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Operator: Good afternoon, thank you for attending today's Penguin Solutions Fourth Quarter and Full Year 2025 Financial Results. My name is Victoria, and I'll be your moderator today. I would now like to pass the conference over to our host, Suzanne Schmidt, thank you. You may proceed, Suzanne. Suzanne Schmidt: Thank you, operator. Good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss Penguin Solutions' Fourth Quarter and Full Year Fiscal 2025 results. On the call today are Mark Adams, Chief Executive Officer; and Nate Olmstead, Chief Financial Officer. You can find the accompanying slide presentation and press release for this call on the Investor Relations section of our website. We encourage you to go to the site throughout the quarter for the most current information on the company. I would also like to remind everyone to read the note on the use of forward-looking statements that is included in the press release and the earnings call presentation. Please note that during this conference call, the company will make projections and forward-looking statements, including, but not limited to statements about the company's growth trajectory and financial outlook, business, plans and strategy and existing and potential collaborations. Forward-looking statements are based on current beliefs and assumptions and are not guarantees of future performance and are subject to risks and uncertainties, including, without limitation, the risks and uncertainties reflected in the press release and the earnings call presentation filed today as well as in the company's most recent annual and quarterly reports. The forward-looking statements are representative only as of the date they are made and except as required by applicable law, we assume no responsibility to publicly update or revise any forward-looking statements. We will also discuss both GAAP and non-GAAP financial measures. Non-GAAP measures should not be considered in isolation from, as a substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing our performance. A reconciliation of the GAAP to non-GAAP measures is included in today's press release and accompanying slide presentation. And with that, let me turn the call over to Mark Adams, CEO. Mark? Mark Adams: Thank you, Suzanne. Welcome to Penguin Solutions Fourth Quarter and Fiscal Year 2025 Earnings Call. Today, I'll walk through both our Q4 and full year results, providing updates on each of our business segments and sharing how we are positioning the company for long-term growth. Fiscal 2025, the transformational year for Penguin Solutions as we continue to evolve from a holding company structure into a leading provider of AI infrastructure solutions. In addition to delivering 17% top line growth, 190 basis points of non-GAAP operating margin expansion and a 53% increase in non-GAAP diluted EPS, we made meaningful progress positioning the company for long-term success. Key accomplishments included expanding our advanced computing pipeline and adding several new customers to the Penguin Solutions franchise, supporting our ongoing customer diversification strategy, deploying our first international AI infrastructure implementation, developing and expanding key partnerships with NVIDIA, CDW, Insight, and Dell; rebranding the company as Penguin Solutions. Moving our corporate domicile to the United States; closing a $200 million investment from SK Telecom; refinancing our debt to strengthen the balance sheet; and strengthening our leadership team with the appointments of Tony Fry formerly of NetApp as our SVP and Chief Revenue Officer; and Ted Gillick, formerly of Dell, as our SVP of Strategy and Corporate Development. I'll now turn to our financial results for the fourth quarter and full year. We delivered solid fourth quarter financial results. Revenue for Q4 was $338 million, an increase of 9% year-over-year. Non-GAAP gross margin was 30.9%. Non-GAAP operating income reached $39 million, a 16% increase year-over-year with non-GAAP operating margin at 11.6% up 80 basis points. Non-GAAP diluted earnings per share was $0.43, up 18% from the prior year. Our fourth quarter performance rounded out a strong fiscal year. For the full year, revenue grew 17% year-over-year. Non-GAAP gross margin remained steady at 31% and non-GAAP operating margin improved by 190 basis points to 12.2%. Non-GAAP diluted EPS was $1.90, an increase of 53% compared to fiscal 2024. We continue to see signs of broad AI adoption particularly within verticals such as financial services, energy, federal and education. As we've noted previously, our expectation has been that the AI pilot systems deployed across industries in 2023 and 2024, could lay the groundwork for broader production scale rollouts in the years ahead. We're now beginning to see indications of this transition with early-stage corporate build-outs taking shape. Notably, Penguin Solutions was recently selected by a Tier 1 U.S. financial institution to manage an AI infrastructure deployment, the institution's first on-premise GenAI data center implementation. We believe this win reflects the growing confidence enterprises have in our ability to deliver scalable high-performance infrastructure, and we look forward to formalizing this engagement in due course. At Penguin Solutions, we support customers in navigating the complexity of AI adoption by combining deep technical expertise in advanced cluster implementations with a comprehensive portfolio of hardware, software and managed services. We collaborate with customers to design, deploy and operate these environments with a focus on time to revenue performance, availability and long-term reliability. Our solutions are primarily targeted at deployment serving Fortune 500 enterprises, educational institutions, government entities and systems integrators and neocloud service providers. While our go-to-market strategy has traditionally focused on direct customer relationships, we are actively investing in forming strategic partnerships that we believe can expand our reach and open new long-term growth opportunities. Our foundation is built on over 25 years of experience in large-scale deployments beginning with our roots in high-performance computing or HPC. We believe this expertise gives us an advantage in integrating complex AI building blocks such as power and cooling systems, compute, memory, storage and networking. This foundation enables us to deliver the kind of infrastructure that today's enterprise customers need to drive innovation, scale efficiently and stay ahead of the curve in enterprise AI. I'd like to provide additional detail on our business segments. Advanced computing revenue for the fourth quarter of fiscal 2025 was $138 million, up 4% sequentially from Q3. For the full fiscal year, advanced computing revenue reached $648 million, reflecting 17% year-over-year growth. Within advanced computing, our HPC AI revenue from non-hyperscalers increased 75% year-over-year, highlighting progress on our customer diversification strategy. Since our last call, we completed the design, build and deployment of Haien, one of South Korea’'s largest and most powerful GPU as a service systems developed by SK Telecom for the Korea Ministry of Science and Technology as a key element in the country's sovereign AI initiative. We now manage the system on an ongoing basis. We also launched several new AI projects, including with a Fortune Global 500 multinational consumer products company, Fortune 100 federal systems integrator and a Fortune 50 financial institution. This last project is in addition to the win from a different Tier 1 financial institution that I mentioned earlier. We're also pleased with the growth in our new customer opportunities. In fiscal 2025, pipeline, bookings and revenue from new customers grew nicely, reflecting the ongoing demand for our expertise and solutions. As we've noted on prior calls, revenue in this segment can be lumpy with large deployments in one period, not necessarily reoccurring in the next. That said, we remain encouraged by the level of customer interest in our solutions and the long-term growth potential of these relationships. Our core competency in successfully managing large-scale AI infrastructure build-outs helps customers accelerate their time to a live production environment. We believe our customers value our technology-agnostic approach, which allows us to create a unique overall solution that meets their specific AI infrastructure needs. Beyond our hardware building blocks, we continue to invest in our Penguin ICE ClusterWare software, a platform that helps customers manage infrastructure assets. Post deployment, our Penguin Solution services organization can provide ongoing operational support to sustain the high performance and high availability of their systems. Our Integrated Memory segment with sales products under the SMART Modular brand, delivered $132 million in revenue for the fourth quarter and $464 million in revenue for the full fiscal year representing a 30% increase compared to fiscal 2024. This growth was driven by strong demand from customers in computing, networking and telecommunications. We are optimistic about our memory demand in the near term as large enterprises seek out higher performance and reliability memory solutions to support both traditional use cases and increasingly complex AI application. In line with this demand, we are seeing promising early interest in our Compute Express Link or CXL family of products. As customer qualification efforts continue to expand, we believe we are well positioned for growth as adoption of CXL scales. In memory, our R&D investments are focused on next-generation technologies. One key area is memory pooling, which has the potential to significantly expand bandwidth and improve memory capacities in GPU environments. We continue to invest in the design of SMART'S optical memory appliance or OMA, with initial product shipments targeted for late calendar 2026 to early 2027. This new offering will be designed to enable memory scaling of the industry's fastest high-bandwidth memory or HBM, which is today a limiting factor in AI cluster performance and efficiency. With a strong backlog, ongoing technology transitions such as DDR4 to DDR5 and a road map that includes innovations like CXL and OMA, we believe memory will be an important growth engine for Penguin Solutions. Optimize LED under the Cree LED brand. Cree's fourth quarter revenue came in at $67 million, an increase of 9% compared to the prior quarter. Full year revenue was $256 million, roughly flat year-over-year reflecting a combination of secular and macroeconomic headwinds in the LED market. Despite these challenges, we achieved a 250 basis point improvement in non-GAAP operating margin in fiscal year 2025. As we move into fiscal 2026, Cree is focused on capturing market share, operating efficiently, protecting our intellectual property and driving operating profit growth. Fiscal 2025 was a defining year for Penguin Solutions. We took meaningful steps to transform the company and sharpen our focus on becoming a leading provider of AI infrastructure solutions. We believe that these efforts have strengthened our foundation and positioned us well for long-term success. Looking ahead to fiscal 2026, we believe we can sustain our growth momentum with the following strategic priorities; growing our enterprise customer base in AI infrastructure deployments; driving innovation across our hardware, software and services portfolio, to create sustainable differentiation; expanding our strategic partnerships to enhance Penguin's go-to-market efforts; operating with discipline and efficiency to position the company for long-term success; and further strengthening our balance sheet to support investments in scale and new capabilities. In setting these priorities, our intention was to align with the long-term interest of our shareholders, customers and employees. In closing, I want to thank our global team for the dedication and performance in FY 2025. We delivered top line growth, improved profitability, strengthened our balance sheet and expanded the Penguin Solutions customer base. We believe we are well positioned for future success in FY '26 and beyond. Let me stop and hand it over to Nate for a detailed review of 2025 financials and our outlook for FY 2026. Nate Olmstead: Thanks, Mark. I will focus my remarks on our non-GAAP results, which are reconciled to GAAP in our earnings release tables and in the investor materials available on our website. Now let me turn to our fourth quarter and full year results. In the quarter, total Penguin Solutions net sales were $338 million, up 9% year-over-year. Non-GAAP gross margin came in at 30.9%, which was flat year-over-year. Non-GAAP operating margin was 11.6%, up 0.8 percentage points versus last year, and non-GAAP diluted earnings per share were $0.43, up 18% from last year. For the full fiscal year 2025, total company net sales were $1.37 billion, up 17% year-over-year and aligned with the outlook we initially provided in April and better than the outlook we provided at the start of the fiscal year. Full year non-GAAP EPS was $1.90, up 53% versus the prior year and better than the increased outlook we provided last quarter. In the fourth quarter, our overall services net sales totaled $63 million, up 5% versus the prior year. Product net sales were $275 million in the quarter, up 9% versus the prior year. Net sales by business segment were as follows; in advanced computing, Q4 net sales were $138 million, which was 41% of our total net sales and down 7% year-over-year. For the full year, advanced computing delivered $648 million of net sales or 47% of total company net sales and up 17% year-over-year. Our strong full year advanced computing growth was driven by our HPC and AI business, which grew 34%. Notably, within our HPC AI business, product and services sales to our non-hyperscale customers were up 75% for the full fiscal year. For Integrated Memory, in Q4, net sales were $132 million, which was 39% of total company net sales and up 38% year-over-year. For the full year, memory net sales totaled $464 million or 34% of total net sales and up 30% year-over-year. And in Optimized LED, net sales were $67 million or 20% of total company net sales and up 2% year-over-year. For the full year, LED delivered $256 million of net sales or 19% of total company and down 1% versus the prior year. Non-GAAP gross margin for Penguin Solutions in the fourth quarter was 30.9%, flat year-over-year with margin pressure from a higher mix of integrated memory net sales offset by improved margin rate across all 3 business segments. Non-GAAP gross margin was down 0.8 percentage points sequentially with lower margin rates in advanced computing, partially offset by higher margin rates in both Integrated Memory and Optimized LED. For the full fiscal year, gross margins were 31%, in line with our prior outlook and down 0.9 percentage points year-over-year due to growth in our memory and AI hardware businesses which have lower than company average margins, but are addressing fast-growing market opportunities. Non-GAAP operating expenses for the fourth quarter were $65 million, up 5% year-over-year and up 1% sequentially. Operating expenses as a percentage of net sales were down both year-over-year and quarter-over-quarter, driven by higher net sales volumes and modest spending increases. For the full fiscal year, non-GAAP operating expenses were $257 million, up 1% year-over-year and down 2.9 percentage points as a percent of net sales due primarily to strong top line growth and disciplined expense management. Q4 non-GAAP operating income was $39 million, up 16% year-over-year and up 2% versus last quarter. The combination of net sales growth and operating expense management translated into a 0.8 percentage point increase in operating margin versus Q4 last year. This is our fifth consecutive quarter of non-GAAP operating margin expansion year-over-year. For the full fiscal year, non-GAAP operating income was $168 million, up 39% year-over-year and non-GAAP operating margin improved 1.9 percentage points to 12.2% of net sales. Non-GAAP diluted earnings per share for the fourth quarter were $0.43, up 18% versus the prior year. For the full year, non-GAAP diluted EPS was $1.90 up 53% versus the prior year and $0.05 better than the high end of our outlook provided in July. Adjusted EBITDA for the fourth quarter was $43 million, up 11% year-over-year, and for the full year was $187 million, up 28% versus the prior year. Turning to balance sheet highlights. For working capital, our net accounts receivable totaled $308 million compared to $252 million a year ago, with the increase driven by higher sales volumes and variations in sales linearity across the quarters. Days sales outstanding came in at 51 days, up from 49 days in the prior year quarter. Inventory totaled $255 million at the end of the fourth quarter, up from $151 million at the end of last year due to higher sales volumes and order linearity. Days of inventory was 51 days up from 36 days a year ago, primarily due to the positioning of inventory for shipment early in Q1 FY '26. Accounts payable were $267 million at the end of the quarter, up from $182 million a year ago due primarily to higher sales volumes and the timing of purchases and payments. Days payable outstanding was 54 days compared to 43 days last year due to the timing of purchases and payments. Our cash conversion cycle was 49 days, an increase of 7 days compared to last year due to slower inventory turns resulting from materials positioned for shipment early next quarter. Consistent with past practice, days sales outstanding, days payables outstanding and inventory days are calculated on a gross sales and gross cost of goods sold basis, which were $550 million and $453 million, respectively, in the fourth quarter. As a reminder, the difference between gross and net sales is primarily related to our memory businesses logistics services which are accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as net sales. Cash, cash equivalents and short-term investments totaled $454 million at the end of the fourth quarter, up $64 million from the prior year and down $282 million sequentially. The year-over-year fluctuation was due primarily to proceeds from the issuance of preferred shares, cash generated by the business and the repayment of our term loan in Q4. The sequential decline was primarily driven by the repayment of our term loan. Fourth quarter cash flows used by operating activities from continuing operations totaled $70 million compared to $12 million used by operating activities from continuing operations in the prior year quarter. The increased use of cash in the quarter versus last year was due primarily to investments in inventory to support shipments at the start of Q1 FY '26. For the full fiscal year 2025, operating cash flow from continuing operations was $113 million, an increase of 8% versus the prior fiscal year. We spent approximately $296,000 to repurchase 16,000 shares in the fourth quarter under our stock repurchase program. Since our initial stock repurchase authorization in April 2022, we have used a total of $113 million to repurchase 6.6 million shares through 2025. Earlier today, we announced that our Board has authorized a $75 million increase in our stock repurchase authorization, bringing our total remaining authorization to $112 million. As mentioned in our Q3 earnings call, in Q4, we completed a refinancing of our existing credit facility. We paid off the $300 million remaining on our term loan using $200 million of cash from our balance sheet and $100 million of borrowings from a new revolving credit facility. This refinancing transaction significantly reduced our leverage, extended our debt maturities and is expected to lower our debt service costs as we reduced our total gross debt by $200 million. Our net debt at the end of the fiscal year was $16 million. For those of you tracking capital expenditures and depreciation, capital expenditures were $3 million in the fourth quarter and $9 million for the full year, and depreciation was $5 million for the quarter and $21 million for the full year. And now turning to our outlook. Coming off a strong fiscal year '25, we believe that our strategy and execution capabilities position us well for long-term profitable growth. For fiscal '26, we are initiating an outlook for net sales to grow 6%, plus or minus 10% versus the prior year. There are a few important assumptions to keep in mind with regard to this outlook. First, as previously disclosed in our annual and quarterly filings, we are in the process of winding down our Penguin Edge business, which is part of our Advanced Computing segment. We expect sales from these Penguin Edge products to essentially cease at the end of this calendar year and have included this assumption in our outlook. While this will result in the phaseout of some profitable business, Penguin Edge has become a smaller portion of our overall portfolio and in the long-term, we do not expect a material impact to our growth trajectory. Second, we believe that we will continue to diversify our customer sales mix and we have assumed zero hardware sales in FY '26 to hyperscale customers as we don't currently have line of sight to such business in this fiscal year. To be clear and importantly, we do expect our hyperscale services business to continue in FY '26, and those sales are included in our outlook. The combined effect of these 2 assumptions in our FY '26 outlook is a 14 percentage point unfavorable year-over-year impact to our total company net sales growth. Last, you may notice that the net sales growth range in our outlook is wider than last year. While we entered this year with a stronger pipeline of AI compute opportunities than last year, we expect our sales volumes to be higher in the second half of the year than in the first half. You will recall that in FY '25, the opposite was true as we had a strong first half of hardware shipments to our large hyperscale customer. That shipment timing led to approximately 52% of our total company sales coming in the first half of fiscal 2025. By comparison for fiscal '26, the midpoint of our outlook assumes approximately 46% of our sales come in the first half of the year. So with our growing base of AI compute opportunities and our expectation of a more back-end loaded year, we felt a wider net sales outlook range was prudent to reflect a broader set of potential outcomes. With that said, our full year net sales outlook reflects the following by segment; for advanced computing, we expect full year net sales to change between minus 15% and plus 15% year-over-year. This outlook includes the Penguin Edge and hyperscale hardware sales impact mentioned earlier. For Memory, we expect net sales to grow between 10% and 20% year-over-year. And for LED, we expect net sales change between minus 5% and plus 5% year-over-year. Our non-GAAP gross margin outlook for the full year is 29.5%, plus or minus 1 percentage point. The decline in gross margin outlook versus FY '25 is primarily due to the wind down of the high-margin Penguin Edge business as well as growth in lower-margin businesses, such as Memory and AI hardware. New AI customer wins typically begin with upfront hardware net sales at lower margin during the implementation phase, and we aim to follow those engagements with higher-margin recurring software and services sales. As a result, we anticipate some near-term gross margin pressure as we engage in initial infrastructure deployments, but we view these upfront investments as an important foundation for durable high-margin growth over time. For non-GAAP operating expenses, we expect a full year total of $255 million, plus or minus $10 million. For non-GAAP full year diluted earnings per share, we expect approximately $2 plus or minus $0.25. Our FY '26 non-GAAP diluted share count is expected to be approximately 55 million shares. Due primarily to changes in the geographic mix of our earnings and benefits from our recently completed U.S. redomiciliation, we are lowering our FY '26 and long-term non-GAAP tax rate to 22% which reflects currently available information. While we expect to use this normalized non-GAAP tax rate throughout FY '26 and beyond, the long-term non-GAAP tax rate may be subject to changes for a variety of reasons, including the rapidly evolving global and U.S. tax environment, significant changes in our geographic earnings mix or changes to our strategy or business operations. Our outlook for fiscal year 2026 is based on the current environment, which contemplates, among other things, the global macroeconomic environment and ongoing supply chain constraints especially as they relate to our advanced computing and Optimized LED businesses. This includes extended lead times for certain components that are incorporated into our overall solutions impacting how quickly we can ramp existing and new customer projects. Overall, we believe our focused execution, disciplined expense management and balance sheet strength provide a strong foundation for sustained profitable growth. We expect these qualities to support our continued progress as we pursue opportunities to enhance long-term shareholder value. Please refer to the non-GAAP financial information section and the reconciliation of GAAP to non-GAAP measures tables in our earnings release and the investor materials on our website for further details. With that, operator, we are ready for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Kevin Cassidy with Rosenblatt Securities. Kevin Cassidy: Thanks for letting me ask a question and congratulations on the strong fiscal year '25. Thank you for the information about your hyperscale customer. But can you say, is there a project over? And would you say that going forward, we should just take them out of the forecast or should -- are you still active in potential -- more hardware deployments? Mark Adams: Kevin, thanks for the question. We don't look at it like the project's over. We have ongoing services with the customer and still are in discussions for future development opportunities, it's just that in our outlook for the year, fiscal 2026, we don't anticipate any non-service revenue or systems hardware revenue in the year. I'll let Nate comment. Nate Olmstead: Yes, that's right. I think last year, we entered the year with some visibility to some hardware shipments from the hyperscalers and just wasn't the case this year. So coming into this year, we thought it made sense to just make the assumption that we wouldn't have any hardware revenue from hyperscalers this year. But as Mark said, we continue to have a very good relationship with them and the services revenues continue. Kevin Cassidy: Okay. Great. And also exciting news with the SK Telecom and landing one client with that. And there was a lot of news last week about SK Telecom even being awarded with some business with OpenAI in Korea. Is there any participation availability for Penguin in that relationship? Mark Adams: That's something we can't address or talk to today, Kevin. What I would say is the referenced implementation in our prerecorded material was a great opportunity for the company. It's our first international deployment of significant scale and we went from order to go live in just about 2 months, and it was a significant validation of our capabilities, our rapid deployment framework. And we really value the relationship with SK Telecom, but we're not able to comment on any future opportunities at this time. Nate Olmstead: Kevin, I'll just add to that. Last quarter, you saw in our filings when we initially booked the deal, it was for hardware. Since then, we've also added services as well. So it's great to see that as part of that transaction and the relationship with SK being strong. Kevin Cassidy: Okay. And maybe just to add on to that a little bit. In the filing, I think it was $34.6 million. Is that -- will that be recognized over the next couple of quarters? Or when does that get recognized? Nate Olmstead: So we recognize that portion in Q4, but we'll have more in FY '26. Operator: Our next question comes from the line of Michael Ng with Goldman Sachs. Michael Ng: I wanted to just ask about the Penguin Edge and combined impact with hardware and revenue for next year. I think you mentioned a 14 percentage point headwind to revenue growth to the total company. When I do the math, I think that implies a 28 percentage point impact to Advanced Computing, is that the right way to think about it? How would you think about Advanced Computing growth next year, kind of ex these items? And could you just remind us why it kind of strategically makes sense to exit the Penguin Edge business, which I think was about 10% of the segment, but would love to hear your general thoughts there. Mark Adams: Thanks for the question, Michael. I'm going to answer the last part of your question first and then hand it over to Nate to talk about the financial impact and your question on impact of the other elements. It really wasn't a decision that we could stay or not stay. We had 2 clients in our Penguin Edge business that made up a significant part of that business. And as we announced in our filings, we were going through some last time buys and we're winding down the business. And over time, we were just getting better visibility towards the end of our fiscal '25 to what the impact would be in '26. So it wasn't really a choice of should we stay in it strategically or not, it was 2 large customers that we're winding down on a prior generation of a product and that they were not renewing. Nate Olmstead: Mike. And so I think on your math, you're roughly right. Advanced Computing is about 47% or 50% of total company sales. So that 14 points all sits within Advanced Computing, which means it's about 28% to 30% of Advanced Computing revenue from FY '25. Michael Ng: Great. And if I could just follow up, please. So if the underlying is growing closer to the 30% to 45%, could you just maybe talk about the key areas of momentum for advanced computing that you're seeing for next year, is it just more of those customer wins that you talked about converting into revenue? And maybe just kind of expand a little bit more in terms of the wideness of the range. I know you had made some comments earlier during the call. Mark Adams: Sure. Let me take a shot at that one. When you think about our model, and we've talked about customer diversification for some time, we've done a pretty good job at the launching of going to market resources into a broader set of customers. And those target enterprise customers plus federal opportunities and those in the education sector. When you combine that into a target set of customers for us, we engage with these customers. We bring them the value proposition we have, we try to identify funded projects that would allow us to utilize our capabilities and helping accelerate our customers' AI implementation. Once we get that opportunity to bid on a proposal, or a request for proposal. We delivered that, and that starts the beginning of a pipeline opportunity, and our pipeline is growing. Now pipeline is not a booking, as we all know. But the pipeline opportunities are growing as our, just the number of customers that we're engaged with. And so as you talk about the offset to some of these headwinds, we're continuing to add customers to the franchise and some really notable global brands in their respective industries. And we're excited about the direction we're heading, and we're looking to convert those pipeline opportunities into bookings and eventually revenue. Nate Olmstead: Yes. I mean I think just building on what Mark said, I think it's part of our diversification of our customer base is what you're seeing reflected in the outlook. And as I mentioned in my prepared remarks, too, 75% growth in the HPC, AI business from non-hyperscalers, I think it's just a really positive that at point for us from FY '25, and we think that we can continue to grow a very fast clip in those customers in FY '26. Operator: Our next question comes from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee: I have a couple, and maybe I'll sort of give you both at the same time. You did mention a better second half compared to the first half. And maybe just if you can dive in towards giving you that visibility with some of your customers? And is it really more coming from Advanced Computing visibility? Or is it more memory-driven? And then just specific to Memory, when you are guiding to 10% to 20% growth. Just curious how much of that is maybe somewhat pricing driven, given sort of what's happened with the underlying commodities here? Or -- and what are the margin implications of what you're seeing on the commodity front -- you feed into your sort of overall systems on the Memory side? Nate Olmstead: Sure. Let me take the Memory one first. So you're right, obviously, prices are starting to increase. And that affects a portion of our portfolio. It's not all of it. Important to keep in mind that we generally operate in Memory on a value-add basis, right? And so as Memory prices increase, we can generally pass along those price increases, but we don't get additional margin from that. So you would see an increase in revenue, but you would see a decrease in margin rate or really no increase in profit dollars because we operate on this value-add basis. I would say in terms of the outlook, listen, I think I put a little bit of price increase probably into the high end of the range for Memory, but not a lot. We'll see how things play out there. I think currently, we feel good about the backlog that we've been able to build from Memory going into Q1. And we have pretty good visibility, I'd say, into the first half on Memory. You mentioned the second half being stronger than the first half in our outlook. And mostly, that reflects the AI business. Mark mentioned about the strength of the pipeline. And we haven't converted those into bookings yet. And so the outlook really reflects that, where we have a strong pipeline and some good opportunities, some of which we expect to convert into bookings, but they will be booked later in the first half into the second half and expect revenue in the second half of the year. Operator: Our next question comes from the line of Ananda Baruah with Loop Capital Markets. Ananda Baruah: Yes. I have a couple, if I could. So just going back on the apples-to-apples revenue growth sort of when you back out -- back out the meta hardware and the Penguin Solutions -- or sorry, the Edge business. So is that to say, if it's a 14% impact year-over-year growth, is that to say that apples-to-apples, like on a pro forma basis, you'd really be guiding 20% growth? Should I think about it that way or am I totally off? Nate Olmstead: Well, let me explain to you this way and see if it makes sense. The 14% of our revenue in FY '25 came from the Penguin Edge business and the hardware from hyperscalers, right? So I haven't included that revenue in the FY '26 outlook. So yes, if you wanted to remove that from FY '25 and have apples-to-apples with FY '26, you would have a calculated growth rate around 20%. Ananda Baruah: It would be. I got it. And that's helpful, Nate. And then this -- Nate, the 75% growth from non-hyperscale HPC, AI. Can you give us a sense -- I mean, I guess, can we -- I guess you're giving us the bits we can back into that, I guess, is right, with the overall guide? Is that something we can back into or do we need sort of more parts? Nate Olmstead: You're talking about how much revenue would that generate? Ananda Baruah: I guess. I think the comment was -- yes, I think the comment was in 2025... Nate Olmstead: Yes. So looking at Advanced Computing and non -- there's the AI business, HPC/AI business, there's Stratus and there's Penguin Edge. Focusing on the HPC/AI business, which is obviously our strategic focus. Within that, you have sort of hyperscale business and non-hyperscale business and the non-hyperscale portion of that grew 75% in fiscal year '25. I'm just trying to [zero] really on that strategic focus area for us. Ananda Baruah: Totally. And I guess what I'm wondering is given the guide [indiscernible] you've given us some different businesses for fiscal '26. Are we able to back into what's implied for that growth in fiscal '26? Or is that something that we need more information to figure out with 75%? Mark Adams: Yes, I think we're basically discussing a trend that happened in '25. And what we're suggesting is that with that focus, we're trying to leverage that and build off that to deliver on the plan for '26. I don't think there's an implied association with what happened in the report for the '25 outcome and -- into the '26 number. Nate Olmstead: Yes. Ananda, I think you can kind of get to a range with data that we've given you. But the other thing I would just add to that is most of the -- the guidance range mostly reflects opportunity in that HPC/AI space for non-hyperscale customers. So that's where we're seeing that pipeline build, right? And so it's a wide range on Advanced Computing because of that. We have visibility to opportunities, but not visibility yet to the bookings. And so I left the range wider for Advanced Computing than I did on LED or Memory, which you see have tighter ranges on the revenue outlook. Ananda Baruah: And Mark -- actually Nate and Mark, like Nate sort of to the variance that's left in the bookings that drove -- describing the wider range. What would be, I guess, like what aspects of HPC/AI business, I guess, maybe what end markets or aspects would be the biggest add parts of the market that would sort of maybe drive some of the upside? I guess, is it -- yes. Mark Adams: What I would say -- let me just -- I'll try to answer that. The market opportunities that we're seeing the most near-term customer engagements are in the financial sector. The federal sector, which includes both government and federal integrators, there are some education opportunities that are interesting, but also sovereign cloud opportunities. Those are the 4 that I think can drive us to a successful FY '26. By the way, this is -- to fully answer, in addition to that, those markets, I think we mentioned in our script, we've had a new CRO start, Tony Fry, who came over from NetApp, and Tony has already brought on team members to target health care and other verticals organizationally to further enhance that. But in terms of '26 outlook, our pipeline reflects the sectors I talked about being, again financial education, federal integrators and government direct as well as sovereign cloud. Operator: Our next question comes from the line of Rustam Kanga with Citizens. Rustam Kanga: Congrats on the strong close to the year and great to hear about Penguin's pivotal role in South Korea’s Sovereign AI plans. I just had one follow-up. Nate, it was great to hear you kind of call out that you were able to add the services revenue in such a short period of time after the initial hardware deal. And I think you guys have historically talked about hardware as you lead with the hardware and then services follow on. I'm just wondering, is it too large of a leap to make to say that in this instance, you were able to sort of accelerate the time to services from an initial hardware implementation. Is that something that you're seeing? Or is that just a one-off? Mark Adams: Well, I think it's -- we got to be careful and be clear here. The overall solution, and as it was commented in our recorded scripts, the overall solution contemplates hardware systems, software and services. And the timing of when the revenue gets recognized is different. And so the more hardware oriented deals we take revenue credit on, that's normally upfront in any deployment. The software and services, bookings and revenue is typically ratified. So if we get a booking, that doesn't mean that we get the revenue upfront as you know. The revenue happens over the lifetime of an agreement. And so in this case, like any case, once we install or deploy systems into a data center environment, for example, the hardware gets booked right away, relatively speaking. And we start the clock on software and services that are contracted to and that happens over time. So this wasn't that different than other deployments. It's just that we got both agreements within a certain time frame right after the other. Nate Olmstead: I think also it's -- listen, each deal can be different than the next. But when we have a large hardware deployments, the value proposition for our services tends to be higher. And so we do tend to see good services attached to those large deployments, and that was the case with SK Telecom. Operator: Our next question comes from the line of Matt Calitri with Needham & Company. Matthew Calitri: There's obviously no shortage of conversation around AI. And lately, we've heard quite a bit of discourse around how CapEx and revenue seems to be rotating between just a few companies. And then this week, we've had reports out about AMD getting involved in chip shipments with OpenAI and another report today, questioning the profitability of Oracle's GPU strategy. Just curious what your thoughts are on how build-outs are and will progress in this space and what you're seeing in the broader market? Mark Adams: Well, implied in our earlier comments, Matt, is that we still think we're in the relatively early innings of broad enterprise rollouts. If I separate your questions to AMD and OpenAI in that announcement, I think that just goes to show that the capital dollars out building on future large language model training environments as well as inferencing implementations. Again, it's still on the front end, the early end of the market opportunity there. buoyed by enterprise adoption of AI, which is different than the earlier stages that were primarily large hyperscalers making significant investments in their training. We're seeing and we're starting to see a big pickup in terms of enterprise engagements and the pipeline growing there. Now relative to your reference to the GPU gross margin announcement, what -- I guess I would say when you have a lot of people selling the same thing, it tends to get commoditized pretty quickly. And I'm not commenting on today's announcement only. But if you look at the gross margin of the hardware-only companies that are the large OEMs in the business. Their gross margins have been significantly impacted over time. And so that model is not, in my opinion, is not for everybody, for sure. I think it's -- it will get commoditized if you're selling the same basic underlying solution or chip in this case. So I think there are 2 different issues you raised. I definitely think the market is on the early stage of deployments, especially around the enterprise opportunity. And I think the announcement with AMD and OpenAI that was in the press this week, certainly, another good example of the CapEx spending. Today's announcement that you're referring to on the gross margin piece is something that we see when there's large hardware-only type environments and competitors. Matthew Calitri: That makes sense. Very helpful there. And then as the memory market seems to be heating up here and good commentary from you guys there and guidance there. How are you differentiating your offering there? Or to a certain extent, is it just a matter of who has availability to ship this stuff? Mark Adams: Well -- and Matt, I know you're relatively new to our story from Needham and thanks again for jumping on the call today. Our business is largely is differentiation because we buy our supply of Memory silicon from the likes of SK Hynix and others. And we deliver a value add in terms of a system or subsystem level solution and we get margin above the industry gross margin for the commodity itself being the memory chip. And so we differentiate ourselves both through design and firmware and software and performance reliability. And so those categories are elements of our differentiation allow us to charge more than the industry charges for the Memory itself. And so it's largely a differentiation model if we're not differentiating on the design wins, we're not going to get a lot of them. Operator: There are no additional questions waiting at this time. I would now like to pass the conference back to Mark Adams, CEO, for closing remarks. Mark Adams: Thank you, operator. Our Q4 and full year results validate that we are on the right path, helping our value customers solve the complexity of AI infrastructure. Thank you all for joining today's call. Operator: That concludes today's call. Thank you for your participation, and enjoy the rest of your day.
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp's First Fiscal Second Quarter 2026 Financial Results Conference Call. Please note that today's call is being recorded. During today's presentation, all parties will be in a listen-only mode. Following management's prepared remarks, we will open the line for questions. At this time, I would now like to turn the call over to Saratoga Investment Corp. Chief Financial and Chief Compliance Officer, Mr. Henri J. Steenkamp. Please go ahead. Henri J. Steenkamp: Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal second quarter 2026 Earnings Conference Call. Today's conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required to do so by law. Today, we will be referencing a presentation during our call. You can find our fiscal second quarter 2026 shareholder presentation in the Events and Presentations section of our Investor website. A link to our IR page is in the earnings press release distributed last night. For everyone new to our story, please note that our fiscal year-end is February 28. So any reference to results reflects our August end period. A replay of this conference call will also be available. Please refer to our earnings press release for details. I would now like to turn the call over to our Chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks. Christian Oberbeck: Thank you, Henri, and welcome, everyone. Saratoga Investment Corp highlights this quarter include continued NAV growth from the previous quarter and year and NAV per share growth from the previous quarter. A strong return on equity beating the industry net originations of $22.4 million and importantly, continued solid performance from the core BDC portfolio in a volatile macro environment, including the return of our Xolage to accrual status, thereby reducing our nonaccrual investments to just one representing only 0.2% of portfolio fair value. Henri J. Steenkamp: Continuing our historical strong dividend distribution history, we announced a base dividend of $0.25 per share per month or $0.75 per share in aggregate for 2026. Our annualized third-quarter dividend of $0.75 per share represents a 12.3% yield based on the stock price of $24.41 as of October 6, 2025, offering a strong current income from an investment value standpoint. Our Q2 adjusted NII of $0.58 per share continues to reflect the impact of the past twelve-month trend of decreasing levels of short-term interest rates and spreads on Saratoga investments largely floating rate assets and the continued effect of the recent repayments. Which has contributed to the buildup of $201 million of cash as of quarter-end available to be deployed accretively in investments or to repay existing debt. During the quarter, we continue to see very competitive market dynamics. These macro factors, our portfolio again saw multiple debt repayments in Q2 in addition to solid new originations. We originated $52.2 million including three follow-ons and new investments in multiple double B and triple B CLO debt securities. Our strong reputation and differentiated market positioning combined with our ongoing development of sponsor relationships, continues to create attractive investment opportunities for high-quality sponsors. Which continued post quarter-end with three new portfolio company that are closed or in closing in Q3 so far. We continue to remain prudent and discerning in terms of the new commitments and the current volatile environment. We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges. At the foundation of our strong operating performance is the high-quality nature and resilience of our $995.3 million portfolio in the current environment. With all four historically challenged portfolio company situations resolved. One of these restructurings, Zollage, is seeing improved financial performance and has been returned to accrual status this quarter. Our current core nonportfolio non-CLO portfolio was marked up by $3.9 million this quarter, and the CLO and JV were marked down by $300,000. We also had $200,000 of net appreciation in our new double B and triple B CLO debt investments and a further net realized gains of $100,000 from an escrow payment on our modern campus investment, resulting in fair value of the portfolio increasing by $3.8 million during the quarter. As of quarter-end, our total portfolio fair value was 1.7% below cost, while our core non-CLO portfolio 2.1% above cost. The overall financial performance and solid earnings power of our current portfolio reflects strong underwriting in our growing portfolio companies and sponsors in well-selected industry segments. During the second quarter, our net interest margin decreased from $15.1 million last quarter to $13.1 million driven by a $2.1 million decrease in non-CLO interest income. This decrease was due first, average assets decreased $11 million or 1.1% to $954 million. Second, the timing of originations and repayment closings during the current and previous quarter with repayments more fully reflected in earnings and the full impact of new originations still having to flow through. And third, the absolute yields on the non-CLO portfolio decreasing from 11.5% to 11.3% as a result of SOFR rates resetting from earlier reductions combined with the impact of lower-yielding new originations during the quarter. In addition, the full period impact of the 200,000 shares issued to the ATM program in Q1 and the partial impact of the additional 400,000 shares issued in Q2 resulted in a $0.02 per share dilution to NII per share. Our overall credit quality for this quarter remains steady 99.7% of credits rated in our highest category, with now just one investment remaining on nonaccrual status. Pepper Palace, which has been successfully restructured representing only 0.2% of fair value and cost, respectively. With 84.3% of our investments at quarter-end in first lien debt and generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations, we believe our portfolio and company leverage is well structured for future economic conditions and uncertainty. As we continue to navigate the challenges posed by the current geopolitical tensions and the volatility seen in the broader underwriting and macro environment, we remain confident in our experienced management team, robust pipeline, strong leverage structure, and disciplined underwriting standards to continue to steadily increase the size, quality, and investment performance of our portfolio the long term and deliver attractive risk-adjusted returns to shareholders. As always, and particularly in the current uncertain environment, balance sheet strength liquidity, and NAV preservation remain paramount for us. At a quarter-end, we maintained a substantial $407 million of investment capacity to support our portfolio companies. With a $136 million available to our existing SBIC three license $70 million from our two revolving credit facilities, and $201 million in cash. This level of cash improves our current regulatory leverage a 166.6% to a 186.5% net leverage. Netting available cash against outstanding debt. Moving on to Saratoga Investment's fiscal 2026 second quarter. Key performance indicators as compared to the quarters ended 08/31/2024, and 05/31/2025, are our quarter-end NAV was $410.5 million up 10.3% from $372.1 million last year, and up 3.6% from $396.4 million last quarter. Our NAV per share was $25.61 down from $27.07 last year and up from $25.52 last quarter. Our adjusted NII was $9.1 million this quarter, down 50.1% from last year and down 10.5% from last quarter. Our adjusted NII per share was $0.58 this quarter, down 56.4% from last year and down 12.1% from last quarter. Adjusted NII yield was 9% this quarter down from 19.7% last year and 10.3% last quarter. And latest twelve months return on equity was 9.1%, up from 5.8% last year and down slightly from 9.3% last quarter and above the industry average of 7.3%. While last year saw markdowns due to a small number of credits in our core BDC, Slide three illustrates how our recent results have delivered an ROE of 9.1% for the last twelve months. Above the industry average of 7.3%. Additionally, our long-term average return on equity over the past eleven years of 10.1% is well above the BDC industry average of 7%. Our long-term return on equity has remained strong over the past decade plus, beating the industry eight of the past eleven years and consistently positive every year. As you can see on slide four, our assets under management have steadily and consistently risen since we took over the BDC fifteen years ago despite a slight pullback recently, reflecting significant repayments. This quarter saw originations again outpacing repayments, resulting in an increase in AUM as compared to the previous quarter. The recent AUM decline over the past year does not detract from our expectation of long-term AUM growth. The quality of our credits remains strong, And with just one recently restructured investment remaining on nonaccrual, Pepper Palace, Our management team is working diligently to continue this positive long-term trend as we deploy our significant levels of available capital into our pipeline. While at the same time being appropriately cautious in this evolving and volatile credit and economic environment. With that, I would like to now turn the call over to Henri to review our financial results as well as the composition and performance of our portfolio. Henri J. Steenkamp: Thank you, Chris. Slide five highlights our key performance metrics for the fiscal second quarter, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q2 was 15.8 million, increasing from 15.3 million and 13.7 million shares for last quarter and last year's second quarter, respectively. Adjusted NII was $9.1 million this quarter, down 50.1% from last year and 10.5% from last quarter. This quarter's decrease in adjusted NII as compared to the prior quarter and prior year were both due to lower AUM and base interest rates. The decrease from the previous year's second quarter was also largely due to the non-recurrence of the $7.9 million Noland investment interest recognized last year that was previously on nonaccrual. The weighted average interest rate on the core BDC portfolio of 11.3% this quarter compares to 12.6% as of last year, 11.5% as of last quarter. The yield reduction from last year primarily reflects the SOFA base rate decreases over the past year. Total expenses this quarter, excluding interest and debt financing expenses, base management fees and incentive fees, and income and excise taxes, increased $300,000 to $2.5 million as compared to $2.2 million last year and decreased $300,000 from $2.8 million last quarter. This represented 0.8% of average total assets on an annualized basis, unchanged from last quarter and up from 0.7% last year. Also, we have again added the KPI slides, 26 through 30 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past two years. Slide 30 is a new slide we added last quarter, comparing our nonaccruals to the BDC industry. You will see that our nonaccrual rate of 0.3% of cost is significantly lower than the industry average of 3.4%. This decreased from 0.6% last quarter due to our Xolage investment returning to accrual status. This highlights the current strength in credit quality of our core BDC portfolio. Moving on to Slide six. NAV was $410.5 million as of fiscal quarter-end. A $14.1 million increase from last quarter and a $38.4 million increase from the same quarter last year. During this quarter, $11.4 million of new equity was raised at or above net asset value respectively through our ATM program. This chart also includes our historical NAV per share. Which highlights how this important metric has increased 23 of the past thirty-two quarters, including by $0.9 this quarter. Over the long term, our net asset value has increased since 2011 and grown by $3.64 per share or 16.6% over the past eight years. On slide seven, you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis. Starting at the top, adjusted NII per share was down $0.8 in Q2, primarily due to, first, the decrease in non-CLO net interest income during the quarter up $0.10 due to recent decreasing AUM and base rates, And second, dilution from the increased DRIP and ATM program share count of $0.2. This was partially offset by both the decrease in operating expense of $0.2 and increases in the CLO and BB debt investments interest income of $0.2. On the lower half of the slide, NAV per share increased by $0.9 primarily due to net realized gains and unrealized appreciation of $0.27 including deferred tax benefits, partially offset by the 17¢ under earning of the dividend and a $0.1 net dilution from the ATM and DRIP programs. Slide eight outlines the dry powder available to us as of quarter-end, which totaled $406.8 million. This was spread between our available cash undrawn SBA debentures, and undrawn secured credit facility. This quarter-end level of available liquidity allows us to grow our assets by an additional 41% without the need for external financing, with $201 million of quarter-end cash available and thus fully accretive to NAV to NII when deployed, and $156 million of available SBA debentures with its low-cost pricing. Also very accretive. In addition, all $296 million of our baby bonds effectively all our 6% plus debt is callable now, creating a natural protection against potential continuing future decreasing interest rates which should allow us to protect our net interest margin if needed. These calls are also available to be used prospectively to reduce current debt. We remain pleased with our available liquidity and leverage position, including our access to diverse sources of both public and private liquidity and especially taking into account the overall conservative nature of our balance sheet, that most of our debt is long-term in nature. Also, our debt is structured in such a way that we have no BDC covenants that can be stressed during volatile times. Especially important in the current economic environment. Now I would like to move on to slides nine through 12. Review the composition and yield of our investment portfolio. Slide nine highlights that we have $995 million of AUM at fair value, and this is invested in 44 portfolio companies one CLO fund, one joint venture, and numerous new double B and BBB CLO debt investments. Our first lien percentage is 84.3% of our total investments, of which 22% is in first lien last out positions. On Slide 10, you can see how the yield on our core BDC assets excluding our CLO investments, has changed over time, especially this past year reflecting the recent decreases to interest rates. This quarter, our core BDC yield decreased to 11.3% from last quarter's 11.5%. Reflecting further core base rate reductions. The CLO yield decreased to 11.8% from 13.7% last quarter, reflecting the inclusion of the new BB and BBB CLO debt investments to this category that have a yield in the eight to 10% range. Slide 11 shows how our investments are diversified through primarily The US. And on Slide 12, you can see the industry breadth and diversity that our portfolio represents. Spread over 39 distinct industries, addition to our investments in the CLO, JV, and BB and BBB CLO debt securities, which are included as structured finance securities. Moving on to Slide 13, 7.9% of our investment portfolio consists of equity interest. Which remain an important part of our overall investment strategy. This slide shows that for the past thirteen fiscal years, had a combined $43 million of net realized gains from the sale of equity interest, or sale or early redemption of other investments. This long-term realized gain performance highlights our portfolio credit quality, has helped grow our NAV, and is reflected in our healthy long-term ROE. That concludes my financial and portfolio review. Our chief investment officer, Michael Joseph Grisius, will now provide an overview of the investment market. Michael Joseph Grisius: Thank you, Henri. Today, I will give an update on the market since we last spoke in July. And then comment on our current portfolio performance and investment strategy. Year to date, deal volumes in our market have been down significantly as compared to 2024 and are down further still as compared to 2021 through 2023. We believe that M and A activity will invariably revert to historical levels. But that pickup in deal volume appears to be postponed for the time being. Although the commencement of decreasing rates might help with that. The combination of historically low M and A volume in the lower middle market and an abundant supply of capital is causing spreads to tighten and leverage to remain full as lenders compete to win deals. Especially premium ones. Market dynamics are at their most competitive level since the pandemic, We've also experienced repayment activity some of our lower leverage loans being refinanced on more favorable terms. The historically low deal volumes we're experiencing has made it more difficult to find quality new platform investments than in prior periods. And with some viable concerns about the longevity of the current issuer-friendly environment, due to both market-driven and macroeconomic factors. We remain vigilant in our underwriting. As we noted on last quarter's call, this may naturally prompt the question of what is our approach to operating in this difficult deployment environment? In summary, first, stay disciplined on asset selection. Second, invest in and greatly expand our business development efforts in a market that is still largely underpenetrated by us And third, continue to support our existing healthy portfolio companies as they pursue growth. The relationships and overall presence we've built in the marketplace combined with our ramped-up business development initiatives, give us confidence in our ability to achieve healthy portfolio growth in a manner that we expect to be accretive to our shareholders in the long run. Before leaving this topic, I'd like to reiterate that we continue to believe that the lower middle market is the best place to be in terms of capital deployment. As compared to the larger end of the middle market, the due diligence we're able to perform when evaluating an investment is much more robust. The capital structures are generally more conservative with less leverage and more equity. The legal protections and covenant features in our documents are considerably stronger and our ability to actively manage our portfolio through ongoing with management, and ownership is greater. As a result, we continue to believe that the lower middle market offers the best risk-adjusted returns, and our track record of realized returns reflects this. Additionally, during this past quarter, we continued to invest in multiple different CLO BB and BBB securities across eight different CLO managers for a total notional amount of $26.3 million. These investments have performed well through numerous economic cycles in the past, experiencing very low long-term default rates. While also providing enhanced yields relative to comparably rated corporate debt securities. We anticipate third-party managed CLO BBs, and to a lesser extent, CLO junior BBBs will play an increased role in our investment portfolio going forward and will also allow us to take advantage of dislocations in the liquid loan and high-yield credit markets. Now our underwriting bar remains high as usual. In a very tough market. Yet we continue to find opportunities to deploy capital As seen on Slide 14, our more recent performance has been characterized by continued asset deployment to existing portfolio companies as demonstrated with 13 follow-ons in calendar year 2025 thus far, and we have invested in three new platform investments this calendar year as well. Overall, our deal flow is increasing as our business development efforts continue to ramp up. Our consistent ability to generate new investments over the long term despite ever-changing and increasingly competitive market dynamics is a strength of ours. Portfolio management continues to be critically important and we remain actively engaged with our portfolio companies and in close contact with our management teams. During the quarter, our Xalage investment returned to accrual status, reflecting its improved financial performance leaving Just Pepper Palace on nonaccrual, although we are still actively managing both, as discussed in previous quarters. This is a significantly positive development as now only 0.2% of the portfolio at fair value and cost, respectively, are on nonaccrual status. In general, our portfolio companies are healthy, and the fair value of our core portfolio are core BDC portfolio, is 2.1% above cost. 84% of our portfolio is in first lien debt, and generally supported by strong enterprise values in industries that have historically performed well in stress situations. We have no direct energy or commodities exposure. In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue, and have historically demonstrated strong revenue retention. Looking at average leverage on this slide, you can see that industry debt multiples move closer to six x with unitranche in the mid-fives Total leverage for our overall portfolio is 5.34 times. Excluding Pepper Palace. Now Slide 15 provides more data on our deal flow. As you can see, the top of our deal pipeline is significantly up from the end of the calendar year 2024 despite the current M and A activity in the lower middle market remaining low. This recent increase of deal sourced is as a result of our recent business development initiatives with 20 of our of the 51 term sheets issued over the last twelve months being from for deals that came from new relationships. Overall, the significant progress we've made in building broader and deeper relationships in the marketplace is noteworthy because it strengthens the dependability of our deal flow and reinforces our ability to remain highly selective as we rigorously screen opportunities to execute on the best investments. Our originations this quarter totaled $52.2 million consisting of three follow-on investments totaling $25.9 million and double B and triple B CLO debt investments of $26.3 million. Subsequent to quarter-end, we closed or currently have in closing in our core BDC portfolio approximately $42.7 million of new originations in three new portfolio companies and two follow-ons. Including delayed draws. Two of the three new portfolio companies are with new relationships. As you can see on slide 16, our overall portfolio credit quality remains solid. As demonstrated by the actions taken and outcomes achieved on the nonaccrual and watch list credits we had over the past year, our team remains focused on deploying capital and strong business models where we are confident that under all reasonable scenarios, the enterprise value of the businesses will sustainably exceed the last dollar of our investment. Our approach and underwriting strategy has always been focused on being thorough and cautious. At the same time. Since our management team began working together fifteen years ago, we've invested $2.34 billion in 122 portfolio companies, and have had just three realized economic losses on these investments. Over that same time frame, we've successfully exited 84 of those investments, achieving gross unlevered realized returns of 14.9% on $1.29 billion of realizations. The weighted average return on our exits this quarter were consistent with our track record at around 14%. Even taking into account the recent write-downs of a few discrete credits, our combined realized and unrealized returns on all capital invested equals 13.5%. Total realized gains year to date were $3 million. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien senior debt. As mentioned, we have now only one investment on nonaccrual, Although Pepper Palace has been restructured, we're still it as red with a fair value of $1.8 million. Pepper Pals continues to be managed actively with several initiatives underway. In addition, during the quarter, our overall core non-CLO portfolio was marked up by $3.9 million of net appreciation including Zollage and Pepper Pellage, Palace, reflecting the strength of the overall portfolio. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital, and our long-term performance remains strong as seen by our track record on this slide. Now moving on to slide 17, you can see our second SBIC license is fully funded and deployed. Although there is cash available there to invest in follow-ons. And we are currently ramping up our new SBIC three license. With a $136 million of lower cost, undrawn debentures available allowing us to continue to support US small businesses, both new and existing. This concludes my review of the market. And I'd like to turn the call back over to our CEO. Chris? Christian Oberbeck: Thank you, Mike. As outlined on slide 18, our latest dividend of $0.75 per share in aggregate for the first quarter ended 08/31/2025 was paid in three monthly increments of $0.25. Recently, we declared that same level of 75¢ for the quarter ending 11/30/2025, marking the third quarter of our new dividend payment structure. The Board of Directors will continue to evaluate the dividend level on at least a quarterly basis. Considering both company and general economic factors including the current interest rate macro environment's impact on our earnings. Moving to slide 19. Our total return for the last twelve months, which includes both capital appreciation and dividend, has generated total returns of 22%, beating the BDC index's 4% for the same period by over five times. Our longer-term performance is outlined on the next slide, 20. Also, our five-year and three-year returns both place us above the BDC index. And since Saratoga took over management, of the BDC in 02/2010, our total return has been almost three times the industry's at 862% versus the industry's 291%. On slide 21, you can further see our last twelve months performance placed in the context of the broader industry and specific to certain key performance metrics. We continue to focus on our long-term metrics such as return on equity, NAV per share, NII yield and dividend growth and coverage. All of which reflect the value of our shareholders are receiving. While NAV per share growth and dividend coverage are lagging this past year, this is largely due to last year's two discrete nonaccrual investments previously discussed. In addition, we've had significant recent repayments of successful investments that have reduced this year's fiscal year's this fiscal year's NII thus far and thus and resulted in healthy levels of cash available for deployment. In this volatile macro environment, we will be prudent in deploying our significant available capital into strong credit opportunities that meet our high underwriting standards. Our focus remains long term, We will also continue to be we also continue to be one of the few BDCs who have grown NAV accretively over the long term, with our long-term return on equity at 1.5 times the industry average and latest twelve-month return on equity also beating the industry by 180 basis points. Moving on to slide 22. All of our initiatives discussed on this call are designed to make Saratoga Investment a leading BDC that is attractive to the capital markets community. We believe that our differentiated performance characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions. These differentiating characteristics, many previously discussed, include maintaining one of the highest levels of management ownership in the industry at 10.8%, ensuring we are strongly aligned with our shareholders. Looking ahead on Slide 23, while geopolitical tensions and macroeconomic uncertainty remain ongoing factors, we are encouraged by the health and resilience of our portfolio and the continued strength of our pipeline. Backed by our experienced management team, disciplined underwriting, and solid balance sheet, we are well positioned to further expand the size and quality of our portfolio, drive consistent investment performance, and deliver attractive risk-adjusted returns for our shareholders over the long term. Recognizing the challenges posed by the ongoing tariff discussions and the volatility seen in the broader macro environment, we also believe that our strong balance sheet, capital structure, and liquidity places us in a strong position to successfully address these types of uncertainties. In closing, I would again like to thank all of our shareholders for their ongoing support And I would now like to open the call for questions. Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone. And wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Erik Edward Zwick from Lucid Capital Markets. Erik Edward Zwick: Thanks. Good morning, everyone. Wanted to first say, I appreciate the slides 19 through 21 where you showed some comparisons between your performance and peers. In looking at five twenty-one, you know, one metric that kinda stands out or maybe your currently, you know, a little bit below the peer mean is just on the dividend coverage. And I know, Chris, you kind of addressed some of the commentary there. About, you know, some of the factors that have impacted that. So just kinda curious from your perspective, given the outlook for some additional headwinds from the outlook for lower short-term rates, what levers and strategies you know, do you feel are, you know, the easiest for you to pull at this point? To potentially improve the dividend coverage and then how much of a priority is that at this time? Christian Oberbeck: Well, I think that's a, you know, very important question, something that we're evaluating at all times here. I think, you know, there's there's, like, there's, a longer-term and a shorter-term perspective on on know, everything in life and and this in particular. And I I think if you look at the dynamics of our portfolio, I think one thing that we've done, you know, we're we're proud of doing well is is our our our is the it's the solidity of their portfolio performance. And now we're back on an increasing NAV trajectory. And I think that contrasts with a lot of what's going on in private credit generally. There's a lot of deterioration. And I think if you look at macro discussions of you know, private credit these days, there's lots of, you know, lots of concern. There's sort of like a grinding, you know, different numbers are out there, four or 5% losses grinding through the system. You know, higher interest rates, all that type of thing. So we've been able to construct a portfolio that's kind of, you know, avoided those major problems. And and so that has been project number one for us was making sure we have a super strong portfolio, consistently strong, credit underwriting. I think in terms of other macro factors, I think everyone's quite aware that the know, m and a environment has been quite muted for the last few years. And so the supply of you know, private credit opportunities is just not as large as as it has been. Now the backlog of future m and a has increased a lot, but just hasn't happened. Right? And and so a lot of the a lot of so there's been a lot of refinancing activity. There's a lot of new money coming into the business. And so know, we we have found that, you know, putting money to work at our credit standards and and underwriting standards, know, has been you know, a little more challenging than it than it has been, in other years. But that doesn't deter us from from maintaining our our standards. And, I think, you know, we have, we've gotta an enormous pipeline, and we're looking at lots and lots of deals. And and our ability to deploy capital could turn very quickly. I mean, we have a you know, a a, you know, a a slightly higher hit rate and we could deploy a fair amount of capital you know, given all the things that we see right now. So, and I think as Mike had mentioned, we are seeing an increase in deal flow and an increase in m and a and all those type of things. So we we we may be coming out of this sort of, you know, highly muted m and a environment. And so we, you know, we feel confident that we will be able to deploy our capital, and we we do have, you know, 400,000,000 plus available. So we can grow, you know, 40 plus percent, of our assets know, inside the four corners of our current financial capability with don't have to raise any outside money to be able to do that. So we're very well positioned but we don't wanna know, you know, for short-term considerations, to compromise our underwriting standards, when we feel like we're gonna get there. You know, we're we're gonna get to the right And I think if you look at if we deploy, you know, a good chunk of that 400,000,000 going forward, we're gonna have we're gonna cover our dividend. It's not gonna be it's not gonna be a major issue. The other element that's kind of run through, and we've repeated it you know, you know, a lot with with our investor base, is, you know, we've had a lot of repayments. And you know, repayments are are are are the the hallmark of successful investing. Right? And and and so when the money comes back, you know, it just we we can't control the lumpiness of it coming back, and it just come back pretty pretty, you know, in pretty large numbers. We recently. And and so that's created a little more of a headwind in terms of our net originations. But we're still originating, and we're and we're actually I mean, I think my wanna talk about the pipeline? I mean, pipeline now is very robust. Michael Joseph Grisius: Yeah. Let me, just more broadly address your question as well just to add to what Chris had mentioned. The marketplace right now is incredibly tough, and it's it's mostly driven by the fact that M and A volume is down considerably relative to historical levels at the very same time that there's a lot of capital on the sidelines. And so what happens is when the quality asset comes to market, people clamor to to provide capital to those businesses. And there's three things that we're witnessing there. And, historically, two of them are are kind of naturally the case. The third one is more concerning. But the the first two are that pricing comes in, so we're certainly seeing competition for price and therefore, spreads are compressing. The other thing that people are doing is they're pushing leverage a bit more. Not changing so much relative to the percentage of debt in the capital structure because the PE firms are also having to pay more for quality assets. So that's a little less concerning, but nonetheless, we are seeing, more aggressive leverage profiles. But the third thing that we've seen and we've passed on some deals as as a result of this more recently, is that we're seeing some larger market participants coming down into our market. I don't think they understand the market that well, and they're offering terms and structures that you tend to see more in the larger market. So you see, you know, less restrictive covenants or or even much fewer covenants. And we're not gonna do those. Deals. So so we're passing on deals that have those features to them while others are investing capital. It'll be interesting for a person like the senior management team here has been through a lot of markets. It'll be interesting to go back and look at how this vintage performs over time. As Chris mentioned, we're gonna stay very disciplined in terms of what our investment bar is. So how are we responding to that? We're doubling down our our business development efforts. And I think as we've discussed in the past, one of the things that's so great about residing in the lower end of the middle market is there literally are hundreds of thousands of businesses out there. We know that our market presence is is still very greatly underpenetrated in that market. So by investing in more business development efforts, really taking a a concerted effort to get greater outreach in the marketplace, you can you can build your pipeline quite a bit. So to what Chris' point is, you can see that in our term sheets issued. Especially the number of term sheets we've issued to newer relationships. And that is very encouraging to us. We've invested in expanding our team. We've added a new managing director who's got a very strong track record as a as a very successful originator in our space. As well as augmenting our team team with other investment professionals, which has freed us up to to really get out there and and drive that pipeline. And then importantly, as I mentioned in the prepared remarks, we've got presently three new portfolio companies that are in closing and two of those three are new relationships that we didn't have. You know, just six months ago. So lots of reasons for us to feel despite how challenging the market is, to feel confident that in the intermediate to long run, we'll get the capital deployed, and we'll bridge that gap between you know, where our earnings are and where our dividend is. Erik Edward Zwick: That's fantastic color. Thank you. Both of you. Maybe a quick follow-up Michael, one of your comments about some of the larger competitors moving down market Do you feel like that's likely a kind of shorter-term trend? And once M and A comes back and there's more activity and, you know, not everyone's chasing all of the smaller deals, but that they kinda go back up to where they're, you know, historically have operated. Michael Joseph Grisius: I I would expect that. I can't say that with certainty. But it doesn't make sense for some of the the platforms that we see you know, chasing $20 million deals or even $30 million deals when you look at their size. It'd be like us running around chasing 2 or $3 million deals. It's just the math doesn't work. But when I'm I think when there's a dearth of of deals in the marketplace, you'll see people sort of reach down into a a lower end of the market. I've seen that historically. So I wouldn't expect at least my judgment would be, I wouldn't expect to see them permanently residing in our end of the market. Erik Edward Zwick: Got it. And one last one for me, and then I'll step away. You know, I I think slide 13 is a very powerful slide that shows kind of the cumulative gains that you guys have been able to record over time. I guess looking over kind of the the near term with the 8% common equity portfolio now, any any near-term opportunities that you guys potentially see for additional gains? Or I I would think, you know, M and A coming back would potentially help that prospect as well. Michael Joseph Grisius: Well, I think the the the valuations that we have take into account what we think the appropriate valuation is. So I think what you see in our valuation, which we're very proud of. I don't know how many BDCs are actually have their core portfolio above their cost basis. Ours is is you know, deal above its cost basis, but I I wouldn't say you know? I I would say the the valuations we have now are are the appropriate reflection of of of fair value. Christian Oberbeck: Yeah. The other covers So any any just the other comment I just make on that. Excuse me, is is the yeah. This has been sort of a feature of of of being in the small or middle market. And what we've been able to do, which is we we often take equity co-investments when we when we do a loan, and we do it kinda as systematically as we can. Now not not every deal allows us in and not every deal do we wanna be in in a very large scale. But but in general, systematically, we're taking equity positions. In in in many of the companies that we're underwriting. And, and so over time, you know, obviously, number one is not losing money in the on the on the basic loan But over time, that, that those equity gains have have been very, have contributed quite a bit to our our NAV and NAV per share growth, and and we're just gonna continue that. And it's it's hard you know, because it's kind of spread out in a portfolio approach, it's kinda hard to say you know, we're gonna get you know, we've had a couple, you know, mega gains in the past, but in general, it's more of a consistent, you know, consistent across the portfolio, you know, steady kind of realization of these of these, you know, these these positions that that basically know, you know, add to the portfolio performance. Erik Edward Zwick: Thank you. Thanks for taking all my questions. Operator: Thank you. One moment for our next question. Our next question comes from the line of Casey Alexander from Compass Point Research and Trading. Casey Alexander: Hi. Good morning. And thanks for taking my questions. Mike, I I'm kinda fascinated by slide 15, which you alluded to. You know, term sheets up a 143% but deals executed down 36%. I almost feel like I feel a level of frustration related to those two statistics. In that you're finding be deals to bid and the the old story used to be that that that you know, given lack of small differences in deal terms, people would would go ahead and go with you guys because of certainty of close, reputation, knowing what you would do, in distressed situations. But I guess the difference between deal terms is large enough now that that's kind of been put off to the side, and and people are just taking deals away from you because the price differential is is just too much. I mean, am I reading that wrong? Michael Joseph Grisius: Well, I think it's there's two things. I I think it's still is very much the case that we win many opportunities because of our reputation in the marketplace. People are impressed with the the quality of the work that we do to understand their businesses so they get confident that we're gonna be very good financial partners to them, that wins us a lot of deals. It also gets us a lot of repeat business. We still have confidence in that core feature to our business model. Which is reflective of really the team that we have here, which we think is best in class in the industry. Having said that, when the market gets really competitive, and you start seeing at at some level, competitors offering much cheaper pricing really relaxed, covenant levels, things of that nature. You know, those things aren't gonna win the tie any longer. It it it so you do see certainly see some deals go away from us. Now I would add this though. The the work that we've been doing, especially more recently in, you know, let's call it the last six or or nine months, doubling down our business development efforts and really investing significantly in growing our presence in the lower middle market. We are seeing a lot more quality opportunities. And our objective is to stay away generally from more commoditized scenarios I e, the ones that you're referring to where it's just somebody gets a a a pricing grid out and and a terms grid, and they just choose the the person that's offering the best terms. Where we really shine is when we're we're getting a chance to interact with the ownership and the management team and and, you know, do a lot of things that I I just mentioned. We feel confident that we'll continue to find plenty of opportunities in our market to differentiate ourselves in the way that we described. We, of course, need to be competitive. And pricing has come down, and we we need to be able to you know, respond to that. But we're not gonna take the one place that we're not gonna lower our bar is on credit quality. And we think that that's reflective of how our portfolio has performed historically as well as where it's sitting today. Okay. Thanks for that. We're we're encouraged. I should we're encouraged. I've I did mention that we've got three new portfolio companies that are in closing right now. Two of the three of those are new relationships. So know, that's, I think, indicative of a lot of the efforts that we've undertaken to grow our reach in the marketplace. Casey Alexander: Alright. Thank you. Chris, this is for you. I have you know, been doing this for a long time, and I've I've never had an investor come to me and say, gee. I wish my my BDC owned a bunch of of structured CLO securities. And in fact, the history of them in BDCs is not that great. And so I really wanna understand the thought process that makes you believe that this is what your investors want? Okay. Christian Oberbeck: I guess I'd be interested in understanding maybe at another time, if you could share with us the the the the bad experience in CLO structured securities. You're aware of? Are you talking about equity investments in equity of CLOs? When you say that? Casey Alexander: There there have been several BDCs that that have had you know, multiple different tranches of CLO securities. And and over time, it is not improved their valuation. It hasn't necessarily been that great for their returns, and and and, again, I don't know that that's what the mandate is that investors give you as a BDC. Christian Oberbeck: Okay. So, again, Casey, we we can go through the details at at another time, but I I I I would I I I think it's fair to say that most of those and and we are familiar with that because know, we we do manage CLOs, so we're very familiar with securities. But most of those are are equity investments in CLOs. And, and we would agree that the the the record there is not very good. The the the securities that we're investing in are are are very different than They're they're way up the, up the scale. And, you know, we we're investing in double B rated and even triple B minus rated. So they're, you either investment grade or just below investment grade. Securities. And and because we've been in the business, we happen to know a lot about it, a lot about the data. We have like, better research. And at some point, you know, we're happy to spend time with you on how how we do the research. But we have a tremendous amount of insight and data on, the managers and their portfolios. And as a result, we're investing in the absolute cream of the CLO manager crop, and we're investing in these in these structured securities. And and for a whole host of reasons, these securities are investment grade or just below investment grade. But they, they have, absolute returns, that are consistent with our absolute returns across our portfolio. And we're there's something we know about and we have a lot of of of of insight into. And if you would compare them to regular corporate bonds, like if you had you know you know, same double B, double triple B minus corporate bonds, know, in general, you know, that would be sort of maybe comparable in size and things like that. They're probably 200 basis points plus, wider in in the structured securities, area. So this is a very, niche, investment area for a whole host of reasons. There's very few parties that are in it. And a number of them are hedge funds. For example, that are you know, have have have come in and out of it. And and so we've noticed, you know, sort of an outsized return. So we're we're basically getting a a, a return level that's consistent with what we're looking for in our private credit, and what what what we're able to get in the private credit marketplace we're able to do it on a highly diversified basis And then another feature of this market is they they they often sell through, through BWICs. On a on a daily basis. And so there's a level of liquidity that can be achieved. In other words, if we wanted to get out of these positions, could probably get out of these positions in in in a in a matter of days or or weeks. Because of the way that we're obviously not in a you know, severe, like, COVID or 2008 environment. But in in in a general environment, there there's a there's a there's a fair amount of liquidity in these names. So you get not only the the the portfolio return levels, you they're consistent with what we do. We have very specific research on it. And we also have, in addition, a level of liquidity that we don't have. The rest of the portfolio. And so we think at a time when we have, you know, a a lot of cash, available, This is a very interesting interesting place to invest. Now should our you know, should should our our our pipeline all of sudden, we we start we start putting a lot more money to work in our in our base business. We you know, our core you know, senior you know, first lien senior secured debt securities, that's our pref that's our preferred place to be. And then we can also unwind some of these investments without any real penalty to help fund that you know, should should that business grow. We think it provides a very good balance for, you know, for the portfolio. We think it provides very good absolute yield. And, and I think the characteristics of it, I don't think you've seen that in other BDCs because I don't think other BDCs are doing it precisely the way we're doing it. Casey Alexander: I appreciate the clarification between equity tranches and the tranches that you're investing in. My my last question and you know, I think this is has has been addressed, but I think it's it's worth it's worth approaching again. I mean, you know, NII this quarter was 17¢ below the dividend. And if you do the math, I mean, you're a long way away from from getting there. And so I'm curious especially, you know, given the trajectory of base rates, which may make it even more difficult by the time you get to a more fully invested position you know, why not more appropriately set the dividend Because your credit is great. And yet you look at the stock, the stock's down a buck and a half over the last two days. What's that telling you? It's telling you that the that the market you know, doesn't understand the dividend relative to your earnings power. Why not get to a more appropriate level And then if you get fully invested, you can start to take it back up from there. Christian Oberbeck: Well, Casey, I think, you know, obviously, the the the question of the dividend earnings is something that we evaluate at at all times, and I think your question is is is is a very good question. Again, I think that we are looking at a you know, we we we kinda wanna balance the short term with the long run. And, we feel that, you know, yes, rates may come down, but but deal volumes may be going up. And we have had periods where we've deployed what what we've had quarters spike. We've been Well over a hundred million dollar quarters. Yeah. Sure. Yeah. I mean, we've had quarters where we've deployed a 100,000,000. And and and and then the question, what is the net investment look like? So so we we feel like we're not that far off of being able to get close that gap. It it and and and for for a variety of of reasons, But you know, obviously, it's something we evaluate at all times, and we also have spillover. And so, as a result of, the spillover, there's there's really, you know, no no particular, need to cut the dividend relative to our spillover requirements. Right now. And so, so so all those things considered, we think we're kind of in a moment where it makes sense to, to to hang in there. And I think, depending how deal volumes play out, going forward, you know, we think we have a very good chance of closing that gap. And, and then, you know, all things being equal, you know, we we'd prefer to maintain our dividend. Casey Alexander: Right. Thank you for taking my questions. Operator: Thank you. One moment for our next question. Our next question comes from the line of Robert James Dodd from Raymond James. Robert James Dodd: Hi, guys. Following up from some of Casey's questions. I mean, the the the comment I think that Mike made was you expect these these CLO debt tranches to be a more significant part of the investment strategy going forward. I mean, how much of the overall portfolio should we contemplate that strategy reaching over the next, you know, twelve months, give or take? Michael Joseph Grisius: Well, I think that, you know, again, we're very cautious about predicting, you know, in in calls like this. I think when Mike said that, I think he was referring to the fact we find it a very attractive, investment category. And so we're so you know, we're we're open to deploying significantly more. We're not projecting doing doing more than that. I think right now, Henri, we're, like, around 5%. You know? And we would be comfortable being, you know, larger know, may maybe twice that much. I we don't know. But, I mean, we haven't we haven't made those determinations. We as as as with everything, we we kind of make our investments, you know, you know, individual credits at a time. There's some you know, seasonality, I guess you'd call it, with with the this marketplace. Like, you know, at certain types of the the year, there's relatively more supply than others And and so, and then depending on the demand versus the supply, there can be some very attractive purchases like we had in in the July time frame. And so we're we're we're trying to be opt you know, opportunistic with with regard to this strategy. We feel very comfortable that it's a very solid, proven strategy, maybe not so much in the BDC landscape as we discussed with with Casey. But, again, I think the mistakes in the BDC landscape was was was going with the equity, not the not the not these I you know, essentially, investment or just below investment grade. Tranches. So so so, again, we find it an attractive investment class, but we don't have a hard target, to to get to our hard allocation. We just know, we're we're just evaluating deploying capital in this as the opportunities arise relative to our regular core, you know, private, credit business. Robert James Dodd: Got it. Got it. Yeah. I mean, just just one additional thing. I don't think I I I double B CLO tranche necessarily classified as a first lien on scheduled investment. Since it's it's well above the equity, but it's well down from the top of the stack. But that's that's that's neither here nor there. The other question And we and and and and, Robert, yeah. Sorry. This is Henri. And we obviously disclose it as part of our structure finance products Yeah. Category. So we do clearly separate it in the in all the disclosures. The the most, Rob, I can't help but add this one thing because we don't wanna get into too much of a sales pitch around it. But just as we've evaluated, as you can imagine, one of the things that makes us really attracted to to those securities is that they've held up historically very well even in stressed environments. The the that that particular tranche of securities where it resides is has really held up well over time. Robert James Dodd: Yeah. On on on the CLO, just to I mean, the the prior history of CLO equity has obviously been a disaster in the space. There are other highly credible players that that do invest in in the debt tranches and I don't think it's been viewed too unfavorably so long as it's not too big a piece of the portfolio. But but that's that's so I appreciate all all all all the color there. On the the the one concern I have not about you guys, but, Mike, on your your comment that the large market participants coming down and they're ass essentially offering you know, large market covenants to small company deals. Know, if the m and a market picks back up, you know, maybe to to your comments, you know, maybe they move back up market. What's the risk in your view that that you know, these small companies now and and their advisers have now gotten a sniff of those simpler easier covenants. What's the risk they hold out for those even if the large market participants move back up, and you end up with a fight with some of your normal competitors but some of them cave on the covenant. Side. Michael Joseph Grisius: Well, I think there's always risk that you have a competitor who offers irrational terms and and under prices risk or under, you know, poorly structures risk, We've managed through that historically. I've been in this market for so long through so many cycles. I've seen this movie before, and usually what happens is they get they stub their toe or or worse than stub their toe. Mhmm. And they get some discipline. And I could tell you that being at this end of the market, the way we structure deals, the way we underwrite deals is you know, we're we're very confident is the is the right way to do it. So know, I think in the intermediate to long run, you know, we'd feel like, one, it doesn't make a lot of sense for much larger balance sheets to be trying to deploy capital that inefficiently so it's not likely that they'll stay there. We've certainly seen that pattern in prior cycles. Then the second thing is, you know, if you structure deals that way aggressively in our end of the market, it's generally not gonna work out well. Robert James Dodd: I I I totally get you that. I agree It usually leads to stubbed toes, but that can take a while to for people to to realize that. You know, obviously I think yeah. No no doubt the way. You know? Michael Joseph Grisius: Yeah. We're we're gonna hold the line. I think the more important thing that we think about is just that as I mentioned before, it's such a massive market. Every time you go to know, kinda second tier city and you get to meet some of the accountants there or some of the brokers or business, you know, investment bankers that are kind of living in that market. There are new sources of deals that you find in in businesses that you otherwise wouldn't, and we're we're really doubling down our efforts there. So we feel confident that we'll find plenty of opportunities to do what we do best And as I said, we'll try to avoid those commoditized you know, overbanked processes and instead kinda do what we've done historically and we're starting to see that in our pipeline and and with some of the deals that we've closed recently. Robert James Dodd: Got it. Thank you. Operator: One moment for our next question. Our next question comes from the line of Christopher Nolan from Ladenburg Thalmann and Company. Christopher Nolan: Hi. Thanks for taking my questions. Henri, what's the spillover income for the quarter? Henri J. Steenkamp: The remaining amount is around about sort of a mid-2s, around $2.02 $32.50 a share at the moment. Christopher Nolan: Great. And then on the deck, it said the portfolio yields for the CLOs were 12.2%. Is that the GAAP yield? Or is the and is the cash yield materially different? Henri J. Steenkamp: So that is the yield on all of what we call our, you know, our CLO and CLO related instruments, Chris. So that includes for example, the F note that we have in our existing CLO It also includes the e note in our joint venture CLO. And then it includes all of these double B's and triple B's. So it's the blended weighted effective yield currently on all of that. Christopher Nolan: Great. Final question. And I appreciate the market commentary talking about the m and a market, and that's quite helpful. But I couldn't help you know, is I know that you guys have a large exposure to various software companies. And I guess my question really is, is AI reading starting to eat the lunch for a lot of these smaller software providers? And is that one of those sectors which, you know, could be under stress because of the encroachment of artificial intelligence. It's a very good question. It's something that we're very focused on with all of our underwriting. So yes, indeed, AI can affect a software company. It can can affect it in two ways. It can it can disrupt a a software company and and be a threat to it. In that it can, in some cases, allow a competitor to kinda enter the marketplace a little easier with fewer barriers to entry. In other cases, AI can be a really powerful enhancement to the value proposition of the software company. And that's something that we look at very, very carefully in our underwriting So when we're looking at the software companies that we underwrite, we're very much focused on and and talking to industry experts about what the exposure is, what the barriers to entry are, what the switching costs for a a product would be. And we're looking at companies that or businesses that generally have really high retention rates. Where the workflow is such an important part of of kind of daily use in a in the in the customer base where the the the product itself it's if it's an enterprise software product, it's kind of attached to the system of the of record for the entire industry. Things of that. Nature are things that we're looking at, and those are the types of deals we underwrite. So while we do have a lot of businesses that are operating in a SaaS, environment, we're incredibly selective around the businesses that we choose. We're still just like we are in our non-SaaS portfolio turning down way more deals than we're doing and we're reaching for those ones that know, that we feel have the most sustainable value and and certainly AI underwriting is a big part of what we evaluate as well. Christopher Nolan: Great. Final question. By the way, thank you for the detail. Final question. Given the upcoming debt maturities, and given the uncertain outlook for short-term rates, should we expect you guys to be utilizing the credit facilities to you know, refinance that? Henri J. Steenkamp: Know, I think one of the things we've worked really, really hard, Chris, is around flexibility on our balance sheet and our capital structure over the last years. So obviously, that is an option. But I think generally, you know, we you know, we we we tend to more look at the current capital structure that we have as one way. We still have a little bit time. We've got a lot of capital available as well, and we're gonna sort of assess it over the coming months on sort of how best to either repay or refinance some of maturities that we have coming up next year. It's a good question because it's obviously something we think about, but I think we what's really great is that we're we have so many different levers to pull as we have some of those maturities coming up in in addition to, of course, raising new capital. At the right time as well. Christian Oberbeck: And then just to further comment to that, I just so everyone on the call is is certain that that we we don't need to go outside to refinance anything coming out. Correct. We got we we we can cover it with and I think Henri's done a fantastic job, as he mentioned, on all this flexibility. So we've we've got a number of paths the the paths that Henri's mentioning going on are all paths, like, within the four corners of what we have already. We're not dependent on the capital markets, for for any of that. Christopher Nolan: That's it for me. Thank you very much. Christian Oberbeck: Thank you. Thank you. Operator: One moment for our next question. Our next question comes from the line of Mickey Schleien from Clear Street LLC. Mickey Schleien: Yes. Good afternoon, everybody. Actually, good morning. Few more questions from me. I appreciate your time. Maybe for Henri, you know, what strategies are you considering to perhaps get some of that cash out of the SBICs? For example, you know, could they pay the BDC a dividend? Henri J. Steenkamp: Yeah. There's actually a a couple of, options that we have. Again, flexibility that we have around our capital structure, Mickey. So firstly, yes, we have not taken out any of our reads, you know, undistributable reserves for quite a period of time, probably a couple of years now, maybe, like, eighteen months. And so you know, that's obviously something that's immediately available for us. To to take that cash out. We just haven't needed it. So, you know, it hasn't been a anything that we've had to do. And then secondly, you probably also noticed that in our SBIC three, we've only got $59 million of debentures drawn. But we've actually already got over $200 million of assets, which means we've prefunded you know, much of the assets, more than half of the assets that are currently in the SBA And the way you can do it by prefunding it, that allows you then to take out you know, the capital you know, because you've refunded the assets and it's already collateralized. So we actually have quite a lot of different levers to pull there to get the to get that cash out of the SBIC, and that's why we sort of view most of the cash that's in the SBIC is available for for general corporate purposes in the BDC, which is a good place to be in, obviously. Mickey Schleien: Yeah. Thanks thanks, Henri. And to follow-up, one of the three follow-ons that you made last quarter was Comfort Care, which was already a large position. Now it's even larger which always gives me indigestion. So I'm I'm curious what's attracting you to that portfolio company. Michael Joseph Grisius: That is a good question, and it's it's one that we love to talk about because it's such a such a great example of what we do. And the types of businesses that we find. So we did that deal and I I think, 02/2017. In support of one of our stronger sponsor relationships. Did a $10 million investment in a business that had, you know, a couple million dollars of EBITDA, let's say, in an end market that has absolutely terrific tailwinds you know, serving senior community for nonmedical home health. And a lot of seniors are are rather than going to nursing homes and other settings like that, they're they're aging in place. So they've got terrific tailwinds there. In a branded product that has just fantastic franchisor economics. I'm I'm sure you know when you look at a franchisor business model, they they generate really, really high free cash flow So since we've been in that business, not only has the core business grown incredibly successfully, but they've also and we've supported them with additional debt to undertake acquisitions that in turn have been very successful acquisitions that have augmented the platform in a way some of them not in the exact same business, but generally serving the senior community. With with also franchisor economics. So this is a business that is performing exceptionally well, and the only reason the sponsor hasn't sold it is they feel like they've got lots and lots of running room in it. We feel like where we sit on an LTV basis relative to the enterprise value is really, really comfortable. So we were delighted to have an opportunity to upsize the investment. Although, you know, we we obviously take that very seriously and and monitor the that very carefully because it is significant exposure we think where we are relative to the enterprise value of of that business and how it's performing and how closely we monitor it
Operator: Welcome to the Dustin Q4 presentation for 2024, 2025. During [Operator Instructions] Now I will hand the conference over to the CEO, Johan Karlsson; and CFO, Julia Lagerqvist. Please go ahead. Johan Karlsson: Thank you, operator, and a warm welcome to this Q4 presentation from Dustin Group. And as you heard, Julia and myself, Johan Karlsson is here to present that to you. If we start with some summary of the Q4 numbers on Slide 2. As in the last quarter, sales was affected by a weak but stabilizing market with continued general cautiousness by the customers mainly in the smaller customer groups. In the quarter, we saw some positive development in LCP, where the market, primarily in the Nordics, is stabilizing. Sales in the quarter was SEK 5.056 billion, representing an organic growth of 3.6%. The organic growth in the SMB segment was negative 6.3%. However, this number in SMB was affected by a retroactive change in accounting treatment. And without the correction, organic growth was negative 2.2%. LCP showed strength and reported an organic growth of 7.0%, mainly driven by the Nordics, where the market has been stronger. In the Benelux region, market continues to be difficult, but due to some large new contracts in Belgium, we saw growth even there. Gross profit ended at SEK 642 million compared to last year's SEK 644 million. Gross margin was at 12.7% compared to last year's 12.9%. Gross margin in the quarter is seasonally low due to high share of public sales in Q4. As market continues to be slow in the Netherlands, the margins have continued to be under pressure also in Q4. Adjusted EBITA came in at SEK 83 million compared to SEK 28 million last year with an EBITA margin of 1.6% compared to last year's 0.6%. And cash flow from operating activities was negative SEK 73 million compared to last year's negative SEK 355 million. Leverage at the end of the quarter was 4.3, which is in line with Q3 and compared to the end of last year was 4.0. If we look at operational highlights for the quarter, we can conclude that the previously announced efficiency measures are fully implemented and that the cost savings from that is around SEK 200 million. We are currently implementing the strategic changes that we announced in Q3 with long-term profitability improvements. And we have updated our sustainability targets and aligned them with the science-based target initiative. If we look at the sales growth a little bit more in detail on Slide 3. As I said before, the market is stabilizing, and we can see some signs of recovery. However, the pattern is not the same as in previous downturns in the market. As you can see in this slide, looking at the solid black and brown curve, the normal pattern is that SMB is coming back to growth earlier than LCP. This time, however, we see the larger customers moving ahead of the small. This is due to the fact that the stabilization and return of the market is fueled by the change of Windows 10 to 11 and not by change in economic or geopolitical sentiment. The trend of exchange of Windows is so far mainly driven by the larger organizations. Further to that, we see that the larger customers are starting to replace old equipment at faster rate than the smaller. All in all, this result in a stronger market for the larger customers than the smaller. With that said, let's move to Slide 4 and a look at the operational efficiency initiatives. Julia? Julia Lagerqvist: Thank you, Johan. Moving to Page 4, and looking at the cost development in the quarter, we see as in previous quarter that the reorganization and our cost efficiency measures have had a clear positive effect in the quarter compared to last year. Overall, SG&A expenses decreased by 6.3% in the quarter. This was positively impacted by ForEx, and excluding this, the cost decreased 4.6%. The effect is slightly less than in previous quarters as we had some positive one-off effects last year, plus that we have in general less consultants and temp staff over summer, so the saving there becomes more. The cost efficiency program is now completed with annual savings of close to SEK 200 million. The main driver is less personnel. Looking at the FTEs, we see that we have reduced FTEs by 225 or 10% versus the same quarter last year. And if we go back 2 years, the total increase is 13%, a solid reduction in workforce. In addition, there has been a reduction in number of consultants and temporary staff, plus reduced number of offices contributes to the savings. Then we move to the overview of the SMB segment on Page 5, where sales landed at SEK 1.2 billion or 7.9% below last year. However, as Johan said, the quarter was affected by the year-to-date retractive change in accounting treatment regarding net revenue recognition related to software and this lower net sales. Excluding this effect and the ForEx effect, the decline in sales was 2.2%. As Johan mentioned, in this quarter, we see some signs of stabilization, but overall, the market remained tentative due to the ongoing economic uncertainty. From a geographic point of view, Sweden and specifically Norway performed well, while Denmark and Netherlands were the main drivers of the decline. Looking at product mix, we saw that the share of software and services sales decreased down to 10.4%, but this was mainly due to the mentioned retractive change in accounting treatment. The increase in the gross margin improved versus both last year and the previous quarter. And the improved cost base from the cost saving program protected the segment result, which increased to SEK 34 million versus SEK 9 million last year despite the lower volumes. And all in all, the segment margin ended at 2.9%, which was an improvement versus last year at 0.7%, obviously coming from a low base. Note that last year was negatively affected by a one-off posting related to COGS on managed services of SEK 13 million. Going to Page 6, we look then at the LCP, the large corporate and public segment. And the sales in LCP was SEK 3.9 billion in the quarter, plus 4.6% versus last year, and organic growth of 7%. So there was a continued large negative ForEx impact from the strengthen segment. Sales were also improved versus previous quarter. Growth was mainly driven by the increased demand in the Nordics stemming from the demand of Windows 11, as Johan was just talking about. The economic uncertainty still impacted the market development, mainly evident in the Netherlands, where we also saw heavy price competition. On the other hand, Belgium showed continued strong growth as in previous quarter due to some large new agreements, and Finland also continued to show solid growth after a tough year. As I said before, we do see a large volatility in sales between quarters in LCP. Gross margin decreased versus previous year. The increased price pressure in the Netherlands on diminishing volume had a negative effect. We also saw continued effects from larger contracts with lower margin. On the opposite, margin in the Nordics was slightly improving helped by country mix. On a global level, there was a negative customer mix with a larger share of public customers versus last year from -- which then have a lower average margin, and this had a negative impact on the margins. We continue to see increase in takeback, which had positive impact on both margin and EBITDA and we also saw positive development in our private label business. The improved cost structure, mainly thanks to the restructuring program had a positive impact on bottom line. And overall, this led to a segment result of SEK 80 million versus SEK 53 million last year, and margin ended at 2.1% versus 1.4% last year. We note that last year was also impacted by a nonrecurring cost of SEK 21 million. Moving then to look at the cash flow and CapEx on Slide 7. We see that the cash flow for the period was minus SEK 1.2 billion. This mainly driven then by the repayment of loans after the rights issue, where the proceeds from the rights issue came in the end of Q3. Looking at details, we see the cash flow from operating activities before change in net working capital was SEK 150 million plus, which was an improvement versus previous year, mainly driven by the improved operational result, but also a better tax position. Cash flow from change in net working capital was minus SEK 188 million, which was still better than last year. We normally have a negative seasonality effect in Q4 with purchases earlier in the quarter and not rollout at the end of August. We look more at net working capital on the next slide. In total, operating cash flow was minus SEK 73 million in the quarter. And the cash flow from financing activities was, as said, impacted by the repayment of loans. Looking at CapEx, we see that the total investment in the quarter was SEK 52 million, of which SEK 36 million affected cash flow. This is mainly linked to IT development investments. Investments intangible assets was SEK 15 million this year, of which only SEK 2 million was affecting cash flow. The noncash items are mainly lease contracts. Investments related to services was SEK 4 million compared to last year at SEK 23 million, and none of it affecting cash flow. Coming then to Page 8, we look at the net working capital development. Net working capital landed at SEK 477 million higher than last year at SEK 170 million and also an increase of the previous quarter. Inventory levels increased versus previous year, now at SEK 1,086 million. This is mainly linked to Benelux and customer-specific inventory but somewhat lower sales than expected. It is slightly below previous quarter, but clearly above our target levels, and we have a clear target to reduce going forward. Accounts receivables increased versus last year, impacted by invoicing the larger contracts in Benelux at the end of the quarter. There is, as said, a normal negative seasonality to accounts receivables and payables in Q4 as we get goods in early in the quarter for configuration, and have large rollout at the end of the quarter. And this was more visible this year with large sales volumes with specific customers. As I said before, we always have some timing effects in the quarters, but our long-term target remains to be around minus SEK 100 million. And with that, I hand back the word to, Johan. Johan Karlsson: Thank you, Julia. And now we're moving to Slide 9 and our plan to sharpen our strategic focus in order to increase profitability. There has been a high pace of change in order to strengthen the efficiency in Dustin during the last year. And there, you can say we have implemented the new organization structure around the value chain with offering sales and delivery and support functions enabling higher pace of execution of the strategy. We have reduced the organization with approximately 200 positions and some office locations, reducing costs by approximately SEK 200 million. We have also continued to transform our business toward more business customer focus, and by that announced that we will close down the consumer business. At the same time, we are focused on our standard services on all our markets. In order to gain scale, we are moving to a European offering in all markets, driving a stronger relationship to partners and vendors. And last but not least, we're continuing to use emerging technologies to drive process efficiency and automation. With that said, we can move to Slide 10, where we go through a little bit of the changes that we have done in the sustainability -- on the sustainability area. On this slide, we have made a summary of updated sustainability targets. So the climate targets have been approved by science-based target initiative. This means that we have climate targets for 2030 and 2050. We have also circularity targets as social impact targets for 2030. For 2030, our targets for climate is to reduce the Scope 1 and 2 emissions by 50%. And for Scope 3, the target is to reduce the CO2 intensity by 51.6%. For circularity, our target is to increase revenue per kilo of new raw material by 20%, and for social impact, the target continues to be the implementation of 100 initiatives across [indiscernible]. And with that said, let's move to Slide 8 and a summary of the quarter. So in summary, Q4 quarter was a quarter where we saw continued market stabilization and where we achieved 3.6% organic growth. Nordics showed the stronger performance in the Benelux and the quarter. Gross margin at 12.7% compared to last year's 12.9%, was affected by higher share of public sales and by the price competition in the Netherlands. Adjusted EBITA margin at 1.6% was up from last year, 0.6%, driven by the finalization of the efficiency program delivering approximately SEK 200 million of savings annually. During the quarter, we concluded the efficiency measures, as mentioned before, saving approximately SEK 200 million on a yearly basis. We also continued the strategic focus announced in Q3 with the closing of the consumer business and the focus on standardized services. Further to that, as we've just heard, we have updated our sustainability targets to align with the market development and customer requirements. And with that, the formal presentation is concluded, and we can move to Q&A. Operator: [Operator Instructions] The next question comes from Jesper Stugemo from Handelsbanken. Jesper Stugemo: So I have a couple here. My first one is related to LCP as the main driver. In this quarter, do you have any feeling from the SMB side where they are in the approach to renew their hardware? Are they looking more to like extend security upgrades for an additional year rather than upgrading to new hardware? Or what is your feeling there? Johan Karlsson: My feeling is that we don't look at additional time from -- having purchasing more time. It's rather -- they are a bit slower out in the process, let's say. So we don't see a lot of purchasing of prolongations. Jesper Stugemo: All right. And with the LCP picking up here, do you see that we will enough volumes from this refresh cycle to increase their refurbishing to actually give some upside on the margin as well already in this new fiscal year? Johan Karlsson: I think we will see that effect during the year because as the renewal starts to kick in, exactly like you say, also, let's say, the takeback will kick in because most of these customers are on that type of contracts. So it is our ambition to continue to increase the takeback in line with the, let's say, new sales of PCs. Jesper Stugemo: All right. And in Finland here, we saw some good sales momentum up year-on-year. What trends do you see in the market? This has been quite slow in the last year? Is this mainly related to the negative trends have bottomed out? Or do you actually see a healthier market that customers are waking up and they're more active or... Johan Karlsson: Yes. I would say that we are seeing customers waking up or getting more money because in Finland, we are relatively high in the public sector sales. So it means that the public budgets are of great importance. And here, you could see that primarily, let's say, police and military have very good budgets at the moment, so they can actually boost purchasing of IT equipment. Jesper Stugemo: All right. So police and military is the main driver here in Finland, I guess. Johan Karlsson: They are for sure, important parts of that. But I would say in Finland, in general, it seems like the public budgets are a bit more generous this year compared to last year, which affects us. Jesper Stugemo: All right. All right. And -- just the last question here on the FTE side, down 10% year-on-year, but do you see a need to recruit more people now when LCP looks to be turning a little bit better? Johan Karlsson: I don't think there is a direct need to recruit people because it -- we also work with, let's say, efficiency on the other side. So our ambition is to more or less remain while the volume is going up, up, of course, there will be areas where we need to strengthen a bit, but it's not a direct relationship between, let's say, volume increase and more people. Operator: The next question comes from Daniel Thorsson from ABG Sundal Collier. Daniel Thorsson: A question on LCP here in Q4. Did you see any larger deliveries in the quarter, especially related to the end-of-life support on Windows 10 that could cause a setback in Q1? Or should we expect these levels to continue recovering in LCP ahead? Johan Karlsson: I don't think we saw kind of one-offs that immediately has a negative effect on Q1. But obviously, we are depending on customer continuing to exchange going forward to maintain the volumes that we have. But nothing on, let's say, a one-off churn in that case. Daniel Thorsson: I see, I see. And then secondly, a more long-term question on your financial targets, you are targeting 6.5% margin in SMB, 4.5% in LCP, which is already next year, which obviously nobody believes in right now. But my question is rather, if those levels are achievable longer term in your view? Or has anything changed structurally in the market over the last 2, 2.5 years, that make those levels harder to get closer longer term in your view? Johan Karlsson: In our view, it has not changed anything. It -- obviously, with a declining market, it's very hard to reach them. But over time, with a more positive market, I don't see any reason why we should not be able to get to these levels going forward. Daniel Thorsson: Okay. I see. That's fine. And then finally, on cash flow, do you expect working capital to recover already in Q1 and be significantly better? Julia Lagerqvist: We do, I mean like I said, we have a clear target to improve on our inventory levels. And we also normally if you look historically, we normally have a better position when it comes to accounts payables and receivables in Q1 versus Q4. Operator: The next question comes from Mikael Laséen from DNB Carnegie. Mikael Laséen: Yes. I have a question about the Netherlands. That country remained challenging. And I was wondering if you could elaborate on the competitive landscape there, the price competition, and -- if you see any signs of improved tender activity or pricing pressure? Johan Karlsson: Yes. Let's start with the competitive landscape. I would say that Netherlands is a country where many of the large European and U.S. resellers exist, let's say, they are in that market -- that was for CDW, that goes from computer center, Bechtle and a few more. There is also a few local players but smaller. So it's -- I would say, like in many areas in the Netherlands, it's a very fierce competition. And that has an impact when the market is slow because then that competition really comes out in price competition. So that's what we have seen lately. Mikael Laséen: Okay. And when it comes to this market situation, then triggering this fierce competition, what -- I mean, the leading indicators are you looking at? And what trends are you seeing there? And how should we think about the coming couple of quarters? Johan Karlsson: I think the -- if you look at the overall underlying market trends that will drive a more positive market, which we talk about is the Windows Exchange. It's the AI PCs, and it's the age of the let's say, PC or IT equipment at our customer site. I think they are the same in the Netherlands as they are in the Nordics. So our expectations is that over time, the market also in the Benelux will come to a situation similar to the ones in the Nordics. And in normal cases, when that happens, that the price competition goes down a bit because volumes are better. And that's our expectation this time as well. Mikael Laséen: Okay. So you're not seeing this Windows 11 Exchange or demand in the Netherlands. Johan Karlsson: We see it, but to a lesser extent and more mix compared to others. Mikael Laséen: Okay. And so what can you do during this time when the market is a bit softer, and like -- to the margins or your market share? Johan Karlsson: I think it's a very good question because that is exactly the question to ask what can you do in the current situation? And what we can do, we can add services, namely takeback and life cycle services to the hardware sales, which will improve the margin. So we can accept maybe a slightly lower margin on the hardware if we can also upsell with product near or life cycle services around the hardware that can help us. We can also add our own private label products in the mix in a tender, for example, which improves the margin. So we need to go back and work on all the basic stuff to improve margins. In parallel, we're trying to win the tenders, which will be won on a slightly lower margin level than before. Mikael Laséen: Okay. Great. And when it comes to this gross margin decline that we saw now in Q4, how much is attributed to Netherlands, specifically? And how much is mix and other things? Johan Karlsson: I think it's a combination of, you could say that a higher share of LCP sales than on an average quarter, and a part coming from directly from the Netherlands competition. If you could say that they are similar in size, I would say. Mikael Laséen: Okay. And in general, can you say something about the difference in gross margin between LCP and SMB, broadly speaking? Johan Karlsson: The difference is you could say that if the average is 15%, then as an example, I would say SMB is a couple of percentage points better, and LCP is a couple of percentage points lower. So it's that magnitude of difference. Mikael Laséen: Okay. Yes, that's helpful. Great. And just wondering here what's happened with the SMB side. It seems, I mean like the Nordic region is stabilizing a bit, I'm not sure what you're seeing there and why you have that weakness of minus 2% underlying growth, excluding reclassification. Johan Karlsson: Well, it's a bit mixed bag there. I think Julia was saying into that in the presentation. You could see that Norway and Sweden is doing relatively okay while Denmark and the Netherlands is poor. So the -- there is a bit of deviation between the countries in the SMB that nets out to the minus 2. So I'm not really sure what drives the Danish numbers to be perfectly honest, it's a market -- how the market -- we don't really have the market data for that, and that's clear, but... Julia Lagerqvist: I think it's related to that. I also see similar price pressure there as we've seen in the Netherlands and Benelux and... Mikael Laséen: Okay. Got it. Just also curious, if you we should think about this reclassification effect continuing in Q1 and Q2 as well? Or if this is behind us now? Julia Lagerqvist: It's the reclassification effect in this quarter was the full year-to-date effect. It was a largely -- it will be very minor in the coming quarters. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Johan Karlsson: Okay. Thank you very much for listening in and asking questions to the Q4 report presentation from Dustin. So thank you very much, and have a nice day.
Operator: Welcome to the Dustin Q4 presentation for 2024, 2025. During [Operator Instructions] Now I will hand the conference over to the CEO, Johan Karlsson; and CFO, Julia Lagerqvist. Please go ahead. Johan Karlsson: Thank you, operator, and a warm welcome to this Q4 presentation from Dustin Group. And as you heard, Julia and myself, Johan Karlsson is here to present that to you. If we start with some summary of the Q4 numbers on Slide 2. As in the last quarter, sales was affected by a weak but stabilizing market with continued general cautiousness by the customers mainly in the smaller customer groups. In the quarter, we saw some positive development in LCP, where the market, primarily in the Nordics, is stabilizing. Sales in the quarter was SEK 5.056 billion, representing an organic growth of 3.6%. The organic growth in the SMB segment was negative 6.3%. However, this number in SMB was affected by a retroactive change in accounting treatment. And without the correction, organic growth was negative 2.2%. LCP showed strength and reported an organic growth of 7.0%, mainly driven by the Nordics, where the market has been stronger. In the Benelux region, market continues to be difficult, but due to some large new contracts in Belgium, we saw growth even there. Gross profit ended at SEK 642 million compared to last year's SEK 644 million. Gross margin was at 12.7% compared to last year's 12.9%. Gross margin in the quarter is seasonally low due to high share of public sales in Q4. As market continues to be slow in the Netherlands, the margins have continued to be under pressure also in Q4. Adjusted EBITA came in at SEK 83 million compared to SEK 28 million last year with an EBITA margin of 1.6% compared to last year's 0.6%. And cash flow from operating activities was negative SEK 73 million compared to last year's negative SEK 355 million. Leverage at the end of the quarter was 4.3, which is in line with Q3 and compared to the end of last year was 4.0. If we look at operational highlights for the quarter, we can conclude that the previously announced efficiency measures are fully implemented and that the cost savings from that is around SEK 200 million. We are currently implementing the strategic changes that we announced in Q3 with long-term profitability improvements. And we have updated our sustainability targets and aligned them with the science-based target initiative. If we look at the sales growth a little bit more in detail on Slide 3. As I said before, the market is stabilizing, and we can see some signs of recovery. However, the pattern is not the same as in previous downturns in the market. As you can see in this slide, looking at the solid black and brown curve, the normal pattern is that SMB is coming back to growth earlier than LCP. This time, however, we see the larger customers moving ahead of the small. This is due to the fact that the stabilization and return of the market is fueled by the change of Windows 10 to 11 and not by change in economic or geopolitical sentiment. The trend of exchange of Windows is so far mainly driven by the larger organizations. Further to that, we see that the larger customers are starting to replace old equipment at faster rate than the smaller. All in all, this result in a stronger market for the larger customers than the smaller. With that said, let's move to Slide 4 and a look at the operational efficiency initiatives. Julia? Julia Lagerqvist: Thank you, Johan. Moving to Page 4, and looking at the cost development in the quarter, we see as in previous quarter that the reorganization and our cost efficiency measures have had a clear positive effect in the quarter compared to last year. Overall, SG&A expenses decreased by 6.3% in the quarter. This was positively impacted by ForEx, and excluding this, the cost decreased 4.6%. The effect is slightly less than in previous quarters as we had some positive one-off effects last year, plus that we have in general less consultants and temp staff over summer, so the saving there becomes more. The cost efficiency program is now completed with annual savings of close to SEK 200 million. The main driver is less personnel. Looking at the FTEs, we see that we have reduced FTEs by 225 or 10% versus the same quarter last year. And if we go back 2 years, the total increase is 13%, a solid reduction in workforce. In addition, there has been a reduction in number of consultants and temporary staff, plus reduced number of offices contributes to the savings. Then we move to the overview of the SMB segment on Page 5, where sales landed at SEK 1.2 billion or 7.9% below last year. However, as Johan said, the quarter was affected by the year-to-date retractive change in accounting treatment regarding net revenue recognition related to software and this lower net sales. Excluding this effect and the ForEx effect, the decline in sales was 2.2%. As Johan mentioned, in this quarter, we see some signs of stabilization, but overall, the market remained tentative due to the ongoing economic uncertainty. From a geographic point of view, Sweden and specifically Norway performed well, while Denmark and Netherlands were the main drivers of the decline. Looking at product mix, we saw that the share of software and services sales decreased down to 10.4%, but this was mainly due to the mentioned retractive change in accounting treatment. The increase in the gross margin improved versus both last year and the previous quarter. And the improved cost base from the cost saving program protected the segment result, which increased to SEK 34 million versus SEK 9 million last year despite the lower volumes. And all in all, the segment margin ended at 2.9%, which was an improvement versus last year at 0.7%, obviously coming from a low base. Note that last year was negatively affected by a one-off posting related to COGS on managed services of SEK 13 million. Going to Page 6, we look then at the LCP, the large corporate and public segment. And the sales in LCP was SEK 3.9 billion in the quarter, plus 4.6% versus last year, and organic growth of 7%. So there was a continued large negative ForEx impact from the strengthen segment. Sales were also improved versus previous quarter. Growth was mainly driven by the increased demand in the Nordics stemming from the demand of Windows 11, as Johan was just talking about. The economic uncertainty still impacted the market development, mainly evident in the Netherlands, where we also saw heavy price competition. On the other hand, Belgium showed continued strong growth as in previous quarter due to some large new agreements, and Finland also continued to show solid growth after a tough year. As I said before, we do see a large volatility in sales between quarters in LCP. Gross margin decreased versus previous year. The increased price pressure in the Netherlands on diminishing volume had a negative effect. We also saw continued effects from larger contracts with lower margin. On the opposite, margin in the Nordics was slightly improving helped by country mix. On a global level, there was a negative customer mix with a larger share of public customers versus last year from -- which then have a lower average margin, and this had a negative impact on the margins. We continue to see increase in takeback, which had positive impact on both margin and EBITDA and we also saw positive development in our private label business. The improved cost structure, mainly thanks to the restructuring program had a positive impact on bottom line. And overall, this led to a segment result of SEK 80 million versus SEK 53 million last year, and margin ended at 2.1% versus 1.4% last year. We note that last year was also impacted by a nonrecurring cost of SEK 21 million. Moving then to look at the cash flow and CapEx on Slide 7. We see that the cash flow for the period was minus SEK 1.2 billion. This mainly driven then by the repayment of loans after the rights issue, where the proceeds from the rights issue came in the end of Q3. Looking at details, we see the cash flow from operating activities before change in net working capital was SEK 150 million plus, which was an improvement versus previous year, mainly driven by the improved operational result, but also a better tax position. Cash flow from change in net working capital was minus SEK 188 million, which was still better than last year. We normally have a negative seasonality effect in Q4 with purchases earlier in the quarter and not rollout at the end of August. We look more at net working capital on the next slide. In total, operating cash flow was minus SEK 73 million in the quarter. And the cash flow from financing activities was, as said, impacted by the repayment of loans. Looking at CapEx, we see that the total investment in the quarter was SEK 52 million, of which SEK 36 million affected cash flow. This is mainly linked to IT development investments. Investments intangible assets was SEK 15 million this year, of which only SEK 2 million was affecting cash flow. The noncash items are mainly lease contracts. Investments related to services was SEK 4 million compared to last year at SEK 23 million, and none of it affecting cash flow. Coming then to Page 8, we look at the net working capital development. Net working capital landed at SEK 477 million higher than last year at SEK 170 million and also an increase of the previous quarter. Inventory levels increased versus previous year, now at SEK 1,086 million. This is mainly linked to Benelux and customer-specific inventory but somewhat lower sales than expected. It is slightly below previous quarter, but clearly above our target levels, and we have a clear target to reduce going forward. Accounts receivables increased versus last year, impacted by invoicing the larger contracts in Benelux at the end of the quarter. There is, as said, a normal negative seasonality to accounts receivables and payables in Q4 as we get goods in early in the quarter for configuration, and have large rollout at the end of the quarter. And this was more visible this year with large sales volumes with specific customers. As I said before, we always have some timing effects in the quarters, but our long-term target remains to be around minus SEK 100 million. And with that, I hand back the word to, Johan. Johan Karlsson: Thank you, Julia. And now we're moving to Slide 9 and our plan to sharpen our strategic focus in order to increase profitability. There has been a high pace of change in order to strengthen the efficiency in Dustin during the last year. And there, you can say we have implemented the new organization structure around the value chain with offering sales and delivery and support functions enabling higher pace of execution of the strategy. We have reduced the organization with approximately 200 positions and some office locations, reducing costs by approximately SEK 200 million. We have also continued to transform our business toward more business customer focus, and by that announced that we will close down the consumer business. At the same time, we are focused on our standard services on all our markets. In order to gain scale, we are moving to a European offering in all markets, driving a stronger relationship to partners and vendors. And last but not least, we're continuing to use emerging technologies to drive process efficiency and automation. With that said, we can move to Slide 10, where we go through a little bit of the changes that we have done in the sustainability -- on the sustainability area. On this slide, we have made a summary of updated sustainability targets. So the climate targets have been approved by science-based target initiative. This means that we have climate targets for 2030 and 2050. We have also circularity targets as social impact targets for 2030. For 2030, our targets for climate is to reduce the Scope 1 and 2 emissions by 50%. And for Scope 3, the target is to reduce the CO2 intensity by 51.6%. For circularity, our target is to increase revenue per kilo of new raw material by 20%, and for social impact, the target continues to be the implementation of 100 initiatives across [indiscernible]. And with that said, let's move to Slide 8 and a summary of the quarter. So in summary, Q4 quarter was a quarter where we saw continued market stabilization and where we achieved 3.6% organic growth. Nordics showed the stronger performance in the Benelux and the quarter. Gross margin at 12.7% compared to last year's 12.9%, was affected by higher share of public sales and by the price competition in the Netherlands. Adjusted EBITA margin at 1.6% was up from last year, 0.6%, driven by the finalization of the efficiency program delivering approximately SEK 200 million of savings annually. During the quarter, we concluded the efficiency measures, as mentioned before, saving approximately SEK 200 million on a yearly basis. We also continued the strategic focus announced in Q3 with the closing of the consumer business and the focus on standardized services. Further to that, as we've just heard, we have updated our sustainability targets to align with the market development and customer requirements. And with that, the formal presentation is concluded, and we can move to Q&A. Operator: [Operator Instructions] The next question comes from Jesper Stugemo from Handelsbanken. Jesper Stugemo: So I have a couple here. My first one is related to LCP as the main driver. In this quarter, do you have any feeling from the SMB side where they are in the approach to renew their hardware? Are they looking more to like extend security upgrades for an additional year rather than upgrading to new hardware? Or what is your feeling there? Johan Karlsson: My feeling is that we don't look at additional time from -- having purchasing more time. It's rather -- they are a bit slower out in the process, let's say. So we don't see a lot of purchasing of prolongations. Jesper Stugemo: All right. And with the LCP picking up here, do you see that we will enough volumes from this refresh cycle to increase their refurbishing to actually give some upside on the margin as well already in this new fiscal year? Johan Karlsson: I think we will see that effect during the year because as the renewal starts to kick in, exactly like you say, also, let's say, the takeback will kick in because most of these customers are on that type of contracts. So it is our ambition to continue to increase the takeback in line with the, let's say, new sales of PCs. Jesper Stugemo: All right. And in Finland here, we saw some good sales momentum up year-on-year. What trends do you see in the market? This has been quite slow in the last year? Is this mainly related to the negative trends have bottomed out? Or do you actually see a healthier market that customers are waking up and they're more active or... Johan Karlsson: Yes. I would say that we are seeing customers waking up or getting more money because in Finland, we are relatively high in the public sector sales. So it means that the public budgets are of great importance. And here, you could see that primarily, let's say, police and military have very good budgets at the moment, so they can actually boost purchasing of IT equipment. Jesper Stugemo: All right. So police and military is the main driver here in Finland, I guess. Johan Karlsson: They are for sure, important parts of that. But I would say in Finland, in general, it seems like the public budgets are a bit more generous this year compared to last year, which affects us. Jesper Stugemo: All right. All right. And -- just the last question here on the FTE side, down 10% year-on-year, but do you see a need to recruit more people now when LCP looks to be turning a little bit better? Johan Karlsson: I don't think there is a direct need to recruit people because it -- we also work with, let's say, efficiency on the other side. So our ambition is to more or less remain while the volume is going up, up, of course, there will be areas where we need to strengthen a bit, but it's not a direct relationship between, let's say, volume increase and more people. Operator: The next question comes from Daniel Thorsson from ABG Sundal Collier. Daniel Thorsson: A question on LCP here in Q4. Did you see any larger deliveries in the quarter, especially related to the end-of-life support on Windows 10 that could cause a setback in Q1? Or should we expect these levels to continue recovering in LCP ahead? Johan Karlsson: I don't think we saw kind of one-offs that immediately has a negative effect on Q1. But obviously, we are depending on customer continuing to exchange going forward to maintain the volumes that we have. But nothing on, let's say, a one-off churn in that case. Daniel Thorsson: I see, I see. And then secondly, a more long-term question on your financial targets, you are targeting 6.5% margin in SMB, 4.5% in LCP, which is already next year, which obviously nobody believes in right now. But my question is rather, if those levels are achievable longer term in your view? Or has anything changed structurally in the market over the last 2, 2.5 years, that make those levels harder to get closer longer term in your view? Johan Karlsson: In our view, it has not changed anything. It -- obviously, with a declining market, it's very hard to reach them. But over time, with a more positive market, I don't see any reason why we should not be able to get to these levels going forward. Daniel Thorsson: Okay. I see. That's fine. And then finally, on cash flow, do you expect working capital to recover already in Q1 and be significantly better? Julia Lagerqvist: We do, I mean like I said, we have a clear target to improve on our inventory levels. And we also normally if you look historically, we normally have a better position when it comes to accounts payables and receivables in Q1 versus Q4. Operator: The next question comes from Mikael Laséen from DNB Carnegie. Mikael Laséen: Yes. I have a question about the Netherlands. That country remained challenging. And I was wondering if you could elaborate on the competitive landscape there, the price competition, and -- if you see any signs of improved tender activity or pricing pressure? Johan Karlsson: Yes. Let's start with the competitive landscape. I would say that Netherlands is a country where many of the large European and U.S. resellers exist, let's say, they are in that market -- that was for CDW, that goes from computer center, Bechtle and a few more. There is also a few local players but smaller. So it's -- I would say, like in many areas in the Netherlands, it's a very fierce competition. And that has an impact when the market is slow because then that competition really comes out in price competition. So that's what we have seen lately. Mikael Laséen: Okay. And when it comes to this market situation, then triggering this fierce competition, what -- I mean, the leading indicators are you looking at? And what trends are you seeing there? And how should we think about the coming couple of quarters? Johan Karlsson: I think the -- if you look at the overall underlying market trends that will drive a more positive market, which we talk about is the Windows Exchange. It's the AI PCs, and it's the age of the let's say, PC or IT equipment at our customer site. I think they are the same in the Netherlands as they are in the Nordics. So our expectations is that over time, the market also in the Benelux will come to a situation similar to the ones in the Nordics. And in normal cases, when that happens, that the price competition goes down a bit because volumes are better. And that's our expectation this time as well. Mikael Laséen: Okay. So you're not seeing this Windows 11 Exchange or demand in the Netherlands. Johan Karlsson: We see it, but to a lesser extent and more mix compared to others. Mikael Laséen: Okay. And so what can you do during this time when the market is a bit softer, and like -- to the margins or your market share? Johan Karlsson: I think it's a very good question because that is exactly the question to ask what can you do in the current situation? And what we can do, we can add services, namely takeback and life cycle services to the hardware sales, which will improve the margin. So we can accept maybe a slightly lower margin on the hardware if we can also upsell with product near or life cycle services around the hardware that can help us. We can also add our own private label products in the mix in a tender, for example, which improves the margin. So we need to go back and work on all the basic stuff to improve margins. In parallel, we're trying to win the tenders, which will be won on a slightly lower margin level than before. Mikael Laséen: Okay. Great. And when it comes to this gross margin decline that we saw now in Q4, how much is attributed to Netherlands, specifically? And how much is mix and other things? Johan Karlsson: I think it's a combination of, you could say that a higher share of LCP sales than on an average quarter, and a part coming from directly from the Netherlands competition. If you could say that they are similar in size, I would say. Mikael Laséen: Okay. And in general, can you say something about the difference in gross margin between LCP and SMB, broadly speaking? Johan Karlsson: The difference is you could say that if the average is 15%, then as an example, I would say SMB is a couple of percentage points better, and LCP is a couple of percentage points lower. So it's that magnitude of difference. Mikael Laséen: Okay. Yes, that's helpful. Great. And just wondering here what's happened with the SMB side. It seems, I mean like the Nordic region is stabilizing a bit, I'm not sure what you're seeing there and why you have that weakness of minus 2% underlying growth, excluding reclassification. Johan Karlsson: Well, it's a bit mixed bag there. I think Julia was saying into that in the presentation. You could see that Norway and Sweden is doing relatively okay while Denmark and the Netherlands is poor. So the -- there is a bit of deviation between the countries in the SMB that nets out to the minus 2. So I'm not really sure what drives the Danish numbers to be perfectly honest, it's a market -- how the market -- we don't really have the market data for that, and that's clear, but... Julia Lagerqvist: I think it's related to that. I also see similar price pressure there as we've seen in the Netherlands and Benelux and... Mikael Laséen: Okay. Got it. Just also curious, if you we should think about this reclassification effect continuing in Q1 and Q2 as well? Or if this is behind us now? Julia Lagerqvist: It's the reclassification effect in this quarter was the full year-to-date effect. It was a largely -- it will be very minor in the coming quarters. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Johan Karlsson: Okay. Thank you very much for listening in and asking questions to the Q4 report presentation from Dustin. So thank you very much, and have a nice day.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Resources Connection, Inc. conference call. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I would like to remind everyone that management will be commenting on results for the first quarter ended August 30, 2025. They will also refer to certain non-GAAP financial measures. An explanation and reconciliation of these measures to the most comparable GAAP financial measures are included in the press release issued today. Today's press release can be viewed in the Investor Relations section of RGP's website and filed today with the SEC. Also during this call, management may make forward-looking statements regarding plans, initiatives and strategies that the anticipated financial performance of the company. Such statements are predictions and actual events or results may differ materially. Please see the Risk Factors section in RGP's report on Form 10-K for the year ended May 31, 2025, for a discussion of risks, uncertainties and other factors that may cause the company's business, results of operations and financial condition to differ materially from what is expressed or implied by forward-looking statements made during this call. I'll now turn the call over to RGP's CEO, Kate Duchene. Kate Duchene: Thank you, operator, and welcome, everyone, to RGP's Q1 earnings call. We continue to make progress in evolving the company to become more integrated, diversified and resilient. While the global macro environment remains uncertain, disrupted and slow moving for professional services, we are working aggressively to evolve the business to be well positioned for the upturn. Our activities are producing meaningful progress, which I'll highlight. In Q1, we delivered results better than our outlook for all measures. Revenue was above our outlook range. Gross margin was significantly better and SG&A also came in better than our outlook. As a result, we achieved more profit than expected by a significant amount. While we have more work to do, we have a clear plan to delivery and enhanced value creation. Several parts of the business are growing, and I want to highlight those. Europe and Asia Pac achieved a solid quarter, delivering 5% growth and have built a strong pipeline for Q2. Japan and India delivered growth in Q1, again with solid momentum moving into Q2. Revenue from our top 10 clients also grew year-over-year, reflecting the global transformation and transaction work happening in the very large company client segment. Countsy grew in Q1 and is busy with strong proposal activity in Q2. Bhadresh and Jenn will share more details about our progress, especially around double-digit bill rate improvements in our Consulting segment, increasing deal size and pipeline momentum. These are the indicators that we closely monitor to track our continued progress against our strategic goals. We are engaged in our transformation to deliver more for our clients and colleagues while improving return for our shareholders. We are transforming purposefully to increase our addressable market while becoming known for a focused set of solutions. We've taken the company from a professional staffing organization to a diversified platform, combining on-demand talent with consulting and outsourced services. We are focused on 2 critical solution areas across all delivery models, CFO advisory and digital transformation. These services are relevant to every business today, large and small. In these areas, we help our clients drive transformation from strategy through to execution by providing heightened value and impact. Our unique value proposition is built on 5 key differentiators. First, we bring agility, expertise and experience. Unlike Big 4 and large consultancies, we deploy skilled analytical consultants paired with highly experienced professionals who can plug into client teams quickly without the heavy overhead, long time lines or rigid methodologies. Clients value this model when they need execution and results fast, not just advisory. Also, our global talent network is unmatched. Our experienced professionals tend to be mid- to senior level practitioners with 10 to 20-plus years of experience, who have worked in industry, not just consulting and have operated in our clients' seats. This makes them credible to client teams immediately. Second, our diversified services model is a strength. We serve clients across consulting, professional staffing and managed solutions or outsourcing, giving clients flexibility in how they engage. Few firms combine all 3 effectively, especially on a global stage like ours. Clients increasingly want more choice, including blended delivery teams that can operate around the world. In addition, with the U.S. changing the H-1B availability and cost model, our global delivery centers in India and Asia Pac allow us to quickly access outstanding global talent without extra complexity or cost. Third, our focus on CFO advisory and digital transformation is right on target for the next several years. We specialize in the high-demand areas of finance transformation, including AI and data, risk and compliance, transaction integration, supply chain optimization, digital and cloud transformation. This is a sweet spot where clients need both deep functional expertise and execution support. Our pipeline of opportunities is growing in the digital finance, ERP and data space, and we expect that to continue. We have accordingly upskilled our talent communities to deliver the specialized skills clients need today. Fourth, our diversified model is scalable. Our clients can flex our team up or down depending on project demand. This gives clients more control over cost and outcomes compared with traditional consulting engagements. In today's macro environment, cost efficiency and flexibility are critical considerations for clients in making procurement decisions. The models of yesterday with large layered teams or inflexible playbook delivery are declining. This shift will play in our favor because we don't deliver services with layers of inexperienced generalists or juniors, often learning skills on the client's dime. We know that much of that work is being actively disrupted by automation and AI. RGP's sweet spot is in the delivery of consulting and on-demand specialized talent that embraces AI and automation to streamline, enhance and cost optimize the delivery of complex change and transformation work. We take pride knowing that when our clients demand teams and talent that have been in their shoes and have experienced the problems they face, we can quickly provide that solution anywhere in the world. In digital finance work, for example, our consultants work collaboratively with modern tools for automating, processing and analyzing, allowing focus to shift to capturing insights and designing innovative new processes and technical architectures that enable the use of these tools at scale. As the on-demand environment improves and clients are reintroduced to the capabilities of RGP today, we believe the market opportunity ahead is significant. The fifth differentiator is our client-centric approach. We partner to truly integrate with client teams. We do not engage as an external firm dictating solutions. Our model is designed to be collaborative, outcome-oriented and more cost-effective than large consultancies. As one client buyer from a $6 billion enterprise undergoing finance transformation recently shared, RGP is positively unique because you deliver strategy when I need it and specialized talent when I need it. You are a trusted partner for both types of services, providing greater control and efficiency as every day brings something new. Next, I want to comment on the qualitative aspects of our transformation as they are important to unlocking cross-sell and upsell opportunities in our exceptional client base. We are working more collaboratively across the enterprise as one RGP and are accelerating the integration of our consulting capabilities. The mindset and attitude of our organization has significantly changed to understand the importance of sales, delivery and talent working together. This mindset shift and accompanying behavioral changes are beginning to produce the right results. In sum, we're transforming to build a more stable and profitable business. The past 3 years have been volatile and disrupted, especially in the staffing market. During this time, we have been building our talent base and solutions to bring to market a new model of consulting that is more affordable, more flexible and more impactful. Larger consulting projects are already beginning to help us create stickier business and higher-level client relationships. This new playing field and approach will pay dividends quickly in an improving global environment. We're also building more outsourced services capabilities with Countsy as it fits into our diversification strategy and the CFO and digital agendas. Countsy is an outsourced finance and accounting service, combining automation, AI and highly specialized fractional CFO talent to serve startups, scale-ups and divested assets of larger enterprises and private equity firms. We are currently expanding our offerings to incorporate more AI and automation in these outsourced services, in turn, driving growth and longer-term revenue opportunity. We believe we will increase the market opportunity for Countsy in 2 ways: one, adding clients that are divested assets of larger enterprises or private equity portfolios; and two, by maintaining clients longer as they mature. Countsy is not just a solution for the start-up and scale-up stage, but a long-term solution for finance and accounting services for a broader range of clients. For example, Countsy's newest client base is AI, technology and fintech who want F&A as an outsourced solution long term. Countsy also delivers RGP's strongest operating margins, which will continue to benefit our consolidated results and drive shareholder value. Finally, I want to share an update on our cost structure, which we are actively redesigning to fit the current size and scale of the business, our current technology platform and our diversified services strategy. We are streamlining organizational structure, simplifying processes, embracing automation and AI and evaluating all functions to ensure they are strategically aligned to what we need today and where we're headed. We've made good progress in reducing our run rate SG&A, and we'll continue to do so at a meaningful level from a holistic point of view. We will report continued progress throughout the fiscal year as we fully optimize our technology investments to simplify process and drive efficiency. Jenn will share more on our cost structure improvements in a moment. In closing, we have a clear strategy we are executing to allow us to rebound quickly as the demand environment improves. We believe the improvements we are making in the business today will enable us to return to double-digit profitability. Our strengths, including our brand, people, client base, technology and flexible solutions will allow us to capitalize on the opportunities ahead, driving long-term shareholder value. With that, I'll turn it over to Bhadresh. Bhadresh Patel: Thank you, Kate, and good afternoon, everyone. We're pleased to report another quarter of progress in advancing our transformation strategy, positioning RGP at the intersection of professional staffing, consulting and outsourced services. Our flexible client-centric offerings continue to resonate with clients, supporting both their transformation and operational priorities. In the first quarter, we delivered results ahead of expectations on both revenue and gross margin. This performance reflects the ongoing stabilization of our operating model, stronger cross-practice collaboration, continued focus on value-based pricing within consulting and disciplined cost management. Together, these actions are driving stronger bottom line performance, which Jenn will cover in more detail shortly. Despite the still choppy demand environment that Kate referred to, our pipeline returned to growth during the quarter. Demand is strengthening across CFO advisory and digital transformation, directly aligned to client priorities around cost efficiency and process automation. This demand underscores the alignment between our sales organization and practice leaders and our positioning at the intersection of staffing, consulting and outsourced services. Europe and Asia Pac as well as outsourced services continue to deliver year-over-year growth. On-demand is stabilizing and consulting is building pipeline while achieving higher bill rates. We are making targeted investments in leadership and services to further accelerate this momentum. With that, let me turn to our performance by segment. Our Consulting segment revenue declined year-over-year, but we did achieve revenue growth in a few areas, including ServiceNow, project and change management and our federal digital offerings. Additionally, we saw a meaningful improvement in bill rates and utilization compared to same quarter last year. And importantly, we're achieving notably higher bill rate increases on new projects. This validates client demand for our specialized solutions, supports our value-based pricing initiative and contributed to the gross margin improvement year-over-year. In addition, stronger collaboration between our sales and consulting teams is expanding the pipeline with larger, more strategic transformation opportunities, particularly in our focus areas of CFO advisory and digital transformation, as Kate mentioned. These areas remain directly relevant to client priorities, but the longer sales cycles and slower project starts in the current environment often translates into elongated revenue conversion. While this impacts near-term quarterly revenue, we believe these engagements represent durable demand that over time will translate into meaningful opportunity at increasingly higher margins. Notable wins this quarter include execution of a technology strategy across multiple work streams for a Fortune 500 financial services company, a master data management implementation for a multibillion-dollar food processing company and employee experience modernization for a large multinational technology company. On the pipeline side, we added several significant opportunities, including global program management support for a Fortune 500 energy company's finance transformation, stabilization pods for cutover support and data validation for a complex best-in-breed ERP and data platform deployment for a large energy distributor and transformation advisory and implementation support of the source-to-pay function for an independent business unit of a FTSE 100 global consumer goods company. Many of these wins and pipeline additions are with clients we have historically served through our on-demand talent channel, which is a testament to our unwavering focus on the value of our integrated go-to-market strategy. Finally, on consulting, as announced in August, I'd like to welcome Scott Rottmann as our new leader for CFO Advisory. Scott will oversee finance transformation, risk assurance, tax and treasury and M&A offerings. He brings deep expertise from the Big 4 and MorganFranklin, a boutique transformation-focused consultancy with a proven track record of building practices and trusted teams and helping clients navigate complex transformation agendas. Turning to On-Demand. Revenue declined year-over-year, but is showing signs of stabilization over the first quarter with improved gross margins supported by moderate bill rate increases. After the expected seasonality of summer, the pipeline returned to growth in the quarter, driven by more net new opportunities and continued focus on extension management, pivoting away from operational accounting as these roles will continue to be replaced by AI and automation. We remain disciplined in pipeline management and qualification with a particular focus in the areas of ERP, finance transformation, data and supply chain, which are more relevant in today's marketplace. In addition, as we continue to build leadership and capabilities in consulting, we're increasingly positioning on-demand talent alongside consulting opportunities and engagements. This integrated approach not only strengthens client impact, but also creates revenue growth across our service lines. Moving to International. Our Europe and Asia Pac segment delivered solid first quarter year-over-year revenue growth. Europe and Asia led the way with revenue gains, higher run rates and stronger bill rates versus last year, underscoring the strength of client relationships and the effectiveness of our regional strategy. Growth in Europe and Asia Pac has been driven by a dual focus on deepening multinational client relationships and expanding our local client base. Demand for our CFO advisory and digital transformation offerings remain strong and our ability to combine local delivery with scalable global delivery centers continues to differentiate us. Together with SG&A management and ongoing optimization initiatives, these actions position us to maintain margins and sustain growth despite longer sales cycles and competitive dynamics. Lastly, on outsourced Services, we delivered year-over-year revenue growth with continued gross margin expansion. We added new clients to our platform while also exhibiting strong retention, while bottom line performance benefited from both operating leverage and disciplined cost management. While our outsourced services focus continues to be on start-up, scale-ups and spinouts, we are capitalizing on the broader venture funding environment by targeting venture-backed AI start-ups where demand is increasingly robust. At the same time, we are advancing our AI strategy to support a rapidly expanding client base with scalable technology-enabled solutions. This includes enhancing internal tools, evolving our go-to-market approach and exploring new delivery models such as AI-enabled accounting agents and innovative pricing structures. To conclude, we remain focused on disciplined execution and delivering meaningful value for our clients as we wait for the demand environment to turn. With a diversified portfolio, strong client relationships and a winning strategy, we are positioning RGP for sustained long-term growth and profitability. With that, I'll now turn the call over to Jenn. Jennifer Ryu: Thank you, Bhadresh, and good afternoon, everyone. We delivered strong performance this quarter against our expectations. Revenue of $120.2 million, gross margin of 39.5% and SG&A expense of $44.5 million, all beat the favorable end of our outlook ranges. We also delivered improved adjusted EBITDA of $3.1 million or a 2.5% adjusted EBITDA margin. We're pleased to see the return to growth in revenue for both our Europe and Asia Pac segment and Outsourced Services segment with 5% and 4% growth over the prior year quarter. Revenue within the On-Demand and Consulting segments continued to be soft as the operating environment in the U.S. remains choppy. This quarter, our continued focus on the number and quality of client outreaches and meetings, pipeline management and cross-sell collaboration have yielded growth in the pipeline. Importantly, we believe the positive progress in our key operating metrics will lead to tangible improvement in revenue over time. Turning to profitability metrics. We achieved strong gross margin for the quarter at 39.5%, 300 basis points higher than the prior year quarter and significantly better than the high end of our outlook range. Contributing to the strong gross margin are: one, continued improvement in our average bill rate and expansion of the pay bill spread; two, significant reduction in employee benefit costs, including health care costs, holiday and paid time off; and three, strategic management of our bench consultants utilization. Enterprise-wide average bill rate increased to $120 constant currency from $118 a year ago. The improvement came despite the revenue mix weighing more towards the Asia Pac region. And of note, we saw an 11% improvement in average bill rate in consulting from $144 to $160. As we continue to execute our pricing strategy and move up the value chain to deliver higher value, larger-scale engagements, we expect more upside in bill rates, especially in the consulting business. Now on to SG&A. Our enterprise run rate SG&A expense for the quarter was $44.5 million, a 7% improvement from $47.7 million a year ago, primarily driven by lower management compensation expense and reductions in other G&A spend such as travel and occupancy. Subsequent to the quarter at the beginning of October, we further streamlined our organizational structure to rightsize leadership layers and headcount through a reduction in force. We expect approximately $6 million to $8 million of annual cost savings associated with this effort. Going forward, we will continue to pull the cost levers within our control to improve operating leverage. Next, I'll provide some additional color on segment performance. All year-over-year percentage comparisons for revenue are adjusted for business days and currency impact. And as a reminder, segment adjusted EBITDA excludes certain shared corporate costs. Revenue for our On-Demand segment was $44.4 million, a decline of 16% versus prior year. However, segment adjusted EBITDA improved to $4.4 million or a margin of 10% from $2.6 million or a 4.9% margin in the prior year quarter. The notable improvement is primarily driven by our cost reduction effort in this segment. Revenue for our Consulting segment was $43.6 million, a decline of 22% from the prior year. First quarter segment adjusted EBITDA was $5 million or an 11.6% margin compared to $7.8 million or a 14.1% margin in the prior year quarter. Turning to our Europe and Asia Pac segment. Revenue was $19.9 million, a 5% growth from the prior year quarter. Segment adjusted EBITDA was $0.8 million or a 4.2% margin, both up from $0.2 million and a 1.3% margin in the prior year. Finally, our Outsourced Services segment revenue was $10 million, up 4% compared to the prior year quarter. Segment adjusted EBITDA was $2.3 million or a 23.3% margin, up from $1.4 million or a 14.7% margin, driven by significant improvement in its gross margin as a result of more effective management of consultant utilization. Turning to liquidity. Our balance sheet remains pristine with $77.5 million of cash and cash equivalents and 0 outstanding debt. Quarterly dividend distributions totaled $2.3 million. With cash on hand, combined with available borrowing capacity under our credit facility, we will continue to take a balanced approach to capital allocation between investing in the business to drive growth and returning cash to shareholders through dividends and opportunistic share buybacks under our repurchase program, which had $79 million remaining at the end of the quarter. I'll now close with our second quarter outlook. Early second quarter weekly revenue run rate has been largely stable compared to the first quarter. We expect to maintain revenue stability through the second quarter while continuing to push forward the momentum in the sales pipeline. I'll also note that while we have very limited U.S. government exposure and therefore, are not materially impacted directly by our clients in the sector, the current government shutdown could lead to additional disruption in the operating environment. With that in mind and based on our current revenue backlog and expectations on late-stage pipeline deals, our outlook calls for revenue of $115 million to $120 million for the second quarter. On the gross margin front, we also expect similar trends to the first quarter with an outlook range of 38% to 39%, with Thanksgiving adding one additional holiday in the U.S. compared to Q1. Second quarter run rate SG&A expense is expected to be in a range of $43 million to $45 million, reflecting the benefit from our cost reduction efforts. Non-run rate and noncash expenses will be around $5 million, consisting primarily of noncash stock compensation and approximately $2 million of restructuring expense associated with the reduction in force. In closing, we continue to be laser-focused on improving our sales execution as well as driving an efficient cost structure to deliver more value even in this operating environment. As better economic clarity emerges for our customers and new business prospects, we will be well positioned for a return to consolidated growth accompanied by even stronger profitability. This concludes our prepared remarks, and we will now open the call for Q&A. Operator: [Operator Instructions] Our first question comes from Jessica [indiscernible] with Northcoast Research. Unknown Analyst: First, I would like to congratulate you on such a positive first quarter, amazing results. And second, I have a question for you and then one brief follow-up. To start, what would you say regarding the trend in pricing? Are you seeing pricing pressure in any particular business? Bhadresh Patel: Yes. Jessica, this is Bhadresh. From a trending perspective, on our staffing business, we have been able to keep our rates pretty steady. However, on the consulting side, while we do see pricing pressures, the value we're bringing is warranting for us to be able to increase our rates, especially on net new projects that we're selling to our clients, which ultimately is bringing a different value to our clients than what we have historically from a professional staffing perspective because we're bringing thought leadership to those projects. So there are pricing pressures for sure. Roles like operational accounting and things like that face a lot more pricing pressures from our space, but we're also pivoting away from those roles as AI and automation is taking over, and we're focused on more high-value roles, especially around ERP, data, supply chain, digital transformation, really aligned to the strategy that we've laid forth for our business. Unknown Analyst: All right. Perfect. That's very helpful. And then as for the follow-up question, I know that you guys are having success with cross-selling. Looking at your pipeline now, how much of the pipeline would you attribute to cross-selling? Bhadresh Patel: I mean we're still building that pipeline, but the good news is that we continue to increase million-plus deals into our pipeline. And we anticipate that with the motions we're playing across both our sales teams and our practice leaders and consulting that, that pipeline to increase and then for us to see the conversion as it relates to that increase. Unknown Analyst: Okay. Awesome. I appreciate it. Another congratulations to the company on the great first quarter. Bhadresh Patel: Thank you, Jessica. Operator: [Operator Instructions] Our next question comes from Mark Marcon with Robert W. Baird. Mark Marcon: I was just wondering, with regards to the revenue guide that you gave us, Jenn, can you break that out between the segments? And specifically, what are you seeing for consulting and on-demand talent? Jennifer Ryu: Yes. Mark, sure. The revenue guide for Q2, we're expecting across our business units, our Europe and Asia Pac region will continue to show strength as they did in Q1. So we expect continued strength in that. If not, it may -- it might even get better than Q1. And in the other 2 segments, on-demand and consulting, the trend is going to be more or less the same. It really -- it depends on -- especially on the consulting side, some of the deals in the pipeline in late stage and the timing of conversion of that. So I would say across all of our business units, performance in Q2 will be somewhat consistent with what you're seeing in Q1. Kate Duchene: Yes, Mark, it's Kate. Can I just add, I think it really depends on how quickly we can get some of this pipeline, especially the improving pipeline in CFO advisory we do have, as Bhadresh shared a new leader who is very dynamic and has a very clear plan to improve our performance there. So he has shared that there's a lot of momentum right now. It just depends on how quickly I think we can move that through the pipeline. Mark Marcon: Great. And then just with regards to on-demand and consulting within the U.S., any regional differences that you're seeing either from your West Coast operations or Chicago or the Tri-State area? Bhadresh Patel: Yes. I mean we are -- we are seeing a lot of demand in the West Coast and the Southeast as well. And I think it's really attributed to the teams and the tenure of the teams there. Overall, in the market, we're seeing consistent kind of demand across our core offerings. We've aligned in CFO advisory and digital transformation for a reason because those are the 2 agendas that are moving in client spaces. And we're balancing this across the tenure and the leadership that we have in other markets and really building pipeline and work across those markets as well. Mark Marcon: Great. And your new leader where is he going to be based. Bhadresh Patel: He's based in Washington, D.C., Northern Virginia, actually. Operator: Our next question comes from Judson Lindley with JPMorgan. Judson Lindley: Maybe just the first one on this quarter's revenue. I know same-day constant currency revenues were down 13.9%. So could you maybe break out for me the delta between same-day constant currency and reported revenue growth? How much of that was from FX? And how much was the days impact? Jennifer Ryu: Yes. More days impact, business day impact. There's some currency impact, but it's probably about 1/3 of the business day impact. Most of it is, as you know, the first quarter, we have -- I think we had one less day in business days this quarter compared to last year. Judson Lindley: Okay. Great. And then maybe as a follow-up, if there was any acquired revenue in the quarter? And if you could, maybe those same 3 components for the second quarter guide? Jennifer Ryu: Yes. In the first quarter year-over-year, there's very little acquired. As you know, we acquired Reference Point last year in the first quarter, a month into the first quarter last year. So the inorganic piece is minimal. Judson Lindley: And then for the second quarter, if you could? Jennifer Ryu: Yes. For the second quarter, comparing year-over-year at the top end of the guidance range, it's a 16% decline on a same-day constant currency basis. Operator: Our next question comes from Joe Gomes with NOBLE Capital. Joseph Gomes: Just a quick question. When you talk to clients or potential clients what are they saying in terms of their general appetite to move forward and spend? And how has that changed over the past year if it's changed? Kate Duchene: I would say it hasn't changed much, Joe. I think we're still in a choppy environment. As we've said before, I expect there's probably more of the same for the next couple of quarters. Every time I think people feel like we're getting more stability and the foundation is getting stable, then it seems like something else happens. As Jenn said, we don't have a lot of exposure to federal government or federal work, but it feels destabilizing when there's that level of uncertainty. And so we've reflected that in our outlook because we're just uncertain. As I said before, there is work that's progressing. I mean there's some really interesting work we're talking to clients about right now. It just depends on how quickly we can progress that work through our pipeline. I'm very impressed with some of the new talent we've brought into the organization, especially around whether you call it finance 4.0, which includes ERP, cloud migration, digital finance, automation, AI, data work, everything that's happening there. That work is progressing. I mean it's happening in our client base right now. So again, I think a lot of it is timing and making sure we're positioned and having the right conversations with clients. Joseph Gomes: Okay. Great. And one follow-up. In the summer, you guys did a Board refresh and added 2 new members to the Board. I was wondering what, if anything, they've brought to the Board here that is kind of new or different ways of thinking or different approaches that would be attributable to them. Kate Duchene: Yes. So let me speak to that. We have welcomed, I think, 2 strong Board members. One brings more of a I would say, private equity lens, if you will, to what we're doing, especially as we look at optimizing our bottom line performance, given that we all recognize the macro environment is difficult and difficult really across professional services. So that has been, I think, instructive for us to look at things with a fresh set of eyes. Our other Board member brings a lot of operating experience and operating experience through transformation. And I think what we're learning from his experience is the importance of the behavioral changes that I've talked about, making sure that we're getting incentive comp right, making sure that we are creating collaborative teams to hunt and farm together and not creating silos or competitive mindset. So competitive -- by that, I mean against each other, not competitive to the broader marketplace. So I think they're both good adds to our Board and the work that we're undertaking right now. Operator: I would now like to turn the call back over to Kate Duchene for any closing remarks. Kate Duchene: Yes. Thank you. Thank you, everyone, for joining us today. I want to highlight that we will be participating in the NOBLE Capital Markets Emerging Growth Virtual Equity Conference tomorrow. So we hope to engage further with investors then. We'll also look forward to updating you on our strategic progress and results following Q2 in early January. Thanks again, everyone. Good night. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
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