think we're going to see a positive impact, and we've stated that. With respect to the collaboration, as you'd imagine, when you're working with companies in a different way that there is a lot of work that goes into that I think that the work is going well and expeditiously and that there's a lot of work that's being done, you'd expect that, that would be the case before it started to impact sales, but I can't, beyond that, comment on what it is. I think that what I'd also -- I don't have the quite percentage -- if you'll just hold on for a second. So there was -- I was just confirming -- you talked about the double-digit increase because of seasonality. If you look at what our performance was in the second quarter of 2025 versus the third quarter 2025, that does create -- that we do see a double-digit increase in sales, which is consistent with the observation that you had made but you wouldn't necessarily expect to see that between the third and fourth quarter because of the seasonality between the first half and the second half, as we described, is fairly consistent. Operator: There are no additional questions at this time. I'd like to now turn it back to our presenters for any additional or closing remarks. Neil Wilkin: Thank you, Stephanie. I appreciate everyone's questions. We'd like to thank everyone for listening to our fourth quarter and fiscal year 2025 conference call today. As always, we appreciate your time and your investment in Optical Cable Corporation. We hope that you and your families have a wonderful holiday and a happy new year. Thank you. . Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: [Foreign Language] Good morning, ladies and gentlemen. Welcome to the Transat conference call. Please note that this call is being recorded. I would now like to turn the meeting over to Andrean Gagne, Senior Director, Communications, Public Affairs and Corporate Responsibility. Please go ahead, Ms. Gagne. Andrean Gagne: [Foreign Language] Hello, everyone, and thank you for joining us for our fourth quarter earnings call ended October 31, 2025. Annick Guerard, President and CEO; and Jean-Francois Pruneau, our Chief Financial Officer; will provide an overview of the quarter and comment on the current operational situation and commercial plans. Jean-Francois will also discuss our financial results in detail. We will then take questions from financial analysts. Questions from journalists will be taken offline after the call. The conference call will be conducted in English, but questions may be asked in French or English. As usual, our supplementary disclosure has been updated and is available on our website in the Investors section. Jean-Francois may refer to it when he presents the results. Our comments and discussions today may include forward-looking information regarding Transat's outlook, objectives and strategies that are based on assumptions and subject to risks and uncertainties. Forward-looking statements represent Transat's expectations as of December 18, 2025, and are therefore subject to change after that date. Our actual results may differ materially from any stated expectations. Please refer to our forward-looking statement in Transat's fourth quarter news release available on transat.com and on SEDAR+. With that, I would like to turn the call over to Annick for opening remarks. Annick Guérard: Good morning. Thank you for joining our fourth quarter conference call for fiscal 2025. Transat significantly improved its operating and financial results during the past year, while strengthening the foundation of its long-term profitable growth strategy. Revenues rose 3.5% to $3.4 billion, reflecting a disciplined approach to capacity management in a volatile economic environment. Adjusted EBITDA supported by efficient cost management and initial benefits from our elevation optimization program improved 33% year-over-year to an all-time record of $271 million. Beyond this solid performance, we established in 2025 key building blocks to generate growth momentum through the deployment of new high potential routes, the rigorous execution of elevation and the refinancing of our government debt that was significantly reduced. In short, we fully achieve our 2025 objectives, and we are on track to continue performing according to plan in 2026. As you know, we reached a tentative agreement with our pilot union last week. This agreement marks an important step in the negotiation process lifting the risk of a strike and allowing our customers to travel with peace of mind during the holiday season. It will be submitted to the pilots for ratification, and we are optimistic about a positive outcome. Now turning to our fourth quarter results. Passenger revenues rose 1.5%, driven by a higher yield. However, as expected, total revenues declined 2.2% year-over-year to $772 million due to timing of Pratt & Whitney compensation. Last year, a significant amount of compensation was received at year-end, whereas this year payments were distributed throughout the year. Given lower engine compensation in the quarter and certain provisions that Jean-Francois will discuss later, adjusted EBITDA amounted to $71 million compared to $128 million in the fourth quarter of 2024. Taking a closer look at our operating metrics, capacity expressed as available seat mile decreased 1.8% in the quarter compared to previous year. For the full year, capacity increased by 0.8%. Most factor reached 87% in the quarter and 84.6% for the full fiscal year, both metrics relatively stable compared to the same period in 2024. Finally, yield improved 2.6% and 2.3%, respectively, in the quarter and fiscal 2025. We are pleased with this performance, which maintained momentum throughout the year, driven by strong demand for Transat offerings and enhanced revenue management. Turning to our operations. We have a fleet of 43 aircraft heading into fiscal 2026. Throughout 2025, the number of grounded aircraft due to the Pratt & Whitney engine issue fluctuated between 6 and 8. Conditions began improving towards year-end, and we post the fourth quarter with 5 grounded aircraft. The situation is expected to keep improving with the number of grounded aircraft projected to range between 3 and 5 during 2026 and full resolution anticipated by the end of 2027 or early 2028. Despite the damaging impact of this persisting issue, we have been able to improve our overall performance in 2025. Moving on to network expansion and diversification. To optimize aircraft utilization, our strategy is to pursue high potential routes with low seasonality and strong demand for visiting friends and relatives. Targeted network expansion across destinations in Africa, Europe and South America combined with a growing network of partners, allows Transat to offer new international destinations in 2026 and to annualize our increased frequency on successful routes. We're really proud to announce today a new nonstop flight between Toronto and Tirana, Albania. This route will be operated once a week starting June 18, 2026, making us the first North American carrier to offer direct service to Tirana. We have announced several new destinations in recent months, including in West Africa. These routes mainly target untapped market with strong year-round demand such as Agra in India, Agadir in Morocco and Dakar in Senegal. Additionally, our interline agreement with Turkish Airlines also came into effect last month. This partnership enables travelers to book itineraries combining flights from both airlines, enhancing connectivity between Canada and Turkey and linking with other routes in Asia and the Middle East. We also recently announced an interline partnership with GOL Airlines, one of Brazil's largest carriers. As we prepare to launch service to Rio de Janeiro in February, this agreement will allow passengers to connect to other major destinations in Brazil and South America. Turning to Europe. New flights to Reykjavik from Montreal will be available from mid-June to late September, twice a week. We have also annualized service to certain successful routes to the Caribbean as well as to Central and South America. We increased the frequency of flights from Montreal to Valencia, Spain due to the popularity of the destination and increased frequencies from Toronto to several destinations. Finally, on the regional front, we expanded our offering from other metropolitan areas in Eastern Canada with exclusive transatlantic routes between Quebec City and Marseille as well as between Ottawa and London, Gatwick. In summary, our network development remains central to our long-term strategy for profitable growth. Looking ahead to fiscal 2026, we remain on our growth trajectory as achieved in 2025. Demand for leisure travel remains solid, particularly for south destinations, driven by the continued shift away from U.S. leisure markets towards the Caribbean and Mexico. Our expansion into new high-potential markets, combined with fewer grounded aircraft and further network optimization should deliver a capacity increase of approximately 5% to 7% for the winter season and 6% to 8% for all of 2026. Our Elevation program, which has become entrenched in day-to-day operation, is expected to reach full potential with permanent cost reduction and further refinement of our revenue management practices. We will also benefit from a substantially lower interest charge in 2026 as our debt level was significantly reduced following the restructuring of our government debt. Looking ahead to the winter season, performance indicators are encouraging. During our Black Friday and Cyber Monday campaign, we successfully addressed strong consumer demand with targeted offers and optimized booking channels. This approach drove an 11% increase in bookings compared to last year setting a new record high for this key period. While the strike threat in early December created some uncertainty, its impact on first quarter result is expected to be limited. We reached an agreement within a few days and have already seen a solid pickup in bookings following the resolution. So far, our yields for winter 2026 are up 1.4% compared to last year, while load factor are 0.8 percentage points lower at this time mainly influenced by second quarter dynamics with potential for improvement as the season progresses. To wrap up, we improved our financial results in fiscal 2025 and made substantial progress in advancing our turnaround plan. Execution will be supported going forward by an improved balance sheet. We can now focus on what we do best, providing customers with a quality travel experience that combines comfort, hospitality and attention to detail at every step of the journey. We will remain prudent in carrying out our capacity expansion strategy, weighing growth opportunities against economic uncertainty as well as a competitive environment. Finally, I want to sincerely thank again our employees for their hard work and commitment during this period mark for certain challenges, but also by promising opportunities. This concludes my remarks for today. Jean-Francois will now review our financial results. Jean-Francois Pruneau: Thank you, Annick. Good morning, everyone. In fiscal 2025, the successful implementation of the Elevation optimization program and the refinancing of government debt have strengthened Transat's long-term financial profile and reinforce confidence in our ability to create sustainable value for shareholders. Our team managed the grounded aircraft situation with discipline and precision, working to reduce its impact on operations and profitability. Despite this continued challenge, which has affected the company since 2023 and will only gradually improve in fiscal 2026, Transat delivered record-high adjusted operating income in fiscal 2025. Now let's take a closer look at our fourth quarter results. Revenues reached $772 million, down 2.2% from last year, reflecting $28 million less in compensation revenue from Pratt & Whitney compared to last year's fourth quarter. Recall that the Q4 2024 amounts represented total compensation attributable to fiscal year 2023 and 2024, whereas the Q4 2025 amount was strictly related to aircraft grounded during the quarter. However, for the year as a whole, compensation remained relatively stable, totaling $32.4 million in 2025. Excluding financial compensation, revenue rose 1.5% in the fourth quarter. And this improvement reflects a 2.6% increase in yield for the quarter, partially offset by a 1.8% reduction in capacity. Adjusted EBITDA amounted to $71 million in the fourth quarter of 2025 compared to $128 million in the fourth quarter of 2024. In addition to the year-over-year difference in financial compensation from Pratt & Whitney, the reduction also reflects higher than expected operating expenses largely driven by unfavorable variations in accounting provisions. Year-over-year for the fourth quarter, results were impacted by the unfavorable provisions totaling approximately more than including $10 million related to compliance costs for carbon credit scheduled for payment in 2028, which contributed to higher fuel expenses. As a result, net loss was $12 million or $0.31 per share in the fourth quarter of 2025 compared to net income of $41 million or $1.05 per share in the same period of 2024. Meanwhile, adjusted net loss was $19 million or $0.42 per share in Q4 2025 versus adjusted net income of $32 million or $0.81 per share last year. Moving to cash flow and financial position. Cash flow used by operating activities amounted to $150 million in Q4 2025 compared to $108 million used in the fourth quarter last year. As for investing activities, fourth quarter CapEx was $30 million, stable from a year ago. Last year, we generated $87.5 million in proceeds during the quarter from the sale and leaseback transactions involving 3 Pratt & Whitney GTF engines. Looking at the full year. Cash flows generated by operating activities totaled $157 million, up 65% from $95 million in fiscal 2024, driven by higher profitability. After accounting for investing activities and repayment of lease liabilities, free cash flow was negative $45 million in fiscal 2025, representing a significant improvement over negative $122 million in fiscal 2024. We anticipate that free cash flow will turn positive in 2026. Turning to our balance sheet. Cash and cash equivalents totaled $165 million as at October 31, 2025, and compared with $260 million a year ago. Among other factors, our cash position was affected by the repayment of $41 million in debt under our refinancing agreement with the Government of Canada. Cash and cash equivalents and trust or otherwise reserved mainly resulting from travel package bookings amounted to $466 million at the end of fiscal 2025, relatively stable from previous year. Sequentially, it was up from $306 million at the end of Q3, reflecting solid travel package bookings during the fourth quarter. Long-term debt and deferred government grant stood at $400 million as of October 31, 2025, versus $803 million a year earlier, reflecting the refinancing of our government debt during the third quarter. Net of cash and cash equivalents, long-term debt and deferred government grant amounted to $235 million at the end of fiscal 2025 versus $543 million at the end of fiscal 2024. Looking ahead to fiscal 2026. Transat will benefit from reduced interest charges, while benefits from the elevation program are expected to further ramp up. In parallel, we will continue to efficiently manage the grounded aircraft situation, which is expected to gradually improve. More importantly, and to reinforce what I said before, we are entering the new year with a stronger foundation. We are exactly where we were, where we projected to be, and we are advancing confidently along our planned trajectory. We have all -- we have a well-defined strategy calling for methodical expansion into high potential markets. A less levered balance sheet will also provide us with more flexibility to carry out the plan. This concludes my prepared comments. We will now open the call for questions from analysts. Operator: [Operator Instructions]. First, we will hear from Cameron Doerksen at National Bank. Cameron Doerksen: I wanted to maybe ask a question about yields as you look into the winter. I mean it's trending positively so far. But as we get into the second fiscal quarter, you and I think the rest of the industry have got a bit of an acceleration of capacity growth. So I'm just wondering if you have any kind of early sense of how yields are faring so far as you look into Q2 and particularly the peak March period. Is it looking positive at this point? Or just any color there would be helpful. Annick Guérard: Yes. So for the winter, we see a momentum being positive. Demand has remained strong enough to absorb additional industry capacity with yields tracking well versus last year, including for Q1 and Q2. So we do not see on balance at this point between supply and demand. We believe that we strongly benefit from the shift in demand from the U.S. market to the South. And the South, as you know, we have a strong presence. So overall, I would say that we have a healthy booking curve right now, which supports a positive outlook for Q1 and Q2. Cameron Doerksen: Okay. Okay. That's helpful. And maybe just a second question, I guess, just on the free cash flow. You mentioned that your expectation was for fiscal 2026 that free cash flow would be positive. Obviously, you do have some tailwinds here, which you highlighted. Just wondering, I guess, what you're, I guess, assuming as far as CapEx for 2026 and maybe expectations for generating cash from working capital in 2026 that gets you to that free cash flow number? Jean-Francois Pruneau: Yes. Well, in terms of CapEx, I think it's going to be relatively stable from the this year from 2025, maybe a bit of upside, but it's not going to be that material. In terms of working capital movements, we have to live with the seasonality that our business our business is. So obviously, that impacts from -- on a quarterly basis, that impacts our working capital movements. On an overall year-over-year basis, I don't see any dramatic change in the working capital. Cameron Doerksen: Okay. So the -- I guess, the bottom line is that the improvement in free cash flow is basically all going to be generated from improving EBITDA. Is that fair to say? Jean-Francois Pruneau: Your math. Operator: Next question will be from Tim James at TD Cowen. Tim James: I'm just wondering you commented or indicated there was -- you don't expect any real impact or a limited impact, I think, was what you indicated from the overhang of the strike risk on bookings as you look at the first quarter. Was there any -- I realize it sort of occurred post quarter end, but was there any sort of anticipation? Or do you think there was any hesitancy or booking a way that maybe impacted your bookings in the fourth quarter from the strike or potential strike? Annick Guérard: Yes, it was a potential strike, not a strike. First, I think we were lucky enough that the strike threat came after our promotions of Black Friday and Cyber Monday sales, which is a key sale moment for us. Then our sales were indeed impacted slightly for a few days, starting December 7. But as you know, we reached an agreement by December 10. So there was a pretty short period, and we were able to get back on our booking curve very quickly. So we decided even that to brought forward a promotional campaign that was due 2 weeks later to recuperate lost sales during these 2, 3 days. But overall, when we look at the situation and take a step back, the impact overall will have remained minimal, and we are very satisfied with the overall results. Tim James: Okay. My second question, just turning to the Elevation program. It looks like other costs were up in the -- well, excited is for the full year, there were some impacts on other costs related to elevation optimization. I think those costs were actually up $12 million, $13 million sequentially from Q3 to Q4. Could you just kind of walk us through what types of expenses the company is incurring that caused that seasonal uptick or sequential uptick from the third quarter into the fourth quarter? Jean-Francois Pruneau: Yes. Unfortunately, I don't see where you're from. How are you making reference to additional costs related to the Elevation program? Overall costs, like I said, has been impacted by some unfavorable variances or variations an unusual, call it, unusual onetime provisions. And obviously, there's also the increase in payroll related to the negotiation with our pilots. But I don't see where you're making reference or why you're making reference to the Elevation program and additional costs related to that, unfortunately. Tim James: Okay. Maybe it's something we can take offline. There's a reference in the discussion under that says this increase resulted mainly from costs secured related to our Elevation optimization program. Jean-Francois Pruneau: From -- okay, I understand what you mean. Yes. No, absolutely. Now I understand what you mean. So essentially, with the implementation of the Elevation program, we have onetime costs that are related to initiatives that we are implementing over time. And that would include various items that would include the consultants that we are working with as an example. So that's essentially onetime costs related to the implementation of the initiatives. Tim James: Okay. Okay. That helps. And I'm trying to -- so there is some nonrecurring costs in there that will decline, I assume going forward. Okay. That's absolutely. Jean-Francois Pruneau: Absolutely. That's the way to look at it, yes. Annick Guérard: I would add on that, from a system implementation, AI tools that we are implementing across the business that are onetime costs as well. Operator: Next question will be from Konark Gupta at Scotiabank. Konark Gupta: Just maybe to ask on the provisions first, Jean-Francois. Can you describe the nature of the 2 parts, the total $15 million, and I think the $5 million is from one thing and a few things maybe and the $10 million is for the carbon offsets. So can you describe the nature of these provisions? And how likely are they to recur in the next few quarters? Jean-Francois Pruneau: Yes. So the CORSIA provision is quite obvious. It's relating to -- it's related to the offset our carbon emissions, and it's a calculation that is quite complicated, but that would imply estimating essentially our growth in carbon emissions relative to the industry overall. So that could obviously make that provisions quite volatile. And it's also, as you can imagine, because it's related to carbon credits and offset the fair market value of the carbon credits also impacts our provision. So it could be quite volatile on an annual basis. And just to give you a bit of perspective on that, our obligation relating to the offset of carbon emissions in 2024, amounted to approximately $1.5 million, which was minimal, obviously. But in 2025, we had to increase the provision by like more than $10 million. So it's quite volatile. Related to the other type provisions, they are more onetime in nature or nonrecurring in nature, I should say. There's a few elements. The biggest 2, I would say, are related to one of our vendor that defaulted on its obligations. And the consequence was unfortunately, a $2 million onetime nonrecurring provision associated with that default. And obviously, we will be looking to get compensation for that default and the impact on us. And there's also a sales tax litigation in Italy for that came from 2006 or 2007. It's a very data litigation, and we had all the information this year that essentially demonstrated that we should book that provision because we don't think that we're in a good -- a favorable position with respect to the selling. Konark Gupta: Okay. That's very helpful. And with reference to the winter load factors being softer and pertaining to the second quarter dynamics, I just want to make sure the second quarter dynamics you're referencing there is the capacity growth in the industry. It's nothing beyond that. There's no like labor or there's one sort of onetime event? Annick Guérard: No, no, no. It's exactly that. Konark Gupta: Okay. And just to wrap things up for me. On the margin side, I guess, you guys are expecting some margin expansion next year as well. Can you like broadly help us understand how that margin is being driven next year? And I mean, what are some of the underlying assumptions you have? Perhaps Canadian dollar could help to some degree, but anything else, be it the broad buckets like elevation program or the fuel price assumptions you're making or any of the fleet changes? Jean-Francois Pruneau: Yes. Well, a few things here. First thing we are improving or we are increasing the capacity and we have a lot of the fixed cost in our structure. So obviously, as we increase the capacity in terms of CASM, it's going to have an impact and it's going to have an impact on margins. So that's just natural, I would say, when you increase capacity. So that's one thing. The elevation program, you're right. The elevation program is driving more productivity in our structure, in our business. So that will also benefit to our margins. And with respect to fuel and to FX, we don't expect material improvement year-over-year, maybe a slight improvement, but not material improvement in terms of fuel cost or fuel prices and FX. Annick Guérard: I would add that as I explained, we are reducing significantly the number of AOG of our A321LR. The A321LR is our most efficient aircraft, which drives margins up. It's -- so that's helping us as well in terms of optimizing our network, increasing state utilization and, therefore, driving margin up. Operator: [Operator Instructions]. Next, we will be from Alexander Augimeri at CIBC. Alexander Augimeri: I was just hoping for some additional color on your elevation program. I was wondering if you could break down how much of that $100 million is now run rate realized exiting fiscal 2025 versus it being back end point? Jean-Francois Pruneau: Like you know, the objective is to generate $100 million of additional EBITDA by mid-2026. We're on track. We're probably, I would say, half of the objective being met, close to that. Alexander Augimeri: Okay. Perfect. And can you share any details on the skew of maybe the cost or productivity gains versus some of the revenue gains associated with that? Jean-Francois Pruneau: I'm sorry, I missed the question. Alexander Augimeri: I was hoping if you could share some details on the SKU, if it's more on the cost and productivity side or if there's a revenue in there as well? Jean-Francois Pruneau: For the elevation program specifically? Alexander Augimeri: Yes, yes. Jean-Francois Pruneau: Yes, it's approximately 60-40. Annick Guérard: 60% costs, 40% revenue management. Operator: At this time, we have no other questions. Please proceed. Annick Guérard: Thank you, everyone. As a reminder, our first quarter results for 2026 will be released on March 10. Thank you, and happy holidays. Operator: Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.
Deborah Honig: Good morning, everyone. Thanks for joining us today. We have Microbix here to talk about their Q4 and Year-End Results for 2025. Before we get into those, I don't believe we're going to work off our presentation today, but I'd like to remind you that this session, as always, will contain forward-looking statements. If you'd like to know more about those, you can find them on the company's website in the presentation. There's disclosures there. I believe the format will be an update from the team on the Q4 and year-end results, and then we'll jump into Q&A. [Operator Instructions] And with that out of the way, I'd like to introduce Cameron Groome, President and CEO; Ken Hughes, COO; and Jim Currie, CFO. Hi, gentlemen, thanks for joining me today. Cameron Groome: Thank you very much, Deborah. That's brilliant. Much appreciate the help as always. Deborah Honig: Yes. Well, before we get started, I wanted to thank you all for contributing to our fundraiser this year for -- in support of food banks. We're actually at $52,000 that we're raising so far. I could not do 26 webinars in December. So a bunch of them are being pushed to January, but the donations are going in before the holiday season, which I think is really important given the economic situation in certain communities globally. So I appreciate you supporting us, and I'd love to hear, which food bank you decided to donate to. Cameron Groome: We supporting the Mississauga Food Bank. I've had the pleasure of meeting some of their executive leadership through at the Board of Trade. They do an excellent job in the community. And as I'm sure is the case in across Canada, the need and the demand for such assistance has never been greater. So we're delighted to be able to make a contribution on that basis. And thank you, Deborah and Adelaide for suggesting this and for you contributing what would normally be your income onto this. So thank you. Deborah Honig: Yes, of course, it's been our pleasure. I mean it's been a great year for us as a team. So we thought it would be something that we could do to give back. But before we get started, I know it's been a tough year for Microbix. There's no 2 ways about that. I have to commend the team on the guidance that you provided throughout the year, even early on the year on the obstacles that you were facing. I think the markets really appreciated that. So I just wanted to point that out and say, I think you guys did an incredible job managing through a couple of major obstacles. So for what it's worth, I'm very proud of you and proud to be working with you. Cameron Groome: First, thank you so much. And we, in turn, appreciate Adelaide's support and that of all of our shareholders and investors and the confidence they show in our professionalism. Just recapping a little bit of that element, and we'll get into some of the precise numbers for the fiscal year. Folks will recall that Microbix is on a September 30 fiscal year. So we had a very strong Q1 of our fiscal 2025, a very strong Q2. And then we had a slowdown -- abrupt slowdown of sales into China through our distribution partners there for epidemiological reasons, there just wasn't as much respiratory disease this past season, which reduced the need for tests and in turn, our test ingredients. And then we also had a major client very abruptly announced the termination of a multi-hundred-million-dollar instrument development program that we were supporting that occurred at the start of June. And that really impacted our Q3 where we were expecting to see stocking deliveries in Q4, particularly. So we're now in that process of building back with new clients and new projects that we have been working on, but are not all yet ripe to announce. So our results that we've just announced for the quarter and for the year are reflective of that. And maybe I can ask Jim to speak about fiscal 2025 financials before I begin to chat about the many achievements that we've made across the fiscal year, and what our outlook is going into 2026 and beyond. Jim, would you like to comment on the -- on 2025 fiscal? James Currie: Sure. Thanks, Cameron. Yes, it was certainly a tale of 2 halves. We started off the year very well and basically hitting and/or exceeding our budget in the first half of the year. And it wasn't until we got the sort of unexpected news, both from our distributor in China as well as on our QAPs business, the loss of business of a key customer for one of their projects that had been canceled, which changed things quite significantly in the second half of the year. Overall, for the year, revenues were down 27%. A good chunk of that actually was -- we had Kinlytic revenues of $4.1 million last year. We didn't have any this year. We didn't expect to have any this year. So that was a good portion of it. Plus, we also had these events in the second half of the year that led to the rest of the decline versus last year. If you look at -- if you took all of those factors out, the Kinlytic out, the China distribution, the QAPs program cancellation, our revenues in all other areas actually increased 12% during the year. From a margin perspective, we were down from last year at 53% versus 61%. Again, a good portion of the last year's strong margin was Kinlytic, which had $4.1 million worth of revenues and very little cost of sales last year. So in comparison, again, we were fairly flat, if not up on last year's gross margin. And that's coming from -- we've had a very good year from a process and yield standpoint on our antigens business. And we've seen yields improve quite significantly on a few of our key products and the number of batch failures declined substantially and, in some cases, 0. So very important for us as we move forward as well. On the OpEx side, we were up 4% on OpEx. Key contributors there were we had lower investment income during the year, again, decline in interest rates led to that. We -- although we did make continued investments in trade shows as well as increasing our R&D spend, predominantly in the QAPs area, but spending more there. It was a profitable first half of the year, unfortunately, a sizable loss in the second half of the year. Our expectation is as we go into 2026, which I think Cameron will focus on a little bit later, we expect to see some improvements in all areas. We did maintain a cash -- we've got a strong balance sheet. We maintained a cash balance of over $12 million at the end of the fiscal year. We made sizable investments in our capital equipment and facilities throughout the year as well. So we're poised to enter -- or we've already entered 2026 at this point in time. We're almost finished Q1, but we're entering it in a strong position and looking forward to our 2026. Cameron Groome: That's great, Jim. Thank you. I think that's the clarifications that you've made there are excellent. Last -- if we look at our fiscal 2024 and remove the $4.1 million in Kinlytic milestones, we achieved revenues of $21.3 million from recurring product sales and royalties in that year. We were looking to grow beyond the total $25.4 million inclusive of Kinlytic in 2025 based on the outlook we had for all of our different clients. But with 2 major clients falling off the table, we effectively went from $21.3 million down to $18.6 million in terms of recurring revenues and royalties. So again, while it's not what we were looking for, it's a very solid performance from our team. And as you pointed out, Jim, if we remove those variables, we grew in sales of pretty much every category and customer outside of the 2 problematic instances. So very good context on there. And some of the achievements we've made across fiscal 2025, I think they are very good to call out. From the -- I'll think to calendar year because it's in my mind rather than fiscal for the achievements now that we're in December, but we've announced the -- our intention to onboard full recombinant antigen capabilities to add to our long-standing native antigen capabilities, and that program has been moving forward through the year, and I think we'll soon have some progress reports on that. We've continued our strong support of the industry and public health with regards to potentially emerging respiratory pandemics and respiratory illness with new products in H5N1 put to market and as well H3N2 most recently, which is this season's emerged flu strain that is the latest clade that's driving infections. We've announced support for cervical cancer screening in multiple countries all throughout the Indo Pacific through our collaboration with the Australian Center for the Prevention of Cervical Cancer. Our partner on Kinlytic has engaged the drug product manufacturing contract development manufacturing organization to help drive that program forward. Work continues with Ken's firm support on that program, and I'll ask him to speak to that as well as ops generally. We've had multiple new program and product collaborations with our proficiency testing and external quality assessment scheme providers in infectious diseases in oncology, molecular pathology and genetics testing, which broadens out our addressable markets again beyond our traditional strength in infectious diseases in relation to QAPs. We strengthened our supply chains with our exclusive supply agreement to access the more than 100-year-old collection of pathogens at the Bulgarian National Center for Infectious and Parasitic Diseases in Bulgaria. We launched our new QUANTDx reference materials product line, which potentially may become as important for the company on a revenue basis as QAPs has become for us and further test manufacturer collaborations with -- most recently with SEKISUI for point-of-care tests being marketed in the United States and with Seegene with respect to cervical cancer screening in Mexico, a population of 140 million. So tremendous fundamental achievements through the year that I think are important to call out. Ken, what would you most want to talk about from an operations point of view in terms of what we achieved in fiscal 2025 and for that matter, some of what you see for '26. Kenneth Hughes: Well, I think it's quite apparent that we're in excellent shape operationally at Microbix. We have the capacity necessary to fulfill our market desires in the next little while, and we've also built capabilities from there. We have an ongoing focus on operational excellence. We've seen batch yields increase. We've seen batch failure rates reduced, and that, of course, reduces costs and increases margins. And we've also been working hard on further implementing aspects of our electronic quality management system and connecting that with our ERP system to further increase efficiencies. So we're in -- we've added new capabilities. We've talked about the recombinant protein program, in addition to our native antigen program, and that is going extremely well, and the first product will be ready for prime time imminently, but there's a whole pipeline behind that. And that's just a description of the scientific excellence we have at Microbix. And so from a capacity perspective, from a capability perspective, we continue to grow. I don't really have anything negative to say in this regard. All we've seen is increased yields and reduced costs. And I think that's the way it's going to stay, and we'll be able to support our business growth in the future. That's for operations in general. I think we're in really excellent shape right now. And kudos to all the staff for doing that because we're replete with outstanding scientific leadership and scientific support throughout this company and the increased yields and reduced costs are a manifestation of that. Cameron Groome: Very good, Ken. Thank you. I think that really highlights how we're entering into -- have entered into fiscal 2026 with incredibly strong capabilities with an absolutely marvelous team, great capacity that we have to bring to bear. And I will say as well a very rich business development pipeline, and there are multiple new products and programs that we're working on with both existing and new customers. And I'll just remind everyone that our policy is we announce programs when they are effectively signed, sealed and delivered, not when we're discussing or negotiating with partners on them. So as those come to full fruition and with the consent of our partners, we'll make those disclosures as and when we pull things over the line with our partners. So very good position in that and for our financial goals for fiscal 2026, really what we're seeing, and we've seen in Q4 is this is beginning our recovery from the revenue setback that began in Q3, leading to our below certainly our target full year results for fiscal 2025. And I think across fiscal 2026, we'll continue to build out that recovery quarter-by-quarter and be looking to regain quarterly profitability in the -- likely in the fourth quarter of fiscal 2026 is what -- on the order of what we're targeting. That really represent -- would represent a growth of approximately 30% from the quarterly low point of $3.5 million that we had in Q3. So if we were just flat across fiscal 2026, we net revenues of $14 million. We will not be net revenues of $14 million. We'll be substantially higher than that from everything we see in our current outlook. And this, again, our outlook is based on projects that have already been signed, sealed and delivered, and we can look at, say, what product is going to be ordered in what quarter by what customer. We don't speculate on things that are not yet fully delivered. And some of our work across 2026, we -- as Jim stated, we should emphasize, we continue to have sufficient financial resources to fully execute, and that's both in terms of our cash on the balance sheet, which, as Jim had mentioned, is over -- was over $12 million at the end of our fiscal 2025, September 30, 2025. And I'll just remind folks that we also have an undrawn mortgage facility on our own facility, and that could be up to $8 million drawable off that, plus an undrawn line of credit, which could be up to $4 million dependent, of course, on a loan credit lending formula with the bank. So altogether, at September 30, we could have access to up to $24 million in further funds before we would need to tap $1 of new equity. So that's very much not on the table to issue equity. And in fact, you've seen the recent renewal of our normal course issuer bid. That's the technical name for a share buyback program. And we're actually able to proceed should we choose at a higher level of daily purchases for the renewal than we had available in fiscal -- across fiscal 2025. So again, very positive from an operational point of view and very bright prospects that we're looking at going forward. So I think that would conclude my comments, and I just thank everybody for their engagement and support as we've continued to build the strength of Microbix in terms of our capabilities, our capacity. And I'm just delighted to see more large multinational companies relying on Microbix as a critical supply chain partner for QAPs and for antigens and for more touch points such as our reference materials as they get into assay development. We're becoming much more known across the industry and recognized and respected. And I think that is a great way to continue building value for shareholders. And then, of course, we have the very substantial kicker with Kinlytic that's continuing to advance towards the filing of a supplemental BLA with the United States Food and Drug Administration. And we're continuing to target the advancement of that with the refreshing and renewal and updating of drug substance manufacturing is progressing, and we'll hopefully have some update disclosures from that in the first half of this calendar year that fiscal -- calendar 2026 and that continues to be have tremendous revenue potential through royalties, recurring royalties and onetime sales and regulatory achievement-driven milestone payments that is sort of the turbocharger, supercharger on a very nice V8 engine that we've built and are now putting gas into. So with that, that would be the conclusion of my comments. Jim and Ken, did you have any further comments you'd want to make before Deborah may ask some questions and open it up to those on the call. Kenneth Hughes: The only thing I would add, I forgot to say when I was talking about general operations was we also have a focus on automation, as you would expect, as part of efficiency increments in Microbix and that initiative, both within manufacturing and QC, and the highly scientific disciplines, of course, fed by R&D and engineering ongoing and continuing to drive efficiencies at Microbix on the basic operational side, no doubt we'll get to Kinlytic in due course. Cameron Groome: And that's so great because that liberates our staff to do work with their minds more than their hands and gives everybody the potential to do their best work -- the best and most fulfilling work. So Jim, what would you want to flag? James Currie: No, I don't have anything else, Cameron, to add to this. I'm more than happy to answer any questions that anyone that's on the line has regarding the financials. Cameron Groome: Okay. Thank you. Deborah, what would you want to ask before we open it up to the audience? Any questions that you've had? Deborah Honig: I mean, for me, I would just like a bit of a more detailed update on Kinlytic and time lines and catalysts. I know, Ken, you've walked us through the process many times, but it would be good to just kind of hear the updated time lines that you're seeing? Kenneth Hughes: I saw some specific questions in the Q&A. I thought we were going to talk then. I'm happy to open it now if the group would like it. Deborah Honig: Sure. Kenneth Hughes: Okay. So it's quite straightforward. The relationship -- as everyone knows, we're working with Sequel and the relationship is excellent, and we're moving forward in updating as per FDA's request at the U.S. FDA's request. production processes to contemporary standards that involves reducing animal components in there and increasing the veracity, if you like, of testing. We're moving forward at a pace. We're currently scaling up processes with 2 separate CDMOs, contract manufacturing development and manufacturing organizations, one for drug substance, the active ingredient, one for drug product, which is the finished and filled and packaged product. These are moving forward at a pace. In fact, we're expecting to be going back to the -- we are going back to the FDA early in the new year, specifically to update them on the work we've done in bringing the process up to contemporary standards because recall, of course, the original Kinlytic process was in the early 2000s, and here, we sit at the end of 2025. This work has gone extremely well, and where we will -- we don't expect to be anything contentious in that. It's mainly an update. They asked us to improve the processes. We have done that, and now we're implementing it at commercial scale along the time lines discussed. So we talked about filings in 2026, 2027. That remains the case, and we're moving forward at a pace. So I really don't have anything negative to say about this. This is mainly an engineering function now, and we're going forward with our 2 CDMOs and with Sequel, as we said we would. So that's really the update. The fact that we have concluded the work in reducing -- in bringing the process up to contemporary standards is a milestone, and it's a milestone that will be reflected in our discussions with FDA. Cameron Groome: A small clarification, Ken. you stated filings in 2026 or 2027. I think there will be interactions in '26, but not a filing. Kenneth Hughes: Yes. Updates and future updates to the file. Of course, Kinlytic is already approved. It's already approved drug with decades of clinical success. And as I say many times here, I've said many times on this type of forum, there's no chance of clinical failure because there's 20 years of clinical success. What we're doing is bringing new manufacturing to bear and adding to the currently approved file. And that's where the interaction with the FDA is going and is going well. Cameron Groome: Yes. And just to state that the relationship with the partner is excellent, and it's that partner that's providing and its private equity backers are providing full project funding. So Microbix participates in the upside of that through onetime milestones, nonrecurring milestones that could total up to USD 31 million, plus should -- unless the product completely disappoints in the marketplace, then we'll see a double-digit recurring stream of royalties on all revenues generated from all applications in all markets for the product, starting with the catheter clearance indication in the United States market. But certainly, we hope, and our partner hopes that it will go beyond that, both geographically and in terms of the clinical indications for the product. Kenneth Hughes: And we're working very closely with Sequel and others on the technical and regulatory and market components of this and absolutely the catheter clearance is only the start, and there are many larger indications in geographies outside of North America that we intend to pursue. Cameron Groome: Deborah, does that -- I think that's a good summary, and perhaps you can start to guide us through some of the questions in the queue. Deborah Honig: Yes, perfect. That covered my questions. A question about it as well as an audience one. So one down. So inventories continue to grow. Is there a substantial amount of antigen intended for China in the inventories -- sorry, let me rephrase that. Is there a substantial amount of antigen intended for China in the inventories that is at risk of being written down? Cameron Groome: I think that this is definitely -- I was just going to tease Jim that do you ever look at inventories. Yes, very much on Jim's mind across the board. Jim, can you give full context on that as well as some of the comments on cell bank renewals and how that is treated in inventory? James Currie: Sure. From an antigen standpoint, yes, there's no question that we ended up with some inventory that we had not necessarily planned on relating to the China distributor because of the sudden shutdown of the business. And we had also been acquiring raw materials to support the anticipated growth and the forecast that they had been providing us with. So we also chose to convert those raw materials into finished goods as well. And both of those in combination led to an increase in inventory. But no, there's no risk of write-down. Antigens don't -- they don't expire. We fully anticipate being able to sell those -- that inventory during the fiscal year as it comes up. So... Cameron Groome: Just for clarity, for antigens, those materials are kept at minus 80 and are -- have effectively an infinite or near infinite shelf life. So... James Currie: Effectively indestructible. Cameron Groome: Yes. Yes. James Currie: The other factor that Cameron mentioned was seed banks. And this was a year of investment in our seed banks and our seed bank inventory. We believe that it was a long-term, and we actually had lobbied to move that into being more of a long-term asset as opposed to inventory. But from an IFRS standpoint, it was deemed that this was still inventory that it is consumed during production. It's just over a much longer period of time. It's important, but there's probably somewhere in the neighborhood of $0.75 million in that increment that belongs to the seed bank. Cameron Groome: Maybe I'll just take a moment to explain what that means for folks that aren't too wholly steeped in our industry. It's a little bit literally like -- think of it like a seed. These are the cells, the cells or viruses or bacteria that will start to grow up and propagate to become the finished antigen products. And in some cases, the finished caps active ingredients. And those are literally like the seed corn that one would so at the beginning of the season and then harvest after it grows and propagates. So those stocks of seeds will be used over years, sometimes even over a decade or more and consequently are really a long-term asset in that sense, but they appear in inventory as, I think, in the raw materials category, Jim, and they appear as a current asset under IFRS. So it's a little bit of -- and certainly, we've said it's certainly not intuitive treatment, but it is prescriptive on the accounting standard. So you do see that in the growth in inventory as well. And then just for -- as we increase the number of SKUs as well in QAPs, particularly, we've been laying in materials, biological materials for those programs, many of which are new programs and new products for different customers. James Currie: And all of those seeds and cell banks are stored frozen. Cells are generally stored in liquid in [indiscernible] phased liquid nitrogen, which -- and seeds generally are stored at minus 80. So once again, they are pretty much indestructible and there's no chance of them going off. And of course, that frozen state is monitored in real time. Cameron Groome: Yes. With uninterruptible power sources in backup and vital seeds are actually stored in multiple locations as further backup and disaster recovery in business continuity planning. James Currie: Absolutely. Deborah Honig: So literally planting seeds for growth. Cameron Groome: Literally, absolutely. Deborah Honig: I'll let you hear that. Cameron Groome: Yes. And just as our products expand and our capabilities expand and you have one touch point with a major international customer, getting that foot in the door the first time is very challenging, and it becomes a little bit easier each time to gain another product once -- or another project once a customer knows us and likes us. And I'm probably the least likable person here. So the rest of the team shines in comparison. Deborah Honig: I wouldn't say that, certainly not to your face, Cameron. Okay. A couple more audience questions here. With the respiratory disease season expected to be stronger this year, do you see any signs of recovery in China? Cameron Groome: Our China -- most of our China sales are related to some of the complications downstream of a viral infection. So a viral infection will often lead somebody to then have a bacterial infection in their lungs. So it starts with a cold or flu and then leads to a pneumonia. And a lot of the sales we've made into China are for the immunologic tests to diagnose pneumonia. So we'll have to see how that goes, and we're trying -- it's always tougher when you're once removed from the end-use customer with the distributor. So those clients have to burn through their inventory of tests before they reorder ingredients. So we do see -- and we do have some reorders budgeted for fiscal 2026, but at a lower number. And we're not -- we don't have current plans to build more product than our current inventory of those products. Deborah Honig: And I had a follow-on question, which was about your China distributor. Are they shut down permanently or just for the past? Cameron Groome: No, no, no, not shut down at all. This is just -- they've seen, and we've seen a decline in customer orders from that market, but we don't have any indication that the market has gone away, nor has our distributor indicated any plans to exit that market. Deborah Honig: Got it. And your royalties were up quite a bit this quarter from recent quarters. Can you talk a little bit about that and the reasons why? Cameron Groome: Sure. Well, there are 2 categories of royalties, and I'll ask Jim to go into that without being too prescriptive on names. But we have royalties on antigens that we sell to other parties from which they make their own caps, and that's the historic legacy. And then we also have a royalty stream from prior inventions of Microbix that are used by others specifically. And I think this has been disclosed previously the target of that, Jim. But this being a rabies vaccine technology on which Microbix receives royalties on an ongoing basis. Jim, do you want to comment on the -- how that -- the accounting of that is treated? James Currie: Sure. Yes, the one related to the selling of antigens, it's been fairly consistent. So the increase in Q4 has nothing to do with that. It is through the rabies royalties. We only get a report once a year. And as it turns out, it comes in December 16 of every year, we get the final report. So during the year, we accrue for royalties based upon -- historically, we've used the prior year's results as what we accrue based upon. As it turns out, when we got the royalty report this year, it was a much stronger year than last year, and that's why we had some incremental revenues that were booked in the fourth quarter. And we will -- as we move forward, we'll be utilizing that information for accruals for fiscal 2026. So that should be an increase year-over-year as well. Cameron Groome: No, that's great, Jim. And just this is a technology for creating oral rabies vaccines for feral and wild animals and control of rabies in wildlife and such animal populations. And it's an invention of Microbix going back a number of years that is used commercially by others to create products and support those programs. Deborah Honig: Well, I always learn something new on a Microbix call. I do not expect a bull market for rabies to me today some including us. Cameron Groome: Yes. Deborah Honig: Who would have thought? I guess be careful out there. Cameron Groome: Absolutely. It's a biological world. Deborah Honig: Okay. So here's a question. How will AI affect your business? Are you seeing any implications? Or on the flip side, are you able to benefit from any of the advances in AI? Cameron Groome: Well, we try to find intelligence in all corners, and sometimes we do. No, for AI, Ken, do you want to touch on that, like... Kenneth Hughes: Absolutely. I mean we have an IT department. So of course, we have an IT -- an AI interest. So I mean, AI is being deployed in data analytics. It's being deployed in documentation development. We have to be absolutely sure that our AI tools that we use are protected. So we're not putting our information out there in the worldwide web for people to enjoy, and we're very sensitive to that. But there's a whole load of efficiencies you can bring to bear based on use of AI in understanding the marketplace, understanding operations, understanding efficiencies and all of these are being deployed. I mean, like I say, we have a very active IT department and their plans for 2026 are substantially oriented to further implementing AI efficiencies. Cameron Groome: Well, that's great. I'll just mention something for those that are [indiscernible] such as myself. Some of the AI, you have to be careful with your use of it. If a free software tool says, this looks like a long document, would you like us to summarize it for you? If you click yes, your document is ported up and becomes the property of that free service provider. So just be very careful in what tools you permit yourself to use on this. And we've developed and are developing the appropriate policies with proprietary tools that do not jeopardize the proprietary or confidential nature of our documentation. Kenneth Hughes: We are fully integrating all our systems, as I've said many times, and we're using AI tools to facilitate that. And obviously, we have developers on staff who know what they're doing, but they know how to deploy these tools. And we deal with third-party people that do that as well, again, under the appropriate confidentiality provisions. So yes, AI is unavoidable and will facilitate efficiencies in the future. Cameron Groome: Yes. And we already use some of those, for example, in sequence construct design and some of the deep data analytics that Ken is speaking to. So those are tools we're already familiar with. Jim, anything you'd want to highlight with regards to AI and ERP or some of the other areas? James Currie: No, nothing. I don't want artificial intelligence in our financials thinking. But certainly, there's opportunities for AI to be utilized within our ERP solutions. And it's like Ken identified, it's an area with our IT department that we're continuing to review. Kenneth Hughes: We have quite sophisticated expertise in that regard actually. Yes. Cameron Groome: Yes. Very good. Deborah, why don't we roll on? Deborah Honig: Yes, sure. For QAPs, is there a client or clients that you expect to be as big with regards to revenue as the major client that terminated the program this year? And when do you expect that client or clients to move to commercial launches? Cameron Groome: Well, it's proven to be perilous to try and predict when clients will move to commercial launches even based on their own internal targets and expectations. So I think I'll be once burned, twice shy on any such predictions of that nature. But I can say that we're working with many -- most but not all of the largest diagnostics companies in the world currently on programs and projects. And as those tip over, we'll start to see some of those, if we secure the business which we're chasing and targeting and deeply engaged with, some of those, yes, can absolutely be as large as -- or larger potentially than the program that was canceled in 2025. So yes, there's a lot of potential here, and we're pushing hard on that. And this is really where you have to have the capabilities to be at the table and you've got to have the capacity to be at the table. So those are the investments that we've made in systems and people and that enable us to have these conversations and now locking in the business is going to be the next step. Deborah Honig: Can you talk about the replacement value of Microbix and how investors should think about that in the context of current enterprise value? Cameron Groome: Yes. This strays into the realm of opinion, of course, Deborah, and we all have some very firm opinions on this. But for us to -- for somebody to try and start this business with the legacy of knowledge, capability, the seed banks that we've talked about that are all clean title and royalty-free, the history of knowledge and the diversity of skills that we've mastered, both in terms of classical virology, bacteriology, upstream and downstream production methods, synthetic biology now moving into recombinant. I can't imagine that you could even start the business from a cold start in less than 5 years, probably 10 or more to get anywhere with unlimited money. So you're looking at a replacement value to me well north of $100 million, maybe even hundreds. It's really extraordinary when we look at the breadth of capability the company has. Ken, would you want to... Kenneth Hughes: I would have answered that exactly the same way. We have in-house expertise, proprietary information and materials that people just don't have, and the title free seeds is a big part of that, but also the years of experience with native antigens and native viruses, native proteasomes, native bacteria added to the recombinant and synthetic biology capabilities. These are nontrivial lifts we have deep, deep expertise and history here. So I think it will be extremely difficult for anybody to recreate a Microbix in their backyard. And I think we should be pretty comfortable with that reality. So I would have answered pretty much exactly as you did, Cameron. We have a lot of proprietary expertise here. Cameron Groome: Jim, you participate in a lot of our strategic discussions. Do you have any perspective you'd like to share on this? James Currie: Yes. I think both you and Ken have identified the key ones. I think in terms of our ability, the stocks, the seed banks and the importance of those as well as the people and the knowledge and the know-how and the expertise are all the keys to the value that this company has. And it's all these intangibles that are beyond what sits on the balance sheet. They're strategically important to the organization and its value... Kenneth Hughes: And not only are we making the stuff, we've got the depth of expertise to make it better. We've talked about yield increases. We've talked about understanding the hardwares and the software. So we have far fewer batch failures and some -- and over this year, 0 batch failures in really complex processes. And that's a description of the expertise in-house. And again, I can't speak highly enough of the scientific and technical staff at Microbix. And we have a low turnover of those staff members because we have a certain environment, and they appreciate the excellence and the way the excellence is brought to bear. So yes, we're in a really strong situation here, and that should kind of be trumped a little bit in my view. Cameron Groome: I think certainly, that's been one of the frustrating elements about TSX and capital markets as they now exist where investors, particularly those individuals with accounts at bank-owned dealers, for example, are actively discouraged from owning individual small-cap industrial companies. So we have a small market, a generalist-oriented market or resource-oriented market, and we're global specialists in this industry. And I think our peers really are recognizing much more what we have than perhaps the capital markets are right now. Deborah Honig: A couple of questions on your cash level. Do you expect this to remain stable moving forward? Or will your increased investment eat into the balance of the course of the year until you regain profitability? Cameron Groome: Yes. We'll see some reduction of cash through fiscal 2026 as we move towards regaining profitability, but we will not go through -- we will not be anywhere near to going through our cash reserves in 2026 based on our current outlook. Deborah Honig: How will that affect your usage of the NCIB? Cameron Groome: It's a great question. Last year, we were able to buy what was the number, Jim, 12,373 or something a day. James Currie: Yes. Cameron Groome: And this year, I don't have the final digit in my mind, but it's about 20,000 shares a day. James Currie: Yes. Cameron Groome: Yes, a little over 20,000 a day. Our goal with the NCIB is at a minimum to offset the ongoing use of the stock option -- the rolling stock option plan of 2% per year and go beyond that. And we bought back -- what did we buy back in percentage terms this past 12 months, Jim? It was close to -- closer to -- well over 3% and close to 4%, I think. James Currie: Yes, I don't have the exact number off the top of my head... Cameron Groome: It's in our MD&A filings and financial statements. So effectively 250 trading days a year or close to that, 20,000 shares a day, it would be about 5 million shares roughly that we would be buying back at that sort of run rate of 20,000 a day. We've budgeted about $1 million in spend for the share buyback for this year, this coming year. And we could certainly go higher than that if we see it to be a prudent use of capital. But I think that would be the minimum spend we'd look at. Deborah Honig: I suppose it's a bit of a trade-off, right, buying at these levels before the recovery starts to set in versus preserving cash and waiting and buying. Cameron Groome: Absolutely. And as -- we'll refresh this with our quarterly Board meetings as well and -- and the Board on this and see based on -- as we bring in and secure projects that we're working on, I think we'll have ever-growing confidence in that and kind of become more aggressive. But it is striking a balance right now between making sure that we retain a very healthy cash balance in a volatile global environment and effectively using that NCIB. Deborah Honig: Got it. Makes sense to me. Is there any update on the cybersecurity incident and what was actually stolen? Cameron Groome: Yes. We -- it's interesting when you have these meetings. We had one cybersecurity meeting and somebody said, well, if you could deploy 20 people from your IT team, we could do all this in really short order. We're going, yes, if we had 20 people on our IT team, that would be great. So we've been progressing as quickly as we can on hardening systems and porting them. And I give kudos to Ken and Jim and Mark Luscher, Alex [ Gostein ] and others on this. So we had fully hardened our e-mail servers and ported that out of company hands into cloud-based technology there. Likewise, our upgrading of our ERP system to NetSuite, which is also cloud-based international company system. Likewise, our digital quality management system, master control. So all of those were completely unaffected. Where we were penetrated was effectively a legacy server and that would have potentially some worksheets and files saved over, but it did not in any way disrupt our operations. So we were -- we recovered that system from backups and recovery within a couple of days. We were fully back operational with no disruptions whatsoever. But we made the news release alert really because what was -- you have a ransomware attack, it's blocked, you're then trying to identify what, if anything, was exfiltrated. So we have now received evidence that some data was exfiltrated, and that included some employee information. So we've moved forward with credit monitoring and protection for all staff. And we just wanted to alert our customers and our shareholders of the event, of course, and that everybody can be more vigilant. But when I talk to peers, I've talked to peers at companies 100x our size and so they say, "Oh, yes, we got nailed." Some of them -- sometimes they pay, sometimes they don't. Sometimes they're able to recover as readily as we were able to. Other times, companies have been massively disrupted. I think there was the example of the entire car dealership network software was hacked and shut down sales and service for the whole industry for a time. Fortunately, we didn't have that. And just for clarity, we did not and have not and do not tend to pay any ransoms on a -- for this event or going forward. Kenneth Hughes: And we continue to upgrade our systems, update our systems and continue with retraining and retraining of staff to make sure that we mitigate the risk as best possible. I mean we live in the real world here, but we are continuing to monitor the dark web. We're continuing to upgrade our systems and train our staff, and that's what you have to do. Cameron Groome: Yes. And it's a double-edged sword. You pick up the efficiencies from moving it would be impossible to scale our business the way we want to purely on paper-based systems. And then as you move into more reliance on software, you've got to then harden the systems appropriately. So it's unfortunate, but this is life in the big city, 21st century. And I think companies of our size have been targeted on in some cases, because they have a heightened obligation, if they have patient-specific medical information, there's a liability associated with that. We don't handle that kind of information, but it may have been one of the reasons why we were targeted with somebody thinking maybe we did. Deborah Honig: Well, again, going back to my initial comments, I commend you on your rules around disclosure because a lot of companies would not have put out that press release. Cameron Groome: Well, thank you. Thank you, Deborah. Deborah Honig: Okay. Two more questions. So if anyone has any more, feel free to get them in, and we'll try and wrap by the hour. A bit of a blast from the past, any progress on VTM sales in Ontario with the new provincial focus on buy Ontario? Is there anything in the forecast for that? Cameron Groome: Our forecast only include some sales to private industry, and this is more in the control elution buffer category, different utilization of similar product formulations. We continue to engage with procurement authorities, but it is -- it does seem to be a riddle wrapped in a mystery surrounded by an enigma in terms of what some of the practices and motivations are. Kenneth Hughes: Yes. It is good that we hear about buy Ontario and buy Canada, and that's great. And when we see a manifestation of that in real life, that will be great, too. Talk is cheap. We continue to work in communication and showing the excellent -- the global leadership that we have in this area. And hopefully, Canada and Ontario will buy our stuff soon. We continue to knock on the door. Cameron Groome: Correct. Yes. Deborah Honig: One last question here. It's an interesting one. With the current U.S. administration focus on deregulation and ease of doing business, do you foresee any possible improvement on time line for either BLA approval or return to market, especially as this is already an approved drug? Cameron Groome: Well, this is specifically in relation to Kinlytic. Deborah Honig: Kinlytic. Cameron Groome: I think all of our interactions with FDA have been very supportive and very appropriately scientifically oriented, responsibly oriented and constructively oriented. So really, we have nothing, but I think, positive and complementary comments to make about our FDA interactions. I've not attended those meetings personally, just full disclosure. But from what I'm -- what information I've received from Ken and from our partners who have attended those meetings, it's just been superlative. So if it gets better from that, great, but no complaints so far. Kenneth Hughes: I think it's -- I mean this is a really great question. I mean, at the end of the day, we're going to update our file and provide data, and FDA has to review it and they'll take their time. What the feedback we've had is they are now oriented to the market dynamic and the reality of this is an approved product. Let's remember that the current market is served by a monopoly, a single product, and that goes down, you have nothing, and people are... Cameron Groome: Which it has, which it has... Kenneth Hughes: And it has gone down. So the FDA is well aware of this, and we expect them to continue in the positive they have previously. And if that facilitates the process so much the better. It's also worth remembering that the European regulators reached out to us to ask us not to forget about them because they have the same monopoly situation. So regulators are well aware of the market dynamic here. So I don't think we're going to have a negative interaction with it, of course, whereas we have to follow through their mechanism and their system once we make our necessary filings. But as we sit here today, the interactions with those regulators has been excellent, and we hope they will be as expeditious as it's possible to be. Cameron Groome: Yes. And I think those are 2 questions because there's the positivity of the interactions and then there will be the question about what is the speed of the review. So there can be a very positive interaction and then a slower review, but the interactions have been very positive, and we'll see in due course in terms of what the review time of the file is. Part of that will be dependent on the excellence of the submissions, the awareness of the individuals reviewing and their resources and prioritizations. James Currie: Absolutely. Deborah Honig: I had one audience question sneak-in. We're just up on the hour. Can you guys go a few minutes over. Cameron Groome: Absolutely. Deborah Honig: Okay. Great. So the question is which KPIs should we keep an eye on in Q1 fiscal '26? And I think I'd like to expand that just beyond KPIs, also catalyst and maybe we can talk about full year. Cameron Groome: Well, we have budgeting cycle going into early fall sort of August, September into October time frame. And then we have a Board -- an annual Board offsite meeting in November to review critique and approve those budget objectives where we inform -- fully inform the Board of what's happening and what we pose and plan for. And then there is the approval of that and then our KPIs get reconfirmed based on that. What we're, again, really looking to achieve is to bring those -- bring the capabilities and capacity we've built to bear and grabbing hold of new programs with major multinational diagnostics companies is something that's key for us, continuing to build our presence with the PT and EQA provider companies growing -- continuing to grow that piece of our business, continuing our, again, the B2B theme to engage with more major international and multinational diagnostics companies on programs, particularly oriented in QAPs. I think that will be something we'll look at. And then we're broadening out the tail as well. A lot of our sort of B2C sales to end user clinical laboratories. We're not that -- we're not decades into this business. So the awareness of our company amongst end users has been more limited than amongst businesses. But we're starting to see those more retail level sales to labs become a significant portion of our business as well, whereas a major international company might order hundreds of thousands or millions of dollars of product from us, a lab might order hundreds or thousands or maybe tens of thousands of dollars from us for one lab in one site in one city, but we're starting to see much more of that regular inflow of orders. And that has a strategic value in diversifying our client base as well. So I think we'll see -- we'll see a progression of announcements with -- should we succeed with our objectives in landing new business with major clients. And then we'll see a more regular flow of business from end users as well. Ken, what would you want to highlight as some of the deliverables in 2026? Kenneth Hughes: Well, I talked about the capacity and capabilities of the business, and I expect to be able to support all of those trajectories. They are necessary. We've added the recombinant capabilities now to -- further to our synthetic biology capabilities, which obviously synergizes with our native antigens and natural virology and bacteriology expertise. So that's going to continue on from there. We're going to see progress in the Kinlytic file, and I expect to see much progress in 2026 and lots to be happy about. And of course, 2027, hopefully, will be even better. And so those are natural KPIs. But in terms of supporting the core business, I think we're in really good shape. And to Cameron's point, we're going to be building that business and really the operational excellence here is going to maintain the necessary margins to drive to profitability. We're also going to see some reduction in costs, I think, or at least in proportion to sales because of the efficiencies we've brought to bear. The electronic quality management system and ERP integrations and the role of quality assurance in that is going to really increase efficiencies as well. So these are all the operational side in support of business development. And it shouldn't be understated. I mean we have really excellent people doing good work to make sure that we maximize every dollar that we've taken in. Cameron Groome: Jim, what would you want to highlight? James Currie: Well, I think one of the key ones for us is the bounce back in revenues in terms of seeing the revenues and the fruits of our labor over the last number of years in both businesses and seeing that revenues get back up to where we believe that they should be. And I think Ken has identified the costing side of things is that we need to be more -- continue to be more efficient and effective and maintain the levels of yields that we have seen in fiscal 2025. They are biological, so it's sometimes difficult to predict. But I think we're getting from a research and manufacturing perspective, a little bit more stable in terms of our yields and our efficiencies. Cameron Groome: No, that's a great point, Jim. And I'll emphasize as well the capabilities and the capacity that we brought to bear, all these efficiency matters really drive that ability to scale and credibility to scale to land business with major customers. And one of the things I'll mention as well is the QUANTDx product line. This is the reference materials, higher price point, earlier engagement with assay development -- with counterparties when they're developing assays and determining limits of detection and doing that development work. This has been an excellent initiative. You'll see some good description of that in our MD&A and in our AIF that will be filed shortly. And that's already broken into a 6-figure revenue category. It won't be yet separated out from the QAPs business from reporting. But I think we're very satisfied with the engagement level on that new product line already that is generating material revenues for us, and just yet another touch point of technical excellence with customers and showing real value added for them. And just reflective of the scientific and strategic excellence of our team, which we can't speak highly enough about. Deborah Honig: I think that gives us a good outlook for next year. I don't see any other audience questions. I have run out of my own questions. Was there anything you guys wanted to discuss today that we didn't get a chance to cover? Any last thoughts for the audience? Cameron Groome: I would just thank everybody for your support of our management team and the commitment of your capital. We're building our business for real. We've built real substantial value. And I think we've talked about just how great that value is and now it's on us to drive the revenue growth to substantiate that thesis, and that's what we're doing and what we're dedicated to doing. So whether it's our diagnostics operations, antigens as ingredients, quality control materials in our quality assessment products and QUANTDx lines and Kinlytic's. So these are all real tangible value that we're building, and we look forward to seeing that more fully reflected in our stock price across 2026, and thank everybody again. Deborah Honig: Well, thank you, Cameron, Ken and Jim. I appreciate your time. Thank you to the audience members for your time and your questions. And yes, I guess we can leave it there. I hope you all have a very nice Christmas, New Year's, Hanukkah, whatever you celebrate, Happy holidays, and thanks again for supporting the food bank drive. Cameron Groome: No, thank you, Deb. Great initiatives. Delighted to do... James Currie: Thanks, Deb. Take care. Cameron Groome: Thanks, everyone. Take care. Bye. James Currie: Bye-bye.
Derek Dewan: Hello, and welcome to the GEE Group Fiscal Fourth Quarter and Fiscal Year Ended September 30, 2025 Earnings and Update Webcast Conference Call. I'm Derek Dewan, Chairman and Chief Executive Officer of GEE Group. I will be hosting today's call. Joining me as a co-presenter is Kim Thorpe, our Senior Vice President and Chief Financial Officer. Thank you for joining us today. It is our pleasure to share with you GEE Group's results for the fiscal 2025 full year and fourth quarter ended September 30, 2025, and provide you with our outlook for the fiscal year 2026 and the foreseeable future. Some comments Kim and I will make may be considered forward-looking, including predictions, estimates, expectations and other statements about our future performance. These represent our current judgments of what the future holds and are subject to risks and uncertainties that actual results may differ materially from our forward-looking statements. These risks and uncertainties are described below under the caption Forward-Looking Statements Safe Harbor and in Wednesday's earnings press release and our most recent Form 10-Q, 10-K and other SEC filings under the captions Cautionary Statement Regarding Forward-Looking Statements and Forward-Looking Statements Safe Harbor. We assume no obligation to update statements made on today's call. Throughout this presentation, we will refer to periods being presented as of this quarter or the quarter or this fiscal year or the fiscal year, which refers to the 3-month or 12-month periods ended September 30, 2025, respectively. Likewise, when we refer to the prior year quarter or prior year, we were referring to the comparable prior 3-month or 12-month periods ended September 30, 2024, respectively. During this presentation, we also will talk about some non-GAAP financial measures. Reconciliations and explanations of the non-GAAP measures we will address today are included in the earnings press release. Our presentation of financial amounts and related items, including growth rates, margins and trend metrics are rounded or based upon rounded amounts, for purposes of this call and all amounts, percentages and related items presented for approximations accordingly. For your convenience, our prepared remarks for today's call are available in the Investor Center of our website, www.geegroup.com. Now on to today's prepared remarks. We continue to face very difficult and challenging conditions in the hiring environment for our staffing services, which have been ongoing since the second half of 2023 and throughout 2024 and 2025. These have stemmed from what is now acknowledged as over hiring that took place in 2021, 2022 in the immediate aftermath of the pandemic and the macroeconomic uncertainty, interest rate volatility and inflation that followed. These conditions have produced a near universal cooling effect on U.S. employment, including businesses' use of contingent labor and the hiring of full-time personnel. Since 2023, many client initiatives such as IT projects and corporate expansion activities requiring additional labor in general have been put on hold. Instead, many of the businesses we serve have implemented and proceeded with layoffs and hiring freezes and in many cases, have focused on retaining their existing employees rather than adding new employees. Companies and businesses are cautiously assessing interest rates and market conditions to ensure their investments in technology and human capital are strategic and sustainable. Artificial intelligence, or AI, is gaining ground at an accelerated pace and is further complicating the HR and project planning opportunities and risks facing virtually all companies, including consumers of our services. These conditions negatively impact job orders for both contract and direct hire placements and have negatively impacted our financial results for the fiscal year and fourth quarter ended September 30, 2025, accordingly. Our contract staffing and direct hire placement services are currently provided under our Professional segment. The operations and substantially all the assets of our former Industrial segment were sold during fiscal 2025 and have been reclassified as discontinued operations and are excluded from the results of continuing operations we'll discuss today, unless otherwise stated. Consolidated revenues were $23.5 million for the quarter and $96.5 million for the fiscal year. Gross profits and gross margins were $8.4 million and 35.8%, respectively, for the quarter and $33.4 million and 34.6%, respectively, for the fiscal year. Consolidated non-GAAP adjusted EBITDA was negative $306,000 for the quarter and negative $1.2 million for the fiscal year. We reported a loss from continuing operations of $613,000 and or $0.01 per diluted share for the quarter and a loss from continuing operations of $34.7 million or $0.32 per diluted share for the fiscal year. We are aggressively taking actions to adjust and enhance our strategic focus, growth plans and financial performance and results. As we announced earlier, we completed an M&A transaction with the acquisition of Hornet Staffing in March 2025 fiscal quarter. We also continue to streamline our core operations and improve or adjust our productivity to match our current lower volumes of business, which helped us improve our results in terms of non-GAAP adjusted EBITDA and EBITDA. We reduced our SG&A during the fiscal year by an estimated annual amount of $3.8 million, of which an estimated $954,000 was realized in our fiscal year results. In addition to our ongoing cost reduction and integration activities, we have renewed our focus on VMS and MSP source business, including the use of special recruiting resources and acceleration of the integration and use of AI technology into our recruiting, sales and other processes. Importantly, we anticipate achieving continuing improvements in our productivity and restoring profitability as soon as practically possible. Our goal is to become profitable again in fiscal 2026. In addition to these near-term initiatives, we are working closely with our frontline leaders in the field across all of our verticals to support them as we all continue to aggressively pursue new business in addition to growing and expanding existing client revenue. We are seeing some positive results from these efforts, as the uncertainty and volatility currently gripping our economy and labor markets begins to subside, I am very confident that we are positioned to meet the increased demand from existing customers and win new business. As you also know, we paused share repurchases on December 31, 2023, having repurchased just over 5% of our outstanding shares as of the beginning of the program. Share repurchases will always be considered as an alternative component of our capital allocation strategy and a bona fide alternative use of excess capital in the future, if and when considered prudent. I want to reassure everyone that we fully intend to successfully manage through the challenges I've outlined and restore the growth and profitability as soon as possible. GEE Group has a strong balance sheet with substantial liquidity in the form of cash and borrowing capacity. The company is well positioned to grow organically and to be acquisitive. We also continue to believe that our stock is undervalued and especially so based upon recent trading at levels very near and even slightly below tangible book value and that there was a good opportunity for upward movement in the share price once we are able to operate again in more normal economic and labor conditions and restore profitable growth. Management and our Board of Directors share the responsibility and are committed to restoring growth and profitability, which will lead to maximizing shareholder value. Before I turn the call over to Kim, I once again wish to thank our wonderful dedicated employees and associates. They work extremely hard every day to ensure that our clients get the very best service and are the most important ingredient for our company's future success. At this time, I'll turn the call over to our Senior Vice President and Chief Financial Officer, Kim Thorpe, who will further elaborate on our fiscal 2025 full year and fourth quarter results. Kim? Kim Thorpe: Thank you, Derek, and good morning, everyone. As Derek mentioned in his remarks, our former Industrial segment results are excluded from the results of continuing ops and comparisons, which I will now address. Consolidated revenues for the quarter and the fiscal year were $23.5 million and $96.5 million, respectively, both down 10% from the comparable prior year periods. Professional contract staffing services revenues for the quarter and the fiscal year were $20.4 million and $84.7 million, respectively, both down 11% from the comparable prior year periods. Our professional contract staffing services revenues for the quarter and fiscal year included $1.3 million and $3.4 million, respectively, generated by Hornet Staffing since its acquisition earlier in January 2025. Direct hire revenues for the quarter and the fiscal year were $3.1 million and $11.8 million, down 9% and 3%, respectively, compared with the prior year periods. Gross profits and gross margins for the quarter and the fiscal year were $8.4 million and 35.8% and $33.4 million and 34.6%, respectively, compared to $9.2 million and 35.1% and $36.1 million and 33.8%, respectively, compared with the prior fiscal year periods. The decreases in gross profit dollars were mainly attributable to lower volumes of our professional contract staffing services revenues. By contrast, the net increases in our gross margins are mainly attributable to the increase in the mix of our direct hire placement revenues which have 100% gross margins relative to total revenue. Selling, general and administrative expenses, or SG&A, for the quarter and fiscal year were $8.9 million and $35.6 million, down 13% and 11%, respectively, compared with the prior year periods. SG&A expenses as a percentage of revenues for the quarter and the fiscal year were 38.1% and 36.9%, respectively, compared with 39.4% and 37.2%, respectively, for the prior year periods. In response to the realities of our present environment, we continue to prioritize and focus heavily on streamlining our core operations and improving our productivity to match our current lower volumes of business. As Derek mentioned, we reduced our annual SG&A during the 2025 fiscal year by approximately $3.8 million on an annualized basis, of which a portion was realized in our 2025 fiscal year results, with the expectation that the full amount plus additional expense reductions as needed will be realized in the 2026 fiscal year. This has helped us improve our results in terms of non-GAAP adjusted EBITDA and non-GAAP EBITDA in both the quarter and the full fiscal year as compared with the prior fiscal periods despite lower volume of business. In addition to our ongoing cost reduction and integration initiatives, we have placed a renewed focus on VMS and MSP source business, including the use of special recruiting resources, the acceleration of integration and use of AI technology in our recruiting, sales and other processes. I also want to restate Derek's earlier point that our plans are intended to restore profitability as soon as practically possible. Our goal is to return to profitability as early as possible and hopefully during mid-fiscal 2026. Our loss from continuing operations for the quarter was $613,000 or negative $0.01 per diluted share as compared with a loss of $2.1 million or $0.02 per diluted share for the prior year quarter. Loss from continuing operations for the fiscal year was $34.7 million or $0.32 per diluted share as compared with a loss of $22.7 million or $0.21 per diluted share for the prior year. These losses include for the year's noncash goodwill and other intangible asset impairment charges of $22 million for the 2025 fiscal year and $19.4 million for the fiscal 2024 year. EBITDA, which is a non-GAAP financial measure, improved for the 2025 fiscal fourth quarter and the 2025 fiscal year and were negative $524,000 and negative $2.3 million, respectively, compared with a negative $1.1 million and negative $3.7 million for the prior fiscal year. Adjusted EBITDA, a non-GAAP -- another non-GAAP financial measure, improved for the 2025 fiscal fourth quarter and 2025 fiscal year and were negative $306,000 and negative $1.2 million, respectively, compared with negative $924,000 and negative $2.0 million for the 2024 prior year comparable fiscal periods. Our current or working capital ratio, as of September 30, 2025, was 4.1:1. We had positive free cash flow, a non-GAAP financial measure, including cash flows from discontinued operations for the fiscal year of $533,000 as compared with $144,000 for the prior year. Our liquidity position as of September 30, 2025, remain very strong with $21.4 million in cash, an undrawn ABL credit facility with availability of $4.8 million, net working capital of $24.0 million and no outstanding borrowings. Our net book value per share and net tangible book value per share were $0.46 and $0.23, respectively, as of September 30, 2025. In conclusion, while we're disappointed with our results and remain cautious in our near-term outlook, we remain resolved to restore profitability and are preparing for the long term, including making modernization improvements and enhancements, such as the integration of AI across all of our businesses and processes. Having completed our acquisition of Hornet in the March quarter 2025, we also intend to continue to pursue other acquisition opportunities, albeit in a very disciplined prudent manner with a particular emphasis on business focused on AI consulting, cybersecurity and other IT consulting. Before I turn it back over to Derek, please note that reconciliations of GEE Group's non-GAAP financial measures discussed today with their GAAP counterparts can be found in the supplemental schedules included in our earnings press release. Now I'll turn the call back over to Derek. Derek Dewan: Thank you, Kim. Despite the macroeconomic headwinds and staffing industry challenges impacting the demand for our services, we are aggressively managing and preparing our business to mitigate losses, restore profitability and be prepared for an anticipated recovery. What we hope you take away from our earnings press release and our remarks today and from our strategic announcements, is that we are moving aggressively not only to prepare for a more conducive and growth-oriented labor market, but also to restore growth by continuing with the execution on both organic and M&A growth plans and initiatives. We will continue to work hard for the benefit of our shareholders, including consistently evaluating strategic uses of GEE Group's capital to maximize shareholder returns. We're very pleased with our 2025 acquisition of Hornet Staffing and the value and opportunities it brings and have identified other acquisition opportunities that we believe can offer additional growth and profitability platforms for us. Before we pause to take your questions, I want to again say a special thank you to all of our wonderful people for their professionalism, hard work and dedication. Now Kim and I would be happy to answer your questions. [Operator Instructions] We'll now enter the question-and-answer period. Kim Thorpe: Our first question is what is the company's time line for achieving your goal of $1 billion in revenue per year. That goal was set initially when we were in a higher accelerated pace of acquiring companies. Since then, the pandemic has hit and our world has changed a lot. So the answer today is, I can't tell you when we might hit that number, but we're going to get back to growth. We're absolutely committed to that. And then from there, we're going to grow as quickly and safely as practically possible. So that's my comment on that. The next question, what changes are going to be made to raise the stock price. On that question, I will tell you, we're doing everything we can now to -- the first step and I'll tell you this in a crawl, walk and run sense. The first step is to return to profitability. The next step is to pivot the business so that we can continue to get back on a growth track to grow the business and face with the current realities that we do. We happen to believe that AI is going to play -- AI and automation and integration are going to play an important role in that. And so that's the trajectory that we're heading for now. Derek, do you want to add anything to that? Derek Dewan: No, other than we've taken a lot of cost-reduction initiatives and put a lot of efficiency improvements in both recruiting and the sales process, and we're starting to see the benefit of that. So organically, we see improvement on the way. It's happening as we speak. And I think they talked about -- the question was about growth and size. I think an acquisition of size and in the right space will also help improve our operating results and growth metrics and thus contributing to a better stock price. Kim Thorpe: The next question refers to BGSF and a recent transaction it had, and it's basic -- without going into a lot of the details, it's basically suggesting to us that it might be something that we consider. Derek, do you want to comment on that one as well? Derek Dewan: Well, we're very familiar with that company, and they sold off professional division at a pretty good multiple to Alvarez & Marsal, a private equity group that has a platform of primarily IT staffing. And the transaction was valued appropriately and got a good price for it. The question is what was left and how is that performing? And I think they have their own strategic plan. And we, on the other side of the fence here are always looking for opportunities to enhance shareholder value. And we believe that critical mass and size matter in this industry, scalability, leveraging your SG&A and lowering it as a percentage of revenue. So M&A is very important in the bigger scheme of things. And we're always looking for opportunities, no matter how they are brought to the table. And I think that was a good transaction for them. Kim Thorpe: The next questions -- a couple of questions involve insider buying. And can we address why the market is not seeing more insider buying from management and the directors recently. And I'll just say that if you pull up a copy of our 10-K, you'll see that insiders and significant holders already have about 25% or more of the company's outstanding stock. The senior management team here combined has about 5 million or 6 million shares. We're all on the same page on that. We all have skin in the game. So that's the answer. And we're not in a blackout period. We don't have a specific policy requiring people to buy the stock, but they're always free to buy the stock outside of the blackout periods or whenever they don't have insider information. Is senior management and Board are taking salary cuts in order to work through a difficult period successfully? Our senior executive pay plans are such that we are rewarded if we perform and we're not rewarded if we don't. I can tell you that for 2 years in a row, we have not earned any management bonuses. The 3 senior executives here have had what was formally granted at about $1.3 million worth of stock forfeited because of the performance over the last 2 years. We have not had any pay increases since 2023, so -- and neither has the Board. So that would be our response to that. Derek, do you have anything to add to that? Derek Dewan: No, we are very cautious about paying for performance. And I think since we haven't performed at the levels that we want to perform at or that are expected, the remuneration has not been -- incentive pay has not been paying out, and we actually have forfeited a lot of potential equity that we would have gotten as part of the pay plan. So we're very keen on watching that. And we're hopeful that we do participate in the upward swing of the company's profitability. But again, there has to be performance for senior management to get paid on any type of incentive pay. Kim Thorpe: Next question, are you consolidating offices given lower demand? The answer to that is yes. Probably over the last 2 or 3 years, we've consolidated or closed about half a dozen offices. Derek Dewan: I'd like to add as well that we have moved away somewhat from bricks and mortar because of the ability to use technology, hybrid work schedules and remote working. So we are taking advantage of that. And as AI has become more prevalent in our toolbox, that facilitates the ability to reduce our bricks-and-mortar footprint. Kim Thorpe: Okay. Would you consider initiating your buyback once you have visibility into achieving profitability again rather than waiting until it's actually achieved? Derek Dewan: I think that strategically, that's an option. And we evaluate that option at our Board of Director level virtually at every Board meeting that we have. We take a look at that, look at our financial position, look at our growth metrics and performance. So it's on the table at virtually every meeting we have and restoring profitability will help drive that as an option as well. Kim Thorpe: Let's see, can you elaborate on why there -- okay, here's another question coming in, I'm sorry, it's telling us that the original question about pay cuts was on base salary, not bonuses. Once again, as I said, we have not had an increase in base salary since 2023, and we're not going to take an increase in base salary until we get back to reasonable profitability. Can you elaborate on why there is such a focus on growing the company via acquisitions, increasing future, why there is -- I'm sorry, can you elaborate on why there is such a focus on growing the company via acquisitions versus increasing future earnings per share, emphasis on per share by buying stock now at valuations that target asset value, intrinsic value. If it is a matter of returns on capital equity, what per share return threshold are you looking for in M&A that you don't think you can obtain in buybacks right now? The ultimate goal of stock buybacks, and I understand everybody's compulsion to ask about these, but the end game on the stock buyback is to liquidate the company. We're not in a point where we want to aggressively buy stock back when there are opportunities still out there that we could get back on a more attractive growth track because at the end of the day, if we put the company in a position where we have a better outlook, we're profitable and we're growing, we believe the return on that number is better than the stock buyback number. What are you seeing in M&A valuation multiples right now? What multiples do you realistically want to buy at? And what do you think it will take to bridge that gap to be able to close on additional deals? Derek, do you want to take that one? Derek Dewan: Sure. So the objective is to obviously pay as little as possible, but the multiples are ranging from 6 to as high as 10x EBITDA, depending upon the growth rate of the business and the space and sector they're in. Ideally, our own multiple will expand in conjunction with the acquisition, so that would make sense. And we will look at tremendous synergies typically because we -- even though we've cut a lot of expenses, we're positioned technologically and with very good internal human resources to take on an acquisition and achieve synergies and economies of scale. So acquisitions provide economies of scale, multiples can range anywhere from 6 to 10x, but 10x would be a very fast-growing pure-play consulting organization, not necessarily a staffing company. So in pivoting -- since we're on acquisitions, pivoting to statement of work-type consultancies is a prime focus with a subset focus into AI, cybersecurity and high-end IT consulting. Kim Thorpe: And then the last question here. Can you share if the company is committed to leveraging offshore or international sales and recruiting. And if so, what is the company's current utilization of offshore? Derek Dewan: That's a great question. And we currently have an offshore team in India that we are leveraging now. We want to do more in terms of utilization of our offshore team and expand it to leverage recruiting and giving them the AI recruiting tools will help allow for that team to expand their capability rapidly, and we can have our senior recruiting team domestically guiding the offshore team, and that's the ideal situation. So you want to use 3 components: onshore, nearshore and offshore, and we're exploring nearshore opportunities as well. Lat Am is Latin American recruiting. You'll hear a lot about that. It's on the rise. So that's also -- so it's a triple option. It's onshore, nearshore and offshore. Kim Thorpe: And we had another late question come in. And to this questioner I'm going to make a bit of an apology. He called me out a little bit for the liquidating the company comment on share buybacks. And he's right. Of course, I didn't mean that we would buy shares back to liquidate the company. My point is, is that buying shares back, grow the per share value, but it does not invest in assets or properties that will grow the company. So that was the point I was making, and I apologize for that. Derek Dewan: Ideally, once we restore profitability, the capital allocation strategies should include taking current cash flow and using that for both M&A support and buybacks and taking the existing cash and creating a combination of both of those types of activities to enhance shareholder value. So these are heavy discussions that we have consistently. But the worst thing to do in the world is to burn your cash position out in a down market with not great operating performance and put the company at risk to have to borrow to fund current operations when you really don't need to. So I think ideally, the concept of a buyback is something considered highly, but we'd like to see the restoration of profitability on a current cash flow basis before we turn on the spigot. Kim Thorpe: Correct and free cash flow. Derek Dewan: And free cash flow. Correct. And we actually are hitting close to that. I mean if you could look at the numbers, Kim, I think we had positive. Kim Thorpe: We had positive cash flow and free cash flow for the year. But again, it's -- until the market itself sorts out and the orders begin to stabilize and get back to normal, and we can get back to normal operations, I don't think it's prudent to burn our cash when there are other opportunities that we believe are better. Derek Dewan: One thing I want to add, too, is AI has provided both a reduction in the human workforce and labor, as we knew it before, but it's also provided an opportunity to grow business and to streamline our own business. So we are heavily focused on AI, both internally and through M&A. Kim Thorpe: And Derek, that's our last question. So do you want to... Derek Dewan: Well, at this point, we'll conclude the call, and we really appreciate your interest level, being a shareholder of the company and rest assured, we're not complacent. We're very -- we're not satisfied, but we are working hard to get back on track to restoring growth and profitability and enhancing our shareholder value. Thanks for being on the call today. Have a great holiday. Thank you. Kim Thorpe: And that concludes our call. Thanks, everybody.
Operator: Greetings. Welcome to the Bridgeline Digital Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Thomas Windhausen. You may begin. Thomas Windhausen: Thank you, and good afternoon, everyone. Thank you for joining us today. My name is Thomas Windhausen, and I'm the Chief Financial Officer of Bridgeline Digital. I'm pleased to welcome you to our fiscal 2025 fourth quarter conference call. On the call with us today is Ari Kahn, Bridgeline's President and CEO, who will begin the call with a discussion of our business highlights. I will then update you on our financial results for the quarter, and we will conclude by taking questions. Before we begin, I'd like to remind listeners that during the conference call, comments that are made regarding Bridgeline that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 and are subject to risks and uncertainties that could cause our statements to differ materially from actual future events or results. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The internal projections and beliefs upon which we base our expectations today may change over time, and we expressly disclaim and assume no obligation to inform you if they do. The results that we report today should not be considered as an indication of future performance. Changes in economic, business, competitive, technological, regulatory and other factors could cause Bridgeline's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more detailed information about the factors and other risks that may have an impact on our business, please review the reports and documents as filed from time to time by Bridgeline Digital with the Securities and Exchange Commission. Also, please note that on the call this afternoon, we will discuss some non-GAAP financial measures when commenting on the company's financial performance. We provide a reconciliation of our GAAP financials to these non-GAAP measures in our earnings release. You can obtain a copy of our earnings release from our website. I'd now like to turn the call over to Ari Kahn, Bridgeline's President and CEO. Ari? Roger Kahn: Thank you, Tom. Good afternoon, everyone. It's been a transformative year for Bridgeline with our core products, led by HawkSearch Suite and its AI products, reaching 58% of our total revenue or $8.9 million and over 60% of our subscription revenue, $7.4 million with 75% gross margin. Validating our dominance in the B2B segment, Gartner ranked HawkSearch #1 for the B2B search use case in their 2025 Critical Capabilities report. HawkSearch customers voted with their pocketbooks by renewing their subscription, expanding their license limits and investing in our AI products. Together, this resulted in 117% net revenue retention and 16% CAGR for our core products. HawkSearch's average sales cycle reduced from 160 days in fiscal 2024 to just 92 days in fiscal 2025, and our average ARR per sale grew by 35% from $18,500 to $25,000. This year, we sold 83 licenses with $6.9 million in total contract value for $2.4 million in ARR. This is an 18% increase over fiscal 2024, which itself was a 74% increase over fiscal 2023. 2024, 74% increase was hard to top, but we did it. We start fiscal 2026 with 65% larger sales pipeline, a shorter sales cycle, a higher average sales size and top analyst recognition from Gartner compared to the beginning of fiscal 2025. Of course, we want cumulative growth for the total whole company, and it's been a long haul with our core product growth being dampened by the decline of our legacy products. This dampening is expected to end in 2026 with continued and accelerated growth for HawkSearch, driving growth to significantly more than 60% of the total revenue. I'm very proud of our customer satisfaction, proven by our customers expanding their investment in HawkSearch products. Net revenue retention of 117% is outstanding, and we achieved 117% NRR because higher renewal rates, less than 4% churn, upgrades by customers to increase usage limits and customers adding new products like our AI-powered Smart Search. Techo-Bloc is a great example. They're in the manufacturing and distribution segment for hardscaping products. They're a happy customer who added Smart Search and Smart Response this year, which analyzes Techo-Bloc's technical documents so their customers can ask complex questions to HawkSearch and quickly make purchasing decisions without having to do time-consuming research on their own. Do it Best is a long-standing HawkSearch customer. And with their recent acquisition of True Value Hardware, they're making substantial investments in HawkSearch. Do it Best now powers search for 170,000 products with real-time inventory in the search and real-time pricing for 3,000 locations and is planned to grow to over 9,000 stores in 2026 as the True Value stores are added. Like HP, this is a great example of HawkSearch at enterprise scale. Another example of expansion within our customer base is a national distributor for foodservice and industrial packaging, who implemented HawkSearch AI recommendations across their product categories to help their customers buy products that they otherwise may have forgotten to purchase. The distributor is now seeing 5x greater revenue from their homepage and 7x more revenue on their checkout screen. Just imagine that. Results like this are why HawkSearch customers renew and expand their investment. Core revenue not only grew from existing customers expanding their investment, but it also grew from new customer wins. In fiscal 2025, we added 28 new logos. These are customers with whom we had no prior relationship to our customer base. The new logos added $2 million in total contract value with $700,000 in annual recurring revenue, and we expect them to buy additional products and expand their license usage limits just as our existing customers do as they start to see the success on their sites with HawkSearch. One of our new customers is Culligan, a brand providing water softening, filtration and drinking solutions to 140 million customers globally. Culligan has both SmartSearch and SmartResponse and recently told us that their site engagement is up 30% since launching HawkSearch. Another one of our new customers is ADENTRA, a multibillion-dollar distributor of architectural building products with 6 brands across 83 regions and 60,000 customers. ADENTRA is using Smart Search and HawkSearch's out-of-the-box unit of measure to drive revenues in an industry where there are several methods of describing and measuring products. This year, we injected $2 million of capital into the company, including investments from our executive team and Board with the expressed purpose of expanding our marketing budget to get the word out about how great HawkSearch is and how happy our customers are. As a result of this investment, we have a 65% larger pipeline at the end of fiscal 2025 than we did at the beginning of the year. We have a 40% more efficient sales cycle, and we have a 35% larger average sales size with industry recognition from Gartner ranking us HawkSearch #1 in the B2B search space. The primary challenge will continue to be our marketing budget. We are great on product, great on customer satisfaction, great with analyst approval. We need to be in every deal by continuing to market the HawkSearch brand. We've doubled our ad spend to $500,000 per quarter, and we'll continue this level of marketing throughout 2026, at which time we'll assess our marketing budget and cash reserves as well as our profitability for continued growth. Another important part of our growth is our partnerships. HawkSearch lends itself to both agency and platform partners. These are partners that generate sales. An important partnership that was established in fiscal 2025 is with Unilog. Unilog offers a SaaS platform for B2B e-commerce and product management, helping businesses streamline operations and enhance digital storefronts. Unilog has embedded HawkSearch into their platform so that their 500 customers can easily choose to add HawkSearch to their website. This partnership will expand our total addressable market and further accelerate our sales cycle. Salesforce customers can now access HawkSearch directly through the AppExchange to drive quick improvements in their revenue. This is another very important partnership for us, and it further expands our TAM to an ecosystem of tens of thousands of prospective customers. Our sales and partnership advances were largely driven by product innovations, especially in the field of artificial intelligence. We released 6 new products this year, all of which are powered by neural networks. Our new products allowed us to expand sales within our existing customers, win new customers and create general industry recognition as the leader in AI product discovery with Gartner ranking us #1. We released Smart Search, our large language model foundation for AI, Smart Response, Gen AI technology to drive revenue conversationally. Smart Agents, MCP agentic artificial intelligence to automate and integrate with third parties. We released multisite management, which is our franchise and chain system that allows centralized management of thousands of online stores like the example I gave you with Do it Best. We released Rapid UI. Rapid UI reduces implementation effort for customers and expands our TAM to include mid-market and SMB. We also released advanced analytics, a data lake to improve intelligence and reporting for our customers and their AI agents. Agentic AI and analytics will be an important focus for 2026 as our customers move towards a more automated sales cycle, sometimes even selling to agents rather than people, and our HawkSearch platform is uniquely positioned to help them beat their competition to the evolution in our market with AI. 2025 was indeed a transformative year, 6 new product launches, customers voting with their pocketbooks, renewing and expanding licenses for 117% NRR, 18% increase in sales over 2024, which was a 74% increase over 2023, sales efficiency accelerating from 160 days to 92 days, 35% increase in average revenue per sale and ending the year with a 65% larger sales pipeline than we started the year with. Core product revenue is the focus, and we have the marketing budget to continue this trajectory. We expect the decline of legacy products to reduce in 2026 and our cumulative financials to show the strength of our core products and their leadership in AI product discovery. Now I'll turn the call over to our Chief Financial Officer, Tom Windhausen, to share additional details. Tom? Thomas Windhausen: Thanks, Ari. I'll provide an update of our financial results for the fourth quarter of fiscal 2025, which ended September 30, 2025. Total revenue for the quarter ended September 30, 2025, was $3.9 million compared to $3.9 million in the prior year period. And looking at the components of revenue, our subscription revenue, which is comprised of SaaS licenses, maintenance and hosting revenue for the quarter ended September 2025 was $3.1 million as compared to $3 million in the prior year period. And as a percentage of total revenue, subscription revenue was 81% of total for the quarter ended September '25. Our services revenue was $700,000 for the quarter ended September '25 compared to $800,000 in the prior year period for a percentage of total revenue of services accounting for 19% of total revenue. Our cost of revenue was $1.3 million for the quarter ended September 30, '25 compared to $1.2 million in the prior year period. And as a result, our gross profit was $2.5 million for the quarter ended September 30, '25. Our overall gross profit margin was 66% for the quarter ended September '25, with subscription gross margin at 69% and services gross margin at 50%. Our operating expenses were $3 million for the quarter ended September 30, a decrease from $3.1 million in the prior year period, and our net loss was $400,000 for the fiscal quarter ended September '25 compared to a net loss of $400,000 in the prior year. Finally, our adjusted EBITDA for the quarter ended September '25 was minus $169,000 compared to $5,000 positive in the prior year comparable 3-month period. Moving to our balance sheet. On September 30, '25, we had cash of $1.6 million and accounts receivable of $1.5 million. Our total debt outstanding as of September 30 was EUR 278,000, approximately USD 326,000 with a weighted average interest rate of currently 3.4% and principal payments due evenly through 2028. We have no other debt or remaining earn-outs from any previous acquisitions. And at September 30, we had total assets of $15 million and total liabilities of $5.8 million. Finally, I'll give a quick update on our cap table, which at September 30, '25 included 12.2 million outstanding shares, 862,000 warrants and just under 2 million stock options outstanding. The 852,000 warrants consist primarily of 167,000 with a $2.85 exercise price expiring in May '26 and $592,000 with an exercise price of $2.51 expiring in November 2026. Bridgeline looks forward to continued growth and success in fiscal '26 and beyond as we continue our focus on revenue, product innovation, customer success and delivering shareholder value. We want to thank you all for joining us on the call today. And at this time, we'd like to open the call to questions and answers. Moderator, can you help us with that process? Operator: [Operator Instructions] First question comes from Casey Ryan with WestPark Capital. Casey Ryan: I wanted to ask about this ARR number that you are sharing with us. It looks like that's the first time you've done that or the first time in a while. And I just wanted to clarify that that's across all customers and all products or maybe that was a HawkSearch-focused metric? Roger Kahn: So for the $8.9 million in ARR, that is HawkSearch. And so the -- our total cumulative revenue of $15.4 million includes $12.4 million in ARR and, I guess, subscription revenue, of which $8.9 million is HawkSearch is core. We like to use the term core because HawkSearch is a suite and there's other products in there. And then there's another $3 million in services. We've not broken out the services detail. It actually does find it though because $8.9 million minus, I don't know maybe... Casey Ryan: Right. Well, so I'll just say this ARR number is excellent, right, and tremendous growth year-over-year. But also, is it one that you believe you can continue to share with us as we move through the year? Or will this kind of be an annual number that you put out at the end of the day? Roger Kahn: That's a really important point. And this right here, we're essentially telling you and the market that, that is our intention. We believe that the future of Bridgeline is HawkSearch, the core products. That's what to really watch, and we're going to continue to share every quarter that growth. Our expectation is that as we go through 2026 that, that is going to dominate our overall financials and the characteristics that we're seeing right now on that core component itself will be the characteristics that we have in the long term for the business as a whole. Casey Ryan: Okay. Well, terrific. I'm happy for the addition of this metric. And obviously, it's showing very strong performance, which is really good. I also wanted to ask about on HawkSearch, if there had been any meaningful changes or trends with -- in regards to sort of contract length or what levels people were committing to in terms of time, dollars are clearly going up. Roger Kahn: Yes. Yes. Dollars are going up. The contract length itself has not changed. And we've heard in adjacent industries of contract lengths actually reducing as people became a little bit less committed. We've not seen that. So our average contract length, we shoot for 3 years when we have initial engagements, and that's negotiated to 2. And the average is going to be somewhere between 2 and 3 in 2025. That was consistent with what we saw in '24 and in '23. The big things that we saw change in 2025 were, first of all, how decisive prospective customers were. I mean, going from 160 days to 92 days. And frankly, I don't know if 92 days is the right average to expect going forward for -- when I say 90 days, that's from the first second that we meet someone to the point that they either say yes or no to doing business with us including lost sales, incredibly fast. So people become more decisive. Also, they're making a higher initial investment where last year, we would see $18,500 as our average in terms of the annual recurring revenue, not the total contract value, but the ARR. Going to 25 shows a much stronger level of confidence that this is going to be a meaningful product for them and they're willing to go in a deeper level on day 1. Because our price didn't go up by 35%. I mean our list price went up by, I don't know, 4% or 5%. And then we also have additional products. So they're buying more components on day 1 than they might have bought the year before, too. Casey Ryan: Yes. Well, I mean, all these metrics are really quite impressive, to be perfectly honest. And so we've been challenged with some sort of shedding of legacy businesses or older products that you've sort of talked about over the course of this fiscal year. That remainder sort of non-HawkSearch revenue, it sounds like you have more confidence in that base that you have today being stable to up potentially in FY '26. Roger Kahn: Absolutely. And our HawkSearch customers have less than 4% churn rate. So we've got really excellent stickiness. And the ones that do churn are probably, I don't know, 5 or 6 years old even pre the acquisition in Bridgeline. So that's a super stable customer base. The reality is that when I came into this business and over the years, we had some old products that although the products themselves were good, we're in areas that other companies were making exponentially higher investments than Bridgeline, long sales cycles and not a good place for the company. So we looked hard over really 2028, 2029, 2020, found HawkSearch in 2019, did that acquisition, and that was the heart of the transformation. We picked up Cellebrite, which is another search product before that. But all along, it was about finding a product that delivered true value to customers that had an efficient sales cycle. and high-quality revenue. And then we got lucky because AI hit and search is in the sweet spot for the particular types of AI technologies that are rapidly maturing. So we were able to quickly add 6 new products to the HawkSearch suite because it was really well fitted for the latest technologies. And I think that's really exciting. I think that analysts, especially Gartner love what we did. Our customers certainly love it, and a lot of the innovation was driven by them, and it's getting proven. Casey Ryan: Yes. Well, it certainly does seem like it's showing up here in the metrics for this quarter for sure. So just 2 more questions. I mean there's a lot to sort of unpack here, I think, in this quarter, which has been really exciting. You mentioned the ability for customers to sort of turn on the product, HawkSearch through the Salesforce AppExchange. I just wanted to ask if that was live and impactful to the September quarter or if that's really something that's going to -- in terms of revenue and sort of activations sort of hit for the first time more in the December quarter and then moving forward? Roger Kahn: It's really just hitting for the first time. I think we had a sale in the September quarter, but we've got a couple in the pipe this quarter and then it's going to accelerate from there. So that's further growth. And the Unilog, even though obviously way smaller business than Salesforce, almost every small business than Salesforce, but is one that is, I think, going to be a really good partnership for us. Their customers are all in the manufacturing and distribution B2B space. They're a specialty platform for that specific market. That is our #1 market. We sell all over the place, and we've got Hewlett Packard in the B2C world. But when it comes to B2B for distributors and manufacturers, there are very unique problems that they have that no one else can solve like we do, the ability to easily find products by their SKU to be able to have agents upload complex shopping lists and auto negotiate and add those to their cart and other capabilities that we do and the Unilog customers are going to love us. Casey Ryan: Okay. Good. Well, that's helpful to understand that how that specialization could be even more impactful even though Unilog might not be a name that would jump off the screen initially for someone like myself. Roger Kahn: Exactly. Yes. Casey Ryan: One last question. This has all been really helpful. The sales and marketing spend was nominally $1.1 million in the September quarter. And I think you said that, that's sort of the rate to expect moving forward and that you'd reevaluate at the end of '26. But that's a good level that's up from what it had been previous. And so I just want to confirm and talk about your comfort with that spend level as we move forward. Roger Kahn: Yes. I think that's the right level for us in 2026. So what that level includes is $500,000 in what we call ad spend. So that's conferences and webinars and online ads and stuff like that, nonpersonnel. And that includes personnel and commissions and then includes subscriptions to our information systems like Salesforce and so on. So the -- we doubled the ad spend component of that with the goal of completely saturating our salespeople with leads and hey, I want them to be the highest paid people in the company. So we have -- our lead flow is that -- so ad spend goes out the door, $500,000 a quarter, goes into 2 BDRs. So we have 2 BDRs. They do the initial contact. If it's a very small deal, they also have the ability to earn a commission and close deals themselves. But for the most part, the deals then flow to a team of 2 BDEs, executive salespeople plus a working VP of Sales. So those 3 people close the deals. Then we have a customer success team whose job is to educate existing customers on our new products so they can buy those. Look for opportunities from a professional services perspective to add value to our customers and to get renewals. And that is a working manager and 2 people. So you've got on the direct sales side, 2 BDRs, 2 BDEs plus working manager, on the customer success side, 2 CSDs plus working manager. And then in the sales, in the marketing team itself, we have 3 full time and some consultants. And that right there is, I think, a good team for our current ability to invest in sales. I definitely want to find a way to get more money because I think that we're -- have a lot of growth potential, but we have to be very cognizant, obviously, of the stock price and not diluting anybody, especially me because my wife will kill me, but that's -- so there you go, there's a lot of details. Casey Ryan: Yes. Well, that is tremendous detail and tremendously helpful. Well, look, it feels like '26 is really setting up very strongly with some optionality with Unilog and Salesforce and some of these automated channels potentially driving even more upside if people adopt the product faster than maybe what you've modeled so far. So tremendous quarter. Roger Kahn: Thank you, Casey. Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to management for closing remarks. Roger Kahn: Thank you, John. Thank you, everybody, for joining us today. We so much appreciate the continued support of all of our investors, of our customers, of our partners, great stakeholders in this business. We're excited about the business, ongoing growth prospects, and we look forward to speaking with you again in our first quarter fiscal 2026 conference call, which will be in February of 2026. Until then, be well. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good afternoon, and welcome to the Victoria Plc Interim Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company can review your questions submitted today and publish responses when it is appropriate to do so. Before we begin, I would like to submit the following poll. And I would now like to hand you over to Executive Chairman, Geoff Wilding. Good afternoon to you. Geoffrey Wilding: Good afternoon, and thank you to everybody for joining the H1 earnings call for Victoria. The macro environment continues to be challenging for consumer discretionary spending. And so we've continued to focus on internal initiatives to improve margins and lower operating costs, and we'll discuss these later on the call. However, we'll begin with Alec Pratt, the Group CFO, taking us through the numbers for H1. Alexander Robert Pratt: Great. Thanks, Geoff. So before we start, just come with a few highlights. So key things have been ongoing pressure on volumes. So revenue for the half was down about 7%. We'll provide a bit more detail on the breakout of that later in the presentation. We're very pleased to improve EBITDA by just over GBP 3 million to GBP 53.5 million. And so a healthy margin increase there despite that volume reduction. We will provide more detail of that. And actually, we believe there's a much stronger performance in the headline than the number suggests. On net debt, just over GBP 1 billion of net debt. A lot of work has gone into extending the maturity profile of our debt over the period. So again, we will run through that in a bit more detail. So if we quickly flick over to the executive summary. I think it's worth reminding ourselves where we are in the cycle. We're very pleased with the resilient performance in what continues to be a fairly low volume environment. Demand remains about 20% to 25% below long-term trend. However, we are beginning to see improving top line trend, which we've seen throughout the first half, and we are expecting that to continue into the second half of the year. Management actions this year have been very significant. We're moving with pace across various divisions of the business and actually, EBITDA margins are improving at the divisional level. We have further cost savings to target as we go through the balance of the year, and we will look at that as we go through the budget, which will continue to benefit into FY '27. I think the biggest update from this morning is caution in the outlook. We are flagging there have been some inefficiencies in the Belgium operations as we transition that manufacturing to Turkey. And clearly, the macro outlook remains volatile, and we are mindful of that. So in the meantime, our focus remains on driving what is in our control. So these are the EBITDA initiatives that we've outlined at the full year results, focusing on cash generation to help with deleveraging the balance sheet and also rebuilding the company's credit rating overall. So just to summarize key messages from the half. So as I mentioned, revenue growth was down about 7% overall. That is primarily volume driven. We'll come on to the split with that, but actually ASPs across the group were healthy. At a gross margin level, those were consistent. But as you go down the P&L, actually improvements in terms of the SG&A and so you saw that improvement in both the absolute number of EBITDA, but also the margin improving to 10.1%. It's important to note there were a few one-off factors, which mask a bigger improvement in the operating performance. We have pulled down the benefit last year of a favorable gas hedging position, which is about GBP 6.7 million. And then also the disruption from the Rugs reorganization, which again was a drag on H1 performance. Excluding those two things, margins improved 390 basis points, and we think this demonstrates very clearly how quickly we are moving to improve the underlying performance of the business. So moving on to the drivers of revenue. This chart breaks out the divisional performance. You can see in every case that actually volume is the main driver of the revenue decline. As a reminder, this chart is in pounds. And so both the Aussie dollar and U.S. dollar were weaker through the period. And so what that masks is that actually pricing in both of those geographies was a lot healthier. You can see in soft flooring, healthy ASP increase of about 5%. Some of that is mix, but within business divisions, that was actually very solid. And in ceramic tiles, I think we'd bring out that the decline there is predominantly due to mix. That gas hedge last year rolling off has meant that we've reduced production of some of the lower-margin products that was using that hedge. Those were within the higher price points categories within tiles, and therefore, that decline in ASP is just a mix effect of doing DIY-orientated products. In terms of EBITDA movements overall, you can see that predominantly that has been driven by the margin improvements that we have pulled out. Biggest mover there is within soft flooring. Philippe will come on to it, but that is despite the headwinds we've seen in the Rugs reorganization, and we're very pleased with the underlying performance there as a result of a lot of initiatives at the back end of last year and into this year. We'll also come on to touch on some of those actions in H1 will flow into 2027 as well. In Ceramics, Rugs reduction in low-margin profitability is what we call bottom slicing. So a good degree of that revenue reduction is actually proactively trimming some of those sales. And so the underlying performance and the market, we feel is much stronger than that 11% decline in revenue would suggest. And then moving on to the smaller divisions, a good performance in Australia, very strong market position there for us. It's worth noting that actually the EBITDA improvement in pounds was basically level, which means in local currency, that was actually a big improvement for that business. In the U.S., a big focus on margins there. Philippe will come on to how that has been driven. And then finally, on central costs, we are being very disciplined there, so just over GBP 1 million of saving. So overall, a modest increase in EBITDA, and we'll come on to some of the other drivers of that through the presentation. So the next page here is just to pull out the non-underlying items. These remain elevated as we go through business transformation. I think the key point here as with the full year is that only a modest amount of those are cash. So those are highlighted in orange. You can see at the top of the chart there, the actual reorganization cash costs were in the low single digits. We've also highlighted the refinancing costs related to the transaction over the summer, and we'll come back to that in the following pages. So this chart shows cash generation over the period. First thing to note is that we are free cash flow positive before CapEx and reorganization, so GBP 8 million for the half. What we pull out there is that the interest cost there of GBP 17 million will be broadly level as we go into the second half. And it's also worth noting that we incurred GBP 7 million of cash tax, the majority of that was related to tax charges in the prior year. Obviously, as we go through this year and into next, we expect that cash tax charge to be relatively minimal, and so that will decrease going forward. This morning, we announced new CapEx guidance with a reduction that we'll come on to, I think what you can see in the first half was about GBP 25 million of CapEx. We expect that to be broadly level in H2 and will stay at that sort of level going forward. And then the other big cash cost there was the refinancing cost. So cash cost of GBP 20.5 million. And so the overall cash movement was minus GBP 40.8 million. The noncash items there, which are kind of the majority of that net debt movement relates to premium paid to the bond investors to do the exchange over the summer. That was GBP 41.4 million. And then the balance of that is a GBP 30 million movement in our FX rates given the bonds are in euros. So GBP 106 million overall in terms of the increase in debt. So this page breaks out the different levels of the capital structure. You can see there the increase to just over GBP 1 billion of true debt. The underlying EBITDA performance broadly flat on the half, so leverage overall at 8.6x. I think it is important to point out that our capital structure is very diversified. That gives us a lot of flexibility in sourcing new capital, and I'll come on to how that's developed. Final piece there is just on the Koch preferred equity. It's important to remind everyone that, that is legal equity and equity in every sense. So the return that Koch earn on that is a preferred dividend, and that is paid in PIK. So no cash cost. There is no maturity on that piece of paper. And so it is not a concern from a going-concern perspective. So the next page summarizes the impact of the refinancing over the summer. A couple of key points to mention there. So having dealt with all our short-term facilities, our next maturity is in 2028. That is for EUR 167 million, which is about GBP 143 million. To put that in context, over the last 6 or 7 months, we have refinanced over GBP 700 million of debt. So it's obviously an area of focus. But in the context of the whole capital structure, we do think that is very manageable, and we're very pleased with the runway that we have created through that refinancing process. So I think with that, Philippe, I hand over to you to run through the operational performance. Philippe Hamers: Okay. Thank you, Alec. So first division is U.K. and Europe soft flooring, which consists of 4 subdivisions, which are Carpets, U.K., Underlay, Grass and Rugs. For the overall division, we've seen a reduction in revenue with about 3.7%, but with an average sales price growth and a margin growth of about 148 basis points. The Rug division, which we are restructuring at this very moment, includes a shift of almost all the production from Balta Belgium to Balta Turkey to the plant -- the existing plant in Usak. And this is diluting the margin number. Without Balta, the EBITDA improvement year-over-year would be 4.1% to a profitability of about 15.9%. In the U.K., in H1, clearly, we have taken market share, grown the revenue and massively improved the margins. And we continue to progressively do in H2 because there are clear opportunities in the market due to some competitor weakness and our strong service proposition, which we have to Alliance. The sales has continued to benefit from the success of the premium residential brands, which we have in the division. We are also expanding our product offering, as we've said in the previous presentation into hard flooring with offerings in LVT, in laminate and in engineered wood. And the revenue is expanding fast within these propositions through the different brands which we have, which are Abingdon, Victoria West and Balta. Alliance, our own developed logistics provider, as you may remember, is a key component to that success with an average processing about 20,000 order lines per week through the three distribution centers. And we've even seen peaks up to 24,000 order lines per week in November. Alliance now services about 87% of the country next day, and it is further expanding its service as a third-party logistics provider, and we are building -- trying to build for Alliance itself a solid P&L. The second leg we have in U.K. and Europe Soft Flooring is the Underlay business. We are currently processing the integration of our two Underlay brands, which is Easyfloor and Interfloor. And the service proposition and product offering is generated through a separate in-house distribution setup, so it's not going together with the carpet and the hard flooring setup to service all the retailers across the country. The third leg in that division is the Grass division. This performed flat in revenue and showed some decline in margin because of some challenging residential market but we've largely made up for that through the selling of the sports services. And as a result, this has been compensated. On the next slide, you will see that we've separated out the Rug division to see what impact it has had. The Balta restructuring, as you see and as we've said earlier and as Alec has referred to, is weighing on the short-term performance of the division. I will come back or Alec will come back later on that restructuring model because there's a case study a bit further down the pack. It is fair to say that on Balta itself, it is fair to say that reorganization is on track to deliver significant cost savings in the next financial year. And H2 EBITDA is expected to be broadly breakeven. From Q2 2027 onwards, we should see the full impact of the improved manufacturing costs in Turkey. Second division then, which we want to comment on is U.K. and Europe Ceramics. You can see that we've had a volume reduction of about 8.6%, mainly driven by the proactive reduction of volumes and lower margin sales. The underlying EBITDA was about steady, 12.7% versus 12.9%. If we eliminate the favorable gas hedging in the same period in the prior year, we've had a margin improvement of 4.2%. In Italy, a new management was installed earlier in the year, and we have split the P&Ls and brand between the DIY brands, which are Serra, Cali and Keradom and the medium to high-end brands for independents, which is Ascot, Capri and Vallelunga. This allows us for an end user-specific approach in terms of the product offering, minimum order quantities and the service proposition. In Spain, there is a specific investment we've done in large tile manufacturing. It is the famous V4 project. There is a separate sheet further in the project to run through that project and the upside of that project. It is a EUR 31 million investment, which we've done in the course of -- in the last half year and which was successfully commissioned in November. This will have -- or this has had no impact in H1, but should start to deliver from Q4 and H2 onwards. At full capacity, we should be in a position to do 5 million square meters extra output in high-volume formats. From a strategic point of view, the Ceramics division continues to execute on four main drivers. First of all, that's the intensifying of the approach of the integration of the Ceramics Group between Spain and Italy. Secondly, we are also starting to focus to expand on small sizes and the DIY approach. And then as said, the most important project of investment, which we have been running is the V4 project in Spain for large tile manufacturing. And then the fourth driver is the product portfolio rationalization and the cost reduction, which we have been performing throughout the division. Third division then is Australia. We've seen a slight drop in revenue, 3.4%, but the growth in profitability of 126 basis points, which confirms the strength of our market position and the resilient performance of the team. At Dunlop, we are focusing on expanding the market share further in Underlay. Further merchandising efforts has also contributed to substantial growth in the hard flooring sales, which is mainly LVT and laminate. And our Underlay factory now, which we have in Sydney is currently at full capacity, and we are commissioning extra volumes outside of Australia to cope with the increased demand, which we are seeing in the market. The carpet business, which we have through our two brands, Quest and Victoria is solid, and we see more growth in manmade fibers rather than in wool currently. So we expect the volumes in Australia to remain broadly flat in H2 with revenue expected to grow slightly from a positive pricing momentum. Unfortunately, within that division, there's still some persistent currency weakness, as you can see, which impacts the pound-denominated reported numbers. Last but not least, in the divisions is North America, where the performance is constrained by U.S. market volatility and the FX weakness, but this has been navigated successfully by the management. The current strategy of being only a distributor in the U.S. So as you know, we are not a manufacturer in the U.S. It is still the best one. We have revenues of about $300 million in the U.S. between Cali, IWT and Balta Home and exports to the U.S. from our European businesses. The Northern American trading conditions, as we all know, remain challenging in terms of the macro. So there's high-end mortgages, which we continue to see and which have driven the U.S. existing housing transactions to the lowest level in the last 30 years. IWT, which is our East Coast distribution of ceramics has been very strong in the Northeast and is progressing the sales attempts to go into the Texas market. Cali continues to further focus on builder and the business-to-business segment. And Cali in the first half has also taken more initiatives to deliver cost savings in terms of the sourcing model, the marketing spend, the merchandising and the minimum order quantities. So more initiatives have been planned to reduce the inland transportation and reduction of the number of warehouses, mainly third-party logistic warehouses, which we have. And then last but not least, on Balta Home, this was a setup which we've done in the past to better serve the distributors and the big box retailers, and to split the volumes over the two channels, and there's a cost-saving initiative there as well, where we will be cutting out one distribution facility, and the distribution in the future will only be done to the Savannah warehouse. So Alec, I think I'll hand back over to you. So this is the overview of the division sec. Alexander Robert Pratt: Great. Thanks, Philippe. So next section is on our EBITDA improvement initiatives. As we laid out at the full year results, we are moving very quickly to drive changes that are in our control. Clearly, we don't have control over the macro environment. What we can do is drive big [indiscernible] of the business across our divisions. So the charts on the left-hand side just a restatement of what we showed at full year. I think the key messages to take away is that we have now completed all of the actions that we were targeting in FY '26, which is that kind of GBP 20 million of improvement this year and that we are on track for all of the improvements that we are driving through for FY '27. The two large projects there are the V4 plants in Spain and then the Belgium Reorganization of Rugs to move that manufacturing to Turkey, which we'll come on to in a bit more detail. Obviously, those two projects are within that manufacturing efficiencies bucket. Those two projects are the vast majority of that GBP 30 million and so we are now confident that those savings will come through. It's worth noting that as we go through the budget process in calendar Q1 next year, we will be pushing the teams to see what else we can deliver in the coming years. I think we are confident that there are further savings to go for, particularly in that procurement and integration categories as well as a little bit more to go for in the manufacturing side as well. We intend to update the market at the next set of results on those initiatives. So this slide just gives a bit more context around what has been delivered this year. Clearly, a lot of this work has been offset by weaker volumes. So as a reminder, we generally guided to a 5% change in revenue drops through to kind of a 20% to 25% -- sorry, GBP 20 million to GBP 25 million kind of change in EBITDA. Obviously, with revenues declining slightly through the course of the year, that has largely offset some of these actions. What you can see from the page is that those are very broad-based, right? So that has been across every one of our divisions and across every one of our geographies. I think we do operate in a federated structure, so we have the ability to manage a lot of these projects at the same time. The other key point to take away from this slide is that whilst a lot of this work has been going on within FY '26, there is obviously an incremental benefit as we go into FY '27. So we know that those EBITDA improvements will come through as we go through into next period. So just to provide a bit more detail on the larger projects. So the picture on the right is part of the kiln for the V4 line. As you can see kind of it is a very large construction. It has been under construction for about 2 years. As Philippe touched on, that has been a EUR 31 million investment for the group. I think that's indicative of the fact that we have continued to invest in the asset base through the cycle, and that is what is going to allow us to be a bit more disciplined around CapEx over the coming years. Now we have uploaded a video onto our website, giving you a bit more color around that site. I think what you'll notice from that is, number one, the scale of the project itself; number two, the lack of physical labor involved in the new setup. So that is a very efficient line. As we alluded to, that will deliver about EUR 15 million of additional EBITDA at full capacity. I think the key question for the team as we go through the start of next year is whether we purely use that for replacement capacity at better margins or whether that becomes incremental capacity being able to target lower price points. So that balance between speed of filling the line and unit profit is something that we are working through, but it gives a lot of flexibility in terms of how we attack the market now. So on the Rugs reorganization, as a reminder, that is moving manufacturing from our Belgium plant into an existing facility that we operate in Turkey. We have gone through a number of these processes before, so it is pretty well tried and tested. I think what is different around this transition is, frankly, the scale of the operation. So we concluded the social plan negotiations with the labor unions around the time of the end of the period. That was kind of executed in line with our expectations in terms of cost and the scale of that. So what that will do is reduce our headcount in Belgium by about 500 people. That process is now well underway. 170 colleagues have exited the business already. There will be a further round in the next kind of month or so. We are targeting being fully operational at the end of financial quarter 1 next year. And so we'll have the majority of the benefit as we go through FY '27. The new piece of disclosure today is around the size of that move. The total cost will be about EUR 50 million. The majority of that, about 80% is related to severance costs, which is part of that negotiation I just referenced. And the cash costs will be split about EUR 10 million in FY '26, EUR 30 million next year and then EUR 10 million in FY '28. The provision for that move was taken at the half year of just over EUR 40 million, and we are moving at pace to ensure that, that is funded. As we touched on previously, the program will be financed by sales of the Belgium properties. So we provide a bit more color around this on this slide. So you can see in the picture on the right-hand side of the page, just the scale of some of those facilities. So effectively that gray building taking up the majority of the page is all of ours. You then see a road at the top of the page and another gray building extending beyond the distance. That is also one of our sites. So the team has begun the sale processes for those facilities. That is a mix of manufacturing and distribution. We will be looking to exit those buildings via a combination of straight sales and sale and leasebacks, and we're expecting the first completions there in calendar H1 2026. We are obviously able to obtain those proceeds within the bond documentation up to a maximum of GBP 45 million. So continuing the theme of controlling the things that we can control, a big focus the last kind of month or so has been around our cash flow targets. So this is new disclosure for today. In terms of CapEx, we are reducing our guidance going forward to about GBP 50 million to GBP 55 million per annum. That's a reduction from previous guidance of about GBP 65 million, so at least a GBP 10 million improvement going forward. That is broadly split between GBP 40 million of maintenance CapEx and GBP 10 million to GBP 15 million of expansion CapEx. So whilst we are very cash flow focused currently, we will continue to selectively invest in the business to drive efficiency going forward. In terms of working capital improvements, we are targeting GBP 40 million of savings. That is split between reduction in receivables overdues. That is going to be one of the quicker initiatives to push through. So that will kind of be going full pace in Q1 calendar '26. We then have a segment of inventory reductions. This will be done through SKU optimization. So effectively reducing the number of products that we're selling and therefore, reducing the amount of inventory that has to be held. That is pretty broad-based across the divisions. And then finally, an improvement in payables days. Now this will be longer lead time. So that is to do with negotiation with our suppliers. As we previously touched on, as we've gone through the refinancing process, we have seen a tightening of payables days. We are going to see incremental improvements in that environment. And the teams are very focused in negotiating with the suppliers to make sure that we are getting the benefits of being a large, well-diversified player in the market. And we do think there is probably upside to that 14-day number as we demonstrate progress on both the operational improvements and cash flow generation. And the final point is additional property sales. So we are targeting GBP 20 million plus over the next 18 months. Those are very much smaller assets, so diversified across effectively spare manufacturing assets, some showrooms, some spare land assets beside manufacturing facilities. So none of them are significant in their own right, but across the different divisions, people are being asked to focus on that. Those proceeds will be retained for driving liquidity across the business. So next stage on governance controls. As we touched on the half year, mostly full year, yes, this has been a focus to the Board. This is about doing simple things well. The aim here is to give us more visibility, more control and actually making sure that we are making the right decisions. So pretty broad-based. Some of that has been around people. So we have strengthened management teams, Philippe talked about in Italy. Obviously, the Rugs business as well, that has been strengthened very significantly, and we will continue to upgrade the teams as and where required. That is not just purely around cost saving, that is also adding skills as well. On the kind of the probably less exciting stuff, we've been refreshing policies, also rolling out internal audit program. Again, that is an element to control, but also identifying where we can be more efficient. So we're very fortunate having a very diverse base of businesses. What that means is hopefully we'll be taking the learnings from some of the more efficient businesses and applying those elsewhere across the group. We've also rolled out improved reporting, both the group and at divisional level and applying a bit more rigor both around CapEx and approvals to make sure we're delivering returns with our incremental capital, but also rolling out a new delegation authority framework so that we are being joined up in how we're making decisions. So finally, just in terms of where we are in the cycle. So clearly working very hard to drive efficiency of the business. It's worth remembering that we are 20% to 25% below long-term trends. And so whilst we can't sit here and promise the timing of that recovery, we are very confident that it will come. In the meantime, we are doing whatever we can in our control to make sure that we are strongest positioned both for where we are in the cycle, but also versus our competitors. We've removed a lot of costs from the business already this year and last year. We have a further GBP 50 million savings to target in FY '27 and '28. And actually, all of the core drivers of flooring industry remain intact. So that is obviously housing linked and economic activity linked. We don't fundamentally believe that anything has changed over the last couple of years to mean that we won't recover to those levels. So just to summarize, hopefully, it's very clear that we have made a lot of progress in the last 6 months. I think we're pleased with where we've got to. In a difficult environment, there is no benefit of complaining about that. It's incumbent on us and the divisional management team to keep on driving performance. I think we're excited to do that. And actually, we do feel that in a number of markets, we are outperforming the competition. So maybe with that, over to Geoff. Geoffrey Wilding: Right. There's been quite a number of questions arrived during the presentation. And I'll paraphrase some of them because quite a few of them are on similar topics. But -- so the first question, which I'll have Philippe answer is, can you talk us through the competitive landscape in the main divisions? Philippe Hamers: Okay. Well, if we talk about carpets, so we have to broadly make a difference between local competitors in the U.K. and overseas competitors. I think it has become -- life has become a bit more complicated from overseas competitors because of the FX and also because of the lack of distribution in the U.K. We've -- as you know, with Alliance, as I have alluded to. So Alliance is there in the market with the next-day delivery performance, which is bringing -- which is attracting a lot of business. Of course, there locally, we are as strong as our local competitors, but we have recently spurred some competitor weakness where we can build upon the business. And we've seen that, okay, I know we're reporting here H1, but we've seen and there was another question, and I'll jump on that one in a minute to know what the current demand was, I can say that normally in the second half is the better season. And we've seen some good sales started from the end of October through to the first week of December as well, so which is a positive. So Geoff has asked me to speak about competitors, so that was U.K. based. If we look at ceramics, the situation, and it's associated with another question that I can see coming up here in terms of Indian imports, we are facing some of these Indian imports, not so much in Europe, but we see that in our export markets, which is mainly the U.S. and into the Middle East. So we suffer a bit more competitor there. In Europe, it is -- we don't see that. So also the competitive landscape in ceramics is very scattered. So there's not like one extremely dominant player. So -- and we are pretty focused on the medium to high end in Spain and in some of the brands in Italy. So I've also mentioned that we are very keen in trying to have separated out the approach towards product, towards end consumer, end user in that DIY market. This is mainly in Italy. So we are -- we don't see any extra competitors there than the ones we've been facing. So all of that is -- we have not seen a lot of change there. There's another question, if I may, Geoff, another question here, which has been a question if there's a structural change that means that the volumes will not recover in the U.K. I would say absolutely, absolutely not. The U.K. market is still the largest flooring market in Europe with about a guesstimated 115 million square meters. This market has not declined in the course of this year, but what has happened is that we have taken a stronger position due to our service proposition, which we have, as with our logistics provider Alliance. Then another -- okay, the question on imports, we've seen the upswing demand, okay. I've talked about that in H2. So we -- the season, it was a normal season. And if looking into H2 and looking into the next financial year, I can see lots of potential for the Soft Flooring division, not only for the soft flooring products, so for carpet, but for all the other products we've added as well and the product portfolio being LVT and engineered wood. Geoffrey Wilding: So there's a question -- in fact, there's been a number of questions about the relationship with Koch Industries or Koch Equity Development, who are the holders of the preferred shares. They're also -- they have 12.5 million ordinary shares in Victoria. I'll give some initial comments, which are that Koch remains very supportive of the business. We've got a very good relationship with them. I could not ask for a better partner, particularly going through the difficult environment of the last 2 or 3 years. And the state of relationship is very, very solid, and they're very supportive of the business. And that's probably as much as I can comment about the actual relationship. But Alec, if you've got any comments you want to add about the conversion or update. Alexander Robert Pratt: No, [indiscernible] in terms of relationship, we also have access to a lot of the capabilities they can bring, right? So they have been helping us with the working capital exercise. I think that has been hugely helpful to the business. So I think that demonstrates their desire to get back the price up. As a reminder, they do have that conversion rights [indiscernible] at this time next year. It is important to remember that, yes, whilst that would be effectively switching that preferred return into an ordinary equity return, it would also reduce the liability on the balance sheet, right? So whilst it would change the percentage holding on the equity, actually, it would reduce the liability by a very similar amount and arguably would strengthen the balance sheet and the flexibility of the business going forward. So I think it's probably not appropriate to comment on discussions with them, but we just echo that, yes, that is a very positive relationship. And actually, we don't necessarily see it as a risk to the business and it's obviously something we will continue to look at over the coming months. Geoffrey Wilding: There's a question about Balta. Clearly, in fact, there's three of them, which I'll amalgamate into one. Clearly, the move of Balta's manufacturing from Belgium to Turkey will be very material to the earnings. Are you satisfied, management have this move under control? And when will it be completed? Philippe? Philippe Hamers: We are -- there's a new management on different positions there. So all the negotiations have been done with the trade unions. So the plan is in place, and it's ready for execution. Part of that has been done already. Alec has alluded to that. So 170 people have already left. There's more to come. And 90% of the production facilities will be based in Turkey. I just want to reiterate, this is not new facilities which we have in Turkey. It's existing facilities, which we will expand. So there was -- we don't have to build for the record. We've just added production there. So this will come at a better productivity, at a cheaper cost of goods sold and as a result, we should be in a better position and a more competitive position. Is the team up for it? Yes, there's been quite a bit of restructuring done already on the Balta file in the recent quarters with a good result, and we will continue to do so. Alexander Robert Pratt: So it's quite a modular move. So some of the machinery is already there and already operating. So in total, we're moving about 24 rooms over to the Turkish facility. Two of those are up and running, basically on a phased basis week by week, right? So there isn't a kind of specific risk around a single piece of machinery. Obviously, the total spend, excluding the redundancy payments is only about EUR 10 million. So I think that probably gives you a bit more confidence around that. And our legal team feels very confident and [they’re also in fact] confident. Geoffrey Wilding: The company is saying that CapEx spend is expected to be EUR 10 million to EUR 15 million lower in the future than it has been historically. Are you underinvesting in plant? Philippe Hamers: No, I think -- and this is important. So we have -- with the investment, for example, in the U.K., with all the investments we've done in logistics in the factories and all that, even if the market was to grow 20%, 25%, we don't need to spend more CapEx. Yes, we may have to add a few shifts. Yes, we may take an extra lease on a truck. But we have all the capacity. We have all the agreements in place with third-party production providers in case we would be running out of capacity, so we can make different decisions in terms of make or buy. But I have to say, in today's market, we have a very competitive production base in the U.K., and I'm not scared of Turkish imports here because Turkish imports need a leg to go into distribution. And this leg we can provide for ourselves and for third-party providers. Alexander Robert Pratt: Yes. I say we obviously invested fairly heavily within CapEx over the last couple of years. V4 line is a good example of that. So despite the challenges over the last couple of years, we've been spending money to make sure that we are well positioned for the future. We do have capacity in all our key markets to kind of grow into that demand recovery. So we are still allocating GBP 10 million to GBP 15 million of growth CapEx. We have had a first pass of the budgeting of that for FY '27. I think really that's choice around where we are getting returns there, but certainly no pressing need for additional incremental spend. Geoffrey Wilding: So what drives volumes and what needs to change in the macro environment for there to be a recovery in volume? I'll give you some initial high-level thoughts and maybe Philippe can comment additionally. Volumes primarily is the result of consumer spending on redecoration with a much smaller amount from construction. In terms of the consumer spending, housing transactions are a key catalyst to consumer spending because there's a very high proportion of buyers of a home redecorate when they first move in. And so therefore, as interest rate comes down and housing transactions recover, that's a key driver. The other consumer spending on existing homes happens when people have money left over at the end of the week. So wage growth versus inflation and mortgage interest rates are important as is consumer confidence, which is clearly strongly correlated with employment prospects. So at a macro level, those are the factors that influence volumes. And I don't know if you've got any additional comments, Philippe, at a practical level. Philippe Hamers: Well, not really. I think I've alluded to that earlier. So we can see if -- and I'm reverting back to U.K. now, if we look at how the market is over here, yes, there's a bit -- we have seen a bit of a swap from soft into hard flooring, but that doesn't really matter because we have both categories on offer; 80% to 85% of what we are selling is driven by refurbishing, not new homes. Yes, we are present in the new home market as well, but mainly to the refurbishing market. And we have not seen any declines of volume, and there's -- according to us, there's absolutely no reason why there would be a structural change in the demand anytime soon in this country. Geoffrey Wilding: Is your growth in the U.K. due to a recovery in demand? Or are you taking market share? Philippe Hamers: So we are clearly taking market share. So I think the market has been pretty flat this year in terms of demand. So you've seen -- or I mentioned that in the presentation that we have grown about 3% top line, but much more in profitability in H1. I think we will by far improve on that number in the second half. And this is market share we're clearly taking now. And as said earlier as well, so not only in H2, but we can see that in the preparation of the budget towards next year. So we are looking forward on a good solid market in the U.K. coming up. Geoffrey Wilding: Can you comment on the company's liquidity position, Alec? Alexander Robert Pratt: Yes, at the half year, we kind of refer to that GBP 86 million of cash on the balance sheet and we -- that have the Super Senior Credit Facility is fully drawn, but we also have the ability to incur about GBP 187 million in local lines, broadly similar number as the cash balance was drawn in local lines, so about an incremental GBP 100 million at the half year period. Geoffrey Wilding: Assuming a recovery does occur, what long term does management expect the EBITDA margins to be with a normalization of demand? Alexander Robert Pratt: Well, look, at the full year, we laid out kind of the long-term track records. I don't think we see it being hugely different to that. I think what we are trying to deliver is more integration than we were through the last cycle that should bring further benefits. So there is no reason we shouldn't be able to get back to those historical levels. Geoffrey Wilding: Is LVT damaging the demand for ceramics? Or is it more a wide consumer spending issue? Philippe Hamers: Yes, I've seen that question here. So there's -- some people say it does, others say it doesn't. So we are -- we have an offering in LVT as we have an offer in ceramic and in carpets. It doesn't really -- I don't really care where the demand comes from. Has it got an impact? I think the sale of LVT has definitely some impact because in terms of decors, you can buy like a wood decoration in LVT as you can buy it in ceramics. So there's probably a bit of back and forth between the two product groups. But I think at the level where we are in ceramics in terms of market share and LVT, it doesn't really -- so it has no impact or influence on the numbers we are reporting. Geoffrey Wilding: I think it's worth mentioning that the size of the ceramics market is absolutely enormous. There is about 1.5 billion square meters of ceramic tiles sold in Europe each year. And the amount of LVT sold at the present time, albeit it's growing, is a rounding error given the overall size of the ceramic tile market. So I don't think that the -- any shift of consumer spending from -- sorry, from ceramic tiles to LVT is having much of an impact in terms of the size of the overall ceramics market. Actually, I've just noticed the time. We better stop. There's still questions to go, which we'll try and answer otherwise, but online. But I think we better bring the session to a close. Operator: Perfect. That's great. Geoff, Philippe, Alec, thank you for addressing those questions from investors today. And of course, the company can review all questions submitted today and will publish those responses on the Investor Meet Company platform. But Geoff, before we direct investors for the feedback, which is particularly important to the company, could I please just ask you for a few closing comments? Geoffrey Wilding: Okay. As I said, I appreciate everybody taking the time to join and continue to take an interest in the business. I appreciate it's not -- it hasn't been a particularly celebrious for last couple of years, but we actually are feeling more confident about the future now than we have at any time in the last couple of years because of the changes that have been made operationally that will ensure earnings grow next year. So with that, we'll wind up for today. Operator: That's great. Thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of Victoria Plc, we would like to thank you for attending today's presentation, and good afternoon to you all.
Operator: Good day, and welcome to the Innovative Aerosystems Fourth Quarter 2025 Results Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Paul Bartolai, partner at Vallum Advisors. Please go ahead. Paul Bartolai: Thank you. Good morning, everyone, and welcome to Innovative Aerosystems Fourth Quarter and Full Year Fiscal 2025 Results Conference Call. Leading the call today are our CEO, Shahram Askarpour; and CFO, Jeff DiGiovanni. This morning, we issued a press release detailing our fiscal 2025 fourth quarter and full year operational and financial results. This release is publicly available in the Investor Relations section of our corporate website at www.iascorp.com. I would like to remind you that management's commentary and responses to questions on today's conference call may include forward-looking statements, which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results could differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the Risk Factors section of our latest report filed with the SEC. Additionally, please note that you can find reconciliations of all historical non-GAAP financial measures mentioned on this call in the press release issued this morning. Today's call will begin with prepared remarks from Shahram, who will provide a review of our recent business performance and an update on our strategic framework, including our accomplishments during fiscal 2025 and our key strategic priorities for fiscal 2026, followed by a financial update from Jeff. At the conclusion of these prepared remarks, we will open the line for your questions. With that, I'll turn the call over to Shahram. Shahram Askarpour: Thank you, Paul, and good morning to everyone joining us on the call today. Fiscal 2025 was another transformational year for the entire organization, highlighted by continued disciplined execution on our strategic priorities, culminating in outstanding fourth quarter and full year performance. In October, in connection with our ongoing transformation, we rebranded to Innovative Aerosystems, a move that better reflects our strategic focus on engineering, manufacturing and supplying advanced avionic solutions for commercial, business and military aviation markets. Our new brand identity underscores our unique capability to integrate next-generation avionics with intelligent system design, delivering innovative mission-critical aerospace solutions. As Innovative Aerosystems, we remain committed to powering progress across the industry's most prominent legacy fleets and emerging next-generation platforms. Entering fiscal 2026, we are executing against a clearly defined go-to-market strategy centered on integrating intelligent system design in advanced avionics to deliver differentiated solutions that improve performance and have safety and reduced operational complexity for commercial and defense aerospace customers. We ended the year on a strong note, with fourth quarter revenue increasing 45% year-over-year to $22 million. The combined benefit of increased throughput from client programs, a more favorable sales mix and improved operating leverage resulted in fourth quarter net income of $7.1 million or $0.39 per diluted share, adjusted EBITDA of $9.6 million, an increase of 71% versus the prior year. For the full year, we generated revenue of $84 million, up nearly 80% from the previous year. Our fiscal 2025 net income was $15.6 million or $0.88 per diluted share. Adjusted EBITDA was $25 million, up just over 80% from last year despite significant investments we made to position the company for its next phase of growth, including the expansion of our engineering team, enhancements to our sales organization, investments in infrastructure and systems to support our defense customers and the integration of our F-16 platform production into our Exton facility. I will discuss each of these in more detail shortly. To that end, I will now provide an update on our progress on the IA Next, our long-term value creation strategy. Our IA Next strategy prioritizes profitable growth, sustained operational excellence and disciplined capital allocation as key drivers of long-term value creation. This framework is the mechanism by which we intend to deliver on our long-term target of $250 million in revenue and adjusted EBITDA margins of between 25% to 30%, driven by a combination of organic and inorganic growth. Our strong fiscal 2025 results are a direct reflection of the execution of these key strategic initiatives. I will now discuss some of our key accomplishments during the year and highlight our focused priorities for the year ahead. Let's begin with a review of our growth initiatives, which focus on new product development, cross-selling of key solutions, expansion of our military capabilities and enhancements to our integrated avionics cockpit solution. An important milestone we achieved during 2025 was the successful completion of the integration of the F-16 program production into our Exton facility. We have completed all required recertifications and resumed full-scale production of the digital flight control computer earlier this month. The recertification and resumption of production of the improved programmable display generator is planned for the next month. We have a strong backlog of demand for our new products used in the F-16 and are encouraged by the growth potential here. The F-16 remains a workhorse for our military as well as many of our allies around the world, and we are encouraged for the long runway growth we see ahead. In addition to the attractive growth opportunities related to this platform, during 2026, we plan to begin in-sourcing F-16 product line subassembly. This initiative, combined with the elimination of the duplicative costs we incurred 2025 as we migrated the F-16 program production into our facility, should lead to improved and more consistent margins related to these products moving forward. Capitalizing on our legacy of engineering excellence, new product development is a critical aspect of our growth strategy. So we were pleased by the significant progress we made during 2025. In the year ahead, we intend to advance our progress towards autonomous flight within the business jet market through the next-generation UMS2 platform. This reengineered platform enables the integration of artificial intelligence in the cockpit, significantly enhancing level of cockpit automation. We have completed test flights on the Pilatus PC-24, and we'll be delivering a new version to Pilatus in June 2026. Another important area of new product focus during 2025 has been our new Liberty Flight Deck. This is a customer-centric, customizable design that can be tailored for virtually any type of aircraft, including large passenger and cargo planes, business jets and military aircraft. We unveiled the Liberty Flight Deck at the National Business Aviation Association Show in October of this year, and the customer feedback was very positive. In the coming year, we will continue with our Liberty avionics certification activities with a goal of 2027 for first certification. Our new Liberty offering can significantly reduce workload in cockpits by using automation to enhance safety and deliver substantial cost savings for Part 25 aircraft operators. The meaningful progress we achieved on new products is a direct result of the recent investments we have made in our engineering department and the core competencies of innovation and engineering expertise. Our engineering organization is a vertically integrated multidiscipline team that brings mechanical, electrical, software and systems engineering together under one roof. This structure enables agile decision-making, tight collaboration and full control over every stage of product development. IA maintains an independent verification and validation group that ensures strong design integrity and compliance throughout the development cycle in compliance with certification requirements to meet the highest level of safety. Our engineering team uses modern fully integrated development tools and employs state-of-the-art microprocessors and FPGA technology. The department has also invested as unitizes an internal AI-based development infrastructure, which hosts a knowledge-based AI model that optimizes documentation, supports training initiatives and facilitates cross-department product queries. We have expanded our engineering team by more than 50% in each of the last couple of years, with engineering personnel representing 1/3 of our total headcount at year-end. Management and the core engineering team have been with the company for over a decade on average, contributing to stability, deep product knowledge and continuity. We view our R&D capabilities to be critical to achieving our long-term growth objectives, and we plan to make additional investments in our engineering headcount in fiscal 2026. Importantly, we maintain an excellent engineering retention rate, supported by an engaging and challenging work environment. Unique initiatives such as sponsoring private pilot training, ensure engineers gain first-hand understanding of the pilot and avionics environment. Our engineering team has demonstrated its agility and innovation with programs like the new Liberty Flight Deck, and consistently shows the willingness to take on ambitious project and new technologies that strengthen the company's competitive position like multi-core processing technology. With a strong talent pipeline, unparallel vertical integration and a culture that embraces challenging projects and new technologies, our culture of innovation serves as a key driver of the company's continued growth and competitive advantage. We look forward to updating you on the continued progress on our UMS2 and Liberty platforms as well as additional innovation and new technologies in the future as we continue to enhance our integrated cockpit avionics solutions and move closer to autonomous flights. During 2025, we also laid groundwork for the expansion of our military business, which we view as an important future growth driver. We made important investments that strengthen our security and accounting services to become compliant with the Defense Federal Acquisition Regulation Supplement, or DFARS requirements. These are necessary improvements as we continue to bid on larger DoD programs. And finally, as it relates to our growth strategy, all of this is supported by the recently completed expansion of our Exton facility. We tripled the production capacity of our facility in 2025, positioning us to scale production over the coming years. Looking ahead, we now have the people, tools and capabilities in place to execute on our growth strategy. Now turning to our pursuit of operational excellence. We made key investments during 2025 that should position the company for solid operating leverage in the coming years as we focus our goal of delivering adjusted EBITDA margins between 25% to 30% over the longer term. During 2025, we completed the integration of our NetSuite ERP system, which provides a platform to efficiently scale our business. This new system will allow us to utilize more robust data to support actionable business decisions. Additionally, we have made further investments in infrastructure and systems to support our growth aspirations. With the infrastructure already in place, we expect only modest increase in operating costs moving forward, allowing for operating leverage as we grow. And finally, as it relates to balance sheet optionality, we continue to add available liquidity to support both organic growth and strategic acquisitions in the years ahead. An important accomplishment in support of our growth strategy was the recent closing of our new 5-year $100 million committed credit agreement with a lending syndicate led and arranged by JPMorgan Chase. The new facility provides an additional $65 million in liquidity versus our previous $35 million facility, and an option, subject to certain conditions, to request up to $25 million in additional loan commitments under an accordion feature in the agreement, bringing the total potential facility to $125 million. This facility provides the improved flexibility required to execute on our long-term growth strategy. In addition to the investments in organic growth I have already discussed, we remain focused on supplementing our growth strategy through strategic acquisition. Our disciplined acquisition strategy centers on acquiring aerospace and defense component product line or businesses with significant aftermarket potential and proprietary content and processes. We are focused on acquisition of product lines and businesses that have above-market growth potential, are strongly cash generative and are profitable. The aerospace supply chain is highly fragmented with many components supplied by smaller, privately-owned businesses that in turn sell to system integrators, Tier 1 or Tier 2 manufacturers or large OEM participates. We continue to see significant opportunities for further consolidation of this supply chain. Before I hand the call over to Jeff, I want to welcome Richard Silfen to our Board of Directors as an independent director. Richard is currently General Counsel of Hildred Capital Management, a private equity firm that specializes in control-oriented transactions in lower middle market company. Before joining Hildred, Richard was a partner and Co-Chair of Mergers and Acquisitions at Duane Morris, a multinational law firm. With Richard's appointment, the Board has expanded to 7 directors. In summary, as we enter fiscal 2026, we're well positioned to benefit from the foundation investments we've made across the organization during the last several years. Our team continues to execute at a high level and market trends remain favorable and our financial position is solid, all of which position us to deliver another year of profitable growth. We are energized by the opportunities ahead of us and remain committed to advancing our long-term strategic initiatives while maintaining a focus on delivering value for our shareholders. With that, I'll turn the call over to Jeff for his prepared remarks. Operator: Thank you, Shahram, and good morning to all those joining us. Today, I will provide a high-level overview of our fourth quarter performance, including a discussion of our working capital, balance sheet and liquidity profile at quarter end, and wrap up with some comments on our outlook for the new fiscal year. We generated net revenues of $22.2 million in the fourth quarter, up 45% from the fourth quarter last year. The strong growth came despite the expected pause in F-16 production we discussed last quarter as we completed the transition of this production into our Exton facility. Consistent with our prior expectations, production related to the F-16 began to ramp back up during December, and we expect to return to normal production levels in the first half of fiscal 2026. Revenues during the fourth quarter benefited from increased volumes in the air transport market and business aviation. Product sales were $14.3 million during the fourth quarter, up from $9.8 million during the same period last year, driven primarily by strong demand in the air transport sector. Service revenue was $7.9 million, owing largely to customer service sales from the Honeywell product lines, including $300,000 associated with the F-16 program and an increase of $1.3 million in nonrecurring engineering services. Gross profit was $14.1 million during the fourth quarter, up from $8.5 million reported in the same period last year, an increase of 65%. Strong growth was driven by the increase in revenue and a more favorable revenue mix, including the benefit of high-margin sales in the air transport market. As a result of the favorable sales mix, our fourth quarter gross margin was 63.2%, up from 55.4% in the same period last year. As we have stated in recent quarters, we continue to expect our gross margins in the future to be in the mid-40% range given our expected mix of revenue going forward. With the integration of the Honeywell product line into our facilities, we expect less volatility in our gross margins relative to what we saw in 2025. We could still see some quarterly variation based on our revenue mix, especially as we continue to grow our military and OEM businesses, but we still expect full year gross margins to be within our targeted range. As a quick reminder, military sales carry a lower average gross margin compared to commercial contracts. However, importantly, there is minimal operating expense associated with these contracts, resulting in incremental EBITDA margins. Operating expense during the fourth quarter of 2025 was $5.8 million, an increase from $4.2 million during the same period last year. The increase in operating expense was driven by investments to support growth, including additional headcount and engineering sales and services. Net income for the quarter was $7.1 million as compared to $3.2 million last year. GAAP earnings per diluted share of $0.39 increased from $0.18 last year. Adjusted EBITDA was $9.6 million during the fourth quarter, up from $5.6 million last year, an increase of 71%, largely due to our revenue growth and a more favorable revenue mix. During the fourth quarter, we recognized a $1.8 million gross benefit related to the employee retention tax credit, a refundable payroll tax credit enacted under the Cares Act and subsequent legislation. The benefit relates primarily to qualifying wages paid during the period and was recognized during the quarter upon confirmation of eligibility. Moving on to backlog. New orders in the fourth quarter of fiscal 2025 were approximately $27 million and backlog as of September 30 was approximately $77 million. The backlog includes only purchase orders in hand and excludes additional orders from the company's OEM customers under long-term programs, including Pilatus PC-24, Textron King Air, Boeing T7 Red Hawk and the Boeing KC-46A and the F-16 with Lockheed Mark. We expect these programs to remain in production for several years and anticipate they will continue to generate future sales. Further, due to their nature, the customer service lines do not typically enter backlog. Now turning to cash flow. For the full year ended September 30, 2025, cash flow from operations was $13.3 million compared to $5.8 million in the year ago comparable period due to our solid operating results. Capital expenditures during the fiscal 2025 were $6.5 million versus a little over $600,000 in the year-ago period. The increase in our capital expenditures related primarily to the cash outlays for the expansion of our Exton facility. Despite the increase in capital spending compared to last year, we were still able to generate free cash flow of $6.8 million during fiscal 2025, up from $5.1 million in the previous year. As of September 30, 2025, we had total debt of $24.4 million and cash and cash equivalents of $2.7 million, resulting in net debt of $21.7 million. As of September 30, 2025, we had total cash and availability under our line of credit of approximately $77.7 million. Our leverage at the end of the quarter was 0.9x. Our modest leverage, combined with availability under our expanded credit facility, gives us significant financial flexibility to execute on our strategic initiatives. Before we move into Q&A session, I'd like to provide our thoughts around the outlook for our business entering 2026. As we have discussed during fiscal 2025, our results benefited from the pull forward of revenues related to the F-16 platform as we prepared for the transfer of production into our Exton facility. Additionally, our fiscal 2025 results also included some service revenues for the F-16 platform that we do not expect to repeat in fiscal 2026. Excluding these factors, we estimate IA generated high single-digit year-over-year organic revenue growth in fiscal 2025 and believe this to be a reasonable annual organic growth run rate for the business on a normalized basis over time. However, when we look at fiscal 2026, we expect organic revenue to grow more modestly relative to our longer-term target given the pull forward of revenue related to the F-16 production and service revenue from fiscal 2026 into fiscal 2025, which was expected. Looking ahead, as we build off a higher base of revenue, we intend to drive the next phase of growth through a combination of market share gains, new product development, expanded capabilities and disciplined inorganic growth. When we think about the cadence of fiscal 2026, we expect first quarter revenues to be in the range of $18 million to $20 million, building steadily on a sequential basis as we move throughout the year. That completes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call. Operator: [Operator Instructions] Our next question comes from Bobby Brooks with Northland Capital Markets. Robert Brooks: So terrific 4Q results, and you had mentioned that the strength in sales is driven by some momentum in the military programs. Is it right to assume that when you're referencing that, it's really all related to the work with the F-16s, or is there something else? Jeffrey DiGiovanni: No, it's not just the F-16, there's also -- we do work with the C-130 and other Boeing products programs. So that's kind of where we saw some of the fourth quarter impact. Robert Brooks: Okay. So it was not just the F-16. Could you maybe help frame what was non -- for the military results, what was non-F-16 net positive? Jeffrey DiGiovanni: Yes. So it's probably a couple of million dollars in there for the C-130 and Boeing platforms in the military programs. And the F-16 really had nominal revenues in for the fourth quarter. There's probably about close to a little over $300,000 of service revenue that hit this period on the F-16 and -- as we expected. We didn't expect any revenue in production for the F-16 in Q4. Robert Brooks: Got it. And then it's great to see you guys put out this 2029 targets. I was curious to hear, and I'm sorry if I missed this earlier in the call, but was curious to hear your assumptions underpinning that outlook? Jeffrey DiGiovanni: Yes. Our $250 million revenue target assumes we're able to generate organic growth in high single digits range with the balance really driven by disciplined acquisition strategy. It's important to note that we believe our acquisition strategy could be accretive to our longer-term organic growth expectations given our expanded cockpit aviation solution, which will allow us to increase cross-selling and the broader market opportunities. Robert Brooks: Got it. And then any comments -- assumptions on the margin outlook there? Jeffrey DiGiovanni: Yes. So we're projecting margins in the range of -- EBITDA margins 25% to 30%, in that target range. Robert Brooks: Yes. But like just curious like what the assumptions are underpinning you guys had in that target? Jeffrey DiGiovanni: Yes, a lot of the platforms and a lot of, I would say, the operating expenses we have here today, so a lot of it we're going to be driving through the growth in EBITDA margins with that future growth. And we're looking to invest in R&D. So you'll see revenue go up and some of the R&D go up for these programs. That's why we're in the 25% to 30% EBITDA margin range. Robert Brooks: All right. I appreciate that. And just last question for me. You had mentioned the Liberty Flight Deck was really well received by both current and potential customers. I was just curious to hear what do they like most about it? Is it maybe lower cost than the alternatives out there? Or is there some type of proprietary tech embedded that gives you an edge? Just curious to hear that. Shahram Askarpour: So I think talking in general, where the avionics market has gone is now being dominated -- especially on the business aviation is being dominated by Garmin and to some extent, Honeywell and Rockwell Collins, all of which will give you a solution that they have. Our solution, we provide the solution to the customer of what they want, not what we have. And that was very well received because we also demonstrated that we can do that without significant NRE requirements. And that was very well received. I think we did have an agreement put in place with one new customer that -- it was a memorandum of agreement that is we're going to be negotiating the details of the contract. And we've also seen additional customers that have strong, good interest. We're in negotiations with 2 or 3 of those customers to -- with regards to the Liberty Flight Deck. What we see in the market is that the trend of industry going towards new OEMs coming along with the new engine technologies bring a lot of hybrid engines for carbon emission reduction, and that's driving a whole new groups of aircraft OEMs coming into the market, which they need customization because of the special needs of their airplanes. And we see an opportunity for us to grab that all by the horn and dominate that market. Operator: Our next question comes from Greg Palm with Craig-Hallum Capital Group. Greg Palm: Congrats on a good way to close out the year. Maybe we can start with, I just wanted to dig into that fiscal Q4 results just a little bit more. I mean, I think you mentioned air cargo, business jet, but was there specific product lines that contributed to the upside relative to maybe your prior expectations? Jeffrey DiGiovanni: So our prior expectations, a couple of things. One, when we look at what occurred over the quarter, as we mentioned before, we always have a lot of volatility, I think, when we're in these transitional periods with Honeywell. When we got their revenue reports and things like that, my team digs through them, challenges those questions and margins. We knew Q3 looked a little off. We got that resolved by the end of this year, fiscal year, and that was probably about another $1.5 million, roughly $2 million there, which went right to margins. So when you look at overall margin kind of, I would say, for the full fiscal year, you're in that 45% margin, but Q4 was high and Q3 was low, again a little bit there. And in terms of the air transport, we just saw more demand in the retrofit market, which typically has higher margins. And we saw comeback in business aviation as well. Greg Palm: Got it. Okay. And then the -- in terms of the orders number, I mean, that was a really good number in the quarter as well, a book-to-bill well over 1. Anything to necessarily or specifically call out there? Jeffrey DiGiovanni: No, I think as we make investments in our sales teams, we're starting to see some of the fruits of those labors where the sales folks are now out there trying to generate these sales for us. It just takes -- these kind of sales, it's a longer lead time. So we went from having 1 person back in 2023 to about a sales team of about 6 today. Greg Palm: Got it. Okay. And then I want to spend a minute on this targeted organic growth rate. I think you said high single-digit sort of on a normalized basis. I mean how much of Liberty and UMS2 is built into that because both of these seem like pretty significant opportunities that could contribute a lot more than high single-digit growth. And I guess we're probably talking out a few years, but I just wanted to kind of get your sense on the contribution potential of that. Shahram Askarpour: Yes. So on the OEM side of the Liberty cockpit, which includes the UMS2 as part of it, we're looking at 2030, 2031 for those new platforms to get into production. On the aftermarket side, we're going to see things hopefully as early as 2027, where we will have our initial certifications in the aftermarket side of -- on the business jet side of things. Organic growth in -- at least in the next few years is going to come from several platforms that we've already -- we're already seeing growth in those. Being on the air transport side, on the aftermarket side, we're beginning to see some of our product lines taking further legs into other platforms. For example, we were never that successful on the 737 business with our cockpit solutions, but we're seeing an uptick in that on the 737 side. On the C-130 side, on the military side, we're seeing some -- a lot of increased interest and mainly because the competitors we had in the past in those platforms, mainly being Collins and Honeywell, Honeywell's kind of doesn't have much to offer on their platform anymore. And Rockwell Collins hasn't done the investments. So we're seeing a lot of the countries, which don't have the kind of budgets to spend on Rockwell Collins solutions as they sell to the U.S. Air Force, coming and looking at lower-cost solutions like we have. And so we're seeing an uptick in a lot of areas that's going to drive our organic growth. Now prior to doing these acquisitions, we were growing somewhere in double digits, mid-teens organic growth. When you do $26 million in revenue, growing it organically by 15% doesn't require a lot of additional revenue to come in. When you're doing $100 million in revenue, obviously, that organic growth becomes hard to achieve in double digits. That's why we're seeing that long term, single-digit organic growth is -- high single-digit organic growth is what we're striving for. Operator: Our next question comes from Sergey Glinyanov with Freedom Broker. Sergey Glinyanov: So my congratulations on really successful quarter and the year. And my question is gross margin is much better than expected. You've achieved such a low product cost level, which is the same a year ago. Whether it's only due to sales mix or there is anything else? Should we expect any substantial changes in next year? Jeffrey DiGiovanni: So when we look at gross margins, as we said before, there's a lot of volatility, especially when you're doing transitions, product mix, especially with the governmental programs. That's kind of why we look at it from a whole year basis versus quarter-over-quarter because it's timing of also product wins and production. So when you look at the full year, we're in the mid-40s, and that's kind of what we projected a few months ago to say we're in the mid-40s. Q4 was over 60% and Q3 was under 40%. That -- there was a little bit, I would say, of a shift in terms of when we got the revenue and the information on the F-16, the margins were lower. Again, my team challenges and then we go back and forth, but that takes time and sometimes there's nothing there. This time, we had a resolution and we worked through with that with Honeywell. And there's probably about close to almost $2 million in changes there, which affects the margin quarter-over-quarter. So when you take that out, it's kind of, I would say, consistent between those quarters, but again, blended on the mid-40s. Sergey Glinyanov: Okay. Got it. And what should we expect revenue in the next 4 quarters? I mean will it be smoother and even in trajectory than a year ago in terms of previous acquisitions, et cetera? Jeffrey DiGiovanni: Yes. Unfortunately, we don't give that forward-looking guidance. We're trying to stay on the target of focusing on the $250 million revenue growth for the next few years to get there. Sergey Glinyanov: Okay. Maybe you can share your thoughts about capital expenditures in the next year after Exton facility expansion is finalized? Jeffrey DiGiovanni: So I mean the Exton facility has been finalized. That spend is all done. We're not expecting major shifts in capital expenditures in 2026. Sergey Glinyanov: Okay. And I think the last question is, you emphasize the employee retention tax credits was accretion. Is it onetime benefit or we can expect it in next year? Jeffrey DiGiovanni: No, that was a onetime benefit. So the company filed under the Employee Retention Credit Act a few years ago. I guess with some changes in the government and the process, we got those checks, the money back in during this period, and that's when you take credit for it. That's why we called it out because it's a onetime event that's not going to occur again. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Shahram Askarpour for any closing remarks. Shahram Askarpour: Well, thank you very much everybody for attending our conference call. Have nice holidays, and enjoy the season. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and thank you for standing by. Welcome to the Birkenstock Fourth Quarter and Fiscal 2025 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. I now turn the call over to Megan Kulick, Director of Investor Relations. Megan Kulick: Hello, and thank you, everyone, for joining us today. On the call are Oliver Reichert, Director of Birkenstock Holding plc and Chief Executive Officer of the Birkenstock Group; and Ivica Krolo, Chief Financial Officer of the Birkenstock Group. Nico Bouyakhf, President of EMEA; Klaus Baumann, Chief Sales Officer; and Alexander Hoff, Vice President of Global Finance, will join us for the Q&A. Today, we are reporting the results for our fiscal fourth quarter and full year ended September 30, 2025. You may find the press release and supplemental presentation connected to today's discussion on our Investor Relations website at birkenstock-holding.com. The company's annual report for the year ended 30 September 2025 on Form 20-F has been filed with the United States Securities and Exchange Commission and has also been posted to our website. We would like to remind you that some of the information provided during today's call is forward-looking and accordingly is subject to the safe harbor provisions of federal securities laws. These statements are subject to various risks, uncertainties and assumptions, which could cause our actual results to differ materially from these statements. These risks, uncertainties and assumptions are detailed in this morning's press release as well as in our filings with the SEC, which can be found on our website at birkenstock-holding.com. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law. We will reference certain non-IFRS financial information. We use non-IFRS measures as we believe they represent the operational performance and underlying results of our business more accurately. The presentation of this non-IFRS financial information is not intended to be considered by itself or as a substitute for the financial information prepared and presented in accordance with IFRS. Reconciliations of IFRS to non-IFRS measures can be found in this morning's press release and in our SEC filings. With that, I'm going to turn it over to Oliver. Oliver Reichert: Good morning, everybody, and thank you for joining us today. As we enter year 3 as a public company, I would like to spend a few moments to highlight our accomplishments since our IPO in 2023. We have delivered strong double-digit top line growth in constant currency and generated a consistent 30% plus EBITDA margin without compromising on our disciplined engineered distribution. We made significant progress in unlocking our white space potential. We deepened our retail footprint and doubled our own store fleet to 97 stores. We have grown our APAC business at an average rate of 36% per year. And we have significantly increased close to our share of business by 10 percentage points to 38%. We generated significant cash flow, allowing us to delever from 3.3x to 1.5x while investing over EUR 150 million into our production capacity and buying back $200 million in shares. We achieved all this in an environmental faced by fundamental changes in global tariffs and international trade, a war in the Ukraine, and energy crisis and a significant decline in the U.S. dollar. Even for a brand like ours with a history spanning 2.5 centuries, these are unusual times. As our results show, we have navigated them consistently and successfully. Our brand delivers growth since 250 years. Our performance during these unusual times proved the resilience of our beloved brand. Our healthy brand momentum continued in the fourth quarter. We are very proud to report strong results for our fiscal year 2025, which came in ahead of our guidance. We delivered full year revenue growth of 18% in constant currency, above the 15% to 17% range we provided at the beginning of the year. We reached EUR 2.1 billion in revenue, the best year in our history. We grew double digits in every segment and channel, and we improved profitability. Gross margin was up 30 basis points to 59.1%. Adjusted EBITDA margin was up 100 basis points to 31.8%, meeting the high end of our target. Most importantly, we accomplished this in the face of significant tariff and currency pressures. Demand for our brand remains very strong across all segments, categories and channels. We sold over 38 million pairs in fiscal '25, up over 12%. ASP was up 5% in constant currency, supported by targeted price actions and the higher share of premium products such as closed-toe shoes and leather executions. We are winning in both B2B and D2C, gaining shelf space and taking share. Birkenstock had a very strong back-to-school season with retail sales at our top 10 partners increasing over 20% year-over-year. Importantly, we see a continuation of this momentum during the important holiday season and over 90% of the growth in B2B came from within existing doors. We remain committed to maintaining relative scarcity and managing tightly our distribution growth. Full price realization, the ultimate indicator for brand health and demand remains over 90%. This shows incredible brand strength in a market faced with significant discounting by others. We delivered as promised in fiscal 2025 in our white space growth opportunities. In owned retail, we added 30 new stores, ending the year with 97 stores and more than doubling our own store fleet since the IPO. The new stores are performing ahead of our expectations in terms of productivity and return of CapEx. We plan to open about 40 new stores in 2026, putting us well on track to reach our 150 store target ahead of schedule. This will allow us to capture more in-person shopping demand and younger shoppers within our own D2C business and allows us to showcase the full range of our collection. Closed-toe share of revenue increased by 500 basis points year-over-year to reach 38% for the year, supporting continued ASP growth. 10 of our top 20 silhouettes in '25 were closed toe. The Boston, a category-defining hero silhouette, which turns 50 years in '26, continues to lead the clog category, a category like sandals we believe we own. At the same time, non-Boston closed-toe silhouettes grew over 30%. Finally, our third white space, APAC, grew 34% in constant currency, approximately double the pace of the more mature markets. APAC increased to 11% share of global revenue and the APAC segment has the highest ASP. We expect to continue to steer APAC growth at double the speed of the other segments. Our growth is only limited by our production capacity and disciplined distribution. We, as many other brands did, saw a continued shift towards in-person shopping, especially in the important Gen Z group. This consumer most often shops in a multi-brand curated retail environment, which is supported by our B2B channel. We are a consumer-centric brand in its core meaning. Our desire is to be where the customer is, reach first-time users who need to touch and feel the product and transform them into brand fans for a lifetime. This strong wholesale growth driven by the younger demographic, which we expect to continue, requires us to produce more pairs in a situation where we are already capacity constrained. At the same time, the strongest demand we see is for our premium executions, which require even more production minutes. The combination of more wholesale and more premium execution is creating additional pressure on our vertically integrated supply chain. We need to manage growth in our production responsibly. This is why we are steering towards a mid-teens pace of growth for fiscal '26. I will now turn it over to Ivica to discuss our financial results and outlook for '26 in more detail. Ivica Krolo: Thanks, Oliver. I'm happy to share with you Birkenstock's performance for the fourth quarter and the fiscal year 2025, which exceeded our targets. We achieved this in the face of significant headwind from FX on our reported numbers. We closed the year with a strong fourth quarter with revenues of EUR 526 million, growth of 20% in constant currency. Reported revenue growth was over 15% due to the historically strong depreciation of the U.S. dollar compared to the fourth quarter of '24, which caused a 420 basis points drag to revenue growth in the quarter. This brought the full year revenues to EUR 2.1 billion, up 18% in constant currency, exceeding the high end of our guidance of 15% to 17%. We saw strong growth across all segments in fiscal 2025. The Americas segment was up 18% in constant currency. EMEA was up 14%, and APAC up 34% in constant currency. By channel for the year, B2B was up 21% and D2C up 12% in constant currency. As Oliver mentioned, we see sustained strength in our B2B channel. Share of business in the B2B channel was about 62%, up from 60% in fiscal 2024. Gross profit margin for the fourth quarter was 58.1%, down 90 basis points year-over-year. Like-for-like margins, excluding 120 basis points of pressure from FX and 100 basis points of pressure from incremental U.S. tariffs were up 130 basis points to 60.3%. For the fiscal year, gross margin improved 30 basis points to 59.1%. Like-for-like margin, excluding FX and tariff impacts, was up 90 basis points to 59.7%, close to our long-term target of 60%. Selling and distribution expenses were EUR 156 million in the fourth quarter, representing 29.7% of revenue. This was down 130 basis points from the prior year. For the full year, selling and distribution expenses totaled EUR 564 million or 26.9% of revenue, down from 28% in fiscal 2024, mainly due to a higher B2B share year-over-year and the reclassification of some expenses into G&A previously recorded in S&D. Adjusted general and administration expenses were EUR 35 million or 6.7% of revenue in the quarter, down 30 basis points versus prior year. Full year adjusted G&A totaled EUR 123 million or 5.9% of revenue, up 30 basis points from fiscal 2024, mainly due to reclassification. Adjusted EBITDA in the fourth quarter of EUR 147 million was up 17% year-over-year. Adjusted EBITDA margin of 27.8% was up 40 basis points year-over-year. Excluding FX and tariff impacts, adjusted EBITDA margin was up 280 basis points to 30.2%. For the full year 2025, adjusted EBITDA was EUR 667 million, up 20% year-over-year. Full year margin of 31.8% was up 100 basis points year-over-year and hit the high end of our targeted range, which we increased after the second quarter. Adjusted EBITDA margin for fiscal '25, excluding FX and tariff impacts, was 32.5%, up 170 basis points. Adjusted net profit of EUR 94 million in the fourth quarter was up 71% year-over-year. Adjusted EPS for the fourth quarter was EUR 0.51, up 76% from EUR 0.29 a year ago. For the fiscal year, adjusted net profit of EUR 346 million was up 44% and EPS of EUR 1.85 were up 45% from fiscal '24, driven by strong operational performance, lower interest payments and a lower effective tax rate. Cash flows from operating activities remained strong at EUR 384 million for the fiscal year, down 12% from fiscal 2024, mainly due to the timing of tax payments. We ended the year with cash and cash equivalents of EUR 329 million after the repurchase of 3.9 million shares totaling EUR 176 million and the partial early repayment of the U.S. dollar term loan of USD 50 million in September. Our inventory to sales ratio declined to 34% for the year from 35% in the fiscal year 2024. Our DSO for the year were healthy 28 days, up from 23 days in 2024, primarily due to the higher B2B mix. During the fiscal year, we spent approximately EUR 85 million in CapEx, adding to our production capacity in Arouca, Goerlitz and Pasewalk and continuing our investments in retail and IT. Even with the share buyback we executed in May, our net leverage was 1.5x at the end of fiscal 2025, down from 1.8x at the end of fiscal 2024. Without the buyback, the net leverage would have been at 1.2x. Our capital allocation priorities continue to be: number one, invest in our business; number two, reduce debt; and number three, opportunistic share buybacks. Now turning to our outlook for fiscal 2026. We are expecting significant headwinds from FX and tariffs in fiscal year 2026. Regarding FX, we will see an especially strong headwind in the first half of the year, impacting the quarter-over-quarter comparison. At today's euro-U.S. dollar exchange rate of 1.17, we expect approximately 600 to 650 basis points of headwind to revenue growth in both the first and the second quarter and around 300 to 350 basis points for the full year. The margin impact to gross profit and adjusted EBITDA will be 150 to 200 basis points in each of the first 2 quarters and about 100 basis points for the full year. As a reminder, nearly all of our COGS are in euro and the majority of SG&A is as well. As such, the absolute euro impact of movements in FX to revenue flows through about 90% to gross profit and about 67% to adjusted EBITDA. Our guidance for fiscal 2026 assumes today exchange rates will remain the same throughout the remainder of the year. Regarding tariffs, we were able to offset most of the 2025 impact with targeted price increases, including the July U.S. price increase. We also benefited from the fact that the majority of our goods for 2025 were already shipped prior to the increase in tariffs. This will not be the case in 2026, where we expect to see more impact from tariffs in COGS than we did in 2025. This will result in about a 100 basis point decline in both gross margin and EBITDA margin for 2026. With that explanation behind us, now on to the guidance. For 2026, we are targeting constant currency revenue growth of 13% to 15%, which, as Oliver mentioned, is a slower pace than we saw in 2025. The FX headwind should be about 300 to 350 basis points for the full year, resulting in reported revenue growth of 10% to 12% to EUR 2.3 billion to EUR 2.35 billion. This goal is based on our capacity constraints and the demand in our B2B channel, especially in the emerging youth segment. We target unit growth of approximately 10% per year, a manageable pace of growth when we consider our supply chain, access to specialized labor and equipment and our desire to maintain scarcity. We expect adjusted gross margin of 57% to 57.5%, inclusive of the 100 basis points of pressure from FX and 100 basis points from incremental U.S. tariffs. We expect adjusted EBITDA of at least EUR 700 million for the year, implying an adjusted EBITDA margin of 30% to 30.5%, inclusive of the pressure from FX and tariffs totaling 200 basis points. Excluding the impact of these external factors, forecasted adjusted EBITDA margin would be at 32% to 32.5%. Our expected tax rate should be in the range of 26% to 28%. Adjusted EPS is expected to be EUR 1.90 to EUR 2.05, including approximately EUR 0.15 to EUR 0.20 of pressure from FX. This is not including the impact of any additional share repurchases. We intend to repurchase share for a total consideration of $200 million during fiscal 2026, subject to market conditions. Capital expenditures should be in the range of EUR 110 million to EUR 130 million. Net leverage target for the end of fiscal 2026 of 1.3 to 1.4x, excluding the impact of any additional share repurchases. Finally, we expect to open about 40 new retail doors globally over the course of the year. Before I turn back to Oliver to close, I'm excited to announce our plans for a Capital Markets Day at the end of January in New York City. Details on venue and timing will be forthcoming and will be posted on our Investor Relations website. We are now in year 3 of our life as a public company, and we are looking forward to providing you a detailed look into the world of Birkenstock and our vision for growth for the next 3 years. We hope you can join us for a deep dive into all areas of our unique and dynamic business model. Oliver Reichert: Thanks, Ivica. 2025 was the strongest year in the over 250-year history of Birkenstock. I am extremely proud of the team and how well and disciplined we steal our business in an overall very challenging context. We remain very optimistic about our future. '26 is off to a great start with Birkenstock at the top of gifting list this holiday season. Demand for the footbed remains robust and unconstrained. The main constraints we face is in our own production capacity and our desire to maintain scarcity. As we look ahead to the rest of this fiscal year and beyond, we see opportunity. The opportunity to continue to take share globally, especially in the fast-growing APAC market, adding to our own retail store fleet, building on our closed-toe momentum and doubling down on our engineered distribution to maximize profitability. We look forward to seeing you all in New York in January to discuss the next few years of this incredible brand journey. We will dig deeper into our growth drivers, including investments in manufacturing, innovation, new usage occasions, retail and the APAC segment. I would now kindly ask the operator to open our Q&A session. Thank you. Operator: [Operator Instructions] Your first question comes from the line of Matthew Boss with JPMorgan. Matthew Boss: So Oliver, maybe relative to the 20% constant currency revenue growth in the fourth quarter and 18% for the year, which both exceeded your plan, you're targeting 13% to 15% constant currency growth for fiscal '26. What's driving the more conservative view for '26? Have you seen any slowdown in demand so far in the first quarter? And how should we think about this more moderate pace of growth within your long-term algorithm? Oliver Reichert: Matt, thank you for your question. First of all, we see very strong demand for our brand all over the world. During the holiday season, in the U.S. in specific, some of our big wholesale partners grew over 30%. So our full price realization is still north of 90%. So since nearly 2 years, we see a change in consumer journey in the Western Hemisphere. A lot of brands, including us seeing more traffic and demand coming from multi-brand environment and in-person shopping at wholesale, especially Gen Z customer -- consumers. Wholesale partners play successfully the full range of Piano marketing activities online, offline and social. They are very attractive partners. This is good news. We have the highest percentage in EBITDA margin in wholesale and Brand Rookies need to have a physical touch point with our products. They will return to us for their second, third, fourth and so on pair. These young customers buying into more expensive and more complex executions. Don't worry, we continue to manage scarcity and execute very tight inventory management door by door. But one of our most successful category in Gen Z, the Clog, Boston, Naples, we own the Clog category. But from a production perspective, a Clog takes more than twice as many production minutes per pair than sandals. So the Clog business puts even more pressure on our production minutes and ultimately, our production capacity, which is the biggest limitation to our growth. So we will produce more than 5 million pairs more in '26. These are the main reasons for our growth algo outlook. The demand is not limiting our growth. The capacity does. On your question about the long-term algo, we expect top line growth over the next 3 to 5 years to be in the mid-teens range. We assured we are investing heavily in our preproduction capacity in Portugal, ramping up stitching and preforming capacities, especially for our Clog styles and more complex and more expensive products. Our new purchased facility in [indiscernible], near Dresden will further increase our cork/latex footbed capacity and our final assembly lines where we currently face the biggest bottlenecks is the factory will be operational in '27. I believe our Investor Day end of January in New York City will help us a lot to further explain and address this topic in more detail. Operator: Your next question comes from the line of Laurent Vasilescu with BNP. Laurent Vasilescu: Ivica, I wanted to dig a bit more on the margin outlook for 2026 and the impact from FX and tariffs. Can you walk us through in more detail how FX flows through the P&L? Similarly, you took pricing in July to mitigate the tariff impact. Why are you seeing so much margin pressure for tariffs in 2026? And what more can be done to offset some of this? And then I've got a quick follow-up. Ivica Krolo: Thanks for the question, Laurent. It's Ivica. So you're right. Fiscal 2026 will be heavily impacted by FX and tariffs, so representing a drag to both gross margin and EBITDA margin of each 100 basis points, which is 200 basis points in total. So excluding these external factors, we do not have under our control, margin would be very consistent with fiscal 2025. So first, regarding FX flow-through and starting with revenue. The 2026 impact will be 300 to 350 basis points drag on top line growth for the full year or about EUR 70 million. And so given that almost all of our COGS are in euro, as you know, we are producing in Europe, this absolute impact flows through to gross profit at about 90% or EUR 63 million hit to gross profit. Pretty much the same picture for adjusted EBITDA. About 2/3 of the top line impact flows through the EBITDA or approximately EUR 47 million on adjusted EBITDA for the full year. So overall, these impacts will be more pronounced in the first half when the dollar was at its strongest level before the decline gain in April this year. On a quarterly basis, we expect revenue growth will be impacted by about 600 to 650 basis points and margin by 150 to 200 basis points in both Q1 and Q2. In our fiscal second half, the pressure will be much less year-over-year. Then with regards to your question on tariffs. So for the full year fiscal 2026, we expect about 100 basis points of margin pressure from incremental tariffs, which is reflected in our forecast. We look at pricing to offset the majority of the incremental tariff impact in absolute terms, which is dollar neutral, however, not margin neutral. So for example, we say we have a $100 shoe with $40 COGS and $60 gross profit. That is a 60% gross margin. Now we add $10 of tariffs to COGS, we need to add $10 to price to maintain $60 gross profit. But the margin is now 54.5%. So that is $60 over $110. If we wanted to maintain a 60% margin, we would have to take pricing up $25 to bring our gross profit to $75, not $60. The price increase would have to be 2.5x the tariffs. This is not something we would do to our customers being a democratic brand. And as you know, we review prices every season and make adjustments very surgically on a style-by-style basis. We will continue to mitigate the tariff impact on margin, lowering COGS in other areas. We do this through production efficiencies, improved logistics and better terms with suppliers and vendors along our vertically integrated supply chain, but this naturally does take time. In addition, our growing share of business in APAC will, for the longer term, reduce our exposure to the U.S. dollar and to U.S. tariffs regime. Laurent Vasilescu: Very helpful detail. And as a follow-up on a finer point on Matt's question. I know you don't guide by quarter, but just because there's a lot of pressure on the stock premarket on this 13% to 15% top line. Any finer point on just like on 1Q, could we assume that top line could be up high teens on that front? Oliver Reichert: It's Oliver again. Yes, of course. I mean, the guidance is the guidance. We guide mid-teens, especially on the long-term algorithm. But I mean, just remember my first comments on the holiday season, especially in the U.S., the business is going super well. So I understand your worry somehow. But listen, it's really brand is performing super strong. So yes, all good. Operator: Your next question comes from the line of Randy Konik with Jefferies. Oliver Reichert: Randy, can you hear us? Randal Konik: Yes. Can you hear me? Yes. Sorry about that. This unmuted thing. Look, can we talk a little bit about channel mix a little bit more? I think for the full year, B2B was up about 21%, D2C up about 12%. And then in the fourth quarter, the B2B channel was, I think, even stronger, up about 26% in constant currency. How do you think about channel growth in 2026? Do you think B2B will continue to outpace D2C by such a wide margin as it did? And then what are you trying to do to drive continued faster -- even faster growth in the D2C channel? Ivica Krolo: Thanks for the question, Randy. It's Ivica again. So as you know, this is a shift that we've been seeing in the business for over a year. In-person shopping is back, especially within our fastest-growing cohort, which is the youth market, where consumers prefer to shop in a multi-brand retail environment. This is very favorable to our B2B business, where we have over 6,000 high-quality strategic retail partners globally, and they are doing a very good job representing our brand, reaching new consumers through their own advertising and outreach. And this is basically marketing spend that brings consumers to our brand, and it's effectively not spent by us. This is a good thing and supports the very strong margins we are achieving. We are leaning in both channels, but we can't control where consumers choose to interact with our brand. We have learned through the experience of other brands that you can't force consumers into one channel or another. All we can do is make sure that touch points they have with the brand are high quality, educate on the purpose of Birkenstock, strive to maintain scarcity in the channel and support full price realization regardless of channel, and this is what we are doing. And we are thrilled to see the strong demand regardless of where it is. It means more Birkenstock on feed and the opportunity to turn the new consumer into a lifetime brand fan who we firmly believe will come -- will become a D2C consumer at some point in their consumer journey regardless of where they purchase the first or the second pair. So with regards to B2B outpacing D2C, so yes, we do expect this trend of faster B2B growth to continue in 2026 and for the foreseeable future as we continue to reach more and more consumers who are new to the brand, especially in the younger demographics. But both channels are growing double digit. A few points that are very important to this. We are not compromising high-quality distribution and full price realization. We manage inventory in the B2B channel very tightly through engineered distribution model. Full price realization is at over 90%. stock-to-sales ratios in the channel are very healthy, and our order book continues to be very strong. On the last part of your questions on the D2C channel itself, we are very much focused on accelerating our store rollout to promote the high-quality touch points with the brand and to present the full range of our products and, of course, introduce newness. With 97 doors globally, we are not able to capture all in-person demand that we are seeing with our own D2B business. We added 30 stores in 2025, and we should add another 40 in 2026. So additionally, we are working to drive an even stronger connection to our consumers through more targeted membership benefits, a loyalty program, exclusive styles, content and special events. Randal Konik: And when you -- and just to follow up, when you say -- I think you said you're committing to double-digit growth on both channels. Is that on a constant currency basis? And lastly, do you expect the -- again, the growth rate spread to widen or stay about the same or narrow from a B2B stronger than D2C growth rate in 2026? Ivica Krolo: With regards to the first part of your question, yes, it's constant currency. And with regards to the second part of your question, so we expect the trend that we are currently seeing to continue. Operator: Your next question comes from the line of Lorraine Hutchinson with Bank of America. Lorraine Maikis: The growth in EMEA accelerated nicely. What are you seeing in terms of consumer demand in the EU in particular? And any comments on first quarter trends there? Mehdi Bouyakhf: Lorraine, this is Nico. Thank you for your question. Indeed, we projected in the last earnings call an acceleration of growth in EMEA and the 17% in Q4 are a significant acceleration versus previous quarter. We saw double-digit growth across B2B and DTC in an overall flat to negative market. So effectively, we continue to be one of the very few chosen brands. And effectively, we take share from many other players. Growth as also part of your question in Q4 was predominantly driven by a strong consumer appetite for product newness and higher price points. We are particularly pleased with our closed-toe performance. This category grew more than 2x our overall business and closed shoes, so lace-up shoes, grew almost 2x our overall business. Looking at the top 20 styles in our sales, 10 styles are closed toe and half of these are closed shoes. Just to name a few, Naples, we're on to something here. That's a new clog silhouette, specifically the wrapped that we bring towards the consumer, and we see great traction. It's growing triple digit and it's really also outgrowing Boston. And then to name a closed shoe silhouette, the Utti, is doing really strong. Again, strong consumer appetite from a female consumer, but also from a male consumer. Your second part of the question was Q1. We are very pleased to see that we are off to a great start in Q1 and see a continuation of the trends that I just mentioned. So appetite for product newness and higher price points. We are very confident that we again outperformed the market and will take share from many other players and be the brand of choice for our consumers. We project our Q1 in EMEA to be very much in line with our overall guidance. And as shared in the opening remarks, our growth is not impacted by consumer demand, but our manufacturing capacity and distribution-wise, our will to maintain the quality in our distribution. Lorraine Maikis: And then it sounds like capacity constraints are the key reason for the slower growth in '26. Would you expect to be back in a position to return to mid- to high teens growth in fiscal '27? Ivica Krolo: Lorraine, it's Ivica speaking. So as you know, we are constantly capacity constrained, we've been for some time. What we are doing is now building up the capacity to close the gap to the demand. Otherwise, we would not be in a position to serve and keep up with the demand that we are seeing in the market. So overall, our goal is to increase our capacity by -- in terms of units by roughly 10% for the foreseeable future, and this will certainly help us to serve the demand going forward. Operator: Your next question comes from the line of Michael Binetti with Evercore ISI. Michael Binetti: Can you hear me okay? Oliver Reichert: Clear. Michael Binetti: So I guess on the EBITDA margin guidance, could you just help us unpack it a little bit more? You gave us 100 basis points drag from FX, 100 basis points drag from tariffs. So we're trying to bridge to the 130 to 175 basis points in total. I think when we last checked in, you had 75 basis points left to recapture from the factory. How should we think about like-for-like pricing as a good guy offsetting the tariffs? And then it sounds like wholesale grows above D2C. So I think that's positive on the EBITDA margin rate line. Is there any way to help us size a couple of those components? Ivica Krolo: Yes, sure. Michael, it's Ivica speaking. So we closed fiscal '25 with a gross margin of 59.1% and the external factors, that is tariffs and the drag in currency is representing a drag in total of 200 basis points. So that means 57.1% and we guided 57% to 57.5%. So what are the puts and takes here? A absorption and capacity absorption within our production will contribute roughly 60 basis points. You mentioned correctly, Michael, 75. However, the base for '26 is higher. As such, the positive contribution will be around 60 basis points. The next point is on channel as B2B will outpace D2C growth, there will be a drag in the gross margin from the channel shift. And this is basically around 50 basis points. So overall, this is neutral. And then what is not embedded is like-for-like pricing. And in that respect, the guide of 57% to 57.5% is more conservative. Michael Binetti: Okay. And then I'm just curious a quick follow -- a quick couple of follow-ups. So you said -- I think you said the units grow about 10%, and that's based on some capacity constraints and your desire to control scarcity. What is the unit growth capacity if you weren't trying to control scarcity? Like what could you produce given where the facilities are at right now? And then Ivica, just to clarify, how much the Australia roll-up adds to revenues this year? Oliver Reichert: Michael, I'm taking the first part. This is Oliver. It is not really easy to comment this because it's like a really diverse picture on what kind of article are we talking about. That's why I mentioned this from a production capacity perspective that a clog, as an example, will digest double the time in minutes and production minutes than an average sandal. So in total, somehow the multiple is if you sell one pair in online. It equals more or less 2.5 -- 2.4 pairs in wholesale to reach the same financial impact. So this alone is a big shift from a unit perspective. That is also what you can see in our unit versus ASP comparison, and that's why we have this 2/3 units and 1/3 ASP situation. So the more we grow in wholesale, the more we are capacity restricted. So that's why we are constantly managing these channels as well and try to maneuver us through their article mix and our production minutes. And we're constantly capacity constrained. So that is the big jigsaw pass at the moment, we are deep diving in. And I'm pretty confident that we can explain it really very transparent and answer all questions in our Investor Day end of January in New York because then you will really understand that -- and it's -- I know it's pretty unique and it sounds super weird from outside, but our growth algorithm is not designed by demand, it's designed by our production capacity. And if people decide to switch to wholesale channels to buy our products. And if they decide to buy into more expensive price groups and more complex price groups, the overall capacity in millions in units are declining because we cannot deliver simply more of the same thing. Makes sense to you or... Michael Binetti: Yes, completely. And just -- yes, the Australia part, please. Ivica Krolo: Sure, Michael, it's Ivica again on the Australia part. So we expect overall an immaterial impact on the Australia acquisition for the 2026 P&L. The benefit of this acquisition over the next few years is we cut out the middleman and take Australia to its full potential in D2C and capture the full value directly in our P&L basically. In a way, Australia was a unique situation in that we had a long-time partner who was looking for retirement. And basically, this was driving the decision to directly enter this market. Operator: Your next question comes from the line of Dana Telsey with Telsey Advisory Group. Dana Telsey: As you think about the DTC channel, was there any difference in performance between e-com and the physical stores? And then with your opening of stores in 2026, where are those stores going to be located regionally? How do you think about it? And is there any difference in store size and where you're going? And then just lastly, for 2026 price increases, any particular way we should think about it or how you're thinking about pricing, whether it's on closed toe or clogs or open toe for '26? Mehdi Bouyakhf: Dana, this is Nico. I'm going to take the first part of your question. So as you know, retail is a very important growth pillar for us. We are currently at 97 doors, adding 30 net new stores. And thus, we are actually holding our promise. So we promised to come closer to 100. We're now at close -- very close to 100. What we also did is we actually accelerated the pace of our openings in the second half, adding 20 in the second half versus 10 in the first half. So really getting much more experienced in driving this expansion. Amongst others, we opened Milan, Mumbai and Singapore, so really key cities and key connection points for our consumers. For next year, we have plans to add 40 more. So that will bring us to 140, and that will bring us very well set up to reach a total goal that we stated of 150 stores by 2027. Whenever we open a store, they perform really well. So we are very, very disciplined with our openings and store locations selection. We will continue to find stores in the format of 100 square meters, 150 square meters, not AAA locations. We go right next to the AAA locations, and that is really driving the very healthy economics of each store. The new stores will continue to outperform the longer-standing ones. We achieved higher average transaction value driven by higher ASP and more units per transaction. And all this, while the same-store sales are up high single digit. So you see that retail is the strongest growing channel and will also outpace in growth our digital channel. With regards to digital, we do continue to see very, very strong growth opportunities in 3 areas: markets. So there are some underdeveloped markets, if you will, underpenetrated markets with regards to our digital, specifically in Asia and Middle East, where we launched later than in the more mature markets. With regards to consumers, we heard that young consumers, young demographics are underpenetrated by us. And so does -- that accounts the same for our digital business. And then on the product side, our expansionary categories like shoes, closed toe, EVA, professional are trending much, much better in our digital business. So this will also enable us to catch more demand and drive the business in our digital channel. So we'll see retail outpacing digital, while we also see substantial growth coming in, in our digital channel. Ivica Krolo: Dana, it's Ivica, on the pricing part. So as you know, we are reviewing pricing on a season-by-season and style-by-style basis and are very surgical to increase prices throughout the product portfolio. And why we're doing that, again, it comes back to the fact that we are a manufacturing company. So we know what our input costs are. We know what labor does cost. We know what raw materials do cost. And this is very much a bottom-up exercise that we continue to do as we have done in the past to pass through inflationary pressures, while at the same time, maintaining our globally aligned pricing structure. Dana Telsey: And any update on the Americas? Oliver Reichert: Very strong holiday season, Dana. It's Oliver speaking. Very, very strong holiday season. I mean do your check in wholesale doors, do the check in New York in the store. It's one of the must-have gifting items. We are very, very confident and very, very successful holiday season in the U.S. Operator: Your next question comes from the line of Simeon Siegel with Guggenheim Partners. Simeon Siegel: [Technical Difficulty] Oliver Reichert: Simeon, we can barely hear you. You have digital dropouts. You dialed in on the land line or... Operator: Your next question comes from the line of Adrien Duverger with Goldman Sachs. Adrien Duverger: So I have one, could you please comment on the performance of the newer products and the opportunity for continued increase of the price mix as well as the appetite for customers on these new products? And I have a quick follow-up on that, which is on the share of sales from the closed-toe shoes. I think you're now at 38%. What are your expectations for the long-term share of sales from these? Mehdi Bouyakhf: Adrien, this is Nico again. Thank you for your question. Great question indeed. So what we definitely see is that our diversification of product offering is really paying off. Particularly, we are very pleased to see consumers adopting newer closed-toe silhouettes. So closed toe is not just the Boston anymore. Non-Boston silhouettes are growing at the same pace as Boston. So we are truly diversifying our Clog business. And we don't just own the sandals category. We now own the sandals and the clogs category. So you'll continue to see closed toe outperforming open toe while open toe is still growing. And that is also something that we've actively -- that we will actively drive forward. So we'll bring back open-toe silhouettes. We'll rejuvenate open-toe silhouettes such as the Madrid, such as fine-strap sandals, the Florida, the Miami. So we'll give them more investment in product and give them more oxygen and daylight to let them flourish further. So where does closed-toe grow forward? Where does it go? You see that we have a very strong growth trajectory until now. We once said it will grow over 30%. We are now coming to 40% and even above. And we'll definitely continue to see this growing further. Closed shoes as a market is a huge market for us. Again, we see new silhouettes being adopted by our consumers very fast, like the Utti, Highwood, and we're also further diversifying that business into different platforms. Boots are performing very strong during the winter season, high price points. Consumers are not shying away from these products. And again, particularly in our DTC, you'll see these categories trending very well. Adrien Duverger: And maybe just on what I have you. What's the opportunity that you see from further price mix? So I think you mentioned you expect about 10% volume growth over the next few years. So should we assume that there is between like the 3% to 5% remaining is from price list and price mix? Is that how we should think about it? Ivica Krolo: Adrien, it's Ivica. Happy to take your question. So it's certainly a combination of both. So looking back to 2025, if you disaggregate growth, it's a mix of 2/3 with regards to units and 1/3 with regards to ASP, but certainly a positive contributor to higher ASP is definitely the mix shift that we are seeing. So consumers are choosing intentionally higher quality and premium execution, including closed-toe, as Nico mentioned. And clearly, this will be driving ASP besides, of course, that we will continue to take targeted like-for-like pricing. Operator: Your next question comes from the line of Mark Altschwager with Baird. Mark Altschwager: Can you hear me? Oliver Reichert: Yes, loud and clear. Mark Altschwager: Wonderful. With respect to sustaining the mid-teens growth over the next 3 to 5 years, can you talk a bit more about what's giving you the confidence that you can continue to add capacity at a fast enough rate to support that growth as the base gets larger, especially as it relates to both labor and component suppliers? And then as a follow-up, you talked about new capacity expansion for the core product and demand is skewing towards the higher-end product. Can you give us a sense of how EVA is trending and how the capacity that you've added in Pasewalk is playing into the growth algorithm? Oliver Reichert: Thank you for your question. As I said in the previous answer to the first question from Matt Boss, we are heavily increasing our preproduction facility in Portugal, which is really a key thing for us to speed up the processes and speed up the go-to-market sequence from our products. And just keep in mind that in the near future, we will probably have a half finished goods warehouse where we simply collect all the uppers and then finally push them into final assembly when needed. And then we -- the reaction time of this company to be in the market with the right article at the right door is very, very significant faster than today. The acquisition of [indiscernible] near Dresden, the factory we bought like 80,000 square meters for EUR 18 million. This will be ready in '27, more or less. And then they can fill the gap of final assembly lines because that's the bottleneck at the moment, as I said, and cork/latex footbed baking. Last but not least, I think you were in Pasewalk with us. The same space in Pasewalk next to us is about to be converted into a construction area. And there will be another 80,000 square meters of production space. And we will definitely keep a very high flexibility within these spaces to react on the different perspective of the markets. And you mentioned the EVA in Pasewalk. We are very happy with the EVA development, especially in the what we call elevated EVA. One example is just the Big Buckle EVA that's performing very well. But keep in mind, globally, we keep our EVA around maximum 20% share of business here. So it's a very planned high scarcity executed model from the EVA perspective. And in Asia, the growth is very strong, highest ASP in Asia. That's a very important message, I would say, because that's very rare that you create as a brand the highest ASP in the APAC region. That's what we're doing. And they are ready for this PU products, direct injected in molds, textile uppers, leather uppers, you name it. And all this will definitely come from Pasewalk. Operator: Your next question comes from the line of Sam Poser with Williams Trading. Samuel Poser: Can you all hear me? Ivica Krolo: Yes, we can hear you, Sam. Samuel Poser: So I guess we have 14 days or 13 days left in Q1. Can you give us like an update on what Q1 looks like in more specifics? I mean the quarter is over pretty much. So I just wonder, I know you said business is very good and so on. But could you give us some details on what the quarter looks like, please, is number one, in more specifics? Oliver Reichert: Sam, can I quickly jump in and give you the first answer? It's Oliver. Samuel Poser: Yes. Oliver Reichert: Okay. So you should expect -- I mean, Q1 is our smallest quarter, but it will be well above our guidance, okay? So easy. Samuel Poser: From a margin and from a revenue growth perspective or in what respect? Ivica Krolo: Sam, this is Ivica speaking. Oliver is referring to top line. And in terms of margin, we're not preannouncing margin for Q1 yet. Samuel Poser: Okay. Do you anticipate doing that prior to ICR or at ICR? Ivica Krolo: No, we're not going to do that. We will give more detail, Sam, though, at our Capital Markets Day end of January. Samuel Poser: And then secondly, I just want to focus on the factories. There's been lots of conversations about that. Within Pasewalk, Goerlitz and Portugal, how the existing framework of your production, you had currently -- you had recently said that, I believe, going into Q3 '26, you expect those production facilities to be pretty much optimized given all the changes. Now it's not to say you're not doing other things, expanding Pasewalk and the new factory near Dresden. But within that framework, is that still the same expectation? And should we expect production capacity to increase going into the back half of fiscal '26? Oliver Reichert: Sam, this is Oliver speaking. There will be no big impact other than optimization within our existing structure. But within '26, all the machines are ordered. So we're waiting for the machines to come and then we have to implement them and then we have to roll them out, find the workforce. So it is a constant optimization, of course, and we're constantly on the edge of the capacity, as you know, blowing every single horn that's available, but it is really tough at the moment. And the big capacity push will come once [indiscernible] is on the net to deliver output from a cork/latex standpoint and very urgently needed from a final assembly standpoint. The construction site in Pasewalk will be a longer game because that's simply grass land at the moment. So we have to build the building first. So that's on a midterm perspective. And Portugal is ongoing. And Portugal will double or triple their capacity from preproduction manufacturing standpoint, which is a huge amount, okay? But this is also in the ramp-up scenario. We need to order lines, machines and stuff. It's all done. But ramping up workforce, especially in this very complicated stuff like stitching, shilling and all this, it's not that quick. Operator: Your next question comes from the line of Paul Lejuez with Citi. Paul Lejuez: You can hear me now, hopefully. Oliver Reichert: Paul, we can hear you loud and clear. Paul Lejuez: Sorry about that. Curious about your regional plans for F '26. I think you talked about pairs being up 10%. Curious how that looks by region, how you're thinking about the 3 big regions. And also curious if -- given your capacity constraints, if you're having to restrict your distribution in certain regions, I think you had to do that once with APMA. Curious if you're facing that again now. Oliver Reichert: Thank you for your question, Paul. You're completely right. I mean this is the basement of our distribution strategy. It's engineered distribution. So with the light of margin perspective on the different regions, Americas, Europe and APAC. And I said it before, the highest ASP is coming from the APAC region. Yes, we definitely will shift more product into this region to further develop the strength of the brand. They're growing very nicely, best-in-class quality. That's an important thing. And I know you guys heard a lot of success stories in Asia, but they are always margin dilutive. There are always low ASPs, and they're always mass driven. So it's the opposite we're executing in APAC, and this is now relatively low-hanging fruit for us to shift also capacity into Asia and making sure these territories are well developed over time. And keep in mind, what we said at pre-IPO, our ideal world, not midterm, but long term will be 1/3 business share Americas, 1/3 business share Europe and 1/3 APAC. And right now, in APAC, we are at 11%. So yes, there's a lot of things we can do, and we should continue doing. And it's very encouraging what we see in this region. Impacts of tariffs and FX is not that bad in this region. So yes, it's the right direction, and you're completely right. Paul Lejuez: Any color you can give around the different growth rates by region just tied to your guidance, full year guidance for the year? Oliver Reichert: APAC is twice the speed of -- compared to the rest of the world. But that's steered. It could be quicker, but that's what we're doing. That's how we -- it's also -- the steering is coming from our capacity restrictions because, honestly speaking, if I have 10 million pairs of clogs available right now, I can send them over to Asia and they are gone in a week. So this is not the issue. I know it sounds super weird. But Paul, believe me, we are not demand constrained. It's all about the capacity. We don't have enough product, we cannot deliver anything. Operator: We have time for one last question, and that comes from the line of Janine Stichter with BTIG. Janine Hoffman Stichter: Yes, I want to ask a bit more about the B2B expansion. I think in the past, you pointed to the long-term opportunity to add about 5,000 doors on a base of around 12,000. What would the time line look like on this, especially given the capacity constraints? And how should we think about that as a near-term driver of B2B growth? Just wondering if there's any change to what we've seen recently with 90% of B2B growth coming from existing doors. Mehdi Bouyakhf: This is Nico. Thank you for your question. Yes, we said there is an opportunity for us when we select the right doors that are 5,000 that are underpenetrated by now. So far, we've been very, very disciplined in our distribution, our B2B. So since IPO, we didn't add any major number of partners at all. So growth is really coming from within through a broader assortment, through a deeper assortment that our partners are enjoying while maintaining a full price realization of above 90%. And we're going to stay very close to that discipline, while we also unlock new areas of distribution, particularly in sport as a recovery opportunity for our footbed, but also in the outdoors area. So that is something that will bring us a small amount of doors, again, very carefully selected that we will increase in fiscal '26 in those 2 areas. But rest assured, we will look at full price realization, we look at stock-to-sales ratio, and we'll not put too much pressure out there with regards to our own DTC. Operator: This does conclude today's call. Thank you for attending. You may now disconnect.
Operator: Greetings, and welcome to the Darden Restaurants Q2 Fiscal Year 2026 Earnings Conference Call and Webcast. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. You may be placed into the question queue at any time by pressing star one on your telephone keypad. If anyone should require operator assistance, please press star 0. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Courtney Aquilla, Vice President, Finance and Investor Relations. Courtney, please go ahead. Courtney Aquilla: Thank you, Kevin. Good morning, everyone, and thank you for participating on today's call. Joining me are Rick Cardenas, Darden's President and CEO, and Raj Vennam, CFO. As a reminder, comments made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Those risks are described in the company's press release, which was distributed this morning, and in the filings with the Securities and Exchange Commission. We are simultaneously broadcasting a presentation during this call, which is available on the Financials tab in the Investors section of our website at darden.com. Today's discussion and presentation include certain non-GAAP measurements, and reconciliations of these measurements are included in the presentation. Looking ahead, we plan to release fiscal 2026 third quarter earnings on Thursday, March 19, before the market opens, followed by a conference call. During today's call, all references to industry results refer to the Black Box Intelligence casual dining benchmark, excluding Darden. During our fiscal second quarter, average same restaurant sales for the industry grew 1.3% and average same restaurant guest counts decreased 0.4%. Additionally, median same restaurant sales for the industry grew 1.9% and median same restaurant guest counts decreased 0.5%. This morning, Rick will share some brief remarks on the quarter, Raj will provide detail on our second quarter financial performance, and share our updated fiscal 2026 financial outlook. Then Rick will close with some final comments. Now I'll turn the call over to Rick. Rick Cardenas: Thank you, Courtney, and good morning, everyone. We had a strong quarter that exceeded our sales expectations as each of our segments delivered positive same restaurant sales. Commodity headwinds were stronger than we anticipated as beef prices remained at historically high levels throughout the quarter. Our restaurant teams did a great job of being brilliant with the basics during the quarter, driving record or near record guest satisfaction scores across all of our brands. At the Darden level, we continue to leverage our four competitive advantages to enable our brands to compete effectively and continue providing strong value to our guests. The power of our scale enables us to continue to price below inflation over the long term and not pass all the costs on to our guests. While the breadth of our portfolio enables our brands to stick to their strategy, even if they are overly impacted by a single commodity. We opened 17 new restaurants during the quarter and are on pace to exceed our planned openings for the full fiscal year. These new restaurants opened faster than planned, collectively contributing forty additional operating weeks, versus our plan for the quarter. This is a testament to the outstanding job Todd Burrows and the entire development team led by Mark Braun have done to strengthen our pipeline. Olive Garden delivered positive same restaurant sales of 4.7% for the quarter driven by the success of the Never Ending Pasta Bowl promotion and first-party delivery combined with strong operational execution that led to all-time high guest satisfaction scores. For the fourth consecutive year, the starting price for the Never Ending Pasta Bowl was $13.99. Preference was strong and refill rates reached a record high, demonstrating that guests continue to find abundance and meaningful value at Olive Garden in this environment. First-party delivery through our partnership with Uber Direct continues to drive strong results. This channel attracts younger, more affluent guests who crave Olive Garden at home, value convenience, and order more frequently. These guests have a higher check average than dine-in guests. Uber Direct sales represented 4% of total sales for the quarter and approximately half of that was incremental. As we have discussed on recent calls, across the portfolio we are placing a greater emphasis on sales growth and reinvesting to drive long-term success. At Olive Garden, the success of first-party delivery is helping fund investments such as the addition of the lighter portion section on their menu, which features seven existing dishes with a smaller portion and a lower price. This section is designed to give guests more choices and is offered in addition to Olive Garden's regular portion sizes. Olive Garden has seen a double-digit increase in affordability perceptions from guests who order from the lighter portions menu and an increase in frequency among these guests, which should help build traffic over time. 40% of restaurants offered this menu during the quarter and they added another 20% of locations early in the third quarter. Olive Garden plans to complete the rollout system-wide in January. As we begin the third quarter, the Olive Garden team is poised to build on their momentum. They are currently offering two fan favorites for a limited time, ravioli de portobello and braised beef tortelloni. Thousands of Olive Garden fans requested the return of these iconic dishes, which included multiple online petitions to bring them back. Turning to LongHorn Steakhouse. The team's ongoing commitment to their strategy rooted in quality, simplicity, and culture continues to guide their success as they delivered strong top-line momentum driven by same restaurant sales growth of 5.9%. The relentless focus on executing every dish on their menu to their high standards was reflected in an all-time high Steaks Road Correctly score for the quarter. Their ability to consistently operate at this high level is enabled by having one of the most experienced teams in the industry. In fact, LongHorn further strengthened their impressive retention by setting their record low for team member turnover during the quarter. The investments LongHorn has made in food quality, combined with their grilling expertise, have built strong guest loyalty. And to further build on their leadership in food quality, LongHorn brought back a guest favorite for the holidays, the 14-ounce seven pepper crusted New York strip with brown butter sauce, which was met with enthusiastic reviews by guests and social media influencers. Same restaurant sales for our other business segment grew 3.1% during the quarter driven by strong performance at Yard House. During the quarter, Yard House's Oktoberfest event returned for the fifth year. This event continued to deepen guest engagement and drive results through limited-time menu offerings, that strengthen Yard House's competitive advantages of a socially energized bar and distinctive culinary with broad appeal. The event also featured a $5 refillable beer stein that was a hit with guests, with all steins selling out within the first few weeks. Also during the quarter, Yard House began rolling out first-party delivery through our partnership with Uber Direct. While the impact on total sales won't be as significant as what we've seen at Olive Garden, the team is pleased with the initial results and plans to continue rolling it out to additional restaurants in the third quarter. Same restaurant sales for the fine dining segment grew 0.8% for the quarter driven by strong performance at Ruth's Chris Steakhouse and improving trends at the Capital Grille. As guests continue to seek price certainty, Ruth's Chris brought back its limited-time offer featuring a three-course menu for $55. It was a key driver of sales and traffic growth and featured a new eight-ounce prime thick cut strip and two guest favorites, stuffed chicken, and salmon and shrimp. Each entree came with a soup or salad, an individual side, and a dessert. The Capital Grille's Wagyu and Wine event returned during the quarter, featuring the choice of a Dave's Finney Wine and Wagyu Burger for $35. This event delivered strong guest preference and sales momentum at the Capital Grille continued to grow throughout the quarter. I'm pleased with our performance as we move back into the back half of our year. Our brand teams have the appropriate plans in place and the power of Darden positions us well to win in a competitive environment. Now, I'll turn it over to Raj. Raj Vennam: Thank you, Rick, and good morning, everyone. As Rick mentioned, the second quarter was another strong sales quarter for Darden with top-line momentum exceeding our expectations. While elevated commodity costs driven by beef were a significant headwind for the quarter, we priced 130 basis points below inflation, as we remain committed to providing strong value to our guests. This large investment in underpricing inflation resulted in level margins being below last year. The near-record beef cost has sustained longer than we anticipated and is likely to remain elevated into the third quarter with some relief as we get into the fourth quarter. In the second quarter, we generated $3.1 billion of total sales, 7% higher than last year driven by same restaurant sales growth of 4.3%, the addition of 30 net new restaurants, and the acquisition of Chewy's in October. Both our same restaurant sales and same restaurant guest counts were in the top decile of the industry again this quarter. Same restaurant sales exceeded the industry benchmark by 300 basis points. And the positive gap widened throughout the quarter. Adjusted diluted net earnings per share from continuing operations of $2.8 were 2.5% higher than last year. We generated $466 million of adjusted EBITDA and returned $396 million to our shareholders this quarter by paying $174 million in dividends and repurchasing $222 million in shares. Now looking at our adjusted margin analysis compared to last year, food and beverage expenses were 90 basis points higher primarily due to elevated beef costs driving total commodities inflation of approximately 5.5% for the quarter. Restaurant labor was 10 basis points higher with total labor inflation of 3.3%. That's our labor in our comparable restaurants was favorable to last year driven by productivity improvements that more than offset pricing below labor inflation. Restaurant expenses were 10 basis points higher as sales leverage was more than offset by Uber Direct fees and brand mix with the addition of Chewy's. Marketing expenses were 10 basis points lower due to sales leverage. We had incremental marketing activity in the quarter that was funded by cost savings. This all resulted in a rational level EBITDA of 18.7%. Adjusted G&A expenses were 60 basis points favorable driven by leverage from sales growth and lower incentive compensation accrual as well as favorable mark-to-market expense on our deferred compensation. Due to the way we hedge mark-to-market expense, this favorability is fully offset in the tax line. Our adjusted effective tax rate for the quarter was 13.2%, and we generated $243 million in adjusted earnings from continuing operations which was 7.8% of sales. Looking at our segments, all segments grew sales for the quarter driven by positive same restaurant sales. The high beef cost pressured segment profit margins at all of our segments except for Olive Garden. Total sales for Olive Garden increased by 5.4% driven by strong same restaurant sales and traffic growth as well as the addition of 11 net new restaurants. The sales momentum continued from prior quarters with same restaurant sales in the top decile of the industry and outperformed the industry benchmark by 340 basis points. Olive Garden delivered its strong segment profit margin of 21.8% for the quarter, which was 30 basis points above last year even with an approximate 20 basis points of margin investment related to the lighter portions menu, and the continued impact of delivery fees. At LongHorn, total sales increased by 9.3% driven by same restaurant sales growth of 5.9% and the addition of 21 new restaurants. The sustained sales and traffic outperformance resulted in same restaurant sales and traffic in the top decile again this quarter. The LongHorn team is doing a great job of staying focused on their strategy and maintaining momentum despite elevated beef costs. Our measured approach in reacting to inflation resulted in pricing 320 basis points below inflation at LongHorn that resulted in a segment profit margin of 16.2%. Total sales at the fine dining segment increased 3.3% driven by positive same restaurant sales and the addition of three net new restaurants. High beef costs also had a large impact on the brands in this segment resulting in a segment profit margin of 14.8%, 280 basis points lower than last year. The other business segment sales increased 11.3% with positive same restaurant sales of 3.1% and the acquisition of Chewy's benefiting part of the quarter. The positive sales growth and the continued productivity improvements in multiple brands within this segment were not enough to fully offset the elevated commodity pressures from beef and the impact of delivery fees. This resulted in a segment profit margin of 13.4%, 60 basis points lower than last year. Turning to our financial outlook for fiscal 2026. We have updated our guidance to reflect year-to-date performance, the evolving commodities environment, and the expectations for the back half of the year. We now expect total sales growth for the year of 8.5% to 9.3%, same restaurant sales growth of 3.5% to 4.3%, 65 to 70 new restaurant openings, total capital spending of $750 million to $775 million, total inflation of approximately 3.5%, with commodities inflation of 4% to 5%, and approximately 116.5 million diluted average shares outstanding. All other aspects of our guidance remain unchanged, including adjusted diluted net earnings per share between $10.60 and $10.70, of which approximately 20¢ is related to the addition of the fifty-third week. We expect earnings per share growth in the third and fourth quarters to sequentially improve as the gap between pricing and total inflation narrows in the back half of the year. Specifically for the third quarter, we expect earnings per share growth in the mid-single digits compared to the third quarter of last year. In summary, we're pleased with our strong top-line performance and continued industry outperformance this quarter. While our pricing strategy amid elevated commodity costs has impacted margins in the near term, we believe it's the right approach to support our long-term success. As we move through the rest of the fiscal year, we remain confident in our ability to grow sales, manage costs, and deliver value to our guests and shareholders. Now back to Rick. Rick Cardenas: As I reflect on our performance, I'm reminded of the power of the platform we built over time and our ability to navigate whatever comes our way. When you look at our company, there are three key factors that we believe make Darden a great company and a great stock. First, our winning strategy grounded in our four competitive advantages and our commitment to managing the business for the long term has led to a long track record of success. Over our thirty-year history as a public company, Darden has achieved annualized total shareholder return of 10% or greater for any ten fiscal year period when considering Darden stock appreciation plus dividend yield. Second, we have a clear roadmap to grow our portfolio of iconic brands which includes two dominant brands, three high potential growth brands, and several balanced brands that are leaders in their respective categories. And third, our strong commitment to disciplined capital stewardship enables us to return capital to shareholders while making appropriate investments in the business for long-term success. I'm incredibly proud of the results we continue to deliver for our shareholders and we remain committed to executing our strategy to drive shareholder value now and for generations. Finally, I want to take a moment to acknowledge the recent passing of Darden's first CEO, Joe Lee. Joe was a visionary leader whose leadership helped shape not only Darden, but the entire casual dining industry. I was fortunate to work with Joe, and one of the things that always stood out to me was the care and compassion he had for his people. He always said, if you take care of your people, they will take care of your guests. Those words remain fundamental to Darden's culture today and they are especially meaningful during the holidays. Now is the busiest time of the year in our restaurants, and I'm so proud of our 200,000 team members who do such a remarkable job of nourishing and delighting everyone they serve. On behalf of our entire leadership team and the Darden board of directors, thank you to all of our team members for everything you do. I wish you and your families a happy holiday season. Now we'll take your questions. Operator: Thank you. We'll now be conducting a question and answer session. You'd like to remove yourself from the queue, please press 2. Once again, that's 1 if you place in the question queue. And please ask one question and one follow-up, then return. Our first question today is coming from Brian Bittner from Oppenheimer. Your line is now live. Brian Bittner: Good morning, and happy holidays, and congratulations on solid top-line results. First question is on the lighter portions menu and the strategy. As you roll that out to 100% of the Olive Garden restaurants here in January, how impactful do you think this will be to sales just based on what you've seen so far? Is it something that actually gonna be able to identify here from the outside or is it more of an impact to internal metrics like value perception, etcetera? Rick Cardenas: Hey, Brian. There is an impact to internal metrics, value perception, affordability, and portion and the right portion size. But we will see some impacts to sales in a couple of ways. In the long term, as we said, we've got higher frequency in the guests that are ordering this versus the guests that aren't. And the guests that aren't are increasing frequency as well. So this is a good, tough spend. In the short term, there will be a little bit of check mix. So as Raj mentioned, in the second quarter, we had about 20 points of mix from 20 to 30 basis points of mix from the lighter portion. As we roll it out to more restaurants, there will be a little bit of a bigger mix impact. But that's being offset by the other things we have. With the strong performance of delivery, it might not be necessarily in mix offset, but in total sales. So we believe this is the right thing to do for our guests in the short term and the long term. And that's why we've actually accelerated the rollout. Brian Bittner: Thanks for that. And my follow-up is on labor and the margins on labor. Over the last couple of quarters, you've seen some labor margin deleverage despite growing comps over 4%. The last couple of quarters. What do you attribute this to? Because historically, you've been able to better leverage labor margins on these types of comps. Is there any specific investments going into labor or mix issues within the brands worth pointing out? How are you thinking about the ability to maybe better leverage labor margins moving forward? Raj Vennam: Hey, Brian. This is Raj. So from a labor margin perspective, I think I said in my prepared remarks, if you actually look at our comparable restaurants, which is where we obviously had the same restaurant sales growth, you have actually labor leveraging. We actually saw labor improve year over year even with us underpricing inflation. Because labor inflation, as I said, was about 3.3%. Our pricing was 2.6%. So we were able to offset that underpricing inflation and drive labor leverage through productivity improvements. The reason you don't see it at the total Darden level is because of the growth over the last year and the acquisition of Chewy's. And so that's really what you gotta look at, the brand mix combined with some of the nuances. So it's more, I would say, idiosyncratic versus a systematic issue. We actually feel like as we go through the back half, you should start to see labor start to be more of the good guy. Operator: Thank you. Next question is coming from David Palmer from Evercore ISI. Your line is now live. David Palmer: Thanks, and congrats on this particularly this Olive Garden same store sales result in the quarter which should help with concerns about that brand lapping the tough comparisons coming up in the fourth quarter, but I'm wondering, what is your guidance generally anticipate with regard to Olive Garden comps going into that quarter? Are you factoring any benefit from fiscal stimulus? And just generally, what do you think you'll be doing in general to help maximize your chances of keeping positive comps going over those tough comparisons? And I have a quick follow-up. Raj Vennam: Yeah, David. Thanks for those comments. So from a same restaurant sales perspective, if you look at our guidance, we talked about for the full year, 3.5% to 4.3%, which essentially means roughly 2.5% to 4% in the back half. Which would imply basically flat traffic at the midpoint of that range. I don't want to get specifically into the brands, but here is how we think about the total. When we look at the, you know, take into consideration the first half of the year, some macro uncertainty, but potential consumer spending benefit from the fiscal stimulus in early 2026. And, you know, we have several initiatives at the brand levels to drive sales. We feel like the outlook we provided is reasonable. And so I think that's really all I have to say on that front. Thanks. David Palmer: You know, the other thing I'm curious about is how you're thinking about pricing versus the path of inflation on beef and steak? Clearly, I think you said something about your pricing was trailing inflation by three points or more. I think I didn't quite catch that. At LongHorn. So I'm just wondering about whether you think that does your guidance anticipate additional pricing at LongHorn through the rest of the year? Any thoughts on that? Thank you. Raj Vennam: Hey, David. So yeah, on the pricing front, let me start at a bigger picture and then get back to LongHorn specifically. So we did price, you know, for the quarter at the Darden level was about 130 basis points below inflation. You know, one, we're taking some pricing. And we do expect that to cut in half by the time we get to the third quarter and actually catch up to inflation as we get to the fourth quarter, primarily because of But also we expect inflation to come down, especially as we go into the fourth quarter. And, specifically at LongHorn, yeah, I don't expect LongHorn to have underpricing by 320 points as you move forward. We'll take some modest price increases. But, look, that's the benefit of the portfolio. Right? We talked about Rick mentioned this in his prepared remarks. That when there is some near-term pressure on one of the commodities, the portfolio provides the air cover to be able to kind of deal with this for the near term. And so all that said, look. Our bias is to minimize pricing, and we'll do what we think is right to protect the guest even if that means some margin erosion in the near term, primarily, we're talking about second and third quarter because we expect margin growth as we get into the fourth quarter. Thank you. Operator: Thank you. Next question today is coming from Brian Harbour from Morgan Stanley. Your line is now live. Brian Harbour: Yes, thanks. Good morning, guys. Raj, could you maybe just talk more about the beef piece and what kinda gives you the confidence that that starts to come down by 4Q? Raj Vennam: Yes, Brian. I guess maybe let me start with what happened in the second quarter and how we're transitioning and how we see this because beef prices peaked in our fiscal second quarter. And they were well above the normal seasonal trends due to supply constraints that stem from packer cutbacks, and, you know, halted Mexican cattle imports due to this screw worm outbreak. We have seen retail demand destruction accelerate over the past few months. And we think November was actually down about 14% demand volume down at in steaks. Prices have started to improve in recent weeks, and we've been able to take some coverage for the back half. I think we want this morning, we showed about 45% coverage for the back half. And actually, as we're speaking, our team is getting a little bit more coverage. So and, so that's and the prices that were the coverage we're getting at is at the levels that are in line with our updated thinking. And all of that is contemplated in our guidance. You know, if you look at what happened in the near term, prices are expected to ease a little bit as beef production actually increased to near prior year levels the last couple of weeks driven by packer profitability and lower cattle prices. Now there is enough inventory on feedlot to support recent production increase. Brian Harbour: Okay. That's helpful. Thank you. The with first-party delivery is 4% of sales, you know, is that kinda where you expected to be at at this point? Or I guess, you know, what else do you think could continue to push that higher? If you know, in fact, want that, are you still seeing sort of sequential increases in delivery mix? Rick Cardenas: Yes, Brian, we're really pleased with 4%. As you recall, we didn't do any marketing. You didn't know. But we didn't do any marketing in Q2. We're at 4%. I think the way that would increase is if we do some more marketing and get more people into it, but it's tracking pretty closely to our overall to-go business. And we feel good where that is with the incrementality we're getting. But if we want to drive that up, we have some options on the marketing side. Operator: Thank you. Next question today is coming from Jacob Aiken-Phillips from Melius Research. Your line is now live. Jacob Aiken-Phillips: Hi, good morning. So I want to ask on Olive Garden delivery. As delivery grows, the income and travel will stay where it is or get better because it's these folks that are ordering delivery or higher frequency, and then just more broadly, you've talked about guests moving between channels depending on value or occasion. And, lower, a little bit younger and more affluent. So as it grows, if it continues to grow, we would expect a little bit more. Have you seen any meaningful shifts in where full service or casual dining fits into the broader food spend mix? Rick Cardenas: Yeah. As you see our sales performance, in the casual dining industry itself, I think the industry has been growing faster than other segments. And we've been growing faster than the industry. So I would say that we're continuing to take share from casual and we're taking share from a little bit on the limited service. Operator: Thank you. Next question today is coming from Jake Bartlett from Truist Securities. Your line is now live. Jake Bartlett: Great. Thanks for taking the question. My first was about marketing. And marketing as a percentage of sales was down a little bit in the second quarter, I think roughly flat in the first. What are your expectations for the year? Is it still the 10 to 20 basis points? And I guess that would imply acceleration, maybe if you can confirm that. And then I have a follow-up. Raj Vennam: Hey, Jake. So recall we said at the last quarter, I think we talked about we got about, you know, call it roughly $20 million of savings in marketing. It's all the work our, you know, great work our teams did to go back and take a look at how we spend the dollar. So anyway, when we take that into consideration, that helped increase marketing activity even though the dollars were basically flat to last year. Now as we look at the full year, we're probably closer to, you know, somewhere around 10 basis points increase year over year. But if something changes, we'll update you next quarter. Jake Bartlett: Okay. And, you know, my follow-up was just on the macro environment. I'm, you know, not sure if I heard you kind of, you talk about what you're seeing from a consumer perspective, lower income whether some of the weakness is bleeding up into the middle income, you know, what is the baseline macro environment that you're basing the back half sales guidance on? Rick Cardenas: Yeah. I would say that we see the same reports you see we've said that before, but the consumer is still resilient. They're being cautious. As we've said a few times, the weaker consumer sentiment doesn't necessarily translate into reduced spending. During the quarter so this is what's happening with our brands. During the quarter, our casual brands saw an increase of visits year over year. From guests within middle to higher income groups. So it hasn't kinda moved up for us to the middle income group with the largest growth, though, coming from our higher income households. We did see strong traffic growth from guests 55 and over as well. So on the demographic side, but there was a little pullback in those earning less than $50,000 in the casual brands. But we'll I'll end it with the way we always talk about it. We know casual dining is the number one category where consumers intend to treat themselves and indulge. When they're thinking about where they spend their hard-earned money, they want to go to a place that they get a great value. And a good experience. For a great price. So we'll continue to focus on delivering an excellent experience and deliver value for every guest that chooses to dine with us. Operator: Thank you. Next question today is coming from Andrew Charles from TD Cowen. Your line is now live. Andrew Charles: Great. Thank you. Raj, just curious, with the updated same store sales guidance, does that embed any incremental pricing? You talked about the higher inflation forecast and you're not going to fully price to offset inflation. Just curious if there's an increased pricing factor contemplated within the updated guidance? Raj Vennam: Yes, Andrew. There is a little bit of increase in price. As I said, we actually expect our pricing to be closer to mid threes in the back half, for the full year to be close to 3%. So if you think about where we started the year, I think we were 2.2% in the first quarter. 2.6% in the second quarter. So there's a little bit of an increase there. That we incorporated into our guidance. Andrew Charles: Very good. Thanks. And Rick, in the past, you've laid out your hesitations around listing Olive Garden on third-party delivery. I'm curious if any of those pieces around you've laid in the past, like data sharing, tip sharing, the ability to throttle it on and off. Do you believe are better addressable as ultimately contemplating the decision to add Olive Garden to third-party delivery? Rick Cardenas: Yes, Andrew. I would say the two big third-party delivery providers know what our concerns are on third-party. And as long as we get a solution for those concerns, then we would look at it. It wouldn't make sense for us not to look at it, but we really do have some concerns, and they know what they are. Andrew Charles: Very good. Thank you. Operator: Thank you. Next question is coming from Jeffrey Bernstein from Barclays. Your line is now live. Jeffrey Bernstein: Great. Thank you very much. My first question is just on the comp commentary. Just I think Raj, you mentioned that the favorable gap to the industry improved through fiscal 2Q. Was wondering whether you would assume or you are assuming that that continues, maybe you have some quarter to date third quarter numbers, but your assumption for the back half of the year in terms of maybe a further widening of that gap? And then I had a follow-up. Raj Vennam: Hey, Jeff. Look. We did see an increase in our performance. And we've said historically when the industry slows down a little bit, we have widened the gap, you know, and as we look at the back half, we don't really start with what the industry numbers are. We actually look at a lot of, you know, what's macro and then all the things I mentioned about the brand initiatives. Because you know, industry is a representation of some of it, but not all of it. And so we just, you know, we do it differently. And so I don't want to comment on what we expect the gap to be going forward. Jeffrey Bernstein: Understood. And then the follow-up is just on the Uber addition. It sounds like Yard House is next up, third in line, therefore, behind Olive Garden and Cheddar's. I think you mentioned it's not likely to be as meaningful of a contributor as it is more of a bar type concept. But just wondering where LongHorn sits or where I know you don't dictate it, so where perhaps management of LongHorn specifically. Think about it. It would seem like that's the next big brand that could have more of a meaningful contribution offsetting that, I know often discussed that maybe their food doesn't travel as well. So just wondering your updated thoughts in terms of whether LongHorn could add 1P delivery? Thank you. Rick Cardenas: Hey, Jeff. I'll start with the Yard House part. We don't anticipate it to be as big an impact because Yard House is a smaller brand. Not just because they're a bar, but they also do a little bit lower to-go business. So you know, you think about when we implemented it at Olive Garden, and then at Cheddar's, the percent to-go the percent delivery aligned up pretty well with the percent to-go. So you know, Cheddar's right now, I think, is doing about 15% off-premise. LongHorn does about 15% off-premise. So it's not a small off-premise business. And we do know that when guests order at LongHorn off-premise, the mix is different. So they order more chicken and seafood, and a little less steak than they do in the dining room. So, you know, it's something that LongHorn is learning from the other brands. To see if it makes sense for us to go onto Uber Direct. And if it does, then we'll start testing it. But we don't have anything to say about that right now. Operator: Thank you. Next question today is coming from Sara Senatore from Bank of America. Your line is now live. Sara Senatore: Thank you. I was interested just to on the topic of value at sounds like that's resonating even actually in fine dining. Talked about these sort of combos and these you know, and the $55 at Ruth's. I guess, are you bringing in different customers to the across the brands? I mean, I know you mentioned maybe some softness in below 50%, but if I just think about you know, while the pricing may be up low single digits, there's presumably some negative mix and the sort of entry-level price points are lower across sounds like across maybe all your brands. So are you seeing different come in, for that? Or is it just more increasing frequency among the customers you do have as you offer these kinds of very accessible price points? Rick Cardenas: Yes, Sara. Most of our promotions really help our core customers. We are seeing a little bit of an increase in new customers or customers who haven't seen in a while that when we do these, but we actually see an increase in our core too. So it's not targeted to get new people. It's targeted for anybody. And we do see a little bit of a mix at Ruth's Chris when we do the $55 prefix menu but that's because guests are looking for certainty and price certainty. And so that's what we're giving them. And it drives quite a bit of volume at Ruth's Chris, and it's a good thing for us. It's not a it's a profitable deal for us. Sara Senatore: Right. Right. Thank you. Understood. And then just on the follow-up, Raj, you mentioned, I think that demand has declined about 14% November for beef. I guess do you are there certain kind of rules of thumb about, you know, what that would mean for beef prices just as I think about it. It seems like this is the first time we've really seen, like, retail demand pull back. So just trying to understand, you know, how that translates into you know, kind of the market prices for beef? Thanks. Raj Vennam: Yeah. I would say, you know, the last few months, have been different from what we would have seen historically. Historically, there was retail demand destruction. You saw the prices come down sooner. I don't want to get into a lot of the dynamics, but there is something with how the between the packers and, you know, how things are working. It seems like there is some constraining of supply, but it's hard for us to really know what's happening. You know, maybe there are other challenges. But so it's really going to be a function of how much production is out there. Right? And so I yeah, I don't think we have a good crystal ball on that. But I did share we are seeing some, you know, some green shoots, and that's, you know, that are actually starting to see the car coverage that comes come more in line with our expectations. Operator: Thank you. Next question is coming from Jim Salera from Stephens. Your line is now live. Jim Salera: Hey, Raj. Good morning. Thanks for taking our question. Raj, I wanted to start and maybe ask if you could give us the comp components for Olive Garden breaking out particularly mix and traffic? And then as an add-on to that, are you able to give us any details around the type of consumer that you're seeing in the near term with Olive Garden, given that it's a well-established brand, but they have a lot more avenues that consumers can access the brand. I wonder if that has any noticeable changes in the type of guests, whether it's income level, age, group sizes, anything like that you could provide would be great. Raj Vennam: Yeah. So from a guest, from Olive Garden breakdown, the comp same restaurant sales were 4.7%. The traffic as we measure was 1.7%, but when you add the catering of 1.1%, basically a traffic growth of 2.8%. And their pricing was, you know, 2.6%. So there was some negative mix, but also there was some help from Uber Direct fees. But that's the mix of the traffic and the sales. From a guest perspective, I think Rick already addressed it in the script. In or in his prepared remarks. About we're seeing more increased growth across, all income levels above 50k. And we're seeing a little bit more growth from the as we move up the age spectrum, there's a little bit of a pullback the below 50k and lowering, you know, lower or younger folks. But that's really it. Jim Salera: Okay. And then if I could shift gears a little on LongHorn. Continued outperformance there, I think value stake in general. Is there any way for us to maybe match that up with the outperformance in fine dining as well? Because I think a lot of people expect the value to continue to do well, but we're surprised by the outperformance in fine dining. I don't know if there's a read to make there if there's some maybe aspirational guests that are accessing fine dining or if we just reached a point where you know, we've lapped enough and the sales base is lower that we can get back to positive on fine dining. Rick Cardenas: Yes, Jim, start with LongHorn. And I think LongHorn their outperformance is driven by years of what they've done focusing on their strategy. Continue to price a little below inflation, invest in their food, and cook their steaks better. And that's been very helpful for them. Now I think they may be benefiting right now with such a high price of beef. That consumers are actually going to LongHorn instead of eating at home. And when we talk about the 50k consumer, under 50k, think 50,000. So interesting. They have a higher check than Olive Garden, but they grew their guest count at an under $50,000 range. That could be because such a disparity between how much you have to pay in the grocery store versus what you pay in the restaurant could be driving some of the traffic growth. But it is impacting their margin. So, on the fine dining side, I'll finish with one other thing at LongHorn. I still think they might be taking a little bit of share from fine dining. That said, fine dining had a good quarter this quarter. The trends are improving. And it may be that we're getting closer to kind of clearing everything out that happened during COVID. We're seeing some good value some good performance at Ruth's Chris, Capital Grille, had a good quarter. But, you know, we don't it's not over yet. We've gotta see that continue for a while to feel really great about it. We feel good about it. We only feel great about it. So you know, as we think about what's happening in the industry, we continue to say that as long as we do the things that we're supposed to do, provide a great value, cook the food properly, give a great experience to our guests, they're gonna be coming back. Jim Salera: Great. I appreciate the color. Operator: Thank you. Next question is coming from Lauren Silberman from Deutsche Bank. Your line is now live. Lauren Silberman: Great. Thank you, guys. Can you just help unpack what you saw in terms of cadence of actual comp as you move through the quarter? I know there's a lot of volatility and noise in the industry. And then anything that you can provide on what you're seeing quarter to date as well as differences that you may be seeing across regions? Thank you. Raj Vennam: Hey, Lauren. I want to get into the quarterly cadence of comps, but I'll just say from an earnings perspective, I think we kinda provided the high level how we're thinking about it. It's really more driven by pricing. As I said, pricing gap to inflation is expected to cut in half as we get into the third quarter. As we take a little bit more price and inflation actually is probably closer to Q2 level. But then as we get to the fourth quarter, we expect pricing to go up a little bit more and inflation to come down a little bit more. And so that's kind of why we talked about what we expect the earnings growth to be more in the third quarter to be in the mid-single digits. But I don't want to get too much into the quarterly sales comp. Lauren Silberman: Okay. And then just on stimulus, there's some excitement about stimulus into '26. If you go back to prior fiscal stimulus, which brands tend to benefit the most in your portfolio? And do you see it through traffic or average check? Rick Cardenas: Yeah, Lauren. I would say all of our brands benefit from stimulus depending on how it comes in. But I will say that if you think about the folks that benefit from no tax on tips, and no tax on overtime, they may be a median income and lower. So that could help our brands like Olive Garden or Cheddar's. Or Chewy's. That have a little bit higher mix there. But all of our brands benefit when there's stimulus that gives more money to consumers. Operator: Thank you very much. Next question is coming from Peter Saleh. Your line is now live. Peter Saleh: Great. Thanks for taking the question. I just wanted to follow-up on the conversation around the marketing efforts around Uber Direct. I think you guys mentioned you didn't do any marketing this quarter. Can you just talk about that decision? And what's the game plan for the back half of the year? Are you planning on increasing marketing around that effort? Any thoughts on that would be helpful. Rick Cardenas: Hey, Peter. The reason we didn't do any marketing on Uber Direct in the second quarter was we had just kind of done some in Q1, and we had other things that we wanted to spend our marketing dollars on. Particularly NeverEnding Possible. NeverEnding Possible is our best promotion at Olive Garden. And, you know, I think others had some concern that we were wrapping on NeverEnding Possible and how that would go. And as Raj mentioned, our gap to the industry grew every month in the quarter. Even though NeverEnding Possible was kinda coming towards the end of the promotion period. So we think that we were better off spending marketing dollars on NeverEnding than we are on delivery. At that time. I can't comment on if we're going to do it in the third or fourth quarter. But it's something that people will see pretty quickly if we do. Peter Saleh: Great. And then just following up my last question on tariffs. Is there any sort of update on the impact there, tariffs on either commodities or on development costs? I think in the past you had mentioned there was maybe a slight impact on development costs from tariffs. Just any update on that front would be helpful too. Raj Vennam: Yeah, Peter. Not a lot. I mean, at this point, you know, of our commodities inflation includes all the tariff impact. You know, it's in the tens of basis points as a percent of sales, which is in line with what we had indicated earlier. From a construction cost, I'd say we're still, you know, from the data we're seeing, it's in that mid-single-digit impact. No change there. Operator: Thank you very much. Next question is coming from Jon Tower from Citi. Your line is now live. Jon Tower: Hey, great. Thanks for taking the question. Maybe going back to the small plates that you're rolling out now and getting it done by January. I'm just curious, have you tested any media behind it? What's your intention behind doing that? Obviously, you're seeing a bit of negative mix now that you've rolled it out to some of the stores. So, how are you thinking about communicating it to guests? And, you know, obviously, there could be some pressure on the business if you were to market it to them so, how are you thinking about that the trade-off there? Rick Cardenas: Yeah, Jon. Currently, we're not expecting or we're not thinking about marketing it to our guests. Because it's doing pretty well on the menu the way it is, and it's driving a little bit more frequency and the guests should order it. And maybe the word-of-mouth from other guests will do that. But our plans right now don't include marketing it. But those could change. Jon Tower: Okay, and is this something that will be available to delivery so one p guests as well? Rick Cardenas: Yes. The way we think about 1P is if it's on our menu, it's probably available for delivery. Jon Tower: Okay, cool. And then just on the unit growth update, it's nice to see you guys taking up the numbers by another five potentially for the year. Can you just give us some color on where you're seeing those numbers or what brands it's coming from? And then is this just a pull forward from what you were thinking for fiscal 2027? Rick Cardenas: Yeah, Jon. When we're talking about five restaurants, it's a couple of brands that are driving that. So without telling you exactly which one, because that can change throughout the year. We end up at fiscal year. So we did say 65 to 70. It isn't necessarily a pull forward from next year that doesn't get backfilled by other brands. So don't anticipate that this year's growth a little bit ahead of plan will damper next year's because our teams are out there working hard going and finding sites, and getting deals done faster than they had before. And as you recall, in the June call, I said, that we are farther along in development than any point in any June we've had in years. So we feel really good about it. And, you know, that team is still doing great work to get us more sites. Jon Tower: Great. Thanks for taking the questions, and happy holidays. Operator: Thank you. Next question is coming from Jeff Farmer from Gordon Haskett. Your line is now live. Jeff Farmer: Thank you. With all the pushes and pulls, how are you guys thinking about the fiscal 2026 restaurant level margin versus fiscal 2025? Raj Vennam: Hey, Jeff. I would just, you know, refer you back to the long-term framework, and we've talked about, you know, that we put out at the beginning of the year, and we said we're on earnings after tax margin of flat to positive 20 basis points. I think our guidance still implies we're going to be in that range. You know, give or take 10 basis points, but that's kind of how we look at it. I don't we don't want to get too bogged down on any one level of one line item. We manage the business holistically to get a good return to the investor. And I would encourage you all to look at it through that lens. Jeff Farmer: And then with your top line exceeding expectations for the second consecutive quarter, I appreciate that there's some incremental costs or greater than expected costs that you guys are incurring. But are there areas where you're increasing reinvestment relative to prior expectation with that better top-line performance? Rick Cardenas: Yes, Jeff. We are making investments with these incremental sales primarily, it's in the lighter portion section on the Olive Garden menu. We're rolling out faster than we anticipated. We had originally expected to roll it out over the fiscal year and maybe even into fiscal year, but it's doing so well. And the delivery is doing so well. We just decided to keep going. And then we're also making big investments in still pricing below inflation. Operator: Thank you. Next question is coming from Dennis Geiger from UBS. Your line is now live. Dennis Geiger: Great. Thanks, guys. I just wanted to ask the latest on the operational efforts or the speed of service efforts. I know it's a longer-term initiative that you've touched on previously, but just any updates on the implementation of that or how you're thinking about the plan? Rick Cardenas: Yeah, Dennis. Every brand's implementing it a little differently depending on what they need to do. I would say that some brands are getting their speed up faster than other brands. All brands are making some improvement. And, again, this is gonna take a lot of effort and a lot of time to convince a group of folks that they have to do something a little differently than they thought. And to help the teams understand that the guests want things faster, and we don't really get a whole lot of complaints about being too fast. We get about being too slow. So those are the things that we have to keep doing. This is changing people's habits. And that takes a while. But we're seeing some improvement. Dennis Geiger: Great. Thanks, Rick. Just to follow-up on that, I know the genesis of the plan is to improve the customer experience, etcetera, more so than table turns, I believe. But an obvious benefit over time if this goes well presumably is your table turns move notably and maybe there's a traffic benefit that you from this. Is that fair? Rick Cardenas: Absolutely. I think especially during peak times, if we can get the speed better, then table turns should speed up. And it would increase traffic during those times. But I think it'll increase traffic long term anyway. Because people are getting the experience they want at the pace they want, and they'll come back more often. Dennis Geiger: Makes good sense. Thanks, Rick. Operator: Thank you. Next question is coming from Andy Barish from Jefferies. Your line is now live. Andy Barish: Hey, guys. Good morning. Could you give us just kind of a Cheddar's brand update and, you know, not a lot of call out there. I imagine there's some pressure just given the success of some big Bar and Grill concepts right now, but just kind of where that stands and what you might look at as a key for more unit growth there? Rick Cardenas: Yeah, Andy. Cheddar's is part of the other segment. The other segment also grew same restaurant sales. And Cheddar's didn't disappoint. So they grew their same restaurant sales as well even if other bar and grills are kind of out there talking a little bit more a lot more about value. Cheddar's is still doing what they do. Provide a great everyday experience, with Wow pricing. The other thing that we've been able to do over the years is to significantly improve their operational turnover. So if you think about turnover, when we bought Cheddar's, it was well, well above industry average, and now it's below industry average. It's much closer to Darden averages for turnover. And that means a better experience. And so we do believe that Cheddar's is one of those brands that we I mentioned earlier that have high potential for growth. And what I would say is I want to remind everybody that we think that growing way too fast is an issue in the industry. So our growth rates for any of our brands won't exceed 10%. But for Cheddar's, this year is the year that they're kind of finalizing and building their pipeline. And so it might take a year or so before you start seeing a little bit more growth at Cheddar's. Andy Barish: Thanks. Appreciate it. And then Raj, you just go through, I missed some of the Olive Garden, the components of same store sales. Raj Vennam: Sure, Andy. So the traffic was, as we measure, was up 1.7%. Catering was another 1.1%. So I'd say really, the traffic growth was 2.8%. And then the check was 2.6%. And then not check. Sorry. Pricing was 2.6%. So yeah. If you look at it through that lens of 2.8%, then the check the implied check would be 1.09%. Operator: Thank you. Next question today is coming from Christopher O'Cull from Stifel. Your line is now live. Christopher O'Cull: Yes, thanks for taking my question. Rick, is there a plan to take the smaller portion approach with any of the other brands? Rick Cardenas: We do have another brand testing smaller portions of current menu items. But they're doing it in a different way. And not as many items. So, you know, there are some brands that lead to being able to do different kinds of portions based on the protein. And so other brands already have it. So you think about LongHorn has different sizes for some steaks, they're testing a little bit more. They have different sizes for their chicken tenders, so does Cheddar's, I believe. So we do have other brands doing it, but not in the same way. We don't have a separate section on the menu for it. Christopher O'Cull: Okay. And just based on the company's research on GLP-one usage, do you see a need to make any additional changes beyond the smaller portions to kind of accommodate these consumers? Rick Cardenas: You know, we're continuing to monitor the usage and the impact on eating and drinking. It's impacting drinking more than it's impacting eating, especially in our kind of brands. Data that we see is they're basically pulling back on some restaurant visits, but more so limited service. That said, you know, the lighter portion section is helpful for that, but we aren't doing the lighter portion just for GLP ones. We're doing it to give all of our guests more options. It just so happens to benefit the consumers that might want smaller portions that are on GLP one medications. And we have a lot of options like that in all of our menus. Operator: Okay. Great. Thanks, guys. Thank you. Next question is coming from Andrew Strelzik from BMO Capital Markets. Your line is now live. Andrew Strelzik: Hey, thanks for taking the question. Wanted to ask about your comments that the all-time delivery was tracking with a broader off-premise business. Does that surprise you at all? I mean, it's supposed to be a different guess. It's as incremental as it is. Earlier in the life cycle. Just curious for your perspective on that. Rick Cardenas: No, Andrew. It doesn't surprise us. They're more similar to off-premise guests than on-premise guests. So if you think about Olive Garden, and the percent of sales they do with ToGo, and you look at the ratio of what they do off-premise versus delivery, then I would expect that same ratio to happen at our other brands. Because they are more similar. Our off-premise guests that are not delivery are also a little bit higher frequency than on-premise guests. These are just the delivery guests are even higher frequency. So it wasn't surprising that the same kind of mix happened at other brands. Andrew Strelzik: Okay. Alright. And then just curious on the changing CapEx guide. Is that all the new units and with the updated new unit guide, you're close to the low end of your updated range. What's a realistic timeline to pushing kinda higher towards the higher end of that range? Thanks. Raj Vennam: Well, so let's start with the CapEx part of it. CapEx is really a function of, you know, saw the openings happening sooner than we planned at the beginning of the year. And, again, kudos to the team for doing a great job on that. But, you know, it's also a function of what we're, you know, as we fill up the pipeline for next year, because the spending this year happens for some of the restaurants opening, especially in the front half of next year. So we feel good about the pipeline. We just updated our framework to reflect 3% to 4% unit growth, contribution from new units. And we think we're going to be in that range based on what we provided here. Operator: Okay. Thank you. Next question is coming from Danilo Gargiulo from Bernstein. Your line is now live. Danilo Gargiulo: Thank you. Stepping back and looking at the long term, you had been outperforming the industry for quite some time. And I was wondering if you were to decompose this outperformance versus the industry, on which consumer course are you winning the most? And I don't mean just by income level, but also maybe occasions, age, and as you're maturing your brand, how do you see this outperformance continue? Rick Cardenas: Yes, Danilo, I would say granularity of data on where we're outperforming more is a little bit harder to get because we don't know where other parts of the industry are getting their guests. We do know that we've had over the last couple of years a little bit better performance in our higher income consumer than not. But I would say during COVID, we had a great in our lower income consumer. So it's really hard to say where we're getting the outperformance versus the industry. I can just tell you we've got a great portfolio of brands that meet all the different consumer needs, and so if a higher-end, higher-income consumer is feeling great, we've got great brands for them. If a lower-income consumer is feeling great, we've got great brands for them. So that's the way that's the beauty of our portfolio. And that's what makes us pretty different than most. Danilo Gargiulo: Thank you. And then I want to follow-up on your comment on GLP-one. Specifically, think your brands have enough flexibility within your menu to offer different options for consumers and solve different needs. I was wondering if you can comment also on how the spending behavior is changing, just on the hardcore mix, but also on the eating behavior of whether, you know, you see, like, a greater mix of protein, pure desserts inside. And what's your best estimate on how this is going to be evolving over time? And how it would be impacting the overall spending behavior in the industry. Rick Cardenas: I would say the only real big change in mix that we're seeing is in alcohol sales and we've been seeing that for a little while. And you can see that more in the fine dining brands and the other brands. We're not seeing a dramatic we are seeing a little bit of mix in appetizer desserts. Probably from some folks that are on GLP one drugs. Because I think when people get on GLP-1s, they also want to try to change their lifestyle. And they want to eat less little less fried food and if you think about most restaurants appetizers are fried. So that could be part of it. But we've got a broad menu and we are going to continue to monitor what's going on with folks on GLP-one drugs. We believe we have great brands that have a lot of protein, which is something that GLP one users want. And I would say we've got a great brand that was designed twenty years ago that is in the sweet spot of GLP ones, that season 52. We've got a lot of things that we can offer folks on those medications. And anybody else. So I don't want to focus just on GLP-one users. We've got a broad portfolio that can serve any guest need. Operator: Great, thank you. Next question is coming from Gregory Francfort from Guggenheim. Your line is now live. Gregory Francfort: Hey, thanks for the question. Raj, can you just maybe give us an update on where turnover sits either for Olive Garden or your total system for labor? And do you think we're in a different environment now than we were the last few years and what that might look like going forward? Thanks. Raj Vennam: Hey, Greg. I would just say the turnover is actually pretty low, which to be better year over year. I think we're still trending probably double-digit increase versus prior year from a turnover essentially lower turnover. And so I think for most of our brands, we'll probably this is a record low. Like, yeah. And so, you know, from that perspective, we feel really good about that environment. And I think the other factor I'll mention is our hourly wage rate is, you know, inflation, on the hourly wage was about 3%. This is kind of lower than what we saw even before COVID. We used to be in the mid-threes, so to be around 3% tells you that, you know, the labor environment is actually pretty solid for us. Gregory Francfort: Okay. Awesome. Thanks for the perspective. Operator: Thank you. Our next question is coming from Brian Vaccaro from Raymond James. Your line is now live. Brian Vaccaro: Hey, thank you. I just had a question on Olive Garden. Rick, you spoke to the strength of, never-ending pasta. Was this I was just curious. Was the sales mix up on NEP year on year? And are you seeing any changes in the mix kind of the entry-level price point versus the higher tiers? And could you comment also just on the lighter portions? I think the sales mix was running mid-single digits last time we heard. Have you seen that increase the longer it's been in the market? Rick Cardenas: Yeah, Brian. I would start with the never-ending pasta bowl. We did see a little bit more mix, to Never Ending Pasta Bowl, so a little bit more preference in it. We did see a much stronger refill rate. I think we had a record refill rate potentially. And we did see a little bit fewer buy-ups to the higher protein, the more protein it could be because we've got more guests coming in. And because the refills were so high, they were getting great value. In regards to the lighter portion menu, still about, you know, still somewhere 1.5%. But we're around. So it could be up ten basis points down, 10 basis points here, there. As we talk about frequency growing, it's gonna take a while for that frequency to really make a meaningful impact in that mix. And we feel good about that mix. Brian Vaccaro: Alright. That's helpful. And then, Raj, just a quick one on G&A, if I could. It came in lower than we were expecting here in the current quarter. I know there's quarter-to-quarter volatility, but could you just give a quick update on where you see G&A is shaking out within your fiscal 2026 guidance? Thanks very much. Raj Vennam: Yeah, Brian. I'd say we're still probably around, you know, when we look at the full year, we're probably going to be still close to $500 million. Q4 is probably 15 to 20 million higher than Q3. Part of it is because of the fifty-third week and some seasonal stuff, but really, no change to the total guidance for G&A. Operator: Thank you. Next question is coming from Jim Sanderson from Northcoast Research. Your line is now live. Jim Sanderson: Hey, thanks for the question and the time. Just wanted to follow-up on the lighter portions at Olive Garden. Anything to call out that's notable about the demographics of the consumer that is purchasing this light portion, whether by gender, household income, daypart, anything like that? Rick Cardenas: Hey, Jim. We're still doing some more work on that. If you think about we haven't had it in all the restaurants, and we're talking about 1.5% of sales. Think about the number of tokens we have for that it's gonna take us a little bit of time to get that work. Jim Sanderson: Oh, and just another quick follow-up. Anything to comment on with respect to holiday bookings? Are they exceeding your expectations for the current time frame? Maybe in line? Just anything you would provide as a test on how the consumer is behaving. Rick Cardenas: Yeah, Jim. Two things. One, in regards to Thanksgiving, which was already happened, we had record Thanksgivings in our fine dining brands or reservation brands, and our holiday bookings are strong. Jim Sanderson: Alright. Thank you very much. Operator: Thank you. Next question today is coming from John Ivankoe from Morgan Stanley. Your line is now live. John Ivankoe: Hi. Thank you so much. Yeah. So the question is on immigration broadly. You know, I was hoping we could touch on a couple of, you know, maybe related topics. To that. You know, firstly, you know, I heard the comments, obviously, that labor inflation is now running lower than even it was pre-COVID. So that must mean that your supply of labor overall is very good, but I wonder if there's anything happening kind of below the surface that maybe in certain restaurants, certain pockets that labor markets have kind of turned over, but you've just been able to replace the people that perhaps would have left or maybe gotten competed away. So that's kind of the first question. And then secondly, a comment if you can in terms of pockets of demand. I think I remember you using the word that there may have been some ripples of kind of demand being affected in various markets. So I wanted to see if there was a change there. And then the third point, there's a comment made on beef that maybe were constraining some supply. I wonder, and this is actually came to mind when you said that, if there may be kind of an immigrant worker situation on the packer side, if that could potentially be a leading indicator for other types of industries. So just the overall your view on this broadly important topic. Thanks. Thank you. Rick Cardenas: Hey, John. Thanks. I'll try to get those answers and maybe Raj can jump in too. On the immigration front on our team members, you know, we really haven't seen anything material. On any restaurants turning all of their team members for those reasons. As we mentioned, we've got record level churn record retention. So you know, there might be a restaurant or two that had a few folks but it's not something that we're too worried about. In regards to the packer situation, you know, we can't comment on what's going on and why there might be some supply constraints. I don't think it's necessarily driven by labor. Although one supplier did close one of their plants. I don't know if that was a labor issue or not. They didn't comment on why. And then Raj can talk about the sales impact for us. Raj Vennam: Yeah. From a regional difference, John, I'd say for the quarter, when we look at the second quarter, the Midwest was our strongest growth. And then I think we saw actually softness in sales in the New England area and then Northwest. Other than that, others were pretty close to the median. Even Florida and Texas, which were lagging, were still below the company average, but they were a little bit closer to the company average than they were a quarter ago. John Ivankoe: Okay. Alright. Thank you very much. Operator: Thank you. Next question is coming from Christine Cho from Goldman Sachs. Your line is now live. Christine Cho: Thank you so much. Follow-up to the earlier question on the casual dining outperformance. With many other segments kind of playing catch up on value. Could you kind of talk about your plans to better communicate value to consumers? Any new or expanded marketing purchase you are planning for the back half? And, additionally, I think, Rick, you mentioned that you have no imminent plans to market the lower portion size menus. But what would make you change your mind? Thank you. Rick Cardenas: Yeah. Christine, competitively I don't want to get into too much detail about our plans, especially for each brand. We're disciplined and remain committed to our marketing filters and as you all remember the marketing filters is just the does the message build brand equity? Is it simple to execute and not at a deep discount? And so, you know, we're going to continue to pull the right levers like we did with Never Any Pasta Bowl, Oktoberfest at Yard House, the three-course menu at Ruth's Chris, Wagyu and Wine at Capital Grille. Those are all things that elevate everything that we talk about. Without a deep discount. You know? And you look at our promotional calendar last year for the back half, I wouldn't anticipate it's gonna be significantly different than that. Now on the lighter portion menu in marketing, yes, right now, we have no plans to do it. You know, if that changes, we'll have to find the right way to communicate it. But, you know, it'll have to be something that we feel like we've got a great way to communicate it to explain what it is. For consumers that don't really know that section of the menu. But I think that there's a better way to do that, which is just let the consumer tell their friends. And so right now, don't have plans to do it. If that changes, it's because Olive Garden came up with a great way to talk about it. Operator: Great. Thank you. We reached the end of our question session. I'd like to turn the floor back over for any further or closing comments. Courtney Aquilla: That concludes our call. I want to remind you that we plan to release third quarter results on Thursday, March 19, before the market opens with a conference call to follow. Thank you for participating on today's call, and happy holidays, everyone. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, have a wonderful day. We thank you for your participation today.
Operator: Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Full Year 2026 Consolidated First Half Results Conference Call of Sesa. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Jacopo Laschetti, Stakeholder and Corporate Sustainability Manager of Sesa. Please go ahead, sir. Jacopo Laschetti: Good morning, and thank you for joining the Sesa Group presentation. Representing the group today are Alessandro Fabbroni, Group CEO; Caterina Gori, Investor Relations and Corporate Finance and M&A Manager; and myself, Stakeholder Relations and Head of Sustainability. Earlier today, the Board of Directors approved the consolidated financial results for the first half of the fiscal year 2026, ended October 31, 2025. The corporate presentation is available on the Sesa website and will serve as a reference throughout today's conference call. Alessandro will begin by providing an overview of the key business developments and achievements. Alessandro Fabbroni: Good morning, everybody, and thank you for joining our group presentation. In the first half of 2026, Sesa started the implementation of the new '26-'27 industrial plant by evolving our data-driven digital market-oriented and people inspired platform for enabling the sustainable growth of corporates and organizations with a specific focus on organic growth and skills development in a challenging market scenario confirming growing demand for digitalization, Sesa has achieved its goal of consistent organic growth in revenue and profitability by strengthening our position in the key areas, catalyzing digital transformation such as cybersecurity, cloud, AI and automation, vertical and digital platform by enabling the value creation from our stakeholders. The group's transformation from a technology to a leading digital integrator has improved with investment focus on skills development and the adoption of the so-called digital enablers. In the first half of 2026 on a consolidated basis, Sesa achieved revenues and other income for EUR 1.6 billion, up by 12% year-on-year, and EBITDA for EUR 114 million, up 11.4% year-on-year, and the net profit adjusted for around EUR 50 million, up by 17% year-on-year. On an organic basis compared to the half year pro forma, including the first half 2025 data of Greensun, consolidated revenues grew by 5.5% year-on-year, EBITDA by 6.0% year-on-year, and group net profit after taxes adjusted by 7.6% year-on-year. The second quarter '26 alone, show a great acceleration in consolidated revenues, which achieved EUR 755 million, up 16% year-on-year compared to reported years and 9.4% like-for-like compared to pro forma, and an increase of operating EBITDA by 16.6% compared to reported figures and 8.4% compared to pro forma. With a group [ EAT ] adjusted increase by 30% compared to reported figures and 17% compared to pro forma. Consolidated revenues show positive contribution from all group sectors. ICT VAS, recorded EUR 939 million, up 2.1% fully organic with a great recovery compared to the decline in first quarter '25 with a down of 2.7%, driven by the high single-digit growth achieved in the second quarter, up by 8.1%. The positive November backlog trend up by 25%, will support positive trend for next quarters. Digital Green VAS reported EUR 210 million up by 26% compared to the first half '25 pro forma, driven by the extension of the double-digit growth achieved in the first quarter '26 and thanks to a strong performance in the copper market, driven by the increasing energy demand associated with digitalization and AI adoption, system integration and software sector reported EUR 420 million, up by 4% year-on-year, showing resilient performance despite the slowdown of demand in some made in Italy districts and the reengineering process affecting some business units. And finally, Business Services achieved EUR 74 million, up around 7% year-on-year, extending its entirely organic job driven by the development of applications for the financial services industry. Consolidated EBITDA increased by 11.4% year-on-year, up 6% in comparison with the pro forma reaching EUR 114.4 million compared to EUR 102.7 million as of October 2024, with an EBITDA margin of 7.1%, broadly stable year-on-year, thanks to the growth trend in the VAS sectors, both Green and ICT and the Business Services one. ICT VAS reported EUR 42.7 million, up 6.6% with an EBITDA margin equal to 4.5%, up from 4.4% year-on-year. Digital Green VAS recorded EUR 14 million EBITDA, up 30% compared to the first half '25 pro forma with a 6.7% EBITDA margin compared to 6.5% year-on-year. System integration achieved EUR 43.4 million, down 1.9% with an EBITDA margin equal to 10.3%, reflecting the reengineering operations in some business units of the sectors with an expectation of EBITDA margin stabilization FY '26 at similar levels to FY '25. Business Services reported EUR 11.6 million, up 6.6% year-on-year and 15.8% EBITDA margin stable compared to the previous year. In the second quarter 2026 alone, Business Services revenues accelerated with an 11% growth driven by the start of some multiyear contracts not yet translated into a positive impact on profitability. Consolidated EBIT adjusted amount to EUR 86 million, up 9.2% year-on-year, up 2.5% compared to the pro forma after depreciation and amortization for EUR 26 million, up around 14% year-on-year, and provision for EUR 2.7 million. Consolidated EBIT reached EUR 65 million, up 8.8% year-on-year after amortization of intangible assets relating to customer lists and know-how for EUR 17.5 million in line with the 2026, '27 industrial plant, net financial expenses show a significant decrease equaling 11% compared to first half '25 improving by 15.5% in the second quarter 2026 alone compared to the second quarter '25. Thanks to lower interest rates and the actions to enhance the group's financial management efficiency. Consolidated EAT adjusted amounted to EUR 50 million, up 17.1% year-on-year and 7.1% compared to the pro forma, reflecting the growth in operating profitability and the reduction in financial expenses. Group net profit adjusted reached EUR 45 million, up 13% year-on-year from EUR 40 million in the first half '25, up 7.6% year-on-year compared to the pro forma 2025, while consolidated reporting profit to reached EUR 34 million, increasing by 19.4% compared to around EUR 29 million in the first half '25, up by 5.6% year-on-year compared to the pro forma figures. In the period under review, Sesa Group selected its M&A investment and improved its payout ratio in accordance with the new industrial plan. Group reported net financial position as of October '25, including EUR 208 million of IFRS debt was negative. That means net debt for EUR 119 million improving compared to EUR 122 million compared to the pro forma figures. Following last 12 months investment for EUR 140 million, of which EUR 37 million in the first half alone, including EUR 80 million of M&A investments, of which EUR 23 million in the first half. And after last 12 months buyback and dividend distribution of around EUR 35 million, which EUR 30 million in the first half 2026. Now I give the floor to Caterina for presenting our M&A strategy and the main resolution of the last shareholders' meeting and Board of Directors of today. Caterina Gori: Thank you, Alessandro. After years of significant M&A activities, our new FY 2026, 2027 industrial plan represents a strategic shift with a clear focus on simplifying the group and accelerating organic growth. We will capitalize on the capabilities and business model we have developed over the years to drive sustainable growth, supported by target CapEx in AI, automation and skill development to enhance efficiency, scalability and market penetration. As a result, annual M&A investments are expected to decline to around EUR 30 million, following a selective valid driven strategy, while CapEx is expected to be roughly EUR 50 million per year. In the first half of FY '26, we further strengthened our international presence through 4 strategic acquisitions, all within the SSI sector. Two M&As consolidated in the first half of FY '26 with total investments of approximately EUR 7 million. The first Visicon GmBH in Germany and SAP Consulting Specialists with EUR 5.3 million of revenue. And the second, Delta Tecnologías de Información in Spain, an AI-driven player in digital identity, we used 2 million in revenue. Both companies delivered EBITDA margin above 10% and 2 additional M&As with total investment of approximately EUR 7 million. Albasoft, a EUR 2.2 million software company, specialized in treasury and finance manager solution; and 4IT, a Swiss cloud and managed service company with EUR 9 million of revenue. Both companies will be consolidated from November 2025, delivering EBITDA margin above 10%. The deal structure is designed to ensure the long-term commitment of key people in target companies with an entry valuation of around 5x EBITDA, adjusted for net financial position and consistent with our standard approach. These acquisitions confirm our strategy. a selective approach to high-value M&A in Europe, together with continued strong investments in digital transformation areas such as AI, automation and digital platforms. As outlined in 2026,2027 industrial plan, we are fully commitment to generating strong cash flow and delivering solid returns to our shareholders. As demonstrated at our latest shareholder meeting on August 27, 2025, where we approved a dividend of EUR 1 per share, in line with the previous year with EUR 15.5 million distribution completed last September. A significant increase in the share buyback program from EUR 10 million in FY '25 to EUR 25 million for FY 2026 to further strengthen shareholder value by raising the payout ratio from 30% last year to 40% this year. The shareholder meeting on August 27, 2025, approved a new EUR 25 million buyback program structured in 2 phases. The first EUR 15 million phase completed October 9 and the second EUR 10 million phase beginning on November 6, 2025. Sesa held 142,706 treasury shares of October 1, 2025 and 246,868 as of December 12, 2025. Equal to 1.609% of share capital. Today, the Board of Directors approved the cancellation of an additional 157,522 shares, representing 1.03% on share capital which is part of the 1.609% treasury share mentioned above. And finally, the cancellation of treasury shares up to a maximum of 2% of Sesa share capital over the next 18 months. As of August 27, 2025, approximately 1% of shares has already been canceled. And today, we completed the plan of the cancellation of an additional 157,522 shares. Additionally, last October, we signed a binding agreement for the sales of the controlling stake held by DV Holding in Digital Value SPA subject to the fulfillment of certain conditions precedent, including Golden Power and antitrust approvals. Upon completion of the transaction, Sesa plans to disinvest a 6.6% stake in DV Holding for an expected gross amount of around EUR 11 million compared to an initial investment of around EUR 4 million. This transaction is expected to generate a positive impact of around EUR 7 million on [indiscernible] consolidated net profit. This investment is fully consistent with the 2026, 2027 industrial plan. which focuses on strengthening core activities and provides for the possible disposal of nonstrategic assets, in line with the disciplined and optimized approach to capital allocation while leaving us room to evaluate selected nonstrategic disposals in FY '26. I now invite Jacopo to present our ECG (sic) [ ESG ] results for the first half of FY '26. Jacopo Laschetti: Good morning again, and thank you, Caterina. During the first half of the fiscal year 2026, we continue to focus on integrating sustainability in our strategy. monitoring at the same time, key ESG KPIs to measure progress and the achievement of the target set out in our sustainability plan. This approach allows us to keep a constant view on our environmental, social and government performance. and to guide our operational and strategic choices. Our sustainability plan for '26, '27 approved by Sesa Board of Director on last July, defines priorities targets and specific actions to integrate sustainability in our business model, contributing to the creation of long-term value for our stakeholders. The generation, long-term valuation, sustainability and digitalization continues to be the core pillars of our strategy, defining the group's purpose. In this context, we are also delighted to announce that we have retained the EcoVadis Platinum rating, the highest level in the assessment model, which recognizes the group's commitment and achievements in the ESG field. This milestone further confirms the strength of our approach and reinforces Sesa's position as a reliable and responsible partner for customers, investors and stakeholders. In terms of HR management, we are facing a phase of consolidation with an increased focus on work and collaboration, and the progressive integration of digital enablers in our organization and the way we work. After a great improvement of our human capital over the last 4 years in the first half of fiscal year 2026, we increased the headcount by 1.7% compared to April 30, 2025 in line with our strategic industrial plan. We continue to work to further improve our loyalty rate, reinforcing at the same time, our education, hiring and welfare programs. We provided specific measures to support parenting, diversity well-being and work-life balance, thanks to dedicated programs in favor of diversity and inclusion. Now I give the floor again to Alessandro for the final conclusions. Alessandro Fabbroni: Many thanks, Caterina and Jacopo, I will now share the final remarks and conclude our session. Six months ago, we presented our new industrial plan aiming at group transformation by focusing on organic growth of core businesses, organizations streamlined, growing operating efficiency and market penetration by reinforcing our role as leading digital integrator and partner of the customers' digital transformation. In the first half of 2026, we worked strongly to deliver the main strategic targets of the industrial plan, driving organic growth across the group sectors, streamlining legal entities and in particular, adopting AI automation and digital enablers to boost operating efficiency, and group transformation both internally and towards our customers. Thanks to our strategy, we strengthened our position as a leading digital integrator with a strong focus on cybersecurity, AI, automation, vertical application and digital platforms for the business segment. In particular, in the first half of 2026, we achieved a mid-single-digit growth in revenues and profitability, driven by the great acceleration of the second quarter 2026 with revenues improving by 9.4% year-on-year, EBITDA by 8.4% and group EAT by 17% like-for-like. A 20% organic growth in both revenues and profit of Digital Green VAS fueled by strong business demand, rising energy needs resulting from digitalization and AI adoption. The back to growth of ICT VAS up by 2.1%, revenue, 6.6% in EBITDA and by 15% in group EAT, of which in the second quarter only, a growth by 8.1% revenue, 16% in EBITDA, and around 13% at group EAT level, and 6.8% organic growth in revenues and 15% growth in profitability of the Business Services sector, with a decrease in marginality during the second quarter only due to the start of several multiyear new orders with major customers. A significant reduction in net financial expenses has been achieved [indiscernible] down by 11.6% in first quarter 2026 and by 15.5% in the second quarter 2026, reflecting the ongoing recovery trend driven by lower market interest rates, and the efficiency measures implemented in full year '25. In light of our second quarter 2026 strategic achievements, and a disciplined way we have been executing in the new industrial plan, today, we confirm our commitment to deliver all growth targets we have outlined last July for the new fiscal year '2. That means 5% to 7.5% regarding of revenues, a 5% to 10% organic increase in EBITDA and around organic 10% increase in net consolidated profit confirming that we are on track to achieve our key value generation targets for our stakeholders. Considering the positive trend of our net financial position and cash flow generation, we have been delivering the planned 40% payout ratio by executing the new EUR 25 million buyback program approved by the last shareholders meeting and a 2% share capital cancellation. The goal for the remainder of the fiscal year is to execute with great commitment, the new 2026 and '27 industrial plan, in line with the targets and guidance we already communicated by focusing on organic growth, operating efficiency, the adoption of digital enablers and in particular, inspired by a corporate vision oriented towards sustainable growth and digital innovation. Thank you very much for your attention. Now we open as usual, the Q&A session. Operator: [Operator Instructions] The first question comes from Aleksandra Arsova of Equita. Aleksandra Arsova: One question on my end. Maybe some color on the guidance. So you seem confident to confirm the guidance, but maybe can you clarify which could be the elements that could potentially drive the guidance and the actual numbers, let's say, in the upper end or in the lower end? And then maybe, again, on the guidance in terms of EPS or net income adjusted that you said approximately plus 10% organic. If I remember correctly, in the original guidance, it was between 10% and 12%. So maybe just to clarify, where do you see this slightly lower expectation coming from? Alessandro Fabbroni: Thank you, Aleksandra. So the full set of results that we achieved in the first half and in particular in the second quarter, show that we are absolutely on track to achieve the guidance. So that means considering the second quarter trends and the positive outlook on the backlog at the beginning of the Q3, we may consider the upper end of the guidance, the right target today. So that means not only for revenues and EBITDA, but also for net profitability. In terms of outlook, in comparison with the start of our fiscal year, we are absolutely overperforming in the ICT distribution on one hand and in the Digital Green. We are more or less in line with the Business Services. So that means that for 60% to 70% of our group perimeter, we are overperforming. We are slightly lower in the guidance in the first half for software system integration, but the improvement that we achieved in the second quarter and the outlook on the trend of the backlog seems positive. So that means we are on track to recover a positive trend in the second half of the year. So that means we may consider the average to upper end of the guidance, the reliable target for our fiscal year 2026. Operator: The next question is from Andrea Randone from Intermonte. Andrea Randone: I wonder if you can comment on the ICT VAS trend in the current quarter that is seasonally important. You mentioned the backlog up 25% in November. If you can comment on the trends you see if they are sustainable, consistent also for the remainder of the year. This is the first question. The second question is about CapEx. If you can confirm about EUR 80 million guidance, including M&A for the full year? Alessandro Fabbroni: Thank you, Andrea. So first of all, about the trend of ICT VAS, we may confirm we entered very well in the Q3. We closed a very positive Q2 with growing revenues by 8.1%, an increase of EBITDA by 16% and around 15% in net profitability. We enter with a 25% growth in the backlog for Q3. So that means the beginning of December and in particular the month of November. So that is very positive indication to be able to work with a guidance of mid-single-digit growth for the full year. In terms of CapEx, we confirm our guidance of EUR 80 million investment overall, including EUR 35 million of M&A and EUR 52 million to EUR 55 million CapEx. In the first half of 2026, we invested around EUR 40 million of which more or less EUR 20 million in M&A. So that means we are on track for this kind of trend. Andrea Randone: If I may, just a quick follow-up on SSI. Can you -- it's a normal question, but can you comment once again the implications from AI on this business line? Alessandro Fabbroni: So yes, the AI automation represents a driver that we are embedding in each of our delivering and also inside software system integration that is sector mainly focused on technology, digital business integration with the mix of consulting, software and digital services. So what we are doing is to increase our efficiency to introduce AI in some delivering. For example, the cyber security services and to, as a result, increase our efficiency to make available this efficiency for our customers. Obviously, our exposure to AI erosion is not high, considering that we operating with proprietary software and technology and consulting services. And from our point of view, that is an opportunity more than risk to increase our EBITDA margin. And some of our investments will be focused on skill development and digital enabled adoption in that direction. Operator: [Operator Instructions] Mr. Laschetti, at this time, sir, there are no questions registered. Jacopo Laschetti: Thank you very much, everybody, for participating in this conference call and we wish you Merry Christmas, and we stay available as usual for any additional information about our results. Thank you very much. Operator: Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help. Your meeting will begin shortly. Of our team will be happy to help. Thank you for your continued base. Please standby. Your meeting is about to begin. Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter Fiscal Year 2026 CarMax Earnings Release Conference Call. At this time, all participants are in a listen-only mode. There will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Lowenstein, Vice President, Investor Relations. Please go ahead. David Lowenstein: Thank you, Nikki. Good morning, everyone. Thank you for joining our fiscal 2026 third quarter earnings conference call. I'm here today with Tom Folliard, interim executive chair of the board, David McCraight, interim president and CEO, Enrique Mayor-Mora, executive vice president and CFO, and Jon Daniels, executive vice president, CarMax Auto Finance. Let me remind you our statements today that are not statements of historical fact, including but not limited to, statements regarding the company's future business plans, prospects, and financial performance, are forward-looking statements we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, expectations, and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important factors and risks that could affect these expectations, please see our Form 8-K filed with the SEC this morning, our annual report on Form 10-K for fiscal year 2025, and our quarterly reports on Form 10-Q previously filed with the SEC. Please note, in addition to our earnings release, we have also prepared a quarterly investor presentation, and both documents are available on the Investor Relations section of our website. Should you have any follow-up questions after the call, please feel free to contact our investor relations department at (804) 747-0422, extension 7865. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Tom? Tom Folliard: Thank you, David, and good morning, everyone. Thanks for joining us. Today, I'm gonna provide some perspective on our leadership changes and CEO search. Then turn the call over to David, who will review our initial observations and the actions we are taking in response. After that, Enrique and Jon will speak to our third quarter results before we open the line for your questions. As many of you know, I've been part of CarMax for more than thirty years. Over that time, we've developed a beloved brand with national scale, unmatched physical and digital infrastructure, and an award-winning culture. However, recent results have been unacceptable and do not reflect the company's potential. As a result, even though the Board was already working on a succession plan, we determined that more immediate change was required and that direct involvement from David and myself was the best approach to strengthen the business in the near term. The board has been searching for a permanent CEO with urgency. We are seeking a proven leader who can drive sales, maximize the benefits of our omnichannel experience, strengthen our brand, improve operations, and champion our culture. Conversations are underway. And we have some promising candidates. What is most important is that the next CEO captures the tremendous opportunity that we have in front of us. As interim executive chair of the board, I'm focused on supporting David and the leadership team. David is in Richmond five days a week. And I'm spending a significant amount of time here myself. We are operating with a renewed sense of urgency to drive the business forward. I wanna thank David for stepping into the interim president and CEO role. As you know, he has served on our board since 2018. David has more than twenty years of executive leadership experience, at prominent retail brands in highly competitive and fast-paced markets. He has led several successful brand transformations, new omnichannel strategies, and growth initiatives for digitally native brands. What made him a great addition to our board has also been a tremendous asset in this transition. Before I turn it over to David, I also wanna thank Bill Nash for his more than thirty years of service with CarMax. David McCraight: Thanks, Tom, and good morning, everyone. I'm honored to serve as the interim president and CEO at this important juncture in CarMax's history. While our top priority is to find a terrific next leader, in the interim, Tom and I are committed to lead and take the steps needed to set up the next CEO for success. After three decades in the retail industry, and having led multiple companies through turnarounds, I am familiar with the rigor and critical thinking required to succeed. The good news is CarMax already possesses many of the vital attributes needed to turn the business and regain momentum for growth. Including a well-known and trusted brand, a strong culture supported by a base of 28,000 talented associates, and an expansive digital and physical infrastructure including over 250 premium locations that put us near 85% of the US population. Despite these advantages, and after decades of industry leadership, based on recent results, it is clear CarMax needs change. And while it has been only a few weeks in our interim roles, here are some of our observations. Prices. Our average selling prices have drifted upward and appear to be less attractive to customers. To ensure that CarMax is a preferred choice, we will work to shrink the gap between our offering and the marketplace. We are lowering margins and supporting this action with marketing spend. While also building out more effective ways to communicate our value to the consumer. We are also comprehensively reviewing all the costs associated with bringing a car to market. We're gonna find ways to eliminate the unproductive while maintaining our reputation for having a high-quality fleet. Around the consumer, we need to bring an even sharper focus on the customer throughout the organization. In guiding decisions, we will reawaken our intellectual curiosity and challenge long-held institutional beliefs as we work to discover the most important elements to the customer in closing the sale. We will emphasize customer insight in decision-making rooted in fact-based consumer research. Digital. We have the opportunity to incorporate a clear and more effective selling voice in our digital experience. While we have spent several years building out capabilities for customers to shop, how they want and where they want. We must now focus our energies on making the digital shopping experience easier. And shift our digital voice from one that earnestly delivers abundant information to one that focuses on delivering sales. This will drive conversion and further improve customer satisfaction. Just as we do so successfully in our stores. SG and A. Similar to our approach in tackling the cost of bringing our cars to market, we believe our expense structure is too high. It is clear that we have the opportunity to leverage our technological platforms and process enhancements to reduce our spend. We are committed to sharpening our business model and eliminating unproductive costs. And in just a moment, Enrique will provide a progress update on the decisive actions we are taking to reduce at least $150 million in SG and A. Profitability. We will more aggressively tap into opportunities in the selling experience to enhance our profitability. We're excited about the outstanding growth potential we have across CAF and our ancillary products. You will hear more from Jon today about our progress in full spectrum lending, as well as the steps we are taking to capture incremental flow through in our extended protection plan business. Culture. We've always been a company intensely focused on operations. But with the advent of disruptive technologies, we now need to reignite the entrepreneurial spirit that made CarMax the industry leader for decades. Simply put, we will move faster, and operate leaner while taking smart risks. We are optimistic that our immediate pricing and marketing actions will improve our sales performance. But pressure earnings in the near term. As we consider the business model more holistically moving forward, we anticipate that earnings pressure will be offset by unit growth, expanded profitability in CAF, and ancillary products, and through reductions in SG and A and COGS. Tom, the board, and I believe that CarMax has many of the requisite attributes for a successful turnaround. We are confident the actions we're taking will begin to strengthen performance while the board identifies the right permanent CEO to lead CarMax for the future. Now I'd like to turn the call over to Enrique to discuss our third quarter financial performance in more detail. Enrique? Enrique Mayor-Mora: Thank you, David. During the quarter, we delivered total sales of $5.8 billion, down 6.9% compared to last year, reflecting lower volume. In our retail business, total unit sales declined 8% and used unit comps were down 9%. Pressure performance across our age zero to five inventory was partially offset by increased sales of older, higher mileage vehicles, which represented over 40% of our sales for the quarter. An increase of approximately five percentage points compared to the second quarter and last year's third quarter. Average selling price was $26,400, a year-over-year increase of $230 per unit. The increase was due to higher acquisition costs driven by year-over-year increase in market prices, and partially offset by the increase in toward older, higher mileage vehicles. Wholesale unit sales were down 6.2% versus the third quarter last year. Average wholesale selling price declined by $40 per unit to $8,100. We bought approximately 238,000 vehicles during the quarter, down 12% from last year. We purchased approximately 208,000 vehicles from our consumers. With more than half of those buys coming through our online instant appraisal experience. With the support of our admin sales team, we sourced the remaining approximately 30,000 vehicles through dealers, down 9% from last year. Third quarter net earnings per diluted share was $0.43 versus $0.81 a year ago. This quarter was impacted by $0.08 of restructuring expenses related primarily to our CEO change and the workforce reductions in our customer experience centers. Total gross profit was $590 million, down 13% from last year's third quarter. Used retail margin of $379 million decreased by 11% driven by lower volume and profit per used unit of $2,235. In line with historical averages, down approximately $70 per unit from last year's record high. Wholesale vehicle margin of $115 million decreased by 17% from a year ago with lower volume and wholesale gross profit per unit of $899, a decline of approximately $120 year over year. Both wholesale volume and margin were impacted by steep depreciation. Other gross profit was $96 million, down 16% from a year ago. This was driven primarily by the impact of lower retail unit volume on each CarMax auto finance income was $175 million, up 9% over last year. Jon will provide detail on CAF's growth in a few moments. On the SG and A front, expenses for the third quarter were $581 million, up 1% from the prior year. Driven by our previously communicated investment in marketing as we supported our new brand positioning launch and the restructuring expenses that I previously noted. These were partially offset by a reduction in the corporate bonus accrual. As David noted, we are on track to achieve at least $150 million in exit rate savings by the end of fiscal year 2027. We took our first significant step toward these savings this quarter with an approximately 30% reduction in our CEC workforce. This reduction was supported by our continued process and technology enhancements. Which are making our associates more efficient as well as empowering our customers to perform more of their shopping activities themselves. Turning to capital allocation. During the third quarter, we continued our share repurchases. Buying back 4.6 million shares, a total expenditure of $2 million. As of the end of the quarter, we had approximately $1.36 billion of our repurchase authorization remaining. Looking forward, I'll cover two items. We are optimistic the actions of lowering margins and increasing marketing will improve our sales performance trends. But may pressure near-term earnings. We expect marketing spend on a total unit basis to be up year over year in the fourth quarter, though to a lesser degree than during the third quarter. With a focus on investing in acquisition to drive buys and sales. Secondly, we expect pressure on our service margins in the fourth quarter. Due to seasonal sales and as we annualize over cost coverage leverage taken last year. At this time, I will now turn the call over to Jon to provide more detail on CarMax Auto Finance and our continuing focus on full credit spectrum expansion. Jon? Jon Daniels: Thanks, Enrique, and good morning, everyone. During the third quarter, CarMax Auto Finance originated $1.8 billion resulting in sales penetration of 42.6% net of three-day payoffs, versus 43.1% last year. Weighted average contract rate charged to new customers was 11% versus 11.2% last quarter as we continue to adjust consumer rates in reaction to the broader rate environment. Third-party tier two volume for which we collect a fee and tier three volume for which we pay a fee combined 24.9% of sales versus 24.4% last year. Weakness in tier two application volume, along with the impact from CAF's expansion in the Tier two space, was more than offset by growth from our Tier three partners. CAF penetration continues to benefit from underwriting and pricing adjustments implemented since the beginning of the fiscal year estimated to be 100 to 150 basis points the quarter. However, this volume has been offset primarily by lower application volume in the prime credit segment along with the aforementioned Tier three partner lender overperformance. CAF income for the quarter was $175 million, up $15 million from the same period last year. Included in the quarter is a $27 million gain on sale along with an additional $5 million of servicing fees attributed to the closing of the 25 b deal in September. Note that while the gain on sale is fully recognized at the time of sale, servicing fee income will continue over the remaining life of the deal and will be proportional to the receivable volume remaining. Net interest margin on the portfolio was flat year over year and down to 6.2% from 6.6% last quarter, and largely reflects the higher margin receivables removed from the balance sheet as a part of 25 b. Gas had a loan loss provision of $73 million resulting in a total reserve balance of $475 million or 2.87% of auto loans held for investment. Losses observed during the quarter in line with our expectations upon which we based our reserve at the end of Q2. With regard to growing the cat business, I'm immensely proud of our accomplishments to date. Over the last eighteen months, we have greatly expanded our funding options, including this quarter's off-balance sheet transaction, which have been critical prerequisites to this growth. In addition, we continue to add underwriting capabilities and modeling refinements that support profitable expansion. Separately, I am also excited about the significant future earnings potential from both our redesigned MaxCare plan, which focuses on mechanical coverage and our new MaxCare Plus plan, which focuses on cosmetic protection. These products have already migrated from test phase to pilot in multiple markets, We expect to achieve near nationwide rollout during '27. I'd like to turn the call back over to David. David McCraight: Thank you, Enrique. Thank you, Jon. Today, we outlined our initial observations and near-term priorities to drive improvement. Shrinking the price gap between our offering in the marketplace, with a stronger focus on customer experience increasing digital monetization capabilities, reducing costs, enhancing profitable growth drivers, and improving the speed of decision-making. And while we are realistic about the near-term challenges, CarMax's competitive foundation remains strong. We have a trusted brand, national scale that is difficult to replicate, leading omnichannel capabilities, and growing digital infrastructure, a strong financing platform in CAF, and an award-winning culture. Our execution has not matched the potential of these assets, but that's what's changing. Tom, the board, and I are focused on strengthening performance and creating a solid foundation for the permanent CEO to build upon. We appreciate your continued confidence in CarMax, and are committed to being transparent about our progress. With that, we'll open the line for questions. Operator? Operator: To leave the queue at any time, press 2. Once again, that is star and 1 to ask a question. And your first question comes from the line of Sharon Zackfia with William Blair. Your line is open. May now ask your question. Sharon Zackfia: Morning. Good to hear you again, Tom. I'm a conference call, and welcome, David, to the world of CarMax conference calls. Tom Folliard: Thank you, Sharon. Sharon Zackfia: Yeah. I guess, you know, maybe if you could give some color on the magnitude of the GPU reset that you're looking to see here in the February. And then you look at the business kind of, I guess, with a fresher perspective, are there any customer cohorts that you can delve into where you think somehow CarMax has become a bit less competitive or a bit less attractive and you know, what's the game plan to win those customers back? Enrique Mayor-Mora: Yeah, Sharon. Hey, it's Enrique. Let me let me jump in. You know, the the margin reductions gonna be supported with acquisition spend on marketing, will be meaningful in our design just to narrow the gap that we talked about with the broader marketplace. And we're optimistic those can actually improve our retail sales trends. Into the quarter. But they're, you know, they're big enough for us to talk about. And we're gonna see how they roll out. We're gonna see the impact within this quarter. And then when we have our year-end call in April, we'll provide insight and an outlook on on what those margin reductions and marketing spend increase mean to us. Jon Daniels: Yeah. Sharon, this is Jon. I'll jump into your customer cohort question. Now, yeah, I think there's obviously places across the spectrum that we're, you know, looking to improve and and grow sales. One in particular that stands out for me is if you look at maybe the higher FICO segments, we mentioned in the prepared remarks sort of, in CAF and the tier two section, that maybe six fifty to seven fifty space Feels like we've lost, volume there. We can track that through application volume coming through the door and then progression further on. So lot of speculation around what that could be. Certainly, we're gonna look at all things David mentioned a number of things, pricing. Obviously, we try and keep our rates competitive. Just overall, the offering that we provide the consumer I think that's one spot in particular that I think there's a lot of chance to to recapture and and fuel our growth. Sharon Zackfia: Can I ask a follow-up? You have a competitor who will be kind of lowering finance rates proactively in in the current quarter to reinvest some of the their GPU to the customer. I think, historically, you followed the market. On on finance rates. Would there be something you'd be willing to do on interest rates to be to to kinda weaponize that a bit more to get gain more conversion. Jon Daniels: Sure. I appreciate that question. Yeah. I think we're always keeping the pulse on the market. Looking at how we compare to obviously credit unions and banks what have you and certainly competitors as well to the degree we can measure that. Yeah. Not gonna speak to what what they're gonna do, but we think our our APRs are quite competitive with the Fed making the moves that they've had to make. We will adjust accordingly. We always have a test and learn methodology there. You know, I'm not gonna say we're gonna try and get further ahead of the market, but I still think in in maybe this space, there is a gap in interest rates that still exist, although it might be closing. But I think it's the broader offering question. You know, how do we compare from a an interest rate standpoint, certainly, and maybe term, but, obviously, couple that with what's the price of the car and all the answer all the other fees associated with that. So I think the bigger offering picture is the one that's really gonna be the the focus here. And, Sharon, what I'd say, you know, looking at it a bit more broadly as well is that the reductions SG and A, so these are levers that we've talked about. The reductions in SG and A, the focus on COGS, growth opportunities in CAF, in full spectrum, as well as EPP products that Jon talked about and we're happy to elaborate on. Those are all levers that bring to bear an ability to be more competitive in the marketplace. At the same time, we're reevaluating, as David talked about, reevaluating how we go to market. Right? And how we go to market, as Jon mentioned, it's the kind of cars, it's the price of the cars, how we communicate on our website, it's all of those items. And so we do think we have levers at this point that are lining up be materially more competitive and to go to market with. Operator: K. Thank you. Thank you. Our next question comes from Scott Ciccarelli with Truist. Please go ahead. Your line is open. Scott Ciccarelli: Good morning, everyone. So historically, I'm I'm gonna take another shot at this GPU question. Historically, I believe the management teams have talked about needing to lower prices by about $500 per unit to see a real inflection in the sales pace. So that would obviously be meaningful to use Enrique's words. Is that in the range of how you guys are thinking about reducing your GPU? Enrique Mayor-Mora: Yeah. What I'd say is don't think we've said $500 as as a meaningful or a needed amount to to drive sales. You know, we we do price elasticity testing. We're always in the market doing price elasticity testing. I'd tell you the number to to to move sales is is well south of that. You know? And in terms of what we're doing this quarter, look, we're trying different things. We are going out. It was, again, sizable for us. To talk about on this call. Gonna test the impact on sales, again, in combination with an increase in marketing to kind of get the a boost there. Overall. And we're gonna report out in the fourth quarter call in April. And and communicate what we saw in the market. We're optimistic it's gonna change the trend in sales, but I I wouldn't say that $500 is what need to to to move sales, that's what you're saying. Scott Ciccarelli: Got it. Thank you. And then just just a follow-up if I can. I guess it's a a bigger picture question. For Tom and David. Like, what do you think CarMax represents to consumers today, like, you know, in late twenty twenty five, you know, given some of the alternatives that are out there? And where do you think you would like to end up in, call it, two to three years? Thank you. David McCraight: Hey there. Nice to talk to you. David here. Know, we think many of the things that CarMax has meant to the customers in the past can continue to be. We believe we're a leading used car destination for customers. We've invested a lot of money and time and in building and broadening those capabilities to be able to let them shop where they want and how they want. And, ultimately, we believe we're the most trusted brand out there. The difference is where we've been and and the performance we need to adjust to and adjust our model towards getting to and have confidence we're gonna be able to get there in the near term. Tom Folliard: Hey, Scott. It's Tom. Good to good to talk to you again. You know, from my perspective, and I'm a little biased, the last thirty years, we've built an iconic brand. And I don't think that's changed at all. I think the consumer knows what we represent. They know the quality that we represent. I think our associates in our stores and in our CECs and across the board are are completely engaged and and ready to serve the customer. We've spent a lot of money investing so that we could serve the customer however they wanna served, whether it's online or in our stores. And I just think we we need to activate that. We need to do a better job of presenting that to the customer upfront. But in terms of the brand and the strength and the quality of our vehicles, all that stuff is fully intact, and I think it's the the the the basis for us moving forward. And a basis from which we can we can grow again. Scott Ciccarelli: Thank you, and happy happy holidays. Tom Folliard: Thank you, Scott. Thank you. Operator: Thank you. We will move next with Craig Kennison with Baird. Please go ahead. Your line is open. Craig Kennison: Hey, good morning. Thanks for taking my question. On the SG and A, topic, what is the baseline SG and A from which you expect to cut a $150 million? Just curious so that we can track your performance against that goal. Enrique Mayor-Mora: Yeah. No. Absolutely. And so when we talk about our SG and A goal of a $150 million it's a reduction of SG and A. Opportunities. That's really comparing it to last year, if you will. So if you wanna use you know, our base was $2.5 billion. Right? Roughly. And so that's what we're using as a baseline and those are the reductions that that we're going after. Craig Kennison: And that is an exit run rate as of '27. Enrique Mayor-Mora: Exactly. Craig Kennison: K. Thank you. Thank you. Operator: Our next question comes from Rajat Gupta with JPMorgan. Please go ahead. Your line is open. Rajat Gupta: Great. Thanks for taking the question, and thanks for the the candid assessment the prepared remarks. I had a follow-up on just the margin versus same store expectation. Could you could you give us, like, any any sort of early read? Because we got the sense that last quarter also, there was some effort to become more price competitive. Anything you can give us in terms of, like, early reads in December, and how those actions have already started to show some results, or is it still very early, or have you not implemented them yet? And what kind of, like, equation are we looking at, you know, in terms of you know, dollar versus same store volume, you know, trade off. Dollar GPU versus same store volume trade. Any any any more insights you can give us on how you see this equation playing out? I have a very quick follow-up. Thanks. Enrique Mayor-Mora: Hey, Rajat. So we just rolled out the price changes. So it it is too early to provide any kind of insight into that. And, again, we will provide a a view into that in a Q4 call, but we literally just rolled out those changes. So we're rolling them. They're underway. Yeah. And they're underway. Actually, they're not that's a good point. They're not fully rolled out. They're underway, but we just started this week. So Rajat Gupta: Is it hope to, like, go back to share gains or pause unit growth? I mean, what kind of, you know, the the expected outcome, in the near term? Enrique Mayor-Mora: Yeah. And look, like, we are optimistic that this this lever that we're pulling and again, it's really the combination, right, of having lower margins, lower prices out there being more price competitive. Supporting it with acquisition marketing, So think of, like, paid search, other direct levers like that, like directly to support sales is gonna change the trend. Of our performance. So we just reported a negative nine comp Last quarter was a little better than that, but not great. And our goal is to change the trend and to get the sales flywheel going. And that that's what we're looking to do. And at the same time, we're working really hard on getting other profitability metrics or levers, I should say, in place. And, again, those things are SG and A reductions, COGS reductions, ETP growth, cap full spectrum, so cap income growth over time. These are all levers that we're pulling. Because our goal is to drive sales over time, absolutely, and to drive earnings power over time as well. Rajat Gupta: Understood. And just just a quick follow-up on CAF. You know, it looks like, you know, as you mentioned, like, third party, tier three penetration went up. Is this is there is there, like, any meaningful, like, tightening going on right now? I'm curious know how those reserves will change going forward once you go back to having more in house you know, tier three, tier two type penetration. Maybe, like, any color you can give us on this CAF provision in the fourth quarter would be helpful as well. Thanks. Jon Daniels: Sure. Yeah. Appreciate the question, Rajat. Yeah. I I don't think there's a tremendous story in the tier two, tier three. We always just provide the numbers and provide a little guidance as to the delta there. But, you know, there's always, you know, swapping between know, maybe a tier two lender that is choosing to be a little more aggressive or doing tightening. Again, they're gonna make their own individual decisions. Versus the tier three partner that, again, may be the recipient of that tightening higher up upstream or, again, being a a little looser on their side. So don't think there's a meaningful story there, just to clarify. Just really providing the numbers. And and ultimately, to your second question, I don't think that I I wouldn't read much into that in terms of know, CAF provision. Again, we're as we stated very, very excited about our opportunity as we go go down into the tier two spectrum. You know, just for point a point to note, know, this is we were over 10% of the tier two volume. Came to cast this quarter. We went after it, and so we're really excited about that. And, you know, as we continue to go further spectrum, we're generally operating in the higher 50% of tier two, but we think, you know, we can get the entirety of that credit spectrum as we methodically roll out refinements to our model. We're excited about the, the funding solutions we have in place. And so you know, we will preserve for it accordingly, and we will enjoy the income, and we will get there. Rajat Gupta: Okay. Perfect. Thanks for all the color, and good luck. Thank you. Operator: Thank you. Our next question comes from Brian Nagel with Oppenheimer. Please go ahead. Your line is open. Brian Nagel: Hey, guys. Good morning. Tom, welcome back to the Falls. Tom Folliard: Hey, Brian. Thanks. Brian Nagel: You know, look. This is gonna be a potentially repetitive I wanna make just get this point across. So we're talking about, know, pricing and, you know, and and and being more aggressive on pricing here. For as long as I can remember, and I apologize for some time now. You know, you've done these pricing tests. And the message from CarMax has always been the same is that it it they they really lower prices, so the the debt result is nothing you know, not been favorable. So I I guess, like, that one ask is you're talking about once again you know, is either testing or moving forward with lower prices except in lower GPUs. What's what's different this time? You know, why why do you think that this will you know, this time around is be different than the past, which actually can drive better better know, unit volume. Enrique Mayor-Mora: Yeah. I think in the past, look, when we've lowered our prices and we do price the less all the time. Right, Brandon? We talk about that. I think the equation in the past has been know, you lower your prices, and then when you flow it through to the business, do you make Right? enough money to offset the lower margin with increase in sales? It absolutely drives sales. The equation was, well, it didn't always drive enough profit. I think the difference absolutely right now, there's a clear difference. The clear difference is that we have strong levers that are now supporting to look at the business more holistically. So, again, you know, think of the reduction in SG and A, that aggressive Tesla going after. You think of COGS and the aggressive we're going after COGS. You think of EPP growth. If think of CAF full spectrum income growth. These are all levers that are going to offset some of that pressure we had seen when we looked solely at the impact of lowering prices. So there's absolutely a difference and we're just looking at the business a bit more holistically, and we have those levers at hand here. Tom Folliard: Yeah. And, Brian, I I would just add that as Enrique mentioned, we've always talked about it in terms of total profitability. The the when we do price changes, we definitely see some sales movement. And then we've always had kind of the guardrails around what total profitability is. I would just tell you that our focus in the in the near term, given our current performance, is to drive sales and get things moving in the other direction. The other thing to remember is when we say we're at a lower price as a $100 or $200, it doesn't mean we're taking a $100 across the board on cars. It's more like if we say a $100, it it's think of it as percent of our cars a thousand dollars. Or 5% of our car is $500. So it it does it meaningfully impacts the trajectory of sales because because of the way we execute price changes. But back to our near term priority is to get things turned around and get sales moving in the other direction. Brian Nagel: Thank you. And you. And then just a follow-up. Sorry sorry, David. But, you know, with regard to marketing, know, so you talked about know, if I understand correctly, you stepped up marketing now. You know, you know, it's so same. That's not the gas a little more. Is it when you think about it, is it more of the same, or or or is is Carmex really working on coming with, you know, to market with a new marketing message? David McCraight: So yeah. Good question. Thank you. So what we're doing is taking the the new campaign was launched recently. As the team took you through. And what we're focusing on now now in the near term is sort of optimizing the campaign we have with the results and tests we have. So shifting things that are gonna into driving more conversion, messaging, perhaps some of the and dialing back perhaps some of the brand longer term spend on it. Ultimately, we think the review and positioning of the campaign is really something for the new CEO who's gonna align it with the new strategy, and we're working with the existing campaign and resources we have right now. But the team has been working to optimize the results based on media, based on geographies, and based on messaging. Brian Nagel: Thanks. I appreciate all the color. Thank you. David McCraight: Thanks, Brian. Operator: Thank you. Our next question comes from Daniela Hagian with Morgan Stanley. Please go ahead. Your line is open. Daniela Hagian: Thank you. Good morning, Tom, David. Appreciate your color in the prepared remarks. My first question is on that digital redefining the digital platform. What specifically within that needs to change to drive more of a selling experience? And how does that impact the operating cost structure with your store base? What would be early indicators of progress in in that redefinition? David McCraight: Yeah. The so we'll take the first part of the question first. We have worked very diligently and over the years to build the capability set. But we have not been as focused yet on the next stage, which is to make it easier. Look. Shopping online with us is not easy. We have ways to streamline it, and we have ways to make the digital selling voice really, just like our sales associates in the stores, make it easier to bring to get them to the ultimate sale, and the ultimate satisfaction is finding a car they like that they can afford. But and we recognize that with all the good work that's been done, it's still not an easy experience. We've and so in our earnest efforts to provide information and countless still have opportunity to streamline it, bring it there. And then in terms of the impact downstream, we'll we'll work in lockstep with the organization and the field to figure out what those best options are. As both Jon mentioned and Enrique mentioned earlier, we have an opportunity to look holistic at our business model from the from our COGS, our SG and A, our messaging, and all those components and that includes how we make decisions, not necessarily individually, but more holistically and what that means for an offer for the customer. We don't lose sight of what's most important to them. But I would expect you're gonna see some of the changes. Tom and I would expect you'll see some of the changes and it'll be iterative. In the next month or two. You'll see it, and we'll continue after that. But you should see the the efforts are underway and the team's very excited about this next step and that digital journey and how important it is in linking with the field team. Very symbiotic. Daniela Hagian: Got it. Got it. That's helpful, and I appreciate your transparency there. My follow-up is on COGS. Right? You and Enrique, you keep calling out COGS as a key lever. What's the strategy with reducing that line item, and are you still progressing towards that regional reconditioning center approach? Enrique Mayor-Mora: Yeah. I'd tell you, look, we have been focused on COGS for I mean, we're always focused on COGS. What we've done is that we've called it out over the past couple years. Like, last year, we communicated a goal of a $125. Per unit. We hit that goal. This year, we had communicated again another goal. A $125 per unit. I would tell you, given where sales are, or have been for the past two quarters, we probably a little bit behind. That goal. Not not because the initiatives aren't there, the teams aren't doing great work. It's just because you delever. In a tough tough sales environment. But we will continue to put even more accelerated goals internally to go after COGS opportunities. Some of that is through the reconditioning centers. Right? Some of that I'll give you, like, a real example. We just rolled out a parts selection tool. In our stores. We're already seeing benefits. From that, right, really kind of forcing our associates in the stores to pick balance speed with quality with cost and making it really easy for our associates to do that. And we're seeing results fairly immediately, and that's just an example of items we're focused on in COGS. In terms of the re reconditioning centers, yeah, we've rolled out at this point in time five Only two of them have been open for about a year. It's still kinda early to tell what the goals are. I mean, the the ultimate goal is absolutely to get them more efficient. We're already seeing logistics savings in the system because we've rolled these things out. And we expect that those will perform in line with some of our larger reconditioning units that we have in stores like Murrieta. In LA that we've seen. They're highly efficient store because of the volume that we pump through. And we have the same expectations with these more regional reconditioning centers. But again, we've only rolled out a few at this point in time. Yeah. Operator: Thank you. Our next question comes from David Bellinger with Mizuho Securities. Please go ahead. Your line is open. David Bellinger: Hey, good morning, everyone. Tom, nice to talk to you again. In the prepared remarks, guys mentioned reassessing the cost of bringing a car to market. What about the time to turn vehicles? CarMax has been a leader in that area for a long time. Looks like some competitors have increased their speed to market pretty dramatically. Is there anything you guys can do around AI implementation cut down that timeline, use your thirty plus years of data, and potentially avoid some of those sharper depreciation swings that have disrupted the business over the last few quarters. How should we think about that opportunity? Enrique Mayor-Mora: Yes. I think, look, we're always focused on reconditioning, on speed, on lowering our WIP You know, for example, this quarter, you know, we increased our sellable inventory, decreased our overall inventory. Right? So that's really a strong focus on WIP. That actually this quarter helped per turns relative to last year despite comps being down. 9%. So you can see the organizational focus on just getting better in terms of turning vehicles. I think our off-site reconditioning locations will help as well because it would be even more efficient. So just a couple of examples there in terms of the focus moving forward. David Bellinger: And then Enrique, maybe a a second question. Just can you update us on the real estate strategy? Anything that's changing there? You guys own a lot of your real estate. Is that a potential area where you could monetize and use that to fund more investment in the business if you need to? Enrique Mayor-Mora: Yeah. Look. I think it it always is a potential we own a lot of our sites out there for our store locations. I'd tell you we have better axe better sources of capital versus doing, a sale leaseback or something. So we have great banking relationships. Great partners out there, capital providers, and, you know, we have a revolver, $2 billion revolver we can dip in there. And you know, just more efficient ways to to get capital for us. Rather than kinda monetize our our stores. Or the land. Under our stores. David Bellinger: Got it. Thank you. Operator: Thank you. Our next question comes from Chris Bottiglieri with BNP Paribas. Please go ahead. Your line is open. Chris Bottiglieri: Hey, guys. Thanks for taking the question. First one, more clerical, I suppose, and then just a bigger question. Did you give the service profit? I think it was $4 million last quarter. Curious what that was for Q3. Is that a good run rate for Q4 given volumes are pretty similar Q4 versus Q3? Then my actual can you just elaborate what's happening with the credit penetration? It sounds like the prime side, I suppose, you're seeing less appraisal traffic or less traffic coming in. Is there would think that with a hay shaped economy, that's probably the healthier side of the market. Just kinda curious what's causing that, what you're seeing there. Thank you. Jon Daniels: Wanna do that with Chris? I'll check. Yeah. That's fine. Chris, this is Jon. I'll I'll take your the the credit side. Yeah. As we've noted in the in the remarks and, yeah, even reflecting on Sharon's question, when we look across the credit spectrum, yeah, we really can gauge who's coming and shopping with us through our, you know, our our prequel product is a is a great place to do it. You know, customers love it. They take full advantage of it. Know, eighty eighty plus percent of our customers start with credit online. Yeah. I think we see definitely an opportunity in that sort of six fifty to seven fifty credit space. And as I mentioned earlier, hard to speculate what's driving that, you know, is that, you know, we think our rates are are quite competitive there. But it's always a question of inventory, price, availability, all of that. I think as we mentioned on this call, holistically, all of that is up for discussion, and we're gonna look at, again, improving our overall offering there. So while you would say k shaped economy, know, all ultimately, we do see the others folks probably are less stressed by affordability. We wanna make sure we have the right product at the right price at the right time for them when they're when they're ready to purchase. So I think there's improvement there. That's really what the what the comments, I think, are in that space are. Enrique Mayor-Mora: Yeah. And regarding service in the quarter, there there definitely was pressure in services, as you know, and as we talked about, it is a line item service margin that deleverages when sales are are more challenged. Look, it's like, over the past couple of years, the teams have made material strides. In service margin over the past couple of years, and we had even talked at the beginning of this year that we expect it to be, I think, slightly positive for the year in service margin. Certainly, our sales expectations at that point in time were not where we are currently actualizing. But I'll tell you, for the full year, our outlook right now, is, you know, maybe a little unprofitable or a little profitable. Depending on sales performance in the fourth quarter. And that just tells you the the the incredible work the teams are doing in for service margin there. But we did have a negative margin in the third quarter, and we do expect, as I talked about in my prepared remarks, some pressure in the fourth quarter. We'll be comping over some cost coverage cost coverage that we took last year. But, again, if I take a step back and I look more holistically at it, the teams have done tremendous work You know, it's gonna be borderline whether or we hit that positive margin for the full year. But, again, sales have been definitely more pressured than what we had anticipated. Versus the beginning of the year. Chris Bottiglieri: Gotcha. Thank you. Operator: Thank you. We will move next with John Babcock with Barclays. Please go ahead. John Babcock: Hey, good morning, and thanks for taking my questions. I guess, just first of all, was wondering if you could talk a bit more about what the Board looking for in its next CEO and also how we should think about timing in terms of, you know, when something might be announced there? Tom Folliard: Recognizing that might be variable. Yeah. I I would just tell you it is it's the board's highest priority right now. It's my personal single highest priority as I'm leading the search along with the rest of the search committee. You know, we're looking for somebody that has led a complex business with you know, a diverse set of assets. We're we're hoping to find somebody that's also led some type of a digital transformation Doesn't have to come from automotive necessarily. Doesn't necessarily have to come from retail. But, you know, one of the most important things is that somebody who understands our culture and can can can lead this team onto the next phase of our success. In terms of timing, we're we're moving as as as quickly as we can, but I I don't really an upgrade an update on timing. John Babcock: Okay. Totally fair. And and then next, least based on the work that you've been doing over, you know, the last couple months and and even, you know, in knowing the business, was just wondering, how are you thinking about the omnichannel business? I mean, do you think this is kind of the setup that you wanna keep longer term? Do you think you wanna shift more towards digital over time? You know, what what's the benefit of omnichannel versus digital or or pursuing more of a brick and mortar strategy? Tom Folliard: I I think for us, it's it's really it's all of the above. Know, over the last several years, as the team has been communicating, we've spent hundreds of millions of dollars in our infrastructure and giving us the capabilities to meet the customer wherever they wanna I think having a national physical footprint is an advantage for us, over 250 locations as David mentioned in the beginning of the call. Near 85% of The US population. So I I think it's more of an all of the above strategy. I think some of the comments you've heard today is that we're not happy with how we present to the customer from a digital standpoint. And I think we're gonna you'll see us make some significant improvements there. But we think our stores are extremely valuable, and our and our store team do a great job meeting the doing converting customers once we get them in the store. But we we clearly need to get better on the digital side. David McCraight: Yeah. And just to add a little color to Tom's comments on that, We again, CarMax has built out so many capabilities And now when we are talking about holistically looking at our business model, we've built out so many potential capabilities, and many of them are helpful, but some of them probably are adding clearly decisions we've made, things we're trying to do in our best efforts to please everything for every customer. We have an opportunity to streamline, make some decisions, prioritize some things, based on real quantified insight from the consumer in ways that we can streamline and optimize the advantages that Omni should provide versus getting caught in some of the complexities that Omni also provides. So we'll think you'll see that in the near term as the team sort of finishes that infrastructure build out, but then gets really sharpen it and hone it into a competitive advantage. John Babcock: Alright. Thank you. That's very helpful. Operator: Thank you. We will move next with Jeff Lick with Stephens Inc. Please go ahead. Jeff Lick: Good morning. Thanks for taking my question. Tom, it is absolutely awesome to hear your voice. Tom Folliard: Thank you. Jeff Lick: So listen, David. A question for you. You know, you've been a senior leader at retail organizations that were digitally native and also retail organizations that kind of a hybrid. They have, you know, a physical business and a digital business. I was wondering if you can speak to the challenges of a you know, CarMax is a hybrid business where you know, there are people that are went into the physical part of the business and there's some natural tension which makes it more difficult to have you know, an ideal digital business. David McCraight: Yeah. Jeff, great insight, and, thank you for that Yeah. There there are examples of that, and that's a little bit of what I was alluding to. Now recognize Tom and I have been in the chair for two and a half weeks or so, but, what the most important things I see is that it's a really ex team's very excited about breaking through, and it's incredibly talented and dedicated group. We just need to work across those channels to make sure we're putting the customer at front of those decisions and not having the operational biases or legacy approaches come through. So there is not a battle one version versus another, but what we need to do is provide some leadership and focus the team so we can start executing more with that. What's most important to the customer? Streamline. Make sure it's a competitive offer. Because we know we own the brand and we know we own the trust. In a great part of the American consumer. But you're absolutely right. Many organizations Omni causes them to trip up. I would say we're just going through finish sort of like an off road adolescence, and we'll be moving into a much more refined effort in the coming time. Now that being said, you wanna confirm that answer with the new CEO when they come but in the interim, we're that's why we're so optimistic about the improvement. We have so many of the components already in place. Jeff Lick: And I was just wondering if we could quick double back to Sharon's first question about potential cohorts that you might have lost or been, you know, be less effective with. You know, I don't think she was thinking about necessarily the FICO score. You know? And this kinda gets into the advertising strategy. You know, when you know and, Tom, just wondering, you know, back in the day, it it always seems like you over indexed with that young professional, likely a female, that didn't wanna go into the franchise dealer and do battle. Know, you provided a much more easy professional experience. Do you think that your primary competitor has maybe cut you off the path at the past and hasn't even done a better job of providing an experience for that person where it's like, look. It it now it's super easy. Tom Folliard: You know, it's it's that where Your your question about cohorts, the know, second quarter, we were down 6%. Last quarter, we were down 9%. So we need to improve across the board. In turn, I I would just go back to the comments we've already made. We're not as easy as we need be for the consumer. We need to simplify our processes. We need it's so easy to buy stuff online. It doesn't matter what it is these days. And it's it's true for automotive. It's not just true for one or two competitors. It's across the board. And, again, we've invested the money to put ourselves in a position to be the best at this. And we got some work to do to get there. But we need to simplify for the consumer how they go through the process with us, whether it's on our website or in our app or in our stores. Jeff Lick: Enough. Best of luck, and, look forward to hearing from you again. Tom Folliard: Thanks, Jeff. Operator: Thank you. We will move next with Chris Pearce with Needham. Please go ahead. Your line is open. Chris Pearce: Hey, sort of following up, good morning, on Jeff's thought there. Guess, do you do you think you have the customer base that wants to do more of the work online to sorta drive an OpEx offset? In in GPUs, or do you need to reposition the brand to get younger? Or would you sort of reject that framing? Enrique Mayor-Mora: You say that again? Sorry. Yeah. Sorry. We missed that. Chris Pearce: Yeah. I'm just curious. Do you think you have the customer base that wants to do more of the work online? Like, do you think you need to get younger with this new ad campaign? Or do you think it's just about pricing and the experience you're offering? Tom Folliard: I absolutely think we have the customer base that wants to do more of the process online. The way, the younger you go, the less money you have and the less likely you are to have have the credit required to buy a car that's $26,000. So but yeah, I think we have plenty of customer flow, and we we need to take better advantage of Enrique Mayor-Mora: And as David and and Tom talked about, look, we we have we have enviable assets. Right? We have an awareness level that's off the charts. We have consumers that are extremely loyal and that love our brand. We have associates that are outstanding. We have more than 250 stores across the country that operate extremely well. You know, we have a strong we've invested in the digital capabilities. We just need to kinda fine tune how those things mesh together. But in terms of whether or not we have customers out there that wanna buy us, I would tell you absolutely. That's not the concern that we have. Opportunity that we have is to make our offering based on a consumer most compelling that we can make it, and that's what we're focused on. Chris Pearce: Okay. Thank you, good luck. Tom Folliard: Thank you. Operator: We will move next with Michael Montani with Evercore. Please go ahead. Michael Montani: Yes. Hi. Good morning. Thanks for taking the Tom, good to hear from you again as well. Just wanted to dig into, I guess, it's a three parter, but it's kinda all related, which was depreciation trends just some incremental color about what you're seeing. The the competitive backdrop you know, is the intensity ratcheting up. And then lastly was on the reinvestment into GPU. Just how how much of a reinvestment we ought to be thinking about moving ahead? Enrique Mayor-Mora: Yeah. Let's separate depreciation. You know, my comments were really in the wholesale area. Right? We did see very sharp depreciation within the quarter. A greater than 10% depreciation within the quarter. So very sharp, and that impacted performance within the quarter. And, you know, as that abates, then we would expect that performance would have turned around. In terms of GP, you know, we we did talk about that. Look. It's material in that us to talk about it on the call. But at the same time, we just rolled out you know, different levels of pricing changes. We're gonna see kind of how it performs within the quarter. And then in our Q4 call, we'll come back and, you know, we'll we'll talk about what we saw. And also what that means for our our plan moving forward. You know, I say that, but we're also optimistic that it's gonna change the the sales trend that we've had, you know, negative six, negative nine comps. Sequentially. And that's what we're looking to change. We're looking to change that trend, and we'll come back with that. And forget your number two question, but that the three part. Michael Montani: Competitive intensity. Number one and number three. Don't know. Tom Folliard: Yeah. Let me ask let me add to the pricing part, which is our our pricing is not it's not like we have a static pricing model where we lower all of our prices and leave them there. This is gonna be very dynamic throughout the quarter. You know, I think one of the things David and I and the rest of the team here assessed in a short period of time is you wanna get things moving in the other direction. There's there's some significant levers you can push, but the two biggest are clearly pricing and marketing. So we're making moves there to try to get the trend moving in the other direction. But it'll be very dynamic throughout the quarter. It's why you know, we're not trying to be evasive with what we think the margin impact will be, but we're trying to be as impactful as we can And, again, we're eighteen days into the quarter, so this will be a dynamic process throughout the next three months. Michael Montani: Thank you. Operator: And we don't have any further questions at this time. I will hand the call back to David for any closing remarks. David McCraight: Thank you. We'd like to thank the thousands of CarMax associates who helped build the business that we have today and will be part of our next leg of growth in the future. Thank you all for joining our call today, and then before we sign off, Tom has some closing remarks. Tom Folliard: Yeah. I just thank all of you guys for your support. Many of you I I know and have heard your voice in the past, and although it's good to be back, I wish it was under slightly different circumstances. But what I would tell you is from the board perspective, we are absolutely committed to getting this right. David is the perfect person to to sit in this role while we search for our next CEO. I'm happy to spend more time on the business. What I've been most enthusiastic about in the last two weeks is how engaged all of our employees are and how excited they are to win. And as we've mentioned multiple times and Enrique just kind of covered in total, we have incredible assets in this company. We have a great balance sheet. We have an iconic brand. We have two fifty locations. And most importantly, what has always separated us from everybody else is the engagement of our more than 28,000 associates. And none of that has wavered. So I just wanted to close by saying the board is absolutely committed to getting this right. And I wanted to also thank David for the role that he is playing while we're in the middle of this search. And lastly, I wish everybody a happy holiday season. Thank you for joining us. And, we'll talk to you next time. Operator: Thank you. Ladies and gentlemen, that concludes the third quarter fiscal year 2026 CarMax Earnings Release Conference Call. You may now disconnect.
Operator: Good day. Thank you for standing by. After the speakers' presentation, there will be a question and answer session. Welcome to the FactSet First Quarter Earnings Call. At this time, all participants are in a listen-only mode. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Toomey, Head of Investor Relations. Please go ahead. Kevin Toomey: Thank you, and good morning, everyone. Welcome to FactSet's first quarter fiscal 2026 earnings call. Before we begin, the slides we reference during this presentation can be found through the webcast on the Investor Relations section of our website at factset.com. A replay of today's call will be available on our website. After our prepared remarks, we will open the call to questions. The call is scheduled to last for one hour. To be fair to everyone, please limit yourself to one question. You may reenter the queue for additional follow-up questions which we will take if time permits. Before we discuss our results, I encourage all to review the legal notice on slide two. Discussions on this call may contain forward-looking statements. Such statements are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. Additional information concerning these risks and uncertainties can be found in our forms 10-K and 10-Q. Our slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release issued earlier today, both of which can be found on our website at investor.factset.com. During this call, unless otherwise noted, relative performance metrics reflect changes as compared to the respective fiscal 2025 period. Joining me today are Sanoke Viswanathan, Chief Executive Officer, Helen Shan, Chief Financial Officer, and Goran Skoko, Chief Revenue Officer. I will now turn the discussion over to Sanoke. Sanoke Viswanathan: Thank you, Kevin, and good morning, everyone. I'm very pleased with how we've started our fiscal year. We are reporting strong ASP growth and healthy operating margins, coming from broad adoption of our solutions and some key customer wins. ASP grew 5.9% to $2.4 billion. Adjusted operating margin was 36.2% and adjusted diluted EPS is at $4.51, up 3% year on year. Thank you to all our FactSetters for your focus and commitment to delivering for our clients. We are not just growing; we are winning in the places that matter, across firm types and in the areas that we've prioritized. Clients are choosing FactSet over alternatives because of the strength of our platform. I will share just three examples. We secured a significant mandate with one of the largest warehouse breakaway teams, who made FactSet a requirement in their transition to an RIA consolidator. This matters because these breakaways preserve enterprise revenue at the originating firm while adding ASP at the consolidator. At a global top 10 bank, we displaced an incumbent for pricing and reference data feeds supporting their global reference data hub and multiple use cases in Asia Pacific. We secured a major win with one of the world's largest investment managers, who chose FactSet Vault as their analytics book of record and our managed services for performance to unify holdings across all their subsidiaries into a single database and deliver flexible reporting across their institutional and retail businesses. These wins illustrate the resilience and scalability of our client franchise, driving ASP growth and expanding our reach into adjacent markets, opening new sources of growth. I'm pleased to announce that we are increasing our share repurchase authorization from $400 million to $1 billion. This decision reflects our conviction in the strength of our balance sheet and in the intrinsic value of our shares, delivering shareholder returns while maintaining the flexibility to invest for long-term growth. Over the past three months, I've focused on the fundamentals of our business, including our people, clients, and products, assessing what we do, where we lead, and where we need to improve. I've spent time with employees in all our major global offices, reviewing our operations, product development, execution, and met with over 80 institutional clients across North America, Europe, and Asia. I've engaged with technology and content partners on ways to develop new solutions for our clients. And I've spoken with shareholders about their priorities and how we can better articulate our strategy and milestones. What I've heard from everyone reaffirms the core strengths that set FactSet apart and why we believe we will continue to be indispensable to clients. First, our connected data. Clients rely on FactSet for high-quality, trusted content, curated over decades and enriched by deep domain expertise. Just as important, our ability to standardize and reconcile third-party sources with speed and precision is market-leading, thanks to advanced integration, concordance, and entity resolution capabilities. And clients access our data where and how they need, through APIs, secure low-latency feeds, cloud connectors, and MCP servers, without sacrificing performance, security, or reliability. Second, embedded workflows. FactSet isn't a portal. We are built into the data pipes and decision engines that run global finance. Every day, clients on average make 8.4 billion FactSet query language requests for spreadsheet use, evidence of deep reliance on our platform for valuation screening and other decision-making. Our portfolio analytics power mission-critical workflows, performance, attribution, risk, and reporting, where accuracy, explainability, and governance matter most. We are interested to view the activity, exposure, and risk across client books and deliver analytics that inform decisions throughout the investment life cycle. Third, best-in-class client service. We combine technology with human expertise. Our consultants are trained on the workflows of asset managers, banks, and wealth advisers. They operate as partners to our clients, designing implementations, guiding transitions, and enabling user adoption and personalization. In a recent meeting I had with the head of wealth management at a top 10 global bank, the first thing he said to me was how much he appreciated his FactSet consultant and mentioned her by first name and said she had just been in his office before I showed up. Fourth, broad and deep distribution. We have reached across the industry: 100,000 wealth advisers, roughly three-quarters of the top global investment banks, and 95 of the top 100 global asset managers rely on FactSet. The average age of our client relationships is more than 16 years, so it is clear that this trust runs deep. These strengths reinforce each other in a flywheel to make FactSet essential today, and increasingly so as AI and agentic capabilities become more prevalent in daily work. Success in enterprise AI comes from trusted high-quality data, secure integration with models and workflows, and detailed knowledge of how financial institutions operate. This is where FactSet stands out. Over 90% of our ASV is composed of proprietary client-facing solutions, and proprietary data and tools enriched by subject matter experts. Examples include portfolio analytics, FactSet Performance Solutions, QSIP, Revere, and FactSet Fundamentals. We are one of the few companies trusted to integrate external and private data at scale without compromising safety, supported by strict data ownership entitlements and security compliance. While other providers offer conversational interfaces or point solutions, they lack the governed data foundations and enterprise integration that regulated financial workflows require. And because FactSet is so deeply integrated across buy, wealth, and banking clients, we are uniquely positioned to navigate their technology architecture, consolidate fragmented data environments, and tailor AI and agentic solutions to their needs. As the flywheel compounds, it directly translates into faster product innovation, deeper user personalization, and measurably better client outcomes. Let me give you a sense of the volume running through this flywheel today. Just in the past thirty days, our clients have actively used a million custom models and screens to run data queries pulling hundreds of billions of data points. We believe AI will accelerate this flywheel. We are still in the early stages of enterprise AI adoption, but to give you an example, across the AI products we launched earlier this year, we've seen broad-based user adoption, with sequential growth of more than 45%. Put simply, AI doesn't replace what makes FactSet essential; it amplifies it. While I'm pleased with our first quarter results and the positive feedback from our clients, there's much work to be done to unlock the tremendous value within our business. This starts with decisive action to accelerate growth and operating leverage. I have three priorities: driving commercial excellence, delivering productivity improvements across the business, and solidifying our long-term strategy to ensure FactSet is positioned for sustainable growth. First, commercial excellence. With our strong products and trusted client relationships, we are sharpening sales execution to reinvigorate top-line growth. We are driving new business development, using analytics to prioritize new prospects, scaling marketing to increase awareness and recall of flagship solutions, putting AI tools to work for personalized outreach and follow-up, and managing the pipeline with rigor. We are simplifying packaging and pricing, organizing clients by persona and usage, refreshing bundles with data-driven insight, fully integrating recent acquisitions, pricing to value, and tightening controls to reduce leakage. We are focusing on improving retention and expansion within our clients, aligning customer success metrics and incentives to drive adoption and upsell, using analytics to flag and reduce churn, and elevating our strategic dialogue at top clients. And we're modernizing sales operations, raising performance expectations, applying best practices to sales incentives, reducing friction with advanced forecasting and analytical tools, and instituting robust productivity tracking. We are executing with urgency while laying the groundwork for world-class commercial performance. For example, we've changed sales incentives to better align them with the outcomes we want: new business, cross-selling, and upselling. This has already led to faster sales motions and a richer pipeline. My second priority is driving productivity gains. I've initiated a disciplined review of our technology, processes, and client service model to identify and act on opportunities to reduce complexity, apply modern tools, and streamline operations. We've initiated a program of transforming and consolidating our legacy technology applications onto a centrally managed modern platform. This is expected to significantly reduce complexity for our developers and deliver efficiencies. One tool having immediate impact is our new text-to-formula agent, which reduces routine support traffic, resolving requests in an average of six seconds versus minutes for a human interaction. On average, approximately 35% of formula support questions daily are now handled by this agent. By offloading these repetitive requests, our service teams are able to focus on higher-impact client work. Each interaction also adds to a reinforcement learning loop that continuously improves product performance. Leveraging new data modeling, visualization, and programming approaches, our data operations team is now able to ingest third-party data at 10 times the speed, vastly expanding our content coverage without adding headcount. These examples illustrate the scope of opportunity there is to drive productivity and efficiency across the organization. My third priority is solidifying our long-term strategy to ensure FactSet is positioned for sustainable growth. I'm engaged closely with the board and my management team to shape FactSet's future, and we are holding ourselves accountable to make hard decisions around allocating resources and capital. I know you're all eager to hear my thoughts about medium-term guidance. It's too early for me to comment on that, but I want you to know that I'm working actively on new growth initiatives, anchored on content and technology innovation, that drive real competitive differentiation and deliver durable ASP growth and operating leverage. As I reflect on my first few months, I have greater conviction in FactSet's position today because the structural advantages are real, the client reliance is deep, and the opportunities to expand our impact are tangible. We have three clear priorities that we are acting on with urgency to drive a culture of excellence across the company. Over the coming quarters, we'll continue to provide more details as we execute against these priorities. Now I will hand over to Helen to discuss our Q1 performance in more detail. Helen Shan: Thank you, Sanoke, and great to be here with all of you on this call. Our Q1 FY 2026 results mark a solid start to the year driven by disciplined execution and deepening traction with our clients. For the first quarter, organic ASV growth accelerates sequentially to 5.9%, an increase of $66 million. Expansion with our existing clients was the key component, with strong demand in trading, workstations, and markets data across the buy side, banking, and wealth. With that, let's review the quarterly results in more detail. Starting with our regional performance, in The Americas, organic ASV grew 6% this quarter driven by asset managers and wealth. Within this region, we are seeing increased demand for our portfolio life cycle solutions and AI-ready data, both from existing hedge funds and new ones coming on board. In EMEA, organic ASV grew 4% this quarter. We had higher expansion with Performance Solutions and improved retention overall, both helping to offset some softness we experienced with asset owners in the region. In Asia Pacific, organic ASV grew 8%, up from 7% last quarter. Middle office solutions and AI-ready data were the key drivers here, as we're seeing regional firms increasingly investing in modernizing their tech stacks to compete globally. Now turning to our results by firm type. On the institutional buy side, we delivered 4% organic ASV growth, with broad-based strength across firm types. Asset managers led the way with multiple 7-figure wins and improved expansion with existing clients. Growth here was fueled by our trading solutions, performance, and managed services. Hedge funds accelerated again this quarter with strong demand for our data capabilities and front office offerings. Asset owners' growth was softer this quarter as we lapped the large outsourced CIO win in Q1 last year. We do continue to see selective opportunities where our Performance Solutions and client relationships are gaining traction. In wealth, we delivered 10% organic ASV growth in Q1, displacing incumbents with 6-figure wins spanning workstations, pricing, reference data, and analytics. This quarter, off-platform solutions, data feeds, APIs, and analytics integrations comprise an increasing portion of expansion. This validates our land and expand strategy as existing workstation clients embed FactSet content into their broader technology stacks. In deal makers, organic ASV grew 6% year over year. Banking drove the majority of the growth as clients expanded their use of our data feeds, APIs, and off-platform solutions. Across our banking franchise, we are seeing higher net seasonal hiring, driven by a strong M&A market globally. Corporates and PEVC also contributed to growth with both new business wins and improved retention. Integrated solutions are resonating and driving expansion within existing clients. This quarter, we are renaming partnerships and CGS to market infrastructure to better reflect the exchanges, data providers, and market participants we serve. Organic growth was 7% with robust data demand and continued strong issuance activity. We're expanding our client base and deepening relationships. Client count grew to over 9,000, up 9% year over year, driven by corporate and wealth additions. Retentions remained healthy at 91% for clients and above 95% for ASV. Our user base is now approaching 240,000, with wealth and asset managers leading user growth in the quarter, up 10% versus the prior year. Turning now to our financial results. First quarter revenues grew 6.9% year over year to $608 million, or 6% organically, excluding foreign exchange and M&A impact. Adjusted operating margin came in at 36.2% for the quarter. Adjusted earnings per share was $4.51, up 3% year over year, driven by growth in revenues and a lower share count, offset by a higher tax rate. Operating expense increased 9% year over year on an adjusted basis with a few key drivers. People-related expense rose $15 million or 7%, driven by higher annual merit increases and year-over-year lapping dynamics. Specifically, employees hired or acquired after Q1 of last year, including from Erwin and Liquidity Book, are now reflected in our full quarterly run rate. Sequentially, total headcount grew less than 1% in the quarter, concentrated in low-cost locations. Technology expense grew $13 million or 23%, driven by higher internal use software amortization and cloud expense. As we've discussed, we are concentrating investments in both growth and structural capabilities to expand our market leadership through product innovation. Our other expense categories remained well controlled. Third-party content costs increased $4 million to support new datasets for research workflows, while real estate expense rose $2 million due to lease renewals and a return to office expense. For a detailed breakdown of our expense progression and reconciliations, please reference the appendix in today's earnings presentation. I will now walk you through our investment priorities, which remain consistent with what we've outlined last quarter. We're allocating roughly two-thirds to growth and one-third to our internal infrastructure. The growth investments are targeted across firm types. First, we are building a more differentiated data universe, including enterprise data such as real-time feeds, pricing and reference data, as well as our own deep sector content. Second, we are deepening our client workflows, such as extending our strength on the adviser desktop into the home office functions for wealth clients, broadening our managed services offering, and connecting the trade life cycle through our modern EMS and OMS solutions. The structural investments are aimed to enable growth. First, we are upgrading our go-to-market tools and processes to accelerate our sales motion and increase activity levels. Second, we are modernizing core infrastructure, cybersecurity enhancements, AI-powered productivity tools, and performance-based incentives. These are intended to drive operational efficiency as we scale. These investments should strengthen retention and expand our opportunities with existing clients while positioning us to grow with new clients. To help fund these activities, we are executing on productivity actions Sanoke noted earlier, reallocating resources from maintenance to growth initiatives, managing headcount and third-party spend more rigorously, and implementing AI to automate routine processes. Together, these actions should produce sustainable expense savings. On capital allocation, we maintain a balanced framework, but in our priorities, growth comes first. We are deploying capital into product development, go-to-market capabilities, and infrastructure modernization to drive future growth. Our strong balance sheet gives us the flexibility to pursue these investments while also returning capital to shareholders. We ended the quarter with a gross debt leverage ratio of 1.4 times, and our consistent free cash flow generation supports both our growth agenda and capital returns. With our financial strength as a foundation, we are also committed to shareholder returns. Earlier today, we announced an increase to our share repurchase authorization from $400 million to $1 billion. During our first quarter, we purchased approximately 478,000 shares, leaving $860 million of capacity under the program. This increased authorization reflects confidence in FactSet's long-term fundamentals. We also paid a quarterly dividend of $1.10 per share today to shareholders of record as of November 28. In total, we've returned $554 million to our shareholders over the last twelve months through dividends and buybacks, and we remain committed to delivering strong returns while investing for growth. Let me finish with guidance. We are reaffirming our previously issued FY '26 guidance across all metrics, both GAAP and adjusted. Clearly, Q1 was a solid start, and we are encouraged by continued client demand. So this sets us up well to deliver on full-year targets. Looking ahead, our pipeline remains healthy, and we are confident in our ability to convert opportunities and successfully close on key renewals. With much of the year still ahead of us, we are maintaining a prudent and conservative approach to guidance. We are focused on executing against these commitments and will provide updates as we gain additional visibility. On quarterly phasing, we expect Q2 operating margins to reflect the step-up in investment outlined earlier as we bring on headcount and technology resources. This is deliberate and keeps us on track for a full-year margin target. In summary, we achieved a strong Q1 with a healthy demand environment, disciplined investments in growth, and financial strength to deliver sustainable shareholder returns. Thank you for your time today. Operator, please open for questions. Thank you. Operator: As a reminder, to ask a question, please press 11 on your telephone. Our first question comes from the line of Alex Kramm with UBS Securities. Your line is now open. Alex Graham, your line is open. Please check your mute button. Our next question comes from the line of Kelsey Xu with Autonomous Research. Your line is now open. Hi, good morning. Thanks for taking my question. Kelsey Xu: I feel like recently there's been a lot of discussion around FactSet's competitive positioning versus AI startups. I'm actually more curious to hear your perspective on how FactSet is positioned amongst the Big Four data incumbents. I think everyone is investing in AI infrastructure. Everyone's launching new AI products. And FactSet is a smaller one of the bunch. So just curious to hear your strategy to maintain share or gain share with an incumbent. Sanoke Viswanathan: Thank you, Kelsey, for that question. I'll reiterate what we said earlier, which is that we are very confident, very, very confident in what we view as proprietary assets that we have. Both in terms of data as well as tools and analytics, what we bring to bear, there is a significant amount of capability that we bring that is not disruptable by others. At the same time, we also partner very actively with the full range of the AI ecosystem from the hyperscalers to startups. And we view the distribution through those as complementary to our existing distribution. I'll just take a couple of examples and talk about how we think about our strategy. When you look at our workstation, we view the workstation as a channel that distributes our data just like we distribute data through data feeds and through APIs. At the same time, as clients are starting to move into production workloads with AI, they demand security. They demand entitlements. They want a container through which they can consume their AI in a safe and secure way. All of which the workstation does and has been done for decades. So what we are really seeing, and this is evident in our strong quarter you just saw, and in the pipeline that we see, there is a huge amount of demand from clients. From our core existing clients, who've been through, I would say, months, if not years of trialing and experimenting with different AI solutions, coming to us and asking us to be a consolidator of these solutions. And really driving demand. And we've seen multiple five-year and seven-year contract renewals from some of our largest clients where AI is a key component of what we are going to be delivering for them. And let me ask Goran to add a little bit more color to this. Goran Skoko: Yeah. Kelsey, just in terms of how do we stack up versus the established competitors, we feel strongly about our competitive position. We are well-positioned to take share. We keep investing in our content assets, and, you know, we are pleased with the progress of some of those that really are the key to taking share, especially if we have time, you know, price reference data and things of that nature. And data solution was a big driver of the Q1 results. I hope that answers your question. Operator: Thank you. Our next question comes from the line of Faiza Alwy with Deutsche Bank Securities. Your line is now open. Faiza Alwy: Hey. Thank you so much. Good morning. Sanoke, thank you for your detailed comments regarding your priorities. A few things stuck out to me regarding, you know, commercial excellence. You talked about sort of simplifying pricing, packaging, pricing to value. And some of the changes around, you know, sales incentives. And it sounds like you're saying it's already led to, you know, faster sales motion and a richer pipeline. So we'd love to hear a little bit more, sort of bring to light some of the changes that you have either already incorporated and, you know, the early results that you're seeing. Sanoke Viswanathan: Thanks, Faiza. Yes. We are actively at work on a whole set of levers across the entire sort of sales enablement and Salesforce effectiveness. Incentives were one of the first things we worked on in this last quarter. And we've really aligned our incentives across the board, certainly in sales, but even more broadly across the company. To focus on the motions that we are looking to achieve. So first, just, new business development. There's a real renewed vigor and energy with which we are attacking new business development all the way up and down the funnel. And we are seeing significant expansion in our top-of-the-funnel lead generation coming out of that. The second area is obviously cross-selling and upselling, so driving retention and expansion in our core clients. This, we are seeing a big pickup, and the energy in our sales teams is palpable. We are seeing faster sales motion. It is definitely aided by the fact that our AI products are resonating. And there is an urgency in clients as well to move faster in terms of capturing the value from those products. And in terms of some of the other levers I spoke about, we have a lot of work ahead of us. We are investing in our systems. We are applying more analytics to understanding where we are trending in terms of client usage of our products. And being able to flag and ultimately reduce the risk of churn. So we see good upside from this coming through in the future quarters. And, certainly, the idea is to build a sustainable long sort of high-performance commercial engine. Operator: Our next question comes from the line of Alex Kramm with UBS. Your line is now open. Alex Kramm: Hey, guys. Hopefully, you hear me now on this line. Seems like you are. You hear me? Sorry. Yes. Yes. All clear. Sanoke Viswanathan: Alright. Good. Sorry. Technical difficulties today. Alright. Anyways, I think this was asked when I disconnected, but the other question I'm getting related to AI a lot when it comes to you guys is also how the hiring picture is gonna look for your customer base in the future because obviously, not only you, but your customers are talking about using AI for efficiency. And, you know, I think 50% of your business is still a desktop business. So maybe you with your discussions you've been having with clients, where do you hear that the most? Like, what client types do you think you can actually see some maybe a customer reductions in terms of the seat? So and how do you stack up in those areas? Meaning, you know, where do you see the biggest reduction of force, and how does this impact your kind of desktop-related businesses? Sanoke Viswanathan: Oh, good. Thanks, Alex. Yeah. Look. As I said, I've met with dozens of clients now around the world and across all our firm types. And, certainly, I'd say there's a huge amount of experimentation and testing out and piloting of various AI solutions. What we're seeing on the ground in terms of real commitment and, you know, commitment of the larger dollars though, is to folks like ourselves. Ultimately, clients are looking for ways in which they can augment their FactSet solutions. And our own AI products are resonating. We are not seeing yet any real reduction in headcount. Frankly, not even in banking where there has been a significant amount of discussion about it. What we are actually seeing this season is a strong recovery driven by the M&A recovery more broadly. We're actually seeing increased headcount, increased hiring of bankers, and, by the way, increased usage of all of the digital tooling including our AI products. So our banking AI products, for instance, have seen over a 100% in terms of usage growth just quarter on quarter. So I actually think what is really likely to play out is that we are gonna see consumption growth, which we are very well prepared for because of the way in which we have structured our contracts with clients. And an increase in headcount as well. Again, I don't have a crystal ball, but so far, we're not seeing any reductions. Certainly discussions about it, and there is an expectation that there'll be greater efficiencies. We are seeing those efficiencies, if they are already coming through, being put back into attempts to gain market share by our clients in our end markets. Operator: Our next question comes from the line of Manav Patnaik with Barclays Capital. Your line is now open. Manav Patnaik: Thank you. Good morning. I just had a question on the slide you had on the margin impact for the 2026 investments. Just kind of following up, what is the cadence, I guess, by quarter we should be expecting on that 250 basis point gross investment? Like how much is done this quarter, for example? And then, you know, are these one-time investments? Or should we anticipate, like, 2027, 2028, etcetera, having more of these as well? Sanoke Viswanathan: So, Manav, I'll take the second part of that question, and then I'll ask Helen to cover the cadence through this year. So just to recap the sort of the nature of our investments, we have a good chunk of investments going into foundational elements. Broadly put, the foundational elements into two types. We are investing in our sales incentives as well as broad incentives across the organization. So we can attract and retain top talent. And the second, we are investing in technology infrastructure. So both cybersecurity as well as resilience for the critical infrastructure that we are providing for our clients. Both very essential to the core business that we deliver. So these are strong foundational enablers that set us up well for future operating leverage and for scale. The bulk of the investments then is growing into very specific targeted growth areas. Both on the content side, so explicitly expanding our datasets, whether it's pricing and reference data, real-time data, deep sector data, and, frankly, continuing to invest in the AI readiness of our data and on the other hand, on deepening our workflows across the portfolio life cycle both in the wealth space as well as in investing in areas like our trading and, you know, OMS and EMS systems. So these investments all have clear line of sight into direct line demand. So we feel very good about this level of investment. And we are not planning to change this level of investment the rest of this year. I think the idea is to, you know, we have a solid investment plan. And we expect that the benefits of this will play out in future years. You know, about the longer-term investment path, that's linked intrinsically to our long-term strategy development, which we are working actively on. I will come back and share more about that in future quarters. So let me turn it over to Helen to hit the cadence for 2026. Helen Shan: Thanks. And thanks for that question, Manav. So we're pretty pleased with the progress we've made on our cost management program thus far. Those are the productivity benefits that we referred to earlier. And when we think about the full-year phasing, when we look at, for example, technology costs, which we would expect to continue to increase, amortization of capitalized software is increasing through the year, and that really reflects our prior investments. And then also the full-year run rate from recent acquisitions are gonna start to lap going forward as well. So those are things that are impacting the phasing. When we think about the strategic investments, they're really back-half weighted across three areas: the incremental headcount, software infrastructure, and then also professional services, which are really more largely one-time in nature. So we don't usually provide quarterly guidance as you know, but you can sort of expect that similar pattern that we saw last year. That being said, Q4 can be impacted, positive or negatively, depending on our performance, which is what happened last year. But that's how I would think about the impact of margin over the rest of the year. Operator: Our next question comes from the line of Shlomo Rosenbaum with Stifel. Your line is now open. Shlomo Rosenbaum: Hi. Thank you very much. I had a broader question just on the environment. It seems like during the quarter, the company took a step forward in the organic growth in each of the geographic units. And what I'm trying to understand is how much of that is from the, you know, Sanoke, maybe you're lighting a fire under people more, you know, over the near term in terms of closing some of the business and getting things done. And how much of it is that you're really seeing an improvement out there in the environment in general? And I know that's not it's very hard to quantify it, but maybe, you know, you can give us some thoughts on, you know, what you're seeing with the environment versus how much of it is company-specific success. Sanoke Viswanathan: Yeah. I'll ask Goran to comment on this and add to it. But let me start by saying that we're seeing very good positive sentiment across the board. This high conviction we are seeing from our clients in our products and solutions. And the pipeline is certainly much stronger at this point in the year than it was this time last year. So we're quite pleased with the sales cycle. We're seeing a very diversified pipeline across firm types, which is giving us confidence that, you know, we don't see any risk to any particular type of situation. And frankly, it's the some of the initiatives we are undertaking is leading to better retention. So to your question, it's a complementary situation where, you know, there's certainly a bunch of things we are doing, which is helping our own organic pipeline both in terms of retention and expansion. The market environment is strong, and we see that in customer sentiment. There's lots of demand for new data products. There's expansion in the ways in which clients are looking at consuming our data and applying it to work. We're seeing a growing demand from the technology offices of clients, data science teams, teams that were traditionally not perhaps, you know, in front of a FactSet workstation, but are starting to consume our data in significant quantities through new channels, whether it is APIs, direct data feeds, cloud connectors, MCP servers, etcetera. Goran Skoko: So, Shlomo, yeah, as Sanoke said, it's a little bit of both. You know? So the environment is more positive, more constructive. But, you know, I think it's also the things that we are doing. Investments that we have made are resonating. So we have seen an improvement in retention in banking, for example, and, you know, I would attribute that to our investment in aftermarket research and deep sector, which is certainly helping. Our trading solutions are contributing significantly, so we are seeing better diversification across the product lines in terms of contribution. And then, you know, the client demand is increasing. We have seen some positive impact from regulations in China, and we are seeing, you know, deals closing pretty fast. And, you know, and I think demand for our content is increasing in that region significantly. So it's, you know, well diversified in terms of contributions, and we are pleased with the progress so far. Operator: Our next question comes from the line of Andrew Nicholas with William Blair. Your line is now open. Andrew Nicholas: Good morning. This is Tom Rodsdon for Andrew Nicholas. Thank you for taking my question. I was wondering if you could speak to how AI contributed to your AI product contributed to ASV growth in the quarter. And kind of any color you could add on how it's driving new wins, displacing incumbents, or just helping retention? Thank you. Sanoke Viswanathan: Thank you for that question. As we said last time, we've stopped calling out our AI products separately as a line item. And, candidly, it was because we are seeing AI just deployed everywhere. So across the board, we look at our solutions that we're delivering both for the institutional buy side and wealth management as well as on the sell side. We're seeing AI consumption just being a real complement and an accelerator. It's a real tailwind to the conversion of our core products as well. So it's definitely adding to the mix. And I'd say I'll point to adoption as probably the best way to describe the effect it's having on our clients. Just the AI products we launched in this year, so if you look at what we launched in the first quarter of back in January, February, March, sequentially, they've been growing at a very nice pace. Just this quarter, we saw the growth rate and adoption of all of that at over 45% just quarter on quarter. And we're just at the start of this journey, and we are both investing in new products as well as continuing to distribute and enhance these products. So we see it as a real tailwind for the overall business. Operator: Thank you. Our next question comes from the line of George Tong with Goldman Sachs. Your line is now open. George Tong: Hi, thanks. Good morning. You talked about leaning into product initiatives like ingesting data better, modernizing your tech platform, and driving service team efficiencies. At the same time, you're investing in the sales and tech infrastructure, and that's causing operating margins to decline about 150 bps for full-year fiscal '26 just based on guidance. How do you think about balancing investments with your ability to drive margin expansion? Sanoke Viswanathan: Thanks, George. The investments we are making are, you know, of two types. The structural investments we are making are going to help us in terms of operating leverage. So the example I gave about really organizing all our applications into a new form where they are able to leverage a common technology infrastructure is centrally run. This takes a lot of the toil away from our developers at the front end and puts time back in their hands, which they can focus on really cutting-edge product development, which then creates that sort of flywheel effect for us of being able to ship products faster. So that investment, the structural investments are key to driving operating leverage. The growth investments, as I said earlier, are directly aligned to client demand. We are investing in our content. We are investing in our delivery mechanisms and our work, and we're investing in AI. Right? So the combination of all of this is gonna directly resonate with clients as it has, as you've seen in the quarter. And we see a strong pipeline throughout the year. So we're really balancing these two investments. And we see value from both, both in the short term, but even more so in the medium to long term. Operator: Thank you. Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is now open. Toni Kaplan: Thanks so much. The organic ASV growth has been accelerating for the past three quarters and is better than I was expecting in this quarter. And so just based on the guide, it looks like you're expecting it to decelerate from the current level, and this is despite sort of the confidence and momentum, good pipeline, and the investments. And so I was just wondering, is this just conservatism or is there something that you're seeing that would imply that growth slows towards the end of the fiscal year, maybe it's the tough comp. Just wanted to understand what would drive the, you know, the guidance or, you know, not to be a little bit higher and sort of what factors might go into, you know, sort of getting to the low end of the range versus the high end of the range on organic ASV? Thanks. Sanoke Viswanathan: Thanks, Toni. We remain very confident, as we've said, in the strength of the pipeline. Having said that, it's really early in the year. And there is a significant amount of business to be, you know, acquired throughout the rest of the year. So, you know, we want to be prudent, and we are, obviously, you know, remaining very focused on winning deals, you know, executing well in the market. And we hope to come back in future quarters and, you know, continue to support this sort of growth trajectory that we have been on in the last three quarters. Operator: Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets. Your line is now open. Jeff Silber: Thanks so much. I really appreciate, I think it was slide seven in your deck where you try to calculate what the, you know, of your products and services are proprietary versus non-proprietary. Can you give us a little bit of color how you came up with what exactly went in each bucket? Sanoke Viswanathan: Sure. Thanks, Jeff. As we show in the slide, you know, we have the vast majority of our business as proprietary. And I'll spend a couple of minutes just explaining, you know, how we've gone about the analysis. So as you can tell on the slide, 40% of our business is intrinsically linked to client proprietary data. We bring our proprietary models, our analytics, our solutions to work on their data, which is obviously proprietary, and we feed it back in terms of high quality that then feeds a number of downstream workflows. A good example is portfolio analytics. It's what we do with our adviser dashboards on wealth management advisers' desktops. We're here, we are really supporting millions of portfolios of end clients that our advisers are managing and advising on. We are enabling them to do their jobs better. So that's 40% clearly proprietary. The remaining 60% of the work we do and of our business is data that we distribute through multiple formats, the workstation being a flagship channel. But we also deliver through APIs, through other feeds, and through more and more modern channels. When you look at the far right on that page, the 10% that we are really saying, you know, we are holding a high bar and saying that it's not proprietary, this 10%, we are labeling it enhanced and curated. You could technically access the core data from public sources. But as you can see on the page, there are some very strong branded products there with a high degree of client loyalty to FactSet. An example would be StreetAccount, an example would be Shark. It would be GeoRev. Even these are enhanced with a lot of FactSet methodologies and content and humans, for example, street account reporters, who are working every day to deliver these services. But we're being intellectually very rigorous in saying these can technically be accessed through other sources because the raw data is publicly available like news and filings and so on. That brings us to the 50%, what we are calling proprietary and enriched. So why do we say this is proprietary? This really is either because the data is proprietary, as in the case of QSIP, or that the data is enriched significantly with our proprietary methodologies and know-how. I'll give you a very simple example. Some of our strongest franchises, whether it's identifier assignment, benchmarks, normalized fundamentals, instrument-level cap structures, event-driven data, regulatory data sets, all of these, these are not just historical artifacts. We rely on ongoing skilled domain expert labor and proprietary methodologies that are applied to this every day, every minute, and often in milliseconds to actually deliver very high-quality structured intelligence to our customers. So examples are the Revere, you know, business industry classification, right, our BICs, which is the industry gold standard for industry classification. It's our real-time exchange and pricing and reference data feeds. Our private capital data on private companies. Deep sector data. And, obviously, our absolute flagship products are standardized and point-in-time fundamentals and estimates, which is the gold standard for fundamentals in the market. Operator: Thank you. Our next question comes from the line of Surinder Thind with Jefferies. Your line is now open. Surinder Thind: Thank you. Sanoke, I just wanted to kind of ask about kind of the idea around medium-term targets here. So as you work towards establishing them and you think about the growth in the margins, like, what are some of maybe the key considerations you're exploring here? It just seems that, like, with the pace of change, it's accelerating, you know, how things might look out two or three years. There's just a lot of uncertainty. So would you be even able to build a medium-term outlook that you can have confidence in? Sanoke Viswanathan: Absolutely, Surinder. This is our, as you looked at my priorities that I described earlier, spending a lot of our time working on our strategy and our long-term vision. Of course, there's uncertainty in the marketplace. We like this uncertainty because we see the trend of opportunity in it. We are very well positioned to take advantage of the changing dynamics, the form factor changing, the addition of new content sets, opening up of new end markets. We are excited by the opportunity set in front of us. And our strategy is working the way we are developing it, which we'll, of course, come back and share in future quarters, is designed to find ways in which we can differentiate ourselves better from competition, from our traditional and new competition, and finding ways in which we can capture new vectors of growth and continue to sweat our existing assets and capabilities better and capture more upside from those. So I do feel very confident that we can come back with medium-term guidance in the future quarters. Operator: Thank you. Our next question comes from the line of Jason Haas with Wells Fargo. Your line is now open. Jason Haas: Hey, good morning, and thanks for taking my question. Based on some of my comments, it sounds like you're selling more AI-ready data through feeds and APIs and presumably, your clients are gonna be using that data with their own AI solutions. And I think there's a thought out there that this would be a first step to potentially those clients not needing as many workstation subscriptions. So I'm curious if you could comment on that. And then, it's related, so I wanna also ask are you able to talk about how the margin on those, like, feeds business compares to the margins when you sell a workstation product. Thank you. Sanoke Viswanathan: Thanks, Jason. So a couple of things. The distribution of our high-quality data that is now ready for AI consumption, so AI models can really read the data and make sense of the data because of all the enrichment we've done with the metadata to it, is certainly a growing opportunity for us. We don't see it as a risk of cannibalizing our existing channels. For a couple of reasons. As I said earlier to one of the earlier questions, we see the workstation as a channel. It's a flagship channel. But ultimately, it's a channel for distribution of the content. And we are well prepared with any new channel of consumption. And therefore, we will meet our clients' demand where they want us to meet them. If it is an MCP server, we'll deliver data through the MCP server. If it is the workstation, it is the workstation. What we ourselves expect is that there's going to be more of both. Because anytime we see digital adoption scaling, as we have seen historically with other sort of technology trends, one plus one equals three. There's even more demand. The end markets consume the data in multiple different ways. Now the other point I'd like to point out about the workstation is the workstation is deeply, deeply embedded in the workflows of our clients across the sell side and the buy side. So it's not just a portal where you look at the data. It is deeply intertwined in the investment workflows that our clients pursue, and we see the components of consumption through other channels actually complementing it and being ultimately brought back into the workflow that the workstation is anchoring today. So that's how we see this evolving. And, of course, we are well positioned in whichever way the market evolves. As far as the margins are concerned, you know, we see strong margin opportunity on both sides. Right? The workstation is a high-margin product. But so are these data feeds through other channels. And we continue to anticipate that both will continue to deliver very strongly for us on the operating margin front. Operator: Thank you. Our next question comes from the line of Scott Wortzel with Wolfe Research. Your line is now open. Scott Wortzel: Thank you for taking my question. Just wanted to ask on sort of private market data offering. And there's been a lot of, I think, investment in the space from yourselves and your peers as well in terms of increasing the magnitude of data that you have on private companies. So just wondering how you sort of feel about your competitive position with your private markets data and if it is an investment priority for you over the course of the next twelve months here. Thanks. Sanoke Viswanathan: Thanks, Scott. Private capital is clearly an area that we cannot ignore. And we've been investing in it already now for multiple years. And we have a very strong position now in the quality of our datasets that we're delivering. We cover over 10 million companies in our, you know, private company database at a very high-quality level similar to the quality standards I talked about earlier when we talked about our proprietary data. And that way, if you think about how we operate and how we aim to support the client base, we think of it from the pre-deal stages through the deal-making stages and into the post-deal sort of spectrum of activities. On the buy side, obviously, because of our strong position in portfolio analytics, we have a very privileged position to support clients as they look at their total portfolio views across public and private assets. And, you know, the data that we are today providing on private capital is enabling our asset owner clients and our asset manager clients and insurers to look at the risk in a normalized fashion, which historically has been very difficult. And with some of the market events that are happening, there is a growing need for risk assessments at a much greater frequency, which is playing well to our strengths in the space. Operator: Our next question comes from the line of David Motemaden with Evercore ISI. Your line is now open. David Motemaden: Hey. Thanks. Good morning. I wanted to just ask. It sounded like the pipeline's good. The environment is getting more constructive. Some of the changes to sales incentives and product investments have been gaining traction. But could you just help me reconcile that with the only seven net new clients that were added this quarter? Sanoke Viswanathan: Sorry. Can you repeat that, a bit? We didn't hear it clearly. David Motemaden: Yeah. I just it sounded like the pipeline is good. The environment is constructive for your clients. The product investments have been gaining some traction. But when I look at the net new clients this quarter, it's up by only seven. That's the, you know, the lowest amount of net new client adds you guys have had in quite some time. So, you know, is there, you know, so it seems like retention is solid, but the new logo adds might be lagging a little bit. So I was wondering if you could just explore that a little bit. Sanoke Viswanathan: Sure. Sure. Thank you. The first I would say the client count is broadly in line. It tends to be a little bit lower in the early part of the year. And we are not worried about the client count number itself. We actually have a very strong pipeline of new business opportunities. And if you look at our ASP growth from new business, it's actually very, very strong. So I wouldn't worry much about the client count number. And we actually see a really strong pipeline on that front through the rest of the year. And maybe, Goran, you can add a little bit to that. Goran Skoko: Yeah. David, then if you look at historically, Q1 is a slower, you know, slower in terms of net client growth, but I would just reiterate what you're saying. We're seeing lots of positivity. We're seeing a strong pipeline and, you know, really expect to deliver for the rest of the year. Operator: Thank you. This concludes the question and answer session. I would now like to turn the call back over to Sanoke Viswanathan for closing remarks. Sanoke Viswanathan: Thank you, operator. And thank you, everyone, for joining the call today. We are still early in this next chapter, as you can see, for FactSet. And while there's much work ahead of us, the opportunity in front of us is very clear. Our structural advantages give us a strong foundation, and we are mobilizing with urgency to execute against these priorities. You will hear more from us in the coming quarters as we move forward with speed and discipline. I want to thank once again all our FactSetters for your continued commitment to our clients. Operator, that ends today's call. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Operator: Hello. And welcome to the FuelCell Energy Fourth Quarter of Fiscal 2025 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Keypad. I would now like to turn the conference over to Michael Bishop, CFO. You may begin. Michael Bishop: Thank you, operator. Good morning, everyone, and thank you for joining us on the call today. This morning, FuelCell Energy released our financial results for the fourth quarter and fiscal year 2025, and our earnings press release is available in the Investors section of our website at www.fuelcellenergy.com. In addition to this call and our earnings press release, we have posted a slide presentation on our website. This webcast is being recorded and will be available for replay on our website approximately two hours after we conclude. Before we begin, please note that some information that you will hear or be provided with today consists of forward-looking statements within the meaning of the Securities and Exchange Act of 1934. Such statements express our expectations, beliefs, and intentions regarding the future, and include statements concerning our anticipated financial results, plans and expectations regarding the continuing development, commercialization, and financing of our fuel cell technology, our anticipated market opportunities, and our business plans and strategies. Our actual future results could differ materially from those described or implied by such forward-looking statements because of a number of risks and uncertainties. More information regarding such risks and uncertainties is available in the safe harbor statement in the slide presentation and in our filings with the SEC, particularly the Risk Factors section of our most recent Form 10-Ks and any subsequently filed quarterly reports on Form 10-Q. During this call, we will be discussing certain non-GAAP financial measures, and we refer you to our website, our earnings press release, and the appendix of the slide presentation for the reconciliation of those measures to GAAP financial measures. Our press release and a copy of today's webcast presentation are available on our website under the Investors tab. For this call, I'm joined by Jason Few, our president and chief executive officer. During our prepared remarks, the leadership team will be available to take your questions. I'll now hand the call over to Jason for opening remarks. Jason? Jason Few: Thank you, Mike, and good morning, everyone. Thank you for joining us on our call today. Our fourth fiscal quarter closed a year of meaningful progress for FuelCell Energy. Starting around twelve months ago, we began a series of thoughtful restructuring measures to sharpen our focus and strengthen the fundamentals of our business. Through this series of tough decisions to streamline and focus our organization, today, we are operating with greater discipline, lower cost, and strategic clarity. We are further along on our path to profitability. The work is not finished. But we believe we are on the right track. During this time, the surrounding market environment has undergone significant change as well. Presenting what we see as one of the greatest business opportunities of our generation. The demand for more power to accommodate data centers, industry, and communities, we believe that demand plays directly to the strength of our technology: clean, resilient, near-silent continuous power. We continue to focus on converting our pipeline into executed contracts, scaling our manufacturing capacity at our Torrington facility, and advancing product improvements that differentiate us from our competitors. We are committed to this work and we are doing it with urgency and with clear focus. That focus is delivering distributed, always-on, low-emission power through our carbonate fuel cell platform. Our technology is proven at scale and we are aligning our business around this singular strength. As you all know, demand for power is accelerating quickly, driven by the exponential growth of AI data centers, and digital infrastructure that is outpacing the capabilities of the existing grid. This demand is reshaping the market and it requires solutions that can provide clean, reliable power where it is needed. The need is clear, urgent, and investable. With decades of operating experience, and a differentiated electrochemical platform, we believe we are well-positioned to meet this need and successfully compete for the opportunities emerging in this rapidly growing market segment. Please turn to slide four. As you view our fourth quarter, and full fiscal year results, please keep the following five points in mind. Number one, we are focused on our data center strategy. AI-driven demand is reshaping power requirements across the data center and digital infrastructure ecosystem. We are actively engaged with participants across the ecosystem to make them aware of our capabilities and that we are prepared to provide utility-scale reliable, and cost-competitive clean power for these types of energy-intensive applications. With our collaboration with Diversified Energy, the potential future collaboration with Inuverse announced earlier this year, and a growing pipeline of potential data center opportunities in The US and Asia, we believe we have strong momentum heading into 2026. Number two, we are scaling manufacturing capacity. We believe that our path to profitability runs through higher utilization at our manufacturing facility in Torrington, Connecticut. As we increase production, we expect our cost structure to become more efficient. And we expect this to translate into positive adjusted EBITDA once we reach an annualized production rate of 100 megawatts per year. Entering fiscal year 2026, our focus is on margin expansion driven by disciplined operations and greater production throughput. I will provide additional detail on our scalable manufacturing capacity later in the presentation. Number three, we are building financing capacity to enable growth. We believe that the $25 million financing provided by XM to support our GGE project in Korea demonstrates a model that can be used for future projects both in Korea and worldwide. The current US administration has expressed its intention to use Ex I'm to support the global adoption of American technologies like ours, and we believe this financing signals Ex I'm belief in our utility-scale power generation technology. We are pleased to have XM as a financing partner. We are entering 2026 with a strong balance sheet and we expect to achieve financing flexibility through proven models like the XM financing and other financing alternatives. Number four, we believe we are positioned to win in emerging power markets. Policy certainty under the One Big Beautiful Bill Act improves project economics, supports long-term adoption, and allows current and potential customers to make investment decisions. Furthermore, our core carbonate platform provides reliable, clean power that can be dispatched when needed. And can be situated close to users. An advantage for customers prioritizing dependable energy, lower emissions, and flexible site options for crucial operations. And number five, we are entering fiscal year 2026 with strong momentum. Commercial momentum, policy clarity, and an expanding opportunity set gives us confidence. Our success in fiscal year 2026 will depend on execution, converting our pipeline into executed contracts and backlog into revenue. With the discipline and focus we've been building across the company. Transitioning to slide five. We succeed when we stay focused on solving problems for our customers. Customers turn to us when they need to pursue business growth without compromise. And when power constraints threaten timelines, economics, or operational reliability. Increased demand is not the only challenge they encounter. There are numerous obstacles facing customers today that can hinder their economic growth. Utility interconnections now routinely take five to seven years or more, and new substation builds follow a similar timeline. Traditional gas turbines face three to five years of procurement and construction before they can deliver behind-the-meter power. Our carbonate fuel cells avoid these bottlenecks. They can be deployed without requiring new high-voltage interconnections, can be brought online more quickly, and can deliver a cost of energy comparable to turbines and other engine alternatives with reduced permitting risk. These delays are further compounded by emission restrictions and limited site availability. Our core carbonate platform addresses those issues directly. They produce virtually no NOx or SOx, and offer unique carbon capture capability. In addition, our 1.25 megawatt power blocks allow customers to scale capacity as their needs grow. Traditional generation projects often trigger resistance, adding years of uncertainty. Our distributed carbonate fuel cell platform sidesteps these issues. It requires a smaller footprint, operates quietly, and can operate near the point of use, which may help to mitigate opposition and accelerate time to power. Let's move to slide six. These challenges and the way our customers need to solve them shape how we operate. We have concentrated our efforts on our Carbonite FuelCell platform because it not only is ready now, but also directly addresses the constraints I just outlined. It is proven across commercial deployments of varying scale, and we continue to refine it through real-world operating experience. Our platform also benefits from a strong US policy tailwind, including the reinstatement of the investment tax credit and incentives for carbon capture, an important point of differentiation compared to other generation technologies. And while we are doubling down on what is a commercially ready platform, we are also investing selectively in innovations that we believe will better position us for what comes next. These emerging technologies have the potential to drive the next phase of our growth and strengthen our long-term competitiveness. Now on to Slide eight. I wanted to highlight one example of the momentum we are carrying into 2026. We have established FuelCell Energy as a leading partner in South Korea's growing fuel cell energy economy, the largest in the world. Today, we have more than 100 megawatts of power projects in South Korea in our backlog, with another 100 megawatts under MOU. Our ongoing work with GGE continues to advance, supported by the $25 million in new Ex I'm financing for the next phase of the project, including additional module shipments and service. We also see a clear path for additional repowering opportunities, and we are proud to contribute to Korea's evolving energy landscape. Let's go to slide nine. As we look ahead to fiscal year 2026, we continue to see a compelling case for fuel cells in data center applications. Grid constraints, rising workloads, and pressure to manage energy costs are all increasing demand for reliable, efficient, and scalable on-site power. Our carbonate fuel cell platform addresses these needs directly by delivering baseload reliability, modular scalability, and meaningful permitting advantages. And as data centers push more computational power, our integrated absorption chilling and heat offtake could help manage thermal load while maintaining system performance. It is our assessment that our carbonate fuel cell platform additionally offers extended stack longevity, reliable biogas functionality, minimal performance degradation, and sophisticated containment management. These features collectively facilitate cost-effective carbon capture solutions, particularly in large-scale applications. Additionally, as NIMBY concerns grow and data center operators are under pressure to expand, our fuel cells offer a low-profile, clean solution that provides greater flexibility for siting, that can help them move forward faster amidst community concerns. Let's move to slide 10. With this opportunity in front of us, we also believe we have the manufacturing foundation to meet it. Once we reach an annualized production rate of 100 megawatts per year at our Torrington facility, we expect to achieve positive adjusted EBITDA. Today, we are roughly 40% of the way there. And our backlog continues to build. Looking further ahead, we believe that the Torrington facility could accommodate an estimated annualized production capacity of up to 350 megawatts per year with additional capital investment in machinery, equipment, tooling, labor, outsourcing of certain processes, and inventory. As we entered the new year, we are executing with focus and momentum. We are focused on advancing meaningful opportunities in the data center market, scaling a manufacturing platform built for utility-level deployments, and moving steadily toward profitability with operational discipline. With that, I'd like to turn the call over to our CFO, Mike Bishop. Michael Bishop: Thank you, Jason, and good morning to everyone on the call today. Overall, we are pleased with the progress made during the year with revenue expansion, largely driven by repowering activities in Korea, expense reductions as a result of our restructuring plans implemented in fiscal year 2025, and balance sheet strength as a result of spending reductions and financing activities. Let's review the operating performance for the fourth quarter and fiscal year 2025 shown on Slide 12. In 2025, we reported total revenues of $55 million compared to revenues of $49.3 million in the prior year quarter, representing a 12% increase. We reported a loss from operations in the quarter of $28.3 million compared to $41 million in 2024. The loss from operations in 2025 was impacted by a noncash impairment expense of $1.3 million as a result of our previously announced restructuring plan. The net loss attributable to common stockholders in the quarter was $30.7 million compared to a net loss attributable to common stockholders of $42.2 million in 2024. The resulting net loss per share attributable to common stockholders in 2025 was $0.85 compared to $2.21 in the prior year period. The decrease in net loss per share attributable to common stockholders is due to the benefit of the higher number of weighted average shares outstanding due to the share issuances since 10/31/2024 and the decrease in net loss attributable to common stockholders. Net loss was $29.3 million in 2025 compared to a net loss of $39.6 million in 2024. Adjusted EBITDA totaled negative $17.7 million in 2025 compared to adjusted EBITDA of negative $25.3 million in 2024. Now shifting to the full year results, in fiscal year 2025, we reported total revenues of $158.2 million compared to revenues of $112.1 million in the prior year, representing a 41% increase. This increase was largely driven by module deliveries to Goji Green Energy Company Limited or GGE under our long-term service agreement. During fiscal year 2025, we delivered a total of 22 modules to GGE. We reported a loss from operations for the year of $192.3 million compared to $158.5 million in fiscal year 2024. This increase is mainly attributable to noncash impairment expenses of $65.8 million and restructuring expenses of $5.3 million incurred in fiscal 2025 resulting from our previously announced restructuring plan. The net loss attributable to common stockholders for the year was $191.1 million compared to a net loss attributable to common stockholders of $129.2 million in fiscal year 2024. The resulting net loss per share attributable to common stockholders in fiscal year 2025 was $7.42 compared to $7.83 in the prior year. Adjusted net loss attributable to common stockholders, which excludes the noncash impairment expenses, restructuring expenses, and certain other noncash items, was $4.41 compared to $6.54 in fiscal year 2024. Net loss was $1.914 billion in fiscal year 2025 compared to a net loss of $156.8 million in fiscal year 2024. Adjusted EBITDA totaled negative $74.4 million in fiscal year 2025 compared to adjusted EBITDA of negative $101.1 million in fiscal year 2024, a reduction of 26% and over $25 million. We believe this improvement in adjusted EBITDA and adjusted net loss attributable to common stockholders reflects the early benefits of our cost savings actions and our sharper focus on our core carbonate platform under our restructuring plan. Please refer to the appendix in the earnings release, which provides a reconciliation of the non-GAAP financial measures, adjusted net loss, per share attributable to common stockholders, and adjusted EBITDA. Next, on slide 13, you will see additional details on our financial performance during the fourth quarter and backlog as of 10/31/2025. In the graph on the left-hand side of the slide, revenue is broken down by category. Product revenues were $30 million compared to $25.4 million in the comparable prior year period. This increase was primarily driven by revenue recognized under the company's long-term service agreement with GGE for the delivery and commissioning of 10 fuel cell modules. Service agreement revenues increased to $7.3 million from $5.6 million. The increase in service agreement revenues during the three months ended 10/31/2025 was primarily due to revenue recognized under the company's long-term service agreement with GGE. Generation revenues increased to $12.2 million from $12 million, reflecting higher output from plants in the company's generation operating portfolio during the quarter compared to the prior year period. Advanced technology contract revenues decreased to $5.5 million from $6.4 million. Now looking at the right-hand side of the slide, I will walk through the changes in gross loss and operating expenses. Gross loss for 2025 totaled $6.6 million compared to a gross loss of $10.9 million in the comparable prior year quarter. The decrease in gross loss for 2025 was primarily related to decreased gross loss from generation revenues, product revenues, and service agreement revenues, partially offset by reduced gross margin on advanced technology contract revenues during 2025. Operating expenses for 2025 decreased to $21.7 million from $30.1 million in 2024, primarily due to a $6.2 million decrease in research and development expenses, partially offset by a noncash impairment expense of $1.3 million. Administrative and selling expenses decreased to $15.2 million during the period from $15.9 million during 2024, primarily due to lower compensation expense resulting from the restructuring actions taken in September and November 2024 and June 2025. Research and development expenses decreased to $5.5 million during 2025 compared to $11.6 million in 2024. This decrease was primarily due to lower spending on commercial development efforts related to our solid oxide power generation and electrolysis platforms and carbon separation and carbon recovery solutions. On the bottom right of the slide, you will see that backlog increased by approximately 2.6% to $1.19 billion compared to $1.16 billion as of 10/31/2024, primarily resulting from the additions of the Hartford project and the long-term service agreement with CGN, Yocheng, Generation Company Limited or CGN, partially offset by revenue recognition during the year. Slide 14 is an update on our liquidity position. As of 10/31/2025, we had cash, restricted cash, and cash equivalents of $341.8 million. During the three months ended 10/31/2025, approximately 16.4 million shares of the company's common stock were sold under the company's amended open market sale agreement at an average sale price of $8.33 per share, resulting in net proceeds to the company of approximately $134.1 million. Subsequent to the end of the quarter, approximately 1.6 million shares of the company's common stock were also sold under the amended open market sale agreement at an average sale price of $8.37 per share, resulting in net proceeds to the company of approximately $13.1 million. Additionally, after the quarter ended, we announced a new $25 million debt financing transaction with the Export-Import Bank of the United States or XM, marking a continued commitment from XM to support the company's growth ambitions to deliver utility-grade power in international markets such as the collaboration with GGE in Korea. In closing, we continue to take disciplined steps to strengthen our financial foundation while focusing on a growing set of new commercial opportunities. Our strategy centers on commercial momentum, with the acceleration of data center opportunities, operational leverage through utilization and expansion at our Torrington facility with the goal of achieving positive adjusted EBITDA results while maintaining balance sheet strength through capital efficiency via financing structures including frameworks like those utilized with XM. I will now turn the call over to the operator to begin Q&A. Operator: Thank you. If you would like to withdraw your question, simply press 1 again. We ask that you please limit yourself to one question and one follow-up. Thank you. Your first question comes from the line of Dushyant Ailani with Jefferies. Your line is open. Dushyant Ailani: Hi, team. Thanks for taking my questions. One on just wanted to kinda think about how do you guys frame 2026 growth outlook. Do you think there's a potential to bake in any data center opportunity in 2026, or do you think more of you know, between 2027 and beyond? Story. Jason Few: Thank you for joining us today, and thank you for the question. As we look at 2026 and the overall data center opportunity, you know, today, we set we've got hundreds of megawatts of pricing proposals out across the whole digital infrastructure ecosystem, and that ranges from hyperscalers, utilities, power land developers, infrastructure players, and sponsors, kinda so kind of across the whole gamut of opportunities. And, you know, each of these opportunities are on their own timeline from a development and getting to an FID or closure. But we certainly believe that those opportunities will present in 2026 for the company. And be part of our growth story. Dushyant Ailani: Lovely. And then, just wanted to kind of talk about the capacity expansions. I think you said that you could increase the capacity to two fifty megawatts. Right? How how long would it take scale once you make that decision? Just trying to think that through. Yeah. So if you think about where we are today, we've always talked about our ability under our existing construct and what's there to do a 100 megawatts capacity. We're at 41 megawatts today run rate. So our ability to get to to a 100 megawatts is is really no real new capital investment to make that happen. What we talked about on the call today is getting to 350 megawatts. That's still in that same footprint. Of our existing Torrington facility. So although there will be some capital investment, we think it's fairly modest to get to the three hundred and and fifty megawatts, and we think that we can do that in a pretty short cycle window. And our expectation is that scale can happen in, you know, in the time frame of less than, you know, eighteen months or so to get that build out and get it done. Dushyant Ailani: Got it. Thank you. Jason Few: Thank you. Operator: The next question comes from George Gianarikas with Canaccord Genuity. Please go ahead. George Gianarikas: Hi. Good morning all, and and thank you for my taking my questions. So maybe just to pull that through a little bit with regard to data center traction. Can you just sort of maybe go into a little bit more detail as to how the conversations, with your DPP partners are are going? Like, any bottlenecks to to maybe signing a deal? Any and where you see maybe the most opportunity over the next six to twelve months? Thank you. Jason Few: Yes, George. No, thank you for the question. So I think maybe the way that I would answer that is I break it up into maybe two buckets. If you look at the work that we're doing with Diversified Energy, that's really our play or angle to provide a powered land solution to customers because they bring gas We bring power. And so it's all about offering whether it's a you know, a real estate developer or if it's another you know, data center developer or even a hyperscaler. That's looking to take advantage of that opportunity across the markets where diversified has gas infrastructure we're well positioned to deliver against that opportunity set. We don't see any constraints in our ability to deliver against that because we we have really good knowledge around what the gas position is, and we certainly know what our position to deliver power is from from a manufacturing capacity standpoint. With respect to kind of the broader data center opportunities and the conversations we're having, you know, it cuts across some direct conversations with hyperscalers. Also, with utilities, We also are having, like I said, you know, those conversations with infrastructure players and sponsors as an example. And what we're finding in those conversations is really a a strong interest in our distributed generation platform. Time to power is definitely a major thematic and and one that which we can meet. And thirdly, we're seeing really strong interest in what I would call the benefits of our level of modularity. Meaning that our 1.25 megawatt power blocks gives us the ability scale with those data center customers as they scale And it you know, as you know, that's not linear growth, necessarily in the way those data center scales, so having the modularity is really important. And the other big area that we're seeing is because of our operating temperature of our platform, we're seeing really strong interest to take advantage of our ability to integrate with Steam absorption chilling. To provide a really efficient way of cooling the data center. If you think about about third of the load in a data center goes overhead, So if we can you know, in a 50 megawatt data center, I think we can roughly take about five megawatts or so of power load off that requirement. That's material. And that's very attractive to those customers, and those are the kind of conversations we're having. George Gianarikas: Thank you. And may maybe as a follow-up, any update what's happening with ExxonMobil and your carbon capture opportunity? Jason Few: There. Thank you. Yeah. So on Exxon, you know, we've completed the construction of the modules that are set to be shipped to Rotterdam in support of the in Rotterdam with Exxon at their SO refinery in which we'll demonstrate capturing 90 plus percent c o two while simultaneously producing power in hydrogen. Which is unique No other technology can do that. And it's our expectation in the latter half of twenty twenty six that project will be up and running, and we'll be demonstrating that technology. And upon successful demonstration of the technology, which have a lot of confidence in, you know, we will you know, certainly work with Exxon to to think about how to go after and pursue commercial opportunities with carbon capture. George Gianarikas: Thank you all. Happy holidays. Jason Few: Thanks, George. Happy holiday to you too. Operator: The next question comes from Saumya Jain with UBS. Please go ahead. Saumya Jain: Hey. Good morning, guys. So what are the big changes, if any, that you'd seen across the South Korean market over the past year? And what's your outlook for that market specifically heading into 2026? And then on the data center side specifically, how are you seeing the South Korea market or Asian market in general vary from The US? Jason Few: Yes. Good morning, and thank you for the question. You know, in Korea, we obviously are are seeing really strong momentum across our opportunity to drive powering on our existing installed base there over, you know, a 100 megawatts of installed base. So we're fully taking advantage of that, and we're seeing strong, demand for that. We seek the Korea market, which continues to be the largest fuel cell market in the world, will remain attractive. As you know, we announced a an MOU earlier with InuVerse to, work with them on what they anticipate or trying to do will be the largest data center in the Korea market. And, you know, we're we're talk our efforts with them we think, will will help seed their growth in the market from a data center perspective. I think if you think more broadly about Asia, and and, you know, outside of The US, I think you're seeing very strong interest and demand in data center growth. And we think that the Asia market you know, in its spots, you know, between markets like Korea and Singapore and Japan and Malaysia, you're gonna see really strong data center growth. And and we're you know, you know, excited about the opportunities we're having in those or conversations we're having in those markets. Saumya Jain: Great. Thank you. And then could you provide more color on any carbon capture opportunities you are pursuing with other players like the one with Exxon or any other similar partnerships? Jason Few: Sure. So maybe you think about it in two ways. There's the work that we're doing with ExxonMobil, which is specifically focused on capturing carbon from external sources. So think about that refinery in Rotterdam where we're gonna capture carbon that is being admitted today from that refinery. Right? And in that effort, what we're doing in terms of capturing that external carbon Our commercial activities in that particular application will really start to take full post start demonstration of this technology with Exxon? Outside of that, though, we have you can think about it the way we about it internally is carbon recovery. And that's our ability to recover the carbon from the the fuels that we use to produce clean electricity. And there, we're having those conversations actually with many of these data center customers who are still very committed to decarbonizing. And so our ability to provide a very low emission profile with no SOX, NOx, or other particulates operating at a, you know, very low decibel level. All the things that you're hearing that are causing a lot of problems for these data center customers today. We address with our technology. And then we have the extra added benefit of being able to recover the carbon and then we can do lots of different things with that, with that carbon. Up to, you know, providing and selling it to an industrial gas company, to if we're a data center that's somewhere near a c o two, you know, pipeline, that c o two could ultimately be sequestered or used in some other way. And so we're actively engaged in those conversations with our industrial customers as well from a recovery standpoint. Saumya Jain: Great. Thank you for all the color, and happy holidays. Jason Few: Happy holidays to you too. Thank you for the question. Operator: The next question comes from Ryan Pfingst with B. Riley. Please go ahead. Ryan Pfingst: Hey. Good morning, guys. Thanks for taking my questions. Maybe a follow-up on the data center discussions in The U. S. Is it fair to say that customer readiness is the main hurdle for FuelCell to secure a data center customer at this point? Or are there other factors, we should be thinking about? I don't I don't really think it's a customer readiness issue, Ryan. What I would say is that it's a shift in the way these data center customers have procured power you know, throughout their history. And, you know, they've been they've been able previously to procure power from the grid. And that model has worked for them. It's the shift in the model that requires them to think about on-site generation And as they shift their business model, you know, they're being thoughtful about the way to do that. There's still, you know, thoughts around, you know, going completely behind the meter, or running grid parallel We're comfortable in operating in both of those environments, and and have done that and can demonstrate our capabilities in that regard. I I don't think it's a customer readiness issue. It's it's I think customers have now bought off on the fact that if they're gonna build new data centers and they wanna build those new data centers now, they're gonna need on-site generation to meet that demand. Ryan Pfingst: Appreciate that. And then shifting over to South Korea. Can can you talk about your expectations around timing for the Inverse MOU to the extent you're able to when we might see that convert to a firm order or even first revenue there? Jason Few: Yeah. I I won't get specific on on timing, but we think, we go throughout 2026, we'll have more to say about that opportunity as it developing. Appreciate it, Jason. I'll turn it back. Thanks. Thank you, Brian. Operator: The next question comes from Jeffrey Osborne with TD Cowen. Please go ahead. Jeffrey Osborne: Hey. Good morning. Just, maybe two lines of questioning on my side. One is on the data center side. Is there anything, Jason, that you need to still develop as it relates to the use case or the application? Yeah. I'm thinking, like, low selling or other features relative to, hospitals, college campuses, things like that. You know, as we think about our solution set to address the data center opportunity, don't really have anything that we need to develop because our our ability to integrate in a microgrid configuration to support load following, whether that be through batteries or super caps. We're very comfortable with being able to do that as as you know, we operate in a number of microgrid configurations today. So that's not a concern for us. And and we don't have plans on developing you know, best systems or or those kind of things as a company. And there's plenty of op you know, choices in the market, and we're gonna leverage those those market choices to integrate those solutions for customers. Jeffrey Osborne: Got it. If I'm hearing you right, then then pricing for data centers should be similar ish to what you've seen in in years past for other smaller applications? Given there's no additional equipment? Yeah. I think look. I think when we think about what we're offering to these customers although we aren't gonna be the the if you will, of the best system there are instances where we're bringing that full integrated solution to a customer so the pricing in some of those instances is gonna be all inclusive of of that. So I think you'll see different pricing based on what the customer is asking us to do in a straight just deliver power to me scenario, yeah, I think you'll see similar pricing than what we've been priced in the past, but we've done a lot of things to improve our our cost position. And and so, you know, we we think that we're very price competitive relative to other on-site generation alternatives you know, and that goes across, you know, the landscape including, you know, engines. And and maybe just to add on, and and I know you know this, Jeff, but, with the extension of the investment tax credit, this year, that provides, pricing, strength for us as well. The investment tax credit was extended in the big beautiful bill in July. That goes through at least 2032, and that's a 30% investment tax credit off of the capital cost. Perfect. Maybe just a a quick one for you, Mike. Two parter, but, to expand from a 100 megawatts in Torrington to the three fifty, I think you mentioned, do you have a ballpark of what that would cost? And then I think the ATM is fully utilized, share count's up. I don't know, 80% or so. Year on year. Is now a period of sort of relaxation on adding capital to the balance sheet and then waiting for the orders to come? Then maybe you need to revisit the ATM. Can you just walk us through the the cash consumption in fiscal twenty six and, you know, what what it would cost to add capacity and what what happens if you get some of these major orders that you're targeting? Sure. So maybe I'll go in reverse order, and thank you for the question, Jeff. So as far as as the balance sheet today, the company is quite comfortable with the cash position that we ended the fiscal year with. We ended with about $342 million of total cash on balance sheet. And then subsequent to the end of the year, we also announced a $25 million facility with XM. A follow on to the facility that we had done with them last year, which is really supporting deployment, internationally. And we obviously like those types of structures, and we'll look to do more more of that as we do more deployments internationally, but quite comfortable with our our current liquidity position as we sit here today. As far as the expansion, as Jake said and as we included in in the deck, we do have plans to expand Torrington up to three fifty megawatts That will obviously be paced by customer demand. Demands, but we, we have completed the planning for that. We are starting steps to, to enable us to do that expansion and are making capital investments this year. We include in our disclosures in 2026 that we plan to spend between $20 million to $30 million of CapEx, which gets us started on on that expansion path. And and as as we secure additional backlog and and go down that path of expansion, we will provide additional color around any additional investments. Jeffrey Osborne: I got it. So no no need for an ATM for now, or do you just have a good housekeeping add that just to be clear on that part? So as far as the ATM, the company has historically kept an at the market sales program on file. I don't anticipate that changing and we're not going to forecast potential potential financings beyond what I've already described. Makes sense. Appreciate it. Thank you. Michael Bishop: Thank you. Operator: Once again, if you have a question, it is star one on your telephone keypad. Your next question comes from Noel Parks with Tuohy Brothers. Please go ahead. Noel Parks: Hi. Good morning. You know, talking about the data center market, sort of what we see happening in the broader markets overall is just little bit more realization of there is some devil in the details that it seems the market needs to understand just to to really understand the the pace of the data center you know, rollout. And you know, at scale. And so I I guess one thing I was wondering, I think during the earlier in the call, you you mentioned sort of the emergence of, NIMBY issues. Which is I think, sort of a fairly new topic in in the last quarter or two. And I just wonder if or how those issues are are coming up in your potential customer discussions. And I'm also interested in particularly with utilities, you know, how some of them are are looking ahead to trying to insulate their maybe residential customer base from the the cost that they'll probably incur from ramping up the power supply to data centers. Noel, good morning. Thank you for for the for the question. You know, if you think about the maybe I'll I'll start with maybe the the NIMBY issue. So what are the things that cause challenges? Right? Things that cause challenges are are generation platforms that create poor air quality. We do just the opposite. Right? Because we don't combust the fuel. So that's a significant advantage. What's the other thing that causes the challenge? Noise. We operate at a very low decibel level. Think about maybe your air conditioner running at your home. Right? So we solve that issue. We're very efficient from a space perspective at 30 megawatts an acre. So we can be very efficient in terms of the power density that we deliver to these data center customers. In addition to that, we we do things that help offset even the the power demand. Like, we talked about our ability to deliver absorption chilling. So we can help reduce the amount of power that's needed for that data center. You know, beyond that, we we talked a little earlier on this call about ability to do carbon recovery to even further reduce the emission profile of the platform. And that remains you know, very important for many of these data center, customers or certainly the off takers of these data centers. So we think that our platform does a really good job of addressing the NIMBY issue And in fact, you know, we have examples of our platform being deployed right next to, you know, where people live. And it's not an issue. And we think that, you know, we can clearly deliver a solution to a data center developer or off taker that will minimize, if not eliminate, those issues that they see from the NIMBY standpoint. Right. Right. But it does lead me to wonder, whether there are any advantages regionally in your thinking about pursuing customers, I'm not sure if there's a connection area, what the the data center demand pickup is is looking like there, but just just sort of recognizing that you've done so many projects for sort of communities within your your fairly close radius, And so is that a possibly positive factor in getting new business? Look. I think being able to demonstrate to these data center customers where we have deployments close into communities and we don't have community complaints, is a real strength. So, you know, don't know that that's driving just a close in regional focus for us as our primary focus area, but it's certainly a leverage point for us as we tell our story to those data center customers. Beyond that, I think when you what we when we think about regionality and advantage advantages, you know, across The US, we have the ability to take advantage of the ITC, and we think that's a real positive. In some markets where we are also considered as a platform technology, the equivalent of a class one renewable, we think that just adds to the economic benefit that we can deliver to these customers by deploying our platform. So you know, we think the way in which we've deployed our distributed technology and it's been deployed in urban areas and close in communities, just serves as a great example of a way to do this and not have the consumer backlash. Great. Great. And just the the last one for me again. Sort of about the discussions with potential customers. I'm I'm curious with you know, so many crosscurrents going on, so many different know, issues to evaluate. It as you as you talk to you know, utility or hyperscalers, say, from one conversation to the next, say, you're talking with somebody at one point, and then a couple months later, you kinda reconvene and and go from there. Do is are you are you talking with customers about a pretty stable static set of projects that they have in their sites. Or is it more sort of dynamic and volatile? Like, the conversation is going one direction, and then a couple months later, utility talks about, no. We're thinking about a different region or a different customer type. So I'm I'm just sort of curious whether you're sort of following the same trail with these, and it's just a matter of getting to the endpoint. Or whether sort of the the cable kinda keeps getting reset as you as you progress with these guys. No. Look. I think if you think about at least our experience, you think about a development cycle As you go through the process, there are always puts and takes that happen throughout that development process. What we're what we aren't seeing is kind of a this episodic or very sporadic kind of you know, activity from the customers that we're engaged with And and we think that, you know, as you think about utilities, since you talked about utilities directly, I mean, I think the utilities are are pretty you know, thoughtful in their planning process and what they wanna do. And and I think they you know, they have tremendous insight to where customers want to be and where they wanna develop projects. So I think they've got a pretty good handle on that. And we're working with them to help solve the big constraints they have, which is additional, you know, power capacity, They've got constraints around, you know, transmission, mean, if you look at what just happened in PJM, I mean, PJM they just closed their auction. I think it was yesterday, They're sitting at a 14.8% reserve margin, which is, like, their lowest res reserve margin in a decade. Right? So the way you're gonna solve this problem is with technologies like ours and deploying distributed generation. Great. Thanks a lot. That's a interesting example. Thanks. Thank you. Operator: There are no further questions at this time. I will turn the call to Jason Few for closing remarks. Jason Few: Thank you, Sarah. For everyone on the call, thank you for joining us today. We look forward to updating you on our progress as we move into calendar year 2026. I wish you all a safe, joyful holiday season, and a very happy New Year. Thank you. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Hello. And welcome to the FuelCell Energy Fourth Quarter of Fiscal 2025 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Keypad. I would now like to turn the conference over to Michael Bishop, CFO. You may begin. Michael Bishop: Thank you, operator. Good morning, everyone, and thank you for joining us on the call today. This morning, FuelCell Energy released our financial results for the fourth quarter and fiscal year 2025, and our earnings press release is available in the Investors section of our website at www.fuelcellenergy.com. In addition to this call and our earnings press release, we have posted a slide presentation on our website. This webcast is being recorded and will be available for replay on our website approximately two hours after we conclude. Before we begin, please note that some information that you will hear or be provided with today consists of forward-looking statements within the meaning of the Securities and Exchange Act of 1934. Such statements express our expectations, beliefs, and intentions regarding the future, and include statements concerning our anticipated financial results, plans and expectations regarding the continuing development, commercialization, and financing of our fuel cell technology, our anticipated market opportunities, and our business plans and strategies. Our actual future results could differ materially from those described or implied by such forward-looking statements because of a number of risks and uncertainties. More information regarding such risks and uncertainties is available in the safe harbor statement in the slide presentation and in our filings with the SEC, particularly the Risk Factors section of our most recent Form 10-Ks and any subsequently filed quarterly reports on Form 10-Q. During this call, we will be discussing certain non-GAAP financial measures, and we refer you to our website, our earnings press release, and the appendix of the slide presentation for the reconciliation of those measures to GAAP financial measures. Our press release and a copy of today's webcast presentation are available on our website under the Investors tab. For this call, I'm joined by Jason Few, our president and chief executive officer. During our prepared remarks, the leadership team will be available to take your questions. I'll now hand the call over to Jason for opening remarks. Jason? Jason Few: Thank you, Mike, and good morning, everyone. Thank you for joining us on our call today. Our fourth fiscal quarter closed a year of meaningful progress for FuelCell Energy. Starting around twelve months ago, we began a series of thoughtful restructuring measures to sharpen our focus and strengthen the fundamentals of our business. Through this series of tough decisions to streamline and focus our organization, today, we are operating with greater discipline, lower cost, and strategic clarity. We are further along on our path to profitability. The work is not finished. But we believe we are on the right track. During this time, the surrounding market environment has undergone significant change as well. Presenting what we see as one of the greatest business opportunities of our generation. The demand for more power to accommodate data centers, industry, and communities, we believe that demand plays directly to the strength of our technology: clean, resilient, near-silent continuous power. We continue to focus on converting our pipeline into executed contracts, scaling our manufacturing capacity at our Torrington facility, and advancing product improvements that differentiate us from our competitors. We are committed to this work and we are doing it with urgency and with clear focus. That focus is delivering distributed, always-on, low-emission power through our carbonate fuel cell platform. Our technology is proven at scale and we are aligning our business around this singular strength. As you all know, demand for power is accelerating quickly, driven by the exponential growth of AI data centers, and digital infrastructure that is outpacing the capabilities of the existing grid. This demand is reshaping the market and it requires solutions that can provide clean, reliable power where it is needed. The need is clear, urgent, and investable. With decades of operating experience, and a differentiated electrochemical platform, we believe we are well-positioned to meet this need and successfully compete for the opportunities emerging in this rapidly growing market segment. Please turn to slide four. As you view our fourth quarter, and full fiscal year results, please keep the following five points in mind. Number one, we are focused on our data center strategy. AI-driven demand is reshaping power requirements across the data center and digital infrastructure ecosystem. We are actively engaged with participants across the ecosystem to make them aware of our capabilities and that we are prepared to provide utility-scale reliable, and cost-competitive clean power for these types of energy-intensive applications. With our collaboration with Diversified Energy, the potential future collaboration with Inuverse announced earlier this year, and a growing pipeline of potential data center opportunities in The US and Asia, we believe we have strong momentum heading into 2026. Number two, we are scaling manufacturing capacity. We believe that our path to profitability runs through higher utilization at our manufacturing facility in Torrington, Connecticut. As we increase production, we expect our cost structure to become more efficient. And we expect this to translate into positive adjusted EBITDA once we reach an annualized production rate of 100 megawatts per year. Entering fiscal year 2026, our focus is on margin expansion driven by disciplined operations and greater production throughput. I will provide additional detail on our scalable manufacturing capacity later in the presentation. Number three, we are building financing capacity to enable growth. We believe that the $25 million financing provided by XM to support our GGE project in Korea demonstrates a model that can be used for future projects both in Korea and worldwide. The current US administration has expressed its intention to use Ex I'm to support the global adoption of American technologies like ours, and we believe this financing signals Ex I'm belief in our utility-scale power generation technology. We are pleased to have XM as a financing partner. We are entering 2026 with a strong balance sheet and we expect to achieve financing flexibility through proven models like the XM financing and other financing alternatives. Number four, we believe we are positioned to win in emerging power markets. Policy certainty under the One Big Beautiful Bill Act improves project economics, supports long-term adoption, and allows current and potential customers to make investment decisions. Furthermore, our core carbonate platform provides reliable, clean power that can be dispatched when needed. And can be situated close to users. An advantage for customers prioritizing dependable energy, lower emissions, and flexible site options for crucial operations. And number five, we are entering fiscal year 2026 with strong momentum. Commercial momentum, policy clarity, and an expanding opportunity set gives us confidence. Our success in fiscal year 2026 will depend on execution, converting our pipeline into executed contracts and backlog into revenue. With the discipline and focus we've been building across the company. Transitioning to slide five. We succeed when we stay focused on solving problems for our customers. Customers turn to us when they need to pursue business growth without compromise. And when power constraints threaten timelines, economics, or operational reliability. Increased demand is not the only challenge they encounter. There are numerous obstacles facing customers today that can hinder their economic growth. Utility interconnections now routinely take five to seven years or more, and new substation builds follow a similar timeline. Traditional gas turbines face three to five years of procurement and construction before they can deliver behind-the-meter power. Our carbonate fuel cells avoid these bottlenecks. They can be deployed without requiring new high-voltage interconnections, can be brought online more quickly, and can deliver a cost of energy comparable to turbines and other engine alternatives with reduced permitting risk. These delays are further compounded by emission restrictions and limited site availability. Our core carbonate platform addresses those issues directly. They produce virtually no NOx or SOx, and offer unique carbon capture capability. In addition, our 1.25 megawatt power blocks allow customers to scale capacity as their needs grow. Traditional generation projects often trigger resistance, adding years of uncertainty. Our distributed carbonate fuel cell platform sidesteps these issues. It requires a smaller footprint, operates quietly, and can operate near the point of use, which may help to mitigate opposition and accelerate time to power. Let's move to slide six. These challenges and the way our customers need to solve them shape how we operate. We have concentrated our efforts on our Carbonite FuelCell platform because it not only is ready now, but also directly addresses the constraints I just outlined. It is proven across commercial deployments of varying scale, and we continue to refine it through real-world operating experience. Our platform also benefits from a strong US policy tailwind, including the reinstatement of the investment tax credit and incentives for carbon capture, an important point of differentiation compared to other generation technologies. And while we are doubling down on what is a commercially ready platform, we are also investing selectively in innovations that we believe will better position us for what comes next. These emerging technologies have the potential to drive the next phase of our growth and strengthen our long-term competitiveness. Now on to Slide eight. I wanted to highlight one example of the momentum we are carrying into 2026. We have established FuelCell Energy as a leading partner in South Korea's growing fuel cell energy economy, the largest in the world. Today, we have more than 100 megawatts of power projects in South Korea in our backlog, with another 100 megawatts under MOU. Our ongoing work with GGE continues to advance, supported by the $25 million in new Ex I'm financing for the next phase of the project, including additional module shipments and service. We also see a clear path for additional repowering opportunities, and we are proud to contribute to Korea's evolving energy landscape. Let's go to slide nine. As we look ahead to fiscal year 2026, we continue to see a compelling case for fuel cells in data center applications. Grid constraints, rising workloads, and pressure to manage energy costs are all increasing demand for reliable, efficient, and scalable on-site power. Our carbonate fuel cell platform addresses these needs directly by delivering baseload reliability, modular scalability, and meaningful permitting advantages. And as data centers push more computational power, our integrated absorption chilling and heat offtake could help manage thermal load while maintaining system performance. It is our assessment that our carbonate fuel cell platform additionally offers extended stack longevity, reliable biogas functionality, minimal performance degradation, and sophisticated containment management. These features collectively facilitate cost-effective carbon capture solutions, particularly in large-scale applications. Additionally, as NIMBY concerns grow and data center operators are under pressure to expand, our fuel cells offer a low-profile, clean solution that provides greater flexibility for siting, that can help them move forward faster amidst community concerns. Let's move to slide 10. With this opportunity in front of us, we also believe we have the manufacturing foundation to meet it. Once we reach an annualized production rate of 100 megawatts per year at our Torrington facility, we expect to achieve positive adjusted EBITDA. Today, we are roughly 40% of the way there. And our backlog continues to build. Looking further ahead, we believe that the Torrington facility could accommodate an estimated annualized production capacity of up to 350 megawatts per year with additional capital investment in machinery, equipment, tooling, labor, outsourcing of certain processes, and inventory. As we entered the new year, we are executing with focus and momentum. We are focused on advancing meaningful opportunities in the data center market, scaling a manufacturing platform built for utility-level deployments, and moving steadily toward profitability with operational discipline. With that, I'd like to turn the call over to our CFO, Mike Bishop. Michael Bishop: Thank you, Jason, and good morning to everyone on the call today. Overall, we are pleased with the progress made during the year with revenue expansion, largely driven by repowering activities in Korea, expense reductions as a result of our restructuring plans implemented in fiscal year 2025, and balance sheet strength as a result of spending reductions and financing activities. Let's review the operating performance for the fourth quarter and fiscal year 2025 shown on Slide 12. In 2025, we reported total revenues of $55 million compared to revenues of $49.3 million in the prior year quarter, representing a 12% increase. We reported a loss from operations in the quarter of $28.3 million compared to $41 million in 2024. The loss from operations in 2025 was impacted by a noncash impairment expense of $1.3 million as a result of our previously announced restructuring plan. The net loss attributable to common stockholders in the quarter was $30.7 million compared to a net loss attributable to common stockholders of $42.2 million in 2024. The resulting net loss per share attributable to common stockholders in 2025 was $0.85 compared to $2.21 in the prior year period. The decrease in net loss per share attributable to common stockholders is due to the benefit of the higher number of weighted average shares outstanding due to the share issuances since 10/31/2024 and the decrease in net loss attributable to common stockholders. Net loss was $29.3 million in 2025 compared to a net loss of $39.6 million in 2024. Adjusted EBITDA totaled negative $17.7 million in 2025 compared to adjusted EBITDA of negative $25.3 million in 2024. Now shifting to the full year results, in fiscal year 2025, we reported total revenues of $158.2 million compared to revenues of $112.1 million in the prior year, representing a 41% increase. This increase was largely driven by module deliveries to Goji Green Energy Company Limited or GGE under our long-term service agreement. During fiscal year 2025, we delivered a total of 22 modules to GGE. We reported a loss from operations for the year of $192.3 million compared to $158.5 million in fiscal year 2024. This increase is mainly attributable to noncash impairment expenses of $65.8 million and restructuring expenses of $5.3 million incurred in fiscal 2025 resulting from our previously announced restructuring plan. The net loss attributable to common stockholders for the year was $191.1 million compared to a net loss attributable to common stockholders of $129.2 million in fiscal year 2024. The resulting net loss per share attributable to common stockholders in fiscal year 2025 was $7.42 compared to $7.83 in the prior year. Adjusted net loss attributable to common stockholders, which excludes the noncash impairment expenses, restructuring expenses, and certain other noncash items, was $4.41 compared to $6.54 in fiscal year 2024. Net loss was $1.914 billion in fiscal year 2025 compared to a net loss of $156.8 million in fiscal year 2024. Adjusted EBITDA totaled negative $74.4 million in fiscal year 2025 compared to adjusted EBITDA of negative $101.1 million in fiscal year 2024, a reduction of 26% and over $25 million. We believe this improvement in adjusted EBITDA and adjusted net loss attributable to common stockholders reflects the early benefits of our cost savings actions and our sharper focus on our core carbonate platform under our restructuring plan. Please refer to the appendix in the earnings release, which provides a reconciliation of the non-GAAP financial measures, adjusted net loss, per share attributable to common stockholders, and adjusted EBITDA. Next, on slide 13, you will see additional details on our financial performance during the fourth quarter and backlog as of 10/31/2025. In the graph on the left-hand side of the slide, revenue is broken down by category. Product revenues were $30 million compared to $25.4 million in the comparable prior year period. This increase was primarily driven by revenue recognized under the company's long-term service agreement with GGE for the delivery and commissioning of 10 fuel cell modules. Service agreement revenues increased to $7.3 million from $5.6 million. The increase in service agreement revenues during the three months ended 10/31/2025 was primarily due to revenue recognized under the company's long-term service agreement with GGE. Generation revenues increased to $12.2 million from $12 million, reflecting higher output from plants in the company's generation operating portfolio during the quarter compared to the prior year period. Advanced technology contract revenues decreased to $5.5 million from $6.4 million. Now looking at the right-hand side of the slide, I will walk through the changes in gross loss and operating expenses. Gross loss for 2025 totaled $6.6 million compared to a gross loss of $10.9 million in the comparable prior year quarter. The decrease in gross loss for 2025 was primarily related to decreased gross loss from generation revenues, product revenues, and service agreement revenues, partially offset by reduced gross margin on advanced technology contract revenues during 2025. Operating expenses for 2025 decreased to $21.7 million from $30.1 million in 2024, primarily due to a $6.2 million decrease in research and development expenses, partially offset by a noncash impairment expense of $1.3 million. Administrative and selling expenses decreased to $15.2 million during the period from $15.9 million during 2024, primarily due to lower compensation expense resulting from the restructuring actions taken in September and November 2024 and June 2025. Research and development expenses decreased to $5.5 million during 2025 compared to $11.6 million in 2024. This decrease was primarily due to lower spending on commercial development efforts related to our solid oxide power generation and electrolysis platforms and carbon separation and carbon recovery solutions. On the bottom right of the slide, you will see that backlog increased by approximately 2.6% to $1.19 billion compared to $1.16 billion as of 10/31/2024, primarily resulting from the additions of the Hartford project and the long-term service agreement with CGN, Yocheng, Generation Company Limited or CGN, partially offset by revenue recognition during the year. Slide 14 is an update on our liquidity position. As of 10/31/2025, we had cash, restricted cash, and cash equivalents of $341.8 million. During the three months ended 10/31/2025, approximately 16.4 million shares of the company's common stock were sold under the company's amended open market sale agreement at an average sale price of $8.33 per share, resulting in net proceeds to the company of approximately $134.1 million. Subsequent to the end of the quarter, approximately 1.6 million shares of the company's common stock were also sold under the amended open market sale agreement at an average sale price of $8.37 per share, resulting in net proceeds to the company of approximately $13.1 million. Additionally, after the quarter ended, we announced a new $25 million debt financing transaction with the Export-Import Bank of the United States or XM, marking a continued commitment from XM to support the company's growth ambitions to deliver utility-grade power in international markets such as the collaboration with GGE in Korea. In closing, we continue to take disciplined steps to strengthen our financial foundation while focusing on a growing set of new commercial opportunities. Our strategy centers on commercial momentum, with the acceleration of data center opportunities, operational leverage through utilization and expansion at our Torrington facility with the goal of achieving positive adjusted EBITDA results while maintaining balance sheet strength through capital efficiency via financing structures including frameworks like those utilized with XM. I will now turn the call over to the operator to begin Q&A. Operator: Thank you. If you would like to withdraw your question, simply press 1 again. We ask that you please limit yourself to one question and one follow-up. Thank you. Your first question comes from the line of Dushyant Ailani with Jefferies. Your line is open. Dushyant Ailani: Hi, team. Thanks for taking my questions. One on just wanted to kinda think about how do you guys frame 2026 growth outlook. Do you think there's a potential to bake in any data center opportunity in 2026, or do you think more of you know, between 2027 and beyond? Story. Jason Few: Thank you for joining us today, and thank you for the question. As we look at 2026 and the overall data center opportunity, you know, today, we set we've got hundreds of megawatts of pricing proposals out across the whole digital infrastructure ecosystem, and that ranges from hyperscalers, utilities, power land developers, infrastructure players, and sponsors, kinda so kind of across the whole gamut of opportunities. And, you know, each of these opportunities are on their own timeline from a development and getting to an FID or closure. But we certainly believe that those opportunities will present in 2026 for the company. And be part of our growth story. Dushyant Ailani: Lovely. And then, just wanted to kind of talk about the capacity expansions. I think you said that you could increase the capacity to two fifty megawatts. Right? How how long would it take scale once you make that decision? Just trying to think that through. Yeah. So if you think about where we are today, we've always talked about our ability under our existing construct and what's there to do a 100 megawatts capacity. We're at 41 megawatts today run rate. So our ability to get to to a 100 megawatts is is really no real new capital investment to make that happen. What we talked about on the call today is getting to 350 megawatts. That's still in that same footprint. Of our existing Torrington facility. So although there will be some capital investment, we think it's fairly modest to get to the three hundred and and fifty megawatts, and we think that we can do that in a pretty short cycle window. And our expectation is that scale can happen in, you know, in the time frame of less than, you know, eighteen months or so to get that build out and get it done. Dushyant Ailani: Got it. Thank you. Jason Few: Thank you. Operator: The next question comes from George Gianarikas with Canaccord Genuity. Please go ahead. George Gianarikas: Hi. Good morning all, and and thank you for my taking my questions. So maybe just to pull that through a little bit with regard to data center traction. Can you just sort of maybe go into a little bit more detail as to how the conversations, with your DPP partners are are going? Like, any bottlenecks to to maybe signing a deal? Any and where you see maybe the most opportunity over the next six to twelve months? Thank you. Jason Few: Yes, George. No, thank you for the question. So I think maybe the way that I would answer that is I break it up into maybe two buckets. If you look at the work that we're doing with Diversified Energy, that's really our play or angle to provide a powered land solution to customers because they bring gas We bring power. And so it's all about offering whether it's a you know, a real estate developer or if it's another you know, data center developer or even a hyperscaler. That's looking to take advantage of that opportunity across the markets where diversified has gas infrastructure we're well positioned to deliver against that opportunity set. We don't see any constraints in our ability to deliver against that because we we have really good knowledge around what the gas position is, and we certainly know what our position to deliver power is from from a manufacturing capacity standpoint. With respect to kind of the broader data center opportunities and the conversations we're having, you know, it cuts across some direct conversations with hyperscalers. Also, with utilities, We also are having, like I said, you know, those conversations with infrastructure players and sponsors as an example. And what we're finding in those conversations is really a a strong interest in our distributed generation platform. Time to power is definitely a major thematic and and one that which we can meet. And thirdly, we're seeing really strong interest in what I would call the benefits of our level of modularity. Meaning that our 1.25 megawatt power blocks gives us the ability scale with those data center customers as they scale And it you know, as you know, that's not linear growth, necessarily in the way those data center scales, so having the modularity is really important. And the other big area that we're seeing is because of our operating temperature of our platform, we're seeing really strong interest to take advantage of our ability to integrate with Steam absorption chilling. To provide a really efficient way of cooling the data center. If you think about about third of the load in a data center goes overhead, So if we can you know, in a 50 megawatt data center, I think we can roughly take about five megawatts or so of power load off that requirement. That's material. And that's very attractive to those customers, and those are the kind of conversations we're having. George Gianarikas: Thank you. And may maybe as a follow-up, any update what's happening with ExxonMobil and your carbon capture opportunity? Jason Few: There. Thank you. Yeah. So on Exxon, you know, we've completed the construction of the modules that are set to be shipped to Rotterdam in support of the in Rotterdam with Exxon at their SO refinery in which we'll demonstrate capturing 90 plus percent c o two while simultaneously producing power in hydrogen. Which is unique No other technology can do that. And it's our expectation in the latter half of twenty twenty six that project will be up and running, and we'll be demonstrating that technology. And upon successful demonstration of the technology, which have a lot of confidence in, you know, we will you know, certainly work with Exxon to to think about how to go after and pursue commercial opportunities with carbon capture. George Gianarikas: Thank you all. Happy holidays. Jason Few: Thanks, George. Happy holiday to you too. Operator: The next question comes from Saumya Jain with UBS. Please go ahead. Saumya Jain: Hey. Good morning, guys. So what are the big changes, if any, that you'd seen across the South Korean market over the past year? And what's your outlook for that market specifically heading into 2026? And then on the data center side specifically, how are you seeing the South Korea market or Asian market in general vary from The US? Jason Few: Yes. Good morning, and thank you for the question. You know, in Korea, we obviously are are seeing really strong momentum across our opportunity to drive powering on our existing installed base there over, you know, a 100 megawatts of installed base. So we're fully taking advantage of that, and we're seeing strong, demand for that. We seek the Korea market, which continues to be the largest fuel cell market in the world, will remain attractive. As you know, we announced a an MOU earlier with InuVerse to, work with them on what they anticipate or trying to do will be the largest data center in the Korea market. And, you know, we're we're talk our efforts with them we think, will will help seed their growth in the market from a data center perspective. I think if you think more broadly about Asia, and and, you know, outside of The US, I think you're seeing very strong interest and demand in data center growth. And we think that the Asia market you know, in its spots, you know, between markets like Korea and Singapore and Japan and Malaysia, you're gonna see really strong data center growth. And and we're you know, you know, excited about the opportunities we're having in those or conversations we're having in those markets. Saumya Jain: Great. Thank you. And then could you provide more color on any carbon capture opportunities you are pursuing with other players like the one with Exxon or any other similar partnerships? Jason Few: Sure. So maybe you think about it in two ways. There's the work that we're doing with ExxonMobil, which is specifically focused on capturing carbon from external sources. So think about that refinery in Rotterdam where we're gonna capture carbon that is being admitted today from that refinery. Right? And in that effort, what we're doing in terms of capturing that external carbon Our commercial activities in that particular application will really start to take full post start demonstration of this technology with Exxon? Outside of that, though, we have you can think about it the way we about it internally is carbon recovery. And that's our ability to recover the carbon from the the fuels that we use to produce clean electricity. And there, we're having those conversations actually with many of these data center customers who are still very committed to decarbonizing. And so our ability to provide a very low emission profile with no SOX, NOx, or other particulates operating at a, you know, very low decibel level. All the things that you're hearing that are causing a lot of problems for these data center customers today. We address with our technology. And then we have the extra added benefit of being able to recover the carbon and then we can do lots of different things with that, with that carbon. Up to, you know, providing and selling it to an industrial gas company, to if we're a data center that's somewhere near a c o two, you know, pipeline, that c o two could ultimately be sequestered or used in some other way. And so we're actively engaged in those conversations with our industrial customers as well from a recovery standpoint. Saumya Jain: Great. Thank you for all the color, and happy holidays. Jason Few: Happy holidays to you too. Thank you for the question. Operator: The next question comes from Ryan Pfingst with B. Riley. Please go ahead. Ryan Pfingst: Hey. Good morning, guys. Thanks for taking my questions. Maybe a follow-up on the data center discussions in The U. S. Is it fair to say that customer readiness is the main hurdle for FuelCell to secure a data center customer at this point? Or are there other factors, we should be thinking about? I don't I don't really think it's a customer readiness issue, Ryan. What I would say is that it's a shift in the way these data center customers have procured power you know, throughout their history. And, you know, they've been they've been able previously to procure power from the grid. And that model has worked for them. It's the shift in the model that requires them to think about on-site generation And as they shift their business model, you know, they're being thoughtful about the way to do that. There's still, you know, thoughts around, you know, going completely behind the meter, or running grid parallel We're comfortable in operating in both of those environments, and and have done that and can demonstrate our capabilities in that regard. I I don't think it's a customer readiness issue. It's it's I think customers have now bought off on the fact that if they're gonna build new data centers and they wanna build those new data centers now, they're gonna need on-site generation to meet that demand. Ryan Pfingst: Appreciate that. And then shifting over to South Korea. Can can you talk about your expectations around timing for the Inverse MOU to the extent you're able to when we might see that convert to a firm order or even first revenue there? Jason Few: Yeah. I I won't get specific on on timing, but we think, we go throughout 2026, we'll have more to say about that opportunity as it developing. Appreciate it, Jason. I'll turn it back. Thanks. Thank you, Brian. Operator: The next question comes from Jeffrey Osborne with TD Cowen. Please go ahead. Jeffrey Osborne: Hey. Good morning. Just, maybe two lines of questioning on my side. One is on the data center side. Is there anything, Jason, that you need to still develop as it relates to the use case or the application? Yeah. I'm thinking, like, low selling or other features relative to, hospitals, college campuses, things like that. You know, as we think about our solution set to address the data center opportunity, don't really have anything that we need to develop because our our ability to integrate in a microgrid configuration to support load following, whether that be through batteries or super caps. We're very comfortable with being able to do that as as you know, we operate in a number of microgrid configurations today. So that's not a concern for us. And and we don't have plans on developing you know, best systems or or those kind of things as a company. And there's plenty of op you know, choices in the market, and we're gonna leverage those those market choices to integrate those solutions for customers. Jeffrey Osborne: Got it. If I'm hearing you right, then then pricing for data centers should be similar ish to what you've seen in in years past for other smaller applications? Given there's no additional equipment? Yeah. I think look. I think when we think about what we're offering to these customers although we aren't gonna be the the if you will, of the best system there are instances where we're bringing that full integrated solution to a customer so the pricing in some of those instances is gonna be all inclusive of of that. So I think you'll see different pricing based on what the customer is asking us to do in a straight just deliver power to me scenario, yeah, I think you'll see similar pricing than what we've been priced in the past, but we've done a lot of things to improve our our cost position. And and so, you know, we we think that we're very price competitive relative to other on-site generation alternatives you know, and that goes across, you know, the landscape including, you know, engines. And and maybe just to add on, and and I know you know this, Jeff, but, with the extension of the investment tax credit, this year, that provides, pricing, strength for us as well. The investment tax credit was extended in the big beautiful bill in July. That goes through at least 2032, and that's a 30% investment tax credit off of the capital cost. Perfect. Maybe just a a quick one for you, Mike. Two parter, but, to expand from a 100 megawatts in Torrington to the three fifty, I think you mentioned, do you have a ballpark of what that would cost? And then I think the ATM is fully utilized, share count's up. I don't know, 80% or so. Year on year. Is now a period of sort of relaxation on adding capital to the balance sheet and then waiting for the orders to come? Then maybe you need to revisit the ATM. Can you just walk us through the the cash consumption in fiscal twenty six and, you know, what what it would cost to add capacity and what what happens if you get some of these major orders that you're targeting? Sure. So maybe I'll go in reverse order, and thank you for the question, Jeff. So as far as as the balance sheet today, the company is quite comfortable with the cash position that we ended the fiscal year with. We ended with about $342 million of total cash on balance sheet. And then subsequent to the end of the year, we also announced a $25 million facility with XM. A follow on to the facility that we had done with them last year, which is really supporting deployment, internationally. And we obviously like those types of structures, and we'll look to do more more of that as we do more deployments internationally, but quite comfortable with our our current liquidity position as we sit here today. As far as the expansion, as Jake said and as we included in in the deck, we do have plans to expand Torrington up to three fifty megawatts That will obviously be paced by customer demand. Demands, but we, we have completed the planning for that. We are starting steps to, to enable us to do that expansion and are making capital investments this year. We include in our disclosures in 2026 that we plan to spend between $20 million to $30 million of CapEx, which gets us started on on that expansion path. And and as as we secure additional backlog and and go down that path of expansion, we will provide additional color around any additional investments. Jeffrey Osborne: I got it. So no no need for an ATM for now, or do you just have a good housekeeping add that just to be clear on that part? So as far as the ATM, the company has historically kept an at the market sales program on file. I don't anticipate that changing and we're not going to forecast potential potential financings beyond what I've already described. Makes sense. Appreciate it. Thank you. Michael Bishop: Thank you. Operator: Once again, if you have a question, it is star one on your telephone keypad. Your next question comes from Noel Parks with Tuohy Brothers. Please go ahead. Noel Parks: Hi. Good morning. You know, talking about the data center market, sort of what we see happening in the broader markets overall is just little bit more realization of there is some devil in the details that it seems the market needs to understand just to to really understand the the pace of the data center you know, rollout. And you know, at scale. And so I I guess one thing I was wondering, I think during the earlier in the call, you you mentioned sort of the emergence of, NIMBY issues. Which is I think, sort of a fairly new topic in in the last quarter or two. And I just wonder if or how those issues are are coming up in your potential customer discussions. And I'm also interested in particularly with utilities, you know, how some of them are are looking ahead to trying to insulate their maybe residential customer base from the the cost that they'll probably incur from ramping up the power supply to data centers. Noel, good morning. Thank you for for the for the question. You know, if you think about the maybe I'll I'll start with maybe the the NIMBY issue. So what are the things that cause challenges? Right? Things that cause challenges are are generation platforms that create poor air quality. We do just the opposite. Right? Because we don't combust the fuel. So that's a significant advantage. What's the other thing that causes the challenge? Noise. We operate at a very low decibel level. Think about maybe your air conditioner running at your home. Right? So we solve that issue. We're very efficient from a space perspective at 30 megawatts an acre. So we can be very efficient in terms of the power density that we deliver to these data center customers. In addition to that, we we do things that help offset even the the power demand. Like, we talked about our ability to deliver absorption chilling. So we can help reduce the amount of power that's needed for that data center. You know, beyond that, we we talked a little earlier on this call about ability to do carbon recovery to even further reduce the emission profile of the platform. And that remains you know, very important for many of these data center, customers or certainly the off takers of these data centers. So we think that our platform does a really good job of addressing the NIMBY issue And in fact, you know, we have examples of our platform being deployed right next to, you know, where people live. And it's not an issue. And we think that, you know, we can clearly deliver a solution to a data center developer or off taker that will minimize, if not eliminate, those issues that they see from the NIMBY standpoint. Right. Right. But it does lead me to wonder, whether there are any advantages regionally in your thinking about pursuing customers, I'm not sure if there's a connection area, what the the data center demand pickup is is looking like there, but just just sort of recognizing that you've done so many projects for sort of communities within your your fairly close radius, And so is that a possibly positive factor in getting new business? Look. I think being able to demonstrate to these data center customers where we have deployments close into communities and we don't have community complaints, is a real strength. So, you know, don't know that that's driving just a close in regional focus for us as our primary focus area, but it's certainly a leverage point for us as we tell our story to those data center customers. Beyond that, I think when you what we when we think about regionality and advantage advantages, you know, across The US, we have the ability to take advantage of the ITC, and we think that's a real positive. In some markets where we are also considered as a platform technology, the equivalent of a class one renewable, we think that just adds to the economic benefit that we can deliver to these customers by deploying our platform. So you know, we think the way in which we've deployed our distributed technology and it's been deployed in urban areas and close in communities, just serves as a great example of a way to do this and not have the consumer backlash. Great. Great. And just the the last one for me again. Sort of about the discussions with potential customers. I'm I'm curious with you know, so many crosscurrents going on, so many different know, issues to evaluate. It as you as you talk to you know, utility or hyperscalers, say, from one conversation to the next, say, you're talking with somebody at one point, and then a couple months later, you kinda reconvene and and go from there. Do is are you are you talking with customers about a pretty stable static set of projects that they have in their sites. Or is it more sort of dynamic and volatile? Like, the conversation is going one direction, and then a couple months later, utility talks about, no. We're thinking about a different region or a different customer type. So I'm I'm just sort of curious whether you're sort of following the same trail with these, and it's just a matter of getting to the endpoint. Or whether sort of the the cable kinda keeps getting reset as you as you progress with these guys. No. Look. I think if you think about at least our experience, you think about a development cycle As you go through the process, there are always puts and takes that happen throughout that development process. What we're what we aren't seeing is kind of a this episodic or very sporadic kind of you know, activity from the customers that we're engaged with And and we think that, you know, as you think about utilities, since you talked about utilities directly, I mean, I think the utilities are are pretty you know, thoughtful in their planning process and what they wanna do. And and I think they you know, they have tremendous insight to where customers want to be and where they wanna develop projects. So I think they've got a pretty good handle on that. And we're working with them to help solve the big constraints they have, which is additional, you know, power capacity, They've got constraints around, you know, transmission, mean, if you look at what just happened in PJM, I mean, PJM they just closed their auction. I think it was yesterday, They're sitting at a 14.8% reserve margin, which is, like, their lowest res reserve margin in a decade. Right? So the way you're gonna solve this problem is with technologies like ours and deploying distributed generation. Great. Thanks a lot. That's a interesting example. Thanks. Thank you. Operator: There are no further questions at this time. I will turn the call to Jason Few for closing remarks. Jason Few: Thank you, Sarah. For everyone on the call, thank you for joining us today. We look forward to updating you on our progress as we move into calendar year 2026. I wish you all a safe, joyful holiday season, and a very happy New Year. Thank you. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Good day, everyone, and welcome to the Cintas Corporation Announces Fiscal 2026 Second Quarter Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Jared Mattingley, Vice President, Treasurer and Investor Relations. Please go ahead, sir. . Jared Mattingley: Thank you, Ross, and thank you for joining us. With me are Todd Schneider, President and Chief Executive Officer; Jim Rozakis, Executive Vice President and Chief Operating Officer; and Scott Gurule, Executive Vice President and Chief Financial Officer. We will discuss our fiscal 2026 2nd quarter results. After our commentary, we will open the call to questions from analysts. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the Securities and Exchange Commission. I'll now turn the call over to Todd. Todd Schneider: Thank you, Jared. We had another successful quarter, reflecting the strengths of our value proposition. Cintas delivered record revenues and strong operating margin performance, while we continue to invest in our business to position the company for the future. Second quarter total revenue grew a strong 9.3% to $2.8 billion. The organic growth rate, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations, was 8.6%. Each of our 3 route-based businesses had strong revenue growth in the quarter. Our business continues to operate at a high level as our employee partners deliver strong execution across the board and maintain a clear focus on driving value for our customers and shareholders. Gross margin as a percent of revenue was 50.4%, a 60 basis point increase over the prior year. Operating income grew to $655.7 million, an increase of 10.9% over the prior year, diluted EPS of $1.21 grew 11% over the prior year. Our strong revenue growth is creating leverage and our cost savings initiatives and investments we've made are helping to improve our employee partners productivity and help them deliver better solutions for our customers. Our operating margin for the company was an all-time high. The operating margins for our 2 largest route-based businesses were also all-time highs, reflecting the high level of execution by our employee partners. Turning to guidance. We are raising our fiscal 2026 financial guidance. We expect our revenue to be in the range of $11.15 billion to $11.22 billion, a total growth rate of 7.8% to 8.5%. We expect diluted EPS to be in the range of $4.81 to $4.88, a growth rate of 9.3% to 10.9%. With that, I'll turn it over to Jim to discuss the details of our second quarter results. James Rozakis: Thanks, Todd. This quarter marked another period of solid progress for our business as we continue to advance the rollout of our technology initiatives and build on the strong foundation of organic growth we have established. Our focus on innovation, operational excellence and customer engagement is delivering measurable results. We are strengthening our relationships with existing customers through expanded offerings and superior service, which has led to all-time highs in retention rates while also successfully attracted new customers, who the clear benefits of partnering with us. These achievements reflect the commitment and talent of our employee partners, whose efforts are positioning us for sustained success. Turning to our business segments. Organic growth by business was 7.8% for Uniform Rental Facility Services, 14.1% for First Aid and Safety Services, 11.5% for Fire Protection Services and 2% for Uniform Direct sale. Gross margin percentage by business was 49.8% for Uniform Rental Facility Services, 57.7% for First Aid and Safety Services, 48.2% for Fire Protection Services and 41.9% for the Uniform Direct sale. Gross margin for Uniform Rental Facility Services segment increased 70 basis points from last year. The 49.8% gross margin is the second highest gross margin ever for this segment. The strong revenue growth in this segment is helping to create leverage. In addition, our supply chain team and process improvement initiatives from our engineering and Six Sigma Black Belt teams continue to help expand our margins while navigating the current economic environment. Gross margin for the First Aid and Safety Services segment was 57.7%. This equals a previous all-time high set last year. As we mentioned previously, the mix of revenue and timing of investments can impact this business from quarter to quarter. We are pleased our investments to grow this business are generating strong double-digit revenue growth, while being able to expand our gross margin. We are growing in many ways. We're adding new business with over 2/3 being converted from no programmers. We are cross-selling to existing customers. Our retention rates are at all-time highs, and we continue to experience success in our focused verticals of health care, hospitality, education and state and local governments. Our strong culture of execution, combined with multiple growth levers has positioned us over the years to [indiscernible] multiples of job growth and GDP. All businesses have a need for [ image ], safety, cleanliness and compliance. Our value proposition resonates in all economic cycles as evidenced by our growth in sales and profit in 54 out of the last 56 years. With that, I'll turn it over to Scott to discuss our operating income, capital allocation performance and 2026 guidance assumptions. Scott Garula: Thanks, Jim, and good morning, everyone. As Todd mentioned, we continue to perform at a high level as evidenced by record level revenue and operating margins for the second quarter. Selling and administrative expenses as a percentage of revenue was 27%, which was a 20 basis point increase from last year. Second quarter operating income was $655.7 million, compared to $591.4 million last year. Operating income as a percentage of revenue was 23.4% in the second quarter of fiscal 2026 compared to 23.1% in last year's second quarter, an increase of 30 basis points and an all-time high. Our effective tax rate for the second quarter was 21.2% compared to 20.7% last year. The tax rates in both quarters were impacted by certain discrete items, primarily the tax accounting impact for stock-based compensation. Net income for the second quarter was $495.3 million compared to $448.5 million last year. This year's second quarter diluted earnings per share was $1.21 compared to $1.09 last year, an increase of 11%. For the second quarter, our free cash flow was $425 million, an increase of 23.8% over the prior year. Our strong cash generation allows us to have a balanced approach to the capital allocation in order to create value for our shareholders. In second quarter, we continued to invest in our businesses through capital expenditures of $106.3 million. Also in the second quarter, we were able to make strategic acquisitions totaling $85.6 million in all 3 of our route-based businesses. During the second quarter, we paid dividends in the amount of $182.3 million. Also during the second quarter and as of December 17, we were active in the buyback program with repurchases of $622.5 million of Cintas shares. That is the third largest share repurchase we've made in a quarter. During the first 6 months of fiscal 2026, we have returned $1.24 billion in capital to our shareholders in the form of dividends and share buybacks. Earlier, Todd provided our updated guidance for the remainder of the fiscal year. As you contemplate the guidance, it is important to remember that during the third quarter of fiscal 2025, we recognized a $15 million gain on the sale of an asset. That will not repeat and will be a headwind when comparing the third quarter results year-over-year. In addition, please note the following in the guidance. Both fiscal 2025 and fiscal 2026 have the same number of workdays for the year and by quarter. Our guidance does not assume any future acquisitions. Our guidance assumes a constant foreign currency exchange rate, fiscal 2026 net interest expense of approximately $104 million, a fiscal 2026 effective tax rate of 20%, which is the same compared to our fiscal 2025, and the guidance does not include the impact of any future share buybacks or significant economic disruptions or downturns. With that, I'll turn it back to Todd for some closing remarks. Todd Schneider: Thank you, Scott. Looking ahead to the second half of fiscal 2026, we are right where we want to be, and our focus remains on helping customers meet, and in many cases, exceed their image, safety, cleanliness, compliance needs. We remain committed to leveraging our investments to sustain our positive momentum and deliver exceptional customer service. I want to thank our employee partners for their incredible commitment to our customers and everything they do for Cintas. I'll now turn it back over to Jared. Jared Mattingley: That concludes our prepared remarks. Now we are happy to answer questions from the analysts. Please ask just 1 question and a single follow-up if needed. Thank you. Operator: [Operator Instructions] And our first question comes from Tim Mulrooney from William Blair. Timothy Mulrooney: Only 10 minutes on the prepared remarks. That's what I'm thankful for this holiday season. So just 1 question from me. There continues to be a lot of noise in the labor market data. But I think most would agree that we've seen a softening trend in terms of hiring activity over the last several months, at least on balance. And I'd be curious to hear if you've seen any material change in employment levels across your customer base, if what we are seeing in the broader payroll numbers are playing out in your world or if the reported job losses are more in the white collar world where you're providing some services, but those folks don't typically wear uniforms. I know you've emphasized your ability to grow in all types of environments. But I'd be interested in your take on more of the underlying dynamics here given the number of businesses that you service week to week. Todd Schneider: Well, thank you, Tim. We are Certainly -- we're reading the same things you are. We're watching job reports as we always do. And as we spoke about in our prepared remarks, as a reminder, we've shown the ability to grow in multiples of GDP and jobs growth for a long time now. And we certainly love it when our customers are adding employees and their businesses are really healthy and that's how we love that. But we don't need it in order to grow our business the way we like to. That being said, to your point, I think you have to dig pass the headlines on the jobs report. First off, we've picked our verticals really well, very strategically. . And the employment picture for them is, if you look at it, it's positive, health care, education, hospitality, state, local government, those are good. The services providing sector continues to show growth. And the goods-producing sector isn't performing as well, but the specialty trades within them are doing well, and that's -- those are obvious uniform wearers and users of our services. So there are certainly many jobs that are under pressure, hence, what you see in the headlines and the market reports, but they are certainly more generally, white-collar jobs IT, financial back office that are really not end markets for us, as you pointed out, Tim. Operator: And our next question comes from Manav Patnik from Barclays. Manav Patnaik: I also just had 1 broader question, maybe just following up from that one. I know you've obviously shown that you guys can outperform and execute in any kind of environment. But just maybe help us appreciate like what is your downturn playbook look like? Like if unemployment does crack, how do you still keep up these kind of high single-digit growth levels, which levers typically make up more? Is it all of them? Just any color there would be helpful. Todd Schneider: Yes. Good question, Manav. We certainly have a wide array of products and services that we provide, and we service a wide breadth of customers as well. So our target of mid- to high single-digit organic growth is important to us. And we have so many ways to grow that it gives us flexibility. Certainly, new business is important to us. And when you think about a business that -- when they have less people, that can certainly impact us. But they also have still other needs that they need to address. And in many cases, they don't have enough people to address those and they look to us to outsource for those items. So new business is important. We have -- are still very early in the innings of cross-selling all of our various products and services into us. So trying to gain growth from our current customers is an important lever for us. So that's all valuable. M&A tends to get better during those periods of times as well. But we're -- we have many levers in addition to obviously the ones that I've mentioned that I think give us real optionality. And certainly, when we look at new programmers, that's a big opportunity for us. James Rozakis: Manav, this is Jim. Perhaps I can give just a little more color on how much opportunity really lies within our current customers. And as Todd mentioned in his prepared remarks, our objective is to first supply our customers with a great experience with us. And that starts at the foundational level. And then we are in the right now to be able to ask them for more opportunities and to steer more of their spend that they already have over to us. . And just due to the nature of our service model, we're in their facilities so frequently that we get a really deep understanding of what their needs are and what the opportunities may come from. So I have an example here of a property management company that we service out on the West Coast, and we've been servicing that facility for a number of years for uniform rental for all the folks who work on the property. And during our routine visits, our team uncovered that they were doing bulk orders from an e-commerce solution for all their restroom supplies. And when inquiring with the company, they realized that they were tying up cash flow. They were tying up really precious real estate space and storage space that they did not want to tie up and they were taking a lot of their labor and manpower to go ahead and inventory all of those goods. Our folks went in and introduced the concept of outsourcing that to us and utilizing the Cintas hygiene program. They found out that now their spend is much steadier than it was in the past. It makes it much easier to budget. They're not tying up that space. And maybe most importantly, their team is not involved in taking their precious time away from what they focus on going ahead and managing hygiene inventories. They let us handle that for them. So just a small example of activities that happen across 1 million plus customers every day. Operator: And our next question comes from Andrew Steinerman from JPMorgan. . Andrew Steinerman: I definitely heard the pluses and minuses about the customers' employee base, but I just didn't quite get a compilation if [ ad stops ] are changed year-over-year. I surely heard the separate point that you continue to grow with same customers. So just a comment on ad stops year-over-year? And then my second question is with the acquisitions that were completed in this second quarter, how much will that add to the second half of the year revenues? Todd Schneider: Well, I'll take the first half, Andrew. So thank you for the question. As we mentioned and through Jim's example, we talked about the -- all the various products and services we can provide for our customers and it's broad and growing. So from that standpoint, growth from current customers, I would describe it as very stable, if anything, slightly positive. So we're in a good position. Our current customers see the value proposition that we can offer to them, and that actually helps with retention as well. Scott, if you want to address the second half? Scott Garula: Yes. Thanks, Todd. And Andrew, we've talked in the prepared remarks the acquisition impact during the second quarter was about 70 bps. And if you think about the rest of the year and our guide, we obviously assume no new acquisitions. You can assume that there's a normal tail when it comes to the acquisition volume and generally for the second half of the year, you would assume about half of the second quarter impact, so call it, 30 to 35 bps. Operator: And our next question comes from Josh Chan from UBS. Joshua Chan: Congrats on a really strong quarter. I guess my 2 questions. One, I think both Todd and Jim mentioned that retention rates are at record levels. Usually, you see those in stronger economic time. So maybe could you talk about how you're able to achieve strong retention rates even in these types of climate? And then I guess my second question is on the incremental margins, I think both Q1 and Q2 were within your longer-term range, but maybe towards the lower end. So any way to think about how that kind of transpires in the second half would be great. Todd Schneider: Thank you, Josh. I appreciate that. I'll take the first half and regarding retention, and Jim will address the incrementals. Our retention rates are, they're at all-time levels, and we have been for several quarters now, and it speaks to a number of things. First off, the execution by our team is impressive. They're doing a great job, making sure they're taking great care of our customers that is easy to say, really hard to do, starts with our supply chain team, our operations organization. They're doing a great job. And that all ties back into our culture. And we have spoken over and over again about the fact that our culture is our ultimate competitive advantage, and it shines even brighter in economic environments that are a little bit more uncertain than others. So -- and it's showing up big time for our folks. We're also providing great value for our customers, and they're seeing it with not only the products but the services, the technology that we're utilizing and the technology investments that we've made help accomplish 2 things at a 30,000-foot level. One is it makes it easier for our partners, our employee partners to service and take care of our customers to provide value for them. And the second one is it makes it easier for our customers to do business with us. So when you add those up, all that you mix it in, it adds up to retention rates that we find very attractive. Jim? James Rozakis: Yes, Josh, I'll get to the second question regarding margins. So first of all, we ran [ 27% ] incremental margin by the second quarter, which we really like. And that's right in our stated range of that 25% to 35%. That range is really important for us. That allows us to continue to invest in the future growth of the business, while being able to expand margin along the way. So we really like that, that allows us to make the investments in technology, the necessary investments in capacity, bench strengths, selling resources. All of those are really critically important to us. So that would be really right in the sweet spot of the range. Now a couple of things to keep in mind with regards to incremental this year, and how it plays out for the remainder of the year. First off, we're coming off of a comparison to last fiscal year which is a really tough comp. Last fiscal year, we ran in the second quarter, incrementals of [ 49.7% ] that's an outperformance not what we normally expect. So we're really pleased with the 27% this quarter given that comparison. In fact, if you look at the whole first half of last year, we ran an incremental of 44.3%. So really, really high in the beginning of last fiscal year, settling back into our range this fiscal year. A couple of other things maybe to keep in mind is really what the guide implies with regards to incrementals for this fiscal year. If you look at the whole year across the board, incrementals would imply somewhere between the [ 29 and 30 ] when you adjust for the $15 million asset sale from last fiscal year, so that's right in the heart of where we want to be, a perfect level of investment continuing to fuel the future growth. And if you look at the back half of the year, that would imply incrementals of 30% to 33%. So moving back up towards the high side of that range, so we're really pleased with where we are. We like the outlook of the year, and we think that's a great spot for running the business. Operator: and our next question comes from Jasper Bibb from Truist Securities. . Jasper Bibb: I wanted to get an update on your experience with sourcing costs and tariffs so far this year. I guess, how have things trended relative to your expectations when you initially set guidance for the year? Todd Schneider: thanks for the question. Yes, the tariffs is certainly a dynamic environment as it relates to that. We continue to execute at a high level. As I mentioned earlier, our culture, when the times are challenging, you might have to run at higher RPMs, but we're executing at a high level. We're not immune from impacts of higher costs from tariffs. But our supply chain has always been a competitive advantage. And when you're in this type of environment, it's that much more of an advantage. Now keeping in mind, the ability to -- they're flexible and adaptable and part of how they have that optionality is because we source from all over the world. And we do have really good geographic diversity, and we've spoken in the past that 90-plus percent of our products, we have 2 or more options. So that optionality is incredibly important when it comes to an economic -- excuse me, a sourcing environment than what we're dealing with. The guide does contemplate the current environment for tariffs. So it's coming in very similar to what we expected. You recognize that we do have the ability to -- we amortize most of our goods. So as a result of that, it does give us time to pivot and adapt, but it's coming in about where we expected. But we're certainly staying on our toes because the sourcing environment is dynamic and the tariff environment is there certainly could be changes coming as well. Jasper Bibb: And then really healthy margin in the First Aid business this quarter. Can you provide a bit more detail on what the underlying mix has looked like in that business this year? I know you were a bit heavier on the training side for the end of last year. So curious if that flipped back more recurring revenue. Todd Schneider: Yes. We're -- we love the First Aid business. It is a great business for us. We're very pleased with that. And you've seen that they've had outsized performance for a period of time now. One of the things that -- the mantra that we have and the leadership of our organization there talks about there's nothing more important than the health and wellness of our businesses, employees and customers. We completely agree with that, and you're seeing really good growth in that business. . We see them as a low double-digit grower for the foreseeable future. So that's great. That being said, certainly, the mix of business can have an impact on the margins in that. So we like the range we're in. But if we have a little bit of change in mix, and there's a little change in margin within a range for us. We're okay with that. We're investing for that for the future, providing more value to our customers. And running a business isn't linear. So we're not focused on just a pure, hey, we've got to get another a certain amount of basis points lift in gross margin in that business. We think it's important that we are running a range that's really attractive so we can grow our operating margins, but mix of business really is impacted by that. So Jim, anything else that you'd like to comment on that? James Rozakis: No, Todd, I think you hit all the main points of what really drives this business. The only other thing I might just say is the team did a fantastic job in the quarter of execution, and we're really pleased with the results and where they stand. Operator: and our next question comes from Andrew Wittman from RW Baird. Andrew J. Wittmann: I just thought I would give you guys an opportunity or hear -- I'd like to hear a little bit about the competitive environment. Obviously, over the last couple of years, you've had some competitors that have really gone on volume chasing spree. You guys have obviously executed very well amongst all this, but I was just wondering what you're seeing out there and how that's affecting your price realization. Todd Schneider: Andrew, thanks for the question. Yes, I mean we -- as you know, we operate in a very competitive environment, always have, always will. My entire career, it's always been like that. And we certainly do win some business from competitors, but that's -- as you know, that's not where our focus is, our focus is on signing new customers that weren't programmers when we walked in and when we walk out, they are. And as a result of that, still over 2/3 of our new customers are coming from that sector. And the white space is incredibly large there, with us servicing a little over 1 million customers, but there's still 16-plus million businesses in the U.S. and Canada. So that's really attractive for us. So I mentioned our retention rates are at all-time high. That's helping us as well. But that's really about the value proposition that we're providing for our customers, which starts with our culture and is executed through our employee partners. But it is a -- we're pleased with how our folks are performing competing in the marketplace and really attacking that large TAM out there of that [ no program ] market, which we say we're really excited about. Andrew J. Wittmann: Just for my follow-up, I thought I would just ask a little bit on the M&A side. Obviously, last fiscal year was one of your bigger years that you had since for a while, a pretty big quarter here in terms of capital deployment towards M&A. Maybe, Todd, you could just talk about kind of the funnel here. Do you feel like thinking about the amount of capital deployment last year is again doable this year with the progress that you made this year so far? Todd Schneider: Andrew, great question. First off, just capital allocation in general, we're very pleased with how we're going there. We just we invested over $100 million in CapEx for the quarter, $85 million in M&A. All 3 route-based businesses, we were acquisitive in. And then on top of that, $182 million in dividends paid out and over $600 million in buybacks. So we really like that capital allocation strategy, we've shown to be good fiduciaries with that. But -- and M&A is certainly a part of that. As I mentioned, we had a really good quarter. We had a great year last year. But as you know, it's hard to predict. M&A tends to be a little unpredictable and lumpy, whether it's because they're family-owned businesses that are waiting on their -- the next generation, whether they want to move on or not. And we do love M&A of all shapes and sizes. We love tuck-ins. We like new geographies. And when we make M&A, we always -- we value so much of it, but there's -- the #1 things that we get out of it are the people that are running the business and the customers. And we try to make sure that we can get synergies if it's a tuck-in. And if it's not a tuck-in, then we get extra capacity. And we also then have more customers that we can cross sell. So all that's attractive. The pipe, we are always working on that pipe. Jim and I and our corporate development team are all in that game together. We have relationships that are going back decades, and we're ready and willing to -- for M&A to be an important component of our strategy moving forward. Operator: And our next question comes from George Tong from Goldman Sachs. Keen Fai Tong: You touched on some of this, but can you provide a high-level overview on what you're seeing with sales cycles and broader customer purchasing behaviors. And if you've noticed any meaningful changes from prior quarters? Todd Schneider: George, nothing specific to call out. We've certainly operated in easier environments. As this economic environment, it's a little less certain than we like. But despite that uncertainty, the value proposition continues to resonate. As I mentioned earlier, especially in periods of uncertainty, it can do that. Outsourcing can save money, improving steady cash flow and same time that can be spent on running the business. That was referenced in Jim's example that we talked about earlier. I've already referred to retention rates being at very attractive levels. And our -- and I also mentioned our growth from our current customers was steady and if anything, improved slightly. So we think we're in a good spot, and we like where we're pointing. Keen Fai Tong: Got it. That's helpful. And then just a follow-up. You took up your full year guide for revenue. Can you talk about how much of the increase reflects upside in the quarter versus what you were internally expecting compared to maybe a stronger outlook for the remainder of the year? Todd Schneider: Yes. We're -- first off, our guide for the year is really good. It looks right where we want it to be. If you look at the guide for -- or excuse me, the guide for the year is showing growth of 7.8% to 8.5%, midpoint of 8.2%. It's right where we want. I think it's also important to recognize that the comps do get tougher in the second half for growth. Last year's second half growth was about 90 basis points higher than the first half of last year. So we've booked a good performance, but we're going to be up against tougher comps in the second half on growth than we were in the first half. But we're pleased with where we are, and we're pleased with our guide. And we think that we'll be able to get some leverage as we move forward on that guide, which will help fall to the bottom line, hence the EPS guide as well. Operator: And our next question comes from Jason Haas from Wells Fargo. Jason Haas: I just wanted to follow up to get some more detail on the timing of the tariff costs. It sounds like those have maybe started to flow through the P&L, but there's more impact to come. Is that like a fair understanding. And then how is the industry reacting -- how are you reacting? Have you started to raise prices of your competitors beyond raising prices? How should we think through that? Todd Schneider: Well, a few things. First off, as tariffs come through, I mentioned that we have optionality. So don't think of it as simple as well. Tariffs are a significant impact. We just haven't seen it yet. That's not the case because our culture is such that we don't just accept that we've got to go find ways to improve. We've got to find -- work at higher RPMs to find other additional suppliers to take cost out of our business as well. And we're doing all that. I mentioned we're not immune from it. But we're working really hard to mute that subject as very best we can. As far as pricing is concerned, we're -- we take a long-term approach on pricing. We are at what I'll call historical type levels. But our philosophy is we care about the long-term value of a customer. So we're focused on growing our business via volume growth, not just pricing. We're going to go out and extract out the inefficiencies of our business that will help us allow us to grow our margins at attractive levels, along with the revenue growth to help us get leverage. But we don't simply just pass along those costs to our customers and because we operate in a really competitive environment. And those customers have choices. So we've got to work really diligently to mute the cost impacts of tariffs and other costs that are going through so that -- and we're extracting out those inefficiencies and doing the very best we can to make sure that we're positioned for success to grow our margins. Jason Haas: Great. That's very helpful. And then as a follow-up, can you just refresh us on the timing of the [ SAP Fire ] implementation costs? Are you -- are you still expecting a greater headwind to margins in fire in the second half of the year as that system gets turned on and you start recognizing the amortization? Todd Schneider: Jason, thanks for the question. These ERP implementations take time. And we are experiencing some additional costs now for sure. But there is more cost to come in the future. We're working really hard on on this implementation. We think it will be really valuable for our employee partners and our customers. But so we're investing for the future in that business. You see that we're growing it really attractively. We're not only growing it attractively, but we are also highly acquisitive in that business. . So when you think about the fire business, think about it this way. We are also dealing with M&A that comes to us. And as I mentioned earlier, M&A, you can't predict it exactly. But -- and in that business, we are -- some of our M&A is -- allows us to be tuck-ins, but others are actually geographic expansion. And when we make M&A in that business and you get M&A expansion, it is -- for a period of time that doesn't run at the margin profile that we do. We've got to make sure that we get our operating protocols in place. And as you can see, M&A account for 340 basis points of total growth for fire in Q2. So that's a component of any margin pressure that we have in that business, little bit of SAP, but we're investing for that in that business because we think the future is really, really bright. And we're quite optimistic about the coming years. Scott Garula: Jason, this is Scott. I just might add, as Todd mentioned, the ERP implementations take some time. We've got some experience with that in our rental business as well as First Aid and Safety, and we are expecting the Fire rollout to carry on into next fiscal year. And I would just look at the impact for fiscal year '27 to be around that 100 basis points for the fire protection business. . Operator: And our next question comes from Faiza Alwy from Deutsche Bank. . Faiza Alwy: Yes. So I wanted to ask about your technology initiatives. I think it's well understood that you guys are at the forefront of implementing the latest and the greatest in terms of technology. So I just wanted to get an update on what are -- is there any recent initiatives you'd like to talk about? And maybe the return on those types of investments, whether it's AI related or anything else you would want to highlight? Todd Schneider: Yes, we are investing in technology, have been for many years, and will be probably in perpetuity, just it's the nature of how business works now. And we are -- we spoke about in the past, we're seeing benefits, whether it's a material cost or cost of goods, production, delivery cost, all those, you're seeing that. We talked about Smart Truck helping us from a technology standpoint, garment utilization being on one system allows us to share garments and reduce our cost there. All that is important. Certainly, AI, we see obvious opportunity there. We're in the early stages as many companies are on the AI front. And I include that into our total technology investment. But we're optimistic about where that will impact us in the future, and we are organizing and investing appropriately to make sure we leverage those opportunities. Operator: And our next question comes from Stephanie Moore from Jefferies. Stephanie Benjamin Moore: I think 2 areas of your strategy were very clear this morning and obviously have been clear for some time now. And first is, obviously, the record retention levels that you could continue to see as well as as you called out your investments in key verticals and just the strength that you're seeing there despite the uncertain macro. So kind of given these 2 factors, maybe talk about how your view on pricing can change because it would seem like look retention is very strong. You're also in the verticals where you're seeing a lot of impact, but also continuing to build out your value with these customers. So i.e., I would assume being much stickier. So maybe just talk about how this can inform your pricing strategy going forward. Todd Schneider: Stephanie, our pricing strategy hasn't changed. And as I mentioned, we're running at historical levels. And I also mentioned, we think long term about these subjects. So our strategy around pricing thinking long term has helped the retention rates. So we're focused on growing our margins, but we're not going to do that just through pricing. We have to go extract out inefficiencies because we operate in a very competitive market. And we have many competitors, whether it is what you might think of as a traditional competitor. But online, e-commerce, the big box retail, we compete with all these people. And as a result, we've got to be focused on providing great value and that applies to our key verticals as well. Each of our verticals that we operate in a very competitive environment, and we're focused on providing the value, extracting out those inefficiencies, but -- because we do not operate -- never have, never will operate in an environment where we can just adjust price up because it's an ultra-competitive environment. Operator: And our next question comes from Scott Schneeberger from Oppenheimer. Scott Schneeberger: It was asked earlier a question on sales cycles and you guys covered the spectrum with the answer pretty well. I'm curious just to ask that a little different way. What you're seeing behaviorally from large customers as opposed to small customers. Are you seeing any softness or strength in one or the other? Just any indications on those -- on size category. Todd Schneider: Yes. Good question, Scott. As you can imagine, we watch our customer base really closely. But we have such a wide breadth of customers and products and services. But it's a wide breadth of customers, whether it's geographic or by [ NIC ] code. You name it, we service it. And so nothing to call out specifically there. We've got certain customers that are thriving, certain ones have more challenges. But we're -- I wouldn't say anything specific to call out regarding the customer base. If we want to go to the fourth decimal type we could get into those levels. But I don't think it's appropriate at this point because in general, our customer base is -- has been pretty stable. And as I mentioned earlier, if anything, we had a slight improvement there. Scott Schneeberger: And I did some -- as you guys mentioned, a very large buyback in the quarter. And clearly, we infer from this call, you're interested in being acquisitive. But with -- it seems like we're going to see some large buybacks from you going forward based on what we've just seen. And your leverage is below 1x, ticked up a little bit using a little bit of short-term borrowing to do it. What's the propensity to take the leverage higher and do that? How aggressive might we see you be with the buybacks? And where would you take the leverage? Todd Schneider: Good question. We view buybacks as an excellent use of cash to provide shareholder return. That being said, we have been very transparent on this. We view it as an opportunistic approach. So I wouldn't just simply model in that we are going to lever up and be highly aggressive on buybacks. We'll be opportunistic and handle that as we have in the past. And if you look at our history, even our 5-, 10-, 20-year history, we've been pretty consistent on that. Our capital allocation approach and I wouldn't expect to change to our approach there. We'll continue to look at that opportunistically and return that back to our shareholders as appropriate. Operator: And our next question comes from Shlomo Rosenbaum from Stifel. Shlomo Rosenbaum: The first question I have, I was just hoping to get more detail on the growth verticals versus the rest of the business. Maybe you could talk a little bit about the growth of those verticals in aggregate versus the rest of the business and maybe -- versus each other? And what percentage of the business they are right now? And then just a separate -- just a deep dive a little bit more on one of the verticals. In terms of some of those like scrubs business that you guys have been very successful in, how much of a differentiator is it for you in terms of being able to use your balance sheet to have those dispensers out there and really invest in effective dispensers. Todd Schneider: Jim, why don't you take the first half, and then I'll talk about the dispensaries. James Rozakis: Sure. Yes. Shlomo, as we mentioned in our prepared remarks, we continue to see really good success across all 4 of our verticals, health care, hospitality, state and local government and education. We continue -- right now, health care is the largest and probably the most developed, we've been in that business the longest. That one represents about 8% of our total revenue, is growing and all 4 of them, by the way, are growing slightly faster than the aggregate of the company, but all the company -- we're getting demand in all of our business lines. So we're seeing good growth across the board. But right now, health care is about 8% of total. And if you put all 4 together, they're about 11%. But we really like the trajectory and the total available market in each one of those. So we continue to organize around those and put good resources toward them. Todd Schneider: Yes. And I'll take the second half, Shlomo. The -- as a reminder, we don't just sell into these verticals. We organize around them, whether it be customer service, the routing of that, which would take a little bit away from density, but we think it's so important to be experts in that business so that we can provide that much more value. So that helps us get better at finding the next products and services that those customers want and help us provide a better customer experience. That being said, you mentioned dispensers. We have deployed dispensers at many customers. And the value that we bring is significant there because it changes the game for them and allows them to look at the product differently. Instead of looking at the product as a commodity, that's -- and let's go with the cheapest one we can, they can provide a better value product because they have control over that inventory. So that's all important. And we're blessed to have a great balance sheet. We have a balance sheet that allows us to invest for those customers and ultimately get a return for our company, provide a better value and value proposition for the customer, better products, better service, better technology, and that gives us a strategic advantage. Operator: And our next question comes from Toni Kaplan from Morgan Stanley. Toni Kaplan: I was hoping you could talk about -- if you think about your business long term, you're already growing high single digits, great. Where do you see the next like step-up of growth coming from? Is it from the key verticals? Is it from new geographies, new products. I guess when you think about your penetration in the key verticals, like how do you think about long-term sustainability of growth at this level? And where are the biggest growth drivers come from? Todd Schneider: Toni, we really like the growth levels that we're at. You see that organically, we're growing at that mid- to high single-digit revenue number. And then we've had some nice M&A advantage as well. So we really like where we are. And it all goes into the algorithm. Our verticals, as Jim mentioned, are growing at a higher rate than our business overall. And we expect that. We're always looking at new products and services that we can launch and do launch. And that goes into our algorithm as well. New geographies, we are -- we have the coverage that we really like in our Rental and First Aid businesses. The fire business, we are still rolling out some flags in that area. So we do get some geographic expansion there, but we've already spoken to that. But the great news is for all of us that we don't need to take our models and go to other geographies. But we certainly need to continue to invest in our business, continue to invest in capacity, invest in new products and services, invest in new technologies so that we can continue to grow at these levels. And we like these levels of growth because we can organize around them. We can plan for them, we can staff for those. We can invest capital for those levels. And when we grow at these levels, it gives us the opportunity to get leverage and margin expansion as a result. Scott Garula: Tony, this is Scott. I might just add that we obviously had an outstanding quarter in the second quarter, strong growth performance from all 3 of our route-based businesses. We had a favorable comp in Q2 to last Q2. And as we have talked about earlier, when we think about the second half of the year, I think Todd mentioned this. We do have some more challenging comps. And you can see that in our guide for the second half of the year. But whether it's the first half of the year or our guide for the second half, we're right in the stated range of that mid- to high single-digit growth. And as Todd mentioned, the growth algorithm we have, we have a lot of confidence in that we can sustain that level of growth moving forward. Operator: At this time, there are no further questions. I'll turn the call back over to Jared for closing remarks. Jared Mattingley: Thank you, Ross, and thank you for joining us this morning. We will issue our third quarter of fiscal 2026 financial results in March. We look forward to speaking with you again at that time. Thank you. . Operator: This now concludes today's conference call. Thank you for your participation. You may now disconnect.
Eric: Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enerpac Tool Group Corporation Q1 Fiscal 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I'd now like to turn the call over to Travis Williams, senior director of investor relations. Please go ahead. Travis Williams: Thank you, operator. Good morning, and thank you for joining us for Enerpac Tool Group's earnings call for 2026. On the call today to present the company's results are Paul Sternlieb, president and chief executive officer, and Darren Kozik, chief financial officer. The slides referenced on today's call are available on the Investor Relations section of the company's website, which you can download and follow along. A recording of today's call will also be made available on our website. Today's call will reference non-GAAP measures. You can find a reconciliation of GAAP to non-GAAP measures in the press release issued yesterday. Our comments also include forward-looking statements that are subject to business risks that could cause actual results to be materially different. Those risks include matters noted in our latest SEC filings. With that, I will turn the call over to Paul. Paul Sternlieb: Thanks, Travis, and good morning, everyone. For our 2026 results, were essentially as expected. And there were some favorable developments and encouraging trends. In our industrial tools and services segment, or IT&S, product sales grew a healthy 4% organically, which we believe is a reflection of our ongoing ability to gain market share and outperform our broader industrial peers. We saw strong IT&S product order growth for the quarter, increasing our confidence in the outlook for the year. And as I will talk about later, we continue to invest in the business to support our growth strategy. With that, let me turn the call over to Darren who will provide more detail on our first quarter performance as well as geographic and end market trends. Darren? Darren Kozik: Thanks, Paul. Within product revenue, particularly in the UK, turning to slide five, which shows our due to the timing. Describe as a wild card for fiscal 2026 given the underlying economic conditions declined 10%. Again, it's meaningful to separate product from services. In EMEA, product revenue grew 5%, continued strength from infrastructure and government spending and a solid performance in Southern year-over-year growth. In the second quarter and for the full fiscal year. Turning to Slide six. For 2026, gross profit margin of 50.7% was in line with our performance over the past few quarters. As expected, margins were affected by higher tariff-driven costs flowing through cost of goods sold. However, we were able to successfully offset these on a dollar basis through pricing and productivity actions. We expect the margin pressure from tariffs to ease as we enter 2026. Additionally, we enjoyed a favorable mix shift within the portfolio, which was offset by lower service margins. On the selling, general, and administrative line, we were able to hold spending essentially flat year-over-year, offsetting the inflationary impact from compensation incremental spending and innovation with tight cost controls. As a result, adjusted EBITDA was $32.4 million, representing a margin of 22.4%. First quarter adjusted earnings per share was $0.36 compared with $0.40 in the year-ago period. A higher effective tax rate negatively impacted earnings by 2¢ per share. Turning to the balance sheet shown on slide seven, Enerpac's position remains extremely strong. Net debt was $49 million at quarter-end, resulting in a net debt to adjusted EBITDA ratio of 0.3. Total liquidity, including availability under our revolver and cash on hand, was $539 million. The timing of receipts of payments in the quarter. Capital expenditures were also lower as the year-ago period included additional CapEx for our new headquarters. Finally, with our balanced capital allocation strategy, we repurchased $15 million of stock in the first quarter while we maintain ample dry powder for strategic M&A. Based on our performance in the first quarter and encouraging trends on the order front, we are maintaining our full-year fiscal 2026 guidance. As shown on Slide eight, our expectations include organic revenue growth of 1% to 4%, and adjusted EBITDA growth of 6% at the midpoint. Free cash flow of $100 million to $110 million and earnings per share of $1.85 to $2. With that, let me turn it back to Paul. Paul Sternlieb: Thanks, Darren. As I mentioned at the top of the call, we enjoy the pickup in order rates in the first quarter. A trend we achieved across all three geographic regions. Demand's been particularly healthy from the infrastructure, defense, and power generation markets. At the same time, we have a strong backlog and excellent pipeline in HLT. And with the global rollout of Enerpac commercial excellence or ECX, we are benefiting from more discipline and rigor in our sales process and funnel management. In light of the strong order flow, we built additional inventory in the first quarter to ensure that we have the right products in the right locations to meet customer demand on a timely basis. As we've discussed, we are investing in our business to support Enerpac's growth strategy. As Darren mentioned, we are increasing spend on the innovation front, as we expect to deliver even more new product introductions in fiscal 2026. We are also investing in our commercial organization, expanding sales capabilities, coverage, and distribution in countries like India, Australia, and The Philippines. And we are enhancing our e-commerce capability with the implementation of a new technology platform that will improve the user experience and provide us with even more sophisticated marketing and analytical tools, all of which we expect to result in higher conversion rates. The topic of innovation and growth was front and center during our recent annual global leadership conference, which is a gathering of Enerpac's roughly top 50 leaders held each year in Milwaukee. I was truly inspired by the excitement and energy amongst the team, and the work completed to further refine our growth strategy and update our strategic growth initiatives. Speaking of growth, two of the attractive verticals we mentioned over the past few quarters are power generation and infrastructure. In the former, the proliferation of AI data centers and growing demand for electricity, including a resurgence in nuclear energy, underscores the need for Enerpac's products and services. As seen on slide nine, Enerpac provides a range of standard and specialized products and services that support the nuclear industry in multiple regions across all phases of building, operations and maintenance, inspection, refueling, and decommissioning. In addition to our standard industrial tools and services that many of you are familiar with, Enerpac sells a line of specialized tensioners under the BIOC name that have been the industry standard for refueling inspection for more than fifty years. The BIAOC lightweight, self-contained tensioner shown here is used to tighten reactor pressure vessel head studs. The SCT brings greater safety, reduces manpower, and shortens critical path time. With decades of experience serving the industry, and sizable market share in specialized products, we believe we are well-positioned to capitalize on growth opportunities in nuclear. Another strong market we've addressed over the past few quarters is infrastructure, where we've enjoyed significant contract wins for bridge and tunnel projects both in The US and internationally. Recently, Enerpac was selected to design and build a bridge launching system for the Juneau Creek Bridge in Alaska, which can be seen on slide 10. Our custom hydraulic cylinders and computer controls will pull bridge segments into place. When completed, the bridge will be the highest crossing in the state at 285 feet and the longest single-span bridge built in Alaska since 1982. As we continue to drive profitable growth at Enerpac, we believe we are well-positioned with multiple product lines in these key end markets to take full advantage of these secular trends and the opportunities in the market. Before we take questions, I would like to address a change on the investor relations front. Travis has accepted a position at another company and his last day with Enerpac is tomorrow. Travis has done an outstanding job building relationships and communicating Enerpac's story to investors. Moreover, he's been an invaluable resource internally, sharing intelligence and insight into the industry and capital markets. I would like to take this opportunity to thank him for his many contributions and wish him all the best in his new role. We have a search underway for Travis's replacement. Until we fill the role, Darren will be the main point of contact for investors. With that, we'd be happy to take questions. Eric: At this time, I would like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Will Gildea with CJS Securities. Please go ahead. Will Gildea: Good morning. Paul Sternlieb: Morning, Will. Thanks for taking our questions. You've talked for a number of quarters about efforts to improve profitability of the service business and investment ways that enable you to tap higher margin opportunities. What caused the sudden sharp decline in service revenue this quarter? And were you surprised by it? Paul Sternlieb: Right. So, yeah, I think we were certainly disappointed on the top line performance in the service business this quarter. After a strong fiscal 2025 year growth actually for service. You know, the issue, as I referenced in the remarks, was largely driven by a contraction in The UK market. And as part of our ongoing initiatives to capture, you know, higher margin service business, we passed on lower margin projects as we've talked about in the past. But given the consolidation and softness in the oil and gas market, you know, we've not yet successfully backfilled all that with more business, particularly in The UK given some of the market conditions there. I would say, as a reminder, our service business is a mix of rental and manpower. And overall, it is margin dilutive to Enerpac. We are actively consolidating our service footprint. We've already taken actions underway on that in Europe. While selectively continuing to make growth investments in the business. And I think it will take some time to work through the dynamics on the service side, but keep in mind that based on our reiterated guidance, we do anticipate growth and margin expansion in fiscal 2026. Will Gildea: Thank you. That's helpful. And then I guess just a follow-up question on that. Can you add some more color to the changes you're making in services to capture higher value business? I know on the last call, you gave the example of transitioning Algeria from an agent-based model to a direct-based model. Can you talk about the reasoning behind that? And if an initiative like that is successful, how long of a runway do you have to make that change in other regions? Thank you. Paul Sternlieb: Yeah. Thanks, Will. So I we we're taking a number of initiatives. Some are commercial, like you referenced, where we're moving from an agent to a direct model. That's the direct model is more the norm for our business. The agent is more the exception. In the case of agents and moving to direct, we end up with, obviously, the direct customer relationship, which allows us to do more follow-on business, obviously, capture more margin as well. Just get a closer overall relationship with the customer. So we feel good about that model and the progress that we're making in transition to multiple there. We're also investing in our service business both in field service capabilities, but also in capital equipment and tools. We've invested in the European market in our leak sealing business, for example, and some new capital equipment. That will allow us, we believe, to capture more growth opportunities and more market share in that service line and be able to respond to customers more quickly for their needs in that kind of service business. So we're making a number of improvements like that. We're continuing, as I talked about, to optimize footprint as well. Not only from a cost standpoint, but to be able to react quickly to customer needs. Will Gildea: Thank you, and switching gears. Can you add some color on your pricing strategy heading into calendar year 2026? Should we be expecting an annual price increase at the beginning of the year? Darren Kozik: Well, good question. So just as a reminder for everyone, we talked about in Q4. You know, going into the year, we saw about two points of benefit in price from the actions we took last year. You know, as we look at this year, you know, we will look to kind of remain obviously from a tariffs perspective and a price perspective. We're gonna make up for those on a dollar-for-dollar basis and hold our margin. So with that, we did you know, take a small low single-digit price increase in early December here. That will take some time to roll through the channel as we do have notice periods for that. But we constantly look at price and productivity to keep our margin targets and margin high. Thank you very much. Paul Sternlieb: Thank you. Eric: Your next question comes from the line of Ross Sparenblek with William Blair. Please go ahead. Ross Sparenblek: Hey. Good morning, gentlemen. Paul Sternlieb: Good morning. Darren Kozik: Morning, Ross. Ross Sparenblek: When we think about your, you know, 2026 organic guide, a little bit of price, what is contributing there from new products? And kind of the cadence of your new product launches? Everything about the rest of the year or fiscal 2026? Paul Sternlieb: Yeah. Ross, we're super excited by our innovation program. We highlighted that on the last Q4 earnings call. We launched, you may recall, five new products in fiscal 2025. We're pleased with the market acceptance. They continue to ramp commercially and globally. We also have a pretty ambitious innovation program and a set number of launches that we that we're targeting for this fiscal. Which are more than we launched in last fiscal. So, we're continuing to accelerate our innovation efforts. Part of it that is driven by additional investments we've made in innovation over the last few years. In fact, if you look at our 10-K, actually, over the last three years, you'll see incremental R&D spend on a dollar basis, as a percent of revenue every single year. I think that's a good indication. Also, you know, some folks may have visited our new innovation lab here at our global headquarters in Downtown Milwaukee. That's another investment we've made to drive improvements in our innovation program and faster time to market. So, we're pretty excited by the innovation progress we've made. Excited about the commercialization of the ramp of those products, and excited about the products we're planning to launch here in fiscal 2026. Ross Sparenblek: Okay. Well, when we think about kind of, you know, early days on this, you know, R&D flywheel, what is kind of the trajectory here as we think about, you know, the longer-term growth algo? I mean, are you trying to get a couple extra points of growth in new products? Are we targeting new adjacent TAMs, or is it just kinda upgrading and more defensive in the core portfolio? Darren Kozik: Know, Ross, I think as we think about growth, I mean, you heard us reaffirm our guidance for this year kind of 1% to 4%. You know, I think as we think of the macro, you know, Europe was the wild card for us. As we look at the higher end of that range, that encompasses a little bit of price. Recovery in the market, and obviously successful launches of our new products. Beyond that, obviously, innovation and the product investments we're making as Paul referenced, really, increase in R&D over the last three years. We'll see that start to take off into the future. Paul Sternlieb: Yeah. And Ross, I yeah. It's certainly part of the growth algorithm, you know, it is part of how we believe that you know, we are targeting to, perform or outperform our peer set. And we believe we've been able to do that successfully here. But I would also make the comment that, you know, obviously, we look very closely at our direct competitors and what they're doing from an innovation perspective. And we continue to firmly believe that we are outpacing not only investment spend, but just the pacing, intensity, and the level of new product launches relative to our competitive set. So we never rest on our laurels, but we're pleased with the progress we've made, particularly relative to the competitive set. Ross Sparenblek: Yeah. I can appreciate that. I mean, it looks like you guys are running around 2% of sales in your R&D spend. It has been ticking up slowly. I'm just trying to get a better sense of what your visibility looks like into your R&D funnel, like, how robust of opportunities you see today. Are we still kinda early days of planting the seeds? And, you know, buying the equipment and helping the guys, you know, get to the point where they're, you know, empowered to start building out that pipeline. Paul Sternlieb: Yeah. So we do have a multiyear innovation funnel. So we're always looking several years out. We're working on, you know, now updating that funnel for another year out as we execute on products and projects for this year. And just a reminder, again, you know, we launched five new products in fiscal 2025. You know, our target is to nearly double that number of new product launches here in fiscal 2026. So I think you'll see us gain additional pace and acceleration. And just, again, you know, reflective of the investments and the focus and the new processes that we've put in place. So that all is part of our overall growth algorithm at the end of the day. Ross Sparenblek: Okay. So we should anticipate a more measured pace of R&D growth going forward? Paul Sternlieb: Yeah. I again, I think three and a percent of sales or five percent tomorrow. Yeah. No. I mean, I think you'll see a consistent ramp over prior years. You know? But, you know, we've talked about beating the market by several 100 basis points in terms of top-line growth at the end of the day. And, you know, part of that clearly will be driven by our innovation program. Ross Sparenblek: Okay. I appreciate that. And if I can just add one more here. If I go back to last year, the backlog seemed pretty immaterial, but now we're speaking to confidence kind of these, secular growing, you know, project funnels. Any visibility there on sizing where the backlog kinda stands? Versus, like, a normalized basis and what's kind of underwriting that confidence? Paul Sternlieb: Yeah. I mean, I'll make a few comments Darren may in as well. I think, you know, we do you know, we're not a very heavy backlog business, as you know. We tend to be more you know, book to bill or shorter cycle, and most of our products are what we would classify as more OpEx than by our customers. Although, we do have a capital equipment business in HLT, you know, inclusive of DTA. That has more backlog. And, those backlogs tend to be sort of six to twelve-month time frames. You know, that said, I think we have seen, you know, our backlog tick up and that was driven by, you know, as we referenced on the remarks earlier, pretty strong order activity, and growth in overall orders in the quarter. And we were very pleased with that. And that order growth actually outpaced revenue growth in the quarter. So, again, giving us, you know, just more increasing confidence in our overall outlook for the year. Particularly as we as we go through the year. So I think all of that, you know, you know, just led us to maintain, you know, our current guidance for the full year. Darren Kozik: Only thing I would add, Paul, is, you know, Ross, as we kinda look at the business, obviously, we acquired DTA last year. DTA being part of our HLT business now is really helping that. As those markets tick off, we now have more products for our customers. As we talked about in Q4, their cross-sell opportunity is huge. We're bullish on HLT for the year. Ross Sparenblek: That makes sense. Alright. Well, thank you guys for the time. I'll pass it along. Eric: Your next question comes from the line of Tom Hayes with ROTH Capital. Please go ahead. Tom Hayes: Hey, good morning, guys. Thanks for taking my questions. Darren Kozik: Good morning, Tom. Paul Sternlieb: Hey, Tom. Tom Hayes: Hey. Just wanted to go back to one of Will's questions on the pricing, Darren. Was that pricing act that you put in place in December across all product families and globally? And then kind of a related question on gross margin for the year. How are you thinking about the margin flowing through the balance of the three quarters? You guys have done a great job of offsetting the tariffs. Just wondering your thoughts on kind of puts and takes on the margin front for the balance of the year? Darren Kozik: Sure, Tom. You know, I would say from the recent pricing those were in The Americas and in Europe. Now, you know, we did kinda release in this earnings a little bit more of a pie chart to give you a flavor for what our product business looks like. So just remember that low single-digit price increase is solely on product, it's not in the total portfolio. So when you factor that into the math, make sure you look at that aspect of it. I would say the second piece from a margin perspective you know, Q1 was where we thought it would be. Okay. Q2 will probably look more like Q1. And then as we get into the second half of the year, some of those higher cost tariffs will work off their way through the system, so margin will improve as we enter the second half of the year. Tom Hayes: Okay. Great. Appreciate that. I appreciate the color that on the product sales by region, but I'm not sure if you gave it by for APAC. Is that something you guys can share? Paul Sternlieb: Yeah. I think it's it's actually in the slides page five. But in APAC, we actually saw growth in this revenue in standard products. We saw we did see a sharp decline in APAC on HLT. I mean, it's a small business, and HLT tends to be lumpy. So that just varies quite a bit from quarter to quarter. Tom Hayes: Okay. Maybe just lastly, in respect to time, an area we don't talk about a lot, but you called it out on one of the early slides. It continues strong growth in Cortland. Just kind of remind us, a little bit about the business and kind of what's driving that strong growth. Paul Sternlieb: Yeah. We continue to be really pleased with the progress the team is making at Cortland. As you recall, that's effectively our other segment. And that's Cortland Biomedical. So, you know, roughly a $20 million revenue business annually. Obviously, not connected to our core tools business, but it is a very strong, very solid high growth, and high margin business. And you know, it doesn't draw undue investment or sort of management time or attention. So it runs relatively independent. But that business is very long cycle, very sticky. They design and develop and manufacture, you know, custom biomedical textile fibers for specifically for particular medical devices for giving OEM customers. So those are specked in and that those ultimate products that the customer has are obviously FDA qualified. So it's a very sticky business. Know, there is a lot of growth happening in that market. Cortland is exceptionally, we believe, well placed to support customers. We've won a number of new commercial opportunities, and you've seen that materialize in the ramp in revenue. So we continue to be quite bullish about the growth opportunities, the margin prospects, and we like the funnel of opportunities that we have there. Tom Hayes: Appreciate the color. Thank you. Paul Sternlieb: Mhmm. Thank you. Eric: Your next question comes from the line of Steve Silver with Argus Research. Please go ahead. Steve Silver: Thanks, operator, and thanks for taking my questions. And I'd like to offer my best wishes to Travis as well. So in the prepared remarks, you guys mentioned the pickup in order rates and you also mentioned building inventory heading into Q2. I'm curious just whether you can quantify at all the magnitude of the inventory ramp and maybe identify any key products beyond HLT? Darren Kozik: No, great question. I mean, we think about inventory as we head into, you know, into the quarter, I mean, it's up about 15%. Okay? So we had a really strong Q4. As you think about Q1, our product sales were at 4%. Okay? So we were very pleased with that. With all those product sales coming through, know, we had to work because our order rates were stronger than our product revenue growth rates in the quarter. Steve Silver: Great. And one more if I may. You guys have talked quite a bit in recent quarters about the balance sheet. Curious as to whether there's been any change in the M&A being in a very strong place to support strategic M&A. Funnel, if you will, just in terms of companies that are dealing with the macro issues that might be gravitating towards M&A at this time? Paul Sternlieb: Yeah, sure, Steve. I would say I'm pretty encouraged there as well. I mean, I do think M&A activity overall in the market and here for Enerpac has picked up reasonably considerably in the last quarter or two. We are actively evaluating several opportunities so we're spending a lot of our time focused there at, you know, the pace and quantity of deal flow has definitely picked up. We're having very robust dialogue on any number of opportunities. So I feel, you know, more positive and optimistic around that, the same time, I would say, you know, we remain extremely disciplined. As always, we will certainly not overplay overpay and, you know, our focus ultimately is, of course, on creating value for Enerpac shareholders at the end of the day. Steve Silver: Fair enough. Thanks again, and happy holidays to the entire team. Paul Sternlieb: Thank you. Thank you. Thanks very much. Happy holidays. Eric: As a reminder, if you would like to ask a question, there are no further questions at this time. I will now turn the call back over to Paul Sternlieb for closing remarks. Please go ahead. Paul Sternlieb: Okay. Well, thanks again for joining us this morning. We will be participating in the CJS new ideas for the New Year virtual conference on January 14, and the annual Roth conference in Laguna Niguel, California in late March. Thank you, and to all our team members around the world, customers, partners, and shareholders, best wishes for a wonderful holiday season, and a happy New Year. Eric: Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.
Operator: Good morning, and welcome to Worthington Steel's Second Quarter Fiscal Year 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question during that time, simply press star then the number one on your telephone keypad. I will now turn the call over to Melissa Dykstra, Vice President of Communications and Investor Relations. Please go ahead. Melissa Dykstra: Thank you, operator. Morning, and welcome to Worthington Steel's Second Quarter Fiscal Year 2026 Earnings Call. On our call today, we have Jeff Gilmore, Worthington Steel's President and Chief Executive Officer, and Tim Adams, Vice President and Chief Financial Officer. Before we begin, I'd like to remind everyone that certain statements made today are forward-looking within the meaning of the 1995 Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ from those suggested. We issued our earnings release yesterday after the market closed. Please refer to it for more detail on the factors that could cause actual results to differ materially. Unless noted as reported, today's discussion will include non-GAAP financial measures which adjust for certain items included in our GAAP results which are presented on a standalone basis. You can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliations within our earnings release. Today's call is being recorded and a replay will be made available later today on worthingtonsteel.com. Now I'll turn it over to Jeff Gilmore. Jeff Gilmore: Good morning, and thank you for joining Worthington Steel's Second Quarter Fiscal Year 2026 Earnings Call. Before we discuss our second quarter results, I want to thank our more than 6,000 employees across North America and Europe. Your commitment to safety, quality, and service every shift, every plant, continues to set the standard. I'm proud of the work you're doing and grateful for it. On December 6, we issued a statement regarding potential M&A activity. Consistent with that statement, we will not be providing additional detail or addressing related questions on this call. With that, let's turn to the second quarter. Net sales were $871.9 million, Adjusted EBITDA was $48.3 million, and adjusted earnings per share was 38¢. We delivered these results in a market that remains mixed, combined with compressed galvanized spreads. Even with those headwinds, our execution remains strong where it matters most: safety, shareholder value, customer service, and transformation. On the commercial front, our team continues to win and capture high-margin business, particularly in Cold Rolled Strip. This quarter, we gained market share with new and existing customers. We saw all-time high shipments during the month of October to a key D3 automotive customer and won new business with a large Japanese OEM. While these programs will take some time to ramp up, this momentum fuels cautious optimism for early 2026. Our sales to the automotive market were strong this quarter. Looking ahead, North American light vehicle output is expected to hold. Consumer demand is also expected to continue to drive growth in the electrified vehicle market, particularly hybrids, which suits our strategy and product mix very well. Construction is stable but subdued. We are seeing pockets of strength in areas related to power and infrastructure. In agriculture, we have been able to capitalize on our diverse customer base to partially offset continuing soft conditions. We are hopeful that ag starts to rebound later in calendar year 2026 as interest rates ease and some policy uncertainty subsides. We're positioning for the year depending on OEM release schedules. Patients die casting and automation complement our core, extend our European reach, and improve our competitiveness in advanced mobility and industrial markets. We see good cultural alignment and early collaboration across operations and commercial teams. Thank you to everyone who is involved in this integration. Shifting to new products, this quarter, we announced an innovative technology related to our electrical steel laminations called full surface bonding. This patent-pending technique creates a stronger bond between the laminations in the motor core, eliminating gaps, and resulting in a motor that is more efficient, durable, and cost-effective. All of this is underpinned by daily transformation. Transformation at Worthington Steel isn't a project. It's how we run the company. We measure it in safety, quality, delivery, cost, and revenue. And we work to make progress every day. This quarter was no exception. As a key tool in our transformation toolbox, artificial intelligence is becoming more integrated into our processes. We deployed two AI agents in our credit department, allowing us to speed up individual customer Another success was the development of automation to improve advanced shipping notices to one of our key OEM customers. Automating this process increased the accuracy of our advanced shipping notice and resulted in improved payment timeliness. The common thread here is practical impact: saved hours, higher accuracy, faster decisions, and better use of our assets. These efforts are key to holding operating expenses flat even as volumes and complexity grow. For instance, in plants where we streamline changeovers and reduce scrap, service levels improve and cost per ton comes down. In shared services, where we automate manual reviews and postings, we redeploy talent to analysis. And in the supply chain, where we improve visibility, we integrate inventory more tightly with demand. These are small changes, but they are critical to building a stronger company quarter after quarter. In parallel with these improvements, our culture and customer relationships continue to shine and receive recognition. Last month, we were honored to be named a 2025 Supplier of the Year by Shepler Group USA, receiving the America's Region Supply Chain Award. Recognition for performance, collaboration, and service. Just as our customers are recognizing how we show up for them, others are recognizing how we show up for our people. We received the Military Friendly Employer Gold designation for the eleventh consecutive year. We support those who have served our country through a range of programs, including focused recruitment, onboarding resources, and the internal veterans network that fosters belonging and connection across our company. Additionally, Computer World has named Worthington Steel to its 2026 Best Places to Work in IT for the eighth year in a row. I'm proud to see this recognition for our team's work this year to update global systems, introduce AI-driven tools, enhance our work, and support growth through integration and modernization projects. Finally, this quarter, we released our 2025 Corporate Citizenship and Sustainability Report, highlighting progress in safety, greenhouse gas emissions, and waste elimination, as well as our commitment to developing people through training and supporting communities. Our report sums up what makes Worthington Steel different: our culture and commitment to safety. In calendar year 2025, we also marked our seventieth anniversary. In celebration, our employees set a goal they called 70 for Good, to complete acts of service with 70 nonprofits in our communities, and I'm proud to share that we exceeded that goal. The program embodies who we are at Worthington Steel. It's a tangible expression of being strong for good, and it reflects our belief that investing in our people and communities makes the business stronger. So let me end where I began, with our people. Thank you to every Worthington Steel employee for your commitment to safety, quality, and service. To our customers for your trust and partnership, and to our shareholders for your continued support. We have a clear strategy, a resilient model, and a team that knows how to execute. As I said in my opening remarks, the environment is mixed today. We remain cautiously optimistic about 2026. We believe conditions are setting up for improvement in 2026, and we intend to be ready. I'll now turn the call over to Tim for more detail on the financials for the quarter. Timothy Adams: Thank you, Jeff, and good morning, everyone. Before diving into the details, I want to start with the headline. This was a solid quarter operationally and financially, particularly given a mixed demand environment and continued volatility in steel pricing. We expanded adjusted EBIT meaningfully year over year, generated strong free cash flow, and continued to gain share in our most important markets while maintaining balance sheet strength and financial flexibility. For the second quarter, we are reporting earnings of $18.8 million or 37¢ per share as compared with earnings of $12.8 million or 25¢ per share in the prior year quarter. There were a handful of nonrecurring items in both periods. Excluding those, adjusted earnings were 38¢ per share this quarter compared with 19¢ per share last year, reflecting improved underlying performance. In the second quarter, we reported adjusted EBIT of $26.6 million, which was up $12.3 million from the prior year quarter adjusted EBIT of $14.3 million. That improvement was driven primarily by higher direct volumes, including continued share gains, improved direct spreads, and higher equity earnings from Serviacero, partially offset by lower toll processing volumes and higher SG&A, largely related to compensation, benefits, and professional fees. Total shipments were approximately 902,000 tons, down modestly year over year as lower toll volumes more than offset volume growth in direct sales. Importantly, direct sale volume made up 65% of our mix in the current year quarter compared with 55% in the prior year quarter. Direct volumes increased 13% compared with the prior year quarter, with the vast majority of the volume increase coming from our existing facilities complemented by the addition of CEDA. Our increased shipments in the automotive market continue to be a standout. Direct shipments to automotive increased 26% year over year. This reflects both share gains from new programs reaching expected volumes and a return to more normal production levels at one OEM customer that had curtailed production last year. More broadly, it reflects the strength of our long-standing OEM relationships and our collaborative, solutions-oriented approach with customers. Outside of automotive, energy shipments were up 50% year over year, largely driven by project-based solar programs. Agriculture volume was up 1% as grain bin strength offset weaker OEM equipment demand. These gains were partially offset by softness in construction, down 9%, heavy truck down 6%, and service center where customers continued to destock. Toll processing volumes declined year over year primarily due to the closure of our Cleveland area, Worthington Samuel coil processing facility last fiscal year and softer market conditions. We view this decline as cyclical, not structural, and expect toll volumes to improve as end market demand normalizes, excluding the impact of that consolidation. Turning to the other drivers for adjusted EBIT this quarter. First, direct spreads increased year over year. Direct spreads were up $6.5 million, primarily due to a $6.2 million favorable swing in pretax inventory holding losses. In the current quarter, we had estimated pretax inventory holding losses of $7.2 million compared to estimated pretax inventory holding losses of $13.4 million in the prior year quarter. We expect the market price for steel to remain volatile in the near term. After stabilizing around $800 per ton in September and October, the price for hot roll coil has increased to approximately $900 per ton. Given that many of our contracts use lagging index-based pricing mechanisms, we estimate in our 2026 inventory holding gains and losses will fall within a range of a pretax gain of $3 million to a pretax loss of up to $3 million. As I mentioned earlier, adjusted EBIT also improved year over year due to the increase in equity earnings from Serviacero, our Mexico-based joint venture. Serviacero's equity income increased $7.7 million due to higher direct spreads, inventory holding gains, as well as the favorable impact of exchange rate movements. Finally, these improvements in adjusted EBIT were offset somewhat by an increase in SG&A. The $9.8 million increase in SG&A was primarily due to increased compensation and benefits expense of $5.9 million and higher professional fees related to various strategic projects we are evaluating, up $2.3 million. Turning to cash flows and the balance sheet. This quarter, cash flow from operations was $99 million, and free cash flow was $75 million, benefiting from a reduction in working capital. Capital expenditures were $25 million in the quarter, primarily related to previously announced electrical steel investments. For fiscal 2026, we expect CapEx of approximately $110 million, reflecting a disciplined approach aligned with long-term growth priorities while maintaining flexibility in uncertain markets. On a trailing twelve-month basis, we generated $73 million of free cash flow. We ended the quarter with $90 million of cash and net debt of $92 million, down sequentially driven primarily by working capital improvements. Earlier this week, we announced a quarterly dividend of 16¢ per share payable on March 27, 2026. In summary, this was a solid quarter. We're gaining share in key markets, generating consistent cash flow, and maintaining a strong balance sheet. That combination positions Worthington Steel well to navigate uncertainty and to act decisively when opportunities arise. I want to thank our entire Worthington Steel team for their continued focus on safety, customer service, and execution this quarter. At this point, we will be happy to take your questions. Operator: We will now begin the question and answer session. Our first question will come from the line of Philip Gibbs with KeyBanc Capital Markets. Please go ahead. Philip Gibbs: Hey, good morning. Timothy Adams: Hey, Phil. Philip Gibbs: You'd mentioned in the SG&A increase in your remarks, Tim, that compensation and benefits were up $5.9 million and higher professional fees were up $2.3 million. So I'm wondering what out of that larger increase is more one-time in nature because I know you had called out a CEDIM fee. You know, I also know that some of this is related to some of the M&A that you're potentially working on. So just trying to think about what may be core because clearly, it was elevated this quarter. Timothy Adams: It was. If you look at it from a year-over-year perspective, we now have CEDIM in there. That's one thing we pointed out during my opening remarks. But if you're talking about one-time, it's those professional fees of $2.3 million. I think that's how we had it quantified. That is related to the strategic projects. Philip Gibbs: What about the $2.5 million that you had called out from the just the CEDIM, I believe it was, an earn-out. It's just CEDIM was not in the results. Timothy Adams: Yeah. CEDIM was not in the results last year. And now they're in the results this year. That's the Philip Gibbs: Oh, okay. So that wasn't a one-time payment. That was their underlying result? Timothy Adams: No. The one-time payment was related last quarter to the bonus. It was a transaction bonus that happened. I think it was $4.6 million. That's all done. And now what you're seeing is just adding CEDIM to the mix, adding them to the financials. Philip Gibbs: Okay. So the higher professional fees of $2.3 million, that's largely related to the M&A, and that could obviously be somewhat more volatile and unpredictable. Timothy Adams: Correct. Philip Gibbs: And then in the just the automotive momentum that you had on the direct side, pretty impressive, Jeff, was the primary catalyst behind that the cold rolled strip piece? I thought I heard you mention that early in the call. Jeff Gilmore: Yeah. So, Phil, actually not. Most of what you saw this quarter was the market share gains that we had talked about in previous quarters. And really those programs working to 100% of the market shares that we gained. We have been fortunate, and the market share gains have continued. And a lot of those recent wins are automotive, and they are specifically cold rolled strip specific. And those are programs that we will look forward to starting really in the first quarter of the calendar year. Would probably that third month of the first quarter and then starting to reach full potential in the second quarter of the calendar year. Philip Gibbs: How do we tease out think about how much of that, which is on the that you just mentioned, is related to the tariffs from just imported foreign steel, but also you know, how much eventually is related to onshoring of just OE platforms overall? So I'm trying to Great. Trying to kinda tease I'm trying to tease out the short term versus the long term. Thanks. Jeff Gilmore: Yeah. That's a great question. So the recent market share gains, I would tell you, a pretty significant amount of that is coming due to the onshoring of supply chains. We definitely had some customers bringing material over from Europe or elsewhere, and they are now localizing that supply chain. So certainly was favorable to us. We have not seen any market share gains due to any announcements of onshoring manufacturing. So you know, to your point, that is something that would be more in the future for us to look forward to. Philip Gibbs: Thank you. Operator: Our next question comes from the line of John Tumazos with John Tumazos Very Independent Research. Please go ahead. John Tumazos: Thank you very much. Could you walk us through the deductions for your minority interest partners? They were a little smaller this quarter than last year. Timothy Adams: Yeah. Compared to year over year, I think what you're seeing is there's definitely some slowness in demand. Right? And I think we're seeing some of that. So also, what you have to keep in mind is last year, at this time, we had the Samuel Worthington Samuel coil processing joint venture in there. And we've removed that this year. So you know, we've had some differences in profitability year over year. Really due to demand. John Tumazos: With the disappearance of the Cleveland facility in the Samuel JV, what happens to the machinery? Do you move it to other Worthington plants? Does it get sold for scrap? Just what happens to the equipment? Timothy Adams: Sure. So just to be clear, we had several facilities up there. So the business that we could, we moved to Twinsburg. Your question's a good one. We typically sell the real estate. And we've got that underway already. I think it depends on the type of equipment. If we think it's high value add equipment, we won't sell it, or we'll try to sell it offshore. If it's something that's a little more generic, like a footer or cut to length line, we'll find a home for it. If we can use it I mean, the first question you ask is, can you use it internally somewhere? And we try to do that first. And then if we don't have a need for it internally, then we'll look to sell it if it's low value added equipment. Operator: Our next question will come from the line of Martin Englert with Seaport Research Partners. Please go ahead. Martin Englert: Hello. Good morning, everyone. Quick question. The compressed galvanized spreads in recent history do you think is contributing to that, and what may prompt it to normalize? Jeff Gilmore: Yeah. I mean, question. I mean, I think the first thing you're gonna point to is certainly just decreased demand, Martin, and specifically construction. And so, you know, with decreased demand, it just creates certainly a lot more competitive rivalry. And certainly, that's what we have been facing Martin, we feel like we hit the trough and we'll start to see some margin expansion going forward. We saw a little of that in CRU here. On Wednesday. And the reason for the expansion and then potentially normalizing, hopefully, in the second quarter of the calendar year, it has much to do with the February. So, I mean, there is obviously limited galvanized product coming into the US at this point. I think it was down Tim, correct me if I'm wrong, 35% and probably will continue to increase. That has to do with antidumping as well. So I'd expect we continue to see that. It expand and then normalize somewhere around the second quarter. I think there's a ceiling because there certainly has been added capacity in the US as well, but we're certainly looking forward to that, Martin. Good question. Martin Englert: Have prime scrap spreads relative to obsolete had any negative impact on your business? Recently? Timothy Adams: No. Nothing material. Nothing meaningful to our margins, Martin. Martin Englert: Okay. And last one that I have is, calendar year 2026. What are your top transformation initiatives that you're focused on? Jeff Gilmore: Yeah. So we have we mentioned in prior quarters everything in our facilities, we have transformation events ongoing. You're very familiar with that. That's just how we do business. We really turned our focus after separation was transformation through our back office. And that's been certainly a big priority of ours. We just had our fourth report out with the back office teams. And the progress has been nothing less than amazing. The team has embraced it. We are seeing certainly savings and the hours saved have been significant as well. And in addition to that, Martin, that group has fully embraced artificial intelligence and we have had some great success stories with automation. And have launched our first two agents. So we've now moved to agentik.ai with much on deck there. And then the second, which is a key priority, is Temple. Transformation is not an area where we got too deep into it while we were getting integrated and familiar with their business. We have really started to double down on those efforts as we just think whether it's the income statement or the balance sheet there's gonna be a lot of good meaningful opportunities for the shareholders. And in addition to that, I say Temple is CEDIM. You know, we have mentioned they are world-class at tool and die making as well as world-class in automation. And so we have been excited to learn their best practices and embrace them because they're all scalable across that footprint. But back office and Temple would be the priorities. Operator: We are working towards a scorecard. I for our next call. We want to do a better job of quantifying surely hope to have that available the savings that we're seeing through transformation, as well as the launch of artificial intelligence. We have seen savings. We're gonna continue to see a lot more. We have five pretty robust pilots that I think will have certainly a positive impact on the income statement as well as the balance sheet. So we're gonna start quantifying those savings for you, specifically transformation and artificial intelligence. And then in line with that, we want to quantify and share with you the hours saved in the workplaces as well. We're seeing significant hours saved now, which is allowing us to redeploy all of our employees to more meaningful work. So we're excited about that as well. But that's certainly a commitment that I'm making to you right now, Martin. Martin Englert: Okay. Appreciate it. Look forward to the update on that front. Thank you. Jeff Gilmore: I will now turn the call back over to Jeff Gilmore, President and CEO, for closing remarks. Operator: Just want to thank everybody for joining us this morning and showing interest in Worthington Steel. Clearly, we're quite pleased with the quarter results. And excited over our strategy and the opportunities we have to continue to execute on it. Clearly, the story today was gained market share. And we've talked quite a bit about the market share gains in automotive. But even more exciting, we've started to see market share gains in other markets as well, whether it's agriculture, energy, or transformers, transformer core specifically, as well. So look forward to start seeing those shipments, you know, probably early second quarter of the calendar year, and so a lot for us to look forward along with transformation and artificial intelligence. So with that, we wish everybody happy holidays, and we very much look forward to talking to you again following the current quarter. Thank you. Operator: This concludes today's call. Thanks for joining. You may now disconnect.
Operator: Good morning. Thank you for standing by. Welcome to Accenture's First Quarter Fiscal 2026 Conference Call. At this time, participants will be in listen-only mode. After today's presentation, we will conduct a question and answer session. To ask a question, you may press star then 1 on your telephone keypad, and to withdraw your question, please press star then 2. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Alexia Quadrani, Managing Director and Head of Investor Relations. Please go ahead. Alexia Quadrani: Thank you, operator, and thanks, everyone, for joining us today on our first quarter 2026 earnings announcement. As the operator mentioned, I'm Alexia Quadrani, Executive Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our chair and chief executive officer, and Angie Park, our chief financial officer. We hope you've had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today's call. Julie will begin with an overview of our results, Angie will take you through the financial details, including the income statement and balance sheet, along with some key operational metrics for the first quarter. Julie will then provide a brief update on our market positioning before Angie provides business outlook for the second quarter and full year fiscal 2026. We will then take your questions before Julie provides a wrap-up at the end of the call. Some of the matters we'll discuss on this call, including our business outlook, are forward-looking and, as such, are subject to known and unknown risks and uncertainties, including, but not limited to, those factors set forth in today's news release and discussed in our annual report and Form 10-K and quarterly reports on Form 10-Q and other SEC filings. These risks and uncertainties could cause actual results to differ materially from those expressed on the call. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We will include reconciliations of non-GAAP financial measures where appropriate to GAAP in our news release or in the Investor Relations section of our website at accenture.com. As always, Accenture assumes no obligation to update the information presented on this call. Now let me turn the call over to Julie. Julie Sweet: Thank you, Alexia, and everyone for joining this morning. Apologies in advance for my voice. I am getting over a seasonal cold. And my voice is not quite cooperating. I really wanted to start today by thanking our nearly 784,000 people around the world for your extraordinary work and your commitment to our clients, which enabled us to deliver another strong quarter. Let me begin by sharing that we are very proud to have earned the number four spot on the great place to work list of the world's best workplaces, our highest ever ranking on this prestigious list. This recognition reflects our strategy to be the most client-focused, AI-enabled, great place to work for reinventers. It is especially meaningful because it is based on feedback from our people worldwide. Our ability to attract and retain great talent is one of our most important competitive advantages. Before handing over to Angie, I will briefly highlight the value we delivered this quarter, the importance of our partnership strategy, and this quarter's strategic acquisitions. We are very pleased with our results as we continue executing our strategy to help our clients reinvent every part of their enterprise, reflected in our bookings of $20.9 billion, including 33 clients with quarterly bookings greater than $100 million. We delivered revenue of $18.7 billion, growing 5% in local currency at the top of our guided range with broad-based growth across markets and both types of work. And we continue to strengthen our competitive position by taking significant market share on a rolling four-quarter basis against our closest global publicly traded competitors, which is how we calculate market share. Adjusted operating margin expanded by 30 basis points year over year, and we delivered adjusted EPS growth of 10% compared to Q1 last year. We continue to invest significantly to execute our talent strategy to rotate our workforce. We have nearly reached our goal of 80,000 AI and data professionals, and our people participated in approximately 8 million training hours this quarter, with a significant focus on building advanced AI technology and industry skills. Advanced AI is increasingly embedded in our large transformation programs, either enabling future enterprise use or being implemented directly as part of our solutions. Our strong leadership in advanced AI is a clear competitive advantage. As clients select us to help them capture the value of this technology now and over time and to build the readiness required to adopt it effectively across the enterprise. Momentum in the adoption of enterprise AI continues. Our Advanced AI bookings this quarter were $2.2 billion, nearly doubling from Q1 last year and also up from Q4. Revenue reached another milestone this quarter at approximately $1.1 billion. As we think about the advanced AI opportunity ahead, as you know, we were the first in our industry to share our bookings and revenue from Advanced AI, which we define as GenAI, Adjenta AI, and physical AI, and does not include data, classical AI, or RPA. We introduced the metrics in Q3 FY23 just months after GenAI burst onto the scene, initially to size the reality of the opportunity and to demonstrate our early leadership. At that time, bookings were about $100 million across roughly 100 projects, and revenue was immaterial. We have measured it consistently since that time. To date, we have now delivered approximately $11.5 billion in bookings across 11,000 projects and $4.8 billion in revenue. This will be the last quarter in which we share these specific metrics. The demand for AI is both real and rapidly maturing. We've now reached a point where advanced AI is being embedded in some way across nearly everything we do. Many of our clients are focusing on moving beyond stand-alone proofs of concept or initiatives. We're shifting to more scaled end-to-end solutions that integrate forms of AI, and it has become less meaningful to isolate the data specifically for advanced AI as it does not reflect how the demand is evolving on the ground. The full scope of our AI work and the value we're creating. Now turning to our partnership strategy. Our partnership strategy is grounded in client demand. Demand for reinvention remains strong, with our clients continuing to prioritize larger transformational programs focused on building their digital core and driving both efficiency and growth. Technology is front and center for every client, and the 60% of our revenue in Q1 from work we do with our top 10 ecosystem partners continued to outpace our overall growth. Given the importance of the broader technology ecosystem to our clients, we plan to continue providing insight into the role our top partners play in our growth by maintaining the metric we introduced at the end of FY2025, the percentage of our revenue tied to work with our top 10 ecosystem partners and its growth relative to our overall growth as it provides a clear view into our largest, most important partnerships. We also plan to continue to share our partnership strategy and how we're growing new businesses with an expanded group of partners. Most of our clients operate with a network of ecosystem partners to meet their enterprise needs. They rely on us to help integrate those partners and expect us to be the leader with the most relevant players across their enterprises, including new and emerging players. As a result, it is important that in addition to our top 10, we work with a broad set of partners that play important roles across enterprises. Many of these support specific functions such as digital manufacturing, product engineering, core banking and insurance, supply chain, and finance. While others are helping clients advance their AI and data capabilities. Our partnerships are critical to our clients reinventing all parts of their enterprises. Together, they represent meaningful opportunities for growth and further strengthen our ability to deliver comprehensive end-to-end solutions. Over the past year, in response to client demand, we've been expanding and in some cases forming new partnerships with emerging AI and data companies. And these will play a key role in helping our clients use these technologies, including creating new solutions and integrating and leveraging the synergies with their existing ecosystems. These evolving partnerships, which are laid out in our earnings presentation, are a significant competitive advantage for us. Turning now to our strategic acquisitions. Earlier this week, we announced an agreement to acquire a 65% majority stake in DLB Associates, a US-based leader in AI, data center, engineering, and consulting in the rapidly growing data center professional services market. An estimated $12 billion addressable market expected to double by 2030. Along with our FY25 acquisition of UK-based Sobin, this meaningfully expands our capital projects capabilities and presence in the high-growth data center consulting market. It also positions us to capture growth not only through the work we do with our helping our clients use AI, our primary business, but also in the opportunity created by the company's building the infrastructure to power AI. And this quarter, we also invested $374 million primarily in six strategic acquisitions. We're scaling our capabilities with CPOL integrated product support business in Italy, which brings deep defense and aerospace engineering expertise for mission-critical programs and total EBS solutions in Southeast Asia, which adds AI, cloud, and digital workplace innovation that strengthens Avanade's position in the region. And we're scaling new growth areas with NeuroFLASH in The US, a sales force and advanced AI leader whose AgenTex solutions expand our reach into the mid-market. Atomy in Japan, which enhances LearnVantage with AI learning and capabilities to help clients build AI-ready workforces. And Deco in The UK and Ranger Data in The US, which strengthen our Palantir and advanced AI capabilities. In summary, we are pleased with how we delivered a quarter and continued to strengthen our foundation for long-term growth. Over to you, Angie. Angie Park: Thank you, Julie, and thanks to all of you for joining us on today's call. We are very pleased with our first quarter results with revenue at the top of our guided range as well as strong adjusted margin expansion, adjusted EPS growth, and free cash flow. These results reflect the execution of our strategy to be the reinvention partner for our clients. We continue to invest for long-term market leadership while delivering significant value for our shareholders. Now, let me summarize a few highlights for the quarter. Revenues grew 5% in local currency, reflecting nearly 4% organic growth and were broad-based across geographic markets and types of work. Excluding the 1% impact from our federal business, our revenues grew approximately 6% in local currency in Q1. Adjusted operating margin was 17%, an increase of 30 basis points compared to Q1 results last year and continues to include significant investments in our business and our people. We delivered adjusted EPS in the quarter of $3.94, which represents 10% growth compared to EPS last year. And finally, we delivered free cash flow of $1.5 billion and returned $3.3 billion to shareholders through accelerated repurchases and dividends this quarter. We also invested $374 million primarily attributed to the six acquisitions in the quarter. With those high-level comments, let me turn to some of the details starting with new bookings. New bookings were $20.9 billion for the quarter, representing 12% growth in U.S. Dollars and 10% growth in local currency with an overall book to bill of 1.1. Consulting bookings were $9.9 billion with a book to bill of 1.0. Managed services bookings were $11.1 billion with a book to bill of 1.2. Turning now to revenues. Revenues for the quarter were $18.7 billion at the top of our guided range, reflecting a 6% increase in U.S. Dollars and 5% in local currency and a foreign exchange impact of 1.4%. Consulting revenues for the quarter were $9.4 billion, up 4% in U.S. Dollars and 3% in local currency. Managed services revenues were $9.3 billion, up 8% in U.S. Dollars and 7% in local currency, driven by high single-digit growth in technology managed services, which include application managed services and infrastructure managed services, and mid-single-digit growth in operations. Turning to our geographic markets. In The Americas, revenue grew 4% in local currency, excluding the 2% impact from our federal business, Americas grew 6% in local currency in the quarter. Growth was led by banking and capital markets, industrial and software and platforms partially offset by a decline in public service. Revenue growth was driven by The United States. In EMEA, we delivered 4% growth in currency, led by growth in banking and capital markets, insurance, and life sciences. Revenue growth was driven by The United Kingdom and Italy. In Asia Pacific, revenue grew 9% in local currency, led by growth in banking and capital markets, communications and media, and public service. Revenue growth was led by Japan and Australia. Before I move on, I want to briefly update you on the business optimization actions we initiated last quarter and completed in Q1 as part of executing our talent strategy. This quarter, we recorded $308 million in costs, primarily related to employee severance, bringing the total for these actions over the past six months to $923 million. Our business optimization costs impacted operating margin, tax rate, and EPS. The following comparisons exclude these impacts and reflect adjusted results. Now moving down the income statement. Gross margin for the quarter was 33.1% compared with 32.9% for the same period last year. Sales and marketing expense for the quarter was 10% compared with 10.2% for the first quarter last year. General and administrative expense was 6.1% compared to 6% for the same quarter last year. Adjusted operating income was $3.2 billion in the first quarter, reflecting a 17% adjusted operating margin up 30 basis points compared with results in Q1 last year. Our adjusted effective tax rate for the quarter was 23.9% compared with an effective tax rate of 21.6% for the first quarter last year. Adjusted diluted earnings per share were $3.94 compared with diluted EPS of $3.59 in the first quarter last year, reflecting 10% growth. Day services outstanding were fifty-one days, compared to forty-seven days last quarter and fifty days in the first quarter of last year. Free cash flow for the quarter was $1.5 billion resulting from cash generated by operating activities of $1.7 billion net of property and equipment additions of $157 million. Our cash balance at November 30 was $9.6 billion compared with $11.5 billion at August 31. With regard to our ongoing objective to return cash to shareholders, in the first quarter, we accelerated our share buybacks and repurchased or redeemed 9.5 million shares for $2.3 billion at an average price of $245.32 per share. Also in November, we paid a quarterly cash dividend of $1.63 per share, a 10% increase over last year for a total of $1 billion. So in summary, we are very pleased with our Q1 results. And we are focused on delivering Q2 end of the year. Before I turn it back to Julie, let me provide an update on our commercial models. Our large base of fixed price work continues to grow and is a strong foundation for how we believe our commercial models will continue to evolve. In FY 2025, about 60% of our work was fixed price, which is up about 10 points over the last three years. This reflects the increasing role of our proprietary platforms over a long period of time and clients wanting greater certainty in cost delivery. This is where our scale, experience, and strong financials matter. Now back to you, Julie. Julie Sweet: Thank you, Angie. Starting with the demand environment, clients continue to prioritize their most strategic and large-scale transformational programs, which convert to revenue more slowly, but position us at the center of the reinvention agendas. The pace of overall spending and discretionary spend in our market is at the same levels we have seen over the last year. We are delivering strong results and taking market share in this environment because reinvention is critical to our clients and our clients know we deliver real reinvention with real outcomes. Let me turn to four strategic growth areas that are essential for enterprises to use technology, AI, and data to achieve these outcomes. First, the digital core. Cloud, data, and platform modernization remain foundational to every reinvention. When companies tell us they want to use AI, they quickly realize that AI is only as powerful as the data underneath it. Most organizations have mountains of data, so spread across systems, stored in different formats, often unreliable or incomplete. Before AI can create value, underlying data and the connected and properly governed processes connected to it need to be simplified, cleaned, and modernized. We help clients manage all their data wherever it may be and turn it into something they can access and use to make decisions, train models, and uncover insights. We modernize their data platforms and make sure the data flows securely and consistently across the business so people can trust it and use it with confidence. We also use AI to improve data quality at scale. In the age of AI, data isn't just an input. It's the advantage. That's why we continue to see at least one out of every two advanced AI projects lead to a data project and we're the partner that helps our clients unlock it. For example, Essity, a global leader in hygiene and health, is making advanced AI, including agentic AI, core to how they run their business, starting with procurement and finance, setting the foundation for company-wide reinvention. We are helping Essity build a cloud-based data and AI platform that combines Accenture's deep industry and functional expertise with our ability to scale advanced AI. We're starting in high-volume parts of the business. Processing hundreds of thousands of purchase orders a year, the opportunity for double-digit productivity gains is strong. This foundation positions Essity to move decisively beyond pilots and reinvent end-to-end processes, unlocking new pathways to value and long-term growth. Security remains one of our fastest-growing businesses, growing very strong double digits this quarter. As cloud data and AI connect more of the enterprise, the threat landscape expands quickly. We are using AI to detect threats earlier, respond faster, and simplify complex environments. Companies cannot scale AI unless they can do so safely, this continues to be an important growth engine. Building on our long-standing relationship, we are partnering with one of Saudi Arabia's leading financial institutions to build a robust internal cyber defense capability that is designed to protect the bank, meet rising regulatory expectations, and enable the launch of modern sustainable digital services. We helped the bank move from limited visibility to a far more advanced security position, expanding threat detection, reducing incident response times, and are helping to improve their national cyber maturity scores. We are also helping the bank achieve full regulatory audit readiness, a critical requirement for trust and future growth. Now with Accenture's deep cybersecurity expertise, we will bring in specialized talent, strengthen governance, and help with upskilling to accelerate their progress. With the stronger foundation and the internal capability to maintain it, the bank can now introduce new services with far greater confidence and is well-positioned for its next phase of innovation. Accenture Song grew mid-single digits this quarter. Song continues to help B2B and B2C clients drive growth by improving how they connect with, and shape the customer's experience, the marketing first reaches them, the website or store where they buy, the service when they need help, and the digital products they use every day by bringing together design, creative, data, technology, and industry expertise to reinvent marketing, commerce, service, and digital products. One example is our partnership with Virgin Media O2, one of The UK's leading telecom providers. Where we didn't just modernize technology. We worked together to transform the entire customer experience and how work gets done. By rebuilding their digital core and embedding advanced AI, nearly 10,500 service agents now work on a unified cloud platform with connected data and workflows. More than 300 customer journeys have been redesigned, simplifying processes bringing the full customer context into a single view. These changes are helping agents resolve issues faster and more accurately contributing to a 35% increase in net promoter scores in some areas and same-day resolution improving from approximately sixty-five percent two years ago to nearly 90% today. A cultural shift is also underway. Upskilling teams to enhance their customer-first mindset turning service calls into opportunities to improve customer loyalty and trust. This kind of change takes strategy, process, and talent working in sync with Accenture's song bringing it all together to design experiences that resonate at scale so that Virgin Media O2 can drive innovation, and set a new benchmark for customer service excellence. We also continue to grow in the core value chain of many industries through our Industry X offerings, growing mid-single digits this quarter. Manufacturing and engineering remain early in their digital transformation journeys. Digital twins, predictive analytics, robotics, and other AI-enabled technologies are creating new levels of efficiency and resilience. Those same strengths are now propelling our capital projects work, where clients need us to design, build, and commission critical infrastructure and extend Accenture deeper into their core value chains. Take North America's transit sector, Agencies are facing mounting pressure to modernize aging infrastructure and meet growing ridership needs. Efforts that require delivering multiyear multibillion-dollar capital programs. Partnering with one of the largest public transit agents we're applying our infrastructure and capital projects expertise help transform how these critical programs are managed spanning a vast network of subway stations, maintenance facilities, bus garages, and administrative offices. By bringing together multiple data sources across their construction portfolio, we are helping to enable more informed decision-making. Supported by rigorous project controls, advanced scheduling, cost and risk management, and safety and financial oversight to improve efficiency, transparency, and forecasting. Just as we do in manufacturing. As a result, the agency is strengthening its daily transit operations and supporting safer, more reliable service for millions of riders. Now let me share how we're seeing demand evolve with the work we're doing in advanced AI. It is early innings, which means there is significant opportunity ahead. Technology is rapidly evolving. While enterprise adoption at scale is nascent, demand continues to grow, and IDC estimates that the total addressable market for advanced AI is expected to grow more than 40% through 2029, from roughly $20 billion today to over $70 billion. We are seeing a steady increase in demand, Over the last nine quarters, we've seen about 100 incremental clients initiate advanced AI projects with us each quarter, but most have a lot of work to do before they will be able to scale across the enterprise and it is still a relatively small part of our client base. Over 1,300 clients to date out of 9,000. So we see lots of opportunity to help those who have initiated and to expand in our existing clients as well as attract new clients. Clients increasingly understand that advanced AI is not a quick fix. Adopting it successfully requires foundational work to deliver P and L impact and other critical outcomes. This is why our clients and the broader ecosystem are turning to us to help bridge the gap between powerful technology and achieving real measurable results. The real opportunity is not proving AI works, it is making it work everywhere. Scaling AI means working with all forms of AI and means embedding it across critical processes so it transforms outcomes. For example, we are partnering with Bristol Myers Squibb, a global biopharmaceutical leader, to transform how therapies move from discovery to market. By embedding AI at scale across the organization. Drawing on its deep life sciences experience, BMS is using AI to accelerate innovation and expand its impact for patients. We are also establishing early leadership in Agentic AI with a scale of our deployments working across the ecosystem. We have built an extensive library of over 3,000 reusable agents reflecting our deep industry and functional expertise. These agents have been used in real client environments giving us a unique foundation of proven solutions to help clients move faster, and with more confidence. Over to you, Angie. Angie Park: Thanks, Julie. Now let me turn to our business outlook. For the 2026, we expect revenues to be in the range of $17.35 billion to $18 billion. This assumes the impact of FX will be approximately positive 3.5% compared to the 2025. Our Q2 guidance reflects an estimated 1% to 5% growth in local currency, including about a 1% impact from our federal business. For the full fiscal 2026, based upon how the rates have been trending over the last few weeks, we continue to assume that the impact of FX on our results in U.S. Dollars will be approximately positive 2% compared to fiscal 2025. For the full fiscal 2026, we continue to expect revenue to be in the range of 2% to 5% growth in local currency over fiscal 2025, including an estimated one impact from our federal business. Excluding the impact of federal, our revenue is expected to be an estimated 3% to 6%. This year, we continue to expect an inorganic contribution of about 1.5% and we continue to expect to invest about $3 billion in acquisitions this fiscal year with the potential to do more. For adjusted operating margin, we continue to expect fiscal year 2026 to be 15.7% to 15.9%, a 10 to 30 basis point expansion over adjusted fiscal 2025 results. We continue to expect our annual adjusted effective tax rate to be in the range of 23.5% to 25.5%. This compares to an adjusted effective tax rate of 23.6% in fiscal 2025. We continue to expect our full year adjusted diluted earnings per share for fiscal 2026 to be in the range of $13.52 to $13.90 or 5% to 8% growth over adjusted fiscal 2025 results. Due to slightly higher business optimization costs in the quarter, which were $58 million above our original Q1 estimates, we now expect GAAP EPS of $13.12 to $13.50. For the full fiscal 2026, we continue to expect operating cash flow to be in the range of $10.8 billion to $11.5 billion, property and equipment additions to be approximately $1 billion, and free cash flow to be in the range of $9.8 billion to $10.5 billion. Our free cash flow guidance reflects a very strong free cash flow to net income ratio of 1.2. We continue to expect to return at least $9.3 billion through dividends and share repurchases, an increase of $1 billion or 12% from fiscal 2025. Our Board of Directors declared a quarterly cash dividend of $1.63 per share to be paid on February 13, a 10% increase over last year. We remain committed to returning a substantial portion of our cash generated to our shareholders. With that, let's open it up so that we can take your questions. Alexia? Alexia Quadrani: Thanks, Angie. I would ask that each keep to one question and one follow-up to allow for as many participants as possible to ask a question. Operator, would you provide instructions for those on the call, please? Operator: Absolutely. Thank you. And today's first question comes from Tien-Tsin Huang with JPMorgan. Please go ahead. Tien-Tsin Huang: Hey, thanks so much. Julie, I appreciate your comments on scaling AI and how it's not a quick fix. So I do want to ask or maybe comment that we've noticed a bit of a shift in how people view the consulting industry's role in AI. Do you agree with this, Julie? And if so, why now? What's driving the change? And are you seeing any impact on business activity as a result of that? Julie Sweet: Thanks, Tien-Tsin. Yes, we're actually seeing the shift. And it's really because of what we've been saying for a while, right? Enterprise AI is fundamentally different than consumer AI. Consumer AI adoption's instant. The enterprise, you can't adopt it unless you have the right security. You've done the right work around processes, and most companies have fragmented and siloed processes. You have to have the right data, and most companies have, you know, mountains of data with a lot of issues in the data, and we call it, you know, they have processed it, they have data debt. And, of course, they need a modern digital core. And that's why so many companies are still early in the journey. You know, our clients are convinced AI is gonna be a very part of their future, and it's gonna allow them to unlock brand new value. And that's why they're coming to us because now they want to actually get there. And that's the foundational work that's driving our business. And then when you look at our bigger deals over the last quarter, for example, you see that advanced AI is, you know, a bigger part of those deals. You also see that it's both growth and cost because clients are not only fixated on the productivity side, you cannot cut your way to growth. And in this market, they need to find more growth. And this is where our strength really comes in, and that's why we're delivering strong quarters. Right? We have great momentum this quarter because we can help them on the growth agenda and the cost agenda. And we're, you know, so critical with our ecosystem partners. We understand where the technology is. And where it's going. And you saw that again this quarter with our growth with our top 10 ecosystem partners outpacing overall. And then, of course, some exciting new partnerships. Tien-Tsin Huang: Alright. Perfect. Then sort of a related question. You mentioned partners. I'll ask around these AI partnerships. You announced a bunch of Anthropic, OpenAI, Snowflake, etcetera. Just how might these partnerships on the AI front be different than other tech ecosystems partnerships in terms of think about time and productivity or, you know, investments to certify personnel to scale it up, etcetera. Just your thoughts on that and how quickly might these AI partners to the top 10? The partner front? Thanks. Julie Sweet: Well, first of all, the partnerships really demonstrate our talent advantage. So we've got decades of experience in being able to learn new technologies, skill people. Who else could have hundreds of thousands of people, you know, helping our biggest partnerships continue to grow incredibly well and be able to dedicate and commit, you know, 30,000 people here, etcetera. So excuse me. I think that's a really important part of what you're seeing with us in our growth and our ability to grow into new areas is that we've got the foundation of great talent and the ability to upscale. And, look, we're expanding in these partnerships because of what we see in client demand. But our clients have an ecosystem of partners, and the role that we play is to be, you know, we really try to be number one with all of the partners so that we can help our clients integrate and use these new technologies with their existing ecosystem, which is absolutely critical to them. So, you know, lots of excitement. The market is expanding, and we're gonna grow with that market. Tien-Tsin Huang: Thank you. Operator: Thank you. And our next question today comes from Jason Kupferberg with Wells Fargo. Please go ahead. Jason Kupferberg: I actually wanted to pick up where Tien-Tsin just left off. I was curious as a follow-on regarding these big partnerships in the AI world. When did they start moving the needle on revenue in your view? It's obviously critical to lay the foundation right now. But is this, you know, a next twelve months dynamic where we can start to see it showing up in the P and L perhaps? Or is it longer dated? And then I have a follow-up. Thanks. Julie Sweet: Susan, what I would say is these partnerships are part of an ecosystem for our clients. And so it's, I think, more about the market itself, right? So our enterprise adoption is dependent on clients. You know, these partnerships are all about enterprise adoption. So I would focus more on how the market and enterprise adoption is going as opposed to specifically because we can scale as fast as needed. And that is, you know, our expectations there are reflected in our guidance. Jason Kupferberg: Okay. Understood. And then I wanted to pick up on your comments about the increased adoption of the fixed price work because I think it ties in with a trend we've been seeing in your numbers where revenue growth is outpacing headcount growth, pretty materially and consistently. So do you feel like that trend is sustainable? And what's really driving that? Because we've all been talking about nonlinear revenue growth for a very long time, and it seems like Accenture is now actually starting to see it. Angie Park: Hi, Jason. Good morning. It's Angie. Let me take that. We're really pleased with our revenue per person this quarter, which did grow 7%, which is really primarily driven by our talent rotation. We're now hiring, as we shared with you last quarter. We're hiring for the new skill, and so we expect that revenue per person growth to moderate over the course of the year, and that'll go up and down, you know, really based upon when we bring people in. And, Jason, just to add on, though, you're right. So this sort of revenue and headcount that sort of breakage has been going on for a long time. It really goes back all the way to the introduction of RPA. So we'd expect that to continue, but it's not tied exactly as Angie said to, like, what's happening quarter to quarter. Jason Kupferberg: Right. Thank you, guys. Operator: Thank you. And our next question today comes from James Faucette with Morgan Stanley. Please go ahead. James Faucette: Thank you so much. I want to follow-up on a couple of things that have been said by Tien-Tsin and Jason. First, back on AI and those bookings, I appreciate that AI is becoming integral to all of your engagements. And so maybe deploying specific bookings, etcetera, on a go-forward basis makes sense. But how should we think about, like, the mix between what we could think of as proof of concept type engagements versus going into full production, any color you can give on the types of projects that are moving to whether that be by industry or type, etcetera. Julie Sweet: Sure. Great question. So first of all, one of the things that I think is important to understand is that people have moved ahead away from just thinking about models. Right? It's about models embedded in solutions, and most of the solutions involve different kinds of AI. Right? So you have if you have class RPA that is 100% accurate, right, depending on what you're using, you really have to understand all of that. And that's what the clients are looking to us for is to bring them more solutions, which is why our partnerships are really important. And our understanding of the industry and the function is so important. So if you're doing something in banking, which is one of the industries where there's a lot going on in advanced AI, you know, know your customer and compliance. Solution they're looking for you know, you have to understand the actual compliance how it works across the bank. And that's really the importance now of what you're seeing that people get that these are about solutions about really understanding operations. And that's what we're bringing. If you look at sort of where things are scaling into production, of customer so a lot of customer service, and I gave one of the examples today on the call. With the Virgin Media O2. You're also seeing areas like finance, and procurement. And so these are areas where you've got, you know, good technology readiness. We have a lot of depth of understanding here. And you can move relatively quickly because it's using a lot of usually pretty good data. We see a lot of value coming and being embedded in the core value chain, you know, the grid and utilities, right, the pharma and R&D. But those are the harder areas to crack. And so it's still pretty early in terms of scaling. But that kinda gives you a flavor for it. And so any of the industries that have a lot of customer service, are there banking has been, you know, one of the lighthouses, insurance to some extent already. But the things I tell my clients is that in every industry, unlike prior ways of technology, there are leaders in every industry who already had strong digital cores who are leapfrogging. It's very different than cloud where you had some, you know, industries like, say, energy lagging behind for quite some time. It's quite different this time. And that really plays to our strengths because we have that diversity of industry expertise and our clients look to us to really bring it across the board. James Faucette: That's great. And then as a follow-up, you mentioned and talked a little bit about the revenue per head and the evolution there. One of the questions that we get from investors a lot is around pricing particularly on a like-for-like basis and how that may be evolving and how we should think about the puts and takes there, especially as it relates to your margins and margin growth objectives? Julie Sweet: Yes. I think hi, Jim, how are you? Hi, James. So as it relates to pricing, so just overall, I think you have to look at it in totality. And so as you think about our pricing, one of the things and we've been seeing, and it's early, but we're seeing pricing improve in several parts of our business. And as you look, one of the things that we're super pleased about is that our contract profitability, we're starting to see some of that improved pricing, show up in the P and L. And we saw that this quarter. So we were really pleased with that, and it's really about balancing those components. James Faucette: Great. Thank you. Operator: Thank you. And our next question today comes from Bryan Keane at Citi. Please go ahead. Bryan Keane: Hi, guys. Good morning. Wanted to ask about discretionary spend. We're all waiting around for a while here for that to come back. I'd just be curious to know how you're thinking about that heading into next year conversations with clients and should we be hopeful that discretionary spend comes back, you know, in the turn in the calendar year? Julie Sweet: Alright, Bryan. I'm not waiting around for it to come back. Okay? So just to be clear, we have not been waiting around coming back. So I know you guys are, but we're delivering our results despite it because we really at this point, you know, we haven't seen a change in the market. And when you look around, like, all reading the same thing. We saw what came out, you know, in The US. This week on jobs. If there isn't some catalyst out there where we're saying that's the catalyst that's gonna change confidence or change industries. And look, I you know, we work across industries. Every industry right now has got a different set of, you know, challenges with a lot of these big macro trends. And so you know, we're not having conversations today that would suggest that there's gonna be a change in discretionary spending. But what the conversations we are having, though, is you know, CEOs who are just like, you know, Accenture, they're very resolute. That they have to deliver results. Despite the market. And that's why, you know, we're focused on pivoting the way they're spending. We're focused on doing the large transformational deals and then being at the center so that when we hopefully do get tailwinds, we're there, you know, to really benefit from them. But we're not seeing a catalyst. We'd love to hear it if you guys are in the external environment, and our conversations haven't changed. But people are you know, they're gonna deliver despite that. Bryan Keane: Got it. Got it. And then just as a follow-up, that 60% of work being fixed prices is above industry norms. And you guys have been working on that forever. And that's pushed up 10 points in the last three years. How do we think about the as AI becomes a bigger piece of that, does that can that number get up to 70 or 80%? And just a little bit of how that pricing works with productivity, how do you pass on some savings and keep it yourselves? Thanks so much. Julie Sweet: Well, one of the things that I think as you think about our positioning in the market is that these fixed price deals really are about our clients having confidence that we can deliver outcomes. And to do that, you've gotta have our scale, our experience, our strong financials. And so we see that it is a real competitive advantage in this market where clients cannot simply experiment. They can't take a flyer. They have to know that when they're investing with a partner, they're gonna deliver results. And that's why we feel the market now, you know, continue. We're taking market share because of that. So I can't, you know, predict exactly. I mean, I think commercial models are gonna continue. We believe they're gonna continue to evolve. And we've got a really strong foundation for that. And we are starting to see more focus on, you know, trying to get to outcome-based. So, you know, I think more to come in the models, but it really speaks to the underlying strength of our business. And then with respect to, you know, pricing and passing it along to our clients, remember, this has been a business model for the industry. Industry, really all the way going back to the introduction of technology and RPA, right, where we're signing contracts that depend on our use of more technology over time to provide productivity. And so that's still the commercial model of the industry right now. Bryan Keane: Got it. Thanks for taking the questions. Operator: Thank you. And our next question today comes from Bryan Bergin at TD Cowen. Please go ahead. Bryan Bergin: Hey guys, good morning. Thank you. Wanted to ask on the growth side. So just really the moving parts as you consider the fiscal 2026 growth outlook from here. So you affirmed the 2% to 5% after a solid 1Q at the top end, 2Q looks largely as expected. Yet the federal headwind is actually a bit less than the lower than the prior range. So it sounds like demand is broadly consistent. So the question is what may have precluded a low-end raise just considering that low-end raise had deterioration assumed before. Just curious, is there anything incremental there or just ongoing uncertainty and just prudent approach just given this early in the fiscal year? Angie Park: Hi, Bryan. Good morning. So look, as we think about, we just had a really strong print in Q1. We had strong bookings, two quarters in a row. We can see the backlog from our large deals. We've got a solid pipe. It's our 2% to 5% really reflects what we see going for the remainder of the fiscal year. We got three quarters left and it's our best view. And we were really pleased that federal came in a bit better than what we had anticipated, which is the strength of the work that they do. Bryan Bergin: Okay. Understood. My follow-up is on Song. Heard the mid-single-digit growth that sounds consistent here, which is good. Wanted to dig in and appreciate the detail you gave in the slides. Can you just talk about the implications for song growth just looking ahead, just you consider recent advances in models like Sora. And there's a perception that enterprises can do more of this themselves or just the cost of such service we'll see material deflation. So how do you navigate that type of a backdrop going forward? Julie Sweet: SOAR is a great example of something we embrace and are helping our clients embrace because what SOAR does is help them accelerate production, and so it's like a really good tool but it's just a tool. Right? So what Accenture does is say, how do you use these tools to actually get productivity differently to, more importantly, create the right new product and the new experience. And that's why one of the things I was mentioning earlier was that if you look kind of at our largest deals, this quarter, a big proportion of them have customer and customer service in it, because clients need growth. And the tools are just a productivity piece. They're not what you can do to, you know, how do you actually respond to social media sentiment in an hour. Right, which is what we can do in our operations around marketing, for example. So we see Song as critical because again, you can't cut your way to growth. The market's not getting, you know, better overall for our clients. And they're really turning to us to find the new ways and to help them use these tools in the meantime to get more productivity. Bryan Bergin: Makes sense. Thanks, and happy holidays. Operator: Thank you. And our next question today comes from Darrin Peller at Wolfe Research. Please go ahead. Darrin Peller: Thanks guys. Julie, what does the revenue opportunity look like at a client that has done all of the digital core work required to be get effectively leveraging AI much as you'd like to see. And then maybe just a quick follow on would be just around managed service opportunity and what that looks like. Really trying to get a sense if you have any customers that are really at that stage that can give us examples of whether it's a net increase revenue and the opportunities you have in different services that could help a client out that has the digital core ready? Julie Sweet: Darrin, it's a great question. And what we're seeing is it's really expanding our work. So think about you've built a digital core. And of course, just keep in mind, you know, there's still a lot to do in the digital core because there's so much new opportunities and new ways of thinking about data. For example, than if you, you know, built your data foundation a few years ago. So there's still a fair amount of work to do. Even if you've got a pretty modernized digital core. But the real work, and this is why I think it's so important to understand how you adopt AI, is that you have to then change the processes. You have to upscale your talent. Right? One of the things I talk to CEOs a lot about is that if someone comes to you and says, you know, here's how we do something today. Now we're gonna use AI, and there isn't a big change, then they're not gonna get value. And most of the work today has been around sort of isolated areas, hasn't been across the enterprise. And so what you're seeing is we've talked a little bit also about this last quarter, this inflection point where you've got now clients saying to us, okay. We have to do this across the enterprise. How do we think differently? Like, how do we put marketing and sales and service together? And they, you know, used to be in different functions. What does that mean then for the use of AI? So the actual rewiring is a huge amount of work. And remember, the technology today, like, it's great in some parts of the enterprise. But, like, if you think about manufacturing or engineering, where we've had been investing for decades, it's still early in the digitization journey even for those who have a core. So we have lots of great examples and that's why I talk about to our clients. Look. Where people have already invested a lot. They're investing with us now to try to leapfrog. And that's where we are so different because we're tech but we have the industry and the functional and the change management. Right. Which is what unlocks the enterprise AI. So we really see a big opportunity, you know, over the next decade. Darrin Peller: That's great. That's really helpful. Just very quickly, you know, following the business optimization, what is your headcount? What should we expect from headcount? Your headcount strategy for the remainder of the year? Thanks again, guys, and happy holidays. Angie Park: Thanks, Darrin. I'll take that. So as it relates to our headcount, look, we expect to we're doing our talent rotation and we expect to increase our headcount throughout the year. In The U.S. and in Europe. So you should see that come through for the remainder of the year. Darrin Peller: Okay. Thanks again. Operator: Thank you. And our next question today comes from Kevin McVeigh at UBS. Please go ahead. Kevin McVeigh: Great. Thanks so much and congratulations on the results. Think you'd mentioned that advanced AI is 1,300 of your 9,000 clients and that implies about 14%. Versus the 6% revenue and 9% bookings. Should we use that in terms of a leading indicator or goalposts of what the revenue and bookings should scale? And if that's the case, any sense of that 14%, how that scales over time just as we're thinking about the adoption rate? Julie Sweet: The way I would really just think about it, so it's not meant to be some new metric in that way. What it's really showing is just how rapidly it's moving. You know, 100 clients initiating a quarter. And that it's at the same time really, really early, right, when you think of our whole client base. But I wouldn't start now creating, like, kind of a new metric in that. It's just too early to start drawing those correlations. But I'm trying to give some insight into, like, kinda where is the market right now. Kevin McVeigh: It's super helpful. And then just real quick, the 17.3% margin, I mean, went back, I think that's the highest Q1 you've ever had. Is that a function of the efficiencies? And again, fixed pricing? And how should we think about the margin trajectory of the business maybe a little bit longer term to the extent you can comment on that? Angie Park: Yes. Hey, Kevin. We're really pleased with the 30 basis points of op margin expansion that we posted this quarter. Which was in line with our expectations. And certainly, our operating margin is affected by the level of investments that we do throughout the year. And so we're really pleased that we're reconfirming the 10 to 30 basis points for the full year. As it relates to EPS, I do want to make one point. Really pleased with the 10% growth that we posted this quarter, strong operational results, op margin expansion as well as gains on investments. But there's one thing that I do two things that I wanna call out as it relates to Q2 specifically. For your awareness and how we're thinking about it. First is that we expect our tax rate in Q2 to be above our full year guided range due to the tax impact of equity compensation. And then second is that we had higher gains on investment in Q2 of last year, and we don't expect the same for this year. But importantly, there's no change to our overall adjusted our full year guidance for adjusted op margin, tax, or EPS, this is really timing. Angie Park: Thank you. Operator, we have time for one more question, then Julie can wrap up the call. Operator: Absolutely. And our final question comes from Dave Koning at Baird. Please go ahead. Dave Koning: Yeah. Hey, guys. Thanks so much. The Health and Public Services growth was sequentially, I think up 7% the strongest or I think second strongest in twelve years. So, very, very good. Is a lot of that just the federal spending headwind dissipating from Q4 into Q1? Was that a lot of it just getting better than normal? Or is it just underlying health and federal spending? Angie Park: Hi, David. Good morning. And so as it relates to our health and public service, really, we saw strength in we told you about federal, and we know that, and that came in better than we expected. And then the second component is the strength that we're seeing in EMEA and Asia Pacific. Really strong, well-positioned, in terms of that business for us. And keep in mind, that's where we've been investing over the last few years, including in acquisitions, and you're seeing that those investments pay off. Dave Koning: Great. Thank you. Happy holidays. Julie Sweet: Happy holidays. So thank you everyone. In closing, I want to thank our shareholders for your continued trust and support. I want to thank all of the people who do this work every day, all of our Reinventors around the world, I hope everyone has a very safe and happy holiday season. Thank you for joining today. Operator: Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Operator: Good afternoon, everyone, and welcome to NIKE, Inc. Second Quarter Fiscal 2026 Conference Call. You'll find it at investors.nike.com. Leading today's call is Paul Trussell, VP of Corporate Finance and Treasurer. I'd now like to turn the call over to Paul Trussell. Thank you, operator. Paul Trussell: Hello, everyone, and thank you for joining us today to discuss NIKE, Inc.'s second quarter fiscal 2026 results. Joining us on today's call will be NIKE, Inc. President and CEO, Elliott Hill, and EVP and CFO, Matt Friend. Before we begin, let me remind you that participants on this call will make forward-looking statements based on current expectations, and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in NIKE's reports filed with the SEC. In addition, participants may discuss non-GAAP financial measures and nonpublic financial and statistical information. Please refer to NIKE's earnings press release or NIKE's website investors.nike.com, for comparable GAAP measures, and quantitative reconciliations. All growth comparisons on the call today are presented on a year-over-year basis, and are currency neutral unless otherwise noted. We will start with prepared remarks and then open the call for questions. We would like to allow as many of you to ask questions as possible in our allotted time. So we'd appreciate you limiting your initial question to one. Thank you for your cooperation on this. I'll now turn the call over to NIKE, Inc. President and CEO Elliott Hill. Elliott Hill: Thank you, Paul. Let me start by thanking all of you for joining on the eve of a holiday week here in the United States and many parts of the world. And with that, let me also recognize a NIKE team that's leaving nothing on the table right now. When you work in retail, the holidays don't mean a break. When you work in sport, you often say that sport never sleeps. So when you work at NIKE, you're then the sick of an incredibly busy time. With that in mind, I want to extend a special and heartfelt thanks to my NIKE teammates. Thank you for your continued commitment, passion, and determination. And thank you for delivering another quarter of steady progress and building momentum. Fiscal year 2026 continues to be a year taking action to rightsize our classics business, return NIKE Digital to a premium experience, diversify our product portfolio, deepen our consumer connections, strengthen our partner relationships, and realign our teams and leadership. And I'd say we're in the middle innings of our comeback. We started with the win now actions, which was our immediate response to our biggest challenges and opportunities in our culture, product, storytelling, marketplace, and winning on the ground. And now our sport offense is the accelerator of our win now actions. It's how athlete-centered innovation travels across and through every country, and channel to drive growth. Our focus on sport by brand is the engine of our growth. Our global marketplace is the amplifier. And it is our sport offense that connects the two. Said another way, our growth will come from sport, athletes, product innovations, sport moments, and will be scaled through countries, channels, and accounts. Turning to the quarter. I'd frame up the results as slightly better than we had anticipated ninety days ago, and while we're driving progress through WinNow, we're nowhere near our potential. I see three themes that give a better picture of where we stand right now. The first theme is that our sports teams are quickly finding the rhythm in the new sport offense. While rightsizing our classics, we're building a more diverse product portfolio gaining the most traction in our performance business, which validates that we've got the right structure to drive a relentless flow of innovative product across our unmatched opportunities. The second theme is that we're building a healthier base for top-line growth. The NIKE brand grew this quarter. And the mix was strong. We delivered 8% wholesale growth, elevated the experience in key NIKE stores in nike.com, and had fewer days of promotion. These are all positive signs. The third theme is that our comeback continues to move at different speeds. It won't be a straight line. But we're acting decisively to accelerate the lagging areas with China at the top of that list. At year-end, it's clear how important it is to stay closely connected to what's happening on the ground. From intern to CEO, and every role I've held in between, I've felt that way. Which is why as you likely saw this quarter, I announced a change in my leadership team. All geographies will now report directly to me. I'm confident this change will result in accelerating our win now actions by allowing our geography GMs to more closely shape our strategy, drive faster decisions, and influence investments. The geography that is leading the way for NIKE right now is North America. As our largest business, that's where much of our focus has been. With North America, we're working with the most diverse wholesale landscape which gives us several strategic partners to segment and differentiate our multi-brand, multi-sport, and multi-price point portfolio. The team has done an excellent job of reconnecting with partners and getting sharper on the consumers we serve, and those that we seek to serve. This quarter, that approach led to over 20% wholesale growth in North America, with meaningful growth coming from existing partners. Our North America marketing team is also finding the right balance of inspiring through big teen moments, like the Dodgers World Series campaign after their win, or at the Chicago Marathon. Where we supported everyone from everyday runners chasing personal best to Connor Mantz shattering an American marathon record that stood for twenty-three years. North America is driving a healthy repeatable offense, and showing us what winning looks like. It's a great signal for our future success in other geographies. In Greater China, we highlighted last quarter that we were facing a longer road to a healthier business. We've been implementing the WinNow action in our key cities of Beijing and Shanghai, leading with more storytelling of our product innovations, editing our assortments, and elevating the presentation of those assortments in targeted doors. What we've done is a start. But it's not happening at the level or the pace we need to drive wider change. The next step is to further adapt our approach to fit China's unique monobrand footprint and digital-first marketplace. The reset requires a fresh way of thinking from our NIKE teammates, and our NIKE store partners and it will take time. Over the years, we established our premium position in market share there because the Chinese consumer believes in our ability to innovate. And inspire them through sport, I'm confident we'll get back to fulfilling that promise. China continues to stand out as one of the most powerful long-term opportunities in sport. That has not changed. Expect to hear, see, and feel much more about how we'll manage the China marketplace differently this fiscal year and beyond. Both EMEA and APLA are geographies that are led through distinct influential countries and key cities. So we're moving quickly to resourcing our teams on the ground including sales. They're the ones who deliver locally relevant assortments, elevate the presentation of those assortments, fuel product seating, and build local relationships, create meaningful stories and consumer connection, and ultimately drive profitable and sustainable revenue in both wholesale and direct. EMEA activated their sport offense on December 1. So they just started rehiring these critically important revenue-generating roles in key countries. I'm locking arms with the leaders of our geographies and with Matt who now leads sales and NIKE Direct to elevate the way consumers experience our brand. I know what it looks like when it's successful. I can see the upside. It's a brand by brand, sport by sport approach, paid off in a partner by partner. City by city, high street by high street, mall by mall approach. And every detail matters. Next, I'll share some color on how the sport offense is fueling a more diversified product portfolio through footwear, apparel, and equipment, and up and down price points. Our teams are determined to deliver a consistent product innovation pipeline. In January, NIKE Running will build off of the strong start of our new stability shoe, the Structure 26, with the introduction of the structure pop plus. Running grew by over 20% for the second quarter in a row in Q2. It's up double digits in every channel, including NIKE Direct. Also in January, we'll debut NIKE Mind, a new footwear platform that will help athletes prepare for performance, and competition which we see as a new dimension to the NIKE training's offense. We introduced NIKE Mind along with three other new innovations, platforms, in October. One of them is the new platform that traps air for warmth in an ACC jacket. The jacket inflates from a shell to a puffer based on the warmth needed. The Thermofit Air Milano jacket will debut at the Winter Olympics in February. Also in February, at the NBA All-Star Game in LA, you'll see an example of how our three basketball brands and their product lineups will come together under the sport offense. The Swoosh, the Jumpman, and the Star Chevron. Have a unified creative feel and merchandising approach with Foot Locker in LA. And we believe that it has great potential to be scaled. Our NIKE skims collection will launch internationally in EMEA and APLA in the same time frame, following a successful rollout in North America. NIKE football, the deeper investment in World Cup starts now. This quarter, we brought a fresh perspective to the culture of the game in a T90 collaboration with Palace, and with our Hollywood Keepers sportswear collection. And in March, our athletes will begin wearing our new apparel platform Aerofit. In their national team kits. Aerofit is like air conditioning for the body flowing air through the garment unlike any previous performance apparel. The innovation platform will scale across several sport dimensions, in coming seasons. Overall, wholesale partners are very confident in our NIKE football product. Booking units are nearly 40% higher than World Cup 2022. To help sell food, the commitment we'll refresh over 100 NIKE Direct and 1,400 partner doors around the world. And our marketing team is making significant investments to inspire football fans everywhere. All of these new concepts will come to the consumer in the back half of the year. As a result, our order book is improving season on season. Through the sport offense, we're on our way in product. But as I've said, near-term investments to clean up and elevate the marketplace have put real pressures on margins. Tariffs have also obviously added a significant headwind to overcome. I want to state it very clearly. Margin expansion is a top priority for me and my leadership team. While it will take time, we see the path back to double-digit Aegion EBIT margins for NIKE, Inc. That formula includes a multi-branded and diverse product portfolio, that is constantly refreshing and bringing in newness and seeking to drive value out of every relationship we have in the marketplace. It also requires us to be bolder and more creative in how we operate. I made another change within my leadership team this quarter. Asking Venkatesh Alagirasami to be in the role of our Chief Operating Officer. He and his team will look end to end to ensure technology is fully integrated across the company and how we create, plan, make, deliver, and sell our world-class innovations. We see significant opportunity to get our core operations running more efficiently and more profitably. I look forward to sharing more in the coming quarters. With that, I'll turn it over to Matt to go deeper into the quarter and then offer some closing thoughts. Before we take your questions. Matt Friend: Thanks, Elliott, and happy holidays to everyone on the call. Our second quarter results demonstrated the resilience of our portfolio. With modest year-over-year reported top-line growth despite managing headwinds from the actions we have taken to reposition our business. As I look back on where we are, one year from Elliott joining the company and moving forward with our WinNow actions, our business is in a better position. Sport dimensions represent a larger mix of the portfolio. Led by running, and we are seeing momentum build in other sports. The classics footwear franchises are on track to decline from peak levels by more than $4 billion by fiscal year-end. Wholesale has returned to growth. With a growing order book globally in both spring and summer. NIKE digital has reduced promotional activity and is operating more strategically in sync with our partners. And inventory is in a healthy and clean position in North America and EMEA. While we are encouraged by all of this, as we have said, our progress will not be linear. As each brand, sport, and geography is on a different timeline. And we continue to read and react every day in service of the long-term health of our brands. We highlighted last quarter that it will take more time to return to healthy growth in Greater China and Converse. And we expect headwinds to continue for the balance of the fiscal year. There are also puts and takes across EMEA and APLA. Meanwhile, North America and running stand out again this quarter. And we are growing more confident in our ability to sustain the momentum as we look forward. Being in the middle innings, as Elliott referenced, also means it will take time for the actions we have put into place to change the trajectory on EBIT margins. We have been navigating transitory headwinds to margin due to our WinNow actions. And shifts in the business. Including product and channel mix, and continued inventory liquidation. As we highlighted last quarter, we are also navigating new structural headwinds from the $1.5 billion of annualized incremental product costs due to higher US tariffs. This represents a gross headwind of approximately 320 basis points to gross margin. In fiscal 2026. And while we have begun to take actions to reduce this to a net impact of approximately 120 basis points, it is still a significant factor impacting our near-term EBIT margins amidst the turnaround in a very dynamic operating environment. All in all, we have made meaningful progress through our five win now actions. Yet there is more work to do and our teams are hustling. For this quarter, revenues were up 1% on a reported basis. And flat on a currency-neutral basis. NIKE Direct was down 9% with NIKE Digital declining 14%. And NIKE stores down 3%. Wholesale grew 8%. This included a top-line headwind of approximately $550 million from the reduction of our Classics franchises. Down over 20% versus the prior year. This means our currency-neutral revenue grew 6% excluding the impact of this headwind. Gross margins declined 300 basis points to 40.6% on a reported basis primarily due to increased product costs due to higher tariffs in North America as well as inventory obsolescence in Greater China that was not contemplated ninety days ago. SG and A was up 1% on a reported basis year over year, driven by higher brand marketing expense, partially offset by lower operating overhead. Relative to expectations, SG and A was lower due to operating overhead savings. Reflecting the team's continued focus on disciplined cost management. Our effective tax rate was 20.7%, compared to 17.9% for the same period last year. Primarily due to changes in earnings mix. Earnings per share was 53¢. Inventory decreased 3% versus the prior year. With units down high single digits. In North America and EMEA, which represent almost three-quarters of our business, we have returned to a healthy marketplace. We still have work to do in Greater China, parts of APLA, and Converse. Now I will turn to the geographies. And once again focus my remarks on specific context and insights of our WinNow Progress. In North America, Q2 revenue grew 9%. NIKE Direct declined 10%. With NIKE Digital down 16%. NIKE stores were down 2%, Wholesale grew 24%. And EBIT declined 8% on a reported basis. As Elliott said, North America is our best example of executing our win now actions. And we are taking the learnings from their playbook to execute across all other geos. Momentum is extending beyond running into additional sports including basketball and training. It relates to the North America marketplace, wholesale delivered strong growth in the quarter. While the quarter certainly benefited from liquidation to value channels, as we cleaned up the marketplace, we also saw a balanced contribution of growth from both new and existing partners. North America also made additional progress on repositioning NIKE Digital to a more premium representation of the NIKE brand. With fewer days of promotion, lower markdown rates, and increased demand at full price. Nike.com posted its best Black Friday ever this year. Partially driven by strong sell-through of the Jordan Black Cat launch. Growth in the quarter was driven by running, kids, basketball, and training. With running delivering high double-digit growth, in NIKE-owned stores, NIKE digital, and wholesale. Sportswear saw sequential improvement up low single digits in the quarter. With classic footwear franchises declining approximately 20% year over year. Inventory declined mid-single digits versus the prior year. With units down double digits. Closeout units declined double digits, and the mix is very healthy. Last, I want to point out that North America gross margins only declined 330 basis points versus the prior year. Despite 520 basis points of impact from new US tariffs. This gives us confidence that our win now actions are working, profitability is recovering. And we are on the path back to sustainable, profitable growth. EMEA, Q2 revenue was down 1%. NIKE Direct declined 3%. With NIKE Digital down 2%, and NIKE stores down 5%. Wholesale was flat. EBIT declined 12% on a reported basis. EMEA has maintained a healthy marketplace. Although promotional activity has been heavier than expected. We saw growth in Central and Eastern Europe and The Middle East. Offset by slight declines in Western Europe. In Q2, our performance business continued to build momentum, driven by double-digit growth in running, We also saw growth in training and sportswear. Sportswear growth was driven by apparel, with footwear flat, as a mid-twenties percent decline in classic footwear franchises was offset by growth in Air Max, and the look of running styles. Inventory grew double digits versus the prior year. With units flat, and the spread primarily due to foreign exchange rates. Closeout mix in the geography is healthy. In Greater China, Q2 revenue declined sixteen NIKE Direct declined 18%. With NIKE Digital down 36%. And NIKE stores down 5%. Wholesale declined 15%, EBIT declined 49% on a reported basis. Our priority in Greater China is to create greater brand distinction through sport and innovation. Leveraging deep local insights in a premium more consistently managed integrated marketplace across both physical and digital channels. Over the past several seasons, we have faced consistent challenges with declining store traffic softer in-season sell-through rates, and higher levels of aged inventory across the marketplace. Our brands have consistently been off-price for consumers. Especially in digital. Affecting our premium positioning across the entire integrated marketplace. These challenges resulted in a higher mix of off-price sales with higher markdowns. Higher sales-related returns, higher wholesale discounts, and higher obsolescence charges to clean marketplace inventory levels. This cycle has had a significant effect on the profitability of Greater China. This quarter, we took the following actions in China. We continue to obsess our initial NIKE store pilot. Which delivered encouraging results this quarter. With better traffic, and comp sales growth relative to trends across the broader fleet. We focused on sport, combining new product innovation with elevated retail presentation. And we saw running continue to grow. In the quarter. We were less promotional during 11/11, resulting in an approximate 35% decline versus the prior year. In line with our plans. We accelerated returns of aged inventory owned by partners and wrote off both partner and NIKE inventory in the quarter. We reduced NIKE inventory by mid-teens versus the prior year. And by 20% in units. And we reduced our sell-in plans for spring and we cut our buys for summer. To improve sell-through and full-price realization. We will need to make further shifts in the integrated marketplace to break the cycle that we've been managing through. There is more work ahead to scale the momentum of the initial store pilot to more doors to elevate our brands across all digital platforms, and to clean up excess product in the marketplace. We expect headwinds to continue but we are working to set the foundation for a return to growth in this important geography. APLA, Q2 revenue was down 4%. NIKE Direct declined 5% with NIKE Digital down 10%. And NIKE Stores up 1%. Wholesale was down 3%. EBIT declined 15% on a reported basis. APLA continues to deliver mixed results across countries. With positive results in Latin America more than offset by headwinds in Asia Pacific countries. During the quarter, the team leveraged promotions to make progress on pockets of excess inventory in the marketplace. In the quarter, running grew double digits, and apparel grew mid-single digits overall. Inventory grew double digits versus the prior year, with units up mid-single digits. Though we saw pockets of improvement year over year. Now I will turn to our third-quarter guidance. We continue to operate in a dynamic environment. Both for consumers our global business. And we remain focused on what we can control to make forward progress for the long-term health of our brands. Our outlook reflects our best assessment of these factors based on the data we have available to us today. We expect Q3 revenues to be down low single digits. With modest growth in North America as we see reduced liquidation activity versus prior quarters performance in Greater China and Converse similar to Q2, as well as a three-point benefit from foreign exchange. We expect Q3 gross margin to be down approximately 175 to 225 basis points. However, excluding the 315 basis point impact, of higher gross product costs related to new tariffs gross margin expansion would be positive in the third quarter. We expect Q3 SG and A dollars to be up low single digits due to higher demand creation and investments in our sport offense. We expect other expense net of interest income, to be an income of 0 to $10 million in the third quarter. Now I'll close with a few final thoughts. We are making progress in the areas we focused on first. And we are increasingly confident in our path forward. Led by momentum in North America. We are making the investments required to position our full portfolio for a recovery. And making decisions in service of the long-term health of our brands. Operationalizing the sport offense, elevating the marketplace, and rebuilding our key city teams are critical priorities to return to sustainable, profitable growth across all brands, all sports, and all geographies. Finally, as you heard from Elliott, we are focused on improving the profitability and operating efficiency of our business. And realigning costs while also investing to reignite growth. We look forward to sharing more in upcoming quarters. With that, I'll pass it back to Elliott. Elliott Hill: Thank you, Matt. This quarter, the Los Angeles Dodgers reminded us what it takes to win at the highest level. Back-to-back World Series titles, something no team had done in twenty-five years. They gave us a game seven for the ages, They didn't take the lead until the eleventh inning. Down three o early every outside voice said, it's over. But they kept chipping away. Every setback became a lesson. They leaned on each other, They believed. When belief was hard. Manager Dave Roberts shared those insights with us at the opening of our new NIKE store in Portland. Just days after that win. He talked about what guided his decisions not just analytics, but trust. Feel, and sacrifice. That included putting in bench player Miggy Rojas who hit an improbable home run-in the ninth followed by a bases-loaded throw to the plate. In the bottom of the inning. With one more out to go, Robert swapped in Pajas who immediately made a leaping game-saving catch. Every decision mattered. And every player was ready when called upon. But the boldest move he made was managing Yoshinobu Yamamoto's innings our NIKE guy and World Series MVP. Who won his a historic three games in the series. The day after throwing nearly 100 pitches, he surprised everyone to close out game seven. That wasn't just effort. That was a statement. I'm leaving nothing on the table. It inspired the entire team. That's what greatness looks like. It's not about perfection. It's about perseverance. It's about sticking to the plan and performing when the pressure is highest. NIKE is in a similar moment. We're the industry leader. Expectations are high. And, yes, we face pressure and setbacks. But like the Dodgers, we're leaning on each other. Focused on the fundamentals, making the hard calls, and building for the long game. Because in the end, greatness isn't promised. It's earned. And we're ready to earn it again and again. Thank you now. And now Matt and I will take your questions. Operator: We will now begin the question and answer session. To ask a question, press star then 1 on your telephone keypad. Kindly ask that you please limit your initial question to one. Our first question will come from the line of Matthew Boss with JPMorgan. Please go ahead. Matthew Boss: Great. Thanks. So Elliott, you led both in the release and on the call. By citing the turnaround is in middle innings. Could you elaborate maybe where you've scored runs so far versus where you have opportunity remaining? Just your overall confidence today that you can win the game? And then, Matt, if you could just elaborate on the components of gross margin that you cited. I think you cited underlying expansion excluding tariffs. For the third quarter and just the progression that we should think about moving forward? Elliott Hill: Great. Thank you, Matthew, and appreciate the question. And let me start by saying the path back to sustainable profitable growth is gonna go through our win now actions, and that will be and they will be accelerated by our sport offense. And would also say that I'm incredibly inspired by the way our teammates have responded to the actions in the new offense. The drivers of our growth right now for NIKE, they came through the win now which were our near-term actions around culture. Product, storytelling, the marketplace, and winning on the ground with consumers. But it's our sport offense is the accelerator of those actions. It's how we take athlete-centered innovation and it travels through every country channel and account to drive growth. And the sport offense is what's bringing the balance to our portfolio. We have a relentless flow of innovative product now coming across our three brands through multiple sports, performance and sportswear, men's, women's, and kids, and we pay it off across 190 countries. So we've had some meaningful progress, Matthew, over the last ninety days. NIKE brand, is growing. Sport is growing with running leading the effort there at up over 20% and taking market share. We're beginning to diversify the portfolio, rightsizing our classic As Matt said, we declined roughly $4 billion from its peak. North America grew 9%. Wholesale grew. Our order book for spring and summer is up. So we have a healthier base from which to grow profitable, sustainable growth. So in terms of middle innings, specifically, I think the best way to think about it is that we have our businesses the dimensions of our business Jordan. I think still has some room to dimensionalize beyond streetwear. Into things like Jordan basketball, Jordan training, etcetera. But I've seen some real good progress around the streetwear there. We're resetting the marketplace for Converse under new leadership. In terms of product, performance is growing but sportswear is still in the early stages of diversification. We've done a great job of right-sizing the franchises, but we still need to diversify that portfolio. Portfolio. Middle innings. And then from a geography, North America's leading. EMEA just transitioned to the sport offense. Followed by APLA, which, as Matt pointed out, had some mixed results. And then China has our longest road ahead. That's why we're sitting here saying we're in middle of innings. Great success in North America, work to do in China. And but all I would say here just to sort of close it out, Matthew, is while the middle innings, while we keep saying we're in the middle innings, I will say this. The win now actions and the sport offense is working and it will lead us back to profitable, sustainable growth. Matt Friend: And, Matt, as it relates to margins, I would just say that you know, our business is still in a transition in the middle innings. And we are navigating through both transitory and structural headwinds across the portfolio. But as Elliott said, we've made meaningful progress through the win now actions, and you can really see that in the progress that we made in North America in Q2. North America's gross margins were down 330 basis points despite more than 500 basis points of a headwind to product cost due to the gross impact from the new tariffs. And so, that's a marketplace where we're furthest along in repositioning digital. We're back to growth in wholesale. We've made the most progress in cleaning up the marketplace. And so, as I look ahead to Q3, we guided, our margins to be down 175 to 225 basis points. That includes 315 basis points of higher product costs related to new tariffs. And so we expect expansion, excluding the impact of new tariffs, really reflecting the beginning of recovery of the transitory headwinds at the corporate level. And, you know, we continue to expect to see momentum building in North America given where the state of the marketplace is. We're watching promotional activity in Europe. But inventory in Europe is in a healthy place. And then as I mentioned, there's puts and takes across APLA. And we expect the trends in Greater China and Converse for Q3 to be relatively in line with what we saw in Q2. As we continue to take actions on both of those resets. And so I would say that overall, we're encouraged by the momentum and the progress that we're seeing. But we've still got some work to do. Operator: Our next question will come from the line of Ike Boruchow with Wells Fargo. Please go ahead. Ike Boruchow: Thanks. Good afternoon. Thanks for taking the question. I guess maybe for Elliott, maybe a similar type of question as Matt's, but you've mentioned the recovery won't be linear several times over the past year or in transition, and it totally makes sense. I guess, I'd like to know if you're able to share when you believe that maybe that caveat won't be needed anymore, and you'll be able to better kinda hold momentum, create better visibility for investors, on what's clearly becoming a reset base revenue and earnings. Thanks. Elliott Hill: Yeah. Thanks, Ike. Here's the best way that I, you know, that I would should think about it is you know, each geo let's first start with the brands. Each of the brands are at different stages in terms of diversifying their product. Portfolio. We just got into the sport offense. In September, so we got these small cross-functional teams. We're getting them up and running. As fast as we can. Same thing's happening in the countries and key cities around the world. That's happening at different stages. And so that's we believe in the strategy, and we know that the path back to profitable and sustainable growth is through the win now action. We also believe in the sport offense and our ability to create beautiful products, and then pay it off in an integrated marketplace. We just have three brands in multiple sports. And four geos in 190 countries, and they're all operating at different timelines. And so that's the reason why we keep saying that, you know, we have different timelines, and it's just gonna take time. So I will just sort of point to the place we focus first, which is North America, and we're having great success there. So we're confident in our path forward. Matt Friend: Yeah. And I just would add, Ike, that we said on North America that, you know, we're growing increasingly confident that we can sustain that momentum. I would also say that we've said that we believe we're gonna drive modest growth in wholesale this year. Starting to have more confidence in that dimensionality of the business. What you also heard on the call today was that, you know, we took some unplanned actions in Greater China. As we're navigating real-time through, some of the challenges that we see in some of the businesses that are under reset. And so, you know, we're gonna continue to take it ninety days at a time for now. To give ourselves the flexibility to make the right decision for the long-term health of our brands. And, you know, much of what we said today is consistent with what we've been talking about for the past couple quarters. Operator: Our next question will come from the line of Bob Drbul with BTIG. Please go ahead. Bob Drbul: Hi. Good afternoon. Just a could ask two questions. I think the first one is you know, on the commitment and sort of the focus on the return to double-digit, EBIT margin, you know, it's a big priority for you guys. Is there a timeline in which you could talk to when you think you'll get there? I think the second question is just, like, part of that, I think, is on China. Long road ahead, you know, Q2 revenue is similar Q3 similar to Q2. How deep a reset do you think is necessary in China? And is we near a bottom in revenue or EBIT declines in China? Thanks. Elliott Hill: Okay. So, Bob, let me do this. You stuck in two questions on me, but here's what I'm gonna do. Let's take EBIT first, and then we'll take China because I don't wanna confuse the two. But let me first just say that, improving margins continues to be a top priority. And I said it before, and I'll continue to say it. We do see a path back to double-digit EBIT margins. Margins are under pressure for two reasons. First, the driver of our win is our win now actions. When that we've intentionally taken to clean up the marketplaces around the world. The second, is the impact of tariffs. Where we implement they which were implemented after we activated the WinNow actions. And we're seeing the benefits of us taking those actions. We've said it North America back to growth, running back to growth, wholesale up, the order book, and we have a healthier base for top-line growth moving forward. In addition to the top-line growth, we also have the opportunity to improve the efficiency and productivity and how we operate the business and we're gonna share more in the coming quarters. Matt, I don't know if you wanna add anything to that. Matt Friend: I would just say something that's that will sound familiar. You know, we're clear on what the path back looks like. It starts with growth. And I think that, you know, the investments that we've made to drive the win now actions are paying through. You see it with a second quarter of top-line growth. And specifically the growth that North America was able to in the quarter, which is where we focused our demand creation investments and where we focused our investments in our commercial teams in order to be able to get back on the offense in the marketplace. Part of what's gonna drive expansion is recovery of our full-price mix. As we continue to manage the off-price, full-price mix in the marketplace. And, I point to North America where we've now cleaned the inventory in the marketplace, and we're starting to see margin expansion. Excluding the headwind of tariffs. Another big opportunity for us is to leverage the supply chain cost as we grow. And that's been a meaningful headwind over the last year as our business has reduced in size. And growth will help us with that. But there's also a lot of focus and attention on that as well. And then the last piece of it I would say is the work that we're doing to be in the way we're managing cost across the business. We've been investing in marketing, and we feel good about where we've leveled our brand marketing investment. We've locked in some of our most important team franchises for the long term, which strategically puts us in a great position in the world of sport. But we've been very focused on managing operating overhead. And we will continue to do that, and we look forward to sharing more about that in the upcoming quarters. Elliott Hill: K. I'll jump back now, and I'll take let me take China. China continues to be one of the most powerful opportunities in sport. We're confident that, the win now actions and the sport offense will allow us to continue to invite 1.4 billion consumers into the world of sport fitness and the lifestyle sport. So we see China as a big opportunity. With that said, it's clear that we need to reset our approach to the China marketplace. And it's gonna start with structure. The geos are now reporting to me. Angela, who's our GM in Greater China, is now part of my SLT senior leadership team. And I look forward to working with her and the rest of our team more closely. Let me share a little bit of the diagnosis of where we are. And we believe and firmly believe and will always believe that our growth will come through sport, but the reality is we've become a lifestyle brand competing on price. In China. We also reduced the feed on the ground, people on the ground, and as you know, it's a monobrand marketplace with thousands and 5,000 doors. With the teams working the presentation of our product at retail. And we weren't making the investment in our store fleet so our stores aren't compelling. And as Matt mentioned, the cycle that it started to feed itself, soft demand leading to consistent promotions and then impacting profitability. And we did signal last quarter because of these structural differences that China would be on a different timeline. So we're taking action. We're cleaning up the marketplace of aged product. We're getting back to the basics of retail, consumer right assortments. Better storytelling, and elevated visual presentation, We're increasing investments in Shanghai and Beijing, resetting key doors, Matt referenced those in his prepared remarks. We're seeing early success. But I'll say this. It's not happening at the pace we like. So we have more to do. It's gonna take a fresh perspective, a new approach, and we will have to come through this with new capabilities as well. And we're working closely with our partners, Pausch and Top Sports to adapt our approach. But I'll just sort of end here. I've done this before. I have a deep history in the market. We've diagnosed the problem. And we will return NIKE to a beloved premium and innovative brand in China. Operator: Our next question comes from the line of Aneesha Sherman with Bernstein. Please go ahead. Aneesha Sherman: Elliott, at the start of 2025, you expressed your strong confidence in the pipeline for running. And you laid out this three by three framework that you discussed with partners. And we're now seeing strong acceptance in the market, and the business is growing over 20%. As you look across the other verticals, know you talked about new innovation across all of them, but do you see the phasing of the growth? And are there particular areas where you have that same level of conviction that you had in running a year ago and where you expect the business to ramp very quickly versus some that are a little slower? And then a follow-up on North America. Matt and Elliott, you both talked about the contribution of new distribution and same-store sales. On the wholesale growth. Are you happy with the mix of partners you have now? Or is the goal to continue to ramp up new distribution points into next fiscal year as well? Thank you. Elliott Hill: Anisha, thanks for the questions. Let I'll start. Let me take the product portfolio piece first. Here's what I'd say. The teams are doing a really nice job of building a more diverse portfolio. You can start to see it in our numbers. We do have an unmatched portfolio with depth and dimension. Across performance and sportswear, men's, women's, kids, footwear, apparel, accessories, and up and down price points. And we believe that moving into these sport-obsessed teams through our sport offense, we're already starting to see the pipeline and the flow of innovation coming through across the three brands, NIKE, Jordan, and Converse. So we know when we focus on sport, we win. You called out running. Already. I will hit very quickly that we launched Romero premium. As part of that nine-box construct that you referenced this quarter. And had very good sell-through. And we also launched Structure 26 our dues in our stability silo, and we're launching structure plus next month. So we're continuing to fill that out. But it's not just about footwear. It's also about apparel. We have some really strong apparel coming through in running as well. So we will continue to grow and dimensionalize running as NIKE running as an opportunity. In terms of other business opportunities, global football, it's probably the furthest along in terms of their construct. We have three silos there. Footwear silos. The Mercurial, Tiempo, which we will launch in Q3, and then our Phantom, which had a really strong launch in Q1. So three silos, also connecting deeply with each of the consumers that play a different style of football. Apparel and footwear also dimensionalizes that opportunity. National team kits, World Cup, really strong read there. 40% up on the order book versus World Cup 2022. Training, twenty-four seven apparel, continuing to diversify the footwear. I see that coming. That's not yet hit. We feel good about what's coming. From training and footwear. SKIMS had a successful launch. We in EMEA and APLA next. Next quarter at basketball. We're dimensionalizing through women's. Sabrina, Asian, Asia, and now we have Caitlin coming. And our men's business continues to do well. Job sold through extremely well. And then we just launched the GT Future. And we had kids lining up for that shoe. So started dimensionalize beyond or dimensionalize the portfolio. And then I could just dive into innovation a bit more further out I think it's getting stronger every season. We're investing significantly in our NIKE sports research lab. And we're being intentional about connecting that R&D into our sport offense. And we announced a few big which I talked about product opportunity or product innovations, NIKE Mind, and then ArrowFit. So I feel good about the pipeline. And we see the response in our order book, which is up for the back half of the year. Matt Friend: I'll jump in on marketplace, Elliott, and then you can add to it. Anisha, we feel good about the North America marketplace and, our partners. We've got great partnerships. We've been working incredibly close with our partners. As we're working to elevate the marketplace and reposition the NIKE brand in a segmented and differentiated way across accounts and, across the marketplace. Tom Petty and the team have just been crushing it. In terms of, leading us through our win now actions. And when I look at the order book for the back half of the year, the order book is very balanced. In terms of growth between new partners and existing partners. And so we feel great about the quality of the growth that we see in the back half across a balanced integrated marketplace. Our teams are always looking for opportunities because our marketplace strategy is a consumer-based strategy. We wanna be in the path of the consumer leveraging our partners across digital and physical owned and partnered. And so I wouldn't rule out the possibility of it, but I wouldn't say that that's what's needed in order for us to be able to sustain the momentum that we see in North America. Elliott Hill: I was gonna add to it, but you've already embraced your new job. Right? I think the only thing that I would add to it, Anisha, because I think Matt did such a nice job. Is that, again, that Tom and the leadership team have done a really great job of just rightsizing the product, getting the market marketing going. And then I would say the thing that's the big difference is the setting three-year visions with each of and this is into the details, but it matters. Setting three-year vision by account on the consumers that we wanna serve by sport, and then bringing that back to one-year plans and then to seasonal plans. And that's how you get back to driving profitable sustainable growth between with the partners and again, the team's done a really nice job. So leading the way, and there in lies the opportunity in the other geos for us. We've gotta get the other geos keeping pace, and we're working hard to do just that. Operator: Our next question will come from the line of Jonathan Komp with Baird. Please go ahead. Jonathan Komp: Maybe one more on China. Do you think the North America experience where Elliott, we saw maybe two or three quarters of severe after you came in and accelerated the win now actions followed by now a return to growth and healthier conditions. Is that a reasonable timeline or playbook to think about China? And then just maybe bigger picture, if you are viewing some of these headwinds currently in resets, more as temporary. Maybe just expand on why not. Providing maybe two or three-year out targets or a little bit more specificity around you know, the timeline to get back to double-digit margins? Thank you. Elliott Hill: Yeah. You know, in terms of China, you know, what I said earlier is we've taken actions. We're cleaning up. We feel good about having a handle on what has happened in China, and more importantly, what we must go do. And it's gonna take a fresh perspective and a new approach and ultimately, some new capabilities. And so and we're working with and through partners which, again, you know, that's where it gets tough to put an exact date on it, but we're confident in the path forward. And the team that we have in place and we're ready to get that business moved and turned as quickly as we possibly can. Matt Friend: John, I'd just say on your timing question, you know, we're operating in a dynamic environment for both consumers and for a global business. And we're trying to turn around our business across three brands multiple sports, in four geographies. And as a result of that, you know, it's complicated what we're trying to do. We're encouraged by what we've been able to do in North America. And I think we've got a clear path of what we need to do across the other dimensions of our business. But we're reading and reacting every day. And it's important right now that we've got flexibility to be able to make the right decisions every week as we're trading the business in order to be able to establish the long-term health of our brands. And, and so, for the near term, gonna continue with this consistent practice that we've been doing. And, as our confidence grows, we will certainly share greater insight into how we're thinking about the longer term. Operator: Our final question will come from the line of Simeon Siegel with Guggenheim Securities. Please go ahead. Simeon Siegel: Thanks. Hey, guys. I hope you and your families have a very happy holiday and New Year season. So, Elliott, just to follow-up a little bit, the North America revenue growth it was just such a big number even before accounting for this large Classics reset. So can you just speak to what product is growing domestically so much better enough to accelerate that revenue growth? This much and just way more than offset the ongoing reset. And then, Matt, it feels like the growing wholesale penetration should help that operating overhead maybe structurally. So just curious if you could give us any thoughts where operating overhead goes. And then as you think about that opportunity, is the idea that you can take a portion of that and fund it back into demand creation, which has always been one of your key competitive advantages? Thanks, guys. Elliott Hill: Yep. Simeon, thanks. And also wishing you and your family a happy holidays as well. In terms of North America growth, running obviously is a big piece, and it's not just growth. You know, sell-in, what we're encouraged by sell-through. We're actually having, taking market shares, so we're feeling good about that. Global football, soccer, we're seeing growth there. We're seeing growth in training. SKIMS as well would be another one I'd call out. And then basketball. The team's doing a really good job with basketball right now. And, again, I touched on a few, but, like, the GT Future this weekend was phenomenal. And while sportswear is not growing, they've done a really nice job of rightsizing sportswear and starting to diversify the portfolio across the look of running, which is primarily driving it. But we also have some footwear on the women's side in sportswear, Air Max Muse and the Superfly that's doing well. And then, of course, Jordan. You know, I've gotta call Jordan out, and when we speak about North America, they've done a really nice job and we had a great sell-through of the AJ4 Black Cat. We're getting back to telling stories. That by the way, that was our largest Black Friday ever that Black Cat was. A launch ever. And then just recently, it's not in this quarter, but the AJ11 Gamma, we had people lining up for that shoe. Again, which is fun to see. See kids lining up for sneakers again. So I think the team's done a really nice job of making certain that they're running a complete and balanced portfolio across the brands and sports. Matt Friend: Simeon, I just add that the growth that we delivered in North America in Q2 was certainly strong. And if you look at our guidance for Q3, we said that we expect modest growth in North America, and you can really sort of connect the dots between how much liquidation fueled the growth in Q3 versus what's gonna be great comp, full-price growth as we get into the third quarter. And so, hopefully, that helps you connect the dots a little between the second quarter and the guidance for Q3. In terms of your question on cost leverage, you're absolutely correct. Growth creates leverage on the cost structure. Wholesale growth, in particular, creates meaningful growth on the cost structure, led by unit growth. And you see it not only in the supply chain costs, you're shipping pallets of product to partners versus shipping one zero one units to consumers. But you also will see it more broadly across our operating overhead. We're certainly focused on continuing to prioritize our investment in demand creation. I wouldn't leave that to believe that we've necessarily decided we're gonna go much higher than the 10% of revenue at this point in time because we feel like that gives us a good amount of investment to be able to continue to drive our brand forward. But, you know, if I'm prioritizing between the two, we certainly wanna have more flexible liquid demand creation to create big moments that impact consumers and to be able to activate that on the ground in key cities. And so we're gonna continue to tightly manage costs on the operating overhead side. As Elliott said, you know, we've got a number of things that we're looking at here. We look forward to sharing more, in the coming quarters. Operator: And that will conclude our question and answer session and our call today. Thank you all for joining. You may now disconnect.