加载中...
共找到 5,382 条相关资讯
Michael Helm: Good morning and welcome to the BlackBerry second quarter fiscal year 2026 results conference call. My name is Michael Helm and I will be your conference moderator for today's call. During the presentation, all participants will be in a listen-only mode. We will be facilitating a brief question and answer session towards the end of the conference. Should you need assistance during the call, please signal a conference specialist by pressing star zero. As a reminder, this conference is being recorded for replay purposes. I would now like to turn today's call over to Martha Gonder, Director of Investor Relations, BlackBerry. Please go ahead. Martha Gonder: Thank you, Michael. Good morning, everyone, and welcome to BlackBerry's second quarter fiscal year 2026 earnings conference call. Joining me on today's call is BlackBerry's Chief Executive Officer, John Giamatteo, and Chief Financial Officer, Tim Foote. After I read our cautionary note regarding forward-looking statements, John will provide a business update and Tim will review the financial results. We will then open the call for a brief Q&A session. This call is available to the general public via call-in numbers and via webcast in the investor information section at BlackBerry.com. A replay will also be available on the BlackBerry.com website. Some of the statements we'll be making today constitute forward-looking statements and are made pursuant to the safe harbor provisions of applicable U.S. and Canadian securities laws. We'll indicate forward-looking statements by using words such as expect, will, should, model, intend, believe, and similar expressions. Forward-looking statements are based on estimates and assumptions made by the company in light of its experience and its perception of historical trends, current conditions, and expected future developments, as well as other factors that the company believes are relevant. Many factors could cause the company's actual results or performance to differ materially from those expressed or implied by the forward-looking statements. These factors include the risk factors that are discussed in the company's annual filings and MD&A. You should not place undue reliance on the company's forward-looking statements. Any forward-looking statements are made only as of today, and the company has no intention and undertakes no obligation to update or revise any of them, except as required by law. As is customary during the call, John and Tim will reference non-GAAP numbers in their summary of our quarterly results. For a reconciliation between our GAAP and non-GAAP numbers, please see the earnings press release published earlier today, which is available on the Edgar, SEDAR+ and BlackBerry.com websites. With that, let me turn the call over to John. John Giamatteo: Thanks, Martha, and thanks to everyone for joining today's call. Q2 was another strong quarter for BlackBerry, with all three of our divisions meeting the top end of guidance. The company revenue for the quarter was stronger than expected, growing 3% year over year to $129.6 million. BlackBerry delivered another quarter of solid profitability, with total company-adjusted EBITDA reaching 20% of revenue and GAAP net income being positive for the second consecutive quarter at $13.3 million. Likewise, non-GAAP EPS beat guidance at positive $0.04. Despite the headwinds of significant tax payments in the quarter, we were able to return to positive cash flow earlier than anticipated, with operating cash flow at $3.4 million. At a divisional level, QNX beat expectations for both revenue and adjusted EBITDA to achieve a rule of 40 quarter. We delivered 15% year-over-year revenue growth and a 32% adjusted EBITDA margin for Q2. QNX revenue for the quarter was $63.1 million, primarily driven by strong royalties. These solid results are a testament to how the QNX team continues to successfully navigate what remains an uncertain macro environment. This is further evidenced by QNX design wins being ahead of plan in Q2 after a slower start to the year in Q1. The pipeline for potential design wins in the second half of this fiscal year looks solid. In the quarter, we secured a number of noteworthy design wins, including a mid-eight-figure design win in the Chinese market with a leading global tier-one supplier to power ADAS applications. QNX is also progressing with ecosystem partners. BMW and Qualcomm announced that they have jointly developed a scalable platform called Snapdragon RidePilot, which is built on QNX. This product, offered by Qualcomm to all global automakers and tier-one suppliers, enables an active safety system that is continually updated with cloud-based information from global fleets. We secured another win for our cloud-based development platform, Cabin, with one of the top five global automakers. This was also a significant quarter for our QNX sound product, where we had a pivotal win to deliver software-defined audio with a leading domestic Chinese automaker and a leading branded audio partner. This marks a significant step forward in adoption of this product. Like in auto, we continue to see growth in a number of high-performance, safety-critical use cases in the general embedded space. In particular, we're seeing progress in the verticals where we've been increasing focus and investment, namely medical instrumentation, industrial automation, and robotics. During this past quarter, we secured a significant win with a leading North American camera and vision module supplier for QNX to be used globally in automated mobile robots and subsequently in humanoid robotics. This is another data point that our investment strategy is showing returns. During the quarter, the latest version of our QNX operating system passed the safety and security audits conducted by TÜV Rheinland, and QNX OS for Safety 8.0 was formally released on July 31, 2023. Having the product fully certified by arguably the leading body in this space allows customers to demonstrate the product's compliance with rigorous international standards. The QNX-8 pipeline continues to grow and remains approximately 50/50 between auto and general industry. This pipeline is being converted. In Q2, a top global automaker purchased new QNX-8 development seat licenses. We also announced that QNX OS for Safety 8.0 will power NVIDIA's DRIVE AGX Thor development kit. This kit enables software development on the NVIDIA AGX Thor SoC, a truly powerful next-generation chip that facilitates generative AI. QNX forms the foundation for NVIDIA's DRIVE OS that is often used in conjunction with NVIDIA chipsets in the car. There was also meaningful progress for the vehicle software platform that we're investing in and have partnered with Vector Informatik to develop. The platform pre-integrates our operating system with a number of middleware components. We believe that this platform will help automakers accelerate their path to software-defined vehicles, greatly expanding QNX's addressable market and increasing our overall software content in the car. We were excited to launch the first early access version of this product this past quarter, and we're working closely with Vector to implement and accelerate our go-to-market strategy. We continue to see momentum with QNX everywhere. Our initiative to accelerate the growth of the QNX developer and ecosystem community through the availability of our products for non-commercial use and the development of QNX-centric training programs. We see this as a strategically important program that aims to significantly strengthen the position of QNX in the market for the long term. This past quarter, MIT was one of six universities to sign up to using QNX in their engineering curriculums, with more than 4,000 students having already attended QNX learning sessions globally. In summary, despite the continued uncertainty in the automotive market, BlackBerry's QNX division delivered strong results in Q2 and progress across all our key growth initiatives, and we have a solid pipeline of opportunities for the second half of the fiscal year. Moving now on to the Secure Communications division, which had another solid quarter beating the top end of our guidance range and finishing higher sequentially with quarterly revenue of $59.9 million. The better than expected results were driven by a combination of slowing customer churn for UEM as well as some upside for both ad hoc and SecuSmart. Annual recurring revenue, or ARR, grew by $4 million in the quarter to $213 million, and the dollar-based net retention rate, or DVNRR, improved to 93%. Although the revenue was down year over year due to a significant device refresh cycle last fiscal year, this was a good quarter for sales of SecuSmart to the German government, including a five-year deal with a key government agency for hosted secure voice services. Offering a hosted service is a new recurring revenue business model for BlackBerry that, together with more software-only sales, can help create a more predictable revenue profile for the SecuSmart business. This deal can serve as a test case and open the door for future deals of this nature. We also saw traction with the deployment of SecuSmart on iOS devices. In the past, SecuSmart was largely limited to Android. The R&D effort to add support for iOS has significantly increased the size of our potential opportunity within the German government. Outside of Germany, this quarter we secured a deal with a Canadian government entity, and the pipeline of opportunities globally remains robust. During Q2, we secured a large renewal and upsell with the U.S. State Department for our ad hoc critical events management platform. This deal includes four option years, which could result in this being a five-year renewal. FedRAMP High approval and new features added to the ad hoc platform recently were key for the State Department in expanding their relationship with BlackBerry for their emergency notification and accountability platform. In addition, we secured ad hoc wins with the U.S. Coast Guard and Veteran Affairs, among others. As mentioned, this quarter we saw the continuation of the trend for reduced customer churn for UEM. An increased focus on data sovereignty plays to BlackBerry UEM's strength, especially with on-premise deployments. In particular, we secured a number of non-government renewals that helped solidify the base. Renewals include a number of major financial institutions, as well as Rolls Royce, leading law firm Hogan Lovells, defense engineering firm Babcock, the IRS, and the Department of Homeland Security, just to name a few. During the quarter, BlackBerry UEM became the first solution to be certified by Germany's Federal Office for Information Security, or BSI. Meeting these very rigorous standards shows BlackBerry's commitment to this market and opens up potential for UEM expansion opportunities in Germany. Overall, this was another solid quarter for secure comms. The pipeline of potential large deals with government customers continues to be strong, however, sales cycles remain relatively long. Touching briefly on IP licensing, in addition to the run-rate revenue from pre-existing arrangements, which remains solid, we secured a net new one-time deal in the quarter that helped revenue to beat expectations at $6.6 million. With that, let me now turn the call over to Tim for more color on our financials. Tim Foote: Thank you, John, and good morning, everyone. As John mentioned, revenue for the total company in the quarter exceeded the top end of guidance at $129.6 million. Operating leverage driven by the strong top line, combined with tight cost control, enabled us to deliver expanded profit margins. Total company adjusted gross margins expanded by 4% year over year to 75% and remained flat sequentially despite a greater proportion of SecuSmart hardware in the mix. Adjusted operating expenses were approximately 5% lower year over year at $74.8 million. This reduction is in spite of increased investment in strategic growth drivers for QNX, namely our GEM expansion and the vehicle software platform, as well as FX headwinds from a weaker U.S. dollar this fiscal year. This demonstrates how we're successfully controlling costs and driving efficiencies across the business. As was the case in Q1, this past quarter we benefited from approximately $4 million of grant funding from the Canadian Government Strategic Innovation Fund. We do not expect to receive any further P&L benefit from this program for the remainder of the fiscal year. As a result of top-line growth, expanded gross margins, and reduced operating expenses, total company adjusted EBITDA grew a very strong 72% year over year to $25.9 million. Adjusted net income for Q2 was $24.2 million, and GAAP net income was $13.3 million. This is a $33 million turnaround in GAAP net income from the $19.7 million loss in the prior year. Indeed, it is also a significant expansion from the $1.9 million of positive GAAP net income we achieved in Q1. Adjusted EPS also beat expectations at positive $0.04. QNX revenue beat the top end of the guidance range at $63.1 million, representing 15% year-over-year growth. QNX gross margins expanded by 2% sequentially and were flat year over year at a strong 83%. QNX's adjusted EBITDA in Q2 marked the most profitable quarter in the division's history with a 32% margin. Adjusted EBITDA exceeded the top end of guidance at $20.5 million, a 56% year-over-year increase. Revenue for secure communications exceeded the top end of guidance in the quarter at $59.9 million. Gross margin was higher year over year and lower sequentially at 66% as a result of revenue mix. Secure communications remains solidly profitable despite the SecuSmart hardware component in the product mix for Q2, delivering stronger than expected adjusted EBITDA at $9.7 million, or 16% of revenue. Finally, our licensing division delivered better than expected revenue of $6.6 million, leverage from which drove adjusted EBITDA higher to $5.6 million. Adjusted corporate operating costs, excluding amortization, came in at $9.9 million in Q2, in line with guidance. Despite paying $19 million of tax due from prior years, the company had better than expected conversion of profits into cash and was able to deliver positive operating cash flow of $3.4 million and free cash flow of $2.6 million in the quarter. Total cash and investments increased year over year by $99.2 million and decreased by $18.4 million sequentially to $363.5 million. The sequential decrease was as a result of us continuing to take advantage of what we believed to be an undervalued share price and repurchasing approximately $20 million, or approximately 5 million shares at an average price per share of $3.97 in the quarter. These shares have been subsequently canceled, bringing the total number of shares removed by the program to date to 7.6 million. As you know, we're investing for growth, especially in our QNX business. Despite this investment, we expect to deliver positive cash flow this fiscal year, further increasing our net cash position. As a result, we will continue to consider where it makes sense to buy back additional shares. Turning now to financial outlook for the third fiscal quarter and the full fiscal year. Overall, we have seen a stronger than expected first half of fiscal year 2026 for both the QNX and Secure Comms divisions, and we're very pleased to be able to raise expectations for both revenue and adjusted EBITDA for the full year as a result. When we first presented full-year guidance during last fiscal year's Q4 earnings call, there were a significant number of unknowns. We faced a backdrop of significant tariff uncertainty and possible threats from DOGE and other potential government policy changes. While these changes have not gone away, we feel that the level of uncertainty has decreased. As a result, we are pricing in less downside risk in today's guidance than previously, and the top end of the range requires further improvement on the macro and other secular trends. We expect revenue for QNX in Q3 to be in the range of $66 to $70 million and for adjusted EBITDA to be in the range of $13 to $17 million. As I mentioned, we are increasing our full-year revenue guidance by $3 million at the midpoint, while also narrowing the range to $256 to $270 million. Likewise, we're raising our full-year adjusted EBITDA guidance by $11 million at the midpoint to be between $64 and $73 million, as QNX continues to deliver a combination of double-digit growth and strong profit margins. For secure communications, we expect revenue for Q3 to be in the range of $60 to $64 million and for adjusted EBITDA to be between $12 and $16 million. For the second quarter in a row, we are raising our full-year revenue guidance for secure communications such that the range is now $239 to $247 million. We're also raising our guidance for adjusted EBITDA with it now expected to be between $38 and $48 million. For licensing, we reiterate our prior guidance for revenue to be approximately $6 million and adjusted EBITDA to be approximately $5 million per quarter. For the full fiscal year, we're holding revenue guidance at approximately $24 million and adjusted EBITDA at approximately $20 million. We continue to expect adjusted corporate OpEx, excluding amortization, to be approximately $10 million a quarter or $40 million for the full fiscal year. At the total company level, we expect revenue for Q3 to be in the range of $132 to $140 million and adjusted EBITDA to be between $20 and $28 million. Given the increased full-year guidance for both QNX and secure communications revenue, as well as adjusted EBITDA, we are raising guidance for the total company as well. For the full fiscal year 2026, we're raising the midpoint for total company revenue by $7 million and now expected to be between $519 and $541 million, and we're raising guidance for adjusted EBITDA at the midpoint by $12 million, to be in the range of $82 to $101 million. For non-GAAP EPS, we expect it to be between $0.02 and $0.04 in the third quarter and to now be between $0.11 and $0.15 for the full fiscal year. Now that most of the restructuring and tax payments for prior years are behind us, we expect to be cash flow positive for the remainder of fiscal 2026. We expect positive operating cash flow for Q3 in the range of a solid $10 to $20 million. For the full fiscal year, we're raising our guidance and expect to generate between $35 and $40 million in operating cash flow. This does not include the additional $38 million of cash from the second tranche of proceeds from the sale of Cylance to Arctic Wolf that we expect to receive in Q4. This is classified separately as cash flows from investing activities. With that, let me now turn the call back to John. John Giamatteo: Thank you for that, Tim. Before we move to Q&A, let me quickly summarize what was another strong quarter for BlackBerry. We delivered year-over-year top-line growth and expanded gross margins while simultaneously decreasing OpEx. This combination allowed BlackBerry to deliver rock-solid profitability in Q2. QNX delivered a rule of 40 quarter with 15% revenue growth and 32% adjusted EBITDA margin. Secure Comms saw improvement in its key metrics and delivered a solid 16% adjusted EBITDA margin. We exit the first half of the fiscal year having delivered top-line growth, expanded profit margins, and positive cash flow generation. With that, let's now move to Q&A. Operator, could you please open up the lines? Michael Helm: We will now begin the question and answer session. To ask a question, please press star one on your telephone keypad. Please make sure your line is unmuted. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We request that you limit yourself to one question and one follow-up. Your first question comes from Luke L. Junk with Baird. Please go ahead. Luke Junk: Good morning. Thanks for taking the question. A couple of QNX questions for me. Tim, maybe to start with, could you just double-click on how we should think about operating leverage in QNX from here? Growing in the mid-teens year over year this quarter, but OpEx in terms of R&D and sales and marketing still coming down year over year in aggregate, which gave you really good leverage. I know some of that was the R&D credit. If we just pull in that string, what does it say about the business from here from a leverage standpoint and maybe specific to guidance in the sequential walk, just anything we should be keeping in mind, one-timers or seasonality into the third quarter? Thank you. Tim Foote: Yeah, great question, Luke, and good morning. I see a lot of leverage in the QNX model. We're already at gross margins of 83%, and over time, we should see that improve, particularly as the mix of royalties starts to increase as we start to see some of these bigger programs move into production. On the cost, the OpEx side, you're right, we had a $4 million benefit this quarter from the CIF funding. Generally speaking, we are investing in both R&D and sales and marketing, particularly sales and marketing to drive that GEM opportunity that we've been talking about. Regardless of that investment, I still see leverage through the model. I think the investment we're putting into R&D will start to stabilize, and whilst we'll continue to invest in sales and marketing, it won't be at the scale that we hope to grow the top line. You add all that together, very strong gross margins, leverage coming out of OpEx, we should see some pretty strong adjusted EBITDA margins going forward. Luke Junk: Got it. For my follow-up, John, you mentioned that I think it was a mid-eight-figure design win in China with the tier one for ADAS applications. Just be curious if you could maybe expand on your overall approach to the China market, you know, just strategically. Certainly, that's a market in automotive that's at the bleeding edge of software-defined vehicles right now. Just curious how you lean into that in China specifically, and then sort of the offshoot of that would be, you know, some benefit. I would anticipate repatriating that into the rest of the world as well. Thanks, John. John Giamatteo: Thanks, Luke. I think one of the interesting dynamics with the China market in particular is we're seeing, due to some incidents, some safety issues, and some concern, that market shift more towards safety-critical software and the need for a high-performance type of capability where maybe a few years ago, the demand for those kinds of capabilities wasn't quite as rich. I think that has really opened up. There are some high-profile accidents that happened that have really awakened that market to the need of something to the magnitude of our SDP8 and some of our capabilities, which we think really are differentiated from everybody else in the market. I think that trend is a positive one for us, and it certainly enabled us to make some progress this particular quarter. In general, as more of that shift goes towards safety-critical and the higher-end, higher compute, higher performance capabilities, we think that plays into our strength and how we're performing in the marketplace. It's also further evidenced by how the Silicon players, the ecosystem partners, are leaning in with us with our relationships with Qualcomm and NVIDIA and the progress we're making there. Hopefully, that gives you a little bit more color on why we feel we're making a little more progress, not only in China, but around the world. Luke Junk: Yeah, very interesting. I'll leave it there. Thanks, John. Michael Helm: Your next question comes from Paul Michael Treiber with RBC Capital Markets. Please go ahead. Paul Treiber: Thanks very much, and good morning. Just a couple of questions on QNX as well. On the outlook for the year, the outlook continues to be back-end loaded for QNX. Can you remind us again of what you see as a driver of the pickup in the back half of the year? Does that specifically reflect either licensed or professional services, which is more one-time in nature, or is it a ramp in royalties? Tim Foote: Yeah, good question, and good morning, Paul. If you look at the trends, the revenue trend or pattern really for QNX for the last couple of years, it has been back-end loaded. It's pretty much a sequential increase all the way through, with Q1 always being the lowest and Q4 always being the highest. Some of that is seasonality around when design work begins. Obviously, you know, the biggest kind of moving part from quarter to quarter is development seat licenses, and that is driven really by the start of programs and design work. That tends to be towards the back end of the year. We probably expect to see that pattern, generally speaking, going forward, but we'll have to see. That's really what's driving it. Over time, we're also seeing growth in royalties as some of these programs start to come online. Quarter over quarter, generally, you start to see growth in royalties as well. Paul Treiber: Big picture on QNX in the auto market, you mentioned a lot of uncertainty at the beginning of the year. The feedback that you're getting from auto OEMs in terms of the prioritization of new platform development, like you mentioned, the potential for seeing the move of big programs into production. Are you hearing that these big programs are back on track and the plans have moved maybe back to where they were previously, whereas there's concern that they might have been pushed out? Tim Foote: I wouldn't go as far as to say back on track because I think everything is no doubt shifted to the right. I would say programs are starting to come online, obviously not as quickly as we would have liked at the beginning. I don't want to kind of paint the picture that we're totally through all of the headwinds that we saw. The tariff uncertainty has now become kind of really just a more certain tariff headwind. The challenges of developing software remain complex, and those have certainly not gone away. I think inevitably over time, you're going to see problems get solved and vehicles come online. I wouldn't paint the picture that we're totally out of the woods. I think everyone's got just a little bit more certainty than we had at the beginning of the year when we gave guidance on Liberation Day. John Giamatteo: Yeah, just to further to that, what Tim has outlined, you know, the S&P took a global light vehicle production, and we're feeling, you know, that's increased. The OEMs maintaining their guidance is another kind of data point that things are starting to stabilize. April, May, June, it kind of feels like the pause button was pressed, and it's not quite completely ramped, but we definitely feel like it's being unpressed, and there's a little more kind of momentum going on as we look at the second half of the year. Paul Treiber: That's great to hear. I'll pass the line. Michael Helm: Again, if you have a question, please press star, then one. Your next question comes from Todd Adair Coupland with CIBC. Please go ahead. Todd Coupland: Yeah, good morning, everyone. I had a question on QNX. I was wondering if you could update us on the backlog and the backlog growth in the quarter. As a follow-up, with 15% growth in QNX in Q2 and double-digit implied in the second half of the year, are you comfortably in double-digit growth range for QNX now? Just talk about the sustainability of that. Thanks a lot. Tim Foote: I'll take the first part. Maybe, John, you want to take the second. In terms of backlog, obviously, this is not a quarterly business. You have some fairly wild volatility in the design win dollars that you get from quarter to quarter, and that's really just timing of when those decisions take place. That's why we give that metric on an annual basis to kind of normalize from some of that movement. The color I'd give is that Q1, John mentioned the pause button. I think there was a challenge for a lot of OEMs, and hence a certain reluctance to commit to new designs. Q1 was weaker, but Q2 has come back pretty well, and we're actually ahead of plan for Q2. When we look at the second half, the pipeline of opportunities looks really solid. We're feeling really good about where we are going forward, but obviously, we had to navigate through what was a challenge in Q1. We'll give you an update on backlog as normal at the end of Q4. On the growth, John. John Giamatteo: Yeah, you know, I really feel between Todd, the progress that we've gotten in terms of what we've already booked and some of the new programs that are coming online, our vehicle platform initiative, the adoption of SDP8. You know, we talked about the sound win, QNX Sound, which is another. We're very excited about the diversification into GEM with some of the wins that we have in some of the robotics space. I mean, all of that, I think, lines up to what we've given from a guidance standpoint as a solid second half of the year. You know, between that and the pipeline that Tim's talking about, we're optimistic that we're going to keep the momentum going into not only the second half of the year, but as we think about next year as well. Todd Coupland: Great, thank you. Michael Helm: This concludes our question and answer session. I would like to turn the conference back over to John Giamatteo, CEO of BlackBerry, for closing remarks. John Giamatteo: Very good. Thanks, Michael. Before we end the call, I just wanted to mention some upcoming events that we're excited about that BlackBerry is going to be in attendance. The QNX team will be at ELIV in Bonn, Germany, the American Medical Device Summit in Chicago in October, and Embedded World North America in November. Our Secure Communications division will be at ITSA Expo and Congress in Nuremberg, Germany, and at GITEX Global in Dubai next month. If you're in any of these locations, please stop by the events at our booth. We look forward to hosting you and talking to you more about the exciting developments that are happening all across BlackBerry. Thanks, everyone, for joining the call today, and we look forward to talking to you next time. Michael Helm: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good morning. My name is Tiffany. I will be your conference operator today. I would like to welcome everyone to the TD SYNNEX Third Quarter Fiscal 2025 Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. At this time, for opening remarks, I would like to pass the call over to David Jordan, America's CFO and head of investor relations at TD SYNNEX. David? You may begin. Thank you. David Jordan: Good morning, everyone, and thank you for joining us on today's call. With me today is Patrick Zammit, our CEO, and Marshall Witt, our CFO. Before we continue, let me remind you that today's discussion contains forward-looking statements within the meaning of the federal securities laws including predictions, estimates, projections, or other statements about future events, including statements about our strategy, demand, plans and positioning, growth, cash flow, capital allocation, and stockholder return, as well as our financial expectations for future fiscal periods. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties discussed in today's earnings release, in the Form 8-Ks we filed today, in the risk factors section of our Form 10-K, and our other reports and filings with the SEC. We do not intend to update any forward-looking statements. Also, during this call, we will reference certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP results are included in our earnings press release and the related Form 8-Ks on our Investor Relations website ir.tdsynex.com. This conference call is the property of TD SYNNEX and may not be recorded or rebroadcast without our permission. I will now turn the call over to Patrick. Patrick? Thank you, David. Good morning, everyone, and thank you for joining us today. Patrick Zammit: I'm excited to report that our third quarter non-GAAP gross billings and diluted earnings per share established new records for our company. Our performance is a clear result of our team's strong execution, a differentiated go-to-market strategy, and a global end-to-end portfolio of products and services that is unrivaled. Beginning with our financial performance for the quarter, consolidated gross billings were $22.7 billion, growing 12% in constant currency. And non-GAAP diluted earnings per share of $3.58 exceeded the high end of our guidance, representing a 25% increase year over year. Within TD SYNNEX, excluding HIVE, gross billings increased 9% year over year, with gross profit and operating income each increasing by double digits. Hive had a strong quarter, with gross billings increasing in the mid-thirties year over year, and ODM Centimeters gross billings increasing 57% year over year, fueled by continued strength in hyperscaler investments in cloud infrastructure. Hive total gross margins returned to historical levels, operating profit exceeded expectations. The majority of our technology products and services in endpoint and advanced solutions experienced an increase in gross billings year over year. Highlighting a few key areas, software continued to be a standout experiencing a 26% increase in gross billings, fueled by cybersecurity and infrastructure software. Additionally, we are still experiencing strong demand in PCs driven by a higher mix of AI PCs and the Windows 11 refresh cycle. We experienced healthy momentum across each of our regions, exceptionally dynamic performance in Latin America and Asia Pacific and Japan, each increasing strong double digits in gross billings in the quarter and exceeding expectations. Broad-based adoption of IT products and services continues to build in these geographies, validating the strength of our go-to-market strategy and positioning us to continue to capture profitable growth. Moving to our diversified customer end markets, we're experiencing broad-based strength in SMB and MSPs, which grew substantially above the company average in most of our geographies. By developing bespoke value propositions and deploying dedicated commercial teams with deep industry knowledge, we have successfully positioned ourselves as a trusted partner for this strategic customer segment. Enterprise demand remains largely stable, with balanced revenue growth throughout the majority of this customer base. Our US public sector business increased its gross billings low single digits in the quarter. Strength in state and local was offset by anticipated softness in federal, as our customers navigate a dynamic environment led by the revaluation of budgets and expected changes to federal funding programs. As a reminder, federal is a small portion of our total portfolio, but one we will continue to invest in growing. Next, our differentiated and highly specialized go-to-market strategy we outlined during investor day strengthens our competitive position and drives our business forward every day. A great example of this strategy in action is expanding our addressable market by introducing new vendors to the channel and leveraging our network of partners to accelerate growth. Last year, we onboarded a cybersecurity vendor in North America, who was attracted by our specialist go-to-market and partner enablement capabilities. Within eighteen to twenty-four months, we have grown that business from 0 to hundreds of millions of dollars by expanding the customer base and improving their net revenue retention rates with existing clients. We have many more examples like this, and we are continuing to onboard cutting-edge vendors and help accelerate the adoption of new technologies in the market. As the adoption of AI technologies evolves, we are enhancing our destination AI enablement program to include three strategic focus areas that are designed to help our partners adopt, scale, and secure AI solutions: AgenTiKi, security for AI, and AI factory. Launching next week, these programs will deliver comprehensive solution support such as designing modern architectures that blend multiple AI technologies and enable hybrid deployment models that deliver flexible, intelligent threat detection, prevention, and responses. Within Hive, we're extremely proud of our performance during the quarter and remain confident in our ability to be a leading partner for data center infrastructure build-outs. We are continuing to invest in new capabilities, taking a holistic approach to data center requirements that anticipates our customers' needs and provides an end-to-end solution for the world's leading hyperscalers and cloud service providers. As a result, our portfolio is becoming more diversified. We are participating in more compute, networking, and storage rack builds as the deployment of GPU and AI integrated racks accelerates, and we have seen robust growth throughout the majority of our programs. Additionally, our customer mix is also shifting favorably, and we have seen substantial growth beyond our top customer. Moreover, our second largest customer grew faster than expected within the quarter, and we anticipate similar strength in Q4. At our investor day, we outlined a digital strategy including the creation of a unified experience, seamless workflows, and actionable insights to drive customers' growth. Today, we are taking the next step of that journey with the launch of TD SYNNEX Partner First in North America. A unified portal that optimizes the partner experience by combining commerce, services, education, and community in a single digital environment. Partner First marks an important milestone in TD SYNNEX omnichannel strategy, using AI automation and advanced analytics to enhance our operations and streamline the buying journey. Partner First will be rolled out globally in the coming quarters. In summary, our team's strong execution, our differentiated and highly specialized go-to-market strategy, and our unrivaled global end-to-end portfolio of products and services are enabling us to continue to deliver a superior level of service and customer experience. Now I will pass it to Marshall to go over the financial performance and Q4 outlook in more detail. Marshall? Marshall Witt: Thanks, Patrick, and good morning, everyone. As Patrick highlighted, we're excited to report that we achieved 12% gross billings growth and 25% non-GAAP diluted EPS growth in the third quarter, which exceeded the high end of our guidance range. Our endpoint solutions portfolio increased gross billings 10% year over year driven by continued demand for PCs as the refresh cycle progresses. As well as a higher mix of AI PCs. Globally, PCs have increased double digits for three consecutive quarters, and we believe that we are in the mid to late innings of the refresh cycle. Advanced Solutions portfolio increased gross billings by 13% year over year, and 8% year over year when excluding the impact of Hive, driven by meaningful demand in cloud, security, software, and other high-growth technologies. Hive, which is reported within the advanced solutions portfolio, increased in the mid-thirties, primarily due to strength in programs associated with server and networking rack builds. Hive's capabilities, capacity, and US manufacturing footprint positions it to support the increased demand. In the quarter, there was an approximately 31% reduction from gross billings to net revenue, which was slightly higher than our expectations but consistent with previous quarters. Our net treatment as a percentage of billings continues to remain elevated versus the prior year, primarily driven by an increase in Hive transactions where we act as an agent and a higher mix of software within distribution. As a result, net revenue was $15.7 billion, up 7% year over year and above the high end of our guidance range. Gross profit increased 18% year over year to $1.1 billion. Gross margin as a percentage of gross billings was 5%, which increased 23 basis points year over year and improved sequentially. Notably, we expanded our gross margin profile in both distribution and Hive. Non-GAAP SG&A expense was $155 million or 3% of gross billings. Our cost to gross profit percentage, which we define as the ratio of non-GAAP SG&A expense to gross profit, was 58% in Q3, and an improvement from the 60% level that we experienced in the first half of the year, demonstrating our progress towards managing costs as a percentage of gross profit down over time while still making key investments into the business. Non-GAAP operating income increased 21% year over year to $475 million. Non-GAAP operating margin as a percentage of gross billings was 2.09%, representing a 15 basis point improvement year over year. Interest expense and finance charges were $91 million, an increase of $11 million year over year. Our non-GAAP effective tax rate was approximately 23% compared to 21% in the prior year. Total non-GAAP net income was $296 million and non-GAAP diluted earnings per share $3.58, an increase of 25% year over year and an all-time high for TD SYNNEX. Free cash flow was $214 million driven by strong earnings growth and a slight improvement in our cash conversion cycle. Within the quarter, we returned $210 million to stockholders, with $174 million in share repurchases and $36 million in dividend payment, bringing our total return to stockholders for the year up to $534 million. Net working capital was $4 billion, which is consistent with quarter two. We have added a gross cash days metric to the investor presentation, which we believe better reflects the fundamentals of the two-tier distribution industry and our organization. Our gross cash days were approximately sixteen days, which was consistent with the prior year, and a one-day improvement from the prior quarter. We ended the quarter with $874 million in cash and cash equivalents, and debt of $4.2 billion. Our growth leverage ratio was 2.3 times, and our net leverage ratio was 1.8 times. For the current quarter, our Board of Directors has approved a cash dividend of $0.44 per common share that would be payable on 10/31/2025 to stockholders of record as of the close of business on 10/17/2025. Now moving on to our outlook. These numbers are all non-GAAP. For the fourth quarter, we expect gross billings in the range of $23 to $24 billion, representing an increase of approximately 11% at the midpoint. Our outlook is based on a euro to dollar exchange rate of 1.18. Net revenue in the range of $16.5 billion to $17.3 billion, which translates to an anticipated gross to net adjustment of 28%. Non-GAAP net income in the range of $281 million to $322 million, non-GAAP diluted earnings per share in the range of $3.45 to $3.95 per diluted share, based on weighted average shares outstanding of approximately 80.7 million. We expect a non-GAAP effective tax rate of approximately 23% and interest expense of $91 million. In closing, we remain in a strong financial position to close out what has been a great year for our business and are leveraging our strategic pillars that we outlined during our Investor Day to ensure we continue to be the partner of choice in IT. With that, we'll open it up for your questions. Operator? Operator: At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, simply press 1 again. We request that you limit yourself to one question to allow time for the other participants to ask their questions. If there is time remaining, you are welcome to requeue with additional questions. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Eric Woodring with Morgan Stanley. Please go ahead. Eric Woodring: Hi. Good morning, guys. This is Maya on for Eric. Last quarter, you talked about the potential for Hive potentially decline in the fiscal 4Q on tough compares. Given the strong results in the August and the November guide and the momentum we're seeing in cloud CapEx trends more broadly, should we think about, you know, Hive Dynamics in fiscal 4Q? And then, you know, any high-level color on as we look to next year. Thank you. Patrick Zammit: Yeah. Good morning, and thanks a lot for the question. So indeed that we were a little bit cautious quarter. As you know, I mean, HIVE is a lumpy business. But, I mean, the quarter did I mean, went extremely well as the distribution, by the way. So, what explains the overperformance? First, I mean, we saw growth, significant growth across all the programs and all the customers. So that's point number one. Point number two, we see our second customer demand come back and, we are confident by the way, for for next quarter too. It's the second thing. Then also, we saw more demand for supply chain services than expected. And, so the combination explains the other performance of HIVE. We believe that I mean, those dynamics will remain in Q4 and is reflected our guidance. And, Maya, this is Marshall. Just thinking about the the growth expectations being above what we initially had thought. As we said in previous discussions, we continue to make investments in skill sets, engineering capabilities, capacity, manufacturing, etcetera, to ensure that we stay ahead of capacity requirements. Eric Woodring: Alright. Thank you. Patrick Zammit: Thank you. Operator: Your next question comes from the line of David Paige with RBC. Please go ahead. David Paige: Hi. Good morning. Marshall. Thanks for taking my question. I guess I had two questions. Just any comments around the pull forward for PCs in the quarter? I believe last quarter anywhere from $100 million to $200 million. And if I could stick one other question in on free cash flow, should we still expect $1.1 billion for 2025? Thank you. Patrick Zammit: Perfect. Yeah. Good morning, David. Thanks for the questions. On the first one, so again, we looked at it. As as you know, it difficult to assess, but we think it's very limited. Mean, what we see is we continue to see very good momentum on PCs. Across the world. So all regions are contributing to to it. And, again, it's driven really by the refresh related to Windows 11, the refresh of the base, was built during the pandemic, we also see the start of some momentum on AIPC. So some customers coming to us, because they want an AI PC. Again, the vast majority is related to the refresh. Marshall Witt: And, David, in regards to free cash flow expectations for the year, our expectation is that the free cash flow will be approximately $800 million for the year. Let me give you some some color behind that. As we were thinking about h two coming out of h one, we had given a miss single digit growth rate to the overall portfolio with distribution being a little bit above and and high being that flat to down. Clearly, the results for quarter '3 showed a 10% growth rate and expectations again for a 10% growth rate in Q4. So in essence, that has lifted the overall working capital requirement for the entire portfolio, both distribution and HIVE. As you know, HIVE has a little bit longer cash conversion cycle given what is required in terms of raw material to ultimately finish rack and how that fell through. And staying ahead of our customers' requirements in terms of ensuring they have a a smooth supply chain. If we think about quarter four, which ultimately is where this goes, we if you look at our our press release, you could see that our year to date free cash flow was zero. Coming into Q4 So how do we get there? And thinking about four cash flow, we think that's gonna be around free cash flow is maybe around $850 million. It's roughly divided evenly between earnings growth for the quarter and expected cash conversion improvement of two to three days. I will say with that and and thinking about what we had said at Investor Day, we still believe over the medium term, cycle that netting net income to free cash flow conversion should stay right around 95%. David Paige: Great. Thank you so much. Patrick Zammit: Thank you. Operator: Your next question comes from the line of Keith Housum with Northcoast Research. Please go ahead. Keith Housum: Thank you. I apologize if my phone's breaking up. Hey guys, great quarter, obviously, in terms of better than expected. I guess, the question that may be asked here is, how sustainable do we see this being? Is there any pull forward that we saw from the, you know, fourth quarter fourth quarter and the third quarter? Patrick Zammit: Yeah. So so good morning. Again, I mean, if you look at what is driving the other performance, so if I I think about distribution, it's it's PCs, it's software, it's cybersecurity, it's compute, I mean, we believe that, that dynamic will continue into Q4. And then HIVE benefits from a very favorable environment, Hyperscalers are confirming or increasing their spend. And we are positioned on programs where the demand continues to be healthy. Operator: Your next question comes from the line of Michael Ng with Goldman Sachs. Please go ahead. Michael Ng: Hey, good morning. Thank you for the question. I just have two quick ones on on Hive. First, I was just wondering if you could talk a little bit about the progress in onboarding, new customers beyond the the two main ones that you have? And then, you know, secondly, could you just talk about whether the growth in high volumes tend to be more from the traditional server side or AI server side. Thank you. Mike, I'll start, and then Patrick, please chime in. So we continue to make good progress in what we'll call programs as Patrick mentioned earlier. Programs to us is the way we define our ability to continue to to grow our presence in in Hive and ODMCM. And data center supply chain management. We do expect to continue to diversify our portfolio, our pipeline remains quite healthy and strong that continues to grow. We're we will continue to seek out more customers in the super six and beyond that. And so we feel good about where that's heading. Pat, do you wanna cover all of those? And so good morning. Patrick Zammit: Just adding that the growth is coming from networking, and compute, and more traditional compute. We have some GPU projects in in the pipe, but, when you look at Q3, the vast majority of Q4, again, the demand will come from networking and and traditional compute. Michael Ng: Great. Marshall. Thanks, Patrick. Patrick Zammit: Thank you. Operator: That concludes our question and answer session. I will now turn the call back over to Patrick Zammit for closing remarks. Patrick Zammit: So thank you everyone for joining us. I want to close by reiterating that our goal isn't simply to perform today. It is to continue building a company that can do so reliably over the long term. That means continuing to invest in our people, in innovation, and in the systems that allow us to anticipate change, rather than react to it. Our approach has always been about building enduring capabilities. Deep customer and vendor relationships, operational discipline, and a culture that adapts quickly to change. These are the factors that we believe will allow all us to continue to deliver differentiated performance year after year regardless of the market cycle. Of course, none of this would be possible without our coworkers around the globe, who are the driving force behind our success. We are grateful for the trust of our vendors, customers, and shareholders place in us, and we remain focused on earning it every day. Thank you, and have a great day. Operator: That concludes today's conference call. You may now disconnect. Have a nice day.
Operator: Good day, everyone, and welcome to Petershill Partners Interim Results First Half 2025 Results Call. [Operator Instructions] I would like to advise all parties that today's call is being recorded. Before we begin, I'd like to remind you that during this call, we may make a number of forward-looking statements, which could differ from our results materially, and Petershill Partners assumes no obligation to update these statements. I'd like to also encourage you to take a moment to read and digest the disclaimer on Slides 2 and 3 of the presentation. By attending this presentation, you will be deemed to have read and understood the terms of the disclaimer and agreed to be bound by them. A replay of today's call will be available on the Investor Relations section of our website, along with a copy of our interim results and presentation. Now I'd like to hand the conference over to Ali Raissi-Dehkordy, Co-Head of the Petershill Group within Goldman Sachs Asset Management. Please go ahead. Ali Raissi: Good morning, everyone, and thank you for joining us to discuss the Petershill Partners' interim results covering the first half of 2025. Today, I'm joined by Naguib Kheraj, Chairman of the Independent Board for Petershill Partners plc; Robert Hamilton Kelly, Co-Head of the Petershill Group; and Gurjit Kambo, CFO of the Petershill Partners plc. Before we discuss our financial and operational results, as you may have seen this morning, we have made an additional announcement. This sets out the Board's proposal and intended recommendation for Petershill Partners to implement a return of capital to all free-float shareholders, which will involve the cancellation of the free-float shareholders' shares and to delist from the London Stock Exchange's main market before reregistering as a privately limited company. To discuss this proposal, I'll pass you on to Naguib. Naguib Kheraj: Thanks, Ali, and good morning. We've announced an important set of proposals today, which we believe will provide a compelling opportunity for shareholders in Petershill Partners. The proposals would deliver with speed and certainty, a return of capital to the free-float shareholders at a substantial premium to the undisturbed share price and a price which is fair to all shareholders. The consequence of the proposals would be that the free-float shares would be canceled and the company would cease to be listed on the stock exchange. Let me take you through the key aspects and the way the Board has thought about the issues in coming up with the proposals. On Slide 6, we set out the value proposition, which is a total payment to free-float shareholders of $4.202 per share. This is made up of $4.15 per share for the return of capital and an interim dividend of $0.052 per share. The total payment is a 35% premium to yesterday's closing share price and a 41% premium to the volume-weighted average price for the past 6 months. The total value equates to a 10.6% discount to book value as compared with the average discount to book value of 37% that the stock has traded at since January 2024, and it represents a P/E multiple of 18.5x. For a shareholder who participated at the time of the IPO, this would translate into a total return over the period of 16%. This compares to the total shareholder return for the FTSE 250 over the same period of approximately 4%. Moving on to Slide 7. I'd like to explain the background and rationale for the Board's proposal. Petershill Partners was listed on the London Stock Exchange in September 2021 with the goal of providing shareholders diversified exposure to the growth and profitability in the alternative asset management industry. We've delivered on that manifesto in terms of growth of assets under management and fee-related earnings. Despite the macroeconomic headwinds and the challenging environment for alternative asset management investing, we've also increased the focus on private market strategies. And so now 95% of our AuM is in private markets with long-term locked-up capital. Slide 8 outlines some of the actions which the Board and the operator have undertaken to drive value creation in addition to the company's underlying performance. At the time of the IPO, we spoke about our intention to generate value through M&A activity. Over the past 4 years, we've invested $1.3 billion in 14 transactions, acquiring stakes in new partner firms or adding to our existing holdings in some firms. We've also sold 5 partner firm stakes at premium valuations, realizing an aggregate nominal value of approximately $1.9 billion. As a Board, we are very conscious of our responsibilities as stewards of shareholder capital. In addition to the regular dividends paid out of operating earnings, we've deployed capital on share buybacks and last year made a tender offer of $103 million at a premium. Following the tender offer, we switched to returning capital to shareholders through special dividends. So we didn't shrink the free-float any further and have paid $438 million in special dividends. Despite the underlying operating performance and these actions to create value and optimize capital efficiency, the Board does not believe the company's share price and valuation has appropriately reflected the quality and value of the company's assets and its attractive growth prospects. Since the 1st of January 2024, the company has traded at an average discount of 43% to the P/E multiples of listed U.S. and European alternative asset management firms and an average discount of 37% to reported book value. The Board's view is that this valuation discount reflects the fact that investment companies are generally trading at a discount to book value, especially where their assets are illiquid. In addition, macroeconomic market, geopolitical and industry factors have dampened interest in our kind of business and the low level of liquidity in the stock due to its limited free-float has also been a factor. We believe that absent any significant catalyst, these factors and the valuation discount would endure. And at these valuation levels, the private funds managed by Goldman Sachs would not be sellers, and so the free-float would remain small and the liquidity in the stock would continue to be limited. Having made a number of disposals, the company has cash available on the balance sheet and a substantial amount of near-term receivables, which are contractually binding deferred payment obligations. As a Board, we've been considering how we would use that capital optimally for the benefit of shareholders. One option would be to redeploy it into new investments. However, if the market were to continue to value the company at a large discount to book value, then every dollar of new investment may end up being valued in the stock at significantly less than $1. If instead we were to return the capital to shareholders, then the distributions would enable shareholders to receive cash back at full book value. But by shrinking the company, we would reduce our future growth prospects and potentially with a smaller company, present a less attractive investment opportunity, which in turn, could result in a lower valuation and a higher discount to book value. So as an alternative, we determined that we could mobilize resources in such a way as to create a near-term opportunity to provide the free-float shareholders with the ability to realize their investment at a substantial premium to the current market and at a level close to book value. Slide 9 sets out the sources of funding as well as the key factors the Board considered in assessing the value at which the transaction would make sense. We have a good starting base because we regularly attribute a fair value to every partner stake as part of our financial reporting. This takes into account our assessment of future growth, and we provide extensive disclosure in our financial statements of the discount rates and other parameters, which are used to come up with a fair value. We also use external valuation experts. But the financial statement values do not take into account illiquidity. By definition, all our investments are minority stakes and are inherently illiquid. We cannot control or easily drive exits or sales and have to work with the majority owners. Some of our partner stakes are very large and so would have a limited universe of potential buyers. And if we were to declare ourselves to be a seller of assets in a runoff, this could also have an impact on achievable values. So our situation is not the same as an investment company, which holds a portfolio of liquid traded stocks, which can easily be sold in a short space of time. If we think about the discounted cash flow value at the level of a plc shareholder, this is slightly different to the aggregated book value of the positions held on the balance sheet. The book value captures the gross value of the individual investments and takes a provision for taxes and divestment fees, assuming those assets are sold at those marks. What the balance sheet book value doesn't capture is the present value of future operating costs of the plc vehicle, such as the operators' fees and governance costs, nor does it capture future taxes on earnings if one were to realize the underlying cash flows from holding the investments. We've taken these factors into account. Of course, all the valuations have inherent in them considerable uncertainty on timing and achievability. What we have on offer in our proposal is certainty of cash proceeds within a short period of time. We are effectively providing an acceleration of value realization. So when we look at the value being put forward in these proposals, we think that the price represents a fair price for all shareholders, and our external advisers have also come to that conclusion. Slide 10 explains the structure and the timetable. The proposal is to be implemented by a court-approved scheme of arrangement in which the company will return capital to free-float shareholders and cancel their shares. There is no third-party offer, and this is not an offer by the private funds managed by Goldman Sachs. The practical result is analogous to the free-float shareholders selling their shares. And the end outcome when the free-float shares are canceled would be that the private funds managed by Goldman Sachs, which currently owns 79.5% of the company, will end up owning 100% of the company. All of the resolutions involved are interconditional and the deal will not happen unless they are all passed. For the capital return, the outcome of the shareholder vote will be determined solely by the free-float shareholders. It requires 75% of the free-float to vote in order to pass the resolution and the private funds managed by Goldman Sachs will not be able to vote their shares and they will not participate in the capital return. We expect to post the documents relating to the transaction on the 7th of October, and the shareholder meetings to approve the transactions would take place on the 3rd of November. If approved by shareholders, the cancellation of the shares and delisting would happen in early December and the cash settlement would take place shortly after that. I hope you found this explanation helpful. As a Board, we've worked very hard to ensure we optimize the outcome for all shareholders. We believe that the proposals we put forward are a good solution, which enables free-float shareholders to realize a substantial premium for their shares in cash and with a high degree of near-term certainty. And the private funds managed by Goldman Sachs have confirmed that they also support the proposals. I will be available, as will other directors and the operator team over the coming weeks to meet with shareholders and answer questions so that investors are able to make a well-informed decision ahead of the shareholder meetings. With that, I'll pass you back to Ali and Gurjit to talk through the interim results. Ali Raissi: Thank you, Naguib. And as the operator of Petershill Partners, we acknowledge the independent Board's proposal that you've set out this morning. Now to summarize the business' interim results for the first half of the year, starting on Slide 12. The company delivered good operational and financial performance in the period, with steady growth in total AUM and fee-paying AUM and double-digit fee-related earnings, FRE growth on a pro forma basis to $99 million when adjusted for disposals. Partner realized performance revenues of $46 million increased relative to a lower comparable period with tentative signs of a pickup in realizations emerging. Partner realized performance revenues, PRE, represented around 20% of the Petershill Partners' total revenue during the first half. Adjusted earnings per share came in at $0.114 per share, 35% higher than the first half of the prior year, largely due to a significant increase in interest income related to the general catalyst loan notes. Finally, the first half of the year's total capital return was $265 million, which included the final dividend payment of $114 million and the special dividend paid of $151 million relating to the divestment of the majority of the company's stake in General Catalyst. In addition, the Board have announced today an interim dividend of $0.052 per share, being 1/3 of the prior year's total ordinary dividend per the company's dividend policy. This will be paid on the 31st of October to eligible shareholders. Before I pass on to Gurjit to go into the details of the results, on Slide 13, I'll touch on the key activities across our partner firms and our interactions with partner firms during the first half of the year. Overall, asset raising and strong engagement has continued despite the volatile market backdrop with $19 billion of gross fee eligible assets raised in the first half. During the first 6 months of the year, Petershill Partners has been active with the sale of the majority of its stake in General Catalyst for $726 million and the acquisition of a stake in Frazier Healthcare Partners for $330 million. Since the end of the period, as previously announced, the disposal of the stake in Harvest Partners was completed for nominal consideration of $561 million. In addition, the company completed a follow-on acquisition for $158 million in STG Partners. Petershill Partners' support to grow partner firms has continued with 222 engagements across a diverse range of functions with particular focus on the support for capital formation. Partnership and alignment with our GPs remains a core tenet of our business model, and we continue to roll out new initiatives to support our firms. I will now pass you on to Gurjit and our results for the half year in more detail from Page 14. Gurjit Kambo: Thank you, Ali, and good morning to you all. As Ali has previously highlighted, fee-paying AUM has grown 3% year-on-year and also on a year-to-date basis, despite the net negative $9 billion impact from our M&A activities and $6 billion of realizations as our partner firms continue to succeed in raising new assets that attracts new fees for the company. Total AUM now stands at $351 billion, up 6%, and our ownership weighted fee-paying AUM at the end of the period stood at $28 billion, down from the $29 billion as at the end of 2024, impacted by disposals. Ownership-weighted total AUM is unchanged at $40 billion. Turning to Slide 15. On a reported basis, net management fees of $177 million declined by 8% and fee-related earnings of $99 million declined by 12%. On a pro forma basis, adjusted for disposals, both net management fees and FRE increased by 14% year-on-year. The 14% growth in FRE on a pro forma basis has been driven by higher gross management fees, up $15 million, and net transaction fees $7 million higher. Partner firm fee-related expenses totaling $78 million were down 3% year-on-year on a reported basis. But when adjusted for disposals in the first half of 2024, we would have seen partner firm fee-related expenses up compared to $68 million on a pro forma basis in the first half of 2024. On to Slide 16. Partner realized performance revenues or PRE totaled $46 million during the period, higher versus the comparable period last year, driven by a pickup in the realization activity and a stronger contribution from the absolute return strategies. PRE represented 20% of the total partner revenues for the first half, which is tracking within our guidance range of 15% to 30% for 2025. On the right-hand side of the slide, the share of partner accrued carried interest of $774 million increased by around 11% since the end of the year, primarily driven by increase in accruals. Moving on to Slide 17 and our balance sheet. Our investments in partner firms at fair value as at 30th of June 2025 was $5.5 billion, down from the $5.8 billion as at the end of 2024. The change includes additions of $275 million relating to Frazier Healthcare Partners, $184 million change in fair value, offset by the $730 million from disposals relating to the General Catalyst sale. The investments at fair value at 30th of June 2025 excludes an amount of $509 million relating to the loan notes from the sale of General Catalyst. There was no material change in the weighted average discount rate used to value the private market fee-related earnings and performance-related earnings. The book value per share at the end of June 2025 was $4.70 and is broadly unchanged from the $4.71 as at the end of the year. The $4.70 per share is equivalent to 342p using the 30th June 2025 U.S. dollar GBP exchange rate. On Slide 18, we set out a few of our post-balance sheet events since the first half reporting period ended. On the left-hand side, we highlighted the previously announced disposal of our stake in Harvest Partners, which was sold for $561 million in total consideration in July 2025. On the right-hand side, we show the acquisition of a follow-on investment in STG, a technology-focused middle market private equity firm, which we completed on 18th of August for total nominal consideration of $158 million. I'll now pass back to Ali to make some final remarks. Ali Raissi: Thank you, Gurjit. As you've heard, Petershill Partners continues to deliver good results for the year so far, and we are pleased that our partner firms have continued to raise new gross fee eligible assets, including some that was originally expected in the second half of this year. Our financial guidance for 2025 is unchanged, and we have continued to acquire and dispose of GP stakes at what we view as attractive valuations during the course of the year despite a challenging external environment. Finally, as you've heard from Naguib, in addition to the interim dividend of $0.052 per share that will be paid at the end of October, the Board intends to recommend a proposal to return $4.15 per share to free-float shareholders for the cancellation of their shares ahead of the intention to delist the Petershill Partners business, resulting in a total payment of $4.202 per share. As the next step, we intend to publish a shareholder circular and notice of court meeting at the General Meeting in October, ahead of the shareholder votes in November. We note that the Board is unanimous in their opinion that this proposal is in the best interest of the company, free-float shareholders and all shareholders. With that, we thank you for joining the call, and we'd like to open it up for questions. Operator: [Operator Instructions] We will take our first question from David McCann with Deutsche Bank. David McCann: I have only really one to ask, please. So I mean, what do the underlying private fund investors think about this proposal? I mean, clearly, one of the key reasons for the IPO was to provide them with an eventual exit at some point. So now, I guess, they're going to be waiting even longer for when that may happen. And obviously, we'll close one important source of liquidity for them. So the question really is, what are their views on these proposals? And what proportion of the private fund investors were in favor? Ali Raissi: David, thanks for the question. Look, I think as you noted, the public company was an important potential avenue of liquidity, but you also note that over the last 4 years, that liquidity, the share price would have indicated, hasn't been at an attractive level that the private funds had found compelling. I think most private investors that we've engaged and clearly, we'll continue to have conversations have recognized value in the underlying assets and particularly the value that as sort of indicated by some of the private transactions that we've been able to undertake for the public company. And so while some of that liquidity may not be available if the company wasn't publicly listed, those shareholders continue to benefit from yield and could also benefit from any realizations along the lines of what we've been able to demonstrate over the last 18 months for the public company. Operator: Any further questions, Mr. McCann? David McCann: No. That's all for me. Operator: [Operator Instructions] And we have no further questions at this time. My apologies, we did have a requeue from David McCann. David McCann: Yes. Since no one else is asking a question, maybe I'll ask one more then. So I mean, you touched on in the opening remarks some of the other options you do consider as to how you might close the gap between the book value and the other -- measured value and the share price. I mean, did you explore any other avenues such as the disposal of the assets to another business or do you need another aggregator in the industry? Maybe you can touch on some of the other avenues which you did explore in addition to some of the measures which you have historically taken. That would just be useful to understand if there was any other thought process there. Naguib Kheraj: Yes. I mean, look, we did consider prevailing trends and valuation levels in the marketplace. But the -- this is a very big portfolio. So the gross assets in the company are over $5 billion. So there are very few people that are able to write a check that size. And if you follow secondary markets in private equity, secondary market transactions typically happen at a significant discount to NAV. So we don't think that, that would have achieved something like the outcome we're able to have generated by ourselves. Operator: And we have no further questions at this time. Naguib Kheraj: So we can close the call then, and thank you very much for your participation. Ali Raissi: Thank you, everybody. Gurjit Kambo: Thanks. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome, everyone, to H&M Group's Conference Call Nine-Month Report for 2025. [Operator Instructions] Please be advised that this conference is being recorded. Today, I am pleased to present Joseph Ahlberg, Head of Investor Relations. I will now hand over to our speakers. Please begin. Joseph Ahlberg: Good morning, and warm welcome to everyone. Today, we present the third quarter results for 2025 for the H&M Group. I am Joseph Ahlberg, and I'm Head of Investor Relations. Before I hand over to our CEO, Daniel Erver, I would like to share this morning's setup. As usual, Daniel will share a short summary of our results, a run-through of selected highlights from the quarter as well as a brief outlook, then we will continue with a Q&A where Daniel; our CFO, Adam Karlsson; and I, will be available to answer your questions. So with that, please go ahead, Daniel. Daniel Erver: Thank you, Joseph, and good morning to everyone. It's great to have the opportunity to speak to all of you again. In the third quarter, we continued to take important steps in the right direction. So let me start by summarizing some of the key numbers from the quarter. The positive sales development continued in the third quarter. Sales grew by 2% in local currencies. And this growth should be seen in the context of having 4% fewer stores at the end of this quarter compared with the same period last year. Our upgraded online store rollout earlier this year has been very well received by our customers around the world contributing to a profitable growth in the quarter. Inventory continued to develop in the right direction and decreased by 9% in SEK compared with last year, and that's mainly, thanks to an improved demand planning capabilities as well as in combination with the well-executed summer sale. The composition of the inventory is good, and we see further opportunities for improvement in the fourth quarter. Sales for the month of September are expected to be on par with last year, and this should be seen in the light of high comparative sales figures from the previous year. We increased our operating profit compared with the same quarter last year, thanks to a stronger customer offer, good cost control, and improved gross margin, where a clear majority of the effect was driven by improvement work in our supply chain, as well as somewhat positive external factors. Additionally, currency exchange effects were positive for the gross margin development in the third quarter. This means that we reached an operating profit for the third quarter of SEK 4.9 billion, and this corresponds to an operating margin of 8.6%, up from 5.9% during the same quarter last year. The increase in profit shows that we are on the right track as we continue to make progress in line with our plan to create fantastic products with outstanding value for money, inspiring experiences and strong brands. Now we are on the right track, was also reflected in the response we got from customers when H&M opened in Brazil for the first time in August. I had the opportunity to join the team on-site and seeing the pride of our colleagues, the reception in social media and above all, the excitement of customers entering our stores for the first time was absolutely remarkable. We successfully built on the core of our plan with elevated products, inspiring experiences and a strong brand and combining these strengths with a deep curiosity for the local market. Please take the time to enjoy a short video from the opening. [Presentation] Daniel Erver: I hope you could feel some of the energy that we felt by being there. And based on this positive reception from our customers and the opportunity in a well-established fashion market, we see good potential to grow both in Brazil and in other parts of Latin America moving forward. With 2 stores and online already in place, we will open 1 more store in Brazil during this year. Additionally, 4 stores are signed for 2026, all in top locations in important cities, including the first store in Rio de Janeiro. Another highlight this quarter was the opening of our new flagship store in Le Marais, in Paris, which you can see on the left screen in front of you. This store has an assortment presentation and interior, that is curated for this special location. And this is a great example of how we strengthen the brand, while we are also creating an inspiring shopping experience in one of the world's most important fashion capitals. We continue to elevate our shopping experience both in stores and digitally, as well as strengthening the integration between both of these channels. As a part of this, we will continue to upgrade a large part of our physical stores worldwide with improvements in layout, presentation and tech features. In parallel with improving the customer offer, we continue to drive our sustainability agenda forward, and we are making clear progress towards our ambitious goals, as we continue to integrate sustainability into all parts of our business. And this morning, Fashion Revolution released their results from the latest What Fuels Fashion? 2025 report. Out of 200 major fashion brand and retailers, H&M ranks first for its level of public disclosure on decarbonization and other sustainability areas. Finally, I would like to share 2 great fashion moments from this quarter. First out, COS returned to New York Fashion Week for the fourth year in a row, underlying their ambition to build a global power brand in the accessible luxury category. The strong autumn/winter collection emphasized materials, contrast and craftsmanship. And last week, H&M opened London Fashion Week by presenting the new autumn/winter collection. The show clearly highlighted the strength of H&M's collections and the creativity of our in-house design teams, featuring both womenswear and menswear. The collection is now available in stores and online with a wide range of price points to cater for a diverse set of fashion needs. With leading models on the catwalk and many well-known guests in the audience, the show also included a special performance by British music talent, Lola Young, featured here on the right. While we continue to drive our plan forward, the world around us remains uncertain. With geopolitical challenges and a cautious consumer, it becomes even more important for us to stay focused on what we can influence and where we can make the biggest difference. Everyone across the entire company stays fully focused on our customer offer to always deliver best and outstanding value for money. In an increasing complex environment, our strong culture, together with good cost control and flexibility, allows us to build a stable foundation for long-term profitable and sustainable growth. With that, thank you so much for listening in this morning, and I will now hand you over to Joseph to take us through to the Q&A. Thank you. Joseph Ahlberg: Thank you, Daniel. [Operator Instructions] So with that, over to you, operator, to facilitate the questions. Operator: [Operator Instructions] The first question goes to Fredrik Ivarsson of ABG Sundal Collier. Fredrik Ivarsson: You've been talking about the strength in women's collections during the last year-or-so. Can you give us an update on the various performances in the categories during the quarter? Daniel Erver: So womenswear continues to be the main priority for us as a company as we make progress on our plan. We're really, really focused to win women first, and that's where we put the most emphasis. And as we shared before, that's a long term work, where we work systematically and disciplined to strengthen the customer offer. As we shared before as well, we see a lot of the learnings that had an effect on womenswear will be relevant for our other customer groups as well. And sequentially, we start to see an improvement in other customer groups. But the main priority and the main strength still remains the womenswear performance and collections. Fredrik Ivarsson: Okay. And the second question on cost. OpEx down 1 percentage point or 1% local currency, despite, I guess, top line growth and underlying cost inflation and such, can you share with us the sort of key drivers of the lower OpEx? I guess I recall you spent quite some money on marketing in Q3 last year, for instance, did you reduce those kind of costs or is it anything else in there? Daniel Erver: So overall, I think it's important to recognize in this quarter, it's been a tremendous work done by the teams on cost efficiency. And as we continue to invest and have a high activity around strengthening the collections, improving the experience and investing in marketing and branding, we gradually learn what takes an effect or not and then are very disciplined in steering resources and investments towards what really impacts the customer. I don't know, Adam, if you want to shed a bit more light on the cost development? Adam Karlsson: No, it's -- as you said, Daniel, it's generally quite a broad efficiency improvement we see. We've managed to plan our store operations well connected to how we execute on the summer sale. We see that we have improvements in our logistics efficiency, and that can also see and be reflected in the stock levels coming down, which supports OpEx on the logistics side. And then the overall long-term ambition to reduce complexity and bureaucracy in our organization still supports the margin expansion here. So it's a broad profit improvement from many parts of the operating part. Fredrik Ivarsson: Okay. So it sounds fairly sustainable then to me, at least? Adam Karlsson: Yes. We see that we have done long-term improvements and that is one of the benefits, for example, of now improving the management of the stock, and that reflects both in how we operate the stores and also benefits logistics efficiencies. So with that trend, we see that we have a good foundation to continue to be efficient within our operations. Operator: The next question goes to Niklas Ekman of DNB Carnegie. Niklas Ekman: Yes, can I ask you to just elaborate a little bit about current trading? And I know that this is a short period that it's always tricky. And maybe for just that reason, I know you had 11% growth last year, but minus 10% the year before. Is there anything you can say about weather comparisons, anything about underlying markets? Any tangible improvements to your own collections? Just anything you can -- to shed some more light on this figure, which today at least seems to have been a lot stronger than what consensus had assumed? Daniel Erver: Yes. As you already pointed out, it's a number that should be handled with a lot of caution because it is very short-sighted, and we are now in a period, at least in the Northern Hemisphere and especially in the northern parts of Europe, where weather is changing dramatically going from summer into fall, and that has a significant effect on customer demand, while September is a volatile month, and we should be really cautious to manage the number as you point out yourself. What we have seen is that we saw a good weather development late August, early September, and then we have seen a little bit warmer end of September. So it is a month where the weather really is shifting. When we look at the trend, we see it very much in line with the sales trend that we have seen so far. So we -- there is no significant deviation from the trend that we have seen when we look ourselves at the September performance. Niklas Ekman: Okay. That's very clear. Second question, just on Q4 here and the guidance that you're giving about the external factors saying that they will be less positive in Q3. And I imagine that, for instance, U.S. dollar and freight should be a lot lower year-over-year compared to the effect in Q3. And you mentioned tariffs here as a negative. So can you elaborate a little bit about these different components here behind the guidance for Q4? Adam Karlsson: Adam here. It's a balancing effect here that we believe will somewhat neutralize. We see the benefit of the dollar-euro pair working in our favor throughout the spring into the summer and into the autumn. But against that, we have then the impact of the tariffs that will then -- based on the tariffs we paid during the Q3. A lot of those garments will be sold during Q4, and that's when they affect our profit and loss. So there are some counterbalancing effect here. But the effect we speak out as currency, freight and raw materials are still to be seen as somewhat positive. Operator: The next question goes to Daniel Schmidt of Danske Bank. Daniel Schmidt: Yes. Maybe a question on the growth potential. You talk about it when it comes to Latin America, and you seem to be very excited about the start so far in Brazil. Do you think that the expansion plans that you have for Latin America will be able to turn the trend when it comes to net store closures in 2026? Daniel Erver: So we are really excited about the opportunity in Brazil, mainly based on how well we have been received by the customers in Brazil and how they have appreciated our offer. But we also see continued opportunity to optimize the store portfolio, and that work is ongoing. For Q4, it will have a slightly negative impact on sales, as we have communicated before. The outlook for 2026, we will share connected to the Q4 report. We're working hard to find opportunities for H&M to continue to be a growth company, and that's part of the work, but the specific numbers of what we'll see, we will share in the fourth quarter when we talk about the total net effect of the optimization work that we will do in 2026. Daniel Schmidt: Okay. But is it fair to say, you mentioned 4 new stores in Brazil for '26, for example, is it likely that there will be many more stores in Brazil than these 4 or are the lead times much longer than you think? Daniel Erver: As always, when we work to establish ourselves in the new market, it's important that we establish ourselves in the right locations, and that is really to be in the malls with the right customer demand, in the right location in the mall where we can provide the full H&M experience, and then Brazil is a mature fashion market and retail market, but it's also a well-established market. So it's not new malls being built. It's finding locations in existing very strong performing malls, but it's fine in those locations. And that's the work that needs to balance speed for chasing the potential with quality of building fantastic stores in the right locations. So when we look at the total portfolio optimization, of course, Brazil will be one key important part, but we also see opportunities in other parts of the world as well as continued need to consolidate part of our portfolio or we don't have the customer demand. So we will come back in Q4 with a more holistic view of how we look at 2026. Daniel Schmidt: Yes. Maybe just 1 question for Adam then. The question was already up on the table, but could you maybe sort of give us a ranking of the impact when it comes to the gross margin of these factors that we've talked about, improved supply chain, internal factors, markdowns, FX? Adam Karlsson: Yes. I'll try that. The majority of the improvement comes from our own work, so to say, the work that we've been speaking about how we collaborate with the partners in our supply chain, how we leverage that partnership, how we also work all the way down to second and third tier of our supply chain to ensure that we have a very competitive offer in -- that we can put in front of our customer. So the majority comes from our own work. Then we had last year some effects that went against that and those we don't think we will have sort of supporting year-on-year in Q4 as we did now in Q3. So majority will remain. The trend is clear, but some of these one-off effects that we saw during Q3, we don't think will materialize in Q4. Operator: The next question goes to Adam Cochrane of Deutsche Bank. Adam Cochrane: Well done on the results. Firstly, the markdown was much lower than I think we expected in the third quarter. Can you just say how you cleared the inventory position with less markdown than you were expecting? Did you do anything differently or was it the consumer demand was stronger than expected? Daniel Erver: This is Daniel. Starting off, the team has done a great job with how we executed the summer sale. So we were able to solve a lot of stock with us in an efficient way, which is well done on the execution of the teams working throughout our market. We also see with stronger collections that we are in a better situation. We still do see a need -- having a cautious consumer that is squeezed for -- although having a squeezed wallet, we still see a need to use a reduction to activate the customer from time to time, and that's why we still have a fairly high level of activity in Q3 and that will also continue into Q4. So we monitor the cautious customer clearly, and we do activities, but we are stock level wise in a very good situation after well-executed summer sale. Adam Cochrane: So still on that point, are your collections better and they're selling well? And at the same time you have to do selective promotions in order to get other consumers to spend the money? Is it a sort of mixed impact on the consumers? I'm trying to understand really how you can have better collections that are being received well and you still have to puts some markdowns or promotions in to get other consumers to purchase. Daniel Erver: Yes. The work we are doing is a long-term journey to strengthen and build a really strong competitive offer. And to do that, we always need to make sure that we offer outstanding value for money. And that's both in the price and how we work closely with suppliers, as Adam shared, to really offer outstanding value for the price that we charge, but it also is around how we provide short-term offers and activities to really stay competitive. And here, we act differently in different markets, and we monitor the market situation. And we're also looking at the customer base that we have and the ones we're moving towards, and in that play we need to still work with activities and reductions to activate the customer, even though we see gradual strengthening from the full price performance of well-received collection. Adam Cochrane: And then the second one is you talked about some of the store refurbishments that need to happen and the tech investments and things. What is the scale of these store refurbishments when you go across your existing estate? How much do you have to invest on a store? What's the -- is there any sales uplift that you do from that? And how long will it take you to go across the entire estate to get them into the -- to put these investments into each store? Daniel Erver: We're working across the entire portfolio with the different levers to build a really competitive experience. Sometimes that's a full rebuild of a store. We have done that, for example, Times Square is a good example of a full complete rebuild of a store in New York, and we have many others. And then based on those rebuilds and our updated formats, we find components that we believe are good for strengthening the experience, the service, the customer offer in a wider part of the portfolio. And then we, with a lighter program, rolled that out to a wider set of the portfolio, and that's the work that we're mentioning in the report that is starting now and that will reach sort of at the lower investment level, but with improvement -- important improvements for the consumer it will reach a wider part of the portfolio, and that's a work that we are initiating now that would happen in the fourth quarter, but then also moving into 2026. Adam Cochrane: Think it will be completed by the end of 2026? Daniel Erver: No, it's an ongoing work. We have almost 4,000 stores, and we always need to make sure that we are competitive in each location. So it will be an ongoing work of optimizing and improving the experience. Operator: The next question goes to Warwick Okines of BNP Paribas. Alexander Richard Okines: First question is on tariffs in the U.S. I was just wondering what sort of proportion of the goods sold in Q3 were actually bought in the tariff regime? What was sort of pre and post tariff purchases? Adam Karlsson: Adam here. It's varied throughout the quarter. So what we call out here is that we've seen an increase throughout the quarter, and we believe that increase and the effect will sort of become fully loaded towards the end of Q4 and then into Q1 next year, given, of course, the uncertainty of the exact tariff level. So we're not giving any guidance on those, but it's just when the goods were imported and when they were planned to sold. So it's an increase throughout third quarter that will be potentially fully loaded end of Q4 and then continue as far as we know currently then into first quarter next year. Alexander Richard Okines: And on those products, when they are sold with tariffs, have you made any price adjustments to reflect that or is your gross margin commentary just reflecting that you're taking all of the tariff impact yourself? Adam Karlsson: They are of course linked, but they're also, separate those questions. And we need to ensure that we have the right customer offer at all times and we respond to how the consumer and the competitive set is looking. So the gross margin comment right now, it's more on the sort of the consequence of us importing garments with tariffs and a higher portion of garments that has been imported with tariffs will be sold in Q4. Alexander Richard Okines: And if I may just squeeze in 1 more. Just sort of clarify, you talked -- when you talked earlier about Q4 guidance on gross margin, you talked about sort of balance effects that were somewhat neutralized. Does that mean you're expecting tariffs to largely offset the other benefits in the gross margin in Q4? Joseph Ahlberg: Thank you, Warwick. This is Joseph speaking. Of course, we still guide for a net slightly positive effect from external factors as we write here in the report. So that is taking all these effects into consideration, but we do indicate that the net effect is slightly smaller than it was in the third quarter based on our judgment connected to the sort of -- sorry, headwind becoming a bit more negative than from the tariffs, which -- to the technical effects Adam just pointed out. Operator: The next question goes to James Grzinic of Jefferies. James Grzinic: Congratulations on the spring/summer. I had a couple of questions really on gross margin. The first one is, can you perhaps remind us what the FX loss that impacted Q3 last year was, specifically, so that we can maybe take it out of the 180 basis points increase year-on-year that you just delivered? Joseph Ahlberg: Thank you, James. Joseph speaking. Yes, last year, we called out the negative FX effect as a factor explaining the gross margin development, meaning it was one of the significant factors that explained the development. This year we see those effects becoming positive instead. So with a negative effect in the comp base and the positive effect this year, the net effect then becomes positive to the year-over-year gross margin development in the third quarter. Now looking ahead, we don't expect these FX effect to give a significant year-over-year effect to the gross margin development in the fourth quarter when looking at the comp base of last year for the fourth quarter. But then again, we cannot make predictions, of course, on the FX development, but the outlook is more neutral for the fourth quarter presently. James Grzinic: I guess I just wanted to exclude the fact that there were exceptional charges that fell last year due to FX. So you're just referencing the ongoing impacts of contracting in dollar, basically, just to clarify that? Joseph Ahlberg: Yes, so when it comes to the FX effect is what we described last year, part of it is exchange rate losses on intergroup liabilities and receivables. And so it's the FX movement in the quarter. But again, it's important to stress that a clear majority of the increase in the gross margin comes from the improvement work we are driving in the supply chain and the somewhat positive external factors we saw in the third quarter. So we remain as a -- as a robust trend also for the fourth quarter. James Grzinic: Understood. Can I also ask, I appreciate the point on the theoretical dilution from gross tariff impact. But one of your peers in the U.S. has talked about moving considerably on pricing a couple of weeks ago and that was happening at a point where everybody in the space seem to have been doing exactly the same immediately post back-to-school being over. First of all, can you confirm that you are also observing that, that there's an industry in the U.S. that is clearly back-solving for those tariff costs through accelerating price increases? And how do you intend to move if indeed you're also observing that or if you -- indeed, you've moved at all? Daniel Erver: So we are done here. We also recognized and observed that there are price increases happening in the market in the U.S. in -- as a general statement, we see the same thing. And we are monitoring those developments closely to make sure that we offer a really competitive offer. We are cautious and prudent about the development in U.S. for the fourth quarter given the effects that Adam spoke about that we see that we have already paid tariffs on the garments that have imported and those garments will be sold in the fourth quarter; hence, we will see a bigger impact of tariffs on the gross margins. And while we see that on the one hand, on the other hand, we are continuously looking at how do we have a competitive offering and how do we optimize our pricing position and that we do in the U.S. as we do in all other markets, and that leads to both price decreases and price increases to stay competitive, and that's an ongoing work. But we are cautious about looking at the Q4 development in the U.S. given that we know we already paid tariffs that would impact the gross margins as we look into the fourth quarter. Operator: The next question goes to Richard Chamberlain of RBC. Richard Chamberlain: A couple of points of clarification, please. Just back to the comments you made about markdowns, expecting a higher -- somewhat higher impact for Q4 as a result of -- partly as a result of the Black Friday timing shift. Would you expect that timing impact to reverse fully in the first quarter? That's my first question. Daniel Erver: So that's correct. You see that specific shift, we will reverse in the first quarter, but we don't give any guidance for reductions in the first quarter. That would be dependent on how well our collections are being received during the autumn as well as the consumer sentiment as we head into the first quarter. So just that specific effect will be shifted, but we don't have a guidance for the first quarter at this point in time. We will come back to that when we meet for the fourth quarter report. Richard Chamberlain: Okay. Great. Very clear. And my second one was on the -- when you're talking about the supply chain in the statement, you talk about a more flexible supply chain with a higher share of purchases made in the current season. But at the same time, you're planning for extended transport times. I just wondered how that's influencing your thinking about how much inventory you need to have now in the business and how that will affect your sort of working capital profile in the fourth quarter? Adam Karlsson: Adam here. If I start with the transportation lead time, we still see that the negative effect we saw during the autumn of 2023 still persists. We cannot sail the shortest route between sort of supply chain in Asia, customer in Europe. So that still persists. And then within those guardrails, we try always to optimize both the design lead time, how we buy and source the mix of that and of course, how we ultimately secure that we are responsive and flexible throughout the supply chain. But that is what we call out. That sort of shift when it comes to transportation lead time. That has not -- that we're still seeing and observing that we're not sailing the shortest route. So that's what we call out. It's not worse than it's been, but it's not obviously a lot better either than the last 18 months. But then on the responsiveness on the suppliers here and how we collaborate them. Daniel? Daniel Erver: And then as an really important part of how we strengthen the product offering and making sure that we have the most competitive product offering, we are working on how do we increase the speed and reaction time in our supply chain. And that's a wide work that includes both, as we mentioned before, how we move production closer to the customer with what we call nearshoring or proximity sourcing, but it's also working with a set of suppliers that can be much quicker and where they can support with a larger part of the product development process, for example, it's working early on and preparing components to be able to do the design decisions at a later stage still being quick. So it's a broad spectrum of activities that we do where nearshoring is one, but not the only one. We also work a lot with how we collaborate with some of the best suppliers in the world to really speed up our supply chain. And that's how we build up higher responsiveness and can buy more in season, which creates better position and also more relevance for our customers. Operator: The next question goes to Monique Pollard of Citigroup. Monique Pollard: Two questions from me. The first one is just on the space impact in quarter. So obviously, as you mentioned, 4% fewer stores versus last year. But obviously, you'll be closing stores that are less productive, you might be opening larger stores. So what's the overall contribution to sales of that 4% fewer stores? Joseph Ahlberg: Monique, this is Joseph. So in this year so far and also expected for the full year, we do see somewhat negative net contribution to selling. So adjusting for this effect, we would see a slightly higher top line development for both the third quarter and expected for the full year. Monique Pollard: So that impacts quite a bit less than the minus 4 of the stores presumably? Joseph Ahlberg: That is correct, Monique. We do close low productive, low profitability stores and open the best possible stores, looking in every corner of the world for the best expansion opportunities. Monique Pollard: Understood. And then just a quick one on the marketing cost. Is it possible to quantify the marketing costs that were incurred in the quarter versus the -- I think it was about SEK 350 million last year, please? Daniel Erver: So we're keeping a very high activity when it comes to how we strengthen the brand and how we create excitement around all the brands in the portfolio, like the cost show we show, but especially with the focus on the H&M brand, where we continue to invest and have a high activity level. A great example is the Brazil opening where we used the opportunity for H&M entering Brazil as a global event to strengthen the relevance around the brand. And also, of course, the show we did in on London Fashion Week last week, that was a really strong statement of putting our own collection on display and sort of building excitement around that. So the activity remains. And as we have increased activity over the last 12 months, we also learn a lot of where we can find efficiencies and be more disciplined to steer investments that have a significant improvement and really break through all the way to the customers. And that's the ongoing work. We want to send a clear signal that the activity level is high. We believe a lot in strengthening the brand as part of our journey, but we also find efficiencies where we can really focus around the things that really makes a difference. I don't know, Adam, if you want to shed a bit more light on the development. Adam Karlsson: No. I think it reflects what we said that we had an autumn last year of sort of a restart of investing like an overall broad investment in brand and that ambition stays, but we believe that we can find clever ways to get the same and more effective in other ways. So I think that is partly reflected in the Q3 result here where we optimize the resource use and still, as you said, have a very high ambition and engage with a lot of customers all around the world. Operator: The next question goes to Georgina Johanan of JPMorgan. Georgina Johanan: Just 2 questions from me, please. First of all, just in terms of all of the underlying work that you're doing with the supply chain and going through the different supply tiers. I appreciate you're doing sort of more nearshore and can be more reactive and so on. But at the same time, you've obviously talked about markdowns continuing to move higher. So I assume that you are actually achieving sort of better buying with those suppliers, if you like. And I think by the end of this year, you're probably close to some 200 basis points or so cumulative. So just trying to get a sense of how far through that process you are because just from a high-level perspective, 200 basis points is already a great achievement in that regard. And then second question, I think you mentioned in the release around how the digital business is contributing strongly to profit growth at the moment. And I just wondered if that was coming from like the incremental sales that you're generating or actually if there's any initiatives that's been done, particularly around logistics or anything else in the digital business that is supporting that profitability, please? Joseph Ahlberg: Georgi, first question I can answer. This is Joseph. So on the supply chain, we are really driving several initiatives at the same time. We, for instance, have been talking about the work we do working closer with our strategic suppliers. This has been where we have consolidated the supplier base to work very closely with a shortlisted number of strategic suppliers who now stand for a big share of our total order value. And these suppliers, we work very closely with them, open book costing and so on to really make sure that we can deliver on our business idea with really high quality, good sustainability commitments and the right fashion and, of course, at an unbeatable value for the money. In parallel to this, we are ramping up this work that Daniel talked about earlier with collection suppliers with their own product development capabilities where our own design team work very closely with these suppliers design teams to very quickly turn around new design ideas to ready products reaching our customers. So that is also being ramped up at the same time as we are sort of on the other part of the supplier base and working closely with the strategic suppliers. So I hope that clarifies the sort of 2 directions we're driving in parallel. And when it comes to -- yes, the second question, I hand over to Adam. Adam Karlsson: Or did you have a follow-up question? Sorry. Georgina Johanan: I was just going to try and understand if possible sort of -- because that makes a lot of sense, but just how far through that process you were and whether we should be expecting comparable gains into a third year? Joseph Ahlberg: Yes, we do see that the -- if we take the collection buying sort of the in-season buying has been growing steadily. The share has been increasing over the past years. So now we are achieving a fairly high share for selected categories of products like light woven and so on. Daniel Erver: I think looking at the 2 different, as Joseph clearly explained. So I think the work when it comes to optimizing the way we collaborate with our suppliers on the costing models, the consolidation and so on, we have come fairly far in the work, and that's given a lot of support to the gross margin. And we think we are not done, but we're far on that journey. When it comes to increasing the pace of product development, buying more in season and speeding up the relevance to market, we have taken the first good steps, but there's still a lot of steps to be taken on that journey and how we speed up and become more relevant. I think to try to guide on the question, we have come quite far on the improvements of how to consolidate and build stronger gross margins. That work will continue, but we're far along. When it comes to increasing the speed and pace and buying more in season, we're more in the beginning with some great first steps on that journey. Adam Karlsson: And then I think there was a question about the broad cost sort of activities we drive. And I think that can also be seen in 2 parts. One is the effects on the -- sorry, Daniel. Daniel Erver: I think the question was around digital, the updated digital store and the sort of what has been... Adam Karlsson: Was a long time ago we got the question. Repeat the question. Joseph Ahlberg: Georgi, would you like to repeat your second question? Georgina Johanan: Yes, it was just -- I think you mentioned in the release that the digital store has been contributing strongly to profitability improvements. And I just wondered if that was simply coming from more sales in the digital store or if actually there were specific initiatives around maybe logistics or what you're spending on tech or marketing or whatever it was in the digital channel that was particularly supporting profitability improvements. Daniel Erver: When it comes to the digital development, both the sales team and the tech team has done a great job with -- including our creative teams to take the -- sort of provide the imagery and build up the experience. All of that has significantly improved with the rollout of the new optical experience that was sort of concluded at the end of the spring to all our markets where the experience really, really elevates the product offering and elevating the product offering with a stronger product offering and stronger products, that builds an even stronger value for money, and we see that is being really well received by the customers. So that combination of a great product offering where we have improved the design, the product development, the making, the material choices, combined with more inspirational imagery, better flow, better search functions, better size recommendation, that in combination has driven a strong comp sales development, and that's a tremendous job done by our teams. Then we see that -- we continuously look at the customer promise and the different offers that we have and how we provide a competitive experience. And actively and connected working on how can we reduce the return rate given that we don't want neither for the stock management nor for the planet and our sustainability targets, it's good to have high levels of returns. And that's also work that had a good progress during this quarter where we managed to lower the returns, which we see as very positive for both profitability, but as well for our climate impact. So those are the 2 things for this quarter. Operator: [Operator Instructions] And the next question goes to Sreedhar Mahamkali of UBS. Sreedhar Mahamkali: Most of them are already asked, but I just got a follow-up from James' question on tariffs and another small follow-up on something else that was discussed. Just on tariffs, how are you thinking -- I understand your point about watching the market, watching the consumer. Are you planning to follow your key competitors that you're watching? If they move, you move, what sort of kind of time delays that we should be thinking about? Clearly, it would be a persisting headwind if you didn't adjust pricing into next year. How should we think about it? What sort of time delay? How do you think about it? That's the first one. If you can just expand a little bit more, that would be very helpful. And a little bit more short term into Q4 on OpEx. Is there anything we should keep in mind in local currency changes in OpEx? Or is Q3 development of 1% reduction in SG&A a good indication for Q4 also? Daniel Erver: Thank you for the question. I'll take the first one, and then Adam will take the second one. We are in all our markets, monitoring the price development and how this -- I mean we have many markets with quite significant inflation where we continuously adjust prices based on the market competitive situation that we do in the U.S. as well, which leads to both price investments and price increases. And we see a general sort of gradual increase in the market. With that said, we always want to protect that we have a competitive customer offer and offer the best value for money, why we are cautious about Q4, where we already now know based on the tariffs that we paid in the third quarter that they will impact the gross margin. So we will evaluate. We are assessing the strength of our collections and sort of making sure that they are positioned with a competitive price. But of course, when we are paying increased tariffs, it will have an impact on our gross margin. Sreedhar Mahamkali: And I was trying to understand, you're not trying to increase your price gaps. You're trying to keep the price gaps where you want them to be but look to move over time rather than... Daniel Erver: Broadly, yes. But in that, there are always -- sorry. Go ahead. Sreedhar Mahamkali: No, go ahead, please. Daniel Erver: Broadly, that's a fair statement, but we always find opportunities as we look at the competitive situation and our product offering in making changes both up and down. But broadly, that's the direction, yes. Adam Karlsson: And on the OpEx side, I think we spoke about 3 effects that we believe are fairly sustainable. But for Q4, I think one can see that the store operations efficiencies and also the logistics efficiencies are likely to remain a little bit more caution on the marketing advertising side as we -- last year, when we relaunched the brand, we had quite a lot of costs connected to marketing during Q3 that were not there this year. So a little bit less positive impact on the marketing side for fourth quarter. Operator: The next question goes to Matthew Clements of Barclays. Matthew Clements: Most of my questions have been taken, but I thought I'd maybe zoom out a little bit and focus a little bit less on the long term. Just wondering, when you look to some of your benchmark peers, where do you see on cost the biggest and most exciting opportunities going forward? And could you highlight a few areas of initiatives that it's in-store efficiencies, RFID, self-checkouts, et cetera, or in logistics, automation, et cetera? What are the opportunities where currently H&M is underperforming where you think there's a scope basically to catch up and equalize? Daniel Erver: It's a broad and very interesting question that we work with. I think one clear view is that as we work on strengthening our customer offer and really being competitive in offering outstanding value for money, one key piece will be to increase store productivity and increasing the sales per square meter and store productivity is an important way to sort of balance the cost base because many of our costs are not fixed or are fixed. So when we drive productivity gains, we drive a better profitability. So I think that's one important scope where we see compared to some of the best peers that there is potential for square meter productivity. And that links, of course, very closely to both the experience, but especially to what we put into the store and the product offering, which is priority #1, 2 and 3 for our entire organization. So that's one important piece. I don't know, Joseph, if you want to elaborate on other cost? Joseph Ahlberg: Certainly, we have taken good steps on the inventory productivity over the past 2 quarters. We have stock composition, which is good, where we are slightly lower on the number of pieces versus last year. So this is also, of course, an area where some of our competitors are slightly ahead of us still, and we have long-term targets, which are more ambitious than the levels we currently have. So this is, of course, an area also that will help us generate a lot of operational efficiencies as we approach these targets. Matthew Clements: Just a follow-up on the inventory point. What are the key kind of initiatives at the moment? I mean kind of maybe some of your peers might talk about RFID reducing stock management time, visibility through the supply chain, et cetera. What are the kind of areas where you think you can work on over the next couple of years? Daniel Erver: This is Daniel. I'll start. One important area is to have a really, really competitive product. And a big part of what we spoke about with creating speed and flexibility in the supply chain is one key enabler of making sure that we have a very good quality, relevant product as well as strengthening our design teams and really sort of celebrating that know-how and those design team, both with competence, but also with the tech features to help them do efficient, really relevant design. So that's one important piece. We see with the use of RFID as we start to increase the precision and have real-time data, what we carry in all our different locations, physical stores, warehouses and so on, we see a lot of opportunities for optimization where we can offer better site availability at a lower stock level and having less safety stock to still have a very strong site availability. So here, we're excited about the opportunities as we start to roll out RFID at a broader scale. And then we work actively with the teams on improving the demand planning. So using all the data we have in a more efficient way to be more precise how we forecast the demand and then work actively with improving the supply to be precise to that demand, which also then helps us to come down in stock levels. And that's one -- that work that's been done over the last year that shows effect in this quarter, lowering the stock to sales ratio while we're actually increasing availability to the customers. Those are a few of the examples. Matthew Clements: Okay. That's very helpful. And then maybe one near-term question on regional performance. Just looking across your key markets, are there areas where you're particularly happy with performance, areas where you think there's room for improvements and weakness? Just interested on that front. Daniel Erver: If you look at this quarter, it's a quarter of quite even performance across the markets, where there's -- we believe there are opportunities in all markets, but there's no one single one sticking out in particular for this quarter. It's quite even performance across the geographical regions. Operator: The next question goes to William Woods of Bernstein Societe Generale Group. William Woods: The portfolio brands were soft relative to the overall group this quarter and have slowed down on a pretty easy comp. What's driving the weakness in the portfolio brands? Adam Karlsson: Adam here. One of the effects that we see is that, of course, the decision to close Monki as a physical store concept. So we also highlight then that we have within the portfolio brands about 10% fewer stores. So that is one isolated main effect and connected to the closure of Monki stores. And I think worth calling out is we see strong performance in costs, really continuing to build a very strong position in the market and building excitement around the brand, which we have seen with both the list rankings over the last 6 months as well as the reception of their fashion show in New York, which was really well received. So I think that's worth a call out. We also see our youth concept weekday performing well and having a good quarter and a good year so far. So that's on the positive side worth calling out. Operator: There are no further questions at this time. I will now return the call over to Daniel for any closing remarks. Daniel Erver: Thank you so much, and then thank you very much to all participating in this conference call. Thank you for listening in, and we wish you all a continued great day. Thank you from Stockholm. Operator: Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.
Operator: Good day, everyone, and welcome to Petershill Partners Interim Results First Half 2025 Results Call. [Operator Instructions] I would like to advise all parties that today's call is being recorded. Before we begin, I'd like to remind you that during this call, we may make a number of forward-looking statements, which could differ from our results materially, and Petershill Partners assumes no obligation to update these statements. I'd like to also encourage you to take a moment to read and digest the disclaimer on Slides 2 and 3 of the presentation. By attending this presentation, you will be deemed to have read and understood the terms of the disclaimer and agreed to be bound by them. A replay of today's call will be available on the Investor Relations section of our website, along with a copy of our interim results and presentation. Now I'd like to hand the conference over to Ali Raissi-Dehkordy, Co-Head of the Petershill Group within Goldman Sachs Asset Management. Please go ahead. Ali Raissi: Good morning, everyone, and thank you for joining us to discuss the Petershill Partners' interim results covering the first half of 2025. Today, I'm joined by Naguib Kheraj, Chairman of the Independent Board for Petershill Partners plc; Robert Hamilton Kelly, Co-Head of the Petershill Group; and Gurjit Kambo, CFO of the Petershill Partners plc. Before we discuss our financial and operational results, as you may have seen this morning, we have made an additional announcement. This sets out the Board's proposal and intended recommendation for Petershill Partners to implement a return of capital to all free-float shareholders, which will involve the cancellation of the free-float shareholders' shares and to delist from the London Stock Exchange's main market before reregistering as a privately limited company. To discuss this proposal, I'll pass you on to Naguib. Naguib Kheraj: Thanks, Ali, and good morning. We've announced an important set of proposals today, which we believe will provide a compelling opportunity for shareholders in Petershill Partners. The proposals would deliver with speed and certainty, a return of capital to the free-float shareholders at a substantial premium to the undisturbed share price and a price which is fair to all shareholders. The consequence of the proposals would be that the free-float shares would be canceled and the company would cease to be listed on the stock exchange. Let me take you through the key aspects and the way the Board has thought about the issues in coming up with the proposals. On Slide 6, we set out the value proposition, which is a total payment to free-float shareholders of $4.202 per share. This is made up of $4.15 per share for the return of capital and an interim dividend of $0.052 per share. The total payment is a 35% premium to yesterday's closing share price and a 41% premium to the volume-weighted average price for the past 6 months. The total value equates to a 10.6% discount to book value as compared with the average discount to book value of 37% that the stock has traded at since January 2024, and it represents a P/E multiple of 18.5x. For a shareholder who participated at the time of the IPO, this would translate into a total return over the period of 16%. This compares to the total shareholder return for the FTSE 250 over the same period of approximately 4%. Moving on to Slide 7. I'd like to explain the background and rationale for the Board's proposal. Petershill Partners was listed on the London Stock Exchange in September 2021 with the goal of providing shareholders diversified exposure to the growth and profitability in the alternative asset management industry. We've delivered on that manifesto in terms of growth of assets under management and fee-related earnings. Despite the macroeconomic headwinds and the challenging environment for alternative asset management investing, we've also increased the focus on private market strategies. And so now 95% of our AuM is in private markets with long-term locked-up capital. Slide 8 outlines some of the actions which the Board and the operator have undertaken to drive value creation in addition to the company's underlying performance. At the time of the IPO, we spoke about our intention to generate value through M&A activity. Over the past 4 years, we've invested $1.3 billion in 14 transactions, acquiring stakes in new partner firms or adding to our existing holdings in some firms. We've also sold 5 partner firm stakes at premium valuations, realizing an aggregate nominal value of approximately $1.9 billion. As a Board, we are very conscious of our responsibilities as stewards of shareholder capital. In addition to the regular dividends paid out of operating earnings, we've deployed capital on share buybacks and last year made a tender offer of $103 million at a premium. Following the tender offer, we switched to returning capital to shareholders through special dividends. So we didn't shrink the free-float any further and have paid $438 million in special dividends. Despite the underlying operating performance and these actions to create value and optimize capital efficiency, the Board does not believe the company's share price and valuation has appropriately reflected the quality and value of the company's assets and its attractive growth prospects. Since the 1st of January 2024, the company has traded at an average discount of 43% to the P/E multiples of listed U.S. and European alternative asset management firms and an average discount of 37% to reported book value. The Board's view is that this valuation discount reflects the fact that investment companies are generally trading at a discount to book value, especially where their assets are illiquid. In addition, macroeconomic market, geopolitical and industry factors have dampened interest in our kind of business and the low level of liquidity in the stock due to its limited free-float has also been a factor. We believe that absent any significant catalyst, these factors and the valuation discount would endure. And at these valuation levels, the private funds managed by Goldman Sachs would not be sellers, and so the free-float would remain small and the liquidity in the stock would continue to be limited. Having made a number of disposals, the company has cash available on the balance sheet and a substantial amount of near-term receivables, which are contractually binding deferred payment obligations. As a Board, we've been considering how we would use that capital optimally for the benefit of shareholders. One option would be to redeploy it into new investments. However, if the market were to continue to value the company at a large discount to book value, then every dollar of new investment may end up being valued in the stock at significantly less than $1. If instead we were to return the capital to shareholders, then the distributions would enable shareholders to receive cash back at full book value. But by shrinking the company, we would reduce our future growth prospects and potentially with a smaller company, present a less attractive investment opportunity, which in turn, could result in a lower valuation and a higher discount to book value. So as an alternative, we determined that we could mobilize resources in such a way as to create a near-term opportunity to provide the free-float shareholders with the ability to realize their investment at a substantial premium to the current market and at a level close to book value. Slide 9 sets out the sources of funding as well as the key factors the Board considered in assessing the value at which the transaction would make sense. We have a good starting base because we regularly attribute a fair value to every partner stake as part of our financial reporting. This takes into account our assessment of future growth, and we provide extensive disclosure in our financial statements of the discount rates and other parameters, which are used to come up with a fair value. We also use external valuation experts. But the financial statement values do not take into account illiquidity. By definition, all our investments are minority stakes and are inherently illiquid. We cannot control or easily drive exits or sales and have to work with the majority owners. Some of our partner stakes are very large and so would have a limited universe of potential buyers. And if we were to declare ourselves to be a seller of assets in a runoff, this could also have an impact on achievable values. So our situation is not the same as an investment company, which holds a portfolio of liquid traded stocks, which can easily be sold in a short space of time. If we think about the discounted cash flow value at the level of a plc shareholder, this is slightly different to the aggregated book value of the positions held on the balance sheet. The book value captures the gross value of the individual investments and takes a provision for taxes and divestment fees, assuming those assets are sold at those marks. What the balance sheet book value doesn't capture is the present value of future operating costs of the plc vehicle, such as the operators' fees and governance costs, nor does it capture future taxes on earnings if one were to realize the underlying cash flows from holding the investments. We've taken these factors into account. Of course, all the valuations have inherent in them considerable uncertainty on timing and achievability. What we have on offer in our proposal is certainty of cash proceeds within a short period of time. We are effectively providing an acceleration of value realization. So when we look at the value being put forward in these proposals, we think that the price represents a fair price for all shareholders, and our external advisers have also come to that conclusion. Slide 10 explains the structure and the timetable. The proposal is to be implemented by a court-approved scheme of arrangement in which the company will return capital to free-float shareholders and cancel their shares. There is no third-party offer, and this is not an offer by the private funds managed by Goldman Sachs. The practical result is analogous to the free-float shareholders selling their shares. And the end outcome when the free-float shares are canceled would be that the private funds managed by Goldman Sachs, which currently owns 79.5% of the company, will end up owning 100% of the company. All of the resolutions involved are interconditional and the deal will not happen unless they are all passed. For the capital return, the outcome of the shareholder vote will be determined solely by the free-float shareholders. It requires 75% of the free-float to vote in order to pass the resolution and the private funds managed by Goldman Sachs will not be able to vote their shares and they will not participate in the capital return. We expect to post the documents relating to the transaction on the 7th of October, and the shareholder meetings to approve the transactions would take place on the 3rd of November. If approved by shareholders, the cancellation of the shares and delisting would happen in early December and the cash settlement would take place shortly after that. I hope you found this explanation helpful. As a Board, we've worked very hard to ensure we optimize the outcome for all shareholders. We believe that the proposals we put forward are a good solution, which enables free-float shareholders to realize a substantial premium for their shares in cash and with a high degree of near-term certainty. And the private funds managed by Goldman Sachs have confirmed that they also support the proposals. I will be available, as will other directors and the operator team over the coming weeks to meet with shareholders and answer questions so that investors are able to make a well-informed decision ahead of the shareholder meetings. With that, I'll pass you back to Ali and Gurjit to talk through the interim results. Ali Raissi: Thank you, Naguib. And as the operator of Petershill Partners, we acknowledge the independent Board's proposal that you've set out this morning. Now to summarize the business' interim results for the first half of the year, starting on Slide 12. The company delivered good operational and financial performance in the period, with steady growth in total AUM and fee-paying AUM and double-digit fee-related earnings, FRE growth on a pro forma basis to $99 million when adjusted for disposals. Partner realized performance revenues of $46 million increased relative to a lower comparable period with tentative signs of a pickup in realizations emerging. Partner realized performance revenues, PRE, represented around 20% of the Petershill Partners' total revenue during the first half. Adjusted earnings per share came in at $0.114 per share, 35% higher than the first half of the prior year, largely due to a significant increase in interest income related to the general catalyst loan notes. Finally, the first half of the year's total capital return was $265 million, which included the final dividend payment of $114 million and the special dividend paid of $151 million relating to the divestment of the majority of the company's stake in General Catalyst. In addition, the Board have announced today an interim dividend of $0.052 per share, being 1/3 of the prior year's total ordinary dividend per the company's dividend policy. This will be paid on the 31st of October to eligible shareholders. Before I pass on to Gurjit to go into the details of the results, on Slide 13, I'll touch on the key activities across our partner firms and our interactions with partner firms during the first half of the year. Overall, asset raising and strong engagement has continued despite the volatile market backdrop with $19 billion of gross fee eligible assets raised in the first half. During the first 6 months of the year, Petershill Partners has been active with the sale of the majority of its stake in General Catalyst for $726 million and the acquisition of a stake in Frazier Healthcare Partners for $330 million. Since the end of the period, as previously announced, the disposal of the stake in Harvest Partners was completed for nominal consideration of $561 million. In addition, the company completed a follow-on acquisition for $158 million in STG Partners. Petershill Partners' support to grow partner firms has continued with 222 engagements across a diverse range of functions with particular focus on the support for capital formation. Partnership and alignment with our GPs remains a core tenet of our business model, and we continue to roll out new initiatives to support our firms. I will now pass you on to Gurjit and our results for the half year in more detail from Page 14. Gurjit Kambo: Thank you, Ali, and good morning to you all. As Ali has previously highlighted, fee-paying AUM has grown 3% year-on-year and also on a year-to-date basis, despite the net negative $9 billion impact from our M&A activities and $6 billion of realizations as our partner firms continue to succeed in raising new assets that attracts new fees for the company. Total AUM now stands at $351 billion, up 6%, and our ownership weighted fee-paying AUM at the end of the period stood at $28 billion, down from the $29 billion as at the end of 2024, impacted by disposals. Ownership-weighted total AUM is unchanged at $40 billion. Turning to Slide 15. On a reported basis, net management fees of $177 million declined by 8% and fee-related earnings of $99 million declined by 12%. On a pro forma basis, adjusted for disposals, both net management fees and FRE increased by 14% year-on-year. The 14% growth in FRE on a pro forma basis has been driven by higher gross management fees, up $15 million, and net transaction fees $7 million higher. Partner firm fee-related expenses totaling $78 million were down 3% year-on-year on a reported basis. But when adjusted for disposals in the first half of 2024, we would have seen partner firm fee-related expenses up compared to $68 million on a pro forma basis in the first half of 2024. On to Slide 16. Partner realized performance revenues or PRE totaled $46 million during the period, higher versus the comparable period last year, driven by a pickup in the realization activity and a stronger contribution from the absolute return strategies. PRE represented 20% of the total partner revenues for the first half, which is tracking within our guidance range of 15% to 30% for 2025. On the right-hand side of the slide, the share of partner accrued carried interest of $774 million increased by around 11% since the end of the year, primarily driven by increase in accruals. Moving on to Slide 17 and our balance sheet. Our investments in partner firms at fair value as at 30th of June 2025 was $5.5 billion, down from the $5.8 billion as at the end of 2024. The change includes additions of $275 million relating to Frazier Healthcare Partners, $184 million change in fair value, offset by the $730 million from disposals relating to the General Catalyst sale. The investments at fair value at 30th of June 2025 excludes an amount of $509 million relating to the loan notes from the sale of General Catalyst. There was no material change in the weighted average discount rate used to value the private market fee-related earnings and performance-related earnings. The book value per share at the end of June 2025 was $4.70 and is broadly unchanged from the $4.71 as at the end of the year. The $4.70 per share is equivalent to 342p using the 30th June 2025 U.S. dollar GBP exchange rate. On Slide 18, we set out a few of our post-balance sheet events since the first half reporting period ended. On the left-hand side, we highlighted the previously announced disposal of our stake in Harvest Partners, which was sold for $561 million in total consideration in July 2025. On the right-hand side, we show the acquisition of a follow-on investment in STG, a technology-focused middle market private equity firm, which we completed on 18th of August for total nominal consideration of $158 million. I'll now pass back to Ali to make some final remarks. Ali Raissi: Thank you, Gurjit. As you've heard, Petershill Partners continues to deliver good results for the year so far, and we are pleased that our partner firms have continued to raise new gross fee eligible assets, including some that was originally expected in the second half of this year. Our financial guidance for 2025 is unchanged, and we have continued to acquire and dispose of GP stakes at what we view as attractive valuations during the course of the year despite a challenging external environment. Finally, as you've heard from Naguib, in addition to the interim dividend of $0.052 per share that will be paid at the end of October, the Board intends to recommend a proposal to return $4.15 per share to free-float shareholders for the cancellation of their shares ahead of the intention to delist the Petershill Partners business, resulting in a total payment of $4.202 per share. As the next step, we intend to publish a shareholder circular and notice of court meeting at the General Meeting in October, ahead of the shareholder votes in November. We note that the Board is unanimous in their opinion that this proposal is in the best interest of the company, free-float shareholders and all shareholders. With that, we thank you for joining the call, and we'd like to open it up for questions. Operator: [Operator Instructions] We will take our first question from David McCann with Deutsche Bank. David McCann: I have only really one to ask, please. So I mean, what do the underlying private fund investors think about this proposal? I mean, clearly, one of the key reasons for the IPO was to provide them with an eventual exit at some point. So now, I guess, they're going to be waiting even longer for when that may happen. And obviously, we'll close one important source of liquidity for them. So the question really is, what are their views on these proposals? And what proportion of the private fund investors were in favor? Ali Raissi: David, thanks for the question. Look, I think as you noted, the public company was an important potential avenue of liquidity, but you also note that over the last 4 years, that liquidity, the share price would have indicated, hasn't been at an attractive level that the private funds had found compelling. I think most private investors that we've engaged and clearly, we'll continue to have conversations have recognized value in the underlying assets and particularly the value that as sort of indicated by some of the private transactions that we've been able to undertake for the public company. And so while some of that liquidity may not be available if the company wasn't publicly listed, those shareholders continue to benefit from yield and could also benefit from any realizations along the lines of what we've been able to demonstrate over the last 18 months for the public company. Operator: Any further questions, Mr. McCann? David McCann: No. That's all for me. Operator: [Operator Instructions] And we have no further questions at this time. My apologies, we did have a requeue from David McCann. David McCann: Yes. Since no one else is asking a question, maybe I'll ask one more then. So I mean, you touched on in the opening remarks some of the other options you do consider as to how you might close the gap between the book value and the other -- measured value and the share price. I mean, did you explore any other avenues such as the disposal of the assets to another business or do you need another aggregator in the industry? Maybe you can touch on some of the other avenues which you did explore in addition to some of the measures which you have historically taken. That would just be useful to understand if there was any other thought process there. Naguib Kheraj: Yes. I mean, look, we did consider prevailing trends and valuation levels in the marketplace. But the -- this is a very big portfolio. So the gross assets in the company are over $5 billion. So there are very few people that are able to write a check that size. And if you follow secondary markets in private equity, secondary market transactions typically happen at a significant discount to NAV. So we don't think that, that would have achieved something like the outcome we're able to have generated by ourselves. Operator: And we have no further questions at this time. Naguib Kheraj: So we can close the call then, and thank you very much for your participation. Ali Raissi: Thank you, everybody. Gurjit Kambo: Thanks. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Yuki Nishio: [Foreign Language] Now I'd like to turn this call over to KK, Senior Vice President, Finance, JPAC and Japan CFO. S.Krishna Kumar: Thank you, Nishio-san. Good afternoon, everyone, and welcome to Oracle Japan's First Quarter Fiscal Year 2026 Earnings Conference Call. We had another excellent performance in this Q1 attributed to growth of cloud services, especially Oracle Cloud Infrastructure. The demand is substantial for our cloud business, which has led to acceleration in revenue growth. In Software License business, we changed our list price in Q2 '25. Therefore, we anticipated that there would be a reactionary decrease due to rush demand in Q1 of last year. We announced the opening of Japan operations center to accelerate innovation in AI adoption by Japanese companies and organizations and to accelerate the adoption of sovereign cloud. This center supports Oracle Alloy partner companies by providing operational expertise and technical assistance, enabling them to deliver a broad range of cloud and AI services and expand their business. Regarding Oracle AI World in Las Vegas from October 13 to 16, starting this year, it will be called Oracle AI World. The new name emphasizes our commitment to help customers and partners take advantage of latest AI innovations to move faster, reduce costs, make more informed decisions and build smarter businesses. You can also participate online via streaming all live events. We continue to add a lot of customers in various industries like public sector manufacturing, financials and information technology. Let me give you a few examples. Number one, Kubota provides products and solutions developed and produced in over 120 countries and regions worldwide across the fields of food, water and environment. When advancing water environment projects across 3 Southeast Asian countries, information was previously managed in a decentralized manner using spreadsheet software and paper creating a risk of human error. Additionally, there was a need to strengthen internal controls and streamline redundant tasks. It was difficult to grasp information on profit and loss project performance in real time, posing challenges for rapid management decision-making. To solve these issues, Kubota selected NetSuite, a solution that could be implemented quickly and cost effectively while offering high adaptability to change. Number two, Yamato Contact Service, which handles Contact Center and BPO operations for the Yamato Group has streamlined its customer support operations by leveraging Oracle Cloud Infrastructure generative AI service and Oracle Database 23ai. Specifically in e-mail support operations, they have successfully increased the match rate for proposing FAQs to self resolvable inquiries to 85%, roughly double the previous rate. This has enabled Yamato to automatically process and reduce approximately 20% of e-mail inquiries relating to TA-Q-BIN delivery operations using AI. Number three, Toyo University. Looking ahead to its 150th anniversary in 2037, Toyo University is formulating a vision for its future as a comprehensive academic institution. To achieve this, a financial accounting system, enabling data-driven management decisions and financial operations was essential. While previously using a custom developed system, the university adopted Oracle Cloud ERP to reduce operational and maintenance burdens and transition to a sustainable, highly flexible system. Oracle Cloud ERP is valued for its extensive implementation track record at universities, both domestically and internationally and its ability to loosely integrate with university-specific peripheral systems via APIs and its flexibility to accommodate future expansion. Number four, AEON Housing Loan Service, AEON faced challenges in its traditional on-premise environment including end-of-life hardware maintenance, delays in applying security patches, difficulties in flexible resource allocation and the need to strengthen its disaster recovery configuration. Against this backdrop, following a feasibility study and POC for cloud migration using Oracle Cloud Lift Services, they decided to proceed with a full-scale migration to Oracle Cloud Infrastructure. With support from Oracle Consulting Services, they achieved full cloud migration in a short time frame. This was made possible by high affinity between our on-premise Oracle database environment and Oracle autonomous database on OCI, coupled with a highly reliable project structure. This is just to give you a sense of the broad outreach in the market that we have with our different products and services and to underline Oracle's presence in most mission-critical systems, applications and industries. Let me move to the numbers. We have made some changes to the face of our income statement to better reflect how we manage the business so you understand our cloud business dynamics more directly. Total revenue was JPY 66,275 million, growing at 3.7% compared to previous year, driven by strong growth in our cloud revenue. Total cloud revenue was JPY 19,097 million, up 37.2% now represent 29% of the total company revenue. Infrastructure consumption revenues continue to have a strong momentum which includes autonomous database. Operating income was JPY 21,128 million, decreasing 4.8% and net income was JPY 14,805 million, down 3.7%. Total revenue again hit a record high for the first quarter. The profit categories were down mainly due to decline in high-margin software license business. We will maintain our guidance for revenue and EPS communicated at the start of this fiscal year. Thank you very much, and back to Nishio-san. Yuki Nishio: [Foreign Language] Unknown Executive: [Foreign Language] [Interpreted] First question is from Kikuchi-san of SMBC Nikko. There are 2 questions, but we will go one by one. First question. This is about the revenue of cloud service in the first quarter. Year-on-year, it grew by 37% and Q-on-Q, it grew by 12%. It appears to have grown significantly Q-on-Q basis, but is there any onetime factor? S.Krishna Kumar: As I mentioned in my opening comments, our infrastructure revenues, especially infrastructure [Technical Difficulty] Hello. I'm back. Sorry, I think I got disconnected. Yuki Nishio: [Foreign Language] S.Krishna Kumar: So did you hear my answer to the question? Or should I start again? Yuki Nishio: You were cut off. Please start over again. S.Krishna Kumar: Okay. Let me talk about the cloud revenue. So I think we will -- we saw very strong momentum, as I said in my opening comments. This is across all product offerings, especially infrastructure and even SaaS revenue growth was strong. So -- and I think there is no one-off factor affecting this. So we should see strong momentum continuing into the fiscal year. Yuki Nishio: [Foreign Language] Unknown Executive: [Foreign Language] [Interpreted] And second question from Kikuchi-san. This is about HR expense. The growth is quite significant. However, in terms of number of headcount, it is not increasing. So what are the reasons behind it? And if you could share with me the outlook for second quarter and onwards, that would be helpful. S.Krishna Kumar: Yes. Regarding the people expense, we -- there are a few factors that is affecting the increase. There was a salary increase last year that was provided. We are also constantly changing and churning our people. So new people come at higher costs, with the right skill set, and that's the whole intention of the organization. And we also had some restructuring expense that got into the P&L. And also a little bit of stock compensation expenses got affected because the stock price also climbed significantly. So these are some of the factors that are contributing to the personnel expense. The second question on the outlook for Q2 and beyond. As I said, for the full year, I am maintaining my guidance. We should see some bounce back in license. I would expect it to bounce back for the remainder of the year. And we'll continue to see some good momentum on our cloud revenues. So the year looks very strong for us. Yuki Nishio: [Foreign Language] Unknown Executive: [Foreign Language] [Interpreted] We have questions from Noda-san of CLSA Securities. This is about Oracle Alloy, when will it start to contribute to the revenue of cloud service? S.Krishna Kumar: Sorry. Sorry, I was on mute. So all the alloys that we have booked, and we have more alloys in our pipeline that we are working on. Some of it will start showing in our numbers towards the end of this fiscal FY '26. But the consumption will really accelerate. The alloy consumption will really start accelerating more in FY '27. Yuki Nishio: [Foreign Language] Unknown Executive: [Foreign Language] [Interpreted] Second question from Noda-san of CLSA Securities. OpenAI and Meta in the U.S. are starting to use OCI for their infrastructure to do inferencing. So -- and if these tech companies wishes to -- wish to expand their AI service in Japan. And if they start to use OCI in Tokyo region in order to ensure secure their local resources, will this become a potential upside from Oracle Japan? S.Krishna Kumar: So this is kind of a little -- I appreciate the question, but at this point in time, it's a little hypothetical for me. It all depends on how we contract it and what exactly the nature of work would be and whether it's an Oracle Japan contract or not. But having said that, what we have seen globally, and you -- if you have followed Oracle Corporation's earnings call, we -- a lot of the biggest training model -- or large language models do their training on by default on Oracle Cloud Infrastructure. We also have enabled OCI to offer these large language models to our customers as a choice. For example, our customers can use our generative AI service and use any of these LLMs, whether it's OpenAI or Grok or Llama to further their AI capabilities for their organizations. So there will be some linkages. And of course, it's going to be beneficial for Oracle Japan also. But I don't think I can answer your specific -- I don't -- I have an answer to your question specifically on this one. Thank you. Yuki Nishio: [Foreign Language] Unknown Executive: [Foreign Language] [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Hello, and welcome to Glenveagh Interim Results 2025. My name is Laura, and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] I will now hand you over to your host, Stephen Garvey, CEO, to begin today's conference. Thank you. Stephen Garvey: Good morning, and thank you, Laura. I am Stephen Garvey, CEO of Glenveagh. I'm joined today by our CFO, Conor Murtagh. We appreciate you joining our interim results call for the first 6 months ended the 30th of June 2025. This morning, I'll walk you through the key highlights, the market, the policy context and how our strategy is showing up in Homebuilding, Partnerships, land and innovation. Conor will take you through the financials and capital allocation, and I will return to the outlook and closing remarks. As always, we will leave plenty of time for your questions at the end. Let's begin on Slide 4, which sets out our headline numbers for the first half of the year. This period demonstrated the strength of our Building Better strategy, set out scale delivery, deepened our partnerships with the state and drove operational efficiency through innovation, and that's exactly what's reflected in our results. Our focus on standardization and vertical integration is now embedded across the business, making us more resilient and more efficient as we grow. The benefits of our early investment and innovation are visible in our margin profile and our ability to deliver at scale even as the market evolves. This is also the first interim period where our Partnerships segment has made a material contribution to group profit. This is a real milestone for us and reflects the strength of our public-private model. We are now recognized as a partner of choice for the state with a growing pipeline and strong demand for our homes. We continue to manage our capital with discipline, optimizing our landbank and maintaining a strong balance sheet even as we accelerated delivery. Our buyback program continues to create value for shareholders, and we are seeing the benefits of a more efficient, more focused approach to capital deployment. We will discuss these elements in greater detail as we progress this morning. For now, I want to emphasize that the strategy we set out a few years ago is delivering for our customers, our partners and our shareholders. Turning to Slide 5. Let's take a moment here to consider what sets Glenveagh apart in the current environment. The need for new homes in Ireland remains acute, and government policy is more focused than ever on increasing supply. This is happening against the backdrop of continued economic strength and a supportive policy environment, so the market opportunity is clear. What gives us confidence is the way we have positioned the business to capture the opportunity. We've built a sector-leading platform, one that's not just about scale, but about delivering high-quality homes in the right locations, supported by a uniquely integrated operating model. Our early investment in innovation and standardization is now delivering tangible benefits, making our business more resilient and more efficient as we grow. We are seeing the benefits of our deepening partnerships with the state and hard-won reputation as a partner of choice for public housing delivery. This is supported by a disciplined approach to capital allocation and a strong balance sheet. Our focus on profitable growth, active landbank management and ongoing investment in our supply chain is enabling us to create long-term value for the business and drive sustainable returns for our shareholders. Providing further context, Slide 6 shows just the long-term demand outlook for housing in Ireland remains exceptionally strong. We continue to see positive trends in income and employment with both wages and job creation rising steadily across the economy. Alongside this, Ireland's population growth remains robust, driven by sustained net inward migration well above the European average. Mortgage lending activity is also maintaining a healthy pace with first-time buyers accounting for a significant share of drawdowns supported by government schemes. The underlying drivers of demand for new homes are strengthening. Turning to Slide 7. We can see in more detail how government policy and recent market initiatives are creating a genuine supportive environment for housing delivery. The National Development Plan and the Planning and Development Act 2024 are setting ambitious targets and providing significant funding alongside the infrastructure and planning certainty needed to achieve them. On the demand side, supports such as Help to Buy and the First Home Scheme continue to underpin affordability for buyers. They both have been extended, giving buyers and developers greater confidence to plan ahead. There's also a strong policy push for modern methods of construction and using state land at scale through the Land Development Agency and local authorities. But as we've said before, meeting Ireland's housing needs will require more than just policy ambition. It will take sustained private sector capital, adequately zoned land, public sector resources and critical infrastructure. The success of our Partnerships platform shows how public and private resources can be pooled effectively to deliver much needed homes. We've shaped our strategy around this shift, and we are beginning to see material results, which we will talk about shortly. In the short term, the policy environment is evolving for the better, and that gives us real confidence in our ability to continue delivering at scale. Now let's dive deeper into our segments, starting with Homebuilding on Slide 8. Just a quick reminder that at the start of the year, we announced with the 2024 results that we have simplified our reporting on Homebuilding previously Suburban and Partnerships, previously Urban and Partnerships. This was a standout period for homebuilding with delivery nearly doubling year-on-year. The momentum reflects the strong demand and the benefits of our differential model and strategy. Standardization, scalable sites, vertical integration are all coming through in our results. Excellence in our execution saw major completions at Kilmartin Grove and Hereford Park as well as major progress across a number of developments and a number of new sites starting earlier in the year. Our average selling price was elevated in the first half due to mix, but we expect that to normalize as the year progresses. Margin expansion in Homebuilding was driven by the choices we made to invest efficiently and repeatably with the forward order book at around EUR 1.4 billion, we have strong visibility for the rest of the year and well into 2026. Turning to Slide 9. Let's talk about Partnerships. For the first time, this segment made a material profit contribution, reflecting the scale and momentum in this part of the business. We now have 6 active sites underway, including new contributions from Mooretown, New Road, the Cork Docklands, which is a development in collaboration with the Land Development Agency, alongside Ballymastone, Oscar Traynor Road and Foxwood Barns. This growing pipeline underpinned by robust planning momentum and repeated demand from public sector clients gives us strong visibility on future delivery. Moving to Slide 10. We can see how our land portfolio remains a source of strength and flexibility. The portfolio has been carefully assembled to align with our strategy. It is focused on supporting high-quality own-door homes in right locations with 74% of our units in the Greater Dublin area. We continue to maintain a strong cost discipline with the average plot cost at EUR 32,000, and the landbank supports an attractive embedded margins and capital returns. Importantly, this landbank gives us capacity to deliver between 2,600 and 3,600 equivalent units per year through to 2030, underpinning our medium-term delivery objectives. We have also been actively managing the portfolio with over EUR 60 million of land sales either closed or at advanced stages, ensuring we remain flexible and capital efficient as the market evolves. Finally, just to note, the recent publication of the National Planning Framework is expected to materially positively impact our strategic landbank, resulting in a lower capital deployment requirement in future land periods. Turning to Slide 11. Our commitment to innovation remains a core pillar to our strategy. We continue to invest significantly in this area. Phase 2 of our innovation program is now underway via a EUR 25 million commitment to expand our off-site facility -- manufacturing facilities in Carlow, including an additional facade line alongside our timber frame platform. At the heart of this is NUA, our in-house manufacturing and innovation platform. Through NUA, we are moving beyond traditional building methods and embracing innovative lightweight alternatives, such as a new wall system, roof cladding and floor cassettes. Our exclusive perpetual license for integrated external facades is now a key part of this, allowing us to increase premanufactured value and improve further efficiencies. Off-site manufacturing and modern methods of construction are already delivering tangible improvements in cost control, build efficiency and margin performance, all of which makes Glenveagh more resilient, more efficient and better positioned to deliver at scale as the market evolves. With that context, I'll hand you over to Conor to talk you through the financials and the capital allocation. Conor Murtagh: Thanks, Stephen, and good morning, everyone. I'll take you through the financials for the first half of 2025, starting with the income statement, then moving to the balance sheet, land and cash flow and finally, our capital allocation priorities. As always, we'll outline the key drivers behind the numbers and what they mean for the business. If we can turn to Slide 13. As Stephen noted, the first half of 2025 marked a period of strong growth for Glenveagh. Group revenue reached EUR 342 million, up 124% on last year. This uplift reflects the momentum we've built in both Homebuilding and Partnerships with delivery volumes and on-site partnership activity, both moving in our favor. Gross profit increased to approximately EUR 67 million, and our gross margin expanded to 19.5%, up 130 basis points. This margin improvement is as a result of several years of investment in standardization, scale and vertical integration in addition to mix benefits. Work in progress rose to approximately EUR 347 million, which is in line with our plans to ramp up Homebuilding output and deliver under the Croí Cónaithe scheme. Net assets finished the first half at EUR 748 million and reflects approximately EUR 35 million of capital returns in the period. Altogether, it shows we're supporting growth in a disciplined way, optimizing working capital, managing our landbank and maintaining a strong balance sheet. Moving to the landbank slide then. Apologies, continuing on the income statement there, we're seeing the benefits of delivering more homes and large repeatable sites and our off-site manufacturing is now contributing to program certainty, quality and cost control. A feature of both business segments in 2025 is the completion of sites and phases with cost contingencies unutilized supporting margin expansion. Underlying gross margin in the Homebuilding segment, excluding noncore sales at Shrewsbury Road and land sales was 22.8% Nevertheless, spot homebuilding margins in the group's medium-term delivery pipeline are approximately 21%, with site mix continuing to be a principal driver as the business monetizes its vintage landbank and scales to 2,000 units with a focus on return on capital. Gross margin in Partnerships in H1 was 16.2%, ahead of target owing to site mix and unutilized contingency due to strong cost control. Similar to Homebuilding, site mix will play a significant role in future periods as the business scales up and the group completes the transition out of its remaining urban sites. EUR 400 million in revenues remains an achievable current year and medium-term target with visibility on replacing existing partnership sites with new wins increasing over the period. Operating profit for the first half was EUR 42.1 million, Net finance costs were EUR 9.6 million, reflecting a higher opening debt level following last year's land acquisitions. Profit before tax was EUR 32.5 million and earnings per share came in at EUR 0.052. Moving to the balance sheet on Slide 14. Focusing in on the key numbers here. Land balance, excluding development rights, was EUR 536 million, down from year-end as we continue to actively manage the landbank and focus on capital efficiency. I'll come back to land on the next slide. Work in progress rose to EUR 347 million, which is in line with our plans to ramp up homebuilding and deliver under the Croí Cónaithe scheme. Altogether, it shows we're supporting growth in a disciplined way, optimizing working capital, managing our landbank and maintaining a strong balance sheet. Moving to Slide 15. I touched on it briefly, and you can see how our landbank is evolving and supporting our growth agenda. The EUR 536 million land balance at June 2025 represents a peak investment level for us. From here, we're focused on reducing capital intensity, delivering units from our existing landbank and executing targeted disposals. We remain on track to complete land sales of EUR 100 million across 2025 and 2026. More than EUR 60 million of that is already closed or at advanced stages of contract. This strategy is about prioritizing capital employed in land and focusing on sites of scale that can support delivery in both Homebuilding and Partnerships. Given the strength of the landbank, both in terms of scale and product type, i.e., own-door homes, we can both grow the business and reduce capital deployed in land towards EUR 400 million to EUR 450 million over the next number of years. Next, Slide 16 shows our cash flow. Operating cash outflow was EUR 10.8 million, a material improvement from the EUR 194 million outflow in H1 last year. That is driven by higher completions, greater contribution from Partnerships and tighter working capital management. Importantly, net debt was EUR 230 million, a lower figure than this time last year despite a materially higher starting position. Moving forward, we continue to invest selectively where returns are strongest, principally funding construction WIP, investing in innovation and returning surplus capital to shareholders, which brings me to Slide 17, where we have our capital allocation priorities. Our medium-term visibility is as strong as it has been. We have clear line of sight on unit growth combined with landbank reduction on replenishing the Partnership's pipeline on freeing up capital, while capturing manufacturing benefits that will provide a structural medium-term cost advantage. Against that backdrop, we continue to focus on 4 key priorities: firstly, land. We're actively reducing our landbank, as I set out, primarily through unit delivery and targeted unit sales. But importantly, we will sustain, as Stephen mentioned, the capacity to deliver 2,600 to 3,600 units per annum. Secondly, work in progress. Investment here is supporting the planned increase in Homebuilding outputs to 1,900 units in 2027, which remains a core driver of revenue growth. Third, supply chain and innovation. We're investing in off-site manufacturing and next-generation building approaches. That includes a EUR 25 million commitment to deliver a new external facade line and facility upgrade, which will transform how we deliver homes. Approximately EUR 10 million of spend will occur in 2025, EUR 10 million in '26 with the balance in 2027. And finally, returning excess cash. The buyback program announced in May has been expanded from EUR 85 million to EUR 105 million. That's been made possible by strong operational performance, robust cash generation and good visibility on land sales. To date, approximately EUR 84 million has been deployed under the current program. This disciplined balanced approach is supporting growth, innovation and value creation while also maintaining a strong financial position. That's the conclusion of the financial review. Stephen, I'll hand back to you for the outlook and to close out. Stephen Garvey: Thanks, Conor. So to bring it all together on Slide 18, we remain fully on track to deliver full year guidance. We are reiterating our earnings per share target of EUR 0.195 for full year 2025, underpinned by a strong operational momentum and a healthy forward order book. We expect to deliver approximately 1,500 Homebuilding units this year with Partnerships contributing around EUR 400 million in revenue. This reflects the scale and the consistency we are now achieving across both segments. On the capital side, we are making real progress in optimizing our land portfolio with EUR 100 million of land sales targeted across '25 and '26. And our landbank remains a core strength, giving us the capacity to deliver between 2,600 and 3,600 units per year all the way to 2030. Notably, we are achieving this growth while reducing the net debt and returning value to shareholders by expanding our buyback program to EUR 105 million today. To wrap things up on Slide 19 and 20, we have our differential investment case. We will conclude -- I want to conclude by emphasizing 3 things: building better strategy set out the direction, and we are executing on it with consistency. Standardization and manufacturing are improving our cost control and speed with benefits already visible in margin and program predictability. Partnerships are now a material first half contributor and our land strategy balances visibility with capital efficiency. We have strong momentum into the second half and beyond. Glenveagh is uniquely positioned with strong visibility on future delivery for the balance of this year and beyond. All of this gives us real confidence for Glenveagh's ability to deliver sustainable value well into the future. With that, I'll pass you over to Laura for any questions you may have, and thank you. Operator: [Operator Instructions] We will now take our first question from Colin Sheridan of Davy. Colin Sheridan: Just maybe starting on Partnerships. Maybe you could talk a little bit about what the pipeline looks at this point in time. And I guess, with the changes we're likely to see from government with additional funding and a change to housing for all, how you think that could evolve or how you'd like to see it evolve in the next year or so? And maybe just on build cost inflation. I mean, you've referred to the sectoral employment orders in the statement. Just wondering how build cost inflation has been progressing more generally and how the vertical integration in the business has been playing its part and trying to mitigate that on site. Stephen Garvey: Thanks, Colin. Partnerships, yes, obviously made substantial progress. I suppose it's a hard one reputation. We've been at this for a period of time, and we're only really seeing the benefits of that flow through on the income statement now. Positively disposed to what we're seeing coming down the track. We're in negotiations on a number of new partnerships, quite substantial ones, some of them adjacent sites, some future sites that are very close to us. Proactive local authorities out there now looking at opportunities and very much looking at certain local authorities who have probably perfected the model and got it really well coming out there to a certain degree. The Land Development Agency, obviously, very proactive now as well. A lot of their land is starting to come into the system. They're running a number of RFPs. So yes, we've obviously got 6 sites on the go. Some of them will come to completion next year, but we're very positively disposed to being able to replace them on an ongoing basis. And I think we've proven we're the delivery partner of choice out there with all government agencies at this stage. So happy to dispose that. Build cost inflation, yes, you're right. On the sectoral employment agreement was 3%. Labor probably makes up 50%, 55% of the delivery out there. So that will inevitably pass through. On the material side, pretty good, a little volatility in 1 or 2 products, but again, in the either, it's probably not too bad out there. So probably happy where things are at. So somewhere between 2.5% and 3% is probably where we see things plateauing out for the next 12 months. We don't see anything on the horizon that makes us concerned out there. On the manufacturing side, I think what you're really seeing from the manufacturing and innovative side is it's probably really driving that way we can deliver programs, being able to release contingency on sites. They're obviously positive to margins. So it's the capability of predictability, sticking with programs, the quality of the product, all of those things are coming. We're probably now moving to Phase 2 of the innovation side. The benefits of that and the cost that, that will bring to the table and the -- or the cost savings, it's too early to predict yet. But Phase 2, 2027, 2028, we really hope it will feed into the system, and we should see positive turn from that. Conor Murtagh: I think what you see in manufacturing over the next number of years is will be labor and labor increases as we're seeing through sectoral employment orders will be less of a dial mover in that CPI number as we transition more and more to premanufactured value. Operator: And we'll now take our next question from Shane Carberry of Goodbody. Shane Carberry: Just kind of a follow-up on Colin's question, I guess, in terms of that kind of gross margin point. In terms of the standardization piece of the jigsaw, is it fair to think of that as the main contributor to the kind of underlying growth in the gross margin this year? And just, Conor, you mentioned in the presentation about maybe the mix going forward into '26. So if you could expand on that a little bit more, it would be helpful. And then the second question is just around the medium-term targets really, it sounds like even more confident in the medium term kind of maybe beyond all of our forecast horizons as well. So if you could just give me a little bit more color in terms of how that kind of your confidence has evolved? Is it more the policy side improving, underlying demand getting better? Or it is some of the kind of innovation that you're doing or maybe it's a bit of all of the above. Stephen Garvey: Just -- go ahead. Go ahead. Conor Murtagh: On the gross margin side then, yes, you're right. Standardization is a lot of the benefit. It's also sites of scale. It's also strong cost control, getting to the end of sites and having contingency in place. And you're seeing that particularly on the Partnerships side as well. And then mix, there's a good strong mix effect this year, which brings us to your sort of follow-up question around gross margin for next year. We've spoken since the start of this year about intake margins being around approximately 21% in the medium-term landbank. And what you're going to see is that transition happening in 2026. So you'll see margins of approximately 21% in 2026 is the way to think about it. Stephen Garvey: And just on the policy and medium to long term, positive what we said 2027, we feel very comfortable about the 1,900 units in Homebuilding. We're positive towards the National Planning Framework. I suppose for our view, just where the policy is evolving is, you know the government have instructed the National Planning Framework and instructed local authorities to now go out and start varying their development plans. So an element of local authorities will vary their plans, but they'll also start going into their new plan phase. And we see kind of 2027 into 2028 as the period of time that about 750,000 units of zoned land will come into the system. Some of that will be our strategic land as well. So I suppose that's the opportunity we're seeing coming down the track. Obviously, there will be sites of scale. So yes, positive in the sense of, I suppose, you have a government who are really now on the front foot to drive their policy initiatives. They're probably seeing some challenges with the administration side, not moving as fast as they'd like. But I think, yes, they're really trying to make a difference out there. I think we're well set up that our landbank positions ourselves to 2030. We're obviously core product, 80% of our product is that own-door product, so in a nice place there. But obviously, we hope we can enhance that. And the more the vertical integration feeds into the system, the bigger the sites become, the faster, more efficient we can deliver into the future. So yes, we're in a good place. Operator: We will now take our next question from Jonny Coubrough of Deutsche Bank. Jonathan William Coubrough: Can I ask on the landbank? You said in the presentation that the landbank could support up to 3,600 units a year out to 2030. What other investments would you need to make to achieve this level of output across WIP, supply chain overheads? I think you set out some of this on Slide 17, but it would be useful just for a bit of clarification on that one. And then also, you've mentioned EUR 100 million of land site sales over 2 years. So from there, will you be maintaining about a EUR 450 million landbank? And then how would you be looking to replenish that land? Are you looking at land options or other avenues? Stephen Garvey: Jonny, yes. So look, obviously, last year was the big pivotal year. We bought 9,000 plots of land. There was a 3-year supply in 1 hit. Obviously, we got them at attractive 32,000 a plot. So we're very happy with that. We're not actively in the land market. We're always keeping an eye on it, but we're not actively investing. Probably strategic land is where we're looking at an element of because we know what will come down the track. So product that might come into the system in '29, '30, we're looking at those kind of sites. But we're not making a very big investment on that. On the WIP side of it, I'll leave that. Conor, do you want to go on that? Conor Murtagh: Yes. The WIP is actually well invested. So we've obviously grow Homebuilding units from 1,500 to 1,900 over the next couple of years. But at the same time, we have a number of urban schemes where we're well invested on the apartment side, which we'd be seeking to forward fund in the future. So one in North County, Dublin and another one in Cork. So you could see maybe EUR 50 million go into WIP on a net basis there between now and 2027 to support growth into 2028. And we obviously have called out the office as a cash inflow, most likely in or around 2028. So WIP is well invested even to support that growth that's there. And then on the Partnerships side, obviously, there's a prevalence of forward funding in that. So the investment there will be minimum from where we are at the moment. And then manufacturing-wise, it's the EUR 25 million, with EUR 10 million over the balance of this year, EUR 10 million next year and EUR 5 million in '27. Operator: [Operator Instructions] And while we wait, I'm handing it over for the written question. Unknown Executive: So we've had a question in from Glynis Johnson. She has asked regarding the admin costs for H1 '25. What drove step-up? And what is the guidance for FY '25 and medium term? Second, on land market, she's asked, given the competitive land market, but also the positive upside potential to your strategic land, is there scope to increase the land sales targeted? And lastly, can you elaborate on the facade production? Is this the Mauer system? And how many home units would this likely cover by 2027? Conor Murtagh: I'll take 1 and 2 there. On admin costs, H1 reflects the run rate from H2 2024. So consensus is around EUR 51 million of administration costs for 2025. So we're comfortable with where that is. And over the medium term, we've said we want to reduce admin costs to less than 5% of revenue and are on track to do that. The land market and potential for more land sales. And what we'd say on that is we have greater certainty on the EUR 100 million of land sales than we had a number of months ago. However, the likelihood of it being materially in excess of EUR 100 million has reduced. So EUR 100 million is a good number to have across '25 and '26. And Stephen, do you want to take the Mauer system? Stephen Garvey: Yes, you're right on that, Glynis. Obviously, we're the sole holder of that license in Ireland, and we think it's a huge opportunity for us. The potential savings and how this can evolve is it will make huge benefits for our prelims on site. It's a better, more attractive looking product. We've had some of the local authorities out down to look at the finished product. They're really impressed with it. So they're actually -- the quality of it and the aesthetics of it, it's really pleasing. We are putting it into production in '26. First homes are going out in 2027. And we're going to take it on a phased basis. So probably 10% of the portfolio will start with, but the ambition is to get it right across the portfolio by a period of time. Like we've done with all other innovation and manufacturing, we've taken a step basis to us. But I suppose the real benefit is if we see success, we can start factoring that into us as we acquire new lands and right across the portfolio. So hopefully, we'll see the positive turn from that into 2027. Operator: There are no further questions in queue and audio. And I will now hand it back to Stephen for closing remarks. Stephen Garvey: Thank you, Laura, and thank you all for joining today. We really appreciate it. Obviously, we'll be engaged with a number of you over the next number of days and weeks and look forward to seeing you. And thank you very much for joining us today. Operator: Thank you. That concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Hello, and welcome to Glenveagh Interim Results 2025. My name is Laura, and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] I will now hand you over to your host, Stephen Garvey, CEO, to begin today's conference. Thank you. Stephen Garvey: Good morning, and thank you, Laura. I am Stephen Garvey, CEO of Glenveagh. I'm joined today by our CFO, Conor Murtagh. We appreciate you joining our interim results call for the first 6 months ended the 30th of June 2025. This morning, I'll walk you through the key highlights, the market, the policy context and how our strategy is showing up in Homebuilding, Partnerships, land and innovation. Conor will take you through the financials and capital allocation, and I will return to the outlook and closing remarks. As always, we will leave plenty of time for your questions at the end. Let's begin on Slide 4, which sets out our headline numbers for the first half of the year. This period demonstrated the strength of our Building Better strategy, set out scale delivery, deepened our partnerships with the state and drove operational efficiency through innovation, and that's exactly what's reflected in our results. Our focus on standardization and vertical integration is now embedded across the business, making us more resilient and more efficient as we grow. The benefits of our early investment and innovation are visible in our margin profile and our ability to deliver at scale even as the market evolves. This is also the first interim period where our Partnerships segment has made a material contribution to group profit. This is a real milestone for us and reflects the strength of our public-private model. We are now recognized as a partner of choice for the state with a growing pipeline and strong demand for our homes. We continue to manage our capital with discipline, optimizing our landbank and maintaining a strong balance sheet even as we accelerated delivery. Our buyback program continues to create value for shareholders, and we are seeing the benefits of a more efficient, more focused approach to capital deployment. We will discuss these elements in greater detail as we progress this morning. For now, I want to emphasize that the strategy we set out a few years ago is delivering for our customers, our partners and our shareholders. Turning to Slide 5. Let's take a moment here to consider what sets Glenveagh apart in the current environment. The need for new homes in Ireland remains acute, and government policy is more focused than ever on increasing supply. This is happening against the backdrop of continued economic strength and a supportive policy environment, so the market opportunity is clear. What gives us confidence is the way we have positioned the business to capture the opportunity. We've built a sector-leading platform, one that's not just about scale, but about delivering high-quality homes in the right locations, supported by a uniquely integrated operating model. Our early investment in innovation and standardization is now delivering tangible benefits, making our business more resilient and more efficient as we grow. We are seeing the benefits of our deepening partnerships with the state and hard-won reputation as a partner of choice for public housing delivery. This is supported by a disciplined approach to capital allocation and a strong balance sheet. Our focus on profitable growth, active landbank management and ongoing investment in our supply chain is enabling us to create long-term value for the business and drive sustainable returns for our shareholders. Providing further context, Slide 6 shows just the long-term demand outlook for housing in Ireland remains exceptionally strong. We continue to see positive trends in income and employment with both wages and job creation rising steadily across the economy. Alongside this, Ireland's population growth remains robust, driven by sustained net inward migration well above the European average. Mortgage lending activity is also maintaining a healthy pace with first-time buyers accounting for a significant share of drawdowns supported by government schemes. The underlying drivers of demand for new homes are strengthening. Turning to Slide 7. We can see in more detail how government policy and recent market initiatives are creating a genuine supportive environment for housing delivery. The National Development Plan and the Planning and Development Act 2024 are setting ambitious targets and providing significant funding alongside the infrastructure and planning certainty needed to achieve them. On the demand side, supports such as Help to Buy and the First Home Scheme continue to underpin affordability for buyers. They both have been extended, giving buyers and developers greater confidence to plan ahead. There's also a strong policy push for modern methods of construction and using state land at scale through the Land Development Agency and local authorities. But as we've said before, meeting Ireland's housing needs will require more than just policy ambition. It will take sustained private sector capital, adequately zoned land, public sector resources and critical infrastructure. The success of our Partnerships platform shows how public and private resources can be pooled effectively to deliver much needed homes. We've shaped our strategy around this shift, and we are beginning to see material results, which we will talk about shortly. In the short term, the policy environment is evolving for the better, and that gives us real confidence in our ability to continue delivering at scale. Now let's dive deeper into our segments, starting with Homebuilding on Slide 8. Just a quick reminder that at the start of the year, we announced with the 2024 results that we have simplified our reporting on Homebuilding previously Suburban and Partnerships, previously Urban and Partnerships. This was a standout period for homebuilding with delivery nearly doubling year-on-year. The momentum reflects the strong demand and the benefits of our differential model and strategy. Standardization, scalable sites, vertical integration are all coming through in our results. Excellence in our execution saw major completions at Kilmartin Grove and Hereford Park as well as major progress across a number of developments and a number of new sites starting earlier in the year. Our average selling price was elevated in the first half due to mix, but we expect that to normalize as the year progresses. Margin expansion in Homebuilding was driven by the choices we made to invest efficiently and repeatably with the forward order book at around EUR 1.4 billion, we have strong visibility for the rest of the year and well into 2026. Turning to Slide 9. Let's talk about Partnerships. For the first time, this segment made a material profit contribution, reflecting the scale and momentum in this part of the business. We now have 6 active sites underway, including new contributions from Mooretown, New Road, the Cork Docklands, which is a development in collaboration with the Land Development Agency, alongside Ballymastone, Oscar Traynor Road and Foxwood Barns. This growing pipeline underpinned by robust planning momentum and repeated demand from public sector clients gives us strong visibility on future delivery. Moving to Slide 10. We can see how our land portfolio remains a source of strength and flexibility. The portfolio has been carefully assembled to align with our strategy. It is focused on supporting high-quality own-door homes in right locations with 74% of our units in the Greater Dublin area. We continue to maintain a strong cost discipline with the average plot cost at EUR 32,000, and the landbank supports an attractive embedded margins and capital returns. Importantly, this landbank gives us capacity to deliver between 2,600 and 3,600 equivalent units per year through to 2030, underpinning our medium-term delivery objectives. We have also been actively managing the portfolio with over EUR 60 million of land sales either closed or at advanced stages, ensuring we remain flexible and capital efficient as the market evolves. Finally, just to note, the recent publication of the National Planning Framework is expected to materially positively impact our strategic landbank, resulting in a lower capital deployment requirement in future land periods. Turning to Slide 11. Our commitment to innovation remains a core pillar to our strategy. We continue to invest significantly in this area. Phase 2 of our innovation program is now underway via a EUR 25 million commitment to expand our off-site facility -- manufacturing facilities in Carlow, including an additional facade line alongside our timber frame platform. At the heart of this is NUA, our in-house manufacturing and innovation platform. Through NUA, we are moving beyond traditional building methods and embracing innovative lightweight alternatives, such as a new wall system, roof cladding and floor cassettes. Our exclusive perpetual license for integrated external facades is now a key part of this, allowing us to increase premanufactured value and improve further efficiencies. Off-site manufacturing and modern methods of construction are already delivering tangible improvements in cost control, build efficiency and margin performance, all of which makes Glenveagh more resilient, more efficient and better positioned to deliver at scale as the market evolves. With that context, I'll hand you over to Conor to talk you through the financials and the capital allocation. Conor Murtagh: Thanks, Stephen, and good morning, everyone. I'll take you through the financials for the first half of 2025, starting with the income statement, then moving to the balance sheet, land and cash flow and finally, our capital allocation priorities. As always, we'll outline the key drivers behind the numbers and what they mean for the business. If we can turn to Slide 13. As Stephen noted, the first half of 2025 marked a period of strong growth for Glenveagh. Group revenue reached EUR 342 million, up 124% on last year. This uplift reflects the momentum we've built in both Homebuilding and Partnerships with delivery volumes and on-site partnership activity, both moving in our favor. Gross profit increased to approximately EUR 67 million, and our gross margin expanded to 19.5%, up 130 basis points. This margin improvement is as a result of several years of investment in standardization, scale and vertical integration in addition to mix benefits. Work in progress rose to approximately EUR 347 million, which is in line with our plans to ramp up Homebuilding output and deliver under the Croí Cónaithe scheme. Net assets finished the first half at EUR 748 million and reflects approximately EUR 35 million of capital returns in the period. Altogether, it shows we're supporting growth in a disciplined way, optimizing working capital, managing our landbank and maintaining a strong balance sheet. Moving to the landbank slide then. Apologies, continuing on the income statement there, we're seeing the benefits of delivering more homes and large repeatable sites and our off-site manufacturing is now contributing to program certainty, quality and cost control. A feature of both business segments in 2025 is the completion of sites and phases with cost contingencies unutilized supporting margin expansion. Underlying gross margin in the Homebuilding segment, excluding noncore sales at Shrewsbury Road and land sales was 22.8% Nevertheless, spot homebuilding margins in the group's medium-term delivery pipeline are approximately 21%, with site mix continuing to be a principal driver as the business monetizes its vintage landbank and scales to 2,000 units with a focus on return on capital. Gross margin in Partnerships in H1 was 16.2%, ahead of target owing to site mix and unutilized contingency due to strong cost control. Similar to Homebuilding, site mix will play a significant role in future periods as the business scales up and the group completes the transition out of its remaining urban sites. EUR 400 million in revenues remains an achievable current year and medium-term target with visibility on replacing existing partnership sites with new wins increasing over the period. Operating profit for the first half was EUR 42.1 million, Net finance costs were EUR 9.6 million, reflecting a higher opening debt level following last year's land acquisitions. Profit before tax was EUR 32.5 million and earnings per share came in at EUR 0.052. Moving to the balance sheet on Slide 14. Focusing in on the key numbers here. Land balance, excluding development rights, was EUR 536 million, down from year-end as we continue to actively manage the landbank and focus on capital efficiency. I'll come back to land on the next slide. Work in progress rose to EUR 347 million, which is in line with our plans to ramp up homebuilding and deliver under the Croí Cónaithe scheme. Altogether, it shows we're supporting growth in a disciplined way, optimizing working capital, managing our landbank and maintaining a strong balance sheet. Moving to Slide 15. I touched on it briefly, and you can see how our landbank is evolving and supporting our growth agenda. The EUR 536 million land balance at June 2025 represents a peak investment level for us. From here, we're focused on reducing capital intensity, delivering units from our existing landbank and executing targeted disposals. We remain on track to complete land sales of EUR 100 million across 2025 and 2026. More than EUR 60 million of that is already closed or at advanced stages of contract. This strategy is about prioritizing capital employed in land and focusing on sites of scale that can support delivery in both Homebuilding and Partnerships. Given the strength of the landbank, both in terms of scale and product type, i.e., own-door homes, we can both grow the business and reduce capital deployed in land towards EUR 400 million to EUR 450 million over the next number of years. Next, Slide 16 shows our cash flow. Operating cash outflow was EUR 10.8 million, a material improvement from the EUR 194 million outflow in H1 last year. That is driven by higher completions, greater contribution from Partnerships and tighter working capital management. Importantly, net debt was EUR 230 million, a lower figure than this time last year despite a materially higher starting position. Moving forward, we continue to invest selectively where returns are strongest, principally funding construction WIP, investing in innovation and returning surplus capital to shareholders, which brings me to Slide 17, where we have our capital allocation priorities. Our medium-term visibility is as strong as it has been. We have clear line of sight on unit growth combined with landbank reduction on replenishing the Partnership's pipeline on freeing up capital, while capturing manufacturing benefits that will provide a structural medium-term cost advantage. Against that backdrop, we continue to focus on 4 key priorities: firstly, land. We're actively reducing our landbank, as I set out, primarily through unit delivery and targeted unit sales. But importantly, we will sustain, as Stephen mentioned, the capacity to deliver 2,600 to 3,600 units per annum. Secondly, work in progress. Investment here is supporting the planned increase in Homebuilding outputs to 1,900 units in 2027, which remains a core driver of revenue growth. Third, supply chain and innovation. We're investing in off-site manufacturing and next-generation building approaches. That includes a EUR 25 million commitment to deliver a new external facade line and facility upgrade, which will transform how we deliver homes. Approximately EUR 10 million of spend will occur in 2025, EUR 10 million in '26 with the balance in 2027. And finally, returning excess cash. The buyback program announced in May has been expanded from EUR 85 million to EUR 105 million. That's been made possible by strong operational performance, robust cash generation and good visibility on land sales. To date, approximately EUR 84 million has been deployed under the current program. This disciplined balanced approach is supporting growth, innovation and value creation while also maintaining a strong financial position. That's the conclusion of the financial review. Stephen, I'll hand back to you for the outlook and to close out. Stephen Garvey: Thanks, Conor. So to bring it all together on Slide 18, we remain fully on track to deliver full year guidance. We are reiterating our earnings per share target of EUR 0.195 for full year 2025, underpinned by a strong operational momentum and a healthy forward order book. We expect to deliver approximately 1,500 Homebuilding units this year with Partnerships contributing around EUR 400 million in revenue. This reflects the scale and the consistency we are now achieving across both segments. On the capital side, we are making real progress in optimizing our land portfolio with EUR 100 million of land sales targeted across '25 and '26. And our landbank remains a core strength, giving us the capacity to deliver between 2,600 and 3,600 units per year all the way to 2030. Notably, we are achieving this growth while reducing the net debt and returning value to shareholders by expanding our buyback program to EUR 105 million today. To wrap things up on Slide 19 and 20, we have our differential investment case. We will conclude -- I want to conclude by emphasizing 3 things: building better strategy set out the direction, and we are executing on it with consistency. Standardization and manufacturing are improving our cost control and speed with benefits already visible in margin and program predictability. Partnerships are now a material first half contributor and our land strategy balances visibility with capital efficiency. We have strong momentum into the second half and beyond. Glenveagh is uniquely positioned with strong visibility on future delivery for the balance of this year and beyond. All of this gives us real confidence for Glenveagh's ability to deliver sustainable value well into the future. With that, I'll pass you over to Laura for any questions you may have, and thank you. Operator: [Operator Instructions] We will now take our first question from Colin Sheridan of Davy. Colin Sheridan: Just maybe starting on Partnerships. Maybe you could talk a little bit about what the pipeline looks at this point in time. And I guess, with the changes we're likely to see from government with additional funding and a change to housing for all, how you think that could evolve or how you'd like to see it evolve in the next year or so? And maybe just on build cost inflation. I mean, you've referred to the sectoral employment orders in the statement. Just wondering how build cost inflation has been progressing more generally and how the vertical integration in the business has been playing its part and trying to mitigate that on site. Stephen Garvey: Thanks, Colin. Partnerships, yes, obviously made substantial progress. I suppose it's a hard one reputation. We've been at this for a period of time, and we're only really seeing the benefits of that flow through on the income statement now. Positively disposed to what we're seeing coming down the track. We're in negotiations on a number of new partnerships, quite substantial ones, some of them adjacent sites, some future sites that are very close to us. Proactive local authorities out there now looking at opportunities and very much looking at certain local authorities who have probably perfected the model and got it really well coming out there to a certain degree. The Land Development Agency, obviously, very proactive now as well. A lot of their land is starting to come into the system. They're running a number of RFPs. So yes, we've obviously got 6 sites on the go. Some of them will come to completion next year, but we're very positively disposed to being able to replace them on an ongoing basis. And I think we've proven we're the delivery partner of choice out there with all government agencies at this stage. So happy to dispose that. Build cost inflation, yes, you're right. On the sectoral employment agreement was 3%. Labor probably makes up 50%, 55% of the delivery out there. So that will inevitably pass through. On the material side, pretty good, a little volatility in 1 or 2 products, but again, in the either, it's probably not too bad out there. So probably happy where things are at. So somewhere between 2.5% and 3% is probably where we see things plateauing out for the next 12 months. We don't see anything on the horizon that makes us concerned out there. On the manufacturing side, I think what you're really seeing from the manufacturing and innovative side is it's probably really driving that way we can deliver programs, being able to release contingency on sites. They're obviously positive to margins. So it's the capability of predictability, sticking with programs, the quality of the product, all of those things are coming. We're probably now moving to Phase 2 of the innovation side. The benefits of that and the cost that, that will bring to the table and the -- or the cost savings, it's too early to predict yet. But Phase 2, 2027, 2028, we really hope it will feed into the system, and we should see positive turn from that. Conor Murtagh: I think what you see in manufacturing over the next number of years is will be labor and labor increases as we're seeing through sectoral employment orders will be less of a dial mover in that CPI number as we transition more and more to premanufactured value. Operator: And we'll now take our next question from Shane Carberry of Goodbody. Shane Carberry: Just kind of a follow-up on Colin's question, I guess, in terms of that kind of gross margin point. In terms of the standardization piece of the jigsaw, is it fair to think of that as the main contributor to the kind of underlying growth in the gross margin this year? And just, Conor, you mentioned in the presentation about maybe the mix going forward into '26. So if you could expand on that a little bit more, it would be helpful. And then the second question is just around the medium-term targets really, it sounds like even more confident in the medium term kind of maybe beyond all of our forecast horizons as well. So if you could just give me a little bit more color in terms of how that kind of your confidence has evolved? Is it more the policy side improving, underlying demand getting better? Or it is some of the kind of innovation that you're doing or maybe it's a bit of all of the above. Stephen Garvey: Just -- go ahead. Go ahead. Conor Murtagh: On the gross margin side then, yes, you're right. Standardization is a lot of the benefit. It's also sites of scale. It's also strong cost control, getting to the end of sites and having contingency in place. And you're seeing that particularly on the Partnerships side as well. And then mix, there's a good strong mix effect this year, which brings us to your sort of follow-up question around gross margin for next year. We've spoken since the start of this year about intake margins being around approximately 21% in the medium-term landbank. And what you're going to see is that transition happening in 2026. So you'll see margins of approximately 21% in 2026 is the way to think about it. Stephen Garvey: And just on the policy and medium to long term, positive what we said 2027, we feel very comfortable about the 1,900 units in Homebuilding. We're positive towards the National Planning Framework. I suppose for our view, just where the policy is evolving is, you know the government have instructed the National Planning Framework and instructed local authorities to now go out and start varying their development plans. So an element of local authorities will vary their plans, but they'll also start going into their new plan phase. And we see kind of 2027 into 2028 as the period of time that about 750,000 units of zoned land will come into the system. Some of that will be our strategic land as well. So I suppose that's the opportunity we're seeing coming down the track. Obviously, there will be sites of scale. So yes, positive in the sense of, I suppose, you have a government who are really now on the front foot to drive their policy initiatives. They're probably seeing some challenges with the administration side, not moving as fast as they'd like. But I think, yes, they're really trying to make a difference out there. I think we're well set up that our landbank positions ourselves to 2030. We're obviously core product, 80% of our product is that own-door product, so in a nice place there. But obviously, we hope we can enhance that. And the more the vertical integration feeds into the system, the bigger the sites become, the faster, more efficient we can deliver into the future. So yes, we're in a good place. Operator: We will now take our next question from Jonny Coubrough of Deutsche Bank. Jonathan William Coubrough: Can I ask on the landbank? You said in the presentation that the landbank could support up to 3,600 units a year out to 2030. What other investments would you need to make to achieve this level of output across WIP, supply chain overheads? I think you set out some of this on Slide 17, but it would be useful just for a bit of clarification on that one. And then also, you've mentioned EUR 100 million of land site sales over 2 years. So from there, will you be maintaining about a EUR 450 million landbank? And then how would you be looking to replenish that land? Are you looking at land options or other avenues? Stephen Garvey: Jonny, yes. So look, obviously, last year was the big pivotal year. We bought 9,000 plots of land. There was a 3-year supply in 1 hit. Obviously, we got them at attractive 32,000 a plot. So we're very happy with that. We're not actively in the land market. We're always keeping an eye on it, but we're not actively investing. Probably strategic land is where we're looking at an element of because we know what will come down the track. So product that might come into the system in '29, '30, we're looking at those kind of sites. But we're not making a very big investment on that. On the WIP side of it, I'll leave that. Conor, do you want to go on that? Conor Murtagh: Yes. The WIP is actually well invested. So we've obviously grow Homebuilding units from 1,500 to 1,900 over the next couple of years. But at the same time, we have a number of urban schemes where we're well invested on the apartment side, which we'd be seeking to forward fund in the future. So one in North County, Dublin and another one in Cork. So you could see maybe EUR 50 million go into WIP on a net basis there between now and 2027 to support growth into 2028. And we obviously have called out the office as a cash inflow, most likely in or around 2028. So WIP is well invested even to support that growth that's there. And then on the Partnerships side, obviously, there's a prevalence of forward funding in that. So the investment there will be minimum from where we are at the moment. And then manufacturing-wise, it's the EUR 25 million, with EUR 10 million over the balance of this year, EUR 10 million next year and EUR 5 million in '27. Operator: [Operator Instructions] And while we wait, I'm handing it over for the written question. Unknown Executive: So we've had a question in from Glynis Johnson. She has asked regarding the admin costs for H1 '25. What drove step-up? And what is the guidance for FY '25 and medium term? Second, on land market, she's asked, given the competitive land market, but also the positive upside potential to your strategic land, is there scope to increase the land sales targeted? And lastly, can you elaborate on the facade production? Is this the Mauer system? And how many home units would this likely cover by 2027? Conor Murtagh: I'll take 1 and 2 there. On admin costs, H1 reflects the run rate from H2 2024. So consensus is around EUR 51 million of administration costs for 2025. So we're comfortable with where that is. And over the medium term, we've said we want to reduce admin costs to less than 5% of revenue and are on track to do that. The land market and potential for more land sales. And what we'd say on that is we have greater certainty on the EUR 100 million of land sales than we had a number of months ago. However, the likelihood of it being materially in excess of EUR 100 million has reduced. So EUR 100 million is a good number to have across '25 and '26. And Stephen, do you want to take the Mauer system? Stephen Garvey: Yes, you're right on that, Glynis. Obviously, we're the sole holder of that license in Ireland, and we think it's a huge opportunity for us. The potential savings and how this can evolve is it will make huge benefits for our prelims on site. It's a better, more attractive looking product. We've had some of the local authorities out down to look at the finished product. They're really impressed with it. So they're actually -- the quality of it and the aesthetics of it, it's really pleasing. We are putting it into production in '26. First homes are going out in 2027. And we're going to take it on a phased basis. So probably 10% of the portfolio will start with, but the ambition is to get it right across the portfolio by a period of time. Like we've done with all other innovation and manufacturing, we've taken a step basis to us. But I suppose the real benefit is if we see success, we can start factoring that into us as we acquire new lands and right across the portfolio. So hopefully, we'll see the positive turn from that into 2027. Operator: There are no further questions in queue and audio. And I will now hand it back to Stephen for closing remarks. Stephen Garvey: Thank you, Laura, and thank you all for joining today. We really appreciate it. Obviously, we'll be engaged with a number of you over the next number of days and weeks and look forward to seeing you. And thank you very much for joining us today. Operator: Thank you. That concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to Accenture's first quarter of the first fiscal year 2025 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. Please note, today's event is being recorded. I'd now like to turn the conference over to Alexia Quadrani, Executive Director, Head of Investor Relations. Please go ahead. Alexia Quadrani: Thank you, Operator, and thanks everyone for joining us today on our fourth quarter and full-year fiscal 2025 earnings announcement. As the Operator just mentioned, I'm Alexia Quadrani, Executive Director and Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chief Executive Officer, and Angie Park, our Chief Financial Officer. We hope you've had an opportunity to review the news release we issued a short time ago, and we also have an earnings presentation, which will be made available on our website after the call. Let me quickly outline the agenda for today's call. Julie will begin with an overview of our results. Angie will take you through the financial details, including the income statement and balance sheet, along with some key operational metrics for the fourth quarter and fiscal year. Julie will then provide a brief update on the market position before Angie provides our business outlook for the first quarter and full-year fiscal 2026. We will then take your questions before Julie provides a wrap-up at the end of the call. Some of the matters we'll discuss on this call, including our business outlook, are forward-looking and, as such, are subject to known and unknown risks and uncertainties, including but not limited to those factors set forth in today's news release and discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q and other SEC filings. These risks and uncertainties could cause actual results to differ materially from those expressed in this call. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations from non-GAAP financial measures where appropriate to GAAP in our news release or in the Investor Relations section on our website at accenture.com. As always, Accenture assumes no obligation to update the information presented on this conference call. Now, let me turn the call over to Julie. Julie Sweet: Thank you, Alexia, and to everyone joining this morning, and thank you to our more than 779,000 reinventors around the world for your extraordinary work and commitment to our clients. In fiscal year 2025, we delivered a strong year financially. We significantly elevated our competitive positioning, and we took our next big steps to position us for growth in the age of AI. We grew 7% last year, which was adding $5 billion in revenue, with over $80 billion in bookings. We did so against a macroeconomic backdrop that did not improve over FY24. Of that 7% growth, the majority was organic, and the growth was broad-based across markets, industries, and types of work. We also delivered strong earnings per share growth and generated strong free cash flow, both above our guidance on an adjusted basis, and we returned a significant amount of cash to shareholders, an increase of 7% over FY24. We took share at more than 5X our investable basket. How did we do it? We built on the rapid shift in our business we made by the end of FY24 to address the challenging market conditions. We then took action to fully capitalize on the competitive advantages we have built over a long period of time to deliver these results. These advantages include our ecosystem partnerships, our breadth of capabilities, our deep and trusted client relationships, our track record of investing in new skills and rotating our business with successive technology revolutions, and of course, our ability to invest. Our strategy for more than a decade has been to be the number one partner for the tech ecosystem, and it's serving us well. Technology is front and center for every client, and in FY25 we continued to be the number one partner for all of our top 10 ecosystem partners by revenue. 60% of our revenue is from work that we do with these partners, which grew 9%, outpacing our overall revenue growth in FY25. These partners are the world's largest technology companies by revenue, and they're seeking deeper and deeper partnerships with us as they look for help to turn their technology into business outcomes and scale the adoption of AI. We continue to be the reinvention partner of choice for our clients. Our deep and longstanding relationships mean we know our clients and their industries inside out. Our global footprint and breadth of capability mean we can serve more of our clients' needs for large-scale transformations than any other player in the industry. We added 37 clients with quarterly bookings greater than $100 million in Q4 alone, bringing us to a record of 129 such bookings for the year, and we finished the year with 305 Diamond clients, our largest relationships. Our early and decisive decision in FY23 to invest significantly to become the leader in Gen AI with a $3 billion multi-year investment is clearly paying off as we capture this new area of spend for our clients. In FY25, we tripled our revenue over FY24 from Gen AI and increasingly Agentic AI to $2.7 billion, and we nearly doubled our Gen AI bookings to $5.9 billion. As a reminder, these numbers only reflect revenue and bookings specifically related to advanced AI, which is Gen AI, Agentic AI, and physical AI, and do not include data, classical AI, or AI used in delivery of our services. We are now going to use the term advanced AI as it encompasses the latest developments that are starting to gain traction. In addition to all we are doing around advanced AI, for over a decade, we have made disciplined inorganic investments to expand our market and fuel organic growth. For example, our capital projects business, which was initially built through several acquisitions around the world, is now a $1.2 billion business for us, and in FY25, it grew 49% year on year, largely organically. While delivering these results, we also took the next big steps in our reinvention for the age of AI. We are reinventing what we sell, how we deliver, how we partner, and how we operate Accenture. In short, on the ground, advanced AI is becoming a part of everything we do. Let's review our reinvention to date. By definition, every new wave of technology has a time where you have to train and retool. Accenture's core competency is to do that at scale. Our clients cannot possibly build all of the expertise they need on their own. They need us to go first and fast. In FY23, we had 40,000 AI and data professionals, with roughly 30 people working on a handful of Gen AI projects with negligible revenue. Today, we have 77,000 AI and data professionals. We have worked on more than 6,000 advanced AI projects just this year, and we delivered meaningful revenue in FY25. We are also in the process of equipping all of our reinventors with the latest AI skills. Over 550,000 of our reinventors are already trained in the fundamentals of Gen AI. We have already significantly embedded advanced AI into key platforms like GenLizard so that we are now delivering differently for our clients. We reinvented our corporate functions to create additional investment capacity, among other benefits, and will now increasingly use advanced AI in the next chapter. In FY25, we focused our new actions on the ecosystem, our talent strategy, and our growth model. We expanded our partnerships beyond the top 10 in AI and data and created new ones with companies that are becoming critical to many of our clients who also want to work with us to help them scale their relationships, and our revenue is growing in double digits with many of these partners. In FY26, we expect to increase our headcount overall across our three markets, including in the U.S. and Europe, reflecting the demand we see in our business. In addition to continuing to hire world-class talent, in FY25, we developed and are implementing a refreshed, robust three-pronged talent strategy to rotate our workforce. We are investing in upskilling our reinventors, which is our primary strategy. We are exiting on a compressed timeline. People work reskilling based on our experience is not a viable path for the skills we need. We are continuously identifying areas of how we operate Accenture to drive more efficiencies, including through AI, in order to create more investment capacity. Finally, our growth model. On September 1, we launched reinvention services, which brings all of Accenture's capabilities into a single unit. Nearly 80% of our large deals are multi-service. The model, as we fully roll it out, will make it faster and simpler to sell and deliver everything Accenture offers and to rotate our offerings to embed more AI and data and equip our people. In summary, I am pleased with our strong results in FY25 and our positioning for FY26 and beyond. Over to you, Angie. Angie Park: Thank you, Julie, and thanks to all of you for joining us on today's call. We were very pleased with our results in the fourth quarter, which were at the top of our guided range and completed another strong year for Accenture. Our results reflect our relentless focus to consistently deliver on our shareholder value proposition while investing for long-term market leadership and reinforce our role as a trusted reinvention partner for our clients and a leader in AI. Now, let me summarize a few highlights for the quarter. Revenues grew 4.5% in local currency. Excluding the 1.5% impact from our federal business, our revenues grew 6% in Q4, and we continue to take significant market share at more than 5X, reflecting the relevance of our services and the strength of our diversified portfolio and execution. As a reminder, we assess market growth against our investable basket, which is roughly two dozen of our closest global public competitors, which represents about a third of our addressable market. We use a consistent methodology to compare our financial results to theirs, adjusted to exclude the impact of significant acquisitions through the date of their last publicly available results on a rolling four-quarter basis. Adjusted operating margin was 15.1%, an increase of 10 basis points compared to adjusted Q4 results last year. We continue to drive margin expansion while making significant investments in our business and our people. We delivered adjusted EPS in the quarter of $3.03, which represents 9% growth compared to adjusted EPS last year. Finally, we delivered free cash flow of $3.8 billion and returned $1.4 billion to shareholders through repurchases and dividends this quarter. Before I move on to the details of the quarter, I want to spend a moment on the six-month business optimization program we initiated in Q4, for which we recorded a charge of $615 million and expect to record an additional approximately $250 million in Q1 for a total of approximately $865 million over the period. The business optimization program has two parts: one related to rapid talent rotation that Julie mentioned, which reflects severance associated with headcount reductions that we are making in a compressed timeline, and second, related to the divestiture of two acquisitions that are no longer aligned with our strategic priorities. These actions will result in cost savings, which will be reinvested in our people and our business. In FY26, we expect to increase our headcount overall across all three markets, including in the U.S. and in Europe, reflecting the demand we see in our business. Now, let me turn to some of the details. New bookings were $21.3 billion for the quarter, representing 6% growth in U.S. dollars and 3% growth in local currency, which is on top of the 24% growth in Q4 of last year. Overall book-to-bill was $1.2. Consulting bookings were $8.9 billion with a book-to-bill of $1.0. Managed services bookings were $12.4 billion with a book-to-bill of $1.4. Turning now to revenues. Revenues for the quarter were $17.6 billion at the top of our guided range, reflecting a 7% increase in U.S. dollars and 4.5% in local currency. Consulting revenues for the quarter were $8.8 billion, up 6% in U.S. dollars and 3% in local currency. Managed services revenues were $8.8 billion, up 8% in U.S. dollars and 6% in local currency, driven by high single-digit growth in technology managed services, which includes application managed services and infrastructure managed services, and mid-single-digit growth in operations. Turning to our geographic markets. In the Americas, revenue grew 5% in local currency, led by growth in banking and capital markets, industrials, and software and platforms, partially offset by a decline in public service. Revenue growth was driven by the United States. Excluding the 3% impact from our federal business, Americas grew 8% in local currency in the quarter. In EMEA, we delivered 3% growth in local currency, led by growth in insurance, life sciences, utilities, and consumer goods, retail, and travel services, partially offset by a decline in public service. Revenue growth was driven by the United Kingdom and Spain, partially offset by a decline in Italy. In Asia Pacific, revenues grew 6% in local currency, driven by growth in banking and capital markets, public service, and utilities, partially offset by a decline in energy. Revenue growth was led by Japan and Australia. Moving down the income statement, gross margin for the quarter was 31.9% compared with 32.5% for the same period last year. Sales and marketing expense for the quarter was 10.2% compared with 10.7% for the fourth quarter last year. General and administrative expense was 6.6% compared to 6.8% for the same quarter last year. Before I continue, I want to note that results in Q4 FY25 and Q4 FY24 include costs associated with business optimization actions, which impacted operating margin, tax rate, and EPS. The following comparisons exclude these impacts and reflect adjusted results. Adjusted operating income was $2.7 billion in the fourth quarter, reflecting a 15.1% adjusted operating margin, up 10 basis points compared with adjusted results in Q4 last year. Our adjusted effective tax rate for the quarter was 27.9% compared with an adjusted effective tax rate of 26.2% for the fourth quarter last year. Adjusted diluted earnings per share were $3.03 compared with adjusted EPS of $2.79 in the fourth quarter last year, reflecting 9% growth. Day services outstanding were 47 days compared to 47 days last quarter and 46 days in the fourth quarter of last year. Free cash flow for the quarter was $3.8 billion, resulting from cash generated by operating activities of $3.9 billion, net of property and equipment additions of $108 million. Our cash balance at August 31 was $11.5 billion compared with $5 billion at August 31 last year. With regards to our ongoing objective to return cash to shareholders in the fourth quarter, we repaid our fourth quarterly cash dividend of $1.48 per share for a total of $922 million. Now, I'd like to take a moment to summarize the year as we successfully executed our business to deliver or exceed all aspects of our original guidance that we provided last September on an adjusted basis. We delivered bookings of $80.6 billion, with a record 129 quarterly client bookings over $100 million and a book-to-bill of $1.2. Revenues of $69.7 billion for the year reflect growth of 7% in local currency, with nearly $5 billion in incremental revenue added this year. Our federal business was a 20 basis point headwind to our overall growth for the year. Consulting revenues were $35.1 billion, up 6% in U.S. dollars and 5% in local currency. Managed services revenues were $34.6 billion, up 9% in both U.S. dollars and in local currency, driven by 10% growth in technology managed services and 6% growth in operations. The following comparisons exclude the impacts of business optimization actions I noted earlier and reflect adjusted results. Adjusted operating margin at 15.6% was a 10 basis point expansion over our adjusted FY24 results. Adjusted earnings per share were $12.93, reflecting 8% growth over adjusted FY24 EPS. Free cash flow was $10.9 billion, up 26% year over year, reflecting a very strong free cash flow to net income ratio of 1.4. With regards to our ongoing objective to return cash to shareholders, we returned $8.3 billion of cash to shareholders while investing approximately $1.5 billion across 23 acquisitions. In closing, we feel good about how we managed our business while navigating the macro environment in 2025, and now we are laser-focused on executing and delivering fiscal 2026. Back to you, Julie. Julie Sweet: Thank you, Angie. Today, we've worked across every major market with more than 9,000 clients, including the world's largest companies, three quarters of the Fortune Global 100 and 500. As we look at the markets, we have not seen any meaningful change, positive or negative, in the overall market. We are focused on delivering results regardless of the market conditions by being the most relevant to our clients. Relevance today requires leadership in AI. We're working with companies early in their journey to use AI, which want our help to get them AI ready and to leverage our assets and platforms to accelerate their ability to deploy AI, as well as to help them do what they can now to use AI, even when they're not fully ready across the enterprise. We also are working with companies far along their journey to be AI ready and wanting to be the first to change the game with AI, even as its potential is still emerging. The technology itself is new and rapidly changing, so across companies, they need help in understanding the tech landscape. This is where we are in the age of AI. It is very early innings, however you look at it, which means there is massive opportunity ahead for our clients, our ecosystem partners, and us. It is well recognized that advanced AI has taken the mindshare of CEOs, the C-suite, and boards faster than any technology development we've seen in the past two decades. At the same time, as reported widely, value realization has been underwhelming for many, and enterprise adoption at scale is slow other than with digital natives. This is why our clients are turning to us. We know that the gap between mindshare and faster actual adoption is because the enterprise reinvention required to truly unlock the value of advanced AI is hard and has significant costs. There is a huge difference between how we're all using AI in our individual lives that is incredibly easy and what it takes to use it in an enterprise. The opportunity for AI is at the intersection of business strategy and tech and org readiness. For most companies, the biggest gap between mindshare and adoption is tech and org readiness. We're still in the thick of cloud, ERP, and security modernization. Data preparedness is nascent in many companies, and companies grapple with fragmented processes and siloed organizations. Generations of leaders need new skills to understand how AI should inform their business strategy. The workforce needs new skills to use AI, and new talent strategies and related competencies must be developed. Helping clients with all of this work is what is driving our growth, and our pipeline of large-scale transformations continues to grow. We're also starting to see early signals of an inflection point, with more clients looking for true enterprise-wide plans and activation and seeking out our successful experience with scaling in enterprises and at Accenture. Two years into this AI journey, we also are seeing a pattern in how AI can expand our opportunities with our clients. As some companies are making progress in creating AI readiness, it leads to even more work. Longstanding partnerships are deepening, and the demand for transformation is accelerating. For example, take a major financial services client we've worked with for over a decade. Their reinvention began with digital operations and cloud modernization. Now they've asked us to modernize their data estate, the foundation for scaling AI across the enterprise, from the contact center and marketing to finance and the trading floor. As we begin to implement AI into many facets of their business, our relationship continues to grow as we retire legacy systems, transform core functions like HR and risk, and build AI-centric capabilities to keep them ahead of shifting customer expectations. This has meaningfully expanded the amount of work we do for this client, and in fact, over the past five years, the value of our contract has more than doubled. We're seeing more stories like this across our portfolio, where AI is extending across the enterprise and adjacent work is following. Our contracts are expanding, and our client relationships are compounding, creating a powerful, sustainable growth engine for Accenture. Building the digital core remains our biggest growth driver. Only now, our clients understand that Accenture is bringing even more capabilities because we understand how the digital core will enable them to use advanced AI, and advanced AI is now a new catalyst for doing the large-scale transformations of the digital core in the first place. Taking an industry lens, let's look at banking. In banking, investment in digital core modernization remains strong, with cloud adoption accelerating as AI demand grows. Here's what it looks like in practice, and I'm particularly proud of this work because the scale is frankly breathtaking, and we were trusted by this client with mission-critical work. The Bank of England's real-time gross settlement service, which lies at the heart of most electronic payments in the UK, was rebuilt on a modern digital core using private cloud and end-to-end automation. This upgrade improved security, reliability, speed, and scale. The system now offers faster onboarding and secure APIs, giving more financial institutions safe access. It processes about $1 trillion in transactions every day, and in its first five months up to today, it has handled 22.5 million transactions worth $110 trillion. For people, that means big payments like buying a home go through quickly and safely. This modernization strengthens a national platform, reducing risk and creating a trusted foundation for innovation. Now the system is ready for what's next, even the potential for the market adopting AI-driven payment services. Now let's take a horizontal lens across industries with security. Security is essential to a digital core, which is reflected in our 16% growth for the year. We're seeing increased demand for advanced cyber protection and more integrated intelligent security solutions that can fully harness AI's potential and keep pace with emerging threats. To further strengthen our position, in the past quarter, we agreed to acquire CyberCX, our largest cybersecurity acquisition to date, which helps us in geographic expansion, bringing approximately 1,400 specialists in APAC and also bringing AI-powered security platforms which are applicable globally. We also acquired IAM Concepts, a Canadian identity security specialist serving critical infrastructure, expanding the depth and regional reach of our managed security and identity capabilities that underpin secure AI adoption. Now let's look through the lens of our unique industry, functional process, and talent and org capabilities. These, coupled with our technology expertise, are making a difference to our clients. These next two examples also demonstrate the pattern we're seeing in expanding our relationships due to advanced AI. Ecolab, a global sustainability leader, has been a client for 15 years. Three years ago, we partnered with Ecolab to lay the foundation for their growth transformation. One Ecolab, bringing the company together as one team to better serve customers, drive cross-sell and upsell, and improve operational efficiency. A year into that journey, we started working with Ecolab and its leadership to accelerate value with AI. Instead of executing one-off use cases, we redesigned the entire lead-to-cash process, the steps from generating a lead to collecting payment using nine scaled Agentic AI agents. These agents clean core data, resolve billing errors, and automatically match customer payments to the right billing invoices. In cash application alone, work that used to be 100% manual is now about 60% automated, reducing errors and speeding up processes. By using AI to streamline operations, Ecolab is on a path to deliver an estimated 5% to 7% sales growth and 20% operating income margin without increasing costs at the same pace. Big picture, it supports the company's mission to deliver water, hygiene, and infection prevention solutions to more customers worldwide. We're partnering with a leading energy company, which has been a client for nearly two decades, to reinvent field operations with cloud, data, and Gen AI. The challenge was scale, safety, cost, and sustainability, running thousands of wells with fragmented data and a leaner field workforce. We unified data from more than 25 legacy systems into a single cloud-based digital core. On top of that, we built AI-powered scaled digital twins that monitor, optimize, and control the field in real time using our Accenture Industrial Intelligence Suite solution. That live view speeds decisions and improves safety, often without sending a technician on site, while emissions are continuously monitored for compliance. This solution is expected to reduce lost production by up to 2% to 4%, increase productivity by up to 28%, and decrease costs by up to 22%. Field exposure and unplanned visits are also reduced, and emissions are expected to be lower. People can now focus on higher-value work, and the business can respond faster to a changing energy landscape. Our scaled examples set the North Star. Here's an example of how our clients are starting to work with us for broader AI adoption across multiple areas to enable their business strategy. We've partnered with UOB, a leading bank in ASEAN, for nearly two decades on various initiatives, including multi-country application services rollouts to omnichannel enhancement. Today, we're helping them scale Gen AI and use agentic AI to transform customer experience and core operations. Using our AI refinery platform, we're supporting them in powering high-value use cases in customer engagement, risk management, and workforce enablement. This transformation enables faster, more personalized service, strengthens decision-making with predictive insights, accelerates response times, and enhances operational resilience. Together, we're positioning UOB to lead and create sustainable impact in the financial services industry. Now, an important part of our growth strategy is to be relevant to the core of our clients' industries, such as digital manufacturing, and to be relevant to their growth agenda. Industry X grew 10% and Song grew 8% in FY25. Both follow a similar pattern of needing a strong digital core and reinvention. The digitization of digital manufacturing and engineering and the use of AI and data to reinvent customer experience is still in the early days. We're seeing strong demand across both areas and continue to invest both organically and inorganically. For example, we recently acquired Momentum ABM in the United Kingdom and SuperDigital in the U.S., extending our edge in B2B and social and influencer marketing. Over to you, Angie. Angie Park: Thanks, Julie. Now let me turn to our business outlook. For the first quarter of fiscal 2026, we expect revenues to be in the range of $18.1 billion to $18.75 billion. This assumes the impact of FX will be approximately positive 1% compared to the first quarter of fiscal 2025. Our Q1 guidance reflects an estimated 1% to 5% growth, including about a 1.5% impact from our federal business, with AFS contracting mid-teens. For the full fiscal year 2026, based upon how the rates have been trending over the last few weeks, we currently assume the impact of FX on our results in U.S. dollars will be approximately positive 2% compared to fiscal 2025. For the full fiscal 2026, we expect revenue to be in the range of 2% to 5% growth in local currency over fiscal 2025, including an estimated 1% to 1.5% impact from our federal business. Excluding the impact of federal, our revenue is expected to be an estimated 3% to 6%. This year, we expect an inorganic contribution of about 1.5%, and we expect to invest about $3 billion in acquisitions this fiscal year. For adjusted operating margin, we expect fiscal year 2026 to be 15.7% to 15.9%, a 10 to 30 basis point expansion over adjusted fiscal 2025 results. We expect our annual adjusted tax rate, effective tax rate, to be in the range of 23.5% to 25.5%. This compares to an adjusted effective tax rate of 23.6% in fiscal 2025. We expect our full-year adjusted diluted earnings per share for fiscal 2026 to be in the range of $13.52 to $13.90, or 5% to 8% growth over adjusted fiscal 2025 results. For the full fiscal 2026, we expect operating cash flow to be in the range of $10.8 billion to $11.5 billion, property and equipment additions to be approximately $1 billion, and free cash flow to be in the range of $9.8 billion to $10.5 billion. Our free cash flow guidance reflects a very strong free cash flow to net income ratio of 1.2. We expect to return at least $9.3 billion through dividends and share repurchases, an increase of $1 billion, or 12% from fiscal 2025. Our board of directors declared a quarterly cash dividend of $1.63 per share to be paid on November 14, a 10% increase over last year, and approved $5 billion of additional share repurchase authority. We remain committed to returning a substantial portion of our cash generated to shareholders. With that, let's open it up so we can take your questions. Alexia. Alexia Quadrani: Thanks, Angie. I would ask that you each keep to one question and a follow-up to allow as many participants as possible to ask a question. Operator, would you please provide instructions for those on the call? Operator: Absolutely. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. Today's first question comes from Tien-Tsin Huang with JPMorgan. Please go ahead. Tien-Tsin Huang: I think it's a good presentation here. My first question I'll ask on visibility on revenue growth, if that's OK. Just love to hear your thoughts on visibility compared to the last couple of years, given the backlog, which is quite big with large deals. You have the pipeline, of course, and then what you're seeing on discretionary spending, given the economic backdrop as you see it. Angie Park: Great. Hi, Tien-Tsin. Good morning. Let me start with that. As we look at FY2026, we feel really good about our positioning. As you said, you saw our strong bookings of $80.6 billion in FY2025. That positions us for FY2026. We can see our backlog from the large deals. If you look at our pipeline, and looking at our pipeline, it's solid overall, and we see strong demand for our large transformation deals. From a discretionary perspective, what we've assumed is at the top end of the range, there's no change in discretionary spend, while at the bottom of the range, it allows for deterioration. By the way, as you think about our guidance of 2% to 5%, excluding AFS, we're at 3% to 6% for the year. Tien-Tsin Huang: OK. Thanks for that, Angie. Julie, I like your AI remarks. Can you dig us? I'd like to want to dig in a little bit more, if you don't mind. Just give us your latest thoughts on AI-driven productivity and those gains and how they might unfold. I get that question quite a bit from investors. Do you see potential deflationary effects? How might that impact Accenture services, both positively and negatively? Thanks. Julie Sweet: Great. Thanks, Tien-Tsin. We do not see AI as deflationary. We do see and are seeing it as expansionary, similar to every tech evolution we've been through. The move from analog to digital, from on-prem to cloud and SaaS, and as many of you who've been with us over the course of the years have known, in every successive tech evolution, we've become stronger. If you look at AI, we see the same thing. Yes, AI absolutely boosts efficiency in areas like coding or operations. Those savings do not disappear. They're being reinvested into new priorities. The list of what our clients want to do with technology is truly virtually unlimited. When we can save them money by delivering our services with advanced AI, that frees up their budget to do the next things on their list. That's what they're doing. They're always going to those next priorities, and we're best positioned then to help them. That is how we delivered our 7% growth last year. Two years in, we're seeing the pattern for how that journey to advanced AI is expanding our business. By the way, I will add that one of the most consistent things that I'm telling CEOs today is that their AI strategy has to focus on both growth and productivity. Almost every CEO that I've talked to says they've pivoted way too far toward productivity and not enough to growth, which, of course, we are helping them with things like Song. We give that advice really from our own experience in how we have successfully grown through every tech evolution, embracing the productivity on one side and then capturing the opportunity it creates on the other side by helping our clients. Operator: Thank you. Our next question today comes from Dave Koning with Baird. Please go ahead. Dave Koning: Yeah. Hey, guys. Great job and great to see Gen AI bookings reaccelerate. A question, I guess, a little like Tien-Tsin's question. Just wanted to ask about the balance between Gen AI and managed services. You do a ton of managed services work. You get to know client operations really well. You can probably go in and recommend Gen AI work and gain a lot of share there, but then maybe displace some managed services. How does that really balance between consulting and managed services over time? Does the net of it all push revenue and margins higher? Angie Park: Sure. First, let me just kind of ground you in how we're thinking about consulting and managed services in FY26, just so we all have the facts of how we're thinking about it in FY26. I'll give you some more color on how we see those things actually work in the market. Angie, you want to just ground them in the FY26 piece? Angie Park: Hi, David. Good morning. For our guidance for FY26, both consulting and managed services are balanced. We see both of them in the low to mid-single-digit range. That's the context. Julie Sweet: Yeah. As you know, how it's actually worked out on the ground is that as you think about enterprise-wide strategies, a lot of times what we're talking to our clients about is where do you invest and build proprietary capabilities, where do you want to buy capabilities, and where are you best situated to go faster because you're partnering and buying them through a managed service like Accenture. What we're seeing a lot of is, for example, companies that are really behind, they're not as far along in their tech journey. They need managed services because they simply can't go fast enough. It's not just a cost play. They want the cost takeout, but they want to use everything we've invested in our platforms to get them to the advanced AI. Similarly, in the core operations, things like digital manufacturing and supply chain, we're developing more and more managed services there in order to allow them to go faster. We see this kind of continuing to develop as we have over the last several years, where managed services have become very strategic. They're not just a cost play. The more we can save them money in the way that we deliver, using advanced AI, that allows them to then reinvest into the business. Very similar patterns, managed services really for the last five or six years have become a very important part to the strategy of companies and how to use advanced technology, now it's advanced AI, faster. Dave Koning: Great. No, that's super helpful. Maybe just quick follow-up. Are you expecting a similar Q4 headwind through the first three quarters of this year and then anniversary it in Q4, and then going forward, maybe not having much impact at all? Is that kind of how you're modeling it? Angie Park: That's exactly right. We expect it to anniversary at the end of Q3. Dave Koning: Awesome. Thanks, guys. Nice job. Angie Park: Thanks. Operator: Thank you. Our next question today comes from James Faucette with Morgan Stanley. Please go ahead. James Faucette: Thank you very much. Appreciate all the incremental color and detail here from everybody. I wanted to ask, we see, at least in the forecast, a little bit of increase in CapEx, et cetera. I'm wondering if you can give us a little bit of detail where that investment is going and how we should expect that to play out further. Angie Park: Sure. On our CapEx, we expect about $1 billion this year, which is about $400 million more than FY2025. This is really about us expanding our real estate and leasehold improvements in certain geographies, certain major markets for us. Julie Sweet: Because we're bringing more people back to the office. James Faucette: Kind of what I suspected. You mentioned, and we saw the reacceleration in Gen AI and bookings, et cetera. How is the pricing of those projects evolving? Has the velocity of projects transitioning from proof of concept to production changed at all? Angie Park: Let me just start on the pricing. For our Gen AI projects and the pure Gen AI that we were, or advanced AI that we've been talking about, we do see pricing that is accretive overall to Accenture's average. Julie Sweet: Yeah. In terms of acceleration, in terms of kind of moving from proof of concept to production, we're seeing more and more now move into production because we're helping them with the proof of concept, and then we're helping them scale. You also are just continuously seeing companies that weren't as fast out of the block now starting proof of concept. It really is a cycle that many companies are going to go through. You have leaders who are way ahead. We have other companies that are just getting started. What I would say is, rather than a reacceleration or deceleration, these things are going to be like everything. They're going to be lumpy, in terms of it. What we really look at is the overall trend of how much growth that we are getting and our share of this new spend. Operator: Thank you. Our next question comes from Jamie Friedman with Susquehanna. Please go ahead. Jamie Friedman: Hi. Good morning. I too appreciate your prepared remarks. Really thought-provoking. I wanted to ask, Julie, about the way you're defining advanced AI. I think if the transcript's right, you say Gen AI, agentic AI, and physical AI. I'm actually asking about why you're saying you're not including data because we've sort of been trained that data is foundational. Why is the data component not in the definition of advanced AI? Julie Sweet: Because what we're trying to share with you is how we're taking spend in a new market. By the way, data is absolutely critical. In fact, one out of every two projects in Gen AI, Agentic AI, physical AI has significant data pull-through. Our data business is on fire, right? This is an absolutely critical area. Companies are just getting started. It's nascent in many places. It's part of the digital core that we're building. It's just that to date, we've wanted to share with all of you transparently the really new area. Data is part of the digital core that's growing. We've shared with you that 60% of our revenue is from the ecosystem partners, including the data. Look, going forward, now that advanced AI is, in fact, in all of the work, because it's either actual work or we're getting ready for the work, we'll think about how to share that. Just to date, since this started for all of us, like really from negligible revenue, we wanted to share how we've been specifically accelerating in the new area of spend. Jamie Friedman: Got it. Thank you. Going further, will you say that every new wave of technology has a time where you have to train and retool, and your core competence is to do that at scale? I'm just wondering, relative to prior technology, and you alluded to some of this in prior architectures, how do you think about that requirement, which you have tremendous mindshare at, which is to do technology at scale? How do you think about this relative to some of the previous technological evolutions? Thank you. Julie Sweet: It's going faster. There is so much demand, and the technology is moving faster. The more advanced skills and the new types of skills are coming faster. That's why we're being very decisive, right? Upfront, we said you've got to start training everyone in the new skills. We're now saying we've got to move faster to that. Also, remember that when we went into this, we'd already trained about 500,000 of our people on classical AI because going back to FY2019, we said the next decade would be about cloud, data, and AI. We start with a very strong base. This is definitely moving faster than prior technology evolutions in terms of how fast the demand is coming and the importance of us really winning the talent rotation. Operator: Thank you. Our next question today comes from Bryan Bergin with TD Cowen. Please go ahead. Bryan Bergin: Hey, good morning. Thanks for the added detail in the slides here. My first question on Gen AI impact. Can you speak about client behavior in seeking to use Gen AI and agentic solutions more themselves? You mentioned the efficiencies from the tech in areas like software development. I'm curious if you're seeing more clients seeking to then benefit to do that more themselves versus with third parties. I'm also curious if you've seen clients that thought they could do it themselves 6 to 12 months ago and then realize they do need help and they return to you. Julie Sweet: Yes. In fact, especially early on, because Gen AI seemed so simple, right? The reality is it's not the technology that is the biggest barrier. It is actually being able to get the mindset reorganized around how best to use it, the ability to do the change management, the process reinvention. If you think about your average company, their core competencies inside are not things like end-to-end process reinvention, right? You're hard-pressed to find a CEO that doesn't say, "I feel like my organization is too siloed. I feel like we don't have the right way of managing our data." We've had lots of clients who have started things on their own and then come to us who've got good proofs of concept that their team was able to do, but then just can't scale it. I'm doing right now, like just in the next few weeks, I'm personally leading a few different workshops with the entire C-suites of companies where the focus is, share with us how do we actually scale it and what can we really do now, right? As we're a couple of years into this, we have a number of solutions which we're now doing repeatedly within industries and across industries. Our clients are looking for us to share that success so that they can start, stop just having their own team saying, "Well, I have this idea, this idea," and saying, "How can we actually get scale now?" Bryan Bergin: OK. Thank you. That's helpful. A follow-up on the business optimization program. Can you talk about the assumed savings you expect to achieve from this optimization program and how it may help you evolve your operations? I'm specifically curious if you see that kind of combined with Gen AI adoption internally allowing you to operate at a sustainably higher utilization as that did take up this quarter. Julie Sweet: Hi, Brian. I think that for overall, we expect savings of over $1 billion from our business optimization program, which we expect that we will reinvest in our business and in our people because it's so important for our future growth. We expect to reinvest that while still delivering modest margin expansion. Julie Sweet: Yeah. In terms of the connection, just making sure this particular, these moves are primarily due to our talent strategy. The other piece was an exit of a couple of non-strategic acquisitions. On the talent strategy, it's more around, our number one strategy is upskilling. Given the skills we need, and we've had a lot of experience in upskilling, we're trying to, in a very compressed talent timeline where we don't have a viable path for skilling, sort of exiting people so we can get more of the skills in we need. That's really not related to the utilization piece in terms of it ticking up to 93%. We think it'll stay in the zone, in the low 90s to that, and it'll fluctuate a little bit. To your point around what can we do long term, we are continuously looking at, as the technology matures, our new structure around reinvention services. We'll look to see, are there ways that we can use the technology to deliver our services and operate Accenture in its core better? That's one of the reasons why we have the new reinvention services to really simplify how we're operating because that makes it much easier to start to use this AI. More to come as we fully roll out that model and identify new opportunities. Operator: Thank you. Our next question comes from Darrin Peller of Wolfe Research. Please go ahead. Darrin Peller: Hey, guys. Thanks. It's good to hear from what it sounds like the pace of procurement change has calmed down a bit from the government side, such that you can forecast those. I guess, number one, just to verify that's right, you feel more confident around forecasting on it. There's a lot of policy changes. Just want to touch on a couple and ask you your thoughts lately. Number one, now that we have a little more clarity on tariffs, do you see more capital investment, especially in areas like products? Number two, maybe you could just comment on H-1B changes or potential changes. What are your thoughts around either wages or the pace of hiring of H-1Bs going forward and how it may or may not impact the business? Just a quick one on health care and the big beautiful bill, if any impact you're seeing there. Thanks, guys. Julie Sweet: Great. Thanks. Just quickly on federal, we do see procurement is now starting to pick up, although it's still slower than it has been in the past. The demand in federal is very much around modernization, consolidation, efficiency. Tech is at the center, so lots of demand around ERP and platforms. Our position with the ecosystem is really key here and our strategy to expand that partnership. Those partnerships are also important. We're really pleased with our new partnership with Palantir, which is really playing a critical role in federal. We feel good about where we are in federal and are relevant to the administration's agenda. That's what we're really focused on, being relevant to our clients. That's federal. On capital investment, I would say it's still a little early, right? Obviously, you've seen the improvement with the cut in interest rates. We're a global company, so there's a lot of stuff going on around the world. I think it's just a little bit too early to call yet how much this is going to open up on the capital investment. Of course, we're growing very significantly and taking advantage of the investments that are already happening, as you saw in our capital projects business. On H-1B visas, for us, this is really a non-issue because we only have about 5% of our people in the U.S. on H-1B visas, and they're for really specialized experience and skills for our clients. Not something that is really a big impact on Accenture. Whether it's health care or a lot of the different policy changes, remember, our business thrives by helping our clients navigate change, right? What we're seeing is that every time there's big policy changes, and this has been true for decades, that's why in our business, we have industry expertise. We have the functional expertise. When you have new compliance rules, et cetera, that usually drives more business for us. At this point, we see an opportunity to really stay close to our clients and help them navigate and take advantage and comply with new policy changes. That's true in health care, and it's really true across the board. Angie Park: Thank you. Operator, we have time for one more question, and then Julie will wrap up the call. Operator: Absolutely. Our final question comes from Jim Schneider at Goldman Sachs. Please go ahead. Jim Schneider: Good morning. Thanks for taking my question. Julie, I just wonder if you could follow on your comment that you expect headcount to grow during the course of the fiscal year across all regions. Can you maybe kind of frame for us the magnitude of that and the timing for it, given the context of some of the other business optimization actions you're seeing? Where would you expect headcount growth to land exiting the year, perhaps? Angie Park: I'll take that. Hey, Jim. Good morning. What I would tell you is, look, we expect it to grow across all markets. We don't have a specific number that we're giving you, but based upon the demand that we see, we expect our headcount to grow. Jim Schneider: Great. As a follow-up on that, if you could maybe talk about the net impact of AI you're using internally to optimize your own work, your own business, utilization. I think you mentioned earlier, 93%. That's basically hitting a new record. When would we expect to see that either reflected in even higher utilization or potentially gross margins, even though we know you don't manage directly to that? Julie Sweet: Yeah. Remember, right now, our utilization is really a reflection of the kind of momentum in demand that we're seeing. You saw the bookings, right? Our utilization, we would expect to continue to move around in the low 90%, so we don't have a structural change in utilization due to AI. We are already embedding AI, particularly in our big platforms like Gen AI, to drive efficiencies, and that's reflected in both our bookings and in our guide for the year. We're going to continue to be the leaders because that is what works, right? As you lead yourself, we're able to take that to our clients. We're able to show them how we're doing it and then help them do it in their business. That's kind of how it's developing. Operator: Thank you. As we close the question and answer session, I'd like to turn the conference back over to Julie Sweet for closing remarks. Julie Sweet: Terrific. Thanks again, everyone, for joining. In closing, I just want to thank all of our shareholders for your continued trust and support. We are working every day to earn your trust. A huge thank you to all of our reinventors because you are why we are able to deliver these results. Thanks again. Operator: Thank you. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Operator: To all sights on hold, we do appreciate your patience and ask that you continue to stand by. To all sites on hold, we do appreciate your patience and ask that you continue to stand by. Go outside on hold. We do appreciate your patience and ask that you continue to stand by. To all sites on hold, we do appreciate your patience and ask that you continue to stand by. Please standby, your program is about to begin. Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter Fiscal Year 2026 CarMax Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Lowenstein, Vice President, Investor Relations. Please go ahead. David Lowenstein: Thank you, Nikki. Good morning, everyone. Thank you for joining our fiscal 2026 second quarter earnings conference call. I'm here today with Bill Nash, our President and CEO, Enrique Mayor-Mora, our Executive Vice President and CFO, and Jon Daniels, our Executive Vice President, CarMax Auto Finance. Bill Nash: Let me remind you our statements today that are not statements of historical fact including, but not limited to, statements regarding the company's future business plans, prospects, and financial performance are forward-looking statements we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, expectations, and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important factors and risks, that could affect these expectations, please see our Form 8-K filed with the SEC this morning, our annual report on Form 10-K for fiscal year 2025, and our quarterly reports on Form 10-Q previously filed with the SEC. Please note, in addition to our earnings release, we have also prepared a quarterly investor presentation and both documents are available on the Investor Relations section of our website. Should you have any follow-up questions after the call, please feel free to contact our investor relations department at (804) 747-0422 extension 7865. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Bill? Bill Nash: Thank you, David. Good morning, everyone, and thanks for joining us. Today, I want to start with our priorities. While our second quarter results fell short of our expectations, we remain focused on driving sales, gaining market share, and delivering significant year-over-year earnings growth for years to come. We have a differentiated and best-in-class omnichannel customer experience and are focused on maximizing that advantage by driving operational efficiency and sharpening our go-to-market approach. With this mindset, our key priorities include, first, focusing on price and selection. This includes maintaining competitive prices while minimizing macro factor impact and having the cars consumers are looking for at CarMax's high-quality standards. Second, driving consumer awareness of our differentiated experience. This includes not only our new brand campaign "Wanna Drive," but also enhancing the conversion waterfall from web traffic all the way to the ultimate buy and/or sell decision. Third, delivering incremental SG&A reductions of at least $150 million over the next eighteen months. This will be broad-based, and it includes leveraging technology to drive efficiencies and our net promoter score to new heights. And finally, generating additional profit through components of our diversified business. This includes increasing CAF penetration and profitability in a responsible and thoughtful way. It also includes pursuing other opportunities across our business to drive incremental flow through to our bottom line. We are already making progress across these fronts and are confident in our strategy and our earnings model, which will produce high teen EPS growth with mid-single-digit retail unit growth. During our first quarter call, I mentioned that we saw an increase in sales volume in March and April due to the tariff speculation. This impacted our performance in the second quarter in two ways. First, we ramped our inventory ahead of the second quarter to support this growth. Across May through June, we saw about a $1,000 in depreciation, which negatively impacted our price competitiveness and our sales. Second, while hard to quantify, we believe there was a pull forward of demand in the first quarter. In the second quarter, we responded by lowering retail margin to drive sell-through, and we intentionally slowed buy to balance our inventory with sales. This strategy has worked as both price competitiveness and inventory position have improved since that time and have put us in a better position for the third quarter. During the quarter, we delivered total sales of $6.6 billion, down 6% compared to last year, reflecting lower volume. In our retail business, total unit sales declined 5.4%, and used unit comps were down 6.3%. Pressured performance across our age zero to five inventory were partially offset by increased sales in older, higher mileage vehicles. Average selling price was $26,000, a year-over-year decrease of approximately $250 per unit. Second quarter retail gross profit per used unit was similar to last year but down approximately $200 from the first quarter. The sequential decline was more than twice our historical average, reflecting the actions that I mentioned earlier. We will continue to focus on maintaining our price competitiveness. And we remain disciplined yet nimble in leveraging selection and margins to drive sales. Wholesale unit sales were down 2.2% versus the second quarter last year. Average wholesale selling price increased approximately $125 per unit to $7,900 and wholesale gross profit per unit was historically strong and similar to last year. We bought approximately 293,000 vehicles during the quarter, down 2% from last year. We purchased approximately 262,000 vehicles from consumers with more than half of those buys coming through our online instant appraisal experience. With the support of our Edmond sales team, we sourced the remaining 31,000 vehicles through dealers which is slightly up from last year. This quarter's outperformance is a direct result of a decision to pull back offers to rightsize inventory. We are no longer intentionally slowing buy and expect to see year-over-year improvement in the third quarter. At the August, we launched our new "Wanna Drive" brand positioning campaign that brings to light our unique omnichannel experience. Our net promoter score is the highest it's been since we rolled out our digital capabilities nationwide. Driven by record high satisfaction among customers purchased online as well as those using our omnichannel experience. "Wanna Drive" spotlights this unique offering, empowering customers to buy their way, with the clarity, confidence, and control to navigate the journey on their terms. "Wanna Drive" appears across TV, streaming, social, digital, and audio and represents the first phase of a sustained multiphase strategy. This approach, we will complement with increased advertising spend, demonstrates our commitment to long-term brand investment that supports our growth objectives. As previously discussed, we've been focused on driving SG&A efficiencies. We're pleased with our progress so far and have line of sight to at least an incremental $150 million in SG&A reductions over the next eighteen months. This does not impact our growth strategy as we will continue to invest in initiatives that position us for the future. Later, Enrique will comment on the anticipated scope of our efforts and the likely timing. At this time, I will now turn the call over to John to provide more detail on CarMax Auto financing and our continuing focus on full credit spectrum expansion. Jon Daniels: Thanks, Bill, and good morning, everyone. During the second quarter, CarMax Auto Finance originated over $2 billion resulting in sales penetration of 42.6% net of three-day payoffs, which was 60 basis points above last year. Weighted average contract rate charged to new customers was 11.2% versus 11.4% last quarter, and reflects downward rate testing executed within the quarter. While CAF's full quarter increase in penetration appears modest, we believe the tariff pull forward in Q1 negatively impacted CAF share during the early part of the quarter. Since the beginning of the fiscal year, we have made underwriting adjustments that translate to 100 to 200 basis points of growth but the full realization of this growth can be impacted by noncontrollable factors, such as customer credit mix and partner lender behavior. It is important to note that more than half of the impact from these adjustments comes from recaptured Tier one segments but with additional criteria overlaid to reduce risk. While the remainder comes from within the top half of the tier two space, which we have been testing over the past year. Third party Tier two and Tier three penetration in the quarter combined for 23.8% of sales versus 24.4% last year as CAF growth had an impact on partner volume. CAF income for the quarter was $103 million, down $13 million from FY 2025. Net interest margin on the portfolio was 6.6%, up over 50 basis points from last year and relatively in line with last quarter. GAAP's loan loss provision of $142 million results in a total reserve balance of $507 million or 3.02% of managed receivables exclusive of auto loans held for sale. Of the $142 million, $71 million is attributed to new originations within the quarter, while the remaining $71 million is an adjustment to the loss expectation of the existing portfolio. Also of note, was seen in the first quarter, there was a reduction on the required provision stemming from $16 million in the reserve allocated to loans booked prior to Q2 now classified as held for sale. The primary driver of the $71 million adjustment on the existing portfolio comes from additional losses anticipated within the 2022 and 2023 vintages. Recall, these customers have been the most impacted by the convergence of rapidly increasing vehicle prices and broader inflation. Despite the observed worsening, these vintages still remain highly profitable, an estimated lifetime profit of $1,500 per unit versus $1,800 contemplated at origination. Additionally, they continue to shrink in size and contribution to the overall portfolio as they are replaced with more recently originated Tier one receivables at significantly lower loss rates. Note that 2024 and 2025 post contraction vintages continue to be right in line with our original loss expectations. Regarding the funding aspect of our full spectrum efforts, yesterday, we closed our 25-B transaction, our second non-prime securitization of the year. This was upsized to $900 million in total notes and for the first time, included the sale of most of the residual financial interest in the transaction to third-party investors, thus resulting in off-balance sheet treatment. We expect the gain on sale to be approximately $5 million to $30 million in third quarter income. We also expect to receive approximately $40 million to $45 million in additional CAF income related to servicing fees and the retained beneficial interest over the life of the transaction. As a reminder, going forward, there will be no loss allowance or provision for this pool of loans. Now I'd like to turn the call over to Enrique to discuss our second quarter financial performance in more detail. Enrique Mayor-Mora: Thanks, John, and good morning, everyone. Second quarter net earnings per diluted share was $0.64 versus $0.85 a year ago. The decrease was driven primarily by lower volume and the CAF loss provision adjustment. Total gross profit was $718 million, down 6% from last year's second quarter. Used retail margin of $443 million decreased by 8% with lower volume and relatively stable per unit margins. Retail gross profit per used unit was $2,216 in line with historical average. Wholesale vehicle margin of $137 million decreased by less than 1% from a year ago with lower volume partially offset by a slight increase in per unit margins. Wholesale gross profit per unit was $993. Other gross profit was $138 million, down 4% from a year ago. This was driven primarily by EPP, decreased by $6 million driven by lower retail unit volume. Service recorded a $4 million margin, reflecting a small improvement over last year's quarter. Continued efficiency and cost coverage improvements were partially offset by the deleverage inherent in the lower year-over-year second quarter sales. On the SG&A front, expenses for the second quarter were $601 million, down 2% from the prior year, driven primarily by lower stock-based compensation. Continue to realize expense savings, but they were offset by cost pressures in the quarter. SG&A to gross profit deleveraged 350 basis points to 84% as lower volume more than offset lower costs. The continued deployment of AI technology remains a key driver of efficiency gains and experience enhancements across our operations. For example, this quarter, Sky, our AI-powered virtual assistant, continued to deliver year-over-year double-digit percent improvements in containment rate, customer experience consultants productivity, and web and phone response rate SLAs. We recently fully rolled out Sky 2.0 which leverages AgenTeq AI and expect this release will drive even more efficiency and experience improvements. As Bill noted, we are committed to further reducing our SG&A by continuing to deliver efficiency gains across the business. The investments in technology, systems, and processes that we have made as part of our omni transformation will allow us to substantially reduce spend through several key initiatives. Modernizing and consolidating our technology infrastructure, automating manual processes, renegotiating and reducing third-party contracts, and eliminating redundancies across the organization. The goal of at least $150 million in SG&A reductions over the next eighteen months represents a material improvement in our cost profile, and reflects the execution on a plan that we have been developing with outside support. While we expect to realize some of these savings this fiscal year, we expect the vast majority will materialize in our exit rate by the end of fiscal 2027. In addition to offsetting inflationary pressures, these ongoing savings will provide additional flexibility to reinvest in areas that directly drive sales. While also serving as a tailwind to our already robust earnings model of a high teens EPS growth CAGR when retail unit growth is in the mid-single digits. We will continue to provide updates on this initiative during future earnings calls. Looking forward, I'll cover a few items. Regarding marketing, we expect an increase in per total unit spend in the back half of the year, particularly in the third quarter as we appropriately support our new brand positioning launch. We expect service margin to face pressure in the back half of the year due to seasonal sales volumes. For the full year, we still expect to deliver positive margin, which is a direct result of our efficiency improvements and cost coverage measures. Turning to capital allocation. During the second quarter, we continued our share repurchases at an accelerated pace, buying back approximately 2.9 million shares for a total expenditure of $180 million. As of the end of the quarter, we had approximately $1.56 billion of our repurchase authorization remaining. Now I'll turn the call back over to Bill. Bill Nash: Thank you, Enrique and John. Our customer-centric car buying and selling experience is a key differentiator in a very large and fragmented market and positions us well for the future. We are intently focused on driving this differentiated and best-in-class experience doing so with greater efficiency. As you heard from us today, we're actively executing on our key priorities which include driving sales, advancing innovations to improve customer and associate experiences, bolstering our marketing efforts, increasing company-wide efficiencies, and expanding CAF participation across the credit spectrum. All of these priorities will give us added flexibility and strengthen us for the future. With that, we will be happy to take your questions. Operator? Operator: Thank you. And at this time, if you would like to ask a question, please press the star and one on your telephone keypad. Your first question comes from the line of Brian Nagel with Oppenheimer. Please go ahead. Your line is open. Brian Nagel: Hey, guys. Good morning. Bill Nash: Morning, Brian. Brian Nagel: So the question first question I want to ask, just with regard to used unit sales. So, Bill, if I if I heard you correctly, you know, it seemed like the most disruptive factor here in fiscal Q2 was you know, now it's was was a clearer or pull forward in demand. You know, into the fiscal first quarter. So the the question I have is, you know, it could could you are there numbers you can give us to to size that better, you know, that that disruption? And then you know, as we look as you look through the quarter, I know you typically don't discuss, you know, sales trends in the quarter, but you know, following that pull forward impact, I mean, has the has the business or have sales got back to a more normal run rate, and what is that? Bill Nash: Yeah. So, Brian, first of all, you know, like I said, it's actually, we think, two factors. And I would put the I put the other factor probably first because it is hard to quantify exactly how much each one is. But know, my commentary around buying inventory up and then seeing that depreciation happen, I would say that is probably the the most impactful and then the pull forward. But, again, it's hard to it's hard to quantify exactly how much each of those each of those are. Know, for the quarter, each month, was was down year over year, and each month got a little weaker throughout the quarter. Now what I'll tell you for September and month to date is that it is stronger than the quarter and any of the months in the second quarter But when I look at it from a year over year, it's still a little soft on a from a year over year standpoint. But certainly, we put ourselves in a better position the start of this quarter, both on an inventory position as well as from a a pricing standpoint. Brian Nagel: That's helpful. If I could I ask a follow-up? Bill Nash: Sure. Brian Nagel: Just just with with regard to pricing. So, you know, the know, CarMax has, for a long time, talked about, you know, you know, know, having attractive pricing within the market. It seems me just listening to your comments say that you're you're focusing on this more now, So I guess that's is that the case? And then know, the the question I have is, are you seeing something in the marketplace or other competitors are getting more price aggressive that CarMax may have to change some of its stance there? Bill Nash: I think the the pricing commentary, first of all, is is you're right. We're always focused on pricing. We want to be competitive. I think in the quarter, we we fell into a spot where we weren't as competitive. Again, I feel better about where we are now. Then the only other thing I would add to that is I think we just need to continue to be as nimble as possible. When it when it comes to pricing. Mean, you saw in the quarter, we saw that South dollar depreciation over a month period and and, you know, we started acting on it very quickly. And there's a lot that goes into that decision. You know, as far as what do you do with your prices when you see depreciation, that kind of thing. But I think the takeaway for for that I want you to hear is that always focused on on competitive pricing. And, certainly, the focus as we go forward is to continue to be as nimble as possible because it is a it's a it's an aggressive environment out there. Brian Nagel: Right. Appreciate all the color. Thanks. Bill Nash: Sure, Brian. Operator: Thank you. Our next question comes from Rajat Gupta with JPMorgan. Please go ahead. Your line is open. Rajat Gupta: Great. Thanks for taking the question. Just got a couple. First one on CAF. Last quarter, had mentioned that you expect CAF income to be up year over year for the full year. Can you give us an update on that? And if it has changed, I'm just surprised by just the magnitude of, you know, the provision pickup know, because we had your last earnings call just two months ago. So curious, like, how could it how could it have changed so dramatically in shift for the short period of time? And any color there would be helpful. And I have a quick follow-up on SG&A. Enrique Mayor-Mora: Sure, Rajat. Appreciate your question. First, let's touch on the cap income. Obviously, as mentioned, there's a larger provision impact this quarter. Also, we mentioned we're excited about the the twenty five b transaction, which will yield gain in, you know, in during Q3. You put all that together, Yeah. We did highlight that we thought there would be, you know, increase year over year in CAF income. I think we're gonna be, you know, flat to down. Obviously, two more quarters to go, but flat to slightly down. But I think there's some nice trade offs that are occurring there. Obviously, all disclaimers with, you know, how does the consumer perform, how does sales come in, because that would yield a provision origination for us. But, hopefully, that gives you a little flavor on the income cadence. Regarding provision, it's certainly a fair question. I'll give a little color on what we saw for the quarter beyond what I did in my prepared remarks. So let's highlight the 22, and 23 vintages. That customer as I mentioned, high ASP, you know, certainly a higher APR environment, higher overall payment they were seeing, They come into the, yeah, the purchasing cycle with excess cash from COVID. And they hadn't fully experienced inflation yet. So we had a lot to learn about that customer. Initially, we saw some you know, again, we're coming off of incredibly low trough loss rates of 19, 20, 21 vintages. So hard to gauge how those twenty two and twenty three vintages were gonna perform. We saw an increase in losses initially, but that's not surprising because it's coming off of trough lower vintages. So there's previous years. So as we watched that customer perform, we saw it and thought maybe it was a pull forward in losses. Ultimately, as we saw a little increase, so maybe a timing curve adjustment, And then we watched that customer begin to struggle and continue to struggle a little bit. We made some adjustments that we thought were very smart for consumer and smart for us, and that has proven to be the case. And that was we adjusted our extension policy in the fall. We saw more payments come in had we otherwise not done that, so we were pleased to see that. But we had to watch that play through. We saw some of those customers coming back into delinquency and loss during Q1. It's obviously a tax time season as well, so it's a little muddied. So we did make an adjustment in Q1. And we wanted to watch it all play through. We saw some good performance initially with, again, those extensions. We wanted to see how much was gonna come back in delinquency. Unfortunately, during the quarter, we saw more revert back to delinquency and loss. That being said, you know, we've we've made a a significant adjustment this quarter as you see. We made what we would say a sizable adjustment last quarter I think we have a a much better handle on where these guys are are gonna land because we've watched these extensions play through almost completely at this point. Also, if you look at the totality of those vintages, you're about two thirds of the way through those vintages. So there's about a third left. So it's really gonna ultimately, you know, play through. There's more to come. But it really has played through. And then if you look at these twenty four and twenty five vintages, we are extremely pleased with those. So, you know, we're watching those losses early on. We're now twelve, fifteen months through there, and that stuff is right on the mark from what we expected So, yeah, hated to have to make an additional adjustment. I think there are a lot of, you know, confounding factors that had to play out. We feel like we have a mess much better understanding of them. And then I'll end with and, again, just as a reminder, these things are incredibly so profitable. You know, $1,800 versus maybe what we anticipated, $1,500 because of these loss adjustments. Roughly a half a billion dollars we're gonna achieve in lifetime value across the 2223 vintages. So a lot to say there because I wanted to explain what was going on there. But hopefully, that answers your question. Rajat Gupta: That that's that's helpful color. And just just on the SG&A, could you elaborate a little bit more on the areas of cost reduction? I'm curious because it seems to me that, you know, a lot of you might need might be tied to know, the omnichannel support function. Because you've already gained good productivity on your in store salespeople. I'm curious, like, should investors be worried that know, these actions might hurt your ability to recover some of the share loss that you seen. I'm curious, like, how do you balance those two? Enrique Mayor-Mora: Yeah. Absolutely. Thanks. Yeah. And and also, like, what he offers offset from the pickup and advertising. Thanks. Yeah. No. Absolutely, Rajat. I'll I'll jump into it. We do not think it's gonna impact our growth strategy. As I noted in my prepared remarks, our investments in technology, systems, and and processes are really going to allow us to rationalize our costs. So very specifically, I'll give you some examples. So we have a a stronger ability to retire legacy systems. Have an ability to lower licensing usage as we either need less of them or we can eliminate certain functionality as well given our investments in technology such as chat. Due to invest investments in Sky. Become even more efficient in our call centers, and I've been talking about that for quite a few quarters at this point in time. Able to automate manual processes, and leverage AI to even more frequently review third party contracts. So those are just some of the examples. That will help us take out that 150,000,000 and if you'll note, those examples don't really impact our growth strategy. And part of our thinking as well is that there is a portion of these savings again, it's $150,000,000 at least 150,000,000 that we do expect to direct back to investments that have a direct tie with sales, you know, such as an example this quarter would be marketing. You know, we are going heavier up in marketing, appropriately so, or our new brand positioning, and that'd be an example of something that we're gonna go invest in. I do think it's important to remember, right, that we had been in investment mode as we transformed our company into an omni retailer. But once you're done with that, the next step really is to optimize and then rationalize that spend. And that's where we are. Rajat Gupta: It's not a it's not a net $150,000,000 reduction. Is there a net number? That you can give us? Enrique Mayor-Mora: Yeah. So it's gonna be net of any ongoing SG&A expenses to accomplish. That number, but it's not net of any kind of onetime charges that we may end up having to to incur. But it is net of ongoing expenses to to realize the savings. Rajat Gupta: No. No. I meant, like, net of, like, investment in other areas like advertising and other sales initiatives. Is there any Like I said, there there will be part of those dollars that will be a reinvestment back into the business to drive top line sales. However, that being said, know, we do expect just the SG&A savings to be, you know, a material tailwind to our already robust earnings model. Rajat Gupta: Understood. Great. Thanks for the color, good luck. Operator: Thank you. Our next question comes from Sharon Zackfia with William Blair. Please go ahead. Your line is open. Sharon Zackfia: Hi. Good morning. I wanted to go back to morning. I wanted to go back to Brian's question on price. And as you think about it, and I know you're talking about reinvesting some of the SG&A savings. And back in 2019, which seems like forever ago, you had talked about kind of maybe targeting some lower GPU to drive incremental sales. So kind of putting that all together, is there a a thought process or a strategy about taking of the bulk of the 150,000,000 and really reinvesting it to the consumer and price your selection to drive the top line? Because it does feel like the consistent market share story that we had had in the past has kind of become much more volatile, you know, post pandemic. Bill Nash: Yeah. Sure. I I think you're thinking about it the right way, but I would expand on it a little bit. I mean, the $150,000,000 in SG&A reductions, as Enrique pointed some of that we will reinvest directly back into things to of driving sales. The other piece I would tell you, which is another reason why we're focused on it, the key priority, is just being able to generate additional profit from other parts of the business. Because that also gives you flexibility and allows you to reinvest some of that in price. So, again, I think it goes back to Brian's initial questions that we wanna be as nimble as possible make sure that we're as competitive as possible, and we feel like we're gonna have several levers to be able to do that. Sharon Zackfia: Bill, can I just follow-up? And do you think there's price in less elasticity of demand that if you were more aggressive on price, you could stimulate sales in a profit accretive way? Bill Nash: Yeah. There's look. There's always elasticity when it comes in. You know, we've talked about this before. You know, we know pretty much because we're constantly testing. You take prices down a certain dollar amount, we know what you get for that. The what you have to think way we think about it is is that that when you look at the price elasticity, there's a lot of things that go into that equation. So for example, your variable expenses. So the better that you're doing in your variable expenses, it makes that equation easier. The capacity of your of your operational workforce. Are they at capacity? Are they not? Capacity? Are you having to pay people for unproductive time? Your ancillary profit attachment, how well we're doing on things like ESP or or finance, there's a lot of things that we look at to decide, okay. Does this make sense? And that equation changes depending on the market factors. I mean, even without taking some of those things in, the elasticity will change just given what competitors are doing. So we will con continue to be nimble. We will continue to make improvements in some of these other factors because, again, that makes the elasticity pay off. Sharon Zackfia: K. Thank you. Bill Nash: Sure. Thank you. Operator: Thank you. Our next question comes from Chris Bottiglieri with BNP Paribas. Please go ahead. Your line is open. Chris Bottiglieri: Hey, guys. Two questions on credit for me. So the first one is, can you elaborate on the servicing fee of $4,045,000,000? I would think there's probably some servicing cost to achieve that servicing revenue. Just was wondering if you'd help us think through the cost since the receivables won't be in on the balance sheet, but the expenses will be. And then bigger picture question on credit. Like, you guys are normally really conservative, you know, really prudent guys historically. Kinda pushing into deep subprime now. The market's you know, I think beyond your control is getting a little bit weaker. Wanna kinda, like, test to resolve. Like, how committed are you to pushing into subprime right now? Just given the macro backdrop? Is it something you're gonna pull, you know, forward into regardless, or if macro keeps worse or you'd have maybe hit the brakes a little bit. Bit? Bill Nash: Yeah. I'll start off and then I'll I'll pass it over to John. Just wanna to clarify something on deep subprime. Know, John and his comments talked about going into really the top half of what we call the tier two. So you know, we're not talking about deep subcoms. I just wanna have some clarification there. And then, John, I'll let you add just to that end. The first part of the question. Jon Daniels: Yeah. Kicked me under the table because he wanted that one. Yeah. I mean, that we wanna make that very clear. I mean, it is not It it is not deep subprime at all. Again, we have been in tier three space. And we we have experience there and all that. But, again, we're trying to be very prudent to your point, Chris. Of how we go down when we go down. Now make no mistake. There is there is money to be made there. We have partners that make tremendous profit there. You need to price it right, provision correctly, service it correct. We believe, you know, we're learning how to do that. So but, yeah, I wouldn't characterize it as deep subprime. There's a lot of penetration to be gained as we inch our way down there. No doubt about it. To your first question on the expenses, I just just to step back because I like to take that after I speak to the overall program. Again, we are super excited because it ties to the first question. The the full spectrum nature. We have laid out a plan, and I think we have gone after that plan. First, it was, hey. We're gonna bifurcate our securitization program. We've done that. We've executed multiple deals now there. We said we're gonna recapture volume in tier one and expand into tier two. Again, we're being very prudent about that. Then announced that we that plan to do a deal where we're actually gonna sell the the future's residual interest in that deal, and we've done that very, very successfully. So we are super pleased. This was supposed to give us flexibility. Obviously, you know, give us insight into to what a deal like this looks like, and we've I think, hit on all of those. That being said, we've enjoyed the game. We'll enjoy the game that we're gonna see 25 to $30,000,000 in new highlights also referenced the additional value to be gained on the servicing side. Again, future interest there. On the expense on the expense there, yes, there is a little additional volume to be gained from the servicing side. There is a cost to us, but, yes, we will make additional additional value there. Enrique, anything you wanna add? Enrique Mayor-Mora: Yeah. And, Chris, you don't see the servicing income. It'll be broken out the cap contribution line, so you'll get a good view of that kinda on go forward reporting. And while the servicing costs will be embedded in kind of your your your cost of your business. Right? And so that's how it'll be reported. And you'll see that moving forward. Jon Daniels: Yeah. And and and the 40 to 45 also includes retain Yeah. Some retainers. Also, income from the five percent retention as well, the five and five. So we expect that'll continue as well. So, you know, all in all, like John mentioned, we're really pleased with the deal and the execution of the deal out there and and and really proud of the teams in getting that done. And as John mentioned, this just fits our overall strategy, and we are executing on that strategy. Chris Bottiglieri: Gotcha. Okay. Is the is most of the income coming from the beneficial interest or from the service fees? Or would I like to mention that a at all? Jon Daniels: Yeah. It's coming from kind of a mix. Yeah. It is. Chris Bottiglieri: Okay. Okay. And thanks thanks for clarifying this stuff, Rami. You did say that prepared remarks. So spoke there, so thanks for clarifying Yep. Operator: Thank you. Our next question comes from David Bellinger with Mizuho. Please go ahead. Your line is open. David Bellinger: Hey, good morning. Thanks for the question. Can you help us walk down the path back to positive unit comps and what the the timeline could be there? Bill, you mentioned the aggressive environment. So maybe if we take this up to the industry level, is the used car market just getting materially worse in your view? Or are there some macro cracks forming with these CAF adjustments? Or any other signals of a more strained consumer? Or do you think this is more of a competitive element here in Q2 versus other players in the sector and something that you guys have to invest against going forward? Just help us piece all that together. Bill Nash: Yeah. So, you know, when I say aggressive environment, I wouldn't say it's necessarily more aggressive than last quarter. It's been aggressive aggressive for a while. I think, you know, on the the strained consumer, I think we are seeing where consumers, especially your your mid to high FICO customers, they be sitting on the sidelines a little bit, and we just measure that by just pure app volume. Think we're seeing that with you know, it's a it's a little bit of a headwind in September, but that's not you unique to us. We we've talked with our finance partners, and they're seeing something similar. So you know, again, think and and even that, you know, consumer's been distressed for a little while. I think there's some angst. You could the consumer sentiment isn't isn't great. But again, I think we've put ourselves in in good shape, and I think the priorities that we we're focused on will will continue to pay dividends. You know, as I think about the full year, we we set out this year to to gain market share. And, you know, look, through the first half of the year, we feel good about it. Through the calendar June, which is where we have data through. Would just caution people when you're looking at June, July, and August, it's tough on a year over year comparison just because of the CDK outage last year. But you know, we're not backing off of our stance. It's like we started this year going after market share. And at this point, I don't see a reason why we would back off that. We expect to gain market share for the full year. So hopefully that that adds a little color. Jon Daniels: Yeah. David, I'd to just jump in on the consumer just to highlight a few things again, the cracks issue set. I think there's something incredibly unique about the twenty twenty two to twenty three consumer, and it is an industry issue. You look at other issue lenders out there, they would tell you, those are some tough vintages. It's kind of the perfect storm of IAS and probably an overconfident consumer coming in with they think they have plenty of cash. Get hit with inflation. If you look at the 2425 consumer, they're just more eyes wide open walking in the door. Prices have come down a little bit. They're you know, interest rates have come down a little bit. Typically, people that buy in a a in a more stressed environment perform usually better. Now, again, we think we have reserved. We watch very carefully, how those guys performing, and and we know they might perform worse than maybe pre COVID. Yeah, I think that 24, 25 consumer is gonna just be a a better one. Bill Nash: Yeah. So I think to your point, David, you know, the second quarter second quarter kind of event that would be a second quarter event. You know, truing that up, but we feel good about where we stand on that know that that's getting to be less and less of a population. As John said, the extensions are kinda back in, and that's really what this was to to to clean up on. So we we feel good about where we are there. David Bellinger: Great. Very helpful. Thank you. Bill Nash: Thank you, guys. Operator: Thank you. Our next question comes from Scott Ciccarelli with Charisse. Please go ahead. Your line is open. Josh Shang: Hey. Good morning, guys. This is Josh Young on for Scott. So as we think about the slowdown in sales here, is it a function of you just aren't getting people into the top of the funnel, or is it more you get them in there, but then they're kind of falling out of the bottom? Just any color on how you guys are thinking about that would be helpful. Bill Nash: Yeah. No. Look. Our our web traffic is up year over year. Our conversion as you go down the funnel is actually improving. I would say the biggest opportunity and some of it I think we can control and some of it we we can't control and that's that's really kind of web traffic to what we call a selling opportunity. Do does the customer do something that we can then you know, kind of start the process versus just folks that come to the website that are just, you know, viewing cars. Some of it is gonna be that we can't control because there's gonna be some folks who are they're they're window shopping. Others, I think we we can control and just how we how well we do in the presentation on that first initial glance how we make this the website stickier at that that topper part of top of the of the funnel. So I think it's a little bit kind of macro, but I think there's absolutely some improvements we can make. Josh Shang: Got it. That's helpful. Thanks. Bill Nash: Sure. Operator: Thank you. We will move next with David Winston with Morningstar. Please go ahead. Your line is open. David Whiston: Thanks. Good morning. I was kind of staying on that question. I mean, maybe help me fill in some blanks here because, I mean, it sounds like at the beginning of the quarter, you wanted to the the tariff the juicing of demand didn't really happen on the quarter, so you're you were trying to clear inventory to get rid of that depreciation. But you're saying web traffic was up year over year conversions improving. Yeah. Your unit volumes were slowed down over 5%. Used prices have been elevated for a long time now. Is the consumer just staying away, or is it that they're still having sticker shock despite this many quarters of elevated pricing? Bill Nash: Yeah. David, just so just for clarification, the web traffic is up. What's down for us would be what I would call selling opportunities. Once we have a selling opportunity, the conversion, we're actually seeing some good improvement in conversion just down through the rest of the funnel. So the opportunity really is, a customer hits our website, actually getting them to do something on the website. And, some of that I think is in our control. Of it is not in our control. You're just gonna have folks that are coming in there and realize, well, you know, either they're just looking or they just they're not ready to to to buy. So that's that's of the clarification of you know, your question between, well, your traffic's up, your conversion up, why aren't you seeing more sales? That's why. Jon Daniels: And, again, I would say not all traffic is considered the same. A seven eighty comes through the door versus a five eighty comes through the door. They convert it tremendously different rates. David Whiston: Yeah. In high quality, is that down even at the very high end of prime. Right? Bill Nash: Well, yeah. What we're seeing is that the the higher FICO customers, the app volume is down. So and that, you know, that's a that's a core customer of of ours. And really, you're seeing that kind of and John, keep me honest on that. You're probably seeing it probably 600 and above is probably down, certainly at the high end. I think the one area that's maybe not down is probably low FICO five fifty and and and below. Right. And and and I think, again, I don't think we're alone there. We can talk to other, you know, other lenders other dealers. You can see it in the credit bureaus. It's it's apparent. David Whiston: Okay. Thanks, guys. Operator: Thank you. Our next question comes from Jeff Lick with Stephens Inc. Please go ahead. Your line is open. Jeff Lick: Good morning. Thanks for taking my question. Bill, I was wondering if we could talk about the concept of the reserve inventory that you guys do, my understanding is it's any it's at the most, seven days, it's usually around seven, but not not always seven. But you know, our records or just our analysis shows that you know, roughly about 40% of your inventory at any given time online is reserved. And it know, it appears that you know, let's just take, you know, a unit that is probably attractive because someone's reserving it, so someone else who wants it doesn't see it. Or it's, you know, at the back of the queue. I'm I'm wondering your thoughts there you know, in terms of how that's affecting sales and if that's a policy you're looking at changing. Bill Nash: Yeah. No. I look. I think there's both reserve inventory and there's that that can't be transferred. I think the the reserve inventory generally is is inventory that has a customer that's basically interested in that that inventory. And, you know, that's obviously when you've got a customer in Richmond that's interested in a car and Pennsylvania, we think that's a a huge benefit that that customer can actually get that car. So that plays into our transfer. You know, I think the only thing that we'd be looking at there from a reserved inventory standpoint is just making sure that we're being active on how long a consumer can actually hold the car or reserve the car, and that's the the the transaction is progressing. On the the vehicles that are labeled not transferred, only reason they're not transferred at that time is because that's generally related to title issues. In some states, you can sell them, you'll see it on our website, hey. This can't be transferred because you can sell that car without a title in that state. There's other states you cannot sell a car without the without the title, so we're not gonna transfer that car in that case. And then once the title becomes available, it certainly can be open for transfer it's still around. So it's those are the two buckets we think about that would bring just kind of your overall available inventory down. Jeff Lick: And do you you know, I'm assuming you won't disclose this, but in terms of the amount of sales you know, of the percentage of people that are reserving I'm wondering what percent actually buy versus it goes back in. So how much of the inventory actually kinda sits out of out of view of the next potential buyer for seven days. Bill Nash: Yeah. I mean, we haven't gone into the specifics, but, obviously, there's you know, we look at the economic of that. The other thing I'd let you know is even on the reserved inventory, consumers can still express interest for it and say, hey. Please let me know if this doesn't does not actually pan out with that that customer. Keep in mind, you think about the reserved inventory, you know, a third of our sales are through transfers, and they go through the reserved inventory process. So you're absolutely right. We go through an economic decision, and where we are with that is we feel really good about it. You know, can we add a little extra friction just to make sure that cars aren't held for reserve over, you know, three days? Sure. But that's a that's a a small enhancement. Jeff Lick: Okay. Great. Thanks for taking my question. Best of luck. Bill Nash: Thank you. Operator: Thank you. Our next question comes from Michael Montani with Evercore ISI. Please go ahead. Michael Montani: Yes. Hi. I just had two questions. The first question was really around the credit trends. Can you just give us some more color in terms of the progression that you saw playing out throughout the quarter? When you think about kind of delinquency rates, and then how we should be thinking, you know, for provisions into the third quarter. And then the other question, let's do that and hopefully get to the other one. Jon Daniels: Sure. Yeah. Appreciate the question. Yeah. If you look at delinquency rates for the quarter, there's definitely a seasonality trend that you're always gonna have to observe there. So you're coming out off of tax time into Q2. It ramps up delinquency ramp will ramp up through through the rest of the calendar year and then back down through delinquency time typically. So but all in all, you look at overall delete delinquency rates, we're really looking at it by vintage We're looking at it, are they as expected often not the best indicator of ultimate loss, timing of loss, what have you. But if I think broadly, you know, through the quarter, aside from, again, those vintages that we've adjust that we adjusted on, as you can imagine, the delinquency trends on the newer stuff, and and even the older stuff that's more seasoned continued to be in line. So again, we feel very positive as we're gonna continue as we continue to put on that again, lower risk, tightened stuff. That'll perform well. So, hopefully, that addresses your addresses your question. Enrique Mayor-Mora: And, Mike, I think part of your question too was just on the the kind of provision as we as we go forward. And I I think the way I think the way to to think about that I mean, you saw what our provision was for our origination this quarter. You saw what the what we're calling the true up is. The way you should think about it is the provision this quarter for the new originations, I think, you know, that's pretty representative. You know, we'll we'll just with the stuff that we're going into, it it might be a little bit higher. But you know, we feel good about the true up. So the provisions, John, and, you know, you certainly speak up, but we would expect it to to be more You saw the $71,000,000 this quarter. Again, you you can go back and look at where we didn't have outsized strips where it was probably lean a little higher considering that we are, again, going after, yeah, a little bit lower in the credit spectrum. So that's gonna require a higher upfront provision. But, yeah, a hopefully, the the true ups are going to be minimal. That is our goal through this. We feel like that older stuff is rolling off. So, yeah, I would think you'd you'd see more in that $70.80 certainly south of a 100 thou a $100,000,000 range from a provision standpoint. Jon Daniels: And like John said, right, what we're seeing in the '24 and twenty five vintages is they are consistently meeting our expectations in terms of what the loss trends are. So what we're really talking about here, and we've taken a a material hit to our provision this quarter, what you're really talking about is the provision for new originations that John and and Bill just spoke to. Michael Montani: Okay. And then the the follow-up question that's helpful was just around some of the cost savings. So you had called out 150,000,000 you know, which could work out to somewhere around $200 a a car here potentially as reinvestment fuel if you decided to do it. And then on the COGS front, I believe you've said in the past that could be another 100 or $200 there as well. I just wanted to understand, you know, you know, is that separate and distinct? Am I kind of in the ballpark there in terms of some of COGS opportunity? And then kinda bottom line, if if it does require several $100 of reinvestment in into sharper pricing, you know, is that something that you all are committed to doing in order to kind of reinvigorate the top line? Bill Nash: Yeah. So okay. A lot of neck questions. Let me tackle the the the COGS and the SG&A. You're thinking about that the right way. They're they're separate. Separate initiatives. So on the COGS side, if you recall last year, we were going after over a couple years, we were going after $200 in cog savings. Last year, we actually got a 125 at the beginning of this year. We actually talked about going after another 125 for this year. So we're ahead of where we thought we'd be from a $200 goal. Will tell you we're still on track for that 125 for this year partway through the year, and that is a separate and distinct initiative versus the SG&A savings. So we we don't wanna get those two muddied up. To your question about, hey. If if you know, would you be willing to reinvest all that back in to be you know, to make sure that you're competitive? What I would tell you is yes. But would also tell you I don't think that's necessary. I think that we'll be able to take some to to the bottom line. Absolutely, but we'll invest some of them back in appropriate amount. And as I said here right now, I don't I can't see a scenario where you'd have to take all that savings and put it back into and and to price. But, again, I also want you to know that we're gonna we're gonna continue to be price competitive. Michael Montani: Thank you. Thanks, Mike. Operator: Thank you. Our next question comes from Chris Pearce with Needham. Please go ahead. Your line is open. Chris Pierce: Hey. Good morning. Just kind of following up on that question, I guess, you were a lot about pricing in the quarter, pricing going forward. Is this something that you know, should we reset our because you guys had sort of reset GPU expectations kind of higher with your performance. Does this conversation around pricing mean that investors maybe reset GPU expectations modestly lower? Or is it too soon to tell? Or how kind of intertwined would those be? Bill Nash: Yeah. No. Chris, that's a that's a that's a great question. And, you know, what I had had said at the beginning of the year is, from a modeling standpoint, you can kinda think about year over year on a retail GPU will will be similar. I also said, hey. You know, in any given quarter, there's gonna be some some some puts and and takes, and I think that's what you're seeing here. Think we still feel comfortable for the year as a as a whole to use that kind of retail GPU target. But what I will tell you is, you know, if you think about the third quarter, if you look at year's third quarter, it was a record high. So I would expect this to certainly come off of that. From from from last year and be more kind of in in the historical historical range. And I think didn't ask it, but I think you can think about wholesale being the same way on a on a year over year. I think you can know, keep that target that we talked about being very, very similar. But similar to retail, you know, last year's third quarter wholesale, one of the strongest, probably the top two or three GPUs that we had in in wholesale for the third quarter. So I would expect to to down and be more in line with kind of historical averages on that one. For the quarter. Chris Pierce: Okay. Thank you for that. And then just I might get my years wrong here, but at the '22, I believe, was calendar 2022 when you guys had too much inventory at that period in time and dealers were being more aggressive on price, and it kinda took you longer to work through because you wanted to hold margin versus pricing. And it there was sort of a longer reset to your inventory level. I I just wanna confirm that's sorta not what we're talking about here because of kinda your commentary around September and this being more onetime, or I guess I'd just love to hear you kinda talk through that, and apologies if I got the dates wrong given your system for line up the quarters. Bill Nash: You actually did get the date wrong. It's it was it's really which I think what you're referring to is the the the big depreciation event. Which we saw in calendar '23 and twenty four. I believe there was one in '23, and there were two in '24. That that we worked through. And and just to to remind everyone, on those events, it was about for each of them, it was about $3,000 in each of the event over a few months. So the degree of it was was different back then. Than it is here. And this this event, a couple different things. One, it was a thousand dollars over about a month period, and then you saw some stabilization. And then we're also going into a period where you know, you're gonna see generally seasonal depreciation. So we wanted to make sure we get we got through that. But yeah, those events that you're talking about, basically, at those times, you know, you look at that elasticity with all the things that we talked about earlier that go into that equation. And, you know, we held our margins a little bit more because at the time that that made sense. This one actually, it made sense. Let's get this stuff through. And so, again, we'll we'll tackle these things as as they come up. Chris Pierce: Okay. Thank you, good luck. Operator: We have a follow-up from Rajat Gupta with JPMorgan. Please go ahead. Rajat Gupta: Oh, hi. Thanks. Just wanted to follow-up on CAF. Just going back to the commentary, I'm still expecting flat to slightly down Could you help us a little bit more around the third quarter? You're going to get the gain on sale the 900,000,000 but you're also gonna lose, a quarter of net interest income. On that 900,000,000. So it almost feels like a wash. Is that is that the right way to think about it? If if you could give us a little more color on how you'd get to you know, still flat income even if you have, like, 80,000,000 provisions in the April and maybe the fourth quarter. I just want to bridge that. Thanks. Jon Daniels: Sure. Yeah. I I think you've got a a couple things going on there. First, yes, you've got the income, but you're gonna realize that you know, all upfront. Whereas, again, the receivables, you're gonna no longer have there. You were gonna gain that income over time. So that's a bit of a a pull forward. Your overall NIM will will be impacted. There's no doubt about that, Rajat. You're you're correct. But, yeah. Obviously, when we look at the provision going out, that's a key piece of it. But, again, you're bringing on higher NIM receivables as well. So I think that's that's that's helping benefit you to bring that NIM back up in the probably by the fourth quarter off of where you are in the third quarter. So I think all that's playing together Yeah. I think you got servicing income. You have the 5% retention. Right. So there there are things that, you know, should provide a tailwind. Rajat Gupta: Yeah. Jon Daniels: And, again, I'd probably say it's more slightly down a lot a lot plays into what's the origination provision, where's the NIM, where the losses go. Ultimately. But, yeah, I'd say probably slightly down more than flat. For the full year? For the full year. For the for the third quarter. No. No. For the full year. So take last fiscal year, this fiscal year. That's what I'd refer to. Rajat Gupta: Understood. Okay. Thanks for the color. Operator: Thank you. We do have another follow-up from Brian Nagel with Oppenheimer. Please go ahead. Your line is open. Brian Nagel: Hey, thanks for slipping me back in here. So my follow-up question and I think we've discussed this in the past, but did you notice anything with regard to I'm I'm I'm looking at used car unit demand. Anything notable with regard to kinda, you know, the the different type vehicles? I mean was there a stronger trend, high end, low end, that type? And did anything shift as we push here through the fiscal year? Bill Nash: Yeah. I think a couple observations. I mean, I still just the industry is a is a as a total, you're seeing older vehicles Like, if you look at older vehicle registration, older vehicles being, you know, older than ten year old, ten years old, that market segment is doing better than the the the zero to 10. You know, from the in the first quarter, we kinda had a barbell effect where you're under $25,000 cars were up year over year, so were, like, your 40,000 plus. This quarter, pretty much everything was down. The the under 25,000 was was you know, as a percent of sales, was up a little bit over over last year. But, you know, as far as the other ones, they were either down or or a little bit flat. So you still picked up some more as a percent of sale and the the under $25,000 card. Brian Nagel: And then built to that end, I I know you're you know, you've been, you know, merchandising different. To say, to to reflect the consumer preferences. But, you know, so as you look forward, is is is there are you are you pushing further into that that older inventory within the system? Bill Nash: Yeah. Look, we've obviously, Brian, been focused on this. I think if we look at the what we call that value max sale, let's call it six years and older or more than 60,000 miles. We had you know, a bump up in sales in that. We're up if you look year over year, we had a nice little tick up, which means you know, we had more of that that available. I think our goal will be continue to have more of that available, but I also think that we have to make sure that there's also a good selection of later model used cars as well because that appeals to a lot of CarMax customers also. So know, you can't go to at some point, you have, you know, the the benefit that you get of having older, higher higher mileage, will be offset because you don't have some of the vehicles that, you know, the core car customer is looking for. So we'll we'll walk that we'll walk that line. Brian Nagel: I appreciate it. Thanks. Bill Nash: Sure. Thank you. Operator: And we don't have any further questions at this time. I will hand the call back to Bill for any closing remarks. Bill Nash: Great. Thank you, Nikki. Well, listen. Thank you for joining the call today and and for your questions and your support. As always, I just want to thank our associates for everything they do to take care of each other and the customers in our communities and and we will talk again next quarter. Operator: Thank you, ladies and gentlemen. That concludes the second quarter fiscal year 2026 CarMax Earnings Release Conference Call. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the KWS SAAT conference regarding the publication of the financial results '24-'25. [Operator Instructions] Let me now turn the floor over to Dr. Jorn Andreas. Jorn Andreas: Good morning, everyone, and welcome to our analyst and investor call for the fiscal year '24-'25. I'm very pleased to share how KWS has delivered in a challenging agricultural environment with a robust operational performance and a number of deliberate strategic choices that set us up well for the future. Before we begin, as always, a brief reminder. Today's remarks include forward-looking statements that are subject to risks and uncertainties, and you will find the full disclaimer on this slide. And with that, let me take you through the year's highlights. Over the past year, we navigated a weaker agricultural market condition with resilience, and we delivered our full year targets in line with the latest guidance. Two signals stand out: a strong increase in free cash flow and a low net debt position, both underlying KWS earnings power and balance sheet strength. We also sharpened our focus. We streamlined the portfolio. We repositioned the corn segment as we also anticipated and communicated earlier and set a new financial framework designed to drive sustainable, profitable growth. As a leading seed specialist, this means targeted long-term investments in growth areas and in our innovation pipeline and continue to help to address the real challenges facing agriculture. At the same time, we want our shareholders to participate in the company's long-term success. We are aiming for a higher payout ratio, while maintaining a strong commitment on dividend continuity. And looking ahead to '25-'26, we are confident in the resilience and the trajectory of our market-leading businesses. So even if market headwinds unfortunately won't disappear overnight, we expect to stay on our growth path and create sustainable value for all our stakeholders. Let's now take a look at our key performance indicators for the last fiscal year. So the figures presented on that slide relate to the continuing operations of KWS following the sale of our South American corn and sorghum activities that we closed in the first quarter of the last fiscal year. Net sales of EUR 1.68 billion were at previous year's level, including a slight negative currency effect. On a comparable basis, so on a constant exchange rate basis and without portfolio effects, organic growth was plus 1%. So overall, I find this quite remarkable as an outcome, given the declining acreage that we've seen in our global ag markets, in particular, in our core European markets. EBITDA was EUR 351 million, down 13.4%. This reflects special items and operating developments. Keep in mind that previous year included a positive onetime effect of EUR 28 million from divestments of our Chinese corn business. We also had higher costs on the administrative side, increased R&D and also selling expenses. Net income declined to EUR 140 million, mainly due to lower EBIT and a higher tax rate. The financial result, however, improved significantly, driven by higher interest income after we materially reduced our net debt. A very nice result is our increased gross margin, which grew slightly to 63.1%, benefiting from positive [Technical Difficulty] sugarbeet. So this development clearly demonstrates our pricing power even in times of challenging commodity market and the premium innovation [Technical Difficulty]. Free cash flow from continuing operations improved substantially to EUR 123 million, mainly due to higher cash from operating activities and lower CapEx. As a consequence, our net debt fell significantly from EUR 385 million to EUR 62 million or 0.2x EBITDA. So all in all, this is a very solid picture against the industry backdrop. A quick walk-through of the sales bridge. We achieved a slight organic growth despite the continued headwinds and lower acreage, organic growth of plus 1%, mainly driven by sugarbeet and vegetables. With this, we slightly exceeded our latest sales outlook where we guided around 0% growth. On the other hand, FX effects had a negative effect of approximately 1% primarily related to the Turkish lira. Overall, this underscores our ability and our resilience to deliver stable sales under challenging conditions. Our 2 differentiators, the economic value of our [ varieties ] and the broad portfolio that balances opportunities and risks. To illustrate, in the last fiscal year '24-'25, we generated 2/3 of our sales with new varieties, which is a strong indicator of our innovation power and also a clear evidence of our R&D effectiveness. We also achieved a new record, 584 new varieties approved in the last year -- last reporting year. That's an increase of more than 4% versus the previous year, which means with this, we're also laying the foundation for future growth. Our income statement reflects both a robust underlying business performance, but also several one-off items. So let me walk you quickly through the special items that impacted our results. First, prior years included a positive onetime gain of EUR 28 million from the sale of our Chinese corn business. This year, we benefited from the reversal of a VAT provision amounting to EUR 7.7 million in our Sugarbeet segment. So this was established in the previous fiscal year related to a claim which we successfully fended off. Another one-off effect is the EUR 20.7 million write-down related to the divestment of our North American joint venture, AgReliant that we completed in June 2025. Despite these effects, we maintained a strong profitability of an adjusted EBITDA margin of 20.4%, while continuing our high level of R&D investments that are crucial for our long-term competitive advantage. Net income from continuing operations reached EUR 140 million or EUR 4.24 per share. And taking into account the extraordinary gain of EUR 96 million from the sale of our corn and sorghum business in South America, earnings per share increased sharply to EUR 7.16 per share. Let us now turn to our segments, and we are starting with Sugarbeet and Sugarbeet net sales rose to EUR 872 million on an organic basis, plus 2.2%, even though acreage declined by roughly 3%. The context matters here. So European producers reduced contracted areas from last season's very high base, moving essentially back toward normal levels. Growth was driven primarily by Northern, Western and Eastern Europe and also, but to a lesser extent from North America. Our sustainable product innovations, CONVISO SMART and CR+ continue to lead. Together, they account now for 61% of our segment sales, which is up from 56% last year. We also launched unique combination varieties, so a combination of CONVISO and CR+ across several European countries, which will also support the future growth. EBITDA increased 5%, including the EUR 7.7 million onetime provision reversal. EBITDA margin rose to 45.5% so overall profitability improved, supported by portfolio mix and sustained pricing power. Moving on to corn. I mentioned it earlier, corn saw a fundamental strategic change, which I address later. Market-wise, Europe moved lower with reduced acreage in our continuum corn operations, which includes the pro rata contribution of AgReliant, sales declined 2.7% to EUR 683 million. Adjusted again for FX and portfolio, the decline was minus 1.6%. So Europe held stable and the decline came mainly from North America, reflecting FX, but also volumes in a pretty competitive market. EBITDA was at EUR 53 million, below prior year's EUR 82 million, which had include, however, the EUR 28 million onetime gain that I mentioned. The EBITDA margin [Technical Difficulty] accordingly below last year. Let's now turn to Cereals. In Cereals, net sales declined as expected by about 4.6% to EUR 263 million, driven by weaker commodity markets and a declining business [ in Russia ] where we benefited from onetime sales in the previous fiscal year. Our largest crops, hybrid rye and oilseed rape were slightly down versus last year, while wheat was stable. EBITDA declined to EUR 43 million, reflecting the softer top line and continued high R&D investments, in particular with regards to our hybridization efforts in cereals. On the other hand, Vegetables continued to perform very well. It was our fastest-growing business unit in the last fiscal year, top line 16.2% to EUR 72 million. And this increase was primarily driven by spinach seeds, which accounts now for 2/3 of the segment sales. We added sales activities across key European markets. We improved our go-to-market, which supported the dynamic sales growth and also strengthened our global leadership in spinach seeds. The bean business was flat in a slightly softer market. So also here, we were able to gain market shares. EBITDA was at minus EUR 22 million below last year due to the planned step-up in expenses for breeding and sales expansion. These are, as you know, deliberate investments to build a significant long-term position in the vegetable seed market. Operating cash flow increased significantly to EUR 228 million, mainly because cash outflows for inventory and receivables were lower. Cash outflow from investing activities was at EUR 105 million, slightly above last year. However, last year included roughly EUR 40 million proceeds from the sale of our Chinese corn activities. So that is important for comparison purposes. Investments focused on production, R&D capacity, including the completion of our lead seed storage in Einbeck and the opening of an R&D center for vegetable seeds in the Netherlands. So overall, free cash flow improved substantially to EUR 123 million. As a consequence, our net debt position improved substantially from EUR 385 million to EUR 62 million or 0.2x EBITDA. In practice, that puts us close to a net debt-free position. Two main drivers. First, our annual EBITDA of EUR 350 million already covered a large share of the starting debt and our M&A proceeds of EUR 277 million from our divestments further debt. Net working capital did build through the year, but it remained significantly below the prior year period, supporting free cash flow. Our capital structure is now fundamentally stronger, giving us flexibility to invest in growth, advance our strategy and, of course, also selectively pursue M&A from a position of strength. I'm pleased to report that beyond the operational delivery, we reached key strategic milestones in our positioning. Most notably, we realigned our corn segment, streamlining the portfolio with divestments in North and South America and in the prior year in China, of course. The result, higher profitability and a much stronger financial position. Going forward, KWS will focus on the profitable European corn business, where we already today hold a market leadership position. So we are deliberately exiting sales outside Europe in exchange for higher margins, in exchange for reduced currency and market risks and also lower capital intensity. So by exiting the corn GMO markets, we've also reduced our dependence on external IP and can concentrate on our own proprietary breeding technologies. This focus supports our goal of sustainable profitable growth, it supports our goal of entrepreneurial independence and it also fits very well to the growth opportunities we see in Europe, in particular, in grain corn. With the portfolio adjustments behind us, we are now entering a new phase of corporate development, and that's why we have refreshed our strategic framework, and we set new medium-term financial targets. And our priorities rest on 3 pillars: First, expand our market leadership in established crops. We want to scale activities where we see additional value potential such as vegetable seeds. And of course, we want to continually push innovation in plant breeding. And these 3 drivers, lead, build, advance, they form a clear framework for our profitable and sustainable growth in the future. And over the next 3 years, so over the midterm period, we're targeting a 3% to 5% organic net sales growth and EBITDA margin of 19% to 21% alongside our 2030 sustainability ambition. And in this context, we have also updated our dividend policy. KWS values continuity, and we are committed to stable and increasing dividends. We are now aiming for a higher payout ratio of 25% to 30% of earnings after taxes adjusted for portfolio and other onetime effects. And for last fiscal year [ '24-'25 ], the Executive Board and Supervisory Board will propose a dividend of EUR 1.25 per share [indiscernible] year-over-year. So that implies a 26% payout ratio of adjusted earnings after taxes. And as always, we will balance dividends with investments, inorganic growth and potentially M&A. That balance is important to us. Let's now turn to the outlook for the current fiscal year. In line with our midterm ambitions, we expect a comparable net sales to grow by approximately 3% year-over-year in '25-'26 so despite a subdued -- still subdued agricultural backdrop and an expected decline in Russia due to import restrictions and localization of seeds. And I think that's a strong statement. We also expect an EBITDA margin of 19% to 21%, so consistent with our midterm target range. This excludes a positive special effect of around EUR 30 million from the sale of our license rights as part of the divestments of our North American corn activities that we will recognize in the first quarter '25-'26. Yes, with that, and before I close, I would like to warm you -- invite you to our Capital Markets Day on 18th of November 2025 in Einbeck. So my fellow Board colleagues and I will share deeper insights into our goals, into our growth ambitions. And while we offer [Technical Difficulty] participation, I would be delighted to see many of you in person. So you can really expect a full day of presentations, Q&A with deep dives on strategy, on business, on financials and also on pipeline and innovation plus on-site insights into our innovation capabilities. We talk about genome editing, we talk about hybridization. And of course, you will have a look also at our sugarbeet production backbone. So there will be ample of opportunities to have direct conversations, and I look forward to welcoming you on 18th November in Einbeck. That concludes my prepared remarks. Thank you for your attention, and I look forward to the Q&A together with our Head of Investor Relations, Peter Vogt. Operator: [Operator Instructions] And first up is Oliver Schwarz from Warburg Research. Oliver Schwarz: Congrats on the past results. I've got 2 questions here on the results. Firstly, I saw that earnings were boosted by a reversal of provisions to the amount of EUR 7.8 million. Could you elaborate on that one? Secondly, I saw that -- or realize that the outlook is now basically performed on -- when it comes to earnings on the EBITDA level, no longer on the EBIT level. But still, you tend to report the EBIT as the prime earnings figure in the segmental overview. Is that going to change in the future? And what's the rationale in regard to switching from an EBIT guidance to an EBITDA guidance? That would be my questions. Jorn Andreas: Oliver, thank you for your question. So yes, correct. So on the VAT provision, we basically refer to VAT provision in the amount of EUR 7.7 million that we took basically earlier -- in the previous fiscal year. It relates to a dispute [Technical Difficulty] in Russia with the applicability of a certain VAT rate, and we successfully tendered this off in front of the court. So that put us in a position to reverse this provision, and that had a positive onetime effect that we recognized in the Sugarbeet segment. On the EBITDA, correct, yes, so we are switching essentially from EBIT to EBITDA, and that is mainly driven by 2 factors. First is we had a longer discussion in the first half of this year, market perception study where we talked to many people in the financial community, and there was the preference and the rest also to be more comparable also to our peers in our industry. And that's why we switch from EBIT to EBITDA. And also internally, that provides us with a much cleaner view on our operating performance because it strips out accounting effects in particular with regards to the purchase price allocation also in our vegetables segment. So with that, we want to make sure that we are consistently also reporting internally and externally with a true view of our operating -- underlying operating performance. And this will be also the guidance going forward, both on the group level as well as on a business unit or segment level. Operator: The next question comes from Christian Faitz from Kepler Cheuvreux. Christian Faitz: I just have a question on your relatively cautious outlook for this current fiscal year. Is that because pharma profitability in your relevant markets continues to be low? Or what's the background to essentially a flat development minus obviously the 3% envisaged organic sales growth? Jorn Andreas: That's a good question. So exactly as you're saying, so we are still in a period of, I would say, subdued agriculture commodity prices. So when you look at the price development, then we are essentially on 2020 commodity price levels, which has, of course, an impact on the producer margin. So there is not so much, of course, an incentive of our customers to increase production, to increase acreage under these, let's say, price -- commodity price conditions, and that has also an effect on our guidance. We still believe that the 3%, we are actually making also a strong statement because the market will be more in the area of 1% to 2% growth for the current fiscal year. So we believe with this outlook, actually, we will be able to grow faster than the relevant markets. And of course, what we also took also into consideration in our outlook and I mentioned this is that we will have also [Technical Difficulty] also going forward based on the current activities to increase the localization of production and the reduction of the import quota. So that has an effect that has been built also in our guidance. But still, this is very much also with what we guide for the midterm. So we actually feel good with that. Operator: And next up is Michael Schaefer from ODDO BHF. Michael Schaefer: The first one is on your outlook statement on -- for sugarbeet. I mean, you're looking for a slight organic growth. This is, if I understand, despite what you're expecting maybe from Russia, maybe some clarification to what extent you expect the Russian business or how this to evolve in sugarbeet primarily? And then also related to the sugarbeet business, you are forecasting basically a lower margin in the Sugarbeet segment for the current fiscal year. This is on the back of the special effects, which -- to the VAT recovery basically, which you accounted for. However, if I strip this out, I'm getting to something like 44.6% margin for last year. So question is, how do you see basically this on a more comparable basis, the margin to evolve on sugarbeet? This would be my first question. The second one is on the vegetables side. [Technical Difficulty] correctly, you provided some undistorted sort of profitability target of -- or a number of around 20% margin for the vegetables business on that one. So if I strip this out compared to your reported negative number, so I'm getting to something like a EUR 36 million -- EUR 35 million of extra OpEx, which you are basically earmarking for investing into further growth. So I wonder how this number is evolving in the years to come on what's baked into the midterm guidance for the segment or for the group in general, how this is evolving. So this would be my 2 questions. Jorn Andreas: Very good, Michael. Very good questions. So as you rightfully said, so we believe that the market -- of course, the sugar market is still under pressure. I mentioned already a very weak commodity price situation still. Of course, as a seed producer, we are only indirectly affected by these commodity price movements. However, we believe on an acreage basis for sugarbeet in our relevant markets, it will be more stagnating in the current fiscal year. We initially had a more optimistic outlook, but I would say right now, what we see in front of us, it's rather stagnating. However, what we've also demonstrated in the past, and that's really important is that even under those conditions, we are to grow and we also increase our profitability, thanks to our innovative product portfolio. So the pricing power that we have, the portfolio effects [Technical Difficulty] innovative varieties CONVISO, CR+ and also our unique new combination varieties always puts us in a position to be able to grow and also to deliver value even under, let's say, adverse, I would say, market conditions. That means also that we are confident that we will be able to maintain also the profitability. You rightfully said we had in the last fiscal year, the reversal of a provision, which is a positive onetime effect. We will not, of course, have that in the current fiscal year [Technical Difficulty] a profitability well above 40%. So with that, I believe we are well positioned also to navigate also this more challenging environment that we see. I mentioned Russia. So for Russia, I would say our outlook is stable. So for us, sugarbeet remains a better business for us also in the current fiscal year. For the other crops, it's more an opportunistic business because here, the localization of the activities in Russia have already progressed quite a bit, and that's also baked into our guidance that in particular, when it comes to corn, for example, we have a much lower forecast for our business. And this is more on the opportunistic side. But so far, I would say the situation in Russia is neutral. It hasn't worsened. It hasn't improved, and that's also how we react to this market picture. Vegetables, yes. So we are really happy also with the operative profitability. You can imagine with the 16%, we are able to also turn this into a very nice operating leverage for our underlying business, so spinach and beans. So that's really on the positive side. But at the same time, we need to build our go-to-market structure. We need to build our breeding infrastructure. We are roughly halfway through, let's say, the innovation cycle of what we call our foody crops, so tomato, pepper, cucumber, melon and watermelon. So you will see also, I would say, until the 2020s, an additional buildup of expenses in order to build that structure, but our goal is over the midterm for the next 3 years to launch basically product launch varieties in each of the foody crops so that you see also now traction when it comes also [Technical Difficulty] years. So that's what you can expect. So further buildup of structure in the next years, but also a launch of key varieties that will be the driver of our future growth in the years to come. Michael Schaefer: Can I have a follow-up on vegetables, please? I mean you reported strong organic sales growth in the past fiscal 15% plus, but guiding for flat organic sales growth for the current -- for the ongoing fiscal year. So what's holding back? Jorn Andreas: Well, it's more a comparable topic. So of course, we are now comparing ourselves against [Technical Difficulty] 16%. It's a significant growth, and we've been able to capture very good market share, particularly Italy, other parts of Europe. We also saw nice growth also in North America. That's why we've been a bit on the cautious side and say, okay, based on that high comparable level, I think would be for us already a good result if you can sustain this also given, of course, the pressure that the consumers have when they choose these products. So I can -- from my side -- I mean, I would not be surprised if we can maybe put a little bit on top of that, but we said, okay, based on the very good, let's say, lending of last year, that is basically what we see in front of us. Operator: At the moment, there are no further questions. [Operator Instructions] There are no further questions. Jorn Andreas: All right. If there are no further questions, then again, thank you very much for your interest in KWS. And as I said earlier, please have a look at your Inbox to see the invitation to our Capital Markets Day. So we look forward to welcoming you Einbeck, continue the dialogue on site and of course, also over the coming weeks and months together with our Investor Relations team. So thank you and all the best until then.
Operator: Good morning, and welcome, everyone, to H&M Group's Conference Call Nine-Month Report for 2025. [Operator Instructions] Please be advised that this conference is being recorded. Today, I am pleased to present Joseph Ahlberg, Head of Investor Relations. I will now hand over to our speakers. Please begin. Joseph Ahlberg: Good morning, and warm welcome to everyone. Today, we present the third quarter results for 2025 for the H&M Group. I am Joseph Ahlberg, and I'm Head of Investor Relations. Before I hand over to our CEO, Daniel Erver, I would like to share this morning's setup. As usual, Daniel will share a short summary of our results, a run-through of selected highlights from the quarter as well as a brief outlook, then we will continue with a Q&A where Daniel; our CFO, Adam Karlsson; and I, will be available to answer your questions. So with that, please go ahead, Daniel. Daniel Erver: Thank you, Joseph, and good morning to everyone. It's great to have the opportunity to speak to all of you again. In the third quarter, we continued to take important steps in the right direction. So let me start by summarizing some of the key numbers from the quarter. The positive sales development continued in the third quarter. Sales grew by 2% in local currencies. And this growth should be seen in the context of having 4% fewer stores at the end of this quarter compared with the same period last year. Our upgraded online store rollout earlier this year has been very well received by our customers around the world contributing to a profitable growth in the quarter. Inventory continued to develop in the right direction and decreased by 9% in SEK compared with last year, and that's mainly, thanks to an improved demand planning capabilities as well as in combination with the well-executed summer sale. The composition of the inventory is good, and we see further opportunities for improvement in the fourth quarter. Sales for the month of September are expected to be on par with last year, and this should be seen in the light of high comparative sales figures from the previous year. We increased our operating profit compared with the same quarter last year, thanks to a stronger customer offer, good cost control, and improved gross margin, where a clear majority of the effect was driven by improvement work in our supply chain, as well as somewhat positive external factors. Additionally, currency exchange effects were positive for the gross margin development in the third quarter. This means that we reached an operating profit for the third quarter of SEK 4.9 billion, and this corresponds to an operating margin of 8.6%, up from 5.9% during the same quarter last year. The increase in profit shows that we are on the right track as we continue to make progress in line with our plan to create fantastic products with outstanding value for money, inspiring experiences and strong brands. Now we are on the right track, was also reflected in the response we got from customers when H&M opened in Brazil for the first time in August. I had the opportunity to join the team on-site and seeing the pride of our colleagues, the reception in social media and above all, the excitement of customers entering our stores for the first time was absolutely remarkable. We successfully built on the core of our plan with elevated products, inspiring experiences and a strong brand and combining these strengths with a deep curiosity for the local market. Please take the time to enjoy a short video from the opening. [Presentation] Daniel Erver: I hope you could feel some of the energy that we felt by being there. And based on this positive reception from our customers and the opportunity in a well-established fashion market, we see good potential to grow both in Brazil and in other parts of Latin America moving forward. With 2 stores and online already in place, we will open 1 more store in Brazil during this year. Additionally, 4 stores are signed for 2026, all in top locations in important cities, including the first store in Rio de Janeiro. Another highlight this quarter was the opening of our new flagship store in Le Marais, in Paris, which you can see on the left screen in front of you. This store has an assortment presentation and interior, that is curated for this special location. And this is a great example of how we strengthen the brand, while we are also creating an inspiring shopping experience in one of the world's most important fashion capitals. We continue to elevate our shopping experience both in stores and digitally, as well as strengthening the integration between both of these channels. As a part of this, we will continue to upgrade a large part of our physical stores worldwide with improvements in layout, presentation and tech features. In parallel with improving the customer offer, we continue to drive our sustainability agenda forward, and we are making clear progress towards our ambitious goals, as we continue to integrate sustainability into all parts of our business. And this morning, Fashion Revolution released their results from the latest What Fuels Fashion? 2025 report. Out of 200 major fashion brand and retailers, H&M ranks first for its level of public disclosure on decarbonization and other sustainability areas. Finally, I would like to share 2 great fashion moments from this quarter. First out, COS returned to New York Fashion Week for the fourth year in a row, underlying their ambition to build a global power brand in the accessible luxury category. The strong autumn/winter collection emphasized materials, contrast and craftsmanship. And last week, H&M opened London Fashion Week by presenting the new autumn/winter collection. The show clearly highlighted the strength of H&M's collections and the creativity of our in-house design teams, featuring both womenswear and menswear. The collection is now available in stores and online with a wide range of price points to cater for a diverse set of fashion needs. With leading models on the catwalk and many well-known guests in the audience, the show also included a special performance by British music talent, Lola Young, featured here on the right. While we continue to drive our plan forward, the world around us remains uncertain. With geopolitical challenges and a cautious consumer, it becomes even more important for us to stay focused on what we can influence and where we can make the biggest difference. Everyone across the entire company stays fully focused on our customer offer to always deliver best and outstanding value for money. In an increasing complex environment, our strong culture, together with good cost control and flexibility, allows us to build a stable foundation for long-term profitable and sustainable growth. With that, thank you so much for listening in this morning, and I will now hand you over to Joseph to take us through to the Q&A. Thank you. Joseph Ahlberg: Thank you, Daniel. [Operator Instructions] So with that, over to you, operator, to facilitate the questions. Operator: [Operator Instructions] The first question goes to Fredrik Ivarsson of ABG Sundal Collier. Fredrik Ivarsson: You've been talking about the strength in women's collections during the last year-or-so. Can you give us an update on the various performances in the categories during the quarter? Daniel Erver: So womenswear continues to be the main priority for us as a company as we make progress on our plan. We're really, really focused to win women first, and that's where we put the most emphasis. And as we shared before, that's a long term work, where we work systematically and disciplined to strengthen the customer offer. As we shared before as well, we see a lot of the learnings that had an effect on womenswear will be relevant for our other customer groups as well. And sequentially, we start to see an improvement in other customer groups. But the main priority and the main strength still remains the womenswear performance and collections. Fredrik Ivarsson: Okay. And the second question on cost. OpEx down 1 percentage point or 1% local currency, despite, I guess, top line growth and underlying cost inflation and such, can you share with us the sort of key drivers of the lower OpEx? I guess I recall you spent quite some money on marketing in Q3 last year, for instance, did you reduce those kind of costs or is it anything else in there? Daniel Erver: So overall, I think it's important to recognize in this quarter, it's been a tremendous work done by the teams on cost efficiency. And as we continue to invest and have a high activity around strengthening the collections, improving the experience and investing in marketing and branding, we gradually learn what takes an effect or not and then are very disciplined in steering resources and investments towards what really impacts the customer. I don't know, Adam, if you want to shed a bit more light on the cost development? Adam Karlsson: No, it's -- as you said, Daniel, it's generally quite a broad efficiency improvement we see. We've managed to plan our store operations well connected to how we execute on the summer sale. We see that we have improvements in our logistics efficiency, and that can also see and be reflected in the stock levels coming down, which supports OpEx on the logistics side. And then the overall long-term ambition to reduce complexity and bureaucracy in our organization still supports the margin expansion here. So it's a broad profit improvement from many parts of the operating part. Fredrik Ivarsson: Okay. So it sounds fairly sustainable then to me, at least? Adam Karlsson: Yes. We see that we have done long-term improvements and that is one of the benefits, for example, of now improving the management of the stock, and that reflects both in how we operate the stores and also benefits logistics efficiencies. So with that trend, we see that we have a good foundation to continue to be efficient within our operations. Operator: The next question goes to Niklas Ekman of DNB Carnegie. Niklas Ekman: Yes, can I ask you to just elaborate a little bit about current trading? And I know that this is a short period that it's always tricky. And maybe for just that reason, I know you had 11% growth last year, but minus 10% the year before. Is there anything you can say about weather comparisons, anything about underlying markets? Any tangible improvements to your own collections? Just anything you can -- to shed some more light on this figure, which today at least seems to have been a lot stronger than what consensus had assumed? Daniel Erver: Yes. As you already pointed out, it's a number that should be handled with a lot of caution because it is very short-sighted, and we are now in a period, at least in the Northern Hemisphere and especially in the northern parts of Europe, where weather is changing dramatically going from summer into fall, and that has a significant effect on customer demand, while September is a volatile month, and we should be really cautious to manage the number as you point out yourself. What we have seen is that we saw a good weather development late August, early September, and then we have seen a little bit warmer end of September. So it is a month where the weather really is shifting. When we look at the trend, we see it very much in line with the sales trend that we have seen so far. So we -- there is no significant deviation from the trend that we have seen when we look ourselves at the September performance. Niklas Ekman: Okay. That's very clear. Second question, just on Q4 here and the guidance that you're giving about the external factors saying that they will be less positive in Q3. And I imagine that, for instance, U.S. dollar and freight should be a lot lower year-over-year compared to the effect in Q3. And you mentioned tariffs here as a negative. So can you elaborate a little bit about these different components here behind the guidance for Q4? Adam Karlsson: Adam here. It's a balancing effect here that we believe will somewhat neutralize. We see the benefit of the dollar-euro pair working in our favor throughout the spring into the summer and into the autumn. But against that, we have then the impact of the tariffs that will then -- based on the tariffs we paid during the Q3. A lot of those garments will be sold during Q4, and that's when they affect our profit and loss. So there are some counterbalancing effect here. But the effect we speak out as currency, freight and raw materials are still to be seen as somewhat positive. Operator: The next question goes to Daniel Schmidt of Danske Bank. Daniel Schmidt: Yes. Maybe a question on the growth potential. You talk about it when it comes to Latin America, and you seem to be very excited about the start so far in Brazil. Do you think that the expansion plans that you have for Latin America will be able to turn the trend when it comes to net store closures in 2026? Daniel Erver: So we are really excited about the opportunity in Brazil, mainly based on how well we have been received by the customers in Brazil and how they have appreciated our offer. But we also see continued opportunity to optimize the store portfolio, and that work is ongoing. For Q4, it will have a slightly negative impact on sales, as we have communicated before. The outlook for 2026, we will share connected to the Q4 report. We're working hard to find opportunities for H&M to continue to be a growth company, and that's part of the work, but the specific numbers of what we'll see, we will share in the fourth quarter when we talk about the total net effect of the optimization work that we will do in 2026. Daniel Schmidt: Okay. But is it fair to say, you mentioned 4 new stores in Brazil for '26, for example, is it likely that there will be many more stores in Brazil than these 4 or are the lead times much longer than you think? Daniel Erver: As always, when we work to establish ourselves in the new market, it's important that we establish ourselves in the right locations, and that is really to be in the malls with the right customer demand, in the right location in the mall where we can provide the full H&M experience, and then Brazil is a mature fashion market and retail market, but it's also a well-established market. So it's not new malls being built. It's finding locations in existing very strong performing malls, but it's fine in those locations. And that's the work that needs to balance speed for chasing the potential with quality of building fantastic stores in the right locations. So when we look at the total portfolio optimization, of course, Brazil will be one key important part, but we also see opportunities in other parts of the world as well as continued need to consolidate part of our portfolio or we don't have the customer demand. So we will come back in Q4 with a more holistic view of how we look at 2026. Daniel Schmidt: Yes. Maybe just 1 question for Adam then. The question was already up on the table, but could you maybe sort of give us a ranking of the impact when it comes to the gross margin of these factors that we've talked about, improved supply chain, internal factors, markdowns, FX? Adam Karlsson: Yes. I'll try that. The majority of the improvement comes from our own work, so to say, the work that we've been speaking about how we collaborate with the partners in our supply chain, how we leverage that partnership, how we also work all the way down to second and third tier of our supply chain to ensure that we have a very competitive offer in -- that we can put in front of our customer. So the majority comes from our own work. Then we had last year some effects that went against that and those we don't think we will have sort of supporting year-on-year in Q4 as we did now in Q3. So majority will remain. The trend is clear, but some of these one-off effects that we saw during Q3, we don't think will materialize in Q4. Operator: The next question goes to Adam Cochrane of Deutsche Bank. Adam Cochrane: Well done on the results. Firstly, the markdown was much lower than I think we expected in the third quarter. Can you just say how you cleared the inventory position with less markdown than you were expecting? Did you do anything differently or was it the consumer demand was stronger than expected? Daniel Erver: This is Daniel. Starting off, the team has done a great job with how we executed the summer sale. So we were able to solve a lot of stock with us in an efficient way, which is well done on the execution of the teams working throughout our market. We also see with stronger collections that we are in a better situation. We still do see a need -- having a cautious consumer that is squeezed for -- although having a squeezed wallet, we still see a need to use a reduction to activate the customer from time to time, and that's why we still have a fairly high level of activity in Q3 and that will also continue into Q4. So we monitor the cautious customer clearly, and we do activities, but we are stock level wise in a very good situation after well-executed summer sale. Adam Cochrane: So still on that point, are your collections better and they're selling well? And at the same time you have to do selective promotions in order to get other consumers to spend the money? Is it a sort of mixed impact on the consumers? I'm trying to understand really how you can have better collections that are being received well and you still have to puts some markdowns or promotions in to get other consumers to purchase. Daniel Erver: Yes. The work we are doing is a long-term journey to strengthen and build a really strong competitive offer. And to do that, we always need to make sure that we offer outstanding value for money. And that's both in the price and how we work closely with suppliers, as Adam shared, to really offer outstanding value for the price that we charge, but it also is around how we provide short-term offers and activities to really stay competitive. And here, we act differently in different markets, and we monitor the market situation. And we're also looking at the customer base that we have and the ones we're moving towards, and in that play we need to still work with activities and reductions to activate the customer, even though we see gradual strengthening from the full price performance of well-received collection. Adam Cochrane: And then the second one is you talked about some of the store refurbishments that need to happen and the tech investments and things. What is the scale of these store refurbishments when you go across your existing estate? How much do you have to invest on a store? What's the -- is there any sales uplift that you do from that? And how long will it take you to go across the entire estate to get them into the -- to put these investments into each store? Daniel Erver: We're working across the entire portfolio with the different levers to build a really competitive experience. Sometimes that's a full rebuild of a store. We have done that, for example, Times Square is a good example of a full complete rebuild of a store in New York, and we have many others. And then based on those rebuilds and our updated formats, we find components that we believe are good for strengthening the experience, the service, the customer offer in a wider part of the portfolio. And then we, with a lighter program, rolled that out to a wider set of the portfolio, and that's the work that we're mentioning in the report that is starting now and that will reach sort of at the lower investment level, but with improvement -- important improvements for the consumer it will reach a wider part of the portfolio, and that's a work that we are initiating now that would happen in the fourth quarter, but then also moving into 2026. Adam Cochrane: Think it will be completed by the end of 2026? Daniel Erver: No, it's an ongoing work. We have almost 4,000 stores, and we always need to make sure that we are competitive in each location. So it will be an ongoing work of optimizing and improving the experience. Operator: The next question goes to Warwick Okines of BNP Paribas. Alexander Richard Okines: First question is on tariffs in the U.S. I was just wondering what sort of proportion of the goods sold in Q3 were actually bought in the tariff regime? What was sort of pre and post tariff purchases? Adam Karlsson: Adam here. It's varied throughout the quarter. So what we call out here is that we've seen an increase throughout the quarter, and we believe that increase and the effect will sort of become fully loaded towards the end of Q4 and then into Q1 next year, given, of course, the uncertainty of the exact tariff level. So we're not giving any guidance on those, but it's just when the goods were imported and when they were planned to sold. So it's an increase throughout third quarter that will be potentially fully loaded end of Q4 and then continue as far as we know currently then into first quarter next year. Alexander Richard Okines: And on those products, when they are sold with tariffs, have you made any price adjustments to reflect that or is your gross margin commentary just reflecting that you're taking all of the tariff impact yourself? Adam Karlsson: They are of course linked, but they're also, separate those questions. And we need to ensure that we have the right customer offer at all times and we respond to how the consumer and the competitive set is looking. So the gross margin comment right now, it's more on the sort of the consequence of us importing garments with tariffs and a higher portion of garments that has been imported with tariffs will be sold in Q4. Alexander Richard Okines: And if I may just squeeze in 1 more. Just sort of clarify, you talked -- when you talked earlier about Q4 guidance on gross margin, you talked about sort of balance effects that were somewhat neutralized. Does that mean you're expecting tariffs to largely offset the other benefits in the gross margin in Q4? Joseph Ahlberg: Thank you, Warwick. This is Joseph speaking. Of course, we still guide for a net slightly positive effect from external factors as we write here in the report. So that is taking all these effects into consideration, but we do indicate that the net effect is slightly smaller than it was in the third quarter based on our judgment connected to the sort of -- sorry, headwind becoming a bit more negative than from the tariffs, which -- to the technical effects Adam just pointed out. Operator: The next question goes to James Grzinic of Jefferies. James Grzinic: Congratulations on the spring/summer. I had a couple of questions really on gross margin. The first one is, can you perhaps remind us what the FX loss that impacted Q3 last year was, specifically, so that we can maybe take it out of the 180 basis points increase year-on-year that you just delivered? Joseph Ahlberg: Thank you, James. Joseph speaking. Yes, last year, we called out the negative FX effect as a factor explaining the gross margin development, meaning it was one of the significant factors that explained the development. This year we see those effects becoming positive instead. So with a negative effect in the comp base and the positive effect this year, the net effect then becomes positive to the year-over-year gross margin development in the third quarter. Now looking ahead, we don't expect these FX effect to give a significant year-over-year effect to the gross margin development in the fourth quarter when looking at the comp base of last year for the fourth quarter. But then again, we cannot make predictions, of course, on the FX development, but the outlook is more neutral for the fourth quarter presently. James Grzinic: I guess I just wanted to exclude the fact that there were exceptional charges that fell last year due to FX. So you're just referencing the ongoing impacts of contracting in dollar, basically, just to clarify that? Joseph Ahlberg: Yes, so when it comes to the FX effect is what we described last year, part of it is exchange rate losses on intergroup liabilities and receivables. And so it's the FX movement in the quarter. But again, it's important to stress that a clear majority of the increase in the gross margin comes from the improvement work we are driving in the supply chain and the somewhat positive external factors we saw in the third quarter. So we remain as a -- as a robust trend also for the fourth quarter. James Grzinic: Understood. Can I also ask, I appreciate the point on the theoretical dilution from gross tariff impact. But one of your peers in the U.S. has talked about moving considerably on pricing a couple of weeks ago and that was happening at a point where everybody in the space seem to have been doing exactly the same immediately post back-to-school being over. First of all, can you confirm that you are also observing that, that there's an industry in the U.S. that is clearly back-solving for those tariff costs through accelerating price increases? And how do you intend to move if indeed you're also observing that or if you -- indeed, you've moved at all? Daniel Erver: So we are done here. We also recognized and observed that there are price increases happening in the market in the U.S. in -- as a general statement, we see the same thing. And we are monitoring those developments closely to make sure that we offer a really competitive offer. We are cautious and prudent about the development in U.S. for the fourth quarter given the effects that Adam spoke about that we see that we have already paid tariffs on the garments that have imported and those garments will be sold in the fourth quarter; hence, we will see a bigger impact of tariffs on the gross margins. And while we see that on the one hand, on the other hand, we are continuously looking at how do we have a competitive offering and how do we optimize our pricing position and that we do in the U.S. as we do in all other markets, and that leads to both price decreases and price increases to stay competitive, and that's an ongoing work. But we are cautious about looking at the Q4 development in the U.S. given that we know we already paid tariffs that would impact the gross margins as we look into the fourth quarter. Operator: The next question goes to Richard Chamberlain of RBC. Richard Chamberlain: A couple of points of clarification, please. Just back to the comments you made about markdowns, expecting a higher -- somewhat higher impact for Q4 as a result of -- partly as a result of the Black Friday timing shift. Would you expect that timing impact to reverse fully in the first quarter? That's my first question. Daniel Erver: So that's correct. You see that specific shift, we will reverse in the first quarter, but we don't give any guidance for reductions in the first quarter. That would be dependent on how well our collections are being received during the autumn as well as the consumer sentiment as we head into the first quarter. So just that specific effect will be shifted, but we don't have a guidance for the first quarter at this point in time. We will come back to that when we meet for the fourth quarter report. Richard Chamberlain: Okay. Great. Very clear. And my second one was on the -- when you're talking about the supply chain in the statement, you talk about a more flexible supply chain with a higher share of purchases made in the current season. But at the same time, you're planning for extended transport times. I just wondered how that's influencing your thinking about how much inventory you need to have now in the business and how that will affect your sort of working capital profile in the fourth quarter? Adam Karlsson: Adam here. If I start with the transportation lead time, we still see that the negative effect we saw during the autumn of 2023 still persists. We cannot sail the shortest route between sort of supply chain in Asia, customer in Europe. So that still persists. And then within those guardrails, we try always to optimize both the design lead time, how we buy and source the mix of that and of course, how we ultimately secure that we are responsive and flexible throughout the supply chain. But that is what we call out. That sort of shift when it comes to transportation lead time. That has not -- that we're still seeing and observing that we're not sailing the shortest route. So that's what we call out. It's not worse than it's been, but it's not obviously a lot better either than the last 18 months. But then on the responsiveness on the suppliers here and how we collaborate them. Daniel? Daniel Erver: And then as an really important part of how we strengthen the product offering and making sure that we have the most competitive product offering, we are working on how do we increase the speed and reaction time in our supply chain. And that's a wide work that includes both, as we mentioned before, how we move production closer to the customer with what we call nearshoring or proximity sourcing, but it's also working with a set of suppliers that can be much quicker and where they can support with a larger part of the product development process, for example, it's working early on and preparing components to be able to do the design decisions at a later stage still being quick. So it's a broad spectrum of activities that we do where nearshoring is one, but not the only one. We also work a lot with how we collaborate with some of the best suppliers in the world to really speed up our supply chain. And that's how we build up higher responsiveness and can buy more in season, which creates better position and also more relevance for our customers. Operator: The next question goes to Monique Pollard of Citigroup. Monique Pollard: Two questions from me. The first one is just on the space impact in quarter. So obviously, as you mentioned, 4% fewer stores versus last year. But obviously, you'll be closing stores that are less productive, you might be opening larger stores. So what's the overall contribution to sales of that 4% fewer stores? Joseph Ahlberg: Monique, this is Joseph. So in this year so far and also expected for the full year, we do see somewhat negative net contribution to selling. So adjusting for this effect, we would see a slightly higher top line development for both the third quarter and expected for the full year. Monique Pollard: So that impacts quite a bit less than the minus 4 of the stores presumably? Joseph Ahlberg: That is correct, Monique. We do close low productive, low profitability stores and open the best possible stores, looking in every corner of the world for the best expansion opportunities. Monique Pollard: Understood. And then just a quick one on the marketing cost. Is it possible to quantify the marketing costs that were incurred in the quarter versus the -- I think it was about SEK 350 million last year, please? Daniel Erver: So we're keeping a very high activity when it comes to how we strengthen the brand and how we create excitement around all the brands in the portfolio, like the cost show we show, but especially with the focus on the H&M brand, where we continue to invest and have a high activity level. A great example is the Brazil opening where we used the opportunity for H&M entering Brazil as a global event to strengthen the relevance around the brand. And also, of course, the show we did in on London Fashion Week last week, that was a really strong statement of putting our own collection on display and sort of building excitement around that. So the activity remains. And as we have increased activity over the last 12 months, we also learn a lot of where we can find efficiencies and be more disciplined to steer investments that have a significant improvement and really break through all the way to the customers. And that's the ongoing work. We want to send a clear signal that the activity level is high. We believe a lot in strengthening the brand as part of our journey, but we also find efficiencies where we can really focus around the things that really makes a difference. I don't know, Adam, if you want to shed a bit more light on the development. Adam Karlsson: No. I think it reflects what we said that we had an autumn last year of sort of a restart of investing like an overall broad investment in brand and that ambition stays, but we believe that we can find clever ways to get the same and more effective in other ways. So I think that is partly reflected in the Q3 result here where we optimize the resource use and still, as you said, have a very high ambition and engage with a lot of customers all around the world. Operator: The next question goes to Georgina Johanan of JPMorgan. Georgina Johanan: Just 2 questions from me, please. First of all, just in terms of all of the underlying work that you're doing with the supply chain and going through the different supply tiers. I appreciate you're doing sort of more nearshore and can be more reactive and so on. But at the same time, you've obviously talked about markdowns continuing to move higher. So I assume that you are actually achieving sort of better buying with those suppliers, if you like. And I think by the end of this year, you're probably close to some 200 basis points or so cumulative. So just trying to get a sense of how far through that process you are because just from a high-level perspective, 200 basis points is already a great achievement in that regard. And then second question, I think you mentioned in the release around how the digital business is contributing strongly to profit growth at the moment. And I just wondered if that was coming from like the incremental sales that you're generating or actually if there's any initiatives that's been done, particularly around logistics or anything else in the digital business that is supporting that profitability, please? Joseph Ahlberg: Georgi, first question I can answer. This is Joseph. So on the supply chain, we are really driving several initiatives at the same time. We, for instance, have been talking about the work we do working closer with our strategic suppliers. This has been where we have consolidated the supplier base to work very closely with a shortlisted number of strategic suppliers who now stand for a big share of our total order value. And these suppliers, we work very closely with them, open book costing and so on to really make sure that we can deliver on our business idea with really high quality, good sustainability commitments and the right fashion and, of course, at an unbeatable value for the money. In parallel to this, we are ramping up this work that Daniel talked about earlier with collection suppliers with their own product development capabilities where our own design team work very closely with these suppliers design teams to very quickly turn around new design ideas to ready products reaching our customers. So that is also being ramped up at the same time as we are sort of on the other part of the supplier base and working closely with the strategic suppliers. So I hope that clarifies the sort of 2 directions we're driving in parallel. And when it comes to -- yes, the second question, I hand over to Adam. Adam Karlsson: Or did you have a follow-up question? Sorry. Georgina Johanan: I was just going to try and understand if possible sort of -- because that makes a lot of sense, but just how far through that process you were and whether we should be expecting comparable gains into a third year? Joseph Ahlberg: Yes, we do see that the -- if we take the collection buying sort of the in-season buying has been growing steadily. The share has been increasing over the past years. So now we are achieving a fairly high share for selected categories of products like light woven and so on. Daniel Erver: I think looking at the 2 different, as Joseph clearly explained. So I think the work when it comes to optimizing the way we collaborate with our suppliers on the costing models, the consolidation and so on, we have come fairly far in the work, and that's given a lot of support to the gross margin. And we think we are not done, but we're far on that journey. When it comes to increasing the pace of product development, buying more in season and speeding up the relevance to market, we have taken the first good steps, but there's still a lot of steps to be taken on that journey and how we speed up and become more relevant. I think to try to guide on the question, we have come quite far on the improvements of how to consolidate and build stronger gross margins. That work will continue, but we're far along. When it comes to increasing the speed and pace and buying more in season, we're more in the beginning with some great first steps on that journey. Adam Karlsson: And then I think there was a question about the broad cost sort of activities we drive. And I think that can also be seen in 2 parts. One is the effects on the -- sorry, Daniel. Daniel Erver: I think the question was around digital, the updated digital store and the sort of what has been... Adam Karlsson: Was a long time ago we got the question. Repeat the question. Joseph Ahlberg: Georgi, would you like to repeat your second question? Georgina Johanan: Yes, it was just -- I think you mentioned in the release that the digital store has been contributing strongly to profitability improvements. And I just wondered if that was simply coming from more sales in the digital store or if actually there were specific initiatives around maybe logistics or what you're spending on tech or marketing or whatever it was in the digital channel that was particularly supporting profitability improvements. Daniel Erver: When it comes to the digital development, both the sales team and the tech team has done a great job with -- including our creative teams to take the -- sort of provide the imagery and build up the experience. All of that has significantly improved with the rollout of the new optical experience that was sort of concluded at the end of the spring to all our markets where the experience really, really elevates the product offering and elevating the product offering with a stronger product offering and stronger products, that builds an even stronger value for money, and we see that is being really well received by the customers. So that combination of a great product offering where we have improved the design, the product development, the making, the material choices, combined with more inspirational imagery, better flow, better search functions, better size recommendation, that in combination has driven a strong comp sales development, and that's a tremendous job done by our teams. Then we see that -- we continuously look at the customer promise and the different offers that we have and how we provide a competitive experience. And actively and connected working on how can we reduce the return rate given that we don't want neither for the stock management nor for the planet and our sustainability targets, it's good to have high levels of returns. And that's also work that had a good progress during this quarter where we managed to lower the returns, which we see as very positive for both profitability, but as well for our climate impact. So those are the 2 things for this quarter. Operator: [Operator Instructions] And the next question goes to Sreedhar Mahamkali of UBS. Sreedhar Mahamkali: Most of them are already asked, but I just got a follow-up from James' question on tariffs and another small follow-up on something else that was discussed. Just on tariffs, how are you thinking -- I understand your point about watching the market, watching the consumer. Are you planning to follow your key competitors that you're watching? If they move, you move, what sort of kind of time delays that we should be thinking about? Clearly, it would be a persisting headwind if you didn't adjust pricing into next year. How should we think about it? What sort of time delay? How do you think about it? That's the first one. If you can just expand a little bit more, that would be very helpful. And a little bit more short term into Q4 on OpEx. Is there anything we should keep in mind in local currency changes in OpEx? Or is Q3 development of 1% reduction in SG&A a good indication for Q4 also? Daniel Erver: Thank you for the question. I'll take the first one, and then Adam will take the second one. We are in all our markets, monitoring the price development and how this -- I mean we have many markets with quite significant inflation where we continuously adjust prices based on the market competitive situation that we do in the U.S. as well, which leads to both price investments and price increases. And we see a general sort of gradual increase in the market. With that said, we always want to protect that we have a competitive customer offer and offer the best value for money, why we are cautious about Q4, where we already now know based on the tariffs that we paid in the third quarter that they will impact the gross margin. So we will evaluate. We are assessing the strength of our collections and sort of making sure that they are positioned with a competitive price. But of course, when we are paying increased tariffs, it will have an impact on our gross margin. Sreedhar Mahamkali: And I was trying to understand, you're not trying to increase your price gaps. You're trying to keep the price gaps where you want them to be but look to move over time rather than... Daniel Erver: Broadly, yes. But in that, there are always -- sorry. Go ahead. Sreedhar Mahamkali: No, go ahead, please. Daniel Erver: Broadly, that's a fair statement, but we always find opportunities as we look at the competitive situation and our product offering in making changes both up and down. But broadly, that's the direction, yes. Adam Karlsson: And on the OpEx side, I think we spoke about 3 effects that we believe are fairly sustainable. But for Q4, I think one can see that the store operations efficiencies and also the logistics efficiencies are likely to remain a little bit more caution on the marketing advertising side as we -- last year, when we relaunched the brand, we had quite a lot of costs connected to marketing during Q3 that were not there this year. So a little bit less positive impact on the marketing side for fourth quarter. Operator: The next question goes to Matthew Clements of Barclays. Matthew Clements: Most of my questions have been taken, but I thought I'd maybe zoom out a little bit and focus a little bit less on the long term. Just wondering, when you look to some of your benchmark peers, where do you see on cost the biggest and most exciting opportunities going forward? And could you highlight a few areas of initiatives that it's in-store efficiencies, RFID, self-checkouts, et cetera, or in logistics, automation, et cetera? What are the opportunities where currently H&M is underperforming where you think there's a scope basically to catch up and equalize? Daniel Erver: It's a broad and very interesting question that we work with. I think one clear view is that as we work on strengthening our customer offer and really being competitive in offering outstanding value for money, one key piece will be to increase store productivity and increasing the sales per square meter and store productivity is an important way to sort of balance the cost base because many of our costs are not fixed or are fixed. So when we drive productivity gains, we drive a better profitability. So I think that's one important scope where we see compared to some of the best peers that there is potential for square meter productivity. And that links, of course, very closely to both the experience, but especially to what we put into the store and the product offering, which is priority #1, 2 and 3 for our entire organization. So that's one important piece. I don't know, Joseph, if you want to elaborate on other cost? Joseph Ahlberg: Certainly, we have taken good steps on the inventory productivity over the past 2 quarters. We have stock composition, which is good, where we are slightly lower on the number of pieces versus last year. So this is also, of course, an area where some of our competitors are slightly ahead of us still, and we have long-term targets, which are more ambitious than the levels we currently have. So this is, of course, an area also that will help us generate a lot of operational efficiencies as we approach these targets. Matthew Clements: Just a follow-up on the inventory point. What are the key kind of initiatives at the moment? I mean kind of maybe some of your peers might talk about RFID reducing stock management time, visibility through the supply chain, et cetera. What are the kind of areas where you think you can work on over the next couple of years? Daniel Erver: This is Daniel. I'll start. One important area is to have a really, really competitive product. And a big part of what we spoke about with creating speed and flexibility in the supply chain is one key enabler of making sure that we have a very good quality, relevant product as well as strengthening our design teams and really sort of celebrating that know-how and those design team, both with competence, but also with the tech features to help them do efficient, really relevant design. So that's one important piece. We see with the use of RFID as we start to increase the precision and have real-time data, what we carry in all our different locations, physical stores, warehouses and so on, we see a lot of opportunities for optimization where we can offer better site availability at a lower stock level and having less safety stock to still have a very strong site availability. So here, we're excited about the opportunities as we start to roll out RFID at a broader scale. And then we work actively with the teams on improving the demand planning. So using all the data we have in a more efficient way to be more precise how we forecast the demand and then work actively with improving the supply to be precise to that demand, which also then helps us to come down in stock levels. And that's one -- that work that's been done over the last year that shows effect in this quarter, lowering the stock to sales ratio while we're actually increasing availability to the customers. Those are a few of the examples. Matthew Clements: Okay. That's very helpful. And then maybe one near-term question on regional performance. Just looking across your key markets, are there areas where you're particularly happy with performance, areas where you think there's room for improvements and weakness? Just interested on that front. Daniel Erver: If you look at this quarter, it's a quarter of quite even performance across the markets, where there's -- we believe there are opportunities in all markets, but there's no one single one sticking out in particular for this quarter. It's quite even performance across the geographical regions. Operator: The next question goes to William Woods of Bernstein Societe Generale Group. William Woods: The portfolio brands were soft relative to the overall group this quarter and have slowed down on a pretty easy comp. What's driving the weakness in the portfolio brands? Adam Karlsson: Adam here. One of the effects that we see is that, of course, the decision to close Monki as a physical store concept. So we also highlight then that we have within the portfolio brands about 10% fewer stores. So that is one isolated main effect and connected to the closure of Monki stores. And I think worth calling out is we see strong performance in costs, really continuing to build a very strong position in the market and building excitement around the brand, which we have seen with both the list rankings over the last 6 months as well as the reception of their fashion show in New York, which was really well received. So I think that's worth a call out. We also see our youth concept weekday performing well and having a good quarter and a good year so far. So that's on the positive side worth calling out. Operator: There are no further questions at this time. I will now return the call over to Daniel for any closing remarks. Daniel Erver: Thank you so much, and then thank you very much to all participating in this conference call. Thank you for listening in, and we wish you all a continued great day. Thank you from Stockholm. Operator: Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to the KWS SAAT conference regarding the publication of the financial results '24-'25. [Operator Instructions] Let me now turn the floor over to Dr. Jorn Andreas. Jorn Andreas: Good morning, everyone, and welcome to our analyst and investor call for the fiscal year '24-'25. I'm very pleased to share how KWS has delivered in a challenging agricultural environment with a robust operational performance and a number of deliberate strategic choices that set us up well for the future. Before we begin, as always, a brief reminder. Today's remarks include forward-looking statements that are subject to risks and uncertainties, and you will find the full disclaimer on this slide. And with that, let me take you through the year's highlights. Over the past year, we navigated a weaker agricultural market condition with resilience, and we delivered our full year targets in line with the latest guidance. Two signals stand out: a strong increase in free cash flow and a low net debt position, both underlying KWS earnings power and balance sheet strength. We also sharpened our focus. We streamlined the portfolio. We repositioned the corn segment as we also anticipated and communicated earlier and set a new financial framework designed to drive sustainable, profitable growth. As a leading seed specialist, this means targeted long-term investments in growth areas and in our innovation pipeline and continue to help to address the real challenges facing agriculture. At the same time, we want our shareholders to participate in the company's long-term success. We are aiming for a higher payout ratio, while maintaining a strong commitment on dividend continuity. And looking ahead to '25-'26, we are confident in the resilience and the trajectory of our market-leading businesses. So even if market headwinds unfortunately won't disappear overnight, we expect to stay on our growth path and create sustainable value for all our stakeholders. Let's now take a look at our key performance indicators for the last fiscal year. So the figures presented on that slide relate to the continuing operations of KWS following the sale of our South American corn and sorghum activities that we closed in the first quarter of the last fiscal year. Net sales of EUR 1.68 billion were at previous year's level, including a slight negative currency effect. On a comparable basis, so on a constant exchange rate basis and without portfolio effects, organic growth was plus 1%. So overall, I find this quite remarkable as an outcome, given the declining acreage that we've seen in our global ag markets, in particular, in our core European markets. EBITDA was EUR 351 million, down 13.4%. This reflects special items and operating developments. Keep in mind that previous year included a positive onetime effect of EUR 28 million from divestments of our Chinese corn business. We also had higher costs on the administrative side, increased R&D and also selling expenses. Net income declined to EUR 140 million, mainly due to lower EBIT and a higher tax rate. The financial result, however, improved significantly, driven by higher interest income after we materially reduced our net debt. A very nice result is our increased gross margin, which grew slightly to 63.1%, benefiting from positive [Technical Difficulty] sugarbeet. So this development clearly demonstrates our pricing power even in times of challenging commodity market and the premium innovation [Technical Difficulty]. Free cash flow from continuing operations improved substantially to EUR 123 million, mainly due to higher cash from operating activities and lower CapEx. As a consequence, our net debt fell significantly from EUR 385 million to EUR 62 million or 0.2x EBITDA. So all in all, this is a very solid picture against the industry backdrop. A quick walk-through of the sales bridge. We achieved a slight organic growth despite the continued headwinds and lower acreage, organic growth of plus 1%, mainly driven by sugarbeet and vegetables. With this, we slightly exceeded our latest sales outlook where we guided around 0% growth. On the other hand, FX effects had a negative effect of approximately 1% primarily related to the Turkish lira. Overall, this underscores our ability and our resilience to deliver stable sales under challenging conditions. Our 2 differentiators, the economic value of our [ varieties ] and the broad portfolio that balances opportunities and risks. To illustrate, in the last fiscal year '24-'25, we generated 2/3 of our sales with new varieties, which is a strong indicator of our innovation power and also a clear evidence of our R&D effectiveness. We also achieved a new record, 584 new varieties approved in the last year -- last reporting year. That's an increase of more than 4% versus the previous year, which means with this, we're also laying the foundation for future growth. Our income statement reflects both a robust underlying business performance, but also several one-off items. So let me walk you quickly through the special items that impacted our results. First, prior years included a positive onetime gain of EUR 28 million from the sale of our Chinese corn business. This year, we benefited from the reversal of a VAT provision amounting to EUR 7.7 million in our Sugarbeet segment. So this was established in the previous fiscal year related to a claim which we successfully fended off. Another one-off effect is the EUR 20.7 million write-down related to the divestment of our North American joint venture, AgReliant that we completed in June 2025. Despite these effects, we maintained a strong profitability of an adjusted EBITDA margin of 20.4%, while continuing our high level of R&D investments that are crucial for our long-term competitive advantage. Net income from continuing operations reached EUR 140 million or EUR 4.24 per share. And taking into account the extraordinary gain of EUR 96 million from the sale of our corn and sorghum business in South America, earnings per share increased sharply to EUR 7.16 per share. Let us now turn to our segments, and we are starting with Sugarbeet and Sugarbeet net sales rose to EUR 872 million on an organic basis, plus 2.2%, even though acreage declined by roughly 3%. The context matters here. So European producers reduced contracted areas from last season's very high base, moving essentially back toward normal levels. Growth was driven primarily by Northern, Western and Eastern Europe and also, but to a lesser extent from North America. Our sustainable product innovations, CONVISO SMART and CR+ continue to lead. Together, they account now for 61% of our segment sales, which is up from 56% last year. We also launched unique combination varieties, so a combination of CONVISO and CR+ across several European countries, which will also support the future growth. EBITDA increased 5%, including the EUR 7.7 million onetime provision reversal. EBITDA margin rose to 45.5% so overall profitability improved, supported by portfolio mix and sustained pricing power. Moving on to corn. I mentioned it earlier, corn saw a fundamental strategic change, which I address later. Market-wise, Europe moved lower with reduced acreage in our continuum corn operations, which includes the pro rata contribution of AgReliant, sales declined 2.7% to EUR 683 million. Adjusted again for FX and portfolio, the decline was minus 1.6%. So Europe held stable and the decline came mainly from North America, reflecting FX, but also volumes in a pretty competitive market. EBITDA was at EUR 53 million, below prior year's EUR 82 million, which had include, however, the EUR 28 million onetime gain that I mentioned. The EBITDA margin [Technical Difficulty] accordingly below last year. Let's now turn to Cereals. In Cereals, net sales declined as expected by about 4.6% to EUR 263 million, driven by weaker commodity markets and a declining business [ in Russia ] where we benefited from onetime sales in the previous fiscal year. Our largest crops, hybrid rye and oilseed rape were slightly down versus last year, while wheat was stable. EBITDA declined to EUR 43 million, reflecting the softer top line and continued high R&D investments, in particular with regards to our hybridization efforts in cereals. On the other hand, Vegetables continued to perform very well. It was our fastest-growing business unit in the last fiscal year, top line 16.2% to EUR 72 million. And this increase was primarily driven by spinach seeds, which accounts now for 2/3 of the segment sales. We added sales activities across key European markets. We improved our go-to-market, which supported the dynamic sales growth and also strengthened our global leadership in spinach seeds. The bean business was flat in a slightly softer market. So also here, we were able to gain market shares. EBITDA was at minus EUR 22 million below last year due to the planned step-up in expenses for breeding and sales expansion. These are, as you know, deliberate investments to build a significant long-term position in the vegetable seed market. Operating cash flow increased significantly to EUR 228 million, mainly because cash outflows for inventory and receivables were lower. Cash outflow from investing activities was at EUR 105 million, slightly above last year. However, last year included roughly EUR 40 million proceeds from the sale of our Chinese corn activities. So that is important for comparison purposes. Investments focused on production, R&D capacity, including the completion of our lead seed storage in Einbeck and the opening of an R&D center for vegetable seeds in the Netherlands. So overall, free cash flow improved substantially to EUR 123 million. As a consequence, our net debt position improved substantially from EUR 385 million to EUR 62 million or 0.2x EBITDA. In practice, that puts us close to a net debt-free position. Two main drivers. First, our annual EBITDA of EUR 350 million already covered a large share of the starting debt and our M&A proceeds of EUR 277 million from our divestments further debt. Net working capital did build through the year, but it remained significantly below the prior year period, supporting free cash flow. Our capital structure is now fundamentally stronger, giving us flexibility to invest in growth, advance our strategy and, of course, also selectively pursue M&A from a position of strength. I'm pleased to report that beyond the operational delivery, we reached key strategic milestones in our positioning. Most notably, we realigned our corn segment, streamlining the portfolio with divestments in North and South America and in the prior year in China, of course. The result, higher profitability and a much stronger financial position. Going forward, KWS will focus on the profitable European corn business, where we already today hold a market leadership position. So we are deliberately exiting sales outside Europe in exchange for higher margins, in exchange for reduced currency and market risks and also lower capital intensity. So by exiting the corn GMO markets, we've also reduced our dependence on external IP and can concentrate on our own proprietary breeding technologies. This focus supports our goal of sustainable profitable growth, it supports our goal of entrepreneurial independence and it also fits very well to the growth opportunities we see in Europe, in particular, in grain corn. With the portfolio adjustments behind us, we are now entering a new phase of corporate development, and that's why we have refreshed our strategic framework, and we set new medium-term financial targets. And our priorities rest on 3 pillars: First, expand our market leadership in established crops. We want to scale activities where we see additional value potential such as vegetable seeds. And of course, we want to continually push innovation in plant breeding. And these 3 drivers, lead, build, advance, they form a clear framework for our profitable and sustainable growth in the future. And over the next 3 years, so over the midterm period, we're targeting a 3% to 5% organic net sales growth and EBITDA margin of 19% to 21% alongside our 2030 sustainability ambition. And in this context, we have also updated our dividend policy. KWS values continuity, and we are committed to stable and increasing dividends. We are now aiming for a higher payout ratio of 25% to 30% of earnings after taxes adjusted for portfolio and other onetime effects. And for last fiscal year [ '24-'25 ], the Executive Board and Supervisory Board will propose a dividend of EUR 1.25 per share [indiscernible] year-over-year. So that implies a 26% payout ratio of adjusted earnings after taxes. And as always, we will balance dividends with investments, inorganic growth and potentially M&A. That balance is important to us. Let's now turn to the outlook for the current fiscal year. In line with our midterm ambitions, we expect a comparable net sales to grow by approximately 3% year-over-year in '25-'26 so despite a subdued -- still subdued agricultural backdrop and an expected decline in Russia due to import restrictions and localization of seeds. And I think that's a strong statement. We also expect an EBITDA margin of 19% to 21%, so consistent with our midterm target range. This excludes a positive special effect of around EUR 30 million from the sale of our license rights as part of the divestments of our North American corn activities that we will recognize in the first quarter '25-'26. Yes, with that, and before I close, I would like to warm you -- invite you to our Capital Markets Day on 18th of November 2025 in Einbeck. So my fellow Board colleagues and I will share deeper insights into our goals, into our growth ambitions. And while we offer [Technical Difficulty] participation, I would be delighted to see many of you in person. So you can really expect a full day of presentations, Q&A with deep dives on strategy, on business, on financials and also on pipeline and innovation plus on-site insights into our innovation capabilities. We talk about genome editing, we talk about hybridization. And of course, you will have a look also at our sugarbeet production backbone. So there will be ample of opportunities to have direct conversations, and I look forward to welcoming you on 18th November in Einbeck. That concludes my prepared remarks. Thank you for your attention, and I look forward to the Q&A together with our Head of Investor Relations, Peter Vogt. Operator: [Operator Instructions] And first up is Oliver Schwarz from Warburg Research. Oliver Schwarz: Congrats on the past results. I've got 2 questions here on the results. Firstly, I saw that earnings were boosted by a reversal of provisions to the amount of EUR 7.8 million. Could you elaborate on that one? Secondly, I saw that -- or realize that the outlook is now basically performed on -- when it comes to earnings on the EBITDA level, no longer on the EBIT level. But still, you tend to report the EBIT as the prime earnings figure in the segmental overview. Is that going to change in the future? And what's the rationale in regard to switching from an EBIT guidance to an EBITDA guidance? That would be my questions. Jorn Andreas: Oliver, thank you for your question. So yes, correct. So on the VAT provision, we basically refer to VAT provision in the amount of EUR 7.7 million that we took basically earlier -- in the previous fiscal year. It relates to a dispute [Technical Difficulty] in Russia with the applicability of a certain VAT rate, and we successfully tendered this off in front of the court. So that put us in a position to reverse this provision, and that had a positive onetime effect that we recognized in the Sugarbeet segment. On the EBITDA, correct, yes, so we are switching essentially from EBIT to EBITDA, and that is mainly driven by 2 factors. First is we had a longer discussion in the first half of this year, market perception study where we talked to many people in the financial community, and there was the preference and the rest also to be more comparable also to our peers in our industry. And that's why we switch from EBIT to EBITDA. And also internally, that provides us with a much cleaner view on our operating performance because it strips out accounting effects in particular with regards to the purchase price allocation also in our vegetables segment. So with that, we want to make sure that we are consistently also reporting internally and externally with a true view of our operating -- underlying operating performance. And this will be also the guidance going forward, both on the group level as well as on a business unit or segment level. Operator: The next question comes from Christian Faitz from Kepler Cheuvreux. Christian Faitz: I just have a question on your relatively cautious outlook for this current fiscal year. Is that because pharma profitability in your relevant markets continues to be low? Or what's the background to essentially a flat development minus obviously the 3% envisaged organic sales growth? Jorn Andreas: That's a good question. So exactly as you're saying, so we are still in a period of, I would say, subdued agriculture commodity prices. So when you look at the price development, then we are essentially on 2020 commodity price levels, which has, of course, an impact on the producer margin. So there is not so much, of course, an incentive of our customers to increase production, to increase acreage under these, let's say, price -- commodity price conditions, and that has also an effect on our guidance. We still believe that the 3%, we are actually making also a strong statement because the market will be more in the area of 1% to 2% growth for the current fiscal year. So we believe with this outlook, actually, we will be able to grow faster than the relevant markets. And of course, what we also took also into consideration in our outlook and I mentioned this is that we will have also [Technical Difficulty] also going forward based on the current activities to increase the localization of production and the reduction of the import quota. So that has an effect that has been built also in our guidance. But still, this is very much also with what we guide for the midterm. So we actually feel good with that. Operator: And next up is Michael Schaefer from ODDO BHF. Michael Schaefer: The first one is on your outlook statement on -- for sugarbeet. I mean, you're looking for a slight organic growth. This is, if I understand, despite what you're expecting maybe from Russia, maybe some clarification to what extent you expect the Russian business or how this to evolve in sugarbeet primarily? And then also related to the sugarbeet business, you are forecasting basically a lower margin in the Sugarbeet segment for the current fiscal year. This is on the back of the special effects, which -- to the VAT recovery basically, which you accounted for. However, if I strip this out, I'm getting to something like 44.6% margin for last year. So question is, how do you see basically this on a more comparable basis, the margin to evolve on sugarbeet? This would be my first question. The second one is on the vegetables side. [Technical Difficulty] correctly, you provided some undistorted sort of profitability target of -- or a number of around 20% margin for the vegetables business on that one. So if I strip this out compared to your reported negative number, so I'm getting to something like a EUR 36 million -- EUR 35 million of extra OpEx, which you are basically earmarking for investing into further growth. So I wonder how this number is evolving in the years to come on what's baked into the midterm guidance for the segment or for the group in general, how this is evolving. So this would be my 2 questions. Jorn Andreas: Very good, Michael. Very good questions. So as you rightfully said, so we believe that the market -- of course, the sugar market is still under pressure. I mentioned already a very weak commodity price situation still. Of course, as a seed producer, we are only indirectly affected by these commodity price movements. However, we believe on an acreage basis for sugarbeet in our relevant markets, it will be more stagnating in the current fiscal year. We initially had a more optimistic outlook, but I would say right now, what we see in front of us, it's rather stagnating. However, what we've also demonstrated in the past, and that's really important is that even under those conditions, we are to grow and we also increase our profitability, thanks to our innovative product portfolio. So the pricing power that we have, the portfolio effects [Technical Difficulty] innovative varieties CONVISO, CR+ and also our unique new combination varieties always puts us in a position to be able to grow and also to deliver value even under, let's say, adverse, I would say, market conditions. That means also that we are confident that we will be able to maintain also the profitability. You rightfully said we had in the last fiscal year, the reversal of a provision, which is a positive onetime effect. We will not, of course, have that in the current fiscal year [Technical Difficulty] a profitability well above 40%. So with that, I believe we are well positioned also to navigate also this more challenging environment that we see. I mentioned Russia. So for Russia, I would say our outlook is stable. So for us, sugarbeet remains a better business for us also in the current fiscal year. For the other crops, it's more an opportunistic business because here, the localization of the activities in Russia have already progressed quite a bit, and that's also baked into our guidance that in particular, when it comes to corn, for example, we have a much lower forecast for our business. And this is more on the opportunistic side. But so far, I would say the situation in Russia is neutral. It hasn't worsened. It hasn't improved, and that's also how we react to this market picture. Vegetables, yes. So we are really happy also with the operative profitability. You can imagine with the 16%, we are able to also turn this into a very nice operating leverage for our underlying business, so spinach and beans. So that's really on the positive side. But at the same time, we need to build our go-to-market structure. We need to build our breeding infrastructure. We are roughly halfway through, let's say, the innovation cycle of what we call our foody crops, so tomato, pepper, cucumber, melon and watermelon. So you will see also, I would say, until the 2020s, an additional buildup of expenses in order to build that structure, but our goal is over the midterm for the next 3 years to launch basically product launch varieties in each of the foody crops so that you see also now traction when it comes also [Technical Difficulty] years. So that's what you can expect. So further buildup of structure in the next years, but also a launch of key varieties that will be the driver of our future growth in the years to come. Michael Schaefer: Can I have a follow-up on vegetables, please? I mean you reported strong organic sales growth in the past fiscal 15% plus, but guiding for flat organic sales growth for the current -- for the ongoing fiscal year. So what's holding back? Jorn Andreas: Well, it's more a comparable topic. So of course, we are now comparing ourselves against [Technical Difficulty] 16%. It's a significant growth, and we've been able to capture very good market share, particularly Italy, other parts of Europe. We also saw nice growth also in North America. That's why we've been a bit on the cautious side and say, okay, based on that high comparable level, I think would be for us already a good result if you can sustain this also given, of course, the pressure that the consumers have when they choose these products. So I can -- from my side -- I mean, I would not be surprised if we can maybe put a little bit on top of that, but we said, okay, based on the very good, let's say, lending of last year, that is basically what we see in front of us. Operator: At the moment, there are no further questions. [Operator Instructions] There are no further questions. Jorn Andreas: All right. If there are no further questions, then again, thank you very much for your interest in KWS. And as I said earlier, please have a look at your Inbox to see the invitation to our Capital Markets Day. So we look forward to welcoming you Einbeck, continue the dialogue on site and of course, also over the coming weeks and months together with our Investor Relations team. So thank you and all the best until then.
Operator: Hello, and welcome to the H.B. Fuller Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. And if you would like to ask a question during this time, please press I would now like to turn the conference over to Scott Jensen, Head of Investor Relations. You may begin. Thank you, operator. Scott Jensen: Welcome to H.B. Fuller's Third Quarter 2025 Investor Conference Call. Presenting today are Celeste Mastin, President and Chief Executive Officer, and John Corkrean, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will have a question and answer session. Before we begin, let me remind everyone that our comments today will include references to certain non-GAAP financial measures. These measures are supplemental to the results determined in accordance with GAAP. We believe that these measures are useful to investors in understanding our operating performance and to compare our performance with other companies. Reconciliations of non-GAAP measures to the nearest GAAP measure are included in our earnings release. Unless otherwise noted, comments about revenue refer to organic revenue, comments about EPS, EBITDA, and profit margins refer to adjusted non-GAAP measures. We will also be making forward-looking statements during this call. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations due to factors covered in our earnings release, comments made during this call, and the risk factors detailed in our filings with the SEC, all of which are available on our website at investors.hbfuller.com. I will now turn the call over to Celeste Mastin. Celeste? Celeste Mastin: Thank you, Scott, and welcome, everyone. We delivered a strong quarter evidenced by continued margin expansion and double-digit EPS growth despite the challenging operating environment. Our continued operational discipline, strong execution, and ongoing portfolio shift keep us on track to achieve our greater than 20% EBITDA margin target. Despite our strong performance, we remain cautious and have tightened our guidance range for the year to reflect a globally subdued economic backdrop. Looking forward, we expect volume growth to remain elusive and end market conditions to be challenging. However, we continue to actively focus on enhancing the composition of our portfolio, driving continued efficiencies, and structurally repositioning the company for growth and continued margin expansion consistent with our long-term strategy. Looking at our results in the third quarter, our organic sales were slightly negative, consistent with our expectations given economic headwinds. Organic sales decreased 0.9% with positive pricing of 1% offset by a volume decline of 1.9%. From a profitability perspective, we executed well and delivered strong results. We grew EBITDA 3% year on year to $171 million and expanded EBITDA margin to 19.1%, up 110 basis points year on year, including positive EBITDA growth and margin expansion in all three GBUs. The net impact of pricing and raw material cost actions, the contribution of acquisitions and divestitures, and targeted cost reduction efforts drove the increase in margin relative to the prior year. Now let me move on to review the performance in each of our segments in the third quarter. In HHC, organic revenue softened sequentially as we saw the effects of continued economic uncertainty impact consumption trends. Organic revenue decreased 3.1% as positive pricing actions were offset by weaker volume. Strength in medical and tissue and towel was offset by broad-based end market softness, particularly in some of our packaging-related market segments. EBITDA was up 2% year on year for HHC in the third quarter, and EBITDA margin increased 50 basis points year on year to 16.9%. Positive pricing and the impact from acquisitions were partially offset by negative volume leverage. In EA, organic revenue increased 2.2% in the third quarter, driven by both positive pricing and volumes. EA continues to lead the portfolio as positive organic growth was driven by ongoing strength in automotive and a bounce back in electronics. Solar continues to be a headwind as a result of regulatory changes, tariff-driven ambiguity, and the oversupplied global panel market. Excluding solar, EA organic growth was positive mid-single digits. We continue to see the benefits of our strategic growth focus in EA against a still difficult backdrop. Overall, more than half of the market segments in EA saw positive volume growth during the third quarter. EBITDA increased 14% in EA, and EBITDA margin expanded 190 basis points year on year to 23.3%. Positive volume leverage, the impact of net price and raw material cost management, and efficiency gains drove the increase in EBITDA margin year on year. Building adhesive solutions, organic sales were flat year on year as positive pricing actions were offset by modest volume declines. BAS performed as expected as the construction market-related slowdown we identified last quarter was partially mitigated by the team's strong execution. Although construction demand remains weak, we expect a declining interest rate environment will drive an improvement in building conditions and ultimately benefit BAS moving forward. EBITDA for BAS increased 3% versus the third quarter of last year to $41 million, and EBITDA margin expanded 10 basis points to 17.7%. Net price and raw material cost management drove the improvement in EBITDA margin year on year. Geographically, America's organic revenue was up 1% year on year in the third quarter. EA drove the increase for the region, achieving a high single-digit increase with positive organic growth across most market segments. BAS organic revenue was slightly positive versus the prior year, and HHC organic revenue was down modestly. In EIMEA, organic revenue declined 2% year on year, similar to the second quarter as continued weakness in Europe weighed down the region. EA was flat year on year, while HHC and BAS were both down modestly. In Asia Pacific, organic revenue decreased 4% year on year, driven by the significant volume decline in solar. Excluding solar, organic sales for Asia Pacific were approximately flat year on year, and organic revenue for EA in the region was up 7% year on year, driven by strong results in automotive and electronics. From our vantage point, which reflects a broad-based geographic and end market view, we have observed a widespread slowing economic environment. The manufacturing sector continues to be weak and has shown some signs of softening. Customer demand is appearing more uneven and less predictable, driven by global trade tensions and export-driven uncertainty. In general, customers are hesitant to make product changes and incremental investments given economic volatility and high interest rates. Therefore, looking forward, we expect a slow growth environment with a continuation of these themes. Now let me turn the call over to John Corkrean to review our third quarter results in more detail and our updated outlook for 2025. John Corkrean: Thank you, Celeste. I'll begin with some additional financial details on the third quarter. For the quarter, revenue was down 2.8% versus the same period last year. Currency had a positive impact of 1%, and the net impact of acquisitions and divestitures decreased revenue by 2.9%. Adjusting for those items, organic revenue was down 0.9%, pricing up 1%, and volume down 1.9% year on year in the quarter. Adjusted gross profit margin was 32.3%, up 190 basis points versus last year. The net impact of pricing and raw material cost actions, the benefit of acquisitions and divestitures, and targeted cost reduction efforts drove the year on year increase in adjusted gross profit margin. Adjusted selling, general, and administrative expense was up 3% year on year. Adjusting for M&A, FX, and variable comp, SG&A was flat year on year, reflecting diligent cost control. Adjusted EBITDA for the quarter of $171 million was up 3% year on year, reflecting the positive net impact of pricing and raw material cost actions, which more than offset higher wage inflation and lower volume. The net impact of acquisitions and divestitures was neutral to EBITDA year on year. Adjusted earnings per share of $1.26 was up 12% versus 2024, driven by higher adjusted net income and lower shares outstanding. Third quarter operating cash flow was up 13% year on year, primarily driven by improved profitability. Net debt to adjusted EBITDA decreased from 3.4x at the end of the second quarter to 3.3x at the end of 2025. Solid cash flow from operations, growth in adjusted EBITDA, and our intentional slowdown in M&A activity drove the sequential decrease in our leverage ratio. With that, let me now turn to our guidance for the 2025 fiscal year. As a result of our year-to-date performance, the current macroeconomic conditions summarized by Celeste, are updating our previously communicated financial guidance for fiscal 2025 as follows. Net revenue is still expected to be down 2% to 3% year on year, now expect organic revenue to be flat to up 1% year on year, expect foreign exchange to adversely impact revenue by approximately 1% year on year. We are tightening our adjusted EBITDA range for the year to $615 million to $625 million, equating to growth of 4% to 5% year on year. This compares favorably to our initial 2025 full-year guidance of $600 million to $625 million. Now expect our 2025 core tax rate to be between 26% and 26.5% and expect full-year interest expense to be between $125 million and $130 million. Combined, these assumptions now result in full-year adjusted diluted EPS in the range of $4.10 to $4.25, equating to year on year growth of between 7% and 11%. We now expect full-year operating cash flow to be between $275 million and $300 million, reflecting slightly higher inventory levels in preparation for our manufacturing footprint optimization. Finally, we reduced our full-year capital spending target to approximately $140 million for the year. Now let me turn the call back over to Celeste to wrap us up. Celeste Mastin: Thank you, John. As we entered 2025, we anticipated a challenging macroeconomic environment where both volume growth and margin expansion would be difficult. This sentiment was further exacerbated by the upending of global trade relations and tariff-driven disruption. As a result of our expectation for a difficult year, we took early and proactive measures delivering strong execution on pricing and raw material management as well as cost controls while placing an emphasis on operational efficiency. These actions are clearly paying off as evidenced by our third quarter results. While we are not immune from an economic slowdown, we are diligently focused on the variables we can control. Starting with providing outstanding service and support to our customers. We are a demonstrated and critical partner to our customers as they grapple with potential changes to everything from the point of origin of the materials they buy to their manufacturing locations and processes. This is increasingly valuable in this time of material optionality and supply chain disruption. To wrap up, we are pleased with the progress we continue to make in improving our portfolio, streamlining our operations, and driving EBITDA margin expansion. While volume growth remains challenged, we have a clear and focused strategy and a highly experienced team that is well prepared to execute and drive operational success. We remain on track to deliver on our long-term EBITDA margin and growth targets. As a reminder, we look forward to seeing you at our Investor Day on October 20, where we will provide an update on our strategic plan, including our successful M&A strategy, transformational footprint optimization, and roadmap to our greater than 20% EBITDA margin goal. That concludes our prepared remarks for today. Operator, please open the line for questions. Operator: Thank you. You would like to ask a question, please press 1 on your telephone keypad. If you would like to withdraw your question, simply press 1 again. Please ensure that your phone is not on mute when called upon. Thank you. Your first question comes from David Begleiter with Deutsche Bank. Your line is open. David Begleiter: Good morning. This is Emily Fusco on for Dave Begleiter with Deutsche Bank. Could you provide some more detail behind the reduction in cash flow guidance? Thanks. Celeste Mastin: Morning. Good morning, Emily. John, do you wanna cover cash flow? John Corkrean: Sure. It really comes down to working capital, specifically inventory, Emily. So as we've in preparation and we're actually kind of in process on a number of these footprint consolidation actions. We're trying to manage inventory a little differently to accommodate these, which requires us to keep higher inventory levels. That's driving the increase in working capital and the decrease in cash flow expectations for the year. And I would just add that they're temporary. Right? They're positioning us for these changes, and we would expect that we would reduce inventory to more normal levels in the future. Emily Fusco: Got it. Thank you. Operator: The next question comes from Patrick Cunningham with Citi. Your line is open. Celeste Mastin: Morning, Patrick. Alex: Hi. This is actually Alex on Patrick's team. Thank you for taking my question. So for me, what kind of struck me as interesting was that in EA, autos and durables, you're kind of saying that things were okay. I'm just curious if did anything accelerate in the quarter, or was anything whether it's in the mix or any kind of accretion from acquisitions? What kind of LPA volumes there and margins there? Celeste Mastin: Right. Absolutely. So in the EA business, we had a great quarter, and a few things happened there that are notable. So in Q2, you might recall if you were on at that time, Alex, that we said that we were experiencing a temporary lull in the electronics market in Q2, as more and more product upgrades were coming out featuring our adhesive, in some wins there as we continue to take share. That was one thing that did happen during the quarter favorably. Our electronics business returned to globally double-digit organic growth. Also in the quarter, we saw great performance improvement in our US business. In Q2, we had seen that business operating at negative mid-single-digit organic growth, in Q3 in EA in the U.S. The business drove forward to positive mid-single-digit organic growth. A lot of that based on some share take and new customer wins, but also just really strong execution by our sales and technical service teams. So we're seeing some good momentum in the EA business. And we expect that to continue going forward. Alex: Great. Thank you very much. Operator: The next question comes from Ghansham Panjabi with Baird. Your line is open. Ghansham Panjabi: Hi. Good morning. It is actually good morning, Ghansham. Celeste Mastin: Good to hear you. Ghansham Panjabi: Likewise. So, Celeste, you know, just going back to your prepared comments and, you know, the caution you shared for obviously good reason, etcetera. But how would you explain the HHC decline in volumes versus EA in context of HHC, generally speaking, being, you know, considered a little bit more defensive versus EA, which has multiple dimensions of exposure, including to some of the cyclical end markets. How would you always think about that? Celeste Mastin: Yeah. The way I think about that, Ghansham, is our EA business today is performing much stronger than the market. I do think we're still seeing slowing in durable goods. However, that team, as I mentioned, as it relates to electronics, but also as it relates to automotive, has really been successfully growing their business, taking share, bringing unique solutions to the customer base, and that has facilitated their above-market growth. In the HHC business, we saw strong pricing performance around the globe in the third quarter. However, you know, volumes were really tough to come by, Ghansham. And you know, they really are a reflection of the consumer. And so in all major regions, The Americas, Europe, Asia, we saw mid-single-digit declines in HHC volume. And I just think that's a reflection of the eroding global economic consumer. Ghansham Panjabi: Got it. And then, you know, in past calls, you've given us some characterization in terms of your different GBUs and the number that are decelerating versus accelerating. Can you do that score on as well? Like, how did 3Q actually shape up as it relates to the different GBUs? Celeste Mastin: Yeah. So in the business in total, about eight of our market segments out of 30 were accelerating. And, you know, what we saw typically was in every GBU that the case for about half of them. So nothing really notable there. And I'm pleased that we were able to deliver a quarter that demonstrated EBITDA margin expansion and positive pricing in all GBUs. And maintained that sort of mid-level of acceleration. It didn't take all of our segments operating in concert positively to deliver that. Ghansham Panjabi: Okay. And then just one final one, as it relates to the outlook for fiscal year 2026, which isn't that far away. Is solar, will that fully have cycled through as it relates to the negative volumes by then, or will there be some sort of lingering flow through into fiscal year 2026? Celeste Mastin: Yeah. So let's talk about solar, just the solar strategy, solar technology, and then what you should expect from a revenue and an EBITDA margin perspective. So in the global solar industry, we operate, supplying three different product lines essentially to that space. Two of the three of those product lines are very specialized. And in fact, they are critical in enabling more efficient solar panels to be produced and introduced in the future upcoming years. So we're continuing to emphasize those product ranges. Now the third product range, which is more of a silicon sealant type of product, became, you know, really a challenging part of that market, particularly in China. As construction in China slowed down and those sealants were redirected into the solar industry. That's a part of the market where we're going to be deemphasizing our focus. And so with all of that as the technology backdrop and the market backdrop to what's going on, what you'll see in the P&L is that on the top line, there will continue to be headwinds as it relates to revenue as we continue to draw back away from the silicon sealant product line in particular regions. Now what you will also see, however, is a shoring up of EBITDA and EBITDA margin as we're exiting that lower margin space. Ghansham Panjabi: Okay. Very helpful. Thank you very much. Operator: The next question comes from Mike Harrison with Seaport Research Partners. Your line is open. Mike Harrison: Morning, Mike. Celeste Mastin: Hi. Good morning. Appreciate you taking my question. You've talked about this, I believe it was $55 million worth of kind of pricing versus raw material cost tailwind for the year. Was hoping that you could give us a sense of where we stand on that. Are you tracking above or below that number? How much of it is yet to be realized? And maybe give us a little bit of a sense of how you're seeing raw material costs trending as we start to think about price cost and some potential tailwind from that into fiscal 2026? Celeste Mastin: Sure. So that's correct. At the beginning of the year, we established that in order to achieve our guidance of $600 million to $625 million of EBITDA, we would be delivering $55 million of price and raw material cost action benefit. So it's less about how the market's trending, more about the action that we were taking on raw materials, in order to get there. And so if you look at our progress as of the first half, as I mentioned last quarter, we had achieved about $5 million of that. However, we also established that we have taken all of the actions that we needed to take in order to make both of those factors, price and raw material savings, come to fruition. What we realized over the course of this quarter is that the cadence for those savings is going to be slower than we anticipated given that we have more raw material inventory in preparation for this footprint optimization. So through the third quarter, we've generated about $15 million of the $55 million of price and cost action. We anticipate another $15 million benefit in Q4, and then the remainder will wrap around into the beginning of next year. You know, in the interim, in order to still achieve our guidance, we did take action to pull forward some of our footprint optimization savings. And so we still feel very confident. And as you see, we brought up the bottom end of our range last quarter and have just tightened it now to be able to achieve $615 million to $625 million of EBITDA this year. Mike Harrison: Alright. So it sounds like maybe $20 or $25 million yet to come in '26. Is that the way we should think about it? Celeste Mastin: Correct. Mike Harrison: Okay. Perfect. And then my other question for you is you guys have had a number of organic growth initiatives since you took over, Celeste. Also done a number of bolt-ons over the past couple of years. As you look at the cross-selling and geographic expansion opportunities, just curious if you can talk about how much faster than underlying markets you think you can grow in the next year or two? It sounds like you're really delivering on that potential in EA, but I'm just curious, can it accelerate in EA? What do you think about the other two segments? Celeste Mastin: Yes. It has accelerated in EA. In fact, I was really pleased just the other day to be talking to one of our leaders here in the U.S. and finding that we have adopted the Vibrotite product range from ND Industries into our HVAC product range. So, we are expanding the ND Industries products very quickly. In fact, you will see an expansion by the conclusion of the year of those in multiple additional geographies. Three new locations versus where that business was when we acquired it last year. The other thing I would say is, you know, we've been really pleased with the medical adhesive business. Again, it's a business where we're growing businesses that we acquired into new geographies. And in fact, if you look at the medical adhesive technology business, the EBITDA has doubled and revenues are up 60%, with EBITDA margins over 40% just this year. We're really excited. We're validated that our strategy is delivering in the manner that we originally anticipated, and you see that in the EBITDA expansion numbers. It's been a prime contributor. Mike Harrison: Alright. And any comment on BAS? I know that The Middle East, in particular, has been an expansion initiative. Celeste Mastin: The Middle East has been an expansion. You know, that business, I know organic growth was down 1% this quarter. But bear in mind, it held in there well on a very good comp from Q3 prior year. In fact, 2024, our roofing business, which is one of the bigger businesses in that GBU, was up 30% organic growth. So the business is performing well. We're seeing adoption of our 4SG insulated glass sealant. In fact, we just won a couple of projects in Japan, so we're seeing kind of geographical expansion of that business. And are pleased with its performance. Yes. The Middle East represents a great opportunity for us there. Mike Harrison: Alright. Thanks very much. Operator: The next question comes from Kevin McCarthy with Vertical Research Partners. Your line is open. Matt Hetwer: Hi. This is Matt Hetwer on for Kevin McCarthy. Staying with BAS, you know, as the Fed presumably continues to cut interest rates moving forward, what kind of lag effects do you expect to see between the timing of lower interest rates and how they might feed through to stronger results in that business? And are there any specific, you know, underlying business lines in BAS, such as maybe glass or woodworking, you think might benefit from lower interest rates more than others? Celeste Mastin: Yes. So lower interest rates tend to impact our business, call it, fifteen to eighteen months later than we would see them in the architectural billing index. Now that said, there will be more immediate impacts of lower interest rates both on that business and at H.B. Fuller. I mean, just the mobility that lower interest rates create, the possibility for household formation or and moving households, helps bolster our business in many ways. The HHC business would benefit from that, in BAS. Specifically, the woodworking business, think furniture, would benefit from that. And so, ultimately, we don't have to see building as a consequence of interest rates to get the benefit. We will see indirect benefits in addition. Matt Hetwer: Great. Thank you. And then, yeah, I guess one more for BAS. You know, data centers have been a source of strength to you. I was wondering if you could just give us a sense for how large that business is. And, you know, I assume it's maybe on the smaller side, but is the high growth rate there relative to the size of the business, you know, is that strong enough for it to have a meaningful impact on segment results moving forward? Celeste Mastin: Yeah. So the data center business, just to speak more broadly, and then, John, maybe you can speak to it relative to H.B. Fuller. More broadly, the data center business grew this year at 40% as I understand it, and the outlook is for that business to continue to grow at a rate of, call it, 30%. Our BAS business has taken a very strategic approach to data center building. We've long been part of the specification for the roofing systems in data centers. And now that we have revised that GBU and have different market segments working together, we've been able to bring a package of adhesives to support different parts of the structure. And I think I mentioned last quarter I was pretty wild about the flooring adhesive we've introduced for panels and raised floors in data centers that dissipates electrostatic energy. So the team is approaching the business very strategically. John, do you wanna comment on how to contextualize that? Maybe dimensionalize the size. John Corkrean: You know, most of this activity resides in our roofing business, which is a 100% commercial focus. That business, you know, it's between 5% and 10% of total revenue. I'm gonna guess, you know, data centers are less than half of that, but they're growing quickly. So it's a true strategic focus area. It's high margin business, and the team's done a great job of winning new business to really drive both take advantage of both the underlying macro trends, but as win new business on top of that. Matt Hetwer: Great. Thank you. Operator: Star one on your telephone keypad. Your next question comes from Lydia Hoang with JPMorgan. Your line is open. Lydia Hoang: Hi, good morning. Could you give some color on the pricing trends for your segments in the fourth quarter? Thank you. Celeste Mastin: Sure. Just you probably noticed, Lydia, that the businesses, all three GBUs were positive price year on year in Q3. There's a very supportive pricing environment in the market, given so much inflation tariffs, etcetera. And in fact, speaking of the fourth quarter, I actually just was reading a survey that was done here in the U.S. by the Adhesives and Sealants Council. They had surveyed their members to understand amongst other things how they were responding to tariffs and price was one question related to that. And 84% of the respondents to that survey that are all adhesives and sealants companies responded that they were raising price. So again, it's a very supportive pricing environment, and I think you'll continue to see that throughout the fourth quarter. Lydia Hoang: Thank you. Operator: There are no further questions at this time. I'll turn the call to Celeste Mastin, CEO, for closing remarks. Celeste Mastin: Thank you very much for joining the call today. We look forward to speaking with you next quarter. Have a great day. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Yuki Nishio: [Foreign Language] Now I'd like to turn this call over to KK, Senior Vice President, Finance, JPAC and Japan CFO. S.Krishna Kumar: Thank you, Nishio-san. Good afternoon, everyone, and welcome to Oracle Japan's First Quarter Fiscal Year 2026 Earnings Conference Call. We had another excellent performance in this Q1 attributed to growth of cloud services, especially Oracle Cloud Infrastructure. The demand is substantial for our cloud business, which has led to acceleration in revenue growth. In Software License business, we changed our list price in Q2 '25. Therefore, we anticipated that there would be a reactionary decrease due to rush demand in Q1 of last year. We announced the opening of Japan operations center to accelerate innovation in AI adoption by Japanese companies and organizations and to accelerate the adoption of sovereign cloud. This center supports Oracle Alloy partner companies by providing operational expertise and technical assistance, enabling them to deliver a broad range of cloud and AI services and expand their business. Regarding Oracle AI World in Las Vegas from October 13 to 16, starting this year, it will be called Oracle AI World. The new name emphasizes our commitment to help customers and partners take advantage of latest AI innovations to move faster, reduce costs, make more informed decisions and build smarter businesses. You can also participate online via streaming all live events. We continue to add a lot of customers in various industries like public sector manufacturing, financials and information technology. Let me give you a few examples. Number one, Kubota provides products and solutions developed and produced in over 120 countries and regions worldwide across the fields of food, water and environment. When advancing water environment projects across 3 Southeast Asian countries, information was previously managed in a decentralized manner using spreadsheet software and paper creating a risk of human error. Additionally, there was a need to strengthen internal controls and streamline redundant tasks. It was difficult to grasp information on profit and loss project performance in real time, posing challenges for rapid management decision-making. To solve these issues, Kubota selected NetSuite, a solution that could be implemented quickly and cost effectively while offering high adaptability to change. Number two, Yamato Contact Service, which handles Contact Center and BPO operations for the Yamato Group has streamlined its customer support operations by leveraging Oracle Cloud Infrastructure generative AI service and Oracle Database 23ai. Specifically in e-mail support operations, they have successfully increased the match rate for proposing FAQs to self resolvable inquiries to 85%, roughly double the previous rate. This has enabled Yamato to automatically process and reduce approximately 20% of e-mail inquiries relating to TA-Q-BIN delivery operations using AI. Number three, Toyo University. Looking ahead to its 150th anniversary in 2037, Toyo University is formulating a vision for its future as a comprehensive academic institution. To achieve this, a financial accounting system, enabling data-driven management decisions and financial operations was essential. While previously using a custom developed system, the university adopted Oracle Cloud ERP to reduce operational and maintenance burdens and transition to a sustainable, highly flexible system. Oracle Cloud ERP is valued for its extensive implementation track record at universities, both domestically and internationally and its ability to loosely integrate with university-specific peripheral systems via APIs and its flexibility to accommodate future expansion. Number four, AEON Housing Loan Service, AEON faced challenges in its traditional on-premise environment including end-of-life hardware maintenance, delays in applying security patches, difficulties in flexible resource allocation and the need to strengthen its disaster recovery configuration. Against this backdrop, following a feasibility study and POC for cloud migration using Oracle Cloud Lift Services, they decided to proceed with a full-scale migration to Oracle Cloud Infrastructure. With support from Oracle Consulting Services, they achieved full cloud migration in a short time frame. This was made possible by high affinity between our on-premise Oracle database environment and Oracle autonomous database on OCI, coupled with a highly reliable project structure. This is just to give you a sense of the broad outreach in the market that we have with our different products and services and to underline Oracle's presence in most mission-critical systems, applications and industries. Let me move to the numbers. We have made some changes to the face of our income statement to better reflect how we manage the business so you understand our cloud business dynamics more directly. Total revenue was JPY 66,275 million, growing at 3.7% compared to previous year, driven by strong growth in our cloud revenue. Total cloud revenue was JPY 19,097 million, up 37.2% now represent 29% of the total company revenue. Infrastructure consumption revenues continue to have a strong momentum which includes autonomous database. Operating income was JPY 21,128 million, decreasing 4.8% and net income was JPY 14,805 million, down 3.7%. Total revenue again hit a record high for the first quarter. The profit categories were down mainly due to decline in high-margin software license business. We will maintain our guidance for revenue and EPS communicated at the start of this fiscal year. Thank you very much, and back to Nishio-san. Yuki Nishio: [Foreign Language] Unknown Executive: [Foreign Language] [Interpreted] First question is from Kikuchi-san of SMBC Nikko. There are 2 questions, but we will go one by one. First question. This is about the revenue of cloud service in the first quarter. Year-on-year, it grew by 37% and Q-on-Q, it grew by 12%. It appears to have grown significantly Q-on-Q basis, but is there any onetime factor? S.Krishna Kumar: As I mentioned in my opening comments, our infrastructure revenues, especially infrastructure [Technical Difficulty] Hello. I'm back. Sorry, I think I got disconnected. Yuki Nishio: [Foreign Language] S.Krishna Kumar: So did you hear my answer to the question? Or should I start again? Yuki Nishio: You were cut off. Please start over again. S.Krishna Kumar: Okay. Let me talk about the cloud revenue. So I think we will -- we saw very strong momentum, as I said in my opening comments. This is across all product offerings, especially infrastructure and even SaaS revenue growth was strong. So -- and I think there is no one-off factor affecting this. So we should see strong momentum continuing into the fiscal year. Yuki Nishio: [Foreign Language] Unknown Executive: [Foreign Language] [Interpreted] And second question from Kikuchi-san. This is about HR expense. The growth is quite significant. However, in terms of number of headcount, it is not increasing. So what are the reasons behind it? And if you could share with me the outlook for second quarter and onwards, that would be helpful. S.Krishna Kumar: Yes. Regarding the people expense, we -- there are a few factors that is affecting the increase. There was a salary increase last year that was provided. We are also constantly changing and churning our people. So new people come at higher costs, with the right skill set, and that's the whole intention of the organization. And we also had some restructuring expense that got into the P&L. And also a little bit of stock compensation expenses got affected because the stock price also climbed significantly. So these are some of the factors that are contributing to the personnel expense. The second question on the outlook for Q2 and beyond. As I said, for the full year, I am maintaining my guidance. We should see some bounce back in license. I would expect it to bounce back for the remainder of the year. And we'll continue to see some good momentum on our cloud revenues. So the year looks very strong for us. Yuki Nishio: [Foreign Language] Unknown Executive: [Foreign Language] [Interpreted] We have questions from Noda-san of CLSA Securities. This is about Oracle Alloy, when will it start to contribute to the revenue of cloud service? S.Krishna Kumar: Sorry. Sorry, I was on mute. So all the alloys that we have booked, and we have more alloys in our pipeline that we are working on. Some of it will start showing in our numbers towards the end of this fiscal FY '26. But the consumption will really accelerate. The alloy consumption will really start accelerating more in FY '27. Yuki Nishio: [Foreign Language] Unknown Executive: [Foreign Language] [Interpreted] Second question from Noda-san of CLSA Securities. OpenAI and Meta in the U.S. are starting to use OCI for their infrastructure to do inferencing. So -- and if these tech companies wishes to -- wish to expand their AI service in Japan. And if they start to use OCI in Tokyo region in order to ensure secure their local resources, will this become a potential upside from Oracle Japan? S.Krishna Kumar: So this is kind of a little -- I appreciate the question, but at this point in time, it's a little hypothetical for me. It all depends on how we contract it and what exactly the nature of work would be and whether it's an Oracle Japan contract or not. But having said that, what we have seen globally, and you -- if you have followed Oracle Corporation's earnings call, we -- a lot of the biggest training model -- or large language models do their training on by default on Oracle Cloud Infrastructure. We also have enabled OCI to offer these large language models to our customers as a choice. For example, our customers can use our generative AI service and use any of these LLMs, whether it's OpenAI or Grok or Llama to further their AI capabilities for their organizations. So there will be some linkages. And of course, it's going to be beneficial for Oracle Japan also. But I don't think I can answer your specific -- I don't -- I have an answer to your question specifically on this one. Thank you. Yuki Nishio: [Foreign Language] Unknown Executive: [Foreign Language] [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale Corporation Fourth Quarter Fiscal 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 a second time. And thank you. I would now like to turn the conference over to Mr. Gary Millerchip, Chief Financial Officer. You may begin. Gary Millerchip: Good afternoon, everyone, and thank you for joining us for Costco's fourth quarter 2025 earnings call. I'd like to start by reminding you that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements except as required by law. Comparable sales and comparable sales excluding impact from changes in gasoline prices and foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with GAAP. Before we dive into our financial results, I am delighted to say that Ron Vachris is once again joining me for today's call. I'll now hand over to Ron for some opening comments. Ron Vachris: Thank you, Gary. Good afternoon, everyone, and thank you for joining us today. As we wrap up fiscal year 2025, I'll make a few brief comments on some of the highlights. In the fourth quarter, we opened 10 new warehouses including a relocation in Canada, our twentieth warehouse in Korea, our second warehouse in Sweden, and five net new locations in the US. For the fiscal year, we opened 27 new warehouses including three relocations for a total of 24 net new buildings. This brings our total warehouse count to 914 worldwide. We plan to open another 35 warehouses in fiscal year 2026, of which five are relocations. We continue to see significant opportunities for expansion both domestically and internationally across the markets where we currently operate. Gary will go into details about the quarter results, but a few highlights for the fiscal year: Net sales came in just under $270 billion, an increase of over 8% versus last year, and e-commerce sales exceeded $19.6 billion, increasing over 15%. We had a record year for gas volumes, which benefited from longer gas station hours, new gas stations, and expansions of existing gas stations as well. We also recently celebrated a few milestones including the fortieth anniversary of our $1.50 hot dog and soda combo. Fittingly, we've just completed the rollout of Coca-Cola, the original soda partner from the 1985 inception, of the iconic combo to all food courts worldwide. Our private label Kirkland Signature reached its thirtieth year anniversary this year. Kirkland Signature sales penetration continues to increase, bringing even more high-quality value to our members while offsetting potentially inflationary impacts from tariffs. As mentioned last quarter, we are continuing to look at opportunities to move more KS product sourcing into the countries and regions where the items are sold, and this is helping to lower costs as well as reduce emissions from transporting goods around the world. To increase value and convenience for our members, on June 30, we added executive member exclusive operating hours in the mornings, an additional hour on Saturday evenings for all members in our US warehouses. We estimate these incremental hours have added about 1% to weekly US sales since implementation. This has been very well received by our members. In addition to the early opening hours for executive members, we also introduced a $10 credit per month on Instacart purchases greater than $150. Since announcing these new executive benefits, we've seen a meaningful increase in upgrades from Gold Star members to Executive Membership. Another way we are improving the member experience is through the rollout of enhanced checkout technology in all US warehouses. This is speeding up the checkout process by allowing our employees to scan small and medium-sized transactions while the member is still in line. So upon reaching the cashier, nothing has to be removed from the cart. Only payment is needed. We also continue to make progress with our technology roadmap for digital and e-commerce. Enhancements this quarter included using data augmentation to improve search effectiveness, adding passwordless sign-in to our mobile app, and creating a waiting room for high-velocity items such as Pokémon cards. These waiting rooms reduce the traffic from bots, increase the opportunity for members to purchase high-demand items, while improving the speed and the stability of the site during peak traffic periods. Reflecting on fiscal year 2025 overall, our merchandising and operations team did a fantastic job delivering strong financial results while also investing in our employees and improving value and convenience for our members. Our merchants adjusted their plans to mitigate tariff impacts and source items that our members need while delivering the lowest price at the best value. Our operators quickly and efficiently adapted to pay raises in March '24, July '24, and, again, March '25, that brought our average hourly US wage to over $31 per hour. And most recently to the expansion of our operating hours. Their focus on efficiency and improving productivity allowed us to absorb these significant investments with minimal impact to our SG&A rate. As we look ahead to fiscal year 2026, despite the current macroeconomic uncertainty, we remain confident in our ability to grow market share by continuing to deliver exciting, high-quality items at the best value for our members. With that, I'll turn it back over to Gary to discuss the results for the quarter, and I'll jump back in during Q&A to fill some questions. Gary Millerchip: In today's press release, we reported operating results for the sixteen weeks ended August 31. As usual, we've published a slide deck under events and presentations on our investor website with supplemental information to support today's press release. Net income for the fourth quarter came in at $2.61 billion or $5.87 per diluted share, up 11% from $2.35 billion or $5.29 per diluted share in the fourth quarter last year. Last year's results included a non-recurring tax benefit of $63 million or $0.14 per diluted share. Excluding this tax item, net income and earnings per diluted share both grew 14%. Net sales for the fourth quarter were $84.43 billion, an increase of 8% from $78.18 billion in the fourth quarter last year. Comparable sales were 5.7% or 6.4% adjusted for gas deflation and FX. E-commerce comparable sales were 13.6%, or 13.5% adjusted for FX. Our segment breakout of comparable sales is disclosed in both our earnings release and the supplemental slide deck. In terms of Q4 comp sales metrics, FX positively impacted sales by approximately 0.2%, while gas price deflation negatively impacted sales by approximately 0.9%. Traffic or shopping frequency increased 3.7% worldwide. Our average transaction or ticket was up 1.9% worldwide. This includes the impacts from gas deflation and FX. Adjusted for those items, the ticket would have been up 2.6% worldwide. Moving down the income statement to membership fee income. We reported membership fee income of $1.72 billion, an increase of $212 million or 14% year over year. Adjusting for FX, the increase was 13.6%. Last September's US and Canada membership fee increase accounted for a little less than half of the membership fee income growth in the quarter. Excluding the membership fee increase and FX, membership income grew 7% year over year. This was driven by continued growth in our membership base and increased upgrades from Gold Star to Executive Membership. At Q4 end, we had 38.7 million paid executive memberships, up 9.3% versus last year. Executive members represented 47.7% of paid members, 74.2% of worldwide sales. As Ron mentioned earlier, we have recently seen a lift in upgrades in the US after we announced our executive member exclusive hours and other benefits. New member sign-ups continue to be strong, and we ended the fiscal year with 81 million total paid members, up 6.3% versus last year, and 145.2 million cardholders, up 6.1% year over year. In terms of renewal rates at Q4 end, our US and Canada renewal rate was 92.3%, and the worldwide rates came in at 89.8%. The decline in renewal rates was largely attributable to a higher number of online sign-ups entering the renewal rate. And this quarter included a large Groupon campaign in December 2023 entering the calculation. Overall, we view the growth in online sign-ups as a net positive. As they are helping to grow our overall membership base and membership revenue, and are also introducing younger members to Costco. Almost half of our new member sign-ups are now under the age of forty. As we previously shared, new online members renew at a slightly lower rate on average, and they have grown as a percentage of our sign-ups over recent years. We would therefore expect to continue to see a small decline in our renewal rate as this change in membership mix gets fully reflected in our renewal rate calculation. That being said, through a focus on auto renewal and targeted digital communications, our goal is to improve the renewal rate for this cohort of new members in the future. Turning to gross margin. Our reported rate in the fourth quarter was higher year over year by 13 basis points, coming in at 11.13% compared to 11% last year. Gross margin was up three basis points excluding gas deflation. Core was higher by 30 basis points, and higher by 22 basis points without gas deflation. In terms of core margins on their own sales, our core on core margins were higher by 29 basis points. This increase was broad-based with fresh, foods and sundries, and nonfoods all up year over year. Supply chain improvements and an increase in KS penetration benefited margins in all categories. While fresh further benefited from lower spoilage and labor efficiencies. Ancillary and other businesses' gross margin was lower by 11 basis points and 13 basis points without gas deflation. Gas was the main driver of the decrease. LIFO negatively impacted the gross margin rate by six basis points. We had a $43 million LIFO charge in Q4 this year, compared to an $8 million credit in Q4 last year. This charge was essentially in line with the estimate we provided last quarter as overall inflation remained consistent with Q3. On to SG&A. Our reported SG&A rate in the fourth quarter was higher or worse year over year by 17 basis points, coming in at 9.21% compared to last year's 9.04%. SG&A was higher or worse by nine basis points adjusted for gas deflation. The operations component of SG&A was higher or worse by 15 basis points and eight basis points without gas deflation. This increase was partly due to our investment in employee wages. As noted last quarter, the incremental year over year impact from this year's March employee agreement was mid-single-digit basis points. And the off-cycle wage increase in July 2024, which affected the year over year rate comparison for the first ten weeks of Q4, was mid to high single-digit basis points. An increase in general liability charges and reserves also negatively impacted SG&A this quarter by approximately five basis points. To partially offset these headwinds, our operators continue to do a great job leveraging strong top-line sales and improving labor productivity. Notably, following the change in warehouse hours on June 30, our operators were able to minimize any impact to the SG&A rate. Below the operating income line, interest expense was $46 million versus $49 million last year, and interest income was $169 million versus $138 million last year. FX and other was a $46 million gain in Q4 this year, versus an $18 million loss last year. In terms of income taxes, our Q4 tax rate was 25.6% compared to 24.4% last year. As a reminder, last year's tax rate included a non-benefit of $63 million related to a transfer pricing settlement and true-ups of tax reserves. Turning now to some key items of note in the quarter. Capital expenditure in Q4 was approximately $1.97 billion and for the full year was a little under $5.5 billion. We made some additional investments in Q4 to support accelerated warehouse growth, including the 35 planned openings in fiscal year 2026 that Ron mentioned earlier. Additionally, we increased our pace of spend on remodels to ensure that we continue to offer our members a best-in-class experience across all of our warehouses. Land purchases for future depot expansions and investments in our manufacturing facilities for expanded hot dog production and a new coffee roasting facility also contributed to the increased spend. A few fun sales facts as we wrap up our fiscal year. While our members love the treasure hunt items that they find in our warehouses and online, our everyday value items are also extremely important to them. Especially in times of economic uncertainty. There are no better examples of this than our hot dog combo, rotisserie chicken, and KS bath tissue. And in fiscal year 2025, we sold over 245 million hot dog combos, over 157 million rotisserie chickens, and enough bath tissue to reach the moon and back over 200 times. Now taking a look at core merchandising sales in the quarter. Fresh sales were up high single digits, led by double-digit growth in meat. We continue to see strong unit growth across the department due to the quality and value we offer on both premium and lower-cost proteins. Wagyu and grass-fed beef performed well in the quarter, and lower-cost proteins like poultry, pork, and ground beef also saw very strong unit growth. Nonfoods had comp sales in the high single digits. Our buyers continue to do an excellent job finding new and exciting items great values. Which are resonating well with members even as they remain very choice in their spending on discretionary items. In the quarter, gold and jewelry, gift cards, majors, toys, and men's apparel were all up double digits. While gold was less of a year over year tailwind than earlier in the year, as we have now started to lap sales from a year ago, it continues to perform well. Strength in gift cards was driven by Disney, Uber, and DoorDash. And majors were up high teens with consumer electronics leading the way. We also added a number of new high-quality national brand partnerships across a broad range of nonfood categories including Fabletics, True Classic, Aura, and La-Z-Boy. Food and sundries had mid to high single-digit comps. With cola and candy showing the strongest results. New Kirkland Signature offerings allow us to deliver greater value to members and our high-quality alternatives to some tariff-impacted goods. KS items typically offer members 15 to 20% value compared to national brand alternatives, with equal or better quality. In Q4, we launched over 30 new KS items, including grass-fed beef sticks, organic extra firm tofu, and various apparel items. In addition to our latest food court offering, the combo calzone. Within ancillary businesses, pharmacy, optical, and hearing aids all had strong quarters. And while gas volumes were positive low single digits in the quarter, gas comps were negative mid to high single digits due to a lower average price per gallon. Turning to inflation. Overall, inflation remained in the low to mid-single-digit range. Fresh, and food and sundries were relatively similar to last quarter, with higher inflation in key commodities like beef, coffee, sugar, and corn partially offset by lower inflation in produce, eggs, butter, and cocoa. In nonfoods, we saw inflation return for the second consecutive quarter, primarily driven by imported items. This inflation drove the $43 million LIFO charge for the quarter, which is calculated by comparing the net landed cost of inventory at the beginning of the fiscal year to the net landed cost of inventory on hand at the end of the fiscal year. We continue to work closely with our suppliers to find ways to mitigate the impact of tariffs, including moving the country of production where it makes sense, and consolidating our buying efforts globally to lower the cost of goods across all our markets. Additionally, we are changing item assortment where appropriate. This includes leaning into KS items, and increasing domestically sourced goods. Examples include an increased emphasis on items in health and beauty, live goods, tires, and mattresses. We believe our expertise in buying, and the flexibility afforded by our limited SKU count give us greater agility to navigate the current environment and minimize the impact of tariffs. Our ultimate goal is to increase our member values compared to the market. From a supply chain perspective, we haven't seen any major changes since last quarter. Overall, supply remains relatively stable. With no notable issues. Looking ahead to the holiday season, our merchants feel good about our inventory position, and while the product mix will look a little different from years past, we will have a strong assortment of high-quality items that bring meaningful value, seasonal themes, and exciting newness to our members. Turning now to digital. E-commerce site traffic was up 27%, and sales were led by gold and jewelry, housewares, apparel, tires, sporting goods, majors, small electrics, lawn and garden, and domestics. All of which grew double digits year over year. We continue to grow share in big and bulky items sold online, powered by our investments in Costco logistics. The combination of great values and the delivery experience that includes installation and haul away of old items resonating extremely well with members and resulted in a 13% increase in items delivered in the quarter. Q4 fiscal year 2025 marked the fifteenth consecutive quarter of improved member experience scores for Costco logistics deliveries. A key focus of our digital strategy is to deliver a seamless experience and more personalized and relevant communications to our members. This is a multiyear journey, and as we complete the foundation elements of our plan, we are able to launch new experiences for members. For example, during the fourth quarter, we launched more relevant messaging on the costco.com home page highlighting different offers depending on an individual's membership type and co-brand credit card status. Executive members are shown information about executive benefits, while Gold Star members are encouraged to upgrade their membership. And nonmembers are shown information about becoming members. Co-brand cardholders will be shown offers associated with ongoing spend campaigns, while noncardholders will be shown acquisition offers. These digital capabilities are also an enabler for retail media, as they allow us to target specific ads that deliver greater value for both members and suppliers, while always honoring the privacy choices of our members. As an example, we recently executed a series of targeted MVM amplification campaigns with Kimberly-Clark on third-party websites. This resulted in a strong return on ad spend of 14 to 1, drove a 22% increase in traffic to the product details pages, and a 45% increase in digital sales of the promoted items. As we continue to execute our digital and technology roadmap, we are excited about the opportunities this creates to further enhance the member experience, and drive top-line sales. Finally, in terms of upcoming releases, we will announce our September sales results for the five weeks ending Sunday, October 5, on Wednesday, October 8 after market close. Based on feedback received from investors, starting with our September sales release, we'll be changing our e-commerce comparable sales metric to now report digitally enabled comparable sales. This measure will incorporate all sales that originated online including our same-day delivery service fulfilled by Instacart, Uber Eats, DoorDash, Costco Travel, business center delivery, and a few other smaller direct-to-member businesses. We believe this change aligns our reporting more closely with how our retail peers disclose this metric. For fiscal year 2025, our digitally enabled sales totaled more than $27 billion. That concludes our prepared remarks. And we'll now open the line for questions. Operator: Thank you. And if you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your questions, simply press 1 a second time. If you're called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit yourself to one question. Again, it is 1 if you would like to join the queue. And our first question comes from the line of Christopher Horvers with JPMorgan. Your line is open. Christopher Horvers: Thanks. Good evening. So my question has to do with the extended member hours. To what extent do you think that your members are actually aware of these extended hours? Was the June 30 the soft launch, and you made a harder launch as you came into the fall? And how do you think about that 1% comp lift in terms of it becoming much larger? Thanks very much. Ron Vachris: Well, I think the communication we have done a good job informing our members both with signing at the warehouse along with emails to our executive members. So we saw we really based that success based on the traffic we saw when we initially began these additional hours. 1% is after we've analyzed the business compared to the prior months and to see how much we've picked up both on the additional Saturday night hour along with the early morning hours as well. So we feel that the word is out there. We feel that we continue to communicate the executive member benefits as we continue to add to that suite of services that they get. And that is inclusive of the hours that they get as well. Gary Millerchip: Chris, I think as well, just to completely agree with Ron's comments, it's one of those things that obviously it's a little bit difficult to predict exactly how the change flows through in terms of impact of member shopping behavior. To Ron's point, we did a lot of communication. When we made changes before around some of our warehouses had longer hours before, it probably took a little bit longer than the first month or so for the full impact to show through in terms of member shopping behavior. But with that being said, I think because this was a national launch, we did get more visibility and more social media exposure to it as well. So I think we've been pleased with the response we've seen, but there's certainly probably more time to unfold to see exactly how it plays out. Christopher Horvers: Thanks very much. Operator: And our next question comes from the line of Michael Lasser with UBS. Your line is open. Michael Lasser: Good evening. Thank you so much for taking my question. You mentioned that you would expect your renewal rate to continue to fall as some of the digital sign-ups accrete out of the base. How far do you expect to see the membership rate decline if we look back in the pre-COVID 2019, Costco regularly had a renewal rate worldwide renewal rate in the mid to high 80% range, is it realistic for it to go back to that? And if it did, what actions would Costco take in order to stabilize or improve that? And how might this all impact the financial performance of the company? Thank you very much. Gary Millerchip: Yeah. Thanks, Michael. Appreciate the question. You know, I think we take a little bit of a broader step back on the membership metrics because to your point, we certainly look at the renewal rate and it's an important measure for us and talk a little bit more about how we view the opportunity to improve that metric over time as well. But I do think, you know, when we look at our overall metrics for membership, we were pleased with how the quarter played out. I think you heard us say in the prepared remarks that we're seeing a continued increase in sign-ups, and that's also reflecting a growing number of younger members flowing into the base as well. We saw an acceleration in upgrades, particularly towards the end of the quarter after we announced the extended hours and the Instacash $10 benefit per month if you spend $150 on the basket. And we also saw overall household growth grow by greater than 6% and executive members up by over 9% because of the acceleration in upgrades. And then on membership fee income, actually, membership fee income was a little bit ahead of where we'd have budgeted at the start of the year. So looking at sort of the overall of the membership fee increase and the way that members were behaving overall, we're actually ahead of where we'd have budgeted based on everything we knew at that point. I think it's important just to take that bigger picture step back because overall, we think the membership base, the renewal rate is very strong overall, and the results that we're seeing in growth in our overall membership engagement is also very strong. Now with all that being said, as I mentioned a moment ago, we do view the membership renewal rate as an important measure and we've analyzed it very closely as you might imagine because it's something that we take pride in the overall level of membership renewal that we see. When we analyze it, it really is essentially the vast majority of it is attributable to this higher number of online sign-ups. And if you look at what's happened really since COVID, we've seen in the last three or four years, a significant growth in the number of members and the proportion of members that are signing up online. And that's bringing in newer members. It's helping to grow everything I just mentioned around membership fee income and an overall membership base. But they do renew at a slightly lower rate. And as you think about how our membership renewal rate works and how it lags the effect of some of those changes, we're really sort of flowing through the impact of that into a sort of changing mix, if you like, of the overall base. So as I mentioned in my prepared comments, we do think we'll see a few more quarters of a similar type of impact that we saw in this quarter with the 40 basis point decline. But that being said, as we learn more about how to engage with those newer digital members, we're really investing in the to improve the auto renewal with that member group, increase the amount of digital communication and more relevant communication for those members who are joining Costco starting online rather than starting in the warehouse. So we have to think about how we can help really get them to experience more of the great value that we offer in a broader relationship. So we think there's opportunities to improve that measure but overall, we like where we are with the membership metric in total because of the overall growth it's driving in our membership income. Operator: And our next question comes from the line of Chuck Grom with Gordon Haskett. Your line is open. Chuck Grom: Good afternoon. Can we dive into your core on core margins a little bit, up 29 basis points year over year, how that spans across categories? And then more broadly, curious any notable observations on price increases you've taken recently? And I guess what unit velocity you're observing in those product categories? And then just last question, just on the holiday you called out how the product mix might be different than your past. Can we just double click on that comment? I guess, what might be different in terms of particularly in the general merchandise part of the business? Thanks. Gary Millerchip: Yeah. Sure. Thanks for the question, Chuck. I'll cover the first couple of parts around margin and tariffs and then Ron will talk a little bit more about assortment for the holidays. On the gross margin rate, so, yeah, I talked a little bit about it in the prepared comments, but overall, you know, I think our focus was on the gross margin rate overall grew by three basis points excluding gas. And when we think about the job our buyers did and merchants did to navigate tariffs, and make sure we're still delivering tremendous value for our members, then we feel that was a really good outcome, and we were pleased with the way in which the team was able to manage staying true to who we are as a company and delivering value while also being able to deliver an overall slight improvement in the gross margin rate. The core on core margin was definitely the strength area. That was as I mentioned earlier, fairly well widespread across all three of our main categories. So fresh food and sundry and nonfoods all saw a slight improvement in core on core margin. It was really in our merchants and operators focusing on how can we offset some of the impacts that we're seeing in the business through tariffs. So a lot of the improvement came from supply chain efficiency with improvements by the operators in our depots and also gas prices helping with there as well. We also saw some mixed benefits with Kirkland Signature penetration improving. And then similar to last quarter, in fresh in particular, the teams did a great job of reducing spoilage or shrink as some retailers call it and improving our labor efficiency in the fresh departments. So those were all tailwinds in the quarter that helped us offset some of the headwinds that we saw in gas margins in particular during the quarter. Also the impact that we saw on the LIFO charge with the higher inflation in the back half of the year. I think, you know, in terms of about it for the future, I would say, really, we tend not to focus on individual quarters because our goal obviously is to manage the business for the long term. I should say, and manage the business holistically. And so I think it's probably more relevant to look at the performance over a number of years and how we've been able to continue to grow the business and seen a slight improvement in gross margin. And really, we look at the quarter, and as I mentioned earlier, how we're able to balance the impact of tariffs and supporting our members while also maintaining a steady gross margin rate as well. I'll maybe let Ron talk a little bit about the assortment and what we're seeing there with some of the changes. Ron Vachris: Thank you, Gary. And exactly. You know, it's not gonna be a marked change than what you'll see in a Costco. Our buyers, when we were booking for this holiday season, really had to evaluate all the discretionary items, the toys and the trim and the decorations and those kinds of things, and made decisions based on the necessities and what they felt they needed to be in Christmas trees, but we skinned that. We really thinned down that whole category. And we thinned down a lot of the additional seasonal areas as well. What that provided us was the opportunity to bring in categories that we don't traditionally carry during that time of year. And so we're seeing some of that already when we're bringing in backyard sheds in the fall, which are doing very, very well for us. We never had the ability to do that due to space constraints. We're bringing in saunas for your garage or your home who are also performing very well. High ticket goods that are very relevant to the time of year but not reflective of the traditional Costco set you'll see. You'll see some more furniture in the warehouses that we normally didn't do any furniture that time of year. But it says great opportunities for top-line sales. So I feel really good about the way the buyers have pivoted on the discretionary items and said, okay. How can we still be relevant in the time of year with some new categories that we had not done before due to space limitations. So I still see it as a very exciting holiday season. With some new goods that we haven't carried in prior years. Chuck Grom: Great. Thank you. Operator: And our next question comes from the line of Jiang Ma with Bernstein. Your line is open. Jiang Ma: Great. Thank you. I wanted to on the membership fee side where you I think Gary mentioned it's 7% growth excluding the price increase and the FX. How sustainable do you think that trend is going to be especially in the US and Canada, where you're opening some of the fill-in stores? In markets where the penetration may already be fairly high. So is there a risk of the membership fee income growth slowing down from here? Thank you. Gary Millerchip: Yeah. Thanks for the question. You know, we still remain very excited about the opportunities for continued growth in the membership base. We're obviously opening new warehouses every year, and Ron talked about that earlier in terms of the opportunity that creates to create a broader coverage of the geographies that we're in and driving new membership engagement. You know, the positive and opportunity side of the comments we made earlier about membership renewal rate with that younger generation of members now also experiencing Costco, we think creates continued opportunity to drive new member engagement in a broader range of the potential member base than we've historically seen prior to COVID. If we look at the majority of our warehouses and some of the warehouses that have been opened in recent years, particularly in some of our international markets, generally speaking, we see continued growth in the number of members in those locations as those businesses and those warehouses mature over time as well. And, of course, we're adding new member benefits all the time with the extended opening hours that Ron mentioned in the earlier comments and the Instacart benefits and the 5% cash rewards on the credit card that we mentioned a couple of quarters ago. So you know, we generally don't talk about sort of future projections, but I think we feel positive about the opportunity to continue to grow the membership base. Operator: Thank you very much. And our next question comes from the line of Scott Ciccarelli with Truist. Your line is open. Scott Ciccarelli: Hi. Thank you. This is Sherman on for Scott. Kind of a piggyback on the memberships question. Was it growing 6% in the quarter is it possible that we're seeing the delayed benefits of people affected by the membership sharing like crackdowns and can we see an acceleration from here? And outside of the existing memberships, are you seeing the new executive membership benefits driving a more favorable mix for new and incoming members? Gary Millerchip: Yeah. I think, you know, to the first part of the question, there's nothing we would see in the data that would say there's anything sort of happening relative to the change you referred to. And, again, that was something that we found certainly during COVID. There was some change in behavior, and as we introduced the communication around the entry to the warehouse that helped make sure that our members were able to renew and update their memberships in an appropriate way, and that's been something that's really been flowing through now for some considerable time. So I wouldn't say there's anything that we'd point to in the volume of member sign-ups that we're seeing that we would believe is related to that particular activity that you mentioned. You know, I think we have been really encouraged and pleased with the member reaction to the continued value that we're adding to the membership, the extended opening hours, the Instacart benefits that we referenced earlier. And certainly, with the growth that we've seen in the executive membership profile. Typically, what we see over time is those members are more engaged and they shop more frequently, and our goal is always to demonstrate more value for the member and encourage them to keep upgrading and getting more value from the membership from the Costco membership. So in that regard, I think we're encouraged by what we're seeing, and it was part of the goal that we had when we introduced those benefits. Scott Ciccarelli: Alright. Thank you so much. That's very helpful. Operator: And our next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open. Simeon Gutman: Hey, Ron. Hey, Gary. My question is on e-commerce and specifically grocery. So there was this announcement from Amazon in the quarter around increased fulfillment capabilities. Can you talk about if you've seen a spike in your Instacart driven traffic since then? I know you've added some benefits, so maybe it's hard to parse it out. And then can I ask if Costco has what you think is an optimal capability to meet what is increasing online grocery demand? Thanks. Ron Vachris: Yes. I mean, like you said, it's very tough to tell. The Instacart and Uber businesses continue to really do a very good business for us. It continues to grow at a good rate. And so we have seen the additional executive membership benefit be accretive to that. It's definitely helped it out quite a bit. We're very aware of new competition in this space, and we continue to watch that very closely. You know, it comes down to the Costco items that are being delivered as well too, which is a big driver from the consumer out there is that they want the goods that we have at their home. It may be a different way to deliver to them as opposed to coming into the warehouse, but there still is a desire for the fresh foods, which is a big driver for us in the food and sundry business that we have out there. So, very aware of it. We're very happy with the growth of the business there. And we are seeing some strong growth at the back half of the year. And it's hard to tell exactly what that's coming from. Gary Millerchip: And, Simeon, you may have heard me mention at the end of the prepared remarks that we are gonna include now those sales in our definition of e-commerce enabled digitally enabled sales. So going forward from next month's monthly sales, you'll see those numbers called out, but those numbers will be included within our overall growth in e-commerce and digital. Simeon Gutman: Yep. Thank you. Operator: And our next question comes from the line of Peter Benedict with Baird. Your line is open. Peter Benedict: Hey, guys. Thanks for taking the question. It comes on the unit growth the 30 for this year, 20 in the US. Just curious, the sustainability of that pace of growth. How long do you think you can kind of sustain that level of growth here? And where do you think you can get the international growth, unit growth to over the next few years? And kind of related to that, maybe a sense for what the CapEx plan is for next year. I apologize if we missed that. But curious kind of what the spend plan is for next year in terms of total CapEx. Thank you. Ron Vachris: As far as the future growth, I'll touch on that part. Yes, we do see some runway. We made an investment in our real estate group to make sure that we're looking at all the opportunities as our geographical footprint continues to broaden around the world. We want to make sure that we are indeed looking at these opportunities and, you know, for a few reasons, we feel very good. The right opportunities have come both in existing markets to increase capacity and where we feel we can better serve those markets, and we continue to still find in North America and internationally opportunities in new markets where we're doing very well. So we do see some runway as far as this 30 warehouses opening a year. We don't strive for a number. I mean, we're not gonna make any bad decisions on opening warehouses to get to any set number. So it could ebb and flow. And in some of the international countries, it takes a little bit longer. So you'll see some swings back and forth year to year when things come to fruition. Some projects could take us three years internationally where we have things that can turn much quicker in North America. So, overall, I think we do feel some good runway is out in front of us as far as growth goes. And we have people ready to expand the company, and our operators have done a very good job dealing with the cannibalization we've dealt with in the existing markets we're in. Gary Millerchip: And then maybe to answer the question on capital expenditure, I'll just maybe take a step back on that as well and provide a bit more context on what we saw in fiscal year 2025 and how we think about '26 as well for you. So I think, generally, when you look back at capital expenditure, over the last few years, we've seen it grow when you look at the compounded growth rate over the years. It's generally growing in line with sales, and we did see in 2025 when you look at the total capital expenditure for the year, we grew capital expenditure at a faster pace than sales for the first time actually for a while for us. And that was really for the areas that we mentioned earlier in the prepared remarks around the number of warehouses that we're looking to open in 2026, the remodel work that we're doing, the preparing the depots for the expansion in warehouse sales and also e-commerce and also some manufacturing opportunities to improve the value in Kirkland Signature. And I would say as we think about future growth in 2026, those areas we think are opportunities for us looking forward as well. We've already talked about the warehouse growth, but we do think with remodels, the opportunity to keep expanding our capacity in our warehouses, especially as the average warehouse now in the US some of our more mature markets is around twenty years old. There's an opportunity for us to refresh and to support continued best-in-class service in those warehouses. We think there's continued opportunities in manufacturing to support further growth in Kirkland Signature. We didn't really talk about it in the prepared comments, but technology is also an opportunity for us to be able to deliver more better member experiences and deliver growth in e-commerce and member engagement. So overall, we think those will continue to be good opportunities for growth. We feel confident the returns on the investments that we'll make will be very strong as well. So we'd expect 2026 to have capital expenditure that would grow over 2025 and probably a little bit higher than sales again for the same reasons in '26 or '25. We typically actually give the CapEx number, I think, in our Q1 release. So we'll give you a specific number in Q1 as we do every year, but I would expect it to be a growth again for the reasons I just mentioned. Operator: And our next question comes from the line of Greg Melich with Evercore. Your line is open. Greg Melich: Hi. Thanks. A couple of questions. I do want to circle back on inflation. Gary, I think you mentioned it was low single digits, maybe 2%-ish last quarter. And now it's low to mid singles. Can you just describe, is it nonfood driving all that acceleration and sort of frame it magnitude-wise? Gary Millerchip: Sure. Yeah. Thanks for the question. Yeah. I think last quarter, actually, we said overall low to mid single digits, and we really kind of said the same. This quarter, the change was really in Q3. Q4 has generally been pretty consistent with Q3. And as we look at it and break it down by category, fresh and food and sundries are relatively consistent quarter over quarter in that sort of low to mid single-digit range. There are lots of sort of puts and takes in there. When you look at individual departments, we certainly see meat and deli largely because of meat and candy would be more inflationary. Whereas departments like produce and liquor would be either lower inflation or decelerating inflation or even deflation in certain items. And then on the commodities front, we see acceleration in inflation currently in commodities like beef and coffee, sugar, and corn. But then also that's partially offset by seeing some deceleration in produce in particular in berries and avocados. And then eggs and butter and cocoa are also slower inflation too. So there's lots of puts and takes in those food and sundries and fresh departments. The change in Q3 really was in nonfoods. But, again, I would say it's really low single-digit inflation overall within nonfoods, but the real change there was it had been deflationary for twelve months or so. So that was kind of what drove the change in Q3 and the reason that we updated our LIFO estimates because we saw a little we've seen continued inflation in food and fresh, but that was being offset by nonfoods. And now with some inflation in nonfoods, that's kind of changed the overall picture, but it's still in that low to mid single-digit overall, I would say. Greg Melich: Got it. And then my follow-up is we've just seen a lot of the credit card companies add perks and raise fees on their card. I'm just sort of curious what trends you're seeing there in terms of penetration any thought of ways to maybe enhance the member value on that front? Gary Millerchip: Yeah. Well, for our credit card, it's an incredibly successful program for us and we deliver a lot of incremental value to our members through the credit card with the rewards that we offer and some of the additional benefits around travel as well. We did recently make some changes to our credit card recognizing that we felt there was an opportunity to accelerate the value and also to continue to grow that program. And so we added an incremental benefit where the member can now receive 5% rewards on gas. We also updated and modernized the card itself as well. And we've been pleased so far with the response from members and the continued growth in that program. Greg Melich: That's great. Thanks, and good luck. Gary Millerchip: Thank you. Operator: And our next question comes from the line of Edward Kelly with Wells Fargo. Your line is open. Edward Kelly: Yes. Hi, everyone. Good afternoon. I wanted to follow-up on tariffs and the outlook for the gross margin around that. I'm curious as to how you're thinking about the impact of tariffs over the next few quarters because it seems like there are retailers that are going to be taking more price. Is that something that you think you're gonna be doing as well? How you're thinking about the elasticity associated with that. And I'm curious, in terms of your, you know, competitive positioning, do you plan to be offensive around this? Is it something that could have some incremental margin pressure in the coming quarters? Just any color around that would be great. Thank you. Gary Millerchip: Thanks for the question, Ed. I think overall, first thing to say, of course, is that the environment with tariffs does still remain fluid. There could still be changes that we have to address as, you know, as the picture unfolds. But the tariffs that we've seen and we're sort of managing, if you like, as things stand today, our teams, I think, have done a fantastic job in navigating what has been a very fluid and changing environment. And I think the benefit of us having buyers who have really been in the business for many years and understand the business well. Are managing with the limited SKU count that we have a low number of items per buyer. So they really understand the individual items that we're buying and the way those products are costed and constructed. And we can also, as Ron mentioned earlier, we have the flexibility to change items where we believe if we don't see that the value would be there with the impact of tariffs that we can move our assortment to items that really will deliver that value that our members have come to expect. I think we've also had the benefit of being a global retailer. So with 30% of our business being international, it gives us the opportunity to work with our suppliers in offsetting some of these things by buying globally and also still supporting 30% of our, you know, of our warehouses that are international still, you know, are less impacted by some of those issues that we're working through. We've taken really a multipronged approach to it. There isn't a single answer to how we manage tariffs. You know, part of it is that we have absorbed costs ourselves and ourselves to offset those costs to protect the member by improving efficiency and lowering waste and spoilage and those kinds of things. We've also worked with suppliers to find offsets and efficiencies, and that includes buying more globally. And there are examples there where we've been able to save 30 to 40% on the cost of items by consolidating to a smaller number of buyers and bringing the cost down because of the volume that we can consolidate there. We've also looked at sourcing from different countries and local production, and you may recall last quarter we talked about with KS laundry detergent, we were able to save 40% in Asia by moving production for the items that we're producing for those markets to be in the region. And we've rotated items as Ron referred to earlier. So I think from what we know today, we feel like, you know, there wasn't like, a cliff for us. There was the impact was managed gradually by teams doing all the things that we've mentioned, and we largely feel like we've worked through the strategies that we needed to mitigate what we see in front of us today. So we feel like we know the teams have done a very good job to position us to make sure we have the right assortment at the right value and deliver even greater value for our members. The sort of caveat of everything I just said, of course, is that there may be changes still to come that we have to manage, and that's something that we'll have to be agile if that's the case. Ron Vachris: But I would add to what Gary said and I agree with everything he said. We're taking a very offensive approach to this. We're gonna do everything we can to mitigate tariff impacts. And the last effect would be we pass on price. And if we do that, we're gonna be the last one to go up and always the first one to go down on any opportunities we have out there. So it is all hands on deck, and we address this like we would any commodity increase. We use the different tools we have to try and mitigate any price increase for any reason. Thank you. Operator: And our next question comes from the line of Kelly Bania with BMO Capital Markets. Your line is open. Kelly Bania: Hi, Ron and Gary. Thanks for taking our questions. Just wanted to ask about membership growth and total membership households that continue to increase in that six to 7% range year over year. Just two questions about that. One, is the way to think about the components of that more like a low single-digit figure in the US and high single-digit internationally? And then as you think about the long-term US potential for household membership, what do you think or estimate that Costco has today in terms of percentage of US households that are members? And how high do you think you can take that over time? Gary Millerchip: Yeah. Thanks, Kelly. You know, I think it maybe comes back to a couple of the comments that I made earlier. We look at the growth that we've seen and certainly it's a good reflection I think of the focus of all of our team here to say how do we start every day thinking of how can we deliver more value for our members and how do we show that the membership decision is the best decision that our members have made because of the value that they get from the membership with Costco. And really our focus tends to be a little bit less on the way you phrase the question and more on how do we make sure that's always at the center of everything we do and continues to create new opportunities to grow our membership base. And I think because of the focus there and some of the things that we talked about on the call about how the team is navigating tariffs to make sure we stay true to that delivering the best value for the member. As we're adding more membership benefits like the extended hours as we continue to open new warehouses and start to reach new member geographies. But also as the maturity of those warehouses, you know, we as you know, we don't advertise as a company. And so we believe that word-of-mouth and our existing members extolling the value they see from their membership is how we grow our base. So an organic growth to our business because we're really focusing on ensuring how we deliver that continued value. So we still think there's opportunity to continue to grow that base. It would certainly be true that there's an opportunity in international markets to and we typically when we open in international markets, we see a larger number of membership new in those markets because there's less awareness of Costco, and typically, there's less sort of surrounding warehouses that could be impacted. On the other side of that, what we tend to see with warehouses in the US where we open and we're filling in markets we see tremendously quick growth in sales in those areas because it and not only in the new warehouses, but we replace the sales in the affected warehouses because we're freeing up the capacity for those members to shop more frequently in the warehouse as well. Operator: And our next question comes from the line of Rupesh Parikh with Oppenheimer. Your line is open. Rupesh Parikh: Good afternoon. Thanks for taking my question. So a housekeeping question to start. So just on the incremental hours P&L impact sounds like it's going well. Good sales lift and you're seeing good upgrades to executive members. As you look towards this fiscal year, do you expect it to be a net benefit, you know, the benefits versus some of the expenses with the increase in employee hours? Gary Millerchip: Yeah. I think it's fair to say that, Rupesh. I mean, just kind of re-summarizing what we talked about earlier. As Ron mentioned, we've seen a positive impact in terms of overall sales in the US warehouses from the extended hours and our operators have done a great job managing the impact from an SG&A perspective. So have the typical sort of headwinds from the employee agreement that we need to manage and leverage our sales, but we wouldn't be calling out any sort of major headwind from the SG&A perspective based on what a great job our operators have done to manage the impact. Rupesh Parikh: Great. And then maybe just my follow-up question. I know, Gary, on alternative revenue streams, you guys have talked about successful media campaigns earlier this year. So just curious on any new efforts in on the alternative revenue stream as we look towards this upcoming year? Gary Millerchip: Yeah. It's still very much in the early stages. You know, when we talk about alternative revenue for us, I think that it's broader than media. Sure. Question earlier that was asked around financial services and credit card, we think that's continued strength in our business and an opportunity to continue to grow. We launched the buy now, pay later product with Affirm earlier in the year, which is doing well. We have a tremendously successful travel business that delivers significant value for members, and has strong growth in our overall model and delivering value for member and top-line growth in the company as well. And media then is another component of that. And I think, you know, our journey with media is that we're on a two-pronged journey, I would say. One is to build out the capabilities so that we can deliver more personalized relevant messaging to our members, and that includes a unified single data platform where we stitch all of our information and data together and then build out the tools that allow us to deliver more relevant messaging at scale to our members. And as we're doing that, which is also really important to media, we're really kind of proving out the concept with our suppliers of the value of media within Costco, and that's why we shared the example as we're sort of wanna make sure that we're demonstrating how we can create future value as we build those capabilities, and that'll be a continuation over the next twelve months or so, and we'll certainly share more updates as we continue to make progress on that journey. Rupesh Parikh: Great. Thank you. Best of luck. Gary Millerchip: Thanks, Rupesh. Operator: And our next question comes from the line of John Heinbockel with Guggenheim. Your line is open. John Heinbockel: Hey, guys. Two strategic questions. For either one of you. You know, maybe, Ron, when you think about the B2B opportunity, how do you think about that, the size of that whether it's through business centers or online? I know when you do relos, some of those become business centers. You know, we're likely to see an acceleration in business centers. And then secondly, when you think about markets where you've it's just taken longer to get real estate, is there an opportunity to use the balance sheet to acquire chunks of real estate right, that you can then kind of develop over a period of time and maybe that speeds the process up a little bit? Ron Vachris: On the first question about business centers, yes. There's some tremendous capacity, especially we have now six in Canada and we're going to continuously really grow at a much quicker rate in Canada in the business centers. The US, we see great opportunities both in new markets as well as when we relocate a building to a larger facility. The old warehouses serve a great purpose for us as far as becoming a business center because they have the right size and parking is not an issue at that level because we deliver about 60% of the goods from our trucks out there as well. So we see a good runway for us both US and Canada and potential and international markets for the business centers as well. So that is it. As far as, you know, looking at the additional property that we need to, we did we will take that into account if we have got the get into the right market and then how we can create value for any outparcels or additional properties that are nearby us. That could open up opportunities for us to expand in the right place. So we are open to those opportunities as well. Gary Millerchip: Thank you. Operator: And our next question comes from the line of Steven Zaccone with Citi. Your line is open. Steven Zaccone: Great. Good evening. Thanks very much for taking my question. Couple of follow-ups. First follow-up is you've talked about cannibalization to comps for the last couple of months. Do you expect that to be a headwind throughout 2026? And then just on some of the questions around the inflation outlook, on the nonfood side, based on what you're seeing in the business, do you expect nonfoods inflation kind of stay in this range for the next couple of quarters? Basically trying to understand, are we at some of the peak pressure or could it get a little bit higher from here? Thanks. Gary Millerchip: Sure. Yeah. Thanks for the questions. On cannibalization, it's really a reflection of our continued investment in filling warehouses to really make sure that we're continuing to grow our overall sales in those markets and relieve some of the pressure in some of our busier warehouses. And so I wouldn't see any reason why that would change dramatically in the future because that's working for us well in terms of continuing to grow our overall sales and grow our overall profitability in the markets in which we operate. And then from an inflation point of view, you know, I think as I mentioned earlier, we think that from everything we see today, on tariffs, we've been proactive in managing that. And so from everything that we're dealing with today, I think what you're hearing from us on inflation is how we see it at the moment. But the dilemma, as I mentioned earlier, is we can't really predict what might happen in the future around future tariffs or future pricing by other players in the market if you like. And so or events. So that's the it's obviously hard for us to predict. But I wouldn't say that we're seeing anything in our plans that would cause that to change significantly. Steven Zaccone: Okay. Understood. Thanks very much. Operator: And our final question comes from the line of Oliver Chen with TD Cowen. Your line is open. Oliver Chen: Hi, Gary and Ron. On the digital roadmap, there's been a lot of customer-centric innovation you've done. What's low-hanging fruit ahead that you're most excited about? And then on Kirkland Signature, which is iconic, what's next? Or is it just tweaks, or is it the similar strategy? Some of the language in this call, leaning into KS, that's probably a product of the environment, but was there anything different about how you'll continue to amplify that and maintain, you know, how great it is? Thanks a lot. Gary Millerchip: Yeah. Thanks, Oliver. On the first part of your question, you know, you're right, we spent a lot of time as a team focusing on how can we continue to invest in improving the digital experience and making it more convenient for members to shop and we've had some good progress in those areas. I think we continue to see opportunities to improve the member experience through the app and through the website and particularly in investing in capabilities that deliver more targeted and relevant personal messaging for members. That's definitely one of the highest priorities we're focused on, and you've heard us give a couple of examples of things that we're starting to do there. But we should certainly expect to see more of those opportunities going forward to drive visits into the warehouse or items in the basket or more engagement online with our members for e-commerce sales. And then Kirkland Signature, I think just briefly on that, you know, overall, our view on Kirkland Signature is that it's all about delivering quality, value, and innovation for members. And if we see examples where there are gaps for our members where we think there's items that we can deliver, that value and quality that doesn't exist today, then that's what we're doing and how we're innovating and delivering new products for our members. We don't have a specific target for Kirkland Signature. It really is about when does that value and that opportunity there with the member. And, of course, we love working with national brands as well to develop and grow those partnerships. But Kirkland Signature also provides a sort of healthy tension there to make sure that value and quality is there for our members. And so we'll continue to innovate and grow those items we think we can deliver that value for the member, and it's certainly over the last few years has continued to grow in penetration because of the great work our teams have done in building out those items and delivering that value for the member. Oliver Chen: Thanks a lot. Best regards. Gary Millerchip: Maybe you should go to twenty-four hours, by the way. Ron Vachris: We'll take that into consideration. Operator: And ladies and gentlemen, that concludes our question and answer session and today's call. We thank you for your participation, and you may now disconnect.
Operator: Good day, everyone, and welcome to Concentrix Third Quarter 2025 Financial Results Conference Call. At this time, participants are in a listen-only mode. After the presentation, there will be a question and answer session. You will then hear a message advising your hand is raised. To withdraw your questions, simply press 11 again. Please note that this conference is being recorded. Now it's my pleasure to turn the call over to the Vice President of Investor Relations, Sara Buda. Please go ahead. Sara Buda: Great. Thank you, operator, and good evening. Welcome to the Concentrix Third Quarter 2025 Earnings Call. This call is the property of Concentrix and may not be recorded or rebroadcast without the written permission of Concentrix. This call contains forward-looking statements that address our expected future performance and that, by their nature, address matters that are uncertain. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements as a result of new information or future expectations, events, or developments. Please refer to today's earnings release and our most recent filings with the SEC for additional information regarding uncertainties that could affect our future financial results. This includes the risk factors provided in our annual report on Form 10-K and our other public filings with the SEC. Also during the call, we will discuss non-GAAP financial measures, including adjusted free cash flow, non-GAAP operating income, non-GAAP operating margin, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, non-GAAP EPS, and constant currency revenue growth. A reconciliation of these non-GAAP measures is available in the news release and on the company's Investor Relations website under Financials. With me on the call today are Chris Caldwell, our President, and Andre Valentine, our Chief Financial Officer. Chris will provide a summary of our operating performance and growth, and Andre will cover our financial results and business outlook. Then we'll open the call up for your questions. And so now I'll turn the call over to Chris. Christopher A. Caldwell: Thank you very much, Sara. Hello, everyone, and thank you for joining us today for our third quarter 2025 earnings call. In Q3, we exceeded our revenue guidance once again with solid year-on-year growth across the board. We are gaining share and securing new wins by combining AI, CX, and IT services into a powerful, tightly integrated solution. Our adjacent offerings continue to scale and complement our traditional business. And we believe our IX suite is giving us clear competitive differentiation in front of clients. Overall, I am pleased with our strong market position and our revenue momentum. Turning to profit, margins were below plan in the quarter, which Andre will provide more details in his comments. It is important to understand that we have line of sight to modest sequential quarterly margin improvement over the next few quarters even as we continue to lean into growth and believe we can drive further margin expansion from there. Now let's dive into the details of our demand environment and how we see our business evolving. The positive revenue momentum we've seen this year is a direct reflection of our commitment to establish Concentrix at the forefront of change happening in our industry. We believe we are becoming a leader in solutions that combine practical AI and human intelligence where applicable, at global scale. As a result, we are well-positioned to be a trusted strategic partner clients rely on to support their business in these times of change. In fact, almost 40% of our new wins this year include our AI technology platforms as part of the solution. This percentage only increases as we include our partner's technology. As a reminder, our IX AI technology suite addresses clients' needs for both fully automation of tasks that can be handled completely autonomously and for partial automation using AI and AgenTx to supercharge human advisers to make them more effective and efficient. Within a year of commercial availability, our IX suite of AI solutions is ramping and on track to be accretive as we exit this year. This achievement in its own right sets us apart from many of our pure AI players and from traditional CX players in the space. Clients recognize that they need partners to help them convert AI promises into reality. A recent study from MIT shows that only 33% of AI projects built internally are succeeding on plan. Conversely, the same study showed that externally sourced AI projects with strategic partners succeeded about 67% of the time, more than double the success rate. Our rate of success with our deployments is even higher. With early data showing that the vast majority of our use cases result in a documented positive outcome for the client through improved revenue, better CSAT, or process efficiency. This is reflective of our ability to deliver pragmatic AI solutions that are aligned with what clients need and what they value most. The strategic role of partners that can combine AI with CX and IT services has support of our own blind study of 450 global enterprises that stated by an overwhelming majority, clients plan to increase their outsourcing spend as they deploy AI. We absolutely are focused on capturing as much of this growth as we can, and I'm confident that we are in a strong position to make that happen. In summary, our strategy is paying off despite all the market speculation about the negative impacts of AI on our business, we have shown that AI is indeed a positive tailwind. We are growing our major accounts and securing new wins with our integrated offer. With a strong competitive position, we are leaning into growth delivering solutions that align with our clients' business needs, gaining share, and scaling our business. This gives us the foundation to support our progression towards a higher growth rate in coming years while generating strong cash flow. Lastly, I would like to thank our game changers across more than 70 countries for their commitment to client success and welcome our new team members from SA SAi Digital who joined us in September. I'm optimistic about our strategy as we capitalize on the opportunities we have in front of us today. Now let me turn it over to Andre for details of the quarter and our outlook. Andre S. Valentine: Thank you, Chris, and hello, everyone. I'll review the details of the third quarter and then discuss our outlook for the fourth quarter. We are in a positive position for revenue growth as we enter the final months of 2025. As we focus on improving margins, we are capturing the growth opportunities in the current environment, and our cash flow continues to increase. Importantly, we are winning the right kind of revenue that reflects the value of our differentiated offerings. Now let me get into some details on the quarter. We delivered revenue of approximately $2.48 billion, an increase of 2.6% year-on-year on a constant currency basis and 4% year-on-year as reported. We delivered revenue above our guidance range as we have done for the past several quarters. Looking at growth by vertical, our growth in the quarter was led by growth in banking, financial services, and insurance. Other verticals were solid as well, driven by continued demand for our integrated offerings and ongoing growth in our adjacent solutions. Specific constant currency revenue growth by vertical was as follows. Revenue from banking and financial services and insurance clients grew 8% year-on-year. Media and communications clients grew 7% year-on-year, largely driven by clients outside of the US and global entertainment/media companies. Revenue from retail, travel, and e-commerce clients grew 3%, largely driven by travel, which continues to be a strong vertical for us. And our technology and consumer electronics vertical and our healthcare vertical were both essentially flat. Turning to profitability, our non-GAAP operating income was $105 million, which was below the guidance range we provided on our last call. This was largely due to two factors. First, excess capacity. For context, when we set our guide for the quarter, we expected a faster return to stability with a handful of clients impacted by tariffs in the second quarter. And expected consolidation of additional client volume to occur more quickly to optimize the resources we were holding. We are doing the right thing for our clients long term, in quarter volumes didn't materialize, how the clients or we envisioned? This excess capacity accounted for the majority of the shortfall. A distant second factor for the margin variance was some decisions to accelerate transformation opportunities to help clients realize technology benefits more quickly. We are confident that we can deliver modest sequential quarter profitability improvement in the next few quarters as we resolve the capacity issue as committed volume migrates to us, or we remove the excess capacity proactively. On a year-on-year basis, our non-GAAP operating income was impacted by the factors I just mentioned as well as $8 million in additional investments in cybersecurity for generative AI, and a $4 million negative currency impact. Adjusted EBITDA in the quarter was $359 million, a margin of 14.5%. Non-GAAP diluted earnings per share was $2.78 per share, $0.02 below our guidance range as a lower effective tax rate partially offset the non-GAAP operating income variance. GAAP net income was $88 million for the quarter, and GAAP diluted earnings per share was $1.34 per share. Reconciliations of non-GAAP measures to the comparable GAAP measures are provided in today's earnings release. Adjusted free cash flow was $179 million in the quarter, an increase of about $44 million year-on-year. Year to date, our adjusted free cash flow increased $83 million. We returned approximately $64 million to shareholders in the quarter, which included repurchasing $42 million of common shares or approximately 800,000 shares at an average price of approximately $53 per share. The remaining $22 million in shareholder return was in the form of our quarterly dividend. I'm pleased to share that our Board has authorized an increase to our quarterly dividend to $0.36 per share. At the end of the third quarter, cash and cash equivalents were $350 million and total debt was $4.8 billion, bringing our net debt to $4.5 billion. We also reduced the amount of our off-balance sheet factored accounts receivable to approximately $127 million at the end of the quarter. To summarize, in Q3, we delivered strong revenue above. We are lessening our exposure to low complexity transactions and growing our higher complexity integrated solutions. We continue to be on our front foot with generative AI, using it to our advantage to secure highly strategic tech-enabled CX programs while scaling our adjacent services. Now I'll turn to our outlook. For Q4 and the full year 2025, we expect the following: Q4 revenue of $2.525 to $2.55 billion. Based on current exchange rates, these expectations assume a 160 basis point positive impact of foreign exchange rates in Q4 compared with the prior year period. This guidance implies constant currency revenue growth for the quarter ranging from 1.5% to 2.5%. As we've said, our goal is to be conservative in our revenue guidance. This leads to fiscal year 2025 revenue, of $9.798 to $9.823 billion based on current exchange rates, which assume an approximate 10 basis point positive impact of foreign exchange rates compared with the prior year. As such, we're increasing our guidance for the full year to 1.75% to 2% constant currency revenue growth. For Q4, we expect non-GAAP operating income of $320 to $330 million. This drives full year non-GAAP operating income to $1.25 to $1.26 billion. This translates into expected non-GAAP earnings per share of $2.85 to $2.96 for Q4, assuming approximately $67 million in non-GAAP interest expense, $62.4 million diluted common shares outstanding, and approximately 5.5% of net income attributable to participating securities. For fiscal year 2025, we expect full year non-GAAP EPS of $11.11 per share to $11.23 per share. Assuming non-GAAP interest expense, of $273 million, approximately 3.1 million diluted common shares outstanding, and approximately 5% of net income attributable to participating securities. The non-GAAP effective tax rate is expected to be approximately 25% for Q4, and 24% for the full year. And finally, we've modified our expectations for full year adjusted free cash flow to be between $585 million to $610 million, an increase of between $110 and $135 million year-on-year. This implies a continuation of our year-over-year improvement in adjusted free cash flow in the fourth quarter. Regarding capital allocation priorities, we are on track to meet our commitment to return over $240 million to shareholders this year, a combination of over $150 million in spending to repurchase our shares and approximately $90 million in dividends. And today, we repaid the €700 million seller's note related to the WebHelp combination through our previously committed new term loan borrowings that we discussed in our last earnings call. Looking to next year, we will prioritize debt repayment while supporting our dividend and our share repurchase program. In summary, our overall demand environment remains positive as we enter the last part of 2025. We had some margin headwinds in the quarter but see a path to modest sequential quarter improvement moving forward. We continue to drive strong cash flow growth year-on-year. And as Chris mentioned, we are in a strong competitive position to drive long-term outperformance. With all of this, we are feeling positive about 2026 and look forward to providing detailed guidance for 2026 on our next call. Now operator, please open the line for questions. Operator: Thank you so much. And as a reminder, to ask a question, simply press 11 on your telephone and wait for your name to be announced. To remove yourself, press 11 again. One moment for our first question. And it comes from the line of Luke Moore Morrison with Canaccord Genuity. Please proceed. Luke Moore Morrison: Hey, guys. Thanks for taking the question here. So maybe we can start with the margin guide down. So you obviously highlighted excess capacity from tariffs, impacted clients as the main driver there. Along with some drag from those accelerating transformation programs. Can you just unpack that in a little more detail? Were there any additional tariff-related headwinds from the new round that went into effect in August? Or was this impact all carryover from last quarter's client pauses? And then on the excess capacity, how quickly do you expect that to normalize? Is this more of a one or two quarter issue or something that can linger? And then finally, on the transformation programs, can you just give us more color on what those were and whether they should be thought of as near-term margin headwinds or flip to revenue over time? Christopher A. Caldwell: Yeah. For sure, Luke. It's Chris. So if you remember what we talked about in Q3, we talked that we were under from a year-over-year profitability perspective when the tariffs were first announced with sort of excess capacity that we had. And our expectations were and what our clients were messaging us was that they thought that they would be no more normalized in Q3 and we talked about sort of being a little under in the first month of the quarter, kind of on par in the second month and over on the third month. And what happened was with some of the additional noise with tariffs within the third quarter, by the second month, we still seeing that uptick coming through from the clients. The clients weren't seeing that uptick either. We were also seeing that they were taking a little longer to move volume that they commit to consolidating to us just from ability to move it from other providers to us. That's already started. But it delayed us from getting that kickstart. And we had multiple conversations sort of with them on a daily basis saying, do you want us to remove capacity? Do you want us to keep capacity? And really, the overall belief was to keep capacity because these are highly trained individuals. And they're sort of in global roles and they're tightly integrated into the supply chain. And that they needed to balance this out. So from our perspective, we are seeing sort of the momentum we want. We do think it'll be a multi-quarter normalization. And as Andre pointed out, if we don't see and we're measuring this on a daily basis, we don't see sort of the expectations coming in. Our clients don't see the expectations, and then we'll start to rationalize the excess capacity through the quarter and into next quarter. There was a bit of additional noise before August on tariffs, frankly. The additional noise in August only slightly uptick, but really clients are looking at this more holistically about some of the new reality of where they're operating in. And so it didn't get worse by any stretch of imagination. It was it didn't get as better as either the clients that we expected. And, again, just to be very clear on this, there's a small group, a handful of clients, very defined clients that we're working through with this. On your second question sorry. That to your second question to get whether there would be a lingering impact. We don't we don't believe so. From a transformation perspective, we have some clients who were in the process of looking at different AI technology partners. We were able to present and put in our technology into the solution right away. The clients were excited about it and so they wanted kind of get it in in the quarter and we were able to achieve that. Similarly, what happens when we put that in and we're able to remove head counts, normally that would be a couple of quarter process and planning our guidance. What happened was we were able to put the technology in successfully. We had some overcapacity, which we're already in the process of dealing with. So to your point, we don't see it as impacting our margins going forward. You wouldn't normally notice it if we had made the decision pre-quarter. And they would have been sort of in line or accretive to our existing underlying business margins. Hopefully, a lot of color, but hopefully that explains where we're at. Luke Moore Morrison: Yeah. Super, super helpful. Thank you. And then maybe just a follow-up. I'd love to get a little more color on how your IX suite is ramping here. You know, what does pipeline and win rates look like here? What's the relative demand between Hello and Hero? And to what extent are those deployments being priced at discreetly versus being bundled into broader deals? Christopher A. Caldwell: Yeah. For sure, Luke. So a couple things. As we talk about, when we look across the course of the year, and you have to remember, we probably started at a smaller percentage when we first announced to where we are now. But literally 40% of our new wins have our technology our platforms integrated into the new wins. And it's a combination of both where discrete billing as well as where it's bundled in. The majority still of this point are where we're bundling it in and using it as a differentiated service. We see that inflection point coming relatively quickly where there'll be more discreet billing than from a bundled offering even though, you know, frankly, the client sees the value in it because they're giving us the business to do it. In terms of the two products, we're seeing far more traction with Hero than Hello. And I just wanna kind of explain this a little bit. Hello is the fully autonomous product where we're putting in a product which removes human interaction. So think of a multimodal bot that can be, you know, call out, can take calls coming in or chats or whatever the case may be. The commercial model for that product is evolving where it's much more gain share, where we're putting it in. And similarly, I think competitors are pure AI competitors are doing the same thing. It's more of a, you know, we'll take this out. We'll take a percentage of the transactions that we're saving you. Being fully autonomous, and we think that'll continue on with that revenue model. On the Hero product, we're seeing much stronger traction because clients see this product as being able to work immediately in their environment, drive significant benefits from a quality and automation perspective and proficiency perspective, meaning that they're able to sell more, be more efficient, take up more cost, drive CSAT, we have so many demonstratable cases of that. It's very, very, very, very compelling. And what we're happy about is that clients are now starting to see, hey, I can deploy this across my entire infrastructure, including my internal capabilities as well as other partner capabilities. And that is as a SaaS model, a SaaS model where we're charging per seat, and we'll continue that model based on what we're seeing with it. And our pipeline just continues to build and get stronger. And as I mentioned at the beginning, while 40% of new wins are that, you have to imagine that in the last quarter, it was a lot higher. And we're gonna continue to drive that forward. And as we talked about in the prepared remarks, expect to be, you know, mildly, modestly, we modifier you want, accretive. At the end of Q4. Luke Moore Morrison: Excellent. Thank you. Operator: Thank you so much. Our next question comes from the line of Dave Cunning with WBIRD. Please go ahead. David Koning: Yeah. Hey, guys. Thank you. And I guess my first question, just kind of the bridge to margins and, you know, how we how we get back. You know, we I think we were at 13.4% or around there was your previous guidance. Now we're maybe at 12.8% margin guidance. Something in that ballpark. So we've come down 60 bps. Is it fair to say these sound pretty, like, one-off type things. Is it fair to say that 13.4% or somewhere around there, what your old guidance would be the baseline from which to grow next year, then as you weave some of the Gen AI projects on that should carry a higher margin, we could have a pretty outsized margin improvement next year as things normalize, or is some of the one-offs stuff really gonna kinda recur for a little bit? Christopher A. Caldwell: Yeah, Dave. So let me talk about the market environment. I'll let Andre do the bridge. These are one-off items. And as we as we talk about their pretty defined about where we're seeing them. And when we look at our business, clients outside of these impacted clients are providing and driving the margins that historically we see, and then also new wins that are coming in as they ramp and get to scale are providing the margins that we want to see and are driving. We do expect that the AI platforms will continue to help us as they become more accretive. Don't know how accretive they will be in the 2020 time frame. I just wanna temper that a little bit. What we're focused on doing is driving back to where historically we were as we talked about. And then we do see additional opportunity to grow our margins. That's a combination, though, of not only our tech solution, also the areas where we're winning new deals, and the solutions and transformation deals that we're winning, and some of the new auxiliary services that we've talked about. Are higher margin around AI enablement. Andre, I'll pass to you for the bridge. Andre S. Valentine: Yeah. You pretty much covered it. So yes, David. You know, I think it'll take a couple of quarters, as we've said. To kind of take care of these one-off items, which are at with just a handful of clients. So I don't know that I would say that they go away completely, and we're completely at run rate, as we enter 2026. There'll be a bit of a build there. From there, I think, though, I think the margin levers and the things that give us the confidence we can get margins moving back in the right direction are most of the things that Chris has just alluded to. We should see, we should see some contribution as software revenue ramps. We'll see, more contribution as we deploy more technology into our solutions. We're reducing the kind of low complex commoditized work, and replacing it with, faster growth. Higher margin work, including the work in some of the adjacent areas that we've talked about. Shore movement continues to be a driver for us with margin improvement. And then, you know, as we continue to move our growth rate up from where we'll exit this year, should be able to start seeing some leverage on our G and A. So all of those things have us confident that while we will work for a quarter or two here to get margins kinda back related to these onetime kind of one-off items on these handful of clients, once we get there, we can keep margins moving in the right direction. David Koning: Got you. And then maybe my follow-up you had really good sequential movement in your retail travel, ecom business, and then your communications and media. Those two segments had big sequential step ups. Anything to that? Any anything one-off, or is that sustainable? And, you know, are are those maybe some lower margin businesses and maybe created a little bit of a mix pressure? Andre S. Valentine: You're right. So we have seen, nice sequential step ups in those. Those are not one-off things. It's pretty broad-based across the vertical you've mentioned. And I talked a little bit commented a little bit on the drivers of the growth in BD and comms. Again, mostly clients outside of the US, as well as some, you know, media/entertainment, global media entertainment companies. And retail, travel, e-commerce, that has been a pretty broad base as well, spread between travel and e-commerce clients. So, and then from a margin profile perspective, you know, something we really wanna emphasize. The work that we're winning, we're winning at the right long-term margin. And so, while we maybe see some some constructs where there's a bit more upfront investment on our part to get to that run rate. The deals as they are are are as they are priced kind of when they get to full scale, are are at the right margins and should be accretive as we go forward. Christopher A. Caldwell: And then the only other comment I'll make is that, you know, when we look at adoption of some of our IX technology platforms, we're doing well in travel with them. We're doing well in e-commerce with them. We're doing well in consumer electronics with them because they tend to be faster at adopting sort of this new technology or making good inroads in BFSI with it, and that's actually driving some some wind. Those deployments are a little behind just because of the regulatory and compliance that you have to go through with with any winds within that space. David Koning: Gotcha. Well, thanks, guys. Andre S. Valentine: Sure. Operator: One moment for our next question. It comes from Vincent Colicchio with Barrington Research. Please proceed. Vincent Alexander Colicchio: Yeah, Chris. Curious if the consolidation situation remains robust. And if, we're still in the early innings there. Christopher A. Caldwell: Yeah, Vince. We do think that consolidation will continue to impact our industry and we see it as sort of a positive to be quite honest. And we continue to see it being primarily driven by clients who are looking for fewer partners and deeper relationships with those partners. And sort of a more robust offering from those for those partners. And so I think we're we're still in early innings, especially with sort of now as clients are procuring services across multiple different disciplines together. And do expect that to continue for the next, you know, frankly, 24, 36 months in probably a heightened fashion. Vincent Alexander Colicchio: And then, the overall sales pipeline, is that I assume it's at a healthy level. That broad-based, or, is it, the three segments that were strong this quarter? Will continue to be strong and some of the others will lag? Christopher A. Caldwell: No. We're really happy with our pipeline then. Like, there's a couple of things that we've been doing through the course of the year that are starting to pay off. We've really brought in a lot of deep domain expertise within a number of our verticals. Of talent both from a technical sales and sort consultation background that's really driving some nice pipeline both from a transformation perspective and an integrated offering perspective. And so that we're seeing the benefits of. And that's pretty broad-based across our strategic vertical. We're also seeing good momentum in all of our geos or sorry, all of our major regions like EMEA and The Americas and then Asia Pacific, seeing some very, very nice momentum from that perspective. And as Andre pointed out, not only the margin profile of these new deals, as well as our pipeline is where we want to see it, but the length of the contracts, the stickiness of the deals, and, frankly, the complexity of these deals are really where we are driving as a business. Vincent Alexander Colicchio: Good to hear. Thanks. Operator: Thank you so much. Our last question comes from Ruplu Bhattacharya with Bank of America. Please proceed. Ruplu Bhattacharya: Hi, thanks for taking my questions. I want to ask a question on risk management. So obviously, were lower from some clients this quarter. But the company decided to invest in some transformational items for other customers. So I'm just trying to understand. Can you talk about the decision criteria for doing such investments? Like what ROI are you expecting from those customers? And just when you like, in terms of making such investments, obviously, it hurts margins in the near term, but can you talk about what long-term benefit you expect to get? And I have a couple of follow-ups. Thank you. Christopher A. Caldwell: Yeah. For sure, Ruplu. That's a great question. A couple of things. When we look at our business as a whole, one thing that we're very focused on is driving more share gains within a client. And long, long-term relationships. If you look at our top 25, that's over a 17-year tenure. It kind of goes to we believe in these long-term relationships through thick and thin because they benefit us. And we've also talked about when we look at our top sort of 25 accounts, they're growing very well, frankly, a little higher than the rest of the client base. And these are very sort of sophisticated buyers. They're very complex buyers. They're very large buyers. And so when we look at making those investments, you can think that the clients that we do that with are clients who we've been with a long time, multiple different offerings in, really their key go-to-market partner, and we see a lot more opportunity to grow within that business. And as painful as it is to kind of deal with some of these things in period, we're really looking at longer term. And those clients want to reciprocate our investments are around either more volume, more opportunities, and consolidating out smaller partners, etcetera, etcetera, etcetera. So that's how we look at it. We don't do it on clients who wanna RP their business every quarter or are not sort of like-minded from a long-term partnership perspective. From the transformation clients, you know, the way we look at it is that if we do the right thing with the client, that they will reward us with more business over the longer term. And the clients that we kind of set up some transformation in quarter honestly, were focused on saying, we need to do this. Can we do this right away? And if we can, it would be a big benefit. And we could have, you know, said, well, we can start it next quarter or whatever the case may be. That also allows the competitor to come in and say, hey. We can do it sooner. And so from our perspective, wanna keep these clients focused on us. We want them on our technology and our platforms. And so we're willing to take the pain to get them across to our platforms from a relationship perspective. And time has shown us over 20 years in this industry, time has shown us when we do the right thing with our clients, we get rewarded over the longer term, and we're seeing that. Even with sort of the conversations about how to deal with this excess capacity right now, they are collaborative. They are engaged. And they're all focused about trying to make sure that we're both doing the right things for each other. Ruplu Bhattacharya: Okay. Thanks for the details there. Can I ask a similar on the IX suite of software that you're investing in? So you're investing $50 million incremental on the software versus the $50 million base level of CapEx that you typically have or investments that you typically have, do you still expect to get to breakeven in fiscal 4Q? And what level of investment should we expect going forward? And what's the criteria for you to either increase or decrease that spend? And I have a follow-up final for Andre. Christopher A. Caldwell: Yeah. So a couple things. We absolutely expect to be on track as we talked about in our prepared remarks to be breakeven, modest accretive at the end of Q4 as we exit on our IX suite of products. You are correct. You know, roughly it's about $50 million incremental spend that has popped up a little bit. It's gone down a little bit, but the reality is that it's in that ballpark. And so when you think of from an accretive nature, perspective, that's where we're at. Do expect that we're gonna need to continue to increase investments, but I wanna be very clear about this. It's in line with our revenue growth on the products that we're doing. As we install our Hello product, we absorb the cost for that as we put it in, and so more and more projects, there will be a cost to it, and then we get the revenue from the run rate perspective of the software. On the Hello product, we get sort of the license revenue kind of right out of the gate as we sign those deals. So it's a bit of different between the products, but the criteria is it becomes a scalable business. We're going to invest as we continue to drive scale in that business. But as you've seen us in the past, we wanna make an economic return on those investments, and so we'll do so as we go. Ruplu Bhattacharya: Okay. Thank you. And maybe the last question I have for Andre. Andre, it looks like, you know, you're taking down free cash flow guidance a little bit. How should we think about free cash flow going forward? And it looks like you also raised the dividend. So what was the rationale for doing that now? And how should we think about capital returns going forward? Thank you for all the details. Andre S. Valentine: Sure. Happy to do that. So as we think about free cash flow beyond 2025, we're still very optimistic that we can drive some increase to free cash flow in '26. Drivers there, you know, we're coming to the very end of integration activities. A lot of those spending is cash. So that should be a help to us as we go out to next year. Secondly, our cash interest should drop next year as we continue to pay down debt, maybe get some help from interest rates as well. So those things have us positive. We also think we'll continue to grow the top line and make progress with the margin. And that will help. The drop in our guidance for Q4 is being driven by the margin pressures that we've seen and drop in our profitability expectations for the full year. Capital allocation priorities as we go forward will remain balanced. So again, we're going to generate more free cash flow next year. And with that, we are going to prioritize repayment of debt while supporting our dividend and continuing our share repurchase program. I don't know that we'll see share repurchase dollars go up dramatically next year. I think we'll probably prioritize more taking some of the increase in cash flow and putting it towards our debt. But and then lastly, the dividend. Look. We have investors who are very appreciative of the dividend. They are appreciative of our cadence of annual increases. We're confident in our ability to generate strong free cash flow not only this year where we've driven a pretty sizable increase, but drive an increase in the next year as well. All of that is part of the decision to increase the dividend. Ruplu Bhattacharya: Thanks for all the details. Appreciate it. Andre S. Valentine: Sure. Thank you. Operator: And this concludes our Q&A session and conference for today. Thank you for participating. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the LightPath Technologies Fiscal Fourth Quarter and Full Year 2025 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. This conference is being recorded today, 09/25/2025, and the earnings press release accompanying this conference call was issued after the market closed today. I'd like to remind you that during the course of this call, the company will be making a number of forward-looking statements that are based on current expectations and involve various risks and uncertainties as discussed in its periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them can be proven to be inaccurate, and there could be no assurances that the projected results will be realized. In addition, references may be made to certain financial measures that are not in accordance with generally accepted accounting principles or GAAP. We refer to these as non-GAAP financial measures. Please refer to our SEC reports and certain of our press releases, which include reconciliations of non-GAAP financial measures and associated disclaimers. CEO Sam Rubin will begin today's call with a strategic overview of the business and recent developments for the company, while CFO Al Miranda will then review financial results for the quarter. Following the prepared remarks, there will be a formal question and answer session. I would now like to turn the conference over to CEO Sam Rubin. Sam, the floor is yours. Sam Rubin: Thank you, operator. Good afternoon to everyone, and welcome to LightPath Technologies fiscal fourth quarter and full fiscal year 2025 Financial Results Conference Call. Pretty exciting times here at LightPath. Over the last few years, we've been working on the transformation of the company, and we're now beginning to see the tangible results of these efforts. Since we likely have many new shareholders and many new listeners on this call, I will take some time to describe where we've come from, which will help put in context the recent developments. Then I will talk about specific programs that are driving our record $90 million backlog, the investment from Ondas and Unusual Machines, and our next growth drivers. This will likely take up more time than usual and will come at the expense of some of the financial side. So, Al? So let's start with strategy. LightPath is a forty-year-old company that for thirty-five out of those forty years was a component manufacturer. The strategy of LightPath as an optical component company was strongly tied to the industry structure and worked well when the industry was small and highly technical. A component company like LightPath could create value with its fabrication technology and at times capture that value with high margins. However, as the industry grew and changed, the structure of the industry changed and led to commoditization of optical fabrication technologies and a change in customer characteristics and supplier-customer dynamics. LightPath unfortunately did not adapt its strategy to that and therefore relied on being a lowest-cost provider of components and focusing on manufacturing in China to achieve that. This resulted in eroding margins, increasing competition, and diminishing ability to capture the value its technologies created. This also resulted in an unhealthy reliance on both manufacturing and sales in China. By 2020, most of the company's manufacturing footprint was in China, and more than one-third of its revenue was from China. In late 2020, following a change in management, we developed and implemented a new strategic direction. Without going into great details, because honestly, I could spend the whole evening talking about this, I'll just say that we realigned the company to strategic directions that allow us to substantially grow and capture much more value from our technologies and capabilities. This is not about moving away from being a component company as much as it is about moving into a position that will allow us to grow, improve margins, and secure our position in the supply chain. In our specific industry, with the dynamics of the technology, supply chain, and geopolitics, this means that we can grow best and impact our bottom line best if we focus on subsystems and systems that are enabled by our technologies. More specifically, doing that in the field of infrared imaging, a growing market in which we have strong differentiators. To explain a bit more about what I mean, let's look at just one of our unique differentiators, our Black Diamond Glass. Unique materials, such as our proprietary Black Diamond Glass, which is licensed from US Naval Research Laboratories as an alternative to germanium in infrared optics, help create value by enabling customers to do in this case, could be smaller systems, more could be cheaper systems, or more could simply be something as trivial as just being able to guarantee delivery of your systems to the customers with production certainty without worrying about germanium supply restrictions from China. Some companies, when they have such technology, might say something like, well, these materials are valued by my customers, so I can charge more for my material, which is a valid point. Another company could say, let's take a step further, and with our unique materials, we can sell more components value-added. So we do that. For us, we found that the sweet spot was going into subsystems or small systems, which we often call engineered solutions. Those do not require a large infrastructure of service and field support much more of the value as full systems do, but still allow us to capture the combination of LightPath's materials and our optics, together with, for example, the recently acquired subsidiary of G5 Infrared, which is a leader in thermal imaging cameras. G5 is known as the industry leader in long-range infrared cameras. That was the case before we acquired them, not something we created. But like its competitors, G5 was facing supply chain challenges due to global geopolitics, and primarily germanium and gallium, which are critical materials in their optics. After acquiring G5 in February, in conjunction with their team, we began the effort to redesign their systems to use our materials. Recently, we announced the completion of the redesign of two of those cameras. By doing so, we are positioning ourselves not only as offering the best cameras now but also as the most reliable provider of cameras with supply chain resiliency that no one else can offer. The result of this is the massive growth we're seeing. Our backlog today is around $90 million. That is more than four times what the backlog was just a few months ago. And with more than two-thirds of this backlog in systems and subsystems, it is clear that the strategy is working. Our strategy is all about creating value and capturing value. You have core technologies that are unique and well-positioned, they clearly create value. It is up to the company to make the most of it by capturing as much of that value as possible. For LightPath, it means going up the food chain. With this background behind us, I would like to now dive into some of our most recent developments and events and add some color and background to the announcement we have recently made and the large backlog I just mentioned. First, let's talk about the two recent large orders. Over the last few weeks, we announced two large orders that are really one order split into two separate appeals. Those orders totaling over $40 million for deliveries of infrared cameras in calendar years 2026 and 2027. The customer is an existing customer that has been consistently doing business with G5 over the last few years, although not at levels anywhere near this. Applications for those cameras will be in border surveillance and counter UAVs, or CUAS as it is often called. Let's first talk about the border surveillance. So border surveillance program known as CTSE is something we had previously discussed. At the time, I think in our last call, we expected the entirety of the program to include installing about 300 new surveillance towers along the southern border, and the work to be divided between three primes, one of them was our customer. Then along came the big beautiful bill and more than tripled the funding to Border Patrol. To our understanding, this means the number of towers along the border go up to 1,000 towers. Some even speak about 1,200 towers. This includes not only an increase in the number of towers along the southern border but also the installation of towers in some places along the northern border. Now take the large increase in expected deployment, add to it supply chain constraints companies are facing, and you get a scramble to ensure supplies of cameras. Or in other words, for us, a perfect storm. The border contract is an IDIQ divided among three companies. Until recently, we've been supplying cameras to only one of those three. The $40 million in orders for calendar 2026-2027 we just discussed is for another one of the prime contractors. So this is going to be in addition to the existing work we have been expecting and spoke about for the border. Okay. Enough about the border, but there's a lot going on there, clearly. Let's go back to our $90 million backlog. Another part of our record $90 million backlog is systems for Counter UAS. More specifically, powerful zoom cameras that can passively detect, classify, and track drones. Drones that are as small as 10 inches in size, for example. These cameras not only integrate systems for detecting drones but also integrate onto almost any weapon system that is used to counter drones by disabling drones using different means. It could be systems named remote weapon systems, or vehicle-mounted kinetic systems, or pretty much any deployment of a counter UAS system, which as we all know is a rapidly growing industry not only in battlefields and frontlines but also in critical infrastructure such as airports, or public and private infrastructure. Currently, more than $10 million of our backlog is for cameras for counter UAS. This is separate from the $40 million of orders I just discussed. And those specific orders were announced and discussed earlier. We expect this to continue to grow as our cameras are integrated into more and more systems. Another area of growth that we expect to see is the Navy Sphere program, L3 Harris is a prime integrating this system, which is expected to be installed on all US naval surface vessels. The contract, we announced together with L3 Harris earlier this year, is expected to move into LRIP, LRIP is low rate initial production, in the coming months. It has also been publicly disclosed that they expect to see the first installation and full integration into a fire control system, of the first destroyer by 2027. For a system to be deployed by 2027, given all the slowdowns and processes, that timeline means that we will be working on our part very soon. This is a large program of record and a key program for the US Navy. So we expect this to be a meaningful source of revenue for many more years to come. All of those are systems that we've already qualified so all the development work is pretty much done. It's a matter of receiving and executing on the purchase. We feel very confident in our ability to deliver all of those especially in light of our unique position, utilizing our proprietary Black Diamond materials in the cameras instead of germanium, which traditionally is the element of use for many infrared cameras. This brings me to China's ongoing export restrictions, who late last year cut off the export of germanium, as well as other critical materials to the US defense industry. China produces substantially most of the germanium globally, making the Chinese ban effectively global. In response to those events, US defense contractors moved to stockpile germanium, but the ongoing ban to stop the stockpiles are running dangerously low. One executive noted in a Wall Street Journal last month that his firm is now down to safety stock. Some suppliers now hold only a few months of inventory, exposing even large firms to disruption. The result of this disruption has been a massive interest from defense customers to move away from germanium, to eliminate China-related supply chain risk. Inbound interest from defense contractors in LightPath's proprietary Black Diamond Glass, the replacement for germanium we licensed exclusively from NRL, has increased significantly. And while there's some lag from design to field deployment, the shift is happening and happening quickly and can be already seen in some of our numbers. So those programs are what is currently driving our large backlog and short-term growth. Now let's talk about additional programs and growth drivers in the pipeline. NGSRI is one of our most important programs, in which we are developing for Lockheed Martin a system that is a key technology in their version of next-generation Stinger portable ground-to-air. Lockheed is competing against Raytheon in this and is now in testing stages with the customer. While I do not have any specific updates to share, I will likely not be able to answer most questions about this. I would like to commend the teams at Lockheed Martin and Visomed Group in Texas in putting together a completely new missile system in a two-year time frame, something almost unheard of. The system is now in testing and we expect delivery or feedback from the customer anytime in the next few months. I know many are anxious to receive updates on this, as am I, to be honest. But because if we win this according to projections we received from the customer, this could be between $50 million to $100 million of recurring annual revenue for us while in full-rate production. The only related update I can share right now is that our tech group is in the process of moving to a larger facility that will be able to support the production for this system. For those that want to understand more about this system and why our camera is making such a big difference, I would suggest searching online for the term QuadStar and Lockheed Martin. Lockheed names the missile QuadStar. There is a long and detailed article that describes fairly well why Lockheed's solution can achieve better distance and overall performance due to LightPath's camera system integrated into the missile. Additionally, we also have programs such as the Apache program, which we delivered our subsystem recently and is now being integrated and tested by the customer. We have some programs related to Golden Doe, which are in the design phase. And we have another program which is really unnamed. And I mentioned in the last call is a key Black Diamond material program in which the customer is actually funding equipment dedicated to that program. I can't say much about it, unfortunately. What is common to all these programs is that we believe each and every one of them could reach over $10 million of recurring revenue a year. Some of them, like NGSRI, much more. All of those are specific programs or projects. But we also have our assemblies and optics product offering. The assemblies business includes standard and custom design of lens assemblies that customers integrate into their own cameras or systems. Part of this business is growing too. And especially assemblies that are designed to replace existing assemblies that utilize germanium and wanner wall lens. LightPath has a portfolio of lens assemblies designed so they can be used with other cameras. Those could be cameras made by FLIR, Seek Thermal, DRS, or pretty much any thermal camera manufacturer. In particular, we are seeing a growing demand for assemblies and also complete cameras for use in drones. A bit of background. Following the COVID pandemic, China emerged as a strong player in the market for low-cost thermal cameras used in applications such as drones. This is as a result of the significant state investment in technologies related to contactless temperature measurement, which are really the same technologies used in thermal imaging. While for a while after 2021 or so, it looked like Chinese vendors might become the main source for cameras for drones, geopolitics, however, has been changing that. Ukraine, for example, has decided a while ago that it will no longer use cameras or lens assemblies made in China in Zedgeville. US Europe and The US have followed shortly after with different initiatives for domestic drone and component manufacturing. LightPath designs and produces its lens assemblies in Orlando, and in recent months, we have made investments in those capabilities both in The US and our RECO operation, which is a certified defense manufacturer in Europe. Further supports a focus on disassembly on those assemblies and the drone market, we have done two things. First, we've recruited Doctor Steve Milky as VP of engineering. The engineering discipline, which focuses on the successful transition of new products from into manufacturing and high-volume manufacturing of these products is key to LightPath scaling in this business. Doctor Milky brings many years of experience in doing exactly that. We view his addition as instrumental in this effort to scale this manufacturing. Secondly, and pretty excitingly, to finance many of those efforts, we received a strategic investment from two leading companies in our industry, Ondas Holdings and Unusual Machines. These companies are not only key strategic customers to LightPath, they are also leading the charge in setting up manufacturing and the complete ecosystem for drones and all components and subsystems required for this in The US and The West. What LightPath is doing in bringing manufacturing of thermal imaging to The US, Ondas and UMAC are doing with drone motors, complete drones, and much more. We're excited to be working with them and take part in building the future drone infrastructure for The US and Europe. The $8 million investment received from Ondas and UMAC will go towards expanding these efforts. And I expect these efforts to be very fruitful for all three companies and the industry as a whole. I firmly believe LightPath is poised for great success in the coming years. The 41% quarter-over-quarter growth we just announced for Q4, and the $90 million backlog is only the beginning. There are many tailwinds supporting our growth, and the investments and efforts the team has made over the last five years. Many of which are just starting to show. Our future is very bright, and we're excited to be here and to see it all unfold. Now I've spoken enough, so I'll pass it on to our CFO, Al Miranda, to talk about fourth quarter and fiscal year-end results. Please go ahead. Al Miranda: Thank you, Sam. I will keep my review to a succinct highlight of the financials. As a reminder, much of the information we're discussing during this call was also included in our press release, issued earlier today and will be included in the 10-K for the period. I encourage you to visit our investor relations web page to access these documents. Revenue for 2025 increased 41.4% to $12.2 million as compared to $8.6 million in the same year-ago quarter. Sales of infrared components were $4.9 million or 40% of the company's consolidated revenue. Revenue from visible components was $2.8 million or 23.2% of consolidated revenue. Revenue from assemblies and modules were $4.2 million, or 34.1% of consolidated revenue. Revenue from engineering services was $300,000 or 2.1% of consolidated revenue. Gross profit increased 6.6% to $2.7 million or 22% of total revenues from 2025, as compared to $2.5 million or 29.2% of total revenues in the same quarter of the prior fiscal year. The difference in gross margin as a percentage of revenue was primarily due to an approximately $500,000 increase in inventory reserve charges recorded in 2025, primarily related to our visible component business. Operating expenses increased 52% to $7.2 million for 2025, as compared to $4.7 million in the same quarter of the prior fiscal year. This increase was due to the integration of G5 and infrared following its acquisition earlier, as well as increased sales and marketing spend to promote new products, an increase of material spend for internally funded new product development, and an increase in the fair value of the acquisition liabilities of $1.4 million. The earn-out liability for 2025 totaled $7.1 million or $0.16 per basic and diluted share as compared to $2.4 million or $0.06 per basic and diluted share in the same quarter of the prior fiscal year. The change in net loss was driven by an increase in certain non-cash non-operating expenses associated with the acquisition of G5 Infrared and the related financing of the acquisition. Adjusted EBITDA loss for 2025 was $1.9 million compared to a loss of $1.1 million for the same period of the prior fiscal year. Although not perfect, we believe that adjusted EBITDA is a better indicator of core operating performance by excluding non-core non-cash items. Cash and cash equivalents as of 06/30/2025 totaled $4.9 million, as compared to $3.5 million as of 06/30/2024. As of 06/30/2025, total debt stood at $5 million and backlog totaled $37.4 million. But as Sam noted, backlog has grown significantly since that time. I'd like to point out two significant activities we undertook during the fiscal year that we have not discussed. During the fiscal year and especially in the fourth quarter, we migrated our global IT infrastructure to a new provider to bolster and meet the defense industry's high-level security requirements. This was usually important. Without the right local and global IT infrastructure, we would severely limit our opportunities in the defense industry. Second, we successfully integrated G5 into LightPath in six months ahead of plan and below budget. I'd like to publicly acknowledge and thank the teams from both companies that worked together to make it happen. Everyone knows acquisitions live or die based on cultural fit and integration. So thanks again to the entire team. Looking forward, our focus for fiscal 2026 supports the business opportunities that Sam described. We have a detailed go-to-market strategy that we're funding to target revenues in key high-growth areas, some of which Sam mentioned. Our prior year investments in manufacturing are bearing fruit in terms of quality and on-time delivery. And in the next year, I expect to see margin expansion as a result. With all of the interesting accounting around acquisitions, we will continue to report and focus on adjusted EBITDA for fiscal year 2026 as a helpful measure of financial success. And then lastly, as Sam noted, subsequent to the quarter close, we announced an $8 million investment from Ondas Holdings and Unusual Machines. We are truly, truly fortunate with the quality of the existing investors in the company and Ondas and Unusual Machines are not only a continuation of quality investors, but in addition, they're a great strategic fit for us. With that, I'll turn the call back to Sam for some closing remarks. Thank you. Sam Rubin: So as we look forward, we remain very focused on the transformation of LightPath. As Al was pointing out, we've been focusing on top-line growth, and followed by that, we'll be focusing on margins and bottom line in coming quarters. Expect to see significant growth continuing and our investments in Black Diamond and other differentiators bearing fruit. Since I've spoken quite a bit before, I'll use the rest of the time for questions and answers. I'll pass it back to the operator, please. Operator: Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press 1 on your telephone keypad. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And the first question comes from the line of Jaeson Schmidt with Lake Street Capital Markets. Please proceed. Jaeson Schmidt: Hey, guys. Thanks for taking my questions. Just looking at the June, how much did G5 contribute to in that quarter? And I assume it's a big chunk of that backlog just given the significant wins you have in the pipeline, but can you break that out as well? Al Miranda: So it was $4.2 million, Jaeson, was the G5 contribution to revenue. Jaeson Schmidt: Okay. Perfect. And how much does it comprise of that $90 million in backlog? Sam Rubin: I'd say two-thirds of the backlog altogether is cameras and assemblies. I'm not sure if we have it broken down now by G5 or LightPath or the rest of LightPath since I had. Jaeson Schmidt: Okay. And then just a follow-up, and I'll jump back into the queue. Looking at the border security opportunity, obviously, a big win with the second customer. Are you expecting to be sole sourced here? Sam Rubin: You know, I don't know what the third prime or third integrator is going to do, but we're definitely in a very, very unique position. I think I would not be surprised if we end up providing all the cameras for all the towers along this border. Jaeson Schmidt: Okay. Perfect. Jump back into the queue. Thanks a lot, guys. Al Miranda: Thank you. Thanks, Jaeson. Operator: The next question comes from the line of Glenn Mattson with Ladenburg Thalmann. Please proceed. Glenn Mattson: Hi. Thanks for taking the question, and congrats on the great transformation these companies have gone under. Thanks, Sam, for laying out kind of an outline of that. But one thing that stood out in your remarks that I'd wanted to just flesh out a little more was I think you said that you were rapidly expanding capacity in Visomed. And if I'm not mistaken, I think the kind of core technology that got you into the hunt for this Lockheed contract. Can you just go into what kind of signal you're sending with that? Or and is there some, you know, if you don't win the Lockheed, is there other work that you could tend to pump through that? Just some points on that would be great. Sam Rubin: Sure. Definitely. So Visomed, when we acquired them, was a small engineering firm. Right? Less than 10 people in a very small space, very confined space where they were doing development. That's not conducive for any expansion or manufacturing. I mean, they've been cramped already. We acquired them. In addition to NGSRI, we do all the development of our uncooled cameras at that location in Texas. So they're not moving into a massive plant, maybe 10,000 square feet or so. But it will be enough both for the NGSRI and for all the non-Lockheed uncooled product. So optical gas imaging camera, drone cameras that we come out with, some of the Mantis work and so on. So there's much more going on in that facility than just the NGSRI. Glenn Mattson: Okay. Great. Helpful. And then, Al, can you if you add back $500,000 you talked about in the inventory write-off, still gross margin will be down sequentially. So I guess I think that's related to mix a little bit, but maybe can you confirm that? And then is there any change to the margin within that mix within each category, like any significant changes? Al Miranda: No. In the quarter, we actually thought the mix was, let's say, typical. There's half a million I mentioned that because that's the single largest item. But there's a few other items. So if I kind of do the math you're asking, that puts us around 29.7% gross margin if I adjust for that half a million and a couple of other unusual one-time items. Glenn Mattson: That's helpful. And then on the OpEx, is this like, I may ask SG&A side, is this the normal run right now, or was there any, you know, I know you're investing in marketing and stuff because you have a lot of stuff to sell, but is this the normal level, or is there some? Al Miranda: No. It really isn't, Glenn. We had a lot of one-time expenses in the OpEx this quarter. G5 for the meantime. Yeah. So, I mean, to kind of ballpark it, G5 adds a million. Just, you know, for a full quarter in terms of their OpEx. And then, of course, we had M&A related expenses with lawyers. In order for us to level up in cybersecurity, we had significant IT costs. We spent a little bit on marketing. We'll do some more of that actually going forward. So there are quite a few items in there and in the quarter that are one-time. Glenn Mattson: Okay. Okay. Great. That's very helpful. I'll jump back in the queue. Thanks again, guys. Sam Rubin: Thanks, Glenn. Operator: And the next question comes from the line of Richard Shannon with Craig Hallum. Please proceed. Richard Shannon: Well, great. Thanks, Sam and Al, for letting me take some questions, and congratulations on a really nice running start here with G5. I guess I want to ask the first question just to get a definition down here. In backlog, a lot of companies report it as of the end of the prior quarter end as well as usually reported on an outgoing out one year. It seems like that may not be the case here, so I'd love for you to clarify where is that measured and over what period that measures, please. Al Miranda: So great question. Backlog is a real order. It's a real order from a, you know, a real customer. There's no forecasting in there. You know? So real order 100%. In our case, we do accept orders that are multiple years. Right? So the $90 million Sam mentioned is more than one year. About 60% of that, 57% of that, so more in that neighborhood, is going to ship in fiscal year 2026. And then the balance of it is in fiscal year 2027. And maybe even a little bit might spill over to fiscal year 2028. Richard Shannon: So for us, that is a bit unique because in the history of LightPath, we've not had that long lead items. That we know that orders are coming, but it's also a bit of the nature of the defense business. Right? Richard Shannon: Yep. That makes sense, and thanks for clarifying that, Al. Now let's look forward here on the pipeline, and, Sam, you did a good job explaining some of the opportunities here. But maybe you can talk about big picture, what kind of how's the size of the pipeline here? As you've added the G5 here? Obviously, you've done a really good job converting a lot of it to backlog, but I wonder what the remaining pipeline looks like especially as you mentioned the big beautiful build that's offered some opportunities you've won. But also sitting out there from big beautiful bill and other places. And how would you quantify that if any? Sam Rubin: Yeah. I'd say it's, like, counter UAS, I think we're just beginning. So $10 million plus whatever part of that $40 million you know, that is really just starting. And because the deployment of those systems is just starting, I think every event like what happened in the airports in Europe over the last few days and things like that accelerates all of this. I'd say most of the $40 million that order of $40 million we weren't planning or budgeting for most of it. So it's all too much gravy on top of numbers we talked about in the past for the long term. So I'd say, you know, expecting still quite a bit of growth. Richard Shannon: Okay. Fair enough. Let me ask a question on gross margins and taking two comments from, I think, both prepared remarks and response to one of here to try to get a sense here. Sounds like from Al's comments, you're talking about maybe focusing on gross margins in a little bit of time, more focused on revenue growth today. But, also, I think if I heard you correctly, you think your gross margins excluding some unusual or more one-time dynamics could be close to 30% here. So what are the dynamics under which and time frame for which we see this gross margin improvement? And kind of what are your goals here, obviously, getting another quarter in your belt with G5 and then also expanding capacity and other like that. Where do we think we can go with this in the next couple of years? Al Miranda: So we can go I mean, right now, on an adjusted basis, as I just said, you know, last question, we're pretty close to 30. I think we can step up to 35. Pretty quickly in a quarter or two. And then in the longer run, as the product mix really does shift, to these larger finished infrared camera systems we're thinking 40% is where it would settle out in the midterm. Richard Shannon: Okay. Perfect. Actually, you know what? I'll ask one last quick question here, Sam. I know you didn't want to say you didn't want to talk much about Lockheed, but I will ask a question that since you put it in your press release last quarter about expecting a decision perhaps this year or early next, is that time frame no longer valid, or you're not making a comment? Sam Rubin: Wanna make sure about that one. Thank you. I can't comment beyond what we spoke about. So, formally, the program will be decided by next fall. Realistically, we get indication that it might be much sooner, you know, this year still, January, February, maybe, but we really don't know that much, and we've we need to be very cautious also on what we share. Richard Shannon: Certainly understood, and I appreciate the detail, guys. Thanks. That's all for me. Operator: The next question comes from the line of Scott Buck with H. C. Wainwright. Please proceed. Scott Buck: Hi, good afternoon, guys. Thanks for taking my questions. Sam, I'm curious. You guys call out, you know, kind of the active redesign of some of G5's product line. What kind of lift is that, and what's the timeline look around that? Sam Rubin: So it can vary quite a bit. I mean, we expect another one or two cameras to be redesigned or move forward in the next two, three months probably. After that, it gets a bit more complicated. So really large ones, complex very long-range ones. Take obviously much, much more effort. Trying to flow more resources at it to accelerate it. We've taken equipment from production to dedicate it also for prototyping, so that we can quickly turn it in. It's not an acute thing because we have a G5 and LightPath enough materials and access to enough materials right now to deliver what we need. It is more that, you know, we understand how uniquely it positions us. And we're seeing an overwhelming positive response from customers for the first two that we announced that we understand that doing more will possibly drive much more business to us. Scott Buck: That's helpful. Now does it change the way you're able to sell some of these products in the near term? Sam Rubin: I don't know. What in what way do you mean? Scott Buck: Just in terms of if it's gonna take months. Right, to kind of redesign some of these new, you know, kind of take it out of the, you know, the quote product catalog here in the near term? Sam Rubin: No. No. We can still deliver the products, these are new versions, if you would, but we are seeing customers already placing orders for them before we produce even one of them. So just telling customers we're doing that and we will have a germanium-free version is driving some orders. Scott Buck: Okay. Perfect. That's helpful. And then the second question I had the 40 or so million that you've announced with the leading global technology customer, I'm curious. Was any revenue expectation from this customer within the initial kind of $55 million of annual revenue you laid out at the time of the acquisition? Al Miranda: So, when we did our due diligence, we thought this customer would be around $9 million on a run rate per year. So it's more than it's more than twice that now. Scott Buck: Okay. So there's incremental revenue in there and meaningful incremental revenue with Al Miranda: Yeah. And prior to that, that particular customer did about $4 million with G5 before we were in the picture. Scott Buck: Okay. Perfect. Well, I appreciate the added color, guys. Thanks a lot. Operator: The next question comes from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed. Brian Kinstlinger: Great. Thanks so much for taking my questions, and congrats on the recent wins. I take 60% of the $90 million backlog suggests you've already got about $54 million of revenue in hand roughly, plus or minus, for next year. I'm wondering, is the company adjusted EBITDA profitable on that? Is 5% a reasonable target, plus or minus? And then as you think about profit, is that more of a second-year half of the year event? Or do you think you're already at that run rate starting next year to generate profit? Al Miranda: So we would if I, Brian, if I look at the consensus, I would say that at this point, the consensus on revenue would have to be raised by about 10%. Right? So if you look back at where we were three months ago, you know, or four months ago when we had this discussion, from that, we do get some uplift. Obviously, we get uplift in gross margin, and we do get uplift in EBITDA. So I would expect that we would be positive on that higher level of revenue. Brian Kinstlinger: But I based on the gross margin comments, it's gonna take some quarters to get to thirty-five. Maybe that's the second half of the year event, not first. Al Miranda: Yep. That's exactly right. Yep. Brian Kinstlinger: Great. So that brings me into my second question. Because in the backlog, you said you didn't separate it out to one of the previous questions. By the companies. Remind us the first tranche of what you call the first twelve-month earn-out revenue and EBITDA target, I assume you'll eventually have to split it out. And then your thoughts on both EBITDA and revenue targets and ability to meet it. Obviously, revenue seems likely, but I'm curious about more on the EBITDA side. Al Miranda: Yes. So I thought the question was cameras and assemblies. We didn't break it out by product line. We know exactly what G5 backlog is, obviously. Right. Right? So and to refresh your memory, it was $21 million in revenue always with 20% EBITDA. So it's 21, 23, 25, and 27. Those are the earn-out targets for them. We're watching that pretty closely, obviously. The backlog, back order for them indicates they'll hit that first mark. So you know, we're actually pleased, I guess, you could say. That we're gonna end up giving them more earn-out than we expected to. But with the caveat that they've gotta deliver that 20% EBITDA as well to go with it. Right. Brian Kinstlinger: That seems to be the only uncertain piece is if that'll happen or not, it sounds like. Al Miranda: That's correct. Yeah. Brian Kinstlinger: Okay. Thanks so much. Sam Rubin: Thank you. Operator: Ladies and gentlemen, we have concluded our Q&A session. And I'd like to turn the call back to Sam Rubin for closing remarks. Sam Rubin: Thank you. We appreciate everyone's interest and patience as we've been going through this transformation. I can definitely say now with confidence that we're well at an inflection point and are very pleased with where we are. We expect to see this translate to gross margins and bottom line at least cash flow very soon. As well as continued growth from the top line. I look forward to reporting again in a few weeks for our first fiscal quarter and wish everyone a good day. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.
Craig Baxter: Good morning, ladies and gentlemen, and welcome to EnQuest PLC's results for the first half of 2025. Throughout this webcast, you will have the opportunity to submit questions at any time, and we will look to answer as many of these as possible during the Q&A session at the end of the presentation. Without further ado, I will hand you over to our Chief Executive Officer, Amjad Bseisu. Amjad Bseisu: Thank you very much, Craig, and good morning, ladies and gentlemen. Welcome to our 2025 half year results presentation. Thank you very much for the time joining us today. My name is Amjad Bseisu. I'm the CEO of EnQuest. Joining me today is our Chief Financial Officer, Jonathan Copus; and Steve Bowyer, our U.K. North Sea Managing Director. Craig Baxter is also joining us, Head of Investor Relations and Corporate Affairs. Steve and Jonathan lead the high-performing teams across our business, and our operational performance has remained very strong in the first half of the year, as you will see. Let's start with the backdrop of U.K. The U.K. North Sea remains one of the most challenging environments in oil and gas as evolving fiscal and regulatory pressure continue to undermine global competitiveness. With the sector losing 1,000 jobs every month according to our industry OEUK outfit, crucial that the government urgently reforms energy profit study, which now delivers a fraction of the originally projected revenue. Only a fair, more predictable tax environment can help companies like ours to invest and secure a U.K. energy supply that protects jobs in this critical energy transition environment and allows success of the business. The opportunity is there now and today to enact positive change in the upcoming autumn budget. We are poised to play a leading part in enhancing the U.K.'s energy security and protecting the jobs that are vital to our country and also the energy transition ambitions. So let's start by looking at our fundamentals, which have been strong and that underpin the business. For those who are less familiar with EnQuest, EnQuest is an independent energy company with operations focused on the U.K. North Sea and Southeast Asia. We are listed in 2010, and our foundations are based on acquiring mature underdeveloped assets and from the majors and developing those assets and producing more out of those assets. We've done that in 9 hubs and continue now with the new expansion in Southeast Asia to have 7 operating assets. We've built a strong expertise in mature asset management, driving efficiencies, optimizing operations to extend lives. Over the years, our capability mix has expanded also to maximize recovery of oil through top quartile drilling and major project execution. We are also now proud to be recognized as we've built a very strong sector-leading decommissioning business. Over the past 12 months, we've also expanded our Southeast Asia business significantly. We are now in 4 countries, building on a strong reputation that we have forged over 11 years of successful operations in Malaysia and having been chosen the Operator of the Year 2 years in a row in Malaysia, something I think is the first to have. With the recent acquisition of Harbour's Vietnam business, we now have 7 assets, as I mentioned, with material reserves and resources in place, and we operate nearly all of our assets, deploying our operating expertise to maximize our value, which is our big business proposition. We also operate the Sullom Voe Terminal in the Shetland Island in Scotland, which is a very critical asset for us, both upstream as well as for our new energy decarbonization and renewable business, which is [ varied ]. We've got a number of assets which have also moved into decommissioning over the last few years and have reached the end of their useful economic life. So we have had from taking the assets to decommission the assets, a full cycle of asset management. As we're all aware, the energy transition -- the energy landscape is in transition. And to ensure our long-term success, we recognize that the business must continue to show resilience, creativity and adaptability. The combination of the core capabilities set for EnQuest set us apart from any of our peers. We are able to take these assets and produce more out of these assets and have proven that over the last 15 years. By lowering cost, improving uptime, these assets last longer and run in the hands of us as a better operator. Since our inception, we've extended the useful life of all 9 assets that we've operated. Next slide. Our strategy is underpinned by us being established as a top quartile operating company, both in the U.K. and in Southeast Asia. This is demonstrable across the whole life cycle, as I mentioned, of the assets from the beginning through decommissioning. During the first half of 2025, our production efficiency was 89% and would have been 94%, excluding a third-party infrastructure outage in Magnus, which is certainly upper quartile and maybe even best-in-class. With 96% of our 2P reserves under our operatorship, we maintain control over our asset management, which is a key factor for our excellence over the years. The operational control has been pivotal in our ability to extend the lives of every asset that we've operated and also provide us with a line of sight of material organic opportunities around our assets for optimizing our core assets. We've done that in Magnus, Kraken, PM8/Seligi and our other assets. We can now proudly say that our expertise extends to the decommissioning performance, where we've executed 81 wells since 2022. And the activity has been mostly focused on Thistle and Heather, where we recently completed also the largest lift of topsides in the U.K. of 15,300 tonnes in 2025, the heaviest lift planned in 2025. We have now completed the Heather disembarkation and look forward disembarkation of Thistle in early 2026. And again, as I said, we're very proud to have now the ability to say we are sector leading in the decommissioning area also alongside the other areas like drilling, project execution and operations. This new capability is a key enabler for us, both to transact in the U.K. and to maximize the value of our assets. As you will see from Jonathan's presentation, we've had a significant continuing deleveraging path during which we've directed our free cash flow to repay around $1.6 billion of debt. We remain very much ready for our transformative growth and looking to utilize our tax assets. Our net debt, as mentioned, continues to go down and was $377 million on the 30th of June. And our liquidity has increased from $475 million at the end of last year to $578 million at the end of June. We've been clear on our strategic focus on executing transactions, which we have done in Southeast Asia and using our U.K. tax asset of $3.3 billion to execute another transaction in the U.K. It's a matter of public records that we were in discussions with Serica earlier this year about a combination, which didn't come to fruition, but we remain engaged in negotiations across several other U.K. growth opportunities, and everyone at EnQuest is motivated to complete a value-accretive U.K. deal in the coming months, similar to the deals that we've done in Southeast Asia. We also remain active outside of the U.K., adding scale to our business in Southeast Asia. Next slide, where conditions are conducive to investments across the life cycle. Over the past 12 months, we've executed 5 growth transactions across Southeast Asia, and we've stated that we see this as part of a business reaching 35,000 barrels of oil equivalent production by the end of the decade. We have visibility now on getting to our goal through the acquisitions that we've made. These transactions include a full corporate acquisition in Vietnam, which brings flowing barrels which have produced over 5,000 barrels in the first half of this year. Development of existing infrastructure to unlock significant gas volumes. That's done in PM8 Seligi, where we have signed a gas sales agreement, and we will be starting to produce 70 million scfs a day early next year for production into the system. New developments like DEWA in Sarawak as well as in Brunei with -- the joint venture with the government -- 50-50 joint venture, which we've announced recently, which will be gas weighed into gas sales agreement and into LNG plants and a significant exploration and appraisal opportunity in Indonesia with us being as operator and bp and the LNG Tangguh Alliance being our very strategically important partner because we have access to the infrastructure there. Our growth in the region sees EnQuest in these new areas, adding 3 new countries to our main hub of Vietnam and emphasizing the strong reputation we've built over 10 years operating in Malaysia. I was extremely proud to see EnQuest again named as Operator of the Year in Malaysia, the first of any operator to achieve this accolade. And this is clear that PETRONAS' recognition of our credentials has opened the doors for us in many other countries. We've also received the award for decommissioning excellence in Southeast Asia, of which I'm extremely proud. The Southeast Asia team continues to deliver against our strategic growth aims, and we intend to build on our recent deal momentum with further M&A activity. I'll hand over to Jonathan to cover the financial performance for the first half of the year. Jonathan Copus: Thanks, Amjad. So just moving to my first slide. I think the first thing to say here is that financially speaking, the foundation of everything we do is our capital structure, and we are committed to maintaining both a strong and flexible capital structure. Now to that end, in the last 12 months, we have taken steps to simplify our balance sheet as well as continue paying down or reducing our net debt. At the moment, we have -- well, now we have a structure that is built primarily around our flexible RBL and also our foundation of bonds as well. When we think about capital discipline, we are focused on a few things. First of all, fast payback investment. That is where we can see opportunity organically within the portfolio. And alongside that, of course, we're also focused on growth, diversification and internationalization. And Amjad spoke about our transactional activity in Vietnam, but also ambitions both in the North Sea and Southeast Asia. And of course, we also paid our maiden dividend in June of this year. If we move on to the income statement, Amjad mentioned that in the first half, we had disruption at the -- third-party disruption at the Ninian facility. And that meant that we lost about 3,500 barrels a day of production in the first half. Now that's equivalent to about one cargo deferred and the value of that at prevailing prices would have been something like $40 million to $50 million. We also saw a 14% year-on-year reduction in Brent. However, we have a strong commodity hedge position and gains on that hedge book mean that in the period, we reported revenue of $549 million, which was a strong delivery. Cost of sales totaled $389 million. And within that, we held operating costs flat year-on-year, and that was despite an 11% weakening in the U.S. dollar. So again, a strong performance here in terms of costs. On a unit basis, of course, the numbers are again impacted by the Magnus outage. And including hedging, our unit OpEx for the period was $26.4 per BOE. Our adjusted EBITDA was $235 million. And the other number that jumps out of the income statement is our tax charge, which is significantly distorted by the 2-year extension to EPL and the deferred tax impact that we see coming through the income statement. So within that $239 million tax charge, $50 million of it was current and $189 million was deferred, $124 million of that figure being this 2-year extension to EPL, which has impacted our numbers, and you would have seen that impact across the sector as well. However, if you move to free cash flow, we delivered free cash flow in the period of $33 million. And from that, we paid our $15 million dividend, and we reduced our net debt to $377 million. CapEx in the period was $83 million. We spent $31 million on decommissioning. And at the 30th of June, our cash and available facilities had increased to $578 million, which is about $100 million rise on the position at the end of 2024. Now driving that increase was a positive redetermination outcome on our RBL, which we detail on the next slide. So through our year-end redetermination, we saw a 34% uplift in terms of our capacity on the RBL. And that reflects the tangibility, but also the consistent delivery and high levels of uptime on our assets as well. As Amjad mentioned, you can see that in recent years, we have reduced our net debt position by $1.6 billion. And that has taken very significant focus and very significant discipline, and it's something we're proud of. We have no debt maturities before 2027. And of course, the other key asset that we have as well are our tax assets. And those at the 30th of June totaled $2 billion in the recognized category with a further $1.2 billion that are yet to be recognized. Finally, turning to our guidance. We are reiterating all of our guidance points today. These are given on a pro forma basis: production 40,000 to 45,000 BOE a day; operating expenditure, $450 million for the year; CapEx of $190 million; decommissioning of $60 million; and of course, as I said, we paid our maiden dividend of $15 million. Looking to 2026, organic growth is our focus in terms of the core portfolio, and we have projects such as the Kraken EOR project and the optimization of Magnus production. In terms of operating expenditure, we are consistently focused on maintenance and maximizing our asset uptime and continuing the excellent production efficiencies, which we continue to see across the portfolio, both in the North Sea and Southeast Asia. And in terms of CapEx, we remain very focused on low-cost, quick payback opportunities. And in terms of shareholder returns, these sit within our capital priorities, and we aim to deliver every year a sustainable capital allocation framework that builds value for our shareholders. So now just handing over to Steve, who will cover the operations. Steve Bowyer: Good morning, everyone. Thank you, Jonathan. I'm Steve Bowyer, U.K. Managing Director. I'm pleased to report on a very strong operational year for the business. Our operational performance has been exceptional across all facets of the energy transition, and I'll talk you through how we've managed to do that and through the first part of the year, with the only blip in the year being the third-party outage at NCP and what I'm pleased to report that we worked very well and collaboratively with CNRI, the holder and operator of the Ninian Central platform to resolve the minor [indiscernible] on NCP in short order and making sure we delivered an alarm solution and got production back on within 5 weeks. Just to talk through our operating performance, underpinning everything we do is delivering safe results. We continue to strive for continuous improvement on our health and safety performance. As Amjad mentioned already, we've received awards in Malaysia, not just for our operating performance, but also for our HSE excellence where it's been very strong, and I'll talk through that when we get to the Southeast Asia section. And we've delivered 3-plus years LTI-free on Kraken, and we're 19-plus years LTI-free on GPA. So very strong performance across the assets. Our operational excellence comes through very strongly in our production efficiencies. Production efficiency of 94% is best-in-class. That excludes the NCP outage. But if you look at what we're in control of as EnQuest as operator, a phenomenal performance by the teams. And that's focused on prioritizing the right operational activities, making sure we understand the asset fully, invest in integrity and making sure our assets run as well as they possibly can. And when you consider within that portfolio is Magnus, which is over 40 years old, that's a phenomenal performance. Production is right in line with guidance for the first half of the year despite the NCP outage. Obviously, if you exclude Vietnam, which is 5,000 BOEs a day, so we're right in the middle of the range if you exclude Vietnam. And Amjad already mentioned, we're very proud again to be awarded Malaysia Operator of the Year, which I believe is the first. And I think in the market we're in, we all know the North Sea is quite difficult at the moment with the continued application of EPL and obviously, commodity prices being lower than potentially we'd expected, our strong cost discipline comes to the fore. So we have a track record of extending field lives significantly of 10-plus years. We've used that cost discipline and work very closely with the teams and good collaboration across all teams from supply chain through operations to ensure that we maintain costs flat despite material inflationary pressures and material FX impacts across the business. So really good work by the teams in a particularly challenging market. We remain at the forefront of the energy transition, decarbonizing our existing oil and gas assets and also making good progress on our SVT projects to reduce emissions by 90%. And at Veri Energy, although the transition takes a little bit longer than anyone had anticipated, we're making good progress on onshore wind and continuing to study carbon storage and excited about the potential through e-fuels. And as Amjad mentioned, it's key to be good at decommissioning. If you're going to be active in the energy transition and it's a key part of any future acquisition we do, our performance has been exceptional in decommissioning. We've P&A'd over 81 wells and since 2022, and that's effectively more than 35% of the Northern and Central North Sea P&A across the basin, and we've done that at 35% below the basin average cost. Big achievements as well. So although our wells P&A team is exceptional, good decommissioning comes down to strong project management. And our team there, as you'll see, have safely disembarked the Heather platform, and I'll show you a video later, which highlights how strong our operational capability is as you'll see the Heather fast lift actually in action. And as I talk through each of the assets, we'll start with Kraken. So Kraken continued its exceptional performance from 2024 and 2025. You can see production efficiency. Kraken is up at 96%, which is 30% above the basin average for FPSOs, which is phenomenal. We continue to optimize our emissions through going direct to the marine market for sales. We've managed to take the Bressay Gas tieback and progress that through towards FID. We're not at FID yet, but we have submitted a draft FDP to the NSTA, and we're clearly working with our partner, Waldorf to ensure we can get to an FID point. That project is really important for the future of Kraken. Not only does it reduce our emissions on Kraken, also delivers a material cost saving by reducing our reliance on diesel. In terms of future investment on Kraken, we're working on EOR, as Jonathan has mentioned, to enhance oil recovery. We see good potential upside through that, and we're also continuing to study infill drilling. So the future for Kraken will be EOR or infill drilling or a combination of the 2, and it may well end up being a combination of the 2 that we work on. And just to focus on costs again, the FPSO lease costs reduced at the start of 2Q 2025, which is an $80 million per annum saving, which is clearly very helpful. So really strong performance on Kraken and thanks to Bumi Armada for working very collaboratively with the teams on that asset. Flipping to Magnus. Late-life management asset expertise in play. The asset is over 40 years old. And as I mentioned earlier, we're way up at 95% if you exclude the NCP outage in terms of our operating efficiency, which is phenomenal. And that comes down to the teams really understanding the asset, great collaboration from the offshore teams right through the onshore teams. And if you look at our production that we managed to deliver through the early part of this year, post the NCP outage, we were up at 19,000 BOEs a day. We've sustained production around that level since mid-July, and that's a peak 3-month oil rate that we've seen on Magnus since 2020. But further than that, we've actually managed to take the water cut of the field, which is a measure of how efficient you are in terms of your reservoir recovery. We've taken that back to 85%, which was at pre-acquisition levels. So that's been done by excellent performance on drilling where we've brought the drilling and the well interventions of the recent wells in at cost and on target and tremendous work by the subsurface team working with the operations team and the production teams to ensure that we fully maximize delivery from that asset. And as you look forward on Magnus, obviously buoyed by recent performance, we're planning a future infill drilling program, looking to reestablish drilling back on Magnus later in 2026 and looking at potentially up to 6 wells in that program. Oil production, as we say, has been at peak rates. There's no planned maintenance. So being as efficient as we are, we actually took the opportunity to complete any Magnus shutdown work that we needed to do in 2025 during the NCP outage. So there's no further maintenance outages planned until 2026. And as I've mentioned, our reservoir management strategy has been extremely successful, ensuring that we maximize water injection and throughput and get the water into the right places and sweep as many barrels as we can out of that Magnus reservoir. Flipping into Southeast Asia, where our operating efficiency and our capability has been very well transferred across, you can see production efficiency of the assets at 93%. We've also completed the 4 infill well campaign and well restoration program and well workovers, increasing production by around 10% versus the first half 2024 average. Important as well is the Seligi 1B gas agreement, which expands our gas footprint and expands our reserves and our production. We've managed to accelerate first gas of that project Q1 2026, which will add 6,000 BOEs a day of gas from that point, which is really good work by the teams in Southeast Asia. And just to mention the strong HSE performance, 3 years and over 6 million man hours LTI fees is a great performance by the team. Amjad mentioned how we're expanding our Southeast Asia footprint. So we've got the DEWA PLC now. We're at early stages of studying that opportunity, but it's up to 500 Bcf gas in place, which is a really exciting expansion opportunity for the company. And we've got 2 further gas infill wells planned to be drilled in 2026 in our Malaysian portfolio. So really good performance, not just in the North Sea, but across Southeast Asia. Flipping to Vietnam, which we successfully completed the acquisition of in early July. Pleased to say that the operators handed the asset over in good shape with above expectation production through the first half of the year. We'll now, as Jonathan has mentioned, take our EnQuest skills to bear around getting into fast payback opportunities. We've seen an opportunity and the Vietnam team have highlighted that to bring back some wells into production early on [indiscernible] phase of the asset. So we'll be active on that asset now in terms of getting after the fast quick win payback opportunities. The team have come across and are fully energized and pleased to be part of the EnQuest team. So we're looking forward to extending the life of that asset and making sure we exploit the asset fully. It's a very accretive asset, life of field asset breakeven is about $40 per BOE, and it's high-value crude at a 10% premium to Brent. Just moving on to SVT. So this is a great example for the U.K. government as to how the energy transition should work. And so we're in play at the moment with 2 key projects. We've got the new stabilization facility and the connection to the U.K. grid. They allow us to extend the life of SVT and extend the life of the oil and gas facility and oil and gas production as far as possible. As I mentioned, we're very focused on energy transition projects and new energy projects through Veri Energy. As we all understand in the market now, they'll take a little bit longer to bring to bear, although we are making good progress on onshore wind. So clearly, we need to maintain the life of oil and gas assets as long as we can. We're very focused on that SVT where we can see life going out into the 2050s and that allows more than sufficient time for the new energy projects to come through, hopefully in late 2020s into the 2030s and start to actually act on the energy transition in the way it should be done with a managed and effective transition. In terms of decommissioning, so very strong performance, good validation by our peers who are very impressed with our performance. As I think I mentioned last time I spoke, we were awarded additional P&A operatorship and well abandonment operatorship by one of our peers, which is very good. The Heather P&A was successfully completed by the teams. We also completed safely the disembarkation from the platform. And I'll show you in a minute the Heather top size lift, which was completed with a fast lift. It took about 14 seconds to lift the full topsize facility from the jacket, which is very impressive and done safely. And more impressively, we're looking at basically 95% recycling of that topside facility at the Maersk yard in Denmark. So great work by Heather, and I'll talk a bit more about that before we launch the video. On Thistle, we've now completed all of the platform P&A operations, which is great in terms of Phase 1, 2 and all the conductor recoveries that we needed to do from the platform. As Amjad mentioned, we're on target to disembark in early 2026. And again, very successful performance across that asset. Both projects have remained pretty close to budget within about 5% of the original budgets, and that's been done in a very high inflationary market. So really good performance by the team to control the [indiscernible] costs. And again, Southeast Asia, we transfer our skills across. So really good to see the abandonment excellence award being given to the teams from PETRONAS and the Emerald awards, and that's a good benchmark for the teams. We've also, as I've mentioned, completed the P&A of 81 wells since 2022. We've done that at 35% of the benchmark cost, and we're pleased to have signed up a contract with Well-Safe, which is a multiyear contract, which allows us to complete decommissioning. As always, with EnQuest, our decommissioning, we keep operated control but very low exposure to the decommissioning cost, which is really important from a business management perspective. And we'll commence with low equity but very well-executed decommissioning on the Magnus field with some subsea well P&A, which is due to commence in 2027. In terms of going forward, we keep 95% operatorship of our decom. We've got our decom plans carefully managed. We've got excellent teams in place, and we're very comfortable with the capability we've delivered, which I think is seen as best-in-class across the industry. And just to mention Heather. So Heather was an exemplar asset in its production phase. It went through production of 47 years. The asset is 47 years old now, and I'm pleased to say that it's been an exemplar through the decommissioning phase as well. It's been many workers' homes for a long time. I think one of the employees remained on the asset for the full 47 years. So clearly, it's quite sad to see people moving on and losing their jobs as we P&A assets. But we do it in the right way and we do it as an exemplar of how the decommissioning field should be done, then it's something to be proud of. And you'll see through the video that's just a way to play how strong our decommissioning capability is and how good we are at executing decommissioning with our key supply chain providers. And clearly, the Pioneering Spirit, which executed the work did a phenomenal job of the fast lift. [Presentation] Steve Bowyer: I'll now pass you back to Amjad to conclude the presentation. Amjad Bseisu: Thank you very much, Steve. And that's, I guess, just a great video showing examples of exceptional work where things are very complex, but for everything to fit in exactly at the right time in the right place and the right conditions and the right measurements is, again, just something that shows how we have tremendous attention to detail and the ability to execute these very complex projects. Next slide. So again, delivering organic growth is key. We'll continue to progress and execute opportunities, which provide these growth both organically now that we have a much wider business set, including the acquisitions in Asia that give us more organic opportunities in Malaysia, where we have signed for access to the gas in PM8/Seligi, have signed the first agreement there. We have over 2 Tcf of resource there in the PM8/Seligi fields that we're able to access given the new commercial framework. And we have a ready partner in PETRONAS that needs gas. So I think we're very excited about that. DEWA, transformative opportunity in Sarawak to try and develop gas resources, as Steve mentioned, 500 Bcf. Brunei, a significant opportunity also to develop a gas field and get LNG production there, too. And in the U.K., we're looking forward to the Bressay development that Steve mentioned which again is -- gives us production, but also reduces -- importantly, reduces our emissions in our path to net zero as we've talked about. So we continue also to focus on our relative tax advantage in the U.K. and reemphasizing the expectation that we will grow the North Sea business materially, enable us to release these tax assets, and I think that's one of our key and primary goals and remains our primary goals. We remain committed to growth, as you've seen, but not at any cost. We're focused on creating value for shareholders, and we'll continue to be very disciplined in our M&A, underpinned by a strategy to invest capital where we identify the most favorable terms and returns. This way, we can bring our wide skill sets to bear and continue our track record of extending the economic life of all assets under the execution and operatorship that we have. Of course, our decommissioning expertise now is increasingly important and has become another tenet of our enablers going forward, both in looking at assets and in M&A. In all our endeavors, we also look to diversify the portfolio to improve our overall carbon intensity. And as you've seen, we're shifting a lot more to gas in the future in the commodity mix. We have a clear path in place to add value accretive scale to our business, and I'm energized by the opportunities which are ahead of us. As you've seen, we've seen tremendous growth in Asia, almost 300% growth from last year to next year, and we are continuing to look at growth opportunities in the U.K. and in Southeast Asia. Next slide. In conclusion, you can see our operational strengths are well suited to very mature oil and gas basins and are able -- we are able to transfer for this across geographies. At our core, EnQuest is an agile independent energy company focused on asset-rich regions in the U.K. and Southeast Asia. Since our listing 15 years ago, we have a proven model, acquiring mature and underdeveloped assets from majors and have enabled us to drive operational efficiencies to extend asset lives, maximize value even in complex operating conditions. With our deleveraged balance sheet, enhanced liquidity and significant U.K. tax assets, our strong fundamentals see us very well positioned to deliver transformative continuing value-accretive growth opportunities to our shareholders. Thank you all for your attention. We'll now move to Q&A, and I'll hand over to Craig on the Q&A section. Thank you, everyone. Craig Baxter: Thank you very much, Amjad, and thank you, gentlemen, for the presentation. I'm pleased to say we have a number of questions that have been submitted through the presentation. I'm going to keep you busy for a little bit longer, if that's all right. And we'll start off, if I may, with Alejandra Magana from JPMorgan. And Jonathan, I'll maybe come to you first, and I'm sure Amjad will want to comment on the second part of this question. Alejandra has asked us with regard to transformational U.K. acquisitions to expand a little bit on the financial flexibility that we have today in terms of balance sheet strength, liquidity and the undrawn facilities we can access to act on opportunities as they arise. And maybe this is one more for Amjad. She's looking for a bit of a sense of what we're seeing in the current market and what the sort of bid-ask spreads are in terms of valuation? Jonathan Copus: Sure. Yes. Let me kick off. Yes. So a lot of -- the aim of our deleverage pathway has been to not just reduce our net debt, but to simplify our balance sheet as well, and we've been successful in doing that. We had net debt of $377 million at the 30th of June. And within that figure, our cash balances were $331 million. As I mentioned, we also had a positive redetermination on our RBL. And that meant that the cash and available facilities at the 30th of June was $578 million. Now that provides a great platform to use for transacting. But more to the point, because our debt and our capital structure are simplified, it means that we can also act simply in terms of structuring deals. And that is a great positive in terms of derisking the kind of transactional pathway. I think the other thing that I would point to is that a number of these deals also have quite a long period between the effective date and completion. And you can see this in Vietnam, where the consideration paid was $85 million. The final cash payment was $22 million. So another moving part in terms of financing these deals are those interim cash flow pathways as well. So we certainly have the capacity to transact from a balance sheet point of view. Everything in our ethos around it, not just financially, but in terms of positioning is about being simple and straightforward. And we believe that gives us the best pathway in terms of engagement, but also moving conversations through to completion as well. Amjad, just hand over to you for other comments. Amjad Bseisu: Yes. So the comment on what do we see in current environment on M&A. I mean I think we see a slightly slowed down environment in the U.K. because of the fiscal uncertainty. And so there's been more joint ventures, and that's been kind of the M&A transaction of choice. We've seen a few transactions there with Repsol, NEO and Equinor, Shell and indeed, even Eni is more of a JV there, too. So we've seen that in the past. But I do think we're still seeing opportunities. We're still seeing our asset as a very critical asset and tax asset to move forward, and we are still in discussions on several fronts. In Southeast Asia, as you note, we have had 4 opportunities that we closed: 1 production, 2 developments and 1 appraisal exploration opportunity. And we continue to look at opportunities there. And we have -- we are now in 4 countries in Southeast Asia. So our footprint is growing quite rapidly. I would say we're probably one of the leading independents now in Southeast Asia. We've also tripled our production there in the last -- between last year and next year, so in the last 2 years effectively. And that also is a great testament to ability to grow quickly when we have the balance sheet to do it, as Jonathan mentioned. Craig Baxter: Thanks, Amjad. That's actually a perfect segue into Alejandra's other question, which is around Southeast Asia. And she's looking for a bit of color from you on the sort of the relative cash and cash flow and economic attractiveness of the growth. We've mentioned today in Southeast Asia versus what we see in the U.K., particularly when you factor in fiscal regimes, reinvestment requirements, et cetera. And as a bolt-on to that question, we've talked a little bit about the upside opportunities now that we have our hands on the Vietnam asset, there's obviously some upside there, both with the current assets and across the field. So maybe if you could touch on some of those, that would be very helpful? Amjad Bseisu: Okay. So on the U.K. versus Asia, I mean, they are very different propositions in terms of investment. U.K. gives you full access to cash flow with tax being paid. There is no royalty being paid in the U.K., but it's very sensitive to oil price. And as we've seen this year, the cash flows are lower because the oil price is lower. In Southeast Asia, the opportunities are more production sharing contract types where the cost recovery takes a big load of the contractor, which would be ourselves. So it's less sensitive to oil price movements versus the U.K. So U.K. is very sensitive to oil price movement. And with a high tax rate in the U.K., the investment -- organic investment gets much more challenging because, again, it's the volatility to oil price is very high. So I mean, we're still investing in the U.K., but we would invest more and we would like to invest more if the U.K. fiscal conditions improve. We continue to look at Asia opportunities. I think in Vietnam, we took over in July, and we are looking now to have a full field model analysis and opportunity analysis. I'm confident in the next few months, we'll see a segue to a program. We're already starting a program with our first workover in Southeast Asia in Vietnam, but we will look at a drilling program in the future. And we are looking to expand the Malaysia gas [indiscernible] phase. Our first phase is 70 million standard cubic foot a day from PM8/Seligi. We're looking to expand that significantly. And as you've seen in our analysis -- our results analysis, we also have a contract -- first phase of the DEWA, the development contract; also the first phase of Brunei. These are development opportunities subject to final investment decisions. But we get great comfort that those resources have been certified. And again, we -- in our hands, it will be lower cost to develop them. And that's why they are in our hands because we'll have a much more efficient development approach to them. Craig Baxter: Thanks, Amjad. And staying with the new developments, a question from James Hosie at Shore Capital around the developments at DEWA and Block C in Brunei, whether EnQuest will be selling gas at a price linked to LNG spot prices and what you see the market is for those resources? And James' follow-up is also reverting back to Vietnam. It's around EnQuest's appetite to extend the license beyond the 2030 sunset that's currently in place. Amjad Bseisu: Yes. So on gas prices, in Malaysia, there's this Malaysian reference price. So as we've negotiated the first contract on PM8/Seligi, it's related -- the price would be related to Malaysian reference price, which is probably around $7 or $8 in Peninsular Malaysia. In Sarawak, it could be a multiple of that, but it's usually also relating to the Malaysian reference price. There is -- I mean, obviously, there's -- in Sarawak, there is an LNG plant and PETRONAS could buy the gas for the LNG, but the purchase is relating to the Malaysian reference price. In Brunei, the access is to LNG and the plan is to produce into the LNG plant in BSP, the Brunei LNG plant. So commercial discussions would be ongoing post the first phase of front-end engineering design and when we get to the CapEx and the economics of the project. So that would be the segue into that. And indeed, this is a very early phase in Indonesia, very, very early phase, but that would be the -- also access to the LNG plant in Tangguh is key for developing that resource -- the gas resources once those are in commercial quantities. So again, that would be an LNG development. Hence, the push for us to bring in the LNG partners -- Tangguh LNG partners. On the Vietnam extension, we are keen on looking to expand there, both our investment and extending the PSC. So I think we are -- we will get into discussions on that in the future once our investment program is crystallized. Craig Baxter: Thanks, Andrew. finishing up on Southeast Asia for the moment, unless other questions, of course, come in. Sam at Peel Hunt has asked a little bit about your thoughts on the CapEx required to sort of develop out these resources. And obviously, we haven't put any numbers out there publicly. But just your thoughts, Amjad, how you see the investment landscape between the U.K. and Southeast Asia going forward? Amjad Bseisu: Yes. So you've seen the cash flows from Malaysia and Vietnam. So I think we actually have assets there now that have significant cash flow. So as Jonathan mentioned, between first of '24 and middle of '25, there was over $50 million cash flow from Vietnam. And the numbers in Malaysia are also very robust. And they will -- with the increase in production and the gas sales agreement, they will become robust. So the first thing I want to outline is we have 15,000 barrels a day next year of production. And so our cash flows will have gone up by the same factor of production roughly. So I think we'll have significant cash flows generated in the region itself. And so that will go a long way to actually providing the CapEx. Indeed, our first phase development, the first phase that we've had for the gas development, the 70 million standard cubic feet a day, which was contractually around $100 million, that has been generated internally, and we did not call on resources from corporate or external debt. And so that will be in place for gas to start next year. Now it's too early to identify both DEWA where we're a 40% partner -- 43%, and Brunei we're a 50% partner. But I feel the cash flows will be reasonable, and it's fit for purpose for EnQuest. That's why we're in those developments. So I think we -- between our cash flow and our facilities, we will be able to finance our share of those. Craig Baxter: Thanks, Amjad. That's very clear. Switching to the U.K. now, we've got a number of questions, and some of them I kind of aggregate up because they're on similar themes. A question, I guess, for Steve and Amjad. So we've got a few questions on the scale of Kraken EOR. Obviously, you've talked about that a little bit over the last few months and certainly today. And Steve, I think touched on the combination of infill drilling and EOR. But it would be interesting and there's a number of people asking to get a bit more from you on EOR as a project and how that fits for the next phase of Kraken operations. Let me start with you, Steve. Steve Bowyer: Yes. So we've made good progress on Kraken EOR. We're currently studying polymers, testing polymers and we've been updating reservoir models. And the sweep efficiency of Kraken without EOR has been pretty good. So it's complex. There are new polymers coming on the market as well. So I think we previously mentioned we're progressing that towards a decision tail end of this year. We're still on track with that, but we may push that into early next year as we start to study further the polymers and optimize that fully, but we still see quite a bit of upside through Kraken EOR. There's still infill drilling opportunities on Kraken as well. You know we drill-ready infill opportunities previously. They still exist and are still strong. So I think EOR will either apply across the whole reservoir once we've selected the right polymer or it will be selective in certain areas of the reservoir where we'll instead go after infill drilling. So still excited by EOR. It's still a great potential opportunity for Kraken. It's just it's complex in terms of understanding the polymer, understand how it reacts within the reservoir and making sure we get the right optimized way forward. Craig Baxter: Thanks, Steve. Anything you want to add to that, Amjad? Amjad Bseisu: I just think the opportunities in U.K. organically are still very strong. I think we believe -- I mean, as you've seen from Steve's presentation, Magnus has had a great performance due to the wells drilled there and also to the increase in efficiencies that we've had. And in Kraken, as Steve mentioned, there were 2 drill-ready wells, which we had delayed because of our partner issues, but I think those will be coming in the future. And I think we're still excited about the EOR. The EOR is a material opportunity. The numbers are very significant. It has been tried elsewhere, and we're going to -- we're going to be focused on getting that, like Steve said, maybe in the early part of the next year. Craig Baxter: Thanks, Amjad. So sticking with the U.K., but switching from Kraken to Magnus. Both Charlie at Canaccord and Mark Wilson at Jefferies have asked about the 6 well program planned at Magnus. And talking a little bit -- there's a request to kind of give a feel of what that could generate for Magnus production and also just the sort of cost versus return trade-off with that obviously being a U.K. investment program. And maybe start again with Steve and Amjad, you can give your views if you wouldn't mind? Steve Bowyer: Yes. So we run an active well hopper across all of our assets. We've always got well opportunities there. Obviously, we've got some very successful well results. The 2 wells were above our expectations that we drilled this year, and that just shows the strength of the subsurface team we've got. We've focused on the LKCF, which is a less exploited part of the Magnus reservoir, which is a lower water cut. We've had some success in that. We've got water injection going in there. And we do still see plenty of Magnus opportunities, which we would look to drill. The wells we've drilled recently, they have paybacks within about 12 months. The future wells identified are very similar. And obviously, with those returns, we see healthy returns through our Magnus infill drilling program. When we go back, we tend to want to drill in the sequence and batch of wells. The team have already got a number of those opportunities matured, and we'll be working to mature up the opportunities with a return of drilling probably mid- to end 2026 on Magnus, where we'll mobilize and there will be a bit of time to get the rig back up and ready to run. But we're pretty confident we've got good opportunities already identified and more to mature on Magnus. So quite excited about the future of Magnus. And there'll be similar scale to the existing opportunities we drill where they're somewhere between about 1 million to 3 million barrel recovery wells, and those work out very well economically with our position in terms of our financial and fiscal position. So they are very robust in respect for VPL. Craig Baxter: Amjad, are you going to add? Amjad Bseisu: No, I'll just add that we're quite excited about the LKCF, which we've just drilled a recent well. The recovery factor there is relatively low. It's 24%. So a very rich opportunity for growth. It's almost 400 million barrels of stope there, and we're very excited about looking at that further as Steve mentioned. Craig Baxter: Thanks. Staying with Magnus, [indiscernible] from Sona has asked a question. Obviously, we've seen the third-party outage that's affected Magnus production in the first half of the year. So Steve, maybe coming to you. Do you have any sort of update on the future of the Ninian infrastructure, the time line to decommissioning and what EnQuest is doing to mitigate that and obviously secure future production of Magnus? Steve Bowyer: Yes. So I think it's understood in the market that Ninian Central is due to COP 2027. It may be later than that. We've clearly been progressing a bypass opportunity, which is a subsea -- basically a rerouting of the subsea pipe work. And we're progressing feed on that and we'll be well ahead. So we're ready to bypass the Ninian platform long before it gets to COP. So working very collaboratively with CNR and Total. Obviously, the all wind field comes through the same system, and we're very well progressed so far with our design around how we would bypass Ninian. So the future of Magnus is pretty much secured. We're still to FID the project, but it's a no-brainer in terms of FID. And so good progress by the teams in terms of being prepared for that. And obviously, that's a key facet of extending the life of SVT and the projects we're doing there. So we see a very strong life for Magnus going forward. The subsea operation is kind of routine, it's bypass pipe work. So it's basically a subsea rerouting of the pipe work where we've already got block and bleeds where we can tie into. So pretty solid and robust project that we're progressing forward. Craig Baxter: Thanks, Steve. Jonathan, coming to you, if I may, a couple of questions from Mr. Wilson at Jefferies. We've talked a little bit around -- and Steve touched on material cost inflation has been managed in the business. You yourself, Jonathan talked about the group managing to keep operating costs flat. Can you talk a little bit to EnQuest's kind of approach there and which areas have been the most pleasing for you in terms of that achievement? And also, Mark has asked just for you to give a quick summary and reminder for those listening around the way in which our GBP 3.2 billion U.K. tax asset is split up into the 2 component parts? Jonathan Copus: Sure. Yes. I mean, cost management is sort of absolutely core to what we do. We talk about it being in our sort of DNA, right? And operating in the basin we do and focus on extending the life of late-life assets or underdeveloped assets. A huge part of this is about delivering these things at optimal cost as well. Now in an inflationary environment, one way we can manage that is through activity in supply chain. And so certainly, across our sort of production operation business, but also our decommissioning business, we are good at securing equipment and securing equipment for extended pieces of work. Steve talked about the 6 wells grouping. We've also talked on this call about the Well-Safe contract, which has multiyear options. So that means that because we can give service providers visibility on extended periods of usage, it means we get good prices for that equipment. So I think the team does a great job in terms of all of that. I think the other thing though that goes hand-in-hand with cost management is also making sure that we manage costs in the right way. What we're not interested in doing is undermining the production uptime on the assets as well. So it's also really important to be on top of maintenance and things like that. And one thing that really helps us in this respect is the fact that we operate 96% of our 2P reserves. So that means that we're in very strong control of how we spend our time and also how we spend our money and that puts us in a good place in terms of managing costs. And just to sort of reiterate that point that I made, which is holding operating costs flat despite the weaker U.S. dollar. That's a combination of cost optimization. It's also a product of being proactive in terms of hedging out our dollar position as well. So I think both have kind of helped us in that respect. Turning to the tax assets. So these are very simply held. They sit within 2 entities. And that is a really important point because the value of these tax assets is not just their value sitting in our organization, it's their value deployed, so principally transaction. So Lion's share of that $3.2 billion tax loss sits within EnQuest Heather Limited and that is where all of our producing assets sit, and those tax assets are $2 billion that sit within that EHL entity. And these are what are called recognized tax losses, which means they sit on our balance sheet. So you can see that in our accounts and our notes. The other portion are what are called unrecognized tax losses, and they're only unrecognized because it's about the pathway to recovery, which means we don't recognize deferred tax assets alongside them. Now they total a further $1.2 billion, but they also are on a pathway to recognition, and we would expect to be bringing those into our recognized tax loss pool in the coming periods. So I think there's 2 really important things to focus on the tax losses. One is the size, but the second one is the simplicity of how they're held, which means that they can be deployed quickly and efficiently. And that, of course, is a big part of creating value around production in our portfolio and production that we can bring into the portfolio as well through transactions. Craig Baxter: Thanks for that, Jonathan. That was very, very clear. James, a question coming from [indiscernible], is around, James acknowledges we're not going to talk too much around other companies' processes, but he's asked whether we're seeing any issues arising from the parent Waldorf being in administration of agreement work programs, et cetera, and whether there's an opportunity here. I do understand we can't be too specific about this, but I think it's worth maybe reiterating the way in which the Kraken JV is moving forward. Amjad, do you want to take that one? Amjad Bseisu: Yes. So I mean, I think clearly, the administration process delayed our Kraken wells that we were planning to do. And obviously, we came into a settlement late '23, early '24. So we -- so we will continue looking at those prospects in the future. I would say the discussions on the Bressay Gas and the submission of the FTP, as mentioned by Steve, has been more constructive. And I think we've had a more constructive dialogue with the new management now that the new management has changed in Waldorf. So I think we see progress, but it's tough to say anything more than that at present. I do think that the Bressay Gas going into Kraken is strategically important, but also important from an emissions perspective and meeting emission standards in the U.K. So I think there's an impetus for that going forward. And I do feel that -- again, it's a question of time, but I do feel that the new approach that Waldorf is taking is more constructive. I don't know, Steve, do you want to add anything to that? Steve Bowyer: Yes, no. At a working level, I think relations are good, and we're making good progress on discussions around Bressay Gas. So as you say, the new management certainly improved things, and we're seeing good engagement from Waldorf. So on a day-to-day basis, which I think was the question, there's no real impact. And as you've mentioned, Amjad, Bressay Gas is really important to both companies in terms of the emissions reduction and obviously reducing cost for the asset and also for us, secures the Bressay license, which is important for future oil development once we're in a market where we can invest in large developments again. Craig Baxter: Thanks, gentlemen. I'll wrap up with a couple of wider questions that I'll put to you, please, Amjad. And these are based on a number of questions we've received today in the Q&A. So the first of which is -- and I guess you knew this one was probably coming, but it was around the U.K. fiscal system and our engagement with government and whether you see any positive moves on the horizon as we head towards the late November autumn statement. If you could give some thoughts, Amjad, I'm sure that would be appreciated by those joining. Amjad Bseisu: Yes. No. So I think we -- I'm part of the fiscal forum, the U.K. fiscal forum, which discusses the new tax system. Steve has also been very involved with the OEUK as well as being on the Board of the OEUK, but as well as with the government on these discussions and setting up these discussions, both from an industry perspective and from an individual company perspective. And I would say the government, it has been very constructive -- the discussions with the government have been very constructive. I think the government understands the needs of the business and has indeed come up with a framework that is very palatable to the business in terms of the new type of windfall tax, which we are very much supportive of as an industry, I think. So the question is how quickly that's put in place. And if we can get something put in place relatively quickly, I think we would kind of reduce the risks that are significant on the business. Obviously, the U.K. fiscal environment now is very difficult for the business, and it's one of the most challenging in the world. And I think a change of that fiscal regime is needed. The government, I think, framework for the future is that they've discussed would be palatable. And I think it needs to be put in place as quickly as possible to just reduce the challenges of this -- of our industry, where we're losing 1,000 jobs a month according to the OEUK analysis and our basin is declining. So I do feel that we are part of the transition. We have reduced our emissions by 40%. We're going to reduce them further by these projects in NSF that are very clear and critical. We -- with the new stabilization facility, we're reducing the footprint from 1.5 million barrels a day to 40,000 barrels a day. So we'll decrease the size of the facility significantly. And with the long-term power, we're taking out the gas turbines and removing and moving to wind power, both either on the terminal or supplied by the terminal for backup power. So we will reduce our emissions there by 90%. So we need the investments in the U.K. to be generated from our upstream business, so we can actually enact these very important reduction measures. But more importantly, we don't want to export jobs. I mean the U.K. will continue to use oil and gas for many, many decades to come. And instead of importing those resources and exporting our jobs, it's important that we produce those resources internally in the U.K. and keep our jobs in the U.K. Craig Baxter: Thank you, Amjad. Amjad, I'm going to ask you to close, please. And this is in response to a number of questions that have been raised today from long-standing holders that you know like [ David Larson ] and [indiscernible] you met at AGMs over the years and others. And it's around -- it's around shareholders. And obviously, we're trading at a discount to our valuation. So it's a bit of an outlook from you, Amjad, as to what our shareholders can look forward to in the future with EnQuest? Amjad Bseisu: Well, I mean, we, at EnQuest have a very unique proposition because we have proven that we can take assets that are underdeveloped and late life or mature life assets and extract value out of them. And you can see we've done that over and over again. We've done that in 9 operated assets that we've taken. We've now also proven that we can be the best decommissioning company for assets in our area, but also in Southeast Asia. I think we have done, as Steve mentioned, a tremendous job in the U.K., the largest decommissioning company in the Central and Northern North Sea by a long shot, 81 wells decommissioned, 35% below the NSTA standards. We've got the award in Southeast Asia for the best decommissioning company in Malaysia. And so I think the -- with us being the right shepherd of these assets, even in decommissioning cycle, which I think is important, but all through from their mid-life to the decommissioning, I think we have a unique set of skills. Our acquisition costs when we have the right assets are low. As you've seen in Vietnam, we can actually acquire assets for relatively low amount, similar to what we did in Malaysia and similar to what we've done in the U.K. with Greater Kittiwake and Thistle and Heather. So I think the impetus is on the government to make the basin actually investable. And I think we have the capability and expertise that is clearly world-class and clearly best-in-class in the U.K. to invest in these new opportunities. So I'm looking forward to the U.K. when we're prodding the government to make a change because, again, we've seen a handful of companies either fail or stop production, and there's no need for that. It's self-inflicted wounds. And we also see the platform in Southeast Asia now that we are in 4 countries and continue growing in those 4 countries. So I do see -- I'm very hopeful for the future. I think our financial position is strong, and it's clearly improved significantly from 5 years ago when our debt levels are high. And I mean, the impetus and the catalyst will be -- in the U.K. will be a change in the fiscal regime, which we're looking forward to. But in the meantime, we're redeploying our capital in Asia where the returns are attractive and the risk reward is high. Craig Baxter: Thank you, Amjad. That's very clear. Thanks for that. Thank you for all your time, gentlemen, through the Q&A. So I propose we close here. Thank you very much. Amjad Bseisu: Thank you, everyone. Steve Bowyer: Thank you. Jonathan Copus: Thank you.
Operator: Thank you for standing by, and welcome to the Q3 2025 AGF Management Limited Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Tsang. You may begin. Ken Tsang: Thank you, operator, and good morning, everyone. I'm Ken Tsang, Chief Financial Officer of AGF Management Limited. Today, we will be discussing the financial results for the third quarter of fiscal 2025. Slides supporting today's call and webcast can be found in the Investor Relations section of agf.com. Also speaking on the call today will be Judy Goldring, Chief Executive Officer. For the question-and-answer period following the presentation, Ash Lawrence, Head of AGF Capital Partners; and David Stonehouse, Interim Chief Investment Officer, will also be available to address questions. Slide 4 provides the agenda for today's call. After the prepared remarks, we will be happy to take questions. With that, I will now turn the call over to Judy. Judith Goldring: Good morning, and thank you for joining us. This was a strong quarter for AGF, but one also marked by profound loss with the sudden passing of Kevin McCreadie, our former CEO and CIO. Kevin was a tremendous leader and friend who is deeply missed by all of us. In the face of this tragedy, AGF's strong governance and well-established succession plan enabled us to respond with stability and continuity. In July, I announced updates to our senior leadership team. including naming Chris Jackson as President and COO; David Stonehouse as Interim CIO and Ash Lawrence as Executive Management team sponsor to the office of the CIO. A global search for a permanent CIO is underway. And in the interim, I am confident in the strength of our investment team under the leadership of David Stonehouse and the office of the CIO. As CEO of AGF and together with the executive management team, we are committed to continuing to execute on our strategic priorities. With the right people in place, a clear strategy and a strong balance sheet, we are well positioned to deliver consistent results and drive long-term success for the benefit of all of our stakeholders. Now moving on to our business updates. Global Markets were strong in Q3, overcoming the volatility experienced in the first half of 2025. With this macro backdrop, Q3 was another strong quarter for AGF. I'll begin with some highlights. AUM and fee-earning assets were $56.8 billion at the end of Q3, up 14% from a year ago. Compared to Q2, our average AUM was up 6%. AGF Investments retail mutual funds reported net sales of $262 million or 0.08% of mutual fund AUM in the quarter, outpacing the Canadian mutual fund industry. Our SMA and ETF AUM remained strong, which increased by 64% year-over-year to $3.5 billion. We reported adjusted diluted EPS of $0.46 in the quarter, up 18% from the previous quarter. In addition, we have $432 million in short- and long-term investments on our balance sheet. Net debt of $17 million with $186 million remaining on our credit facility. We have capital available and flexibility in our capital allocation strategy. Our European subsidiary was once again accepted as a signatory to the U.K. Stewardship Code, a best practice benchmark in investment stewardship. Finally, the Board declared a $0.125 per share dividend for Q3 2025. Starting on Slide 6, we will provide updates on our business performance. On this slide, we break down our total AUM and fee earning assets in the categories disclosed in our MD&A and show comparisons to the prior year. AGF Investments mutual fund AUM was $33 billion, up 17% year-over-year, outpacing the industry increase of 12%. The growth of our ETF and SMA AUM remains strong. I'll provide more color on our mutual fund sales and ETF and SMA AUM in a moment. Segregated accounts and sub-advisory AUM increased by 4% compared to the prior year. During the quarter, we received a redemption notice from one of our institutional clients for $500 million. The redemption was driven by the client's shift toward passive management to comply with regulatory requirements and is expected to occur in Q4 2025. The financial impact of the redemption is not material on our financial results, and we continue to see strong interest in our strategies in the institutional space. Our private wealth AUM increased by 10% compared to prior year to $9 billion, and our AGF Capital Partners AUM and fee-earning assets were $4.6 billion at the end of the quarter. As a reminder, New Holland Capital's AUM of $9 billion is not consolidated into AGF's total AUM and fee-earning assets at this time. Now turning to Slide 7. I'll provide some details on mutual fund sales. With volatility in equity markets subsiding, the Canadian mutual fund industry saw net positive sales in the quarter of $9 billion or 0.4% of AUM. AGF Investments retail mutual fund sales outpaced the industry and achieved $262 million of net sales in the quarter or 0.8% of our mutual fund AUM. The strength of our retail mutual fund sales reflects the successful execution of our distribution and marketing strategy, particularly in penetrating high-growth distribution channels supported by strong investment performance. Notably, all distribution channels delivered net positive sales this quarter, underscoring the broad-based momentum across our platform. Let me provide a brief update on our investment performance, which continues to be strong. AGF Investments measures mutual fund performance by comparing gross returns before fees relative to peers within the same category with the first percentile being the best possible performance. Our 1-year performance was in the 44th percentile. Our 3-year performance was in the 50th percentile and our 5-year performance is in the 41st percentile and approximately 58% of our strategies are outperforming our peers on a 3- and 5-year basis. Turning now to Slide 8. Slide 8 shows our ETF and SMA AUM. The AUM in this category is at $3.5 billion and has grown 62% on a compounded basis over the last 2 years. Included in this number are Canadian and U.S. listed ETFs and SMA platforms globally. We have seen consistent growth and momentum in our SMA AUMs across the U.S., Canada and Asia, where many of our strategies are available on leading wealth management platforms. I will now pass it over to Ken to discuss our financial results. Ken Tsang: Thanks, Judy. Slide 9 reflects a summary of our financial results with sequential quarter and year-over-year comparisons. The financial results in these periods are adjusted to exclude severance, corporate development and noncash acquisition-related expenses. Adjusted EBITDA for the quarter was $46 million, which is $7 million higher than Q2 and $6 million higher compared to the prior year. The improvement was primarily driven by higher AUM levels. SG&A was $61 million, up $2 million from both the previous quarters and the same time last year. The increase from Q2 was mainly due to higher performance-based compensation, reflecting our strong business momentum. Adjusted net income attributable to equity owners for the current quarter was $31 million and adjusted diluted EPS was $0.46. Free cash flows for the quarter was $31 million, up $7 million from Q2, primarily due to higher net management fee revenues and distribution income in the current quarter. Slide 10 provides a further breakdown of our net revenues. Within our traditional asset and wealth management businesses, net management fees were $92 million for the quarter, which is $8 million higher than the prior quarter and $11 million higher than the prior year. This growth was primarily driven by higher AUM levels, as previously noted. Revenues from AGF Capital Partners business remained strong, reporting $16 million this quarter. The decrease from the prior year is mainly due to elevated recurring manager earnings and carried interest income in Q3 of 2024 as a result of the monetization of one of Kensington's investments. These monetizations can be lumpy from quarter-to-quarter. On Slide 11, we outline adjustments to our EBITDA. As you might recall, the AGF Capital Partners business gives rise to various LLTIP, contingent consideration and put option obligations. These liabilities are fair valued each quarter with the difference flowing through to the P&L. These accruals and fair value adjustments have no immediate cash impact and create noise quarterly, which is why we've adjusted for these items to facilitate easier comparison of quarterly results. This quarter, we have also adjusted for nonrecurring expenses related to the accelerated vesting of Kevin McCreadie's long-term incentive plan as a result of his passing. Adjusting for these items, along with severance and other expenses, our adjusted EBITDA for this quarter is $46 million. Turning to Slide 12, I will walk through the yield on our business in terms of basis points. This slide shows our average AUM, net management fees, adjusted SG&A and EBITDA as basis points on our average AUM in the current quarter, previous quarter and trailing 12 months. This view excludes AUM and related results from AGF Capital Partners as well as DSC revenues, other income and any other onetime adjustments. The EBITDA yield this quarter was 25 basis points, which is 1 basis point higher than the prior quarter and 2 basis points higher than the trailing 12 months. The increase was driven by lower SG&A relative to our AUM, highlighting the operating leverage of our business. Turning to Slide 13, I will discuss our free cash flows and capital uses. This slide represents the last 5 quarters of consolidated free cash flows on a trailing 12-month basis, as shown by the orange bars on the chart. The black line represents the percentage of free cash flows that was paid out as dividends. Our trailing 12-month free cash flow was $108 million, and our dividends paid as a percentage of free cash flows was 28%. In the same period, we returned $49 million to shareholders, consisting of $31 million in dividends and $18 million in share buybacks. During the quarter, we repurchased over 1 million shares under our NCIB for approximately $12 million. We ended the quarter with net debt of $17 million. We also have $432 million in short-term and long-term investments and have $186 million remaining on our credit facility, which provides credit to a maximum of $250 million. Our future capital allocation will be balanced and includes returning capital to shareholders in the form of dividends and share buybacks as well as investing in areas of growth. Before I pass it back to Judy, let me take a minute on Slide 14 to look at our market valuation. AGF's current share price of $14, which, by the way, has increased by approximately 30% year-to-date, translates to an enterprise value of approximately $920 million. Taking our $432 million of short- and long-term investments into account, our remaining enterprise value is about $485 million. This implies a 3.7x enterprise value to EBITDA multiple on our trailing 12 months adjusted EBITDA, excluding income from our long-term and short-term investments. Comparing this multiple to those of other traditional and alternative asset managers and recent acquisitions would suggest further potential upside to our valuation. I will now pass it back to Judy to close out our presentation. Judith Goldring: To wrap up this quarter, we've made significant strides in achieving our strategic goals. Our AUM and fee-earning assets continue to climb, reaching nearly $57 billion. Our investment performance remains solid. Our sales momentum remains strong and continue to outpace the industry. We remain disciplined in our expense management while investing for growth and the strength of our balance sheet and capital position will provide us with flexibility in our capital allocation strategy and the resilience to weather a challenging market environment. I would also like to take a moment to thank our AGF team for all that you've done and continue to do to support our organization. Your resilience, professionalism and unwavering commitment has been truly inspiring. Your dedication continues to be the foundation of our strength as we move forward together. We will now take your questions. Operator: [Operator Instructions] Our first question comes from the line of Gary Ho of Desjardin Capital Markets. Gary Ho: First, just on your mutual fund net flows, $262 million, perhaps for Judy, fairly strong. Just wondering what strategies are you seeing the most success in? And with rates coming down, are you seeing perhaps greater flows into equity categories yet? And then perhaps if you can elaborate on whether that strong momentum has carried through so far in Q4? Judith Goldring: Yes. Thanks, Gary. Certainly, we did see in the industry flows, they had positive flows going into heavily weighted at least into the fixed income categories, but there was, of course, strong flows going into the balanced equities and some of the specialty categories. Similarly, at AGF, we do tilt more towards the equities. So we did see strong flows into our equity categories. But we did see flows into our Fixed Income Plus and Global Select European equity, which, as you know, is a 2-time Lipper award winner 5-star Morningstar fund. So it's been seeing some interesting flows. And then we launched recently our enhanced income fund, which -- Income Plus, which has actually seen some very strong flows in a very short period of time. So it's really demonstrating a broad breadth of our product lineup and seeing the flows across that. And then quarter-to-date, we're seeing $64 million or $65 million, I should say, as of last night, again, emphasizing continued strong flows. Gary Ho: Great. Okay. That's good to hear. Second question, maybe for Ken. As you plan out your budget for next year, just wondering any priorities that may require a higher cadence of SG&A. Historically, I think you've kind of guided to kind of cost of living type increases in the 3% to 4%. Just curious to hear if there are any other investments that you're looking at in the pipeline over the next year or so. Ken Tsang: Yes. Thanks, Gary. As you might know, we typically provide guidance on next year's SG&A in Q4. Having said that, of course, as you might be aware, we did make some earlier on investments in our sales force, which is clearly paying off now. But we continue to evaluate all investment opportunities going forward, and we'll provide more clarity in Q4 as to our SG&A guidance. Gary Ho: Okay. Great. And then maybe just last question, just spreading it out a bit for Ash. Wondering if you wouldn't mind giving an update on how New Holland is progressing. I believe there -- I think you mentioned around CAD 9 billion. Just maybe just remind us when you could potentially increase your stake in New Holland and your appetite for that? And how is the launch of the Tactical Alpha Fund in Canada? Ashley Lawrence: Yes, for sure. Thanks, Gary. So more broadly, just on New Holland Capital, they're having a pretty good year. on a few fronts, net inflows to a number of their strategies, including their multi-strat and some of their credit investments that they make as well and some positive feedback from market on the fundraising side for them. So it's been a pretty good year on that front. As it relates to our AGF run feeder fund here in Canada, that just launched earlier this year. And so most of our activity has really been on approvals getting on platforms. We have had good response from market as we've been touring around seeing advisers and investors with the New Holland team. So we do expect as we move into the latter half of this year and early next to start seeing some activity there, some more activity there. So that's been a positive. And then the last point of your question, as we've disclosed in February of next year 2026, we have the first of 2 options to both convert our position from debt to equity and increase our ownership to 51%. We are evaluating that now, and we'll make a decision as we go forward and that window opens. But at the present, based on the update I just gave you, we're feeling pretty positive about where we want to take our relationship with New Holland. Operator: And our next question comes from the line of Graham Ryding of TD Securities. Graham Ryding: Can you hear me? Operator: Yes, we can hear you. Graham Ryding: Great. Just on the ETF SMA side, pretty solid growth there, collectively up 64% year-over-year. Is there any color you can provide in just sort of breaking out what the AUM is for SMA and ETFs in particular? And then maybe what the flows are like for those 2 different areas of your business in the quarter or year-to-date? Judith Goldring: We don't split out the actual ETF and SMA. In part, that's just due to the timing of getting the accurate AUM of the SMA in particular. But certainly, we've seen strong growth in the U.S., largely on the backs of us getting on to several different platforms. And so that growth has been quite impressive, hitting just over $2 billion for the ETFs and SMA. And then in Canada, we continue to penetrate different platforms as well. And we've just seen huge investor demand and adviser demand for that particular kind of product. Graham Ryding: Okay. And then on the Capital Partners side, is there any fundraising underway that you can flag either at the institutional level or maybe some color on traction or progress on selling capital partners products, be it Kensington or New Holland Capital into those retail channels. Ashley Lawrence: Yes, sure. It's Ash here. So we're relatively early days in terms of the build-out of the capital partners distribution team here in Canada. So what I can tell you is we are actively out there with a number of strategies, some of those being related to New Holland Capital that I gave a previous answer on. We're seeing good traction in terms of conversations and interest. It's probably a little bit early in terms of actual flows. Sales cycle for alternatives in the institutional world is relatively long. And a lot of the -- especially for New Holland introduction to Canadian investors is the first time they'll be seeing this strategy in that manager. But we're feeling pretty positive about the meetings and how that is going. As well on the -- what I'll call the evergreen side, we're starting to see some good activity on the private credit side. I think the competition has picked up in certain retail channels for that strategy, but our sort of consistent performance and now longer track record is helping us in that channel. On the private equity side, returns have been relatively muted across the whole industry for reasons that I think everyone probably has read about with the rapid rise in interest rates and then followed on by the tariff situation. So it's been pretty muted in that sector, especially when you have a mature fund that has been investing through the full cycle versus some of the competition that is relatively early in their inception. Graham Ryding: Okay. Understood. And sorry, did you say that New Holland Capital on its own, even though it's not consolidated in your results potentially just yet, but New Holland Capital is seeing solid organic growth onto itself? Ashley Lawrence: Yes, they've been positive fundraising over the course of the year this year. Again, given that most of their investor base or all of their investor base at present is institutional, it does tend to be a little bit chunky. Ken Tsang: I'll just -- Graham, it's Ken. Just a reminder, when we made the acquisition of New Holland, average assets under management was about USD 5 billion. And as of the end of August of this year, it's currently at around USD 6.7 billion. So certainly have seen some very strong momentum in that business. Operator: [Operator Instructions] I'm showing no further questions at this time. I'll now turn it back to Judy for closing remarks. Judith Goldring: Thank you very much for your questions and for attending today. Just to recap, this was another strong quarter for AGF at $0.46 EPS. Our investment performance remains strong, and our sales momentum continues to outpace the industry. Our strong balance sheet and strong cash flow positions us well to return capital to our shareholders while driving long-term growth. So thank you again for attending, and we look forward to our Q4 earnings call on January 27, 2026. Operator: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.